AMILING, BEBER, CAINDAY, CONEJERO, FERUELO & LIAO TAXATION LAW REVIEWER FOR THE 2011 BAR
GENERAL PRINCIPLES IN TAXATION
DEFINITION AND CONCEPT OF TAXATION
Taxation has been defined as the inherent
legislative power by which the sovereign raises
income to defray the expenses of the government.
Taxation is the inherent power of the
sovereign exercised through the legislature to
impose burden upon subjects and objects within its
jurisdiction for the purpose of raising revenues to
carry out the legitimate objects of government.
2. Taxation is a legislative power.
It is also defined as the power vested in the
legislature to impose burdens or charges upon
persons and property for the purpose of raising
revenue for public purposes.
NATURE OF TAXATION
TWO FOLD NATURE OF TAXATION
1. Power of taxation is an inherent power.
The power to tax is inherent in sovereignty.
The moment the state exists, the power to
tax automatically exists. As such it can be
exercised by the state even without any
delegation by the Constitution or by
Congress through legislation.
The power of taxation is an essential and
inherent attribute of sovereignty,
belonging as a matter of right to every
independent government without being
expressly granted by the people (Pepsi
Cola Inc. V. Municipality of Tanauan, Leyte,
69 SCRA 460)
A principal attribute of sovereignty, the
exercise of taxing powers derives its source
from the very existence of the state whose
social contract with its citizens obliges it to
promote the public interest and common
good. (NPC v. City of Cabanatuan, G.R. no.
149110, April 9, 2003)
MANIFESTATIONS OF THE INHRENT POWER OF
TAXATION
GENERAL PRINCIPLES
A. Imposition even in the absence of
constitutional grant empowering a
state to collect taxes.
B. State’s right to select objects and
subject of taxation.
C. No injunction rule. As a general rule
courts should not issue injunctive writs
to enjoin the collection of tax
otherwise this would restrict the
amount of taxes that may be collected
to finance the activities of government.
The power of taxation can only be
exercised by the lawmaking body
(Congress), not by the executive or the
judicial branch of the government, except
when delegated by the national legislative
body to a local legislative body, or to the
executive branch subject to limitations as
may be provided by law.
POWER OF TAXATION COMPARED WITH
OTHER POWERS
SIMILARITIES:
1. Power of taxation, eminent domain,
and police power are inherent in the
state.
2. They all exist independently of the
Constitution.
3. They constitute ways by which the
state interferes with private rights and
property.
4. They are legislative in nature and
character.
5. Each presupposes an equivalent
compensation.
DISTINCTIONS:
1. As to purpose
Taxation – for the support of the
government or to defray the expenses
of the government.
Eminent Domain – for public use.
BEBER, DINDO 1
 AMILING, BEBER, CAINDAY, CONEJERO, FERUELO & LIAO TAXATION LAW REVIEWER FOR THE 2011 BAR
Police power - to promote general
welfare, public health, public morals,
and public safety.
2. As to compensation
Taxation – protection and benefits
received from the government.
Eminent Domain – payment of just
compensation, which is the full and fair
equivalent of the loss.
Police power – maintenance of a
healthy economic standard of the
society.
3. As to persons affected
Taxation and Police power – operates
upon a community or class of
individuals.
Eminent Domain – operates on the
individual property owner.
4. As to authority which exercises the
power
Taxation and Police power – Exercised
only by the Government or its political
subdivisions.
Eminent Domain – May be exercised
by public services corporation or public
utilities if granted by law.
5. As to amount of imposition
Taxation – generally no limit to the
amount of tax that may be imposed.
Eminent Domain - There is no
imposition; it is the owner who is paid
just compensation.
How may the power to tax be utilized to carry out
the social justice program of our government ?
The compensatory purpose of taxation is to
implement the social justice provisions of the
constitution through the progressive system of
2 GENERAL PRINCIPLES
taxation, which would result to equal distribution of
wealth, etc.
Progressive income taxes alleviate the
margin between rich and poor. (Southern Cross
Cement Corporation v. Cement Manufacturers
Association of the Philippines, et al., G. R. No.
158540, August 3, 2005)
In recent years, the increasing social
challenges of the times expanded the scope of the
state activity, and taxation has become a tool to
realize social justice and the equitable distribution
of wealth, economic progress and the protection of
local industries as well as public welfare and similar
objectives. (Batangas Power Corporation v.
Batangas City, et al., G. R. No. 152675, and
companion case, April 28, 2004 citing National
Power Corporation v. City of Cabanatuan, G. R. No.
149110, April 9, 2003)
Explain the sumptuary purpose of taxation.
The sumptuary purpose of taxation is to promote
the general welfare and to protect the health, safety
or morals of the inhabitants. It is in the joint exercise
of the power of taxation and police power where
regulatory taxes are collected.
Taxation may be made the implement of the state’s
police power. The motivation behind many taxation
measures is the implementation of police power
goals. [Southern Cross Cement Corporation v.
Cement Manufacturers Association of the
Philippines, et al., G. R. No. 158540, August 3, 2005)
The reader should note that the August 3, 2005
Southern Cross case is the decision on the motion
for reconsideration of the July 8, 2004 Southern
Cross decision.
The so-called “sin taxes” on alcohol and
tobacco manufacturers help dissuade the
consumers from excessive intake of these
potentially harmful products. (Southern Cross
BEBER, DINDO
 AMILING, BEBER, CAINDAY, CONEJERO, FERUELO & LIAO TAXATION LAW REVIEWER FOR THE 2011 BAR

Cement Corporation v. Cement Manufacturers receipts for tax purposes and shall be subject to
Association of the Philippines, et al., G. R. No. proper documentation and to the provisions of the
158540, August 3, 2005) National Internal Revenue Code, as amended.
[M.E. Holding Corporation v. Court of Appeals, et
Taxation distinguished from police power. Taxation al., G.R. No. 160193, March 3, 2008 citing Expanded
is distinguishable from police power as to the means Senior Citizens Act of 2003, Sec. 4 (a)]
employed to implement these public goals. Those
doctrines that are unique to taxation arose from CHARACTERISITC OF THE POWER OF TAXATION
peculiar considerations such as those especially
A. E – nforced contribution
punitive effects (Southern Cross Cement Corporation
B. PA – id at regular intervals
v. Cement Manufacturers Association of the C. GE - nerally payable in money
Philippines, et al., G. R. No. 158540, August 3, 2005) D. PRO – portionate in character (to the
as the power to tax involves the power to destroy taxpayers ability to pay)
and the belief that taxes are lifeblood of the state. E. LE –vied on persons, property, or
(Ibid.) taxes being the lifeblood of the government, exercise of a right or privilege.
F. LE – vied by the state having
their prompt and certain availability is of the
jurisdiction.
essence.” G. LE – vied by the legislature.
H. LE – vied for public purpose
These considerations necessitated the
evolution of taxation as a distinct legal concept from PURPOSE OF TAXTAION
police power. (Ibid.)
1. Revenue Raising Purpose
How the power of taxation may be used to
The primary purpose of taxation is to provide funds
implement power of eminent domain. Tax or property with which the government discharges
measures are but ”enforced contributions exacted its appropriate functions for the protection and
on pain of penal sanctions” and “clearly imposed for general welfare of its citizens.
public purpose.” In most recent years, the power to
Imposed for the purpose of raising funds for the
tax has indeed become a most effective tool to
service of the government.
realize social justice, public welfare, and the
equitable distribution of wealth. (Commissioner of 2. Non-revenue Objectives
Internal Revenue v. Central Luzon Drug Corporation, a. To strengthen the anaemic
G.R. No. 159647, April 16, 2005) enterprises by granting them tax
exemptions or other conditions or
Establishments granting the 20% senior incentives for growth.
citizens discount may claim the discounts granted b. To protect local industries against
foreign competition by increasing
to senior citizens as tax deduction based on the net
import taxes.
cost of the goods sold or services rendered: c. As a bargain tool in trade
Provided, That the cost of the discount shall be negotiations with other countries.
allowed as deduction from gross income for the d. To counter the effects of inflation
same taxable year that the discount is granted. or depression.
Provided, further, That the total amount of the e. To reduce inequalities in the
claimed tax deduction net of value added tax if distribution of wealth.
f. To promote science and invention,
applicable, shall be included in their gross sales
finance educational activities or

GENERAL PRINCIPLES BEBER, DINDO 3

 AMILING, BEBER, CAINDAY, CONEJERO, FERUELO & LIAO TAXATION LAW REVIEWER FOR THE 2011 BAR
maintain and improve the
efficiency of local police force.
g. To implement police power and
promote general welfare.
3. Special or regulatory. Imposed primarily for
the regulation of useful or non useful
occupation or enterprises and secondarily
only for the raising of public funds.
PRINCIPLES OF SOUND TAX SYSTEM
The Canons of a sound tax system,
also known as the characteristics or,
principles of a sound tax system, are used
as a criteria to determine whether a tax
system is able to meet the purpose or
objectives of taxation. They are:
1. Fiscal adequacy – The sources of
revenue should be sufficient and
elastic to meet the demands of
public expenditure.
2. Administrative Feasibility – Tax laws
must be capable of convenient, just,
and effective administration on the
part of both the government and
taxpayer.
3. Theoretical justice – The tax burden
should be in proportion to the
taxpayers ability to pay.
THEORY AND BASIS OF TAXATION
a. Principle of Necessity. The existence of the
government is a necessity; and the main
source of revenue of the government is
taxes. Taxes are the lifeblood of the
government. The government therefore
will not be able to survive and continue to
perform its functions without taxes.
(CIR vs. ALGUE 158 SCRA 8)
b. Lifeblood Theory.
1. The primary purpose of taxation is to
generate funds for the state to finance
the needs of the citizenry and to
advance the common wealth.
2. The government chiefly relies on
taxation to obtain the means to carry
on its operation.
4 GENERAL PRINCIPLES
3. Modes adopted to enforce the
collection of taxes levied should be
summary and should be interfered
with as little as possible.
4. The state cannot be put in estoppels by
the errors or mistakes of its officials or
agents. (PBCOM vs. CIR, GR NO.
112024, January 23, 1994)
5. The BIR has the necessary discretion to
avail itself of the most expeditious way
to collect taxes.
c. Benefits Received Theory. In return for the
enforced contributions of the citizens, the
latter receive general protection and
enjoyment of benefits in an organized
society. The power of taxation is therefore
founded on the reciprocal duties of
protection and support between the state
and its inhabitants. The taxpayer, however,
should not expect a definite, specific
commodity, service or benefit in return for
the contributions he or she has made.
DOCTRINES IN TAXATION
1. Prospectivity of Tax Laws. In general, tax statutes
should be given a prospective application.
Although not favoured, they may, nevertheless, be
given a retroactive application, if it is expressly so
declared, or it is clearly the legislative intent,
except when it would be harsh or oppressive to the
tax payer.
2. Impresciptibility.
General rule: Collection of taxes is imprescriptible.
While this may be so, statutes may provide for
periods of prescription,
Why is the collection of taxes imprescriptible ?
As a general rule, revenue laws are not intended to
be liberally construed, and exemptions are not given
retroactive application, considering that taxes are
the lifeblood of the government and in Holmes’
memorable metaphor, the price we pay for
civilization, tax laws must be faithfully and strictly
implemented. (Commissioner of Internal Revenue v.
BEBER, DINDO
 AMILING, BEBER, CAINDAY, CONEJERO, FERUELO & LIAO TAXATION LAW REVIEWER FOR THE 2011 BAR
Acosta, etc.,G. R. No. 154068, August 3, 2007)
However, statutes may provide for
prescriptive periods for the collection of particular
kinds of taxes.
b. Tax laws, unlike remedial laws, are
not to be applied retroactively. Revenue laws are
substantive laws and their application must not be
equated with remedial laws. (Acosta, supra)
3. Double Taxation. In its particular sense, it may
mean direct duplicate taxation, which is prohibited
under the constitution because it violates the
concept of equal protection, uniformity and
equitableness of taxation.
Direct double taxation is taxing twice by the same
authority, for the same purpose, in the same taxing
period, within the same taxing district, some of the
property in a given territory in which the tax is laid,
without taxing all of them a second time.
Elements of Direct Duplicate or Double Taxation:
a. Subject or Object is taxed twice.
b. By the same taxing authority.
c. For the same taxing purpose.
d. During the same taxable period.
e. Taxing all of the subjects or objects for the
first time without taxing all of them for the
second time.
If any of the elements are absent then there is
indirect double taxation which is not
prohibited by the constitution.
Direct double taxation is unconstitutional and
is therefore prohibited, while indirect double
taxation is allowed, as in the case of a lessor
who pays income tax on his rental income, real
estate tax on the assessed value of the
1. Escapes from taxation that do not result in loss
property being leased, community tax, and
of revenue to the government.
value added tax on the same property/ income
but levied by different taxing authorities and
for different purposes.
When an income is taxed in the Philippines and
the same income is taxed in another country,
this would be known as international juridical
GENERAL PRINCIPLES
double taxation which is the imposition of
comparable taxes in two or more states on the
same tax payer in respect of the same subject
matter and for identical grounds. (CIR vs. S C
JOHNSON JUNE 25, 1999)
METHODS OF AVOIDING DOUBLE TAXATION
a. Tax treaties which exempts foreign
nationals from local taxation and local
nationals from foreign taxation under the
principle of reciprocity.
b. Tax credits where foreign taxes are allowed
as deductions from local taxes that are due
to be paid.
c. Allowing foreign taxes as deductions from
gross income.
Tax Credit. Refers to an amount that is
subtracted directly from one’s total tax liability,
an allowance against the tax itself, or a
deduction from what is owed.
A tax credit reduces the tax due, including –
whenever applicable- the income tax that is
determined after applying the corresponding
tax rates to taxable income. (CIR vs. CENTRAL
LUZON DRUG GR NO. 159647 APRIL 15, 2005)
Tax deduction. Is defined as deduction from
income for tax purposes, or an amount that is
allowed by law to reduce income prior to the
application of the tax rate to compute the
amount of tax which is due.
A tax deduction reduces the income that is
subject to tax in order to arrive at the taxable
income. (CIR vs. CENTRAL LUZON DRUG GR NO.
159647 APRIL 15, 2005)
ESCAPES FROM TAXATION
a. Shifting is a transfer of tax burden by the
taxpayer to another who bears it.
The IMPACT of TAXATION is a point at
which a tax is originally imposed.
BEBER, DINDO 5
 AMILING, BEBER, CAINDAY, CONEJERO, FERUELO & LIAO TAXATION LAW REVIEWER FOR THE 2011 BAR
The INCIDENCE of TAXATION is a point at
which the tax burden finally rests or settles
down.
a.1 forward shifting is the shifting of the
tax burden from a factor of production
through the factors of distribution until
finally rest on the consumer.
a.2 backward shifting is the transfer of the
tax burden from the consumer through the
factors of distribution to the factors of
production.
a.3 onward shifting is the transfer of the
tax burden two or more times either
forward or backward.
b. Capitalization is the reduction in the price of the
taxed object equal to the capitalized value of
future taxes on the property sold. This a special
form of backward shifting, where the burden of
future taxes which the buyer may have to pay is
shifted back to the seller in the form of reduction
in the selling price.
c. Transformation is an escape in taxation, whereby
the manufacturer, in an effort to avoid losing his
customers maintains the same selling price and
margin of profit not by shifting the burden to his
customers, but by improving his method and
cutting down on other production cost, thereby
transforming the tax into gain through the medium
of production.
2. Escapes from taxation that result in loss of
revenue to the government.
a. Tax Evasion. Also known as “tax dodging”. It is
the use of illegal means to defeat or lessen the
payment of the tax. Examples are the deliberate
padding of expenses, understatement of income,
and so forth.
b. Tax Avoidance. Also known as “tax
minimization”. It is the use legally permissible
means to reduce tax liability.
6 GENERAL PRINCIPLES
Tax avoidance is the use of legally permissible
means to reduce the tax while tax evasion is the use
of illegal means to escape the payment of taxes.
Tax evasion connotes the integration of three
factors:
a. The end to be achieved, i.e., the payment of
less than that known by the taxpayer to be legally
due, or the non-payment of tax when it is shown
that a tax is due;
b. an accompanying state of mind which is
described as being “evil” on “bad faith,” “willful,” or
”deliberate and not accidental”; and
c. a course of action or failure of action which is
unlawful. (Commissioner of Internal Revenue v. The
Estate of Benigno P. Toda, Jr., , etc., G. R. No.
147188, September 14, 2004)
Tax avoidance distinguished from tax evasion.
a. Tax avoidance is legal while tax
evasion is illegal.
b. The objective of tax avoidance in
most instances is merely to reduce the tax that is
due while is tax evasion the object is to entirely
escape the payment of taxes.
c. Tax evasion warrants the imposition
of civil, administrative and criminal penalties while
tax avoidance does not.
Tax sparing is a provision in some tax treaties which
provides that the state of residence allows as credit
the amount that would have been paid, as if no
reduction has been made. (Vogel, Klaus on Double
Taxation Conventions, Third Edition, p.1255 cited
in Segarra, Venice H, Tax Treaties: Trick or treat ?,
Philippine Daily Inquirer, December 6, 2002, p. C5)
There may be instances where a particular income
is exempt from taxation in order to encourage
BEBER, DINDO
 AMILING, BEBER, CAINDAY, CONEJERO, FERUELO & LIAO TAXATION LAW REVIEWER FOR THE 2011 BAR
foreign investments which may lead to economic
development. If the tax credit method is used,
there would be no more tax to credit since there is
no more tax to credit as a result of the tax
exemption. Consequently, when the tax method
credit method is applied to these items of income,
such incentives are siphoned off since, in effect,
the tax benefits are cancelled out. (Ibid.) Thus, the
need for the tax sparing provision.
EXEMPTION FROM TAXATION
Tax Exemption. Is the granting of immunity to a
particular class, from a tax which persons or
corporations generally with in the same state or
taxing district are obliged to pay.
RATIONALE OF TAX EXEMPTION
Being a waiver of its power to tax, the government
in granting a tax exemption, should justify the
grant that such exemption will benefit the body of
people, which is sufficient to offset the loss of
revenue occasioned thereby.
Taxes are what civilized people pay for civilized
society. Thus statutes granting tax exemptions are
construed stricissimi juris against the tax payer and
liberally in favor of the taxing authority. A claim of
tax exemption must be clearly shown and based on
language in law too plain to be mistaken.
Otherwise stated, taxation is the rule, exemption is
the exception. (QC vs. ABS-CBN GR NO. 166408
OCTOBER 06, 2008)
KINDS OF TAX EXEMPTION
a. Express or affirmative tax exemption. Tax
exemption is expressly provided by the
constitution, statutes, treaties, ordinance,
franchise or contract.
b. Implied or exemption by omission. Is the
exemption that applies to all those who are not
expressly mentioned in the law as subject to tax.
c. Contractual.
GENERAL PRINCIPLES
GROUNDS FOR EXEMPTION
1. Contract.
2. Tax exemptions may be granted on some
ground of public policy.
3. Reciprocity.
COMPENSATION AND SET OFF
Compensation takes place by operation of law,
where the local government and the taxpayer are in
their own right reciprocally debtors and creditors of
each other, and that the debts are both due and
demandable, in consequence of Articles 1278 and
1279 of the Civil Code. (Domingo v. Garlitos, 8 SCRA
443)
 May there be compensation or set-off
between a national tax and a debt? Reason out
your answer.
As a general rule, there could be no
compensation or set-off between a tax and a debt
for the following reasons:
a. Lifeblood theory.
b. Taxes are not contractual
obligations but arise out of a duty to, and are the
positive acts of government, to the making and
enforcing of which the personal consent of the
individual taxpayer is not required. (Republic v.
Mambulao Lumber Co., 4 SCRA 622)
c. Taxes cannot be the subject of
compensation because the government and
taxpayer are not mutually creditors and debtors of
each other and a claim for taxes is not such a debt,
demand, contract or judgment as is allowed to be
set-off.
Thus, it is correct to say that the offsetting
of a taxpayer’s tax refund with its alleged tax
deficiency is unavailing under Art. 1279 of the Civil
Code. (South African Airways v. Commissioner of
BEBER, DINDO 7
 AMILING, BEBER, CAINDAY, CONEJERO, FERUELO & LIAO TAXATION LAW REVIEWER FOR THE 2011 BAR
Internal Revenue, G.R. No. 180356, February 16,
2010 reiterating Caltex Philippines, Inc. v.
Commission on Audit, which applied Francia v.
Intermediate Appellate Court)
Exceptions: When set-off or compensation
allowed for local taxes. a.
Where both claims already become
overdue and demandable as well as fully
liquidated. Compensation takes place by operation
of law under Art. 1200 in relation to Arts. 1279 and
1290 all of the Civil Code. (Domingo v. Garlitos, 8
SCRA 443) b.
Compensation takes place by operation of
law, where the government and the taxpayer are in
their own right reciprocally debtors and creditors
of each other, and that the debts are both due and
demandable. This is in consequence of Article 1278
and 1279 of the Civil Code. (Domingo v. Garlitos, 8
SCRA 443)
c. ,The Supreme Court
upheld the validity of a set-off between the
taxpayer and the government. In both cases, the
claims of the taxpayers therein were certain and
liquidated. The claims were certain since there
were no doubts or disputes as to their
refundability. In fact, the government admitted
the fact of over-payment. (Commissioner of
Internal Revenue v. Esso Standard Eastern, Inc.,
172 SCRA 364) d. In case of
a tax overpayment, the BIR’s obligation to refund
or off-set arises from the moment the tax was paid.
REASON: Solutio indebeti. (Commissioner of
Internal Revenue v. Esso Standard Eastern, Inc 172
SCRA 364)
e.
While judgment should be rendered in
favor of Republic for unpaid taxes, judgment ought
at the same time to issue for Sampaguita Pictures
commanding payment to the latter by the Republic
of the value of the backpay certificates which the
Republic received. (Republic v. Ericta, 172 SCRA
623)
 Gilbert obtained a judgment for a
sum of money against the municipality of Camiling.
The judgment has become final although execution
has not issued. Upon receiving an assessment for
8 GENERAL PRINCIPLES
municipal sales taxes from the Municipal
Treasurer, Gilbert executed a partial assignment of
his judgment sufficient to cover the assessment in
favor of the Municipality.
May the Municipal Treasurer validly accept the
assignment? Why?
Yes. The parties in this case are mutually debtors
and creditors of each other, and since both of the
claims became overdue, demandable and fully
liquidated, compensation takes place by operation
of law. Such was the holding in Domingo v.
Garlitos, 8 SCRA 443, a case decided by the
Supreme Court whose factual antecedents are
similar to the problem.
COMPROMISE
What is a compromise?
A compromise is a contract whereby the parties, by
making reciprocal concessions, avoid a litigation or
put an end to one already commenced. (Art. 2028,
Civil Code)
A compromise penalty could not be imposed by the
BIR, if the taxpayer did not agree. A compromise
being, by its nature, mutual in essence requires
agreement. The payment made under protest could
only signify that there was no agreement that had
effectively been reached between the parties. (Vda.
de San Agustin, et al., v. Commissioner of Internal
Revenue, G. R. No. 138485, September 10, 2001)
What tax cases may be the subject of a compromise
?
The following cases may, upon taxpayer’s
compliance with the basis for compromise, be the
subject matter of compromise settlement:
a. Delinquent accounts;
b. Cases under administrative protest
after issuance of the Final Assessment Notice to the
BEBER, DINDO
 AMILING, BEBER, CAINDAY, CONEJERO, FERUELO & LIAO TAXATION LAW REVIEWER FOR THE 2011 BAR
taxpayer which are still pending in the Regional
Offices, Revenue District Offices, Legal Service, Large
Taxpayer Service (LTS), Collection Service,
Enforcement Service and other offices in the
National Office;
c. Civil tax cases being disputed
before the courts;
d. Collection cases filed in courts;
e. Criminal violations, other than
those already filed in court, or those involving
criminal tax fraud. (Sec. 2, Rev. Regs. No. 30-2002)
What tax cases could not be the subject of
compromise?
a. Withholding tax cases unless the
applicant-taxpayer invokes provisions of law that
cast doubt on the taxpayer’s obligation to withhold.;
b. Criminal tax fraud cases, confirmed as
such by the Commissioner of Internal Revenue or his
duly authorized representative;
c. Criminal violations already filed in
court;
d. Delinquent accounts with duly
approved schedule of installment payments;
e. Cases where final reports of
reinvestigation or reconsideration have been issued
resulting to reduction in the original assessment and
the taxpayer is agreeable to such decision by signing
the required agreement form for the purpose. On
the other hand, other protested cases shall be
handled by the Regional Evaluation Board (REB) or
the National Evaluation Board (NEB) on a case to
case basis;
f. Cases which become final and
executory after final judgment of a court where
GENERAL PRINCIPLES
compromise is requested on the ground of doubtful
validity of the assessment; and
g. Estate tax cases where compromise
is requested on the ground of financial incapacity of
the taxpayer. (Sec. 2, Rev. Regs. No. 30-2002)
When may the Commissioner of Internal Revenue
compromise the payment of any internal revenue
tax ? Alternatively, what are the grounds for a
compromise, and what are the amounts for which a
compromise may be entered into ?
a. A reasonable doubt as to the
validity of the claim against the taxpayer exists
provided that the minimum compromise entered
into is equivalent to forty percent (40%) of the basic
tax; or
b. The financial position of the
taxpayer demonstrates a clear inability to pay the
assessed tax provided that the minimum
compromise entered into is equivalent to ten
percent (10%) of the basic assessed tax
In the above instances the Commissioner is
allowed to enter into a compromise only if the basic
tax involved does not exceed One million pesos
(P1,000,000.00), and the settlement offered is not
less than the prescribed percentages. [Sec. 204 (A),
NIRC of 1997]
In instances where the Commissioner is not
authorized, the compromise shall be subject to the
approval of the Evaluation Board composed of the
Commissioner and the four (4) Deputy
Commissioners.
When is the Commissioner of Internal Revenue
authorized to abate or cancel a tax liability ?:
a. The tax or any portion thereof appears to
be unjustly or excessively assessed; or
BEBER, DINDO 9
 AMILING, BEBER, CAINDAY, CONEJERO, FERUELO & LIAO TAXATION LAW REVIEWER FOR THE 2011 BAR
b. The administration and collection costs
involved do not justify the collection of the amount
due. [Sec. 204 (B), NIRC of 1997]
The collection of a tax may not be suspended. Only
the Court of Tax Appeals may issue an order
suspending the collection of a tax.
As a general rule, “No court shall have the authority
to grant an injunction to restrain the collection of
any national internal revenue tax, fee or charge.”
(Sec. 218, NIRC)
“No appeal taken to the CTA from the
decision of the Commissioner of Internal Revenue or
the Commissioner of Customs or the Regional Trial
Court, provincial, city or municipal treasurer or the
Secretary of Finance, the Secretary of Trade and
Industry and Secretary of Agriculture, as the case
may be shall suspend the payment, levy, distraint,
and/or sale of any property of the taxpayer for the
satisfaction of his tax liability as provided by existing
law: Provided, however, That when in the opinion of
the Court the collection by the aforementioned
government agencies may jeopardize the interest of
the Government and/or the taxpayer the Court at
any stage of the proceeding may suspend the said
collection and require the taxpayer either to deposit
the amount claimed or to file a surety bond for not
more than double the amount with the Court.”
(Sec. 11, Rep. Act No. 1125, as amended by Sec. 9,
Rep. Act No. 9282 )
The Supreme Court may enjoin the collection
of taxes under its general judicial power but it
should be apparent that the source of the power is
not statutory but constitutional.
TAX AMNESTY
A tax amnesty is a general pardon or intentional
overlooking by the State of its authority to impose
penalties on persons otherwise guilty of evasion or
violation of a revenue or a tax law.
10 GENERAL PRINCIPLES
It partakes of an absolute waiver by the
government of its right to collect what is due it and
to give tax evaders who wish to relent a chance to
start with a clean slate. A tax amnesty, much like a
tax exemption, is never favored nor presumed in
law. The grant of a tax amnesty, similar to a tax
exemption, must be construed strictly against the
taxpayer and liberally in favor of the taxing
authority. (Philippine Banking Corporation, etc., v.
Commissioner of Internal Revenue, G. R. No.
170574, January 30, 2009)
The purpose of tax amnesty is to:
a. give tax evaders who wish to relent a
chance to start a clean slate, and to
b. give the government a chance to collect
uncollected tax from tax evaders
without having to go through the tedious
process of a tax case. (Banas, Jr. v. Court of Appeals,
et al., G.R. No. 102967, February 10, 2000)
Tax amnesty distinguished from tax exemption.
a. Tax amnesty is an immunity from all
criminal, civil and administrative liabilities arising
from nonpayment of taxes (People v. Castaneda,
G.R. No. L-46881, September 15, 1988) WHILE a tax
exemption is an immunity from civil liability only. It
is an immunity or privilege, a freedom from a charge
or burden to which others are subjected. (Florer v.
Sheridan, 137 Ind. 28, 36 NE 365)
b. Tax amnesty applies only to past tax
periods, hence of retroactive application
(Castaneda, supra) WHILE tax exemption has
prospective application.
CONSTRUCTION AND INTREPRETATION OF:
In case of doubt, tax laws must be construed strictly
against the State and liberally in favor of the
taxpayer because taxes, as burdens which must be
endured by the taxpayer, should not be presumed
BEBER, DINDO
 AMILING, BEBER, CAINDAY, CONEJERO, FERUELO & LIAO TAXATION LAW REVIEWER FOR THE 2011 BAR
to go beyond what the law expressly and clearly
declares. (Lincoln Philippine Life Insurance
Company, Inc., etc., v. Court of Appeals, et al., 293
SCRA 92, 99)
Interpretation in the imposition of taxes, is not the
similar doctrine as that applied to tax exemptions.
The rule in the interpretation of tax laws is that a
statute will not be construed as imposing a tax
unless it does so clearly, expressly, and
unambiguously. A tax cannot be imposed without
clear and express words for that purpose.
Accordingly, the general rule of requiring
adherence to the letter in construing statutes
applies with peculiar strictness to tax laws and the
provisions of a taxing act are not to be extended by
implication. In answering the question of who is
subject to tax statutes, it is basic that in case of
doubt, such statutes are to be construed most
strongly against the government and in favor of the
subjects or citizens because burdens are not to be
imposed nor presumed to be imposed beyond
what statutes expressly and clearly import.
[Commissioner of Internal Revenue v. Fortune
Tobacco Corporation, G. R. Nos. 167274-75, July
21, 2008 citing CIR v. Court of Appeals, 338 Phil.
322, 330-331 (1997)] As burdens, taxes should
not be unduly exacted nor assumed beyond the
plain meaning of the tax laws. (Ibid., citing CIR v.
Philippine American Accident Insurance Company,
Inc., G.R. No. 141658, March 18, 2005, 453 SCRA
668)
Strict interpretation of tax exemption laws. Taxes
are what civilized people pay for civilized society.
They are the lifeblood of the nation. Thus, statutes
granting tax exemptions are construed stricissimi
juris against the taxpayer and liberally in favor of
the taxing authority. A claim of tax exemption
must be clearly shown and based on language in
law too plain to be mistaken. Otherwise stated,
taxation is the rule, exemption is the exception.
(Quezon City, et al., v. ABS-CBN Broadcasting
Corporation, G. R. No. 166408, October 6, 2008
citing Mactan Cebu International Airport Authority
v. Marcos, G.R. No. 120082, September 11, 1996,
GENERAL PRINCIPLES
261 SCRA 667, 680) The burden of proof rests upon
the party claiming the exemption to prove that it is
in fact covered by the exemption so claimed.
(Quezon City, supra citing Agpalo, R.E., Statutory
Construction, 2003 ed., p. 301)
Rationale for strict interpretation of tax exemption
laws. The basis for the rule on strict construction
to statutory provisions granting tax exemptions or
deductions is to minimize differential treatment
and foster impartiality, fairness and equality of
treatment among taxpayers. (Quezon City, et al., v.
ABS-CBN Broadcasting Corporation, G. R. No.
166408, October 6, 2008) He who claims an
exemption from his share of common burden must
justify his claim that the legislature intended to
exempt him by unmistakable terms. For
exemptions from taxation are not favored in law,
nor are they presumed. They must be expressed in
the clearest and most unambiguous language and
not left to mere implications. It has been held that
“exemptions are never presumed the burden is on
the claimant to establish clearly his right to
exemption and cannot be made out of inference or
implications but must be laid beyond reasonable
doubt. In other words, since taxation is the rule
and exemption the exception, the intention to
make an exemption ought to be expressed in clear
and unambiguous terms. (Quezon City, supra citing
Agpalo, R.E., Statutory Construction, 2003 ed., p.
302)
Why are tax exemptions are strictly construed
against the taxpayer and liberally in favor of the
State ?
Taxes are necessary for the continued existence of
the State.
In case of a tax overpayment, where the BIR’s
obligation to refund or set-off arises from the
moment the tax was paid under the principle of
BEBER, DINDO 11
 AMILING, BEBER, CAINDAY, CONEJERO, FERUELO & LIAO TAXATION LAW REVIEWER FOR THE 2011 BAR
solutio indebeti. (Commissioner of Internal Revenue
v. Esso Standard Eastern, Inc, 172 SRCA 364)
But note Nestle Phil. v. Court of Appeals, et al., G.R.
No. 134114, July 6, 2001 which held that in order for
the rule on solutio indebeti to apply it is an essential
condition that the petitioner must first show that its
payment of the customs duties was in excess of
what was required by the law at the time the
subject 16 importations of milk and milk products
were made. Unless shown otherwise, the
disputable presumption of regularity of
performance of duty lies in favor of the Collector of
Customs.
Strict interpretation of a tax refund that partakes
of the nature of a tax does not apply to tax refund
based on erroneous payment or where there is no
law that authorizes collection of the tax. There is
parity between tax refund and tax exemption only
when the former is based either on a tax
exemption statute or a tax refund statute.
(Commissioner of Internal Revenue v. Fortune
Tobacco Corporation, G. R. Nos. 167274-75, July
21, 2008)
Tax refunds (or tax credits), on the other
hand, are not founded principally on legislative
grace but on the legal principle which underlies all
quasi-contracts abhorring a person’s unjust
enrichment at the expense of another.
[Commissioner, supra citing Ramie Textiles, Inc. v.
Hon. Mathay, Sr., 178 Phil. 482 (1979); Puyat &
Sons v. City of Manila, et al., 117 Phil. 985 (1963)]
The dynamic of erroneous payment of tax
fits to a tee the prototypic quasi-contract, solutio
indebiti, which covers not only mistake in fact but
also mistake in law. (Commissioner, supra citing
CIVIL CODE, Arts. 2142, 2154 and 2155)
The Government is not exempt from the
application of solutio indebiti. (Commissioner,
supra citing Commissioner of Internal Revenue v.
12 GENERAL PRINCIPLES
Fireman’s Fund Insurance Co., G.R. No. L-30644, 9
March 1987, 148 SCRA 315, 324-325; Ramie
Textiles, Inc. v. Mathay, supra; Gonzales Puyat &
Sons v. City of Manila, supra)
Indeed, the taxpayer expects fair dealing
from the Government, and the latter has the duty
to refund without any unreasonable delay what it
has erroneously collected. (Commissioner, supra
citing Commissioner of Internal Revenue v. Tokyo
Shipping Co., supra at 338) If the State expects its
taxpayers to observe fairness and honesty in
paying their taxes, it must hold itself against the
same standard in refunding excess (or erroneous)
payments of such taxes. It should not unjustly
enrich itself at the expense of taxpayers.
[Commissioner, supra citing AB Leasing and
Finance Corporation v. Commissioner of Internal
Revenue, 453 Phil. 297 in turn citing BPI-Family
Savings Bank, Inc. v. Court of Appeals, 330 SCRA
507, 510, 518 (2000)] And so, given its essence, a
claim for tax refund necessitates only
preponderance of evidence for its approbation like
in any other ordinary civil case. (Commissioner,
supra)
Tax refunds premised upon a tax exemption
strictly construed, Tax exemption is a result of
legislative grace. And he who claims an exemption
from the burden of taxation must justify his claim
by showing that the legislature intended to exempt
him by words too plain to be mistaken.
[Commissioner of Internal Revenue v. Fortune
Tobacco Corporation, G. R. Nos. 167274-75, July
21, 2008 citing Surigao Consolidated Mining Co.
Inc. v. Commissioner of Internal Revenue and Court
of Tax Appeals, 119 Phil. 33, 37 (1963)]
The rule is that tax exemptions must be
strictly construed such that the exemption will not
be held to be conferred unless the terms under
which it is granted clearly and distinctly show that
such was the intention. [Commissioner, supra citing
Phil. Acetylene Co. v. Commission of Internal
Revenue, et al., 127 Phil. 461, 472 (1967); Manila
Electric Company v. Vera, G.R. No. L-29987, 22
BEBER, DINDO
 AMILING, BEBER, CAINDAY, CONEJERO, FERUELO & LIAO TAXATION LAW REVIEWER FOR THE 2011 BAR
October 1975, 67 SCRA 351, 357-358; Surigao
Consolidated Mining Co. Inc. v. Commissioner of
Internal Revenue, supra]
A claim for tax refund may be based on
statutes granting tax exemption or tax refund. In
such case, the rule of strict interpretation against
the taxpayer is applicable as the claim for refund
partakes of the nature of an exemption, a
legislative grace, which cannot be allowed unless
granted in the most explicit and categorical
language. The taxpayer must show that the
legislature intended to exempt him from the tax by
words too plain to be mistaken. [Commissioner,
supra with a note to see Surigao Consolidated
Mining Co. Inc. v. CIR, supra at 732-733; Philex
Mining Corp. v. Commissioner of Internal Revenue,
365 Phil. 572, 579 (1999); Davao Gulf Lumber Corp.
v. Commissioner of Internal Revenue, 354 Phil. 891-
892 (1998); . Commissioner of Internal Revenue v.
Tokyo Shipping Co., Ltd., 314 Phil. 220, 228 (1995)]
Effect of a BIR reversal of a previous ruling
interpreting a law as exempting a taxpayer. A
reversal of a BIR ruling favorable to a taxpayer
would not necessarily create a perpetual exemption
in his favor, for after all the government is never
estopped from collecting taxes because of mistakes
or errors on the part of its agents. (Lincoln Philippine
Life Insurance Company, Inc., etc., v. Court of
Appeals, et al., 293 SCRA 92, 99)
PENALTIES, INTERESTS AND SURCHARGES
1. Surtaxes or surcharges, also known as the civil
penalties, are the amounts imposed in addition to
the tax required.
They are in the nature of penalties and shall
be collected at the same time, in the same manner,
and as part of the tax. [Sec.248 (A), NIRC of 1997]
2. What are the two (2) kinds of civil penalties ?
GENERAL PRINCIPLES
a. the 25% surcharge for late filing or
late payment [Sec. 248 (A), NIRC of 1997] (also
known as the delinquency surcharge), and
b. the 50% willful neglect or fraud
surcharge. [Sec. 248 (B), Ibid.]
3. Define deficiency income tax.
Deficiency income tax is the amount by which
the tax imposed under the NIRC of 1997 exceeds the
amount shown as the tax due by the taxpayer upon
his return. [Sec. 56 (B) (1), NIRC of 1997]
4. Deficiency interest, defined. The
interest assessed and collected on any unpaid
amount of tax at the rate of 20% per annum or such
higher rate as may be prescribed by regulations,
from the date prescribed for payment until the
amount is fully paid. [Sec. 249 (A) (B), NIRC of 1997]
5. Delinquency interest, defined. The
interest assessed and collected on the unpaid
amount until fully paid where there is failure on the
part of the taxpayer to pay the amount die on any
return required to be filed; or the amount of the tax
due for which no return is required; or a deficiency
tax, or any surcharge or interest thereon, on the
date appearing in the notice and demand by the
Commissioner of Internal Revenue. [Sec.249 (c),
NIRC of 1997]
6. After resolving the issues the BIR
Commissioner reduced the assessment. Was it
proper to impose delinquency interest despite the
reduction of the assessment ? Why ?
Yes. The intention of the law is to discourage delay
in the payment of taxes due to the State and in this
sense the surcharge and interest charged are not
penal but compensatory in nature – they are
compensation to the State for the delay in payment,
or for the concomitant tuse of the funds by the
taxpayer beyond the date he is supposed to have
BEBER, DINDO 13
 AMILING, BEBER, CAINDAY, CONEJERO, FERUELO & LIAO TAXATION LAW REVIEWER FOR THE 2011 BAR
paid them to the State. (Bank of the Philippine
Islands v. Commissioner of Internal Revenue, G. R.
No. 137002, July 27, 2006)
7. Compromise penalty is the amount agreed
upon between the taxpayer and the Government to
be paid as a penalty in cases of a compromise.
8. As a result of divergent rulings on whether it
is subject to tax or not, the taxpayer was not able to
pay his taxes on time. Imposed surcharges and
interests for such delay, the taxpayer not invokes
good faith with the BIR countering by saying that
good faith is not a valid defense for violation of a
special law. Furthermore, the BIR further raises the
defense that the government is not bound by the
errors of its agents. Who is correct ?
The taxpayer is correct. The settled rule is that good
faith and honest belief that one is not subject to tax
on the basis of previous interpretation of
government agencies tasked to implement the tax,
are sufficient justification to delete the imposition of
surcharges. (Michel J. Lhuillier Pawnshop, Inc. v.
Commissioner of Internal Revenue, G. R. No. 166786,
September 11, 2006)
Non Retroactive Applications to Tax Payers:
Exceptions
Any Revocation, Modification, reversal of the rules
and regulations or the rulings of the Commissioner
of Internal Revenue cannot be given retroactive
application if the same will be prejudicial to the tax
payer. This will be applied retroactively in the
following cases:
a. Where the tax payer deliberately misstates
or omits material facts from his return or in
any documents require of him by the BIR;
b. Where the facts subsequently gathered by
the BIR are materially different from the
facts on which the ruling is based; and
c. Where the taxpayer acted in bad faith.
14 GENERAL PRINCIPLES
SCOPE AND LIMITATION OF TAXATION
INHERENT LIMITATIONS
What are the inherent limitations on the power of
taxation ?
a. Public purpose. The revenues collected from
taxation should be devoted to a public purpose.
It is a general rule that the legislature is without
power to appropriate public revenue for anything
but a public purpose. It is the essential character of
the direct object of the expenditure, which must
determine its validity justifying a tax, and not the
magnitude of the interest to be affected. Incidental
to the public or the state, which results from the
promotion of private interest and the prosperity of
the of private enterprise do not justify their aid by
public use. (PASCUAL vs. SEC. OF PUBLIC WORKS
DECEMBER 29, 1960)
b. No improper delegation of legislative
authority to tax. Only the legislature can exercise
the power of taxes unless the same is delegated to
some other governmental body by the constitution
or through a law which does not violate any
provision of the constitution.
c. Territoriality. The taxing power should be
exercised only within territorial boundaries of the
taxing authority.
PHIL. MATCH CORP. vs CITY OF CEBU JANUARY 18,
1978
d. Recognition of government exemptions; and
e. Observance of the principle of comity.
Comity is the respect accorded by nations to each
other because they are equals. On the other hand
taxation is an act of sovereign. Thus, the power
should be imposed upon equals out of respect.
CIR vs LEDNICKY JULY 31, 1964
BEBER, DINDO
 AMILING, BEBER, CAINDAY, CONEJERO, FERUELO & LIAO TAXATION LAW REVIEWER FOR THE 2011 BAR
What are the principles to consider in the
determination of whether tax revenues are
devoted for a public purpose ?
a. The tax revenues are for a public
purpose if utilized for the benefit of the community
in general. An alternative meaning is that tax
proceeds should be utilized only to attain the
objectives of government.
b. Inequalities resulting from the
singling out of one particular class for taxation or
exemption infringe no constitutional limitation.
REASON: It is inherent in the power to tax
that the legislature is free to select the subjects of
taxation.
BASIS: The lifeblood theory.
c. An individual taxpayer need not
derive direct benefits from the tax.
REASON: The paramount consideration is
the welfare of the greater portion of the
population.
d. A tax may be imposed, not so
much for revenue purposes, but under police
power for the general welfare of the community.
This would still be for a public purpose.
e. Public purpose continually
expanding. Areas formerly left to private initiative
now lose their boundaries and may be undertaken
by the government if it is to meet the increasing
social challenges of the times.
f. Tax revenue must not be used for
purely private purposes or for the exclusive benefit
of private persons.
g. Private persons may be benefited but
such benefit should be merely incidental as its
GENERAL PRINCIPLES
main object is the benefit of the community in
general.
h. Determined at the time of
enactment of tax law and not at the time of
implementation.
i. There is a presumption of public purpose
even if the tax law does not specifically provide for
its purpose. (Santos & Co., v. Municipality of
Meycauayan, et al., 94 Phil. 1047)
j. Public use is no longer confined to the
traditional notion of use by the public but held
synonymous with public interest, public benefit,
public welfare, and public convenience.
(Commissioner of Internal Revenue v. Central Luzon
Drug Corporation, G.R. No. 159647, April 16, 2005)
A law was enacted imposing a tax on
manufacturers of coconut oil, the proceeds of
which are to be used exclusively for the protection
and promotion of the coconut industry, namely, to
improve the working conditions in coconut mills
and to conduct research on the use of coconut oil
for motor fuel. Some of the manufacturers of
coconut oil challenge the validity of the law,
contending that the tax is to be used for a private
purpose, and therefore, the law violates the rule
that public revenues shall not be appropriated for
anything but a public purpose. Decide with
reason.
The levy is for a public purpose. It cannot be
denied that the coconut industry is one of the
major industries supporting the national economy.
It is, therefore, the state’s concern to make it a
strong and secure source not only of the livelihood
of the significant segment of the population, but
also of export earnings, the sustained growth of
which is one of the imperatives of economic
growth. (Philippine Coconut Producers Federation,
Inc. (Cocofed v. Presidential Commission on Good
Government, 178 SCRA 236, 252)
BEBER, DINDO 15
 AMILING, BEBER, CAINDAY, CONEJERO, FERUELO & LIAO TAXATION LAW REVIEWER FOR THE 2011 BAR

Requisites for taxpayers, concerned citizens, voters c. For voters, there must be a
or legislators to have locus standi to sue. showing of obvious interest in the validity of the
election law in question.
a. In general, the case should involve
constitutional issues. (David, et al., v. President d. For concerned citizens, there must
Gloria Macapagal-Arroyo, etc., et al., G. R. No. be a showing that the issues raised are of
171396, May 3, 2006) transcendental importance which must be settled
early.
b. For taxpayers, there must be a
showing: e. For legislators, there must be a
claim that the official action complained of
1) That tax money is “being infringes upon their prerogatives as legislators.
extracted and spent in violation of specific (David, et al., v. President Gloria Macapagal-
constitutional protections against abuses of
Arroyo, etc., et al., G. R. No. 171396, May 3, 2006)
legislative power.” (Flast v. Cohen, 392
U.S. 83) Only those directly affected have locus standi to
impugn the alleged encroachment by the executive
2) That public money is being department into the legislative domain of
deflected to any improper purpose Congress.
(Pascual v. Secretary of Public Works, 110
Phil. 33) or a claim of illegal a. Only those who shall be directly
disbursement of public funds or that the tax affected by such executive encroachment, such as
measure is unconstitutional. (David, supra) for example employees who would find themselves
subject to disciplinary powers that may be imposed
3) A taxpayer is allowed to sue under the questioned Executive Order as they have
where there is a claim that public funds a direct and specific interest in raising the
are illegally disbursed, or that public money is substantive issue therein (Automotive Industry
being deflected to any improper purpose, or that Workers Alliance (AIWA),etc., et al., v. Romulo, etc.
there is a wastage of public funds ,et al., G. R. No. 157509, January 18, 2005) or
through the enforcement of an invalid or employees who are going to be demoted,
unconstitutional law. (Abaya v. Ebdane, G.
transferred or otherwise affected by any personnel
R. No. 167919, February 14, 2007; Garcia v. action subject o the rule on exhaustion of
Enriquez, Jr. G.R. No. 112655 December 9, administrative remedies.
1993, Minute Resolution)
b. Moreover, and if at all, only Congress,
A taxpayer’s suit is properly can claim any injury from the alleged executive
brought only when there is an exercise encroachment of the legislative function to amend,
of the spending or taxing power of Congress. modify and/or repeal laws. (Automotive Industry
(Automotive Industry Workers Alliance Workers Alliance (AIWA),etc., et al., supra, citing
(AIWA),etc., et al., v. Romulo, etc. ,et al., Gonzales v. Narvasa, G. R. No. 140835, August
G. R. No. 157509, January 18, 2005
14,2000, 337 SCRA 733, 741)
citing Gonzales v. Narvasa, G. R. No. 140835,
August 14, 2000, 337 SCRA 733, 741) Locus standi being merely a matter of procedure,
have been waived in certain instances where a party

16 GENERAL PRINCIPLES BEBER, DINDO

 AMILING, BEBER, CAINDAY, CONEJERO, FERUELO & LIAO TAXATION LAW REVIEWER FOR THE 2011 BAR
who is not personally injured may be allowed to
bring suit. The following are examples of instances
where suits have been brought by parties who have
not have been personally injured by the operation
of a law or any other government act but by
concerned citizens, taxpayers or voters who actually
sue in the public interest:
a. Taxpayer’s suits to question
contracts entered into by the national government
or government-owned or controlled corporations
allegedly in contravention of the law.
b. A taxpayer is allowed to sue where
there is a claim that public funds are illegally
disbursed, or that public money is being deflected to
any improper purpose, or that there is a wastage of
public funds through the enforcement of an invalid
or unconstitutional law. (Abaya v. Ebdane, G. R. No.
167919, February 14, 2007)
The VAT law provides that, the President, upon the
recommendation of the Secretary of Finance, shall,
effective January 1, 2006, raise the rate of value-
added tax to twelve percent (12%) after any of the
following conditions have been satisfied. “(i) value-
added tax collection as a percentage of Gross
Domestic Product (GDP) of the previous year
exceeds two and four-fifth percent (2 4/5%) or (ii)
national government deficit as a percentage of GDP
of the previous year exceeds one and one-half
percent (1 ½%).”
Was there an invalid delegation of legislative power
? In this instance, there is a requirement that
No. There is no undue delegation of legislative
power but only of the discretion as to the execution
of the law. This is constitutionally permissible.
Congress does not abdicate its functions or unduly
delegate power when it describes what job must be
done, who must do it, and what is the scope of his
authority. In the above case the Secretary of
Finance becomes merely the agent of the legislative
department, to determine and declare the even
GENERAL PRINCIPLES
upon which its expressed will takes place. The
President cannot set aside the findings of the
Secretary of Finance, who is not under the
conditions acting as the execute alter ego or
subordinate. . [Abakada Guro Party List (etc.) v.
Ermita, etc., et al., G. R. No. 168056, September 1,
2005 and companion cases citing various cases]]
Instances of proper delegation: When taxing power
could be delegated: Exceptions to the rule on non-
delegation:
a. Delegation of tariff powers by Congress
to the President under the flexible tariff clause,
Section 28 (2), Article VI of the Constitution.
b. Delegation of emergency powers to
the President under Section 23 (2) of Article VI of
the Constitution.
c. The delegation to the President of the
Philippines to enter into executive agreements,
and to ratify treaties which may contain tax
exemption provisions subject to the concurrence
by the Senate in the ratification made by the
President.
d. Delegation to the people at large.
e. Delegation to administrative bodies
[Abakada Guro Party List (Formerly AASJS), etc., v,
Ermita, et al., G. R. No.168056, September 1,
2005], which is referred to as subordinate
legislation.
the law is complete in all aspects so what is
delegated is merely the implementation of the law
or there exists sufficiently determinate standards
to guide the delegate and prevent a total
transference of the taxing power.
“Paradigm shift” from exclusive Congressional
power to direct grant of taxing power to local
legislative bodies. The power to tax is no longer
BEBER, DINDO 17
 AMILING, BEBER, CAINDAY, CONEJERO, FERUELO & LIAO TAXATION LAW REVIEWER FOR THE 2011 BAR
vested exclusively on Congress; local legislative
bodies are now given direct authority to levy taxes,
fees and other charges pursuant to Article X, section
5 of the 1987 Constitution. (Batangas Power
Corporation v. Batangas City, et al. G. R. No. 152675,
and companion case, April 28, 2004 citing National
Power Corporation v. City of Cabanatuan, G. R. No.
149110, April 9, 2003)
Local government legislation, “is not
regarded as a transfer of general legislative power,
but rather as the grant of authority to prescribe
local regulations, according to immemorial
practice, subject, of course, to the interposition of
the superior in cases of necessity.” (People v. Vera,
65 Phil. 56)
Taxing power of the local government is limited.
The taxing power of local governments is limited in
the sense that Congress can enact legislation
granting tax exemptions.
While the system of local government
taxation has changed with the onset of the 1987
Constitution, the power of local government units
to tax is still limited.
While the power to tax by local governments
may be exercised by local legislative bodies, no
longer merely by virtue of a valid delegation as
before, but pursuant to direct authority conferred
by Section 5, Article X of the Constitution, the basic
doctrine on local taxation remains essentially the
same, “the power to tax is [still] primarily vested in
the Congress.” (Quezon City, et al., v. ABS-CBN
Broadcasting Corporation, G. R. No. 166408,
October 6, 2008 citing City Government of Quezon
City, et al. v. Bayan Telecommunications, Inc., G.R.
No. 162015, March 6, 2006, 484 SCRA 169 in turn
referring to Mactan Cebu International Airport
Authority, v. Marcos, G.R. No. 120082, September
11, 1996, 261 SCRA 667, 680)
18 GENERAL PRINCIPLES
Further amplification by Bernas of the local
government’s power to tax. “What is the effect of
Section 5 on the fiscal position of municipal
corporations? Section 5 does not change the
doctrine that municipal corporations do not
possess inherent powers of taxation. What it does
is to confer municipal corporations a general
power to levy taxes and otherwise create sources
of revenue. They no longer have to wait for a
statutory grant of these powers. The power of the
legislative authority relative to the fiscal powers of
local governments has been reduced to the
authority to impose limitations on municipal
powers. Moreover, these limitations must be
“consistent with the basic policy of local
autonomy.” The important legal effect of Section 5
is thus to reverse the principle that doubts are
resolved against municipal corporations.
Henceforth, in interpreting statutory provisions on
municipal fiscal powers, doubts will be resolved in
favor of municipal corporations. It is understood,
however, that taxes imposed by local government
must be for a public purpose, uniform within a
locality, must not be confiscatory, and must be
within the jurisdiction of the local unit to pass.”
(Quezon City, et al., v. ABS-CBN Broadcasting
Corporation, G. R. No. 166408, October 6, 2008
citing City Government of Quezon City, et al. v.
Bayan Telecommunications, Inc., G.R. No. 162015,
March 6, 2006, 484 SCRA 169)
Reconciliation of the local government’s authority
to tax and the Congressional general taxing power.
Congress has the inherent power to tax, which
includes the power to grant tax exemptions. On
the other hand, the power of local governments,
such as provinces and cities for example Quezon
City, to tax is prescribed by Section 151 in relation
to Section 137 of the LGC which expressly provides
that notwithstanding any exemption granted by
any law or other special law, the City or a province
may impose a franchise tax. It must be noted that
BEBER, DINDO
 AMILING, BEBER, CAINDAY, CONEJERO, FERUELO & LIAO TAXATION LAW REVIEWER FOR THE 2011 BAR
Section 137 of the LGC does not prohibit grant of
future exemptions.
The Supreme Court in a series of cases has
sustained the power of Congress to grant tax
exemptions over and above the power of the local
government’s delegated power to tax. (Quezon
City, et al., v. ABS-CBN Broadcasting Corporation,
G. R. No. 166408, October 6, 2008 citing City
Government of Quezon City, et al. v. Bayan
Telecommunications, Inc., G.R. No. 162015, March
6, 2006, 484 SCRA 16)
“Indeed, the grant of taxing powers to local
government units under the Constitution and the
LGC does not affect the power of Congress to grant
exemptions to certain persons, pursuant to a
declared national policy. The legal effect of the
constitutional grant to local governments simply
means that in interpreting statutory provisions on
municipal taxing powers, doubts must be resolved
in favor of municipal corporations.” *Ibid., referring
to Philippine Long Distance Telephone Company,
Inc. (PLDT) vs. City of Davao]
SITUS OF TAXATION
Situs of taxation literally means the place of
taxation, or the country that has jurisdiction to lecy
a particular tax on persons, property, rights or
business.
SITUS OF PERSONS
1. Community Tax is levied on residents of a
community.
2. Income Tax is levied based on:
a. citizenship, or the country of which he or she is a
citizen (nationality theory)
b. legal residence (domicillary theory), and
c. the place where income is derived (source).
GENERAL PRINCIPLES
General principles of income taxation in the
Philippines or the source rule of income taxation as
provided in the NIRC of 1997.
a. A citizen of the Philippines residing therein
is taxable on all income derived from sources
within and without the Philippines;
b. A nonresident citizen is taxable only on
income derived from sources within the
Philippines;
c. An individual citizen of the Philippines who
is working and deriving income abroad as an
overseas contract worker is taxable only on income
from sources within the Philippines: Provided, That
a seaman who is a citizen of the Philippines and
who receives compensation for services rendered
abroad as a member of the complement of a vessel
engaged exclusively in international trade shall be
treated as an overseas contract worker;
d. An alien individual, whether a resident or
not of the Philippines, is taxable only on income
derived from sources within the Philippines;
e. A domestic corporation is taxable on all
income derived from sources within and without
the Philippines; and
f. A foreign corporation, whether engaged or
not in trade or business in the Philippines, is
taxable only on income derived from sources
within the Philippines. (Sec. 23, NIRC of 1997,
emphasis supplied)
Juliane a non-resident alien appointed as a
commission agent by a domestic corporation with a
sales commission of 10% all sales actually concluded
and collected through her efforts. The local
company withheld the amount of P107,000 from
her sales commission and remitted the same to the
BIR.
BEBER, DINDO 19
 AMILING, BEBER, CAINDAY, CONEJERO, FERUELO & LIAO TAXATION LAW REVIEWER FOR THE 2011 BAR
She filed a claim for refund alleging that her sales
commission is not taxable because the same was a
compensation for her services rendered in Germany
and therefore considered as income from sources
outside the Philippines.
Is her contention correct ?
Yes. The important factor which determines the
source of income of personal services is not the
residence of the payor, or the place where the
contract for service is entered into, or the place of
payment, but the place where the services were
actually performed.
Since the activity of securing the sales were in
Germany, then the income did not originate from
sources from within the Philippines. (Commissioner
of Internal Revenue v. Baier-Nickel, G. R. No.
153793, August 29, 2006)
Ensite, Ltd.. is a Canadian corporation not doing
business in the Philippines. It holds 40% of the
shares of Philippine Stamping Plant, Inc.,., a
Philippine company while the 60% is owned by
Fred Corporation, a Filipino-owned Philippine
corporation. Ensite Co. also owns 100% of the
shares of Susanto Co., an Indonesian company
which has a duly licensed Philippine branch. Due to
worldwide restructuring of the Ensite Ltd.,. group,
Ensite Ltd.,. decided to sell all its shares in
Philippine Stamping Plant, Inc. and Susanto Co.
The negotiations for the buy-out and the signing of
the Agreement of Sale were all done in the
Philippines. The Agreement provides that the
purchase price will be paid to Ensite Ltd’s bank
account in the U.S. and that title to the Philippine
Stamping Plant, Inc. and Susanto Co. shall be
transferred to General Co., in Toronto Canada
where stock certificates will be delivered. General
Co. seeks your advice as to whether or not it will
subject the payments of the purchase price to
withholding tax. Explain your advice. The
payments of the purchase price will be subject to
withholding tax. Considering that all the activities
(sales) occurred within the Philippines, the income
is considered as income from within, subject to
20 GENERAL PRINCIPLES
Philippine income taxation. Ensite, Ltd. being a
foreign corporation is to be taxed on its income
derived from sources within the Philippines.
Ensite, Ltd. is a Canadian corporation, which has a
duly licensed Philippine branch engage in trading
activities in the Philippines. Ensite, Ltd.. also
invested directly in 40% of the shares of stock of
Philippine Stamping Plant, Inc.., a Philippine
corporation. These shares are booked in the Head
Office of Ensite, Ltd.. and are not reflected as
assets of the Philippine branch. In 2009, Philippine
Stamping Plant, Inc.. declared dividends to its
stockholders. Before remitting the dividends to
Ensite Ltd.,., Philippine Stamping Plant, Inc. Co.
seeks your advice as to whether it will subject the
remittance to withholding tax. There is no need to
discuss WT rates, if applicable. Focus your
discussion on what is the issue.
Philippine Stamping Plant, Inc.. should subject the
remittance to withholding tax.. Since Philippine
Stamping Plant. is a Philippine corporation, its
shares of stock have obtained a business situs in
the Philippines, hence the dividends are considered
as income from within. Ensite. Ltd., being a foreign
corporation, should be subject to tax on its income
from within.
Philippine Stamping Plant, Inc., a Philippine
corporation, has an executive Larry who is a
Filipino citizen. Philippine Stamping Plant, Inc,. has
a subsidiary in Malaysia (Kuala Lumpur
Manufacturing, Inc.) and will assign Larry for an
indefinite period to work full time for Kuala
Lumpur Manufacturing, Inc.. Larry will bring his
family to reside in Malaysia and will lease out his
residence in the Philippines. The salary of Larry will
be shouldered 50% by Philippine Stamping Plant,
Inc.. while the other 50% plus housing, cost of
living and educational allowances of Larry’s
dependents will be shouldered by Kuala Lumpur
Manufacturing, Inc.. Philippine Stamping Plant,
Inc.. will credit the 50% of Larry’s salary to his
Philippine bank account. Larry will sign the
contract of employment in the Philippines. He will
also be receiving rental income for the lease of his
Philippine residence.
BEBER, DINDO
 AMILING, BEBER, CAINDAY, CONEJERO, FERUELO & LIAO TAXATION LAW REVIEWER FOR THE 2011 BAR
Are these salaries, allowances and rentals subject
to Philippine income tax? Explain briefly.
The salaries and allowances of Larry, being derived
from labor or personal services rendered outside of
the Philippines is considered as income from
without. Since Larry is an OCW, then he is to be
taxed only on his income derived from within the
Philippines such as the rentals on his Philippine
residence, and not on his income from without.
Obama Airlines, Inc., a foreign airline company
which does not maintain any flight to and from the
Philippines sold air tickets in the Philippines, through
a general sales agent, relating to the carriage of
passengers and cargo between two points, both
outside the Philippines.
Is Obama, Inc., subject to income taxes on the sale
of the tickets ?
Yes. The source of income which is taxable is that
“activity” which produced the income. The ”sale of
tickets” in the Philippines is the activity that
determines whether such income is taxable in the
Philippines.
The tickets exchanged hands here and payments for
fares were also made here in Philippine currency.
The situs of the source of payments is the
Philippines. the flow of wealth proceeded from and
occurred, within the Philippine territory, enjoying
the protection accorded by the Philippine
Government. In consideration of such protection,
the flow of wealth should share the burden of
supporting the government. [Commissioner of
Internal Revenue v. British Overseas Airways
Corporation (BOAC), 149 SCRA 395]
Off-line air carriers having general sales agents in
the Philippines are engaged in or doing business in
the Philippines and their income from sales of
passage documents here is income from within the
Philippines. Thus, the off-line air carrier liable for
the 32% (now 30%) tax on its taxable income.
GENERAL PRINCIPLES
[South African Airways v. Commissioner of Internal
Revenue, G.R. No. 180356, February 16, 2010 citing
Commissioner of Internal Revenue v. British
Overseas Airways Corporation (British Overseas
Airways), No. L-65773-74, April 30, 1987, 149 SCRA
395]
Supposing that Obama, Inc., sells tickets outside of
the Philippines for passengers it carry from Gold
City, South Africa to the Philippines but returns to
South Africa without any cargo or passengers.
Would it then be subject to any Philippine tax on
such sales ?
It would not be subject to any tax. It is not subject
to any income tax because the activity which
generated the income (the sale of the tickets) was
performed outside of the Philippines.
It is not subject to the carrier’s tax based on gross
Philippine billings because there were no lifts that
originated from the Philippines. “Gross Philippine
Billings” refers to the amount of gross revenue
derived from carriage of persons, excess baggage,
cargo and mail originating from the Philippines in a
continuous and uninterrupted flight, irrespective of
the place of sale or issue and the place of payment
of the ticket or passage document.” *NIRC of 1997,
Sec. 28(A)(3)(a)]
Would your answer be the same if Obama, Inc. sold
tickets outside of the Philippines for travelers who
are going to picked up by Obama, Inc., planes from
the Diosdado Macapagal Intl. Airport at Clark,
Angeles, Pampanga, bound for Nairobi, Kenya ?
Reason out your answer.
No more. This time Obama, Inc., would be subject
to the carrier’s tax based on Gross Philippine
Billings. (GPB).
“Gross Philippine Billings” refers to the
amount of gross revenue derived from carriage of
persons, excess baggage, cargo and mail
BEBER, DINDO 21
 AMILING, BEBER, CAINDAY, CONEJERO, FERUELO & LIAO TAXATION LAW REVIEWER FOR THE 2011 BAR
originating from the Philippines in a continuous
and uninterrupted flight, irrespective of the place
of sale or issue and the place of payment of the
ticket or passage document.” *NIRC of 1997, Sec.
28(A)(3)(a)]
The place of sale is irrelevant; as long as
the uplifts of passengers and cargo occur from the
Philippines, income is included in GPB. (South
African Airways v. Commissioner of Internal
Revenue, G.R. No. 180356, February 16, 2010)
3. Estate Tax is levied on the basis of the residence
of the decedent at the time of his death.
4. Donor’s Tax is levied on the basis of the
residence of the donor at the time of donation.
5. Business or Occupation Tax is levied on the basis
of the place where the business is done or the
place the occupation is engaged in.
6. Tax on the sale of personal property is levied on
the basis of the place where the sale is
consummated or perfected.
SITUS OF TAXATION OF PROPERTY
1. Real Property. Location of the property ( lex rei
sitae)
2. Tangible Personal Property. Location of the
property or owner’s domicile (mobilia sequuntur
personam)
3. Intangible Personal property. Domicile or
residence.
SITUS OF VAT
Value-added tax (VAT) is a tax which is imposed
only on the increase in the worth, merit or
importance of goods, properties or services, and
not on the total value of the goods or services
being sold or rendered.
22 GENERAL PRINCIPLES
Nature of VAT. VAT is an indirect tax that may be
shifted or passed on to the buyer, transferee or
lessee of the goods, properties or services. As
such, it should be understood not in the context of
the person or entity that is primarily, directly liable
for its payment, but in terms of its nature as a tax
on consumption. [Commissioner of Internal
Revenue v. Seagate Technology (Philippines), G. R.
No. 153866, February 11, 2005 citing various
authorities}
VAT is a percentage tax imposed on any person
whether or not a franchise grantee, who in the
course of trade or business, sells, barters,
exchanges, leases, goods or properties, renders
services. It is also levied on every importation of
goods whether or not in the course of trade or
business. The tax base of the VAT is limited only to
the value added to such goods, properties, or
services by the seller, transferor or lessor.
Further, the VAT is an indirect tax and can be
passed on to the buyer. (Quezon City, et al., v.
ABS-CBN Broadcasting Corporation, G. R. No.
166408, October 6, 2008)
Effect of exemptions from VAT which is an indirect
tax. If a special law merely exempts a party as a
seller from its direct liability for payment of the
VAT, but does not relieve the same party as a
purchaser from its indirect burden of the VAT
shifted to it by its VAT-registered suppliers, the
purchase transaction is not exempt.
The VAT is a tax on consumption, the amount of
which may be shifted or passed on by the seller to
the purchaser of the goods, properties or services.
[Commissioner of Internal Revenue v. Seagate
Technology (Philippines), G. R. No. 153866,
February 11, 2005)
CONSTITUTIONAL LIMITATIONS
Constitutional limitations on the power of taxation .
The general or indirect constitutional limitations as
BEBER, DINDO
 AMILING, BEBER, CAINDAY, CONEJERO, FERUELO & LIAO TAXATION LAW REVIEWER FOR THE 2011 BAR

well as the specific or direct constitutional c. Congress shall evolve a progressive

limitations. system of taxation;

The general or indirect constitutional limitations on d. All appropriation, revenue or tariff

the power of taxation are: bills shall originate exclusively in the House of
Representatives, but the Senate may propose and
a. Due process clause; SECTION 1, concur with amendments;
ART. III
e. The President shall have the power to veto
b. Equal protection clause; SECTION any particular item or items in an appropriation,
28, ART. VI revenue, or tariff bill, but the veto shall not affect
c. Freedom of the press; the item or items to which he does not object;SEC.
27(2), ART. VI
d. Religious freedom; SECTION 5, ART.
III f. Delegated power of the President
to impose tariff rates, import and export quotas,
tonnage and wharfage dues:

e. No taking of private property 1) Delegation by Congress

without just compensation;
2) through a law
f. Non-impairment clause;SECTION
10, ART. III 3) subject to Congressional limits and
restrictions
g. Law-making process:
4) within the framework of national
1) Bill should embrace only development program.
one subject expressed in the title thereof;
g. Tax exemption of charitable
2) Three (3) readings on three institutions, churches, parsonages and convents
separate days; appurtenant thereto, mosques, and all lands,
buildings and improvements of all kinds actually,
3) Printed copies in final form
directly and exclusively used for religious, charitable
distributed three (3) days before passage.
or educational purposes;
h. Presidential power to grant
h. No tax exemption without the
reprieves, commutations and pardons and remittal
concurrence of majority vote of all members of
of fines and forfeiture after conviction by final
Congress;
judgment.
i. No use of public money or property
The specific or direct constitutional limitation.
for religious purposes except if priest is assigned to
a. No imprisonment for non-payment the armed forces, penal institutions, government
of a poll tax; SEC. 20, ART. III orphanage or leprosarium;

b. Taxation shall be uniform and

equitable; SEC. 28(1), ART. VI
GENERAL PRINCIPLES BEBER, DINDO 23
 AMILING, BEBER, CAINDAY, CONEJERO, FERUELO & LIAO TAXATION LAW REVIEWER FOR THE 2011 BAR
j. Money collected on tax levied for a
special purpose to be used only for such purpose,
balance if any, to general funds;
k. The Supreme Court's power to
review judgments or orders of lower courts in all
cases involving the legality of any tax, impose,
assessment or toll or the legality of any penalty
imposed in relation to the above;
l. Authority of local government units
to create their own sources of revenue, to levy
taxes, fees and other charges subject to guidelines
and limitations imposed by Congress consistent with
the basic policy of local autonomy;
m. Automatic release of local
government's just share in national taxes;
n. Tax exemption of all revenues and
assets of non-stock, non-profit educational
institutions used actually, directly and exclusively for
educational purposes;SEC. 28(3), ART. VI
o. Tax exemption of all revenues and assets
of proprietary or cooperative educational
institutions subject to limitations provided by law
including restrictions on dividends and provisions for
reinvestment of profits;SEC 4(3/4), ART. XIV
p. Tax exemption of grants,
endowments, donations or contributions used
actually, directly and exclusively for educational
purposes subject to conditions prescribed by law.
Equal protection of the law clause is subject to
reasonable classification. If the groupings are
characterized by substantial distinctions that make
real differences, one class may be treated and
regulated differently from another. The
classification must also be germane to the purpose
of the law and must apply to all those belonging to
the same class. (Tiu, et al., v. Court of Appeals, et
al., G.R. No. 127410, January 20, 1999)
24 GENERAL PRINCIPLES
Requisites for valid classification. All that is
required of a valid classification is that it be
reasonable, which means that a. the
classification should be based on substantial
distinctions which make for real differences,
b. that it must be germane to the
purpose of the law;
c. that it must not be limited to
existing conditions only; and
d. that it must apply equally to each
member of the class.
The standard is satisfied if the classification
or distinction is based on a reasonable foundation
or rational basis and is not palpably arbitrary.
[ABAKADA Guro Party List, etc., v. Purisima, etc., et
al., G. R. No. 166715, August 14, 2008]
Equal protection does not demand absolute
equality. It merely requires that all persons shall
be treated alike, under like circumstances and
conditions, both as to the privileges conferred and
liabilities enforced. (Santos v. People, et al, G. R.
No. 173176, August 26, 2008)
It is imperative to duly establish that the
one invoking equal protection and the person to
which she is being compared were indeed similarly
situated, i.e., that they committed identical acts for
which they were charged with the violation of the
same provisions of the NIRC; and that they
presented similar arguments and evidence in their
defense - yet, they were treated differently.
(Santos, supra)
Tests to determine validity of classification. The
United States Supreme Court has established
different tests to determine the validity of a
classification and compliance with the equal
protection clause. The recognized tests are:
BEBER, DINDO
 AMILING, BEBER, CAINDAY, CONEJERO, FERUELO & LIAO TAXATION LAW REVIEWER FOR THE 2011 BAR
a. The traditional (or rational basis)
test.
b. The strict scrutiny (or compelling
interest) test.
c. The intermediate level of scrutiny (or
quasi-suspect class) test.
The traditional (or rational basis) test used in order
to determine the validity of classification. The
classification is valid if it is rationally related to a
constitutionally permissible state interest.
The complainant must prove that the
classification is “invidous,” “wholly arbitrary,” or
”capricious,” otherwise the classification is
presumed to be valid. (Lindsley v. Natural
Carboinic Gas Co., 220 U.S. 61; McGowan v.
Maryland, 366 U.S. 420; United States Railroad
Retirement Board v. Fritz, 449 U.S. 166)
The strict scrutiny (or compelling interest) test
used in order to determine the validity of the
classification. Government regulation that
intentionally discriminates against a “suspect class”
such as racial or ethnic minorities, is subject to
strict scrutiny and considered to violate the equal
protection clause unless found necessary to
promote a compelling state interest.
A classification is necessary when it is
narrowly drawn so that no alternative, less
burdensome means is available to accomplish the
state interest.
Thus, it was held that denial of free public
education to the children of illegal aliens imposes
an enormous and lasting burden based on a status
over which the children have no control is violative
of equal protection because there is no showing
that such denial furthers a “substantial” state goal.
(Plyler v. Doe, 457 U.S. 202)
GENERAL PRINCIPLES
The intermediate level of scrutiny (or quasi-suspect
class) test used in order to determine the validity
of he classification. Classification based on gender
or legitimacy are not “suspect,” but neither are
they judged by the traditional or rational basis test.
Intentional discriminations against
members of a quasi-suspect class violate equal
protection unless they are substantially related to
important government objectives. (Craig v. Boren,
429 U.S. 190)
Thus, a state law granting a property tax
exemption to widows, but not widowers, has been
held valid for it furthers the state policy of
cushioning the financial impact of spousal loss
upon the sex for whom that loss usually imposes a
heavier burden. (Kahn v. Shevin, 416 U.S. 351)
Equality and uniformity of taxation may mean the
same as equal protection. In such a case, the terms
would mean that all subjects and objects of taxation
which are similarly situated shall be subject to the
same burdens and granted the same privileges
without any discrimination whatsoever.
It is inherent in the power to tax that the State be
free to select the subjects of taxation, and it has
been repeatedly held that, "inequalities which result
from a singling out of one particular class of
taxation, or exemption, infringe no constitutional
limitation." (Commissioner of Internal Revenue, et
al., v. Santos, et al., 277 SCRA 617)
Benjie is a law-abiding citizen who pays his real
estate taxes promptly. Due to a series of typhoons
and adverse economic conditions, an ordinance is
passed by Soliman City granting a 50% discount for
payment of unpaid real estate taxes for the
preceding year and the condonation of all penalties
on fines resulting from the late payment.
Arguing that the ordinance rewards delinquent tax
payers and discriminates against prompt ones,
BEBER, DINDO 25
 AMILING, BEBER, CAINDAY, CONEJERO, FERUELO & LIAO TAXATION LAW REVIEWER FOR THE 2011 BAR
Benjie demands that he be refunded an amount
equivalent to one-half of the real property taxes he
paid. The municipal attorney rendered an opinion
that Benjie cannot be reimbursed because the
ordinance did not provide for such reimbursement.
Benjie files suit to declare the ordinance void on
the ground that it is a class legislation. Will his suit
prosper ? Explain your answer briefly.
No. There is no class legislation because there is
no violation of the equal protection suit. There is a
valid classification between those who already paid
their taxes and those who have not. Furthermore,
the taxing authority has the prerogative to select
the subjects and objects of taxation, including
granting a 50% discount in the payment of unpaid
real estate taxes, and the condonation of all
penalties on fines resulting from late payment.
The rewards law to tax collectors does not violate
equal protection. The equal protection clause
recognizes a valid classification, that is, a
classification that has a reasonable foundation or
rational basis and not arbitrary. With respect to RA
9335, it’s expressed public policy is the
optimization of the revenue-generation capability
and collection of the BIR and the BOC. Since the
subject of the law is the revenue- generation
capability and collection of the BIR and the BOC,
the incentives and/or sanctions provided in the law
should logically pertain to the said agencies.
Moreover, the law concerns only the BIR and the
BOC because they have the common distinct
primary function of generating revenues for the
national government through the collection of
taxes, customs duties, fees and charges.
Indubitably, such substantial distinction is
germane and intimately related to the purpose of
the law. Hence, the classification and treatment
accorded to the BIR and the BOC under RA 9335
fully satisfy the demands of equal protection.
26 GENERAL PRINCIPLES
(ABAKADA Guro Party List, etc., v. Purisima, etc., et
al., G. R. No. 166715, August 14, 2008)
The prosecution of one guilty person while others
equally guilty are not prosecuted, however, is not,
by itself, a denial of the equal protection of the
laws. Where the official action purports to be in
conformity to the statutory classification, an
erroneous or mistaken performance of the
statutory duty, although a violation of the statute,
is not without more a denial of the equal
protection of the laws.
The unlawful administration by officers of
a statute fair on its face, resulting in its unequal
application to those who are entitled to be treated
alike, is not a denial of equal protection unless
there is shown to be present in it an element of
intentional or purposeful discrimination. This may
appear on the face of the action taken with respect
to a particular class or person, or it may only be
shown by extrinsic evidence showing a
discriminatory design over another not to be
inferred from the action itself.
(Santos v. People, et al, G. R. No. 173176, August
26, 2008)
Equal protection should not be used to protect
commission of crime. While all persons accused of
crime are to be treated on a basis of equality
before the law, it does not follow that they are to
be protected in the commission of crime. It would
be unconscionable, for instance, to excuse a
defendant guilty of murder because others have
murdered with impunity.
Likewise, if the failure of prosecutors to
enforce the criminal laws as to some persons
should be converted into a defense for others
charged with crime, the result would be that the
trial of the district attorney for nonfeasance would
become an issue in the trial of many persons
charged with heinous crimes and the enforcement
of law would suffer a complete breakdown. (Santos
v. People, et al, G. R. No. 173176, August 26, 2008)
BEBER, DINDO
 AMILING, BEBER, CAINDAY, CONEJERO, FERUELO & LIAO TAXATION LAW REVIEWER FOR THE 2011 BAR

STAGES OF TAXATION c. If the examiner is satisfied that the

A. Levying or Imposition refers to the tax return is truly reflective of the taxable
enactment of tax laws and is therefore transaction and all taxes have been paid,
purely legislative in character. Courts have
the process ends. However, if the examiner
no power to inquire into or interfere in the
wisdom, objective, motive or expediency in is not satisfied that the tax return is truly
the passage of a tax laws. The legislative reflective of the taxable transaction and
power to tax includes: that the taxes have not been fully paid, a
Notice of Informal Conference is issued
1. Discretion as to purpose inviting the taxpayer to explain why he
for which taxes shall be should not be subject to additional taxes.
levied;
d. If the taxpayer attends the informal
2. Discretion as to subjects
of taxation; conference and the examiner is satisfied
3. Discretion as to amount with the explanation of the taxpayer, the
or rate of tax; and process is again ended.
4. Discretion as to the If the taxpayer ignores the invitation to the
manner, means, and informal conference, or if the examiner is
agencies of collection of not satisfied with taxpayer’s explanation,,
taxes.
and he believes that proper taxes should be
B. Collection and Administration refers to the
act of assessing, collecting, and assessed, the Commissioner of Internal
implementing tax laws, which can be Revenue or his duly authorized
delegated by the legislative body to the representative shall then notify the
executive branch and the local taxpayer of the findings in the form of a pre-
government. The power of taxation should assessment notice. The pre-assessment
be exercised with caution to minimize the
notice requires the taxpayer to explain
injury to the proprietary rights of a
taxpayer. within fifteen (15) days from receipt why no
C. Payment. notice of assessment and letter of demand
D. Refund. for additional taxes should be directed to
him.
ASSESSMENT OF INTERNAL REVENUE e. If the Commissioner is satisfied
TAXES with the explanation of the taxpayer, then
the process is again ended.
Outline of tax remedies of a taxpayer and If the taxpayer ignores the pre-assessment
the government relative to ASSESSMENT of notice by not responding or his explanations
internal revenue taxes. are not accepted by the Commissioner, then
a notice of assessment and a letter of
a. The taxpayer files his tax return. demand is issued.
b. A Letter of Authority is issued The notice of assessment must be issued by
authorizing BIR examiner to audit or the Commissioner to the taxpayer within a
examine the tax return and determines period of three (3) years from the time the
whether the full and complete taxes have tax return was filed or should have been
been paid. filed whichever is the later of the two
events. Where the taxpayer did not file a

GENERAL PRINCIPLES BEBER, DINDO 27

AMILING, BEBER, CAINDAY, CONEJERO, FERUELO & LIAO TAXATION LAW REVIEWER FOR THE 2011 BAR
tax return or where the tax return filed is
false or fraudulent, then the Commissioner
has a period of ten (10) years from
discovery of the failure to file a tax return or
from discovery of the fraud within which to
issue an assessment notice. The running of
the above prescriptive periods may
however be suspended under certain
instances.
The notice of assessment must be issued
within the prescriptive period and must
contain the facts, law and jurisprudence
relied upon by the Commissioner.
Otherwise it would not be valid.
f. The taxpayer should then file an
administrative protest by filing a request for
reconsideration or reinvestigation within
thirty (30) days from receipt of the
assessment notice.
The taxpayer could not immediately
interpose an appeal to the Court of Tax
Appeals because there is no decision yet of
the Commissioner that could be the subject
of a review.
To be valid the administrative protest must
be filed within the prescriptive period, must
show the error of the Bureau of Internal
Revenue and the correct computations
supported by a statement of facts, and the
law and jurisprudence relied upon by the
taxpayer. There is no need to pay under
protest. If the protest was not seasonably
filed the assessment becomes final and
collectible and the Bureau of Internal
Revenue could use its administrative and
judicial remedies in collecting the tax.
g. Within sixty (60) days from filing of
the protest, all relevant supporting
documents shall be submitted, otherwise
the assessment shall become final and
collectible and the BIR could use its
28 GENERAL PRINCIPLES
administrative and judicial remedies to
collect the tax.
Once an assessment has become final and
collectible, not even the BIR Commissioner
could change the same. Thus, the taxpayer
could not pay the tax, then apply for a
refund, and if denied appeal the same to
the Court of Tax Appeals.
h. If the protest is denied in whole or
in part, or is not acted upon within one
hundred eighty (180) days from the
submission of documents, the taxpayer
adversely affected by the decision or
inaction may appeal to the Court of Tax
Appeals within thirty (30) days from receipt
of the adverse decision, or from the lapse of
the one hundred eighty (180-) day period,
with an application for the issuance of a writ
of preliminary injunction to enjoin the BIR
from collecting the tax subject of the
appeal.
If the taxpayer fails to so appeal, the denial
of the Commissioner or the inaction of the
Commissioner would result to the notice of
assessment becoming final and collectible
and the BIR could then utilize its
administrative and judicial remedies to
collect the tax.
i. A decision of a division of the Court
of Tax Appeals adverse to the taxpayer or
the government may be the subject of a
motion for reconsideration or new trial, a
denial of which is appealable to the Court
of Tax Appeals en banc by means of a
petition for review.
The Court of Tax Appeals, has a period of
twelve (12) months from submission of the
case for decision within which to decide.
j. If the decision of the Court of Tax
Appeals en banc affirms the denial of the
protest by the Commissioner or the
assessment in case of failure by the
BEBER, DINDO
 AMILING, BEBER, CAINDAY, CONEJERO, FERUELO & LIAO TAXATION LAW REVIEWER FOR THE 2011 BAR
Commissioner to decide the taxpayer must
file a petition for review on certiorari with
the Supreme Court within fifteen (15) days
from notice of the judgment on questions
of law. An extension of thirty (30) days may
for justifiable reasons be granted. If the
taxpayer does not so appeal, the decision of
the Court of Tax Appeals would become
final and this has the effect of making the
assessment also final and collectible. The
BIR could then use its administrative and
judicial remedies to collect the tax.
The word assessment when used in
connection with taxation, may have more
than one meaning. More commonly the
word “assessment” means the official
valuation of a taxpayer’s property for
purpose of taxation. The above definition of
assessment finds application under tariff
and customs taxation as well as local
government taxation.
For real property taxation, there may be a
special meaning to the burdens that are
imposed upon real properties that have
been benefited by a public works
expenditure of a local government. It is
sometimes called a special assessment or a
special levy. (Commissioner of Internal
Revenue v. Pascor Realty and Development
Corporation, et al., G.R. No. 128315, June
29, 1999)
For internal revenue taxation assessment as
laying a tax. The ultimate purpose of an
assessment to such a connection is to
ascertain the amount that each taxpayer is
to pay. (Ibid.)
An assessment is a notice duly sent to the
taxpayer which is deemed made only when
the BIR releases, mails or sends such notice
to the taxpayer. (Commissioner of Internal
GENERAL PRINCIPLES
Revenue v. Pascor Realty and Development
Corporation, et al., G.R. No. 128315, June
29, 1999)
Self-assessed tax, defined. A tax that the
taxpayer himself assesses or computes and
pays to the taxing authority. It is a tax that
self-assessed by the taxpayer without the
intervention of an assessment by the tax
authority to create the tax liability.
The Tax Code follows the pay-as-you-file
system of taxation under which the
taxpayer computes his own tax liability,
prepares the return, and pays the tax as he
files the return. The pay-as-you-file system
is a self-assessing tax return.
Internal revenue taxes are self-assessing.
(Dissent of J. Carpio in Philippine National
Oil Company v. Court of Appeals, et al., G. R.
No. 109976, April 26, 2005 and companion
case)
A clear example of a self-assessed
tax is the annual income tax, which the
taxpayer himself computes and pays
without the intervention of any assessment
by the BIR. The annual income tax becomes
due and payable without need of any prior
assessment by the BIR. The BIR may or may
not investigate or audit the annual income
tax return filed by the taxpayer. The
taxpayer’s liability for the income tax does
not depend on whether or not the BIR
conducts such subsequent investigation or
audit.
However, if the taxing authority is first
required to investigate, and after such
investigation to issue the tax assessment
that creates the tax liability, then the tax is
no longer self-assessed. (Ibid.)
BEBER, DINDO 29
AMILING, BEBER, CAINDAY, CONEJERO, FERUELO & LIAO TAXATION LAW REVIEWER FOR THE 2011 BAR
Sec. 6 (B) of the NIRC of 1997 allows the BIR
to make or amend a tax return from his own
knowledge or obtained through testimony
or otherwise. Thus, the Commissioner of
Internal Revenue investigates ”any
circumstance which led him to believe that
the taxpayer had taxable income larger than
that reported. Necessarily, this inquiry
would have to be outside of the books
because they supported the return as filed.
He may take the sworn testimony of the
taxpayer, he may take the testimony of
third parties; he may examine and
subpoena, if necessary, traders’ and
brokers’ accounts and books and the
taxpayer’s books of accounts. The
Commissioner is not bound to follow any
set of patterns. The existence of
unreported income may be shown by any
particular proof that is available in the
circumstances of the particular situation.
(Commissioner of Internal Revenue v.
Hantex Trading Co., Inc. G. R. No. 136975,
March 31, 2005)
General rule: When the Commissioner of
Internal Revenue may rely on estimates.
“The rule is that in the absence of
accounting records of a taxpayer, his tax
liability may be determined by estimation.
The petitioner (Commissioner of Internal
Revenue) is not required to compute such
tax liabilities with mathematical exactness.
Approximation in the calculation of taxes
due is justified. To hold otherwise would be
tantamount to holding that skillful
concealment is an invincible barrier to
proof.” (Commissioner of Internal Revenue
v. Hantex Trading Co., Inc. G. R. No. 136975,
March 31, 2005)
“However, the rule does not apply where
the estimation is arrived at arbitrarily and
capriciously.” (Ibid.)
30 GENERAL PRINCIPLES
Meaning of "best evidence obtainable"
under Sec. 6 (B), NIRC of 1997. This means
that the original documents must be
produced. If it could not be produced,
secondary evidence must be adduced.
(Hantex Trading Co., Inc. v. Commissioner of
Internal Revenue, CA - G.R. SP No. 47172,
September 30, 1998)
The following are the general methods
developed by the Bureau of Internal
Revenue for reconstructing a taxpayer’s
income where the records do not show the
true income or where no return was filed or
what was filed was a false and fraudulent
return
(a) Percentage method;
(b) Net worth method.;
(c) Bank deposit method;
(d) Cash expenditure method;
(e) Unit and value method;
(f) Third party information or access to
records method;
(g) Surveillance and assessment method.
(Chapter XIII. Indirect Approach to
Investigation, Handbook on Audit
Procedures and Techniques – Volume I, pp.
68-74)
Third party information or access to records
method. The BIR may require third parties,
public or private to supply information to
the BIR, and thus, “obtain on a regular basis
from any person other than the person
whose internal revenue tax liability is
subject to audit or investigation, or from
any office or officer of the national and local
governments, government agencies and
instrumentalities including the Bangko
Sentral ng Pilipinas and government-owned
or –controlled corporations, any
information such as, but not limited to,
costs and volume of production, receipts or
sales and gross incomes of taxpayers, and
BEBER, DINDO
 AMILING, BEBER, CAINDAY, CONEJERO, FERUELO & LIAO TAXATION LAW REVIEWER FOR THE 2011 BAR
the names , addresses, and financial
statements of corporations, mutual fund
companies, insurance companies, regional
operating headquarters or multinational
companies, joint accounts, associations,
joint ventures or consortia and registered
partnerships, and their members; xxx” *Sec.
5 (B), NIRC of 1997)
A pre-assessment notice is a letter sent by
the Bureau of Internal Revenue to a
taxpayer asking him to explain within a
period of fifteen (15) days from receipt why
he should not be the subject of an
assessment notice. It is part of the due
process rights of a taxpayer.
As a general rule, the BIR could not issue an
assessment notice without first issuing a
pre-assessment notice because it is part of
the due process rights of a taxpayer to be
given notice in the form of a pre-
assessment notice, and for him to explain
why he should not be the subject of an
assessment notice.
Instances where a pre-assessment notice is
not required before a notice of assessment
is sent to the taxpayer.
a. When the finding for any deficiency tax is
the result of mathematical error in the
computation of the tax as appearing on the
face of the return; or
b. When a discrepancy has been
determined between the tax withheld and
the amount actually remitted by the
withholding agent; or
c. When a taxpayer opted to claim a refund
or tax credit of excess creditable
withholding tax for a taxable period was
determined to have carried over and
automatically applied the same amount
claimed against the estimated tax liabilities
GENERAL PRINCIPLES
for the taxable quarter or quarters of the
succeeding table year; or
d. When the excess tax due on excisable
articles has not been paid; or
e. When an article locally purchased or
imported by an exempt person, such as, but
not limited to vehicles, capital equipment,
machineries and spare parts, has been sold,
trade or transferred to non-exempt
persons. (Sec. 228, NIRC of 1997)
Prescriptive periods for making assessments
of internal revenue taxes.
a. Three (3) years from the last day
within which to file a return or when the
return was actually filed, whichever is later
(Sec. 203, NIRC of 1997). The CIR has three
(3) years from the date of actual filing of
the tax return to assess a national internal
revenue tax or to commence court
proceedings for the collection thereof
without an assessment. [Bank of Philippine
Islands (Formerly Far East Bank and Trust
Company) v. Commissioner of Internal
Revenue, G. R. No. 174942, March 7, 2008]
b. ten years from discovery of the
failure to file the tax return or discovery of
falsity or fraud in the return [Sec. 222 (a),
NIRC of 1997[ ; or
c. within the period agreed upon
between the government and the taxpayer
where there is a waiver of the prescriptive
period for assessment (Sec. 222 (b), NIRC of
1997).
Purpose of period of limitations in
taxation. For the purpose of safeguarding
taxpayers from any unreasonable
examination, investigation or assessment,
our tax law provides a statute of limitations
in the collection of taxes. [Commissioner of
Internal Revenue v. B.F. Goodrich Phils, Inc.,
BEBER, DINDO 31
AMILING, BEBER, CAINDAY, CONEJERO, FERUELO & LIAO TAXATION LAW REVIEWER FOR THE 2011 BAR
(now Sime Darby International Tire Co., Inc.),
et al., G.R. No. 104171, February 24, 1999,
303 SCRA 546; Philippine Journalists, Inc. v.
Commissioner of Internal Revenue, G. R. No.
162852, December 16, 2004], as well as their
assessments.
The law prescribing a limitation of
actions for the collection of the income tax
is beneficial both to the Government and to
its citizens; to the Government because tax
officers would be obliged to act promptly in
the making of assessment, and to citizens
because after the lapse of the period of
prescription citizens would have a feeling of
security against unscrupulous tax agents
who will always find an excuse to inspect
the books of taxpayers, not to determine
the latter’s real liability, but to take
advantage of every opportunity to molest
peaceful, law-abiding citizens. Without such
a legal defense taxpayers would
furthermore be under obligation to always
keep their books and keep them open for
inspection subject to harassment by
unscrupulous tax agents. The law on
prescription being a remedial measure
should be interpreted in a way conducive to
bringing about the beneficent purpose of
affording protection to the taxpayer within
the contemplation of the Commission which
recommend the approval of the law. [Bank
of Philippine Islands (Formerly Far East Bank
and Trust Company) v. Commissioner of
Internal Revenue, G. R. No. 174942, March
7, 2008]
This mandate governs the question
of prescription of the government’s right
to assess internal revenue taxes primarily
to safeguard the interests of taxpayers
from unreasonable investigation.
Accordingly, the government must assess
internal revenue taxes on time so as not to
32 GENERAL PRINCIPLES
extend indefinitely the period of
assessment and deprive the taxpayer of
the assurance that it will no longer be
subjected to further investigation for taxes
after the expiration of reasonable period of
time. (Commissioner of Internal Revenue v.
FMF Development Corporation, G. R. No.
167765, June 30, 2008 citing Philippine
Journalists, Inc. v. Commissioner of Internal
Revenue G.R. No. 162852, December 16,
2004, 447 SCRA 214, 225)
Unreasonable investigation contemplates
cases where the period for assessment
extends indefinitely because this deprives
the taxpayer of the assurance that it will not
longer be subjected to further investigation
for taxes after the expiration of a reasonable
period of time. (Philippine Journalists, Inc. v.
Commissioner of Internal Revenue, G. R. No.
162852, December 16, 2004 with note to see
Republic v. Ablaza, 108 Phil. 1105. 1108)
Laws on prescription should be liberally
construed in favor of the taxpayer. Reason:
for the purpose of safeguarding taxpayers
from an unreasonable examination,
investigation or assessment, our tax laws
provide a statute of limitation on the
collection of taxes. Thus, the law on
prescription, being a remedial measure,
should be liberally construed in order to
afford such protection, As a corollary, the
exceptions to the law on prescription should
perforce be strictly construed. [Philippine
Journalists, Inc. v. Commissioner of Internal
Revenue, G. R. No. 162852, December 16,
2004 citing Commissioner of Internal
Revenue v. B.F. Goodrich Phils, Inc (now
Sime Darby International Tire Co., Inc.),., et
al., G.R. No. 104171, February 24, 1999, 303
SCRA 546]
The prescriptive period was precisely
intended to give the taxpayers peace of
mind. (Commissioner of Internal Revenue v.
BEBER, DINDO
 AMILING, BEBER, CAINDAY, CONEJERO, FERUELO & LIAO TAXATION LAW REVIEWER FOR THE 2011 BAR
B.F. Goodrich Phils., Inc., et al., G.R. No.
104171, February 24, 1999)
A “jeopardy assessment” is a delinquency
tax assessment which was assessed without
the benefit of complete or partial audit by
an authorized revenue officer, who has
reason to believe that the assessment and
collection of a deficiency tax will be
jeopardized by delay because of the
taxpayer’s failure to comply with the audit
and investigation requirements to present
his books of accounts and/or pertinent
records, or to substantiate all or any of the
deductions, exemptions, or credits claimed
in his return. [Sec. 3.1 (a), Rev. Regs. No. 6-
2000)
Jeopardy assessment is an indication of the
doubtful validity of the assessment, hence it
may be subject to a compromise. [Sec. 3.1
(a), Rev. Regs. No. 6-2000]
Requisites for Formal Letter of Demand
and Assessment Notice. The formal letter
of demand and assessment notice shall be
issued by the Commissioner or his duly
authorized representative. The letter of
demand calling for payment of the
taxpayer’s deficiency tax or taxes shall
state the facts, the law, rules and
regulations, or jurisprudence on which the
assessment is based, otherwise, the formal
letter of demand and assessment notice
shall be void. The same shall be sent to the
taxpayer only by registered mail or by
personal delivery.
What are the requirements for the validity
of a formal letter of demand and
assessment notice ?
a. There must have been previously issued
a pre-assessment notice until excepted;
GENERAL PRINCIPLES
b. It must have been issued prior to the
prescriptive period; and
c. The letter of demand calling for payment of
the taxpayer’s deficiency tax or taxes shall state
the facts, the law, rules and regulations, or
jurisprudence on which the assessment is
based, otherwise, the formal letter of demand
and assessment notice shall be void. (Sec. 3.1.4,
Rev. Regs. No. 12-99)
What are the reasons for presumption of
correctness of assessments ?
a. Lifeblood theory
b. Presumption of regularity
(Commissioner of Internal Revenue v.
Hantex Trading Co., Inc., G, R. No. 136975,
March 31, 2005) in the performance of
public functions. (Commissioner of Internal
Revenue v. Tuazon, Inc., 173 SCRA 397)
c. The likelihood that the taxpayer will
have access to the relevant information
[Commissioner of Internal Revenue, supra
citing United States v. Rexach, 482 F.2d 10
(1973). The certiorari was denied by the
United States Supreme Court on November
19, 1973]
d. The desirability of bolstering the
record-keeping requirements of the NIRC.
(Ibid.)
Give instances where prima facie
correctness of a tax assessment does not
apply.
The “prima facie correctness of a tax
assessment does not apply upon proof that
an assessment is utterly without
foundation, meaning it is arbitrary and
capricious. Where the BIR has come out
with a “naked assessment” i.e., without any
foundation character, the determination of
the tax due is without rational basis.”
[Commissioner of Internal Revenue v.
Hantex Trading Co., Inc., G, R. No. 136975,
March 31, 2005 citing United States v. Janis,
BEBER, DINDO 33
AMILING, BEBER, CAINDAY, CONEJERO, FERUELO & LIAO TAXATION LAW REVIEWER FOR THE 2011 BAR
49 L. Ed. 2d 1046 (1976); 428 US 433 (1976)]
In such a situation, “the determination of
the Commissioner contained in a deficiency
notice disappears.” *Commissioner of
Internal Revenue, supra citing a U.S. Court
of Appeals ruling, in Clark and Clark v.
Commissioner of Internal Revenue, 266 F. 2d
698 (1959)+ “Hence, the determination by
the CTA must rest on all the evidence
introduced and its ultimate determination
must find support in credible evidence.”
[Commissioner of Internal Revenue, supra]
What are the instances that suspends the
running of the prescriptive periods (Statute
of Limitations) within which to make an
assessment and the beginning of distraint or
levy or of a proceeding in court for the
collection, in respect of any tax deficiencies?
a. When the Commissioner is
prohibited from making the assessment, or
beginning distraint, or levy or proceeding in
court and for sixty (60) days thereafter;
b. When the taxpayer requests for and
is granted a reinvestigation by the
commissioner;
c. When the taxpayer could not be
located in the address given by him in the
return filed upon which the tax is being
assessed or collected;
d. When the warrant of distraint and
levy is duly served upon the taxpayer, his
authorized representative, or a member of
his household with sufficient discretion, and
no property could be located; and
e. When the taxpayer is out of the
Philippines.
NOTES AND COMMENTS:
The holding in Commissioner of Internal
Revenue v. Court of Appeals, et al., G.R. No.
115712, February 25, 1999 (Carnation case)
that the waiver of the period for assessment
34 GENERAL PRINCIPLES
must be in writing and have the written
consent of the BIR Commissioner is still
doctrinal because of the provisions of Sec.
223, NIRC of 1997 which provides for the
suspension of the prescriptive period:
Under RMO No. 20-90, which implements
Sections 203 and 222 (b), the following
procedures should be followed for a valid
waiver of the prescriptive period for an
assessment:
a. The waiver must be in the
proper form;
b. The waiver shall be signed
by the taxpayer himself or his duly
authorized representative. In the case of a
corporation, the waiver must be signed by
any of its responsible officials.
Soon after the waiver is signed by
the taxpayer, the Commissioner of Internal
Revenue or the revenue official authorized
by him, as hereinafter provided, shall sign
the waiver indicating that the Bureau has
accepted and agreed to the waiver. The
date of such acceptance by the Bureau
should be indicated. Both the date of
execution by the taxpayer and date of
acceptance by the Bureau should be before
the expiration of the period of prescription
or before the lapse of the period agreed
upon in case a subsequent agreement is
executed.
c.The following revenue officials are
authorized to sign the waiver.
A. In the National Office
xxxx
3. Commissioner
BEBER, DINDO
 AMILING, BEBER, CAINDAY, CONEJERO, FERUELO & LIAO TAXATION LAW REVIEWER FOR THE 2011 BAR
For tax cases involving more than
P1M
B. In the Regional Offices
1. The Revenue District
Officer with respect to tax
cases still pending investigation
and the period to assess is
about to prescribe regardless of
amount.
xxxx
d. The waiver must be executed in three (3)
copies, the original copy to be attached to
the docket of the case, the second copy for
the taxpayer and the third copy for the
Office accepting the waiver. The fact of
receipt by the taxpayer of his/her file copy
shall be indicated in the original copy.
e. The foregoing procedures shall be strictly
followed. Any revenue official found not
to have complied with this Order resulting
in prescription of the right to assess/collect
shall be administratively dealt with.
(Renumbering and emphasis supplied.)
If the above are not followed there is no
valid waiver and prescription would run.
(Commissioner of Internal Revenue v. FMF
Development Corporation, G. R. No.
167765, June 30, 2008 citing Philippine
Journalists, Inc. v. Commissioner of Internal
Revenue G.R. No. 162852, December 16,
2004, 447 SCRA 214, 228-229)
The procedures in RMO No. 20-90 are NOT
merely directory and that the execution of a
waiver is a renunciation of a taxpayer’s
right to invoke prescription. RMO No. 20-90
must be strictly followed. A waiver of the
statute of limitations under the NIRC, to a
GENERAL PRINCIPLES
certain extent being a derogation of the
taxpayer’s right to security against
prolonged and unscrupulous investigations,
must be carefully and strictly construed.
The waiver of the statute of limitations does
not mean that the taxpayer relinquishes the
right to invoke prescription unequivocally,
particularly where the language of the
document is equivocal.
Thus a waiver becomes unlimited in time,
and invalid, because it did not specify a
definite date, agreed upon between the BIR
and the taxpayer, within which the former
may assess and collect taxes. It also would
have no binding effect on the taxpayer if
there was no consent by the Commissioner.
On this basis, no implied consent can be
presumed, nor can it be contended that the
concurrence to such waiver is a mere
formality. (Commissioner of Internal
Revenue v. FMF Development Corporation,
G. R. No. 167765, June 30, 2008 citing
Philippine Journalists, Inc. v. Commissioner
of Internal Revenue G.R. No. 162852,
December 16, 2004, 447 SCRA 214, 229 in
turn citing Id. at 229, citing Commissioner
of Internal Revenue v. Court of Appeals,
G.R. No. 115712, February 25, 1999, 303
SCRA 614, 620-622.)
BIR cannot rely on its invocation of the rule
that the government cannot be estopped by
the mistakes of its revenue officers in the
enforcement of RMO No. 20-90 because the
law on prescription should be interpreted in
a way conducive to bringing about the
beneficent purpose of affording protection
to the taxpayer within the contemplation of
the Commission which recommended the
approval of the law. To the Government, its
tax officers are obliged to act promptly in the
BEBER, DINDO 35
AMILING, BEBER, CAINDAY, CONEJERO, FERUELO & LIAO TAXATION LAW REVIEWER FOR THE 2011 BAR
making of assessment so that taxpayers,
after the lapse of the period of prescription,
would have a feeling of security against
unscrupulous tax agents who will always try
to find an excuse to inspect the books of
taxpayers, not to determine the latter’s real
liability, but to take advantage of a possible
opportunity to harass even law-abiding
businessmen. Without such legal defense,
taxpayers would be open season to
harassment by unscrupulous tax agents.
[Commissioner of Internal Revenue v. FMF
Development Corporation, G. R. No.
167765, June 30, 2008 citing Republic of
the Phils. v. Ablaza, 108 Phil. 1105, 1108
(1960)]
The signatures of both the Commissioner
and the taxpayer, are required for a waiver
of the prescriptive period, thus a unilateral
waiver on the part of the taxpayer does not
suspend the prescriptive period.
[Commissioner of Internal Revenue v. Court
of Appeals, et al., G.R. No. 115712, February
25, 1999 (Carnation case)]
The act of requesting a reinvestigation
alone does not suspend the running of the
prescriptive period. The request for
reinvestigation must be granted by the CIR.
The Supreme Court declared that the
burden of proof that the request for
reinvestigation had been actually granted
shall be on the Commissioner of Internal
Revenue. Such grant may be expressed in
its communications with the taxpayer or
implied from the action of the
Commissioner or his authorized
representative in response to the request
for reinvestigation. [Bank of Philippine
Islands (Formerly Far East Bank and Trust
36 GENERAL PRINCIPLES
Company) v. Commissioner of Internal
Revenue, G. R. No. 174942, March 7, 2008]
PROTESTING INTERNAL REVENUE TAX
ASSESSMENTS
What is the presumption that flows from a
taxpayer’s failure to protest an assessment
?
SUGGESTED ANSWER: “Tax
assessments by tax examiners are
presumed correct and made in good faith.
The taxpayer has the duty to prove
otherwise. In the absence of proof of any
irregularities in the performance of duties,
an assessment duly made by a Bureau of
Internal Revenue examiner and approved
by his superior officers will not be disturbed.
All presumptions are in favor of the
correctness of tax assessments.”
(Commissioner of Internal Revenue v. Bank
of Philippine Islands., G, R. No. 134062, April
17, 2007 citing Sy Po v. Court of Appeals, G.
R. No. L-81446, 18 August 1988, 164 SCRA
524, 530, citations omitted)
What are the two ways of protesting an
assessment notice for an internal revenue
tax ? Alternatively, what are the two types
of protests ? Explain briefly.
a. Request for reconsideration
which refers to a plea for re-evaluation of
an assessment on the basis of existing
records without need of additional
evidence. It may involve both a question of
fact or of law or both.
b. Request for reinvestigation
which refers to a plea for re-evaluation of
an assessment on the basis of newly-
discovered evidence or additional evidence
that a taxpayer intends to present in the
investigation. It may also involve a question
of fact or law or both. (Commissioner of
Internal Revenue v. Philippine Global
BEBER, DINDO
 AMILING, BEBER, CAINDAY, CONEJERO, FERUELO & LIAO TAXATION LAW REVIEWER FOR THE 2011 BAR
Communication, Inc., G. R. No. 167146,
October 31, 2006 citing Rev. Regs. No. 12-
85)
What is that type of protest that
suspends the running of the statute of
limitations for the beginning of distraint or
levy or a proceeding in court for collection ?
Why ?
It is that type of protest “when the taxpayer
requests for a reinvestigation which is
granted by the Commissioner” (Sec. 223,
NIRC of 1997), that suspends the running of
the statute of limitations for collection of
the tax. (Commissioner of Internal Revenue
v. Philippine Global Communication, Inc., G.
R. No. 167146, October 31, 2006 citing Sec.
271, now Sec. 223, NIRC of 1997) When a
taxpayer demands a reinvestigation, the
time employed in reinvestigation should be
deducted from the total period of
limitation. [Commissioner of Internal
Revenue, supra citing Republic v. Lopez, 117
Phil. 575, 578; 7 SCRA 566, 568-569 (1963)]
Undoubtedly, a reinvestigation, which
entails the reception and evaluation of
additional evidence, will take more time
than a reconsideration of a tax assessment
which will be limited to the evidence
already at hand; this justifies why the
former can suspend the running of the
statute of limitations on collection of the
assessed tax, while the latter cannot.
(Commissioner of Internal Revenue v.
Philippine Global Communication, Inc., G. R.
No. 167146, October 31, 2006 citing Bank of
Philippine Islands v. Commissioner of
Internal Revenue, G. R. No. 139736, 17
October 2005, 473 SCRA 205, 230-231)
What are the requirements for the validity
of a taxpayer’s protest ?
GENERAL PRINCIPLES
a. It must be filed within the
reglementary period of thirty (30) days from
receipt of the notice of assessment.
b. The taxpayer must not only show
the errors of the Bureau of Internal
Revenue but also the correct computation
through
1) A statement of the facts, the
applicable law, rules and regulations, or
jurisprudence on which the taxpayer’s
protest is based,
2) If there are several issues involved
in the disputed assessment and the
taxpayer fails to state the facts, the
applicable law, rules and regulations, or
jurisprudence in support of his protest
against some of the several issues on which
the assessment is based, the same shall be
considered undisputed issue or issues, in
which case, the taxpayer shall be required
to pay the corresponding deficiency tax or
taxes attributable thereto. (Sec. 3.1.5, Rev.
Regs. 12-99)
c. Within sixty (60) days from filing of
the protest, the taxpayer shall submit all
relevant supporting documents. [4th par.,
Sec. 228 (e), NIRC of 1997]
“Relevant supporting documents,”
defined. The term “relevant supporting
documents” should be understood as
those documents necessary to support the
legal basis in disputing a tax assessment as
determined by the taxpayer. The BIR can
only inform the taxpayer to submit
additional documents.
The BIR cannot demand what type of
supporting documents should be
submitted. Otherwise, a taxpayer will be
at the mercy of the BIR, which may require
the production of documents that a
taxpayer cannot submit. (Commissioner of
BEBER, DINDO 37
 AMILING, BEBER, CAINDAY, CONEJERO, FERUELO & LIAO TAXATION LAW REVIEWER FOR THE 2011 BAR
Internal Revenue v. First Express Pawnshop
Company, Inc., G. R. 172045-46, June 16, 2009)
JUDICIAL REMEDIES INVOLVING
PROTESTED ASSESSMENTS
Acts of BIR Commissioner that may be
considered as denial of a protest which
serve as basis for appeal to the Court of Tax
Appeals.
a. Filing by the BIR of a civil suit for
collection of the deficiency tax is considered
a denial of the request for reconsideration.
(Commissioner of Internal Revenue v. Union
Shipping Corporation, 185 SCRA 547)
b. An indication to the taxpayer by the
Commissioner “in clear and unequivocal
language” of his final denial not the
issuance of the warrant of distraint and
levy. What is the subject of the appeal is
the final decision not the warrant of
distraint. (Ibid.)
c. A BIR demand letter sent to the taxpayer
after his protest of the assessment notice is
considered as the final decision of the Commissioner
on the protest. (Surigao Electric Co., Inc. v. Court of
Tax Appeals, et al., 57 SCRA 523)
d. A letter of the BIR Commissioner reiterating
to a taxpayer his previous demand to pay an
assessment is considered a denial of the request for
reconsideration or protest and is appealable to the
Court of Tax Appeals. (Commissioner v. Ayala
Securities Corporation, 70 SCRA 204)
e. Final notice before seizure considered as
commissioner’s decision of taxpayer’s request for
reconsideration who received no other response.
Commissioner of Internal Revenue v. Isabela Cultural
Corporation, G.R. No. 135210, July 11, 2001 held
that not only is the Notice the only response
received: its content and tenor supports the theory
38 GENERAL PRINCIPLES
that it was the CIR’s final act regarding the request
for reconsideration. The very title expressly
indicated that it was a final notice prior to seizure of
property. The letter itself clearly stated that the
taxpayer was being given “this LAST OPPORTUNITY”
to pay; otherwise, its properties would be subjected
to distraint and levy.
The taxpayer seasonably protested the assessment
issued by the Commissioner of Internal Revenue.
During the pendency of the protest the CIR issued a
warrant of distraint and levy to collect the taxes
subject of the protest.
As counsel what advice shall you give the
taxpayer. Explain briefly your answer.
The taxpayer should appeal, by way of a
petition for review, to the Court of Tax
Appeals not on the ground of the denial of
the protest but on other matter arising
under the provisions of the National
Internal Revenue Code. The actual issuance
of a warrant of distraint and levy in certain
cases cannot be considered a final decision
on a disputed assessment.
To be a valid decision on a disputed assessment,
the decision of the Commissioner or his duly
authorized representative shall (a) state the
facts, the applicable law, rules and regulations,
or jurisprudence on which such decision is
based, otherwise, the decision shall be void, in
which case the same shall not be considered a
decision on the disputed assessment; and (b)
that the same is his final decision. (Sec. 3.1.6,
Rev. Regs. 12-99) These conditions are not
complied with by the mere issuance of a
warrant of distraint and levy. (Commissioner of
Internal Revenue v. Union Shipping Corp., 185
SCRA 547)
Furthermore, a motion for the suspension of the
collection of the tax may be filed together with the
BEBER, DINDO
 AMILING, BEBER, CAINDAY, CONEJERO, FERUELO & LIAO TAXATION LAW REVIEWER FOR THE 2011 BAR
petition for review (Sec. 3, Rule 10, RRCTA effective
December 15, 2005) because the collection of the
tax may jeopardize the interest of the taxpayer.
As a general rule, there must always be a decision of
the Commissioner of Internal Revenue or
Commissioner of Customs before the Court of Tax
Appeals, would have jurisdiction. If there is no such
decision, the petition would be dismissed for lack of
jurisdiction unless the case falls under any of the
following exceptions.
Instances where the Court of Tax Appeals would
have jurisdiction even if there is no decision yet by
the Commissioner of Internal Revenue:
a. Where the Commissioner has not acted on the
disputed assessment after a period of 180 days from
submission of complete supporting documents, the
taxpayer has a period of 30 days from the expiration
of the 180 day period within which to appeal to the
Court of Tax Appeals. (last par., Sec. 228 (e), NIRC of
1997; Commissioner of Internal Revenue v. Isabela
Cultural Corporation, G.R. No. 135210, July 11, 2001)
b. Where the Commissioner has not acted on an
application for refund or credit and the two year
period from the time of payment is about to expire,
the taxpayer has to file his appeal with the Court of
Tax Appeals before the expiration of two years from
the time the tax was paid.
It is disheartening enough to a taxpayer to be kept
waiting for an indefinite period for the ruling,. It
would make matters more exasperating for the
taxpayer if the doors of justice would be closed for
such a relief until after the Commissioner, would
have, at his personal convenience, given his go
signal. (Commissioner of Customs, et al, v. Court of
Tax Appeals, et al., G.R. No. 82618, March 16, 1989,
unrep.)
The characteristic of a BIR denial of a protest such as
would enable the taxpayer to appeal the same to
GENERAL PRINCIPLES
the Court of Tax Appeals. The Commissioner of
Internal Revenue should always indicate to the
taxpayer in clear and unequivocal language
whenever his action on an assessment questioned
by a taxpayer constitutes his final determination on
the disputed assessment.
On the basis of his statement indubitably
showing that the Commissioner’s
communicated action is his final decision on
the contested assessment, the aggrieved
taxpayer would then be able to take
recourse to the tax court at the opportune
time. Without needless difficulty, the
taxpayer would be able to determine when
his right to appeal to the tax court accrues.
(Commissioner of Internal Revenue v. Bank
of the Philippines Islands, G. R. No. 134062,
April 17, 2007)
COLLECTION OF INTERNAL REVENUE TAXES
1. General rule: Collection of taxes is
imprescriptible. While this may be so,
statutes may provide for periods of
prescription,
2. Why is the collection of taxes
imprescriptible ?
a. As a general rule, revenue laws are
not intended to be liberally construed, and
exemptions are not given retroactive
application, considering that taxes are the
lifeblood of the government and in Holmes’
memorable metaphor, the price we pay for
civilization, tax laws must be faithfully and
strictly implemented. (Commissioner of
Internal Revenue v. Acosta, etc.,G. R. No.
154068, August 3, 2007) However, statutes
may provide for prescriptive periods for the
collection of particular kinds of taxes.
BEBER, DINDO 39
AMILING, BEBER, CAINDAY, CONEJERO, FERUELO & LIAO TAXATION LAW REVIEWER FOR THE 2011 BAR
b. Tax laws, unlike remedial laws, are
not to be applied retroactively. Revenue
laws are substantive laws and their
application must not be equated with
remedial laws. (Acosta, supra)
3. What is the prescriptive period for
collecting internal revenue taxes ?
There are four (4) prescriptive periods for
the collection of an internal revenue tax:
a. Collection upon a false or
fraudulent return or no return without
assessment. In case of a false or fraudulent
return with the intent to evade tax or of
failure to file a return, “a proceeding in
court for the collection of such tax may be
filed without assessment, at any time within
ten (10) years after the discovery of the
falsity, fraud or omission.” *Sec. 222 (a),
NIRC of 1997]
b. Collection upon a false or
fraudulent return or no return with
assessment. Any internal revenue tax which
has been assessed (because the return is
false or fraudulent with intent to evade tax
or of failure to fail a return), within a period
of ten (10) years from discovery of the
falsity, fraud or omission “may be collected
by distraint or levy or by a proceeding in
court within five (5) years following the
assessment of the tax.” *Sec. 222 (c), in
relation to Sec. 222 (a) NIRC of 1997,
emphasis supplied]
c. Collection upon an extended
assessment. Where a tax has been assessed
with the period agreed upon between the
Commissioner and the taxpayer in writing
(which should initially be within three (3)
years from the time the return was filed or
should have been filed), or any extensions
before the expiration of the period agreed
upon, the tax “may be collected by distraint
40 GENERAL PRINCIPLES
or levy or by a proceeding in court within
the period agreed upon in writing before
the expiration of the five (5) year period.
The period so agreed upon may be
extended by subsequent written
agreements made before the expiration of
the period previously agreed upon.” *Sec.
222 (d), in relation to Secs. 222 (b) and 203,
NIRC of 1997, emphasis supplied]
d. Collection upon a return that is not
false or fraudulent, or where the
assessment is not an extended assessment.
“Except as provided in Section 222, internal
revenue taxes shall be assessed within three
(3) years after the last day prescribed by law
for the filing of the return, and no
proceeding in court without assessment for
the collection of such taxes shall be begun
after the expiration of such period;
Provided, That in case where a return is
filed beyond the period prescribed by law,
the three (3) year period shall be computed
from the day the return was filed. For
purposes of this Section, a return filed
before the last day prescribed by law for the
filing thereof shall be considered filed on
such last day.” (Sec. 203, NIRC of 1997,
emphasis supplied)
When the BIR validly issues an
assessment within the three (3)-year
period, it has another three (3) years
within which to collect the tax due by
distraint, levy, or court proceeding. The
assessment of the tax is deemed made
and the three (3)-year period for
collection of the assessed tax begins to
run on the date the assessment notice
had been released, mailed or sent to the
taxpayer. [Bank of Philippine Islands
(Formerly Far East Bank and Trust
Company) v. Commissioner of Internal
Revenue, G. R. No. 174942, March 7,
BEBER, DINDO
 AMILING, BEBER, CAINDAY, CONEJERO, FERUELO & LIAO TAXATION LAW REVIEWER FOR THE 2011 BAR
2008 citing BPI v. Commissioner of
Internal Revenue, G.R. No. 139736, 17
October 2005, 473 SCRA 205, 222-223]
NOTES AND COMMENTS:
a. Both the former Sec. 269,
NIRC of 1977 and Sec.222 of NIRC of 1997
do not refer to a “regular return.” It is
clear that in enacting Sec. 222, entitled
“Exceptions as to the period of limitation
of assessment and collection of taxes,”
the NIRC of 1997 has eliminated sub-
paragraph c of the former Sec. 269 of the
NIRC, also entitled “Exceptions as to the
period of limitation of assessment and
collection of taxes.” Said Sec. 269 (c),
reads “Any internal revenue tax which has
been assessed within the period of
limitation above-prescribed may be
collected by distraint or levy or by a
proceeding in court within three years
following the assessment of the tax.”
A perusal of Sec. 222 of the NIRC is
clear that it covers only three scenarios
only. 1) No assessment was made upon a
false or fraudulent return or omission to
file a return; 2) an assessment was made
upon a false or fraudulent return or
omission to file a return; and 3) an
extended assessment issued within a
period agreed upon by the Commissioner
and the taxpayer. The same scenarios are
those referred to in the former Sec. 269
which provided for a prescriptive period
for collection of three (3) years.
It is clear therefore that neither Sec. 222
nor the former Sec. 269 provide for an
instance where the assessment was made
upon a “regular return” or one that is not
false or fraudulent, or that there was an
agreement to extend the period for
assessment.
GENERAL PRINCIPLES
Resort should therefore be made to
the three (3) year period referred to in
Sec. 203 of the NIRC of 1997 which reads,
“Except as provided in Section 222,
internal revenue taxes shall be assessed
within three (3) years after the last day
prescribed by law for the filing of the
return, and no proceeding in court
without assessment for the collection of
such taxes x x x “ (paraphrasing and
emphasis supplied)
What is a compromise ?
A compromise is a contract whereby the
parties, by making reciprocal concessions,
avoid a litigation or put an end to one
already commenced. (Art. 2028, Civil
Code)
A compromise penalty could not be
imposed by the BIR, if the taxpayer did
not agree. A compromise being, by its
nature, mutual in essence requires
agreement. The payment made under
protest could only signify that there was
no agreement that had effectively been
reached between the parties. (Vda. de
San Agustin, et al., v. Commissioner of
Internal Revenue, G. R. No. 138485,
September 10, 2001)
What tax cases may be the subject of a
compromise ?
The following cases may, upon taxpayer’s
compliance with the basis for
compromise, be the subject matter of
compromise settlement:
a. Delinquent accounts;
b. Cases under administrative protest
after issuance of the Final Assessment
Notice to the taxpayer which are still
pending in the Regional Offices, Revenue
BEBER, DINDO 41
AMILING, BEBER, CAINDAY, CONEJERO, FERUELO & LIAO TAXATION LAW REVIEWER FOR THE 2011 BAR
District Offices, Legal Service, Large
Taxpayer Service (LTS), Collection Service,
Enforcement Service and other offices in
the National Office;
c. Civil tax cases being disputed
before the courts;
d. Collection cases filed in courts;
e. Criminal violations, other than
those already filed in court, or those
involving criminal tax fraud. (Sec. 2, Rev.
Regs. No. 30-2002)
What tax cases could not be the subject
of compromise ?
a. Withholding tax cases unless the
applicant-taxpayer invokes provisions of
law that cast doubt on the taxpayer’s
obligation to withhold.;
b. Criminal tax fraud cases, confirmed as
such by the Commissioner of Internal
Revenue or his duly authorized
representative;
c. Criminal violations already filed in
court;
d. Delinquent accounts with duly
approved schedule of installment
payments;
e. Cases where final reports of
reinvestigation or reconsideration have
been issued resulting to reduction in the
original assessment and the taxpayer is
agreeable to such decision by signing the
required agreement form for the purpose.
On the other hand, other protested cases
shall be handled by the Regional
Evaluation Board (REB) or the National
Evaluation Board (NEB) on a case to case
basis;
f. Cases which become final and
executory after final judgment of a court
where compromise is requested on the
42 GENERAL PRINCIPLES
ground of doubtful validity of the
assessment; and
g. Estate tax cases where compromise
is requested on the ground of financial
incapacity of the taxpayer. (Sec. 2, Rev.
Regs. No. 30-2002)
When may the Commissioner of Internal
Revenue compromise the payment of any
internal revenue tax ? Alternatively, what
are the grounds for a compromise, and
what are the amounts for which a
compromise may be entered into ?
a. A reasonable doubt as to the
validity of the claim against the taxpayer
exists provided that the minimum
compromise entered into is equivalent to
forty percent (40%) of the basic tax; or
b. The financial position of the
taxpayer demonstrates a clear inability to
pay the assessed tax provided that the
minimum compromise entered into is
equivalent to ten percent (10%) of the
basic assessed tax
In the above instances the
Commissioner is allowed to enter into a
compromise only if the basic tax involved
does not exceed One million pesos
(P1,000,000.00), and the settlement
offered is not less than the prescribed
percentages. [Sec. 204 (A), NIRC of 1997]
In instances where the
Commissioner is not authorized, the
compromise shall be subject to the
approval of the Evaluation Board
composed of the Commissioner and the
four (4) Deputy Commissioners.
When is the Commissioner of Internal
Revenue authorized to abate or cancel a
tax liability ?:
BEBER, DINDO
 AMILING, BEBER, CAINDAY, CONEJERO, FERUELO & LIAO TAXATION LAW REVIEWER FOR THE 2011 BAR
a. The tax or any portion thereof appears
to be unjustly or excessively assessed; or
b. The administration and collection costs
involved do not justify the collection of
the amount due. [Sec. 204 (B), NIRC of
1997]
The collection of a tax may not be
suspended. Only the Court of Tax Appeals
may issue an order suspending the
collection of a tax.
As a general rule, “No court shall have the
authority to grant an injunction to restrain
the collection of any national internal
revenue tax, fee or charge.” (Sec. 218,
NIRC)
No appeal taken to the CTA from the
decision of the Commissioner of Internal
Revenue or the Commissioner of Customs
or the Regional Trial Court, provincial, city
or municipal treasurer or the Secretary of
Finance, the Secretary of Trade and
Industry and Secretary of Agriculture, as
the case may be shall suspend the
payment, levy, distraint, and/or sale of
any property of the taxpayer for the
satisfaction of his tax liability as provided
by existing law: Provided, however, That
when in the opinion of the Court the
collection by the aforementioned
government agencies may jeopardize the
interest of the Government and/or the
taxpayer the Court at any stage of the
proceeding may suspend the said
collection and require the taxpayer either
to deposit the amount claimed or to file a
surety bond for not more than double the
amount with the Court.” (Sec. 11, Rep.
Act No. 1125, as amended by Sec. 9, Rep.
Act No. 9282 )
GENERAL PRINCIPLES
The Supreme Court may enjoin the
collection of taxes under its general
judicial power but it should be apparent
that the source of the power is not
statutory but constitutional.
What is the procedure for suspension of
collection of taxes ?
Where the collection of the amount of
the taxpayer’s liability, sought by means
of a demand for payment, by levy,
distraint or sale of property of the
taxpayer, or by whatever means, as
provided under existing laws, may
jeopardize the interest of the
government or the taxpayer, an
interested party may file a motion for
the suspension of the collection of the
tax liability (Sec. 1, Rule 10, RRCTA
effective December 15, 2005) with the
Court of Tax Appeals.
The motion for suspension of the
collection of the tax may be filed
together with the petition for review or
with the answer, or in a separate motion
filed by the interested party at any stage
of the proceedings. (Sec. 3, Rule 10,
RRCTA effective December 15, 2005)
REFUND OF INTERNAL REVENUE TAXES
What are the grounds for refund or credit
of internal revenue taxes ?
The grounds for refund or credit or
internal revenue taxes are the following:
a. The tax was illegally
collected. There is no law that authorizes
the collection of the tax.
b. The tax was excessively
collected. There is a law that authorizes
the collection of a tax but the tax
BEBER, DINDO 43
AMILING, BEBER, CAINDAY, CONEJERO, FERUELO & LIAO TAXATION LAW REVIEWER FOR THE 2011 BAR
collected was more than what the law
allows.
c. The tax was paid through a
mistaken belief that the taxpayer should
pay the tax (solution indebeti)
What are the three (3) conditions
for the grant of a claim for refund of
creditable withholding tax ?
a. The claim is filed with the
Commissioner of Internal Revenue within
the two-year period from the date of the
payment of the tax.
b. It is shown on the return of
the recipient that the income payment
received was declared as part of the gross
income; and
c. The fact of withholding is
established by a copy of a statement duly
issued by the payee showing the amount
paid and the amount of tax withheld
therefrom. (Banco Filipino Savings and
Mortgage Bank v. Court of Appeals, et al.,
G. R. No. 155682, March 27, 2007)
Proof of fact of withholding. “Sec. 10.
Claim for tax credit or refund. – (a) Claims
for Tax Credit or Refund of Income tax
deducted and withheld on income
payments shall be given due course only
when it is shown on the return that the
income payment received has been
declared as part of the gross income and
the fact of withholding is established by a
copy of the Withholding Tax Statement
duly issued by the payor to the payee
showing the amount paid and the amount
of the tax withheld therefrom xxx” (Rev.
Regs. No. 6-85, as amended)
The document which may be accepted as
evidence of the third condition, that is,
44 GENERAL PRINCIPLES
the fact of withholding, must emanate
from the payor itself, and not merely from
the payee, and must indicate the name of
the payor, the income payment basis of
the tax withheld, the amount of the tax
withheld and the nature of the tax paid.
(Banco Filipino Savings and Mortgage
Bank v. Court of Appeals, et al., G. R. No.
155682, March 27, 2007)
What should be established by a taxpayer
for the grant of a tax refund ? Why ?
A taxpayer needs to establish not only
that the refund is justified under the law,
but also the correct amount that should
be refunded.
If the latter requisite cannot be
ascertained with particularity, there is
cause to deny the refund, or allow it only
to the extent of the sum that is actually
proven as due.
Tax refunds partake of the nature of tax
exemptions and are thus construed
strictissimi juris against the person
claiming the exemption. The burden in
proving the claim for refund necessarily
falls on the taxpayer. (Far East Bank Trust
and Company, etc., v. Commissioner of
Internal Revenue, et al., G. R. No. 138919,
May 2, 2006)
What is The legal remedy under the NIRC
of 1997 at the judicial level with respect
to refund or recovery of tax erroneously
or illegally collected ?
Filing of a suit or proceeding with the
Court of Tax Appeals
a. before the expiration of
two (2) years from the date of payment of
the tax regardless of any supervening
cause that may arise after payment (2nd
par., Sec. 229, NIRC of 1997), or
BEBER, DINDO
 AMILING, BEBER, CAINDAY, CONEJERO, FERUELO & LIAO TAXATION LAW REVIEWER FOR THE 2011 BAR
b. within thirty (30) days from
receipt of the denial by the Commissioner
of the application for refund or credit.
(Sec. 11, R.A. No. 1125)
The two (2) year period and the
thirty (30) day period should be applied
on a whichever comes first basis. Thus, if
the 30 days is within the 2 years, the 30
days applies, if the 2 year period is about
to lapse but there is no decision yet by the
Commissioner which would trigger the
30-day period, the taxpayer should file an
appeal, despite the absence of a decision.
(Commissioners, etc. v. Court of Tax
Appeals, et al., G. R. No. 82618, March 16,
1989, unrep.)
Where the taxpayer is a corporation the
two year prescriptive period from “date of
payment” for refund of income taxes
should be the date when the corporation
filed its final adjustment return not on the
date when the taxes were paid on a
quarterly basis. (Philippine Bank of
Communications v. Commissioner of
Internal Revenue, et al., G.R. No. 112024,
January 28, 1999)
It is only when the return, covering the
whole year, is filed that the taxpayer will
be able to ascertain whether a tax is still
due or refund can be claimed based on
the adjusted and audited figures. (Bank of
the Philippine Islands v. Commissioner of
Internal Revenue, G.R. No. 144653,
August 28, 2001)
What is solutio indebeti as applied to tax
cases ?
Under the principle of solutio indebiti
provided in Art. 2154, Civil Code, “If
something is received when there is no
GENERAL PRINCIPLES
right to demand it, and it was unduly
delivered through mistake, the obligation
to return it arises.” The BIR received
something “when there *was+ no right to
demand it,” and thus, it has the
obligation to return it. [State Land
Investment Corporation v. Commissioner
of Internal Revenue, G. R. No. 171956,
January 18, 2008citing Citibank, N. A. v.
Court of Appeals and Commissioner of
Internal Revenue, G.R. No. 107434,
October 10, 1997, 280 SCRA 459, in turn
citing Ramie Textiles, Inc. v. Mathay, Sr.,
89 SCRA 586 (1979)]. It is an ancient
principle that no one, not even the state,
shall enrich oneself at the expense of
another. Indeed, simple justice requires
the speedy refund of the wrongly held
taxes. (Ibid.)
What is the nature
of the taxpayer’s remedy of either to ask for
a refund of excess tax payments or to apply
the same in payment of succeeding taxable
periods’ taxes ?
Sec. 69 of the 1977 NIRC (now Sec. 76 of
the NIRC of 1997) provides that any
excess of the total quarterly payments
over the actual income tax computed in
the adjustment or final corporate income
tax return, shall either (a) be refunded to
the corporation, or (b) may be credited
against the estimated quarterly income
tax liabilities for the quarters of the
succeeding taxable year. To ease the
administration of tax collection, these
remedies are in the alternative and the
choice of one precludes the other. Since
BEBER, DINDO 45
AMILING, BEBER, CAINDAY, CONEJERO, FERUELO & LIAO TAXATION LAW REVIEWER FOR THE 2011 BAR
the Bank has chosen the tax credit
approach it cannot anymore avail of the
tax refund. (Philippine Bank of
Communications v. Commissioner of
Internal Revenue, et al., G.R. No. 112024,
January 28, 1999)
a. The choice, is given to the taxpayer,
whether to claim for refund under Sec. 76
or have its excess taxes applied as tax
credit for the succeeding taxable year,
such election is not final. Prior
verification and approval by the
Commissioner of Internal Revenue is
required. The availment of the remedy of
tax credit is not absolute and mandatory.
It does not confer an absolute right on the
part of the taxpayer to avail of the tax
credit scheme if it so chooses. Neither
does it impose a duty on the part of the
government to sit back and allow an
important facet of tax collection to be at
the sole control and discretion of the
taxpayer. (Paseo Realty & Development
Corporation v. Court of Appeals, et al., G.
R. No. 119286, October 13, 2004)
What is the “irrevocability rule” in claims
for refund and what is the rationale
behind this ?
A corporation entitled to a tax credit or
refund of the excess estimated quarterly
income taxes paid has two options: (1) to
carry over the excess credit or (2) to
apply for the issuance of a tax credit
certificate or to claim a cash refund. If
the option to carry over the excess credit
is exercised, the same shall be
irrevocable for that taxable period.
In exercising its option, the corporation
must signify in its annual corporate
adjustment return (by marking the
46 GENERAL PRINCIPLES
option box provided in the BIR form) its
intention either to carry over the excess
credit or to claim a refund. To facilitate
tax collection, these remedies are in the
alternative and the choice of one
precludes the other. [Systra Philippines,
Inc., v. Commissioner of Internal
Revenue, G. R. No. 176290, September
21, 2007 citing Philippine Bank of
Communications v. Commissioner of
Internal Revenue, 361 Phil. 916 (1999)]
This is known as the irrevocability rule
and is embodied in the last sentence of
Section 76 of the Tax Code. The phrase
“such option shall be considered
irrevocable for that taxable period”
means that the option to carry over the
excess tax credits of a particular taxable
year can no longer be revoked.
The rule prevents a taxpayer from
claiming twice the excess quarterly taxes
paid: (1) as automatic credit against
taxes for the taxable quarters of the
succeeding years for which no tax credit
certificate has been issued and (2) as a
tax credit either for which a tax credit
certificate will be issued or which will be
claimed for cash refund. (Systra
Philippines, Inc., supra citing De Leon,
Hector, THE NATIONAL INTERNAL
REVENUE CODE, Seventh Edition, 2000,
p. 430)
In the year 2000 Systra derived excess
tax credits and exercised the option to
carry them over as tax credits for the
next taxable year. However, the tax due
for the next taxable year is lower than
excess tax credits. It now applies for a
refund of the unapplied tax credits. May
its refund be granted ? If the refund is
denied, does Systra lose the unapplied
tax credits ? Explain briefly your answer.
Systra’s claim for refund should be
denied. Once the carry over option was
BEBER, DINDO
 AMILING, BEBER, CAINDAY, CONEJERO, FERUELO & LIAO TAXATION LAW REVIEWER FOR THE 2011 BAR
made, actually or constructively, it
became forever irrevocable regardless of
whether the excess tax credits were
actually or fully utilized Under Section 76
of the Tax Code, a claim for refund of
such excess credits can no longer be
made. The excess credits will only be
applied “against income tax due for the
taxable quarters of the succeeding
taxable years.”
Despite the denial of its claim for refund,
Systra does not lose the unapplied tax
credits. The amount will not be forfeited
in favor of the government but will
remain in the taxpayer’s account.
Petitioner may claim and carry it over in
the succeeding taxable years, creditable
against future income tax liabilities until
fully utilized. (Systra Philippines, Inc., v.
Commissioner of Internal Revenue, G. R.
No. 176290, September 21, 2007 citing
Philam Asset Management, Inc. v.
Commissioner of Internal Revenue, G.R.
Nos. 156637/162004, 14 December
2005, 477 SCRA 761)
Supposing in the above problem that
Systra permanent ceased operations,
what happens to the unapplied credits ?
Where, the corporation permanently
ceases its operations before full
utilization of the tax credits it opted to
carry over, it may then be allowed to
claim the refund of the remaining tax
credits. In such a case, the remaining tax
credits can no longer be carried over and
the irrevocability rule ceases to apply.
Cessante ratione legis, cessat ipse lex.
(Footnote no. 23, Systra Philippines, Inc.,
v. Commissioner of Internal Revenue, G.
R. No. 176290, September 21, 2007)
The holding in State Land Investment
Corporation v. Commissioner of Internal
Revenue, G. R. No. 171956, January 18,
2008 that the taxpayer is entitled to a
GENERAL PRINCIPLES
refund because during the succeeding
year there was no tax due against which
the excess tax credits may be applied is
not doctrinal. This is so because it
interpreted the provisions of then Sec.
69 of the NIRC, which did not provide for
the “irrevocability rule” now contained in
Sec. 76 of the NIRC of 1997.
A simultaneous filing of the application
with the BIR for refund/credit and the
institution of the court suit with the CTA is
allowed. There is no need to wait for a BIR
denial. REASONS:
a. The positive requirement of Section
230 NIRC (now Sec. 229, NIRC of 1997);
b. The doctrine that delay of the
Commissioner in rendering decision does
not extend the peremptory period fixed
by the statute;
c. The law fixed the same period two
years for filing a claim for refund with the
Commissioner under Sec. 204, par. 3,
NIRC (now Sec. 204 [C], NIRC of 1997),
and for filing suit in court under Sec. 230,
NIRC (now Sec. 229, NIRC of 1997), unlike
in protests of assessments under Sec. 229
(now Sec. 228, NIRC of 1997), which fixed
the period (thirty days from receipt of
decision) for appealing to the court, thus
clearly implying that the prior decision of
the Commissioner is necessary to take
cognizance of the case. (Commissioner of
Internal Revenue v. Bank of Philippine
Islands, etc. et al., CA-G.R. SP No. 34102,
September 9, 1994; Gibbs v. Collector of
Internal Revenue, et al., 107 Phil, 232;
Johnston Lumber Co. v. CTA, 101 Phil. 151)
The grant of a refund is founded on the
assumption that the tax return is valid, i.e. that the
facts stated therein are true and correct.
BEBER, DINDO 47
 AMILING, BEBER, CAINDAY, CONEJERO, FERUELO & LIAO TAXATION LAW REVIEWER FOR THE 2011 BAR
(Commissioner of Internal Revenue v. Court of Tax
Appeals, G. R. No. 106611, July 21, 1994, 234 SCRA
348) Without the tax return it would be virtually
impossible to determine whether the proper taxes
have been assessed and paid. After all, it is
axiomatic that a claimant has the burden of proof to
establish the factual basis of his or her claim for tax
credit or refund. Tax refunds, like tax exemptions,
are construed strictly against the taxpayer. (Paseo
Realty & Development Corporation v. Court of
Appeals, et al., G. R. No. 119286, October 13, 2004)
However, in BPI-Family Savings Bank v.
Court of Appeals, 386 Phil. 719; 326 SCRA
641 (2000), refund was granted, despite
the failure to present the tax return,
because other evidence was presented to
prove that the overpaid taxes were not
applied. (Ibid.)
Discuss the difference between tax
refund and tax credit..
There are unmistakable formal and
practical differences between the two
modes. Formally, a tax refund requires a
physical return of the sum erroneously
paid by the taxpayer, while a tax credit
involves the application of the
reimbursable amount against any sum
that may be due and collectible from the
taxpayer.
On the practical side, the taxpayer to
whom the tax is refunded would have the
option, among others, to invest for profit
the returned sum, an option not
proximately available if the taxpayer
chooses instead to receive a tax credit.
(Commissioner of Customs v. Philippine
Phosphate Fertilizer Corporation, G. R. No.
144440, September 1, 2004)
48 GENERAL PRINCIPLES
NOTES AND COMMENTS: It may be that
there is no essential difference between a
tax refund and a tax credit since both are
moves of recovering taxes erroneously or
illegally paid to the government.
(Commissioner of Customs v. Philippine
Phosphate Fertilizer Corporation, G. R. No.
144440, September 1, 2004)
A bank-trustee of employee trusts filed
an application for the refund of taxes
withheld on the interest incomes of the
investments made of the funds of the
employees’ trusts. Instead of presenting
separate accounts for interest incomes
made of these investments, the bank-
trustee instead presented witness to
establish that it would next to impossible
to single out the specific transactions
involving the employees’ trust funds
from the totality of all interest income
from its total investments. On the above
basis will the application for refund
prosper ?
No. The application for refund will not
prosper.
The bank-trustee needs to establish not
only that the refund is justified under the
law (which is so because incomes of
employees’ trusts are tax exempt), but
also the correct amount that should be
refunded.
Tax refunds partake of the nature of tax
exemptions and are thus construed
strictissimi juris against the person or
entity claiming the exemption. The
burden in proving the amount to be
refunded necessarily falls on the bank-
trustee, and there is an apparent failure
to do so.
A necessary consequence of the special
exemption enjoyed alone by employees’
BEBER, DINDO
 AMILING, BEBER, CAINDAY, CONEJERO, FERUELO & LIAO TAXATION LAW REVIEWER FOR THE 2011 BAR
trusts would be a necessary segregation
in the accounting of such income,
interest or otherwise, earned from those
trusts from that earned by the other
clients of the bank-trustee. (Far East
Bank and Trust Company, etc., v.
Commissioner, etc., et al., G.R. No.
138919, May 2, 2006) The amounts that
are the exempt earnings of the
employee’s trust has not been shown as
they have been commingled with the
interest income of the other clients of
the bank-trustee.
CTA Circular No. 1-95 clearly requires
that photocopies of the receipts or
invoices must be pre-marked and
submitted to the CTA to verify the
correctness of the summary listing and
the CPA certification. CTA Circular No. 1-
95, issued on 25 January 1995, reads:
“1. The party who desires to introduce
as evidence such voluminous documents
must present: (a) Summary containing
the total amount/s of the tax account or
tax paid for the period involved and a
chronological or numerical list of the
numbers, dates and amounts covered by
the invoices or receipts; and (b) a
Certification of an independent Certified
Public Accountant attesting to the
correctness of the contents of the
summary after making an examination
and evaluation of the voluminous
receipts and invoices. Such summary and
certification must properly be identified
by a competent witness from the
accounting firm.
2. The method of individual presentation
of each and every receipt or invoice or
other documents for marking,
identification and comparison with the
GENERAL PRINCIPLES
originals thereof need not be done
before the Court or the Commissioner
anymore after the introduction of the
summary and CPA certification. It is
enough that the receipts, invoices and
other documents covering the said
accounts or payments must be pre-
marked by the party concerned and
submitted to the Court in order to be
made accessible to the adverse party
whenever he/she desires to check and
verify the correctness of the summary
and CPA certification. However, the
originals of the said receipts, invoices or
documents should be ready for
verification and comparison in case
doubt on the authenticity of the
particular documents presented is raised
during the hearing of the case.”
(Emphasis supplied)
Manila Electric Company a grantee of a
legislative franchise under Act No. 484,
as amended by Republic Act No. 4159
and Presidential Decree No. 551,1[3] had
been paying a 2% franchise tax based on
its gross receipts, in lieu of all other taxes
and assessments of whatever nature.
Upon the effectivity of Executive Order
No. 72 on February 10, 1987, however,
respondent became subject to the
payment of regular corporate income
tax.
For the last quarter ending December 31,
1987, respondent filed on April 15, 1988
its tentative income tax reflecting a
refundable amount of P101,897,741, but
only P77,931,812 was applied as tax
credit for the succeeding taxable year
1988.
BEBER, DINDO 49
AMILING, BEBER, CAINDAY, CONEJERO, FERUELO & LIAO TAXATION LAW REVIEWER FOR THE 2011 BAR
Acting on a yearly routinary Letter of
Authority No. 0018064 NA dated June
27, 1988 issued by petitioner, directing
the investigation of tax liabilities of
respondent for taxable year 1987, an
investigation was conducted by Revenue
Officer Frederick Capitan which showed
that respondent was liable for “1.
deficiency income tax in the amount of
P2,340,902.52; and 2. deficiency
franchise tax in the amount of
P2,838,335.84.”
On April 17, 1989, respondent filed an
amended final corporate Income Tax
Return ending December 31, 1988
reflecting a refundable amount of
P107,649,729.
Respondent thus filed on March 30, 1990
a letter-claim for refund or credit in the
amount of P107,649,729 representing
overpaid income taxes for the years 1987
and 1988.
Petitioner not having acted on its
request, respondent filed on April 6,
1990 a judicial claim for refund or credit
with the Court of Tax Appeals.
It is gathered that respondent paid the
deficiency franchise tax in the amount of
P2,838,335.84. It protested the payment
of the alleged deficiency income tax and
claimed as an alternative remedy the
deduction thereof from its claim for
refund or credit.
The Court of Tax Appeals granted the
P107,649,729 claim for refund, or in the
alternative for the BIR to issue a tax
credit. Is the Court of Tax Appeals
correct ?
Yes. Section 69 of the National Internal
Revenue Code of 1986, now Sec. 76
provides, if the sum of the quarterly tax
payments made during a taxable year is
50 GENERAL PRINCIPLES
not equal to the total tax due on the
entire taxable income of that year as
shown in its final adjustment return, the
corporation has the option to either: (a)
pay the excess tax still due, or (b) be
refunded the excess amount paid. The
returns submitted are “merely pre-
audited which consist mainly of checking
mathematical accuracy of the figures in
the return.” After such checking, the
purpose of which being to “insure
prompt action on corporate annual
income tax returns showing refundable
amounts arising from overpaid quarterly
income taxes,” (Revenue Memorandum
Order No. 32-76 dated June 11, 1976)
the refund or tax credit is granted.
(Commissioner of Internal Revenue v.
Manila Electric Company, G. R. No.
121666, October 10, 2007.
TAX AS DISTINGUISHED FROM OTHER
FORMS OF EXACTIONS.
1. TAX AND TOLL
a. Tax is a demand of sovereignty
while toll is a demand of
proprietorship.
b. Tax is for the support of the
government while toll is a
compensation for the use of
another’s property.
c. The amount of tax is regulated
by necessities of the
government, while the amount
of toll is determined by the cost
of the property.
d. Tax is imposed only by the
government, while toll is
collected by the government or
private property.
2. TAX AND PENALTY
BEBER, DINDO
 AMILING, BEBER, CAINDAY, CONEJERO, FERUELO & LIAO TAXATION LAW REVIEWER FOR THE 2011 BAR
a. Tax is aimed at raising revenue
while penalty is imposed to
regulate conduct.
b. Tax is imposed only by the
government, while penalty is
imposed by the government or
by private entities.
3. TAX AND LICENSE FEE
a. Tax is imposed to raise revenue
while license is imposed for
regulatory purpose.
b. Tax has no maximum limit,
whereas license is limited to the
cost of regulation.
c. Tax is imposed on person,
property, and right to exercise
privilege, whereas license is
important on the right to
exercise a privilege.
d. Non-payment of tax does not
make the act or business illegal,
while non-payment of license
makes the act or business illegal.
4. TAX AND SPECIAL ASSESSMENT
a. Tax is levied on persons,
property, or exercise of a
privilege, while special
assessment is levied only on
land.
b. No special benefit accrues to the
tax payer, while special benefit
result to the property assessed in
special assessment.
c. Tax is of general application,
whereas special assessment is
exceptional as to time and place
and not of general application.
5. TAX AND DEBT
a. Tax is imposed while debt
arises from contract.
b. Tax cannot be assigned while
debt is assignable.
GENERAL PRINCIPLES
c. Taxes is generally payable in
money, while debt may be
paid in kind.
d. Taxes is not subject to set-off
while debt is subject to set-
off.
e. Tax is governed by special
prescriptive periods under
the tax code while debt is
governed b by the civil code
and other special laws as to
prescriptive period.
f. Failure to pay tax, except poll
tax, may be punishable by
imprisonment, while under
the constitution, no person
shall be imprisoned for non-
payment of debt.
6. TAX AND CUSTOM DUTIES
Tax is broader than custom duties
because the latter refer only to taxes
levied on commodities imported into
or exported out of the country.
KINDS OR CLASSIFICATION OF TAXES
1. As to subject matter or object
a. Personal, poll or capitation tax is a
fixed amount imposed on individuals
residing within a specified territory,
without regard to their property,
occupation or business.
b. Property tax is imposed on property,
real or personal, in proportion to its
value, or in accordance with some
reasonable method of apportionment.
c. Excise tax is a tax imposed upon the
performance of an act, the enjoyment
of a privilege, or the engaging in an
occupation, profession, or business.
2. As to who bears the tax burden
BEBER, DINDO 51
AMILING, BEBER, CAINDAY, CONEJERO, FERUELO & LIAO TAXATION LAW REVIEWER FOR THE 2011 BAR

a. Direct tax is a tax imposed on the Sources:

person who also bears the burden
PRIMUS PRE-BAR REVIEW BAR STAR NOTES
thereof.
b. Indirect tax is a tax imposed on the tax TAXATION LAW REVIEW, ATTY. FRANCIS SABABAN
payer who shifts the burden of the tax
to another. TAXATION FOR FILIPINOS, ATTY. ANGELINA
ARANDIA-VILLANUEVA
3. As to determination of amount
TAX LAW, ATTY. ABELARDO T. DOMODON
a. Specific tax is computed based on a
physical unit of measurement, as by
head, number, weight, length, or
volume.
b. Ad valorem tax is a tax of a fixed
proportion of the value of property
with respect to which the tax is
assessed.
4. As to purpose
a. General, fiscal, or revenue tax is
imposed for the general purpose of
supporting the government.
b. Special or regulatory tax is imposed for
a special purpose, to achieve some
social or economic objectives.
5. As to scope or authority imposing the tax
a. National tax is imposed by the national
government
b. Municipal or local tax is imposed by
municipal corporations, or local
governments.
6. As to graduation of rates
a. Proportional
Based on a fixed percentage of the
amount of the property, receipts, or
other basis to be taxed.
b. Progressive or graduated
The rate of tax increases as the tax
base or bracket increases.
c. Regressive
The rate of tax decreases as the tax
base or bracket increases. We have no
regressive taxes in the Philippines.

52 GENERAL PRINCIPLES BEBER, DINDO

 AMILING, BEBER, CAINDAY,CONEJERO, FERUELO & LIAO TAXATION LAW REVIEWER FOR THE 2011 BAR
II. National Internal Revenue Code of 1997 as
amended (NIRC)
A. Income Taxation
1. Income Tax Systems:
a. Global Tax System
Global Tax System – Under the global tax
system, the total allowable deductions as well as
personal and additional exemptions, in the case of
qualified individuals, or the total allowable
deductions only, in the case of corporations, are
deducted from the gross income to arrive at the
net taxable subject to the graduated income tax
rates, in the case of individuals, or to the corporate
income tax rate, in the case of corporations. It did
not matter whether the income received by the
taxpayer is classified as compensation income,
business or professional income, passive
investment income, capital gain, or other income.
All items of gross income, deductions, and personal
and additional exemptions, if any, are reported in
one income tax return to be filed at least annually,
and the applicable tax rate is applied on the tax
base. The pure global tax system was enforced in
the Philippines up to December 31, 1981, with the
maximum rate of 70% being applied on net income
of individuals.
Under the global system, all income received
by the taxpayer are grouped together, without any
distinction as to the type or nature of the income,
and after deducting therefrom expenses and other
allowable deductions, are subjected to tax at a
graduated or fixed rate.(Mamalateo,67)
b. Schedular Tax System
Schedular Tax System – Under the schedular
tax system, different types of incomes are subject
to different sets of graduated or flat income tax
rates. The applicable tax rate (s) will depend on the
NATIONAL INTERNAL REVENUE CODE OF 1997
classification of the taxable income and the basis
could be gross income (without deductions) or net
income (i.e., gross income less allowable
deductions). Separate regular income tax return or
capital gains tax return, whichever is applicable, is
filed by the recipient of income for appropriate
types of income received within the prescribed
dates but no income tax return is fled by the
recipient of passive income subject to final
withholding tax because the withholding agent is
made primarily responsible for the filing of the
withholding tax return and the payment of income
tax to the BIR on such passive income of the
investor or depositor.(Mamalateo,68)
Under a schedular system, the various
types/items of income are classified accordingly
and are accorded different tax treatments, in
accordance with schedules characterized by
graduated tax rates. Since these types of income
are treated separately, the allowable deductions
shall likewise vary for each type of income.
c. Semi-schedular or semi-global tax system
Semi-Schedular or Semi-Global Tax System –
Under the semi-schedular or semi-global tax
system, the compensation income, business or
professional income, capital gain and passive
income not subject to final withholding income tax,
and other income are added together to arrive at
the gross income, and after deducting the sum of
allowable deductions from business or professional
income, capital gain, passive income and other
income not subject to final tax, in the case of
corporations, as well as personal and additional
exemptions, in the case of individual taxpayers, the
taxable income is subjected to one set of
graduated tax rates (if an individual) or normal
corporate income tax rate (if a corporation.) With
respect to the above incomes not subject to final
withholding tax, the computation of income tax is
“global.”
FERUELO, MARIVIC M. 53
 AMILING, BEBER, CAINDAY,CONEJERO, FERUELO & LIAO TAXATION LAW REVIEWER FOR THE 2011 BAR
In sum, either (a) the global tax system
(e.g., taxpayer with compensation income not
subject to final withholding tax, or business or
professional income, or mixed income –
compensation and business or professional
income), or (b) the schedular tax system (e.g.,
taxpayer with compensation, capital gains, passive
income, or other income subject to final
withholding tax), or (c) both the global and
schedular tax systems, may be applied, depending
on the nature of the income realized by the
taxpayer during the year.(Mamalateo,68)
2. Features of the Philippine Income Tax Law
a. Direct tax
“Direct tax” because the tax burden is borne
by the income recipient upon whom the tax is
imposed. It is a tax demanded from the very
person who, it is intended or desired, should pay it.
b. Progressive
Progressive tax, since the tax base increases
as the tax rate increases. It is founded on the
ability to pay principle and is consistent with the
Constitutional provision that “Congress shall evolve
a progressive system of taxation.”
c. Comprehensive
Comprehensive system of imposing income
tax by adopting the citizenship principle, the
residence principle, and the source principle. Any
one of the three principles is enough to justify the
imposition of income tax on the income of a
resident citizen and domestic corporation thst are
taxed on worldwide income.
d. Semi-schedular or semi-global tax system
Semi-schedular or semi-global system of
income taxation, although certain passive
54 FERUELO, MARIVIC M.
investment incomes and capital gains from sale of
capital assets, namely:
(a) shares of stock of domestic
corporations; and
(b) real property are subject to final taxes at
preferential tax rates.(Mamalateo,70,72)
3. Criteria in Imposing Philippine Income Tax
a. Citizenship Principle
Citizenship Principle – A citizen of the
Philippines is subject to Philippine income tax (a)
on his worldwide income from within and without
the Philippines, if he resides in the Philippines, or
(b) only on his income from sources within the
Philippines, if he qualifies as a nonresident citizen;
hence, the income of a non-resident citizen from
sources outside the Philippines shall be exempt
from Philippine income tax.(Mamalateo,73)
b. Residence Principle
Residence Principle – An alien was subject to
Philippine income tax on his worldwide income
because of his residence in the Philippines but was
discarded in R.A. 8424. Thus, a resident alien is
now liable to pay Philippine income tax only on his
income from sources within the Philippines and is
exempt from tax on his income from sources
outside the Philippines.(Mamalateo,74)
c. Source Principle
Source Principle – An alien is subject to
Philippine income tax because he derives income
from sources within the Philippines. Thus, a non-
resident alien is liable to pay Philippine income tax
on his income from source within the Philippines,
such as dividend, interest, rent, or royalty, despite
the fact that he has not set foot in the
Philippines.(Mamalateo,74)
NATIONAL INTERNAL REVENUE CODE OF 1997
 AMILING, BEBER, CAINDAY,CONEJERO, FERUELO & LIAO TAXATION LAW REVIEWER FOR THE 2011 BAR
4. Types of Philippine Income Tax
1. Presumptive income tax- A scale of income taxes
is imposed in relation to a group of person’s actual
expenditure and the presumed income.
2. Composite tax- A tax consisting of a series of
separate quasi-personal taxes, assessed on the
particular source of income with a superimposed
personal tax on the income as a whole.
3. Unitary income tax- Incomes are arranged
according to source. The separate items are added
together and the rate applied to the resulting total
income. (Vol.2 Domondon,11)
5. Taxable Period
Sec. 22 (P) The term "taxable year" means the
calendar year, or the fiscal year ending during
such calendar year, upon the basis of which the
net income is computed under this Title. 'Taxable
year' includes, in the case of a return made for a
fractional part of a year under the provisions of
this Title or under rules and regulations
prescribed by the Secretary of Finance, upon
recommendation of the commissioner, the period
for which such return is made.
a. Calendar Period
The twelve (12) consecutive months
starting on January 1 and ending on December 31.
Instances when a calendar year shall be the
basis for computing the net income:
1. when the taxpayer is an individual;
2. when the taxpayer does not keep books of
account;
3. when the taxpayer has no annual accounting
period; and
4. when the taxpayer is an estate or trust.
NATIONAL INTERNAL REVENUE CODE OF 1997
Taxpayers who are required to use only the
calendar year:
1. individuals;
2. Estates and trusts;
c. General professional partnertships. (Vol.2
Domondon, 27)
b. Fiscal Period
Sec.22 (Q) The term "fiscal year" means an
accounting period of twelve (12) months ending
on the last day of any month other than
December.
A corporation may employ either:
1. calendar year, or
2. fiscal year.
Note: only the corporation may change its
accounting periods but always subject to the
approval of the BIR and compliance with the
requirements for filing returns for short period
resulting from change of accounting period.
An individual taxpayer cannot change its
accounting period because it is allowed only one,
the calendar year. (Vol.2 Domondon 28)
c. Short Period
SEC. 47. Final or Adjustment Returns for a Period
of Less than Twelve (12) Months. -
(A) Returns for Short Period Resulting from
Change of Accounting Period. - If a taxpayer,
other than an individual, with the approval of the
Commissioner, changes the basis of computing
net income from fiscal year to calendar year, a
separate final or adjustment return shall be made
for the period between the close of the last fiscal
year for which return was made and the following
December 31. If the change is from calendar year
FERUELO, MARIVIC M. 55
 AMILING, BEBER, CAINDAY,CONEJERO, FERUELO & LIAO TAXATION LAW REVIEWER FOR THE 2011 BAR

to fiscal year, a separate final or adjustment a. a separate final or adjustment return

return shall be made for the period between the shall be made
close of the last calendar year for which return
was made and the date designated as the close of i. for the period between the close of
the fiscal year. If the change is from one fiscal the last calendar year for which
year to another fiscal year, a separate final or return was made and
adjustment return shall be made for the period ii. the date designated as the close of
between the close of the former fiscal year and the fiscal year.
the date designated as the close of the new fiscal
year. 4. If the change is from one fiscal year to
another fiscal year,
(B) Income Computed on Basis of Short Period. -
Where a separate final or adjustment return is a. a separate final or adjustment return
made under Subsection (A) on account of a shall be made
change in the accounting period, and in all other
i. for the period between the close of
cases where a separate final or adjustment return
the former fiscal year and
is required or permitted by rules and regulations
prescribed by the Secretary of Finance, upon ii. the date designated as the close of
recommendation of the Commissioner, to be the new fiscal year.
made for a fractional part of a year, then the
income shall be computed on the basis of the 6. Kinds of Taxpayers
period for which separate final or adjustment
There are four groups of taxpayers:
return is made.
1. Individual;
Returns for short period resulting from
change of accounting period. 2. Corporations;

a. if a taxpayer, other than an individual, with the 3. Estate under judicial Settlement;
approval of the BIR,
4. Irrevocable trusts (irrevocable both as to corpus
1. changes the basis of computing net income and as to income)(Vol.2 Domondon, 89)
from fiscal year to calendar year,
a. Individual Taxpayers
2. a separate final or adjustment return shall be
made The individual taxpayers are classified into
seven (7), namely:
a. for the period between the close of the
last fiscal year for which return was 1. Resident citizen (RC);
made and
2. Non-Resident Citizen (NRC);
b. the following December 31.
3. Overseas Contract Workers (OCW) and Seaman;
3. If the change is from calendar year to fiscal
4. Resident Alien (RA);
year,

56 FERUELO, MARIVIC M. NATIONAL INTERNAL REVENUE CODE OF 1997

 AMILING, BEBER, CAINDAY,CONEJERO, FERUELO & LIAO TAXATION LAW REVIEWER FOR THE 2011 BAR
5. Non-Resident Alien Engaged in Trade or Business
in the Philippines (NRAETB);
6. Non-Resident Alien Not Engaged in Trade or
Business in the Philippines (NRANETB);
7. Aliens Employed in Multinational Companies,
Offshore Banking Units and Petroleum Service
Contractors and Subcontractors (MOP).
(2008Sababan,21)
1) Citizens
Generally, a citizen has only one tax status
during the calendar year, either as a resident
citizen or a non-resident citizen. However, it is
possible for a citizen to have a dual status (resident
and non-resident) during a calendar year for
income tax purposes. He may be treated as a
resident citizen and at the same time a non-
resident citizen during the same taxable year, if at
the beginning of the year, he derives compensation
and/or business or professional income, and
sometime later during the same year, he departs
from the Philippines as an immigrant or a qualified
non-resident citizen, or vice versa. In such case, the
income from sources outside the Philippines is
exempt from tax, while the income from source
within the Philippines shall be subject to income
tax.(Mamalateo,76)
Classification of citizens for tax purposes:
1. resident citizen;
2. nonresident citizen; and
3. overseas contract worker; including seaman
a) Resident citizens
A citizen of the Philippines who stays in the
Philippines without the intention of transferring his
physical presence abroad whether to stay
NATIONAL INTERNAL REVENUE CODE OF 1997
permanently or temporarily as an overseas
contract worker.
To constitute abandonment of one’s
residence there must be a deliberate and probable
choice of a new domicile, coupled with actual
residence in the place chosen with a declared or
probable intent that it should be one’s fixed and
permanent place of abode, one’s home.
(2Domondon,92)
A Resident citizen implies:
1. a citizen of the Philippines residing therein;
2. a citizen residing outside the Philippines without
the intention of residing thereat permanently;
3. a citizen of the Philippines who did not manifest
to the total satisfaction of the Commissioner the
fact of his physical presence abroad with a definite
intention to reside therein permanently.
(2008Sababan,22)
Resident citizen vs. nonresident citizen – It
is important to know whether a citizen is a resident
or non-resident of the Philippines because he is:
(a) taxable on his worldwide income, if he is
treated as a resident citizen; and
(b) taxable only on his income from sources
within the Philippines and exempt on his
income from sources outside the Philippines,
if he qualifies as a non-resident citizen.
b) Non-resident citizens
Sec. 22 (E) The term "nonresident citizen"
means:
(1) A citizen of the Philippines who establishes
to the satisfaction of the Commissioner the fact of
his physical presence abroad with a definite
intention to reside therein.
FERUELO, MARIVIC M. 57
 AMILING, BEBER, CAINDAY,CONEJERO, FERUELO & LIAO TAXATION LAW REVIEWER FOR THE 2011 BAR
(2) A citizen of the Philippines who leaves the
Philippines during the taxable year to reside
abroad, either as an immigrant or for
employment on a permanent basis.
(3) A citizen of the Philippines who works and
derives income from abroad and whose
employment thereat requires him to be physically
present abroad most of the time during the
taxable year.
(4) A citizen who has been previously
considered as nonresident citizen and who arrives
in the Philippines at any time during the taxable
year to reside permanently in the Philippines shall
likewise be treated as a nonresident citizen for
the taxable year in which he arrives in the
Philippines with respect to his income derived
from sources abroad until the date of his arrival in
the Philippines.
(5) The taxpayer shall submit proof to the
Commissioner to show his intention of leaving the
Philippines to reside permanently abroad or to
return to and reside in the Philippines as the case
may be for purpose of this Section.
Types of nonresident citizens – There are
three (3) types of nonresident citizens, namely:
(1) immigrants;
(2) employees of a foreign entity on a
permanent basis; and
(3) overseas contract workers. Immigrants and
employees of a foreign entity on a
permanent basis are treated as nonresident
citizens from the time they depart from the
Philippines. However, overseas contract
workers must be physically present abroad
“most of the time” during the calendar year
to qualify as nonresident citizens. The phrase
‘most of the time’ means at least 183 days
58 FERUELO, MARIVIC M.
during the calendar year. His presence
abroad, however, need not be
continuous.(Mamalateo,79)
The term OCW covers only those individuals
with a working contract abroad. Hence, TNTs
are not considered under this group. A
Filipino seaman is deemed OCW for pruposes
of taxation if he receives compensation for
services rendered abroad as a member of
the complement of a vessel engaged
exclusively in international trade.
(2008Sababan,22)
2) Aliens
Alien individuals are classified into:
1. resident alien; and
2. non-resident alien
a. non-resident aliens engaged in trade,
business or profession within the
Philippines;
b. non-resident aliens not engaged in
trade, business or profession within the
Philippines.
a) Resident aliens
Sec. 22 (F) The term "resident alien"
means an individual whose residence is within the
Philippines and who is not a citizen thereof.
An alien actually present in the Philippines
who is not a mere transient or sojourner is a
resident of the Philippines for income tax
purposes. A mere floating intention indefinite as to
time, to return to another country is not sufficient
to constitute him a transient. If he lives in the
Philippines and has no definite intention as to his
stay, he is a resident.
NATIONAL INTERNAL REVENUE CODE OF 1997
 AMILING, BEBER, CAINDAY,CONEJERO, FERUELO & LIAO TAXATION LAW REVIEWER FOR THE 2011 BAR
What the law requires for an alien to be
considered as a resident of the Philippines is
merely physical or bodily presence in a given place
for a period of time, not the intention to make it a
permanent place of abode.
b) Non-resident aliens
Sec. 22(G) The term "nonresident alien"
means an individual whose residence is not within
the Philippines and who is not a citizen thereof.
Nonresident aliens are further classified
into engaged or not engaged in trade or business in
the Philippines. The Philippines exercises limited
taxation rights over income of aliens derived from
the economic activities done within the Philippines.
The “country of source” exercises its taxing rights
due to the territorial link on the income.
(1) Engaged in trade or business
Nonresident Alien Engaged in Trade or Business
in the Philippines – If the aggregate period of his
stay in the Philippines is more than one hundred
eighty (180) days during any calendar year, he shall
be deemed a ‘nonresident alien doing business in
the Philippines.’ An alien engaged in trade or
business in the Philippines is taxed on his income
from sources within the Philippines (after
deducting personal and additional exemptions, if
any) at the graduated income tax rates of 5% to
32%, while his passive investment incomes shall
generally be subject to 20 final tax.(Mamalateo,81)
Non-resident alien engaged in trade or
business in the Philippines is:
1. a foreigner not residing but engaged in trade,
business in the Philippines;
2. engaged in the exercise of profession in the
Philippines; and
NATIONAL INTERNAL REVENUE CODE OF 1997
2. nonresident alien who is neither a
businessman nor a professional who stays in the
Philippines for an aggregate period of more than
180 days during one calendar year.(2008Sababan,
23)
(2) Not engaged in trade or business
Nonresident Alien Not Engaged in Trade or
Business in the Philippines – If the aggregate
period of the nonresident alien’s stay in the
Philippines does not exceed 180 days during any
calendar year, he shall be deemed a ‘nonresident
alien not doing business in the Philippines.’ As
such, his compensation income, business or
professional income, capital gain, passive
investment income, and other income from
sources within the Philippines is taxed at the flat
rate of 25%, but capital gains from sale or
exchange of shares of stocks in a domestic
corporation and from real property located in the
Philippines shall be subject to capital gains tax or
stock transaction tax, as the case may
be.(Mamalateo, 76-82)
Importance of knowing the classification of
individual taxpayers. The application of the
following tax concepts differ in accordance with
the classification of individual taxpayers:
1. gross income for tax purposes;
2. Exclusions from gross income;
c. exemptions;
d. deductions; and
e. income tax rates.
3) Special Class of Individual Employees
1. Sec. 25 (C) Alien Individual Employed by
Regional or Area Headquarters and Regional
Operating Headquarters of Multinational
FERUELO, MARIVIC M. 59
 AMILING, BEBER, CAINDAY,CONEJERO, FERUELO & LIAO TAXATION LAW REVIEWER FOR THE 2011 BAR
Companies. - There shall be levied, collected and
paid for each taxable year upon the gross income
received by every alien individual employed by
regional or area headquarters and regional
operating headquarters established in the
Philippines by multinational companies as
salaries, wages, annuities, compensation,
remuneration and other emoluments, such as
honoraria and allowances, from such regional or
area headquarters and regional operating
headquarters, a tax equal to fifteen percent (15%)
of such gross income: Provided, however, That
the same tax treatment shall apply to Filipinos
employed and occupying the same position as
those of aliens employed by these multinational
companies. For purposes of this Chapter, the term
'multinational company' means a foreign firm or
entity engaged in international trade with
affiliates or subsidiaries or branch offices in the
Asia-Pacific Region and other foreign markets.
2. Sec. 25 (D) Alien Individual Employed by
Offshore Banking Units. - There shall be levied,
collected and paid for each taxable year upon the
gross income received by every alien individual
employed by offshore banking units established in
the Philippines as salaries, wages, annuities,
compensation, remuneration and other
emoluments, such as honoraria and allowances,
from such off-shore banking units, a tax equal to
fifteen percent (15%) of such gross income:
Provided, however, That the same tax treatment
shall apply to Filipinos employed and occupying
the same positions as those of aliens employed by
these offshore banking units.
3. (E) Alien Individual Employed by Petroleum
Service Contractor and Subcontractor. - An Alien
individual who is a permanent resident of a
foreign country but who is employed and
assigned in the Philippines by a foreign service
contractor or by a foreign service subcontractor
engaged in petroleum operations in the
60 FERUELO, MARIVIC M.
Philippines shall be liable to a tax of fifteen
percent (15%) of the salaries, wages, annuities,
compensation, remuneration and other
emoluments, such as honoraria and allowances,
received from such contractor or subcontractor:
Provided, however, That the same tax treatment
shall apply to a Filipino employed and occupying
the same position as an alien employed by
petroleum service contractor and subcontractor.
Any income earned from all other sources within
the Philippines by the alien employees referred to
under Subsections (C), (D) and (E) hereof shall be
subject to the pertinent income tax, as the case
may be, imposed under this Code.
Aliens employed in multinational
companies and offshore banking units may be
classified as either resident or nonresident aliens.
While those employed by petroleum service
contractors and subcontractors are always
considered as non-residents, as provided by the
law: “an alien individual who is a permanent
residence of a foreign country xxx.”
(2008Sababan,24)
a) Minimum wage earner
RA 9504. Sec. 1 (HH) the term 'minimum
wage earner' shall refer to a worker in the private
sector paid the statutory minimum wage, or to an
employee in the public sector with compensation
income of not more than the statutory minimum
wage in the non-agricultural sector where he/she
is assigned."
Sec. last paragraph. "Provided, That
minimum wage earners as defined in Section 22
(HH) of this Code shall be exempt from the
payment of income tax on their taxable income:
Provided, further, That the holiday pay, overtime
pay, night shift differential pay and hazard pay
received by such minimum wage earners shall
likewise be exempt from income tax.
NATIONAL INTERNAL REVENUE CODE OF 1997
 AMILING, BEBER, CAINDAY,CONEJERO, FERUELO & LIAO TAXATION LAW REVIEWER FOR THE 2011 BAR
RA 9504: Tax Exemption on Minimum
Wage Earners
The President signed into law on June 17,
2008 Republic Act No. (RA) 9504 granting
additional tax exemption of minimum wage
earners.
The new law exempts minimum wage
earners in the private and public sector from
payment of income tax. The exemption will cover
not only the basic pay but also holiday pay,
overtime pay, night shift differential, and hazard
pay received by said minimum wage earners.
b. Corporations
Sec.22 (B) The term "corporation" shall
include partnerships, no matter how created or
organized, joint-stock companies, joint accounts
(cuentas en participacion), association, or
insurance companies, but does not include
general professional partnerships and a joint
venture or consortium formed for the purpose of
undertaking construction projects or engaging in
petroleum, coal, geothermal and other energy
operations pursuant to an operating consortium
agreement under a service contract with the
Government.
The phrase “no matter how created or
organized” has been construed by the BIR in its
rulings as to be applicable to all entities deemed as
a corporation, to wit:
1. whether or not organized under Philippines or
foreign laws;
2. whether or not organized in accordance with law
or against it; or
3. whether stock or non-stock, profit or non-profit.
(2008Sababan,25)
Corporations under the NIRC of 1997:
NATIONAL INTERNAL REVENUE CODE OF 1997
1. Domestic Corporation;
2. Foreign Corporations;
3. Unregistered partnerships and others treated
like corporations.(Vol.2Domondon,117)
1) Domestic corporations
The term “domestic,” when applied to a
corporation means created or organized in the
Philippines or under its laws. While the term
“foreign,” when applied to a corporation, means a
corporation which is not domestic.
Classification of Domestic Corp.:
1. Domestic corporations in general, including
partnerships other than general professional
partnerships;
2. Proprietary educational institutions and
hospitals;
3. Government-owned or controlled corporations,
agencies or instrumentalities.
2) Foreign corporations
(1) Resident foreign corporations
Sec. 22 (H) The term "resident foreign
corporation" applies to a foreign corporation
engaged in trade or business within the
Philippines.
A “resident foreign corporation” is a
foreign corporation engaged in trade or business
within the Philippines. The adjective “resident” in
the term “resident foreign corporation” is merely
used to describe a corporation organized under the
laws of a foreign country, which is engaged in trade
or business in the Philippines.
There are two (2) general types of resident
foreign corporations:
FERUELO, MARIVIC M. 61
 AMILING, BEBER, CAINDAY,CONEJERO, FERUELO & LIAO TAXATION LAW REVIEWER FOR THE 2011 BAR
1. Those that do not derive any income from
sources within the Philippines and thus
exempt from income tax; and
2. Those that are engaged in trade or business
in the Philippines and thus subject to income
tax at:
a. Preferential tax rate, or
b. Normal corporate income tax rate or
minimum corporate income tax rate,
whichever is higher.
Under the first category are the regional or
area headquarters established in the Philippines.
They are exempt from income tax because they are
not engaged in trade or business in the Philippines.
They do not derive income from sources within the
Philippines and are merely cost centers.
Under the second category are branches
engaged in trade or business in the Philippines.
(2)Non-resident foreign corporations
Sec. 22 (I) The term 'nonresident foreign
corporation' applies to a foreign corporation not
engaged in trade or business within the
Philippines.
A “nonresident foreign corporation” is a
foreign corporation not engaged in trade or
business within the Philippines. Gross income from
sources within the Philippines paid to a
nonresident foreign corporation shall be subject to
the 35% final corporate income tax, which must be
withheld by the Philippine payor of the income.
(Mamalateo,96-99)
c. Partnerships
Except for a general professional
partnerships and an unincorporated joint venture
62 FERUELO, MARIVIC M.
or consortium engaged in construction or energy-
related projects, which in reality are also
partnerships, Section 22 (B) of the 1997 Tax Code
considers any other type of partnership (described
here as “business partnership”) as a corporation
subject to income tax.
“The taxable income declared by a
partnership for a taxable year which is subject to
tax under Section 27 (A) of this Code, after
deducting the corporate income tax imposed
therein, shall be deemed to have been actually or
constructively received by the partners in the same
taxable year and shall be taxed to them in their
individual capacity, whether actually distributed or
not.”(Mamalateo,89-93)
d. General Professional Partnerships
Sec. 22. (B), last sentence. "General
professional partnerships" are partnerships
formed by persons for the sole purpose of
exercising their common profession, no part of
the income of which is derived from engaging in
any trade or business.
GPP is not a taxable entity. – A general
professional partnership is not considered as a
taxable entity for income tax purposes. The
partners themselves, not the partnership (although
it is still obligated to file an income tax return), are
liable for the payment of income tax in their
individual capacity computed on their respective
distributive shares of the partnership profit. In the
determination of the tax liability, a partner does so
as an individual, and there is no choice on the
matter.
The share of an individual partner in the
net profit of a general professional partnership is
deemed to have been actually or constructively
received by the partner in the same taxable year in
which such partnership net income was earned,
and shall be taxed to them in their individual
NATIONAL INTERNAL REVENUE CODE OF 1997
 AMILING, BEBER, CAINDAY,CONEJERO, FERUELO & LIAO TAXATION LAW REVIEWER FOR THE 2011 BAR
capacity, whether actually distributed or not. Thus,
the principle of constructive receipt of income or
profit is being applied to undistributed profits of
general professional partnerships.
e. Estates and Trusts
An estate - is created by operation of law,
when an individual dies, leaving properties to his
compulsory or other heirs,
A trust - is a legal arrangement whereby the
owner of a property (the trustor) transfers
ownership to a person (the trustee) who is to hold
and control the property belonging to the owner’s
instructions, for the benefit of a designated person
(s) (the beneficiaries).
Taxable estates and trusts are taxed in the
same manner and on the same basis as in the case
of an individual, except that:
(a) the amount of income for the year which is to
be distributed currently by the fiduciary to the
beneficiaries, and the amount of the income
collected by a guardian of an infant which is to be
held or distributed as the court may direct, shall be
allowed as deduction in computing taxable income
of the estate or trust, but the amount so allowed
as deduction shall be included in computing the
taxable income of the beneficiaries, whether
distributed to them or not;
(b) in the case of income received by estates of
deceased persons during the period of
administration or settlement of the estate, and in
the case of income which, in the discretion of the
fiduciary, may be either distributed to the
beneficiary or accumulated, there shall be allowed
as an additional deduction in computing the
taxable income of the estate or trust the amount of
the income of the estate or trust for its taxable
year, which is properly paid or credited during such
year to any legatee, heir or beneficiary, but the
NATIONAL INTERNAL REVENUE CODE OF 1997
amount so allowed as a deduction shall be included
in computing the taxable income of the legatee,
heir or beneficiary.
(c) In the case of a trust administered in a foreign
country, the deductions mentioned in Subsections
(A) and (B) of Section 61 shall not be allowed:
Provided, That the amount of any income included
in the return of said trust shall not be included in
computing the income of the beneficiaries.
f. Co-ownerships
There is co-ownership whenever the
ownership of an undivided thing or right belong to
different persons. For income tax purposes, the
individual co-owners in a co-ownership report their
share of the income from the property owned in
common by them in their individual tax returns for
the year, and the co-ownership is not considered
as a separate taxable entity or a corporation as
defined in Section 22.
Co-ownership due to death of a decedent
1. Before partition of property – In general,
co-ownerships are not treated as separate taxable
entities. The income of a co-ownership arising from
the death of a decedent is not subject to income
tax, if the activities of the co-owners are limited to
the preservation of the property and the collection
of the income therefrom. In which case, each co-
owner is taxed individually on his distributive
share. Before the partition and distribution of the
estate of the deceased, all the income thereof
belongs commonly to all the heirs.
2. After partition of property – Should the
co-owners invest the income of the co-ownership
in any income-producing properties after the
extrajudicial partition of the estate, they would be
constituting themselves into an unregistered
partnership which is consequently subject to
income tax as a corporation. The co-ownership of
FERUELO, MARIVIC M. 63
 AMILING, BEBER, CAINDAY,CONEJERO, FERUELO & LIAO TAXATION LAW REVIEWER FOR THE 2011 BAR
inherited properties is automatically converted
into an unregistered partnership the moment the
said common properties and/or the incomes
derived therefrom are used a common fund with
intent to produce profits for the heirs in proportion
to their respective shares in the inheritance as
determined in a project partition either duly
executed in an extrajudicial settlement or
approved by the court in the corresponding testate
or intestate proceeding. (Mamalateo,83-85)
7. Income Taxation
a. Definition
Income Tax means:
1. A tax on the yearly profits arising from property,
profession, trades and offices.
2. It is a national tax imposed on the net or the
gross income realized in a taxable year. It is subject
to withholding.
3. A tax based on income, gross or
net.(Vol.2Domondon, 1)
b. Nature
Nature of Income Tax
It is an excise tax and not a tax on
property. The theory that a tax on income is legally
or economically a tax on its source is no longer
tenable. (Vol.2Domondon,3)
c. General principles
General Principles of Income Taxation
1. Basis of Taxability of Incomes.
a. As regards individuals, the taxability of
income depends upon:
1) citizenship; or
64 FERUELO, MARIVIC M.
2) residence of the recipient; or
3) the place where such income is derived.
b. With respect to corporation, the
taxability of income depends upon ;
1) whether the corporation is a domestic or a
foreign corporation;
2) whether the foreign corporation is a
resident or non-resident.
8. Income
a. Definition
“Income” means:
1. All wealth which flows into the taxpayer
other than as a mere return of capital.
2. An amount of money coming to a person or
corporation within a specified time, whether as
payment for services, interest or profit from
investment.
3. A flow of service rendered by the capital by
the payment of money from it or any other benefit
rendered by a fund of capital in relation to such
fund through a period of time.
4. Gain derived from capital, from labor, or
from both combined, provided it be understood to
include profit gained through a sale or conversion
of capital assets.
5. It is a gain derived and severed from capital,
from labor or from both combined.
6. Earnings, lawfully or unlawfully acquired,
without consensual recognition, express or
implied, of an obligation to repay and without
restriction as to their disposition.
(Vol.2 Domondon,17)
Definition of income for income tax purposes.
NATIONAL INTERNAL REVENUE CODE OF 1997
 AMILING, BEBER, CAINDAY,CONEJERO, FERUELO & LIAO TAXATION LAW REVIEWER FOR THE 2011 BAR
1. Any material gain, not excluded by law;
2. Realized out of a closed and completed
transaction;
3. Where the is an exchange of economic value for
economic value.
b. Nature
c. When income is taxable
“Net income” means gross income less statutory
deductions and exemptions. It is referred to as
“taxable income” under Section 31 of the 1997 Tax
Code. Net income must be computed with respect
to a fixed period. That period is twelve months
ending December 31st of every year, except in the
case of a corporation filing returns on a fiscal year
basis, in which case net income will be computed
on the basis of such fiscal year.(Mamalateo, 100)
1) Existence of income
2) Realization of income
Realized out of a closed and completed
transaction. Even if there is a material gain, not
excluded by law, if the material gain is not yet
realized by the taxpayer, then there is no income
to peak of. Realization is determinative of earning
process resulting to income. Without realization,
there is no income.
The determining factor for the imposition
of income tax is whether any gain or profit was
derived from the transaction. (Vol.2Domondon,59)
a) Tests of Realization
Under the realization principle, revenue is
generally recognized when both of the following
conditions are met:
1. the earning process is complete or virtually
complete, and
NATIONAL INTERNAL REVENUE CODE OF 1997
2. any exchange has taken place
This principle requires that revenues must
be earned before it is recorded.
(Vol.2Domondon,60)
b) Actual vis-à-vis Constructive receipt
Income is considered received for
Philippine income tax purposes:
1. if actually or physically received by taxpayer; or
2. if constructively received by taxpayer.
Actual receipt may be actual receipt of
physical receipt. For example, actual receipt of
interest income is not limited to physical receipt.
Actual receipt may either be physical receipt or
constructive receipt. When the depository bank
withholds the final tax to pay the tax liability of the
lending bank, there is prior to the withholding a
constructive receipt by the lending bank of the
amount withheld.
Constructive receipt occurs when money
consideration or its equivalent is placed at the
control of the person who rendered the service
without restriction by the payor.(2Domondon,67)
3) Recognition of income
4) Methods of accounting
There are several methods of accounting
revenues and expenses that may be used by
taxpayers under the 1997 Tax Code. These are:
1. Cash receipts and disbursements method;
2. Accrual method;
3. Installment method;
4. Percentage of completion method; or
FERUELO, MARIVIC M. 65
 AMILING, BEBER, CAINDAY,CONEJERO, FERUELO & LIAO TAXATION LAW REVIEWER FOR THE 2011 BAR
5. Crop year basis.
a) Cash method vis-à-vis Accrual
method
Cash method. – Cash method is a method
of accounting whereby all items of gross income
received during the year shall be accounted for in
such taxable year and that only expenses actually
paid shall be claimed as deductions during the
year. Under this method, income is realized upon
actual or constructive receipt of cash or its
equivalent, and expenses are deductible only upon
actual payment thereof, regardless of the taxable
year when the service is performed or the expense
is incurred.
Accrual method. – Accrual method is a
method of accounting for income in the period it is
earned, regardless of whether it has been received
or not. In the same manner, expenses are
accounted for in the period they are incurred and
not in the period they are paid. Under this method,
net income is being measured by the excess of the
income earned during the period over the
expenses incurred during the same period. The
income that has been earned and the expenses
that have been incurred are to be reported during
the year, although they have not been collected or
paid. In the succeeding year of receipt or payment,
the taxpayer shall report no additional income or
expenses.
b) Installment payment vis-à-vis
Deferred payment vis-àvis Percentage
completion (in long term contracts)
Installment method
SEC. 49. Installment Basis. - (A) Sales of
Dealers in Personal Property. - Under rules and
regulations prescribed by the Secretary of
Finance, upon recommendation of the
Commissioner, a person who regularly sells or
66 FERUELO, MARIVIC M.
otherwise disposes of personal property on the
installment plan may return as income therefrom
in any taxable year that proportion of the
installment payments actually received in that
year, which the gross profit realized or to be
realized when payment is completed, bears to the
total contract price.
(B) Sales of Realty and Casual Sales of Personality.
- In the case (1) of a casual sale or other casual
disposition of personal property (other than
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), for a price
exceeding One thousand pesos (P1,000), or (2) of
a sale or other disposition of real property, if in
either case the initial payments do not exceed
twenty-five percent (25%) of the selling price, the
income may, under the rules and regulations
prescribed by the Secretary of Finance, upon
recommendation of the Commissioner, be
returned on the basis and in the manner above
prescribed in this Section. As used in this Section,
the term "initial payments" means the payments
received in cash or property other than evidences
of indebtedness of the purchaser during the
taxable period in which the sale or other
disposition is made.
(C) Sales of Real Property Considered as Capital
Asset by Individuals. - An individual who sells or
disposes of real property, considered as capital
asset, and is otherwise qualified to report the gain
therefrom under Subsection (B) may pay the
capital gains tax in installments under rules and
regulations to be promulgated by the Secretary of
Finance, upon recommendation of the
Commissioner.
(D) Change from Accrual to Installment Basis. - If a
taxpayer entitled to the benefits of Subsection (A)
elects for any taxable year to report his taxable
income on the installment basis, then in
NATIONAL INTERNAL REVENUE CODE OF 1997
 AMILING, BEBER, CAINDAY,CONEJERO, FERUELO & LIAO TAXATION LAW REVIEWER FOR THE 2011 BAR
computing his income for the year of change or
any subsequent year, amounts actually received
during any such year on account of sales or other
dispositions of property made in any prior year
shall not be excluded.
Installment method. – Installment method
is a method considered appropriate when
collections of the proceeds of sales and income
extend over relatively long periods of time and
there is strong possibility that full collection will
not be made. As customers make installment
payments, the seller recognizes the gross profit on
sale in proportion to the cash collected during the
year.
Generally, income from a sale of property
on the installment basis may be reported as the
payments are received. If the installment method
is elected for qualifying sales, the gain reported for
any taxable year is the proportion of the
installment payment received in that year which
the gross profit, realized or to be realized when
payment is completed, bears to the total contract
price.
Deferred Payment
CREDITABLE WITHHOLDING TAX; deferred
payment sales of real property made prior to and
after February 20, 1996 - A distinction should be
made if the payment was made prior to or after
February 20, 1996. In case of deferred payment
sales of real property, not on installment plan, and
made prior to February 20, 1996, the income is
wholly taxable to the seller in the year of sale. The
buyer shall withhold the Creditable Withholding
Tax (CWT) based on the initial or down payment.
[BIR Ruling No. 0-78-94]. The CWT shall be credited
when the final income tax payable is computed at
the end of the taxable year.
Subsequent installments shall still be
subject to withholding by the buyer, if the seller-
NATIONAL INTERNAL REVENUE CODE OF 1997
real estate dealer did not report the entire income
form the deferred payment sales in the year of the
sale, and that the tax due thereon was not fully
paid. On the other hand, if the sale was made after
February 20, 1996, the basis of the CWT shall be
the amount of the "selling price" or the fair market
value (FMV), whichever is higher. (BIR Ruling No.
019-96] (BIR Ruling No. 013-2001 dated March 22,
2001)
Percentage of completion method.
This method is applicable in the case of a
building, installation or construction contract
covering a period in excess of one year, whereby
gross income derived from such contract may be
reported upon the basis of percentage of
completion. In determining the percentage of
completion of a contract, one of the following
methods is generally used:
a. The costs incurred under the contract as of the
end of the tax year are compared with the
estimated total to be performed; or
b. The work performed on the contract as of
the end of the tax year is compared with the
estimated work to be performed. .(Mamalateo,
Tax Reviewer, 251)
Long-term contracts
SEC. 48. Accounting for Long-Term
Contracts. - Income from long-term contracts shall
be reported for tax purposes in the manner as
provided in this Section. As used herein, the term
'long-term contracts' means building, installation
or construction contracts covering a period in
excess of one (1) year. Persons whose gross
income is derived in whole or in part from such
contracts shall report such income upon the basis
of percentage of completion. The return should
be accompanied by a return certificate of
architects or engineers showing the percentage of
FERUELO, MARIVIC M. 67
 AMILING, BEBER, CAINDAY,CONEJERO, FERUELO & LIAO TAXATION LAW REVIEWER FOR THE 2011 BAR

completion during the taxable year of the entire
work performed under contract. There should be
deducted from such gross income all expenditures
made during the taxable year on account of the
contract, account being taken of the material and
supplies on hand at the beginning and end of the
taxable period for use in connection with the
work under the contract but not yet so applied. If
upon completion of a contract, it is found that the
taxable net income arising thereunder has not
been clearly reflected for any year or years, the
Commissioner may permit or require an amended
return.
Long-term contracts, which are usually
contracts taking more than a year to complete, and
frequently involving large scale projects for the
construction of industrial plants or buildings, are
regulated due to the timing issues of the reporting
of income and expenses. In long-term contracts,
the return should be accompanied by a certificate
of the architect or engineer showing the
percentage of completion during the taxable year
of the entire work performed under the
contract.(Mamalateo, Tax Reviewer, 255)
Claim of right doctrine. – A taxable gain is
conditioned upon the presence of a claim of right
to the alleged gain.(Mamalateo,113)
3) Economic benefit test, Doctrine of
proprietary interest
Economic benefit test. – Any economic
benefit to the employee that increases his
networth, whatever may have been the mode by
which it is effected, is taxable.
4) Severance test
There is no taxable income until there is a
separation from capital of something of
exchangeable value, thereby supplying the
realization or transmutation which would result in
the receipt of income.(2Domondon,66)
Thus, in Fisher vs. Trinidad, 43 Phil. 973, it
was held that stock dividends are not income
subject to income tax. However, in Perez Rubio vs.
CIR, 54 Phil. 256, the same Court held that
Congress may include stock dividends in the
definition of income subject to tax.

d. Tests in determining whether income is

earned for tax purposes

1) Realization test

Realization test. – There is no taxable

income until there is a separation from capital of
something of exchangeable value, thereby
supplying the realization or transmutation which
would result in the receipt of income. Thus, stock
dividends are not income subject to income tax on
the part of the stockholder, because he merely
holds more shares representing the same equity
interest in the corporation that declared the stock
of dividends.

2) Claim of right doctrine or Doctrine of

ownership, command, or control
68 FERUELO, MARIVIC M. NATIONAL INTERNAL REVENUE CODE OF 1997
 AMILING, BEBER, CAINDAY,CONEJERO, FERUELO & LIAO TAXATION LAW REVIEWER FOR THE 2011 BAR
9. Gross Income.
a. General Definition. - Except when
otherwise provided in this Title, gross income
means all income derived from whatever source,
including (but not limited to) the following items:
(1) Compensation for services in whatever form
paid, including, but not limited to fees, salaries,
wages, commissions, and similar items; (2) Gross
income derived from the conduct of trade or
business or the exercise of a profession; (3) Gains
derived from dealings in property; (4) Interests; (5)
Rents; (6) Royalties; (7) Dividends; (8) Annuities; (9)
Prizes and winnings; (10) Pensions; and (11)
Partner's distributive share from the net income of
the general professional partnership.(Section 42
NIRC)
“Gross income” means income, gain or
profit subject to tax. It includes compensation for
personal and professional services, business
income, profits, and income derived from any
source whatever (whether legal or illegal), unless
exempt from tax under the Constitution, tax treaty,
or statute.
“Net income” means gross income less
statutory deductions and exemptions. It is referred
to as “taxable income” under Section 31 of the
1997 Tax Code. Net income must be computed
with respect to a fixed period. That period is twelve
months ending December 31st of every year,
except in the case of a corporation filing returns on
a fiscal year basis, in which case net income will be
computed on the basis of such fiscal year.
(Mamalateo, Tax Review)
b. Concept of income from whatever
source derived
Income means gain derived from labor,
capital or both, including the profit derived from
the sale or exchange of capital assets.
c. Gross income vis-à-vis Net Income vis-à-
vis Taxable Income
GROSS INCOME
Gross income is defined in (a) above while
Net Income or Taxable Income is the amount of
income upon which the tax rate prescribed by law
is applied to get the income tax due, depending on
the kind of taxpayer. It means the pertinent items
of gross income less the deductions and /or
personal exemptions, if any authorized for such
types of income specified in the law/s.
d. Classification of Income as to Source
Income can be derived or sourced from
within and without the Philippine or partly within
and partly without the Philippines.
1) Gross Income From Sources Within
the Philippines (Section 42, NIRC). - The following
items of gross income shall be treated as gross
income from sources within the Philippines:
(1) Interests. - Interests derived from
sources within the Philippines, and interests on
bonds, notes or other interest-bearing obligation of
residents, corporate or otherwise;
(2) Dividends. - The amount received as
dividends:
(a) from a domestic corporation; and
(b) from a foreign corporation, unless less
than fifty percent (50%) of the gross income of
such foreign corporation for the three-year period
ending with the close of its taxable year preceding
the declaration of such dividends or for such part
of such period as the corporation has been in
existence) was derived from sources within the
Philippines as determined under the provisions of
this Section; but only in an amount which bears the
same ration to such dividends as the gross income
of the corporation for such period derived from
sources within the Philippines bears to its gross
income from all sources.
3) Services. - Compensation for labor or
personal services performed in the Philippines;
CAINDAY, RAQUEL A. 69
 AMILING, BEBER, CAINDAY,CONEJERO, FERUELO & LIAO TAXATION LAW REVIEWER FOR THE 2011 BAR
(4) Rentals and royalties. - Rentals and
royalties from property located in the Philippines
or from any interest in such property, including
rentals or royalties for -
(a) The use of or the right or privilege to
use in the Philippines any copyright, patent, design
or model, plan, secret formula or process, goodwill,
trademark, trade brand or other like property or
right;
(b) The use of, or the right to use in the
Philippines any industrial, commercial or scientific
equipment;
(c) The supply of scientific, technical,
industrial or commercial knowledge or
information;
(d) The supply of any assistance that is
ancillary and subsidiary to, and is furnished as a
means of enabling the application or enjoyment of,
any such property or right as is mentioned in
paragraph (a), any such equipment as is mentioned
in paragraph (b) or any such knowledge or
information as is mentioned in paragraph (c);
(e) The supply of services by a nonresident
person or his employee in connection with the use
of property or rights belonging to, or the
installation or operation of any brand, machinery
or other apparatus purchased from such
nonresident person;
(f) Technical advice, assistance or services
rendered in connection with technical
management or administration of any scientific,
industrial or commercial undertaking, venture,
project or scheme; and
(g) The use of or the right to use:
(i) Motion picture films;
(ii) Films or video tapes for use in
connection with television; and
70 CAINDAY, RAQUEL A.
(iii) Tapes for use in connection with radio
broadcasting.
(5) Sale of Real Property. - gains, profits
and income from the sale of real property located
in the Philippines; and
(6) Sale of Personal Property. - gains;
profits and income from the sale of personal
property, as determined in Subsection (E) of this
Section.
2) Gross Income From Sources Without
the Philippines. (Section 42 C) - The following
items of gross income shall be treated as income
from sources without the Philippines:
(1) Interests other than those derived from
sources within the Philippines as provided in
paragraph (1) of Subsection (A) of this Section;
(2) Dividends other than those derived
from sources within the Philippines as provided in
paragraph (2) of Subsection (A) of this Section;
(3) Compensation for labor or personal
services performed without the
(4) Rentals or royalties from property
located without the Philippines or from any
interest in such property including rentals or
royalties for the use of or for the privilege of using
without the Philippines, patents, copyrights, secret
processes and formulas, goodwill, trademarks,
trade brands, franchises and other like properties;
and
5) Gains, profits and income from the sale
of real property located without the Philippines.
3) Income From Sources Partly Within
and Partly Without the Philippines Section 42 E).-
Items of gross income, expenses, losses and
deductions, other than those specified in
Subsections (A) and (C) of this Section, shall be
allocated or apportioned to sources within or
without the Philippines, under the rules and
regulations prescribed by the Secretary of Finance,
GROSS INCOME
 AMILING, BEBER, CAINDAY,CONEJERO, FERUELO & LIAO TAXATION LAW REVIEWER FOR THE 2011 BAR
upon recommendation of the Commissioner.
Where items of gross income are separately
allocated to sources within the Philippines, there
shall be deducted (for the purpose of computing
the taxable income therefrom) the expenses,
losses and other deductions properly apportioned
or allocated thereto and a ratable part of other
expenses, losses or other deductions which cannot
definitely be allocated to some items or classes of
gross income. The remainder, if any, shall be
included in full as taxable income from sources
within the Philippines. In the case of gross income
derived from sources partly within and partly
without the Philippines, the taxable income may
first be computed by deducting the expenses,
losses or other deductions apportioned or
allocated thereto and a ratable part of any
expense, loss or other deduction which cannot
definitely be allocated to some items or classes of
gross income; and the portion of such taxable
income attributable to sources within the
Philippines may be determined by processes or
formulas of general apportionment prescribed by
the Secretary of Finance. Gains, profits and income
from the sale of personal property produced (in
whole or in part) by the taxpayer within and sold
without the Philippines, or produced (in whole or
in part) by the taxpayer without and sold within
the Philippines, shall be treated as derived partly
from sources within and partly from sources
without the Philippines.
Gains, profits and income derived from the
purchase of personal property within and its sale
without the Philippines, or from the purchase of
personal property without and its sale within the
Philippines shall be treated as derived entirely form
sources within the country in which sold: Provided,
however, That gain from the sale of shares of stock
in a domestic corporation shall be treated as
derived entirely form sources within the
Philippines regardless of where the said shares are
sold. The transfer by a nonresident alien or a
foreign corporation to anyone of any share of stock
issued by a domestic corporation shall not be
effected or made in its book unless: (1) the
transferor has filed with the Commissioner a bond
conditioned upon the future payment by him of
GROSS INCOME
any income tax that may be due on the gains
derived from such transfer, or (2) the
Commissioner has certified that the taxes, if any,
imposed in this Title and due on the gain realized
from such sale or transfer have been paid. It shall
be the duty of the transferor and the corporation
the shares of which are sold or transferred, to
advise the transferee of this requirement.
Definitions. - As used in this Section the
words 'sale' or 'sold' include 'exchange' or
'exchanged'; and the word 'produced' includes
'created', 'fabricated,' 'manufactured', 'extracted,'
'processed', 'cured' or 'aged.'
(e) Sources of Income Subject to Tax
(1) Compensation Income – all
remuneration for services rendered by employee
for his employer, including salaries, wages,
emoluments, honoraria, bonus, allowances,
directors fees, taxable pension, retirement pay,
proceeds from profit sharing and other benefits
paid in cash or in kind. If paid in kind, such as
shares of stock, bonds and other properties, the
income must be reported at the air market value of
the property received at the time the services were
rendered.
In general, the term “compensation”
means all remuneration for services performed by
an employee for his employer under an employer-
employee relationship.
The term “compensation income” means
all remuneration for services performed by an
employee for his employer, including the cash
value of all remuneration paid in any medium
other than cash.
Items not included as compensation
income. – Compensation shall not include
remuneration paid: (a) for agricultural labor paid
entirely in products of the farm where the labor is
performed; or (b) for domestic service in a private
home; or (c) for casual labor not in the course of
CAINDAY, RAQUEL A. 71
 AMILING, BEBER, CAINDAY,CONEJERO, FERUELO & LIAO TAXATION LAW REVIEWER FOR THE 2011 BAR
the employer’s trade or business; or (d) for services
by a citizen or resident of the Philippines for a
foreign government or an international
organization. (Mamalateo,114-116)
(2) Fringe Benefits
a) Special Treatment of Fringe
Benefit.- Section 33
(A) Imposition of Tax. - A final tax is hereby
imposed on the grossed-up monetary value of
fringe benefit furnished or granted to the
employee (except rank and file employees as
defined herein) by the employer, whether an
individual or a corporation (unless the fringe
benefit is required by the nature of, or necessary to
the trade, business or profession of the employer,
or when the fringe benefit is for the convenience
or advantage of the employer).
(B) Fringe Benefit defined. - any good,
service or other benefit furnished or granted in
cash or in kind by an employer to an individual
employee (except rank and file employees as
defined herein) such as, but not limited to, the
following: (1) Housing; (2) Expense account; (3)
Vehicle of any kind; (4) Household personnel, such
as maid, driver and others; (5) Interest on loan at
less than market rate to the extent of the
difference between the market rate and actual rate
granted; (6) Membership fees, dues and other
expenses borne by the employer for the employee
in social and athletic clubs or other similar
organizations; (7) Expenses for foreign travel; (8)
Holiday and vacation expenses; (9) Educational
assistance to the employee or his dependents; and
(10) Life or health insurance and other non-life
insurance premiums or similar amounts in excess
of what the law allows.
Fringe Benefits Not Taxable. - The
following fringe benefits are not taxable under this
72 CAINDAY, RAQUEL A.
Section: (1) fringe benefits which are authorized
and exempted from tax under special laws; (2)
Contributions of the employer for the benefit of
the employee to retirement, insurance and
hospitalization benefit plans; (3) Benefits given to
the rank and file employees, whether granted
under a collective bargaining agreement or not;
and (4) De minimis benefits as defined in the rules
and regulations to be promulgated by the
Secretary of Finance, upon recommendation of the
Commissioner.
To ensure that fringe benefits are
subjected to income tax, Section 33 of R.A. 8424,
which imposes a fringe benefits tax on the fringe
benefits received by supervisory and managerial
employees, was enacted. The law mandates that
the employer shall assume the fringe benefitstax
imposed on the taxable fringe benefits of the
managerial or supervisory employee, but allows
the employer to deduct such tax as a business
expense. However, the fringe benefits a rank-and-
filed employees are treated as part of his
compensation income, which must be withheld
and deducted by his employer from the
compensation income of the employee.
Bar Question (2003)
A “fringe benefit” is defined as being any
good, service or other benefit furnished or granted
in cash or in kind by an employer to an individual
employee. (Mamalateo,119)
(3) Professional Income – Section 26
Tax Liability of Members of General
Professional Partnerships. - A general professional
partnership as such shall not be subject to the
income tax imposed under this Chapter. Persons
engaging in business as partners in a general
professional partnership shall be liable for income
tax only in their separate and individual capacities.
GROSS INCOME
 AMILING, BEBER, CAINDAY,CONEJERO, FERUELO & LIAO TAXATION LAW REVIEWER FOR THE 2011 BAR
For purposes of computing the distributive share of
the partners, the net income of the partnership
shall be computed in the same manner as a
corporation.
Each partner shall report as gross income his
distributive share, actually or constructively
received, in the net income of the partnership.
Under R.A. 6110) - An individual is deemed
a professional if, during a taxable year, he passes
any government examination for the practice of a
profession given by a board of examiners or by the
Supreme Court or remains a registered member of
any profession covered by such examination,
regardless of whether or not, during that taxable
year he actually practices his profession.
"Every professional legally authorized to
practice his profession, who has paid the
corresponding annual privilege tax on professions
as herein imposed, shall be entitled to practice the
profession for which he has been duly qualified
under the law, in all parts of the Philippines
without being subject to any other national tax,
license or fee for the practice of the profession, if
they have paid to the office concerned the
registration fees required by their respective
profession. (R.A. 6110)
“Professional Income” refers to the fees
received by a professional from the practice of his
profession, provided that there is no employer-
employee relationship between him and his clients.
The existence or absence of the employer-
employee relationship determines whether the
income shall be treated as compensation income
or professional fee. This fact is material for
purposes of taxation because there is no deduction
allowed against compensation income, whereas
allowable deductions may be made from
professional income. Thus, a lawyer may practice
GROSS INCOME
his profession as a legal officer of a private
corporation, but for income tax purposes, the
compensation income he recieves is subjected to
the graduated income tax rates without deductions
(except for his personal and additional
exemptions)because of the existence of employer-
employee relationship.(Mamalateo)
(4) Income from Business – income
derived from merchandising, manufacturing,
mining , farming and long term
contracts.(Villanueva’s Taxation Simplified, 2004 p.
79)
Gross Income from business – In the case
of manufacturing, merchandising, or ming
business, “gross income” means the total sales,
less the cost of goods sold, plus any income from
investments and from incidental or outside
operations or sources. In determining the gross
income, substractions should not be made for
depreciation, depletion, selling expenses or losses,
or for items not ordinarily used in computin the
cost of goods sold (Sec. 43, Rev. Regs. 2). In the
case of sellers of services, their gross income is
computed by deducting all direct costs and
expenses as prescribed in Revenue Memorandum
Circular Nos. 4-2003 and 30-2008 dated April 1,
2008.
Bar Question (1994)
The University of Bigaa, a non-
stock, non-profit entity, operates a canteen for its
students and a bookstore inside the campus. It also
operates two dormitories for its students, one of
which is in the campus.
Is the University liable to pay income taxes
for the operation of the:
1. canteen?
CAINDAY, RAQUEL A. 73
 AMILING, BEBER, CAINDAY,CONEJERO, FERUELO & LIAO TAXATION LAW REVIEWER FOR THE 2011 BAR
2. bookstore?
3. two dormitories?
Suggested answer:
1. For the operation of the canteen inside
the campus, the income thereon being incidental
to the operations of the university as a school, is
exempt (Art. XIV [4] [3], Constitution; DECS
Regulations No. 137-87, Dec.16, 1987).
2. For the same reasons, the University of
Bigaa is not liable to pay income taxes for the
operations of the bookstore, since this is an
ancillary activity the conduct of which is carried out
within the school premises.
3. The University of Bigaa shall not be liable
to pay income taxes for the operation of the
dormitory located in the campus, for same reasons
as the foregoing.
However, the latter shall be liable for
income taxes on income from operations of the
dormitory located outside the school premises.
(Mamalateo,122)
(5) Income from Dealings in Property
a) Types of Property
1) Ordinary Asset -Include stock in
trade of the taxpayer or other property of a kind
which would properly be included in the inventory
of the taxpayer if on hand at the close of the
taxable year, or property held by the taxpayer
primarily for sale to customers in the ordinary
course of his trade or business, or property used in
the trade or business, of a character which is
subject to the allowance for depreciation; or real
property used in trade or business of the
taxpayer.(Codal)
74 CAINDAY, RAQUEL A.
2) Capital Asset - means property
held by the taxpayer (whether or not connected
with his trade or business), but does not include
stock in trade of the taxpayer or other property of
a kind which would properly be included in the
inventory of the taxpayer if on hand at the close of
the taxable year, or property held by the taxpayer
primarily for sale to customers in the ordinary
course of his trade or business, or property used in
the trade or business, of a character which is
subject to the allowance for depreciation; or real
property used in trade or business of the
taxpayer.(Codal)
Illustration:
G.R. No. L-26284 October 8, 1986 TOMAS
CALASANZ, ET AL vs. THE COMMISSIONER OF
INTERNAL REVENUE and the COURT OF TAX
APPEALS
The statutory definition of capital assets is
negative in nature. If the asset is not among the
exceptions, it is a capital asset; conversely, assets
falling within the exceptions are ordinary assets.
And necessarily, any gain resulting from the sale or
exchange of an asset is a capital gain or an ordinary
gain depending on the kind of asset involved in the
transaction
However, there is no rigid rule or fixed formula by
which it can be determined with finality whether
property sold by a taxpayer was held primarily for
sale to customers in the ordinary course of his
trade or business or whether it was sold as a
capital asset.
Also a property initially classified as a capital asset
may thereafter be treated as an ordinary asset if a
combination of the factors indubitably tend to
show that the activity was in furtherance of or in
the course of the taxpayer's trade or business.
Thus, a sale of inherited real property usually gives
GROSS INCOME
 AMILING, BEBER, CAINDAY,CONEJERO, FERUELO & LIAO TAXATION LAW REVIEWER FOR THE 2011 BAR
capital gain or loss even though the property has to
be subdivided or improved or both to make it
salable. However, if the inherited property is
substantially improved or very actively sold or both
it may be treated as held primarily for sale to
customers in the ordinary course of the heir's
business.
The sole question is-were the taxpayers in the
business of subdividing real estate? If they were,
then it seems indisputable that the property sold
falls within the exception in the definition of capital
assets . . . that is, that it constituted 'property held
by the taxpayer primarily for sale to customers in
the ordinary course of his trade or business
Capital Assets
For tax purposes, there are three (3)
general types of capital assets. These are: (a)
shares of stock of a domestic corporation; (b) real
property (of individuals) or land/or building (of
corporations); and (c) other types of assets,
including shares of stock of a foreign corporation.
The rules provided for in the 1997 Tax Code are
summarized below.
1. Shares of stock of Domestic Corporation
The rules on sale cr exchange of shares of
stock of a domestic corporation are:
a. If the seller or transferor is a dealer in
securities, the shares of stock (whether listed and
traded in the local stock exchange, listed but not
traded in the local stock exchange, or not listed)
shall be treated as ordinary assets and the ordinary
gain, if any, from the sale or transfer thereof shall
be subject to the graduated income taxrates, in the
case of individual seller or transferor, or to the
normal corporate income tax, in the case of
corporate seller or transferor.
GROSS INCOME
b. If the seller or transferor is not a dealer
in securities,the shares of stock are regarded as
capital assets. There is a need to determine if the
shares of stock are listed and traded in a local stock
exchange.
1. If the shares of stock are listed and
traded in the local stock exchange, the transaction
is exempt from income tax, regardless of the
nature of business of the seller or transferor
(individual corporation). Income taxes covered by
the exemption are capital gains taxes from the
sales of shares of stock by citizens, resident aliens,
domestic corporations, resident and non resident
foreign corporations and regular income tax on
gains derived from sales of shares of stock.
However, it is subject to the one-half of one
percent (1/2 of 1%) stock transaction tax imposed
in Section 127 (A) of the 1997 Tax Code, based on
thegross selling price or gross value in money of
the shares of stock sold or transferred. The selling
price of the shares of stock shall be the fair market
value of the shares of stocks transferred or
exchanged and not the fair market value of the
property received in exchanged. The stockbroker
who effected the sale has the duty to collect the
tax from the seller upon the issuance of the
confirmation of sale, issue the coreesponding
official reciept thereof and remit the same to the
Revenue District Office wherein the Philippine
Stock Exchange is located within five (5) banking
days from the date of collection thereof.
2. If the shares of stock are not listed, or they are
listed but not traded, in the local stock exchange,
the net capital gains realized during the year, if
any, shall be subject to the final capital gains tax
equivalent to 5% of the net capital gains not
exceeding P100,000.00, and 10%, on any amount
in excess of P100,000.00. An annual capital gains
tax return must be filed by the taxpayer, covering
all his stock transactions during the calendar year,
CAINDAY, RAQUEL A. 75
 AMILING, BEBER, CAINDAY,CONEJERO, FERUELO & LIAO TAXATION LAW REVIEWER FOR THE 2011 BAR
not later than the 15th day of the fourth month
following the close of the taxable year. Take note
that it does not matter who is the seller or
transferor (whether he is an individual (citizen or
alien) or a corporation (domestic or foreign),
provided he/it is not a dealer in securities.
The capital gain from the sale of listed
chores over the counter or outside of the local
stock exchange shall be subject to 5%-10% capital
gains tax, since the law requires that the listed
shares must be traded in the local stock exchange.
What is controlling is whether or not the shares of
stock are traded in the local stock exchange.
However, the capital loss from the sale of listed
shares outside of the local stock exchange can be
deducted from the capital gain from another sale
of unlisted shares, or listed shares but traded
outside of the local stock exchange.(Mamalateo)
Other capital assets
All other capital assets, except shares of
stocks of a domestic corporation and real property,
shall be subject to income tax at the graduated
income tax rates (if seller is an individual) or at 32%
corporate income tax (if seller is a corporation).
Examples are motor vehicles, and jewelries not
used in the taxpayer’s trade or business, shares of
stocks of a foreign corporation and investments in
short term commercial papers that are not
considered as deposits substitutes.(Mamalateo)
“Holding Period” of the property is
material for individual taxpayers only – Only 50% of
long term capital gains are recognized as subject to
income tax, if derived by an individual taxpayer
from short-term capital asset transactions. A
capital gain is treated as (a) long-term if the asset
sold or exchanged is held for more than twelve
months, (b) short-term if the asset sold or
exchanged is held for twelve months or less. In the
76 CAINDAY, RAQUEL A.
case of corporate taxpayers, the holding period is
not material and the capital gain or capital loss is
recognized in full.
Capital losses can be offset only against
and to the extent of capital gains – Capital losses
cannot be deducted from ordinary gains or income.
This principle applies to all types of tax payer
(corporate or otherwise). Capital losses are
deductible only to the extent of capital gains.
b) Types of Gain from Dealing in
Property
1) Ordinary Income vis-à-vis Capital
Gain
Section 22 (Z), NIRC- The term 'ordinary income'
includes any gain from the sale or exchange of
property which is not a capital asset or property
described in Section 39(A)(1). Any gain from the
sale or exchange of property which is treated or
considered as 'ordinary income' shall be treated as
gain from the sale or exchange of property which is
not a capital asset as defined in Section 39(A)(1).
The term 'ordinary loss' includes any loss from the
sale or exchange of property which is not a capital
asset. Any loss from the sale or exchange of
property which is treated or considered, under
other provisions of this Title, as 'ordinary loss' shall
be treated as loss from the sale or exchange of
property which is not a capital asset.
In ( G.R. No. L-14532, May 26, 1965- JOSE
LEON GONZALES vs.THE HON. COURT OF TAX
APPEALS and THE COLLECTOR OF INTERNAL
REVENUE: “Ordinary Income is the same as gross
Income. — General Definition. — "Gross income"
includes gains, profits, and income derived from ...
interests, rents, dividends, securities, or the
transactions of any business carried on for gain or
GROSS INCOME
 AMILING, BEBER, CAINDAY,CONEJERO, FERUELO & LIAO TAXATION LAW REVIEWER FOR THE 2011 BAR
profit, or gains, profits and income derived from
any source whatever .”
Capital Gain – gain derived from the sale
or exchange of capital asset
Illustrations:
G.R. No. L-14532 ( May 26, 1965) JOSE
LEON GONZALES vs THE HON. COURT OF TAX
APPEALS and THE COLLECTOR OF INTERNAL
REVENUE:
“We also adhered to the view that the
transfer of property through condemnation
proceedings is a sale or exchange and that profit
from the transaction constitutes capital gain.
But to say that the proceeds of
expropriation which is the return of capital and,
therefore, a capital gain, partakes of the same
nature as interests paid thereon is far from correct;
because interest is compensation for the delay in
the return of such capital. It was so held by the
United States Supreme Court in Kieselback v.
Commissioner of Internal Revenue, 317 U.S. 399.
This additional payment was necessary to
give the owners the full equivalent of the value of
the property at the time it was taken. Whether one
calls it interest on the value or payments to meet
the constitutional requirement of just
compensation is immaterial. It is income paid to
the taxpayers in lieu of what they might have
earned on the sum found to be the value of the
property on the day the property was taken. It is
not a capital gain upon an asset sold.”
G.R. No. 160756 (March 9, 2010)
CHAMBER OF REAL ESTATE AND BUILDERS'
ASSOCIATIONS, INC. vs. THE HON. EXECUTIVE
SECRETARY ALBERTO ROMULO, et al:
GROSS INCOME
“Under RR 2-98, the tax base of the income
tax from the sale of real property classified as
ordinary assets remains to be the entity’s net
income imposed under Section 24 (resident
individuals) or Section 27 (domestic corporations)
in relation to Section 31 of RA 8424, i.e. gross
income less allowable deductions. The CWT
(creditable withholding tax) is to be deducted from
the net income tax payable by the taxpayer at the
end of the taxable year. Precisely, Section 4(a)(ii)
and (c)(ii) of RR 7-2003 reiterate that the tax base
for the sale of real property classified as ordinary
assets remains to be the net taxable income:
Section 4. – Applicable taxes on sale, exchange or
other disposition of real property. - Gains/Income
derived from sale, exchange, or other disposition
of real properties shall unless otherwise exempt,
be subject to applicable taxes imposed under the
Code, depending on whether the subject
properties are classified as capital assets or
ordinary assets;
xxx xxx xxx
a. In the case of individual citizens (including
estates and trusts), resident aliens, and non-
resident aliens engaged in trade or business in the
Philippines;
xxx xxx xxx
(ii) The sale of real property located in the
Philippines, classified as ordinary assets, shall be
subject to the [CWT] (expanded) under Sec.
2.57.2(j) of [RR 2-98], as amended, based on the
[GSP] or current [FMV] as determined in
accordance with Section 6(E) of the Code,
whichever is higher, and consequently, to the
ordinary income tax imposed under Sec. 24(A)(1)(c)
or 25(A)(1) of the Code, as the case may be, based
on net taxable income.
CAINDAY, RAQUEL A. 77
 AMILING, BEBER, CAINDAY,CONEJERO, FERUELO & LIAO TAXATION LAW REVIEWER FOR THE 2011 BAR

xxx xxx xxx No Blurring of Distinctions Between Ordinary

Assets and Capital Assets
c. In the case of domestic corporations.
RR 2-98 imposes a graduated CWT on income
The sale of land and/or building classified as based on the GSP or FMV of the real property
ordinary asset and other real property (other than categorized as ordinary assets. On the other hand,
land and/or building treated as capital asset), Section 27(D)(5) of RA 8424 imposes a final tax
regardless of the classification thereof, all of which and flat rate of 6% on the gain presumed to be
are located in the Philippines, shall be subject to realized from the sale of a capital asset based on
the [CWT] (expanded) under Sec. 2.57.2(J) of [RR 2- its GSP or FMV. This final tax is also withheld at
98], as amended, and consequently, to the source.
ordinary income tax under Sec. 27(A) of the Code.
In lieu of the ordinary income tax, however, The differences between the two forms of
domestic corporations may become subject to the withholding tax, i.e., creditable and final, show that
[MCIT] under Sec. 27(E) of the same Code, ordinary assets are not treated in the same manner
whichever is applicable. as capital assets. Final withholding tax (FWT) and
CWT are distinguished as follows:
Accordingly, at the end of the year, the
taxpayer/seller shall file its income tax return and
credit the taxes withheld (by the withholding
agent/buyer) against its tax due. If the tax due is
greater than the tax withheld, then the taxpayer
shall pay the difference. If, on the other hand, the
tax due is less than the tax withheld, the taxpayer
will be entitled to a refund or tax credit.
Undoubtedly, the taxpayer is taxed on its net
income.

The use of the GSP/FMV as basis to determine the

withholding taxes is evidently for purposes of
practicality and convenience. Obviously, the
withholding agent/buyer who is obligated to
withhold the tax does not know, nor is he privy to,
how much the taxpayer/seller will have as its net
income at the end of the taxable year. Instead, said
withholding agent’s knowledge and privity are
limited only to the particular transaction in which
he is a party. In such a case, his basis can only be
the GSP or FMV as these are the only factors
reasonably known or knowable by him in
connection with the performance of his duties as a
withholding agent.

78 CAINDAY, RAQUEL A. GROSS INCOME

 AMILING, BEBER, CAINDAY,CONEJERO, FERUELO & LIAO TAXATION LAW REVIEWER FOR THE 2011 BAR

As previously stated, FWT is imposed on the sale asset shall be taken into account in computing net
of capital assets. On the other hand, CWT is capital gain, net capital loss, and net income:
imposed on the sale of ordinary assets.
(1)One hundred percent (100%) if the
The fact that the tax is withheld at source does not
automatically mean that it is treated exactly the
FWT CWT
same way as capital gains. As aforementioned, the
mechanics of the FWT are distinct from those of
the CWT. The withholding agent/buyer’s act of
collecting the tax at the time of the transaction by a) The amount of a) Taxes withheld on
withholding the tax due from the income payable income tax withheld certain income
is the essence of the withholding tax method of tax by the withholding payments are intended
collection. agent is constituted as to equal or at least
a full and final approximate the tax
2) Actual Gain vis-à-vis Presumed Gain payment of the due of the payee on
income tax due from said income.
In.(G.R. No. 102967(February 10, 2000), the payee on the said
BIBIANO V. BAÑAS, JR. vs. COURT OF APPEALS – “ income.
For income tax purposes, income is an actual gain
or an actual increase of wealth.”

Presumed gain b)The liability for b) Payee of income is

payment of the tax required to report the
Illustration: rests primarily on the income and/or pay the
payor as a withholding difference between the
The 2-1/2% tax on gross Philippine billings agent. tax withheld and the
imposed under the proviso added by Presidential tax due on the income.
Decree No. 69 to Section 24(b)(2) is an income tax
The payee also has the
levied on the presumed gain of the airline
companies. Such proviso and the statutory right to ask for a refund
definition of gross Philippine billings provided by if the tax withheld is
Presidential Decree No. 1355 ensured that more than the tax due.
international airlines are taxed on the income they
derive from Philippine sources. (G.R. No. 67938
December 19, 1989) COMMISSIONER OF INTERNAL
c) The payee is not c) The income recipient
REVENUE vs. AMERICAN AIRLINES, INC. and COURT
OF TAX APPEALS required to file an is still required to file
income tax return for an income tax return,
3) Long Term Capital Gain vis-à-vis Short the particular income as prescribed in Sec. 51
Term Capital Gain – Section 39 B and Sec. 52 of the
NIRC, as amended.
Percentage Taken into Account. - In the case of a
taxpayer, other than a corporation, only the
capital asset has been held for not more
following percentages of the gain or loss
recognized upon the sale or exchange of a capital than twelve (12) months (according to

GROSS INCOME CAINDAY, RAQUEL A. 79

 AMILING, BEBER, CAINDAY,CONEJERO, FERUELO & LIAO TAXATION LAW REVIEWER FOR THE 2011 BAR
Sababan, this is referred to as the “Short
Term Holding Period”
(2)Fifty percent (50%) if the capital asset
has been held for more than twelve (12)
months- (according to Sababan, this is
referred to as the “Long Term Holding
Period”
Illustration:
G.R. No. L-24248 (July 31, 1974) ANTONIO
TUASON, JR vs. JOSE B. LINGAD:
“As thus defined by law, the term "capital assets"
includes all the properties of a taxpayer whether or
not connected with his trade or business, except:
(1) stock in trade or other property included in the
taxpayer's inventory; (2) property primarily for sale
to customers in the ordinary course of his trade or
business; (3) property used in the trade or business
of the taxpayer and subject to depreciation
allowance; and (4) real property used in trade or
business. If the taxpayer sells or exchanges any of
the properties above-enumerated, any gain or loss
relative thereto is an ordinary gain or an ordinary
loss; the gain or loss from the sale or exchange of
all other properties of the taxpayer is a capital gain
or a capital loss.
Under section 34(b) (2) now section 39 B of the Tax
Code, if a gain is realized by a taxpayer (other
than a corporation) from the sale or exchange of
capital assets held for more than twelve months,
only 50% of the net capital gain shall be taken
into account in computing the net income.
The Tax Code's provision on so-called long-term
capital gains constitutes a statute of partial
exemption. In view of the familiar and settled rule
that tax exemptions are construed in strictissimi
juris against the taxpayer and liberally in favor of
80 CAINDAY, RAQUEL A.
the taxing authority, the field of application of the
term "capital assets" is necessarily narrow, while
its exclusions must be interpreted broadly.
Consequently, it is the taxpayer's burden to bring
himself clearly and squarely within the terms of a
tax-exempting statutory provision, otherwise, all
fair doubts will be resolved against him.
When the petitioner obtained by inheritance the
parcels in question, transferred to him was not
merely the duty to respect the terms of any
contract thereon, but as well the correlative right
to receive and enjoy the fruits of the business and
property which the decedent had established and
maintained. Moreover, the record discloses that
the petitioner owned other real properties which he
was putting out for rent, from which he periodically
derived a substantial income, and for which he had
to pay the real estate dealer's tax (which he used to
deduct from his gross income). In fact, as far back
as 1957 the petitioner was receiving rental
payments from the mentioned 28 small lots, even
if the leases executed by his deceased mother
thereon expired in 1953. Under the circumstances,
the petitioner's sales of the several lots forming
part of his rental business cannot be characterized
as other than sales of non-capital assets.”
4) Net Capital Gain, Net Capital Loss
(Section 39)
Net Capital Gain. - The term 'net capital gain'
means the excess of the gains from sales or
exchanges of capital assets over the losses from
such sales or exchanges.
Net Capital Loss. - The term 'net capital loss'
means the excess of the losses from sales or
exchanges of capital assets over the gains from
such sales or exchanges.
Illustration:
GROSS INCOME
 AMILING, BEBER, CAINDAY,CONEJERO, FERUELO & LIAO TAXATION LAW REVIEWER FOR THE 2011 BAR
G.R. No. L-16021, August 31, 1962 - ANTONIO
PORTA FERRER vs. (COLLECTOR) now
COMMISSIONER OF INTERNAL REVENUE
The petitioner was the sole proprietor of the "La
Suiza Bakery. He owned this bakery from October
16, 1951 up to September 15, 1955, when he sold
the same to Juan Pons for the sum of P100,000.00.
After deducting the total book value of the assets
and the incidental expenses from the gross selling
price, petitioner filed on February 14, 1956 his
income tax return, showing a net profit of
P19,678.09 as having been realized from the sale of
the bakery.
Petitioner later requested the respondent to refund
to him the sum of P2,030.00, claiming that the
bakery was a capital asset which he had held for
more than twelve months, so that the profit from
its sale was a long term capital gain, and therefore,
only 50 per cent of it was taxable under the
National Internal Revenue Code.
Parenthetically, it may be noted that tax rates are
graduated upwards as the total amount of income
increases. But capital assets are generally held for a
period in excess of a year. When held for more
than a year, the profit or loss realized is reported
for tax purposes only in the year that the asset was
sold or exchanged even though the increment
might have developed over several years or was
the result of years of effort. Since the gain is taxed
all in one year, a higher rate of tax would
necessarily be paid be included; similarly, only a
limited amount of any loss than if a part of the gain
were reported each year the asset was held. In an
attempt to compensate for this, only a percentage
of the gain on such sales is required to can be
deducted in the year in which realized. (Alexander,
Federal Tax Handbook, p. 411, 1959 ed.)
GROSS INCOME
Held: We believe that any profit which the
petitioner may have gained in the same must have
come from the sale of the other assets of the
business which must have been sold for amounts
other than their stated book value. As the Tax
Court held, in order to ascertain the capital and/or
ordinary gains taxes properly payable on the sale of
a business, including its tangible assets, it is
incumbent upon the taxpayer to show not only the
cost basis of each asset, but also what portion of
the selling price is fairly attributable to each asset.
(Cohen v. Kelm, 119 F supp. 376.)
.
5) Computation of Gain or Loss (Section
40)
Computation of Gain or Loss. - The gain from the
sale or other disposition of property shall be the
excess of the amount realized therefrom over the
basis or adjusted basis for determining gain, and
the loss shall be the excess of the basis or adjusted
basis for determining loss over the amount
realized. The amount realized from the sale or
other disposition of property shall be the sum of
money received plus the fair market value of the
property (other than money) received;
a. Cost or basis of the property sold
Basis for Determining Gain or Loss from Sale or
Disposition of Property. - The basis of property
shall be -
(1) The cost thereof in the case of property
acquired on or after March 1, 1913, if such
property was acquired by purchase; or
(2) The fair market price or value as of the date of
acquisition, if the same was acquired by
inheritance; or
CAINDAY, RAQUEL A. 81
 AMILING, BEBER, CAINDAY,CONEJERO, FERUELO & LIAO TAXATION LAW REVIEWER FOR THE 2011 BAR
(3) If the property was acquired by gift, the basis
shall be the same as if it would be in the hands of
the donor or the last preceding owner by whom it
was not acquired by gift, except that if such basis is
greater than the fair market value of the property
at the time of the gift then, for the purpose of
determining loss, the basis shall be such fair
market value; or
(4) If the property was acquired for less than an
adequate consideration in money or money's
worth, the basis of such property is the amount
paid by the transferee for the property; or
(5) The basis as defined in paragraph (C)(5) of this
Section, if the property was acquired in a
transaction where gain or loss is not recognized
under paragraph (C)(2) of this Section.
b) Cost or basis of the property
exchanged in:
Exchange of Property. -
(1) General Rule. - Except as herein provided, upon
the sale or exchange or property, the entire
amount of the gain or loss, as the case may be,
shall be recognized.
(2) Exception. - No gain or loss shall be recognized
if in pursuance of a plan of merger or consolidation
- other property received has the effect of a
(a) A corporation, which is a party to a
merger or consolidation, exchanges property solely
for stock in a corporation, which is a party to the
merger or consolidation; or
(b) A shareholder exchanges stock in a
corporation, which is a party to the merger or
consolidation, solely for the stock of another
corporation also a party to the merger or
consolidation; or
82 CAINDAY, RAQUEL A.
(c) A security holder of a corporation,
which is a party to the merger or consolidation,
exchanges his securities in such corporation, solely
for stock or securities in such corporation, a party
to the merger or consolidation.
c) Recognition of gain or loss in exchange of
property
No gain or loss shall also be recognized if
property is transferred to a corporation by a
person in exchange for stock or unit of
participation in such a corporation of which as a
result of such exchange said person, alone or
together with others, not exceeding four (4)
persons, gains control of said corporation:
Provided, That stocks issued for services shall not
be considered as issued in return for property.
Exchange Not Solely in Kind. -
(a) If, in connection with an exchange described in
the above exceptions, an individual, a shareholder,
a security holder or a corporation receives not only
stock or securities permitted to be received
without the recognition of gain or loss, but also
money and/or property, the gain, if any, but not
the loss, shall be recognized but in an amount not
in excess of the sum of the money and fair market
value of such other property received: Provided,
That as to the shareholder, if the money and/or
distribution of a taxable dividend, there shall be
taxed as dividend to the shareholder an amount of
the gain recognized not in excess of his
proportionate share of the undistributed earnings
and profits of the corporation; the remainder, if
any, of the gain recognized shall be treated as a
capital gain.
(b) If, in connection with the exchange described in
the above exceptions, the transferor corporation
GROSS INCOME
 AMILING, BEBER, CAINDAY,CONEJERO, FERUELO & LIAO TAXATION LAW REVIEWER FOR THE 2011 BAR
receives not only stock permitted to be received
without the recognition of gain or loss but also
money and/or other property, then (i) if the
corporation receiving such money and/or other
property distributes it in pursuance of the plan of
merger or consolidation, no gain to the corporation
shall be recognized from the exchange, but (ii) if
the corporation receiving such other property
and/or money does not distribute it in pursuance
of the plan of merger or consolidation, the gain, if
any, but not the loss to the corporation shall be
recognized but in an amount not in excess of the
sum of such money and the fair market value of
such other property so received, which is not
distributed.
Meaning of merger, consolidation, control
securities
The term 'merger' or 'consolidation', when used in
this Section, shall be understood to mean: (i) the
ordinary merger or consolidation, or (ii) the
acquisition by one corporation of all or
substantially all the properties of another
corporation solely for stock: Provided, That for a
transaction to be regarded as a merger or
consolidation within the purview of this Section, it
must be undertaken for a bona fide business
purpose and not solely for the purpose of escaping
the burden of taxation: Provided, further, That in
determining whether a bona fide business purpose
exists, each and every step of the transaction shall
be considered and the whole transaction or series
of transaction shall be treated as a single unit:
Provided, finally , That in determining whether the
property transferred constitutes a substantial
portion of the property of the transferor, the term
'property' shall be taken to include the cash assets
of the transferor. (Section 40 6(b)
GROSS INCOME
(c) The term 'control', when used in this Section,
shall mean ownership of stocks in a corporation
possessing at least fifty-one percent (51%) of the
total voting power of all classes of stocks entitled
to vote. (Section 40 6(c)
A merger or acquisition is a combination of two
companies where one corporation is completely
absorbed by another corporation. The less
important company loses its identity and becomes
part of the more important corporation, which
retains its identity. A merger extinguishes the
merged corporation, and the surviving corporation
assumes all the rights, privileges, and liabilities of
the merged corporation A consolidation is one in
which two corporations lose their separate
identities and unite to form a completely new
corporation.(The Free Dictionary.com)
Control securities are those held by an affiliate of
the issuing company. An affiliate is a person, such
as a director or large shareholder, in a relationship
of control with the issuer. Control means the
power to direct the management and policies of
the company in question, whether through the
ownership of voting securities, by contract, or
otherwise. If you buy securities from a controlling
person or "affiliate," you take restricted securities,
even if they were not restricted in the affiliate's
hands. (U.S. Securities and Exchange Commission,
Rule 144)
Transfer of controlled corporation - No
gain or loss shall also be recognized if property is
transferred to a corporation by a person in
exchange for stock or unit of participation in such a
corporation of which as a result of such exchange
said person, alone or together with others, not
exceeding four (4) persons, gains control of said
corporation: Provided, That stocks issued for
services shall not be considered as issued in return
for property, (Codal provision)
CAINDAY, RAQUEL A. 83
 AMILING, BEBER, CAINDAY,CONEJERO, FERUELO & LIAO TAXATION LAW REVIEWER FOR THE 2011 BAR
6) Income Tax Treatment of Capital Loss
a) Capital loss limitation rule – Section 39
C (applicable to both corporations and individuals)
“Limitation on Capital Losses. - Losses from
sales or exchanges of capital assets shall be
allowed only to the extent of the gains from such
sales or exchanges. If a bank or trust company
incorporated under the laws of the Philippines, a
substantial part of whose business is the receipt of
deposits, sells any bond, debenture, note, or
certificate or other evidence of indebtedness
issued by any corporation (including one issued by
a government or political subdivision thereof), with
interest coupons or in registered form, any loss
resulting from such sale shall not be subject to the
foregoing limitation and shall not be included in
determining the applicability of such limitation to
other losses.”
a) Net loss carry over rule – Section 39 D
(applicable only to individuals)
“Net Capital Loss Carry-over. - If any
taxpayer, other than a corporation, sustains in any
taxable year a net capital loss, such loss (in an
amount not in excess of the net income for such
year) shall be treated in the succeeding taxable
year as a loss from the sale or exchange of a capital
asset held for not more than twelve (12) months.”
7) Dealings in real property situated in the
Philippines (Section 24 D)
The provisions of Section 39 (B), notwithstanding.
A final tax of 6% based on the gross selling price or
current fair market value as determined in
accordance with Section 6(E) of this Code,
whichever is higher, is hereby imposed upon
capital gains presumed to have been realized from
the sale, exchange, or other disposition of real
property located in the Philippines, classified as
84 CAINDAY, RAQUEL A.
capital assets, including pacto de retro sales and
other forms of conditional sales, by individuals,
including estates and trusts: Provided, That the tax
liability, if any, on gains from sales or other
dispositions of real property to the government or
any of its political subdivisions or agencies or to
government-owned or controlled corporations
shall be determined either under Section 24 (A) or
under this Subsection, at the option of the
taxpayer.
Since the Tax Code does not define the term “real
property”, the definition of “immovable property”
in Art. 415, Civil Code of the Philippines shall be
applied. The rules on the sale or exchange of real
property located in the Philippines are summarized
below:
a. If the seller or transferor is a real estate
dealer, the real property sold is an ordinary asset,
and the gain, if any is subject to the grauated
income tax (if an individual who is a citizen, or a
resident or non resident alien engaged in trade or
business in the Philippines, or 25% final tax if a
nonresident alien not engaged in trade or business
in the Philippines), or to the normal corporate
income tax (if a domestic corporation or a resident
foreign corporation). The buyer must withhold the
proper withholding tax on the transaction and
remit the same to the BIR within the period
prescribed in Revenue Regulations No. 2-98, as
amended. Nonresident foreign corporations are
taxed on their gross income from sources within
the Philippines, including gain from sale of real
property at 35%, effective November 1, 2005.
b. If the seller or transferor is not a real
estate dealer, determine whether the real property
sold or transferred is (a) used in the taxpayer’s
trade , business or profession, or (b) treated as
fixed asset used in his trade, business or
profession, subject to depreciation. If the answer in
GROSS INCOME
 AMILING, BEBER, CAINDAY,CONEJERO, FERUELO & LIAO TAXATION LAW REVIEWER FOR THE 2011 BAR
either of the two cases above is in the affirmative,
the real property shall be treated as ordinary asset,
and the gain, if any, from the sale or transfer
thereof shall be subject to the graduated income
tax rates or to the normal corporate income tax
rate, and expanded withholding tax, as discussed
in the preceding paragraph. On the other hand, if
the answer is in the negative, the real property
shall be treated as capital asset, and the gain, if
any, by a citizen, alien (resident or nonresident),
and domestic corporation shall be subject to the
final capital gains tax of 6% based on the gross
selling price or fair market value of the property at
the time of sale, whichever is higher. It is to be
noted that foreign corporations (whether resident
or nonresident) are not entitled to the preferential
tax rates on their gain from sale of real property
classified as capital asset because there is no
similar express provision as that granted to
domestic corporations. Therefore, regardless of
classification, net taxable income from the sale of
real property realized by a resident foreign
corporation shall be subject to the normal
corporate income tax and expanded withholding
tax. However, if the seller is a nonresident foreign
corporation, the gain from sale shall be taxed at
32% (now 35%). The real property referred to here
could be a condominium unit which foreigners are
allowed to own subject to certain conditions under
the Condominium Act.
Deed of exchange executed by the parties
voluntarily and without any financial consideration,
involving real properties, would subject both
parties separately and distinctly to the capital gains
tax, based on the fair market value or
consideration, whichever is igher. In this case,
there are two taxable transactions.
Income on sale of real property not located
in the Philippines, regardless of classification, by
resident citizens and domestic corporations shall
GROSS INCOME
be subject to the graduated income tax (if a
resident citizen) or normal corporate income tax (if
a domestic corporation), since they are taxed on
orldwide income. Such income is exempt from
income tax in the case of nonresident citizens,
alien individuals, and foreign corporations because
they are taxed only on income from sources within
the Philippines. (Mamalateo, 125-129)
8) Dealings in shares of stocks of
Philippine Corporations
a) shares traded and listed in the stock
exchange
Section 127. Tax on Sale, Barter or Exchange of
Shares of Stock Listed and Traded through the
Local Stock Exchange or through Initial Public
Offering. -
(A) Tax on Sale, Barter or Exchange of
Shares of Stock Listed and Traded through
the Local Stock Exchange. - There shall be
levied, assessed and collected on every
sale, barter, exchange, or other disposition
of shares of stock listed and traded
through the local stock exchange other
than the sale by a dealer in securities, a tax
at the rate of one-half of one percent (1/2
of 1%) of the gross selling price or gross
value in money of the shares of stock sold,
bartered, exchanged or otherwise disposed
which shall be paid by the seller or
transferor.
b) shares not listed and traded in the
stock exchange (Section 24 C)
Capital Gains from Sale of Shares of Stock not
Traded in the Stock Exchange. - The provisions of
Section 39(B) notwithstanding, a final tax at the
rates prescribed below is hereby imposed upon the
CAINDAY, RAQUEL A. 85
 AMILING, BEBER, CAINDAY,CONEJERO, FERUELO & LIAO TAXATION LAW REVIEWER FOR THE 2011 BAR
net capital gains realized during the taxable year
from the sale, barter, exchange or other
disposition of shares of stock in a domestic
corporation, except shares sold, or disposed of
through the stock exchange.
Not over P100,000
5%
On any amount in excess of P100,000
10%
9. Sale of Principal Residence (Section 24
D – Exception)
Capital Gains from Sale of Real Property. -
(2) Exception. - The provisions of
paragraph (1) of this Subsection to the contrary
notwithstanding, capital gains presumed to have
been realized from the sale or disposition of their
principal residence by natural persons, the
proceeds of which is fully utilized in acquiring or
constructing a new principal residence within
eighteen (18) calendar months from the date of
sale or disposition, shall be exempt from the
capital gains tax imposed under this Subsection:
Provided, That the historical cost or adjusted basis
of the real property sold or disposed shall be
carried over to the new principal residence built or
acquired: Provided, further, That the Commissioner
shall have been duly notified by the taxpayer
within thirty (30) days from the date of sale or
disposition through a prescribed return of his
intention to avail of the tax exemption herein
mentioned: Provided, still further, That the said tax
exemption can only be availed of once every ten
(10) years: Provided, finally, that if there is no full
utilization of the proceeds of sale or disposition,
the portion of the gain presumed to have been
realized from the sale or disposition shall be
subject to capital gains tax. For this purpose, the
gross selling price or fair market value at the time
86 CAINDAY, RAQUEL A.
of sale, whichever is higher, shall be multiplied by a
fraction which the unutilized amount bears to the
gross selling price in order to determine the
taxable portion and the tax prescribed under
paragraph (1) of this Subsection shall be imposed
thereon.
6) Passive Investment Income
Passive Income Definition in:
(G.R. No. 160756 (March 9, 2010) CHAMBER OF
REAL ESTATE AND BUILDERS' ASSOCIATIONS, INC.
vs. THE HON. EXECUTIVE SECRETARY ALBERTO
ROMULO, et al
Section 57(A) expressly states that final tax can be
imposed on certain kinds of income and
enumerates these as passive income. The BIR
defines passive income by stating what it is not:
…if the income is generated in the active pursuit
and performance of the corporation’s primary
purposes, the same is not passive income.
It is income generated by the taxpayer’s assets.
These assets can be in the form of real properties
that return rental income, shares of stock in a
corporation that earn dividends or interest income
received from savings.
a. Interest Income – there are two
interest incomes: 1) interest on loans which are
always included in the gross income ; 2) bank
interest or interest on deposits. If the bank interest
is derived from sources within the Philippines, it is
subject to final tax, otherwise it is included in the
gross income of the taxpayer. (Sababan, Taxation
Law Review, 2008, p. 88)
In general, interests received or credited to
the account of the depositor or investor are
included in their gross income, unless they are
GROSS INCOME
 AMILING, BEBER, CAINDAY,CONEJERO, FERUELO & LIAO TAXATION LAW REVIEWER FOR THE 2011 BAR
exempt from tax or subject to the final tax at
preferential rate under the 1997 Tax Code or under
the applicable tax treaty.
Interest means the amount which a
depository bank may pay on savings and time
deposits in accordance with the rates authorized
by the Bangko Sentral ng Pilipinas.(Mamalateo,Tax
Review)
a. Income interes from Philippine currency
deposits and eposit substitutes – Gross interest
income from Philippine currency bank deposits and
yield or any other monetary benefits from deposit
substitutes and from trust fund and similar
arrangements are subject to the 20% final
withholding tax, of all depositors, including
enterprises registered with PEZA, SBMA, CDA,and
other economic zones and free port zones, and
senior citizens, except when the depositories a
nonresident alien not engaged in trade or business
in the Philippines, where such interest in income
shall be subject to the higher 25% tax rate
pursuant to Section 25 (B) of the Tax Code.
However, if the depositor is an employee trust
fund or accredited retirement plan, such interest
income, yield or other monetary benefit is exempt
from final the final withholding tax.
The term “deposit substitutes” shall mean
an alternative form of obtaining funds from the
public (the term “public” means borrowing from
twenty (20) or more individual or corporatelenders
at any one time).
b. Interest income on foreign currency
deposits – Gross interest income from foreign
currency deposits with an Offshore Banking Unit
(OBU) or Foreign Currency Deposit Unit (FCDU) in
the Philippines is subject to the final withholding
tax of 7.5%. However interest income from foreign
currency deposit is with a bank located outside the
GROSS INCOME
Philippines, the interest income from foreign
currency transactions of a bank shall be subject to
10% final withholding tax. If the foreign currency
deposit is with a bank located outside in the
Philippines, the interest income is subject to the
graduated income tax rates (if the depositor is a
resident citizen) or the normal corporate income
tax rate of 35% (if the depositor is a domestic
corporation). Take note that interest income on
foreign currency deposits with a bank located
outside the Philippines by a nonresident citizen,
alien individual, and foreign corporation is exempt
from income tax, pursuant to the express
provisions of Section 28 (A) (4) for OBU and Section
27 (D) (3) for FCDU , both of the 1997 Tax Code.
c. Interest income from traditional loans by
local banks and other creditors – Interest income
derived from loans and other transactions, other
than those enumerated above, is subject to
graduated income tax rates (if the creditor is an
individual) or the normal corporate tax rate (if the
creditor is a corporation) and no creditable
withholding tax is requred to be made, except in
the case of (a) nonresident alien is not engaged in
trade or business in the Philippines where the rate
applicable is 25% final tax and (b) nonresident
foreign corporation where the rate applicable is
20% final tax.
d. Discounts are treated in the same
manner as interest income – Discount revenues in
financing or factoring arrangements and in the
issuance of long-term instruments and bonds are
treated for income tax purposes in the same
manner as interest income.
e. Interest income from long-term deposits
or investments of individuals is exempt – Interest
income from long-term deposit or deposit
substitutes , investment management accounts
and other investments evidenced by certificates in
CAINDAY, RAQUEL A. 87
 AMILING, BEBER, CAINDAY,CONEJERO, FERUELO & LIAO TAXATION LAW REVIEWER FOR THE 2011 BAR
such form prescribed by the Banko Sentral ng
Pilipinas received by a citizen, resident alien, and
nonresident alien engaged in trade or business in
the Philippines, shall be exempt fro income tax.
Howeer, should the holder of the certificate pre-
terminate the deposit or investment before the
fifth year, a final tax shall be imposed on the entire
income and shall be deducted and withheld by the
depository bank from the the proceeds of the long
term deposit or investment certificate based on
the remaining maturity thereof:
Four years to less than five years……. 5%
Three years to less than four years….. 12%
Less than three years………………………..20%
This tax exemption is not extended to a no.
resident alien not engaed in trade or business in
the Philippines and Revenue Regulations No. 2-98
used holding period for purposes of determining
the applicable withhelding tax rate in case of
pretermination.
f. Interest income from long-term deposits
or investments of corporations is taxable – The
preferential tax tratment accorded to individuals is
not extended to corporations as no similar
provision can be found in Sections 27 and 28 of the
Tax Code.
g. Interest income on traditional loans is
not subject to final or creditable withholding tax –
Interest payments for loans and other borrowings
granted by financila institutions , ordinary
corporations and individuals are not subject to the
final or expanded withholding tax, unless made by
a Top 10,000 Corporation.
h. Interest on foreign loans – Interest on
foreign loans exsended by nonresident foreign
corporations is subject to the 20% final withholding
88 CAINDAY, RAQUEL A.
tax, unless a lower rate of tax is imposed under an
existing tax treaty. If the loan is granted by a
foreign government or by a financial institution
owned, controlled or enjoying refinancing from the
foreign government, or an international or regional
financing institution established by governments,
the interest income of the lender shall not be
subject to the final withholding tax.(Mamalateo)
b. Dividend Income – any distribution
made by a corporation to its shareholders out of its
earnings or profits and payable to its shareholders,
whether in money or in other property. (Section 73
A)
Dividends comprise any distribution
whether in cash or other property in the ordinary
course of business, even though extraordinary in
amount made by a domestic corporation, joint
stock company, partnership, joint account,
association or insurance company to the
shareholders or members out of its earnings or
profits. A dividend is defined as a corporate profit
set aside, declared, and ordered by the directors to
be paid to the stockholders on demand or at a
fixed time. Until the cash or property dividend is
declared, the corporate profits belong to the
corporation and not to the stockholders and are
laible for the payment of the debts of the
corporation.
In general, dividends are included
in the gross income of the stockholder, unless they
are exempt from tax or subject to the final tax at
preferential rate. Cash dividend and property
dividend are subject to income tax, whereas stock
dividend is generally exempt from income tax.
However, any type of dividend must come from
the unappropriated retained earnings of the
corporation. property dividend is a dividend
payable in property, which maybe investments in
shares of stocks of corporation, or real property, or
GROSS INCOME
 AMILING, BEBER, CAINDAY,CONEJERO, FERUELO & LIAO TAXATION LAW REVIEWER FOR THE 2011 BAR
some other owned property by the corporation,
paying the dividend. The shares of stocks declared
as a property dividend by a corporation are shares
of stock of another corporation to which the
corporation paying the dividend has investments
and is shown as assets in its balance
sheet.(Mamalateo, Tax Reviewer)
1) Cash Dividend – taxable to the extent of
cash received
2) Stock Dividend –A stock dividend
representing the transfer of surplus to capital
account shall not be subject to tax. However, if a
corporation cancels or redeems stock issued as a
dividend at such time and in such manner as to
make the distribution and cancellation or
redemption, in whole or in part, essentially
equivalent to the distribution of a taxable dividend,
the amount so distributed in redemption or
cancellation of the stock shall be considered as
taxable income to the extent that it represents a
distribution of earnings or profits. (Section 73 B)
ordinarily not taxable income if it involves the
transfer of a portion of retained earnings to capital
stock, which does not change the proportionate
interest of the stockholder in the corporation. It
becomes taxable if it gives the shareholder an
interest different from that which his former
shareholdings represent, as when there has been a
change of corporate identity or in the nature of
shares issued as dividend.
A stock dividend is a dividend payable in
reserve or increase of additional stock corporation.
A cash dividend is disbursement to the stock holder
of the accumulated earnings and the corporation
parts irrevocably with all interest therein.
Stock dividends are generally exempt from
tax – A stock dividend, which represents the
transfer of surplus to capital account, is not subject
GROSS INCOME
to income tax. However a dividend in stock may
constitue taxable income to recipients theeof,
notwithstanding the fact that the officers or
directors of the corporation choose to call such
distribution as a stock dividend. The distinction
between a stock dividend, which does not, and,
one, which does, constitute income taxable, to the
shareholder is the distinction between the stock
dividend which works no change in the corporate
entity, the same interest in the same corporation
being represented after the distribution is
essentially different from his former interest.
A stock dividend constitutes income if it
gives the shareholder an interest different from
that which his former stockholding represented. A
stock dividend does not constitute income if the
new shares confer no different rights or interests
than did the old. However, the reciept of tax-free
stock dividends by the stockholder will reduce his
cost or adjusted basis of the stocks in determining
the gain or loss upon subsequent sale or transfer
thereof.
Stock dividends issued by the corporation,
are considered unrealized gain, and cannot be
subjected to income tax until that gain has been
realized. Before the realization, stock dividends are
nothing but a representation of an interest in the
corporate properties. A capital, it is not yet subject
to income. However, if a corporation,cancels or
redeems stock issued as a dividend at such time
and in such manner as to make the distribution or
cancellation , in whole or in part, essentially
equivalent to the distribution of a taxable dividend,
the amount so distributed in redemption or
canecllation of the stock shall be considered as
taxable income to the extent it represents a
distribution of earnings or profits.
3) Property Dividend – taxable to the
extent of the fair market value of bonds, securities
CAINDAY, RAQUEL A. 89
 AMILING, BEBER, CAINDAY,CONEJERO, FERUELO & LIAO TAXATION LAW REVIEWER FOR THE 2011 BAR
or stock investments and other properties
received as dividends.
4) Liquidating Dividend – Where a
corporation distributes all of its assets in complete
liquidation or dissolution, the gain realized or loss
sustained by the stockholder, whether individual or
corporate, is a taxable income or a deductible loss,
as the case may be. (Section 73 A par. 2)
Rules on taxation of dividends
a. Dividend is paid by domestic corporation
Recipient is a citizen or resident alien
Cash dividend or property dividend paid by
a domestic corporation or a joint stock company;
insurance or mutual fund company, or on the share
of an individual in the distributable net income
after tax of a partnerhip (except a general
professional partnership) of which he is a partner,
or on the share of an individual on the net income
after tax of an association joint account, or joint
venture or cosortium taxable as a corporation of
which he is a member or co-venturer, out of its
earnings or profits in 1998 or succeeding years, is
generally subjected to the following final
withholding tax rates:
10% - beginning January 1, 2000.
However, the tax on dividends shall apply
only on income earned on or after January 1, 1998.
Income formin part of retained earnings as of
December 31, 1997 shall not even if declared or
distributed on or after January 1, 1998, be
subjected to this tax.
Recipient is a nonresident alien engaged in
trade or business in the Philippines
90 CAINDAY, RAQUEL A.
Cash and/or property dividends shall be
subject to to 20% final withholding tax.
Recipient is a non resident alien not
engaged in trade or business in the Philippines.
Cash and/or property dividends
shall be subject to the final withholding tax rate of
25%.
Recipient is a domestic corporation
or a resident foreign corporation.
Dividends received by a domestic
corporation or resident foreign corporation from a
domestic corporation (intercorporate dividend)
shall not be subject to tax.
Recipient is a non-resident foreign
corporation
Dividends received by a non-resident
foreign corporation from a domestic corporation is
subject to the 15% final withholding tax, subject to
the condition that the country in which the non-
resident foreign corporation is domiciled, shall
allow a credit against the tax due from the non-
resident foreign corporation taxes deenied to have
been paid in the Philippines equivalent to 15% for
1997 which represents the difference between the
regular income tax of 30% and the 15% tax on
dividends/as provided for.
A tax sparing credit is a credit granted by
the residence country for foreign taxes that for
some reasons were not actually paid to the source
country has provided a tax holiday or other tax
incentive to foreign investors as an encouragement
to invest or conduct business in the country. In the
absence of tax sparing, the actual beneficiary of a
tax incentive provided by a source country to
attract foreign investment may be residence
country rather than the foreign investor. This result
GROSS INCOME
 AMILING, BEBER, CAINDAY,CONEJERO, FERUELO & LIAO TAXATION LAW REVIEWER FOR THE 2011 BAR
occurs whenever the reduction in source-country
tax is replaced by an increase in residence-country
tax.
The fact that the Switzerland does not
impose any tax on the dividends received from a
domestic corporation should be considered as full
satisfaction of the condition that the 20%
differential is deemed credited bythe Swiss
government (as against the Commisioner’s
contention that the tax-sparing credit should apply
only if the foreign country allows a foreign tax
credit). The court observed that to deny private
repondent the privilege to withold only 15%
provided for under PD 369 would run counter to
the very spirit and intent of said law and definitely
will adversely affect foreign corporations’ interest
and discourage them from investing capital in our
country (Commissioner vs. Wander Philippines, 160
SCRA 573).
c. Royalty Income - are usage-based
payments made by one party (the "licensee") and
another (the "licensor") for ongoing use of an
asset, sometimes an intellectual property .
(Wikipedia). It include rentals or royalties for the
use of or for the privilege of using patents,
copyrights, secret processes and formulas,
goodwill, trademarks, trade brands, franchises and
other like properties. It is subject to final income
tax if it is derived from sources within the
Philippines, otherwise, the net income tax is
applicable, hence, it should be included in the
gross income.(Sababan, Taxation Law Review, 2008
p. 89)
Royalty is a valuable property that can be
developed and sold on a regular basis or a
consideration; in which case, any gain derived
there from is considered as an active business
income subject to the normal corporate income
tax. Where a person pays royalty to another for the
GROSS INCOME
use its intellectual property, such royalty is a
passive income of the owner there of subject to
final withholding tax.
a. Royalty paid a domestic corporation
Recipient is a citizen or a resident alien, or
a nonresident alien engaged in trade or business in
the Philippines, or a domestic corporation, or a
resident foreign corporation.
Royalty income from sources within the
Philippines is subject to 20% final withholding
(income) tax, except royalty on books, other
literary works and musical compositions received
by individuals cited above which is subject to 10%
final tax.
Recipient is a non-resident alien not engaged in
trade or business in the Philippines.
Royalty income from sources within the
Philippines is subject to 25% final withholding
(income) tax, unless a lower tax rate is allowed
under an existing tax treaty.
Recipient is a nonresident foreign corporation
Royalty income from sources within the
Philippines is subject to the 35% final withholding
tax, unless a lower tax rate is allowede under an
existing tax treaty.
The term royalty is broad enough to include
technical advice, assistance or services renedered
in connection with technical management or
administration of any scientific, industrial or
commercial undertaking, venture project or
scheme.
Taxation of royalty under the Philippines – US Tax
Treaty – The Philippines US Tax Treaty provides
that royalty paid by a resident of the Philippines to
CAINDAY, RAQUEL A. 91
 AMILING, BEBER, CAINDAY,CONEJERO, FERUELO & LIAO TAXATION LAW REVIEWER FOR THE 2011 BAR
a corporation domiciled in the US shall be as
follows: (a) 25% in all other cases; (b) 15%, if paid
by a BOI-registered enterprise engaged in
preferred areas of activities, and (c) the lowest rate
of the Philippines tax that may be imposed on
royalties of the same kind, paid under similar
circumstances to a resident of the third State.
The phrase “paid under similar
circumstances” under the most favored nation
clause in the Philippines-US Tax Treaty has been
constructed as referring to the manner of payment
of taxes or circumstances that are tax-related, and
not to the subject matter of the tax (royalty).
Treatment of royalty under the Philippines-China
Tax Treaty – Under the Philippines-China Tax
Treaty effective January 1, 2002, the tax on
royalties shall not exceed:
1. 15 percent of the gross amount of the
royalties arising arising from the the use of, or the
right to use, any copyright of literary, artistic or
scientific work, including cinematographic films or
tapes for televison or broadcasting or
2. 10 percent of thegross amount of
royalties arising from the use of, or the right to use,
any patent, trade mark, design or model, plan,
secret formula or process, or from the use of, or
right to use, industrial, commercial or scientific
equipment, or for information concerning
industrial, commercial or scientific experience.
b. Royalty paid by a foreign corporation
Recipient is a resident citizen and a domestic
corporation
The royalty paid by a foreign corporation
to a resident citizen and a domestic corporation is
subject to tax at the graduated rates of tax ranging
from 5% to 32% (in the case of resident citizens) or
92 CAINDAY, RAQUEL A.
a t 32% (in the case of domestic corporations),
because they are liable to come tax on worldwide.
Recipient is a nonresident citizen, an alien, and a
foreign corporation
Sine they are liable to Philippine income
tax only on income the source of which is from the
Philippines, they are exempt from income on the
royalties received from a foreign corporation
whose property or interest is not located or used in
the Philippines.(Mamalateo, Tax Reviewer)
d. Rental Income – Compensation for the
use or enjoyment of a thing (personal property) or
right including all rentals derived from: the lease of
property (real property), whether used in business
or not, and obligations of the lessor to third parties
paid by the lessee as further consideration of the
lease, such as real estate taxes on leased property,
insurance premiums on policy covering the said
property, dividends paid to stockholders of lessor
corporation, and value of permanent
improvements made by the lessee on the leased
property, that will become the property of the
lessor upon termination of the lease contract.
Tax treatment
The book value of the permanent improvement
maybe spread over the remaining life of the lease
(spread-out method), or the fair market value
thereof may be reported as income in the year
when construction was completed (outright
method). Regardless of the accounting method
being used by the taxpayer-lessor, the entire
amount of rentals received in advance in the
nature of prepaid rentals should be reported as
income in the year received, except when the same
is in the nature of a loan or security deposit.
(Villanueva, Taxation Simplified, 2004 pp. 84-85)
GROSS INCOME
 AMILING, BEBER, CAINDAY,CONEJERO, FERUELO & LIAO TAXATION LAW REVIEWER FOR THE 2011 BAR
Lease of real property. – “Gross income”
means all income derived from whatever source,
including rents. Rental income is treated os
business income to which the lessor may claim
allowable deductions under Section 34 of the 1997
Tax Code.
If the lessor is a citizen, resident alien or
non-resident alien engaged in trade or business in
the Philippines, his net taxable income shall be
subject to the graduated income tax rates provided
for in Section 24 of the 1997 Tax Code, and if the
lessors are husband and wife, they shall corapute
separately their individual income tax based on
their respective taxable income. However if any
income cannot be definitely attributed to or
identified as income exclusively earned or realized
by either of the spouses the same shall be divided
equally between the spouses for the purpose of
determining their respective taxable income.
If the lessor is a nonresident alien not
engaged in trade or business in the Philippines, the
rental income from real property located in the
Philippines shall be subject to 25% final with
holding tax, unless a lower rate is imposed
pursuant to an effective tax treaty, such tax to be
withheld and remitted by the lessee in the
Philippines to the BIR within the prescribed date.
If the lessor is a domestic corporation or a
resident foreign corporation, its net taxable
income shall be subject to the 32% (now 35%)
norms, corporate income tax or its gross income
will be subjected to the 2% minimum corporate
income tax, whichever higher. However, if the
lessor is a nonresident foreign corporation, the
gross rental income from real property located in
the Philippines shall be subjected to the 32% (now
35%) corporate income tax, such tax to be withheld
and remitted by the lessee in the Philippines to BIR
within the prescribed dates.(Mamalateo,123)
GROSS INCOME
Rental income on the lease of personal
property located in the Philippines and paid to
nonresident taxpayer shall be taxed as follows:
Non Resident Non
Corp Resident
Alien
Vessel 4.5% 25%
Aircraft,
machineries and
other equipments 32.0% 25%
Other assets 7.5% 25%
7. Annuities, Proceeds from life insurance
or other types ofinsurance – refer to those types
which are not excluded from the income tax.
8) Prizes and Awards - There are three
instances for a prize to be included in the gross
income: 1) It should be derived from sources
within the Philippines and should be less than
Php10,000 or exactly Php10,000 ; 2) the prize is
derived from sources without the Philippines; 3)
the taxpayer is a corporation.
If the prize is from sources within but is not
less than Php10,00, the prize will be excluded from
the gross income because it shall not be subject to
final income tax,
With respect to winnings, the only instance
when a willing is included in the gross income is
when it is derived from sources within the
Philippines. If the winnings is from sources within,
it shall be included in the gross income but will be
subject to final income tax
CAINDAY, RAQUEL A. 93
 AMILING, BEBER, CAINDAY,CONEJERO, FERUELO & LIAO TAXATION LAW REVIEWER FOR THE 2011 BAR

9) Pensions, retirement benefit or exchange of some concession which the creditor

separation pay. – this refers to pensions which are
not considered as exclusions from gross income.
(Sababan, Taxation Law Review, 2008 pp. 89-90)
10) Income from any sources whatever
Income from any source whatever
The phrase is broad enough tocover gains
contemplated here. These words disclose a
legislative policy to include all income not expressly
exempted within the class of taxable income under
our laws, irrespective of the voluntary or
involuntary action of the taxpayer in producing the
gains.
receives.
b) recovery of accounts previously written
off or bad debts recover – under the doctrine of
equitable benefit, bad debts previously written off
and subsequently recovered will be taxable income
only when such bad debt deduction benefited the
taxpayer, in the form of reduction in income tax
liability. (Villanueva, Taxation Simplified, 2004 p.
87)
c) receipt of tax refunds or credit – taxes
paid and subsequently refunded are taxable only
when the taxes are deductible. (Villanueva,
Taxation Simplified, 2004 p. 87)

a) forgiveness of indebtedness or d) income from any source whatever – all

condonation or remission of debt - other items of income, not expressly exempted
under the law/s whether derived from legal or
In G.R. No. 140944 - April 30, 2008 - RAFAEL illegal sources are taxable. (Villanueva, Taxation
ARSENIO S. DIZON, in his capacity as the Judicial Simplified, 2004 p. 87)
Administrator of the Estate of the deceased JOSE P.
FERNANDEZ vs.COURT OF TAX APPEALS and
COMMISSIONER OF INTERNAL REVENUE
e) Source Rule in determining Income
from within and without (Section 42)
“condonation or remission of debt” is
The word "source" conveys only one idea, that of
defined as:
origin. ..(Manila Gas Corporation vs CIR) G.R. No. L-
42780 January 17, 1936
an act of liberality, by virtue of which, without
receiving any equivalent, the creditor renounces
Kind of Sources from Sources from
the enforcement of the obligation, which is
Income Within the without the
extinguished in its entirety or in that part or aspect
Philippines Philippines
of the same to which the remission refers. It is an
(Section 42 A) (Section 42 C)
essential characteristic of remission that it be
gratuitous, that there is no equivalent received for
the benefit given; once such equivalent exists, the
1. interests Interests interests other
nature of the act changes. It may become dation in
derived from than those
payment when the creditor receives a thing
sources within derived from
different from that stipulated; or novation, when
the Philippines, sources within
the object or principal conditions of the obligation
and interests on the Philippines
should be changed; or compromise, when the
bonds, notes or (Section 42 C-1)
matter renounced is in litigation or dispute and in
other interest-
94 CAINDAY, RAQUEL A. GROSS INCOME
 AMILING, BEBER, CAINDAY,CONEJERO, FERUELO & LIAO TAXATION LAW REVIEWER FOR THE 2011 BAR

bearing only in an
obligation of amount which
residents, bears the same
corporate or ration to such
otherwise( dividends as the
Section 42 A 1) gross income of
2. Dividends The amount Dividends other the corporation
received as than those for such period
dividends: derived from derived from
sources within sources within
(a) from a
the Philippines the Philippines
domestic
(Section 42 C-2) bears to its gross
corporation; and
income from all
sources (Section
(b) from a
42 A -2)
foreign
3. Services Compensation Compensation
corporation,
for labor or for labor or
unless less than
personal personal
fifty percent
services services
(50%) of the
performed in performed
gross income of
the Philippines without the
such foreign
(Section 42 A- 3) Philippines;
corporation for
(Section 42 C-3)
the three-year
4, Rentals; Rentals and Rentals or
period ending
5. Royalties royalties from royalties from
with the close of
property located property located
its taxable year
in the without the
preceding the
Philippines or Philippines or
declaration of
from any from any
such dividends
interest in such interest in such
or for such part
property, property
of such period as
including rentals including rentals
the corporation
or royalties for - or royalties for
has been in
the use of or for
existence) was
(a) The use of or the privilege of
derived from
the right or using without
sources within
privilege to use the Philippines,
the Philippines
in the patents,
as determined
Philippines any copyrights,
under the
copyright, secret processes
provisions of
patent, design and formulas,
this Section; but
or model, plan, goodwill,

GROSS INCOME CAINDAY, RAQUEL A. 95

AMILING, BEBER, CAINDAY,CONEJERO, FERUELO & LIAO TAXATION LAW REVIEWER FOR THE 2011 BAR

secret formula trademarks, mentioned in

or process, trade brands, paragraph (b) or
goodwill, franchises and any such
trademark, other like knowledge or
trade brand or properties information as is
other like (Section 42 C-4 mentioned in
property or and 5) paragraph (c)
right;
(e) The supply of
(b) The use of, services by a
or the right to nonresident
use in the person or his
Philippines any employee in
industrial, connection with
commercial or the use of
scientific property or
equipment; rights belonging
to, or the
(c) The supply of installation or
scientific, operation of any
technical, brand,
industrial or machinery or
commercial other apparatus
knowledge or purchased from
information; such
nonresident
(d) The supply of person;
any assistance
that is ancillary (f) Technical
and subsidiary advice,
to, and is assistance or
furnished as a services
means of rendered in
enabling the connection with
application or technical
enjoyment of, management or
any such administration
property or right of any scientific,
as is mentioned industrial or
in paragraph (a), commercial
any such undertaking,
equipment as is venture, project

96 CAINDAY, RAQUEL A. GROSS INCOME

 AMILING, BEBER, CAINDAY,CONEJERO, FERUELO & LIAO TAXATION LAW REVIEWER FOR THE 2011 BAR

or scheme; and without the

Philippines, or
(g) The use of or from the
the right to use: purchase of
personal
(i) Motion property
picture films; without and its
sale within the
(ii) Films or Philippines shall
video tapes for be treated as
use in derived entirely
connection with form sources
television; and within the
country in which
(iii) Tapes for
sold:
use in
8. Shares of That gain from
connection with
Stock of the sale of
radio
Domestic shares of stock
broadcasting
Corporation in a domestic
(Section 42 A-4 )
corporation shall
6. Sale of gains, profits Gains, profits
be treated as
Real and income and income
derived entirely
Property from the sale of from the sale of
form sources
real property real property
within the
located in the located without
Philippines
Philippines the Philippines
regardless of
(Section 42 A-5)
where the said
shares are sold.
T
7. Sale of - gains; profits
Personal and income
Property from the sale of f. Situs of Income Taxation – Power to tax
personal is limited to territorial jurisdiction of the state. The
property, government can impose taxes only on persons and
properties within its territorial jurisdiction, except
Gains, profits when there is privity of relationship between the
and income government and the person subject to tax, wherein
the jurisdiction of the government remains,
derived from the
wherever the taxpayer maybe. (Villanueva,
purchase of Taxation Simplified, p. 13)
personal
property within
and its sale

GROSS INCOME CAINDAY, RAQUEL A. 97

 AMILING, BEBER, CAINDAY,CONEJERO, FERUELO & LIAO TAXATION LAW REVIEWER FOR THE 2011 BAR
It is explained in G.R. No. L-42780 January
17, 1936 - MANILA GAS CORPORATION vs.THE
COLLECTOR OF INTERNAL REVENUE -
“The approved doctrine is that no state
may tax anything not within its jurisdiction without
violating the due process clause of the
constitution. The taxing power of a state does not
extend beyond its territorial limits, but within such
it may tax persons, property, income, or business.
If an interest in property is taxed, the situs of either
the property or interest must be found within the
state. If an income is taxed, the recipient thereof
must have a domicile within the state or the
property or business out of which the income
issues must be situated within the state so that the
income may be said to have a situs therein.
Personal property may be separated from its
owner, and he may be taxed on its account at the
place where the property is although it is not the
place of his own domicile and even though he is
not a citizen or resident of the state which imposes
the tax. But debts owing by corporations are
obligations of the debtors, and only possess value
in the hands of the creditors. “
g. Exclusions from Gross Income
G.R. No. 143867 March 25, 2003 PHILIPPINE LONG
DISTANCE TELEPHONE COMPANY, INC. vs. CITY OF
DAVAO
“Indeed, both in their nature and in their
effect there is no difference between tax
exemption and tax exclusion. Exemption is an
immunity or privilege; it is freedom from a charge
or burden to which others are subjected.
Exclusion, on the other hand, is the
removal of otherwise taxable items from the reach
of taxation, e.g., exclusions from gross income and
allowable deductions. Exclusion is thus also an
immunity or privilege which frees a taxpayer from
a charge to which others are subjected. “
98 CAINDAY, RAQUEL A.
Section 32 of the Code speaks of gross
income and exclusions, and Section 34 of
deduction from gross income. (Goss Income is the
basis of computing the taxable income of a
taxpayer paying by way of the net. Exclusions,
however, should come ahead of gross income. The
formula is, all income less exclusion equals gross
income. Cuiled from the overall provisions of the
Code, the following classes of income are not
included in the computation of the gross income:
a) passive income subject to final income tax; b)
income that are exempt under the income tax law;
c) income classified as exclusions under Section 32
(B) ( Sababan, Taxation Law Reviewer, 2000 pp.
126-127).
1)Rationale for the exclusions - The
inherent power to the state to impose taxes
naturally carries with it the power to grant tax
exemptions. The power to exempt from taxation,
as well as the power to tax is an essential attribute
of sovereignty, and may be exercised in the
constitution or in a statute, unless the Constitution
expressly or by implication prohibits action by the
legislature on the subject. (Dimaampao, Tax
Principles and Remedies, 2005 p. 107)
1) Taxpayers who may avail of the
exclusions
2) Exclusions distinguished from
deductions and tax credit
A tax credit is a sum deducted from the
total amount a taxpayer owes to the state or
Federal Government. A tax credit may be granted
for various types of taxes, such as an income tax,
property tax, or VAT. It may be granted in
recognition of taxes already paid, as a subsidy, or
to encourage investment or other behaviors. In
some systems tax credits are 'refundable'[1] to the
extent they exceed the relevant tax. Tax systems
may grant tax credits to businesses or individuals,
and such grants vary by type of credit. (Wikipedia)
GROSS INCOME
 AMILING, BEBER, CAINDAY,CONEJERO, FERUELO & LIAO TAXATION LAW REVIEWER FOR THE 2011 BAR
Tax Credit - The direct dollar-for-dollar
reduction of an individual's tax liability; compare
with tax deduction, which reduces an individual's
tax liability only in proportion to his/her tax
bracket. (investorword.com)
Tax deductions reduce how much you owe
in taxes by decreasing your income. This can put
you down into a lower tax bracket, and that means
that you will owe less in terms of taxes. There are
two types of tax deductions that lower your
income. (infotaxsquare.com)
A tax credit is much more valuable than a
deduction or income exclusion. A tax credit
reduces your taxes, but a deduction reduces your
taxable amount. Tax deductions and income
exclusions have the same effect, but a different
cause. Income exclusions apply to money that was
not taxable in the first place (for example, some
money earned in a foreign country), but
deductions usually relate to spending and charity.
(infotaxsquare.com)
A tax credit is an item that reduces your
actual tax, whereas a tax deduction only reduces
your taxable income. With tax credits you can
reduce the actual amount of tax that must be paid;
a deduction is subject to the variation in the
progressive tax rate.
Tax credits do not depend on the tax rate,
so it is of equal value to a taxpayer regardless of
your income level. Tax deductions are just as
valuable as tax credits, and are available to
practically everyone. (irstaxsupport.com)
4. Under the Constitution
Section 27 (C) Government-owned or
Controlled-Corporations, Agencies or
Instrumentalities. - The provisions of existing
special or general laws to the contrary
GROSS INCOME
notwithstanding, all corporations, agencies, or
instrumentalities owned or controlled by the
Government, except the Government Service
Insurance System (GSIS), the Social Security System
(SSS), the Philippine Health Insurance Corporation
(PHIC), the Philippine Charity Sweepstakes Office
(PCSO) and the Philippine Amusement and Gaming
Corporation (PAGCOR), shall pay such rate of tax
upon their taxable income as are imposed by this
Section upon corporations or associations engaged
in similar business, industry, or activity.
However, this must be correlated with the
provision under Section 32 (B) Exclusions from
Gross Income: (7) Miscellaneous Items. - (b)
Income Derived by the Government or its Political
Subdivisions. - Income derived from any public
utility or from the exercise of any essential
governmental function accruing to the
Government of the Philippines or to any political
subdivision thereof.
5) Under the Tax Code
(B) Exclusions from Gross Income Section
32 B) - The following items shall not be included in
gross income and shall be exempt from taxation
under this title:
(1) Life Insurance. - The proceeds of life
insurance policies paid to the heirs or beneficiaries
upon the death of the insured, whether in a single
sum or otherwise, but if such amounts are held by
the insurer under an agreement to pay interest
thereon, the interest payments shall be included in
gross income.
Proceeds of life insurance policies. –
Proceeds of life insurance policies, paid by reason
of the death of an insured to his estate or to any
beneficiary (individual, partnership, or corporation,
but not a transferee for a valuable consideration),
directly or in trust, are excluded from the gross
CAINDAY, RAQUEL A. 99
 AMILING, BEBER, CAINDAY,CONEJERO, FERUELO & LIAO TAXATION LAW REVIEWER FOR THE 2011 BAR
income of the beneficiary. It is immaterial whether
the proceeds are received in a single sum or in
installments. If, however, such proceeds are held
by the insurer under an agreement to pay interest
thereon, the interest payments must be included in
income. The interest income shall be taxed at the
graduated income tax rates.
The law explicitly provides that proceeds of
life insurance policies paid to the heirs or
beneficiaries upon the death of the insured are
excluded from gross income and is exempt from
taxation. The proceeds of life insurance received
upon death of the insured constitutes a
compensation for the loss of life; hence, a return of
capital, which is beyond the scope of income
taxation. The reservation as to his right to
designate or substitute the beneficiary for another
is not important for income tax purposes, although
it is material for estate tax purposes].(Mamalateo,
Tax Reviewer, 162-163)
(2) Amount Received by Insured as Return
of Premium. - The amount received by the insured,
as a return of premiums paid by him under life
insurance, endowment, or annuity contracts, either
during the term or at the maturity of the term
mentioned in the contract or upon surrender of
the contract.
Amounts received under life insurance,
endowment or annuity contracts. – Amounts
received under a life insurance, endowment, or
annuity contract are excluded from gross income,
but if such amounts exceed the aggregate
premiums or considerations paid then the excess
shall be included in gross income.
However, in the case of a transfer for a
valuable consideration, by assignment or
otherwise, of a life insurance, endowment, or
annuity contract, or any interest therein, only the
actual value of such consideration and the amount
of the premiums and other sums subsequently paid
by the transferee are exempt from taxation. No
loss is realized on surrender of a life insurance
policy for its surrender value.(Mamalateo, Tax
Reviewer, 163)
100 CAINDAY, RAQUEL A.
(3) Gifts, Bequests, and Devises. - The value
of property acquired by gift, bequest, devise, or
descent: Provided, however, That income from
such property, as well as gift, bequest, devise or
descent of income from any property, in cases of
transfers of divided interest, shall be included in
gross income.
Value of property acquired by gift,
bequest, devise or descent.
Gifts, bequests and devises (which are
subject to estate or gift taxes) are excluded, but
not the income from such property. If the amount
received is on account of services rendered,
whether constituting a demandable debt or not, or
the use or opportunity to use of capital, the receipt
is income.(Mamalateo, Tax Reviewer, 164)
(4) Compensation for Injuries or Sickness. -
amounts received, through Accident or Health
Insurance or under Workmen's Compensation Acts,
as compensation for personal injuries or sickness,
plus the amounts of any damages received,
whether by suit or agreement, on account of such
injuries or sickness.
Amounts received through accident or
health insurance.
- Amounts received through accident or
health insurance or under workmen’s
compensation acts, as compensation for personal
injuries or sickness, plus the amounts of any
damages received, whether by suit or agreement,
on account of such injuries or sickness.
Compensation for damages to personal or family
rights, damages for slander and libel, award for loss
of life, damages for injuries to the goodwill of a
taxpayer’s business are not taxable, unless they
exceeded its cost. Payments in settlement of an
action for breach of promise to marry and
compromise payments in settlement of an action
for damages against a bank on account of conduct
impairing the taxpayer’s goodwill by injuring its
reputation are not taxable. (Mamalateo, Tax
Reviewer, 164)
GROSS INCOME
 AMILING, BEBER, CAINDAY,CONEJERO, FERUELO & LIAO TAXATION LAW REVIEWER FOR THE 2011 BAR
(5) Income Exempt under Treaty. - Income
of any kind, to the extent required by any treaty
obligation binding upon the Government of the
Philippines.
Income of any kind, to the extent required
by any treaty obligation binding upon the
Government of the Philippines, is exempt from
income tax, Interest income from foreign currency
loan extended by Asian Finance and Investment
Corporation of Singapore is exempt from the 20%
final withholding tax under the tax treaty.
(Mamalateo, Tax Reviewer, 166)
(6) Retirement Benefits, Pensions,
Gratuities, etc.-
(a) Retirement benefits received under
Republic Act No. 7641 and those received by
officials and employees of private firms, whether
individual or corporate, in accordance with a
reasonable private benefit plan maintained by the
employer: Provided, That the retiring official or
employee has been in the service of the same
employer for at least ten (10) years and is not less
than fifty (50) years of age at the time of his
retirement: Provided, further, That the benefits
granted under this subparagraph shall be availed of
by an official or employee only once. For purposes
of this Subsection, the term 'reasonable private
benefit plan' means a pension, gratuity, stock
bonus or profit-sharing plan maintained by an
employer for the benefit of some or all of his
officials or employees, wherein contributions are
made by such employer for the officials or
employees, or both, for the purpose of distributing
to such officials and employees the earnings and
principal of the fund thus accumulated, and
wherein its is provided in said plan that at no time
shall any part of the corpus or income of the fund
be used for, or be diverted to, any purpose other
than for the exclusive benefit of the said officials
and employees.
(b) Any amount received by an official or
employee or by his heirs from the employer as a
consequence of separation of such official or
employee from the service of the employer
GROSS INCOME
because of death sickness or other physical
disability or for any cause beyond the control of
the said official or employee.
The phrase “for any cause beyond the
control of the said official or employee” means
that the separation of the employee must be
involuntary and not initiated by him. Retrenchment
of the employee due to unfavorable business
conditions or financial reverses is considered as
involuntary.
Thus, if the employee is separated under a
Voluntary Separation Program of his employer, any
separation pay received by the employee thereat
shall be taxable.
The tax exemption applies to the salary or
cash equivalent of accumulated vacation and sick
leaves such as the “terminal leave pays” of retiring
government employees, which are considered not
part of the gross salary. (Mamalateo, Tax Reviewer,
169,170)
(c) Retirement benefits from foreign
government agencies. – The provisions of any
existing law to the contrary notwithstanding, social
security benefits, retirement gratuities, pensions
and other similar benefits received by resident or
nonresident citizens of the Philippines or aliens
who come to reside permanently in the Philippines
from foreign government agencies and other
institutions, private or public.
(d) Payments under U.S. Veterans
Administration.- Payments of benefits due or to
become due to any person residing in the
Philippines under the laws of the United States
administered by the United States Veterans
Administration.
(e) SSS benefits.- Benefits received from or
enjoyed under the Social Security System in
accordance with the provisions of Republic Act No.
8282.
(f) GSIS benefits.- Benefits received from
the GSIS under Republic Act No. 8291, including
CAINDAY, RAQUEL A. 101
 AMILING, BEBER, CAINDAY,CONEJERO, FERUELO & LIAO TAXATION LAW REVIEWER FOR THE 2011 BAR
retirement gratuity received by government
officials and employees.
(7) Miscellaneous Items. -
(a) Income Derived by Foreign
Government. - Income derived from investments in
the Philippines in loans, stocks, bonds or other
domestic securities, or from interest on deposits in
banks in the Philippines by (i) foreign governments,
(ii) financing institutions owned, controlled, or
enjoying refinancing from foreign governments,
and (iii) international or regional financial
institutions established by foreign governments.
(b) Income Derived by the Government or
its Political Subdivisions. - Income derived from any
public utility or from the exercise of any essential
governmental function accruing to the
Government of the Philippines or to any political
subdivision thereof.
(c) Prizes and Awards. - Prizes and awards
made primarily in recognition of religious,
charitable, scientific, educational, artistic, literary,
or civic achievement but only if:
(i) The recipient was selected without any
action on his part to enter the contest or
proceeding; and
(ii) The recipient is not required to render
substantial future services as a condition to
receiving the prize or award.
(d) Prizes and Awards in sports
Competition. - All prizes and awards granted to
athletes in local and international sports
competitions and tournaments whether held in the
Philippines or abroad and sanctioned by their
national sports associations.
To be eligible for exemption, the national
sports association referred to in the law that
should sanction said sport activity is the Philippine
Olympic Committee.(Mamalateo,173)
102 CAINDAY, RAQUEL A.
(e) 13th Month Pay and Other Benefits. -
Gross benefits received by officials and employees
of public and private entities: Provided, however,
That the total exclusion under this subparagraph
shall not exceed Thirty thousand pesos (P30,000)
which shall cover:
(i) Benefits received by officials and
employees of the national and local government
pursuant to Republic Act No. 6686;
(ii) Benefits received by employees
pursuant to Presidential Decree No. 851, as
amended by Memorandum Order No. 28, dated
August 13, 1986;
(iii) Benefits received by officials and
employees not covered by Presidential decree No.
851, as amended by Memorandum Order No. 28,
dated August 13, 1986; and
(iv) Other benefits such as productivity
incentives and Christmas bonus: Provided, further,
That the ceiling of Thirty thousand pesos (P30,000)
may be increased through rules and regulations
issued by the Secretary of Finance, upon
recommendation of the Commissioner, after
considering among others, the effect on the same
of the inflation rate at the end of the taxable year.
(f) GSIS, SSS, Medicare and Other
Contributions. - GSIS, SSS, Medicare and Pag-ibig
contributions, and union dues of individuals.
(g) Gains from the Sale of Bonds,
Debentures or other Certificate of Indebtedness. -
Gains realized from the same or exchange or
retirement of bonds, debentures or other
certificate of indebtedness with a maturity of more
than five (5) years.
(h) Gains from Redemption of Shares in
Mutual Fund. - Gains realized by the investor upon
redemption of shares of stock in a mutual fund
company as defined in Section 22 (BB) of this Code.
6. Under a Tax Treaty
GROSS INCOME
 AMILING, BEBER, CAINDAY,CONEJERO, FERUELO & LIAO TAXATION LAW REVIEWER FOR THE 2011 BAR

In the case of G.R. No. 127105 June 25, taxes payable in the Philippines on such royalties
1999 COMMISSIONER OF INTERNAL REVENUE, vs. where the tax rate is reduced to 10 or 15 percent
S.C. JOHNSON AND SON, INC., and COURT OF under such treaty. Article 24 of the RP-Germany
APPEALS, two tax treaties were discussed:
Tax Treaty states —
“RP-US Tax Treaty regarding the rate of tax
1) Tax shall be determined in the case of a
to be imposed by the Philippines upon royalties
resident of the Federal Republic of Germany as
received by a non-resident foreign corporation.
follows:
The provision states insofar as pertinent
that —
xxx xxx xxx

1) Royalties derived by a resident of one of the

b) Subject to the provisions of German tax
Contracting States from sources within the other
law regarding credit for foreign tax, there shall be
Contracting State may be taxed by both
allowed as a credit against German income and
Contracting States.
corporation tax payable in respect of the following
items of income arising in the Republic of the
2) However, the tax imposed by that Contracting
Philippines, the tax paid under the laws of the
State shall not exceed.
Philippines in accordance with this Agreement on:
a) In the case of the United States, 15
xxx xxx xxx
percent of the gross amount of the royalties, and
dd) royalties, as defined in paragraph 3 of
b) In the case of the Philippines, the least
Article 12;
of:
xxx xxx xxx
(i) 25 percent of the gross amount of the
royalties;
c) For the purpose of the credit referred in
subparagraph; b) the Philippine tax shall be
ii) 15 percent of the gross amount of the
deemed to be
royalties, where the royalties are paid by a
corporation registered with the Philippine Board of
xxx xxx xxx
Investments and engaged in preferred areas of
activities; and cc) in the case of royalties for which the tax
is reduced to 10 or 15 per cent according to
(iii) the lowest rate of Philippine tax that
paragraph 2 of Article 12, 20 percent of the gross
may be imposed on royalties of the same kind paid
amount of such royalties.
under similar circumstances to a resident of a third
State. 7) Under Special Laws: (refer to Villanueva,
p.95), among others, are:
Unlike the RP-US Tax Treaty, the RP-
Germany Tax Treaty allows a tax credit of 20 1. Income of cooperative marketing
percent of the gross amount of such royalties associations (Act No. 3425)
against German income and corporation tax for the
2. Backpay benefits (R.A. No. 304)
GROSS INCOME CAINDAY, RAQUEL A. 103
 AMILING, BEBER, CAINDAY,CONEJERO, FERUELO & LIAO TAXATION LAW REVIEWER FOR THE 2011 BAR
Under R.A. 9178 (Barangay Micro Business
Enterprises Act of 2002), Barangay Micro Business
Enterprises shall be exempt from income tax for
income arising from the operation of the
enterprise. BMBE refers to any business entity or
enterprise engaged in the production, processing
or manufacturing of products or commodities,
including agro-processing, trading and services,
whose total assets including those arising from
loans but exclusive of the land on which the
particular business entity’s office, plant and
equipment are situated, shall not be more than P3
million.(Mamalateo, Tax Reviewer,161)
h. Deductions from Gross Income
1) General Rules:
a) Deductions must be paid or incurred in
connection with the taxpayer’s trade, business or
profession. Rationale: Sababan p. 101) Deductions
are allowed because these are necessary to
generate income.;
b) Deductions must be supported by
adequate receipts or invoices (except standard
deductions)
Deductions are construed strictly against
the taxpayer claiming it.
As a general rule, deductions are strictly
construed against the taxpayer claiming them and
it is incumbent upon the taxpayer to establish a
clear right to tax exemption. Tax exemptions are
looked upon with disfavor.(Mamalateo, 192)
Deductions from Gross Income
There are three (3) types of deductions from gross
income. These are:
a. The itemized deductions in Section 34 (A) to (J)
and (M) available to all kinds of taxpayers engaged
in trade or business or practice of profession in the
Philippines;
104 CAINDAY, RAQUEL A.
b. The optional standard deduction in Section 34
(L) available only to individual taxpayers deriving
business, professional, capital gains and passive
income not subject to final tax, or other income;
and
c. The special deductions in Section 37 and 38,
both of the Tax Code, and in special laws like the
BOI law (E.O. 226). (Mamalateo, 193)
2. Return of capital (cost of sales or
services) (Section 27 E)
Cost of goods sold' shall include all
business expenses directly incurred to produce the
merchandise to bring them to their present
location and use.
Cost of 'goods manufactured and sold'
shall include all costs of production of finished
goods, such as raw materials used, direct labor and
manufacturing overhead, freight cost, insurance
premiums and other costs incurred to bring the
raw materials to the factory or warehouse.
For taxpayers engaged in the sale of
service, 'gross income' means gross receipts less
sales returns, allowances, discounts and cost of
services. 'Cost of services' shall mean all direct
costs and expenses necessarily incurred to provide
the services required by the customers and clients
including (A) salaries and employee benefits of
personnel, consultants and specialists directly
rendering the service and (B) cost of facilities
directly utilized in providing the service such as
depreciation or rental of equipment used and cost
of supplies: Provided, however, That in the case of
banks, 'cost of services' shall include interest
expense.
Return of Capital
Income tax is levied by law only on income,
which may be gross income or net income; hence,
the amount representing return of capital should
be deducted from the proceeds from sales of
GROSS INCOME
 AMILING, BEBER, CAINDAY,CONEJERO, FERUELO & LIAO TAXATION LAW REVIEWER FOR THE 2011 BAR
assets and should not be subjected to income tax.
Cost of goods purchased for resale, with proper
adjustment for opening and closing inventories,
are deducted from gross sales in computing gross
income.(Mamalateo, Tax Reviewer,190)
a) sale of inventory of goods by
manufacturer’s and dealers of property
The sale of real property located in the
Philippines, classified as ordinary assets, shall be
subject to the [CWT] (expanded) under Sec.
2.57..2(J) of [RR 2-98], as amended, based on the
gross selling price or current fair market value as
determined in accordance with Section 6(E) of the
Code, whichever is higher, and consequently, to
the ordinary income tax imposed under Sec.
24(A)(1)(c) or 25(A)(1) of the Code, as the case may
be, based on net taxable income.( (G.R. No. 160756
(March 9, 2010) CHAMBER OF REAL ESTATE AND
BUILDERS' ASSOCIATIONS, INC. vs. THE HON.
EXECUTIVE SECRETARY ALBERTO ROMULO, et al)
Sale of inventory of goods by
manufacturers and dealers of properties. – In sale
of goods representing inventory, the amount
received by the seller consists of return of capital
and gain from sale of goods or properties. That
portion of the receipt representing return of
capital is not subject to income tax. Accordingly,
cost of goods manufactured and sold (in the case
of manufacturers) or cost of sales (in the case of
dealers) is deducted from gross sales and is
reflected above the gross income line in a profit
and loss statement.(Mamalateo, 190)
b) sale of stock in trade by real estate
dealer and dealer in securities
Sale of stock in trade by a real estate
dealer and dealer in securities. – While real estate
dealers and dealers in securities also maintain
stocks in trade primarily for sale to customers in
the course of their trade or business, they are
GROSS INCOME
ordinarily not allowed to compute the amount
representing return of capital through cost of sales.
Rather, they are required to deduct the total cost
specifically identifiable to the real property or
shares of stock sold or exchanged. However,
computation of the cost of building projects on
pre-sale stage can be based on the estimated
construction cost of the project on the theory that
income tax is a tax on gross or net
income.(Mamalateo,190)
c) In the case of taxpayers engaged in the
sale of service, 'gross income' means gross receipts
less sales returns, allowances, discounts and cost
of services. 'Cost of services' shall mean all direct
costs and expenses necessarily incurred to provide
the services required by the customers and clients
including (A) salaries and employee benefits of
personnel, consultants and specialists directly
rendering the service and (B) cost of facilities
directly utilized in providing the service such as
depreciation or rental of equipment used and cost
of supplies: Provided, however, That in the case of
banks, 'cost of services' shall include interest
expense. (Sections 27 E(4) last paragraph)
Sale of services. – Sellers of services do not
buy and carry nor sell any stock in trade or
inventory of property; hence, they do not take or
assume any risk of loss similar to sellers of
inventory of goods. Their entire gross receipts are
treated as part of income.(Mamalateo, 191)
3. Itemized deductions:
Explanation by Wikipedia: Most income tax
systems allow a tax deduction for recovery of the
cost of assets used in a business or for the
production of income. Such deductions are allowed
for individuals and companies. Where the assets
are consumed currently, the cost may be deducted
currently as an expense or treated as part of cost
of goods sold. The cost of assets not currently
consumed generally must be deferred and
recovered over time, such as through depreciation.
Some systems permit full deduction of the cost, at
CAINDAY, RAQUEL A. 105
 AMILING, BEBER, CAINDAY,CONEJERO, FERUELO & LIAO TAXATION LAW REVIEWER FOR THE 2011 BAR
least in part, in the year the assets are acquired.
Other systems allow depreciation expense over
some life using some depreciation method or
percentage. Rules vary highly by country, and may
vary within a country based on type of asset or
type of taxpayer. Many systems that specify
depreciation lives and methods for financial
reporting require the same lives and methods be
used for tax purposes. Most tax systems provide
different rules for real property (buildings, etc.)
and personal property (equipment, etc.).
a. expenses - Section 34 A (1)
(1) Requisites for deductibility – refer
below for discussion
Business Expenses:
Conditions for deductibility of business
expenses:
1. It must be ordinary and necessary;
2. It must be paid or incurred during the
taxable year;
3. It must be paid or incurred in carrying on
or which are directly attributable to the
development, management, operation and/or
conduct of the trade, business or exercise of
profession;
4. It must be supported by adequate
invoices or receipts;
5. It is not contrary to law, public policy or
morals; and
6. The tax required to be withhold on the
expense paid or payable is shown to have been
remitted to the BIR.(Mamalateo, Tax
Reviewer,193)
a) Ordinary and necessary – According to
Villanueva p. 109. expense is necessary if intended
106 CAINDAY, RAQUEL A.
to increase profit or minimize losses, appropriated
and helpful to taxpayer’s business and ordinary if
usually or normally incurred in trade or business of
the employer.
An expense is “ordinary” when it connotes
a payment, which is normal in relation to the
business of the taxpayer and the surrounding
circumstances. An expense is “necessary” where
the expenditure is appropriate or helpful in the
development of the taxpayer’s business or that the
same is proper for the purpose of realizing a profit
or minimizing a loss.
The court held that “goodwill” generally
denotes the benefit arising from connection and
reputation, and efforts to establish reputation are
akin to acquisition of capital assets. Therefore,
expenses related thereto are not business
expenses but capital expenditures.(Mamalateo,194
b. Paid and incurred during the taxable year
-
In General. - There shall be allowed as deduction
from gross income all the ordinary and necessary
expenses paid or incurred during the taxable year
in carrying on or which are directly attributable to,
the development, management, operation and/or
conduct of the trade, business or exercise of a
profession, including:
2. salaries, wages, and other forms of
compensation. A reasonable allowance for
salaries, wages, and other forms of compensation
for personal services actually rendered, including
the grossed-up monetary value of fringe benefit
furnished or granted by the employer to the
employee: Provided, That the final tax imposed
under Section 33 hereof has been paid;
( According to Sababan p. 102 – There are
3 expenses under this section, namely:
(1) reasonable wages and salaries’
GROSS INCOME
 AMILING, BEBER, CAINDAY,CONEJERO, FERUELO & LIAO TAXATION LAW REVIEWER FOR THE 2011 BAR

2) other forms of compensation for considered as a fringe benefit since it is not

personal services actually rendered; and pursuant to trade, business or profession. On the
other hand, the latter ((34A-1(a)ii are the expenses
3) the grossed-up monetary value of the incurred by an employee, whether managerial or
fringe benefits provided the final income tax not, in the pursuit of trade or business. He further
thereof has been paid. explained that even if the travel expense is not in
the pursuit of trade, business or profession is still
With respect to (2) Sababan cited the case deductible provided the final income tax therefrom
of Aguinaldo vs Commissioner 112 SCRA 136), the has been paid and it is given to a managerial
Supreme Court declared that the bonus given to employee.
the workers from the profit earned in the sale of a
parcel of land by the corporation cannot be (4) Cost of materials
allowed as deduction from gross income. Since
bonus is considered as “other forms of
compensation.” To be allowed as a deduction the
5. rentals and/or other payments for the
workers must have rendered actual service and
continued use or possession . A reasonable
since the source of the bonus was the sale of a
allowance for rentals and/or other payments which
parcel of land the bonus is not within the coverage
are required as a condition for the continued use
of the allowable deduction because the sale was
or possession, for purposes of the trade, business
done by the real estate brokers. The worker in this
or profession, of property to which the taxpayer
case, did not render personal service.
has not taken or is not taking title or in which he
has no equity other than that of a lessee, user or
With respect to fringe benefit, Sababan
possessor.
explained that this refers to fringe benefit under
Section 33, given to managerial employees subject
According to Villanueva, p. 110, these
to final income tax wherein the managerial
include all payments for obligations of the lessor
employee is the taxpayer although the
paid by the lessee to third parties, such as property
management withholds the tax therein, thus, it can
taxes, insurance premiums on the property leased,
be claimed only as a deduction by the
as well as the cost of permanent leasehold
management provided the final income tax
improvements, to be deducted in an amount equal
thereon has been paid.
to the cost of the improvement divided by the life
of the lease or life of the improvement whichever
3. travel expenses. A reasonable allowance for
is shorter.
travel expenses, here and abroad, while away from
home in the pursuit of trade, business or
(6) Repairs and maintenance
profession.

Sababan p. 103, made a distinction

between Section 33 B-7 and the above provision (7) Expenses under lease agreements
(Section 34 A-1(a)ii. The travel expense in the
former (33 B-7) is the one granted to managerial
employees for their foreign travel. This is

GROSS INCOME CAINDAY, RAQUEL A. 107

 AMILING, BEBER, CAINDAY,CONEJERO, FERUELO & LIAO TAXATION LAW REVIEWER FOR THE 2011 BAR
(8) Expenses for professionals
Professional expenses are deductible in the
year the professional services are rendered, not in
the year they are billed.
The court ruled that accrual of income and expense
is permitted when the all events test has been met.
This test requires: (1) fixing a right to income or
liability to pay; and (2) the availability of
reasonably accurate determination of such income
or liability. It added that it does not, however,
demand that the amount of income or liability be
known absolutely; it only requires that a taxpayer
has at its disposal the information necessary to
compute the amount with reasonable accuracy,
which implies something less than an exact or
completely accurate amount. Moreover, deduction
partakes the nature of tax exemption; it must be
construed strictly against the
taxpayer.(Mamalateo, 194)
(9) Entertainment expenses
A reasonable allowance for entertainment,
amusement and recreation expenses during the
taxable year, that are directly connected to the
development, management and operation of the
trade, business or profession of the taxpayer, or
that are directly related to or in furtherance of the
conduct of his or its trade, business or exercise of a
profession not to exceed such ceilings as the
Secretary of Finance may, by rules and regulations
prescribe, upon recommendation of the
Commissioner, taking into account the needs as
well as the special circumstances, nature and
character of the industry, trade, business, or
profession of the taxpayer: Provided, That any
expense incurred for entertainment, amusement
or recreation that is contrary to law, morals public
policy or public order shall in no case be allowed as
a deduction.
108 CAINDAY, RAQUEL A.
Sababan, p. 104, explained that the above
expenses may be allowed as deduction, provided
they are incurred pursuant to the trade, business
or profession of the taxpayer and points out the
proviso that these expenses must not be contrary
to law moral, public policy or public order. He
further said, that under RR No. 10-2002 a limitation
on the amount to be deductible from the gross
income of taxpayers engaged in the selling of
goods, shall not be more than 1.5% of the gross
receipts of such taxpayer, while those engaged in
the selling of services, only an amount not more
than 1% of its gross receipts shall be deductible.
(10) Political campaign expenses
Are contributions to a candidate in an election
subject to donor’s tax? On the part of the
contributor, is it allowable as a deduction from
gross income?
Suggested answer:
a) No, provided the recipient candidate had
complied with the requirement for filing of returns
of contributions with the Commission on Elections
as required under the Omnibus Election Code.
b) The contributor is not allowed to deduct the
contributions because the said expense is not
directly attributable to the development,
management, operation and/or conduct of a trade,
business or profession. Furthermore, if the
candidate is an incumbent government official or
employee, it may even be considered as a bribe or
a kickback. (Mamalateo, 199)
(b) Substantiation Requirements. - No deduction
from gross income shall be allowed under
Subsection (A) hereof unless the taxpayer shall
substantiate with sufficient evidence, such as
official receipts or other adequate records: (i) the
GROSS INCOME
 AMILING, BEBER, CAINDAY,CONEJERO, FERUELO & LIAO TAXATION LAW REVIEWER FOR THE 2011 BAR
amount of the expense being deducted, and (ii) the
direct connection or relation of the expense being
deducted to the development, management,
operation and/or conduct of the trade, business or
profession of the taxpayer.
Sababan, pp. 104-105, cited the case of
Esso Standard Eastern, Inc. vs. Commissioner (175
SCRA 149), where the Supreme Court enumerated
the conditions for an expense to be deductible,
namely: (1) the expense must be ordinary and
necessary; (2) it must be paid or incurred within
the taxable year; and it must be paid or incurred
while carrying on a trade or business. In addition,
not only must the taxpayer meet the “business
test,” he must substantially prove by evidence or
records the deductions claimed under the law,
otherwise, the same will be disallowed. The mere
allegation of the taxpayer than an item or expense
is ordinary and necessary does not justify its
deduction.
(c) Bribes, Kickbacks and Other Similar Payments. -
No deduction from gross income shall be allowed
under Subsection (A) hereof for any payment
made, directly or indirectly, to an official or
employee of the national government, or to an
official or employee of any local government unit,
or to an official or employee of a government-
owned or -controlled corporation, or to an official
or employee or representative of a foreign
government, or to a private corporation, general
professional partnership, or a similar entity, if the
payment constitutes a bribe or kickback.
Sababan, p. 105, these are exceptions to the
expenses deductible, because Bribes and kickbacks
are not ordinary and necessary to the trade,
business or profession the taxpayer, therefore, not
deductible.
GROSS INCOME
(2) Expenses Allowable to Private Educational
Institutions. - In addition to the expenses allowable
as deductions under this Chapter, a private
educational institution, referred to under Section
27 (B) of this Code, may at its option elect either:
(a) to deduct expenditures otherwise considered as
capital outlays of depreciable assets incurred
during the taxable year for the expansion of school
facilities or (b) to deduct allowance for
depreciation thereof under Subsection (F) hereof.
Sababan, p. 105, explained that the above
provision is an incentive to private educational
institutions since the rule is that with respect to
capital expenditures, the Code expressly prohibits
the deduction of “any amount paid out for new
buildings or for permanent improvements or
betterments made to increase the value of any
property or estate, Section 36 A-2)” and “any
amount expended in restoring property or in
making good the exhaustion thereof for which an
allowance is or has been made, Section 36 A-3.” He
further explained that these exceptions is allowed
to give the educational institutions the opportunity
to expand and improve their facilities.
b. Interest
In General. - The amount of interest paid
or incurred within a taxable year on indebtedness
in connection with the taxpayer's profession, trade
or business shall be allowed as deduction from
gross income: Provided, however. That the
taxpayer's otherwise allowable deduction for
interest expense shall be reduced by an amount
equal to 42% of the interest income subjected to
final tax:
Illustration as provided by Sababan. P. 106:
Taxpayer A, resident citizen, eaned bank interest
income of Php 10,000 and incurred interest
expense of Php20,000. The interest expense
CAINDAY, RAQUEL A. 109
 AMILING, BEBER, CAINDAY,CONEJERO, FERUELO & LIAO TAXATION LAW REVIEWER FOR THE 2011 BAR
allowed to be deducted is Php 15,800. This figure is
arrived at by deducting 42% out of the P10,000
interest earned by the taxpayer which is P4,200
from the P20,000 interest expense incurred.
“Interest” is the amount paid by a debtor
to his creditor for the use or forbearance of
money.
In general, the amount of interest expense
paid or incurred within a taxable year on
indebtedness in connection with the taxpayer’s
trade, business or exercise of profession shall be
allowed as a deduction from the taxpayer’s gross
income.
1) Requisites for deductibility (Villanueva,
pp. 111-112):
a) There must be an indebtedness
connected with the trade or business of the
taxpayer;
b) The interest must have been paid or
accrued during the taxable year;
c) The interest must have been stipulated
in writing;
d) The indebtedness must be that of the
taxpayer, except in the case of a mortgage upon
real estate of which the taxpayer is the legal or
equitable owner, he may deduct interest paid by
him, even though he is not directly liable, upon the
bond or note secured by such mortgage.
Conditions for deductibility of interest.
1. There must be a valid and existing
indebtedness;
2. The indebtedness must be that of the
taxpayer;
110 CAINDAY, RAQUEL A.
3. The interest must be legally due and
stipulated in writing;
4. The interest expense must be paid or
incurred during the taxable year;
5. The indebtedness must be connected
with the taxpayer’s trade, business or exercise of
profession;
6. The interest payment arrangement must
not be between related taxpayers as mandated in
Section 34 (B) (2) (b), in relation to Section 36 (B),
both of the Tax Code of 1997;
7. The interest is not expressly disallowed
by law to be deducted from the taxpayer’s gross
income (e.g. interest on indebtedness to finance
petroleum operations); and
8. The amount of interest deducted from
gross income does not exceed the limit set forth in
the law. In other words, the taxpayer’s otherwise
allowable deduction for interest expense shall be
reduced by forty-two percent (42%) of the interest
income subjected to final tax beginning November
1, 2005 under R.A. 9337, and that effective January
1, 2009, the percentage shall be thirty-three
percent (33%), (Mamalateo,199-200)
2) Non-deductible interest expense or
exceptions as stated in the Code:
Exceptions. - No deduction shall be allowed in
respect of interest under the succeeding
subparagraphs:
(a) If within the taxable year an individual
taxpayer reporting income on the cash basis
incurs an indebtedness on which an interest
is paid in advance through discount or
otherwise: Provided, That such interest shall
be allowed as a deduction in the year the
GROSS INCOME
 AMILING, BEBER, CAINDAY,CONEJERO, FERUELO & LIAO TAXATION LAW REVIEWER FOR THE 2011 BAR
indebtedness is paid: Provided, further, That
if the indebtedness is payable in periodic
amortizations, the amount of interest which
corresponds to the amount of the principal
amortized or paid during the year shall be
allowed as deduction in such taxable year.
An illustration was also provided by
Sababan, p.107: A taxpayer using the cash basis
method of accounting borrows money in which
interest is paid in advance through discount. He
obtains a loan of P1,000,000 in October 2006
subject to a 20% interest, after deducting the
advanced interest of P200,000, he received only
P800,000. Can the taxpayer claim the deduction in
April, 2007 or April 2006 ITR? The answer requires
qualification on when the obligation has been paid.
If the entire amount of the obligation has been
paid in 2006, the entire amount of interest shall be
allowed as a deduction in 2006. However, if the
principal obligation has not been paid entirely, let
say only P100,000 of the P1,000,000 was paid in
2006, then the taxpayer can only claim P20,000
(10% of the advanced interest) as deduction for
interest expense for that year.
The same is true with obligations subject
to periodic amortization payments, only the
interest expense corresponding to the principal
amortizations paid during the taxable year shall be
deducted as interest expense.
(3) Optional Treatment of Interest
Expense. - At the option of the taxpayer, interest
incurred to acquire property used in trade business
or exercise of a profession may be allowed as a
deduction or treated as a capital expenditure.
The provision was explained by Sababan, p
108: A acquired a machine for use in his trade or
business in the amount of P100,000 in October
2006 payable in October 2007 subject to 10%
interest. The interest expense may be treated as
GROSS INCOME
part of the value of the property acquired
(P110,000) which amount will be treated as a
capital expenditure subject to the allowance for
depreciation as provided under 34 B-3 or the
entire interest (P10,000) shall be claimed as a
deduction on the year the principal obligation has
to be paid in 2007.
c) Taxes.
All taxes, national or local, paid or accrued during
the taxable year in connection with the trade or
business or profession of the taxpayer are
deductible from gross income, except:
1. Philippine income tax
2. Foreign income tax
3. Estate and donor’s taxes
4. Special assessments on real property; and
5. Electric energy consumption tax under B.P. 36.
Conditions for deductibility of taxes:
1. Payments must be for taxes;
2. Taxes are imposed by law upon the lawyer;
3. Taxes must be paid or accrued during the
taxable year in connection with the taxpayer’s
trade, business or profession; and
4. Taxes are not specifically excluded by law from
being deducted from the taxpayer’s gross
income.(Mamalateo, 204)
1) Requisites for deductibility: It must be
paid or incurred within the taxable year, in
connection with the taxpayer’s profession trade or
business shall be allowed as a deduction (as
provided in the Code).
CAINDAY, RAQUEL A. 111
 AMILING, BEBER, CAINDAY,CONEJERO, FERUELO & LIAO TAXATION LAW REVIEWER FOR THE 2011 BAR
2) Non-deductible taxes, exceptions under
the Code:
(a) The income tax provided for under this Title;
(b) Income taxes imposed by authority of any
foreign country; but this deduction shall be
allowed in the case of a taxpayer who does not
signify in his return his desire to have to any extent
the benefits of paragraph (3) of this subsection
(relating to credits for taxes of foreign countries);
(c) Estate and donor's taxes; and
(d) Taxes assessed against local benefits of a kind
tending to increase the value of the property
assessed.
3) Treatment for surcharges/interests/fines
for delinquency
4) Treatment for special assessment
5) Tax credit vis-a- vis deduction
Sababan, pp 108-109 - There are two ways
to minimize a taxpayer’s tax liability: a) tax
deductions; and b) tax credits. The first is deducted
from the gross in come, while the latter is a
deduction from the income tax due:
Gross Income
Less: Deductions
Net Income
X Tax Rate
Net Income Tax Payable
Less: Tax Credits
112 CAINDAY, RAQUEL A.
Net Income Tax Payable
Section 34 C allows taxes to be deducted
from gross income provided the same was paid or
incurred during the taxable year in connection with
his trade or business with stated exceptions and
limitations under Section 34 C-2 pertaining to
nonresident alien taxpayers engaged in trade or
business in the Philippines who are allowed only to
deduct taxes up to the extent of the taxes incurred
in connection with their income from sources
within the Philippines. Section 34 C-3, on the other
hand, provides for a tax credit. – “Credit Against
Tax for Taxes of Foreign Countries. - If the taxpayer
signifies in his return his desire to have the benefits
of this paragraph, the tax imposed by this Title
shall be credited with:
(a) Citizen and Domestic Corporation. - In
the case of a citizen of the Philippines and
of a domestic corporation, the amount of
income taxes paid or incurred during the
taxable year to any foreign country; and
(b) Partnerships and Estates. - In the case
of any such individual who is a member of
a general professional partnership or a
beneficiary of an estate or trust, his
proportionate share of such taxes of the
general professional partnership or the
estate or trust paid or incurred during the
taxable year to a foreign country, if his
distributive share of the income of such
partnership or trust is reported for taxation
under this Title. “
If however the two aforementioned
taxpayers failed to signify in their return
their intention to avail of the tax credit
benefit under this section, the taxpayer
may still claim the taxes as deduction.
The distinction lies in the benefit that the
taxpayer will receive from deducting the
GROSS INCOME
 AMILING, BEBER, CAINDAY,CONEJERO, FERUELO & LIAO TAXATION LAW REVIEWER FOR THE 2011 BAR
said taxes. The above formula should be
considered. In considering the taxes as a
deduction, the taxpayer reduces only his
taxable income or net income which serves
the basis for the tax he should pay since
the net income is in turn multiplied with
the tax rate to arrive at the net income tax
due. On the other hand, in claiming the
said taxes as a form of tax credit, the
taxpayer reduces not the basis of his tax
liability but more significantly, the tax
liability itself, hence the taxpayer can have
more benefit in claiming taxes as tax
credits rather than as deductions.
d. Losses
1) Requisites for deductibility – The Code
provided the requisites:
In General. - Losses actually sustained
during the taxable year and not compensated for
by insurance or other forms of indemnity shall be
allowed as deductions:
(a) If incurred in trade, profession or
business;
(b) Of property connected with the trade,
business or profession, if the loss arises from fires,
storms, shipwreck, or other casualties, or from
robbery, theft or embezzlement.
The Secretary of Finance, upon
recommendation of the Commissioner, is hereby
authorized to promulgate rules and regulations
prescribing, among other things, the time and
manner by which the taxpayer shall submit a
declaration of loss sustained from casualty or from
robbery, theft or embezzlement during the taxable
year: Provided, however, That the time limit to be
so prescribed in the rules and regulations shall not
GROSS INCOME
be less than thirty (30) days nor more than ninety
(90) days from the date of discovery of the casualty
or robbery, theft or embezzlement giving rise to
the loss.
(c) No loss shall be allowed as a deduction
under this Subsection if at the time of the filing of
the return, such loss has been claimed as a
deduction for estate tax purposes in the estate tax
return.”
Losses are generally classified into:
(a) those incurred in a trade or business for
profit;
(b) those incurred in any transaction
entered into for profit, although not connected
with the trade or business; and
(c) casualty losses that arise from fire,
storm, shipwreck, or other casualty, or from theft
or robbery, even though not connected with the
trade or business of the taxpayer.
Conditions for deductibility of losses
1. The loss must be that of the taxpayer;
2. The loss is actually sustained and
charged off within the taxable year;
3. The loss is evidenced by a closed and
completed transaction;
4. The loss is not claimed as a deduction
for estate tax purposes;
5. The loss is not compensated for by
insurance or otherwise;
6. In the case of an individual, the loss
must be connected with his trade, business or
CAINDAY, RAQUEL A. 113
 AMILING, BEBER, CAINDAY,CONEJERO, FERUELO & LIAO TAXATION LAW REVIEWER FOR THE 2011 BAR
profession, or incurred in any transaction entered
into for profit though not connected with his trade,
business or profession; and
7. In the case of casualty loss, it has been
reported to the BIR within forty-five days from
date of occurrence of the loss.(Mamalateo, 203-
204)
2) Other types of losses:
a) Capital Losses – is deductible only to the
extent of capital gain (Villanueva, p. 119).
To understand the concept, Sababan, pp.
39-41), defined capital asset as provided for in the
Code as ”property held by the taxpayer (whether
or not connected with his trade or business), but
does not include stock in trade of the taxpayer or
other property of a kind which would properly be
included in the inventory of the taxpayer if on hand
at the close of the taxable year, or property held by
the taxpayer primarily for sale to customers in the
ordinary course of his trade or business, or
property used in the trade or business, of a
character which is subject to the allowance for
depreciation; or real property used in trade or
business of the taxpayer. “ The definition is
relevant in order to determine the applicability of
three provisions of the Code: 1) Percentage taken
into account otherwise known as the Holding
Period (Section 39 B; 2) Limitation on Capital
Losses or the Loss Limitation Rule (Section 39 C; 3)
Net Capital Loss Carry Over Rule (Section 39 D.
The percentage taken into account or the
holding period is defined as the length of time or
duration by which an individual held the capital
asset. There are two percentages which should be
taken into account in recognizing the gain or loss
from such sale or exchange: 1) 100% if the capital
asset has been held for not more than 12 months
114 CAINDAY, RAQUEL A.
(referred to as the Short-term Holding Period; 2)
50% if the capital asset has been held for more
than 12 months (referred to as the Long-term
Holding period). The rule is application on ly to
individual taxpayers since the Code provides,
“taxpayer, other than a corporation.” Furthermore,
there are sales or exchanges of capital asset which
are not subject to the foregoing rule, to wit: a) sale
or exchange of shares of stocks which is a capital
asset; B) sale or exchange of real property held as a
capital asset.
Bar Question: If the gain is a capital gain,
what is the tax treatment? Should it be include in
the gross income? Yes, the capital gain should be
included in the gross income subject to net in come
tax except in the two cases: 1) for sale or exchange
of share of stocks; 2) for sale or exchange of real
property, both of which are capital assets and 3)
capital assets held by corporation.
Thus, the Limitation Capital Losses or the
Loss Limitation Rule provides the “losses from sales
or exchanges of capital assets shall be allowed only
to the extent of the capital gains from such sale or
exchange, stated otherwise, a capital loss can only
be deducted from capital gains but never from
ordinary gain, while an ordinary loss may be
deducted from both capital and ordinary gain.
b) Securities Becoming Worthless – Section
34 D-4(b)
“If securities as defined in Section 22 (T)
become worthless during the taxable year and are
capital assets, the loss resulting therefrom shall, for
purposes of this Title, be considered as a loss from
the sale or exchange, on the last day of such
taxable year, of capital assets.”
c) Losses on wash sale of stocks or
securities – Section 38
GROSS INCOME
 AMILING, BEBER, CAINDAY,CONEJERO, FERUELO & LIAO TAXATION LAW REVIEWER FOR THE 2011 BAR
(A) In the case of any loss claimed to have
been sustained from any sale or other disposition
of shares of stock or securities where it appears
that within a period beginning thirty (30) days
before the date of such sale or disposition and
ending thirty (30) days after such date, the
taxpayer has acquired (by purchase or by exchange
upon which the entire amount of gain or loss was
recognized by law), or has entered into a contact
or option so to acquire, substantially identical stock
or securities, then no deduction for the loss shall
be allowed,
d) Wagering Losses (from gambling –
Section 34 D 4 (6) - “Losses from wagering
transactions shall be allowed only to the extent of
the gains from such transactions.”
e) Net Operating Loss Carry-Over (NOLCO)
Section 34 D(3)
(3) Net Operating Loss Carry-Over. - The
net operating loss of the business or enterprise for
any taxable year immediately preceding the
current taxable year, which had not been
previously offset as deduction from gross income
shall be carried over as a deduction from gross
income for the next three (3) consecutive taxable
years immediately following the year of such loss:
Provided, however, That any net loss incurred in a
taxable year during which the taxpayer was
exempt from income tax shall not be allowed as a
deduction under this Subsection: Provided, further,
That a net operating loss carry-over shall be
allowed only if there has been no substantial
change in the ownership of the business or
enterprise in that -
(i) Not less than seventy-five
percent (75%) in nominal value of outstanding
issued shares., if the business is in the name of a
GROSS INCOME
corporation, is held by or on behalf of the same
persons; or
(ii) Not less than seventy-five
percent (75%) of the paid up capital of the
corporation, if the business is in the name of a
corporation, is held by or on behalf of the same
persons.
According the Sababan, pp. 112-113), the
rule provides that the net operating loss of the
business or enterprise for the taxable year
preceding the current taxable year can be carried
over as a deduction from the gross income for the
next 3 consecutive years immediately following the
year the loss was incurred. As an exception, for
mines, other that oil and gas wells a net operating
loss incurred in any of the first 10 years of
operation may be carried over as a deduction fro
taxable income for the next 5 years immediately
following such loss.
The rule is applicable to both individual
and corporate taxpayers which are subject to the
net income tax. However, with respect to
corporations, the carry-over shall only be allowed if
there has been no substantial change in the
ownership of the business or enterprise.
e) Bad Debts – Section 34 E
The term “bad debt” refers to debt
resulting from the worthlessness or uncollectibility,
in whole or in part, of amount date the taxpayer by
others, arising from money lent or from
uncollectible amounts of income from goods sold
or services rendered. A bad debt arises when a
loan or debt for services or sale or rental of
property becomes worthless or uncollectible. A
genuine creditor-debtor relationship must
exist.(Mamalateo, 206)
CAINDAY, RAQUEL A. 115
 AMILING, BEBER, CAINDAY,CONEJERO, FERUELO & LIAO TAXATION LAW REVIEWER FOR THE 2011 BAR
“Debts due to the taxpayer actually
ascertained to be worthless and charged off within
the taxable year except those not connected with
profession, trade or business and those sustained
in a transaction entered into between parties
mentioned under Section 36 (B) of this Code:
Provided, That recovery of bad debts previously
allowed as deduction in the preceding years shall
be included as part of the gross income in the year
of recovery to the extent of the income tax benefit
of said deduction.”
!) Requisites for deductibility –
Villanueva p. 124 (Bad debts are deductive
when ascertained to be worthless and charged off
within the taxable year. The debt must be valid and
subsisting and must arise from the business, trade
or profession of the taxpayer. Before a debt can be
ascertained to be worthless, the creditor must
have taken all reasonable steps to collect within
the period or prescription, and in the light of the
following circumstances, action in good faith, he
may justify an ascertainment of worthlessness of a
debt:
a) insufficiency of collateral’
b) bankruptcy or insolvency;
c) loss of evidence of indebtedness;
d) the disappearance of the debtors, who
fled leaving no properties;
e) debt of the debtor leaving no properties;
f) injury to debtor incapacitating him from
work;
g) fruitless efforts to collect small amounts
from debtors scattered all over the country.)
116 CAINDAY, RAQUEL A.
What is the Tax Benefit Rule? – According
to Sababan, p. 113 – The rule provides that where
the creditor was allowed a deduction of bad debts
but said debts are subsequently recovered, the
previous deduction of bad debts will not be
cancelled but the recovered amount will be added
in the computation of the gross income.
Tax benefit rule states that the taxpayer is
obliged to declare as taxable income subsequent
recovery of bad debts in the year they were
collected to the extent of the tax benefit enjoyed
by the taxpayer when the bad debts were written
off and claimed as deduction from gross income. It
also applies to taxes previously deducted from
gross income but which were subsequently
refunded or credited. The taxpayer is also required
to report as taxable income the subsequent tax
refund or tax credit granted to the extent of the tax
benefit of the taxpayer enjoyed when such taxes
were previously claimed as deduction from
income.(Mamalateo, 206)
1. Bad debts must be charged off during
the taxable year to be allowed as deduction from
gross income.
2. Worthless securities, which are ordinary
assets, are not allowed as deduction from gross
income because the loss is not realized. However,
if these worthless securities are capital assets, the
owner is considered to have incurred a capital loss
as of the last day of the taxable year and,
therefore, deductible to the extent of capital gains.
This deduction, however, is not allowed to a bank
or trust company.
In order that debts shall be considered as
bad debts because they have become worthless,
the taxpayer should establish that during the year
for which the deduction is sought, a situation
developed on a result of which it became evident
GROSS INCOME
 AMILING, BEBER, CAINDAY,CONEJERO, FERUELO & LIAO TAXATION LAW REVIEWER FOR THE 2011 BAR
in the exercise of sound, objective business
judgment that there remained no practical, but
only vaguely theoretical, prospect that the debt
would ever be paid. “Worthless” is not determined
by an inflexible formula or slide rule calculation,
but upon the exercise of sound business judgment.
The factors to be considered include, but are not
limited to, the following: (a) the debtor has no
property nor visible income; (b) the debtor has
been adjudged bankrupt or insolvent; (c) collateral
shares have become worthless; and (d) there are
numerous debtors with small amounts of debts
and further action on the accounts would entail
expenses exceeding the amounts sought to be
collected.(Mamalateo,206)
f. Depreciation – Section 34 F
It is the gradual diminution in the useful
value of tangible property resulting from wear and
tear and normal obsolescence. The term is also
applied to amortization of the value of intangible
assets, the use of which in the trade or business is
definitely limited in duration.
“There shall be allowed as a depreciation
deduction a reasonable allowance for the
exhaustion, wear and tear (including reasonable
allowance for obsolescence) of property used in
the trade or business. In the case of property held
by one person for life with remainder to another
person, the deduction shall be computed as if the
life tenant were the absolute owner of the
property and shall be allowed to the life tenant. In
the case of property held in trust, the allowable
deduction shall be apportioned between the
income beneficiaries and the trustees in
accordance with the pertinent provisions of the
instrument creating the trust, or in the absence of
such provisions, on the basis of the trust income
allowable to each. “
1) Requisites for deductibility – the Code
provided for the requisites for
depreciation to be deductible: it must
GROSS INCOME
be incurred due to ordinary
exhaustion, wear and tear, including
reasonable allowance for
obsolescence, of property used in the
trade or business of the taxpayer.
Conditions for deductibility of depreciation
1. The allowance for depreciation must be
reasonable;
2. It must be for property arising out of its use in
the trade or business, or out of its not being used
temporarily during the year; and
3. It must be charged off during the taxable year
from the taxpayer’s books of accounts.
The proper allowance of depreciation of
any property used in trade or business refers to the
reasonable allowance for the exhaustion, wear and
tear (including reasonable allowance for
obsolescence) of said property. The reasonable
allowances shall include, but not limited to, an
allowance compared under any of the following
methods: (a) straight-line method; (b) declining-
balance method;(c) sum-of-years-digit; and (d) any
other method which may be prescribed by the
Secretary of Finance upon recommendation of the
Commissioner of Internal
Revenue.(Mamalateo,209)
According to Sababan, p. 114, This
deduction serves as an exception to the ule that
expenses to be deducted should have been
incurred during the taxable year. Depreciation is
the expense which can be deducted by the
taxpayer for several years as the case may be.
Since the property subject to depreciation is being
used by the taxpayer usually for more than one
taxable year, it is only reasonable that the expense
be spread over the useful life of the property.
Every property used in the trade, business or
profession of the taxpayer can be subject to
depreciation except for a parcel of land.
CAINDAY, RAQUEL A. 117
 AMILING, BEBER, CAINDAY,CONEJERO, FERUELO & LIAO TAXATION LAW REVIEWER FOR THE 2011 BAR

2) Methods of computing depreciation

allowance:

(a) The straight-line method;

For example, a vehicle that depreciates over 5
Illustration: G.R. No. L-24213 March 13, 1968 years, is purchased at a cost of US$17,000, and will
VICTORIAS MILLING CO., INC., vs. THE COURT OF have a salvage value of US$2000, will depreciate at
TAX APPEALS, THE PROVINCIAL ASSESSOR AND THE US$3,000 per year: ($17,000 − $2,000)/ 5 years =
PROVINCIAL TREASURER OF NEGROS OCCIDENTAL, $3,000 annual straight-line depreciation expense.
In other words, it is the depreciable cost of the
“Under the "straight-line method," the rate and asset divided by the number of years of its useful
the base — the cost — are constant. For example, life.
the depreciation of the same machinery
depreciated at the same rate, will be as follows: This table illustrates the straight-line method of
depreciation. Book value at the beginning of the
first year of depreciation is the original cost of the
Book Value Depreciation asset. At any time book value equals original cost
minus accumulated depreciation.
5%
First year, P100,000.00 P100,000.00 P5,000.00 book value = original cost − accumulated
of
depreciation Book value at the end of year
becomes book value at the beginning of next year.
Second 5% The asset is depreciated until the book value
100,000.00 95,000.00 5,000.00 equals scrap value.
year, of

Book value Book

5%
Third year, 100,000.00 90,000.00 5,000.00 at Depreciation Accumulated value at
of
beginning of expense depreciation end of
year year
Formula by Wikipedia:
$17,000
(original $3,000 $3,000 $14,000
Straight-line depreciation
cost)
Straight-line depreciation is the simplest and most-
often-used technique, in which the company $14,000 $3,000 $6,000 $11,000
estimates the salvage value of the asset at the end
of the period during which it will be used to $11,000 $3,000 $9,000 $8,000
generate revenues (useful life) and will expense a
portion of original cost in equal increments over $8,000 $3,000 $12,000 $5,000
that period. The salvage value is an estimate of the
value of the asset at the time it will be sold or $2,000
disposed of; it may be zero or even negative. $5,000 $3,000 $15,000 (scrap
Salvage value is also known as scrap value or value)
residual value.

Straight-line method:

118 CAINDAY, RAQUEL A. GROSS INCOME

 AMILING, BEBER, CAINDAY,CONEJERO, FERUELO & LIAO TAXATION LAW REVIEWER FOR THE 2011 BAR

(b) Declining-balance method, using a rate not
exceeding twice the rate which would have been
used had the annual allowance been computed
under the method described in Subsection (F) (1);
In the "fixed percentage of diminishing book value
method", the rate of yearly depreciation remains
the same but the base — the book value — upon
which the rate is applied diminishes from year to
year. For instance, the depreciation of a machinery
which costs P100,000.00, depreciated at 5% is as
follows:
annual depreciation = depreciation rate * book
value at beginning of year
The most common rate used is double the straight-
line rate. For this reason, this technique is referred
to as the double-declining-balance method. To
illustrate, suppose a business has an asset with
$1,000 original cost, $100 salvage value, and 5
years useful life. First, calculate straight-line
depreciation rate. Since the asset has 5 years
useful life, the straight-line depreciation rate
equals (100% / 5) 20% per year. With double-
declining-balance method, as the name suggests,
double that rate, or 40% depreciation rate is used.
The table below illustrates the double-declining-
balance method of depreciation.

Book Value Depreciation Book Book

Accumulat
value at Depreciati Depreciati value
ed
First year, 5% of P100,000.00 P5,000.00 beginni on on at
depreciati
ng of rate expense end of
on
Second year, 5% of 95,000.00 4,750.00 year year

$1,000
Third year, 5% of 90,250.00 4,512.50 (original 40% $400 $400 $600
cost)

$600 40% $240 $640 $360

(b) The sum-of-the-years-digit $360 40% $144 $784 $216

method;
$129.6
Formula from Wikipedia: $216 40% $86.40 $870.40
0

Declining-balance method (or Reducing balance

$100
method) $129.60 -
$129.60 $29.60 $900 (scrap
$100
Depreciation methods that provide for a higher value)
depreciation charge in the first year of an asset's
life and gradually decreasing charges in subsequent
years are called accelerated depreciation methods. When using the double-declining-balance method,
This may be a more realistic reflection of an asset's the salvage value is not considered in determining
actual expected benefit from the use of the asset: the annual depreciation, but the book value of the
many assets are most useful when they are new. asset being depreciated is never brought below its
One popular accelerated method is the declining- salvage value, regardless of the method used. The
balance method. Under this method the book process continues until the salvage value or the
value is multiplied by a fixed rate. end of the asset's useful life, is reached. In the last

GROSS INCOME CAINDAY, RAQUEL A. 119

 AMILING, BEBER, CAINDAY,CONEJERO, FERUELO & LIAO TAXATION LAW REVIEWER FOR THE 2011 BAR

year of depreciation a subtraction might be needed beginn cost rate expense tion e at
in order to prevent book value from falling below ing of end
estimated Scrap Value.
year of
year
c) Sum-of-the-years digit method

Formula by Wikipedia: $1,000

$300
(origin $70
$900 5/15 ($900 * $300
Sum-of-years' digits method al 0
5/15)
cost)
Sum-of-years' digits is a depreciation method that
results in a more accelerated write-off than $240
straight line, but less than declining-balance $46
$700 $900 4/15 ($900 * $540
method. Under this method annual depreciation is 0
4/15)
determined by multiplying the Depreciable Cost by
a schedule of fractions.
$180
$28
depreciable cost = original cost − salvage value $460 $900 3/15 ($900 * $720
0
3/15)
book value = original cost − accumulated
depreciation $120
$16
$280 $900 2/15 ($900 * $840
0
Example: If an asset has original cost of $1000, a 2/15)
useful life of 5 years and a salvage value of $100,
compute its depreciation schedule. $10
0
First, determine years' digits. Since the asset has $60
(scr
useful life of 5 years, the years' digits are: 5, 4, 3, 2, $160 $900 1/15 ($900 * $900
and 1. ap
1/15)
valu
Next, calculate the sum of the digits. e)
5+4+3+2+1=15

The sum of the digits can also be determined by

using the formula (n2+n)/2 where n is equal to the
useful life of the asset. The example would be g) Charitable and Other Contributions – Section 34
shown as (52+5)/2=15 H

Depreciation rates are as follows: (1) In General. - Contributions or gifts

actually paid or made within the taxable year to, or
5/15 for the 1st year, 4/15 for the 2nd year, 3/15
for the use of the Government of the Philippines or
for the 3rd year, 2/15 for the 4th year, and 1/15 for
the 5th year. any of its agencies or any political subdivision
thereof exclusively for public purposes, or to
Book Total Accumul Boo accredited domestic corporation or associations
Deprecia Deprecia organized and operated exclusively for religious,
value depreci ated k
tion tion charitable, scientific, youth and sports
at able deprecia valu

120 CAINDAY, RAQUEL A. GROSS INCOME

 AMILING, BEBER, CAINDAY,CONEJERO, FERUELO & LIAO TAXATION LAW REVIEWER FOR THE 2011 BAR
development, cultural or educational purposes or
for the rehabilitation of veterans, or to social
welfare institutions, or to non-government
organizations, in accordance with rules and
regulations promulgated by the Secretary of
finance, upon recommendation of the
Commissioner, no part of the net income of which
inures to the benefit of any private stockholder or
individual in an amount not in excess of ten
percent (10%) in the case of an individual, and five
percent (5%) in the case of a corporation, of the
taxpayer's taxable income derived from trade,
business or profession as computed without the
benefit of this and the following subparagraphs.
Conditions for deductibility
1. The charitable contribution must
actually be paid or made to the Philippine
government or any political subdivision thereof
exclusively for public purposes, or any of the
accredited domestic corporation or association
specified in the Tax Code;
2. It must be made within the taxable year;
3. It must not exceed 10% (individual) or
5% (corporation) of the taxpayer’s taxable income
before charitable contributions (whether
deductible in full or subject to limitation);
4. It must be evidenced by adequate
receipts or records; and
5. The amount of charitable contribution of
property other than money shall be based on the
acquisition cost of said property. The limitation is
imposed to prevent abuse of donating paintings
and other valuable properties and claiming
excessive deductions therefrom. (Mamalateo,210)
Irrespective of the accounting method
used by the donor, donation is recognized as a
GROSS INCOME
deduction from his gross income in the year such
donation was actually paid or made, not in the year
the deed of donation was perfected. The
deductibility of donation is not governed by the
ordinary rules on deductibility of the expense.
Donation must be both perfected and
consummated before it can be allowed as a
deduction.
Under Section 29 (h) (1) of the National
Internal Revenue Code charitable contributions to
be deductible must be:
a. Actually paid or made to domestic corporations
or associations organized and operated exclusively
for religious, charitable, scientific, youth and sports
development, cultural or educational purposes or
for rehabilitation of veterans or to social welfare
institutions no part of which insures to the benefit
of any private individual;
b. Made within the taxable year;
c. Not more than 6% (for individuals) or 3% (for
corporations) of the taxpayer’s taxable income to
be computed without including the contribution.
(2) Contributions Deductible in Full. -
Notwithstanding the provisions of the preceding
subparagraph, donations to the following
institutions or entities shall be deductible in full;
(a) Donations to the Government. -
Donations to the Government of the Philippines or
to any of its agencies or political subdivisions,
including fully-owned government corporations,
exclusively to finance, to provide for, or to be used
in undertaking priority activities in education,
health, youth and sports development, human
settlements, science and culture, and in economic
development according to a National Priority Plan
determined by the National Economic and
CAINDAY, RAQUEL A. 121
 AMILING, BEBER, CAINDAY,CONEJERO, FERUELO & LIAO TAXATION LAW REVIEWER FOR THE 2011 BAR
Development Authority (NEDA), In consultation
with appropriate government agencies, including
its regional development councils and private
philantrophic persons and institutions: Provided,
That any donation which is made to the
Government or to any of its agencies or political
subdivisions not in accordance with the said annual
priority plan shall be subject to the limitations
prescribed in paragraph (1) of this Subsection;
(b) Donations to Certain Foreign
Institutions or International Organizations. -
donations to foreign institutions or international
organizations which are fully deductible in
pursuance of or in compliance with agreements,
treaties, or commitments entered into by the
Government of the Philippines and the foreign
institutions or international organizations or in
pursuance of special laws;
(c) Donations to Accredited Non-
government Organizations. - the term 'non-
government organization' means a non profit
domestic corporation:
(1) Organized and operated exclusively for
scientific, research, educational, character-building
and youth and sports development, health, social
welfare, cultural or charitable purposes, or a
combination thereof, no part of the net income of
which inures to the benefit of any private
individual;
(2) Which, not later than the 15th day of the third
month after the close of the accredited non-
government organizations taxable year in which
contributions are received, makes utilization
directly for the active conduct of the activities
constituting the purpose or function for which it is
organized and operated, unless an extended period
is granted by the Secretary of Finance in
accordance with the rules and regulations to be
122 CAINDAY, RAQUEL A.
promulgated, upon recommendation of the
Commissioner;
(3) The level of administrative expense of which
shall, on an annual basis, conform with the rules
and regulations to be prescribed by the Secretary
of Finance, upon recommendation of the
Commissioner, but in no case to exceed thirty
percent (30%) of the total expenses; and
(4) The assets of which, in the even of dissolution,
would be distributed to another nonprofit
domestic corporation organized for similar purpose
or purposes, or to the state for public purpose, or
would be distributed by a court to another
organization to be used in such manner as in the
judgment of said court shall best accomplish the
general purpose for which the dissolved
organization was organized.
Subject to such terms and conditions as may be
prescribed by the Secretary of Finance, the term
'utilization' means:
(i) Any amount in cash or in kind (including
administrative expenses) paid or utilized to
accomplish one or more purposes for which the
accredited non-government organization was
created or organized.
(ii) Any amount paid to acquire an asset used (or
held for use) directly in carrying out one or more
purposes for which the accredited non-
government organization was created or
organized.
An amount set aside for a specific project
which comes within one or more purposes of the
accredited non-government organization may be
treated as a utilization, but only if at the time such
amount is set aside, the accredited non-
government organization has established to the
GROSS INCOME
 AMILING, BEBER, CAINDAY,CONEJERO, FERUELO & LIAO TAXATION LAW REVIEWER FOR THE 2011 BAR
satisfaction of the Commissioner that the amount
will be paid for the specific project within a period
to be prescribed in rules and regulations to be
promulgated by the Secretary of Finance, upon
recommendation of the Commissioner, but not to
exceed five (5) years, and the project is one which
can be better accomplished by setting aside such
amount than by immediate payment of funds.”
Requisites for deductibility – The Code
provided for the requisites for deductibility: a)
Contributions or gifts actually paid or made within
the taxable year; 2) to, or for the use of the
Government of the Philippines or any of its
agencies or any political subdivision thereof
exclusively for public purposes, 3) or to accredited
domestic corporation or associations organized
and operated exclusively for religious, charitable,
scientific, youth and sports development, cultural
or educational purposes or for the rehabilitation of
veterans, or to social welfare institutions, or to
non-government organizations, no part of the net
income of which inures to the benefit of any
private stockholder or individual in an amount not
in excess of ten percent (10%) in the case of an
individual, and five percent (5%) in the case of a
corporation, of the taxpayer's taxable income
derived from trade, business or profession.
Amounts that may be deducted
According to Sababan, pp. 13 114), There
are two types of deduction for donations: (1)
partial and (2) full deduction.
Partial deduction may be claimed if the
donee is any of the following: a) the Government
of the Philippines or any of its agencies or any
political subdivision thereof – for its use exclusively
for public purpose; 2) accredited domestic
corporation or associations organized and
operated exclusively for religious, charitable,
GROSS INCOME
scientific, youth and sports development, cultural
or educational purposes or for the rehabilitation of
veterans; 3) social welfare institutions; 4) non-
governmental organizations. The deduction is
considered partial since the Code provides for a
limitation on the amount of the donation to be
deducted. In case of individuals, the amount
allowed should not exceed 10% of their taxable
income while in case of corporation, it should not
exceed 5% of its taxable income.
Illustration: A corporation who has a
taxable in come of P1,000,000, donated to the
government a parcel of land worth P500,000. In
this case the corporation can only claim P50,000
(5% of P1,000,000).
The donation of the taxpayer can be
deducted in full provided the donations is made to
any of the following: 1) the Government of the
Philippines or any of its agencies or political
subdivisions, including fully-owned government
corporations – exclusively to finance, to provide
for, or to be used in undertaking priority activities
in education, health, youth and sports
development, human settlements, science and
culture, and in economic development according
to a National Priority Plan determined by the
NEDA; 2) foreign institutions or international
organizations in pursuance of or in compliance
with agreements, treatises or commitment entered
into by the government and the foreign institutions
or international organizations or in pursuance of
special laws; 3) accredited non-governmental
organizations. If the donees are these three, the
amount of the donation can be claimed as a
deduction regardless of the amount of the net
income.
h) Contributions to Pension Trusts (Section 34 J)
CAINDAY, RAQUEL A. 123
 AMILING, BEBER, CAINDAY,CONEJERO, FERUELO & LIAO TAXATION LAW REVIEWER FOR THE 2011 BAR
“An employer establishing or maintaining a
pension trust to provide for the payment of
reasonable pensions to his employees shall be
allowed as a deduction (in addition to the
contributions to such trust during the taxable year
to cover the pension liability accruing during the
year, allowed as a deduction under Subsection (A)
(1) of this Section ) a reasonable amount
transferred or paid into such trust during the
taxable year in excess of such contributions, but
only if such amount (1)has not theretofore been
allowed as a deduction, and (2) is apportioned in
equal parts over a period of ten (10) consecutive
years beginning with the year in which the transfer
or payment is made.”
1) Requisites for deductibility –
Villanueva, p. 137: 1) employer must
have established a pension plan; 2)
pension plan must be reasonable and
actually sound; 3) It must be funded by
the employer; 4) amount contributed
by the employer must no longer be
subject to his control; 5) payment has
not been allowable as a deduction; and
6) (per Sababan, p. 117) must be
apportioned in equal parts over a
period of 10 consecutive years
beginning with the year in which the
transfer or payment is made.
Gross compensation income earners are
now allowed at least an item of deduction in the
form of premium payments on health and/or
hospitalization insurance in an amount not
exceeding P2,400.00 per annum. This deduction is
allowed if the aggregate family income do not
exceed P250,000.00 and by the spouse, in case of
married individual, who claims additional personal
exemption for dependents.
4. Optional Standard Deduction – Section
34 L (as amended by R.A 9504
124 CAINDAY, RAQUEL A.
“In lieu of the deductions allowed under
the preceding Subsections, an individual subject to
tax under Section 24, other than a nonresident
alien, may elect a standard deduction in an amount
not exceeding forty percent (40%) of his gross sales
or gross receipts, as the case may be. In the case of
a corporation subject to tax under section 27(A)
and 28(A)(1), it may elect a standard deduction in
an amount not exceeding forty percent (40%) of it
gross income as defined in Section 32 of this Code.
Unless the taxpayer signifies in his return his
intention to elect the optional standard deduction,
he shall be considered as having availed himself of
the deductions allowed in the preceding
Subsections. Such election when made in the
return shall be irrevocable for the taxable year for
which the return is made: Provided, That an
individual who is entitled to and claimed for the
optional standard shall not be required to submit
with his tax return such financial statements
otherwise required under this Code: Provided,
further, That except when the Commissioner
otherwise permits, the said individual shall keep
such records pertaining to his gross sales or gross
receipts, or the said corporation shall keep such
records pertaining to his gross income as defined in
Section 32 of this Code during the taxable year, as
may be required by the rules and regulations
promulgated by the Secretary of Finance, upon
recommendation of the Commissioner.
According to Sababan, pp. 117-118,
individual taxpayers including corporations, expect
a nonresident alien, are given the option, instead
of availing of the itemized deductions, to claim a
deduction in an amount not exceeding 10% of their
gross income. A nonresident alien not engaged in
trade or business is the one being referred to here
since his liability is by way of the gross income tax
where deductions are not allowed. For this option
to be exercised, the taxpayer must signify in his
return his intention to elect the optional standard
deduction, otherwise he shall be considered as
having chosen the itemized deduction. In case the
taxpayer elects the optional standard deduction,
GROSS INCOME
 AMILING, BEBER, CAINDAY,CONEJERO, FERUELO & LIAO TAXATION LAW REVIEWER FOR THE 2011 BAR
such election shall be irrevocable for the taxable
year for which the return is made.
Optional Standard Deduction (OSD)
The optional standard deduction, which is
in lieu of the itemized deductions, is merely a
privilege that may be enjoyed by certain individual
taxpayers. The requisites for its exercise are as
follows:
a. OSD is available only to citizens or
resident aliens; thus, nonresident aliens are not
entitled to claim the optional standard deduction;
b. The standard deduction is optional; i.e.,
unless taxpayer signifies in his return his intention
to elect this deduction, he is considered as having
availed of the itemized deductions;
c. Such election, when made by the
qualified taxpayer, is irrevocable for the year in
which made; however, he can change to itemized
deductions in succeeding year (s);
d. The amount of standard deduction is
limited to 10% of taxpayer’s gross income; and
e. Proof of actual expenses is not
required.(Mamalateo, 213)
5. Personal and additional exemption
Section 35 as amended by Republic Act 9504)
“Allowance of Personal Exemption for Individual
Taxpayer. -
"(A) In General. - For purposes of determining the
tax provided in Section 24(A) of this title, there
shall be allowed a basic personal exemption
amounting to Fifty thousand pesos (P50,000) for
each individual taxpayer.
GROSS INCOME
"In the case of married individual where only one
of the spouses is deriving gross income, only such
spouse shall be allowed the personal exemption.
"(B) Additional Exemption for Dependents. - There
shall be allowed an additional exemption of
Twenty-five thousand pesos (25,000) for each
dependent not exceeding four (4).
"The additional exemption for dependents shall be
claimed by only one of the spouses in the case of
married individuals.
"In the case of legally separated spouses,
additional exemptions may be claimed only by the
spouse who has custody of the child or children:
Provided, That the total amount of additional
exemptions that may be claimed by both shall not
exceed the maximum additional exemptions herein
allowed.
"For purposes of this Subsection, a "dependent"
means a legitimate, illegitimate or legally adopted
child chiefly dependent upon and living with the
taxpayer if such dependent is not more than
twenty-one (21) years of age, unmarried and not
gainfully employed or if such dependent,
regardless of age, is incapable of self-support
because of mental or physical defect.”
Discussion by Sababan, pp.119-120):
a) Basic personal exemption
The exemption provided in Section 35 is available
to the following taxpayers: 1) resident citizen; 2)
nonresident citizen; 3) OCW an Seamen; 4)
resident alien and nonresident alien engaged in
trade or business.
The individual taxpayers are no longer classified as
single, head of the family or married. All the
CAINDAY, RAQUEL A. 125
 AMILING, BEBER, CAINDAY,CONEJERO, FERUELO & LIAO TAXATION LAW REVIEWER FOR THE 2011 BAR
taxpayers are now entitled to a personal
exemption in the amount of P50,000 regardless of
status.
For married individuals where only one spouse is
deriving gross income, only such spouse shall be
allowed the personal exemption.
Personal note: Under the provisions of R. A. 9504
as amendment to Section 35 of the Code, the term
“head of the family is no longer defined, may be
explained by the act that a uniform personal
exemption of P50,000 was provided regardless of
the status.
b) Additional exemptions for taxpayers
with dependents
Discussion by Sababan, p.120):
The additional exemption for dependents
which allows additional exemption of P25,000 for
each dependent not to exceed 4, is only for
married individuals. This shall only be claimed by
one lone of the spouses. Further, in order to avail
of this exemption, the spouses must be legally
married.
In case of legally separated spouses, the Code
provides that the additional exemption may be
claimed by the spouse who has custody of the
children.
c) Status as the end-of-the-year rule –
Section 35 – “Change of Status. - If the taxpayer
marries or should have additional dependent(s) as
defined above during the taxable year, the
taxpayer may claim the corresponding additional
exemption, as the case may be, in full for such
year.
If the taxpayer dies during the taxable
year, his estate may still claim the personal and
126 CAINDAY, RAQUEL A.
additional exemptions for himself and his
dependent(s) as if he died at the close of such year.
If the spouse or any of the dependents dies
or if any of such dependents marries, becomes
twenty-one (21) years old or becomes gainfully
employed during the taxable year, the taxpayer
may still claim the same exemptions as if the
spouse or any of the dependents died, or as if such
dependents married, became twenty-one (21)
years old or became gainfully employed at the
close of such year.”
Discussion of Sababan, p. 121,
The Code, (as stated), in effect, provides
that the change of status of the taxpayer shall be
effective only if such change will benefit the
taxpayers, i.e, if the status will change from
married with no dependent to married with one
dependent. Since in that case, the exemption will
be from P50,000 to P75,000. Thus, the rule is the
higher exemption will be the applicable exemption
for the taxpayer.
Discussion of Mamalateo, p.213
Additional exemptions for taxpayer with
dependents. – A married individual or a head of
family shall be allowed an additional exemption of
P25,000.00 for each qualified dependent child,
provided that the total number of dependents for
which additional exemptions may be claimed shall
not exceed four (4) dependents. The additional
exemptions for qualified dependent children shall
be claimed by only one of the spouses in the case
of married individuals.
A “dependent” means a legitimate,
illegitimate or legally adopted child chiefly
dependent upon and living with the taxpayer if
such dependent is not more than twenty-one (21)
GROSS INCOME
 AMILING, BEBER, CAINDAY,CONEJERO, FERUELO & LIAO TAXATION LAW REVIEWER FOR THE 2011 BAR
years of age, unmarried and not gainfully
employed or if such dependent, regardless of age,
is incapable of self-support because of mental or
physical defect.
Personal exemptions to P50,000.00, as
irrespective of whether the individual is simple,
head of the family, or married. It also increased
additional exemptions for children not exceeding
from to P25,000.00 for each child. The new law
also exempts from income tax the compensation of
minimum wage earners.
c) Status-at-the-end-of-the-year rule
“Status-at-the-end-of-the-year rule” which
means that whatever is the status of the taxpayer
at the end of the calendar year shall be used for
purposes of determining his personal and
additional exemptions generally applies. A change
of status of the taxpayer during the taxable year
generally benefits, but does not prejudice,
him.(Mamalateo, 217)
6. Items Not Deductible - Section 36
(A) General Rule. - In computing net
income, no deduction shall in any case be
allowed in respect to -
(1) Personal, living or family expenses;
(2) Any amount paid out for new
buildings or for permanent
improvements, or betterments made to
increase the value of any property or
estate;
This Subsection shall not apply to
intangible drilling and development costs
incurred in petroleum operations which
are deductible under Subsection (G) (1)
of Section 34 of this Code.
GROSS INCOME
(3) Any amount expended in restoring
property or in making good the
exhaustion thereof for which an
allowance is or has been made; or
(4) Premiums paid on any life insurance
policy covering the life of any officer or
employee, or of any person financially
interested in any trade or business
carried on by the taxpayer, individual or
corporate, when the taxpayer is directly
or indirectly a beneficiary under such
policy.
(B) Losses from Sales or Exchanges of
Property. - In computing net income, no
deductions shall in any case be allowed in
respect of losses from sales or exchanges
of property directly or indirectly -
(1) Between members of a family. For
purposes of this paragraph, the family of
an individual shall include only his
brothers and sisters (whether by the
whole or half-blood), spouse, ancestors,
and lineal descendants; or
(2) Except in the case of distributions in
liquidation, between an individual and
corporation more than fifty percent
(50%) in value of the outstanding stock of
which is owned, directly or indirectly, by
or for such individual; or
(3) Except in the case of distributions in
liquidation, between two corporations
more than fifty percent (50%) in value of
the outstanding stock of which is owned,
directly or indirectly, by or for the same
individual if either one of such
CAINDAY, RAQUEL A. 127
 AMILING, BEBER, CAINDAY,CONEJERO, FERUELO & LIAO TAXATION LAW REVIEWER FOR THE 2011 BAR
corporations, with respect to the taxable
year of the corporation preceding the
date of the sale of exchange was under
the law applicable to such taxable year, a
personal holding company or a foreign
personal holding company;
(4) Between the grantor and a fiduciary
of any trust; or
(5) Between the fiduciary of and the
fiduciary of a trust and the fiduciary of
another trust if the same person is a
grantor with respect to each trust; or
(6) Between a fiduciary of a trust and
beneficiary of such trust.
To summarize, the following are Non-Deductible
Expenses
In general, in computing net income, no
deduction shall in any case be allowed in respect to
–
1. Personal, living or family expenses;
2. Any amount paid out for new buildings or for
permanent improvements, or betterments made
to increase the value of any property or estate;
This shall not apply to intangible drilling and
development costs incurred in petroleum
operations, which are deductible under Subsection
(G) (1) of Section 34 of this Code.
3. Any amount expended in restoring property or
in making good the exhaustion thereof for which
an allowance is or has been made; or
4. Premiums paid on any life insurance policy
covering the life of any officer or employee, or of
any person financially interested in any trade or
128 CAINDAY, RAQUEL A.
business carried on by the taxpayer, individual or
corporate, when the taxpayer is directly or
indirectly a beneficiary under such policy.
5. Losses from sales or exchanges of property
between related parties. – In computing net
income, no deduction shall in any case be allowed
in respect of losses from sales or exchanges of
property directly or indirectly –
a. Between members of a family. For
purposes of this paragraph, the family of
an individual shall include only his brothers
and sisters (whether by the whole or half-
blood), spouse, ancestors, and lineal
descendants; or
b. Except in the case of distributions in
liquidation, between an individual and a
corporation more than fifty percent (50%)
in value of the outstanding stock of which
is owned, directly or indirectly, by or for
such individual; or
c. Except in the case of distributions in
liquidation, between two corporations
more than fifty percent (50%) in value of
the outstanding stock of each of which is
owned, directly or indirectly, by or for the
same individual, if either one of such
corporations, with respect to the taxable
year of the corporation preceding the date
of the sale or exchange was, under the law
applicable to such taxable year, a personal
holding company or a foreign or a foreign
personal holding company;
d. Between the grantor and a fiduciary of
any trust; or
e. Between the fiduciary of a trust and the
fiduciary of another trust if the same
GROSS INCOME
 AMILING, BEBER, CAINDAY,CONEJERO, FERUELO & LIAO TAXATION LAW REVIEWER FOR THE 2011 BAR
person is a grantor with respect to each
trust; or
f. Between a fiduciary of a trust and a
beneficiary of such trust.(Mamalateo, 217-
220)
Discussion of Sababan, pp.125:
The items provided in Section 36 are not
deductible from gross income because as a general
rule, these items are not related to trade, business
or profession of the taxpayer – particularly with
respect to personal, living or family expenses.
With respect to item number 2, of Section
36 A (for permanent improvement or betterment),
and item number 3 of Section 36 A (expenses for
restoring property) the same is no longer
deductible because allowance for depreciation
thereof has already been provided.
The expense referred to in Section 36 A-4
refers to the life insurance policies of rank-and-file
employees although the Code is silent. This section
should be correlated to Section 33 B-10 (the life or
health insurance and other non-life insurance
premiums or similar amounts in excess of what the
law allows) is considered as a fringe benefit subject
to the final income tax. As previously discussed,
this fringe benefit is only subject to tax if given to
managerial and supervisory employees. If given to
rank-and-file employees, such benefit is not
subject to final income tax. Further, the fringe
benefit under Section 33 is deductible from the
gross income under Section 34 A-1(a)(i) which
provides “ x-x including the grossed-up monetary
value of fringe benefit furnished or granted by the
employer to the employee: Provided, that the final
income tax imposed under Section 33 x-x has been
paid.” Thus, the life or health insurance given to
managerial and supervisory employees in the form
GROSS INCOME
of fringe benefits are deductible whereas under
Section 36, the premiums paid for life insurance
covering the life of any officer or employee are not
deductible. The only logical conclusion to be
deduced is that the premiums for life insurance
under Section 36 are those given to rank-and-fie
employees.
Further, it is required that for the premium
paid to be not deductible, the taxpayer-employer
should be directly or indirectly the beneficiary
under such policy.
With respect to losses from sales or
exchanges of property (Section 36 B), such loss
shall not be allowed as a deduction from the gross
income if such loss is incurred from sales or
exchanges of property between the following
related parties:
1) between member of the family (the term
“family” is defined as including only his
brothers and sisters, whether by full or
half-blood, spouse, ancestors and lineal
descendants.)
With respect to Section 36 B-2 and 36 B-3, the
provision for non-deductibility is not applicable .
With respect to Section 36 B-4 and 36 B-6, the
persons involved are the grantor and the fiduciary,
and the fiduciary and beneficiary, respectively. The
losses between these parties are not deductible
because of the proximity of the relationship
between the parties. Thus, the law presumes the
presence of irregularity between the parties as
regards the transactions.
This provision between related parties
shall also apply to interest expense and bad debts,
and losses from sales of property between related
parties.
CAINDAY, RAQUEL A. 129
 AMILING, BEBER, CAINDAY,CONEJERO, FERUELO & LIAO TAXATION LAW REVIEWER FOR THE 2011 BAR
Non-deductible interest refers to Section
34 B 2(b) - interest is not deductible if both the
taxpayer and the person to whom the payment has
been made or is to be made are related.
Non-deductible taxes refers to Section 34 C
1 (a) Income tax provided for under this title, (c)
Estate and Donor’s Taxes, and (d) Taxes assessed
against local benefits of a kind tending to increase
the value of the property assessed.
Losses from wash sales of stock or securities
(Section 38)
(A) In the case of any loss claimed to have
been sustained from any sale or other
disposition of shares of stock or securities
where it appears that within a period
beginning thirty (30) days before the date
of such sale or disposition and ending
thirty (30) days after such date, the
taxpayer has acquired (by purchase or by
exchange upon which the entire amount of
gain or loss was recognized by law), or has
entered into a contact or option so to
acquire, substantially identical stock or
securities, then no deduction for the loss
shall be allowed under Section 34.
Exception: when the losses is claimed by a
dealer in stock or securities and with
respect to a transaction made in the
ordinary course of the business of such
dealer.
Exempt Corporations: Section 30
Exempt Corporations
Government-owned or controlled corporations. –
All corporations, agencies, or instrumentalities
owned or controlled by the Government, except;
1. Government Service Insurance System;
130 CAINDAY, RAQUEL A.
2. Social Security System;
3. Philippine Health Insurance Corporation; and
4. Philippine Charity Sweepstakes Office
Exempt corporations and associations. – Section
30
Exemptions from Tax on Corporations. - The
following organizations shall not be taxed under
this Title in respect to income received by them as
such:
(A) Labor, agricultural or horticultural
organization not organized principally for
profit;
(B) Mutual savings bank not having a
capital stock represented by shares, and
cooperative bank without capital stock
organized and operated for mutual
purposes and without profit;
(C) A beneficiary society, order or
association, operating fort he exclusive
benefit of the members such as a fraternal
organization operating under the lodge
system, or mutual aid association or a
nonstock corporation organized by
employees providing for the payment of
life, sickness, accident, or other benefits
exclusively to the members of such society,
order, or association, or nonstock
corporation or their dependents;
(D) Cemetery company owned and
operated exclusively for the benefit of its
members;
(E) Nonstock corporation or association
organized and operated exclusively for
religious, charitable, scientific, athletic, or
GROSS INCOME
 AMILING, BEBER, CAINDAY,CONEJERO, FERUELO & LIAO TAXATION LAW REVIEWER FOR THE 2011 BAR
cultural purposes, or for the rehabilitation
of veterans, no part of its net income or
asset shall belong to or inures to the
benefit of any member, organizer, officer
or any specific person;
(F) Business league chamber of commerce,
or board of trade, not organized for profit
and no part of the net income of which
inures to the benefit of any private stock-
holder, or individual;
(G) Civic league or organization not
organized for profit but operated
exclusively for the promotion of social
welfare;
(H) A nonstock and nonprofit educational
institution;
(I) Government educational institution;
(J) Farmers' or other mutual typhoon or
fire insurance company, mutual ditch or
irrigation company, mutual or cooperative
telephone company, or like organization of
a purely local character, the income of
which consists solely of assessments, dues,
and fees collected from members for the
sole purpose of meeting its expenses; and
(K) Farmers', fruit growers', or like
association organized and operated as a
sales agent for the purpose of marketing
the products of its members and turning
back to them the proceeds of sales, less
the necessary selling expenses on the basis
of the quantity of produce finished by
them;
Notwithstanding the provisions in the
preceding paragraphs, the income of whatever
kind and character of the foregoing organizations
GROSS INCOME
from any of their properties, real or personal, or
from any of their activities conducted for profit
regardless of the disposition made of such income,
shall be subject to tax imposed under this Code.
10) Taxation of Resident Citizens (RC), Non-
resident Citizens (NRC), and Resident Aliens(RA) –
Section 24:
Discussion of Sababan, pp 44-45.
a) General Rule - Of the individual
taxpayers, only the RC is liable for income derived
from all sources, within and without the
Philippines. The NRC and the RA are liable only for
income derived from sources within the
Philippines.
b) Taxation on Compensation Income - Net
Income Tax (Section 24 A)
According to Section 32, “, gross income
means all income derived from whatever source,
including (but not limited to) the following items:
(1) Compensation for services in whatever
form paid, including, but not limited to
fees, salaries, wages, commissions, and
similar items; -x – x
Thus, compensation income includes
monetary compensation as follows:
1. Regular salary/wage earned under
employer-employee relations
2. Separation pay/retirement benefit not
otherwise exempt. This includes
separation pay given to private or
public employees who resigned from
their position before reaching
retirement age, i.e. separation pay
given to an employee who resigned
from present employment to transfer
to another company who offered a
better compensation package.
CAINDAY, RAQUEL A. 131
AMILING, BEBER, CAINDAY,CONEJERO, FERUELO & LIAO TAXATION LAW REVIEWER FOR THE 2011 BAR
3. Bonuses, 13th month pay, and other
benefits not exempt (this refers to
bonus received by an employee in
excess of the allowable P30,000 per
year.
4. Director’s fees – this includes per
diems and allowances given to a
director or trustee of a corporation
5. non-monetary compensation, this
include fringe benefit subject to tax
which refers to those given to
managerial employees.
Exclusions from Compensation Income:
1. Fringe benefit not subject to tax –
(Section 32 C) “(1)fringe benefits which
are authorized and exempted from tax
under special laws; (2) Contributions of
the employer for the benefit of the
employee to retirement, insurance and
hospitalization benefit plans; (3)
Benefits given to the rank and file
employees, whether granted under a
collective bargaining agreement or not
“
2. De minimis benefits as defined in the
rules and regulations to
promulgated by the Secretary of
Finance, upon recommendation of the
Commissioner.
3. 13th Month Pay and Other Benefits. -
Gross benefits received by officials and
employees of public and private
entities: Provided, however, That the
total exclusion under this
subparagraph shall not exceed Thirty
thousand pesos (P30,000) which shall
cover:
(i) Benefits received by officials and
employees of the national and local
government pursuant to Republic Act No.
6686;
(ii) Benefits received by employees
pursuant to Presidential Decree No. 851, as
132 CAINDAY, RAQUEL A.
amended by Memorandum Order No. 28,
dated August 13, 1986;
(iii) Benefits received by officials and
employees not covered by Presidential
decree No. 851, as amended by
Memorandum Order No. 28, dated August
13, 1986; and
(iv) Other benefits such as productivity
incentives and Christmas bonus: Provided,
further, That the ceiling of Thirty thousand
pesos (P30,000) may be increased through
rules and regulations issued by the
Secretary of Finance, upon
recommendation of the Commissioner,
after considering among others, the effect
on the same of the inflation rate at the end
of the taxable year.
Deductions from Gross Income:
1. Personal exemptions and additional
exemptions as allowed under R.A. 9504,
Section 4-A- “there shall be allowed a basic
be
personal exemption amounting to Fifty
thousand pesos (P50,000) for each
individual taxpayer. X-x-x; Section 4-B – “
Additional Exemption for Dependents. -
There shall be allowed an additional
exemption of Twenty-five thousand pesos
(25,000) for each dependent not exceeding
four (4).”
2. Health and hospitalization insurance - M)
Premium Payments on Health and/or
Hospitalization Insurance of an Individual
Taxpayer. - the amount of premiums not to
exceed Two thousand four hundred pesos
(P2,400) per family or Two hundred pesos
(P200) a month paid during the taxable
year for health and/or hospitalization
insurance taken by the taxpayer for
himself, including his family, shall be
allowed as a deduction from his gross
income: Provided, That said family has a
GROSS INCOME
 AMILING, BEBER, CAINDAY,CONEJERO, FERUELO & LIAO TAXATION LAW REVIEWER FOR THE 2011 BAR
gross income of not more than Two
hundred fifty thousand pesos (P250,000)
for the taxable year: Provided, finally, That
in the case of married taxpayers, only the
spouse claiming the additional exemption
for dependents shall be entitled to this
deduction.”
3. Taxation of compensation income of a
minimum wage earner
Definition of Terms per R.A. 9504:
Statutory Minimum Wage "(GG) the term
'statutory minimum wage' shall refer to
rate fixed by the Regional Tripartite Wage
and Productivity Board, as defined by the
Bureau of Labor and Employment Statistics
(BLES) of the Department of Labor and
Employment (DOLE)
"(HH) the term 'minimum wage earner'
shall refer to a worker in the private sector
paid the statutory minimum wage, or to an
employee in the public sector with
compensation income of not more than
the statutory minimum wage in the non-
agricultural sector where he/she is
assigned."
4. R.A. 9504 Section 2(2) second
paragraph to wit: “That minimum wage
earners as defined in Section 22 (HH)
of this Code shall be exempt from the
payment of income tax on their taxable
income: Provided, further, That the
holiday pay, overtime pay, night shift
differential pay and hazard pay
received by such minimum wage
earners shall likewise be exempt from
income tax.
Taxation of Business Income/Income from
Practice of Profession:
Under Section 32 A-2 Gross income derived
from the conduct of trade or business or the
GROSS INCOME
exercise of profession shall also be included in the
computation of the Taxable Income defined under
Section 31(Net Income Tax), less the deductions
and/or personal and additional exemption,
authorized by the Code.
Taxation of Passive Income:
Passive Income Subject to Final Tax:
As discussed by Sababan, pp45-46:
a) Interest Income – To be considered
passive, the interest income must come from
sources within the Philippines. The rate of 20% is
generally applicable. However, for interest income
received by an individual taxpayer, except a non-
resident individual, from a depositary bank under
the expanded foreign currency system, a final tax
of 7.5% is applicable. Further, for interest income
from long term deposit or investment, such income
shall be exempt from final income tax but should
the holder of the deposit or investment pre-
terminate such before the 5th year, a final tax shall
be imposed at the following rate: a) 4 years to less
than 5 years – 5%; b) 3 years to less than 4 years –
12%; c) less than 3 years – 20%.
b) Royalties – Income from royalty must be
derived from sources within the Philippines to
constitute passive income. The general rule is that
income from royalties are subject to a final income
tax rate of 20%. However, for those derived from
books, other literary works and musical
compositions, a final income tax rate of 10% is
applicable.
c) Dividends from domestic corporation –
There are 2 types of dividends under this section,
cash and property dividends. Stock dividends are
generally not taxable since such dividends are only
a transfer of the surplus profit from the retained
CAINDAY, RAQUEL A. 133
 AMILING, BEBER, CAINDAY,CONEJERO, FERUELO & LIAO TAXATION LAW REVIEWER FOR THE 2011 BAR
earnings to the authorized capital stock. The
dividends shall be subject to a final income tax rate
of 10%. For dividend income to be considered
passive, the dividends must be issued by a
domestic corporation or partnership except,
general professional partnership. The share of a
partner in a general professional partnership is
exempt from the final tax, however, each partner
shall be liable for net income tax in their separate
and individual capacities.
d) Prizes and Winnings – With respect to
prizes the following elements must be present to
constitute passive income: a) must be derived from
sources within the Philippines; b) must be more
than P10,000; c) must be pursuant to a promotion
or contest. Exception are those prizes with the
following elements: a) received primarily in
recognition of religious, charitable, scientific,
educational, artistic, literary, or civic achievement;
b) the recipient was selected without any action on
his part to enter the contest or proceeding; c) the
recipient is not required to render substantial
future services as a condition to receiving the prize
or award, in which case, the recipient is not liable
for the tax.
Winnings on the other hand are not
subject to limitation of P10,000 unlike prizes. A
winning to be considered passive must be derived
from sources within the Philippines. Winnings are
subject to final tax rate of 20%, including those
from gambling, except those from Lotto and PCSO.
Passive Income not subject to final tax:
Interests, royalties, dividends, prizes and
winnings derived from sources without are not
considered passive income, thus, must be included
by the individual taxpayer in his net income tax.
The individual taxpayer liable is the RC.
134 CAINDAY, RAQUEL A.
Taxation of Capital Gains:
1) Income from sale of shares of stock of
a Philippine Corporation:
a) Shares traded in and listed in the stock
exchange – Section 127 A (Other
Percentage Taxes) - “Tax on Sale,
Barter or Exchange of Shares of Stock
Listed and Traded through the Local
Stock Exchange. - There shall be levied,
assessed and collected on every sale,
barter, exchange, or other disposition
of shares of stock listed and traded
through the local stock exchange other
than the sale by a dealer in securities, a
tax at the rate of one-half of one
percent (1/2 of 1%) of the gross selling
price or gross value in money of the
shares of stock sold, bartered,
exchanged or otherwise disposed
which shall be paid by the seller or
transferor.”
b) Shares not listed and traded in the
Stock Exchange – Section 24 C – Although
the shares under this provision are capital
assets, the rule on the Holding Period does
not apply as expressly provided by the
Code. The rationale behind this is that the
basis of the tax is the net capital gain and
not the length of time by which the
taxpayer held the shares of stock. The final
income tax is not only applicable for sales
of shares. Barter exchange or other
disposition of shares are likewise subject to
final income tax. Under Section 4 C, the net
capital gains from sale, barter, exchange or
other disposition of shared of stock in a
domestic corporation not listed and traded
in the stock exchange is subject to a final
tax rate of: a) 5% for the first P100,000 of
the net capital gain; b) 10% of the net
capital gain of any amount in excess of
P100,000.
GROSS INCOME
 AMILING, BEBER, CAINDAY,CONEJERO, FERUELO & LIAO TAXATION LAW REVIEWER FOR THE 2011 BAR
Suppose, the shares are from a foreign
corporation, what then is the income tax
liability? In this case, the place where the
shares are sold is material.
2) Income from the sale of real property
situated in the Philippines:
Discussion by Sababan pp. 50-51 (Section
24 D)
A final income tax of 6% based on
the gross selling price or fair market value,
whichever is higher, shall be imposed on
capital gains presumed to have been
realized from the sale, exchange or other
disposition of real property located in the
Philippines classified as capital asset. To be
classified as capital asset subject to final in
come tax the following element must be
present: a) the property sold is real
property; b) located in the Philippines; c)
classified as a capital asset.
First, the property must be a real
property. In case the seller is an individual,
estate or trust, the real property subject of
the provision refers to the immovable
property under Article 415 of the Civil
Code. If the seller is a corporation, the real
property referred to only includes land
and/or buildings.
Second, the real property must be
located in the Philippines. Consequently if
the real property is located outside the
Philippines, the final income tax is
inapplicable.
Lastly, the real property must be
classified as a capital asset. Consequently,
if the real property is classified as an
ordinary asset, the income tax prescribed
GROSS INCOME
herein (final income tax) is not applicable.
The applicable tax depends on the status of
the taxpayer.
As expressly provided by the Code,
the Holding Period is inapplicable under
this provision, although the asset involved
is a capital asset.
In case, however, of sale or other
disposition in favor of the government or
any of its political subdivision or agencies
or government owned or controlled
corporation, the taxpayer has a choice,
either: a) to pay by way of the final income
tax or 2) by way of the net income tax.
In case of mortgaged properties
sold at public auction, RR No. 4-99 provides
for the rule. If the buyer is other than a
financial institution, ever sale, even though
there exists a right of redemption, shall be
subject to final income tax. If the buyer is a
bank or a financial institution, the sale is
not immediately subject to final income tax
since there is no change in ownership yet.
It is only after the lapse of the period for
redemption and the mortgagor-seller did
not redeem the property will the sale be
subject to final income tax..
An exception the final income tax
liability for sale, exchange or other
disposition of real property is provided by
the Code – pertaining to sale or disposition
of the principal residence by natural
persons. The same shall be exempt from
the final income tax, provided: a) the
property sold or otherwise disposed of is
the principal residence of the taxpayer; b)
the proceeds of which is fully utilized in
acquiring or constructing a new principal
CAINDAY, RAQUEL A. 135
 AMILING, BEBER, CAINDAY,CONEJERO, FERUELO & LIAO TAXATION LAW REVIEWER FOR THE 2011 BAR
residence; c) the acquisition or
construction of the new residence is within
18 months from the dale of sale or
disposition; d) the historical cost or
adjusted basis of real property sold or
disposed shall be carried over to the new
principal residence built or acquired; e) the
taxpayer should inform the BIR of his
intention to avail of the exemption within
30 days from the sale or disposition and f)
the tax exemption can only be availed of
once every 10 years. If there is no full
utilization of the proceeds of sale or
disposition, the portion of the gain
presumed to have been realized from the
sale or disposition shall be subject to final
income tax. For this purpose, the gross
selling price or fair market value at the
time of sale whichever is higher, shall be
multiplied by a fraction which the
unutilized amount bears to the gross
selling price in order to determine the
taxable portion and final income tax shall
be imposed.
11) Taxation of Non-Resident Alien Engaged in
Trade or Business (NRAETB) - Section 25. Tax on
Nonresident Alien Individual. -
“(A) Nonresident Alien Engaged in trade or
Business Within the Philippines. -
(1) In General. - A nonresident alien
individual engaged in trade or business in the
Philippines shall be subject to an income tax in the
same manner as an individual citizen and a
resident alien individual, on taxable income
received from all sources within the Philippines. A
nonresident alien individual who shall come to the
Philippines and stay therein for an aggregate
period of more than one hundred eighty (180) days
during any calendar year shall be deemed a
136 CAINDAY, RAQUEL A.
'nonresident alien doing business in the
Philippines'. Section 22 (G) of this Code
notwithstanding. “- Section 25 A-1
Discussion by Sababan, p. 53 – A NRAETB
in the Philippine is subject to the net income tax
and is liable only for income derived from sources
within the Philippines
Section 25 A-(2)- “Cash and/or Property
Dividends from a Domestic Corporation or Joint
Stock Company, or Insurance or Mutual Fund
Company or Regional Operating Headquarter or
Multinational Company, or Share in the
Distributable Net Income of a Partnership (Except a
General Professional Partnership), Joint Account,
Joint Venture Taxable as a Corporation or
Association., Interests, Royalties, Prizes, and Other
Winnings. - Cash and/or property dividends from a
domestic corporation, or from a joint stock
company, or from an insurance or mutual fund
company or from a regional operating headquarter
of multinational company, or the share of a
nonresident alien individual in the distributable net
income after tax of a partnership (except a general
professional partnership) of which he is a partner,
or the share of a nonresident alien individual in the
net income after tax of an association, a joint
account, or a joint venture taxable as a corporation
of which he is a member or a co-venturer;
interests; royalties (in any form); and prizes (except
prizes amounting to Ten thousand pesos (P10,000)
or less which shall be subject to tax under
Subsection (B)(1) of Section 24) and other winnings
(except Philippine Charity Sweepstakes and Lotto
winnings); shall be subject to an income tax of
twenty percent (20%) on the total amount thereof:
Provided, however, that royalties on books as well
as other literary works, and royalties on musical
compositions shall be subject to a final tax of ten
percent (10%) on the total amount thereof:
Provided, further, That cinematographic films and
GROSS INCOME
 AMILING, BEBER, CAINDAY,CONEJERO, FERUELO & LIAO TAXATION LAW REVIEWER FOR THE 2011 BAR
similar works shall be subject to the tax provided
under Section 28 of this Code: Provided,
furthermore, That interest income from long-term
deposit or investment in the form of savings,
common or individual trust funds, deposit
substitutes, investment management accounts and
other investments evidenced by certificates in such
form prescribed by the Bangko Sentral ng Pilipinas
(BSP) shall be exempt from the tax imposed under
this Subsection: Provided, finally, that should the
holder of the certificate pre-terminate the deposit
or investment before the fifth (5th) year, a final tax
shall be imposed on the entire income and shall be
deducted and withheld by the depository bank
from the proceeds of the long-term deposit or
investment certificate based on the remaining
maturity thereof:
Four years to less than five years
5%
Three years to less than four years
12%
Less than three years
20%
Discussion by Sababan, pp. 53-54:
Final income tax of 20% is imposed on
dividends, interests, royalties prizes and other
winnings received from sources within the
Philippines by a NRAETB. By way of exception, with
respect to prizes amounting to P10,000 or less, the
tax applicable is the net income tax. Also prizes
from PCSO and Lotto are exempt from income tax.
Royalties on books as well as other literary
works an on musical compositions are subject to a
final income tax of only 10% on the total amount
thereof.
GROSS INCOME
Interest income from long-term deposit or
investment is exempt from tax. However, in case of
pre-termination by the taxpayer of the long-term
deposit or investment, such shall be subject to final
income tax as provided for in the Code.
Section 25 A-(3) – “Capital Gains. - Capital
gains realized from sale, barter or exchange of
shares of stock in domestic corporations not
traded through the local stock exchange, and real
properties shall be subject to the tax prescribed
under Subsections (C) and (D) of Section 24.”
The tax treatment of capital gains derived
by a NRAETB from sources within the Philippines is
the same as that of a RC.
12. Nonresident Alien Individual Not Engaged in
Trade or Business Within the Philippines – Section
25 B (excluded in the coverage)
13. Individual Taxpayers Exempt from Income Tax:
a. Senior citizens – Expanded Senior
Citizens Act of 2010 (R.A. 9994) Section 4-9(b) - “
exemption from the payment of individual income
taxes of senior citizens who are considered to be
minimum wage earners in accordance with
Republic Act No. 9504”
The Bureau of Internal Revenue recently
issued Revenue Regulations No. 07-10 (the
“Regulations”), which implement Republic Act No.
9994, otherwise known as the Expanded Senior
Citizens Act of 2010.
The major provisions of the Regulations include the
following:
Income tax and other taxes (Source: Tax Law,
Leoterica)
CAINDAY, RAQUEL A. 137
 AMILING, BEBER, CAINDAY,CONEJERO, FERUELO & LIAO TAXATION LAW REVIEWER FOR THE 2011 BAR
In general, Senior Citizens must file income tax
returns and pay income tax. However, the Senior
Citizen is exempt from paying income tax if his
returnable income is in the nature of
compensation income and he qualifies as a
minimum wage earner under RA No. 9504. The
Senior Citizen is also exempt from income tax if the
aggregate amount of gross income earned by the
Senior Citizen during the taxable year does not
exceed the amount of his personal exemptions
(basic and additional).
Under the Regulations, the Senior Citizen can avail
of income tax exemption only upon compliance
with certain requirements. These are:
1. the Senior Citizen must first be qualified as
such by the Commissioner of Internal Revenue or
his duly authorized representative (i.e., the
Revenue District Officer (RDO)) having jurisdiction
over the place where the Senior Citizen resides), by
submitting a certified true copy of his Senior
Citizen Identification Card (OSCA ID) issued by the
OSCA of the city or municipality where he resides;
2. the Senior Citizen must file a Sworn Statement
on or before January 31 of every year that his
annual taxable income for the previous year does
not exceed the poverty level as determined by the
NEDA thru the NSCB; and
3. if qualified, his name shall be recorded by the
RDO in the Master List of Tax-Exempt Senior
Citizens for that particular year, which the RDO is
mandatorily required to keep.
b.Exemption granted under international
agreements:
Example:
138 CAINDAY, RAQUEL A.
COMMISSIONER OF INTERNAL REVENUE vs.JOHN
GOTAMCO & SONS, INC. and THE COURT OF TAX
APPEALS (G.R. No. L-31092 February 27, 1987)
“The World Health Organization (WHO for short) is
an international organization which has a regional
office in Manila. As an international organization, it
enjoys privileges and immunities which are defined
more specifically in the Host Agreement entered
into between the Republic of the Philippines and
the said Organization on July 22, 1951. Section 11
of that Agreement provides, inter alia, that "the
Organization, its assets, income and other
properties shall be: (a) exempt from all direct and
indirect taxes. It is understood, however, that the
Organization will not claim exemption from taxes
which are, in fact, no more than charges for public
utility services; . . . “ x-x-x
The ruling of the Supreme Court:
“The Host Agreement, in specifically exempting the
WHO from "indirect taxes," contemplates taxes
which, although not imposed upon or paid by the
Organization directly, form part of the price paid or
to be paid by it. This is made clear in Section 12 of
the Host Agreement which provides:
While the Organization will not, as a general rule,
in the case of minor purchases, claim exemption
from excise duties, and from taxes on the sale of
movable and immovable property which form part
of the price to be paid, nevertheless, when the
Organization is making important purchases for
official use of property on which such duties and
taxes have been charged or are chargeable the
Government of the Republic of the Philippines shall
make appropriate administrative arrangements for
the remission or return of the amount of duty or
tax. (Emphasis supplied).
GROSS INCOME
 AMILING, BEBER, CAINDAY,CONEJERO, FERUELO & LIAO TAXATION LAW REVIEWER FOR THE 2011 BAR
The above-quoted provision, although referring
only to purchases made by the WHO, elucidates
the clear intention of the Agreement to exempt the
WHO from "indirect" taxation.
The certification issued by the WHO, dated January
20, 1960, sought exemption of the contractor,
Gotamco, from any taxes in connection with the
construction of the WHO office building. The 3%
contractor's tax would be within this category and
should be viewed as a form of an "indirect tax" On
the Organization, as the payment thereof or its
inclusion in the bid price would have meant an
increase in the construction cost of the building. “
Tax Exemption Under RP-US Military Bases
Agreement
COMMISSIONER OF INTERNAL REVENUE vs. FRANK
ROBERTSO (G.R. Nos. 70116-19 August 12, 1986)
The law and the facts of the case are so clear that
there is no room left for Us to doubt the validity of
private respondents' defense. In order to avail
oneself of the tax exemption under the RP-US
Military Bases Agreement: he must be a national of
the United States employed in connection with the
construction, maintenance, operation or defense,
of the bases, residing in the Philippines by reason
of such employment, and the income derived is
from the U.S. Government (Art. XII par. 2 of PI-US
Military Bases Agreement of 1947). Said
circumstances are all present in the case at bar.
Likewise, We find no justifiable reason to disturb
the findings and rulings of the lower court in its
decision reading as follows:
We find nothing in the said treaty provision that
justified the lifting of the tax exemption privilege of
GROSS INCOME
the petitioners (private respondents herein).
Respondent (petitioner herein) has grafted a
meaning other than that conveyed by the plain and
clear tenor of the Agreement. An examination of
the words used and the circumstances in which
they were used, shows the basic intendment "to
exempt all U.S. citizens working in the Military
Bases from the burden of paying Philippine Income
Tax without distinction as to whether born locally
or born in their country of origin." Ubi lex non
distinguit nec nos distinguere debemos (one must
not distinguish where the law does not distinguish)
(Emphasis supplied). Moreover, the ruling has
altered a satisfactorily settled application of the
exemption clause and has fallen short of measuring
up to the familiar principle of International Law
that, "The obligation to fulfill in good faith a treaty
engagement requires that the stipulations be
observed in their spirit as well as according to their
letter and that what has been promised be
performed without evasion, or subterfuge,
honestly and to the best of the ability of the party
which made the promise." (Kunz, The Meaning and
Range of the Norm (Pacta Sunt Servanda, 29 A.J.I.L.
180 (1945); cited in Freidmann, Lisstzyn, Pugh,
International Law (1969) 329). Somehow, the
ruling becomes an anacoluthon and a persiflage.
It bears repeating as so disclosed in the records
that the petitioners together with families upon
repatriation in 1945 had since acquired domicile
and residency in the United States. And, obtained
employment with the United States Federal
Service. Not until after several years of a hiatus,
petitioners did return to the Philippines not so
much of honoring a pledge nor of sentimental
journey but by reason of taking up assigned duties
with the United States military bases in the
Philippines where they were gainfully employed by
the U.S. Federal Government. The situation of the
petitioners is of no different mold as of the rest of
the U.S. civilian employees who continued to enjoy
CAINDAY, RAQUEL A. 139
 AMILING, BEBER, CAINDAY,CONEJERO, FERUELO & LIAO TAXATION LAW REVIEWER FOR THE 2011 BAR
the benefits of tax exemption under the
Agreement, Petitioners' circumstances before the
questioned ruling remained obtaining thru the
taxable years 1969-1972. It appears too much of a
stretch to hold petitioners straight-jacketed to an
irreversible situs of birth constraint and by reason
thereof deny altogether any opportunity to a
serendipitous enjoyment of a tax relief accorded in
the Agreement. Such a random quirk of pirouette
in the tax treatment fags sharply at odds with the
shared expectations of the high contracting parties.
This Court will not deem itself authorized to depart
from the plain meaning of the tax exemption
provision so explicit in terms and so searching in
extent. (Emphasis supplied) This does not however
foreclose the possibility of petitioners' coming to
roost in the country contingent upon the
termination of their tour of duty, but only then
may the bridge be crossed for tax purposes. (pp.
82-84, Record)
14. Taxation of Domestic Corporation – Section 27
a) Tax payable
1) Regular tax – Discussion by Sababan p.
57- In general a domestic corporation is liable for
net income tax because the Code says “taxable
income”. The net income tax is imposed at a rate
of 35% on all income derived from sources within
and without the Philippines.
2) Minimum Corporate Income Tax on
Domestic Corporations (MCIT) – Section 27 E:
“(1) Imposition of Tax. - A minimum
corporate income tax of two percent (2%)
of the gross income as of the end of the
taxable year, as defined herein, is hereby
imposed on a corporation taxable under
this Title, beginning on the fourth taxable
year immediately following the year in
which such corporation commenced its
140 CAINDAY, RAQUEL A.
business operations, when the minimum
income tax is greater than the tax
computed under Subsection (A) of this
Section for the taxable year.
(2) Carry Forward of Excess Minimum Tax. -
Any excess of the minimum corporate
income tax over the normal income tax as
computed under Subsection (A) of this
Section shall be carried forward and
credited against the normal income tax for
the three (3) immediately succeeding
taxable years.
(3) Relief from the Minimum Corporate
Income Tax Under Certain Conditions. -
The Secretary of Finance is hereby
authorized to suspend the imposition of
the minimum corporate income tax on any
corporation which suffers losses on
account of prolonged labor dispute, or
because of force majeure, or because of
legitimate business reverses.”
Discussion of Sababan pp. 73-74
a) Imposition of Tax – MCIT is
imposed on 2 corporations – the Domestic
Corporation (D) and the Resident Foreign
Corporation (RFC). Generally, these
corporations are liable b y way of the net
income tax. However, to discourage these
corporations from claiming too many
deductions to avoid the payment of tax,
the MCIT of 2% on the gross income is
imposed in lieu of the net income tax.
Further, the Code provides that the MCIT
of 2% is only applicable beginning the 4th
taxable year immediately following the
year in which the corporation started its
operation, hence, if the corporation
started its operation in 1997, the MCIT will
GROSS INCOME
 AMILING, BEBER, CAINDAY,CONEJERO, FERUELO & LIAO TAXATION LAW REVIEWER FOR THE 2011 BAR
be applicable beginning 2011, the 4th year
of operation.
b) Carry Forward of Excess
Minimum Tax – Any excess of the MCIT
over the net income tax shall be carried
forward and credited against the net
income tax for the 3 years immediately
succeeding taxable years:
Illustration: Corporation A, 2006 and 2007
NIT
MCIT
2006 P110,000
P200,000
2007 P300,000
P200,000
How much is Corporation A liable in 2006?
In 2007?
In 2006, Corporation A is liable for the
MCIT of P200,000 because it is higher than
the NIT. In 2007, A is liable for P210,000.
Since the NIT is higher, A is liable for the
NIT of P300,00, however, in 2006 A has
minimum corporate income tax carry over
of P90,000, the same should be deducted
from A’s tax due. (P200,000 less P110,000
equals P90,000), thus P300,000 less
P90,000 is P210,000. Compared with the
net capital loss carry over (NOLCO), the
MCIT can be carried over for the 3 years
immediately succeeding years. In the
illustration, the P90,000 excess MCIT
incurred in 2006 can be carried over for
the 3 years immediately succeeding years,
2007, 2008 and 2009.
GROSS INCOME
a) Relief from the MCI under
certain conditions – The Secretary of
Finance is authorized to suspend the
imposition of the MCIT of 2% on any
corporation which suffer losses on account
of 1) prolonged labor dispute; 2) force
majeure; 3) legitimate business reverses.
The Secretary is likewise authorized to
promulgate, upon the recommendation of
the Commissioner, the necessary
regulations that shall define the terms and
conditions under which he may suspend
the imposed of the MCIT in meritorious
cases.
b) Corporation exempt from
MCIT is the Non-resident Foreign
Corporation (NRFC)
c) Applicability of the MCIT
where a corporation is governed both
under the regular tax system and a special
income tax system - Based on the provision
of the Code, it is safe to conclude that the
MCIT of 2% cannot be imposed
simultaneously with the net income tax of
35%. Only one may be imposed, whichever
is higher.
Revenue Regulation No. 9-98 – “Issued
September 2, 1998 prescribes the regulations to
implement RA No. 8424 relative to the imposition
of the Minimum Corporate Income Tax (MCIT) on
domestic corporations and resident foreign
corporations. Specifically, an MCIT of 2% of the
gross income as of the end of the taxable year is
imposed upon any domestic corporations
beginning the 4th taxable year immediately
following the taxable year in which such
corporation commenced its business operations.
The MCIT will be imposed whenever such
operation has zero or negative taxable income or
whenever the amount of MCIT is greater than the
normal income tax due from such operation. In the
case of a domestic corporation whose operations
or activities are partly covered by the regular
income tax system and partly covered under a
CAINDAY, RAQUEL A. 141
 AMILING, BEBER, CAINDAY,CONEJERO, FERUELO & LIAO TAXATION LAW REVIEWER FOR THE 2011 BAR
special income tax system, the MCIT will apply on
operations covered by the regular income tax
system.
The Regulations will apply to domestic and
resident foreign corporations on their
aforementioned taxable income derived beginning
January 1, 1998 pursuant to the pertinent
provisions of RA 8424, provided, however, that
corporations using the fiscal year accounting
period and which are subject to MCIT on income
derived pertaining to any month or months of the
year 1998 will not be imposed with penalties for
late payment of the tax.”
b) Allowable Deductions:
1) Itemized deductions – these deductions
are found under Section 34 of the Code,
are amounts authorized to be subtracted
from gross income to arrive at taxable
income (Villanueva, p. 107), include the
following:
a. Ordinary and necessary trade,
business or professional expenses
b. Interest expense
c. Taxes
d. Losses
e. Bad Debts
f. Depreciation
g. Depletion of oil and gas well and
mines
h. Charitable and other contributions
i. Research and development
j. Pension trusts
k.
2) Optional Standard Deduction - Section 34
L:
In lieu of itemized deduction, an individual
taxpayer, other than a non-resident alien, may
elect a standard deduction in an amount not
exceeding 10% of his gross income. Unless he
signifies his intention in his income tax return to
elect the optional standard deduction, he is
142 CAINDAY, RAQUEL A.
considered as having availed of the itemized
deductions. The election when made in the return
is irrevocable for the taxable year for which the
return is made and the taxpayers shall not be
required to submit any financial statements with
his return. (Villanueva, p. 108)
c) Taxation of Passive Income:
1) Passive Income Subject to Tax – Section
27 D:
a)”Interest from Deposits and Yield or any
other Monetary Benefit from Deposit Substitutes
and from Trust Funds and Similar Arrangements,
and Royalties. - A final tax at the rate of twenty
percent (20%) is hereby imposed upon the amount
of interest on currency bank deposit and yield or
any other monetary benefit from deposit
substitutes and from trust funds and similar
arrangements received by domestic corporations,
and royalties, derived from sources within the
Philippines: Provided, however, That interest
income derived by a domestic corporation from a
depository bank under the expanded foreign
currency deposit system shall be subject to a final
income tax at the rate of seven and one-half
percent (7 1/2%) of such interest income.”(Codal
provision)
Discussion by Sababan. P. 60 - Under the above
provision, there are 2 passive income mentioned:
1) bank interest and 2) royalties.
With respect to bank in interest, to be considered
passive, it must be derived from sources within the
Philippine s. It will be considered derived from
sources within the Philippines if the bank from
which the interest is earned is located in the
Philippines. Unlike the final income tax of
individuals, a DC is not exempt from final income
tax for long-term deposits.
GROSS INCOME
 AMILING, BEBER, CAINDAY,CONEJERO, FERUELO & LIAO TAXATION LAW REVIEWER FOR THE 2011 BAR
As regards royalties, the lower rate of 10% which is
applicable to individual taxpayers, does not apply
to DC. All royalties derived by DCs from sources
within the Philippines are subject to a final income
tax rate of 20%.
If the interest and royalty income are derived from
sources without the Philippines, the DC is liable to
pay the net income tax.
b) “Capital Gains from the Sale of Shares
of Stock Not Traded in the Stock
Exchange. - A final tax at the rates
prescribed below shall be imposed on
net capital gains realized during the
taxable year from the sale, exchange or
other disposition of shares of stock in a
domestic corporation except shares
sold or disposed of through the stock
exchange:
Not over P100,000
5%
Amount in excess of P100,000
10%
Discussion by Sababan, p. 60 – The rules on
individuals are also applicable to DC. The capital
gains from the sale of shares of stock not traded in
the stock exchange shall be subject to final income
tax provided the elements are present.
c) “Tax on Income Derived under the
Expanded Foreign Currency Deposit System. -
Income derived by a depository bank under the
expanded foreign currency deposit system from
foreign currency transactions with local
commercial banks, including branches of foreign
banks that may be authorized by the Bangko
Sentral ng Pilipinas (BSP) to transact business with
foreign currency depository system units and other
depository banks under the expanded foreign
currency deposit system, including interest income
from foreign currency loans granted by such
depository banks under said expanded foreign
GROSS INCOME
currency deposit system to residents, shall be
subject to a final income tax at the rate of ten
percent (10%) of such income.
Any income of non-residents, whether
individuals or corporations, from transactions with
depository banks under the expanded system shall
be exempt from income tax.” (Codal provision)
Discussion by Sababan, p. 61m- A bank
under a foreign currency deposit system is bank
which is authorized by the Bangko Sentral ng
Pilipinas (BSP) to transact business in Philippine
currency and all acceptable foreign currency. The
depositary bank is the income earner, liable to the
net income tax of 35%.
However, when the depositary bank under
the expanded foreign currency deposit system
transacts with the following its income therefrom
is exempt from net income tax: 1) non-residents; 2)
offshore banking units of the Philippines, 3) local
commercial banks, 4) branches of foreign banks
that may be authorized by the BSP to transact
business with foreign currency deposit systems
units; 5) other depository banks under the
expanded foreign currency deposit system.
With regard to foreign currency loans
granted by such depository banks under the
expanded foreign currency deposit system to: 1)
residents other than offshore banking units in the
Philippines; 2) other depository banks under the
expanded systems, the income derived therefrom
shall be subject to a final in come tax at the rate of
10%.
d) Inter-corporate dividends – ‘Dividends
received by a domestic corporation from another
domestic corporation shall not be subject to tax.”
(Codal provision)
CAINDAY, RAQUEL A. 143
 AMILING, BEBER, CAINDAY,CONEJERO, FERUELO & LIAO TAXATION LAW REVIEWER FOR THE 2011 BAR
Discussion by Sababan, p. 61 – Under this
provision, the domestic corporation is the
stockholder of another domestic corporation.
Being a stockholder, it is entitled to dividends. The
dividends received by it is not subject to tax or
exempt.
e) Capital Gains Realized from the Sale,
Exchange or Disposition of Lands and/or Buildings.
- A final tax of six percent (6%) is hereby imposed
on the gain presumed to have been realized on the
sale, exchange or disposition of lands and/or
buildings which are not actually used in the
business of a corporation and are treated as capital
assets, based on the gross selling price of fair
market value as determined in accordance with
Section 6(E) of this Code, whichever is higher, of
such lands and/or buildings. (Codal provision)
Discussion by Sababan, p. 62 – A final income
tax rate of 6% is imposed on the gain presumed to
have been realized on the sale, exchange or
disposition of lands and/or buildings which are
classified as capital assets based on the gross
selling g price or fair market value, whichever is
higher. The rules on individual taxpayers with
respect to sale of real property which is a capital
asset located in the Philippines is also applicable to
domestic corporation, however, the real property
which can be subject under this provision are only
land and/or buildings, unlike in the case of
individuals which includes all the immovable
property enumerated in Article 415 of the Civil
code.
3) Passive Income Not subject to Tax – As can
be deduced from above discussions, the
passive income not subject to tax are: 1)
inter corporate dividends received by a DC
from another DC.
c) Taxation of Capital gains – Section 40 A
144 CAINDAY, RAQUEL A.
1) Income from sale of shares of stocks –
2) Income from sale of real property
situated in the Philippines
3) Income from the sale, exchange or
other disposition of other capital
assets
Discussion of Sababan, pp. 126-127 –
Computation of Gain or Loss: This shall be
applicable to net income tax only since it the only
tax where the determination of gain or loss is
material. The gain from the sale or other
disposition of property refers to the excess of the
amount realized therefrom over the basis or
adjusted basis for determining gain. On the other
hand, the loss shall refer to the excess of the basis
or adjusted basis for determining loss over the
amount realized.
For this purpose, the “amount realized
from the sale or other disposition of property” is
defined as the sum of money received plus the fair
market value (FMV) of the property (other than
money) received.
With respect to personal property the gain
or loss should always be determined since any gain
or loss from the sale of such property is subject to
the net income tax with the exception of the gain
from sale of shares of stocks not traded which is a
capital asset which is subject to final income tax
but even in the sale thereof, the gain or loss should
be determined since it is the basis of the tax.
As regards real property, it should first be
determined whether the real property is a capital
asset or not. If the property is a capital asset the
gain or loss is immaterial since the basis of the tax
is the FMV or assessed value of the property. Any
sale of such capital asset is subject to final income
tax. Its only when the real property is an ordinary
asset where the gain or loss is material since it is
subject to the net income tax.
GROSS INCOME
 AMILING, BEBER, CAINDAY,CONEJERO, FERUELO & LIAO TAXATION LAW REVIEWER FOR THE 2011 BAR
d) Tax on proprietary educational
institutions and hospitals – Section 27
B “Proprietary Educational Institutions
and Hospitals. - Proprietary
educational institutions and hospitals
which are nonprofit shall pay a tax of
ten percent (10%) on their taxable
income except those covered by
Subsection (D) hereof: Provided, that if
the gross income from unrelated trade,
business or other activity exceeds fifty
percent (50%) of the total gross
income derived by such educational
institutions or hospitals from all
sources, the tax prescribed in
Subsection (A) hereof shall be imposed
on the entire taxable income. For
purposes of this Subsection, the term
'unrelated trade, business or other
activity' means any trade, business or
other activity, the conduct of which is
not substantially related to the
exercise or performance by such
educational institution or hospital of its
primary purpose or function. A
'Proprietary educational institution' is
any private school maintained and
administered by private individuals or
groups with an issued permit to
operate from the Department of
Education, Culture and Sports (DECS),
or the Commission on Higher
Education (CHED), or the Technical
Education and Skills Development
Authority (TESDA), as the case may be,
in accordance with existing laws and
regulations
Discussion by Sababan, pp. 57-58 – The net
income tax rate imposed on domestic corporation
is 35%. By way of exception, proprietary
educational institutions and hospitals are liable for
net income tax at a rate of only 10%, provided the
following requisites should concur: 1) it must be a
stock and non-profit institution; 2) it must be a
private educational institution or hospital; 3) their
gross income from unrelated trade, business or
GROSS INCOME
other activity, if any, does not exceed 50% of their
gross income from all sources; 4) must been issued
a permit to operate from DECS, or CHED or TESDA.
Although the Code is silent, this provision
refers to a stock educational institution. This is in
relation with Section 30 H, which provides that a
non-stock and non-profit educational institution is
exempt from income tax for income received as
such. Thus, the one being subject to tax under
Section 27 B, is a stock and non-profit educational
institution. Further, a private educational
institution only is subject to this lower tax rate
because under Section 30 H, a government
educational institution is exempt from income tax.
Unrelated trade, business or other activity”
means any trade, business or other activity the
conduct of which is not substantially related to the
exercise or performance by such educational
institution or hospital of its primary purpose or
function.
f) Tax on Government-owned or
Controlled-Corporations, Agencies or
Instrumentalities (Section 27 C). – “The provisions
of existing special or general laws to the contrary
notwithstanding, all corporations, agencies, or
instrumentalities owned or controlled by the
Government, except the Government Service
Insurance System (GSIS), the Social Security System
(SSS), the Philippine Health Insurance Corporation
(PHIC), the Philippine Charity Sweepstakes Office
(PCSO) and the Philippine Amusement and Gaming
Corporation (PAGCOR), shall pay such rate of tax
upon their taxable income as are imposed by this
Section upon corporations or associations engaged
in s similar business, industry, or activity.”
Discussion by Sababan, p.59 – The
corporation enumerated in Section 27 C is subject
to tax, except: SSS, GSIS, PHIC, and PCSO. The tax
CAINDAY, RAQUEL A. 145
 AMILING, BEBER, CAINDAY,CONEJERO, FERUELO & LIAO TAXATION LAW REVIEWER FOR THE 2011 BAR
exemption of the exempt corporations from
income tax is without any condition or
qualification.
Does the exemption apply only to those
enumerated? No. Under Section 32 B(7)(b), the
Code provides that income from any public utility
or from the exercise of any essential governmental
function accruing to the Government of the
Philippines or to any political subdivision thereof
shall be considered an exclusion from income tax,
hence, exempt.
The exemption provided under Section 7 C
applied to those enumerated without any
qualification, while the exemption under Section
32 B(7)(b) is only applicable if the requirement is
met, otherwise, there is no exemption.
15. Taxation of Resident Foreign Corporation RFC)
– Section 28 A “Tax on Resident Foreign
Corporations. -
(1) In General. - Except as otherwise
provided in this Code, a corporation organized,
authorized, or existing under the laws of any
foreign country, engaged in trade or business
within the Philippines, shall be subject to an
income tax equivalent to thirty-five percent (35%)
of the taxable income derived in the preceding
taxable year from all sources within the
Philippines.
In the case of corporations adopting the
fiscal-year accounting period, the taxable income
shall be computed without regard to the specific
date when sales, purchases and other transactions
occur. Their income and expenses for the fiscal
year shall be deemed to have been earned and
spent equally for each month of the period.
The reduced corporate income tax rates
shall be applied on the amount computed by
146 CAINDAY, RAQUEL A.
multiplying the number of months covered by the
new rates within the fiscal year by the taxable
income of the corporation for the period, divided
by twelve.
Discussion by Sababan, p. 62, like a DC, RFC
is subject to the net income tax. However, unlike a
DC, RFC is only liable for income derived from
sources within the Philippines.
Section 28 A-2 – “Minimum Corporate
Income Tax on Resident Foreign Corporations. - A
minimum corporate income tax of two percent
(2%) of gross income, as prescribed under Section
27 (E) of this Code, shall be imposed, under the
same conditions, on a resident foreign corporation
taxable under paragraph (1) of this Subsection.”
RFC’s is also subject to MCIT in the same
manner as a DC
Tax on Certain Income of RFC – Section 28
A(7)
“Tax on Certain Incomes Received by a
Resident Foreign Corporation. -
(a) Interest from Deposits and Yield or any other
Monetary Benefit from Deposit Substitutes, Trust
Funds and Similar Arrangements and Royalties. -
Interest from any currency bank deposit and yield
or any other monetary benefit from deposit
substitutes and from trust funds and similar
arrangements and royalties derived from sources
within the Philippines shall be subject to a final
income tax at the rate of twenty percent (20%) of
such interest: Provided, however, That interest
income derived by a resident foreign corporation
from a depository bank under the expanded
foreign currency deposit system shall be subject to
a final income tax at the rate of seven and one-half
percent (7 1/2%) of such interest income.
GROSS INCOME
 AMILING, BEBER, CAINDAY,CONEJERO, FERUELO & LIAO TAXATION LAW REVIEWER FOR THE 2011 BAR
Provided, however, That a resident foreign
corporation shall be granted the option to be taxed
at fifteen percent (15%) on gross income under the
same conditions, as provided in Section 27 (A). “
(b) Income Derived under the Expanded
Foreign Currency Deposit System. - Income derived
by a depository bank under the expanded foreign
currency deposit system from foreign currency
transactions with local commercial banks including
branches of foreign banks that may be authorized
by the Bangko Sentral ng Pilipinas (BSP) to transact
business with foreign currency deposit system
units, including interest income from foreign
currency loans granted by such depository banks
under said expanded foreign currency deposit
system to residents, shall be subject to a final
income tax at the rate of ten percent (10%) of such
income.
Any income of nonresidents, whether
individuals or corporations, from transactions with
depository banks under the expanded system shall
be exempt from income tax.
(c) Capital Gains from Sale of Shares of
Stock Not Traded in the Stock Exchange. - A final
tax at the rates prescribed below is hereby
imposed upon the net capital gains realized during
the taxable year from the sale, barter, exchange or
other disposition of shares of stock in a domestic
corporation except shares sold or disposed of
through the stock exchange:
Not over P100,000………………… 5%
On any amount in excess of P100,000…… 10%
(d) Intercorporate Dividends. - Dividends
received by a resident foreign corporation from a
domestic corporation liable to tax under this Code
shall not be subject to tax under this Title.”
GROSS INCOME
(1) Discussion by Sababan, pp. 68-69 –
With respect to ) Interest from Deposits and Yield
or any other Monetary Benefit from Deposit
Substitutes, Trust Funds and Similar Arrangements
and Royalties, the same rule as that of DC applies
to RFC.
(2) ) Income Derived under the Expanded
Foreign Currency Deposit System – The rule on DC
are applicable to RFC, the difference is that under
Section 28 A-7(b), the income earner is a resident
foreign corporation depository bank under the
expanded foreign currency deposit system.
(3) Capital Gains from Sale of Shares of
Stock Not Traded in the Stock Exchange – the rule
on DC also applies to RFC.
(4) Intercorporate Dividends – Under this
provision, RFC is a stockholder of a DC. The
dividend received by RFC from a DC shall be
exempt from income tax..
Taxation of Non-Resident Foreign Corporation
(NRFC) – Section 28 B-1
“(1) In General. - Except as otherwise
provided in this Code, a foreign corporation not
engaged in trade or business in the Philippines
shall pay a tax equal to thirty-five percent (35%) of
the gross income received during each taxable year
from all sources within the Philippines, such as
interests, dividends, rents, royalties, salaries,
premiums (except reinsurance premiums),
annuities, emoluments or other fixed or
determinable annual, periodic or casual gains,
profits and income, and capital gains, except
capital gains subject to tax under subparagraphs
(C) and (d): Provided, That effective 1, 1998, the
rate of income tax shall be thirty-four percent
(34%); effective January 1, 1999, the rate shall be
thirty-three percent (33%); and, effective January
CAINDAY, RAQUEL A. 147
 AMILING, BEBER, CAINDAY,CONEJERO, FERUELO & LIAO TAXATION LAW REVIEWER FOR THE 2011 BAR
1, 2000 and thereafter, the rate shall be thirty-two
percent (32%)
Discussion by Sababan, p. 69 – NRFC is liable for
gross income tax at the rate of 35% on income
derived from sources within the Philippines. This
income includes: interest, dividends, rents,
royalties, salaries, premiums (except reinsurance
premiums), annuities, periodic or casual gains,
profits and income, and capital gains.
(2) Tax on Certain Income – Section 28 B-
1(5)
“(a) Interest on Foreign Loans. - A final withholding
tax at the rate of twenty percent 20%) is hereby
imposed on the amount of interest on foreign
loans contracted on or after August 1, 1986;
(b) Intercorporate Dividends. - A final
withholding tax at the rate of fifteen percent (15%)
is hereby imposed on the amount of cash and/or
property dividends received from a domestic
corporation, which shall be collected and paid as
provided in Section 57 (A) of this Code, subject to
the condition that the country in which the
nonresident foreign corporation is domiciled, shall
allow a credit against the tax due from the
nonresident foreign corporation taxes deemed to
have been paid in the Philippines equivalent to
twenty percent (20%) for 1997, nineteen percent
(19%) for 1998, eighteen percent (18%) for 1999,
and seventeen percent (17%) thereafter, which
represents the difference between the regular
income tax of thirty-five percent (35%) in 1997,
thirty-four percent (34%) in 1998, and thirty-three
percent (33%) in 1999, and thirty-two percent
(32%) thereafter on corporations and the fifteen
percent (15%) tax on dividends as provided in this
subparagraph;
(c) Capital Gains from Sale of Shares of
Stock not Traded in the Stock Exchange. - A final
148 CAINDAY, RAQUEL A.
tax at the rates prescribed below is hereby
imposed upon the net capital gains realized during
the taxable year from the sale, barter, exchange or
other disposition of shares of stock in a domestic
corporation, except shares sold, or disposed of
through the stock exchange:
Not over P100,000………………… 5%
On any amount in excess of P100,000…… 10%
Discussion by Sababan, 69-70 –
1) Interest on Foreign loans – A final
withholding tax at the rate of 20% is imposed on
the amount of interest of foreign loans. The
transaction contemplated here is one where the
lending is a non-resident foreign corporation and
the borrower is a domestic corporation.
This provision would be correlated with
Section 32 B-7(a) wherein interest on foreign loans
are subject to a final income tax of 20%, while
under Section 32 B-7(a), income received by a
foreign government fro investments in the
Philippines in loans, stocks, bonds or other
domestic securities, or from interest on deposits in
banks in the Philippines by: 1) foreign
governments, 2) financing institutions owned,
controlled or enjoying refinancing from foreign
governments; 3) international or regional financial
institutions established by foreign government, are
considered exclusions from gross income.
In Commissioner of Internal Revenue vs.
Mitsubishi Metal Corp. (151 SCRA 214), the
Supreme Court has the occasion to interpret this
twin provision. The Court held that the interest
income paid by the Philippine borrower to a
foreign lender is subject to Philippine income tax
although the loan is funded by Eximbank, a
financing institution owned, controlled, and
financed by the Japanese Government. Further, it
GROSS INCOME
 AMILING, BEBER, CAINDAY,CONEJERO, FERUELO & LIAO TAXATION LAW REVIEWER FOR THE 2011 BAR
was held that although Eximbank financed the loan
which was granted by the foreign lender to the
Philippine borrower, that did not make Eximbank
the lender.
The exemption under Section 32 B-7(a),
applies only where the lender is a foreign
government, or a financing institution owned,
controlled or enjoying refinancing from a foreign
government, or an international or regional
financial institution established by a foreign
government. There the lender does not fall under
any of those enumerated, the exemption from
income tax does not apply. (Exemption is
construed strictissimi juris against the taxpayer), In
contrast, the lender under Section 28 B-5(a) is only
NRFC, not a foreign government.
2.Intercorporate dividends – Among the
three corporate taxpayers, only the NRFC is liable
for dividends received by it from a DC.
Generally, such dividend income is subject
to the final income tax, by way of exception,
Section 28 B-5(b) provided that the amount of cash
and/or property dividends received from a DC by
NRFC shall be subject to final income tax at the
rate of 15%. This is on the condition that the
country in which the NRFC is domiciled, shall allow
a credit against the tax due from the NRFC. Taxes
deemed to have been paid in the Philippines shall
be equal to 20%, which represents the difference
between the regular income tax of 35% and the
15% tax on dividends.
Relevant to this is the Marubeni vs.
Commissioner (177 SCRA 500). Marubeni, a NRFC
located in Tokyo invested in AG&P, a DC, without
coursing the investment through its branch office
in the Philippines. When AG&P declared dividends,
it withheld the 15% final income tax on branch
profit remittance and 10% final income tax on
GROSS INCOME
intercorporate dividends before remitting the
dividends to Tokyo. Marubeni sought the refund of
the 15% final income tax on branch profit
remittances, claiming that the investment was
made directly by the Tokyo head office and was
therefore “not effectively connected” to its branch
operation in the Philippines. However, it accepted
liability for the 10% final income tax on
intercorporate dividends. The Supreme Court
found for the Government. It held that Marubeni is
liable for the 35% final income tax for the
dividends it received from AG&P unless its country
of domicile allows a “deemed credit” of 20% in
which case, the rate of the tax shall be 15%.
On motion for reconsideration, the
Supreme Court reversed itself in Procter & Gamble
vs. Commissioner, (204 SCRA 377), where it held
that actual payment is not required. What is
necessary is that the country of domicile of the
NRFC allows a tax credit of 20% for the taxes
“deemed paid” in the Philippines to be entitled to
the lower rate of 15%. This is known as the ‘tax
deemed paid credit” rule also know as the ‘tax
sparing” rule.
Further, in Wander vs. Commissioner (160
SCRA 573), the High Court allowed the application
of the tax deemed paid rule although there is no
law providing for a tax credit. In allowing the lower
rat of 15, the Court explained that although there
is no law in Switzerland, the country of domicile of
the NRFC, which allows a tax credit of 20% the
lower rate should still be allowed since the citizens
of Switzerland are only liable for income from
sources within their country, thus, there is no
provision in their laws providing for a tax credit for
taxes paid outside their country. In this case, there
in more reason to allow the lower tax rat of 15%
For these two rulings, it can be deduced
that there are 2 groups of countries which should
CAINDAY, RAQUEL A. 149
 AMILING, BEBER, CAINDAY,CONEJERO, FERUELO & LIAO TAXATION LAW REVIEWER FOR THE 2011 BAR
be considered: 1) the first group – those countries
which imposed tax on income derived from
sources within and without their countries; 2)
second group – those countries which imposed tax
on income derived from sources within their
countries only, for income derived outside, their
citizens are exempt.
For the first group, the lower rate of 15% is
applicable only if the country of their domicile
allows a tax credit of 20% for the taxes deemed
paid in the Philippines. If their law is silent, the
applicable rate is 35%. On the other hand, the 2nd
group is always subject to the tax rate of 15% since
their law is sent, not because there is no tax credit
provided, but because there is no law which
imposes tax on income derived outside their
counties.
2.Capital Gains from Sales of Shares of
Stock not Traded in the Stock Exchange – the rule
for DC also applies to NRFC.
Imposition of Improperly Accumulated Earnings
Tax - Section 29
(A) In General. - In addition to other taxes
imposed by this Title, there is hereby imposed for
each taxable year on the improperly accumulated
taxable income of each corporation described in
Subsection B hereof, an improperly accumulated
earnings tax equal to ten percent (10%) of the
improperly accumulated taxable income.
(B) Tax on Corporations Subject to
Improperly Accumulated Earnings Tax. -
(1) In General. - The improperly
accumulated earnings tax imposed in the
preceding Section shall apply to every corporation
formed or availed for the purpose of avoiding the
income tax with respect to its shareholders or the
150 CAINDAY, RAQUEL A.
shareholders of any other corporation, by
permitting earnings and profits to accumulate
instead of being divided or distributed.
(2) Exceptions. - The improperly
accumulated earnings tax as provided for under
this Section shall not apply to:
(a) Publicly-held
corporations;
(b) Banks and other non-
bank financial
intermediaries; and
(c) Insurance companies.
(C) Evidence of Purpose to Avoid Income
Tax. -
(1) Prima Facie Evidence. - the fact that any
corporation is a mere holding company or
investment company shall be prima facie evidence
of a purpose to avoid the tax upon its shareholders
or members.
(2) Evidence Determinative of Purpose. -
The fact that the earnings or profits of a
corporation are permitted to accumulate beyond
the reasonable needs of the business shall be
determinative of the purpose to avoid the tax upon
its shareholders or members unless the
corporation, by the clear preponderance of
evidence, shall prove to the contrary.
(D) Improperly Accumulated Taxable
Income. - For purposes of this Section, the term
'improperly accumulated taxable income' means
taxable income' adjusted by:
(1) Income exempt from tax;
GROSS INCOME
 AMILING, BEBER, CAINDAY,CONEJERO, FERUELO & LIAO TAXATION LAW REVIEWER FOR THE 2011 BAR

(2) Income excluded from gross that only DCs are liable to this tax and those which
income; are classified as closely held corporations. The term
'closely held corporation' means any corporation at
(3) Income subject to final tax; and least fifty percent (50%) in value of outstanding
capital stock or at least fifty percent (50%) of the
(4) The amount of net operating total combined voting power of all classes of stock
loss carry-over deducted; entitled to vote is owned directly or indirectly by or
for not more than twenty (20) individuals (as
And reduced by the sum of: defined under Section 157 of the Code and RR No.
2-2001).
(1) Dividends actually or
constructively paid; and The corporations exempted from the
application of improperly accumulated earnings tax
(2) Income tax paid for the taxable
according to the Code are: 1) publicly-held
year.
corporations; 2) banks and other non-bank
financial intermediaries; 3) insurance companies.
Provided, however, that for corporations
using the calendar year basis, the accumulated
However, RR No. 2-2001 adds the
earnings under tax shall not apply on improperly
following to the list: 1) taxable partnerships, 2)
accumulated income as of December 31, 1997. In
general professional partnerships’ 3) non-taxable
the case of corporations adopting the fiscal year
joint ventures; 4) enterprises located within the
accounting period, the improperly accumulated
PEZA and other economic zones. Therefore, there
income not subject to this tax, shall be reckoned,
are 7 corporation s which are exempted from this
as of the end of the month comprising the twelve
kind of tax.
(12)-month period of fiscal year 1997-1998.
Unlike the specifically exempted corporations
(E) Reasonable Needs of the Business. - For
listed in the Code, the second has no enumeration,
purposes of this Section, the term 'reasonable
that is – “that the improperly accumulated
needs of the business' includes the reasonably
earnings are for the reasonable needs of the
anticipated needs of the business.”
company.” “Reasonable needs of the Business”
includes the reasonable anticipated needs of the
Discussion by Sababan, pp. 76-79,
business.
Generally , atax of 10% is imposed on improperly
accumulated income , for the purpose of avoiding
Further, RR No. 2-2001 enumerates several
the income tax with respect to its shareholders or
instances: 1) Allowance for the increase in the
the shareholders of any other corporation, by
accumulation of earnings up to 100% of the paid
permitting the earnings and profits to accumulate
up capital of the corporations as of Balance Sheet
instead of being divided or distributed. In other
date, inclusive of accumulations taken fro other
words, this tax is imposed not only to encourage,
years; 2) Earnings reserved for definite corporate
but to compel corporations to declare dividends.
expansion projects or programs requiring
considerable capital expenditure as approved by
Although the Code is silent, only DC is
the Board of Directors or equivalent body; 3)
subject to this tax,. Under RR No. 2-2002, provides
GROSS INCOME CAINDAY, RAQUEL A. 151
 AMILING, BEBER, CAINDAY,CONEJERO, FERUELO & LIAO TAXATION LAW REVIEWER FOR THE 2011 BAR
Earnings reserved for building, plants or equipment
acquisition as approved by the Board of Directors
or equivalent body; 54) Earnings reserved for the
compliance with any loan covenant or pre-existing
obligation established under a legitimate business
agreement; 5) Earnings acquired by law or
applicable regulations to be retained by the
corporation or in respect of which there is legal
prohibition against its distribution; 6) In case of
subsidiaries of foreign corporations in the
Philippines, all undistributed earnings intended or
reserved for investment within the Philippines as
can be proven by corporate records and/or
relevant documentary evidence,
In Cyanamid vs Commissioner (322 SCRA
639), the Court ruled that the exemption by virtue
of reasonable needs of the corporation should be
supported by documentary evidence, minutes of
the meeting and a Board Resolution.
What is the difference between the two
exemptions? The enumerated corporations under
the Code, are exempted from the application of
the tax without qualification. By being such
corporation, they are automatically exempted. In
contrast, all other corporations are exempted
provided the qualification for exemption is met,
that is – that the improperly accumulated earnings
must be for the reasonable needs of the business.
If the corporation does not fall under the
two exceptions, is there an instance when said
corporation will be exempt? Yes. If it will be found
that there is no such accumulation, thus it will not
be liable.
Section 29 D defines improperly
accumulated taxable income as taxable income
adjusted by: 1) income exempt from tax; 2) income
excluded from tax; 3) income subject to final
income tax; 4) the amount of net operating loss
152 CAINDAY, RAQUEL A.
carry over deducted, and reduced by the sum of a)
dividends actually or construction paid; b) income
tax paid for the taxable year.
Section 29 C; RR No. 2-2001 (Evidence of
Purpose to Avoid Income Tax) - There are 2
instances to b considered, to wit: 1) the fact that a
company is a mere holding company or investment
company; 2) the fact that the earnings or profits of
a corporation are permitted to accumulate beyond
the reasonable needs of the business. The
presence of either of these two instances brings
about a prima facie evidence of the purpose to
avoid the payment of this tax. The intention of the
taxpayer at the time of accumulation is controlling
to determine whether the profits are accumulated
beyond the reasonable needs of the business.
Definiteness of plans coupled with actions taken
towards its consummation are essential.
Exemption From Tax on Corporation:
(Sababan, pp. 80-86)
The term 'corporation' shall include
partnerships, no matter how created or organized,
joint-stock companies, joint accounts (cuentas en
participacion), association, or insurance
companies, but does not include general
professional partnerships and a joint venture or
consortium formed for the purpose of undertaking
construction projects or engaging in petroleum,
coal, geothermal and other energy operations
pursuant to an operating consortium agreement
under a service contract with the Government.
'General professional partnerships' are
partnerships formed by persons for the sole
purpose of exercising their common profession, no
part of the income of which is derived from
engaging in any trade or business. (Section 22 B.)
Based on the definition, the first two exempt
entities from corporate income taxes can be
deduced. However, these are not the only entities
GROSS INCOME
 AMILING, BEBER, CAINDAY,CONEJERO, FERUELO & LIAO TAXATION LAW REVIEWER FOR THE 2011 BAR
which are exempt from corporate income tax.
These entities according to Sababan are as follows:
a. General Professional Partnership
(GPP) (Section 26)
“Tax Liability of Members of General
Professional Partnerships. - A general professional
partnership as such shall not be subject to the
income tax imposed under this Chapter. Persons
engaging in business as partners in a general
professional partnership shall be liable for income
tax only in their separate and individual capacities.
For purposes of computing the distributive
share of the partners, the net income of the
partnership shall be computed in the same manner
as a corporation.
Each partner shall report as gross income
his distributive share, actually or constructively
received, in the net income of the partnership.”
Discussion: It should be noted that not all
general professional partnerships are exempt from
corporate income tax. A general professional
partnership is partnership formed by persons for
the sole purpose of exercising their common
profession, no part of the income of which is
derived from engaging in any trade or business.
Any other partnership is liable for corporation
income tax.
As stated there are two requisites to be
met for GPP to be exempt from corporate income
tax, 1) it is formed by persons for the sole purpose
of exercising their common profession; 2) no part
of the income of which is derived from engaging in
any trade or business. However, the persons
engaged in a business as partners are liable for the
payment income tax in their separate and
individual capacity. Therefore, if the GPP is exempt
from corporate income tax because the requisites
GROSS INCOME
are present, the share of each partner is subject to
the income tax.
In computing the distributive share of each
partner, the net income of the partnership shall be
computed in the same manner as that of a
corporation. Each partner shall report as gross
income his distributive share, actually or
constructively received, in the net income of the
partnership.
If the requisites are absent, the exemption
cannot be applied, in which case the partnership is
deemed a corporation, hence liable for corporate
income tax. It is deemed to be a corporation if it
derives income from engaging in trade or business.
If the partnership is considered a corporation, thus
liable for corporate income tax, the share of each
partner, whether actually or constructively
received is deemed as dividend which is subject to
final income tax. However, if the income derived by
a GPP deemed as corporation is purely passive
income (i.e., interest income) still the partnership
is exempt from corporate income tax and the
partners are liable in their separate and individual
capacities. The reason for this rule is that being a
passive income, such income is not included in the
partnership’s annual return. It is not included in
the gross income since a separate return is filed for
income subject to final income tax. Thus, it is as if
the partnership did not earn any income other
than from the exercise of their profession.
b) Joint Venture Under a Service Contract
with the Government
Discussion: The joint venture which is
exempt from corporate income tax, is a merger of
two or more corporations for the purpose of
engaging in construction projects or energy
operations pursuant to a consortium agreement or
a service contract with the government. The
CAINDAY, RAQUEL A. 153
 AMILING, BEBER, CAINDAY,CONEJERO, FERUELO & LIAO TAXATION LAW REVIEWER FOR THE 2011 BAR
corporations comprising of the joint venture or
consortium must be engaged in the same line of
business. It is only the joint venture or consortium
itself which is exempt from corporate income tax,
not the income of each corporation comprising the
consortium or joint venture. Thus, each
corporation which is a member of the consortium
or joint venture is liable for corporate income tax.
(Batangas Land Transportation Co. vs. Collector,
102 Phil. 822)
c) Government-Owned or Controlled
Corporation (Section 27 C) – already discussed in
taxation of DC
d) Other Exempt corporations (Section 30)
Discussion: Section 30 enumerates the other
corporations exempt from corporate income tax.
Take note, however, that a corporation has its
shareholder or member and a partnership has its
partners. Although a corporation, organization,
association or partnership is exempt from
corporate income tax, the shareholders, members
or partners are not necessarily exempt from
income tax.
The exemption provided in Section 30, refers only
to the corporation, organization, association or
partnership, but not to the individual stockholders,
member and partners comprising them.
The following corporations are exempt r Section
30:
“The following organizations shall not be taxed
under this Title in respect to income received by
them as such:
(A) Labor, agricultural or horticultural
organization not organized principally for profit;
154 CAINDAY, RAQUEL A.
(B) Mutual savings bank not having a
capital stock represented by shares, and
cooperative bank without capital stock organized
and operated for mutual purposes and without
profit;
(C) A beneficiary society, order or
association, operating fort he exclusive benefit of
the members such as a fraternal organization
operating under the lodge system, or mutual aid
association or a nonstock corporation organized by
employees providing for the payment of life,
sickness, accident, or other benefits exclusively to
the members of such society, order, or association,
or nonstock corporation or their dependents;
(D) Cemetery company owned and
operated exclusively for the benefit of its
members;
(E) Nonstock corporation or association
organized and operated exclusively for religious,
charitable, scientific, athletic, or cultural purposes,
or for the rehabilitation of veterans, no part of its
net income or asset shall belong to or inures to the
benefit of any member, organizer, officer or any
specific person;
(F) Business league chamber of commerce,
or board of trade, not organized for profit and no
part of the net income of which inures to the
benefit of any private stock-holder, or individual;
(G) Civic league or organization not
organized for profit but operated exclusively for
the promotion of social welfare;
(H) A nonstock and nonprofit educational
institution;
(I) Government educational institution;
GROSS INCOME
 AMILING, BEBER, CAINDAY,CONEJERO, FERUELO & LIAO TAXATION LAW REVIEWER FOR THE 2011 BAR
(J) Farmers' or other mutual typhoon or
fire insurance company, mutual ditch or irrigation
company, mutual or cooperative telephone
company, or like organization of a purely local
character, the income of which consists solely of
assessments, dues, and fees collected from
members for the sole purpose of meeting its
expenses; and
(K) Farmers', fruit growers', or like
association organized and operated as a sales
agent for the purpose of marketing the products of
its members and turning back to them the
proceeds of sales, less the necessary selling
expenses on the basis of the quantity of produce
finished by them;
Notwithstanding the provisions in the
preceding paragraphs, the income of whatever
kind and character of the foregoing organizations
from any of their properties, real or personal, or
from any of their activities conducted for profit
regardless of the disposition made of such income,
shall be subject to tax imposed under this Code. “
Discussion by Sababan, pp. 84-86 – With
regard to the corporations enumerated in Section
30, the most important provision to be noted is the
last paragraph, which is an all-embracing provision,
applicable to all those enumerated.
The last paragraph implies that an exempt
corporation can be held liable for corporate
income tax if it derives income from: 1) any of their
property, real o personal; or 2) any of their
activities conducted for profit regardless of the
disposition made of such income. In these two
instances, although a corporation is one of those
enumerated as exempt fro corporate income tax, it
may still be held liable.
GROSS INCOME
Those enumerated corporation, are also
not exempt from all taxes. In this regard, the first
paragraph of the same Section which provides that
“the following organizations shall not be taxed
under this Title in respect to income received by
them as such: x-x” The paragraph implies that the
enumerated corporations are only exempted from
tax under “this Title” which refer to income tax.
Therefore, these corporations are exempt only
from income tax but not to other taxes.
In YMCA vs. Court of Appels (298 SCRA 83),
the Supreme Court ruled that since YMCA leased
rooms as a hotel, such activity is an activity
conducted for profit, hence, YMCA should be held
liable under the last paragraph of Section 30.
To illustrate further, say, a cemetery
company owned and operated exclusively for
benefit of its member, sell a piece of property,
what is the tax liability? By express provision of the
Code, this type of corporation is exempt from tax,
however, because the cemetery sold its property,
activity falls under the last paragraph for which the
cemetery will be held liable. It is now liable for
income tax for the income derived from the sale of
its property whether real or personal.
As the rule now stands Section 30 lays
down the general rule that the corporations
enumerated therein are exempt from income tax,
while the last paragraph thereof provides for the
exception.
CAINDAY, RAQUEL A. 155
 AMILING, BEBER, CAINDAY,CONEJERO, FERUELO & LIAO TAXATION LAW REVIEWER FOR THE 2011 BAR

20. TAXATION OF G.P.P. Formula

General professional partnership is an exempt Gross Income

corporation
LESS: OSD or Itemized Deduction
A general professional partnership is an
exempt corporation for purposes of income tax Net Income of the GPP
provided the following requisites concur:
DIVIDED BY: The number of the Partners
1. It is formed by persons for the sole
purpose of exercising their common Distributive Share of each Partner
profession; and
LESS: Premium on hospitalization& health
2. No part of the income of which is derived insurance
from engaging in any trade or business.
Personal and Additional Exemptions
On the other hand, if the two requisites are
absent, the exemption provided in Sec.22 (B) Taxable Income of Each Partner
cannot be applied. In that case, the partnership is
MULTIPLIED BY: Schedular Tax Rate
deemed a taxable corporation and is liable for
corporate income tax. (Sababan, Taxation Law Review,
p.80-81)
Income Tax Due from Each Partner

Professional partners are liable for income tax in
their separate and individual capacity
Under Section 26 of NIRC a general
professional partnership as such shall not be
subject to the income tax. Persons engaging in
business as partners in a general professional
partnership shall be liable for income tax only in
their separate and individual capacities.
Each partner shall report as gross income his
distributive share, actually or constructively
received, in the net income of the partnership.
The general professional partnership is
deemed to be no more than a mere mechanism or
a flow-through entity in the generation of income
by, and the ultimate distribution of such income to,
respectively, each of the individual partners. (Rufino
R. Tan vs. Ramon R. del Rosario, Jr., et al., G.R. No. 109289,
October 3, 1994)
Determination of each partners distributive share
For purposes of computing the distributive
share of the partners, the net income of the
partnership shall be computed in the same manner
as a corporation. (Sec.26 Par.2, NIRC)
LESS: Taxes Withheld on the Income or Tax Credits
Net Income Tax Payable
Any income of a GPP which is not derived
from the practice of profession is deemed to be
income of a business partnership and is taxable as
a corporation. (Domondon, Income Tax Reviewer II,
pp.179-182)
21. Taxation on Estates and Trusts
Estates under judicial settlement and trusts
irrevocable as to corpus (trust property) and as to
income are liable for income tax in the same
manner as an individual.
The status of the estate depends upon the
status of the decedent immediately prior to his
death. The status of the trust, on the other hand,
shall depend upon the status of the grantor,
trustor or creator of the trust.
a. APPLICATION OF TAX

156 AMILING, EVELYN S. ESTATE TAX, DONOR’S TAX, VAT, TAXPAYERS REMEDIES
 AMILING, BEBER, CAINDAY,CONEJERO, FERUELO & LIAO TAXATION LAW REVIEWER FOR THE 2011 BAR
Income tax shall apply to the income of estates
or of any kind of property held in trust, including:
1. Income accumulated in trust for the
benefit of unborn or unascertained person
or persons with contingent interests;
2. income accumulated or held for future
distribution under the terms of the will or
trust;
3. Income which is to be distributed currently
by the fiduciary to the beneficiaries;
4. income collected by a guardian of an infant
which is to be held or distributed as the
court may direct;
5. Income received by estates of deceased
persons during the period of
administration or settlement of the estate;
and
6. Income which, in the discretion of the
fiduciary, may be either distributed to the
beneficiaries or accumulated. (Sec.60 (A),
NIRC)
b. EXCEPTION
Income tax SHALL NOT BE IMPOSED on
employee's trust which forms part of a pension,
stock bonus or profit-sharing plan of an employer
for the benefit of some or all of his employees:
1. if contributions are made to the trust by
such employer, or employees, or both for
the purpose of distributing to such
employees the earnings and principal of
the fund accumulated by the trust in
accordance with such plan, and
2. if under the trust instrument it is
impossible, at any time prior to the
satisfaction of all liabilities with respect to
employees under the trust, for any part of
the corpus or income to be (within the
taxable year or thereafter) used for, or
diverted to, purposes other than for the
exclusive benefit of his employees.
ESTATE TAX, DONOR’S TAX, VAT, TAXPAYERS REMEDIES
However, income tax SHALL BE IMPOSED on
the EXCESS BETWEEN the amount actually
distributed and the amount contributed by such
employee or distribute under the trust in the year
in which it is distributed. (Sec. 60 (B), NIRC)
c. DETERMINATION OF TAX
1. Consolidation of income of two or more
trusts
Where, in the case of two or more trusts, the
creator of the trust in each instance is the same
person, and the beneficiary in each instance is the
same, the taxable income of all the trusts shall be
consolidated and the tax computed on such
consolidated income, and such proportion of said
tax shall be assessed and collected from each
trustee which the taxable income of the trust
administered by him bears to the consolidated
income of the several trusts. (Sec. 60 (C) (2), NIRC)
2. Taxable Income
Under Section 61 of NIRC the taxable income
of the estate or trust shall be computed in the
same manner and on the same basis as in the case
of an individual, except that certain additional
deductions are allowed.
Deductible expenses of an estate
The estate may deduct the following from the
gross income:
1. The same deductible expenses allowed to
an individual taxpayer; and
2. The amount of income of the estate which
is paid or credited to any legatee, heir or
beneficiary. (Co Untian, Tax Digest, pp. 78)
Deductible expenses of a trust
The trust may deduct the following from the
gross income:
1. The same deductible expenses allowed to
an individual taxpayer;
AMILING, EVELYN S. 157
 AMILING, BEBER, CAINDAY,CONEJERO, FERUELO & LIAO TAXATION LAW REVIEWER FOR THE 2011 BAR
2. The amount of the income of the trust
which is to be distributed currently to the
beneficiary; and
3. The amount of the income collected by the
guardian of an infant which is to be held or
distributed as the court may direct.(Co
Untian, Tax Digest, pp.81)
May taxable estate or trust allowed to claim
exemption?
Under Section 62 of NIRC there shall be
allowed an exemption of Twenty thousand pesos
(P20,000) from the income of the estate or trust.
Formula
The taxable income of estate or trust is arrived
at as follows:
Gross Income
LESS: Deductible Expenses
Income Distributed to Beneficiaries
Net Income
LESS: Exemption
Taxable Income
3. Revocable Trusts
A revocable trust is a trust where at any time
the power to revest in the grantor title to any part
of the corpus of the trust is vested:
1. in the grantor either alone or in
conjunction with any person not having a
substantial adverse interest in the
disposition of such part of the corpus or
the income therefrom; or
2. in any person not having a substantial
adverse interest in the disposition of such
part of the corpus or the income
therefrom.
158 AMILING, EVELYN S.
In the above, the income of such part of the
trust shall be included in computing the taxable
income of the grantor. (Sec. 63, NIRC)
4. Income for benefit of grantor
Where any part of the income of a trust (1) is,
or in the discretion of the grantor or of any person
not having a substantial adverse interest in the
disposition of such part of the income may be held
or accumulated for future distribution to the
grantor, or (2) may, or in the discretion of the
grantor or of any person not having a substantial
adverse interest in the disposition of such part of
the income, be distributed to the grantor, or (3) is,
or in the discretion of the grantor or of any person
not having a substantial adverse interest in the
disposition of such part of the income may be
applied to the payment of premiums upon policies
of insurance on the life of the grantor, such part of
the income of the trust shall be included in
computing the taxable income of the grantor.
5. Meaning of “in the discretion of the
grantor”
As used in Section 64 (B) of NIRC, the term 'in
the discretion of the grantor' means in the
discretion of the grantor, either alone or in
conjunction with any person not having a
substantial adverse interest in the disposition of
the part of the income in question.
22. WITHHOLDING TAX
a. CONCEPT
Income subject to “final tax” refers to an
income collected through the withholding tax
system. The payor of the income withholds the tax
and remits it to the government as a final
settlement of the income tax due on said income.
The recipient is no longer required to include the
income subjected to a final tax as part of his gross
income in his income tax return. (Domondon, Bar Star
Notes on Taxation (2010) p.23)
Reasons for devising the withholding tax system
ESTATE TAX, DONOR’S TAX, VAT, TAXPAYERS REMEDIES
 AMILING, BEBER, CAINDAY,CONEJERO, FERUELO & LIAO TAXATION LAW REVIEWER FOR THE 2011 BAR
The withholding tax system was devised for
two main reasons: first, to provide the taxpayer a
convenient manner to meet his probable income
tax liability; and second, to ensure the collection of
the income tax which could otherwise be lost or
substantially reduced through failure to file the
corresponding returns. To these, a third reason
may be added: to improve the government's cash
flow. (Citibank, N.A. vs. CA, et al., G.R. No. 107434, October
10, 1997, as cited in NIRC Manual for UV Class, p.39)
Taxes withheld are in the nature of payment by a
taxpayer in order to extinguish his possible tax
obligation.
A taxpayer, resident or non-resident who
contributes to the withholding tax system, does
not really deposit an amount to the Commissioner
of Internal Revenue, but, in truth, to perform and
extinguish his tax obligation for the year
concerned, he is paying his tax liabilities for that
year. Consequently, a taxpayer whose income is
withheld at the source will be deemed to have paid
his tax liability when the same falls due at the end
of the tax year. (Finley J. Gibbs, et al. vs. Commissioner of
Internal Revenue, et al., G.R. No. L-17406, November 29,
1965, as cited in NIRC Manual for UV Class, p.39)
Withholding agent
The following persons are constituted as
withholding agents:
1. In general, any juridical person, whether or
not engaged in trade or business;
2. An individual with respect to payments
made in connection with his trade or
business. However, insofar as taxable sale,
exchange or transfer of real property is
concerned, individual buyers who are not
engaged in trade or business are also
constituted as withholding agents; and
3. All government offices, including
government-owned or-controlled
corporations, as well as local government
units. ( Mamalateo, Reviewer on Tax, p.270)
The withholding agent is the agent of both the
Government and the taxpayer.
ESTATE TAX, DONOR’S TAX, VAT, TAXPAYERS REMEDIES
The withholding agent is constituted the agent
of both the Government and the taxpayer. With
respect to the collection and/or withholding of the
tax, he is the Government's agent. In regard to the
filing of the necessary income tax return and the
payment of the tax to the Government, he is the
agent of the taxpayer. The withholding agent,
therefore, is no ordinary government agent
because he is held personally liable for the tax he is
duty bound to withhold; whereas, the
Commissioner of Internal Revenue and his deputies
are not made liable by law. (Philippine Guaranty Co.,
Inc. vs. Commissioner of Internal Revenue, et al., G.R. No. L-
22074,September 6, 1965, as cited in NIRC Manual for UV
Class, p.40)
The payor-withholding agent is resident of the
Philippines
The power of the government to require the
withholding of tax extends only to taxpayers who
are residing (i.e. doing business within the
territorial jurisdiction of the Philippines). Thus,
nonresident foreign corporations and foreign
embassies in the Philippines may not be
constituted nor be compelled to act as withholding
agents of the government, because in case of non-
compliance with their duty to withhold, the
Philippines may not enforce its tax laws beyond its
territorial jurisdictions. (Mamalateo, Reviewer on
Taxation, p.268)
Commissioner may require withholding agents to
regularly pay or deposit the taxes withheld.
In line with this principle that taxes are the
lifeblood of the government and so should be
collected without unnecessary hindrance, the Tax
Code, provides that "the Commissioner of Internal
Revenue may, with the approval of the Secretary of
Finance, require the withholding agents to pay or
deposit the taxes deducted and withheld at more
frequent intervals when necessary to protect the
interest of the government. The return shall be
filed and the payment made within 25 days from
the close of each calendar quarter". (Commissioner of
Internal Revenue vs. Wyeth Suaco Laboratories, Inc., et al.,
G.R. No. 76281, September 30, 1991, as cited in NIRC Manual
for UV Class, p.40 )
Time to withhold tax
AMILING, EVELYN S. 159
 AMILING, BEBER, CAINDAY,CONEJERO, FERUELO & LIAO TAXATION LAW REVIEWER FOR THE 2011 BAR
Withholding tax shall be deducted and
withheld by the withholding agent when the
income payment is paid or payable or accrued
(Rev. Regs. No. 2-98, amended Sec.4, Rev. Regs.
No. 12-2001, Sept. 7, 2001), or the income
payment is accrued as an expense or asset,
whichever is applicable, in the payor’s books,
whichever comes first. The term “payable” refers
to the date the obligation becomes due,
demandable or legally enforceable.
Where the income is not yet paid or payable
but at the same time has been recorded as an
expense or asset, whichever is applicable, in the
payor’s books, the obligation to withhold shall arise
in the last month of the return period in which the
same is claimed as an expense or amortized for tax
purposes. (Mamalateo, Reviewer on Taxation, p.270)
The withholding tax liability may arise only
when the agent has possession, custody or control
of the funds remitted to and received by a non-
resident taxpayer. (Commissioner vs. Union Shipping
Corporation, 185 SCRA 547, as cited in Vitug-Acosta, Tax Law
and Jurisprudence, p.189)
b. KINDS
1) Withholding of final tax on certain income
Subject to rules and regulations the Secretary
of Finance may promulgate, upon the
recommendation of the Commissioner, requiring
the filing of income tax return by certain income
payees, the (1) final income tax on passive
incomes, (2) capital gains tax on sales of shares of
stocks and real properties, (3) fringe benefit tax
and (4) the 10% tax on cash rewards of informers
shall be withheld by payor-corporation and/or
person and paid in the same manner and subject to
the same conditions as provided in the Tax Code.
(Sec. 57 (A), NIRC)
2) Withholding of creditable tax at source
The Secretary of Finance may, upon the
recommendation of the Commissioner, require the
withholding of a tax on the items of income
payable to natural or juridical persons, residing in
the Philippines, by payor-corporation/persons as
provided for by law, at the rate of not less than one
160 AMILING, EVELYN S.
percent (1%) but not more than thirty-two percent
(32%) thereof, which shall be credited against the
income tax liability of the taxpayer for the taxable
year. (Sec. 57 (B), NIRC)
c. WITHHOLDING ON WAGES
1) Requirements for withholding
Every employer making payment of wages shall
deduct and withhold upon such wages a tax
determined in accordance with the rules and
regulations to be prescribed by the Secretary of
Finance, upon recommendation of the
Commissioner: Provided, however, That no
withholding of a tax shall be required where the
total compensation income of an individual does
not exceed the statutory minimum wage, or five
thousand pesos (P5,000.00) per month, whichever
is higher. (Sec. 79 (A), NIRC)
2) Tax paid by recipient
If the employer fails to deduct and withhold
the tax and thereafter the tax against which such
tax may be credited is paid, the tax so required to
be deducted and withheld shall not be collected
from the employer. But the employer shall be
liable for any penalty or addition to the tax
otherwise applicable in respect of such failure to
deduct and withhold. (Sec. 79 (B), NIRC)
3) Refunds or credits
When there has been an overpayment of tax,
refund or credit shall be made to the employer
only to the extent that the amount of such
overpayment was not deducted and withheld by
the employer.
The amount deducted and withheld during any
calendar year shall be allowed as a credit to the
recipient of such income against the tax imposed
under Section 24(A). Refunds and credits in cases
of excessive withholding shall be granted under
rules and regulations promulgated by the Secretary
of Finance, upon recommendation of the
Commissioner.
Any excess of the taxes withheld over the tax
due from the taxpayer shall be returned or
credited within three (3) months from the fifteenth
ESTATE TAX, DONOR’S TAX, VAT, TAXPAYERS REMEDIES
 AMILING, BEBER, CAINDAY,CONEJERO, FERUELO & LIAO TAXATION LAW REVIEWER FOR THE 2011 BAR
(15th) day of April. Refunds or credits made after
such time shall earn interest at the rate of six
percent (6%) per annum, starting after the lapse of
the three-month period to the date the refund of
credit is made.
Refunds shall be made upon warrants drawn
by the Commissioner or by his duly authorized
representative without the necessity of counter-
signature by the Chairman, Commission on Audit
or the latter's duly authorized representative as an
exception to the requirement prescribed by
Section 49, Chapter 8, Subtitle B, Title 1 of Book V
of Executive Order No. 292, otherwise known as
the Administrative Code of 1987. (Sec. 79 (C), NIRC)
Withholding agent has implied authority to file
claim for refund.
If the withholding agent is also an agent of the
beneficial owner of the dividends with respect to
the filing of the necessary income tax return and
with respect to actual payment of the tax to the
government, such authority may reasonably be
held to include the authority to file a claim for
refund and to bring an action for recovery of such
claim. This implied authority is especially
warranted where the withholding agent is the
wholly owned subsidiary of the parent-stockholder
and therefore, at all times, under the effective
control of such parent-stockholder. (Commissioner of
Internal Revenue vs. Procter & Gamble Philippine Mfg. Corp.,
G.R. No. 66838, December 2, 1991, as cited in NIRC Manual
for UV Class, p.40)
4) Year-end adjustment
On or before the end of the calendar year but
prior to the payment of the compensation for the
last payroll period, the employer shall determine
the tax due from each employee on taxable
compensation income for the entire taxable year in
accordance with Section 24(A). The difference
between the tax due from the employee for the
entire year and the sum of taxes withheld from
January to November shall either be withheld from
his salary in December of the current calendar year
or refunded to the employee not later than
January 25 of the succeeding year. (Sec. 79 (H), NIRC)
ESTATE TAX, DONOR’S TAX, VAT, TAXPAYERS REMEDIES
5) Liability for tax
The employer shall be liable for the
withholding and remittance of the correct amount
of tax required to be deducted and withheld. If the
employer fails to withhold and remit the correct
amount of tax as required to be withheld such tax
shall be collected from the employer together with
the penalties or additions to the tax otherwise
applicable in respect to such failure to withhold
and remit.
Where an employee fails or refuses to file the
withholding exemption certificate or willfully
supplies false or inaccurate information, the tax
otherwise required to be withheld by the employer
shall be collected from him including penalties or
additions to the tax from the due date of
remittance until the date of payment. On the other
hand, excess taxes withheld made by the employer
due to:
1. failure or refusal to file the withholding
exemption certificate; or
2. false and inaccurate information shall not
be refunded to the employee but shall be
forfeited in favor of the Government. (Sec.
80, NIRC)
d. WITHHOLDING ON VAT
Withholding Tax on Government Money
Payments (GMP) is the withholding tax withheld
by government offices and instrumentalities,
including government-owned or -controlled
corporations and local government units, before
making any payments to private individuals,
corporations, partnerships and/or associations.
(http://www.bir.gov.ph/taxinfo/taxinfo.htm)
Withholding Tax on GMP Value Added Taxes
(GVAT) is the tax withheld by National Government
Agencies (NGAs) and instrumentalities, including
government-owned and controlled corporations
(GOCCs) and local government units (LGUs), before
making any payments to VAT registered
taxpayers/suppliers/payees on account of their
purchases of goods and services.
(http://www.bir.gov.ph/taxinfo/taxinfo.htm)
AMILING, EVELYN S. 161
 AMILING, BEBER, CAINDAY,CONEJERO, FERUELO & LIAO TAXATION LAW REVIEWER FOR THE 2011 BAR
As a general rule, withholding tax does not
apply on transactions subject to VAT. The
exceptions to this rule are:
1. Gross payments by the government shall
be subject to the 5% withholding tax;
2. Gross payments by resident VAT-taxpayers
to non-resident foreign persons of rentals,
royalties, reinsurance premiums, and
services done in the Philippines-12%
(Sec114(C), NIRC). However, if the payor of
royalty is a PEZA-registered enterprise, the
10% VAT may not be passed on to it. Since
the enterprise is exempt from all direct and
indirect taxes under a special law (RA 7916,
as amended) and considering that the
services is done in a foreign territory, it is
not required to withhold and remit the
VAT. (BIR Ruling No. 009-08; Vat Ruling No.
005-2003). An “ecozone” is considered as a
special customs area which is considered
as a foreign territory by fiction of law.
Withholding of tax applies only to taxable
transactions. Thus, payment for the sale of live
dairy cows to a government agency, which is an
exempt transaction, is not subject to withholding
tax. (VAT Ruling No. 24-98, Sept.1, 1998, Mamalateo,
Reviewer on Taxation, p.393)
e. FILING OF RETURN AND PAYMENT OF TAXES
WITHHELD
Except as the Commissioner otherwise permits,
taxes deducted and withheld by the employer on
wages of employees shall be covered by a return
and paid to:
1. an authorized agent bank;
2. Collection Agent; or
3. the duly authorized Treasurer of the city or
municipality
a. where the employer has his legal
residence or principal place of
business, or
162 AMILING, EVELYN S.
b. in case the employer is a corporation,
where the principal office is located.
The return shall be filed and the payment
made within twenty-five (25) days from the close
of each calendar quarter.
The Commissioner may, with the approval of
the Secretary of Finance, require the employers to
pay or deposit the taxes deducted and withheld at
more frequent intervals, in cases where such
requirement is deemed necessary to protect the
interest of the Government.
The taxes deducted and withheld by employers
shall be held in a special fund in trust for the
Government until the same are paid to the said
collecting officers. (Sec. 81, NIRC)
1) Return and payment in case of
government employees
If the employer is the Government of the
Philippines or any political subdivision, agency or
instrumentality the return of the amount deducted
and withheld upon any wage shall be made by the
officer or employee having control of the payment
of such wage, or by any officer or employee duly
designated for the purpose. (Sec. 82, NIRC)
2) Statements and returns
Every employer required to deduct and
withhold a tax shall furnish to each such employee
in respect of his employment during the calendar
year, on or before January thirty-first (31st) of the
succeeding year, or if his employment is
terminated before the close of such calendar year,
on the same day of which the last payment of
wages is made, a written statement confirming the
wages paid by the employer to such employee
during the calendar year, and the amount of tax
deducted and withheld in respect of such wages.
The statement required to be furnished in respect
of any wage shall contain such other information,
and shall be furnished at such other time and in
such form as the Secretary of Finance, upon the
recommendation of the Commissioner, may, by
rules and regulation, prescribe.
ESTATE TAX, DONOR’S TAX, VAT, TAXPAYERS REMEDIES
 AMILING, BEBER, CAINDAY,CONEJERO, FERUELO & LIAO TAXATION LAW REVIEWER FOR THE 2011 BAR
Every employer required to deduct and
withhold the taxes in respect of the wages of his
employees shall, on or before January thirty-first
(31st) of the succeeding year, submit to the
Commissioner an annual information return
containing a list of employees, the total amount of
compensation income of each employee, the total
amount of taxes withheld during the year,
accompanied by copies of the written statement,
and such other information as may be deemed
necessary. This return, if made and filed in
accordance with rules and regulations promulgated
by the Secretary of Finance, upon recommendation
of the Commissioner, shall be sufficient compliance
with the requirements of Section 68 in respect of
such wages. (Sec. 83, NIRC)
f. FINAL WITHHOLDING TAX AT SOURCE
Final Withholding Tax is a kind of withholding
tax which is prescribed only for certain payors and
is not creditable against the income tax due of the
payee for the taxable year. Income Tax withheld
constitutes the full and final payment of the
Income Tax due from the payee on the said
income. (http://www.bir.gov.ph/taxinfo/taxinfo.htm)
Under the final withholding tax system the
amount of income tax withheld by the withholding
agent is constituted as a full and final payment of
the income due from the payee on the said
income. [1st sentence, 1st par., Sec. 2.57 (A), Rev.
Regs. No. 2-98]
The liability for payment of the tax rests
primarily on the payor or the withholding agent.
Thus, in case of his failure to withhold the tax or in
case of under withholding, the deficiency tax shall
be collected from the payor withholding agent.
The payee is not required to file an income tax
return for the particular income. (Domondon, Bar Star
Notes on Taxation (2010) p.47)
g. CREDITABLE WITHHOLDING TAX
Under the creditable withholding tax system,
taxes withheld on certain income payments are
intended to equal or at least approximate the tax
due from the payee on the said income. The
income recipient is still required to file an income
ESTATE TAX, DONOR’S TAX, VAT, TAXPAYERS REMEDIES
tax return and/or pay the difference between the
tax withheld and the tax due on the income. (1st
and 2nd sentences, Sec. 257(B), Rev. Regs. No. 2-98, as cited
in Domondon, Bar Star Notes on Taxation (2010) p.47)
1) Expandable withholding tax
Expanded Withholding Tax is a kind of
withholding tax which is prescribed only for certain
payors and is creditable against the income tax due
of the payee for the taxable quarter year.
(http://www.bir.gov.ph/taxinfo/taxinfo.htm)
An income payment is subject to the expanded
withholding tax if the following conditions concur:
a. An expense is paid or payable to the
taxpayer, which is income to the recipient
thereof subject to income tax;
b. The income id fixed or determinable at the
time of payment;
c. The income is one of the income payments
listed in the regulations that is subject to
withholding;
d. The income recipient is a resident of the
Philippines liable to income tax; and
e. The payor-withholding agent is also a
resident of the Philippines.
Persons exempt from withholding tax. –The
withholding tax shall not apply to income
payments made to the following:
a. National Government and its
instrumentalities including provincial, city,
or municipal governments;
b. Persons enjoying exemption from payment
of income taxes pursuant to the provisions
of any law, general or special, such as but
not limited to the following:
(1) Sales of real property by a corporation
which is registered with and certified
by the HLURB or HUDCC as engaged in
socialized housing project where the
selling price of the house and lot or
only the lot does not exceed
AMILING, EVELYN S. 163
 AMILING, BEBER, CAINDAY,CONEJERO, FERUELO & LIAO TAXATION LAW REVIEWER FOR THE 2011 BAR
P180,000.00 in Metro Manila and
other highly urbanized areas and
P150,000.00 in other areas or such
adjusted amount of selling price for
socialized housing as may later be
determined and adopted by the
HLURB;
(2) Corporations registered with the
Board of Investments, PEZA, and
SBMA, enjoying exemption from
income tax under E.O. 226, R.A.
7916 and R.A. 7227;
(3) Corporations exempt from income
tax under Sec. 30, of the Tax Code,
like the SSS, GSIS, the PCSO, etc.
However, income payments arising
from any activity which is
conducted for profit or income
derived from real or personal
property shall be subject to a
withholding tax. (Sec. 57.5, Rev.
Regs. No. 2-98);
(4) General professional partnerships;
and
(5) Joint ventures or consortium
formed for the purpose of
undertaking construction projects
or engaging in petroleum, coal,
geothermal and other energy
operations pursuant to an
operating or consortium
agreement under a service
contract with the government.
(Mamalateo, Reviewer on Taxation,
p.266-267)
2) Withholding tax on compensation
Withholding Tax on Compensation is the tax
withheld from individuals receiving purely
compensation income.
http://www.bir.gov.ph/taxinfo/taxinfo.htm)
h. FRINGE BENEFIT TAX
164 AMILING, EVELYN S.
The fringe benefits tax is a final withholding
tax imposed on the grossed-up monetary value of
fringe benefits furnished, granted or paid by the
employer to the employee, except rank and file
employees. (1st par., Sec. 2.33 (A), Rev. Regs. No. 3-98, as
cited in Domondon, Bar Star Notes on Taxation (2010) p.26)
B. ESTATE TAX
1. BASIC PRINCIPLES
Death is the generating source of power
Estate tax laws rest in their essence upon the
principle that death of an individual is the
generating source from which the taxing power
takes its being, and that it is the power to transmit
or the transmission from the dead to the living on
which the tax is more immediately based. (Lorenzo
vs. Posadas, 64 Phil. 353, cited by Mamalateo, p.277)
Justification estate tax
1. Benefit-received theory;
2. Privilege theory or State Partnership
theory.-Succession to the property of the
deceased person is not a fundamental right
and consequently, the legislature can
constitutionally burden such succession
with a tax. (Stebbins vs. Rilly, 268 US 137);
3. Ability to pay theory.-Those who have
more properties to transfer to their heirs
upon death shall pay more estate tax.
Similarly under the redistribution of wealth
theory, the taxes paid by rich people are
programmed for disbursement by Congress
more for the benefit of the poor in terms
of social services, education, health, etc.
(Mamalateo, Reviewer on Taxation, p.277)
Law at the time of death applicable
The law in force at the time of death of the
decedent governs.
Estate Tax Rate
ESTATE TAX, DONOR’S TAX, VAT, TAXPAYERS REMEDIES
 AMILING, BEBER, CAINDAY,CONEJERO, FERUELO & LIAO TAXATION LAW REVIEWER FOR THE 2011 BAR
The transfer of the net estate of the decedent
in excess of P200, 000.00 shall be subject to the
estate tax based on a graduated schedule at a rate
of 5% to 20%.
Formula
Gross Estate
LESS: Deductions
Net Estate
x Rate
Taxable Net Estate
LESS: Tax Credit
Estate Tax Payable
2. DEFINITION
Estate Tax is a tax on the right of the deceased
person to transmit his/her estate to his/her lawful
heirs and beneficiaries at the time of death and on
certain transfers which are made by law as
equivalent to testamentary disposition.
(http://www.bir.gov.ph/taxinfo/taxinfo.htm)
3. NATURE
Estate tax is a transfer tax on the right of
transmitting property at the time of death and on
the privilege that a person is given to control to a
certain extent the disposition of his property to
take effect upon his death. (Vitug & Acosta, Tax Law
and Jurisprudence, p.210)
4. PURPOSE OR OBJECT
The dominant purpose of the law is to reach
such transfers which are really substitutes for
testamentary dispositions and thus prevent the
evasion of the estate tax.
The object of estate tax is to tax the shifting of
economic benefits and enjoyment of the property
from the dead to the living. (Mamalateo, Reviewer on
Taxation, p.276)
ESTATE TAX, DONOR’S TAX, VAT, TAXPAYERS REMEDIES
5. TIME AND TRANSFER OF PROPERTIES
Upon the death of the decedent, succession
takes place and the right of the state to tax vests
instantly, the tax should be measured by the value
of the estate as it stood at the time of the
decedent's death, regardless of any subsequent
contingency affecting value of any subsequent
increase or decrease in value. (Pablo Lorenzo vs. Juan
Posadas, Jr., G.R. No. 43082, June 18, 1937, as cited in NIRC
Manual for UV Class, p.42)
6. CLASSIFICATION OF DECEDENT
For estate tax purposes, decedents are
classified as follows:
1. Resident citizen decedent;
2. Non-resident citizen decedent;
3. Resident alien decedent; and
4. Non-resident alien decedent.
7. GROSS ESTATE VIS-A-VIS NET ESTATE
Gross Estate refers to all property, real or
personal, tangible or intangible, wherever situated
that is left behind by the decedent at the time of
his death. (Sec. 104, NIRC)
Net Estate refers to the decedent’s gross
estate reduced by allowable deductions. The net
estate is the amount that is subject to transfer tax
at death.
8. DETERMINATION OF GROSS ESTATE AND NET
ESTATE
Gross Estate shall be valued based on the fair
market value of the property at the time of death
of the decedent. (Sec. 85, NIRC; Sec.4, RR No. 2-2003))
Under Section 86 the value of the net estate
shall be determined by deducting from the gross
estate the following:
For citizen and resident alien decedent:
a. Expenses, losses, claims, indebtedness and
taxes;
AMILING, EVELYN S. 165
 AMILING, BEBER, CAINDAY,CONEJERO, FERUELO & LIAO TAXATION LAW REVIEWER FOR THE 2011 BAR
b. Property previously taxed;
c. Transfers for public use;
d. The Family Home up to a value not
exceeding P1 million;
e. Standard deduction of P1 million;
f. Medical expenses not exceeding
P500,000.00;
g. Amount of exempt retirement received by
the heirs under Rep. Act No. 4917; and
h. Net share of the surviving spouse in the
conjugal partnership.
For non-resident alien decedent:
a. Expenses, losses, claims, indebtedness and
taxes;
b. Property previously taxed;
c. Transfers for public use; and
d. Net share of the surviving spouse in the
conjugal partnership.
Valuation of the Estate
Under Sec 88 of NIRC, the value of the estate
shall be determined according to the following:
(A) Usufruct. - The value of the right of
usufruct, use or habitation, as well as that of
annuity, shall be determined by taking into account
the probable life of the beneficiary in accordance
with the latest Basic Standard Mortality Table, to
be approved by the Secretary of Finance, upon
recommendation of the Insurance Commissioner.
(B) Properties. - The estate shall be appraised
at its fair market value as of the time of death.
However, the appraised value of real property as of
the time of death shall be, whichever is higher of:
(1) The fair market value as determined by the
Commissioner, or
166 AMILING, EVELYN S.
(2) The fair market value as shown in the
schedule of values fixed by the Provincial
and City Assessors.
In the case of sale of shares of stocks, the fair
market value shall depend whether the shares are:
a. Listed in the stock exchange - the book
value shall be the highest value
immediately before the death of the
decedent;
b. Unlisted in the stock exchange if:
b.1. unlisted preferred stocks, the value to
be used shall be the par value,
b.2. unlisted common stocks, the book
value shall be relevant. RR No. 2-2003.
 For purposes of prescribing real property
values, the Commissioner is authorized to divide
the Philippines into different zones or areas and
shall, upon consultation with competent appraisers
both from the private and public sectors,
determine the fair market value of real properties
located in each zone or area. (Sec. 6 (E), NIRC)
 The Commissioner, notwithstanding RA No.
1405 and other general or special laws, is
authorized to inquire into the bank deposits of a
decedent to determine his gross estate. (Sec. 6 (F),
NIRC)
9. COMPOSITION OF GROSS ESTATE
The gross estate of citizen and resident alien
decedent shall consist of the following:
1. Real property within and without the
Philippines;
2. Tangible personal property within and
without the Philippines; and
3. Intangible personal property within and
without the Philippines.
The gross estate of non-resident alien
decedent shall consist of the following:
1. Real property within the Philippines;
ESTATE TAX, DONOR’S TAX, VAT, TAXPAYERS REMEDIES
 AMILING, BEBER, CAINDAY,CONEJERO, FERUELO & LIAO TAXATION LAW REVIEWER FOR THE 2011 BAR
2. Tangible personal property within the
Philippines; and
3. Intangible personal property - within the
Philippines. Intangible personal property
deemed situated in the Philippines:
a. Franchise exercised within the
Philippines;
b. Shares, obligations or bonds issued by
a domestic corporation;
c. Shares, obligations or bonds issued by
a foreign corporation 85% of the
business of which is located in the
Philippines;
d. Shares, obligations or bonds issued by
a foreign corporation which have
acquired a business situs in the
Philippines ( i.e., they are used in the
furtherance of its business in the
Philippines)
e. Shares or rights in any partnership,
business or industry established in the
Philippines.
However, the presence of reciprocity would
exempt the intangible personal property of the
nonresident alien decedent from Philippines estate
tax. The absence of reciprocity would subject the
said property to estate tax.
 There is reciprocity if the foreign country of
which the decedent was a citizen and resident at
the time of his death: (1) does not impose an
estate tax; and (2) allows a similar exemption from
estate tax with respect to intangible personal
property owned by citizens of the Philippines not
residing in that foreign country.
Note further that, the reciprocity rule applies
only if: (1) the property is an intangible; and (2) the
decedent is a non resident alien. (Sec.104, NIRC)
10. ITEMS TO BE INCLUDED IN GROSS ESTATE
The gross estate includes not only property
owned by the decedent at the time of his death
ESTATE TAX, DONOR’S TAX, VAT, TAXPAYERS REMEDIES
but also certain transfers made during the life time
of the decedent which under the Tax Code is
subject to estate tax. These are the following:
a. Decedent’s Interest.
Although ownership is not vested in the
decedent but he has interest therein at the time of
his death, the interest shall be included as part of
his gross estate.
b. Transfer in contemplation of death.
Death must be contemplated, and the thought
of death, as distinguished from purposes
associated with life, must be the impelling cause of
transfer. (34 Am. Jur. 2d, 780). The transfer is
considered in contemplation of death if after the
property has been transferred during the lifetime
of the decedent, he still retained: (1) the
possession or enjoyment of; or (2) notwithstanding
the transfer he continues to receive the income or
fruits; (3) the right, either alone or in conjunction
with any person, to designate the person who shall
possess or enjoy the property or the income of
such property.
Where a donation was made concurrently
with the execution of a will (Vidal de Roces v.
Posadas, 58 Phil. 108, or where the time for the
making of a gift and the death of the donor is
relatively close (Dizon v. Posadas 57 phil. 465), the
transfers were held in contemplation of death.
(Vitug & Acosta, Tax Law and Jurisprudence, p.211)
As an exception, the transfer in case of a bona
fide sale for an adequate and full consideration in
money or money's worth shall not be considered
one made in contemplation of death.
The reason behind this provision is to reach
ingenious schemes to evade the estate tax liability
by the use of other forms of conveyances other
than by succession or transfer mortis causa. (Vitug &
Acosta, Tax Law and Jurisprudence, p.211)
c. Revocable transfers.
Transfers were the transferor has reserved his
right to alter, amend or revoke such transfer,
AMILING, EVELYN S. 167
 AMILING, BEBER, CAINDAY,CONEJERO, FERUELO & LIAO TAXATION LAW REVIEWER FOR THE 2011 BAR
regardless of whether the power is exercised or
not during his lifetime.
Revocable transfers are included in the gross
estate because of the tremendous power and
control which the transferor can exercise. The
transferor can at anytime revoke the transfer,
hence, it is as if there was no transfer made.
(Sababan, Taxation Law Review, p. 135-136)
d. Property Passing Under General Power of
Appointment.
Property over which the decedent held a
power of appointment is not included in his gross
estate unless such power was “general”. The
phrase “general power of appointment” means
that the decedent must have a power exercisable
in favor of himself, his estate, his creditors or
creditors of his estate. The power is not general if it
can be exercised only in favor of one or more
designated persons or classes of person exclusive
of the decedent, his estate, his creditor or creditors
of his estate. (34 Am. Jur. 2d, 791 cited in Vitug & Acosta,
Tax Law and Jurisprudence, p.212)
Property passing under a general power of
appointment comes from the donor and the donee
(decedent). The power to dispose of the property
at death, the exercise of a power of appointment,
is the equivalent of ownership. It is a potential
source of wealth to the appointee and the
disposition o wealth affected by its exercise or
relinquishment at death is one form of the
enjoyment of wealth. (Mamamalateo citing Graves vs.
Schmidlapp, 36 US 657, p. 286)
e. Proceeds of life insurance
The proceeds of life insurance are includible in
the gross estate in the following cases:
(a) Beneficiary is the estate of the deceased,
his executor or administrator, irrespective
of whether or not the insured retained the
power of revocation;
(b) Beneficiary is other than the decedent’s
estate, executor or administrator, when
designation of beneficiary is not expressly
made irrevocable. (Sec. 85 (E), NIRC).
168 AMILING, EVELYN S.
Under the Insurance Code of 1978,
insurance proceeds are presumed to be
revocable; hence includible in the
decedent’s gross estate.
 Transfers in contemplation of death,
revocable transfer and proceeds of life insurance
apply to transfers, trusts, estates, interests, rights,
powers, and relinquishment of powers whether
made, created, arising, existing, exercised or
relinquished before or after the effectivity of the
Tax Code. (Sec. 85 (F), NIRC)
f. Transfers for Insufficient Consideration
If transfer in contemplation of death, revocable
transfer and transfer of property passing under
general power of appointment is made, created,
exercised or relinquished for a consideration in
money or money's worth, but is not a bona fide
sale for an adequate and full consideration in
money or money's worth, only the excess of the
fair market value, at the time of death, of the
property over the value of the consideration
received by the decedent shall be included in the
gross estate.
11. DEDUCTIONS FROM ESTATE
Deductions Allowed to the Estate of Citizen or a
Resident
1. Expenses, Losses, Indebtedness, and Taxes
A. Funeral Expenses. The amount deductible
is the actual funeral expense or five percent (5%) of
the gross estate, whichever is lower, but in no case
to exceed Two hundred thousand pesos
(P200,000.00).
Actual funeral expenses shall mean those
which are actually incurred in connection with the
interment or burial of the deceased, the expenses
must be duly supported by receipts or invoices or
other evidence to shoe that they were actually
incurred. (Sec.6, RR No. 2-2003)
Under RR No. 2-2003 that the term “funeral
expenses” include:
ESTATE TAX, DONOR’S TAX, VAT, TAXPAYERS REMEDIES
 AMILING, BEBER, CAINDAY,CONEJERO, FERUELO & LIAO TAXATION LAW REVIEWER FOR THE 2011 BAR
1. The mourning apparel of the surviving
spouse and the unmarried minor children
of the deceased bought and used on the
occasion of the burial;
2. Expenses for the deceased’s wake,
including food and drinks;
3. Publication charges for death notices;
4. Telecommunication expenses incurred in
informing relatives of the deceased;
5. Cost of the burial plot, tombstones,
monument or mausoleum ( in case the
deceased owns family estate or several
burial lots, only the value corresponding to
the plot where he is buried);
6. Interment and/or cremation fees and
charges; and
7. All other expenses incurred for the
performance of the rites and ceremonies
incident to interment.
Funeral expenses do not include:
(1) Cash advance of the surviving spouse and
the heirs;
(2) Expenses paid for by relatives and friends;
(3) Expenses after the burial; and
(4) Expenses for upkeep of burial lot,
tombstone, monument and mausoleum.
Are expenses for death anniversary included?
No. The expenses included in RR No. 2-2003
are expenses incurred before and during the burial.
Expenses incurred during the death anniversary are
incurred after the burial, hence these cannot be
considered within the term “funeral expenses”.
B. Judicial Expenses. These refer to expenses
incurred in the testamentary or intestate
proceedings for the settlement of the estate.
Judicial expenses include:
ESTATE TAX, DONOR’S TAX, VAT, TAXPAYERS REMEDIES
(1) fees of executor or administrator;
(2) attorney’s fees;
(3) accountant’s fees;
(4) court fees;
(5) appraiser’s fees;
(6) clerk hire;
(7) costs of preserving and distributing the
estate;
(8) costs of storing or maintaining the property
of the state; and
(9) brokerage fees for selling property of the
estate. (Sec.6, RR No. 2-2003)
Are “extrajudicial expenses” included?
The Code and the revenue regulations are
silent about the matter. However, in CIR vs. CA
(G.R. No. 123206 March 22, 2000) extra-judicial
expenses were held deductible where they were
incurred essentially for the proper settlement of
the estate of the deceased. (Sababan, Taxation Law
Review, p.139)
C. Claims against the estate. The decedent is
the debtor. To be deductible the following
requisites must be present:
1. The amount of the indebtedness must be
included in the gross estate;
2. the debt instrument was duly notarized at
the time the indebtedness was incurred;
3. if the loan was contracted within three (3)
years before the death of the decedent,
the administrator or executor shall submit
a statement showing the disposition of the
proceeds of the loan; and
4. a duly notarized certification as to the
unpaid balance of the debt from the
creditor, if the creditor is a corporation,
such sworn statement shall be signed by
AMILING, EVELYN S. 169
 AMILING, BEBER, CAINDAY,CONEJERO, FERUELO & LIAO TAXATION LAW REVIEWER FOR THE 2011 BAR
the President, Vice President, or other
principal officer of the corporation.
D. Claims of the deceased against insolvent
persons. The decedent case is the creditor. The
only requisite is that the amount of indebtedness
must be included in the gross estate.
E. Mortgage Indebtedness Taxes and Losses.
In case of mortgage indebtedness, the
decedent is the mortgage-debtor. For the
mortgage debt to be recognized, it is required that
the value of the mortgage property must be
included in the gross estate. Under RR No. 2-2003,
in case the loan of the decedent is only an
accommodation loan, it is required that the value
of the loan must be included as a receivable of the
estate.
For taxes, the taxes referred to under Section
86 (A)(e) are those taxes which accrued prior to the
death of the decedent such as unpaid income tax
on income due or received before the death of the
decedent and real property taxes which have
accrued prior to the death of the decedent (real
property tax accrues at the beginning of the year
but may be paid before or at the end of each
quarter). Is estate tax included? No, only taxes
which accrued prior to the death of the decedent
are included. Estate taxes only accrue upon the
death of the decedent.
For losses by virtue of natural calamity, to be
deductible, the following are the requisites:
(1) such losses are not compensated for by
insurance;
(2) at the time of filing of the return, such
losses have not been claim as deduction
for income tax purposes; and
(3) such losses were incurred not later than
the last day for the payment of the estate
tax or six (6) months after the death of the
decedent.
2. Property Previously Taxed
170 AMILING, EVELYN S.
Property previously tax or the “Vanishing
Deduction” is applicable to both the estate and
donor’s tax. Vanishing deduction, so-called
because of the diminishing exemption at the rate
of 20% until it is lost after the 5th year, is designed
to mitigate the harshness of successive taxation.
(Vitug & Acosta, Tax Law and Jurisprudence, p.216)
The requisite for deductibility are:
(1) The present decedent must have acquired
the property by inheritance or donation;
(2) The property must have been acquired
within five (5) years prior to the death of
the present decedent;
(3) The property must have formed part of the
gross estate of the prior decedent if
acquired by inheritance, or taxable gift of
the donor if acquired by donation;
(4) The estate tax or the donor’s tax as the
case may be must have been paid on the
previous transfer; and
(5) The estate of the prior decedent must not
have previously availed of the vanishing
deduction on the subject property. (Sec. 86,
NIRC)
The following percentage should be taken into
account in the computation of the net estate:
Not more than 1 year
100%
More than 1 year but not more than 2 year
80%
More than 2 years but not more than 3 years
60%
More than 3 years but not more than 4 years
40%
More than 4 years but not more than 5 years
20%
3. Transfers for Public Use. The amount of all the
bequests, legacies, devises or transfers to or for
the use of the Government of the Republic of the
ESTATE TAX, DONOR’S TAX, VAT, TAXPAYERS REMEDIES
 AMILING, BEBER, CAINDAY,CONEJERO, FERUELO & LIAO TAXATION LAW REVIEWER FOR THE 2011 BAR
Philippines, or any political subdivision thereof
shall be considered as a deduction to the gross
estate. The only qualification is for the amount of
all the bequests, legacies, devises or property
transferred should be used exclusively for public
purposes.
4. Family Home.
For the amount equivalent to the current fair
market value of the decedent's family home to be
deducted from the gross estate, the requisites are:
(1) The amount to be deducted should not
exceeds One million pesos (P1,000,000);
the excess shall be subject to estate tax;
(2) There must be a certification from the
Barangay Captain that the said family
home is the actual resident of the
decedent;
(3) The estate of the decedent claiming
deduction must be a legally married
individual or a head of the family;
(4) The amount of the family home must be
included in the gross estate.
5. Standard Deduction. An amount equivalent to
One million pesos (P1,000,000). The deduction is
automatic, no condition required.
6. Medical Expenses. Medical Expenses incurred
by the decedent within one (1) year prior to his
death duly substantiated with receipts and in no
case shall exceed Five Hundred Thousand Pesos
(P500,000).
7. Retirement Pay.
The retirement pay or amount received by
heirs under Republic Act No. 4917 can be claimed
as a deduction provided that such amount is
included in the gross estate of the decedent.
The retirement pay referred to is the one
granted by the private sector to its employees. The
private retirement plan must be duly approved by
the BIR, the retiree must have rendered at least 10
ESTATE TAX, DONOR’S TAX, VAT, TAXPAYERS REMEDIES
years of service and must at least be 50 years old
at the time of his retirement.
8. Share in the Conjugal partnership
The net share of the surviving spouse in the
conjugal partnership is considered as a deduction
from the gross estate (Sec. 86(C), NIRC)
Deductions Allowed to Nonresident Estates
In the case of a non-resident alien, where the
estate situated only in the Philippines is subject to
the tax, the deductions are limited to:
1. The proportion of the same Expenses,
Losses, Indebtedness and Taxes (ELIT)
which the value of his gross estate in the
Philippines bears to his entire gross estate
wherever situated:
Phil. Gross Estate x ELIT =
Allowable
World Gross Estate
Deduction
2. Vanishing Deductions;
3. Transfers for Public Use; and
4. Net share of the surviving spouse in the
conjugal partnership.
Pursuant to Section 86(D) of the Code, no
deduction shall be allowed for the estate of the
nonresident alien unless the executor,
administrator, or any of the heirs as the case may
be, includes in the estate tax return of the
decedent, that part of the gross estate of the
nonresident not situated in the Philippines.
12. EXCLUSIONS FROM ESTATE
The following are excluded from the gross
estate:
1. GSIS proceeds/ benefits;
2. Accruals from SSS ;
3. Proceeds of life insurance where the
beneficiary is irrevocably appointed ;
AMILING, EVELYN S. 171
 AMILING, BEBER, CAINDAY,CONEJERO, FERUELO & LIAO TAXATION LAW REVIEWER FOR THE 2011 BAR
4. Proceeds of life insurance under a group
insurance taken by employer (not taken
out upon his life);
5. War damage payments;
6. Transfer by way of bona fide sales;
7. Transfer of property to the National
Government or to any of its political
subdivisions;
8. Separate property of the surviving spouse;
9. Merger of usufruct in the owner of the
naked title;
10. Properties held in trust by the decedent;
and
11. Acquisition and/or transfer expressly
declared as not taxable;
(http://www.bir.gov.ph/taxinfo/taxinfo.htm)
13. TAX CREDIT FOR ESTATE TAXES PAID IN
FOREIGN COUNTRY
A tax credit is granted for estate taxes paid to a
foreign country on the estate of citizens and
resident aliens.. The reason for this allowance is to
minimize the tax burden of imposing two (2) estate
taxes on the same property.
The amount of tax credit is subject to
limitations as follows:
1) NET ESTATE (1 foreign country) x PHILIPPINE
ENTIRE NET ESTATE ESTATE
2) NET ESTATE (all foreign countries) x PHILIPPINE
ENTIRE NET ESTATE ESTATE
14. EXEMPTION OF CERTAIN ACQUISITIONS AND
TRANSMISSIONS
The following shall not be taxed:
(A) The merger of usufruct in the owner of the
naked title;
172 AMILING, EVELYN S.
(B) The transmission or delivery of the
inheritance or legacy by the fiduciary heir
or legatee to the fideicommissary;
(C) The transmission from the first heir,
legatee or donee in favor of another
beneficiary, in accordance with the desire
of the predecessor; and
(D) All bequests, devises, legacies or transfers
to social welfare, cultural and charitable
institutions: (1) no part of the net income
of which insures to the benefit of any
individual; and (2) not more than thirty
percent (30%) shall be used for
administration purposes. (Sec. 87, NIRC)
15. FILING OF NOTICE OF DEATH
When required:
a) In all cases of transfer subject to tax; or
b) Where, though exempt from tax, the value
of the gross estate exceeds P20,000.00
Time of filing:
a) Within two (2) months after the decedent's
death, or
b) Within two (2) months after the executor
or administrator has qualified.
Who shall file notice of death:
a) Executor;
b) Administrator; or
c) Any of the legal heir. (Sec.89, NIRC)
16. ESTATE TAX RETURN
An estate tax return shall be filed in the
following cases:
(1) In all cases of transfers subject to the tax;
(2) Where, though exempt from tax, the gross
value of the estate exceeds Two hundred
thousand pesos (P200,000); and
ESTATE TAX, DONOR’S TAX, VAT, TAXPAYERS REMEDIES
 AMILING, BEBER, CAINDAY,CONEJERO, FERUELO & LIAO TAXATION LAW REVIEWER FOR THE 2011 BAR
(3) Where the estate consists of registered or
registrable property such as real property,
motor vehicle, shares of stock or other
similar property for which a clearance from
the Bureau of Internal Revenue is required
as a condition precedent for the transfer of
ownership thereof in the name of the
transferee.
However, where the value of the estate
exceeds Two million pesos (P2,000,000), the estate
tax shall be supported with a statement duly
certified to by a Certified Public Accountant
containing the following:
a) Itemized assets;
b) Itemized deductions; and
c) The amount of tax due
C. DONOR’S TAX
1. BASIC PRINCIPLE
The gift tax is a tax on the privilege of
transmitting one’s property rights to another or
others without adequate and full valuable
consideration. The gift tax rates are comparatively
lower than the counterpart rats in estate taxation
that may thus provide for an incentive for
taxpayers to opt for the less onerous tax. On the
part of the government, the reduction in revenue
could well be made up by an earlier payment of
the transfer tax. (Report of the Tax Commission on
Natonal Internal Revenue Laws, Vol. 1, p.63 cited in Vitug &
Acosta, Tax Law and Jurisprudence, p.223)
Taxable Gift
Any transfer of property by gift, or, except in
forced sales and in sale of real property which is
classified as capital asset (subject to FIT), for less
than adequate and full consideration in money and
money’s worth may be subject to the gift or
donor’s tax. The tax shall apply whether the
transfer is in trust or otherwise, whether the gift is
direct of indirect, and whether the property is real
ESTATE TAX, DONOR’S TAX, VAT, TAXPAYERS REMEDIES
or personal, tangible or intangible. (Secs. 98-100,
NIRC)
Rate of Tax
Tax payable by the donor on gifts made in
favor of relatives is computed based on graduated
rates from 2% - 15 %.
Tax payable by the donor on gifts made in
favor of strangers is computed at the rate of 30%
of the net gifts.
Relative vis-à-vis Stranger
For the donor’s tax purposes, a "stranger", is a
person who is not a:
a. Spouse, ancestor and lineal decedent;
b. Brother, sister (whether by whole or half
blood); or
c. Relatives by consanguinity in the collateral
lines within the fourth degree
of relationship.
In effect a relative refers to a brother, sister
(whether by whole or half blood), spouse, ancestor
and lineal decedent; or relatives by consanguinity
in the collateral lines within the fourth degree
of relationship
A legally adopted child is entitled to all the
rights and obligations provided by law to legitimate
children. Donation to him shall not be considered
donation made to a stranger. (Sec.10, RR No. 2-2003)
Donations made between business
organizations and those made between an
individual and a business organization shall be
considered as donation made to a stranger. (Sec.10,
RR No. 2-2003)
A merger between a parent company and its
wholly owned subsidiary where no shares are to be
used is not subject to donor’s tax because there is
no intention to donate on the part of any of the
parties. (BIR Ruling No. 030-99 cited in Dizon, Q & A in
Taxation, p. 417)
Computation of Donor’s Tax
AMILING, EVELYN S. 173
 AMILING, BEBER, CAINDAY,CONEJERO, FERUELO & LIAO TAXATION LAW REVIEWER FOR THE 2011 BAR
In general, the tax shall be computed on the
basis of the total net gifts made during the
calendar year in accordance with the graduated or
fixed donor’s tax rates. (Co Untian, Tax Digest, p. 107)
If the donor makes several gifts during the
same calendar year, the gifts shall be added on the
cumulative basis (cummulative method). The
donor is required to include in the return for the
last donation previous donations made within the
same calendar year. The tax paid for the first
donation shall be considered as a tax credit for the
succeeding donations. (Sababan, Taxation Law Review,
p. 152)
What is splitting method or gift splitting?
Splitting method is when the donor makes two
or more donations during the different calendar
years. Donations made during the different
calendar years are not required to be included in
the last return. (Sababan, Taxation Law Review, p. 152)
Gift splitting is spreading the gift over
numerous calendar years in order to avail of a
lower donor’s taxes. (Domondon, Bar Star Notes on
Taxation (2010) p.35) This method is relevant only to
donations made between relatives because
donation between strangers is taxed at a fixed
rate.
Formula
Gross Gifts
LESS: Deductions
Net Gifts
xSchedular or Fixed Rate
Taxable Net Gifts
LESS: Tax Credit
Donor’s Tax Payable
2. DEFINITION
Donor's Tax is a tax on a donation or gift,
and is imposed on the gratuitous transfer of
property between two or more persons who are
174 AMILING, EVELYN S.
living at the time of the transfer.
(http://www.bir.gov.ph/taxinfo/taxinfo.htm)
3. NATURE
Donor’s tax or gift tax is a transfer tax imposed
on the privilege of the donor to transfer property
during his lifetime without consideration or with
consideration but inadequate or insufficient.
4. PURPOSE OR OBJECT
(1) To complement the estate tax by
preventing the tax-free depletion of the
transferer’s estate during his lifetime. (Co
Untian, Tax Digest, p. 102)
(2) To prevent avoidance of income tax
through the device of splitting income
among numerous donees, who are usually
members of a family or into many trusts,
with the donor thereby escaping the effect
of the progressive rates of income tax.
(Mamalateo, Reviewer on Taxation, p.301)
5. REQUISITES OF VALID DONATION
The requisites of a taxable gift are:
(1) Capacity of the donor
(2) Donative intent;
(3) Acceptance by the donee; and
(4) Actual or constructive delivery of the gift.
(Co Untian Jr., Tax Digest, p.102)
In order that a donation of an immovable may
be valid, it must be made in a public document
specifying therein the property donated.
Acceptance must be in a public instrument and
made during the lifetime of the donor.
There can be no donative intent on the part of
the transferor in a transfer of properties to the
member beneficiaries, considering that a person or
entity cannot donate properties the ownership of
which belongs to themselves. Thus, a transfer from
one subsidiary to another pursuant to a worldwide
organization of a group of companies is not subject
ESTATE TAX, DONOR’S TAX, VAT, TAXPAYERS REMEDIES
 AMILING, BEBER, CAINDAY,CONEJERO, FERUELO & LIAO TAXATION LAW REVIEWER FOR THE 2011 BAR
to tax. (BIR Ruling DA 022-2006 cited in Dizon, Q & A in
Taxation, p. 417)
Donor’s tax shall not apply unless and until
there is a completed gift. The transfer of property
by gif is perfected the moment the donor knows of
the acceptance by the donee; it is completed by
the delivery, either actually or constructively of the
donated property to the donee. Thus, the law in
force at the time of the perfection of the donation
shall govern the imposition of the donor’s tax.
(Sec.11, RR No. 2-2003)
6. TRANSFERS WHICH MAY BE CONSIDERED AS
VALID DONATION
a. Sale/exchange/transfer of property for
insufficient consideration
The property was transferred by the donor for
inadequate consideration for money or money’s
worth. What motivated the donor is his generosity.
It is as if the property was donated but in order to
avoid paying the donor’s tax, the donor opted to
transfer the property for inadequate consideration.
(Sababan, Taxation Law Review, p. 154)
The amount by which the fair market value of
the property exceeded the value of the
consideration shall be deemed a gift and is subject
to estate tax. (Sec. 100, NIRC)
b. Condonation/remission of debt
Condonation or remission of debt would
constitute a donation to the extent of the fair value
of the debt condoned or remitted. Therefore, the
creditor would be considered a donor for donor’s
tax purposes and would be liable for the tax
thereon. (Co Untian, Tax Digest, p. 103)
In addition, renunciation by the surviving
spouse of his/her share in the conjugal
partnership or absolute community after the
dissolution of the marriage in favor of the heirs of
the deceased spouse or any other person/s is
subject to donors tax; whereas general
renunciation by an heir, including the surviving
spouse, of his/her share in the hereditary estate
left by the decedent is not subject to donor’s tax,
unless specifically and categorically done in favor
ESTATE TAX, DONOR’S TAX, VAT, TAXPAYERS REMEDIES
of identified heir/s to the exclusion or
disadvantage of the other co-heirs in the
hereditary estate. (4th par., Sec. 11, Rev. Regs. No. 2-2003
cited in Dizon, Q & A in Taxation, p. 419)
A general renunciation of inheritance in favor
of a co-heir is not a donation subject to donor’s
tax. . (BIR Ruling, 25 Aug. 1977). Since the title to the
property is not deemed to have vested in favor of
the repudiating heir.
7. TRANSFERS FOR LESS THAN ADEQUATE AND
FULL CONSIDERATION
Where property, other than real property
classified as capital asset, is transferred for less
than an adequate and full consideration in money
or money's worth, the amount by which the fair
market value of the property exceeded the value of
the consideration shall be deemed a gift, and shall
be included in computing the amount of gifts made
during the calendar year. (Sec. 100, NIRC)
As an exception, if the property transferred for
inadequate or insufficient consideration was a real
property classified as a capital asset, donor’s tax
shall not apply but the final income tax at a rate of
6% fair market value or the gross selling price
whichever is higher. (Sababan, Taxation Law Review, p.
154)
 Final capital gains tax is imposed instead of
donor’s tax because even if the vendor sells the
property for a lower consideration, the
government is just the same not deprived of any
revenue since the 6% rate would then be applied
to the fair market value of the real property (higher
than gross selling price). (Co Untian, Tax Digest, p. 104)
The purpose of Section 100 is to close all
avenue for tax avoidance by encompassing all
transactions where there is disparity in
consideration, it is, however indicative of a strong
proof that a gratuity is intended. However,
jurisprudence recognizes those instances where
there is no gratuity is intended – these are dealings
done in the ordinary course of business. Donative
intent is not synonymous to disparity in
consideration. An arm’s length transaction and a
bona fide business arrangement negates the fiction
AMILING, EVELYN S. 175
 AMILING, BEBER, CAINDAY,CONEJERO, FERUELO & LIAO TAXATION LAW REVIEWER FOR THE 2011 BAR
which treats the effect as a donation. (BIR Ruling No.
33-02, Aug. 16, 2002 cited in Dizon, Q & A in Taxation, pp.
420-421)
8. CLASSIFICATION OF DONOR
The following taxpayers are subject to donor’s
tax:
(1) Resident citizen donor;
(2) Nonresident citizen donor;
(3) Resident alien donor;
(4) Non-resident alien donor;
(5) Domestic corporation donor; and
(6) Foreign corporation donor.
9. DETERMINATION OF GROSS GIFT
Gross Gifts refer to all property, real or
personal, tangible or intangible,that are given by
the donor to the donee by way of gift, without the
benefit of any deductions. (Co Untian, Tax Digest, p.
102)
Net Gifts refers to the net economic benefit
from the transfer that accrues to the donee.
Accordingly, if a mortgaged property is transferred
as a gift, but imposing upon the donee the
obligation topay the mortgage liability, then the
net gift is measured by deducting from the fair
market value of the property the amount of
mortgage assumed. (last par., Sec.11, RR No. 2-2003 as
cited in Domondon, Bar Star Notes on Taxation (2010) p.34)
In determining the gross amount of gross gift,
the fair market value of the property at the time of
the gift shall be considered. (Sec. 102, NIRC)
10. COMPOSITION OF GROSS GIFT
The gross gift of citizens, resident aliens and
domestic corporation donor shall consist of the
following:
(1) Real property within and without the
Philippines;
176 AMILING, EVELYN S.
(2) Tangible personal property within and
without the Philippines; and
(3) Intangible personal property within and
without the Philippines.
The gross gift of non-resident alien and foreign
corporation (whether or not doing business in the
Philippines) donor shall consist of the following:
(1) Real property within the Philippines;
(2) Tangible personal property within the
Philippines; and
(3) Intangible personal property - within the
Philippines. Intangible personal property
deemed situated in the Philippines:
a. Franchise exercised within the
Philippines;
b. Shares, obligations or bonds issued by
a domestic corporation;
c. Shares, obligations or bonds issued by
a foreign corporation 85% of the
business of which is located in the
Philippines;
d. Shares, obligations or bonds issued by
a foreign corporation which have
acquired a business situs in the
Philippines ( i.e., they are used in the
furtherance of its business in the
Philippines)
e. Shares or rights in any partnership,
business or industry established in the
Philippines.
However, the presence of reciprocity would
exempt the intangible personal property of the
nonresident alien donor from Philippines donor’s
tax.
 There is reciprocity if the foreign country of
which the donor was a citizen and resident at the
time of donation: (1) does not impose donor’s tax;
or (2) allows a similar exemption from donor’s tax
with respect to intangible personal property
ESTATE TAX, DONOR’S TAX, VAT, TAXPAYERS REMEDIES
 AMILING, BEBER, CAINDAY,CONEJERO, FERUELO & LIAO TAXATION LAW REVIEWER FOR THE 2011 BAR

owned by citizens of the Philippines not residing in A. Exemption on Gifts Made by a Resident and
that foreign country. Citizen under Section 101(A)

Note further that, the reciprocity rule applies (1) Dowries.

only if: (1) the property is an intangible; and (2) the
donor is a non resident alien. (Sec.104, NIRC) Requisites:

11. VALUATION OF GIFTS MADE IN PROPERTY a. the gift was made on account of marriage;

Under Section 102 of NIRC, the value of the gift b. it was made before its celebration or
shall be determined by the fair market value of the within one year thereafter;
property at the time of donation. In case of real
c. the donor is a parents;
property, the fair market value shall be determined
by whichever is higher of: d. the donee is the legitimate, recognized
natural, or adopted children of the donor;
(1) The fair market value as determined by the
and
Commissioner, or
e. the amount of gift exempted is only to the
(2) The fair market value as shown in the
extent of the first Ten thousand pesos
schedule of values fixed by the Provincial and City
(P10,000).
Assessors. (Sec. 102 in relation to Sec.88B, NIRC)
(2) Gifts to the Government.
12. TAX CREDIT
The gift is made to or for the use of the National
A citizen and resident alien donor (except
Government or any entity created by any of its
non-resident alien) may claim a tax credit in the
agencies which is not conducted for profit, or to
amount of the donor’s tax paid to the foreign
any political subdivision of the said Government;
country by deducting the same from his Philippine
donor’s tax. The reason for this allowance is to (3) Gifts in favor of an educational and/or
minimize the tax burden of imposing two (2) charitable, religious, cultural or social welfare
donor’s taxes on the same property. corporation, institution, accredited non-
government organization, trust or philanthrophic
The amount of tax credit is subject to
organization or research institution or
limitations as follows:
organization:
1) NET GIFT (1 foreign country) x PHILIPPINE
Requisites:
ENTIRE NET GIFTS TAX DONOR’S
a. not more than thirty percent (30%) shall be
TAX
used for administration purposes;
2) NET GIFT (all foreign countrIES) x PHILIPPINE
b. the donee must be a nonstick, non-profit
ENTIRE NET GIFTS TAX DONOR’S organization or institution;
TAX
c. paying no dividends;
13. EXEMPTIONS OF GIFTS FROM DONOR’S TAX
d. governed by trustees who receive no
The exemptions provided by law on donor’s tax compensation; and
partake the nature of deductions and are,
e. devoting all its income to the
therefore deductible from the gross gifts in order
accomplishment and promotion its
to arrive at the taxable net gifts. (Co Untian, Tax
Digest, p. 104)
purposes.

ESTATE TAX, DONOR’S TAX, VAT, TAXPAYERS REMEDIES AMILING, EVELYN S. 177
 AMILING, BEBER, CAINDAY,CONEJERO, FERUELO & LIAO TAXATION LAW REVIEWER FOR THE 2011 BAR
B. Exemptions on Gifts Made by a Nonresident
Alien under Section 101 (B)
(1) Gifts made to or for the use of the National
Government or any of its agencies not
conducted for profit, or to any of its
political subdivision;
(2) Gifts in favor of an educational and/or
charitable, religious, cultural or social
welfare corporation, institution,
foundation, trust or philanthrophic
organization or research institution or
organization not more than thirty percent
(30% shall be used by for administration
purposes.
Other deductions allowed:
1. Vanishing Deduction ( Sec. 86, NIRC);
2. amount of mortgage assumed by the
donee;
3. amount specifically provided by the donor
as a dimunition of the property donated.
REASONS: In no.1, to mitigate the
harshness of successive taxation. In nos. 2
& 3, the donee does not benefit at all from
the portion of the gifts of which he paid
the mortgage executed by the donor and
also the portion of the gift which was
conditioned by the donor to be given to
some other person or entity by the donee.
(Co Untian, Tax Digest, p. 106)
Donations that are exempt from donor’s tax.
a. The first P100,000.00 net donation during a
calendar year is exempt from donor’s tax
[Sec. 99 (A), NIRC of 1997] made by a
resident or non resident;
b. The donation by a resident or non-resident
of a prize to an athlete in an international
sports tournament held abroad and
sanctioned by the national sports
association is exempt from donor’s tax
(Sec. 1, Rep. Act No. 7549)
178 AMILING, EVELYN S.
c. Political contributions made by a resident or
non-resident individual if registered with
the COMELEC irrespective of whether
donated to a political party or individual.
However, the Corporation Code prohibits
corporations from making political
contributions. (Corp. Code, Title IV, Sec.
36.9)
d. Dowries or gifts made on account of
marriage and before its celebration or
within one year thereafter by residents
who are parents to each of their
legitimate, recognized natural, or adopted
children to the extent of the first ten
thousand pesos (P10,000.00);
e. Gifts made by residents or non-residents to
or for the use of the National Government
or any entity created by any of its agencies
which is not conducted for profit, or to any
political subdivisions of the said
Government;
f. Gifts made by residents or non residents in
favor of an educational and/or charitable,
religious, cultural or social welfare
corporation, institution, foundation, trust
or philanthropic organization or research
institution or organization: Provided,
however, That not more than thirty
percent (30%) of said gifts shall be used by
such donee for administration purposes.
[Sec. 101 (A), NIRC of 1997, numbering and
arrangement supplied]
g. Gifts made by non-resident aliens outside of
the Philippines to Philippine residents are
exempt from donor’s taxes because
taxation is basically territorial. The
transaction, which should have been subject
to tax was made by non-resident aliens and
took place outside of the Philippines.
(Domondon, Bar Star Notes on Taxation p.35)
Donation of Conjugal or community property
A donation by spouses of conjugal or
community property is deemed to be separate
donations of the husband and the wife in
ESTATE TAX, DONOR’S TAX, VAT, TAXPAYERS REMEDIES
 AMILING, BEBER, CAINDAY,CONEJERO, FERUELO & LIAO TAXATION LAW REVIEWER FOR THE 2011 BAR
proportion to their respective interest (one-half
each). Unless the wife expressly joins in the making
of the donation, it shall be deemed to be made by
the husband alone. (Tang Ho v. Board of Tax Appeals, 79
Phil. 889, cited in Vitug & Acosta, Tax Law and Jurisprudence,
p.224)
Each spouse shall file a separate donor’s tax
return and shall declare one-half of the value of
the property as his or her gross gift.
Further, it the gift qualifies as one given on
account of marriage, then each spouse may claim
up to P10,000 exemption to be deducted from his
or her gross gift. (Co Untian, Tax Digest, p. 104, 109)
14. PERSON LIABLE
The donor shall be liable to pay the donor’s
tax.
Any individual who makes any transfer by gift
or for a consideration which is not adequate or
sufficient and not subject to FIT and not exempt
under Section 101 and other special law shall be
liable to pay the donor’s tax.
15. TAX BASIS
The tax for each calendar year shall be
computed on the basis of the total net gifts made
during the calendar year exceeding P100,000. (Sec.
99, NIRC)
The term "deficiency" means:
(a) the amount by which donor’s tax exceeds
the amount shown as the tax by the donor upon
his return; or
b) if no amount is shown as the tax by the
donor, then the amount by which the tax exceeds
the amounts previously assessed, (or collected
without assessment) as a deficiency.
D. VALUE-ADDED TAX
1. CONCEPT
ESTATE TAX, DONOR’S TAX, VAT, TAXPAYERS REMEDIES
Value-added tax (VAT) is a tax which is
imposed only on the increase in the worth, merit
or importance of goods, properties or services, and
not on the total value of the goods or services
being sold or rendered. (Domondon, Bar Star Notes on
Taxation (2010) p.36-37)
It is a percentage tax imposed on any person
whether or not a franchise grantee, who in the
course of trade or business, sells, barters,
exchanges, leases, goods or properties, renders
services. It is also levied on every importation of
goods whether or not in the course of trade or
business. The tax base of the VAT is limited only to
the value added to such goods, properties, or
services by the seller, transferor or lessor. Further,
it is an indirect tax and can be passed on to the
buyer. (Quezon City, et al., v. ABS-CBN Broadcasting
Corporation, G. R. No. 166408, October 6, 2008)
It utilizes the concept of the input and output
taxes. Output VAT less Input VAT equals VAT due
on the increase in worth, merit or improvement f
the goods or services. (Domondon, Bar Star Notes on
Taxation (2010) p.37)
The basic formula is:
Output Tax
Less: Input Tax
Vat Payable (Creditable)
Definition
Value Added Tax is a business tax imposed and
collected from the seller in the course of trade or
business on every sale of properties (real or
personal) lease of goods or properties (real or
personal) or vendors of services. It is an indirect
tax, thus, it can be passed on to the buyer.
(http://www.bir.gov.ph/taxinfo/taxinfo.htm)
Nature
VAT is a tax on consumption levied on the sale,
barter, exchange or lease of goods or properties
and services in the Philippines and on importation
of goods into the Philippines. (Sec. 4.105-2, RR No. 16-
2005)
AMILING, EVELYN S. 179
 AMILING, BEBER, CAINDAY,CONEJERO, FERUELO & LIAO TAXATION LAW REVIEWER FOR THE 2011 BAR
Consumption is "the use of a thing in a way
that thereby exhausts it." (Domondon, Bar Star Notes
on Taxation (2010) p.36-37) Consumption takes place
when the taxpayer when the taxpayer does not sell
further the goods, properties or services either
because he is the final consumer or he is not
engaged in business subject to VAT. (Mamalateo,
Reviewer on Taxation, p.317)
It is an indirect tax that may be shifted or
passed on to the buyer, transferee or lessee of the
goods, properties or services. (Commissioner of
Internal Revenue v. Seagate Technology (Philippines), G. R.
No. 153866, February 11, 2005)
VAT as an indirect tax is not unconstitutional.
The Constitution does not prohibit the
imposition of indirect taxes, which, like the VAT,
are regressive. The provision which provides that
“Congress shall evolve a progressive system of
taxation” has been interpreted to mean that direct
taxes are to be preferred and as much as possible,
indirect taxes should be minimized. The rationale is
that, indirect taxes are imposed not according to
the taxpayer’s ability to pay. In the case of VAT, the
law minimizes the regressive effects by providing
for zero rating of certain transactions while
granting exemptions to other transactions.
(Tolentino v. Secretary, 65 SCAD 352, cited in Co Untian, Tax
Digest, p.114))
2. CHARACTERISTICS
(1) It is a tax on value added of a taxpayer.
(2) It is collected through the tax credit
method.
(3) It is a transparent form of sales tax.
(4) It is broad-based tax on consumption of
goods, properties or services in the
Philippines.
(5) It is an indirect tax.
(6) The Philippines adopted the “tax inclusive
method”.
180 AMILING, EVELYN S.
(7) There is no cascading in the value added
tax system. (Mamalateo, Reviewer on Taxation,
p.314)
What is meant by “tax inclusive method”?
Under the tax inclusive basis rule, when
the seller fails to indicate the VAT as a separate
item in the sales invoice, the VAT is presumed to
be included in the total invoice amount in the sales
voice. (Co Untian, Tax Digest, p. 113)
3-4. IMPACT OF TAX and INCIDENCE OF TAX
VAT as an indirect tax is paid by a person who
is not directly liable therefore, and who may
thereafter shift or pass on the tax to another
person or entity, which ultimately assumes the tax
burden. The impact of taxation is on the seller
upon whom the tax is imposed, while the incidence
of tax is on the final consumer, the place at which
the tax comes to rest. (Mamalateo, Reviewer on
Taxation, p.318)
5. TAX CREDIT METHOD
There are two (2) popular ways of computing
the VAT of the taxpayer. These are:
a. Cost deduction method refers to the
manner of computing the taxpayer’s VAT liability
by deducting his costs and expenses subject to VAT
from his taxable sale of goods, properties or
services, and multiplying the resulting value added
by 12%. It is a single-stage tax which is payable only
by the original sellers. This was subsequently
modified and a mixture of “cost deduction
method” and “tax credit method” was used to
determine the value-added tax payable.
b. Tax credit method. This method relies on
invoices, an entity can credit against or subtract
from the VAT charged on its sales or outputs the
VAT paid on its purchases, inputs and imports.
If at the end of a taxable period, the output
taxes charged by a seller are equal to the input
taxes passed on by the suppliers, no payment is
required. It is when the output taxes exceed the
input taxes that the excess has to be paid.
ESTATE TAX, DONOR’S TAX, VAT, TAXPAYERS REMEDIES
 AMILING, BEBER, CAINDAY,CONEJERO, FERUELO & LIAO TAXATION LAW REVIEWER FOR THE 2011 BAR
If however, the input taxes exceed the output
taxes, the excess shall be carried over to the
succeeding quarter or quarters. Should the input
taxes result from zero-rated or effectively zero-
rated transactions or from acquisition of capital
goods, any excess over the output taxes shall
instead be refunded to the taxpayer or credited
against other internal revenue taxes. (Domondon, Bar
Star Notes on Taxation (2010) p.36-37)
6. DESTINATION PRINCIPLE
As a general rule, the VAT system uses the
destination principle as a basis for the
jurisdictional reach of the tax. Under this principle
goods and services are taxed only in the country
where they are consumed. Thus, exports are zero-
rated, while imports are taxed.
This is also known as the “Cross Border
Doctrine”, according to which, no VAT shall be
imposed to form part of the cost of goods destined
for consumption outside of the territorial border of
the taxing authority. (Commissioner of Internal Revenue v.
Toshiba Information Equipment (Phils.), Inc., G. R.. No. 150154,
August 9, 2005) Hence, actual or constructive export
of goods and services from the Philippines to a
foreign country must be zero-rated for VAT; while,
those destined for use or consumption within the
Philippines shall be imposed the twelve percent
(12%) VAT.
Exception to the destination principle.
The law clearly provides for an exception to the
destination principle; that is, for a zero percent
VAT rate for services that are performed in the
Philippines, "paid for in acceptable foreign
currency and accounted for in accordance with the
rules and regulations of the [BSP]." (Domondon, Bar
Star Notes on Taxation (2010) p.40-41)
7. PERSONS LIABLE
Under Section 105 of the Tax Code and Sec.
4.105-1 of RR No. 16-2005, the following are liable
for VAT:
(1) any person who in the course of trade or
business sells, barters, exchanges, leases
goods or properties;
ESTATE TAX, DONOR’S TAX, VAT, TAXPAYERS REMEDIES
(2) any person who in the course of trade or
business renders services; and
(3) any person who imports goods whether or
not made in the course of trade or
business;
The fourth was added to the enumeration, to
wit:
(4) any person who is engaged in exportation.
(Sababan, Taxation Law Review, p.159)
The last paragraph of Section 105 provides that
services rendered in the Philippines by nonresident
foreign persons shall be considered as being
rendered in the course of trade or business.
The term “in the course of trade or business”
means the regular conduct or pursuit of a
commercial or economic activity, including
transactions incidental thereto, by any person
regardless of whether or not the person engaged
therein is a non-stock, non-profit private
organization (irrespective of the disposition of its
net income and whether or not it sells exclusively
to members or their guests), or government entity.
(Sec. 4.105-3, RR No. 16-2005; Sec. 105, NIRC))
Non-stock, non-profit organizations or
government entities are liable to pay VAT on the
sale of goods or services.
Sec. 105 of the Tax Code clarifies that even a
nonstock,non-profit organization or government
entity, is liable to pay VAT on the sale of goods
orservices. VAT is a tax on transactions, imposed at
every stage of the distribution process on the sale,
barter, exchange of goods or property, and on the
performance of services, even in the absence of
profit attributable thereto. The term "in the course
of trade or business" requires the regular conduct
or pursuit of a commercial or an economic activity,
regardless of whether or not the entity is profit-
oriented. (Commissioner of Internal Revenue vs. Court of
Appeals, et al., G.R. No. 125355, March 30, 2000, NIRC
Manual for UV Class, p.45)
8. VAT ON SALE OF GOODS OR PROPERTIES
AMILING, EVELYN S. 181
 AMILING, BEBER, CAINDAY,CONEJERO, FERUELO & LIAO TAXATION LAW REVIEWER FOR THE 2011 BAR
There shall be levied, assessed and collected
on every sale, barter or exchange of goods or
properties, a VAT equivalent to twelve percent
(12%) of the gross selling price or gross value in
money of the goods or properties sold, bartered or
exchanged to be paid by the seller or transferor.
The term 'goods' or 'properties' shall mean all
tangible and intangible objects which are capable
of pecuniary estimation and shall include:
(a) Real properties held primarily for sale to
customers or held for lease in the ordinary
course of trade or business;
(b) The right or the privilege to use patent,
copyright, design or model, plan, secret
formula or process, goodwill, trademark,
trade brand or other like property or right;
(c) The right or the privilege to use in the
Philippines of any industrial, commercial or
scientific equipment;
(d) The right or the privilege to use motion
picture films, tapes and discs; and
(e) Radio, television, satellite transmission and
cable television time.
The term 'gross selling price' means the total
amount of money or its equivalent which the
purchaser pays or is obligated to pay to the seller
in consideration of the sale, barter or exchange of
the goods or properties, excluding the value-added
tax. The excise tax, if any, on such goods or
properties shall form part of the gross selling price.
(Sec. 106 (A)(1), NIRC)
a. Requisites of taxability of sale of goods or
properties
Requisites of a taxable sale of goods (whether
tangible or intangible):
(1) there must be an actual or deemed sale of
goods or properties for a valuable
consideration;
(2) the sale must be undertaken in the course
of trade or business;
182 AMILING, EVELYN S.
(3) the goods sold must be for the use or
consumption in the Philippines; and
(4) the sale must not be exempt from VAT
under the Tax Code, special law or
international agreement. (Mamalateo,
Reviewer on Taxation, p.325)
Requisites of a taxable sale or exchange of real
property:
(1) the sale must be executed in a public
document;
(2) the real property must be located in the
Philippines;
(3) the seller or the transferor is engaged in
real estate business either as a real estate
dealer, developer, or lessor;
(4) the real property is held primarily for sale
or for lease in the ordinary course of his
trade or business; and
(5) the sale must not be exempt from VAT
under the Tax Code, special law or
international agreement. (Mamalateo,
Reviewer on Taxation, p.325)
 Real properties primarily for sale to
customers or held for lease in the ordinary course
of trade or business of the seller shall be subject to
VAT. (Rev. Regs. No. 16-2005, Sec. 4.106-3, 1st
par.) Thus, capital transactions of individuals are
not subject to VAT. Only real estate dealers are
subject to VAT. (Domondon, Bar Star Notes on Taxation
(2010) pp. 38-39)
“Real estate dealer” includes any person
engaged in the business of buying, developing,
selling, exchanging real properties as principal and
holding himself out as a full or part-time dealer in
real estate. (Sec. 4.6-3, RR No. 16-2005)
Types of Sales
Actual Sale – a VAT registered person is the
seller and another VAT registered person is the
buyer.
ESTATE TAX, DONOR’S TAX, VAT, TAXPAYERS REMEDIES
 AMILING, BEBER, CAINDAY,CONEJERO, FERUELO & LIAO TAXATION LAW REVIEWER FOR THE 2011 BAR
Deemed Sale – the Seller is also the buyer and
no valuable consideration is thus paid. (Mamalateo,
Reviewer on Taxation, p.326)
9. ZERO RELATED SALES OF GOODS OR
PROPERTIES, AND EFFECTIVELY ZERO RELATED
SALES OF GOODS OR PROPERTIES
The following sales by VAT-registered persons
shall be subject to zero percent (0%) rate:
(a) Export Sales. - The term 'export sales'
means:
(1) The sale and actual shipment of goods
from the Philippines to a foreign country
 irrespective of any shipping
arrangement that may be agreed upon
which may influence or determine the
transfer of ownership of the goods so
exported and
 paid for in acceptable foreign currency
or its equivalent in goods or services,
and
 accounted for in accordance with the
rules and regulations of the Bangko
Sentral ng Pilipinas (BSP);
(2) Sale of raw materials or packaging
materials to a nonresident buyer for
 delivery to a resident local export-
oriented enterprise
 to be used in manufacturing,
processing, packing or repacking in the
Philippines of the said buyer's goods
and
 paid for in acceptable foreign currency
and accounted for in accordance with
the rules and regulations of the Bangko
Sentral ng Pilipinas (BSP);
(3) Sale of raw materials or packaging
materials to export-oriented enterprise
ESTATE TAX, DONOR’S TAX, VAT, TAXPAYERS REMEDIES
 whose export sales exceed seventy
percent (70%) of total annual
production;
(4) Sale of gold to the Bangko Sentral ng
Pilipinas (BSP); and
(5) Those considered export sales under
Executive Order NO. 226, otherwise known as
the Omnibus Investment Code of 1987, and
other special laws.
(b) Foreign Currency Denominated Sale. - The
phrase 'foreign currency denominated sale'
means sale to a nonresident of goods, except
sale of automobiles and non-essential goods,
 assembled or manufactured in the
Philippines
 for delivery to a resident in the
Philippines,
 paid for in acceptable foreign currency
and accounted for in accordance with
the rules and regulations of the Bangko
Sentral ng Pilipinas (BSP).
(c) Sales to persons or entities whose
exemption under special laws or international
agreements to which the Philippines is a
signatory effectively subjects such sales to zero
rate. (Sec. 106(A)(2), NIRC)
Zero rating is primarily intended to be enjoyed
by the seller, which charges no output VAT but can
claim a refund of or a tax credit certificate for the
input VAT previously charged to it by suppliers.
(Commissioner of Internal Revenue v. Manila Mining
Corporation, G.R. No. 153204, August 31, 2005, Domondon,
Bar Star Notes on Taxation (2010) p.41)
Export sales of goods which are destined to be
used or consumed outside of the Philippines are
subject to VAT at 0%. This is in conformity with the
principle that the VAT is a tax on consumption of
goods in the Philippines. Sale of goods by a VAT
registered person located in the Customs territory
will also be deemed as export sale and thus zero-
rated, if made to a corporation registered with
AMILING, EVELYN S. 183
 AMILING, BEBER, CAINDAY,CONEJERO, FERUELO & LIAO TAXATION LAW REVIEWER FOR THE 2011 BAR
PEZA or SBMA, since the special economic zone or
free port zone is considered by fiction of law as a
foreign territory. (RR No. 4-2007; RMC 74-99 cited in
Mamalateo, Reviewer on Taxation, p.329)
10. TRANSACTIONS DEEMED SALE
a. Transfer, use or consumption not in the
course of business of goods/properties
originally intended for sale or use in the
course of business
b. Distribution or transfer to shareholders ,
investors or creditors
c. Consignment of goods if actual sale not
made within 60 days from date of
consignment
d. Retirement from or cessation of business
with respect to inventories on hand
The withdrawal or consumption of goods
results in the personal use or consumption by the
seller himself, who is effectively the final
consumer, such withdrawal or transfer is deemed a
sale subject to VAT. The rationale of the
transaction deemed sale provision is to recapture
the VAT that was claimed as input tax at the time
of the purchase. (Mamalateo, Reviewer on Taxation,
p.326)
11. CHANGE OR CESSATION OF STATUS AS VAT-
REGISTERED PERSON
a. Subject to output tax
The VAT shall apply to goods or properties
originally intended for sale or use in business,
and capital goods which are existing as of the
occurrence of the following:
(1) Change of business activity from Vat
taxable status to VAT-exempt status
(2) Approval of request for cancellation of
a registration due to reversion to
exempt status
(3) Approval of request for cancellation
due to desire to revert to exempt
184 AMILING, EVELYN S.
status after lapse of 3 consecutive
years
b. Not subject to output tax
The VAT shall not apply to goods or
properties existing as of the occurrence of the
following:
(1) Change of control of a corporation
(2) Change in the trade or corporate name
(3) Merger or consolidation of corporation
(Sec. 4.106-8, RR No. 16-2005)
12. VAT ON IMPORTATION OF GOODS
There shall be levied, assessed and collected
on every importation of goods a VAT equivalent to
twelve percent (12%)
(a) based on the total value used by the
Bureau of Customs in determining
tariff and customs duties plus excise
taxes, if any, and other charges, such
as postage, commission, and similar
charges, prior to the release of the
goods from customs custody.
(b) based on the landed cost plus excise
taxes, If any where the customs duties
are determined on the basis of the
quantity or volume of the goods.
Landed cost consists of the invoice
amount, customs duties, freight,
insurance and other charges. If the
goods imported are subject to excise
tax, the excise tax shall form part of
the tax base. (Sec. 4.107-1, RR No.16-2005;
Sec. 107(A), NIRC)
“Importer” refers to any person who brings
goods into the Philippines, whether or not made in
the course of his trade or business. It includes non-
exempt persons or entities who acquire tax-free
imported goods from exempt persons, entities or
agencies. (Sec. 4.107-1, RR No.16-2005)
a. Transfer of goods by tax-exempt person
ESTATE TAX, DONOR’S TAX, VAT, TAXPAYERS REMEDIES
 AMILING, BEBER, CAINDAY,CONEJERO, FERUELO & LIAO TAXATION LAW REVIEWER FOR THE 2011 BAR
In the case of tax-free importation of goods
into the Philippines by persons, entities or agencies
exempt from tax where such goods are
subsequently sold, transferred or exchanged in the
Philippines to non-exempt persons or entities, the
purchasers, transferees or recipients shall be
considered the importers thereof, who shall be
liable for any internal revenue tax on such
importation. The tax due on such importation shall
constitute a lien on the goods superior to all
charges or liens on the goods, irrespective of the
possessor thereof. (Sec. 107(B), NIRC)
13. VAT ON SALE OF SERVICE AND USE OR LEASE
OF PROPERTIES
There shall be levied, assessed and collected, a
VAT equivalent to twelve percent (12%) of gross
receipts derived from:
(a) sale or exchange of services;
(b) use or lease of properties. (Sec.108, NIRC)
The phrase 'sale or exchange of services'
means:
(a) the performance of all kinds or services in
the Philippines for others for a fee,
remuneration or consideration, including
those performed or rendered by
construction and service contractors;
(b) stock, real estate, commercial, customs
and immigration brokers;
(c) lessors of property, whether personal or
real; warehousing services;
(d) lessors or distributors of cinematographic
films;
(e) persons engaged in milling processing,
manufacturing or repacking goods for
others;
(f) proprietors, operators or keepers of hotels,
motels, resthouses, pension houses, inns,
resorts;
ESTATE TAX, DONOR’S TAX, VAT, TAXPAYERS REMEDIES
(g) proprietors or operators of restaurants,
refreshment parlors, cafes and other
eating places, including clubs and caterers;
(h) dealers in securities; lending investors;
transportation contractors on their
transport of goods or cargoes, including
persons who transport goods or cargoes
for hire another domestic common carriers
by land, air and water relative to their
transport of goods or cargoes;
(i) services of franchise grantees of telephone
and telegraph, radio and television
broadcasting and all other franchise
grantees except those under Section 119 of
this Code;
(j) services of banks, non-bank financial
intermediaries and finance companies;
(k) non-life insurance companies (except their
crop insurances), including surety, fidelity,
indemnity and bonding companies;
(l) and similar services regardless of whether
or not the performance calls for the
exercise or use of the physical or mental
faculties. (Sec. 108(A), NIRC)
The phrase 'sale or exchange of services' shall
likewise include:
(1) The lease or the use of or the right or
privilege to use any copyright, patent,
design or model, plan secret formula or
process, goodwill, trademark, trade brand
or other like property or right;
(2) The lease of the use of, or the right to use
of any industrial, commercial or scientific
equipment;
(3) The supply of scientific, technical,
industrial or commercial knowledge or
information;
(4) The supply of any assistance that is
ancillary and subsidiary to and is furnished
as a means of enabling the application or
enjoyment of any such property, or right as
AMILING, EVELYN S. 185
 AMILING, BEBER, CAINDAY,CONEJERO, FERUELO & LIAO TAXATION LAW REVIEWER FOR THE 2011 BAR
is mentioned in subparagraph (2) or any
such knowledge or information as is
mentioned in subparagraph (3);
(5) The supply of services by a nonresident
person or his employee in connection with
the use of property or rights belonging to,
or the installation or operation of any
brand, machinery or other apparatus
purchased from such nonresident person.
(6) The supply of technical advice, assistance
or services rendered in connection with
technical management or administration of
any scientific, industrial or commercial
undertaking, venture, project or scheme;
(7) The lease of motion picture films, films,
tapes and discs; and
(8) The lease or the use of or the right to use
radio, television, satellite transmission and
cable television time. (Sec. 108(A), NIRC)
The term 'gross receipts' means the total
amount of money or its equivalent representing
the contract price, compensation, service fee,
rental or royalty, including the amount charged for
materials supplied with the services and deposits
and advanced payments actually or constructively
received during the taxable quarter for the services
performed or to be performed for another person,
excluding value-added tax. (Sec. 108(A), NIRC)
a. Requisites for taxability
(1) The sale of service must be performed
or is to be performed in the course of
trade or business in the Philippines;
(2) For valuable consideration actually or
constructively received; and
(3) The service is not exempt under the
Tax Code, special law or international
agreement. (Mamalateo, Reviewer on
Taxation, p.334)
Lease of properties shall be subject to VAT
irrespective of the place where the contract of
lease or licensing agreement was executed if the
186 AMILING, EVELYN S.
property is leased or used in the Philippines. (Sec.
108(A) , NIRC)
14. ZERO-RATED SALE OF SERVICES
A zero-rated sale of service (by a VAT-
registered person) is a taxable transaction for VAT
purposes, but shall not result in any output tax.
However, the input tax on purchases of goods,
properties or services related to such zero-rated
sale shall be available as tax credit or refund in
accordance with Rev. Regs. No. 16-2005.
(Domondon, Bar Star Notes on Taxation (2010) p.41)
The place where the service is rendered
determines the jurisdiction to impose the VAT. The
place of payment is immaterial much less is the
place where the output of the service will be
further or ultimately used. This is so because the
law neither makes a qualification nor adds a
condition in determining the tax situs of a zero-
rated service. (Commissioner of Internal Revenue v.
American Express International, Inc. (Philipppine Branch), G.
R. No. 152609, June 29, 2005, cited in Domondon, Bar Star
Notes on Taxation (2010) p.40)
The following services performed in the
Philippines by VAT- registered persons shall be
subject to zero percent (0%) rate:
(1) Processing, manufacturing or repacking
goods for other persons doing business
outside the Philippines which goods are
subsequently exported, where the services
are paid for in acceptable foreign currency
and accounted for in accordance with the
rules and regulations of the Bangko Sentral
ng Pilipinas (BSP);
(2) Services other than those mentioned in the
preceding paragraph, the consideration for
which is paid for in acceptable foreign
currency and accounted for in accordance
with the rules and regulations of the
Bangko Sentral ng Pilipinas (BSP);
(3) Services rendered to persons or entities
whose exemption under special laws or
international agreements to which the
ESTATE TAX, DONOR’S TAX, VAT, TAXPAYERS REMEDIES
 AMILING, BEBER, CAINDAY,CONEJERO, FERUELO & LIAO TAXATION LAW REVIEWER FOR THE 2011 BAR
Philippines is a signatory effectively
subjects the supply of such services to zero
percent (0%) rate;
from VAT:
(4) Services rendered to vessels engaged
exclusively in international shipping; and
(5) Services performed by subcontractors
and/or contractors in processing,
converting, of manufacturing goods for an
enterprise whose export sales exceed
seventy percent (70%) of total annual
production.
15. VAT EXEMPT TRANSACTIONS
Zero-rated sale distinguished from exempt
transactions
A zero-rated sale is a taxable transaction but
does not result in an output tax WHILE an exempt
transaction is not subject to the output tax.
The input tax on the purchases of a VAT
registered person who has zero-rated sales may be
allowed as tax credits or refunded WHILE the seller
in an exempt transaction is not entitled to any
input tax on his purchases despite the issuance of a
VAT invoice or receipt.
Persons engaged in transactions which are zero
rated being subject to VAT are required to register
WHILE registration is optional for VAT-exempt
persons. (Domondon, Bar Star Notes on Taxation (2010)
p.41)
a. VAT exempt transactions, in general
The sale of goods or properties and/or services
and the use or lease of properties that is:
(1) not subject to VAT (output tax) and
(2) seller is not allowed any tax credit on VAT
(input tax) purchases.
The person making the exempt sale of goods,
properties or services shall not bill any output tax
to his customers because the said transaction is
not subject to VAT. (Sec. 4.109-1 (A), Rev. Regs. No. 16-
2005)
ESTATE TAX, DONOR’S TAX, VAT, TAXPAYERS REMEDIES
b. Exempt transactions, enumerated
The following transactions shall be exempt
(a) Sale or importation of agricultural and
marine food products in their original
state, livestock and poultry of a kind
generally used as, or yielding or producing
foods for human consumption and
breeding stock and genetic materials
therefore;
(b) Sale or importation of fertilizers, seeds,
seedlings and fingerlings, fish, prawn,
livestock and poultry feeds, including
ingredients, whether locally produced or
imported, used in the manufacture of
finished feeds (except specialty feeds for
race horses, fighting cocks, aquarium fish,
zoo animals and other animals generally
considered as pets);
(c) Importation of personal and household
effects belonging to residents of the
Philippines returning from abroad and non-
resident citizens coming to resettle in the
Philippines; Provided, that such goods are
exempt from customs duties under the
Tariff and Customs Code of the Philippines;
(d) Importation of professional instruments
and implements, wearing apparel,
domestic animals, and personal household
effects (except any vehicle, vessel, aircraft,
machinery and other goods for use in the
manufacture and merchandise of any kind
in commercial quantity) belonging to
persons coming to settle in the Philippines,
for their own use and not for sale, barter
or exchange, accompanying such persons,
or arriving within ninety (90) days before
or after their arrival, upon the production
of evidence satisfactory to the
Commissioner of Internal Revenue, that
such persons are actually coming to settle
in the Philippines and that the change of
residence is bonafide;
AMILING, EVELYN S. 187
AMILING, BEBER, CAINDAY,CONEJERO, FERUELO & LIAO TAXATION LAW REVIEWER FOR THE 2011 BAR
(e) Services subject to percentage tax under
Title V of the Tax Code;
(f) Services by agricultural contract growers
and milling for others of palay into rice,
corn into grits, and sugar cane into raw
sugar;
(g) Medical, dental, hospital and veterinary
services, except those rendered by
professionals;
(h) Educational services rendered by private
educational institutions duly accredited by
the Department of Education (DepED), the
Commission on Higher Education (CHED)
and the Technical Education and Skills
Development Authority (TESDA) and those
rendered by government educational
institutions;
(i) Services rendered by individuals pursuant
to an employer-employee relationship;
(j) Services rendered by regional or area
headquarters established in the Philippines
by multinational corporations which act as
supervisory, communications and
coordinating centers for their affiliates,
subsidiaries or branches in the Asia Pacific
Region and do not earn or derive income
from the Philippines;
(k) Transactions which are exempt under
international agreements to which the
Philippines is a signatory or under special
laws except those granted under PD No.
529 — Petroleum Exploration
Concessionaires under the Petroleum Act
of 1949;
(l) Sales by agricultural cooperatives duly
registered and in good standing with the
Cooperative Development Authority (CDA)
to their members, as well as sale of their
produce, whether in its original state or
processed form, to non-members; their
importation of direct farm inputs,
machineries and equipment, including
spare parts thereof, to be used directly and
188 AMILING, EVELYN S.
exclusively in the production and/or
processing of their produce;
(m) Gross receipts from lending activities by
credit or multi-purpose cooperatives duly
registered and in good standing with the
Cooperative Development Authority;
(n) Sales by non-agricultural, non-electric and
non-credit cooperatives duly registered
with and in good standing with the CDA;
Provided, That the share capital
contribution of each member does not
exceed Fifteen Thousand Pesos
(P15,000.00) and regardless of the
aggregate capital and net surplus ratably
distributed among the members.
(Importation by non-agricultural, non-
electric and non-credit cooperatives of
machineries and equipment, including
spare parts thereof, to be used by them
are subject to VAT.);
(o) Export sales by persons who are not VAT-
registered;
(p) Sale of real properties as follows:
(1) Sale of real properties not primarily
held for sale to customers or held for
lease in the ordinary course of trade or
business.
(2) Sale of real properties utilized for low-
cost housing as defined by RA No.
7279, otherwise known as the “Urban
Development and Housing Act of
1992″ and other related laws, such as
RA No. 7835 and RA No. 8763.
(3) Sale of real properties utilized for
socialized housing as defined under RA
No. 7279, and other related laws, such
as RA No. 7835 and RA No. 8763,
wherein the price ceiling per unit is
P225,000.00 or as may from time to
time be determined by the HUDCC and
the NEDA and other related laws.
ESTATE TAX, DONOR’S TAX, VAT, TAXPAYERS REMEDIES
 AMILING, BEBER, CAINDAY,CONEJERO, FERUELO & LIAO TAXATION LAW REVIEWER FOR THE 2011 BAR
(4) Sale of residential lot valued at One
Million Five Hundred Thousand Pesos
(P1,500,000.00) and below, or house &
lot and other residential dwellings
valued at Two Million Five Hundred
Thousand Pesos (P2,500,000.00) and
below where the instrument of
sale/transfer/disposition was executed
on or after July 1, 2005; Provided, That
not later than January 31, 2009 and
every three (3) years thereafter, the
amounts stated herein shall be
adjusted to its present value using the
Consumer Price Index, as published by
the National Statistics Office (NSO);
Provided, further, that such
adjustment shall be published through
revenue regulations to be issued not
later than March 31 of each year.
If two or more adjacent residential lots
are sold or disposed in favor of one buyer,
for the purpose of utilizing the lots as one
residential lot, the sale shall be exempt
from VAT only if the aggregate value of the
lots do not exceed P1,500,000.00. Adjacent
residential lots, although covered by
separate titles and/or separate tax
declarations, when sold or disposed to one
and the same buyer, whether covered by
one or separate Deed of Conveyance, shall
be presumed as a sale of one residential
lot.
(q) Lease of residential units with a monthly
rental per unit not exceeding Ten
Thousand Pesos (P10,000.00), regardless of
the amount of aggregate rentals received
by the lessor during the year; Provided,
that not later than January 31, 2009 and
every three (3) years thereafter, the
amount of P10,000.00 shall be adjusted to
its present value using the Consumer Price
Index, as published by the NSO;
The foregoing notwithstanding, lease
of residential units where the monthly
rental per unit exceeds Ten Thousand
Pesos (P10,000.00) but the aggregate of
ESTATE TAX, DONOR’S TAX, VAT, TAXPAYERS REMEDIES
such rentals of the lessor during the year
do not exceed One Million Five Hundred
Pesos (P1,500,000.00) shall likewise be
exempt from VAT, however, the same shall
be subjected to three percent (3%)
percentage tax.
In cases where a lessor has several
residential units for lease, some are leased
out for a monthly rental per unit of not
exceeding P10,000.00 while others are
leased out for more than P10,000.00 per
unit, his tax liability will be as follows:
I. The gross receipts from rentals not
exceeding P10,000.00 per month
per unit shall be exempt from VAT
regardless of the aggregate annual
gross receipts.
II. The gross receipts from rentals
exceeding P10,000.00 per month
per unit shall be subject to VAT if
the aggregate annual gross
receipts from said units only (not
including the gross receipts from
units leased for not more than
P10,000.00) exceeds
P1,500,000.00. Otherwise, the
gross receipts will be subject to the
3% tax imposed under Section 116
of the Tax Code.
(r) Sale, importation, printing or publication of
books and any newspaper, magazine,
review, or bulletin which appears at
regular intervals with fixed prices for
subscription and sale and which is not
devoted principally to the publication of
paid advertisements;
(s) Sale, importation or lease of passenger or
cargo vessels and aircraft, including engine,
equipment and spare parts thereof for
domestic or international transport
operations; Provided, that the exemption
from VAT on the importation and local
purchase of passenger and/or cargo
vessels shall be limited to those of one
AMILING, EVELYN S. 189
AMILING, BEBER, CAINDAY,CONEJERO, FERUELO & LIAO TAXATION LAW REVIEWER FOR THE 2011 BAR
hundred fifty (150) tons and above,
including engine and spare parts of said
vessels; Provided, further, that the vessels
to be imported shall comply with the age
limit requirement, at the time of
acquisition counted from the date of the
vessel’s original commissioning, as follows:
(i) for passenger and/or cargo vessels, the
age limit is fifteen (15) years old, (ii) for
tankers, the age limit is ten (10) years old,
and (iii) For high-speed passenger crafts,
the age limit is five (5) years old; Provided,
finally, that exemption shall be subject to
the provisions of Section 4 of Republic Act
No. 9295, otherwise known as “The
Domestic Shipping Development Act of
2004″;
(t) Importation of fuel, goods and supplies by
persons engaged in international shipping
or air transport operations; Provided, that
the said fuel, goods and supplies shall be
used exclusively or shall pertain to the
transport of goods and/or passenger from
a port in the Philippines directly to a
foreign port without stopping at any other
port in the Philippines; Provided, further,
that if any portion of such fuel, goods or
supplies is used for purposes other than
that mentioned in this paragraph, such
portion of fuel, goods and supplies shall be
subject to 10% VAT;
(u) Services of banks, non-bank financial
intermediaries performing quasi-banking
functions, and other non-bank financial
intermediaries subject to percentage tax
under Secs. 121 and 122 of the Tax Code,
such as money changers and pawnshops;
and
(v) Sale or lease of goods or properties or the
performance of services other than the
transactions mentioned in the preceding
paragraphs, the gross annual sales and/or
receipts do not exceed the amount of One
Million Five Hundred Thousand Pesos
190 AMILING, EVELYN S.
(P1,500,000.00); Provided, That not later
than January 31, 2009 and every three (3)
years thereafter, the amount of
P1,500,000.00 shall be adjusted to its
present value using the Consumer Price
Index, as published by the NSO.
For purposes of the threshold of
P1,500,000.00, the husband and the wife
shall be considered separate taxpayers.
However, the aggregation rule for each
taxpayer shall apply. For instance, if a
professional, aside from the practice of his
profession, also derives revenue from
other lines of business which are otherwise
subject to VAT, the same shall be
combined for purposes of determining
whether the threshold has been exceeded.
Thus, the VAT-exempt sales shall not be
included in determining the threshold. (Sec.
4.109-1(B)(1), RR No. 16-200; Sec. 109(1), NIRC)
The enumerated exempt transactions under
Section 109 are exclusive. The provision must be
strictly construed to limit the transactions
exempted from the coverage of VAT.
On the other hand, a VAT registered person
under Section 109 (2) is given an option either to:
(1) be VAT exempt; or be subject to VAT.
The rationale of this option is that VAT exempt
person may incur large amount of input tax in
excess of his output tax, and such input tax can be
credited against any tax under the NIRC. In that
case, said VATable person may elect to be subject
to VAT rather than be exempt. Further, the
election is irrevocable for a period of three (3)
years from the quarter the election was made.
(Sababan, Taxation Law Review, p.176)
16. INPUT TAX AND OUTPUT TAX, DEFINED
The term 'input tax' means the VAT due from
or paid by a VAT-registered person in the course of
his trade or business on importation of goods or
local purchase of goods or services, including lease
or use of property, from a VAT-registered person. It
shall also include the transitional input tax and the
ESTATE TAX, DONOR’S TAX, VAT, TAXPAYERS REMEDIES
 AMILING, BEBER, CAINDAY,CONEJERO, FERUELO & LIAO TAXATION LAW REVIEWER FOR THE 2011 BAR
presumptive input tax. (Sec. 110 (A), NIRC; Sec. 4.109-2
RR16-2005)
The term 'output tax' means the value-added
tax due on the sale or lease of taxable goods or
properties or services by any person registered or
required to register. (Sec. 110 (A), NIRC)
17. SOURCES OF INPUT TAX
a. Purchase or importation of goods
b. Purchase of real properties for which a VAT
has actually been paid
c. Purchase of services in which VAT has
actually been paid
d. Transactions deemed sale
e. Transitional input tax
f. Presumptive input tax
g. Transitional input tax credits allowed
under the transitory and other provisions
of the regulations. (Sec. 110 (A) (3), NIRC; Sec.4.
110-1, RR 16-2005))
18. PERSONS WHO CAN AVAIL OF INPUT TAX
CREDIT
The input tax credit on importation of goods or
local purchases of goods, properties or services by
a VAT-registered person shall be creditable:
(a) To the importer upon payment of VAT
prior to the release of goods from customs
custody;
(b) To the purchaser of the domestic goods or
properties upon consummation of the sale;
or
(c) To the purchaser of services or the lessee
or licensee upon payment of the
compensation, rental, royalty or fee. (Sec.
4.110-2, RR No. 16-2005)
19. DETERMINATION OF INPUT/OUTPUT TAX; VAT
PAYABLE; EXCESS INPUT TAX CREDITS
a. Determination of output tax
ESTATE TAX, DONOR’S TAX, VAT, TAXPAYERS REMEDIES
In a sale of goods or properties, the output tax
is computed by multiplying the gross selling price
by the regular rate of VAT.
Gross Selling Price x 12% = Output Tax
For sellers of services, the output tax is
computed by multiplying the gross receipts by the
regular rate of VAT.
Gross Receipts x 12 % = Output Tax
In all cases where the basis for computing the
output tax is either the gross selling price or the
gross receipts, but the amount of VAT is
erroneously billed in the invoice, the total invoice
amount shall be presumed to be comprised of the
gross selling price/gross receipts plus the correct
amount of VAT. Hence, the output tax shall be
computed by multiplying the total invoice amount
by a fraction using the rate of VAT as numerator
and one hundred percent (100%) plus rate of VAT
as the denominator. Accordingly, the input tax that
can be claimed by the buyer shall be the corrected
amount of VAT computed in accordance with the
formula. (Sec. 4.110-6, RR No. 16-2005)
b. Determination of input tax creditable
The amount of input taxes creditable during a
month or quarter shall be determined by adding all
creditable input taxes arising from the transactions
during the month or quarter plus any amount of
input tax carried-over from the preceding month or
quarter, reduced by the amount of claim for VAT
refund or tax credit certificate (whether filed with
the BIR, the Department of Finance, the Board of
Investments or the BOC) and other adjustments,
such as purchases returns or allowances, input tax
attributable to exempt sales and input tax
attributable to sales subject to final VAT
withholding. (Sec. 4.110-5, RR No. 16-2005)
c. Allocation of input tax on mixed
transactions
A VAT-registered person who is also engaged in
transactions not subject to VAT shall be allowed to
recognize input tax credit on transactions subject
to VAT as follows:
AMILING, EVELYN S. 191
 AMILING, BEBER, CAINDAY,CONEJERO, FERUELO & LIAO TAXATION LAW REVIEWER FOR THE 2011 BAR
(1) All the input taxes that can be directly
attributed to transactions subject to
VAT may be recognized for input tax
credit; Provided, that input taxes that
can be directly attributable to VAT
taxable sales of goods and services to
the Government or any of its political
subdivisions, instrumentalities or
agencies, including government-owned
or controlled corporations (GOCCs)
shall not be credited against output
taxes arising from sales to non-
Government entities; and
(2) If any input tax cannot be directly
attributed to either a VAT taxable or
VAT-exempt transaction, the input tax
shall be pro-rated to the VAT taxable
and VAT-exempt transactions and only
the ratable portion pertaining to
transactions subject to VAT may be
recognized for input tax credit. (Sec.
4.110-4, RR No. 16-2005)
d. Determination of the output tax and VAT
payable and computation of VAT payable
or excess tax credit
If at the end of any taxable quarter the output
tax exceeds the input tax, the excess shall be paid
by the VAT-registered person.
Illustration:
For a given taxable quarter ABC Corp. has
output VAT of 100 and input VAT of 80. Since
output tax exceeds the input tax for such
taxable quarter, all of the input tax may be
utilized to offset against the output tax. Thus,
the net VAT payable is 100 minus 80 = 20.
If the input tax inclusive of input tax carried
over from the previous quarter exceeds the output
tax, the input tax inclusive of input tax carried over
from the previous quarter that may be credited in
every quarter shall not exceed seventy percent
(70%) of the output tax; Provided, That, the excess
input tax shall be carried over to the succeeding
quarter or quarters; Provided, however, that any
input tax attributable to zero-rated sales by a VAT-
192 AMILING, EVELYN S.
registered person may at his option be refunded or
applied for a tax credit certificate which may be
used in the payment of internal revenue taxes,
subject to the limitations as may be provided for by
law, as well as, other implementing rules.
Illustration:
For a given taxable quarter XYZ Corp. has
output VAT of 100 and input VAT of 110. Since
input tax exceeds the output tax for such
taxable quarter, the 70% limitation is imposed
to compute the amount of input tax which may
be utilized. The total allowable input tax which
may be utilized is 70 (70% of the output tax).
Thus, the net VAT payable is 100 less 70 = 30.
The unutilized input tax amounting to 40 is
carried over to the succeeding month. (Sec.
4.110-7, RR No. 16-2005)
20. SUBSTANTIATION OF INPUT TAX CREDIT
a. Input taxes for the importation of goods or the
domestic purchase of goods, properties or
services is made in the course of trade or
business, whether such input taxes shall be
credited against zero-rated sale, non-zero-
rated sales, or subjected to the 5% Final
Withholding VAT, must be substantiated and
supported by the following documents, and
must be reported in the information returns
required to be submitted to the Bureau:
(1) For the importation of goods — import
entry or other equivalent document
showing actual payment of VAT on the
imported goods.
(2) For the domestic purchase of goods and
properties — invoice showing the
information required under Secs. 113 and
237 of the Tax Code.
(3) For the purchase of real property — public
instrument i.e., deed of absolute sale, deed
of conditional sale, contract/agreement to
sell, etc., together with VAT invoice issued
by the seller.
ESTATE TAX, DONOR’S TAX, VAT, TAXPAYERS REMEDIES
 AMILING, BEBER, CAINDAY,CONEJERO, FERUELO & LIAO TAXATION LAW REVIEWER FOR THE 2011 BAR
(4) For the purchase of services — official
receipt showing the information required
under Secs. 113 and 237 of the Tax Code.
A cash register machine tape issued to a
registered buyer shall constitute valid proof of
substantiation of tax credit only if it shows the
information required under Secs. 113 and 237
of the Tax Code.
b. Transitional input tax shall be supported by an
inventory of goods as shown in a detailed list
to be submitted to the BIR.
c. Input tax on “deemed sale” transactions shall
be substantiated with the invoice required
under Sec. 4.113-2 of these Regulations.
d. Input tax from payments made to non-
residents (such as for services, rentals and
royalties) shall be supported by a copy of the
Monthly Remittance Return of Value Added
Tax Withheld (BIR Form 1600) filed by the
resident payor in behalf of the non-resident
evidencing remittance of VAT due which was
withheld by the payor.
e. Advance VAT on sugar shall be supported by
the Payment Order showing payment of the
advance VAT. (Sec. 4.110-8, RR No. 16-2005)
21. REFUND OR TAX CREDIT OF EXCESS INPUT TAX
a. Who may claim for refund/apply for
issuance of tax credit certificate (TCC)
A VAT-registered person whose sales of goods,
properties or services are zero-rated or effectively
zero-rated may apply for the issuance of a tax
credit certificate/refund of input tax attributable to
such sales. The input tax that may be subject of the
claim shall exclude the portion of input tax that has
been applied against the output tax.
In case of zero-rated sales under Secs.
106(A)(2)(a)(1) and (2), and Sec. 106(A)(2)(b) and
Sec. 108(B)(1) and (2) of the Tax Code, the
payments for the sales must have been made in
acceptable foreign currency duly accounted for in
accordance with the BSP rules and regulations.
ESTATE TAX, DONOR’S TAX, VAT, TAXPAYERS REMEDIES
Where the taxpayer is engaged in both zero-
rated or effectively zero-rated sales and in taxable
(including sales subject to final withholding VAT) or
exempt sales of goods, properties or services, and
the amount of creditable input tax due or paid
cannot be directly and entirely attributed to any
one of the transactions, only the proportionate
share of input taxes allocated to zero-rated or
effectively zero-rated sales can be claimed for
refund or issuance of a tax credit certificate.
In the case of a person engaged in the
transport of passenger and cargo by air or sea
vessels from the Philippines to a foreign country,
the input taxes shall be allocated ratably between
his zero-rated sales and non-zero-rated sales (sales
subject to regular rate, subject to final VAT
withholding and VAT-exempt sales). (Sec. 4.112-1, RR
No. 16-2005)
b. Period to file claim/ apply for issuance of
TCC
The application should be filed within two (2)
years after the close of the taxable quarter when
such sales were made. (Sec. 4.112-1, RR No. 16-2005)
c. Manner of giving refund
Refunds shall be made upon warrants drawn
by the Commissioner or by his duly authorized
representative without the necessity of being
countersigned by the Chairman, Commission on
audit, the provisions of the Administrative Code of
1987 to the contrary notwithstanding: Provided,
That refunds under this paragraph shall be subject
to post audit by the Commission on Audit. (Sec. 112
(E), NIRC)
d. Destination principle or Cross-Border
Doctrine
The VAT system uses the destination principle
as a basis for the jurisdictional reach of the tax.
Under this principle goods and services are taxed
only in the country where they are consumed. This
is also known as the “Cross Border Doctrine”,
according to which, no VAT shall be imposed to
form part of the cost of goods destined for
consumption outside of the territorial border of
the taxing authority. Hence, actual or constructive
AMILING, EVELYN S. 193
 AMILING, BEBER, CAINDAY,CONEJERO, FERUELO & LIAO TAXATION LAW REVIEWER FOR THE 2011 BAR
export of goods and services from the Philippines
to a foreign country must be zero-rated for VAT;
while, those destined for use or consumption
within the Philippines shall be imposed the twelve
percent (12%) VAT. (Domondon, Bar Star Notes on
Taxation (2010) p.40-41)
22. INVOICING REQUIREMENTS
a. Invoicing requirements, in general
A VAT-registered person shall issue:
(1) A VAT invoice for every sale, barter or
exchange of goods or properties; and
(2) A VAT official receipt for every lease of
goods or properties, and for every sale,
barter or exchange of services.
Only VAT-registered persons are required to
print their TIN followed by the word “VAT” in their
invoice or official receipts. Said documents shall be
considered as a “VAT Invoice” or VAT official
receipt. All purchases covered by invoices/receipts
other than VAT Invoice/VAT Official Receipt shall
not give rise to any input tax.
VAT invoice/official receipt shall be prepared at
least in duplicate, the original to be given to the
buyer and the duplicate to be retained by the seller
as part of his accounting records. (Sec. 4.113-1(A), RR
No. 16-2005)
Information contained in VAT invoice or VAT
official receipt.
The following information shall be indicated in
VAT invoice or VAT official receipt:
(1) A statement that the seller is a VAT-
registered person, followed by his TIN;
(2) The total amount which the purchaser pays
or is obligated to pay to the seller with the
indication that such amount includes the
VAT; Provided, That:
(a) The amount of tax shall be shown as a
separate item in the invoice or receipt;
194 AMILING, EVELYN S.
(b) If the sale is exempt from VAT, the
term “VAT-exempt sale” shall be
written or printed prominently on the
invoice or receipt;
(c) If the sale is subject to zero percent
(0%) VAT, the term “zero-rated sale”
shall be written or printed prominently
on the invoice or receipt;
(d) If the sale involves goods, properties or
services some of which are subject to
and some of which are VAT zero-rated
or VAT-exempt, the invoice or receipt
shall clearly indicate the break-down of
the sale price between its taxable,
exempt and zero-rated components,
and the calculation of the VAT on each
portion of the sale shall be shown on
the invoice or receipt. The seller has
the option to issue separate invoices or
receipts for the taxable, exempt, and
zero-rated components of the sale.
(3) In the case of sales in the amount of one
thousand pesos (P1,000.00) or more where
the sale or transfer is made to a VAT-
registered person, the name, business
style, if any, address and TIN of the
purchaser, customer or client, shall be
indicated in addition to the information
required in (1) and (2) of this Section. (Sec.
4.113-1(B), RR No. 16-2005)
b. Invoicing and recording deem sale
transactions
In the case of transfer, use or consumption not
in the course of business of goods/properties
originally intended for sale or use in the course of
business, a memorandum entry in the subsidiary
sales journal to record withdrawal of goods for
personal use is required.
In the case of distribution or transfer to
shareholders, investors or creditors and
consignment of goods if actual sale not made
within 60 days from date of consignment, an
invoice shall be prepared at the time of the
occurrence of the transaction, which should
ESTATE TAX, DONOR’S TAX, VAT, TAXPAYERS REMEDIES
 AMILING, BEBER, CAINDAY,CONEJERO, FERUELO & LIAO TAXATION LAW REVIEWER FOR THE 2011 BAR
include, all the information that should be
indicated in a VAT invoice or VAT OR. The data
appearing in the invoice shall be duly recorded in
the subsidiary sales journal. The total amount of
“deemed sale” shall be included in the return to be
filed for the month or quarter.
In the case of retirement from or cessation of
business, an inventory of goods on hand shall be
prepared and submitted to the RDO who has
jurisdiction over the taxpayer’s principal place of
business not later than 30 days after retirement or
cessation from business.
An invoice shall be prepared for the entire
inventory, which shall be the basis of the entry into
the subsidiary sales journal. The invoice need not
enumerate the specific items appearing in the
inventory, but it must show the total amount. It is
sufficient to just make a reference to the inventory
regarding the description of the goods. However,
the sales invoice number should be indicated in the
inventory filed and a copy thereof shall form part
of this invoice. If the business is to be continued by
the new owners or successors, the entire amount
of output tax on the amount deemed sold shall be
allowed as input taxes. If the business is to be
liquidated and the goods in the inventory are sold
or disposed of to VAT-registered buyers, an invoice
or instrument of sale or transfer shall to prepared
citing the invoice number wherein the tax was
imposed on the deemed sale. At the same time the
tax paid corresponding to the goods sold should be
separately indicated in the instrument of sale.
Example: “A”, at the time of retirement, had
1,000 pieces of merchandise which was deemed
sold at a value of P20,000.00 with an output tax of
P2,000.00. After retirement, “A” sold to “B”, 500
pieces for P12,000.00. In the contract of sale or
invoice, “A” should state the sales invoice number
wherein the output tax on “deemed sale” was
imposed and the corresponding tax paid on the
500 pieces is P1,000.00, which is included in the
P12,000.00, or he should indicate it separately as
follows:
Gross selling price P11,000.00
VAT previously paid on
ESTATE TAX, DONOR’S TAX, VAT, TAXPAYERS REMEDIES
“deemed sale”
1,000.00
————
—
Total
P12,000.00
In this case, “B” shall be entitled only to P1,000
as input tax and not 1/11 of P12,000.00. (Sec. 4.113-
2, RR No. 16-2005)
c. Consequences of issuing, erroneous VAT
invoice or VAT official receipt
Issuance of a VAT Invoice or VAT Receipt by a
non-VAT person.
If a person who is not VAT-registered issues an
invoice or receipt showing his TIN, followed by the
word “VAT”, the erroneous issuance shall result to
the following:
(1) The non-VAT person shall be liable to:
(a) the percentage taxes applicable to his
transactions;
(b) VAT due on the transactions under Sec.
106 or 108 of the Tax Code, without
the benefit of any input tax credit; and
(c) a 50% surcharge under Sec. 248 (B) of
the Tax Code;
(2) VAT shall be recognized as an input tax
credit to the purchaser provided the
requisite information required is shown on
the invoice or receipt.
Issuance of a VAT Invoice or VAT Receipt on an
Exempt Transaction by a VAT-registered Person.
If a VAT-registered person issues a VAT invoice
or VAT official receipt for a VAT-exempt
transaction, but fails to display prominently on the
invoice or receipt the words “VAT-exempt sale”,
the transaction shall become taxable and the issuer
shall be liable to pay VAT thereon. The purchaser
shall be entitled to claim an input tax credit on his
purchase. (Sec. 4.113-4, RR No. 16-2005; Sec.113(E),
NIRC)
AMILING, EVELYN S. 195
 AMILING, BEBER, CAINDAY,CONEJERO, FERUELO & LIAO TAXATION LAW REVIEWER FOR THE 2011 BAR

23. FILING OF RETURN AND PAYMENT month the withholding was made. (Sec. 114 (C), NIRC
as amended by Revenue Memorandum Circular No. 7-2006)
Every person liable to pay the VAT shall file a
quarterly return of the amount of his gross sales or
receipts within twenty-five (25) days following the E. COMPLIANCE REQUIREMENTS
close of each taxable quarter. VAT-registered
persons shall pay the VAT on a monthly basis. 1. ADMINISTRATIVE REQUIREMENTS
Sec.113 (D), NIRC)
A person who is subject o internal revenue tax
Any person, whose registration has been
must comply with certain administrative
cancelled, shall file a return and pay the tax due
requirements prescribed by the Tax Code. These
within twenty-five (25) days from the date of
are:
cancellation of registration. Only one consolidated
(1) Registration as a VAT taxpayer;
return shall be filed by the taxpayer for his
principal place of business or head office and all (2) Keeping and stamping of books of
branches. Sec.113 (D), NIRC) accounts, sales, invoices and official
receipts and other accounting records;
Amounts reflected in the monthly VAT
declarations for the first two (2) months of the (3) Issuance of invoices and receipts;
quarter shall still be included in the quarterly VAT
return which reflects the cumulative figures for the (4) Filing of tax returns and payments of taxes;
taxable quarter. Payments in the monthly VAT and
declarations shall, however, be credited in the
quarterly VAT return to arrive at the net VAT (5) Withholding of taxes on certain income.
(Mamalateo, Reviewer on Tax, p.386)
payable or excess input tax/over-payment as of the
end of a quarter. (Sec. 4.114-1(A), RR No. 16-2005) A. REGISTRATION REQUIREMENTS
24. WIHHOLDING OF FINAL VAT ON SALES TO
Every person subject to any internal revenue
GOVERNMENT
tax shall register once with the appropriate
The Government or any of its political Revenue District Officer:
subdivisions, instrumentalities or agencies,
including government-owned or -controlled (1) Within ten (10) days from date of
corporations (GOCCs) shall, before making employment, or
payment on account of each purchase of goods (2) On or before the commencement of
and services which are subject to the value-added business, or
tax imposed in Sections 106 and 108 of this Code,
deduct and withhold the value-added tax due at (3) Before payment of any tax due, or
the rate of five percent (5%) of the gross payment
thereof: Provided, That the payment for lease or (4) Upon filing of a return, statement or
use of properties or property rights to nonresident declaration as required in this Code.
owners shall be subject to twelve percent (12%)
The registration shall contain the taxpayer's
withholding tax at the time of payment. For this
name, style, place of residence, business and such
purpose, the payor or person in control of the
other information as may be required by the
payment shall be considered as the withholding
Commissioner in the form prescribed therefor.
agent.
A person maintaining a head office, branch or
The value-added tax withheld shall be remitted
within ten (10) days following the end of the facility shall register with the Revenue District
Officer having jurisdiction over the head office,

196 AMILING, EVELYN S. ESTATE TAX, DONOR’S TAX, VAT, TAXPAYERS REMEDIES
 AMILING, BEBER, CAINDAY,CONEJERO, FERUELO & LIAO TAXATION LAW REVIEWER FOR THE 2011 BAR
branch or facility. The term 'facility' may include
but not be limited to sales outlets, places of
production, warehouses or storage places. (Sec.
236(A), NIRC)
1) Annual registration fee
An annual registration fee in the amount of
Five hundred pesos (P500) shall be paid upon
registration and every year thereafter on or before
the last day of January for every separate or
distinct establishment or place of business,
including facility types where sales transactions
occur.
Exceptions: (1) cooperatives, (2) individuals
earning purely compensation income, whether
locally or abroad, and (3) overseas workers are not
liable to pay the registration fee.
Where to pay: (1) an authorized agent bank
located within the revenue district, or (2) to the
Revenue Collection Officer, or (3) duly authorized
Treasurer of the city of municipality where each
place of business or branch is registered. (Sec. 236
(B), NIRC)
2) Registration or each type of internal
revenue tax
Every person required to register with the
Bureau of Internal Revenue shall: (1) register each
type of internal revenue tax for which he is
obligated, (2) file a return and (3) pay such taxes,
and (4) updates such registration of any changes.
(Sec. 236 (C), NIRC)
3) Transfer of registration
A registered person who decides to transfer his
place of business or his head office or branches,
has the duty to update his registration status by
filing an application for registration information
update in the form prescribed therefor. (Sec. 236 (D),
NIRC)
4) Other updates
Any person registered shall, whenever
applicable, update his registration information with
ESTATE TAX, DONOR’S TAX, VAT, TAXPAYERS REMEDIES
the Revenue District Office where he is registered,
specifying therein any change in type and other
taxpayer details. (Sec. 236 (E), NIRC)
5) Cancellation of registration
Generally, the registration of any person who
ceases to be liable to a tax type shall be cancelled
upon filing with the Revenue District Office where
he is registered an application for registration
information update in a form prescribed therefor.
(Sec. 236 (F)(1), NIRC)
6) Power of the Commissioner to suspend
the business operation of any person who
fails to register
The Commissioner or his authorized
representative is empowered to suspend the
business operations and temporarily close the
business establishment of any person for any of
the following violations:
(a) In the case of a VAT-registered Person.
(1) Failure to issue receipts or invoices;
(2) Failure to file a value-added tax return
as required under Section 114; or
(3) Understatement of taxable sales or
receipts by thirty percent (30%) or
more of his correct taxable sales or
receipts for the taxable quarter.
(b) Failure of any Person to Register as
Required under Section 236. -
The temporary closure of the
establishment shall be for the duration of not
less than five (5) days and shall be lifted only
upon compliance with whatever requirements
prescribed by the Commissioner in the closure
order. (Sec. 115, NIRC)
B. PERSONS REQUIRED TO REGISTER FOR VAT
The VAT system requires to register every
person who in the course of his trade or business,
sells or leases goods, properties and services
subject to VAT, if the aggregate amount of his
actual or expected gross sale or receipts exceed
P1, 500,000 for any 12-month period. (Co Untian, Tax
AMILING, EVELYN S. 197
 AMILING, BEBER, CAINDAY,CONEJERO, FERUELO & LIAO TAXATION LAW REVIEWER FOR THE 2011 BAR
Digest, p. 112; Section 236(G) in relation to Section 110(1)(v),
NIRC)
However, not later than January 31, 2009 and
every three years thereafter, the amount of
P1,500,000 shall be adjusted to its present value
using the Consumer Price Index as published by the
NSO. (Section 110(1)(v), NIRC)
Where to register: Every person liable to
register for VAT shall register with the Revenue
District Office having jurisdiction over the head
office or branch of that person. (Sec.236(G)(2),
NIRC)
Effect of failure to register when required: If
he fails to register, he shall be liable to pay the VAT
as if he were a VAT-registered person, but without
the benefit of input tax credits for the period in
which he was not properly registered. (Sec. 23 (G)(2),
NIRC)
Registration, therefore, as a VAT taxpayer may
be mandatory or directory. A person whose
transactions exceed the prescribed registration
threshold is a taxable person regardless of whether
or not he registers as a VAT person. In other words,
non registration as a VAT person does not exempt
him from VAT (output tax) liability, and based on
existing regulations, he cannot claim any input tax
s a penalty for non-registration. (Mamalateo, Reviewer
on Tax, p.386)
Where to pay Registration fee: The annual
registration fee of P500 shall be paid to (1) an
authorized agent bank located within the revenue
district, or (2) to the Revenue Collection Officer, or
(3) duly authorized treasurer of the municipality or
city where each place of business or branch is
registered. (Sec. 236(B), (G)(2), NIRC)
1) Optional registration for VAT of exempt
person
Any person, whose transactions are exempt
from value-added tax, may update his registration
as a VAT registered person not later than ten (10)
days before the beginning of the taxable quarter
and shall pay the annual registration fee of P500,
unless he has already paid at the beginning of the
year. Any person who elects to be VAT registered
shall not be entitled to cancel his registration for
198 AMILING, EVELYN S.
the next three (3) years counted from the quarter
when the election was made.
The Commissioner may, for administrative
reason, deny any application for registration. Each
VAT registered person shall be assigned only one
taxpayer’s identification number. (Sec. 236 (H),
NIRC)
2) Cancellation of VAT registration
A VAT registered person may cancel his
registration for VAT if:
(a) He makes written application and
demonstrate to the Commissioner’s
satisfaction that his gross sales or receipts
for the following 12 months, other than
VAT exempt transactions, will not exceed P
1,500,000; or
(b) He has ceased to carry on his trade or
business and does not expect to
recommence any trade or business within
the next 12 months.
The cancellation of registration will be effective
from the first day of the following month. (Sec.
236(F) (2), NIRC)
3) Changes in or cessation of status of a VAT
registered person
c. Subject to output tax
The VAT shall apply to goods or properties
originally intended for sale or use in business,
and capital goods which are existing as of the
occurrence of the following:
(1) Change of business activity from Vat
taxable status to VAT-exempt status
(2) Approval of request for cancellation of
a registration due to reversion to
exempt status
(3) Approval of request for cancellation
due to desire to revert to exempt
status after lapse of 3 consecutive
years
d. Not subject to output tax
ESTATE TAX, DONOR’S TAX, VAT, TAXPAYERS REMEDIES
 AMILING, BEBER, CAINDAY,CONEJERO, FERUELO & LIAO TAXATION LAW REVIEWER FOR THE 2011 BAR
The VAT shall not apply to goods or
properties existing as of the occurrence of the
following:
(1) Change of control of a corporation
(2) Change in the trade or corporate name
(3) Merger or consolidation of corporation
(Sec. 4.106-8, RR No. 16-2005)
C. SUPPLYING TAXPAYER IDENTIFICATION
NUMBER (TIN)
Any person required to make, render or file a
return, statement or other document shall be
supplied with or assigned a Taxpayer Identification
Number (TIN) which he shall indicate in such
return, statement or document filed with the
Bureau of Internal Revenue for his proper
identification for tax purposes.
In cases where a registered taxpayer dies, the
administrator or executor shall register the estate
of the decedent and a new Taxpayer Identification
Number (TIN) shall be supplied to the estate of the
deceased taxpayer.
In the case of a nonresident decedent, the
executor or administrator of the estate shall
register the estate with the Revenue District Office
where he is registered. In case such executor or
administrator is not registered, registration of the
estate shall be made with the Taxpayer
Identification Number (TIN) supplied by the
Revenue District Office having jurisdiction over his
legal residence.
Only one Taxpayer Identification Number (TIN)
shall be assigned to a taxpayer. Any person who
shall secure more than one Taxpayer Identification
Number shall be criminally liable. (Sec. 236(I), NIRC)
D. ISSUANCE OF RECEIPTS OR SALES
COMMERCIAL INVOICES
All persons subject to an internal revenue tax
shall, for each sale or transfer of merchandise or
for services rendered valued at Twenty-five pesos
(P25.00) or more, issue duly registered receipts or
ESTATE TAX, DONOR’S TAX, VAT, TAXPAYERS REMEDIES
sales or commercial invoices, prepared at least in
duplicate, showing the date of transaction,
quantity, unit cost and description of merchandise
or nature of service: Provided, however, That
where the receipt is issued to cover payment made
as rentals, commissions, compensations or fees,
receipts or invoices shall be issued which shall
show the name, business style, if any, and address
of the purchaser, customer or client.
The original of each receipt or invoice shall be
issued to the purchaser, customer or client at the
time the transaction is effected, who, if engaged in
business or in the exercise of profession, shall keep
and preserve the same in his place of business for a
period of three (3) years from the close of the
taxable year in which such invoice or receipt was
issued, while the duplicate shall be kept and
preserved by the issuer, also in his place of
business, for a like period.
The Commissioner may, in meritorious cases,
exempt any person subject to internal revenue tax
from compliance with the provisions of this
Section. (Sec. 237,NIRC)
1) Printing of receipts or sales or commercial
invoices
All persons who are engaged in business shall
secure from the Bureau of Internal Revenue an
authority to print receipts or sales or commercial
invoices before a printer can print the same.
No authority to print receipts or sales or
commercial invoices shall be granted unless the
receipts or invoices to be printed are serially
numbered and shall show, among other things, the
name, business style, Taxpayer Identification
Number (TIN) and business address of the person
or entity to use the same, and such other
OR
information that may be required by rules and
regulations to be promulgated by the Secretary of
Finance, upon recommendation of the
Commissioner.
All persons who print receipt or sales or
commercial invoices shall maintain a
AMILING, EVELYN S. 199
 AMILING, BEBER, CAINDAY,CONEJERO, FERUELO & LIAO TAXATION LAW REVIEWER FOR THE 2011 BAR
logbook/register of taxpayers who availed of their
printing services. The logbook/register shall
contain the following information:
(1) Names, Taxpayer Identification Numbers of
the persons or entities for whom the
receipts or sales or commercial invoices
were printed; and
(2) Number of booklets, number of sets per
booklet, number of copies per set and the
serial numbers of the receipts or invoices
in each booklet. (Sec. 238, NIRC)
2) Invoicing requirements for VAT
A VAT-registered person shall issue:
(1) A VAT invoice for every sale, barter or
exchange of goods or properties; and
(2) A VAT official receipt for every lease of
goods or properties, and for every sale,
barter or exchange of services.
Only VAT-registered persons are required to
print their TIN followed by the word “VAT” in their
invoice or official receipts. Said documents shall be
considered as a “VAT Invoice” or VAT official
receipt. All purchases covered by invoices/receipts
other than VAT Invoice/VAT Official Receipt shall
not give rise to any input tax.
VAT invoice/official receipt shall be prepared at
least in duplicate, the original to be given to the
buyer and the duplicate to be retained by the seller
as part of his accounting records. (Sec. 4.113-1(A), RR
16-2005; Sec. 113(A), NIRC)
(a) Information contained in the VAT
invoice or VAT official receipt
The following information shall be
indicated in VAT invoice or VAT official
receipt:
(1) A statement that the seller is a VAT-
registered person, followed by his TIN;
200 AMILING, EVELYN S.
(2) The total amount which the purchaser
pays or is obligated to pay to the seller
with the indication that such amount
includes the VAT; Provided, That:
(a) The amount of tax shall be shown
as a separate item in the invoice or
receipt;
(b) If the sale is exempt from VAT, the
term “VAT-exempt sale” shall be
written or printed prominently on
the invoice or receipt;
(c) If the sale is subject to zero
percent (0%) VAT, the term “zero-
rated sale” shall be written or
printed prominently on the invoice
or receipt;
(d) If the sale involves goods,
properties or services some of
which are subject to and some of
which are VAT zero-rated or VAT-
exempt, the invoice or receipt shall
clearly indicate the break-down of
the sale price between its taxable,
exempt and zero-rated
components, and the calculation of
the VAT on each portion of the sale
shall be shown on the invoice or
receipt. The seller has the option
to issue separate invoices or
receipts for the taxable, exempt,
and zero-rated components of the
sale.
(3) In the case of sales in the amount of
one thousand pesos (P1,000.00) or
more where the sale or transfer is
made to a VAT-registered person, the
name, business style, if any, address
and TIN of the purchaser, customer or
client, shall be indicated in addition to
the information required in (1) and (2)
of this Section. (Sec. 4.113-1(B), RR 16-2005;
Sec. 113(B), NIRC)
(b) Consequences of issuing erroneous
VAT invoice or official receipt
ESTATE TAX, DONOR’S TAX, VAT, TAXPAYERS REMEDIES
 AMILING, BEBER, CAINDAY,CONEJERO, FERUELO & LIAO TAXATION LAW REVIEWER FOR THE 2011 BAR
Issuance of a VAT Invoice or VAT Receipt
by a non-VAT person.
If a person who is not VAT-registered
issues an invoice or receipt showing his
TIN, followed by the word “VAT”, the
erroneous issuance shall result to the
following:
(1) The non-VAT person shall be liable to:
a. the percentage taxes applicable to
his transactions;
b. VAT due on the transactions under
Sec. 106 or 108 of the Tax Code,
without the benefit of any input
tax credit; and
c. a 50% surcharge under Sec. 248 (B)
of the Tax Code;
(2) VAT shall be recognized as an input tax
credit to the purchaser provided the
requisite information required is
shown on the invoice or receipt.
Issuance of a VAT Invoice or VAT Receipt
on an Exempt Transaction by a VAT-
registered Person.
If a VAT-registered person issues a VAT
invoice or VAT official receipt for a VAT-
exempt transaction, but fails to display
prominently on the invoice or receipt the
words “VAT-exempt sale”, the transaction
shall become taxable and the issuer shall
be liable to pay VAT thereon. The
purchaser shall be entitled to claim an
input tax credit on his purchase. (Sec. 4.113-
4, RR No. 16-2005; Sec.113(E), NIRC)
E. EXHIBITION OF CERTIFICATE OF PAYMENT AT
PLACE OF BUSINESS
The certificate or receipts showing payment of
taxes issued to a person engaged in a business
subject to an annual registration fee shall be kept
conspicuously exhibited in plain view in or at the
place where the business is conducted; and in case
of a peddler or other persons not having a fixed
place of business, shall be kept in the possession of
ESTATE TAX, DONOR’S TAX, VAT, TAXPAYERS REMEDIES
the holder thereof, subject to production upon
demand of any internal revenue officer. (Sec.
241,NIRC)
F. CONTINUATION OF BUSINESS OF DECEASED
PERSON
When any individual who has paid the annual
registration fee dies, and the same business is
continued by the person or persons interested in
his estate, no additional payment shall be required
for the residue of the term which the tax was paid.
The person or persons interested in the estate
should, within thirty (30) days from the death of
the decedent, submit to the Bureau of Internal
Revenue or the regional or revenue District Office
inventories of goods or stocks had at the time of
such death.
These requirement shall also be applicable in
the case of transfer of ownership or change of
name of the business establishment. (Sec. 242, NIRC)
G. REMOVAL OF BUSINESS TO ANOTHER
LOCATION
Any business for which the annual registration
fee has been paid may, subject to the rules and
regulations prescribed by the Secretary of Finance,
upon recommendation of the Commissioner, be
removed and continued in any other place without
the payment of additional tax during the term for
which the payment was made. (Sec. 243, NIRC)
2. TAX RETURNS
A. INCOME TAX RETURNS
1) Individual Tax Returns
a) Filing of individual Tax Returns
(1) Who are required to file
The following individuals are required
to file an income tax return:
(a) A resident citizen - on his income
from all sources;
AMILING, EVELYN S. 201
AMILING, BEBER, CAINDAY,CONEJERO, FERUELO & LIAO TAXATION LAW REVIEWER FOR THE 2011 BAR
(b) A nonresident citizen - on his
income derived from sources
within the Philippines;
(c) A resident alien - on his income
derived from sources within the
Philippines; and
(d) A nonresident alien engaged in
trade or business or in the exercise
of profession in the Philippines - on
his income derived from sources
within the Philippines.
The income tax return shall be filed in
duplicate. (Sec. 51(A)(1)(4), NIRC)
(a) Return of husband and wife
General Rule: Legally married
individuals who do not derive
income purely from compensation
shall file jointly.
Exceptions:
(1) purely compensation
earners;
(2) not purely compensation
earners but impracticable
for the spouses to file one
return, each spouse may
file a separate return but
the returns filed shall be
consolidated by the
Bureau for purposes of
verification for the taxable
year. (Sec. 51 (D), NIRC)
(b) Return of parent to include
income of the child
The income of unmarried
minors derived from property
received from a living parent shall
be included in the return of the
parent, except (1) when the
donor's tax has been paid on such
property, or (2) when the transfer
of such property is exempt from
donor's tax. (Sec. 51 (E), NIRC)
202 AMILING, EVELYN S.
(c) Return of persons under
disability
If the taxpayer is unable to
make his own return, the return
may be made by (1) his duly
authorized agent or representative
or (2) by the guardian or other
person charged with the care of his
person or property, the principal
and his representative or guardian
assuming the responsibility of
making the return and incurring
penalties provided for erroneous,
false or fraudulent returns. (Sec. 51
(F), NIRC)
(2) Who are not required to file
The following individuals shall not be
required to file an income tax return;
(a) An individual whose gross income does
not exceed his total personal and
additional exemptions for dependents
under Section 35: Provided, That a
citizen of the Philippines and any alien
individual engaged in business or
practice of profession within the
Philippine shall file an income tax
return, regardless of the amount of
gross income;
(b) An individual with respect to pure
compensation income, as defined in
Section 32 (A)(1), derived from sources
within the Philippines, the income tax
on which has been correctly withheld
under the provisions of Section 79 of
this Code: Provided, That an individual
deriving compensation concurrently
from two or more employers at any
time during the taxable year shall file
an income tax return: Provided,
further, That an individual whose
compensation income derived from
sources within the Philippines exceeds
Sixty thousand pesos (P60,000) shall
also file an income tax return;
ESTATE TAX, DONOR’S TAX, VAT, TAXPAYERS REMEDIES
 AMILING, BEBER, CAINDAY,CONEJERO, FERUELO & LIAO TAXATION LAW REVIEWER FOR THE 2011 BAR

(c) An individual whose sole income has a return within thirty (30) days
been subjected to final withholding tax following each sale or other
pursuant to Section 57(A) of this Code; disposition. (Sec.51 (C), NIRC)
and

(d) An individual who is exempt from

income tax pursuant to the provisions
of this Code and other laws, general or
special.

b) Where to file References:

Except in cases where the Co Untian Jr., Cresencio P., Tax Digest, Rex Printing
Commissioner otherwise permits, the Company, Inc. 2005
return shall be filed with:
Domondon, Abellardo T., Taxation Law Review II,
(1) an authorized agent bank,
GIC Enterprises & Co., Inc, 8th edition, 2009
(2) Revenue District Officer,
(3) Collection Agent or Domondon, Abellardo T., Bar Star Notes on
(4) duly authorized Treasurer of the Taxation 2010
city or municipality where the taxpayer has
his legal residence or principal place of Mamalateo, Victorino C., Reviewer on Taxation,
business in the Philippines, or Rex Printing Company, Inc. 2008
(5) with the Office of the
Commissioner, if there be no legal Sababan, Francisco J.., Taxation Law Review, Rex
residence or place of business in the Printing Company, Inc. 2008
Philippines. (Sec.51 (B), NIRC)
Vitug, Jose C. and Acosta, Ernesto D., Tax Law and
c) When to file
Jurisprudence, Rex Printing Company, Inc. 2002
(1) The return of any individual
NATIONAL INTERNAL REVENUE CODE REVIEW
specified above shall be filed on or
MANUAL FOR UV TAX CLASS, Taxation Law
before the fifteenth (15th) day of April
Reviewer | NIRC, www.batasnatin.com/.../1340-
of each year covering income for the
taxation-law-reviewer-nirc.html
preceding taxable year.
http://www.bir.gov.ph/taxinfo/taxinfo.htm
(2) Individuals subject to tax on capital
gains;

(a) From the sale or exchange of shares

of stock not traded thru a local stock
exchange as prescribed under Section
24(c) shall file a return within thirty
(30) days after each transaction and a
final consolidated return on or before
April 15 of each year covering all stock
transactions of the preceding taxable
year; and

(b) From the sale or disposition of real

property under Section 24(D) shall file

ESTATE TAX, DONOR’S TAX, VAT, TAXPAYERS REMEDIES AMILING, EVELYN S. 203
 AMILING, BEBER, CAINDAY, CONEJERO, FERUELO & LIAO TAXATION LAW REVIEWER FOR THE 2011 BAR
2. Government Remedies
Remedies provided by the NIRC:
1. Administrative remedies- remedies available at
the administrative (BIR) level.
a. distraint
b. levy
c. tax lien
2. Judicial remedies- remedies that are enforced
through judicial action, which may be civil or
criminal.
a. civil action
b. criminal action
a. Administrative remedies
1) Tax lien
Tax lien- is a legal claim or change on
property, either real or personal, as security for the
tax obligation.
Nature of Tax Lien
The unpaid tax constitutes as a burden
upon all property and property rights belonging to
the delinquent tax payer. The lien is a warning to
all potential buyers of that property that any
proceeds of the sale should first be applied to the
tax delinquency.
The notice of lien usually made upon the
real property is filed by the BIR Commissioner in
the office of the Register of Deeds of the province
or city where the property of the taxpayer is
situated or located.
The lien shall not be valid against any
mortgage purchaser or judgment creditor until the
filing of the above notice or lien.
Tax lien superior to judgment claim of private
property. REASON: A tax lien attaches NOT ONLY
from the service of the warrant of distraint of
personal property BUT from the time the tax
204 FERUELO, MARIVIC MORGIA
become due and payable. (2008Domondon, 445-
446)
2) Levy and sale of real property
Sec. 207. (B) Levy on Real Property. - After the
expiration of the time required to pay the
delinquent tax or delinquent revenue as
prescribed in this Section, real property may be
levied upon, before simultaneously or after the
distraint of personal property belonging to the
delinquent. To this end, any internal revenue
officer designated by the Commissioner or his
duly authorized representative shall prepare a
duly authenticated certificate showing the name
of the taxpayer and the amounts of the tax and
penalty due from him. Said certificate shall
operate with the force of a legal execution
throughout the Philippines.
Levy shall be affected by writing upon said
certificate a description of the property upon
which levy is made. At the same time, written
notice of the levy shall be mailed to or served
upon the Register of Deeds for the province or
city where the property is located and upon the
delinquent taxpayer, or if he be absent from the
Philippines, to his agent or the manager of the
business in respect to which the liability arose, or
if there be none, to the occupant of the property
in question.
In case the warrant of levy on real property is not
issued before or simultaneously with the warrant
of distraint on personal property, and the
personal property of the taxpayer is not sufficient
to satisfy his tax delinquency, the Commissioner
or his duly authorized representative shall, within
thirty (30) days after execution of the distraint,
proceed with the levy on the taxpayer's real
property.
Within ten (10) days after receipt of the warrant,
a report on any levy shall be submitted by the
GOVERNMENT REMEDIES
 AMILING, BEBER, CAINDAY, CONEJERO, FERUELO & LIAO TAXATION LAW REVIEWER FOR THE 2011 BAR
levying officer to the Commissioner or his duly
authorized representative: Provided, however,
That a consolidated report by the Revenue
Regional Director may be required by the
Commissioner as often as necessary: Provided,
further, That the Commissioner or his duly
authorized representative, subject to rules and
regulations promulgated by the Secretary of
Finance, upon recommendation of the
Commissioner, shall have the authority to lift
warrants of levy issued in accordance with the
provisions hereof.
Levy on real property
Levy is a remedy whereby the collection of
delinquent taxes is enforced on the real property
belonging to the delinquent taxpayer.
a. The internal revenue officer designated by the
BIR or his duly authorized representative shall
prepare a duly authenticated certificate.
1. Showing the name of the taxpayer and the
amounts of the tax and penalty due from
him.
2. Said certificate shall operate with the force
of a legal execution throughout the
Philippines.
b. Levy shall be effected by writing upon a said
certificate a description of the property upon
which levy is made.
c. At the same time, written notice of the levy shall
be mailed to or served upon the Register of the
deeds of the province or city where the property
is located upon
1. The delinquent taxpayer, or
2. If he absent from the Philippines, to his
agent or the manager of the business in
respect to which the liability arose, or
GOVERNMENT REMEDIES
3. If there be none, to the occupant of the
property in question.
NOTE: Real property may be levied upon, before,
simultaneously or after the distraint or personal
property belonging to the delinquent.
If the personal property of the delinquent is
not sufficient to satisfy his tax delinquency, the BIR
Commissioner or his duly authorized
representative shall, within thirty (30) days after
execution of the distraint, proceed with the levy on
the taxpayer’s real property. (2008Domondon, 442-
443)
Right of Pre-emption
Sec. 213 provides that at any time before
the day fixed for the sale, the taxpayer may
discontinue all proceedings by paying the taxes,
penalties and interest.
Right of Redemption
Sec. 214 provides that within one (1) year
from the date of sale, the delinquent taxpayer, or
any one for him, shall have the right of paying to
the BIR the amount of public taxes, penalties, and
interest thereon from the date of delinquency to
the date of sale xxx, and such payment shall entitle
the person paying to the delivery of the certificate
issued to the purchaser and a certificate from said
BIR that he has thus redeemed the property.
In case the real property of the taxpayer is
levied by the government, such property shall be
sold in public auction. It is however, required that
the Commisioner shall give, not less that 20 days
notice before the sale and disposition of the real
property in public auction. The real property levied
may also be sold in a private sale but this sale is
subject to the prior approval of the Secretary of
Finance. (Sababan, 197)
FERUELO, MARIVIC MORGIA 205
 AMILING, BEBER, CAINDAY, CONEJERO, FERUELO & LIAO TAXATION LAW REVIEWER FOR THE 2011 BAR
3) Forfeiture of real property to the
government for want of bidder
SEC. 215. Forfeiture to Government for Want of
Bidder. - In case there is no bidder for real
property exposed for sale as herein above
provided or if the highest bid is for an amount
insufficient to pay the taxes, penalties and costs,
the Internal Revenue Officer conducting the sale
shall declare the property forfeited to the
Government in satisfaction of the claim in
question and within two (2) days thereafter, shall
make a return of his proceedings and the
forfeiture which shall be spread upon the records
of his office. It shall be the duty of the Register of
Deeds concerned, upon registration with his office
of any such declaration of forfeiture, to transfer
the title of the property forfeited to the
Government without the necessity of an order
from a competent court.
Within one (1) year from the date of such
forfeiture, the taxpayer, or any one for him may
redeem said property by paying to the
Commissioner or the latter's Revenue Collection
Officer the full amount of the taxes and penalties,
together with interest thereon and the costs of
sale, but if the property be not thus redeemed,
the forfeiture shall become absolute.
The sale in public auction of the levied
property may have two results:
1. there is bidder and the bid is enough;
2. there is no bidder or there is bidder but the bid
is not enough.
In case there is no bidder for real property
levied or sold at public auction or if the highest bid
is for an amount insufficient to pay the tax due, the
Internal Revenue Officer conducting the sale shall
declare the property forfeited to the Government
in satisfaction of the claim in question and within 2
206 FERUELO, MARIVIC MORGIA
days thereafter, shall make a return of his
proceedings. The Register of Deeds is also
mandated by the Code to transfer the title of the
property forfeited to the Government without the
necessity of an order from a competent court. In
this case, the taxpayer is given 1 year from the date
of the forfeiture to redeem the property. However,
if there is no redemption made, the forfeiture hall
become absolute. In this case, no further levy is
allowed.
In case there is a bidder and the bid is not
enough, the rules on distraint of personal property
shall be applicable. In case there is still a deficiency
after the proceeds are applied to the tax liability,
there shall be further levy on the real properties of
the taxpayer. (Sababan, 197)
4) Further distraint and levy
SEC. 217. Further Distraint or Levy. - The remedy
by distraint of personal property and levy on
realty may be repeated if necessary until the full
amount due, including all expenses, is collected.
5) Suspension of business operation
SEC. 115. Power of the Commissioner to Suspend
the Business Operations of a Taxpayer. - The
Commissioner or his authorized representative is
hereby empowered to suspend the business
operations and temporarily close the business
establishment of any person for any of the
following violations:
(a) In the case of a VAT-registered Person. -
(1) Failure to issue receipts or invoices;
(2) Failure to file a value-added tax return
as required under Section 114; or
(3) Understatement of taxable sales or
receipts by thirty percent (30%) or more of his
GOVERNMENT REMEDIES
 AMILING, BEBER, CAINDAY, CONEJERO, FERUELO & LIAO TAXATION LAW REVIEWER FOR THE 2011 BAR
correct taxable sales or receipts for the taxable
quarter.
(b) Failure of any Person to Register as
Required under Section 236. -
The temporary closure of the establishment shall
be for the duration of not less than five (5) days
and shall be lifted only upon compliance with
whatever requirements prescribed by the
Commissioner in the closure order.
6) Non-availability of injunction to restrain
collection of tax
SEC. 218. Injunction not Available to Restrain
Collection of Tax. - No court shall have the
authority to grant an injunction to restrain the
collection of any national internal revenue tax,
fee or charge imposed by this Code.
The provision prohibits any court to have
the authority to grant an injunction for the purpose
abovementioned. The prohibition should not be
applied to taxes other those mentioned in the
NIRC. By way of exception, the CTA, under RA 1125
and RA 9282, is given the authority to issue writs of
injunction provided the contested tax is under the
NIRC. (Sababan, 198)
b. Judicial remedies
1. Civil Action
2. Criminal Action
SEC. 220. Form and Mode of Proceeding in
Actions Arising under this Code. - Civil and
criminal actions and proceedings instituted in
behalf of the Government under the authority of
this Code or other law enforced by the Bureau of
Internal Revenue shall be brought in the name of
the Government of the Philippines and shall be
GOVERNMENT REMEDIES
conducted by legal officers of the Bureau of
Internal Revenue but no civil or criminal action for
the recovery of taxes or the enforcement of any
fine, penalty or forfeiture under this Code shall be
filed in court without the approval of the
Commissioner.
No civil or criminal action for the recovery of
taxes of the enforcement of any fine, penalty or
forfeiture under the NIRC shall be filed in Court
without the approval of the Commissioner.
Further, the action or proceeding shall be
instituted under the name of the Government of
the Philippines. (Sababan, 199)
Civil Action
Two ways by which the civil tax liability of
the taxpayer is enforced by the government
through civil action:
1. by filing a civil case for collection of sum of
money with the regular court (Municipal Court or
RTC); and
2. by filing an answer to the petition for review
filed by the taxpayer with the CTA.
Civil action is available to and initiated by
the government only when a tax liability becomes
delinquent and collectible.
An internal revenue tax is considered
delinquent when:
1. it is unpaid after the lapse of the last day
prescribed by law for its payment; or
2. when an assessment for deficiency tax has
become final and the taxpayer has not paid it
within the period given in the notice of
assessment.
When no return was filed, the taxpayer
shall be considered delinquent as of the time the
FERUELO, MARIVIC MORGIA 207
 AMILING, BEBER, CAINDAY, CONEJERO, FERUELO & LIAO TAXATION LAW REVIEWER FOR THE 2011 BAR
tax on such return was due, and in availing of the
compromise, a tax return shll be filed as basis for
computing the amount of compromise to be paid.
(Mamalateo, 434-435)
Jurisdiction over civil actions
Effective April 2004
CTA- civil action for collection of delinquent taxes
amounting to over 1M.
RTC- retains jurisdiction over amounts up to 1M.
When to go to court?
As a general rule, the BIR can file a civil
action for the collection of a tax that has become
delinquent or collectible within 5 years from the
date of assessment. (Mamalateo, 439)
Criminal Action
The tax liability of a delinquent taxpayer
may be collected through the filing of a criminal
action.
Two common crimes punishable under the
Tax Code:
1. Attempt to evade or defeat tax
SEC. 254. Attempt to Evade or Defeat Tax. - Any
person who willfully attempts in any manner to
evade or defeat any tax imposed under this Code
or the payment thereof shall, in addition to other
penalties provided by law, upon conviction
thereof, be punished by a fine not less than Thirty
thousand (P30,000) but not more than One
hunderd thousand pesos (P100,000) and suffer
imprisonment of not less than two (2) years but
not more than four (4) years: Provided, That the
conviction or acquittal obtained under this
Section shall not be a bar to the filing of a civil suit
for the collection of taxes.
208 FERUELO, MARIVIC MORGIA
2. Failure to File Return, Supply Correct and
Accurate Information, Pay Tax Withhold and Remit
Tax and Refund Excess Taxes Withheld on
Compensation.
SEC. 255. Failure to File Return, Supply Correct
and Accurate Information, Pay Tax Withhold and
Remit Tax and Refund Excess Taxes Withheld on
Compensation. - Any person required under this
Code or by rules and regulations promulgated
thereunder to pay any tax make a return, keep
any record, or supply correct the accurate
information, who willfully fails to pay such tax,
make such return, keep such record, or supply
correct and accurate information, or withhold or
remit taxes withheld, or refund excess taxes
withheld on compensation, at the time or times
required by law or rules and regulations shall, in
addition to other penalties provided by law, upon
conviction thereof, be punished by a fine of not
less than Ten thousand pesos (P10,000) and suffer
imprisonment of not less than one (1) year but
not more than ten (10) years.
Any person who attempts to make it appear for
any reason that he or another has in fact filed a
return or statement, or actually files a return or
statement and subsequently withdraws the same
return or statement after securing the official
receiving seal or stamp of receipt of internal
revenue office wherein the same was actually
filed shall, upon conviction therefor, be punished
by a fine of not less than Ten thousand pesos
(P10,000) but not more than Twenty thousand
pesos (P20,000) and suffer imprisonment of not
less than one (1) year but not more than three (3)
years.
3. Statutory Offenses and Penalties
a. Civil penalties
SEC. 248. Civil Penalties. -
GOVERNMENT REMEDIES
 AMILING, BEBER, CAINDAY, CONEJERO, FERUELO & LIAO TAXATION LAW REVIEWER FOR THE 2011 BAR
(A) There shall be imposed, in addition to the
tax required to be paid, a penalty equivalent to
twenty-five percent (25%) of the amount due, in
the following cases:
(1) Failure to file any return and pay the tax
due thereon as required under the provisions of
this Code or rules and regulations on the date
prescribed; or
(2) Unless otherwise authorized by the
Commissioner, filing a return with an internal
revenue officer other than those with whom the
return is required to be filed; or
(3) Failure to pay the deficiency tax within
the time prescribed for its payment in the notice
of assessment; or
(4) Failure to pay the full or part of the
amount of tax shown on any return required to be
filed under the provisions of this Code or rules
and regulations, or the full amount of tax due for
which no return is required to be filed, on or
before the date prescribed for its payment.
(B) In case of willful neglect to file the return
within the period prescribed by this Code or by
rules and regulations, or in case a false or
fraudulent return is willfully made, the penalty to
be imposed shall be fifty percent (50%) of the tax
or of the deficiency tax, in case, any payment has
been made on the basis of such return before the
discovery of the falsity or fraud: Provided, That a
substantial underdeclaration of taxable sales,
receipts or income, or a substantial
overstatement of deductions, as determined by
the Commissioner pursuant to the rules and
regulations to be promulgated by the Secretary of
Finance, shall constitute prima facie evidence of a
false or fraudulent return: Provided, further, That
failure to report sales, receipts or income in an
amount exceeding thirty percent (30%) of that
declared per return, and a claim of deductions in
GOVERNMENT REMEDIES
an amount exceeding (30%) of actual deductions,
shall render the taxpayer liable for substantial
underdeclaration of sales, receipts or income or
for overstatement of deductions, as mentioned
herein.
What are the two (2) kinds of civil penalties ?
SUGGESTED ANSWER:
a. the 25% surcharge for late filing or
late payment [Sec. 248 (A), NIRC of 1997] (also
known as the delinquency surcharge), and
b. the 50% willful neglect or fraud
surcharge. [Sec. 248 (B), Ibid.]
1) Surcharge
Surtax or Surcharge
Amount imposed in addition to the tax
required. They are in the nature of penalties and
shall be collected at the same time, in the same
manner and as part of tax.
The Surtaxes or surcharges are referred to
in the National Internal Revenue Code of 1997 as
the civil penalties.
The civil penalties, also known as the
surtaxes or surcharges, are usually of two kinds:
(a) The twenty-five percent (25%) surcharge for
late filing or late payment.
(b) The fifty –percent (50%) willful neglect or
fraud surcharge.
Surcharges imposed as penalties are not to
be considered as criminal penalties but civil
administrative sanctions provided primarily as a
safeguard for the protection of the state revenue
and to reimburse the government for the heavy
expense of investigation and loss resulting from
the taxpayer’s fraud.
FERUELO, MARIVIC MORGIA 209
 AMILING, BEBER, CAINDAY, CONEJERO, FERUELO & LIAO TAXATION LAW REVIEWER FOR THE 2011 BAR
The penalty and interest are not penal but
compensatory for the concomitant use of the
funds by the taxpayer beyond the date when he is
supposed to have paid them to the Government.
(2008Domondon, 377-378)
2) Interest
a) In General
Sec. 249. (A) In General. - There shall be assessed
and collected on any unpaid amount of tax,
interest at the rate of twenty percent (20%) per
annum, or such higher rate as may be prescribed
by rules and regulations, from the date prescribed
for payment until the amount is fully paid.
b) Deficiency interest
Sec. 249. (B) Deficiency Interest. - Any deficiency
in the tax due, as the term is defined in this Code,
shall be subject to the interest prescribed in
Subsection (A) hereof, which interest shall be
assessed and collected from the date prescribed
for its payment until the full payment thereof.
Deficiency interest
The interest assessed and collected on any
unpaid amount of tax at the rate of twenty percent
(20%) per annum or such higher rate as may be
prescribed by regulations, from the date prescribed
for payment until the amount is fully paid.
Computation of deficiency interest
Deficiency interest on deficiency income tax
accrues and commences from the date of
assessment as shown in the assessment notice,
instead of the date the compliant for its collection
is filed. (2008Domondon, 382)
c) Delinquency interest
210 FERUELO, MARIVIC MORGIA
Sec. 249. (C) Delinquency Interest. - In case of
failure to pay:
(1) The amount of the tax due on any return to
be filed, or
(2) The amount of the tax due for which no
return is required, or
(3) A deficiency tax, or any surcharge or
interest thereon on the due date appearing in the
notice and demand of the Commissioner, there
shall be assessed and collected on the unpaid
amount, interest at the rate prescribed in
Subsection (A) hereof until the amount is fully
paid, which interest shall form part of the tax.
Delinquency Interest
a. The interest that is required to paid in case of
failure on the part of the taxpayer to pay:
1. The amount of the tax due on any return
required to be filed; or
2. The amount of the tax due for which no
return is required, or
3. A deficiency tax, or any surcharge or
interest thereon, on the due date
appearing on the notice and demand of
the Commissioner of Internal Revenue.
b. The delinquency interest at the rate of twenty
percent (20%) per annum, or such higher rate
as may be prescribed by regulations, shall be
assessed and collected, on the unpaid amount
until the amount is fully paid, which interest
shall form part of the tax.
Collection of delinquency interest is mandatory
The collection of the surcharge and
interest at the stated rate upon any sum or sums
due and unpaid after the dates prescribed by law
GOVERNMENT REMEDIES
 AMILING, BEBER, CAINDAY, CONEJERO, FERUELO & LIAO TAXATION LAW REVIEWER FOR THE 2011 BAR
for the payment of the amounts due is mandatory
in case of delinquency.
Rationale for mandatory collection
The intention of the law is to discourage
delay in the payment of taxes to the State and, in
this sense, the surcharge and interest charged are
not penal but compensatory in nature – they are
compensation to the State for the delay inn
payment or for the concomitant use of the funds
by the taxpayer beyond the date he is supposed to
have paid them to the State.
d) Interest on extended payment
Sec. 249. (D) Interest on Extended Payment. - If
any person required to pay the tax is qualified and
elects to pay the tax on installment under the
provisions of this Code, but fails to pay the tax or
any installment hereof, or any part of such
amount or installment on or before the date
prescribed for its payment, or where the
Commissioner has authorized an extension of
time within which to pay a tax or a deficiency tax
or any part thereof, there shall be assessed and
collected interest at the rate hereinabove
prescribed on the tax or deficiency tax or any part
thereof unpaid from the date of notice and
demand until it is paid.
Interest on extended payment
a. If a person required to pay the tax is qualified
and elects to pay the tax on installment under
the provisions of the NIRC of 1997,
b. But fails to pay the tax or any installment
thereof, or any part of such amount installment
on or before the date within which to pay a tax
or a deficiency tax or any part thereof
c. There shall be assessed and collected interest
at the rate 20% here in above prescribed on the
tax or deficiency tax or any part thereof unpaid
GOVERNMENT REMEDIES
from the date of notice and demand until it is
paid.
4. Compromise and Abatement of taxes
a. Compromise
A compromise is
(a) A contract whereby the parties,
(b) Through mutual agreement
(c) In order to avoid a litigation or put an end
to one already commenced.
Compromises are to be favored, and that
compromises entered into in good faith cannot be
set aside, but this rule is not without qualification.
A court may still reject a compromise or settlement
when it is repugnant to law, morals, good customs,
public order, or public policy.
Compromise requires mutual agreement
between the BIR and the taxpayer
A compromise penalty could not be imposed
by the BIR, if the taxpayer did not agree. A
compromise being, by its nature, mutual in essence
requires agreement. The payment made under
protest could only signify that there was no
agreement that had effectively been reached
between the parties.
Tax cases which may be the subject of a
compromise settlement with the BIR
The following cases may, upon taxpayer’s
compliance with the basis for compromise be the
subject matter of compromise settlement:
(a) Delinquent accounts;
Two conditions:
a. the assessment is of doubtful validity;
FERUELO, MARIVIC MORGIA 211
 AMILING, BEBER, CAINDAY, CONEJERO, FERUELO & LIAO TAXATION LAW REVIEWER FOR THE 2011 BAR
b. the financial position of the taxpayer
demonstrates a clear inability to pay the
tax.
(b) Cases under administrative protest after
issuance of the Final Assessment Notice to the
taxpayer which are still pending in the Regional
Offices, Revenue District Offices, Legal Service,
Large Taxpayer Service (LTS), Collection Service,
Enforcement Service and other offices in the
National Office;
(c) Civil tax cases being disputed before the courts;
(d) Collection cases filed in courts;
(e) Criminal violations, other than those already
filed in court, or those involving criminal tax
frauds.
In civil cases, the government may
compromise the liability of the taxpayer at any
stage of the proceeding except when the case is
already final and executory. In this case, if the
government would allow a compromise even if the
case is already final and executory, the doctrine of
separation of powers will be violated.
In criminal cases, on the other hand,
compromise is also allowed except:
1. if the criminal case is already filed before the
RTC; or
2. if the case involves fraud. (Sababan, 192)
Tax cases which could not be the Subject of
compromise with the BIR:
(a) Withholding tax cases unless the applicant
taxpayer invokes provisions of law that cast
doubt on the taxpayer’s obligation to withhold;
(b) Criminal tax fraud cases, confirmed as such by
the Commissioner of Internal Revenue or his
duly authorized representative;
212 FERUELO, MARIVIC MORGIA
(c) Criminal violations already filed in court;
(d) Delinquent accounts with duly approved
schedule of installment payments;
(e) Cases where final reports of reinvestigation or
reconsideration have been issued resulting to
reduction in the original assessment and the
taxpayer is agreeable to such decision by
signing the required agreement form for the
purpose.
(f) Cases which become final and executor after
final judgment of a court where compromise
is requested on the ground of doubtful validity
of the assessment; and
(g) Estate tax cases where compromise is
requested on the ground of financial
incapacity of the taxpayer.
A withholding who withheld the tax but failed
to remit the amount to the Government is
disqualified from applying a compromise
settlement because he is being made accountable
as an agent, who held funds in trust for the
Government. (2008Domondon, 382)
Commissioner may enter into a compromise
when:
(a) A reasonable doubt exist as to the validity of
the claim against the taxpayer provided that
the minimum compromise entered into is
equivalent to 40% of the basic tax;
(b) The financial position of the taxpayer
demonstrates a clear inability to pay the
assessed tax provided that the minimum
compromise entered into is equivalent to 10%
of the basic tax.
In the above instances the Commissioner is
allowed to enter into a compromise only if the
basic tax involved does not exceed One million
GOVERNMENT REMEDIES
 AMILING, BEBER, CAINDAY, CONEJERO, FERUELO & LIAO TAXATION LAW REVIEWER FOR THE 2011 BAR
pesos (P1,000,000.00), and the settlement offered
is not less than the prescribed percentages.
(2008Domondon, 457-458)
The commissioner has sole power and
authority to compromise taxes. It is ultra vires for
BIR subordinate officers, without being specifically
authorized by the BIR Commissioner, to approve
and accept compromises. These ultra vires act
cannot have any valid and binding legal effect upon
the BIR, which could issue reassessment.
The power to compromise taxes is
discretionary in character subject to judicial
review.
Compromise based on financial incapacity.
The offer to compromise based on
financial incapacity may be accepted upon showing
that:
i. The corporation ceased operation or is
already dissolved Provided, that tax liabilities
corresponding to the Subscription Receivable or
Assets distributed/distributable to the stockholders
representing return of capital at the time of
cessation of operation or dissolution of business
shall not be considered for compromise; or
ii. The taxpayer, as reflected in its latest
Balance Sheet supposed to be filed with the
Bureau of Internal Revenue, is suffering from
surplus or earnings deficit resulting to impairment
in the original capital by at least 50%, provided that
amounts payable to or due to stockholders other
than business-related transactions which are
properly includible in the regular “accounts
payable” are by fiction of law considered as part of
capital and not liability, and provided further that
the taxpayer has no sufficient liquid asset to satisfy
the tax liability; or
GOVERNMENT REMEDIES
iii. The taxpayer is suffering from a net worth
deficit computing by deducting total liabilities from
total assets taken from the latest audited financial
statements, provided that in the case of an
individual taxpayer, he has no other leviable
properties under the law other than his family
home; or
iv. The taxpayer is a compensation income
earner with no other source of income and the
family’s gross monthly compensation income does
not exceed, if single, P10,500 or less, or if married,
whose salary together with his spouse is P21,000
per month, or less, and it appears that the taxpayer
possesses no other leviable/distrainable assets
other than his family home; or
v. The taxpayer has been declared by any
competent tribunal/authority/body/government
agency as bankrupt or insolvent.
Instances when the offer for compromise
based on financial incapacity may be denied.
The Commissioner shall not consider any
offer for compromise settlement on the ground of
financial incapacity of a taxpayer
(a) with Tax Credit Certificate (TCC) issued
under the National Internal Revenue of 1997 or
Executive Order No. 226, on hand or in transit, or
(b) with claim for tax refund or tax credit with
the Bureau of Internal Revenue, Department of
finance One Stop-Shop Tax Credit and Duty
Drawback Center and/or the courts, or
(c) with existing finalized agreement or
prospect of future agreement with any party that
resulted or could result to an increase in the equity
of the taxpayer at the time of the offer for
compromise or at a definite future time.
(d) Presence of circumstances that would
place the taxpayer-applicant’s inability to pay in
FERUELO, MARIVIC MORGIA 213
 AMILING, BEBER, CAINDAY, CONEJERO, FERUELO & LIAO TAXATION LAW REVIEWER FOR THE 2011 BAR
serious doubt can be a ground to deny the
application for compromise based on the financial
incapacity of the taxpayer to pay the tax.
Requirement for offer of compromise based on
financial incapacity to pay
No offer of compromise shall be
entertained unless and until the taxpayer waives in
writing his privilege of the secrecy of bank deposits
under Republic Act No. 1405 or under other
general or special laws, and such waiver shall
constitute as the authority of the Commissioner to
inquire into the bank deposits of the taxpayer.
(2008Domondon, 462-463)
Minimum amounts for compromise settlement
(a) A case of financial incapacity, a minimum
compromise rate equivalent to ten (10%) percent
of the basic assessed tax; and
(b) For other cases, a minimum compromise
rate equivalent to forty percent (40%) of the basic
assessed tax. (2008Domondon, 465)
The taxpayer’s offer to compromise shall not
be considered, unless and until he waives in writing
his privilege under RA 1405 or under other general
or special laws, and such waiver shall constitute
the authority of the Commissioner to inquire into
his bank deposits. (Mamalateo, 427)
b. Abatement
Abatement is the diminution or decrease in
the amount of tax imposed. It refers to the act of
eliminating or nullifying; of lessening or
moderating.
Commissioner may abate or cancel tax liability
when:
(a) The tax or any portion thereof appears to be
unjustly or excessively assessed; or
214 FERUELO, MARIVIC MORGIA
(b) The administration and collection costs
involved do not justify the collection of the
amount due.
G. Organization and Function of the Bureau of
Internal Revenue
SEC. 2. Powers and Duties of the Bureau of
Internal Revenue. - The Bureau of Internal
Revenue shall be under the supervision and
control of the Department of Finance and its
powers and duties shall comprehend the
assessment and collection of all national internal
revenue taxes, fees, and charges, and the
enforcement of all forfeitures, penalties, and fines
connected therewith, including the execution of
judgments in all cases decided in its favor by the
Court of Tax Appeals and the ordinary courts. The
Bureau shall give effect to and administer the
supervisory and police powers conferred to it by
this Code or other laws.
SEC. 4. Power of the Commissioner to Interpret
Tax Laws and to Decide Tax Cases. - The power to
interpret the provisions of this Code and other tax
laws shall be under the exclusive and original
jurisdiction of the Commissioner, subject to
review by the Secretary of Finance.
The power to decide disputed assessments,
refunds of internal revenue taxes, fees or other
charges, penalties imposed in relation thereto, or
other matters arising under this Code or other
laws or portions thereof administered by the
Bureau of Internal Revenue is vested in the
Commissioner, subject to the exclusive appellate
jurisdiction of the Court of Tax Appeals.
SEC. 6 - D) Authority to Terminate Taxable Period.
- When it shall come to the knowledge of the
Commissioner that a taxpayer is retiring from
business subject to tax, or is intending to leave
the Philippines or to remove his property
therefrom or to hide or conceal his property, or is
GOVERNMENT REMEDIES
 AMILING, BEBER, CAINDAY, CONEJERO, FERUELO & LIAO TAXATION LAW REVIEWER FOR THE 2011 BAR
performing any act tending to obstruct the
proceedings for the collection of the tax for the
past or current quarter or year or to render the
same totally or partly ineffective unless such
proceedings are begun immediately, the
Commissioner shall declare the tax period of such
taxpayer terminated at any time and shall send
the taxpayer a notice of such decision, together
with a request for the immediate payment of the
tax for the period so declared terminated and the
tax for the preceding year or quarter, or such
portion thereof as may be unpaid, and said taxes
shall be due and payable immediately and shall be
subject to all the penalties hereafter prescribed,
unless paid within the time fixed in the demand
made by the Commissioner.
The tax code enumerates the powers and
duties of the BIR as follows:
1. To assess the collection of internal taxes, fees,
and charges;
2. To enforce all forfeitures, penalties and fines
connected therewith;
3. To execute judgment in all cases decided in its
favor by the CTA and the ordinary courts; and
4. To effect and administer the supervisory and
police powers conferred upon it by the Tax Code or
other special laws. (Mamalateo, 396)
Rep. Act No. 1405, the Bank Deposits
Secrecy Law prohibits inquiry into bank deposits.
As exceptions to Rep. Act No. 1405, the
Commissioner of Internal Revenue is only
authorized to inquire into the bank deposits of:
a. a decedent to determine his gross estate; and
b. any taxpayer who has filed an application for
compromise of his tax liability by reason of
financial incapacity to pay his tax liability. [Sec.
5 (F), NIRC of 1997]
GOVERNMENT REMEDIES
c. A taxpayer who authorizes the Commissioner
to inquire into his bank deposits.
1. Rule-making authority of the Secretary of
Finance
a. Authority of secretary of finance to
promulgate rules and regulations
SEC. 244. Authority of Secretary of Finance to
Promulgate Rules and Regulations. - The Secretary
of Finance, upon recommendation of the
Commissioner, shall promulgate all needful rules
and regulations for the effective enforcement of
the provisions of this Code.
b. Specific provisions to be contained in
rules and regulations
SEC. 245. Specific Provisions to be Contained in
Rules and Regulations. - The rules and regulations
of the Bureau of Internal Revenue shall, among
other things, contain provisions specifying,
prescribing or defining:
(a) The time and manner in which Revenue
Regional Director shall canvass their respective
Revenue Regions for the purpose of discovering
persons and property liable to national internal
revenue taxes, and the manner in which their lists
and records of taxable persons and taxable objects
shall be made and kept;
(b) The forms of labels, brands or marks to be
required on goods subject to an excise tax, and the
manner in which the labelling, branding or marking
shall be effected;
(c) The conditions under which and the manner in
which goods intended for export, which if not
exported would be subject to an excise tax, shall be
labelled, branded or marked;
FERUELO, MARIVIC MORGIA 215
 AMILING, BEBER, CAINDAY, CONEJERO, FERUELO & LIAO TAXATION LAW REVIEWER FOR THE 2011 BAR
(d) The conditions to be observed by revenue
officers respecting the institutions and conduct of
legal actions and proceedings;
(e) The conditions under which goods intended for
storage in bonded warehouses shall be conveyed
thither, their manner of storage and the method of
keeping the entries and records in connection
therewith, also the books to be kept by Revenue
Inspectors and the reports to be made by them in
connection with their supervision of such houses;
(f) The conditions under which denatured alcohol
may be removed and dealt in, the character and
quantity of the denaturing material to be used, the
manner in which the process of denaturing shall be
effected, so as to render the alcohol suitably
denatured and unfit for oral intake, the bonds to
be given, the books and records to be kept, the
entries to be made therein, the reports to be made
to the Commissioner, and the signs to be displayed
in the business or by the person for whom such
denaturing is done or by whom, such alcohol is
dealt in;
(g) The manner in which revenue shall be collected
and paid, the instrument, document or object to
which revenue stamps shall be affixed, the mode of
cancellation of the same, the manner in which the
proper books, records, invoices and other papers
shall be kept and entries therein made by the
person subject to the tax, as well as the manner in
which licenses and stamps shall be gathered up
and returned after serving their purposes;
(h) The conditions to be observed by revenue
officers respecting the enforcement of Title III
imposing a tax on estate of a decedent, and other
transfers mortis causa, as well as on gifts and such
other rules and regulations which the
Commissioner may consider suitable for the
enforcement of the said Title III;
216 FERUELO, MARIVIC MORGIA
(i) The manner in which tax returns, information
and reports shall be prepared and reported and
the tax collected and paid, as well as the conditions
under which evidence of payment shall be
furnished the taxpayer, and the preparation and
publication of tax statistics;
(j) The manner in which internal revenue taxes,
such as income tax, including withholding tax,
estate and donor's taxes, value-added tax, other
percentage taxes, excise taxes and documentary
stamp taxes shall be paid through the collection
officers of the Bureau of Internal Revenue or
through duly authorized agent banks which are
hereby deputized to receive payments of such
taxes and the returns, papers and statements that
may be filed by the taxpayers in connection with
the payment of the tax: Provided, however, That
notwithstanding the other provisions of this Code
prescribing the place of filing of returns and
payment of taxes, the Commissioner may, by rules
and regulations, require that the tax returns,
papers and statements that may be filed by the
taxpayers in connection with the payment of the
tax. Provided, however, That notwithstanding the
other provisions of this Code prescribing the place
of filing of returns and payment of taxes, the
Commissioner may, by rules and regulations
require that the tax returns, papers and statements
and taxes of large taxpayers be filed and paid,
respectively, through collection officers or through
duly authorized agent banks: Provided, further,
That the Commissioner can exercise this power
within six (6) years from the approval of Republic
Act No. 7646 or the completion of its
comprehensive computerization program,
whichever comes earlier: Provided, finally, That
separate venues for the Luzon, Visayas and
Mindanao areas may be designated for the filing of
tax returns and payment of taxes by said large
taxpayers.
GOVERNMENT REMEDIES
 AMILING, BEBER, CAINDAY, CONEJERO, FERUELO & LIAO TAXATION LAW REVIEWER FOR THE 2011 BAR
For the purpose of this Section, "large taxpayer"
means a taxpayer who satisfies any of the
following criteria;
(1) Value-Added Tax (VAT). - Business
establishment with VAT paid or payable of at least
One hundred thousand pesos (P100,000) for any
quarter of the preceding taxable year;
(2) Excise Tax. - Business establishment with excise
tax paid or payable of at least One million pesos
(P1,000,000) for the preceding taxable year;
(3) Corporate Income Tax. - Business establishment
with annual income tax paid or payable of at least
One million pesos (P1,000,000) for the preceding
taxable year; and
(4) Withholding Tax. - Business establishment with
withholding tax payment or remittance of at least
One million pesos (P1,000,000) for the preceding
taxable year.
Provided, however, That the Secretary of Finance,
upon recommendation of the Commissioner, may
modify or add to the above criteria for determining
a large taxpayer after considering such factors as
inflation, volume of business, wage and
employment levels, and similar economic factors.
The penalties prescribed under Section 248 of this
Code shall be imposed on any violation of the rules
and regulations issued by the Secretary of Finance,
upon recommendation of the Commissioner,
prescribing the place of filing of returns and
payments of taxes by large taxpayers.
c. Non-retroactivity of rulings
SEC. 246. Non-Retroactivity of Rulings. - Any
revocation, modification or reversal of any of the
rules and regulations promulgated in accordance
with the preceding Sections or any of the rulings or
circulars promulgated by the Commissioner shall
not be given retroactive application if the
GOVERNMENT REMEDIES
revocation, modification or reversal will be
prejudicial to the taxpayers, except in the following
cases:
(a) Where the taxpayer deliberately
misstates or omits material facts from his return or
any document required of him by the Bureau of
Internal Revenue;
(b) Where the facts subsequently gathered
by the Bureau of Internal Revenue are materially
different from the facts on which the ruling is
based; or
(c) Where the taxpayer acted in bad faith.
Case: G.R. No. 168129 COMMISSIONER OF
INTERNALREVENUE vs. PHILIPPINE HEALTH
CAREPROVIDERS,INC. - April 24, 2007
Held: Section 246 of the 1997 Tax Code, as amended,
provides that rulings, circulars, rules and regulations
promulgated by the Commissioner of Internal Revenue
have no retroactive application if to apply them would
prejudice the taxpayer. The exceptions to this rule are:
(1) where the taxpayer deliberately misstates or omits
material facts from his return or in any document
required of him by the Bureau of Internal Revenue; (2)
where the facts subsequently gathered by the Bureau of
Internal Revenue are materially different from the facts
on which the ruling is based, or (3) where the taxpayer
acted in bad faith.
In sustaining the CTA, the Court of Appeals
found that the failure of respondent to refer to itself as
a health maintenance organization is not an indication
of bad faith or a deliberate attempt to make false
representations. As the term health maintenance
organization did not as yet have any particular
significance for tax purposes, respondents failure to
include a term that has yet to acquire its present
definition and significance cannot be equated with bad
faith.
According to the Court of Appeals, respondents
failure to describe itself as a health maintenance
organization, which is subject to VAT, is not tantamount
FERUELO, MARIVIC MORGIA 217
 AMILING, BEBER, CAINDAY, CONEJERO, FERUELO & LIAO TAXATION LAW REVIEWER FOR THE 2011 BAR

to bad faith. We note that the term health maintenance 2. Power of the Commissioner to suspend the
organization was first recorded in the Philippine statute business operation of a taxpayer
books only upon the passage of The National Health
Insurance Act of 1995 (Republic Act No. 7875).Section 4 SEC. 115. Power of the Commissioner to Suspend
(o) (3) thereof defines a health maintenance the Business Operations of a Taxpayer. - The
organization as an entity that provides, offers, or Commissioner or his authorized representative is
arranges for coverage of designated health services hereby empowered to suspend the business
needed by plan members for a fixed prepaid premium.
operations and temporarily close the business
Under this law, a health maintenance organization is
establishment of any person for any of the
one of the classes of a health care provider.
following violations:
It is thus apparent that when VAT Ruling No.
231-88 was issued in respondents favor, the term health (a) In the case of a VAT-registered Person. -
maintenance organization was yet unknown or had no
(1) Failure to issue receipts or invoices;
significance for taxation purposes. Respondent,
therefore, believed in good faith that it was VAT exempt (2) Failure to file a value-added tax return as
for the taxable years 1996 and 1997 on the basis of VAT
required under Section 114; or
Ruling No. 231-88.
(3) Understatement of taxable sales or
In ABS-CBN Broadcasting Corp. v. Court of Tax
receipts by thirty percent (30%) or more of
Appeals, this Court held that under Section 246 of the
1997 Tax Code, the Commissioner of Internal Revenue is his correct taxable sales or receipts for the
precluded from adopting a position contrary to one taxable quarter.
previously taken where injustice would result to the
taxpayer. Hence, where an assessment for deficiency
(b) Failure of any Person to Register as Required
withholding income taxes was made, three years after a under Section 236. -
new BIR Circular reversed a previous one upon which
The temporary closure of the establishment shall
the taxpayer had relied upon, such an assessment was
prejudicial to the taxpayer.To rule otherwise, opined the
be for the duration of not less than five (5) days
Court, would be contrary to the tenets of good faith, and shall be lifted only upon compliance with
equity, and fair play. whatever requirements prescribed by the
Commissioner in the closure order.
This Court has consistently reaffirmed its ruling in ABS-
CBN Broadcasting Corp. The rule is that the BIR rulings
have no retroactive effect where a grossly unfair deal
would result to the prejudice of the taxpayer, as in this
case.

More recently, in Commissioner of Internal

Revenue v. Benguet Corporation, wherein the taxpayer
was entitled to tax refunds or credits based on the BIRs
own issuances but later was suddenly saddled with
deficiency taxes due to its subsequent ruling changing
the category of the taxpayers transactions for the
purpose of paying its VAT, this Court ruled that applying
such ruling retroactively would be prejudicial to the
taxpayer.

218 FERUELO, MARIVIC MORGIA GOVERNMENT REMEDIES

 AMILING, BEBER, CAINDAY, CONEJERO, FERUELO & LIAO TAXATION LAW REVIEWER FOR THE 2011 BAR
III. LOCAL GOVERNMENT CODE OF 1991, AS AMENDED
A. LOCAL GOVERNMENT TAXATION
1. FUNDAMENTAL PRINCIPLES GOVERNING LOCAL
TAXATION (SEC. 130, LGC)
a. Shall be uniform in each local sub-unit
b. Shall be equitable and based as much
as possible on the taxpayer’s ability to pay
c. Levied for public purposes
d. Shall not be unjust, excessive,
oppressive, or confiscatory
e. Shall not be contrary to law, public policy,
national economic policy, or in restraint of trade
f. Collection of local taxes and other impositions
shall not be let to any person
g. The revenues collected under the Code shall
inure solely to the benefit of, and subject to
disposition by, the LGU levying the tax or other
imposition unless otherwise specifically
provided therein
h. Each LGU shall, as far as practicable, evolve a
progressive system of taxation.
2. Nature and Source of Local Taxing Power
(See. Sec 5, Art. X, 1987 Constitution and Sec.
129, LGC)
The Local Government Unit has the power:
a. to create its own sources of revenue and
b. to levy taxes, fees and charges.
Congress cannot enact laws depriving LGU from
exercising such power to tax but it may set
guidelines and limitations for the exercise.
Such taxes, fees, and charges shall accrue
exclusively to the local government units.
Art. X, 1987 Constitution Section 5. Each local
government unit shall have the power to create
its own sources of revenues and to levy taxes,
fees and charges subject to such guidelines and
limitations as the Congress may provide,
LOCAL GOVERNMENT TAXATION
consistent with the basic policy of local
autonomy. Such taxes, fees, and charges shall
accrue exclusively to the local governments.
Section 129. Power to Create Sources of
Revenue. - Each local government unit shall
exercise its power to create its own sources of
revenue and to levy taxes, fees, and charges
subject to the provisions herein, consistent with
the basic policy of local autonomy. Such taxes,
fees, and charges shall accrue exclusively to the
local government units.
NATURE OF THE TAXING POWER
a. Not inherent;
b. Exercised only if delegated to them by law
or Constitution;
c. Not absolute; subject to limitations
provided for by law.
Under the present constitutional rule, “where
there is neither a grant nor a prohibition by
statute, the tax power must be deemed to exist
although Congress may provide statutory
limitations and guidelines. The basic rationale
for the current rule is to safeguard the viability
and self-sufficiency of local government units by
directly granting them general and broad tax
powers.” (Manila Electric Co. vs. Province of
Laguna, G.R. No. 131359)
A. LOCAL TAXING AUTHORITY (SEC. 132, LGC)
Section 132. Local Taxing Authority. - The power
to impose a tax, fee, or charge or to generate
revenue under this Code shall be exercised by
the Sanggunian of the local government unit
concerned through an appropriate ordinance.
B. POWER TO PRESCRIBE PENALTIES FOR TAX
VIOLATIONS AND LIMITATIONS THEREON (SEC. 516,
LGC)
1. The Sanggunian is authorized to prescribe
fines or other penalties for violations of tax
ordinances.
a. in no case shall fines be less than
P1,000 nor more than P5,000
CONEJERO, JOSELITO V. 219
 AMILING, BEBER, CAINDAY, CONEJERO, FERUELO & LIAO TAXATION LAW REVIEWER FOR THE 2011 BAR
b. nor shall the imprisonment be less than
one (1) month nor more than six (6) month.
2. Such fine or other penalty shall be imposed
at the discretion of the court.
3. The Sangguniang Barangay may prescribe a
fine of not less than P100 nor more than P1,
000.
C. POWER TO GRANT LOCAL TAX EXEMPTIONS (SEC.
192, LGC)
Local government units may, through
ordinances duly approved, grant tax
exemptions, incentives or reliefs under such
terms and conditions, as they may deem
necessary.
D. WITHDRAWAL OF EXEMPTIONS-TAX
EXEMPTIONS EXISTING BEFORE THE EFFECTIVITY OF THE
LGC HAS BEEN ABOLISHED (SEC. 193, LGC)
Unless otherwise provided in this Code, tax
exemptions or incentives granted to, or
presently enjoyed by all persons, whether
natural or juridical, including government-
owned or controlled corporations are hereby
withdrawn upon the effectively of the LGC
except the following:
1. local water districts,
2. cooperatives duly registered under R.A. No.
6938, non-stock and non-profit hospitals and
3. Educational institutions.
The power to grant tax exemptions, tax
incentives and tax reliefs shall not apply to
regulatory fees which are levied under the
police power of the LGU.
Tax exemptions shall be conferred through the
issuance of a non-transferable tax exemption
certificate.
E. POWER TO ADJUST LOCAL TAX RATE (SEC. 191, LGC)
Adjustment of the tax rates as prescribed herein
should not be oftener than once every five (5)
years, and in no case shall such adjustment
220 LOCAL GOVERNMENT TAXATION
exceed ten percent (10%) of the rates fixed
under the LGC.
F. RESIDUAL TAXING POWERS OF THE LOCAL
GOVERNMENT UNITS (SEC. 186, LGC)
To levy taxes, fees or charges on any base or
subject NOT:
1. Specifically enumerated in LGC
2. Taxed under the provisions of the NIRC,
as amended, and
3. Other applicable laws
Conditions:
1. That the taxes, fees, or charges shall not be
unjust, excessive, oppressive, confiscatory or
contrary to declared national policy
2. The ordinance levying such taxes, fees or
charges shall not be enacted without any prior
public hearing conducted for the purpose.
LIMITATIONS OF THE RESIDUAL POWER
1. Constitutional limitations on taxing
power
2. Common limitations prescribed in Sec.
133 of the LGC
3. Fundamental principles governing the
exercise of the taxing power of the LGUs
prescribed under Sec. 130 of the LGC
4. The ordinance levying such residual
taxes shall not be enacted without any prior
public hearing conducted for the purpose and
5. The principle of preemption.
PRINCIPLE OF PREEMPTION OR EXCLUSIONARY
DOCTRINE
Where the National Government elects to tax a
particular area, it impliedly withholds from the
local government the delegated power to tax
the same field. This doctrine principally rests on
the intention of the Congress.
Excluded impositions (pursuant to the doctrine
of preemption):
CONEJERO, JOSELITO V.
 AMILING, BEBER, CAINDAY, CONEJERO, FERUELO & LIAO TAXATION LAW REVIEWER FOR THE 2011 BAR
a. Taxes which are levied under the NIRC,
unless otherwise provided by LGC of 1991;
b. Taxes, fees, etc. which are imposed
under the Tariffs and Customs Code;
c. Taxes, fees, etc., the imposition of
which contravenes existing governmental
policies or which violates the fundamental
principles of taxation;
d. Taxes, fees and other charges imposed
under special law.
3. LOCAL TAXING AUTHORITY
A. Section 132. Local Taxing Authority. - The
power to impose a tax, fee, or charge or to
generate revenue under this Code shall be
exercised by the Sanggunian of the local
government unit concerned through an
appropriate ordinance.
B. LEVYING OF LOCAL TAXES (LOCAL TAX
ORDINANCE)
Requisites:
1. The procedure applicable to local government
ordinances in general should be observed (Sec.
187, LGC)
2. Procedural details (Secs. 54, 55, and 59,
LGC):
a. necessity of a quorum
b. submission for approval by the local
chief executive
c. he matter of veto and overriding the
same
d. the publication and affectivity
2. Public hearings are required before any
local tax ordinance is enacted (Sec.187, LGC)
4. Within 10 days after their approval,
publication in full for 3 consecutive days in a
newspaper of general circulation. In absence of
such newspaper in the province, city or
municipality, then the ordinances may be
posted in at least 2 conspicuous and publicly
accessible places (Sec. 188, LGC)
LOCAL GOVERNMENT TAXATION
4. SCOPE OF TAXING POWER
Section 132. Local Taxing Authority. - The power
to impose a tax, fee, or charge or to generate
revenue under this Code shall be exercised by
the Sanggunian of the local government unit
concerned through an appropriate ordinance.
5. SPECIFIC TAXING POWER OF LGUs
A. PROVINCES
(SECS. 134-141, LGC)
1. Tax on Transfer of Real Property (Sec. 135,
LGC)
Type of tax: Tax on the sale, donation, barter or
any other mode of transferring ownership or
title of real property.
Rate: Not more than 50% of 1% of the
a. total consideration; or
b. fair market value in case the monetary
consideration involved in the transfer is not
substantial, whichever is higher.
Exceptions: Sale, transfer or other disposition of
real property pursuant to R.A. No. 6657
(Comprehensive Agrarian Reform Law)
Other Provisions: It is the duty of the seller,
donor, transferor or administrator to tax the tax
imposed.
Payable within sixty (60) days from the date of
execution of the deed or date of decedent's
death.
2. Tax on Business of Printing and Publication
(Sec. 136, LGC)
Type of tax: Tax on the business of persons
engaged in the printing and/or publication of
books, cards, posters, leaflets, handbills,
certificates, receipts, pamphlets, and others of
similar nature.
CONEJERO, JOSELITO V. 221
 AMILING, BEBER, CAINDAY, CONEJERO, FERUELO & LIAO TAXATION LAW REVIEWER FOR THE 2011 BAR
Rate: Not exceeding 50% of 1% of the gross
annual receipts for the preceding calendar year.
Exceptions:
1. for newly started business –
TAX RATE = 1/20 of 1% of the capital
investment
2. School Texts or references prescribed by
DEPED shall be EXEMPT from tax.
Other Provisions: No VAT on sale,
importation, printing, publication of books,
newspaper, magazine, review or bulletin w/c
appears at regular intervals w/ fixed prices w/c
is not devoted principally to publication of paid
advertisements (Sec. 109 [y], NIRC)
3. Franchise Tax (Sec. 137, LGC)
Type of tax: Notwithstanding any exemption
granted by any law or other special law, the
province may impose a tax on business enjoying
a franchise.
Rate: Not exceeding 50% of 1% of the gross
annual receipts for the preceding calendar year
based on the incoming receipts, or realized
within its territorial jurisdiction.
Exceptions: For newly started business –
TAX RATE = 1/20 of 1% of the capital
investment
Other Provisions: Franchise grantees of
telephone telegraph, radio, TV & all other
(except electric, gas & water utilities) are
subject to 10% VAT (Sec. 108 [A], NIRC)
4. Tax on Sand, Gravel and Other Quarry
Resources (Sec. 138, LGC)
Type of tax: The province may levy and collect
taxes on ordinary stones, sand, gravel, earth
and other quarry resources extracted from
public lands or from the beds of seas, lakes,
rivers, streams, creeks and other public waters
within its territorial jurisdiction
222 LOCAL GOVERNMENT TAXATION
Rate: Not more than 10% of the fair market
value in the locality per cubic meter.
Other Provisions: The permit to extract
resources shall be issued exclusively by the
provincial governor, pursuant to the ordinance
of the Sangguniang Panlalawigan.
PROCEEDS OF THE TAX DISTRIBUTED AS FOLLOWS:
 Province 30%
 Component city of Municipality where
30% where the quarry resources are extracted
 Barangay where the quarry resources
40% are extracted
5. Professional Tax (Sec. 139, LGC)
Type of tax: Annual professional tax on
persons engaged in the exercise or practice of a
profession requiring government examination.
Rate: At such amount and reasonable
classification as the Sangguniang Panlalawigan
may determine, but shall in no case exceed
P300.
Exceptions: Professionals exclusively
employed in the government shall be exempt
from payment of this tax AND individuals/corpo.
Employing a person subject to prof. tax shall be
required by that person to pay the prof. tax
before employment & annually thereafter.
Other Provisions: To be paid on or
before the 31st of January, in the province
where he practices his profession or where he
maintains principal office in case the practice is
in several places. Any person first beginning to
practice a profession after the month of January
must, however, pay the full tax before engaging
therein.
6. Amusement Tax (Sec. 140, LGC)
Type of tax: Tax on proprietors, lessees, or
operators of theaters, cinemas, concert halls,
CONEJERO, JOSELITO V.
 AMILING, BEBER, CAINDAY, CONEJERO, FERUELO & LIAO TAXATION LAW REVIEWER FOR THE 2011 BAR
circuses, boxing stadia and other places of
amusement.
Rate: Not more than 30% of the gross
receipts from admission fees.
Exceptions: The holding of operas, concerts,
dramas, recitals, painting and art exhibitions,
flower shows, musical programs, literary and
oratorical presentations, except pop, rock or
similar concerts, shall be exempt from the
payment of amusement tax
Other Provisions: Proceeds from the
amusement tax shall be shared equally by the
province & the municipality where such
amusement places are located.
7. Annual Fixed Tax on Delivery Trucks and Vans
of Manufacturers, Wholesalers or, Dealers or
Retailers in certain products (Sec. 141, LGC)
Rate: not exceeding P500 on every truck,
van or vehicle used in the delivery or
distribution of merchandise.
Exceptions: Manufacturers, producers,
wholesalers, dealers & retailers subject to this
tax is exempt from peddler’s tax.
Other Provisions: Covers distilled spirits, soft
drinks, cigars and cigarettes and other products,
as may be determined by the Sanggunian
Panlalawigan.
B. CITIES
(SEC. 151, LGC)
 The city may levy the taxes, fees, and
charges which the province or municipality may
impose.
 The tax rates that the city may levy may
exceed the maximum rates allowed for the
province or municipality by not more than 50%
except the rates of professional and amusement
taxes.
C. MUNICIPALITIES
(SEC. 143, LGC)
LOCAL GOVERNMENT TAXATION
1. Municipal Taxes- taxes on the businesses of
the following:
a. Manufacturers, assemblers, repackers,
processors, brewers, distillers, rectifiers, and
compounders of liquors, distilled spirits and
wines or manufacturers of any article of
commerce of whatever kind or nature (Sec. 143
[a], LGC).
Rate: This is a graduated annual fixed tax, the
rate of which is based on the taxpayer's gross
sales or receipts for the preceding calendar
year. However, when the gross sales or receipts
amount to P6,500,000 or more for the
preceding calendar year, the tax ceases to be a
fixed tax. A percentage tax of 37.5% of 1% is
imposed instead.
b. Wholesalers, distributors or dealers in any
article of commerce of whatever kind or nature.
(Sec. 143 [b], LGC).
Rate: Also a graduated annual fixed tax, the rate
of which is based on the gross sales or receipts
for the preceding calendar year. Where the
gross sales or receipts, however, amount to
P2,000,000 or more, the tax becomes a
percentage tax levied at a rate not exceeding
50% of 1%.
c. Exporters and manufacturers, millers,
producers, wholesalers, distributors, dealers or
retailers of the following essential commodities:
(Sec. 143 [c], LGC).
1. rice and corn;
2. wheat or cassava flour, meat, dairy
products, locally manufactures, processed or
preserved food, sugar, salt and other
agricultural, marine, and fresh water products,
whether in the original state or not;
3. cooking oil and cooking gas;
CONEJERO, JOSELITO V. 223
 AMILING, BEBER, CAINDAY, CONEJERO, FERUELO & LIAO TAXATION LAW REVIEWER FOR THE 2011 BAR
4. laundry soap, detergents, and
medicine;
5. agricultural implements, equipment
and post-harvest facilities, fertilizers, pesticides
and other farm inputs;
6. poultry feeds and other animal feeds;
7. school supplies; and
8. cement.
Rate: At a rate not exceeding one-half
of the rates for sales of articles mentioned in
paragraphs (a), (b) and (d) of Sec. 143 of LGC.
d. Retailers (Sec. 143 [d], LGC).
Rate: The tax on retailers is not a graduated
annual fixed tax but an annual percentage tax
imposed at the following rates: On gross sales
or receipts for the preceding calendar year not
exceeding P400,000 - 2%; and on sales or
receipts exceeding P400,000 -1%.
e. Contractors and other independent
contractors. (Sec. 143 [e], LGC).
Rate: Also a graduated annual fixed tax
based on the gross receipts for the preceding
calendar year. However, when the gross
receipts amount to 2,000,000 or more, the
contractor's tax becomes a percentage tax. The
tax rate is 50% of 1%.
f. Banks and other financial institutions (Sec.
143 [f], LGC).
Rate: The tax is 50% of 1% on their gross
receipts of the preceding calendar year derived
from interests, commissions and discounts from
lending activities, income from financial leasing,
dividends, rentals on property and profit from
exchange or sale of property, insurance
premium.
224 LOCAL GOVERNMENT TAXATION
g. Peddlers engaged in the sale of any
merchandise or article of commerce. (Sec. 143
[g], LGC).
Rate: At a rate not exceeding fifty
pesos (P50) per peddler annually.
h. On any business not otherwise specified
above (Sec. 143 [h], LGC).
Rate: Provided that on any business
subject to excise, value-added or percentage tax
under the National Internal Revenue Code, the
rate of the tax shall not exceed 2% of gross sales
or receipts of the preceding calendar year. The
Sanggunian concerned may impose a schedule
of graduated tax rates but in no case to exceed
the rates prescribed in Sec. 143 of LGC.
Municipal non-revenue fees and charges:
Municipalities may impose & collect reasonable
fees & charges on business & occupation and,
except in case of professional tax, (w/c only
provinces & cities may levy) on the practice of
any profession or calling commensurate w/ the
cost of regulation, inspection & licensing before
any person may engage in such
business/occupation/practice of such profession
or calling. (Sec. 147, LGC)
2. RATES OF TAX WITHIN THE METROPOLITAN MANILA
AREA (SEC. 144, LGC)
- Not to exceed by 50% the maximum rates
prescribed in the preceding Section.
3. Section 145. Retirement of Business. - A
business subject to tax pursuant to the
preceding sections shall, upon termination
thereof, submit a sworn statement of its gross
sales or receipts for the current year. If the tax
paid during the year be less than the tax due on
said gross sales or receipts of the current year,
CONEJERO, JOSELITO V.
 AMILING, BEBER, CAINDAY, CONEJERO, FERUELO & LIAO TAXATION LAW REVIEWER FOR THE 2011 BAR
the difference shall be paid before the business
is considered officially retired.
4. PAYMENT OF BUSINESS TAXES
a. It shall be payable for every separate or
distinct establishment or place where business
subject to the tax is conducted and one line of
business does not become exempt by being
conducted with some other business for which
such tax has been paid.
b. The tax on a business must be paid by
the person conducting the same.
c. In cases where a person conducts or
operates 2 or more of the businesses
mentioned in Section 143 of LGC
- which are subject to the same rate of tax, the
tax shall be computed on the combined total
gross sales or receipts of the said 2 or more
related businesses.
- which are subject to different rates of tax, the
gross sales or receipts of each business shall be
separately reported for the purpose of
computing the tax due from each business.
5. Section 147. Fees and Charges. - The
municipality may impose and collect such
reasonable fees and charges on business and
occupation and, except as reserved to the
province in Section 139 of this Code, on the
practice of any profession or calling,
commensurate with the cost of regulation,
inspection and licensing before any person may
engage in such business or occupation, or
practice such profession or calling.
6. SITUS OF LOCAL TAXATION
A. Situs According to the Cases
With respect to excise tax, the tax is
upon the performance of an act, enjoyment of a
privilege or the engaging in an occupation. The
power to levy such tax is not dependent on the
domicile of the taxpayer, but on the place in
which the act is performed or the occupation is
engaged in; not upon the location of the office,
but the place where the sale is perfected.
(Allied Thread Co., Inc. v. City Mayor of Manila,
L-40296)
LOCAL GOVERNMENT TAXATION
With respect to sale, it is the place of
the consummation of the sale, associated with
the delivery of the things which are the subject
matter of the contract that determines the situs
of the contract for purposes of taxation, and not
merely the place of the perfection of the
contract. (Shell Co., Inc. v. Municipality of
Sipocot, Camarines Sur 105 Phil 1263)
B. Situs According to Sec. 150, LGC
Branch or sales office – a fixed place in the
locality which conducts the operation of the
business as an extension of the principal office
Principal office- the head or the main office of
the business; the city or the municipality
specifically mentioned in the Articles of
Incorporation or official registration papers as
being the official address of said principal office
shall be considered the situs thereof.
1. Place of sale (with branch or sales outlet
therein):
 Municipality or city where the branch or
outlet is located.
2. Place of sale (no branch or sales outlet):
 Municipality or city of principal office
(not in the place of sale)
3. If manufacturer, assembler, contractor,
producer, or exporter (MACPE) with factory,
project office, plant or plantation (FPPP)
4. 30% of recorded sales in the principal office:
city or municipality where the principal office is
located
1. 70% of recorded sales in the principal
office: city or municipality where the FPPP is
located
 pro rata if FPPP are located in different
municipalities or cities in proportion to their
respective volumes of production.
2. If plantation is located in some other place
than where the factory is located, the foregoing
70% shall be subdivided as follows:
CONEJERO, JOSELITO V. 225
 AMILING, BEBER, CAINDAY, CONEJERO, FERUELO & LIAO TAXATION LAW REVIEWER FOR THE 2011 BAR
 60% to the city or municipality where
the factory is located
 40% to the city or municipality where
the plantation is located.
D.BARANGAYS
(SEC. 152, LGC)
Barangays may levy the following taxes, fees,
and charges which shall accrue exclusively to
them:
a. Taxes – On stores or retailers with fixed
business establishments with the gross sales or
receipts for the preceding calendar year of
P50,000 or less (for barangays in the cities) and
P30,000 or less (for barangays in municipalities)
b. Rate = not exceeding 1% of such gross
sales or receipts.
c. Service Fees or Charges – For services
rendered in connection with the regulation or
the use of barangay-owned properties or
service facilities such as palay, copra or tobacco
dryers
d. Barangay Clearance – No city or
municipality may issue any license or permit fee
for any business or activity unless a clearance is
first obtained from the barangay where such
business or activity is located or conducted.
e. Other Fees and Charges – The barangay
may levy reasonable fees and charges:
1. On Commercial breeding of fighting
cocks, cockfights and cockpits;
2. On places of Recreation which
charge admission fees; and
3. On Billboards, signboards, neon
signs and outdoor advertisements.
E. COMMON REVENUE-RAISING POWERS OF
LGUs (SEC. 153 TO 155)
1. Service fees and charges for services
rendered
2. Public Utility Charges for the operation of
public utilities owned, operated and maintained
by LGUs within their jurisdiction.
226 LOCAL GOVERNMENT TAXATION
3. Toll fees or charges for the use of any public
road, pier or wharf, waterway, bridge, ferry or
telecommunication system funded and
constructed by the local government unit
concerned
Section 153. Service Fees and Charges. - Local
government units may impose and collect such
reasonable fees and charges for services
rendered.
Section 154. Public Utility Charges. - Local
government units may fix the rates for the
operation of public utilities owned, operated
and maintained by them within their
jurisdiction.
Section 155. Toll Fees or Charges. - The
Sanggunian concerned may prescribe the terms
and conditions and fix the rates for the
imposition of toll fees or charges for the use of
any public road, pier, or wharf, waterway,
bridge, ferry or telecommunication system
funded and constructed by the local
government unit concerned: Provided, That no
such toll fees or charges shall be collected from
officers and enlisted men of the Armed Forces
of the Philippines and members of the
Philippine National Police on mission, post
office personnel delivering mail, physically-
handicapped, and disabled citizens who are
sixty-five (65) years or older. When public safety
and welfare so requires, the Sanggunian
concerned may discontinue the collection of the
tolls, and thereafter the said facility shall be free
and open for public use.
Exceptions:
a. Officers and enlisted men of the AFP and
PNP;
b. Post office personnel delivering mail;
and
c. Physically handicapped and disabled
citizens who are sixty-five (65) years or
older.(Sec. 152, LGC)
When public safety and welfare so requires, the
sanggunian concerned may discontinue the
collection of the tolls, and thereafter the said
facility shall be free and open for public use.
CONEJERO, JOSELITO V.
 AMILING, BEBER, CAINDAY, CONEJERO, FERUELO & LIAO TAXATION LAW REVIEWER FOR THE 2011 BAR
F. COMMUNITY TAX
Cities or municipalities may levy a community
tax.
A. Individuals Liable (Sec. 157)
a. every inhabitant of the Philippines;
b. eighteen (18) years of age or over;
c. under any of the following instances:
d. who has been regularly employed on
a wage or salary basis for at least thirty (30)
consecutive working days during any calendar
year; or
e. who is engaged in business or
occupation; or
f. who owns real property with an
aggregate assessed value of P1,000 or more; or
g. who is required by law to file an
income tax return
Tax Rate = P5.00 and an annual additional tax of
P1.00 for every P1,000 of income regardless of
whether from business, exercise of profession
or from property which in no case shall exceed
P5,000.
In case of husband and wife, the additional tax
herein imposed shall be based upon the total
property owned by them and the total gross
receipts or earnings derived by them.
A. Juridical Persons (Sec. 158)
Every corporation no matter how created or
organized, whether domestic or resident
foreign, engaged in or doing business in the
Philippines shall pay an annual community tax.
Tax Rate = P500 and an annual additional tax
which in no case shall exceed P10,000 in
accordance with the following schedule:
1. For every P5,000 worth of real property
owned by it during the preceding year based on
the valuation used for the payment of the real
property tax - P2.00; and
LOCAL GOVERNMENT TAXATION
2. For every P5,000 of gross receipts or
earnings derived by it from its business in the
Philippines during the preceding year - P2.00.
The dividends received by a corporation shall,
for the purpose of the additional tax, be
considered as part of the gross receipts or
earnings of said corporation.
THE FOLLOWING ARE EXEMPT FROM THE
COMMUNITY TAX (SEC. 159)
1. Diplomatic and consular representatives;
and
2. Transient visitors when their stay in the
Philippines does not exceed three (3) months.
PLACE OF PAYMENT: place of residence of the
individual, or in the place where the principal
office of the juridical entity is located.
TIME OF PAYMENT: accrues on the 1st day of
January of each year which shall be paid not
later than the last day of February of each year.
PENALTIES FOR DELINQUENCY: an interest of
24% per annum from the due date until it is
paid shall be added to the amount due.
A community tax certificate may also be issued
to any person or corporation not subject to the
community tax upon payment of P1.00 (Sec.
162, LGC).
PRESENTATION OF COMMUNITY TAX CERTIFICATE ON
CERTAIN OCCASIONS – (SEC. 163)
A. Individual
1. When an individual subject to the
community tax acknowledges any document
before a notary public;
2. takes the oath of office upon election
or appointment to any position in the
government service;
CONEJERO, JOSELITO V. 227
 AMILING, BEBER, CAINDAY, CONEJERO, FERUELO & LIAO TAXATION LAW REVIEWER FOR THE 2011 BAR
3. receives any license, certificate or
permit from any public authority; pays any tax
or fee;
4. receives any money from any public
fund;
5. transacts other official business; or
6. receives any salary or wage from any
person or corporation.
The presentation of the community tax
certificate shall not be required in connection
with the registration of a voter.
A. Corporation
1. receives any license, certificate or
permit from any public authority;
2. pays any tax or fee;
3. receives money from public funds; or
4. transacts other official business.
The city of municipal treasurer deputizes the
barangay treasurer to collect the community tax
in their respective jurisdictions. (Sec. 164, LCG)
The proceeds of the community tax actually and
directly collected by the city or municipal
treasurer shall accrue entirely to the general
fund of the city or municipality concerned.
Proceeds of the community tax collected
through the barangay treasurers shall be
apportioned as follows:
 50% accrues to the general fund of the
city or municipality concerned; and
 50% accrues to the barangay where the
tax is collected.
6. COMMON LIMITATIONS ON LOCAL TAXING
POWER (SEC. 133, LGC)
Local government units cannot levy:
1. Income tax, except on banks and other
financial institutions;
2. Documentary stamp tax;
3. Estate tax, inheritance, gifts, legacies
and other acquisitions mortis causa except as
otherwise provided
4. Customs duties, registration fees of
vessels and wharfage on wharves, tonnage dues
228 LOCAL GOVERNMENT TAXATION
and all other kinds of customs fees, charges and
dues except wharfage on wharves constructed
and maintained by the local government unit
concerned;
5. Taxes, fees, charges and other
impositions upon goods carried into or out of,
or passing through, the territorial jurisdictions
of local government units in the guise of charges
for wharfage, tolls for bridges or otherwise.
6. Taxes, fees or charges on agricultural
and aquatic products when sold by marginal
farmers or fishermen;
7. Taxes on business enterprises certified
by the Board of Investments as pioneer or
non-pioneer for a period of 6 and 4 years,
respectively, from the date of registration;
8. Excise taxes on articles enumerated
under the NIRC, as amended, and taxes, fees or
charges on petroleum products;
9. Percentage or value-added tax (VAT) on
sales, barters or exchanges or similar
transactions on goods or services except as
otherwise provided herein;
10. Taxes on the gross receipts of
transportation contractors and persons engaged
in the transportation of passengers or freight by
hire and common carriers by air, land or water,
except as provided in the Code;
11. Taxes on premiums paid by way of
Reinsurance or retrocession;
12. Taxes, fees or charges for the
registration of motor vehicles and for the
issuance of all kinds of licenses or permits for
the driving thereof, except tricycle;
13. Taxes, fees or other charges on
Philippine products actually exported, except as
otherwise provided in the Code;
14. Taxes, fees or charges on Countryside
and barangay business enterprises and
cooperatives duly registered under R.A. 6810
and R.A. 6938, (Cooperatives Code of the
Philippines) ; and
15. Taxes, fees or charges of any kind on
the National Government, its agencies and
instrumentalities, and local government units.
CLASSIFICATION OF COMMON LIMITATIONS
CONEJERO, JOSELITO V.
 AMILING, BEBER, CAINDAY, CONEJERO, FERUELO & LIAO TAXATION LAW REVIEWER FOR THE 2011 BAR
1. Taxes which are levied under the NIRC
unless otherwise provided by the LGC
 Numbers 1, 2, 3, 8, 9, 10
2. Taxes, fees, etc. which are imposed under
the Tariffs and Customs Code
 Number 4
3. Taxes, fees and charges where the
imposition of which contravenes existing
governmental policies or which are violative of
the fundamental principles of taxation
 Numbers 5, 6, 7, 11, 13, 14, 15
4. Taxes, fees, and charges imposed under
special laws.
 Number 12
7. COLLECTION OF LOCAL TAXES
A. Tax Period and Manner of Payment – (Sec.
165, LGC)
Unless otherwise provided, the tax period shall
be the calendar year.
Such taxes, fees, and charges may be paid in
quarterly installments.
B. Accrual of Tax – (Sec. 166, LGC)
Unless otherwise provided, shall accrue on the
first day of January of each year.
However, new taxes, fees or charges, or
changes in the rates thereof, shall accrue on the
first day of the quarter next following the
effectivity of the ordinance imposing such new
levies or rates.
C. Time of Payment – (Sec. 167, LGC)
Unless otherwise provided shall be paid within
the first twenty (20) days of January or of each
subsequent quarter as the case may be.
May, for a justifiable reason or cause, be
extended without surcharges or penalties, but
only for a period not exceeding six (6) months.
D. Surcharges and Penalties on Unpaid Taxes,
Fees or Charges – (Sec. 168, LGC)
LOCAL GOVERNMENT TAXATION
Surcharge not exceeding 25% of the amount of
taxes, fees or charges including surcharges, until
such amount is fully paid.
But in no case shall the total interest on the
unpaid amount or portion thereof exceed
thirty-six (36) months.
Interests on Other Unpaid Revenues – (Sec. 169,
LGC)
An interest thereon at the rate not exceeding
2% per month from the date it is due until it is
paid, but in no case shall the total interest on
the unpaid amount or portion thereof exceed
thirty-six (36) months.
E. COLLECTION OF LOCAL REVENUES BY THE TREASURER
– (SEC. 170 LGC)
All local taxes, fees and charges shall be
collected by the provincial, city, municipal or
barangay treasurer, or their duly authorized
deputies.
The provincial, city or municipal treasurer may
designate the barangay treasurer or his deputy
to collect local taxes, fees or charges.
In case a bond is required for the purpose, the
provincial, city or municipal government shall
pay the premiums thereon in addition to the
premiums of the bond that may be required
under the Code.
Section 171. Examination of Books of Accounts
and Pertinent Records of Businessmen by Local
Treasurer. - The provincial, city, municipal or
barangay treasurer may, by himself or through
any of his deputies duly authorized in writing,
examine the books, accounts, and other
pertinent records of any person, partnership,
corporation, or association subject to local
taxes, fees and charges in order to ascertain.
assess, and collect the correct amount of the
tax, fee, or charge. Such examination shall be
made during regular business hours, only once
for every tax period, and shall be certified to by
the examining official. Such certificate shall be
CONEJERO, JOSELITO V. 229
 AMILING, BEBER, CAINDAY, CONEJERO, FERUELO & LIAO TAXATION LAW REVIEWER FOR THE 2011 BAR
made of record in the books of accounts of the
taxpayer examined.
In case the examination herein authorized is
made by a duly authorized deputy of the local
treasurer, the written authority of the deputy
concerned shall specifically state the name,
address, and business of the taxpayer whose
books, accounts, and pertinent records are to
be examined, the date and place of such
examination and the procedure to be followed
in conducting the same.
For this purpose, the records of the revenue
district office of the Bureau of Internal Revenue
shall be made available to the local treasurer,
his deputy or duly authorized representative.
8. TAX REMEDIES OF THE TAXPAYER
A. Periods of assessment and collection of local
taxes, fees or charges.
Section 194. Periods of Assessment and
Collection. -
(a) Local taxes, fees, or charges shall be
assessed within five (5) years from the date they
became due. No action for the collection of such
taxes, fees, or charges, whether administrative
or judicial, shall be instituted after the
expiration of such period: Provided, That. taxes,
fees or charges which have accrued before the
effectivity of this Code may be assessed within a
period of three (3) years from the date they
became due.
(b) In case of fraud or intent to evade the
payment of taxes, fees, or charges, the same
may be assessed within ten (10) years from
discovery of the fraud or intent to evade
payment.
(c) Local taxes, fees, or charges may be collected
within five (5) years from the date of
assessment by administrative or judicial action.
No such action shall be instituted after the
expiration of said period: Provided, however,
That, taxes, fees or charges assessed before the
effectivity of this Code may be collected within
a period of three (3) years from the date of
assessment.
230 LOCAL GOVERNMENT TAXATION
(d) The running of the periods of prescription
provided in the preceding paragraphs shall be
suspended for the time during which:
(1) The treasurer is legally prevented from
making the assessment of collection;
(2) The taxpayer requests for a reinvestigation
and executes a waiver in writing before
expiration of the period within which to assess
or collect; and
(3) The taxpayer is out of the country or
otherwise cannot be located.
PRESCRIPTIVE PERIODS OF ASSESSMENT
1. Local taxes, fees, or charges – five (5) years
from the date they became due. (Sec. 194, LGC).
2. When there is fraud or intent to evade the
payment of taxes, fees or charges – ten (10)
years from discovery of the fraud or intent to
evade the payment (Sec. 194, LGC).
PRESCRIPTIVE PERIOD OF COLLECTION
Local taxes, fees, or charges may be
collected within five (5) years from the date of
assessment by administrative or judicial action.
No such action shall be instituted after the
expiration of such period (Sec. 194, LGC).
GROUNDS FOR THE SUSPENSION OF THE
RUNNING OF THE PRESCRIPTIVE PERIODS
a. The treasurer is legally prevented from
the assessment or collection of the tax;
b. The taxpayer requests for a
reinvestigation and executes a waiver in writing
before the expiration of the period within which
to assess or collect; and
c. The taxpayer is out of the country or
otherwise cannot be located (Sec. 194, LGC).
B. Protest of assessment.
Section 195. Protest of Assessment. - When the
local treasurer or his duly authorized
representative finds that correct taxes, fees, or
charges have not been paid, he shall issue a
notice of assessment stating the nature of the
tax, fee, or charge, the amount of deficiency,
the surcharges, interests and penalties. Within
sixty (60) days from the receipt of the notice of
assessment, the taxpayer may file a written
CONEJERO, JOSELITO V.
 AMILING, BEBER, CAINDAY, CONEJERO, FERUELO & LIAO TAXATION LAW REVIEWER FOR THE 2011 BAR
protest with the local treasurer contesting the
assessment; otherwise, the assessment shall
become final and executory. The local treasurer
shall decide the protest within sixty (60) days
from the time of its filing. If the local treasurer
finds the protest to be wholly or partly
meritorious, he shall issue a notice cancelling
wholly or partially the assessment. However, if
the local treasurer finds the assessment to be
wholly or partly correct, he shall deny the
protest wholly or partly with notice to the
taxpayer. The taxpayer shall have thirty (30)
days from the receipt of the denial of the
protest or from the lapse of the sixty (60) day
period prescribed herein within which to appeal
with the court of competent jurisdiction
otherwise the assessment becomes conclusive
and unappealable.
a. Protest – within 60 days from receipt of
assessment (Sec. 195 LGC). Payment under
protest is not necessary.
b. Payment & subsequent refund or tax credit
– within 2 years from payment of tax to local
treasurer (Sec. 196 LGC). It is to be noted that,
unlike in internal revenue taxes, the
supervening cause applies in local taxation
because the period for the filing of claims for
refund or credit of local taxes is counted not
necessarily from the date of payment but from
the date the taxpayer is entitled to a refund or
credit.
c. Right of redemption – 1 year from the date
of sale or from the date of forfeiture (Sec. 179,
LGC).
C. Claim for Refund of Tax Credit.
Section 196. Claim for Refund of Tax Credit. - No
case or proceeding shall be maintained in any
court for the recovery of any tax, fee, or charge
erroneously or illegally collected until a written
claim for refund or credit has been filed with
the local treasurer. No case or proceeding shall
be entertained in any court after the expiration
of two (2) years from the date of the payment
LOCAL GOVERNMENT TAXATION
of such tax, fee, or charge, or from the date the
taxpayer is entitled to a refund or credit.
9. CIVIL REMEDIES OF THE LOCAL GOVERNMENT UNITS
(LGU) TO EFFECT COLLECTION OF TAXES
A. Section 173. Local Government's Lien. - Local
taxes, fees, charges and other revenues
constitute a lien, superior to all liens, charges or
encumbrances in favor of any person,
enforceable by appropriate administrative or
judicial action, not only upon any property or
rights therein which may be subject to the lien
but also upon property used in business,
occupation, practice of profession or calling, or
exercise of privilege with respect to which the
lien is imposed. The lien may only be
extinguished upon full payment of the
delinquent local taxes fees and charges
including related surcharges and interest.
B. Section 174. Civil Remedies. - The civil
remedies for the collection of local taxes, fees,
or charges, and related surcharges and interest
resulting from delinquency shall be:
(a) By administrative action thru distraint of
goods, chattels, or effects, and other personal
property of whatever character, including stocks
and other securities, debts, credits, bank
accounts, and interest in and rights to personal
property, and by levy upon real property and
interest in or rights to real property;
(b) By judicial action.
Either of these remedies or all may be pursued
concurrently or simultaneously at the discretion
of the local government unit concerned.
JURISDICTION OF COURTS OVER LOCAL
TAXATION CASES
a. With the amendment brought by RA
No. 9282, the Court of Tax Appeals now has
appellate jurisdiction over local taxation cases
decided by the Regional Trial Court in the
exercise of its appellate or original jurisdiction.
b. Regular judicial courts are not
prohibited from enjoining the collection of local
CONEJERO, JOSELITO V. 231
 AMILING, BEBER, CAINDAY, CONEJERO, FERUELO & LIAO TAXATION LAW REVIEWER FOR THE 2011 BAR
taxes, subject to Rule 58 (Preliminary
Injunction) of the Rules of Court.
Note: Unlike the NIRC, the Local Tax Code
does not contain any specific provision
prohibiting courts from enjoining the collection
of local taxes. Such statutory lapse or intent
may have allowed preliminary injunction where
local taxes are involved. But it cannot negate
the procedural rules and requirements under
Rule 58 of the Rules of Courts. (Valley Trading
Co. vs. CFI of Isabela, GR No. 49529, March 31,
1989)
C. Procedure of Administrative action.
1. Section 175. Distraint of Personal Property. -
The remedy by distraint shall proceed as
follows:
(a) Seizure - Upon failure of the person owing
any local tax, fee, or charge to pay the same at
the time required, the local treasurer or his
deputy may, upon written notice, seize or
confiscate any personal property belonging to
that person or any personal property subject to
the lien in sufficient quantity to satisfy the tax,
fee, or charge in question, together with any
increment thereto incident to delinquency and
the expenses of seizure. In such case, the local
treasurer or his deputy shall issue a duly
authenticated certificate based upon the
records of his office showing the fact of
delinquency and the amounts of the tax, fee, or
charge and penalty due. Such certificate shall
serve as sufficient warrant for the distraint of
personal property aforementioned, subject to
the taxpayer's right to claim exemption under
the provisions of existing laws. Distrained
personal property shall be sold at public auction
in the manner hereon provided for.
(b) Accounting of distrained goods. - The officer
executing the distraint shall make or cause to be
made an account of the goods, chattels or
effects distrained, a copy of which signed by
himself shall be left either with the owner or
person from whose possession the goods,
chattels or effects are taken, or at the dwelling
or place or business of that person and with
232 LOCAL GOVERNMENT TAXATION
someone of suitable age and discretion, to
which list shall be added a statement of the sum
demanded and a note of the time and place of
sale.
(c) Publication - The officer shall forthwith cause
a notification to be exhibited in not less than
three (3) public and conspicuous places in the
territory of the local government unit where the
distraint is made, specifying the time and place
of sale, and the articles distrained. The time of
sale shall not be less than twenty (20) days after
the notice to the owner or possessor of the
property as above specified and the publication
or posting of the notice. One place for the
posting of the notice shall be at the office of the
chief executive of the local government unit in
which the property is distrained.
(d) Release of distrained property upon
payment prior to sale - If at any time prior to
the consummation of the sale, all the proper
charges are paid to the officer conducting the
sale, the goods or effects distrained shall be
restored to the owner.
(e) Procedure of sale - At the time and place
fixed in the notice, the officer conducting the
sale shall sell the goods or effects so distrained
at public auction to the highest bidder for cash.
Within five (5) days after the sale, the local
treasurer shall make a report of the proceedings
in writing to the local chief executive concerned.
Should the property distrained be not disposed
of within one hundred and twenty (120) days
from the date of distraint, the same shall be
considered as sold to the local government unit
concerned for the amount of the assessment
made thereon by the Committee on Appraisal
and to the extent of the same amount, the tax
delinquencies shall be cancelled.
Said Committee on Appraisal shall be composed
of the city or municipal treasurer as chairman,
with a representative of the Commission on
Audit and the city or municipal assessor as
members.
CONEJERO, JOSELITO V.
 AMILING, BEBER, CAINDAY, CONEJERO, FERUELO & LIAO TAXATION LAW REVIEWER FOR THE 2011 BAR
(f) Disposition of proceeds - The proceeds of the
sale shall be applied to satisfy the tax, including
the surcharges, interest, and other penalties
incident to delinquency, and the expenses of
the distraint and sale. The balance over and
above what is required to pay the entire claim
shall be returned to the owner of the property
sold. The expenses chargeable upon the seizure
and sale shall embrace only the actual expenses
of seizure and preservation of the property
pending the sale, and no charge shall be
imposed for the services of the local officer or
his deputy. Where the proceeds of the sale are
insufficient to satisfy the claim, other property
may, in like manner, be distrained until the full
amount due, including all expenses, is collected.
2. Section 176. Levy on Real Property. - After
the expiration of the time required to pay the
delinquent tax, fee, or charge, real property
may be levied on before, simultaneously, or
after the distraint of personal property
belonging to the delinquent taxpayer. To this
end, the provincial, city or municipal treasurer,
as the case may be, shall prepare a duly
authenticated certificate showing the name of
the taxpayer and the amount of the tax, fee, or
charge, and penalty due from him. Said
certificate shall operate with the force of a legal
execution throughout the Philippines. Levy shall
be effected by writing upon said certificate the
description of the property upon which levy is
made. At the same time, written notice of the
levy shall be mailed to or served upon the
assessor and the Register of Deeds of the
province or city where the property is located
who shall annotate the levy on the tax
declaration and certificate of title of the
property, respectively, and the delinquent
taxpayer or, if he be absent from the
Philippines, to his agent or the manager of the
business in respect to which the liability arose,
or if there be none, to the occupant of the
property in question.
In case the levy on real property is not issued
before or simultaneously with the warrant of
LOCAL GOVERNMENT TAXATION
distraint on personal property, and the personal
property of the taxpayer is not sufficient to
satisfy his delinquency, the provincial, city or
municipal treasurer, as the case may be, shall
within thirty (30) days after execution of the
distraint, proceed with the levy on the
taxpayer's real property.
A report on any levy shall, within ten (10) days
after receipt of the warrant, be submitted by
the levying officer to the sanggunian concerned.
3. Section 184. Further Distraint or Levy. - The
remedies by distraint and levy may be repeated
if necessary until the full amount due, including
all expenses, is collected.
4. Section 185. Personal Property Exempt from
Distraint or Levy. - The following property shall
be exempt from distraint and the levy,
attachment or execution thereof for
delinquency in the payment of any local tax, fee
or charge, including the related surcharge and
interest:
(a) Tools and implements necessarily used by
the delinquent taxpayer in his trade or
employment;
(b) One (1) horse, cow, carabao, or other beast
of burden, such as the delinquent taxpayer may
select, and necessarily used by him in his
ordinary occupation;
(c) His necessary clothing, and that of all his
family;
(d) Household furniture and utensils necessary
for housekeeping and used for that purpose by
the delinquent taxpayer, such as he may select,
of a value not exceeding Ten thousand pesos
(P10,000.00);
(e) Provisions, including crops, actually provided
for individual or family use sufficient for four (4)
months;
(f) The professional libraries of doctors,
engineers, lawyers and judges;
CONEJERO, JOSELITO V. 233
 AMILING, BEBER, CAINDAY, CONEJERO, FERUELO & LIAO TAXATION LAW REVIEWER FOR THE 2011 BAR

(g) One fishing boat and net, not exceeding the

total value of Ten thousand pesos (P10,000.00),
by the lawful use of which a fisherman earns his
livelihood; and
(h) Any material or article forming part of a
house or improvement of any real property.

5. Section 177. Penalty for Failure to Issue and

Execute Warrant. - Without prejudice to
criminal prosecution under the Revised Penal
Code and other applicable laws, any local
treasurer who fails to issue or execute the
warrant of distraint or levy after the expiration
of the time prescribed, or who is found guilty of
abusing the exercise thereof by competent
authority shall be automatically dismissed from
the service after due notice and hearing.

D. Procedure for judicial action.

1. Court action
 within 30 days after receipt of decision
or lapse of 60 days of Secretary of Justice’s
inaction (Sec. 187 LGC)
 within 30 days from receipt when
protest of assessment is denied (Sec. 195 LGC)
 if no action is taken by the treasurer in
refund cases and the two year period is about to
lapse (Sec. 195 LGC)
 if remedies available does not provide
plain, speedy and adequate remedy.
2. Action for declaratory relief
3. Injunction – if irreparable damage would be
caused to the taxpayer and no adequate
remedy is available.

234 LOCAL GOVERNMENT TAXATION CONEJERO, JOSELITO V.

 AMILING, BEBER, CAINDAY, CONEJERO, FERUELO & LIAO TAXATION LAW REVIEWER FOR THE 2011 BAR
B. REAL PROPERTY TAXATION
1. Fundamental Principles
Section 198. Fundamental Principles. - The
appraisal, assessment, levy and collection of
real property tax shall be guided by the
following fundamental principles:
(a) Real property shall be appraised at its
current and fair market value;
(b) Real property shall be classified for
assessment purposes on the basis of its actual
use;
(c) Real property shall be assessed on the basis
of a uniform classification within each local
government unit;
(d) The appraisal, assessment, levy and
collection of real property tax shall not be let to
any private person; and
(e) The appraisal and assessment of real
property shall be equitable.
2. Nature of Real Property Tax
1. Direct tax on the Ownership of real
property
2. Ad valorem tax. The value is based on
the tax base.
3. Proportionate – the tax is calculated on
the basis of a certain percentage of the value
assessed.
4. Indivisible single obligation
5. Local tax
3. Imposition of real property tax
Section 232. Power to Levy Real Property Tax. -
A province or city or a municipality within the
Metropolitan Manila Area my levy an annual ad
valorem tax on real property such as land,
building, machinery, and other improvement
not hereinafter specifically exempted.
A. POWER TO LEVY REAL PROPERTY TAX
 Basic real property tax;
235 JOSELITO V. CONEJERO
 1% additional real estate tax to finance
the Special Education Fund; (Sec. 236)
 5% additional ad valorem tax on Idle
lands; (Sec. 236, LGC) and
 Special levy or special assessments (may
be imposed even by municipalities outside
Metro Manila) on lands comprised within its
territorial jurisdiction specially benefited by
public works, projects or improvements funded
by the local government unit concerned.
Provided:
 Special levy shall not exceed 60% of
the actual cost of such projects and
improvements, including the costs of acquiring
land and such other real property in connection
therewithnot apply to lands exempt from basic
real property tax and the remainder of the land
have been donated to the local government unit
concerned for the construction of said projects.
(Sec. 240, LGC).

FOR PURPOSES OF REAL PROPERTY TAXATION
IDLE LANDS SHALL INCLUDE: (SEC. 237, LGC)
1. Agricultural lands more than one hectare in
area one-half of which remain uncultivated or
unimproved by the owner of the property or
person having legal interest therein.
Agricultural lands planted to permanent or
perennial crops with at least 50 trees to a
hectare shall not be considered idle lands.
Lands actually used for grazing purposes shall
likewise not be considered idle lands; and
2. Lands other than agricultural located in a
city or municipality more than one thousand
square meters in area one-half of which remain
unutilized or unimproved by the owner of the
property or person having legal interest therein.
IDLE LANDS EXEMPT FROM TAX (SEC. 238, LGC)
By reason of:
1. force majeure
2. civil disturbance
3. natural calamity
REAL PROPERTY TAXATION
 AMILING, BEBER, CAINDAY, CONEJERO, FERUELO & LIAO TAXATION LAW REVIEWER FOR THE 2011 BAR
4. or any cause which physically or legally
prevents the owner of the property or person
having legal interest therein from improving,
utilizing or cultivating the same.
B. PROPERTIES EXEMPT FROM REAL PROPERTY
TAX (SEC. 234, LGC)
Exemption is limited only to the following:
1. Real property owned by the government
except when the beneficial use thereof has
been granted to a taxable person;
2. Charitable institutions, churches,
personages or convents appurtenant thereto,
mosques, non-profit or religious cemeteries and
all lands, buildings and improvements actually,
directly and exclusively used for religious,
charitable or educational purposes (Art. VI, Sec.
28, Constitution);
3. Machineries and equipment that are
actually, directly and exclusively used by local
water utilities and GOCC’s engaged in the supply
and distribution of water and/or electric power;
4. Real property owned by duly registered
cooperatives as provided for in RA 6938; and
5. Machinery and equipment used for
pollution control and environmental protection.
4. Appraisal and Assessment of Real Property
A. Section 201. Appraisal of Real Property. - All
real property, whether taxable or exempt, shall
be appraised at the current and fair market
value prevailing in the locality where the
property is situated. The Department of Finance
shall promulgate the necessary rules and
regulations for the classification, appraisal, and
assessment of real property pursuant to the
provisions of this Code.
B. BY OWNER OR ADMINISTRATOR (SEC. 202-203)
 File a sworn declaration with the assessor
JOSELITO V. CONEJERO
- once every 3 years during the period from
January 1 to June 30.
 For newly acquired property –
WHEN: Must file with the assessor within 60
days from date of transfer
WHAT: Sworn statement containing the fair
market value and description of the property.
 For improvement on property
WHEN: Must file within 60 days upon
completion or occupation (whichever comes
earlier)
WHAT: Sworn statement containing the fair
market value and description of the property.
DECLARATION BY PROVINCIAL / CITY / MUNICIPAL
ASSESSOR (SEC. 204)
WHEN: Only when the person under Sec. 202
refuses or fails to make a declaration within the
prescribed time.
No oath by the assessor is required.
Notes: Proof of Exemption of Real Property
from Taxation - (Sec. 206)
WHO: By any person or for whom real property
is declared.
 Claim for exemption must be filed with the
assessor together with sufficient documentary
evidence to support claim
WHEN: within 30 days from the date of
declaration of property.
IF PROPERTY IS DECLARED FOR THE FIRST TIME –
(SEC.222)
If Declared for the first time, real property shall
be assessed for back taxes:
For not more than 10 years prior to date of
initial assessment
REAL PROPERTY TAXATION 236
 AMILING, BEBER, CAINDAY, CONEJERO, FERUELO & LIAO TAXATION LAW REVIEWER FOR THE 2011 BAR
Taxes shall be computed on the basis of
applicable schedule of values in force during the
corresponding period.
C. LISTING OF REAL PROPERTY IN THE
ASSESSMENT ROLLS (SECS. 205, 207)
Section 205. Listing of Real Property in the
Assessment Rolls. -
(a) In every province and city, including the
municipalities within the Metropolitan Manila
Area, there shall be prepared and maintained by
the provincial, city or municipal assessor an
assessment roll wherein shall be listed all real
property, whether taxable or exempt, located
within the territorial jurisdiction of the local
government unit concerned. Real property shall
be listed, valued and assessed in the name of
the owner or administrator, or anyone having
legal interest in the property.
(b) The undivided real property of a deceased
person may be listed, valued and assessed in
the name of the estate or of the heirs and
devisees without designating them individually;
and undivided real property other than that
owned by a deceased may be listed, valued and
assessed in the name of one or more co-
owners: Provided, however, That such heir,
devisee, or co-owner shall be liable severally
and proportionately for all obligations imposed
by this Title and the payment of the real
property tax with respect to the undivided
property.
(c) The real property of a corporation,
partnership, or association shall be listed,
valued and assessed in the same manner as that
of an individual.
(d) Real property owned by the Republic of the
Philippines, its instrumentalities and political
subdivisions, the beneficial use of which has
been granted, for consideration or otherwise, to
a taxable person, shall be listed, valued and
assessed in the name of the possessor, grantee
or of the public entity if such property has been
acquired or held for resale or lease.
237 JOSELITO V. CONEJERO
Section 207. Real Property Identification
System. - All declarations of real property made
under the provisions of this Title shall be kept
and filed under a uniform classification system
to be established by the provincial, city or
municipal assessor.
D. Preparation of Schedule of Fair Market
Values
Section 212. Preparation of Schedule of Fair
Market Values. - Before any general revision of
property assessment is made pursuant to the
provisions of this Title, there shall be prepared a
schedule of fair market values by the provincial,
city and municipal assessor of the municipalities
within the Metropolitan Manila Area for the
different classes of real property situated in
their respective local government units for
enactment by ordinance of the Sanggunian
concerned. The schedule of fair market values
shall be published in a newspaper of general
circulation in the province, city or municipality
concerned or in the absence thereof, shall be
posted in the provincial capitol, city or
municipal hall and in two other conspicuous
public places therein.
1. Section 213. Authority of Assessor to Take
Evidence. - For the purpose of obtaining
information on which to base the market value
of any real property, the assessor of the
province, city or municipality or his deputy may
summon the owners of the properties to be
affected or persons having legal interest therein
and witnesses, administer oaths, and take
deposition concerning the property, its
ownership, amount, nature, and value.
2. Section 214. Amendment of Schedule of Fair
Market Values. - The provincial, city or
municipal assessor may recommend to the
Sanggunian concerned amendments to correct
errors in valuation in the schedule of fair market
values. The Sanggunian concerned shall, by
ordinance, act upon the recommendation
within ninety (90) days from receipt thereof.
REAL PROPERTY TAXATION
 AMILING, BEBER, CAINDAY, CONEJERO, FERUELO & LIAO TAXATION LAW REVIEWER FOR THE 2011 BAR

E. Classes of Real Property G. Assessment of real property

CLASSIFICATION OF LANDS FOR PURPOSES OF 1. Section 218. Assessment Levels. - The

ASSESSMENT SEC. 215 (A) assessment levels to be applied to the fair
market value of real property to determine its
a. Commercial assessed value shall be fixed by ordinances of
b. Agricultural the Sangguniang Panlalawigan, Sangguniang
c. Residential Panlungsod or Sangguniang Bayan of a
d. Mineral municipality within the Metropolitan Manila
e. Industrial Area, at the rates not exceeding the following:
f. Timberland (a) On Lands:
g. Special CLASS ASSESSMENT LEVELS
The city or municipality within the Metropolitan
Manila Area, through their respective Residential 20%
Sanggunian, shall have the power to classify
lands as residential, agricultural, commercial, Agricultural 40%
industrial, mineral, timberland, or special in Commercial 50%
accordance with their zoning ordinances.
Industrial 50%
SPECIAL CLASSES OF REAL PROPERTY (SEC. 216,
LGC) Mineral 50%

1. Hospitals Timberland 20%

2. Cultural and Scientific purposes
3. owned and used by Local water districts (b) On Buildings and Other Structures:
4. GOCCs rendering essential public services in
(1) Residential
the supply and distribution of water and/or
generation or transmission of electric power. Fair market Value

Over Not Over Assessment

F. ACTUAL USE OF PROPERTY AS BASIS OF Levels
ASSESSMENT (SEC. 217 LGC)
P175,000 0%
Real property shall be classified, valued and
assessed on the basis of actual use regardless of P175,000.00 300,000 10%
where located, whoever owns it, and whoever
uses it. 300,000.00 500,000 20%

500,000.00 750,000 25%

Unpaid realty taxes attach to the property and
is chargeable against the person who had actual 750,000.00 1,000,000 30%
or beneficial use and possession of it regardless
of whether or not he is the owner. To impose 1,000,000.00 2,000,000 35%
the real property tax on the subsequent owner
which was neither the owner nor the beneficial 2,000,000.00 5,000,000 40%
user of the property during the designated
5,000,000.00 10,000,000 50%
periods would not only be contrary to law but
also unjust. (Estate of Lim vs. City of Manila, GR 10,000,000.00 60%
No. 90639, February 21, 1990)

JOSELITO V. CONEJERO REAL PROPERTY TAXATION 238

AMILING, BEBER, CAINDAY, CONEJERO, FERUELO & LIAO TAXATION LAW REVIEWER FOR THE 2011 BAR

(2) Agricultural 500,000.00 750,000 55%

Fair Market Value
750,000.00 1,000,000 60%
Over Not Over Assessment
5,000,000.00 2,000,000 65%
Levels
2,000,000.00<TD 70%
P300,000.00 25%

P300,000.00 500,000 30% (c) On Machineries

500,000.00 750,000 35% Class Assessment Levels

750,000.00 1,000,000 40% Agricultural 40%

1,000,000.00 2,000,000 45% Residential 50%

2,000,000.00 50% Commercial 80%

(3) Commercial / Industrial Industrial 80%

Fair Market Value (d) On Special Classes: The assessment levels for all
lands buildings, machineries and other
Over Not Over Assessment
improvements;
Levels
Actual Use Assessment
P300,000.00 30% Level

P300,000.00 500,000 35% Cultural 15%

500,000.00 750,000 40% Scientific 15%

750,000.00 1,000,000 50% Hospital 15%

1,000,000.00 2,000,000 60% Local water districts 10%

2,000,000.00 5,000,000 70% Government-owned or 10%

controlled corporations
5,000,000.00 10,000,000 75%
engaged in the supply and
10,000,000.00 80% distribution of water and/or
generation and transmission
(4) Timberland
of electric power
Fair Market Value

Over Not Over Assessment 2. Section 219. General Revision of Assessment and
Levels Property Classification. - The provincial, city or
municipal assessor shall undertake a general revision
P300,000.00 45%
of real property assessments within two (2) years
after the effectivity of this Code and every three (3)
years thereafter.
P300,000.00 500,000 50%

239 JOSELITO V. CONEJERO REAL PROPERTY TAXATION

 AMILING, BEBER, CAINDAY, CONEJERO, FERUELO & LIAO TAXATION LAW REVIEWER FOR THE 2011 BAR
3. Section 221. Date of Effectivity of Assessment or
Reassessment. - All assessments or reassessments
made after the first (1st) day of January of any year
shall take effect on the first (1st) day of January of the
succeeding year: Provided, however, That the
reassessment of real property due to its partial or
total destruction, or to a major change in its actual
use, or to any great and sudden inflation or deflation
of real property values, or to the gross illegality of the
assessment when made or to any other abnormal
cause, shall be made within ninety (90) days from the
date any such cause or causes occurred, and shall take
effect at the beginning of the quarter next following
the reassessment.
4. Section 222. Assessment of Property Subject to
Back Taxes. - Real property declared for the first time
shall be assessed for taxes for the period during which
it would have been liable but in no case of more than
ten (10) years prior to the date of initial assessment:
Provided, however, That such taxes shall be computed
on the basis of the applicable schedule of values in
force during the corresponding period.
If such taxes are paid on or before the end of the
quarter following the date the notice of assessment
was received by the owner or his representative, no
interest for delinquency shall be imposed thereon;
otherwise, such taxes shall be subject to an interest at
the rate of two percent (2%) per month or a fraction
thereof from the date of the receipt of the assessment
until such taxes are fully paid.
5. Section 223. Notification of New or Revised
Assessment. - When real property is assessed for the
first time or when an existing assessment is increased
or decreased, the provincial, city or municipal assessor
shall within thirty (30) days give written notice of such
new or revised assessment to the person in whose
name the property is declared. The notice may be
delivered personally or by registered mail or through
the assistance of the punong barangay to the last
known address of the person to be served.
F. Appraisal and Assessment of Machinery
Section 224. Appraisal and Assessment of Machinery. -
JOSELITO V. CONEJERO
(a) The fair market value of a brand-new machinery
shall be the acquisition cost. In all other cases, the fair
market value shall be determined by dividing the
remaining economic life of the machinery by its
estimated economic life and multiplied by the
replacement or reproduction cost.
(b) If the machinery is imported, the acquisition cost
includes freight, insurance, bank and other charges,
brokerage, arrastre and handling, duties and taxes,
plus charges at the present site. The cost in foreign
currency of imported machinery shall be converted to
peso cost on the basis of foreign currency exchange
rates as fixed by the Central Bank.
5. Collection of Real Property Tax
A. Date of Accrual of Real Property Tax
Section 246. Date of Accrual of Tax. - The real property
tax for any year shall accrue on the first day of January
and from that date it shall constitute a lien on the
property which shall be superior to any other lien,
mortgage, or encumbrance of any kind whatsoever,
and shall be extinguished only upon the payment of
the delinquent tax.
B. Collection of Tax
1.Collecting authority
Section 247. Collection of Tax. - The collection of the
real property tax with interest thereon and related
expenses, and the enforcement of the remedies
provided for in this Title or any applicable laws, shall
be the responsibility of the city or municipal treasurer
concerned.
The city or municipal treasurer may deputize the
Barangay treasurer to collect all taxes on real property
located in the Barangay: Provided, That the Barangay
treasurer is properly bonded for the purpose:
Provided, further, That the premium on the bond shall
be paid by the city or municipal government
concerned.
2. Duty of Assessor to Furnish Local Treasurer with
Assessment Rolls
Section 248. Assessor to Furnish Local Treasurer with
Assessment Roll. - The provincial, city or municipal
assessor shall prepare and submit to the treasurer of
REAL PROPERTY TAXATION 240
 AMILING, BEBER, CAINDAY, CONEJERO, FERUELO & LIAO TAXATION LAW REVIEWER FOR THE 2011 BAR
the local government unit, on or before the thirty-first
(31st) day of December each year, an assessment roll
containing a list of all persons whose real properties
have been newly assessed or reassessed and the
values of such properties.
3. Notice of Time for Collection of Tax
Section 249. Notice of Time for Collection of Tax. - The
city or municipal treasurer shall, on or before the
thirty-first (31st) day of January each year, in the case
of the basic real property tax and the additional tax
for the Special Education Fund (SEF) or any other date
to be prescribed by the sanggunian concerned in the
case of any other tax levied under this title, post the
notice of the dates when the tax may be paid without
interest at a conspicuous and publicly accessible place
at the city or municipal hall. Said notice shall likewise
be published in a newspaper of general circulation in
the locality once a week for two (2) consecutive
weeks.
C. Periods Within Which To Collect Real Property Tax
PERIOD TO COLLECT (SEC. 270)
1. within five (5) years from the date they
become due
2. within ten (10) years from discovery of fraud,
in case there is fraud or intent to evade
SUSPENSION OF PRESCRIPTIVE PERIOD (SEC. 270)
1. Local treasurer is legally prevented to collect
tax.
2. The owner or property requests for
reinvestigation and writes a waiver before expiration
of period to collect.
3. The owner of property is out of the country or
cannot be located.
D. Special Rules on payment
1. Section 250. Payment of Real Property Taxes
in Installments. - The owner of the real property
or the person having legal interest therein may
pay the basic real property tax and the
additional tax for Special Education Fund (SEF)
due thereon without interest in four (4) equal
installments; the first installment to be due and
payable on or before March Thirty-first (31st);
241 JOSELITO V. CONEJERO
the second installment, on or before June Thirty
(30); the third installment, on or before
September Thirty (30); and the last installment
on or before December Thirty-first (31st),
except the special levy the payment of which
shall be governed by ordinance of the
Sanggunian concerned.
The date for the payment of any other tax
imposed under this Title without interest shall
be prescribed by the Sanggunian concerned.
Payments of real property taxes shall first be
applied to prior years delinquencies, interests,
and penalties, if any, and only after said
delinquencies are settled may tax payments be
credited for the current period.
2. Section 255. Interests on Unpaid Real
Property Tax. - In case of failure to pay the basic
real property tax or any other tax levied under
this Title upon the expiration of the periods as
provided in Section 250, or when due, as the
case may be, shall subject the taxpayer to the
payment of interest at the rate of two percent
(2%) per month on the unpaid amount or a
fraction thereof, until the delinquent tax shall
have been fully paid: Provided, however, That in
no case shall the total interest on the unpaid tax
or portion thereof exceed thirty-six (36)
months.
3. Section 276. Condonation or Reduction of
Real Property Tax and Interest. - In case of a
general failure of crops or substantial decrease
in the price of agricultural or agribased
products, or calamity in any province, city or
municipality, the Sanggunian concerned, by
ordinance passed prior to the first (1st) day of
January of any year and upon recommendation
of the Local Disaster Coordinating Council, may
condone or reduce, wholly or partially, the taxes
and interest thereon for the succeeding year or
years in the city or municipality affected by the
calamity.
Section 277. Condonation or Reduction of Tax
by the President of the Philippines. - The
REAL PROPERTY TAXATION
 AMILING, BEBER, CAINDAY, CONEJERO, FERUELO & LIAO TAXATION LAW REVIEWER FOR THE 2011 BAR
President of the Philippines may, when public
interest so requires, condone or reduce the real
property tax and interest for any year in any
province or city or a municipality within the
Metropolitan Manila Area.
E. Remedies of LGUs for the collection of real
property tax.
1. Issuance of Notice of Delinquency in the
Payment of the Real Property Tax.
Section 254. Notice of Delinquency in the
Payment of the Real Property Tax. -
(a) When the real property tax or any other tax
imposed under this Title becomes delinquent,
the provincial, city or municipal treasurer shall
immediately cause a notice of the delinquency
to be posted at the main hall and in a publicly
accessible and conspicuous place in each
Barangay of the local government unit
concerned. The notice of delinquency shall also
be published once a week for two (2)
consecutive weeks, in a newspaper of general
circulation in the province, city, or municipality.
(b) Such notice shall specify the date upon
which the tax became delinquent and shall state
that personal property may be distrained to
effect payment. It shall likewise state that any
time before the distraint of personal property,
payment of the tax with surcharges, interests
and penalties may be made in accordance with
the next following Section, and unless the tax,
surcharges and penalties are paid before the
expiration of the year for which the tax is due
except when the notice of assessment or special
levy is contested administratively or judicially
pursuant to the provisions of Chapter 3, Title II,
Book II of this Code, the delinquent real
property will be sold at public auction, and the
title to the property will be vested in the
purchaser, subject, however, to the right of the
delinquent owner of the property or any person
having legal interest therein to redeem the
property within one (1) year from the date of
sale.
2. Local Government’s Lien
JOSELITO V. CONEJERO
Section 257. Local Governments Lien. - The
basic real property tax and any other tax levied
under this Title constitutes a lien on the
property subject to tax, superior to all liens,
charges or encumbrances in favor of any
person, irrespective of the owner or possessor
thereof, enforceable by administrative or
judicial action, and may only be extinguished
upon payment of the tax and the related
interests and expenses.
3. Remedies in general
Section 256. Remedies for the Collection of Real
Property Tax. - For the collection of the basic
real property tax and any other tax levied under
this Title, the local government unit concerned
may avail of the remedies by administrative
action thru levy on real property or by judicial
action.
4. Resale of Real Estate Taken for Taxes, Fees, or
Charges
Section 264. Resale of Real Estate Taken for
Taxes, Fees, or Charges. - The Sanggunian
concerned may, by ordinance duly approved,
and upon notice of not less than twenty (20)
days, sell and dispose of the real property
acquired under the preceding section at public
auction. The proceeds of the sale shall accrue to
the general fund of the local government unit
concerned.
5. Further levy until full payment of amount due
Section 265. Further Distraint or Levy. - Levy
may be repeated if necessary until the full
amount due, including all expenses, is collected.
6. Refund or credit of real property tax
A. Section 252. Payment Under Protest. -
(a) No protest shall be entertained unless the
taxpayer first pays the tax. There shall be
annotated on the tax receipts the words "paid
under protest". The protest in writing must be
filed within thirty (30) days from payment of the
tax to the provincial, city treasurer or municipal
treasurer, in the case of a municipality within
Metropolitan Manila Area, who shall decide the
protest within sixty (60) days from receipt.
REAL PROPERTY TAXATION 242
 AMILING, BEBER, CAINDAY, CONEJERO, FERUELO & LIAO TAXATION LAW REVIEWER FOR THE 2011 BAR
(b) The tax or a portion thereof paid under
protest, shall be held in trust by the treasurer
concerned.
(c) In the event that the protest is finally
decided in favor of the taxpayer, the amount or
portion of the tax protested shall be refunded
to the protestant, or applied as tax credit
against his existing or future tax liability.
(d) In the event that the protest is denied or
upon the lapse of the sixty day period
prescribed in subparagraph (a), the taxpayer
may avail of the remedies as provided for in
Chapter 3, Title II, Book II of this Code.
B. Section 253. Repayment of Excessive
Collections. - When an assessment of basic real
property tax, or any other tax levied under this
Title, is found to be illegal or erroneous and the
tax is accordingly reduced or adjusted, the
taxpayer may file a written claim for refund or
credit for taxes and interests with the provincial
or city treasurer within two (2) years from the
date the taxpayer is entitled to such reduction
or adjustment.
The provincial or city treasurer shall decide the
claim for tax refund or credit within sixty (60)
days from receipt thereof. In case the claim for
tax refund or credit is denied, the taxpayer may
avail of the remedies as provided in Chapter 3,
Title II, Book II of this Code.
7. Taxpayer’s remedies
A. Contesting an assessment of value of real
property
1. Section 226. Local Board of Assessment
Appeals. - Any owner or person having legal
interest in the property who is not satisfied with
the action of the provincial, city or municipal
assessor in the assessment of his property may,
within sixty (60) days from the date of receipt of
the written notice of assessment, appeal to the
Board of Assessment Appeals of the provincial
or city by filing a petition under oath in the form
prescribed for the purpose, together with
copies of the tax declarations and such
243 JOSELITO V. CONEJERO
affidavits or documents submitted in support of
the appeal.
2. Section 230. Central Board of Assessment
Appeals. - The Central Board of Assessment
Appeals shall be composed of a chairman, and
two (2) members to be appointed by the
President, who shall serve for a term of seven
(7) years, without reappointment. Of those first
appointed, the chairman shall hold office for
seven (7) years, one member for five (5) years,
and the other member for three (3) years.
Appointment to any vacancy shall be only for
the unexpired portion of the term of the
predecessor. In no case shall any member be
appointed or designated in a temporary or
acting capacity. The chairman and the members
of the Board shall be Filipino citizens, at least
forty (40) years old at the time of their
appointment, and members of the Bar or
Certified Public Accountants for at least ten (10)
years immediately preceding their appointment.
The chairman of the Board of Assessment
Appeals shall have the salary grade equivalent
to the rank of Director III under the Salary
Standardization Law exclusive of allowances and
other emoluments. The members of the Board
shall have the salary grade equivalent to the
rank of Director II under the Salary
Standardization Law exclusive of allowances and
other emoluments. The Board shall have
appellate jurisdiction over all assessment cases
decided by the Local Board of Assessment
Appeals.
There shall be Hearing Officers to be appointed
by the Central Board of Assessment Appeals
pursuant to civil service laws, rules and
regulations, one each for Luzon, Visayas and
Mindanao, who shall hold office in Manila, Cebu
City and Cagayan de Oro City, respectively, and
who shall serve for a term of six (6) years,
without reappointment until their successors
have been appointed and qualified. The Hearing
Officers shall have the same qualifications as
that of the Judges of the Municipal Trial Courts.
The Central Board Assessment Appeals, in the
performance of its powers and duties, may
establish and organize staffs, offices, units,
REAL PROPERTY TAXATION
 AMILING, BEBER, CAINDAY, CONEJERO, FERUELO & LIAO TAXATION LAW REVIEWER FOR THE 2011 BAR

prescribe the titles, functions and duties of their

members and adopt its own rules and
regulations. PROVINCIAL, CITY OR MUNICIPAL
ASSESSOR
Unless otherwise provided by law, the annual
appropriations for the Central Board of
Assessment Appeals shall be included in the Within 60 days
budget of the Department of Finance in the Owner/Person with legal interest
corresponding General Appropriations Act. Must file:
1) Written Petition under Oath
3. Section 231. Effect of Appeal on the Payment 2) With Supporting Documents
of Real Property Tax. - Appeal on assessments of
real property made under the provisions of this
Code shall, in no case, suspend the collection of LOCAL BOARD OF ASSESSMENT
the corresponding realty taxes on the property APPEALS
involved as assessed by the provincial or city (LBAA should decide within 120 days
from receipt of petition)
assessor, without prejudice to subsequent
adjustment depending upon the final outcome
of the appeal.
B. Payment of real property under protest Within 30 days
1. File protest with Local Treasurer
Protest – payment under protest is required
within 30 days to provincial, city, or municipal CENTRAL BOARD OF ASSESSMENT
APPEALS
treasurer. No protest shall be entertained
unless the tax is first paid. (Sec. 252 LGC)
2. Appeal to the LBAA
Within 60 days from notice of assessment of Within 30 days
provincial, city or municipal assessor to LBAA
(Sec. 226 LGC)
3. Appeal to the CBAA COURT OF TAX APPEALS (EN BANC)
Within 30 days from receipt of decision of LBAA
to CBAA (Sec. 230 LGC)
4. Appeal to the CTA Within 15 days
Within 30 days from receipt of decision of CBAA
to Court of Tax Appeals en banc
5. Appeal to the SC SUPREME COURT
Within 15 days from receipt of decision of Court
of Tax Appeals en banc to the Supreme Court

JOSELITO V. CONEJERO REAL PROPERTY TAXATION 244