FACULTY OF CIVIL LAW (1734)

TAXATION LAW

2023 GOLDEN NOTES

FACULTY OF CIVIL LAW
UNIVERSITY OF SANTO TOMAS
MANILA
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 Faculty of Civil Law (1734)

ACADEMIC YEAR 2022-2023

CIVIL LAW STUDENT COUNCIL
NICOLO B. BONGOLAN PRESIDENT
IVAN ARNIE C. QUIAMCO VICE PRESIDENT INTERNAL
JANNODIN D. DIPATUAN VICE PRESIDENT EXTERNAL
BRIAN CHOOYE S. LIM SECRETARY
ROMBERT JOSEPH EMIEL D. CRUZ TREASURER
HARLEY JANSEN L. CALDERON AUDITOR
BIENVENIDO L. ORTIZ III PUBLIC RELATIONS OFFICER
KAREN DARYL L. BRITO CHIEF-OF-STAFF

UST BAR-OPS

JUSTINE RENEE GERVACIO CHAIRPERSON

PAULINNE STEPHANY G. SANTIAGO VICE-CHAIRPERSON
KAREN DARYL L. BRITO HEAD, SECRETARIAT
JAN YSABEL U. DE LEON HEAD, PUBLIC RELATIONS OFFICER
GABRIEL C. LAPID HEAD, FINANCE COMMITTEE
BIANCA PATRICIA ALLEN C. FLORES HEAD, HOTEL ACCOMMODATIONS COMMITTEE
FRITZ N. CANTERO HEAD, LOGISTICS COMMITTEE
ARNET C. PAGUIRIGAN ASST. HEAD, SECRETARIAT
ANGELO RAFAEL V. CO ASST. HEAD, FINANCE
NEIL FRANCIS V. ALBUERO ASST. HEAD, LOGISTICS
JOSEPHINE GRACE W. ANG SENIOR MEMBER
MA. ANDREA D. CABATU SENIOR MEMBER
SABINA MARIA H. MABUTAS SENIOR MEMBER
JEDIDIAH R. PADUA SENIOR MEMBER
VANESSA A. SIENA SENIOR MEMBER

ATTY. AL CONRAD B. ESPALDON

ADVISER
 Faculty of Civil Law (1734)

ACADEMICS COMMITTEE 2023

ANGELA BEATRICE S. PEÑA KATHERINE S. POLICARPIO

SECRETARIES-GENERAL

RON-SOPHIA NICOLE C. ANTONIO CRIMINAL LAW

HERLENE MAE D. CALILUNG LABOR LAW AND SOCIAL LEGISLATION

POLITICAL LAW AND

PATRISHA LOUISE E. DUMANIL
PUBLIC INTERNATIONAL LAW

LEGAL AND JUDICIAL ETHICS WITH PRACTICAL

ALEXANDRA MAUREEN B. GARCIA
EXERCISES

HANNAH JOY C. IBARRA COMMERCIAL LAW

JEDIDIAH R. PADUA CIVIL LAW

PAULINNE STEPHANY G. SANTIAGO TAXATION LAW

DIANNE MICAH ANGELA D. YUMANG REMEDIAL LAW

EXECUTIVE COMMITTEE

PAULA ANDREA F. PEÑAFLOR COVER DESIGN ARTIST

 Faculty of Civil Law (1734)

TAXATION LAW COMMITTEE 2023

JENELYN D. GALVEZ

TAXATION LAW SUBJECT HEAD

JEAN MARIELLE R. MANITO ASST. HEAD, GENERAL PRINCIPLES

KATE NICOLE D. TALLA
ASST. HEADS, NATIONAL TAXATION
MARY GRACE S. TEJADA
SHARMAINE ELIZA T. MACASERO ASST. HEAD, LOCAL TAXATION
RAINIEL C. SORIANO ASST. HEAD, JUDICIAL REMEDIES

MEMBERS
STEPHEN NICOLE R. ARAN
THEA KLARISSE S. BALINAS
SHAIRA JONNE A. BAQUIRIN
GEMINA DALE C. BORREO
MELVIN C. BUMAGAT
DIANA M. DELA CRUZ
PRISCILLA LEE V. MORALES
JASMIN T. SANTIAGO

ADVISERS
ATTY. JAMIE ANDREA MAE ARLOS-MARTINEZ
DR. VIRGINIA JEANNIE P. LIM, LLM, Ed.D.
ATTY. KENNETH GLENN L. MANUEL, CPA
 Faculty of Civil Law (1734)

FACULTY OF CIVIL LAW

UNIVERSITY OF SANTO TOMAS

ACADEMIC OFFICIALS
ATTY. NILO T. DIVINA REV. FR. ISIDRO C. ABAÑO, O.P.
DEAN REGENT

ATTY. ARTHUR B. CAPILI

FACULTY SECRETARY

ATTY. ELGIN MICHAEL C. PEREZ

LEGAL COUNSEL
UST CHIEF JUSTICE ROBERTO CONCEPCION LEGAL AID CLINIC

JUDGE PHILIP A. AGUINALDO

SWDB COORDINATOR

LENY G. GADIANA, R.G.C.

GUIDANCE COUNSELOR
 Faculty of Civil Law (1734)

OUR DEEPEST APPRECIATION TO OUR

MENTORS AND INSPIRATION

Justice Japar B. Dimaampao

Judge Noel M. Ortega

Dr. Virginia Jeannie P. Lim, LLM, Ed.D.

Atty. Abelardo T. Domondon

Atty. Prudence Angelita A. Kasala

Atty. Benedicta Du-Baladad

Atty. Rizalina V. Lumbera

Atty. Lean Jeff M. Magsombol

Atty. Kenneth Glenn L. Manuel

Atty. Clarice Angeline V. Questin

Atty. Danica Mae M. Godornes

For being our guideposts in understanding the intricate sphere of Taxation Law.
– Academics Committee 2023
 DISCLAIMER

THE RISK OF USE OF THIS BAR

REVIEW MATERIAL SHALL BE
BORNE BY THE USER
 TABLE OF CONTENTS
I. GENERAL PRINCIPLES ............................................................................................................................................................. 1
A. POWER OF TAXATION AS DISTINGUISHED FROM POLICE POWER AND EMINENT DOMAIN .................... 1
B. INHERENT AND CONSTITUTIONAL LIMITATIONS OF TAXATION ...................................................................... 3
C. REQUISITES OF A VALID TAX ........................................................................................................................................ 29
E. KINDS OF TAXES ............................................................................................................................................................... 32
F. DOCTRINES IN TAXATION ............................................................................................................................................. 34
1. CONSTRUCTION AND INTERPRETATION OF TAX LAWS, RULES, AND REGULATIONS................. 34
2. PROSPECTIVITY OF TAX LAWS ........................................................................................................................ 35
3. IMPRESCRIPTIBILITY OF TAXES ..................................................................................................................... 36
4. DOUBLE TAXATION .............................................................................................................................................. 36
5. ESCAPE FROM TAXATION .................................................................................................................................. 39
a) SHIFTING OF TAX BURDEN ............................................................................................................... 39
b) TAX AVOIDANCE ................................................................................................................................... 39
c) TAX EVASION .......................................................................................................................................... 40
6. EXEMPTION FROM TAXATION ......................................................................................................................... 42
7. EQUITABLE RECOUPMENT ................................................................................................................................ 46
8. PROHIBITION ON COMPENSATION AND SET-OFF .................................................................................... 47
9. COMPROMISE AND TAX AMNESTY ................................................................................................................. 48
II. NATIONAL TAXATION......................................................................................................................................................... 51
A. TAXING AUTHORITY ...................................................................................................................................................... 51
1. JURISDICTION, POWER, AND FUNCTIONS OF THE COMMISSIONER OF INTERNAL REVENUE .. 51
a) INTERPRETING TAX LAWS AND DECIDING TAX CASES .......................................................... 54
b) NON-RETROACTIVITY OF RULINGS ............................................................................................... 55
2. RULE-MAKING AUTHORITY OF THE SECRETARY OF FINANCE ........................................................... 57
B. INCOME TAX ....................................................................................................................................................................... 58
1. DEFINITION, NATURE, AND GENERAL PRINCIPLES................................................................................. 58
a) CRITERIA IN IMPOSING PHILIPPINE INCOME TAX LAW......................................................... 59
b) TYPES OF PHILIPPINE INCOME TAXES ......................................................................................... 60
c) TAXABLE PERIOD ................................................................................................................................. 60
d) KINDS OF TAXPAYERS ....................................................................................................................... 61
2. INCOME .................................................................................................................................................................... 64
a) DEFINITION AND NATURE................................................................................................................ 64
b) WHEN INCOME IS TAXABLE .............................................................................................................. 64
c) TESTS IN DETERMINING WHETHER INCOME IS EARNED FOR TAX PURPOSES.............. 67
(1) REALIZATION TEST ............................................................................................................ 67
(2) ECONOMIC BENEFIT TEST OR DOCTRINE OF PROPRIETARY INTEREST ........ 67
(3) SEVERANCE TEST ................................................................................................................ 67
d) TAX-FREE EXCHANGES ....................................................................................................................... 68
e) SITUS OF INCOME TAXATION ........................................................................................................... 69
3. GROSS INCOME ....................................................................................................................................................... 73
a) DEFINITION ............................................................................................................................................ 73
b) CONCEPT OF INCOME FROM WHATEVER SOURCE DERIVED ............................................... 73
c) GROSS INCOME VS. NET INCOME VS. TAXABLE INCOME ......................................................... 74
d) SOURCES OF INCOME SUBJECT TO TAX ........................................................................................ 75
(1) COMPENSATION INCOME ................................................................................................. 75
(2) FRINGE BENEFITS ............................................................................................................... 76
(3) PROFESSIONAL INCOME ................................................................................................... 76
(4) INCOME FROM BUSINESS ................................................................................................. 77
(5) INCOME FROM DEALINGS IN PROPERTY .................................................................... 78
(6) PASSIVE INVESTMENT INCOME ..................................................................................... 92
 (7) ANNUITIES,PROCEEDS FROM LIFE INSURANCE OR OTHER TYPES OF
INSURANCE................................................................................................................................. 105
(8) PRIZES AND AWARDS ..................................................................................................... 107
(9) PENSIONS, RETIREMENT BENEFIT OR SEPARATION PAY ................................. 108
(10) INCOME FROM ANY SOURCE ...................................................................................... 108
e) EXCLUSIONS.......................................................................................................................................... 110
(1) TAXPAYERS WHO MAY AVAIL ...................................................................................... 111
(2) DISTINGUISHED FROM DEDUCTIONS AND TAX CREDITS .................................. 111
4. DEDUCTIONS FROM GROSS INCOME ............................................................................................................ 112
a) CONCEPT AS RETURN OF CAPITAL .............................................................................................. 113
b) ITEMIZED DEDUCTIONS vs. OPTIONAL STANDARD DEDUCTION .................................... 114
c) ITEMS NOT DEDUCTIBLE ................................................................................................................. 148
5. INCOME TAX ON INDIVIDUALS ...................................................................................................................... 150
a) RESIDENT CITIZENS, NON-RESIDENT CITIZENS, AND RESIDENT ALIENS ...................... 150
(1) INCLUSIONS AND EXCLUSIONS FOR TAXATION ON COMPENSATION INCOME
........................................................................................................................................................ 152
(2) TAXATION OF BUSINESS INCOME/ INCOME FROM PRACTICE OF PROFESSION
........................................................................................................................................................ 162
(3) TAXATION OF PASSIVE INCOME.................................................................................. 166
(4) TAXATION OF CAPITAL GAINS ..................................................................................... 168
(5) CAPITAL ASSET VS. ORDINARY ASSET ...................................................................... 168
b) INCOME TAX ON NON-RESIDENT ALIENS ENGAGED IN TRADE OR BUSINESS ............. 168
c) INCOME TAX ON NON-RESIDENT ALIENS NOT ENGAGED IN TRADE OR BUSINESS .... 168
d) INDIVIDUAL TAXPAYERS EXEMPT FROM INCOME TAX....................................................... 169
(1) SENIOR CITIZENS .............................................................................................................. 169
(2) MINIMUM WAGE EARNERS ........................................................................................... 169
(3) EXEMPTIONS GRANTED UNDER INTERNATIONAL AGREEMENTS.................. 170
6. INCOME TAX ON CORPORATIONS................................................................................................................. 171
a) INCOME TAX ON DOMESTIC CORPORATIONS AND RESIDENT FOREIGN
CORPORATIONS ....................................................................................................................................... 176
(1) BRANCH PROFIT REMITTANCE TAX .......................................................................... 182
(2) ITEMIZED DEDUCTIONS vs. OPTIONAL STANDARD DEDUCTIONS................. 183
b) INCOME TAX ON NON-RESIDENT FOREIGN CORPORATIONS ............................................. 183
c) INCOME TAX ON SPECIAL CORPORATIONS ............................................................................... 183
d) EXEMPTIONS FROM TAX ON CORPORATIONS......................................................................... 190
e) PERIOD WITHIN WHICH TO FILE INCOME TAX RETURN OF INDIVIDUALS AND
CORPORATIONS ....................................................................................................................................... 200
f) SUBSTITUTED FILING ........................................................................................................................ 203
g) FAILURE TO FILE RETURNS ............................................................................................................ 204
7. WITHHOLDING TAX ........................................................................................................................................... 204
a) CONCEPT ................................................................................................................................................ 204
b) CREDITABLE vs. FINAL WITHHOLDING TAXES ....................................................................... 206
C. VALUE-ADDED TAX (VAT)........................................................................................................................................... 208
1. CONCEPT AND ELEMENTS OF VATABLE TRANSACTIONS .................................................................... 209
2. IMPACT AND INCIDENCE OF TAX .................................................................................................................. 218
3. DESTINATION PRINCIPLE AND CROSS-BORDER DOCTRINE ............................................................... 219
4. IMPOSITION OF VAT ON TRANSFER OF GOODS BY TAX EXEMPT PERSONS ................................. 220
5. TRANSACTIONS DEEMED SALE SUBJECT TO VAT ................................................................................... 220
6. ZERO-RATED AND EFFECTIVELY ZERO-RATED SALES OF GOODS OR PROPERTIES .................. 223
7. VAT-EXEMPT TRANSACTIONS ....................................................................................................................... 229
8. INPUT AND OUTPUT TAX................................................................................................................................. 240
9. TAX REFUND OR TAX CREDIT ........................................................................................................................ 247
10. FILING OF RETURNS AND PAYMENT ......................................................................................................... 262
D. TAX REMEDIES UNDER THE NATIONAL INTERNAL REVENUE ....................................................................... 264
 1. ASSESSMENT OF INTERNAL REVENUE TAXES .......................................................................................... 266
a) PROCEDURAL DUE PROCESS IN TAX ASSESSMENTS .............................................................. 269
b) REQUISITES OF A VALID ASSESSMENT ....................................................................................... 276
c) TAX DELINQUENCY vs. TAX DEFICIENCY .................................................................................... 277
d) PRESCRIPTIVE PERIOD FOR ASSESSMENT................................................................................ 278
(1) FALSE RETURNS VS. FRAUDULENT RETURNS VS. NON-FILING OF RETURNS
........................................................................................................................................................ 285
(2) SUSPENSION OF THE RUNNING OF STATUTE OF LIMITATIONS ...................... 288
2. TAXPAYER’S REMEDIES .................................................................................................................................... 289
a) PROTESTING AN ASSESSMENT ...................................................................................................... 290
(1) PERIOD TO FILE PROTEST............................................................................................. 290
(2) SUBMISSION OF SUPPORTING DOCUMENTS ........................................................... 293
(3) EFFECT OF FAILURE TO FILE PROTEST .................................................................... 293
(4) ACTION OF THE COMMISSIONER ON THE PROTEST FILED ............................... 293
b) COMPROMISE AND ABATEMENT OF TAXES ............................................................................. 299
c) RECOVERY OF TAX ERRONEOUSLY OR ILLEGALLY COLLECTED........................................ 306
3. GOVERNMENT REMEDIES FOR COLLECTION OF DELINQUENT TAXES............................................ 322
a) REQUISITES........................................................................................................................................... 323
b) PRESCRIPTIVE PERIODS .................................................................................................................. 323
4. CIVIL PENALTIES ................................................................................................................................................. 334
a) DELINQUENCY INTEREST AND DEFICIENCY INTEREST ........................................................ 334
b) SURCHARGE .......................................................................................................................................... 335
c) COMPROMISE PENALTY ................................................................................................................... 336
III. LOCAL TAXATION ............................................................................................................................................................. 342
A. LOCAL GOVERNMENT TAXATION ............................................................................................................................. 342
1. GENERAL PRINCIPLES ....................................................................................................................................... 342
2. NATURE AND SOURCE OF TAXING POWER ................................................................................................ 343
a) GRANT OF LOCAL TAXING POWER UNDER THE LOCAL GOVERNMENT CODE.............. 344
b) AUTHORITY TO PRESCRIBE PENALTIES FOR TAX VIOLATIONS ....................................... 345
c) AUTHORITY TO GRANT LOCAL TAX EXEMPTIONS ................................................................. 346
d) WITHDRAWAL OF EXEMPTIONS .................................................................................................. 347
3. SCOPE OF TAXING POWER ............................................................................................................................... 348
4. SPECIFIC TAXING POWER OF LOCAL GOVERNMENT UNITS ................................................................ 348
5. COMMON REVENUE RAISING POWERS........................................................................................................ 368
6. COMMUNITY TAX ................................................................................................................................................ 368
7. COMMON LIMITATIONS ON THE TAXING POWERS OF LOCAL GOVERNMENT UNITS ................ 370
8. REQUIREMENTS FOR A VALID TAX ORDINANCE ..................................................................................... 373
9. TAXPAYER’S REMEDIES .................................................................................................................................... 374
a) PROTEST ................................................................................................................................................ 374
b) REFUND .................................................................................................................................................. 376
c) ACTION BEFORE THE SECRETARY OF JUSTICE ........................................................................ 377
10. ASSESSMENT AND COLLECTION OF LOCAL TAXES ............................................................................... 377
a) REMEDIES OF LOCAL GOVERNMENT UNITS .............................................................................. 377
b) PRESCRIPTIVE PERIOD .................................................................................................................... 382
B. REAL PROPERTY TAXATION ...................................................................................................................................... 383
1. FUNDAMENTAL PRINCIPLES........................................................................................................................... 383
2. NATURE .................................................................................................................................................................. 383
3. IMPOSITION .......................................................................................................................................................... 384
a) POWER TO LEVY ................................................................................................................................. 384
b) EXEMPTION FROM REAL PROPERTY TAX ................................................................................. 389
4. APPRAISAL AND ASSESSMENT ....................................................................................................................... 397
a) CLASSES OF REAL PROPERTY......................................................................................................... 397
b) ASSESSMENT BASED ON ACTUAL USE ......................................................................................... 397
 5. COLLECTION ......................................................................................................................................................... 400
a) DATE OF ACCRUAL ............................................................................................................................. 400
b) PERIODS TO COLLECT ...................................................................................................................... 401
c) REMEDIES OF LOCAL GOVERNMENT UNITS .............................................................................. 403
6. TAXPAYER’S REMEDIES .................................................................................................................................... 407
a) CONTESTING AN ASSESSMENT ...................................................................................................... 408
(1) PAYMENT UNDER PROTEST; EXCEPTIONS ............................................................. 408
b) CONTESTING A VALUATION OF PROPERTY.............................................................................. 411
(1) APPEAL TO THE LOCAL BOARD OF ASSESSMENT APPEALS.............................. 411
(2) APPEAL TO THE CENTRAL BOARD OF ASSESSMENT APPEALS ........................ 411
(3) EFFECT OF PAYMENT OF TAXES.................................................................................. 413
c) COMPROMISE OF REAL PROPERTY TAX ASSESSMENT ......................................................... 413
IV. JUDICIAL REMEDIES ......................................................................................................................................................... 415
A. COURT OF TAX APPEALS (CTA) ................................................................................................................................. 415
1. EXCLUSIVE ORIGINAL AND APPELLATE JURISDICTION OVER CIVIL CASES .................................. 416
2. EXCLUSIVE ORIGINAL AND APPELLATE JURISDICTION OVER CRIMINAL CASES ........................ 421
B. PROCEDURES .................................................................................................................................................................. 422
1. FILING OF AN ACTION FOR COLLECTION OF TAXES ............................................................................... 422
a) INTERNAL REVENUE TAXES .......................................................................................................... 422
b) LOCAL TAXES ...................................................................................................................................... 423
2. CIVIL CASES ........................................................................................................................................................... 424
a) WHO MAY APPEAL, MODE OF APPEAL, AND EFFECT OF APPEAL ..................................... 424
b) SUSPENSION OF COLLECTION OF TAXES ................................................................................... 430
c) INJUNCTION NOT AVAILABLE TO RESTRAIN COLLECTION ................................................ 433
3. CRIMINAL CASES ................................................................................................................................................. 433
a) INSTITUTION AND PROSECUTION OF CRIMINAL ACTION ................................................... 433
b) INSTITUTION OF CIVIL ACTION IN CRIMINAL ACTION ......................................................... 433
c) PERIOD TO APPEAL ........................................................................................................................... 434
4. APPEAL TO THE CTA EN BANC ....................................................................................................................... 434
5. PETITION FOR REVIEW ON CERTIORARI TO THE SC ............................................................................. 437
 I. GENERAL PRINCIPLES
As to benefits received
I. GENERAL PRINCIPLES
No Direct
Benefit –
No Direct Maintenance
Benefit – of healthy
A. POWER OF TAXATION AS DISTINGUISHED Protection of economic
Direct
FROM POLICE POWER AND EMINENT DOMAIN a secured standard of
Benefit –
organized society,
The person
society, intangible
receives just
POLICE EMINENT benefits altruistic
TAXATION compensation.
POWER DOMAIN received from feeling that he
the has
As to authority who exercises the power
government. contributed to
Government the general
or public welfare.
Government Government
service
or its political or its political As to non-impairment of contracts
companies
subdivision subdivision Tax laws
and public
utilities generally do
not impair
As to purpose
contracts
To raise unless the
To facilitate
revenue in To promote government is Contracts may Contracts may
the taking of
support of the general party to a be impaired. be impaired.
private
Government; welfare contract
property for
regulation is through granting
public
merely regulations. exemption for
purpose.
incidental. a
consideration.
As to persons affected
As to transfer of property rights
On an
Upon the Upon the
individual as Expropriated
community or community or
the owner of a Taxes paid No transfer private
class of class of
particular become part but only property
individuals. individuals.
property. of public restraint on becomes
funds. its exercise. property of
As to amount of monetary imposition
the State.
As to scope

No Private
Limited to the All persons, All persons, property upon
imposition;
No ceiling cost of property, and property, and payment of
the owner is
except regulation, excises. excises. just
paid just
inherent issuance of compensation.
compensation
limitations. license, or
for his
surveillance.
property. Similarities of the Inherent Powers

1. They are attributes of sovereignty founded on

1 UNIVERSITY OF SANTO TOMAS

FACULTY OF CIVIL L AW
 TAXATION LAW
necessity; authorities passed an ordinance entitled “An
Ordinance Regulating the Establishment of
2. They are inherent powers of the Government; Special Projects” which imposed fees to regulate
activities particularly related to the
3. They are legislative in nature; construction and maintenance of various
structures, certain construction activities of the
4. They are ways by which the State interferes identified special projects, which includes “cell
with private rights and property; sites” or telecommunications towers. Is the
imposition of the fee an exercise of the power of
5. They exists independently of the Constitution, taxation?
but subject to conditions for their exercise as
may be prescribed or limited by the A: NO. The designation given by the municipal
Constitution; authorities does not decide whether the imposition
is properly a license tax or a license fee. The
6. They presuppose an equivalent compensation
determining factors are the purpose and effect of
received by the persons affected by the exercise
the imposition as may be apparent from the
of power, whether directly, indirectly,
provisions of the ordinance. If the generating of
immediate or remote; and
revenue is the primary purpose and regulation is
merely incidental, the imposition is a tax; but if
7. The exercise by local government units may be
regulation is the primary purpose, the fact that
limited by national legislature. (Lim, 2021)
revenue is incidentally raised does not make the
imposition a tax. (Gerochi v. Department of Energy,
Q: Ordinance No. SP-2095 of the Quezon City
G.R No. 159796, 17 July 2007)
government imposes a Socialized Housing Tax
(SHT) equivalent to 0.5% on the assessed value
The fees in the ordinance are not impositions on the
of land in excess of Php100,000. The SHT will be
building or structure itself; rather, they are
used as one of the sources of funds for urban
impositions on the activity subject of government
development and housing program. Can Quezon
regulation, such as the installation and construction
City impose such tax?
of the structures. It is primarily regulatory in nature,
and not primarily revenue-raising. While the fees
A: YES. Cities are allowed to exercise such powers
may contribute to the revenues of the municipality,
and discharge such functions and responsibilities as
this effect is merely incidental. Thus, the fees
are necessary, appropriate, or incidental to efficient
imposed in the said ordinance are not taxes. (Smart
and effective provision of the basic services and
Communications, Inc., v. Municipality of Malvar,
facilities which include, among others, programs
Batangas, G.R. No. 204429, 18 Feb. 2014)
and projects for low-cost housing and other mass
dwellings. The collections made accrue to its
Q: Revenue laws R.A. 6260 and P.D. 276 were
socialized housing programs and projects. The tax is
enacted to establish the Coconut Investment
not a pure exercise of taxing power or merely to
Fund and Coconut Consumers Stabilization Fund
raise revenue; it is levied with a regulatory purpose.
(coco-levy funds). These funds shall be owned
The levy is primarily in the exercise of the police
by the coconut farmers in their private
power for the general welfare of the entire city.
capacities under the Coconut Industry Code.
(Ferrer, Jr. vs. Bautista, G.R. No. 210551, 30 June
2015)
In 2000, E.O. 313 was issued creating the
Coconut Trust Fund and designating the UCPB as
Q: Galaxia Telecommunications Company
the trustee bank. This aimed to provide financial
constructed a telecommunications tower for the
assistance to the coconut farmers, to the coconut
purpose of receiving and transmitting cellular
industry, and to other agriculture-related
communications. Meanwhile, the municipal

UNIVERSITY OF SANTO TOMAS 2

2023 GOLDEN NOTES
 I. GENERAL PRINCIPLES
programs. UCPB suggested that the coco-levy compensation. Is the tax deduction scheme an
funds are closely similar to the SSS funds, which exercise of police power or the power of
have been declared not to be public funds but eminent domain?
properties of the SSS members and held merely A: POLICE POWER. The 20% discount given to
in trust by the government. Are the coco-levy senior citizens is a valid exercise of police power.
funds in the nature of taxes and thus, can only be Thus, even if the current law, through its tax
used for public purpose? deduction scheme (which abandoned the tax credit
scheme under the previous law), does not provide
A: YES. The coco-levy funds were raised pursuant to for a peso for peso reimbursement of the 20%
law to support a proper governmental purpose. discount given by private establishments, no
They were raised with the use of the police and constitutional infirmity obtains because, being a
taxing powers of the State for the benefit of the valid exercise of police power, payment of just
coconut industry and its farmers in general. compensation is not warranted.

Unlike ordinary revenue laws, R.A. No. 6260 and The 20% discount is intended to improve the
P.D. 276 did not raise money to boost the welfare of senior citizens who, at their age, are less
government’s general funds but to provide means likely to be gainfully employed, more prone to
for the rehabilitation and stabilization of a illnesses and other disabilities, and thus, in need of
threatened industry, the coconut industry, which is subsidy in purchasing basic commodities. As to its
so affected with public interest as to be within the nature and effects, the 20% discount is a regulation
police power of the State. The subject laws are akin affecting the ability of private establishments to
to the imposed sugar liens. It cannot be likened to price their products and services relative to a
SSS Law which collects premium contributions that special class of individuals, senior citizens, for
are not taxes and not for public purpose. The SSS which the Constitution affords preferential concern.
members pay contributions in exchange for (Manila Memorial Park v. DSWD, G.R. No. 175356, 03
insurance protection and benefits like loans, Dec. 2013)
medical or health services, and retirement package.
(Pambansang Koalisyon ng mga Samahang
Magsasaka at Manggagawa sa Niyugan v. Executive B. INHERENT AND CONSTITUTIONAL
Secretary, G.R. Nos. 147036-37, 10 Apr. 2012) LIMITATIONS OF TAXATION

Q: R.A. 9257 took effect, amending R.A. 7432,

which provides that the 20% senior citizen
Inherent Limitations (S-P-I-N-E)
discount may be claimed as a tax deduction from
gross income, gross sales, or gross receipts.
1. Situs or Territorial;
Petitioners challenge its constitutionality and
2. Public Purpose;
pray that the tax credit treatment of the 20%
3. International Comity;
discount be reinstated. They posit that the
4. Non-Delegability or Inherently Legislative; and
resolution of this case lies in the determination
5. Exemption of government entities, agencies
of whether the legally mandated 20% senior
and instrumentalities.
citizen discount is an exercise of police power or
eminent domain. If it is police power, no just
Constitutional Limitations
compensation is warranted. But if it is eminent
domain, the tax deduction scheme is
1. Provisions directly affecting taxation
unconstitutional because it is not a peso for peso
reimbursement of the 20% discount given to
a. Prohibition against imprisonment for
senior citizens. Thus, it constitutes taking of
non-payment of poll tax (Sec. 20, Art. III,
private property without payment of just
1987 Constitution)

3 UNIVERSITY OF SANTO TOMAS

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 TAXATION LAW
b. Equal protection (Sec. 1, Art. III, 1987
b. Uniformity and equality of taxation (Sec. Constitution)
28(1), Art. VI, 1987 Constitution) c. Religious freedom (Sec. 5, Art. III, 1987
c. Grant by Congress of authority to the Constitution)
President to impose tariff rates (Sec.
28(2), Art. VI, 1987 Constitution) d. Non-impairment of obligations of
contracts (Sec. 10, Art. III, 1987
d. Prohibition against taxation of religious, Constitution)
charitable entities, and educational
entities (Sec. 28(3), Art. VI, 1987 e. Freedom of the press (Sec. 4, Art. III, 1987
Constitution) Constitution)

e. Prohibition against taxation of non-stock, f. Prohibition on riders (Sec. 25(1) in

non-profit educational institutions (Sec. relation to Sec. 26(1), Art. VI, 1987
4(3), Art. XIV, 1987 Constitution) Constitution)

f. Majority vote of Congress for grant of tax INHERENT LIMITATIONS

exemption (Sec. 28(4), Art. VI, 1987
Constitution) Inherent Limitations

g. Prohibition on use of tax levied for special While the power of taxation is inherent to a State,
purpose (Sec. 29(3), Art. VI, 1987 such power is still subject to limitations. If there
Constitution) were no limitations imposed on the power, then the
State would be dangerous, rampant in wielding such
h. President’s veto power on appropriation, power. (Ingles, 2021)
revenue, tariff bills (Sec. 27 (2), Art. VI,
1987 Constitution) TERRITORIAL

i. Non-impairment of jurisdiction of the Concept of Territoriality

Supreme Court (Sec. 30, Art. VI, 1987
Constitution) Taxation may be exercised only within the
territorial jurisdiction of the taxing authority. (61
j. Grant of power to the LGUs to create its Am. Jur. 88) Within its territorial jurisdiction, the
own sources of revenue (Sec. 5, Art. X, taxing authority may determine the “place of
1987 Constitution) taxation” or “tax situs.” (2013 BAR)

k. Origin of Revenue and Tariff Bills (Sec. 24, GR: The taxing power of a country is limited to
Art. VI, 1987 Constitution) persons and property within and subject to its
jurisdiction.
l. No appropriation or use of public money
for religious purposes (Sec. 29(2), Art. VI, Rationale:
1987 Constitution)
1. Taxation is an act of sovereignty which could
only be exercised within a country’s territorial
2. Provisions indirectly affecting taxation
limits.
a. Due process (Sec. 1, Art. III, 1987
2. This is based on the theory that taxes are paid
Constitution)
for the protection and services provided by the
taxing authority which could not be provided

UNIVERSITY OF SANTO TOMAS 4

2023 GOLDEN NOTES
 I. GENERAL PRINCIPLES
outside the territorial boundaries of the taxing constituted income derived from sources within
State. the Philippines.
XPNs:
Aggrieved, XYZ Air filed a protest, arguing that,
1. Where tax laws operate outside territorial
as a non-resident foreign corporation, it should
jurisdiction (e.g., taxation of resident citizens on
only be taxed for income derived from sources
their incomes derived abroad)
within the Philippines. However, since it only
derived income from serviced passengers
2. Where tax laws do not operate within the
outside the Philippine territory, the situs of the
territorial jurisdiction of the State:
income from its ticket sales should be
a. When exempted by treaty obligations; or considered outside the Philippines. Hence, no
b. When exempted by international comity. income tax should be imposed on the same. Is
XYZ Air’s protest meritorious? Explain. (2019
Principles Relative to Territorial Jurisdiction BAR)

1. As the State can exercise its power to tax within A: NO. Under the law, an international air carrier
its territorial jurisdiction, it can tax sales within with no landing rights in the Philippines is a
foreign military zones as these military zones resident foreign corporation if its local sales agent
are not considered foreign territory. (Reagan v. sells and issues tickets in its behalf. An offline
CIR, G.R. No. L-26379, 27 Dec. 1969) international carrier selling package tickets in the
Philippines through a local general sales agent, is
2. The State can tax a transaction if the substantial considered a resident foreign corporation doing
elements of the contract are situated in the business in the Philippines. As such, it is subject to
Philippines. (Manila Electric Company v. Yatco, regular corporate income tax on income derived
G.R. No. 45697, 01 Nov. 1939) from sources within the Philippines and not on
Gross Philippines Billings subject to any applicable
3. Turnkey contracts relating to the installation of tax treaty. (Air Canada v. CIR, G.R. No. 169507, 11 Jan.
a wharf complex and an ammonia storage 2016)
complex were actually divisible contracts which
each had different stages, with each stage PUBLIC PURPOSE
having different tax implication. (CIR v.
Marubeni, G.R. No. 137377, 18 Dec. 2001) Concept of Public Purpose

Q: XYZ Air, a 100% foreign-owned airline Taxes are exacted only for a public purpose. They
company based and registered in Netherlands, cannot be used for purely private purposes or for
is engaged in the international airline business the exclusive benefit of private persons. The reason
and is a member signatory of the International for this is simple. The power to tax exists for the
Air Transport Association. Its commercial general welfare; hence, implicit in its power is the
airplanes neither operate within the Philippine limitation that it should be used only for a public
territory nor as its service passengers purpose. It would be robbery for the State to tax its
embarking from Philippine airports. citizens and use the funds generated for a private
Nevertheless, XYZ Air is able to sell its airplane purpose. (Planters Products, Inc., v. Fertiphil
tickets in the Philippines through ABC Agency, Corporation, G.R. No. 166006, 14 Mar. 2008)
its general agent in the Philippines. As XYZ Air’s
ticket sales, sold through ABC Agency for the Tax is Considered for Public Purpose if:
year 2013, amounted to P5,000,000, the BIR
assessed XYZ Air deficiency income taxes on the 1. It is for the welfare of the nation and/or for the
ground that the income from the said sales greater portion of the population;

5 UNIVERSITY OF SANTO TOMAS

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 TAXATION LAW
2. It affects the area as a community rather than as constitutionally entitled is that derived from his
individuals; and enjoyment of the privileges of living in an
3. It is designed to support the services of the organized society, established, and safeguarded
government for some of its recognized objects. by the devotion of taxes to public purposes.
Determination when Enacted Tax Law is for (Gomez v. Palomar, G.R. No. L-23645, 29 Oct.
Public Purpose 1968)

Determination lies in the Congress. However, this 4. Public purpose may legally exist even if the
will not prevent the court from questioning the motive which impelled the legislature to
propriety of such statute on the ground that the law impose the tax was to favor one industry over
enacted is not for a public purpose; but once it is another. (Tio v. Videogram Regulatory Board,
settled that the law is for a public purpose, the court G.R. No. 75697, 19 June 1987)
may no longer inquire into the wisdom, expediency,
or necessity of such tax measure. (Dimaampao, 5. Public purpose is continually expanding. Areas
2021) formerly left to private initiative now lose their
boundaries and may be undertaken by the
NOTE: If the tax measure is not for public purpose, government if it is to meet the increasing social
the act amounts to confiscation of property. challenges of the times.

Tests in Determining Public Purpose 6. The public purpose of the tax law must exist at
the time of its enactment. (Pascual v. Secretary
1. Duty Test – whether the things to be furthered of Public Works, G.R. No. L-10405, 29 Dec. 1960)
by the appropriation of public revenue is
something which is the duty of the State, as a
Q: Are subsequent laws, which convert a public
government to provide.
fund to private properties, valid?
2. Promotion of General Welfare Test – whether
the statute enacted providing the tax promotes A: NO. Taxes could be exacted only for a public
the welfare of the community in equal measure. purpose; they cannot be declared private properties
of individuals although such individuals fall within
Principles Relative to Public Purpose a distinct group of persons. (Pambansang Koalisyon
ng mga Samahang Magsasaka at Manggagagawa sa
1. Inequalities resulting from the singling out of Niyugan v. Executive Secretary, G.R. Nos. 147036-37,
one particular class for taxation or exemption 10 Apr. 2012)
infringe no constitutional limitation because
the legislature is free to select the subjects of Q: Lutz assailed the constitutionality of Secs. 2
taxation. and 3 of C.A. 567, which provided for an increase
of the existing tax on the manufacture of sugar.
NOTE: The legislature is not required to adopt Lutz alleged such tax as unconstitutional and
a policy of “all or none” for the Congress has the void for not being levied for a public purpose but
power to select the object of taxation. (Lutz v. for the aid and support of the sugar industry
Araneta, G.R. No. L-7859, 22 Dec. 1955) exclusively. Is the tax law increasing the existing
tax on the manufacture of sugar valid?
2. As the State has the power to determine the
subjects of taxation, it is also free to select those A: YES. The protection and promotion of the sugar
who will be exempt from taxation. (Gomez v. industry is a matter of public concern. The
Palomar, G.R. No. L-23645, 29 Oct. 1968) legislature may determine within reasonable
bounds what is necessary for its protection and
3. The only benefit to which the taxpayer is expedient for its promotion. Legislative discretion

UNIVERSITY OF SANTO TOMAS 6

2023 GOLDEN NOTES
 I. GENERAL PRINCIPLES
must be allowed full play, subject only to the test of 2. The concept that when a foreign sovereign
reasonableness. If objective and methods alike are enters the territorial jurisdiction of another, it
constitutionally valid, there is no reason why the does not subject itself to the jurisdiction of the
State may not levy taxes to raise funds for their other.
prosecution and attainment. Taxation may be made 3. The rule of international law that a foreign
to implement the State’s police power. (Lutz v. government may not be sued without its
Araneta, G.R. No. L-7859, 22 Dec. 1955) consent so that it is useless to impose a tax
which could not be collected.
INTERNATIONAL COMITY
Principles Relative to International Comity
Concept of International Comity
1. The obligation to comply with a tax treaty must
It refers to the respect accorded by nations to each take precedence over an administrative
other because they are sovereign equals. Thus, the issuance. An administrative issuance such as a
property or income of a foreign state may not be the Revenue Memorandum Order (RMO) should
subject of taxation by another State. not operate to divest entitlement to a relief
granted by a tax treaty. (Deutsche Bank AG
Under International Comity, a state must recognize Manila Branch v. CIR, G.R. No. 188550, 19 Aug.
the generally accepted tenets of international law, 2013)
among which are the principles of sovereign
equality among states and of their freedom from 2. However, tax exemptions based on
suit without their consent, that limits that authority international agreements are still subject to the
of a government to effectively impose taxes in a rule “laws granting exemption are construed
sovereign state and its instrumentalities, as well as strictly against the taxpayer”. (Sea-Land
in its property held and activities undertaken in that Services, Inc. v. Court of Appeals, G.R. No. 122605,
capacity. (2009 BAR) 30 Apr. 2001)

Tax treaties are entered into "to reconcile the 3. An Exchange of Notes is considered an
national fiscal legislations of the contracting parties executive agreement binding on states. Hence,
and, in turn, help the taxpayer avoid simultaneous an Exchange of Notes between the Philippines
taxations in two different jurisdictions." They are and Japan which states that the Philippine
entered into to minimize, if not eliminate, the Government will assume taxes initially to be
harshness of international juridical double taxation, paid by Japanese firms should be respected.
which is why they are also known as double tax (Mitsubishi Corporation-Manila Branch v. CIR,
treaty or double tax agreements. (Air Canada v. CIR, G.R. No. 175772, 05 June 2017)
G.R. No. 169507, 11 Jan. 2016)
Q: ABCD Corporation (ABCD) is a domestic
International Comity as a Limitation on the corporation with individual and corporate
Power to Tax shareholders who are residents of the United
States. For the 2nd quarter of 1983, these U.S.-
The Constitution expressly adopted the generally based individual and corporate stockholders
accepted principles of international law as part of received cash dividends from the corporation.
the law of the land. (Sec. 2, Art. II, 1987 Constitution) The corresponding withholding tax on dividend
income – 30% for individual and 35% for
Rationale: corporate non-resident stockholders – was
deducted at source and remitted to the BIR.
1. Par in parem non habet imperium. As between
equals, there is no sovereign. (Doctrine of On May 15, 1984, ABCD filed with the
Sovereign Equality)

7 UNIVERSITY OF SANTO TOMAS

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 TAXATION LAW
Commissioner of Internal Revenue a formal foreign tax authority pursuant to an international
claim for refund, alleging that under the RP-US convention or agreement to which the Philippines is
Tax Treaty, the deduction withheld at source as a signatory or party of. (Sec 3, R.A. No. 10021 or
tax on dividends earned was fixed at 25% of said Exchange of Information on Tax Matters Act)
income. Thus, ABCD asserted that it overpaid NOTE: The Commissioner is authorized to inquire
the withholding tax due on the cash dividends into the bank deposits and other related
given to its non-resident stockholders in the U.S. information held by financial institutions of a
The Commissioner denied the claim. specific taxpayer or taxpayers subject of a request
for the supply of tax information from a foreign tax
On January 17, 1985, ABCD filed a petition with authority pursuant to an international convention
or agreement on tax matters to which the
the Court of Tax Appeals (CTA) reiterating its
Philippines is a signatory or a party of. The exchange
demand for refund.
of information shall be done in a secure manner to
ensure confidentiality thereof under such rules and
Is the contention of ABCD Corporation correct?
regulations as may be promulgated by the Secretary
Why or why not? (2009 BAR) of Finance, upon recommendation of the
Commissioner. (Sec. 6(F)(3), NIRC)
A: YES. The provision of a treaty must take
precedence over and above the provisions of the Principle of Pacta Sunt Servanda in Taxation
local taxing statute consonant with the principle of
international comity. Tax treaties are accepted Observance of any treaty obligation binding upon
limitations to the power of taxation. Thus, the CTA the government of the Philippines is anchored on
should apply the treaty provision so that the claim the constitutional provision that the Philippines
for refund representing the difference between the “adopts the generally accepted principles of
amount actually withheld and paid to the BIR and international law as part of the law of the land. (Sec.
the amount due and payable under the treaty should 2, Art. II, 1987 Constitution)
be granted. (Hawaiian-Philippine Company v. CIR,
CTA Case No. 3887, 31 May 1988) Pacta sunt servanda is a fundamental international
law principle that requires agreeing parties to
Q: In 2011, the Commissioner of the U.S. Internal comply with their treaty obligations in good faith.
Revenue Service (IRS) requested in writing the Hence, the application of the provisions of the NIRC
Commissioner of Internal Revenue to get the must be subject to the provisions of tax treaties
information from a bank in the Philippines, entered into by the Philippines with foreign
regarding the deposits of a U.S. Citizen residing countries. (Air Canada vs. CIR, G.R. No. 169507, 11
in the Philippines, who is under examination by Jan. 2016)
the officials of the US IRS, pursuant to the US-
Philippine Tax Treaty and other existing laws. Tax Treaties and Revenue Memorandum Order
Should the BIR Commissioner agree to obtain Distinguished
such information from the bank and provide the
same to the IRS? Explain your answer. (2012 Q: The CTA denied the claim for a refund of the
BAR) Petitioner on the ground that the application for
a tax treaty relief was not filed with
A: YES. The Commissioner should agree to the International Tax Affairs Division prior to its
request pursuant to the principle of international availment of the preferential rate of ten percent
comity. The Commissioner of the Internal Revenue (10%) under the RP-Germany Tax Treaty
has the authority to inquire into bank deposit provision, and thus violated the fifteen (15) day
accounts and related information held by financial period mandated under Sec. III (2) of Revenue
institutions of a specific taxpayer subject of a Memorandum Order (RMO) No. 1-2000.
request for the supply of tax information from a Petitioner invoked that it has met all the

UNIVERSITY OF SANTO TOMAS 8

2023 GOLDEN NOTES
 I. GENERAL PRINCIPLES
conditions under Art. 10 of the RP-Germany Tax may not be delegated. (Delegata potestas non potest
Treaty, the CTA erred in denying its claim solely delegari)
on the basis of RMO No. 1-2000. Does failure to
strictly comply with RMO No. 1-2000 will Non-Delegable Legislative Powers
deprive persons or corporations of the benefit of
a tax treaty? 1. Selection of subject to be taxed;
2. Determination of purposes for which taxes shall
A: NO. Tax treaties are entered into to minimize, if be levied;
not eliminate the harshness of international 3. Fixing of the rate/amount of taxation;
juridical double taxation, which is why they are also 4. Situs of tax; and
known as double tax treaty or double tax 5. Kind of tax.
agreements. The time-honored international
Principle of Pacta sunt servanda demands the Rationale: These powers cannot be delegated
performance in good faith of treaty obligations on without infringing upon the theory of separation of
the part of the states that enter into the agreement. powers. (Pepsi-Cola Bottling Company of the Phil. v.
Thus, laws and issuances must ensure that the Municipality of Tanauan, G.R. No. L-31156, 27 Feb.
reliefs granted under tax treaties are accorded to 1976)
the parties entitled thereto. The BIR must not
impose additional requirements that would negate XPNs:
the availment of the reliefs provided for under
1. Delegation to Local Government – the LGUs
international agreements. More so, when the RP-
have the power to create their own sources of
Germany Tax Treaty does not provide for any pre-
revenue and to levy taxes, fees, and charges.
requisite for the availment of the benefits under
(Sec. 5, Art. X, 1987 Constitution)
said agreement. Bearing in mind the rationale of tax
treaties, the period of application for the availment
NOTE: The constitutional provision does not
of tax treaty relief as required by RMO No. 1-2000
change the doctrine that municipal
should not operate to divest entitlement to the relief
corporations do not possess inherent powers of
as it would constitute a violation of the duty
taxation; what it does is to confer municipal
required by good faith in complying with a tax
corporations a general power to levy taxes and
treaty. In sum, the obligation to comply with a tax
otherwise create sources of revenue. They no
treaty must take precedence over the objective of
longer have to wait for a statutory grant of these
RMO No. 1-2000. (Deutsche Bank vs. CIR, G.R. No.
powers. The power of the legislative authority
188550, 19 Aug. 2013)
relative to the fiscal powers of local
governments has been reduced to the authority
INHERENTLY LEGISLATIVE
to impose limitations on municipal powers.
Thus, in interpreting statutory provisions on
Legislative Nature of the Power of Taxation municipal fiscal powers, doubts will be resolved
in favor of municipal corporations. (Quezon City
Only the legislature has the full discretion as to the v. ABS-CBN Broadcasting Corporation, G.R. No.
persons, property, occupation or business to be 162015, 06 Mar. 2006)
taxed, provided these are all within the State’s
territorial jurisdiction. It can also fully determine 2. Delegation to the President – the authority of
the amount or rate of tax, the kind of tax to be the President to fix tariff rates, import or export
imposed and method of collection. (1 Cooley 176- quotas, tonnage and wharfage dues or other
184) duties and imposts. (Sec. 28(2), Art. VI, 1987
Constitution)
GR: The power to tax is exclusively vested in the
legislative body, being inherent in nature. Hence, it NOTE: When Congress tasks the President or

9 UNIVERSITY OF SANTO TOMAS

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 TAXATION LAW
his/her alter egos to impose safeguard contrary to Sec. 6, Art. X of the Constitution. Is
measures under the delineated conditions, the the OSG’s contention correct?
President or the alter egos may be properly
deemed as agents of Congress to perform an act A: NO. Sec. 6, Art. X of the 1987 Constitution
that inherently belongs as a matter of right to textually commands the allocation to the LGUs of
the legislature. It is basic agency law that the their just share in the national taxes. Sec. 6
agent may not act beyond the specifically embodies three mandates: (1) the LGUs shall have a
delegated powers or disregard the restrictions just share in the national taxes; (2) the just share
imposed by the principal. (Southern Cross shall be determined by law; and (3) the just share
Cement Corporation v. Cement Manufacturers shall be automatically released to the LGUs.
Association of the Phil., G.R. No. 158540, 03 Aug.
2005) Congress has exceeded its constitutional boundary
by limiting to the National Internal Revenue Taxes
3. Delegation to Administrative Agencies – the base from which to compute the just share of the
when the delegation relates merely to LGUs. Although the power of Congress to make laws
administrative implementation that may call is plenary in nature, congressional lawmaking
for some degree of discretionary powers under remains subject to the limitations stated in the 1987
sufficient standards expressed by law or Constitution. Thus, the phrase “national internal
implied from the policy and purpose of the act revenue taxes” engrafted in Sec. 284 is undoubtedly
(Cervantes v. Auditor General, G.R. No. L-4043, 26 more restrictive than the term national taxes
May 1952; Maceda v. Macaraig, G.R. No. 88291, written in Sec. 6. (Congressman Mandanas v.
08 June 1993) subject to the following tests: Executive Secretary Ochoa, Jr., G.R. No.
199802/208488, 10 Apr. 2019)
a. Completeness Test – the law must be
complete in all aspects when it leaves the EXEMPTION FROM TAXATION OF GOVERNMENT
legislature for it to be valid. The only thing ENTITIES
left to do is to implement the law.
Government Entities are Exempt from Taxation
b. Sufficiently Determinable Standards Test
– there must be a sufficient standard to GR: The government is exempt from tax.
define the boundaries of the authority of
the delegate. This is done by defining the Rationale: Otherwise, we would be “taking money
legislative policy and the circumstance from one pocket and putting it in another.” (Board
under which it is to be pursued and of Assessment Appeals of Laguna v. CTA, G.R. No. L-
implemented. 18125, 31 May 1963)

NOTE: Technically, this does not amount to a XPNs: (L-P-G)

delegation of the power to tax because the
questions which should be determined by 1. Law or Charter creating the agency
Congress are already answered by Congress provides that they are subject to tax;
before the tax law leaves Congress. 2. Performing Proprietary functions; and
3. Government wishes to tax itself.
Q: The Court promulgated a decision declaring
the phrase “internal revenue” appearing in Sec. Since sovereignty is absolute and taxation is an act
284 of R.A. No. 7160 (Local Government Code) of high sovereignty, the State, if so minded, could tax
unconstitutional and deleted the same. The itself, including its political subdivisions. (Maceda v.
Office of the Solicitor-General (OSG), however, Macaraig, G.R. No. 88291, 08 June 1993)
contends that the provisions of the LGC are not

UNIVERSITY OF SANTO TOMAS 10

2023 GOLDEN NOTES
 I. GENERAL PRINCIPLES
National Government is Exempt from Local An instrumentality is neither a stock or a non-stock
Taxation corporation and it performs governmental or public
functions. (Philippine Fisheries Development
If the taxing authority is the LGU, R.A. No. 7160 Authority v. CA, G.R. No. 169836, 31 July 2007)
expressly prohibits LGUs from levying tax on the
National Government, its agencies, and Taxability of Government Instrumentalities
instrumentalities and other LGUs.
A government instrumentality falls under Sec.
In MIAA v. CA, the Supreme Court held that MIAA's 133(o) of the LGC, which states:
Airport Lands and Buildings are exempt from real
estate tax imposed by local governments. Being an “SEC. 133. Common Limitations on the Taxing Powers
instrumentality of the national government, it is of Local Government Units. — Unless otherwise
exempt from local taxation. Also, the real properties provided herein, the exercise of the taxing powers
of MIAA are owned by the Republic of the of provinces, cities, municipalities, and barangays
Philippines and thus exempt from real estate tax. shall not extend to the levy of the following: xxx

NOTE: However, while government (o) Taxes, fees or charges of any kind on the
instrumentalities are exempt from real property National Government, its agencies and
taxes, government-owned or controlled instrumentalities and local government units.”
corporations (GOCC) are not exempt from real
property taxes. (MIAA v. CA, G.R. No. 155650, 20 July Q: PAGCOR is a duly created government
2006) instrumentality by virtue of PD 1869. Under its
Charter, no form of tax or charge shall attach in
Government Agency any way to the earnings of PAGCOR, except a
Franchise Tax of 5% of the gross revenue or
It refers to any of the various units of the earnings derived from its operation under this
government, including a department, bureau, office, Franchise. Further, such tax shall be in lieu of all
instrumentality, or government-owned or kinds of taxes, levies, fees, or assessments of any
controlled corporation, or a local government or a kind. The CIR issued an assessment against
distinct unit therein. PAGCOR for deficiency income tax, among
others, on the ground that PAGCOR is no longer
Taxability of Government Agencies exempt from the payment of income taxes
because its income tax exemption has been
1. Performing governmental functions – tax effectively withdrawn by the amendments to the
exempt unless expressly taxed 1997 NIRC introduced by R.A. No. 9337. Is the
contention of CIR correct?
2. Performing proprietary functions – subject to
tax unless expressly exempted A: NO. PAGCOR's income from gaming operations is
subject only to 5% franchise tax under PD 1869, as
Government Instrumentality amended, while its income from other related
services is subject to corporate income tax pursuant
It refers to any agency of national government, not to PD 1869, as amended, in relation to R.A. No. 9337.
integrated within the department framework, In PAGCOR v. BIR, the Court En Banc clarified that
vested with special functions or jurisdiction by law, R.A. No. 9337 did not repeal the tax privilege
endowed with some if not all corporate powers, granted to PAGCOR under PD 1869, with respect to
administering special funds, and enjoying its income from gaming operations. What R.A. No.
operational autonomy, usually through charter. 9337 withdrew was PAGCOR's exemption from
corporate income tax on its income derived from

11 UNIVERSITY OF SANTO TOMAS

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 TAXATION LAW
other related services, previously granted under In MIAA v. CA, G.R. No. 155650, 20 July 2006, the
Sec. 27 (C) of R.A. No. 8424. (PAGCOR v. CIR, G.R. No. Supreme Court held that MIAA is a government
210689-90, 210704 & 210725, 22 Nov. 2017) instrumentality and is not a GOCC, therefore the real
properties owned by MIAA are not subject to real
Q: Is PEZA a government instrumentality or a estate tax, except when MIAA leases its real
GOCC? Is it exempt from real property taxation? property to private entities. In the said case, PNR
A: PEZA is an instrumentality of the government. It was cited as an example of such government
is not integrated within the department framework instrumentality which is deemed exempt.
but is an agency attached to the Department of
Trade and Industry. PEZA is also vested with special NOTE: The Light Rail Transit Authority (LRTA) is
functions or jurisdiction by law. Congress created also exempt as it is a government instrumentality
the PEZA to operate, administer, manage, and vested with corporate powers. (LRTA v. Quezon City,
develop special economic zones in the Philippines. G.R. No. 221626, 09 Oct. 2019)
Although a body corporate vested with some
corporate powers, the PEZA is not a GOCC that is Government-Owned and -Controlled
taxable for real property taxes because it was not Corporation (GOCC)
organized as a stock or non-stock corporation.
It refers to any agency:
Being an instrumentality of the National
Government, it cannot be taxed by LGUs. (City of 1. organized as a stock or non-stock corporation;
Lapu-Lapu v. PEZA, G.R. No. 184203, 26 Nov. 2014)
2. vested with functions relating to public needs
Q: Philippine National Railways (PNR) operates whether governmental or proprietary in
the rail transport of passengers and goods by nature; and
providing train stations and freight customer
facilities from Tutuban, Manila to the Bicol 3. owned by the Government directly or through
Province. As the operator of the railroad transit, its instrumentalities either wholly, or, where
PNR administers the land, improvements and applicable as in the case of stock corporations,
equipment within the main station in Tutuban, to the extent of at least 51% of its capital stock.
Manila.
NOTE: Government instrumentality may include a
Invoking Sec. 193 of the LGC expressly GOCC and there may be “instrumentality” that does
withdrawing the tax exemption privileges of not qualify as GOCC.
GOCCs, the City Government of Manila issued
Final Notices in the amount of P624,000,000 for Taxability of GOCCs
the taxable years 2006 to 2010. On the other
hand, PNR, seeking refuge under the principle GOCCs perform proprietary functions. Hence, they
that the government cannot tax itself, insisted are subject to taxation.
that the PNR lands and buildings are owned by
the Republic. GOCC are taxable entities, and they are not exempt
from BIR assessment and collection, unless their
Is the PNR exempt from real property tax? charter or the law creating them provides
Explain your answer. (2016 BAR) otherwise. (2017 BAR)

A: YES. The properties of PNR are properties of NOTE: Upon enactment of the LGC, any exemption
public dominion owned by the Republic of the from real property tax given to all persons, whether
Philippines, which are exempt from real property natural or juridical, including all GOCCs, were
tax. (Sec. 234, LGC) withdrawn. (Sec. 193, LGC)

UNIVERSITY OF SANTO TOMAS 12

2023 GOLDEN NOTES
 I. GENERAL PRINCIPLES
However, certain corporations have been granted In other words, while a person may not be
exemption under Sec. 27(c) of R.A. No. 8424 (Tax imprisoned for non-payment of a cedula or poll tax,
Reform Act of 1997) as amended, to wit: he may be imprisoned for non-payment of other
kinds of taxes where the law so expressly provides.
1. Government Service Insurance System (GSIS); (Dimaampao, 2021)
2. Social Security System (SSS);
3. Philippine Health Insurance Corporation Pursuant to the Social Justice Policy, this prohibition
(PhilHealth); reflects the tender regard of the law for the millions
4. Local Water Districts (LWDs); and of our impoverished masses who cannot afford even
5. Home Development Mutual Fund the nominal cost of a poll tax like the basic
community tax certificate. (Cruz, 2015)
NOTE: Philippine Charity Sweepstakes Office
(PCSO) was removed by TRAIN and replaced by UNIFORMITY AND EQUALITY OF TAXATION
LWDs.
The rule of taxation shall be uniform and equitable.
R.A. No. 9337 deleted Philippine Amusement and The Congress shall evolve a progressive system of
Gaming Corporation (PAGCOR) from the list of taxation. (Sec. 28(1), Art. VI, 1987 Constitution)
exempt GOCCs. (PAGCOR v. BIR, G.R. No. 215427, 10
Dec. 2014) Q: Explain the following concepts in taxation:
a. Uniformity,
CONSTITUTIONAL LIMITATIONS b. Equitability, and
c. Equality.
Constitutional Limitations
A:
Taxation, being inherent in sovereignty, need not be a. Uniformity – It means that all taxable articles
clothed with any constitutional authority for it to be or kinds of property of the same classes shall be
exercised by the sovereign state. Instead, taxed at the same rate. (CIR v. Lingayen Gulf Elec.
constitutional provisions are meant and intended Co., G.R. No. L-23771, 04 Aug. 1988)
more to regulate and define, rather than to grant,
the power emanating therefrom. A tax is considered uniform when it operates
with the same force and effect in every place
Provisions Directly Affecting Taxation where the subject is found. (Churchill v.
PROHIBITION AGAINST IMPRISONMENT FOR Concepcion, G.R. No. 115722, 22 Sept. 1916)
NON-PAYMENT OF POLL TAX
Different articles may be taxed at different
No person shall be imprisoned for debt or non- amounts provided that the rate is uniform on
payment of a poll tax. (Sec. 20, Art. III, 1987 the same class everywhere, with all people at all
Constitution) times. Accordingly, singling out one particular
class for taxation purposes does not infringe the
A poll tax is one levied on persons who are residents requirement of uniformity.
within the territory of the taxing authority without
regard to their property, business, or occupation. b. Equitability – Taxation is said to be equitable
Thus, only the basic individual community tax when its burden falls on those better able to
under the LGC could qualify as a poll tax, and the pay.
non-payment of other (additional) taxes imposed,
not being in the nature of poll taxes, may validly be c. Equality – It is accomplished when the burden
subjected by law to imprisonment. (Vitug, 2006) of the tax falls equally and impartially upon all
the persons and property subject to it.

13 UNIVERSITY OF SANTO TOMAS

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 TAXATION LAW
Valid and Reasonable Classification for tax purposes. Exempting lawyers and doctors
from a burden to which other professionals are
Uniformity does not call for perfect uniformity or subjected will make the law discriminatory and
perfect equality. Reasonable classifications do not violative of the equal protection clause of the
violate uniformity and equality of taxation. (Sison v. Constitution. While singling out a class for taxation
Ancheta, G.R. No. L-59431, 25 July 1984) purposes will not infringe upon this constitutional
However, the classification must be valid and limitation (Shell v. Vano, G.R. No. L-6093, 24 Feb.
reasonable, according to the rules of equal 1954), singling out a taxpayer from a class will no
protection. If the classification is unreasonable, then doubt transgress the constitutional limitation.
the rule on uniformity will be violated. (Pepsi-Cola (Ormoc Sugar Co. Inc., v. Treasurer of Ormoc City,
Bottling v. City of Butuan, G.R. No. L022814, 28 Aug. G.R. No. L-23794, 17 Feb. 1968) Treating doctors and
1968) lawyers as a different class of professionals will not
comply with the requirements of a reasonable,
The Constitution is also not violated when a certain hence valid classification, because the classification
tax is not imposed in other jurisdictions, for the is not based upon substantial distinction which
Constitution does not require that the taxes for the makes real differences. The classification does not
same purpose should be imposed in different comply with the requirement that it should be
territorial subdivisions at the same time. germane to the purpose of the law either. (Pepsi-
(Villanueva v. City of Iloilo, G.R. No. L-26521, 28 Dec. Cola Bottling Co., Inc. v. City of Butuan, G.R. No. L-
1968) 22814, 28 Aug. 1968)

For classification to be valid, the following Q: Heeding the pronouncement of the President
requisites must concur: (B-A-G-S) that the worsening traffic condition in the
metropolis was a sign of economic progress, the
1. It must apply Both to present and future Congress enacted R.A. No. 10701, also known as
conditions; An Act Imposing a Transport Tax on the
2. It must apply to All members of the same class; Purchase of Private Vehicles.
3. It must be Germane to the purposes of the law;
and Under R.A. No. 10701, buyers of private vehicles
4. It must be based on Substantial distinctions. are required to pay a transport tax equivalent to
(Ormoc Sugar Company, Inc. v. The Treasurer of 5% of the total purchase price per vehicle
Ormoc City, G.R. No. L-23794, 17 Feb. 1968) purchased. R.A. No. 10701 provides that the
Land Transportation Office (LTO) shall not
Q: A law was passed exempting doctors and accept for registration any new vehicles without
lawyers from the operation of the value-added proof of payment of the 5% transport tax. R.A.
tax. Other professionals complained and filed a No. 10701 further provides that existing owners
suit questioning the law for being of private vehicles shall be required to pay a tax
discriminatory and violative of the equal equivalent to 5% of the current fair market
protection clause of the Constitution since value of every vehicle registered with the LTO.
complainants were not given the same However, R.A. No. 10701 exempts owners of
exemption. Is the suit meritorious or not? public utility vehicles and the Government from
Reason briefly. (2004 BAR) the coverage of the 5% transport tax.

A: YES. The VAT is designed for economic A group of private vehicle owners sued on the
efficiency. Hence, should be neutral to those who ground that the law is unconstitutional for
belong to the same class. Professionals are a class of contravening the Equal Protection Clause of the
taxpayers by themselves who, in compliance with Constitution.
the rule of equality of taxation, must be treated alike

UNIVERSITY OF SANTO TOMAS 14

2023 GOLDEN NOTES
 I. GENERAL PRINCIPLES
Rule on the constitutionality and validity of R.A. the business operators outside in accord with the
No. 10701. (2017 BAR) equal protection clause that does not require
territorial uniformity of laws. The classification
A: R.A. NO. 10701 IS VALID AND applies equally to all the resident individuals and
CONSTITUTIONAL. A levy of tax is not businesses within the “secured area". The residents,
unconstitutional because it is not intrinsically equal being in like circumstances to contributing directly
and uniform in its operation. The uniformity rule to the achievement of the end purpose of the law,
does not prohibit classification for purposes of are not categorized further. Instead, they are
taxation. (British American Tobacco v. Camacho, G.R. similarly treated both in privileges granted and
No. 163583, 15 Apr. 2009) obligations required. (Tiu v. CA, G.R. No. 127410, 20
Jan. 1999)
Uniformity in taxation, like the kindred concept of
equal protection, merely requires that all subjects Q: Does the 20% Sales Discount for Senior
or objects of taxation, similarly situated, are to be Citizens and Persons with Disabilities violates
treated alike both in privileges and liabilities. the constitutional right of equal protection
Uniformity does not forfend classification as long as: clause?
(1) the standards that are used therefor are
substantial and not arbitrary; (2) the categorization A: NO. The equal protection clause is not infringed
is germane to achieve the legislative purpose; (3) by legislation which applies only to those falling
the law applies, all things being equal, to both within a specified class. If the groupings are
present and future conditions; and (4) the characterized by substantial distinctions that make
classification applies equally well to all those real differences, one class may be treated and
belonging to the same class. (Rufino R. Tan v. Del regulated differently from another. (Southern Luzon
Rosario, Jr., G.R. No. 109289, 03 Oct. 1994) All of the Drug Corporation v. DSWD, G.R. No. 199669, 25 Apr.
foregoing requirements of a valid classification 2017)
having been met and those which are singled out are
a class in themselves, there is no violation of the Progressive Taxation
“Equal Protection Clause” of the Constitution.
Taxation is progressive when tax rate increases as
Q: An Executive Order was issued pursuant to the income of the taxpayer increases. It is based on
law granting tax and duty incentives only to the principle that those who are able to pay more
businesses and residents within the “secured should shoulder the bigger portion of the tax
area” of the Subic Economic Special Zone, and burden.
denying said incentives to those who live within
the Zone but outside such “secured area”. Is the Q: Does the Constitution prohibit regressive
constitutional right of equal protection of the taxes?
law violated by the Executive Order? Explain.
(2000 BAR) A: NO. The Constitution does not really prohibit the
imposition of regressive taxes. What it simply
A: NO. Equal protection of the law clause is subject provides is that Congress shall evolve a progressive
to reasonable classification. Classification, to be system of taxation.
valid, must (1) rest on substantial distinctions, (2)
be germane to the purpose of the law, (3) not be Meaning of “Evolve” as Used in the Constitution
limited to existing conditions only, (4) apply equally
to all members of the same class. The constitutional provision has been interpreted
to simply mean that "direct taxes are to be
There are substantial differences between big preferred and as much as possible, indirect taxes
investors being enticed to the “secured area” and should be minimized.” The mandate of Congress is

15 UNIVERSITY OF SANTO TOMAS

FACULTY OF CIVIL L AW
 TAXATION LAW
not to prescribe but to evolve a progressive tax the Finance Department, the National Economic
system. This is a mere directive upon Congress, not Development Authority, or the World Trade
a justiciable right or a legally enforceable one. We Organization, no matter how insistent or
cannot avoid regressive taxes but only minimize persistent these bodies may be. (Southern Cross
them. (Tolentino v. Secretary of Finance, G.R. No. Cement Corporation v. Cement Manufacturers
115455, 30 Oct. 1995) Association of the Phil., G.R. No. 158540, 03 Aug.
2005)
NOTE: VAT is admittedly regressive because it is
imposed on persons regardless of income. 2. Subject to Congressional limits and restrictions
However, it is still valid as the Constitution’s – the authorization to the President can be
mandate is simply to evolve a progressive system of exercised only within the specified limits set in
taxation. In any case, the VAT system minimizes the the law and is further subject to limitations and
regressive effects by providing zero-rated restrictions which Congress may impose.
transactions. (Abakada Guro Party List v. Ermita, Consequently, if Congress specifies that the
G.R. No. 168056, 15 Sept. 2005) tariff rates should not exceed a given amount,
the President cannot impose a tariff rate that
GRANT BY CONGRESS OF AUTHORITY TO exceeds such amount.
THE PRESIDENT TO IMPOSE TARIFF RATES
Assuming there is a conflict between the
specific limitation in the Constitution and the
The Congress may, by law, authorize the President
general executive power of control and
to fix within specified limits and subject to such
supervision, the former prevails in the specific
limitations and restrictions as it may impose, tariff
instance of safeguard measures such as tariffs
rates, import and export quotas, tonnage and
and imposts and would thus serve to qualify the
wharfage dues and other duties or imposts within
general grant to the President of the power to
the framework of the national development
exercise control and supervision over his/her
program of the Government. (Sec. 28(2), Art. VI,
subalterns. (Southern Cross Cement Corporation
1987 Constitution)
v. Cement Manufacturers Association of the Phil.,
G.R. No. 158540, 03 Aug. 2005)
Flexible Tariff Clause

3. Within the framework of national development

This clause provides the authority given to the
program.
President to adjust tariff rates under Sec. 1608 of
R.A. No. 10863, known as Customs Modernization
PROHIBITION AGAINST TAXATION OF
and Tariff Act (CMTA) of 2016.
RELIGIOUS, CHARITABLE ENTITIES, AND
EDUCATIONAL ENTITIES
Requisites on the Authority of the President in
Imposing Tax
Charitable institutions, churches and parsonages or
1. Delegated by Congress through a law – the convents appurtenant thereto, mosques, non-profit
authorization granted to the President must be cemeteries, and all lands, buildings, and
embodied in a law. Hence, the justification improvements, actually, directly, and exclusively
cannot be supplied simply by inherent used for religious, charitable, or educational
executive powers. purposes shall be exempt from taxation. (Sec. 28(3),
Art. VI, 1987 Constitution)
It is Congress which authorizes the President to
impose tariff rates, import and export quotas, Q: What is the coverage of tax exemption?
tonnage and wharfage dues, and other duties or
imposts. Thus, the authority cannot come from A: The exemption only applies to real property tax.

UNIVERSITY OF SANTO TOMAS 16

2023 GOLDEN NOTES
 I. GENERAL PRINCIPLES
(Lladoc v. CIR, G.R. No. L-19201, 16 June 1965) manner to exclude; as enjoying a privilege
Accordingly, a conveyance of such exempt property exclusively.” If real property is used for one or more
can be subject to transfer taxes. commercial purposes, it is not exclusively used for
the exempted purposes but is subject to taxation.
Properties Exempt under the Constitution from The words “dominant use” or “principal use” cannot
the Payment of Property Taxes be substituted for the words “used exclusively”
without doing violence to the Constitution and the
1. Charitable institutions; law. (Lung Center of the Phil. V. Quezon City, G.R. No.
2. Churches and parsonages or convents 144104, 29 June 2004)
appurtenant thereto;
3. Mosques; NOTE: It is the actual use of the property and not the
4. Non-profit cemeteries; and use of the income from the real property that is
5. All lands, buildings, and improvements determinative of whether the property is used for
actually, directly and exclusively used for tax-exempt purposes.
religious, charitable or educational purposes
shall be exempt from taxation. (Sec. 28(3), Art. Rules on Taxation of Non-Stock Corporations for
VI, 1987 Constitution) Charitable and Religious Purposes

Meaning of “Charitable” as Used in the 1. For purposes of income taxation

Constitution
a. The income of non-stock corporation or
It is not restricted to relief of the poor or sick. The association organized and operated
test whether an enterprise is charitable or not is exclusively for religious and charitable
whether it exists to carry out a purpose recognized purposes, no part of which inures to the
in law as charitable or whether it is maintained for benefit of any member, organizer, officer,
gain, profit, or private advantage. (Lung Center of the or any specific person, shall be exempt
Philippines v. Quezon City, G.R. No. 144104, 29 June from tax. (Sec. 30(E), NIRC)
2004)
However, the income of whatever kind and
In addition, an organization must meet the character from any of their properties, real
substantive test of charity. Charity is essentially a or personal, or from any of their activities
gift to an indefinite number of persons which for profit regardless of the disposition
lessens the burden of government. In other words, made of such income, shall be subject to
charitable institutions provide for free goods and tax. (Sec. 30, NIRC)
services to the public which would otherwise fall on
the shoulders of government. (CIR v. St. Luke’s NOTE: An organization may be considered
Medical Center, Inc., G.R. No. 195909, 26 Sept. 2012) as non-profit if it does not distribute any
part of its income to stockholders or
Meaning of “Actual, Direct and Exclusive Use of members. (CIR v. St. Luke’s Medical Center,
the Property” as Used in the Constitution Inc., G.R. No. 195909, 26 Sept. 2012)

It is the direct, immediate, and actual application of b. Donations received by religious,

the property itself to the purposes for which the charitable, and educational institutions are
charitable institution is organized. considered as income but not taxable
income as they are items of exclusion. (Sec.
“Exclusive” is defined as possessed and enjoyed to 32(B)(3), NIRC)
the exclusion of others; debarred from participation
or enjoyment; and “exclusively” is defined, “in a On the part of the donor, such donations

17 UNIVERSITY OF SANTO TOMAS

FACULTY OF CIVIL L AW
 TAXATION LAW
are deductible expense provided that no Summary of Rules on Exemption
part of the income of which inures to the
benefit of any private stockholder or SEC. 28(3), ART. VI,
CRITERIA
individual in an amount not exceeding 1987 CONSTITUTION
10% in case of individual, and 5% in case Covers real property tax
of a corporation, of the taxpayer’s taxable only; the income of
income derived from trade or business or whatever kind and nature
profession. (Sec. 34 (H), NIRC) from any of their
Coverage of properties, real or
NOTE: Donations to accredited non- constitutional personal, or from any of
government organizations, i.e., organized provision their activities for profit
and operated exclusively for scientific, regardless of the
research, educational, character-building disposition made of such
and youth and sports development, health, income shall be subject to
social welfare, cultural or charitable tax.
purposes, or a combination thereof, are Property must be “actually,
deductible in full. (Sec. 34(H)(2)(c), NIRC) Requisite to directly, and exclusively
avail of this used” by religious,
2. For purposes of estate tax exemption charitable, and educational
institutions.
Bequests and devises in favor of charitable
institutions are generally not subject to tax; Test for the Use of the property for
Provided, however, that not more than 30% of grant of this such purposes, not the
the said bequests, devises, legacies, or transfers exemption ownership thereof.
shall be used by such institutions for NOTE: The doctrine of exemption by incidental
administration purposes. (Sec. 87(D), NIRC) purpose is no longer applicable. Such doctrine is
only applicable to cases where the cause of action
3. For purposes of donor’s tax arose under the 1935 Constitution.

Donations in favor of charitable and religious Under the 1987 Constitution, it must be proved that
institutions are generally exempt from tax; the properties are actually, directly, and exclusively
Provided, however, that not more than 30% of used for the purpose of the institution for the
the said donations shall be used by such exemption to be granted. (Sababan, 2008)
institutions for administration purposes. (Sec.
101, NIRC) Tax-Exempt Corporations and Organizations

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 for the exclusive benefit of the
members such as a fraternal organization

UNIVERSITY OF SANTO TOMAS 18

2023 GOLDEN NOTES
 I. GENERAL PRINCIPLES
operating under the lodge system, or mutual NOTE: However, the income of whatever kind and
aid association or a non-stock corporation character of the foregoing organizations from any
organized by employees providing for the of their properties, real or personal, or from any of
payment of life, sickness, accident, or other their activities conducted for profit regardless of
benefits exclusively to the members of such the disposition made of such income, shall be
society, order, or association, or nonstock subject to tax. (Sec. 30, NIRC)
corporation or their dependents;
PROHIBITION AGAINST TAXATION OF NON-
d. Cemetery company owned and operated STOCK, NON-PROFIT EDUCATIONAL
exclusively for the benefit of its members; INSTITUTIONS

e. Non-stock corporation or association All revenues and assets of non-stock, non-profit

organized and operated exclusively for educational institutions used actually, directly, and
religious, charitable, scientific, athletic, or exclusively for educational purposes shall be
cultural purposes, or for the rehabilitation of exempt from taxes and duties. (Sec. 4(3), Art. XIV,
veterans, no part of its net income or asset 1987 Constitution)
belongs to or inures to the benefit of any
member, organizer, officer or any specific Subject to conditions prescribed by law, all grants,
person; endowments, donations, or contributions used
actually, directly, and exclusively for educational
f. Business league, chamber of commerce, or purposes shall be exempt from tax. (Sec. 4(4), Art.
board of trade, not organized for profit and no XIV, 1987 Constitution)
part of the net income of which inures to the
benefit of any private stock-holder, or Meaning of “Actually, Directly, and Exclusively
individual; Used”
g. Civic league or organization not organized for
profit but operated exclusively for the The use of the term “actually, directly, and
promotion of social welfare; exclusively used” referring to religious institutions
cannot be applied to this article. The provision of
h. Government educational institution; Sec. 28(3), Art. VI of the 1987 Constitution applies to
charitable, religious, and educational institutions;
i. Farmers' or other mutual typhoon or fire while Sec. 4(3), Art. XIV applies solely to non-stock,
insurance company, mutual ditch or irrigation non-profit educational institutions.
company, mutual or cooperative telephone
company, or like organization of a purely local Hence, in this case, we should apply its literal
character, the income of which consists solely interpretation – “solely” – in consonance with the
of assessments, dues, and fees collected from principle of Strictissimi juris. The word “exclusively”
members for the sole purpose of meeting its indicates that the provision is mandatory.
expenses; and (Dimaampao, 2021)

j. 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. (Sec. 30, NIRC; RMO
No. 038-19)

19 UNIVERSITY OF SANTO TOMAS

FACULTY OF CIVIL L AW
 TAXATION LAW
Sec. 4(3), Art. XIV and Sec. 28(3), Art. VI of the And when the assets are actually, directly, and
1987 Constitution Distinguished exclusively used for educational purposes, the non-
stock, non-profit educational institution shall be
SEC. 4(3), ART. XIV SEC. 28(3), ART. VI exempt from real property tax. (CIR vs. De La Salle
As to grantee University, Inc., G.R. No. 196596, 09 Nov. 2016)

Charitable institutions, Income from cafeterias, canteens and bookstores

churches and located within the school premises are also exempt
parsonages or if they are owned and operated by the educational
convents appurtenant institution. (RMC 76-2003)
thereto, mosques, non-
Non-stock, non- profit cemeteries, and Q: San Juan University is a non-stock, non-profit
profit educational all lands, buildings, educational institution. It owns a piece of land
institution and improvements, in Caloocan City on which its three 3-storey
actually, directly, and school building stood. Two of the buildings are
exclusively used for devoted to classrooms, laboratories, a canteen,
religious, charitable, a bookstore, and administrative offices. The
or educational third building is reserved as dormitory for
purposes student athletes who are granted scholarships
for a given academic year.
As to tax exemption granted

All taxes and duties Real property tax In 2017, San Juan University earned income
from tuition fees and from leasing a portion of
its premises to various concessionaires of food,
The tax exemption granted by the Constitution to books, and school supplies.
non-stock, non-profit educational institutions is
conditioned only on the actual, direct, and exclusive a. Can the City Treasurer of Caloocan City
use of their assets, revenues, and income for collect real property taxes on the land and
educational purposes. A plain reading of the 1987 building of San Juan University? Explain
Constitution would show that Sec. 4(3), Art. XIV your answer.
does not require that the revenues and income
must have also been sourced from educational A: YES. The City Treasurer can collect real property
activities or activities related to the purposes of an taxes but on the leased portion. Sec. 4(3), Art. XIV of
educational institution. The phrase “all revenues” is the 1987 Constitution provides that a non-stock,
unqualified by any reference to the source of non-profit educational institution shall be exempt
revenues. (CIR vs. De La Salle University, Inc., G.R. No. from taxes and duties only if the same are used
196596, 09 Nov. 2016) actually, directly, and exclusively for educational
purposes. The test of exemption from taxation is the
NOTE: The test to determine exemption is the use use of the property for purposes mentioned in the
of both the revenues and assets. Hence, when the Constitution. The leased portion of the building
revenues are actually, directly and exclusively used may be subject to real property tax since such lease
for educational purposes, the non-stock, non-profit is for commercial purposes, thereby, it removes the
educational institution shall be exempt from asset from the property tax exemption granted
income tax, VAT, and local business tax. The under the Constitution. (CIR vs. De La Salle
revenues do not need to come from educational University, Inc., G.R. No. 196596, 09 Nov. 2016)
activities, as long as it used for educational
purposes. (La Sallian Educational Innovators b. Is the income earned by San Juan University
Foundation v. CIR, G.R. No. 202792, 27 Feb. 2019) for the year 2017 subject to income tax?

UNIVERSITY OF SANTO TOMAS 20

2023 GOLDEN NOTES
 I. GENERAL PRINCIPLES
Explain your answer. (2017 BAR) are in the nature of tax exemptions. Such being the
case, a law granting tax amnesties, tax
A: NO. The income earned is not subject to income condonations, and tax refunds requires the vote of
tax provided that the revenues are used actually, an absolute majority of the members of the
directly, and exclusively for educational purposes Congress.
as provided under Sec. 4(3), Art. XIV of the 1987
Constitution. The requisites for availing the tax A tax amnesty, being a general pardon or
exemption under Sec. 4(3), Art. XIV are as follows: intentional overlooking by the State of its authority
(1) the taxpayer falls under the classification non- to impose penalties otherwise guilty of evasion or
stock, non-profit educational institution; and (2) violation of a revenue or tax law, partakes of an
the income it seeks to be exempted from taxation is absolute forgiveness or waiver by the Government
used actually, directly and exclusively for of its right to collect what otherwise would be due
educational purposes; thus, so long as the it, and in this sense, prejudicial thereto, particularly
requisites are met, the revenues are exempt from to give tax evaders, who wish to relent and are
tax. (Ibid.) willing to reform a chance to do so and thereby
become part of the new society with a clean slate.
MAJORITY VOTE OF CONGRESS FOR GRANT OF (Republic v. IAC, G.R. No. L-69344, 26 Apr. 1991)
TAX EXEMPTION
Required Vote for Withdrawal of such Grant of
No law granting any tax exemption shall be passed Tax Exemption
without the concurrence of a majority of all the
members of Congress. (Sec. 28(4), Art. VI, 1987 A relative majority or plurality of votes is sufficient,
Constitution) that is, majority of a quorum. (Sec. 28(4), Art. VI,
1987 Constitution)
The inherent power of the State to impose taxes
carries with it the power to grant tax exemptions. PROHIBITION ON USE OF TAX LEVIED FOR
SPECIAL PURPOSE
Granting of Exemptions
All money collected on any tax levied for a special
Exemptions may be created: purpose shall be treated as a special fund and paid
1. By the Constitution; or out for such purpose only. If the purpose for which
2. By statute, subject to limitations as the a special fund was created has been fulfilled or
Constitution may provide. abandoned, the balance, if any, shall be transferred
Required Vote for Grant of Tax Exemption to the general funds of the government. (Sec. 29(3),
Art. VI, 1987 Constitution)
In granting tax exemptions, the absolute majority NOTE: In Gaston v. Republic Planters Bank, the Court
vote of all the members of Congress is required. ruled that the “stabilization fees” collected by the
(Sec. 28(4), Art. VI, 1987 Constitution) State for the promotion of the sugar industry were
in the nature of taxes and no implied trust was
It means at least 50% plus 1 of all the members created for the benefit of sugar industries. Thus, the
voting separately. revenues derived therefrom are to be treated as a
special fund to be administered for the purpose
NOTE: Hence, an exemption granted by a intended. No part thereof may be used for the
Presidential Proclamation and not by law is invalid. exclusive benefit of any private person or entity but
(John Hay Peoples Alternative Coalition v. Lim, G.R. for the benefit of the entire sugar industry. Once the
No. 119775, 24 Oct. 2003) purpose is achieved, the balance, if any remaining, is
to be transferred to the general funds of the
Tax amnesties, tax condonations, and tax refunds government. (Gaston v. Republic Planters Bank, G.R.

21 UNIVERSITY OF SANTO TOMAS

FACULTY OF CIVIL L AW
 TAXATION LAW
No. L-77194, 15 Mar. 1988)
NOTE: Sec. 30, Art. VI of the 1987 Constitution
LINE-ITEM VETO provides that “no law shall be passed increasing the
appellate jurisdiction of the Supreme Court without
The President shall have the power to veto any its advice and concurrence.”
particular item or items in an appropriation,
revenue, or tariff bill but the veto shall not affect the The courts cannot inquire into the wisdom of a
item or items which he does not object. (Sec. 27(2), taxing act, except when there is an allegation of any
Art. VI, 1987 Constitution) violation of constitutional limitations or
restrictions.
The item or items vetoed shall be returned to the
Lower House of Congress together with the GRANT OF POWER TO THE LGUS TO CREATE ITS
objections of the President. If after a OWN SOURCES OF REVENUE
reconsideration 2/3 of all the members of such
House shall agree to pass the bill, it shall be sent, Each LGU shall have the power to create its own
together with the objection, to the other House by sources of revenues and to levy taxes, fees and
which it shall likewise be reconsidered, and if charges subject to such guidelines and limitations as
approved by 2/3 of all the Members of that House, it the Congress may provide, consistent with the basic
shall become a law. (Dimaampao, 2021) policy of local autonomy. Such taxes, fees, and
charges shall accrue exclusively to the local
NOTE: The veto power on particular items only governments. (Sec. 5, Art. X, 1987 Constitution)
applies to the following: (R-A-T)
1. Revenue, Justification in the Delegation of Legislative
2. Appropriation, and Taxing Power to Local Governments
3. Tariff bills.
Delegation of legislative taxing power to local
Bills other than appropriation, revenue and tariff governments is justified by the necessary
bills can only be vetoed by the President as a whole. implication that the power to create political
corporations for purposes of local self-government
NON-IMPAIRMENT OF JURISDICTION carries with it the power to confer on such local
OF THE SUPREME COURT government agencies the authority to tax.

The Supreme Court shall have the power to review, Local government units may, through ordinances
revise, reverse, modify, or affirm on appeal on duly approved, grant tax exemptions, incentives or
certiorari as the laws or the Rules of Court may reliefs under such terms and conditions as they may
provide, final judgments or orders of lower courts in deem necessary. (Sec. 192, LGC)
all cases involving the legality of any tax, impost,
assessment, or toll, or any penalty imposed in Condonation or Reduction of Tax by the
relation thereto. (Sec. 5(2)(b), Art. VIII, 1987 President of the Philippines
Constitution)
The President may, when public interest so
These jurisdictions are concurrent with the requires, condone, or reduce the real property tax
Regional Trial Court (RTC). Thus, the petition and interest for any year in any province or city or a
should generally be filed with the RTC following the municipality within the Metropolitan Manila Area.
hierarchy of courts. However, questions on tax laws (Sec. 277, LGC)
are usually filed directly with the Supreme Court as
these are impressed with paramount public Q: May Congress, under the 1987 Constitution,
interest. abolish the power to tax of local governments?

UNIVERSITY OF SANTO TOMAS 22

2023 GOLDEN NOTES
 I. GENERAL PRINCIPLES
(2003 BAR) wholesaler operating within the city, challenged
the new provision based on the following
A: NO. The Congress cannot abolish the local contentions: (1) The new provision is a form of
government’s power to tax as it cannot abrogate prohibited double taxation because it
what is expressly granted by the fundamental law. essentially amounts to City X imposing VAT
The only authority conferred to Congress is to which was already being levied by the national
provide the guidelines and limitations on the local government; and (2) since the tax being
government’s exercise of the power to tax. (Sec. 5, imposed is akin to VAT, it is beyond the power of
Art. X, 1987 Constitution) City X to levy the same.

The Local Government’s Power to Tax as the Rule on ABC Corp.’s second contention. (2019
Most Effective Instrument to Raise the Needed BAR)
Revenues
A: ABC CORP. IS INCORRECT. Under the LGC, LGUs
The right of LGUs to collect taxes due must always are empowered to enact ordinances that will aid in
be upheld to avoid severe tax erosion. This their revenue generation, which is in consonance
consideration is consistent with the State policy to with the principle of fiscal autonomy of LGUs.
guarantee the autonomy of the local government Although the tax to be imposed is akin to VAT, the
and the objective of the LGC that they enjoy genuine LGU may nevertheless impose such local business
and meaningful local autonomy to empower them tax.
to achieve their fullest development as self-reliant
communities and make them effective partners in ALTERNATIVE ANSWER:
the attainment of national goals. (Dimaampao,
2021) ABC CORP. IS INCORRECT. Under Sec. 133(i) of the
LGC, cities may not impose percentage or value-
NOTE: The power of local government units is added tax (VAT) on sales, barters or exchanges or
subject to limitations as Congress may provide, i.e., similar transactions on goods or services “except as
the Local Government Code. (Ingles, 2021) otherwise provided herein”. As an exception to the
said rule, Sec. 143(b) of the LGC allows the
No Power to Grant Franchises imposition of taxes on wholesalers, distributors, or
dealers in any article of commerce of whatever kind
Being mere creatures of the State, LGUs cannot or nature for municipalities. Moreover, Sec. 151 of
defeat national policies through enactments of the LGC provides that cities may impose whatever
contrary measures. In the absence of constitutional the municipality is imposing. Thus, City X may levy
or legislative authorization, municipalities have no the said tax.
power to grant franchises. Consequently, the
protection of the constitutional provision as to ORIGIN OF REVENUE AND TARIFF BILLS
impairment of the obligation of a contract does not
extend to privileges, franchises and grants given by All appropriation, revenue or tariff bills, bills
a municipality in excess of its powers, or ultra vires. authorizing increase of the public debt, bills of local
(Batangas CATV, Inc. v. Court of Appeals, G.R. No. application, and private bills shall originate
138810, 29 Sept. 2004) exclusively in the House of Representatives, but the
Senate may propose or concur with amendments.
Q: In 2018, City X amended its Revenue Code to (Sec. 24, Art VI, 1987 Constitution)
include a new provision imposing a tax on every
sale of merchandise by a wholesaler based on What is required to originate in the House of
the total selling price of the goods, inclusive of Representatives is not the law but the revenue bill
value-added taxes (VAT). ABC Corp., a which must “originate exclusively” in the lower

23 UNIVERSITY OF SANTO TOMAS

FACULTY OF CIVIL L AW
 TAXATION LAW
house. The bill may undergo such extensive changes 1950 amending corporate income taxes,
that the result may be a rewriting of the whole. The percentage, excise and franchise taxes. Verily, Sec.
Senate may not only concur with amendments but 24, Art. VI of the Constitution does not contain any
also propose amendments. To deny the Senate's prohibition or limitation on the extent of the
power not only to “concur with amendments” but amendments that may be introduced by the Senate
also to “propose amendments” would be to violate to the House revenue bill. The Senate can propose
the coequality of legislative power of the two houses amendments and in fact, the amendments made are
of Congress and in fact make the House superior to germane to the purpose of the house bills, which is
the Senate. (Tolentino v. Secretary of Finance, G.R. to raise revenues for the government. The sections
No. 115873, 25 Aug. 1994) introduced by the Senate are germane to the subject
matter and purposes of the house bills, which is to
Q: Why must appropriation, revenue, or tariff supplement our country’s fiscal deficit, among
bills originate from the House of others. Thus, the Senate acted within its power to
Representatives? propose those amendments.

A: On the theory that, elected as they are from the b. Does R.A. 9337 violate Sec. 26(2), Art. VI of
districts, the members of the House of the Constitution on the “No-Amendment
Representatives can be expected to be more Rule”?
sensitive to the local needs and problems.
A: NO. The “no-amendment rule” refers only to the
Q: R.A. 9337 is a consolidation of three procedure to be followed by each house of Congress
legislative bills namely, H.B. Nos. 3555 and with regard to bills initiated in each of said
3705, and S.B. No. 1950. Because of the respective houses, before said bill is transmitted to
conflicting provisions of the proposed bills, the the other house for its concurrence or amendment.
Senate agreed to the request of the House of Verily, to construe said provision in a way as to
Representatives for a committee conference. proscribe any further changes to a bill after one
The Conference Committee on the Disagreeing house has voted on it would lead to absurdity as this
Provisions of House Bill recommended the would mean that the other house of Congress would
approval of its report, which the Senate and the be deprived of its Constitutional power to amend or
House of the Representatives did. introduce changes to said bill. Thus, Sec. 26(2), Art.
VI of the Constitution cannot be taken to mean that
a. Does R.A. 9337 violate Sec. 24, Art. VI of the the introduction by the Bicameral Conference
Constitution on exclusive origination of Committee of amendments and modifications to
revenue bills? disagreeing provisions in bills that have been acted
upon by both houses of Congress is prohibited.
A: NO. It was H.B. Nos. 3555 and 3705 that initiated (ABAKADA Guro v. Executive Secretary, G.R. Nos.
the move for amending provisions of the NIRC 168056, 168207, 168461, 168463 & 168730, 01 Sept.
dealing mainly with the VAT. Upon transmittal of 2005)
said House bills to the Senate, the Senate came out
with S.B. No. 1950 proposing amendments not only NO APPROPRIATION OR USE OF PUBLIC MONEY
to NIRC provisions on the VAT but also amendments FOR RELIGIOUS PURPOSES
to NIRC provisions on other kinds of taxes.
No public money or property shall be appropriated,
Since there is no question that the revenue bill applied, paid, or employed directly or indirectly for
exclusively originated in the House of the use, benefit, or support of any sect, church,
Representatives, the Senate was acting within its denomination, sectarian institution, or system of
Constitutional power to introduce amendments to religion or of any priest, preacher, minister, or other
the House bill when it included provisions in S.B. No. religious teacher or dignitary as such, except when

UNIVERSITY OF SANTO TOMAS 24

2023 GOLDEN NOTES
 I. GENERAL PRINCIPLES
such priest, preacher, minister or dignitary is in the Constitution, as where it can be shown to
assigned to the armed forces or to any penal amount to a confiscation of property. (Reyes v.
institution, or government orphanage or Almanzor, G.R. Nos. L-49839-46, 26 Apr. 1991)
leprosarium. (Sec. 29(2), Art. VI, 1987 Constitution)
EQUAL PROTECTION
This is in consonance with the inviolable principle
of separation of the Church and State. (Sec. 6, Art. II, No person shall be denied the equal protection of
1987 Constitution) the laws. (Sec. 1, Art. III, 1987 Constitution)

Provisions Indirectly Affecting Taxation Definition

DUE PROCESS
It means that all persons subjected to such
No person shall be deprived of life, liberty, or
legislation shall be treated alike, under like
property without due process of law. (Sec. 1, Art. III,
circumstances and conditions, both in the privileges
1987 Constitution)
conferred and, in the liabilities, imposed. (1 Cooley
824-825; Sison Jr. v. Ancheta, G.R. No. 59431, 25 July
Tax laws and their enforcement must comply with
1984)
substantive and procedural due process. (Ingles,
2021)
Q: What is the “rational basis” test? Explain
briefly. (2010 BAR)
Substantive Due Process
A: The rational basis test is applied to gauge the
1. The law must be reasonable, and
constitutionality of an assailed law in the face of an
2. It must be for a public purpose. (Ingles, 2021)
equal protection challenge. It has been held that “in
areas of social and economic policy, a statutory
Procedural Due Process
classification that neither proceeds along suspect
lines nor infringes constitutional rights must be
1. There must be no arbitrariness in the
upheld against equal protection challenge if there is
assessment and collection;
any reasonably conceivable state of facts that could
2. The prescribed rules must be followed before
provide a rational basis for the classification.”
assessment and collection. (Ingles, 2021)
Under the rational basis test, it is sufficient that the
legislative classification is rationally related to
Q: When is deprivation of life, liberty, and
achieving some legitimate State interest. (British
property by the government done in compliance
American Tobacco v. Camacho and Parayno, GR No.
with due process?
163583, 15 Apr. 2009)

A: If the act is done:

Q: RC is a law-abiding citizen who pays his real
1. Under authority of a law that is valid, or the
estate taxes promptly. Due to a series of
Constitution itself (Substantive Due Process);
typhoons and adverse economic conditions, an
and
ordinance is passed by MM City granting a 50%
2. After compliance with fair and reasonable
discount for payment of unpaid real estate taxes
methods of procedure prescribed by law.
for the preceding year and the condonation of
(Procedural Due Process)
all penalties on fines resulting from the late
payment. Arguing that the ordinance rewards
Q: When may violation of due process be
delinquent taxpayers and discriminates against
invoked by the taxpayer?
prompt ones, RC demands that he be refunded
an amount equivalent to ½ of the real taxes he
A: The due process clause may be invoked where a
paid. The municipal attorney rendered an
taxing statute is so arbitrary that it finds no support

25 UNIVERSITY OF SANTO TOMAS

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 TAXATION LAW
opinion that RC cannot be reimbursed because (Ormoc Sugar Industry v. City Treasurer of Ormoc
the ordinance did not provide for such City, G.R. No. L-23794, 17 Feb. 1968)
reimbursements. RC files suit to declare the
ordinance void on the ground that it is a class RELIGIOUS FREEDOM
legislation. Will a suit prosper? (2004 BAR)
No law shall be made respecting an establishment of
A: NO. The remission or condonation of taxes due religion or prohibiting the free exercise thereof. The
and payable to the exclusion of taxes already free exercise and enjoyment of religious profession
collected does not constitute unfair discrimination. and worship, without discrimination or preference,
Each set of taxes is a class by itself and the law shall forever be allowed. No religious test shall be
would be open to attack as class legislation only if required for the exercise of civil or political rights.
all taxpayers belonging to one class were not (Sec. 5, Art. III, 1987 Constitution)
treated alike. (Juan Luna Subdivision, Inc., v.
Sarmiento, G.R. L-3538, 28 May 1952) Q: Is the real property tax exemption of
religious organizations violative of the non-
Q: The municipality of San Isidro passed an establishment clause?
ordinance imposing a tax on installation
managers. At that time, there was only one A: NO. Neither the purpose nor the effect of the
installation manager in the municipality; thus, exemption is the advancement or the inhibition of
only he would be liable for the tax. religion; and it constitutes neither personal
sponsorship of, nor hostility to religion. (Walz v. Tax
Is the law constitutional? (2013 BAR) Commission, 397 US 664)

A: YES. It complies with the requisites of equal NOTE: Under Sec. 30 of the NIRC, income of
protection. It is not limited to existing conditions religious organizations from activities conducted
only, as future installation managers will be subject for profit or from any of their property, regardless
to the tax. (Shell v. Vaño, G.R. No. L-6093, 24 Feb. of disposition of such income is subject to income
1954) tax. (Ingles, 2021)

Q: The City Council of Ormoc enacted Ordinance Q: Is the imposition of fixed license fee a prior
No. 4, Series of 1964 taxing the production and restraint on the freedom of the press and
exportation of only centrifugal sugar at the religious freedom?
Ormoc Sugar Company, Inc. At the time of the
enactment, Ormoc Sugar Co. was the only sugar A: YES. As a license fee is fixed in the amount and
central in Ormoc. Petitioner alleged that said unrelated to the receipts of the taxpayer, the license
Ordinance is unconstitutional for being fee, when applied to a religious sect, is actually
violative of the equal protection clause. Is the being imposed as a condition for the exercise of the
Ordinance valid? sect’s right under the Constitution. (Tolentino v.
Secretary of Finance, G.R. No. 115873, 25 Aug. 1994)
A: NO. Equal protection clause applies only to
persons or things identically situated and does not Q: Is a municipal license tax on the sale of bibles
bar a reasonable classification of the subject of and religious articles by a non-stock, non-profit
legislation. The classification, to be reasonable, missionary organization at minimal profits
should be in terms applicable to future conditions as valid?
well. The taxing ordinance should not be singular
and exclusive as to exclude any substantially A: NO. Such imposition of license tax constitutes
established sugar central, of the same class as curtailment of religious freedom and worship
Ormoc Sugar Co., from the coverage of the tax. which is guaranteed by the Constitution.

UNIVERSITY OF SANTO TOMAS 26

2023 GOLDEN NOTES
 I. GENERAL PRINCIPLES
The constitutional guarantee of the free exercise Government. (Casanovas v. Hord, G.R. No. 3473, 22
and enjoyment of religious profession and worship Mar. 1907)
carries with it the right to disseminate religious
information. Any restraints of such right can only be Rationale for the Non-impairment Clause in
justified like other restraints of freedom of relation to Contractual Tax Exemption
expression on the grounds that there is clear and
present danger of any substantive evil which the When the State grants an exemption on the basis of
State has the right to prevent. (American Bible a contract, consideration is presumed to be paid to
Society v. City of Manila, G.R. No. L-9637, 30 Apr. the State and the public is supposed to receive the
1957) whole equivalent thereof.

NOTE: VAT registration is not restrictive of NOTE: This applies only where one party is the
religious and press freedom. The VAT registration government and the other party is a private person.
fee, although fixed in amount, is not imposed for the
exercise of a privilege but only for defraying part of Rules regarding Non-impairment of Obligation
the cost of registration. (Tolentino v. Secretary of and Contract with respect to the Grant of Tax
Finance, G.R. No. 115873, 25 Aug. 1994) Exemptions

NON-IMPAIRMENT CLAUSE 1. Unilaterally granted by law – if the grant of

the exemption is merely a spontaneous
No law impairing the obligation of contracts shall be concession by the legislature, such exemption
passed. (Sec. 10, Art. III, 1987 Constitution) may be revoked.

Instances when there is Impairment of the NOTE: A license conferring a tax exemption can
Obligations of Contract be revoked at any time since it does not confer
an absolute right, even if these were granted as
When the law changes the terms of the contract by: inducement to invest in the country. (Republic v.
Caguioa, G.R. No. 168584, 15 Oct. 2007)
1. Making new conditions;
2. Changing conditions in the contract; or
2. Franchise – if it is without payment of any
3. Dispenses with the conditions expressed
consideration or the assumption of any new
therein.
burden by the grantee, it is a mere gratuity and
exemption may be revoked.
Contractual Tax Exemptions

NOTE: A franchise is likewise subject to

Contractual tax exemptions are:
amendment, alteration, or repeal by Congress
1. Those entered into by the taxing authority; when the public interest so requires. (Cagayan
2. Those lawfully entered under enabling laws; Electric Power and Light Co., Inc. v. CIR, G.R. No.
and L-60126, 25 Sept. 1985)
3. Wherein the government acts in its private
capacity and sheds its cloak of authority and 3. Bilaterally agreed upon – however, if the tax
immunity. (Manila Electric Co. v. Province of exemption constitutes a binding contract and
Laguna, G.R. No. 131359, 05 May 1999) for valuable consideration, the government
cannot unilaterally revoke the tax exemption.
Examples of contractual tax exemptions which are
protected by the non-impairment clause are Q: Congress enacted R.A. No. 7716, or otherwise
government bonds or debentures and perfected known as the Expanded Value-Added Tax Law,
mining concession granted by the Spanish

27 UNIVERSITY OF SANTO TOMAS

FACULTY OF CIVIL L AW
 TAXATION LAW
which seeks to widen the tax base of the existing A: YES. The exempting statutes are both granted
VAT system and enhance its administration. unilaterally by Congress in the exercise of taxing
powers. Since taxation is the rule and tax
Thereafter, petitions for the declaration of exemption, the exception, any tax exemptions
unconstitutionality were filed before the unilaterally granted can be withdrawn at the
Supreme Court. One of the contentions of the pleasure of the taxing authority without violating
petitioners is that the application of such law to the Constitution. (Mactan Cebu International
existing contracts of sale of real properties by Airport Authority v. Marcos, G.R. No. 120082, 11 Sept.
installment or on deferred payment basis would 1996)
result in substantial increases in the monthly
amortizations to be paid due to the 10% VAT. FREEDOM OF THE PRESS
Hence, R.A. 7716 violates the non-impairment
clause of contracts. No law shall be passed abridging the freedom of
speech, of expression, or of the press, or the right of
Is the contention tenable? the people peaceably to assemble and petition the
government for redress of grievances. (Sec. 4, Art.
A: NO. R.A. No. 7716 does not violate the non- III, 1987 Constitution)
impairment clause. The contention that the
imposition of the VAT on the sales and leases of real Q: Is R.A. No. 7716 unconstitutional for it
estate by virtue of contracts entered into prior to violates the freedom of the press under Art. III,
the effectivity of the law would violate the Sec. 4 of the Constitution by imposing VAT on the
constitutional provision that “No law impairing the gross receipts of newspapers from
obligation of contracts shall be passed” is without advertisements and on their acquisition of
legal basis. paper, ink and services for publication?

The parties to a contract cannot fetter the exercise A: NO. Even with due recognition of its high estate
of the taxing power of the State. For not only are and its importance in a democratic society,
existing laws read into contracts in order to fix however, the press is not immune from general
obligations as between parties, but the reservation regulation by the State. It has been held that the
of essential attributes of sovereign power is also publisher of a newspaper has no immunity from the
read into contracts as a basic postulate of the legal application of general laws. He has no special
order. privilege to invade the rights and liberty of others.
He must answer for libel. He may be punished for
The Contract Clause has never been thought as a contempt of court. Like others, he must pay
limitation on the exercise of the State’s power of equitable and nondiscriminatory taxes on his
taxation save only where a tax exemption has been business. (Tolentino v. Secretary of Finance, G.R. No.
granted for a valid consideration. (Tolentino v. 115873, 25 Aug. 1994)
Secretary of Finance, G.R. No. 115455, 25 Aug. 1994)
PROHIBITION ON RIDERS
Q: X Corporation was the recipient in 1990 of
two tax exemptions both from Congress, one No provision or enactment shall be embraced in the
law exempting the company’s bond issues from general appropriations bill unless it relates
taxes and the other exempting the company specifically to some particular appropriation
from taxes in the operation of its public utilities. therein. Any such provision or enactment shall be
The two laws extending the tax exemptions limited in its operation to the appropriation to
were revoked by Congress before their expiry which it relates. (Sec. 25(1), Art. VI, 1987
dates. Were the revocations constitutional? Constitution)
(1997 BAR)

UNIVERSITY OF SANTO TOMAS 28

2023 GOLDEN NOTES
 I. GENERAL PRINCIPLES
Rationale: The rationale against inserting a rider in 4. It should be for a Public purpose;
an appropriations bill under the specific
appropriation clause embodied in Sec. 25(2),
Article VI of the Constitution is similar to that of the D. TAX AS DISTINGUISHED FROM OTHER
"one subject in the title clause” provided in Sec. FORMS OF EXACTIONS
26(1), which directs that every provision in a bill
must be germane or has some reasonable relation to
the subject matter as expressed in the title thereof.
Tax and Tariff or Customs Duties Distinguished
The unity of the subject matter of a bill is mandatory
in order to prevent hodge-podge or log-rolling
legislation, to avoid surprise or fraud upon the TARIFF OR
TAX
legislature, and to fairly appraise the people of the CUSTOMS DUTIES
subjects of legislation that are being considered. As to Coverage
(Atitiw v. Zamora, G.R. No. 143374, 30 Sept. 2005)
An all-embracing term
to include various
Sec. 11(f) and (g) of Bayanihan 2 Law are
kinds of enforced
Unconstitutional Only a kind of tax;
contributions imposed
upon persons for the limited coverage.
The Supreme Court held that Sec. 11 (f) and (g) of
attainment of public
the Bayanihan 2 Law are not germane to the
purpose.
purpose of the law, and therefore, violates the "one
subject, one title rule" of the Constitution. The As to Object
imposition of new taxes, camouflaged as part of a
long list of existing taxes, cannot be contemplated as Persons, property,
Goods imported or
an integral part of a temporary COVID-19 relief privilege, or
exported.
measure. Invariably, Sec. 11 (f) and (g) of the transactions.
Bayanihan 2 Law are unconstitutional, in so far as it
imposes new taxes on POGO licensees. (Saint Wealth Tax and Toll Distinguished
Ltd. v. BIR, G.R. Nos. 252965 & 254102, 07 Dec. 2021)
TAX TOLL
As to Definition
C. REQUISITES OF A VALID TAX
An enforced
A consideration paid
proportional
for the use of a road,
Q: Enumerate the requisites of a valid tax. contribution from
bridge or the like, of a
persons and property
public nature.
A: The requisites of a valid tax are: (Uni-J-I-P) for public purpose.

1. It should be Uniform; As to Basis

2. The person or property being taxed should

Demand of
be within the Jurisdiction of the taxing Demand of sovereignty
proprietorship
authority;

3. The tax must not impinge on the Inherent As to Amount

and constitutional limitations on the power
of taxation; and

29 UNIVERSITY OF SANTO TOMAS

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 TAXATION LAW

TAX TOLL TAX LICENSE FEE

Amount is limited to
Non-payment does
Generally, the amount the cost and Non-payment makes
not make the business
is unlimited. maintenance of public the business illegal.
illegal.
improvement.
As to the Time of Payment
As to Purpose
For the support of the For the use of another’s Normally paid after Normally paid before
government. property. the start of business; the commencement of
post-activity the business; pre-
As to Imposing Authority imposition. activity imposition.
May only be imposed May be imposed by
by the State under its private individuals or
sovereignty authority. entities, as an attribute NOTE: Building fees are not taxes or impositions
of ownership. upon property, but regulatory fees imposed by a city
for the activity of building or repairing a structure.
Hence, a foundation which is exempt from taxes
NOTE: Fees paid by the public to toll way operators cannot claim that it is exempt from the payment of
for the use of toll ways are not taxes. These are building fees, as these are not taxes in the first place.
exactions which end up as earnings of toll way (Angeles University Foundation v. City of Angeles, G.R.
operators, not the government. (Diaz v. Secretary of No. 189999, 27 June 2012)
Finance, G.R. No. 193007, 19 July 2011)
Q: A municipality, BB, has an ordinance which
Tax and License Fee Distinguished requires that all stores, restaurants, and other
establishments selling liquor should pay a fixed
TAX LICENSE FEE annual fee of P20,000. Subsequently, the
As to Purpose municipal board proposed an ordinance
imposing a sales tax equivalent to 5% of the
Imposed to raise For regulation and amount paid for the purchase or consumption of
revenue control liquor in stores, restaurants, and other
As to Basis establishments. The municipal mayor, CC,
refused to sign the ordinance on the ground that
Collected under the Collected under police it would constitute double taxation. Is the
power of taxation power refusal of the mayor justified? Reason briefly.
As to Amount (2004 BAR)

Limited to the A: NO. The refusal of the mayor is not justified. The
Generally, amount is
necessary expenses of impositions are of different nature and character.
unlimited
regulation and control The fixed annual fee is in the nature of a license fee
imposed through the exercise of police power while
As to Subject
the 5% tax on purchase or consumption is a local tax
Imposed on the imposed through the exercise of taxing powers.
Imposed on persons, exercise of a right or Both a license fee and a tax may be imposed on the
properties, rights or privilege, such as the same business or occupation, or for selling the same
transactions commencement of a article and this is not in violation of the rule against
business or profession double taxation. (Campania General de Tabacos de
Filipinos v. City of Manila, G.R. No. L-16619, 29 June
As to the Effect of Non-Payment 1963)

UNIVERSITY OF SANTO TOMAS 30

2023 GOLDEN NOTES
 I. GENERAL PRINCIPLES
Tax and Special Assessment Distinguished Tax and Debt Distinguished

TAX SPECIAL ASSESSMENT TAX DEBT

As to Nature As to Basis

An enforced An enforced proportional Obligation based on

Obligation created by
proportional contribution from contract, express or
law
contribution from owners of lands implied
persons and especially those who are
property for public peculiarly benefited by As to Assignability
purpose. public improvements. Not assignable Assignable
As to Subject As to Mode of Payment

Imposed on persons, Generally payable in

property rights, or Levied on land only money; in exceptional Payable in kind or in
transactions instances, it may be money
satisfied in kind
As to Person Liable
As to Set-off
A personal liability Not a personal liability of
Not subject to set-off Subject to set-off
of the taxpayer. the person assessed.
As to the Effect of Non-Payment
As to the Imposing Authority
No imprisonment
May be imposed by May result in
May only be imposed by except when debt
national or local imprisonment
the local government arises from crime
government

As to Purpose As to Interest Stipulation Requirement

For the support of Contribution to the cost No interest unless there

No interest shall be
the government of public improvement shall be assessed and
due unless it has been
collected on any unpaid
expressly stipulated
As to Scope amount of tax
in writing. (Art. 1956,
(deficiency interest or
Civil Code)
Exceptional as to time delinquency interest).
Regular exaction
and locality
As to Interest Rate to be Imposed
NOTE: The purpose of special levies or assessments Interest is fixed at the
Interest depends
is to finance the improvement of particular rate of double the legal
upon the written
properties, with the benefits of the improvement interest rate for loans,
stipulation of the
accruing or inuring to the owners thereof who, after or forbearance of any
parties.
all, pay the assessment. (Republic v. Bacolod-Murla money in the absence
Milling Co., G.R. No. L-19824, 09 July 1966) of an express
If no written
stipulation as set by the
stipulation, as to the
BSP from the date
rate, legal rate of
prescribed for payment
interest shall be
until the amount is fully
imposed.
paid.

31 UNIVERSITY OF SANTO TOMAS

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 TAXATION LAW

As to Prescription
A: Direct taxes are demanded from the very person
Governed by the special Governed by the who, as intended, should pay the tax which he
prescriptive periods ordinary periods of cannot shift to another; while indirect taxes are
provided for in the NIRC prescription demanded in the first instance from one person
with the expectation that he can shift the burden to
someone else, not as a tax but as a part of the
purchase price. (Maceda v. Macaraig, Jr., G.R. No.
E. KINDS OF TAXES
88291, 08 June 1993)

Direct taxes are taxes wherein either the incidence

AS TO OBJECT (or liability for the payment of the tax) as well as the
impact or burden of the tax falls on the same person.
1. Personal/poll or capitation tax – a fixed Indirect taxes, on the other hand, are taxes wherein
amount imposed upon all persons, or upon all the incidence of or the liability of payment of the tax
persons of a certain class or residents within a falls on one person but the burden thereof can be
specified territory, without regard to their shifted or passed on to another person. (CIR v. PLDT,
property or occupation. (e.g., basic individual G.R. No. 140230, 15 Dec. 2005)
community tax)
Income tax, estate tax, and donor's tax are
2. Property tax – tax imposed on property, considered as direct taxes. On the other hand, value-
whether real or personal, in proportion either added tax, excise tax, other percentage taxes, and
to its value, or in accordance with some other documentary stamp tax are indirect taxes.
reasonable method of apportionment. (e.g., real
property tax) NOTE: The liability for payment of the indirect taxes
lies only with the seller of the goods or services, not
3. Privilege/excise tax – a charge upon the in the buyer thereof. Thus, one cannot invoke one’s
performance of an act, the enjoyment of a exemption privilege to avoid the passing on or the
privilege, or the engaging in an occupation. An shifting of the VAT to him by the manufacturers or
excise tax is a tax that does not fall as property suppliers of the goods. Hence, it is important to
tax. (e.g., income tax, estate tax, donor’s tax, determine if the tax exemption granted specifically
VAT) includes the indirect tax; otherwise, it is presumed
that the tax exemption embraces only those taxes
NOTE: This is different from the excise tax under for which the buyer is directly liable. (Ibid.)
the NIRC which is a business tax imposed on items
such as tobacco products, alcohol products, mineral In case of withholding taxes, the incidence and
products, among others. burden of taxation fall on the same entity, the
statutory taxpayer. The burden of taxation is not
AS TO BURDEN OR INCIDENCE shifted to the withholding agent who merely
collects, by withholding, the tax due from income
Based on the possibility of shifting the incidence of payments to entities arising from certain
taxation, taxes may be classified into: transactions and remits the same to the
1. Direct taxes, and government. Due to this difference, the deficiency
2. Indirect taxes. (CIR v. PLDT, G.R. No. 140230, 15 VAT and excise tax cannot be “deemed” as
Dec. 2005) withholding taxes merely because they constitute
indirect taxes. (Asia International Auctioneers, Inc. v.
Q: Distinguish a direct from an indirect tax. Give CIR, G.R. No. 179115, 26 Sept. 2012)
examples. (2006, 2001, 2000, 1994 BAR)

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2023 GOLDEN NOTES
 I. GENERAL PRINCIPLES
In indirect taxation, a distinction is made between head or number, or by some standard of weight
the liability for the tax and burden of the tax. For or measurement. (e.g., excise tax on cigar,
instance, the seller who is liable for the VAT (i.e., has cigarettes and liquors)
the incidence of taxation) may shift or pass on the
amount of VAT it paid on goods, properties, or 2. Ad valorem – tax based on the value of the
services to the buyer, who has the burden of property or transaction with respect to which
taxation. In such a case, what is transferred is not the tax is assessed (e.g., real estate tax, income
the seller's liability but merely the burden of the tax, donor’s tax and estate tax).
VAT. (Diaz v. The Secretary of Finance, G.R. No.
193007, 19 July 2011) 3. Mixed – a choice between ad valorem and/or
specific depending on the condition attached.
Where the burden of the tax is shifted to the
purchaser, the amount passed on to it is no longer a AS TO PURPOSE
tax but becomes an added cost on the goods
purchased, which constitutes a part of the purchase 1. General/fiscal or revenue – tax imposed solely
price. The proper party to question or seek a refund for the general purpose of the government. (e.g.,
of an indirect tax is the statutory taxpayer, the income tax and donor’s tax)
person on whom the tax is imposed by law and who
paid the same even if he shifts the burden thereof to 2. Special/regulatory or sumptuary – tax levied
another. (Silkair v. CIR, G.R. No. 166482, 25 Jan. for specific purpose, i.e., to achieve some social
2012) or economic ends. (e.g., tariff and certain duties
on imports)
Impact and Incidence of Taxation Distinguished
AS TO SCOPE OR AUTHORITY TO IMPOSE
IMPACT OF INCIDENCE OF
TAXATION TAXATION 1. National tax – tax levied by the National
As to Definition Government. (e.g., income tax, estate tax,
It refers to the donor’s tax, VAT, other percentage taxes and
statutory liability to documentary stamp taxes)
It is the economic cost
pay the tax; it falls on
of tax; it is also known 2. Local or municipal – tax levied by a local
the person originally
as burden of taxation government. (e.g., real estate tax and
assessed with a
particular tax community tax)
As to its Nature
AS TO GRADUATION
It is the imposition of It is the payment of
tax (liability) tax (burden) 1. Progressive – a tax rate which increases as the
tax base or bracket increases. (e.g., income tax)
As to Whom it is Imposed

It is on the final 2. Regressive – the tax rate decreases as the tax

It is on the seller upon
consumer, the place at base or bracket increases.
whom the tax has been
which the tax comes
imposed
to rest 3. Proportionate – a tax of a fixed percentage of
amounts of the base, which can be the value of
the property, or amount of gross receipts,
AS TO TAX RATE
among others. (e.g., Estate tax and donor’s tax
under TRAIN, VAT, and other percentage taxes)
1. Specific – tax of a fixed amount imposed by the

33 UNIVERSITY OF SANTO TOMAS

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 TAXATION LAW
government. (Kepco Philippines Corporation v. CIR,
F. DOCTRINES IN TAXATION G.R. No. 179961, 31 Jan. 2011)

It is a basic precept of statutory construction that

the express mention of one person, thing, act, or
1. CONSTRUCTION AND INTERPRETATION OF consequence excludes all others as expressed in the
TAX LAWS, RULES, AND REGULATIONS familiar maxim Expressio unius est exclusio alterius.
Thus, the omission or removal of PAGCOR from
Tax Laws exemption from the payment of corporate income
tax is to require it to pay corporate income tax.
GR: Tax statutes must be construed strictly against
(PAGCOR v. BIR, G.R. No. 172087, 15 Mar. 2011)
the government and liberally in favor of the
taxpayer. (MCIAA v. Marcos, G.R. No. 120082, 11
XPNs: (P-E-A)
Sept. 1996) The imposition of a tax cannot be
presumed. 1. If the grantee of the exemption is a Political
subdivision or instrumentality, the rigid rule of
Rationale: Taxes are burdens on the taxpayer and construction does not apply because the
should not be unduly imposed or presumed beyond practical effect of the exemption is merely to
what the statutes expressly and clearly import. (CIR reduce the amount of money that has to be
v. The Philippine American Accident Insurance, Inc., handled by the government in the course of its
G.R. No. 141658, 18 Mar. 2005) operations. (MCIAA v. Marcos, G.R. No. 120082,
11 Sept. 1996)
XPN: The statute imposes a tax clearly, expressly,
and unambiguously. NOTE: It is a recognized principle that the rule
on strict interpretation does not apply in the
XPN to XPN: The rule that, in case of doubt of case of exemptions in favor of a government
legislative intent, the doubt must be liberally political subdivision or instrumentality. In the
construed in favor of taxpayer does not extend to case of property owned by the state or a city or
cases involving the issue of the validity of the tax other public corporations, the express
law itself which, in every case, is presumed valid. exemption should not be construed with the
(City of Cagayan De Oro v. Cagayan Electric Power & same degree of strictness that applies to
Light Co., Inc., G.R. No. 224825, 17 Oct. 2018) exemptions contrary to the policy of the state,
since as to such property "exemption is the rule
Tax Exemptions and Exclusions and taxation the exception”. (Maceda v.
Macaraig, G.R. No. 88291, 31 May 1991)
GR: Statutes granting tax exemptions are construed
in Strictissimi juris against the taxpayers and
2. Erroneous payment of the tax, or
liberally in favor of the taxing authority. (MCIAA v.
Marcos, G.R. No. 120082, 11 Sept. 1996)
3. Absence of law for the government’s exaction.
(CIR v. Fortune Tobacco Corporation, G.R. Nos.
Tax exclusions (removal of otherwise taxable items
167274-75, 21 July 2008)
from the reach of taxation) are likewise strictly
construed against the taxpayer. (Smart
Tax Rules and Regulations
Communications, Inc. v. City of Davao, G.R. No.
155491, 16 Sept. 2008) The construction placed by the office charged with
implementing and enforcing the provisions of a
NOTE: Tax refunds are in the nature of tax Code should be given controlling weight unless
exemptions which are construed in Strictissimi juris such interpretation is clearly erroneous.
against the taxpayer and liberally in favor of the

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2023 GOLDEN NOTES
 I. GENERAL PRINCIPLES
It is axiomatic that a rule or regulation must bear NOTE: When it comes to civil penalties like fines
upon, and be consistent with, the provisions of the and forfeiture (except interest), tax laws may be
enabling statute if such rule or regulation is to be applied retroactively unless it produces harsh and
valid. In case of conflict between a statute and an oppressive consequences which violate the
administrative order, the former must prevail. To taxpayer’s constitutional rights regarding equity
be valid, an administrative rule or regulation must and due process. But criminal penalties arising
conform, not contradict, the provisions of the from tax violations may not be given retroactive
enabling law. An implementing rule or regulation effect.
cannot modify, expand, or subtract from the law it
is intended to implement. Any rule that is not Revenue statutes are substantive laws and in no
consistent with the statute itself is null and void. sense must their application be equated with that of
(Fort Bonifacio Development Corporation v. CIR, G.R. remedial laws. (CIR v. Acosta, G.R. No. 154068, 03
No. 175707, 19 Nov. 2014) Aug. 2007)

Admittedly the government is not estopped from BIR Rules and Regulations that Revoke, Modify,
collecting taxes legally due because of mistakes or or Reverse a Ruling or Circular
errors of its agents. But like other principles of law,
this admits of exceptions in the interest of justice GR: Those BIR Rules and Regulations shall not be
and fair play, as where injustice will result to the given retroactive application if the revocation,
taxpayer. (CIR v. CA, G.R. No. 117982, 06 Feb. 1997) modification, or reversal will be prejudicial to the
taxpayers.
Penal Provisions of Tax Laws
XPNs: (MO-M-B-E)
In criminal cases, statutes of limitations are acts of
grace, a surrendering by the sovereign of its right to 1. It may be given retroactive effect even if such
prosecute. They receive strict construction in favor would be prejudicial to the taxpayer in the
of the Government and limitations in such cases will following cases:
not be presumed in the absence of clear legislation.
(Lim v. CA, G.R. Nos. 48134-37, 18 Oct. 1990) a. Where the taxpayer deliberately Misstates
or Omits material facts from his return, or
2. PROSPECTIVITY OF TAX LAWS any document required of him by the BIR;

b. Where the facts subsequently gathered by

Tax laws, including rules and regulations operate
the BIR are Materially different from the
prospectively unless otherwise legislatively
facts on which the ruling is based; or
intended by express terms or by necessary
implication. (Gulf Air Company, Philippine Branch v.
c. Where the taxpayer acted in Bad faith.
CIR, G.R. No. 182045, 19 Sept. 2012)
(Sec. 246, NIRC)
GR: Tax laws must be applied prospectively.
2. If the revocation is due to the fact that the
regulation is Erroneous or contrary to law,
XPN: If the law expressly provides for retroactive
such revocation shall have retroactive
application.
operation as to affect past transactions,
because a wrong construction of the law cannot
Ex Post Facto Law as Applied in Taxation
give rise to a vested right that can be invoked
by a taxpayer.
The prohibition against Ex post facto laws applies
only to criminal matters and not to laws which are
NOTE: Retroactive application of revenue laws may
civil in nature.
be allowed if it will not amount to denial of due

35 UNIVERSITY OF SANTO TOMAS

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 TAXATION LAW
process. There is violation of due process when the 4. DOUBLE TAXATION
tax law imposes harsh and oppressive tax.
(Dimaampao, 2021)
There is no constitutional prohibition against
Q: In 1997, Mrs. Rocosta filed an amended
double taxation in the Philippines. It is something
return which showed an overpayment of
not favored, but is permissible, provided some
income tax for her 1996 income report. She now
other constitutional requirement is not thereby
claims a refund of taxes withheld on her 1996
violated, such as the requirement that taxes must be
income as provided for in the 1997 NIRC. Should
uniform. (Villanueva v. City of Iloilo, G.R. No. L-
the 1997 tax reform retroactively apply?
26521, 28 Dec. 1968)

A: NO. Tax laws are prospective in operation, unless

There are two kinds of double taxation:
the language of the statute clearly provides
otherwise. At the time Mrs. Rocosta filed her 1. Direct double taxation, and
amended return, the 1997 NIRC was not yet in 2. Indirect double taxation.
effect. Hence, she has no reason at that time to think
that the filing of an amended return would DIRECT (STRICT SENSE)
constitute the written claim for refund required by
applicable law. (CIR v. Acosta, G.R. No. 154068, 03 Elements of Direct Double Taxation (Twice-Ju-
Aug. 2007) P2-A-C-S)

Refer to discussion on “Powers of the BIR” – p. 51 1. The same property is taxed Twice when it
should be taxed only once; and
3. IMPRESCRIPTIBILITY OF TAXES
2. Both taxes are imposed:
GR: Taxes are imprescriptible by reason that it is the a. within the same Jurisdiction;
lifeblood of the government. b. for the same Purpose;
c. during the same taxing Period;
XPN: Tax laws may provide for statute of d. by the same taxing Authority;
limitations. In particular, the NIRC and LGC provide e. the taxes must be of the same kind or
for the prescriptive periods for assessment and Character; and
collection. f. on the same Subject matter. (City of Manila v.
Coca Cola Bottlers Philippines, G.R. No.
Tax laws provide for statute of limitations in the 181845, 04 Aug. 2009)
collection of taxes for the purpose of safeguarding
taxpayers from any unreasonable examination, All the elements must be present in order to apply
investigation or assessment. (CIR v. B.F. Goodrich double taxation in its strict sense.
Phils., G.R. No. 104171, 24 Feb. 1999)
Rationale: It constitutes double taxation in the
NOTE: Although the NIRC provides for the objectionable or prohibited sense since it violates
limitation in the assessment and collection of taxes the equal protection clause of the Constitution.
imposed, such prescriptive period will only be
applicable to those taxes that were returnable. The NOTE: Imposition of a penalty and a tax on one
prescriptive period shall start from the time the taxpayer does not amount to double taxation.
taxpayer files the tax return and declares his (Republic Bank v. CTA, G.R. No. 62554, 02 Sept. 1992)
liability. (Collector of Internal Revenue v. Bisaya Land
Transportation Co., Inc., G.R. Nos. L-12100 & L-11812, INDIRECT (BROAD SENSE)
29 May 1959)
It is a permissible double taxation wherein some

UNIVERSITY OF SANTO TOMAS 36

2023 GOLDEN NOTES
 I. GENERAL PRINCIPLES
elements of direct double taxation are absent. direct double taxation exists only when two taxes
are imposed on the same: (1) subject matter, (2)
Q: Differentiate between double taxation in the purpose, (3) by the same taxing authority, (4)
strict sense and in a broad sense and give an within the same jurisdiction, (5) during the same
example of each. (2015 BAR) taxing period, and (6) the taxes of the same kind of
nature. In this case, the taxing authorities are
A: Double taxation in the strict sense pertains to different. Hence, the tax imposed by the LGU is not a
direct double taxation. This means that the taxpayer form of direct double taxation.
is taxed twice by the same taxing authority, within
the same taxing jurisdiction, for the same property Q: KM Corporation, doing business in the City of
and same purpose. An example is the imposition of Kalookan, has been a distributor and retailer of
final withholding tax on cash dividend and requiring clothing and household materials. It has been
the taxpayer to declare this tax-paid income in his paying the City of Kalookan local taxes based on
tax returns. Secs. 15 (Tax on Wholesalers, Distributors or
Dealers) and 17 (Tax on Retailers) of the
On the other hand, double taxation in the broad Revenue Code of Kalookan City (Code).
sense pertains to indirect double taxation. This Subsequently, the Sangguniang Panglungsod
extends to all cases in which there is a burden of two enacted an ordinance amending the Code by
or more impositions. It is the double taxation other inserting Sec. 21 which imposes a tax on
than those covered by direct double taxation. (CIR v. “Businesses Subject to Excise, Value-Added and
Solidbank Corp., G.R. No. 148191, 25, Nov. 2003) An Percentage Taxes under the NIRC,” at the rate of
example is subjecting the interest income of banks 50% of 1% per annum on the gross sales and
on their deposits with other banks to the 5% Gross receipts on persons “who sell goods and services
Receipts Tax (GRT) despite of the same income in the course of trade or business.” KM
having been subjected to 20% Final Withholding Corporation paid the taxes due under Sec. 21
Tax (FWT). The GRT is a tax on the privilege of under protest, claiming that (a) local
engaging in business, while the FWT is a tax on the government units could not impose a tax on
privilege of earning income. (CIR v. Bank of businesses already taxed under the NIRC and (b)
Commerce, G.R. No. 149636, 08 June 2005) this would amount to double taxation, since its
business was already taxed under Secs. 15 and
Q: In 2018, City X amended its Revenue Code to 17 of the Code. Does this amount to double
include a new provision imposing a tax on every taxation? (2018 BAR)
sale of merchandise by a wholesaler based on
the total selling price of the goods, inclusive of A: YES. The three taxes are all in the nature of local
value-added taxes (VAT). ABC Corp., a business taxes on wholesalers, retailers and service
wholesaler operating within the city, challenged providers which are imposed by the same taxing
the new provision based on the following authority on the same subject matter for the same
contentions: (1) The new provision is a form of tax period; hence, the elements of double taxation
prohibited double taxation because it are present. (Nursery Care Corp. v. Acebedo, G.R. No.
essentially amounts to City X imposing VAT 180651, 30 July 2014)
which was already being levied by the national
government; and (2) Since the tax being Tax Treaties as Relief from Double Taxation
imposed is akin to VAT, it is beyond the power of
City X to levy the same. The purpose is to reconcile the national fiscal
legislation of the contracting parties in order to
Rule on ABC Corp.’s first contention. (2019 BAR) help the taxpayer avoid simultaneous taxation in
two different jurisdictions (e.g., international
A: ABC CORP. IS INCORRECT. Under the NIRC, double taxation). This is to encourage the free flow

37 UNIVERSITY OF SANTO TOMAS

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 TAXATION LAW
of goods and services and the movement of capital, that income when determining the tax to
technology, and persons between countries, be imposed on the rest of the income.
conditions deemed vital in creating robust and
dynamic economies. b. Credit method – although the income or
capital which is taxed in the state of source is
Tax Treaties as Mode in Eliminating Double still taxable in the state of residence, the tax
Taxation paid in the former is credited against the tax
levied in the latter.
In order to eliminate double taxation, a tax treaty
may resort to two methods of relief: The state of residence retains the right to tax
the taxpayer's total income but allows a
1. The first method sets out the respective rights to deduction for the tax paid in the state of
tax of the state of source or situs and of the state source. It may be applied by two methods:
of residence with regard to certain classes of
income or capital. In some cases, an exclusive i. a full credit – where the total amount of
right to tax is conferred on one of the tax paid in the state of source is allowed
contracting states. However, for other items of as deduction; or
income or capital, both states are given the right
to tax, although the amount of tax that may be ii. an ordinary credit – where the deduction
imposed by the state of source is limited; and allowed by the state of residence is
restricted to that part of its own tax
2. The second method applies whenever the state appropriate to the income from the state
of source is given a full or limited right to tax of source.
together with the state of residence. In this case,
the treaties make it incumbent upon the state of NOTE: The basic difference between the two
residence to allow relief in order to avoid double methods is that in the exemption method, the
taxation. There are two methods of relief: focus is on the income or capital itself, whereas
the credit method focuses upon the tax. (CIR v.
a. Exemption method – the income or capital S.C. Johnson and Son, Inc., G.R. No. 127105, 25 June
which is taxable in the state of source or situs 1999)
is exempted in the state of residence,
although in some instances it may be taken Some states have also adopted the Tax Sparing
into account in determining the rate of tax provision, in relation to tax incentives granted
applicable to the taxpayer's remaining under their respective domestic law
income or capital. investments. (Cargill Philippines, Inc. v. CIR, G.R.
The income that may be taxed in the state of No. 203346, 09 Sept. 2020)
source is not taxed in the state of residence.
This may be applied by two methods: Tax Sparing Provision

i. full exemption – where the state of Taxes exempted or reduced are considered fully
residence does not account for the paid. Consequently, a non-resident may obtain a
income from the state of source for tax tax credit for the taxes that have been "spared"
purposes; or under the incentive program of the state of
source, preserving the economic benefits
ii. with progression – where the income granted by the state of source.
taxed in the state of source is not taxed
by the state of residence, but the state of Another form of tax sparing is the Matching
residence retains the right to consider Credit wherein the state of residence agrees, as

UNIVERSITY OF SANTO TOMAS 38

2023 GOLDEN NOTES
 I. GENERAL PRINCIPLES
a counterpart to the reduced tax, to allow a for tax exemption under Sec. 4(3), Art. XIV, of
deduction against its own tax of an amount fixed the Constitution and Sec. 3(h) of the NIRC.
at a higher rate. (Ibid.) Having thus transferred a portion of his said
asset, Mr. Pascual succeeded in paying a lesser
5. ESCAPE FROM TAXATION tax on the rental income derived from his
property. Is there tax avoidance or tax evasion?
Explain. (2000 BAR)
a) SHIFTING OF TAX BURDEN

A: THERE IS TAX AVOIDANCE. Mr. Pascual has

Definition
exploited a legally permissive alternative method to
reduce his income by transferring part of his rental
Shifting is the transfer of the burden of tax by the
income to a tax-exempt entity through a donation
original payer or the one on whom the tax was
of ½ of the income producing property. The
assessed or imposed to another or someone else
donation is likewise exempt from donor’s tax. The
without violating the law. (Lim, 2021)
donation is the legal means employed to transfer
the incidence of income tax on the rental income.
Examples of taxes when shifting may apply are VAT,
percentage tax, excise tax on excisable articles.
Q: Maria Suerte, a Filipino citizen, purchased a
lot in Makati City in 1980 at a price of P1 million.
NOTE: Only indirect taxes may be shifted. In case of
Said property has been leased to MAS
direct taxes, the shifting of burden can only be made
Corporation, a domestic corporation engaged in
by contractual provision.
manufacturing paper products, owned 99% by
Maria Suerte. In October 2007, EIP Corporation,
Determination of Direct or Indirect Tax
a real estate developer, expressed its desire to
buy the Makati property at its fair market value
Refer to previous discussion on “Kinds of Taxes –
of P300 million, payable as follows: (a) P60
As to Burden or Incidence.” – p. 32
million down payment; and (b) balance, payable
equally in twenty four (24) monthly consecutive
b) TAX AVOIDANCE
instalments. Upon the advice of a tax lawyer,
Maria Suerte exchanged her Makati property for
Definition
shares of stocks of MAS Corporation. A BIR
A scheme where the taxpayer uses legally ruling, confirming the tax-free exchange of
permissible alternative method of assessing taxable property for shares of stock, was secured from
property or income, in order to avoid or reduce tax the BIR National Office and a Certificate
liability. Authorizing Registration was issued by the
Revenue District Officer (RDO) where the
It is a tax saving device within the means sanctioned property was located. Subsequently, she sold
by law. This method should be used by the taxpayer her entire stockholdings in MAS Corporation to
in good faith and at arm’s length. (CIR v. The Estate EIP Corporation for P300 million. In view of the
of Benigno Toda Jr., G.R. No. 30554, 28 Feb. 2004) tax advice, Maria Suerte paid only the capital
gains tax of P44,850,000 (P299 million x 15%),
Q: Mr. Pascual’s income from leasing his instead of the corporate income tax of
property reaches the maximum rate of tax P89,700,000 (30% on P299 million gain from
under the law. He donated ½ of his said sale of real property). After evaluating the
property to a non-stock, non-profit educational capital gains tax payment, the RDO wrote a
institution whose income and assets are letter to Maria Suerte, stating that she
actually, directly, and exclusively used for committed tax evasion.
educational purposes, and therefore qualified

39 UNIVERSITY OF SANTO TOMAS

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 TAXATION LAW
Is the contention of the RDO tenable? Explain. Evidence that may be Used to Prove Tax Evasion

A: NO. The exchange of the real estate property for 1. Failure of taxpayer to declare for taxation
the shares of stocks is considered as a legitimate tax purposes his true and actual income derived
avoidance scheme. (Sec. 40(C)(2)(b), NIRC) The sale from business for two (2) consecutive years.
of the shares of stocks of domestic corporation, (Republic v. Gonzales, G.R. No. L-17744, 30 Apr.
which is a capital asset, is subject to a final tax of 1965)
15% on the net capital gains realized. (Sec. 24(C),
NIRC) 2. Substantial under-declaration of income in the
income tax return for four (4) consecutive
c) TAX EVASION years coupled by intentional overstatement of
deductions. (Perez v. CTA, G.R. No. L-10507, 30
Tax evasion is a scheme where the taxpayer uses May 1958)
illegal or fraudulent means to defeat or lessen
payment of a tax. Q: HSBC transferred the assets of its Merchant
Acquiring Business in the Philippines to GPAP
It is a scheme used outside of those lawful means Phils., Inc. The CIR issued a Final Assessment
and when availed of, it usually subjects the taxpayer Notice (FAN) against HSBC for deficiency Income
to further or additional civil or criminal liabilities. Tax on the sale of "Goodwill" of its Merchant
(CIR v. The Estate of Benigno Toda Jr., G.R. No. 30554, Acquiring Business (MAB). HSBC filed its
28 Feb. 2004) Administrative Protest. CIR issued a Final
Decision on Disputed Assessment (FDDA). HSBC,
Elements in Determining Tax Evasion (U-S-E) thus, filed the present Petition for Review with
the CTA Division. In its Answer, CIR claimed that
1. Course of action or failure of action is Unlawful; the Deed of Assignment did not pertain to a sale
of shares but to a sale or transfer of business or
2. Accompanying State of mind, which is “evil”, in "Goodwill," which is subject to ordinary income
“bad faith”, “willful”, or “deliberate and not tax and not capital gains tax. CTA Division
accidental”; and granted HSBC’s petition and cancelled the FDDA
and FAN. The CTA Division found that, contrary
3. End to be achieved, i.e., payment of less than to CIR's assertion, the evidence bears that the
that known by the taxpayer to be legally due, or transaction in question is a sale or transfer of
non-payment of tax when it is shown that the capital asset, and not a sale of an ordinary asset
tax is due. (CIR v. Estate of Benigno Toda, G.R. which the CTA En Banc affirmed. Is the act of the
No. 147188, 14 Sept. 2004) respondent one that falls as tax evasion?

Tax Avoidance and Tax Evasion Distinguished A: NO. A taxpayer has the legal right to decrease the
amount of what otherwise would be his taxes or
altogether avoid them by means which the law
TAX AVOIDANCE TAX EVASION
permits. This is called tax avoidance. It is the use of
As to Validity legal means to reduce tax liability. However, this
method should be used by the taxpayer in good faith
Legal and not subject Illegal and subject to
and at arm’s length.
to criminal penalty criminal penalty

As to Effect In this case, when HSBC transferred the assets of its

Almost always results MAB in the Philippines to GPAP-Phils., Inc. in
Minimization of exchange for shares, pursuant to the tax-free
in absence of tax
taxes exchange provision under Sec. 40(C)(2) of the 1997
payment

UNIVERSITY OF SANTO TOMAS 40

2023 GOLDEN NOTES
 I. GENERAL PRINCIPLES
NIRC, as amended, and subsequently sold such lot and building in the amount of P750,000.
shares to GPAP-Singapore and paid the
corresponding CGT in accordance with Sec. An investigation conducted by the BIR revealed
27(D)(2) of the same Code, it simply availed of tax that two months prior to the sale of the
saving devices within the means sanctioned by law. properties to Rainier, Lucky received P40M
Further, this methodology was adopted by HSBC not from HSC and not from Rainier. Said amount of
merely to reduce taxes but also for a legitimate P40M was debited by HSC and reflected in its
business purpose — i.e., the restructuring of the trial balance as “other inv. – Lucky Bldg.” The
MAB to achieve more efficiency and economies of month after, another P40M was reflected in
scale. Consequently, what was employed to HSC’s trial balance as “other inv. – Lucky Bldg.”
minimize taxes was a tax avoidance scheme. (CIR v The BIR concluded that there is tax evasion since
Co, G.R. No., 241424, 09 Dec. 2020) the real buyer of the properties of Lucky is HSC
and not Rainier. It issued an assessment for
Q: CIC, thru its authorized representative BT, deficiency income tax in the amount of P79M
sold a 16-storey commercial building to RA for against Lucky. Lucky argues that it resorted to
100M who then sold it on the same day to RMI tax avoidance or a tax saving device, which is
for 200M. These two transactions were allowed by the NIRC and BIR Rules since it paid
evidenced by two separate Deeds of Absolute the correct taxes based on its sale to Rainier. On
Sale notarized on the same day by the same the other hand, Rainier and HSC also paid the
notary public. For the sale of the property to prescribed taxes arising from the sale by Rainier
RMI, RA paid a capital gains tax in the amount of to HSC. Is the BIR correct in assessing taxes on
P10M. Is the scheme perpetuated a case of tax Lucky? Explain. (2016 BAR)
evasion or tax avoidance?
Q: YES. The sale of the property of Lucky to Rainier
A: IT IS A TAX EVASION SCHEME. The scheme and consequently the sale by Rainier to HSC being
resorted to by CIC in making it appear that there prompted more on the mitigation of tax liabilities
were two sales of the subject properties, i.e., from than for legitimate business purposes, therefore,
CIC to RA, and then from RA to RMI cannot be constitutes tax evasion. The real buyer from Lucky
considered a legitimate tax planning, which is one is HSC as evidenced by the direct receipt of
way of tax avoidance. Such scheme is tainted with payments by the former from the latter where the
fraud. latter recorded “other inv. – Lucky Bldg.” The
scheme of resorting to a two-step transaction in
In the case, it is obvious that the objective of the sale selling the property to the ultimate buyer in order
to RA was to reduce the amount of tax to be paid to escape paying higher taxes is considered as
especially that the transfer from him to RMI would outside of those lawful means allowed in mitigating
then subject the income to only 6% individual tax liabilities which makes Lucky criminally and
capital gains tax and not the 35% (presently civilly liable. Hence, the BIR is correct in assessing
20/25% under CREATE) corporate income tax. (CIR taxes on Lucky. (CIR v. The Estate of Benigno Toda Jr.,
v. The Estate of Benigno Toda Jr., G.R. No. 147188, 14 G.R. No. 147188, 14 Sept. 2004)
Sept. 2004)
Will Blindness Doctrine
Q: Lucky V Corporation (Lucky) owns a 10-
storey building in a 2,000 square meter lot in the A taxpayer can no longer raise the defense that the
City of Makati. It sold the lot and building to errors on their tax returns are not their
Rainier for P80M. One month after, Rainier sold responsibility or that it is the fault of the
the lot and building to Healthy Smoke Company accountants they hired. (Ingles, 2021)
(HSC) for P200M. Lucky filed its annual tax
return and declared its gain from the sale of the The only thing that needs to be proven is that the

41 UNIVERSITY OF SANTO TOMAS

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 TAXATION LAW
taxpayer was aware of his obligation to file the tax petitioner’s intent not to file her ITR. (People v.
return, but he nevertheless voluntarily, knowingly, Kintanar, CTA E.B. Criminal Case No. 006, 03 Dec.
and intentionally failed to file the required returns. 2010)
(People v. Kintanar, CTA E.B. Criminal Case No. 006,
03 Dec. 2010) 6. EXEMPTION FROM TAXATION

Q: Gloria Kintanar was charged of violation of

Definition
Art. 255 of the NIRC for failure to make or file
her ITRs. Kintanar claimed that entrusted the It is the grant of immunity, express or implied, to
duty of filing the said returns to her husband particular persons or corporations, from a tax upon
who filed their ITRs, through their hired property or an excise tax which persons or
accountant. Is Gloria Kintanar guilty of tax corporations generally within the same taxing
evasion? districts are obliged to pay.

A: YES. The Supreme Court, in its resolution, NOTE: It is the legislature, unless limited by a
affirmed the conviction of a taxpayer for tax evasion provision of the state constitution, which has full
due to non-filing of income tax returns (ITR). The power to exempt any person, corporation, or class
accused Gloria Kintanar was not able to of property from taxation; its power to exempt
satisfactorily convince the court that she did not being as broad as its power to tax. Other than
deliberately and willfully neglect to file her ITR, Congress, the Constitution may itself provide for
considering that she entrusted the filing to her specific tax exemptions, or local governments may
husband who caused the filing through an pass ordinances on exemption only from local
accountant. The court believed that the accused taxes. (John Hay Peoples Alternative Coalition v. Lim,
was not relieved from her criminal liability. As G. R. No. 119775, 24 Oct. 2003)
principal, she must assume responsibility over the
acts of her accountant. (Sec. 51(f), NIRC) NOTE: Taxation is the rule and exemption is the
exception. (FELS Energy Inc. v. Province of Batangas,
The Doctrine on Willful Blindness simply means G.R. No. 168557, 16 Feb. 2007) The burden of proof
that an individual or corporation can no longer say rests upon the party claiming exemption to prove
that the errors on their tax returns are not their that it is, in fact, covered by the exemption so
responsibility or that it is the fault of the accountant claimed. As a rule, tax exemptions are construed
they hired. strongly against the claimant. Exemptions must be
shown to exist clearly and categorically and
Hence, the natural presumption is that the supported by clear legal provision. (PAGCOR v. BIR,
petitioner knows what her tax obligations under the G.R. No. 172087, 15 Mar. 2011)
law are. As a businesswoman, she should have taken
ordinary care of her tax duties and obligations and Principles Governing Tax Exemptions
she should know that their ITRs should be filed and
should have made sure that their ITRs were filed. 1. Tax exemptions are highly disfavored in law.
She cannot just leave entirely to her husband the
filing of her ITR. Petitioner also testified that she 2. Tax exemptions are personal and non-
does not know how much her tax obligations was, transferable.
nor did she bother to inquire or determine the facts
surrounding the filing of her ITR. Such neglect or 3. He who claims an exemption must justify that
omission as aptly found by the former second the legislature intended to exempt him by
division is tantamount to “deliberate ignorance or words too plain to be mistaken. He must
conscious avoidance.” Further, such non- convincingly prove that he is exempted.
compliance with the BIR’s notices clearly shows

UNIVERSITY OF SANTO TOMAS 42

2023 GOLDEN NOTES
 I. GENERAL PRINCIPLES
4. It must be strictly construed against the 03 June 1991)
taxpayer.
Not all Refunds are in the Nature of a Tax
NOTE: Deductions for income tax purposes Exemption
partake of the nature of tax exemptions, hence,
they are also strictly construed against the A tax refund may only be considered as a tax
taxpayer. exemption when it is based either on a tax-
exemption statute or a tax-refund statute. Tax
5. Constitutional grants of tax exemptions are refunds or tax credits are not founded principally
self-executing. on legislative grace, but on the legal principle of
quasi-contracts against a person’s unjust
6. Tax exemption is generally revocable, unless enrichment at the expense of another.
founded on contracts which are protected by
the non-impairment clause. NOTE: The erroneous payment of tax as a basis for
a claim of refund may be considered as a case of
7. In order to be irrevocable, the tax exemption solutio indebiti, which the government is not
must be founded on a contract or granted by exempt from its application and has the duty to
the Constitution. refund without any unreasonable delay what it has
erroneously collected.
8. The congressional power to grant an
exemption necessarily carries with it the Kinds of Tax Exemptions
consequent power to revoke the same.
1. As to Basis
9. Personal in nature and covers only taxes for
which the grantee is directly liable. It cannot be a. Constitutional – immunities from taxation
transferred or assigned by the person to whom which originate from the Constitution.
it is given without the consent of the State.
b. Statutory – those which emanate from
10. Strictly construed against the taxpayer. legislation.

11. Implies a waiver on the part of the government c. Contractual – agreed to by the taxing
of its right to collect what otherwise would be authority in contracts lawfully entered into
due. by them under enabling laws.

12. Exemptions are not presumed. The burden is d. Implied – when particular persons,
upon the claimant to establish right to properties or excises are deemed exempt
exemption beyond reasonable doubt. However, as they fall outside the scope of the taxing
the strict interpretation does not apply in the provision.
case of exemptions running to the benefit of the
government itself or its agencies. NOTE: The law looks with disfavor on tax
exemptions and he who would seek to be
NOTE: Since the power to tax includes the power to thus privileged must justify it by words too
exempt thereof which is essentially a legislative plain to be mistaken and too categorical to
prerogative, it follows that a municipal mayor who be misinterpreted. (Western Minolco Corp.
is an executive officer may not unilaterally v. CIR, G.R. No. L-61632, 16 Aug. 1983)
withdraw such an expression of a policy thru the
enactment of a tax. (Philippine Petroleum e. Treaty
Corporation v. Municipality of Pililla, G.R. No. 90776, f. Licensing ordinance

43 UNIVERSITY OF SANTO TOMAS

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 TAXATION LAW
2. As to Extent a tax that is primarily due from the contractor
and is therefore not covered by the Host
a. Total – connotes absolute immunity. Agreement. The WHO argues that the VAT is
b. Partial – one where a collection of a part of deemed an indirect tax as PCC can shift the tax
the tax is dispensed with. burden to it. Is the BIR correct? Explain. (2016
BAR)
3. As to Object
A: NO. Since the WHO, the contractee, is exempt
a. Personal – granted directly in favor of from direct and indirect taxes pursuant to an
certain persons international agreement where the Philippines is a
b. Impersonal – granted directly in favor of a signatory, the exemption from direct taxes should
certain class of property mean that the entity or person exempt is the
contractor itself because the manifest intention of
These exemptions must not be confused with tax the government is to exempt the contractor so that
exemptions granted under franchises which are no tax may be shifted to the contractee. (CIR v. John
not contracts within the purview of the non- Gotamco & Sons, Inc., G.R. No. L-31092, 27 Feb.
impairment clause of the constitution. (Cagayan 1987) The immunity of WHO from indirect taxes
Electric Co. v. CIR, G.R. No. L-601026, 25 Sept. 1985) extends to the contractor by treating the sale of
service as effectively zero-rated when the law
NOTE: Contractual tax exemptions may not be provided that – “services rendered to persons or
unilaterally so revoked by the taxing authority entities whose exemption under special laws or
without thereby violating the non-impairment international agreements to which the Philippines
clause of the Constitution. (Vitug, 2000) is a signatory effectively subjects the supply to
such service to zero percent rate”. (Sec. 108(B)(3),
Nevertheless, since taxation is the rule and NIRC) Accordingly, the BIR is wrong in assessing
exemption therefrom is the exception, the the 12% VAT from the contractor PCC.
exemption may thus be withdrawn at the pleasure
of the taxing authority. The only exception to this NOTE: For indirect taxes, the tax exemption of the
rule is where the exemption was granted to private buyer (or whoever the burden of tax falls to) does
parties based on material consideration of a not exempt him from the payment of indirect taxes
mutual nature, which then becomes contractual because such person is not the one statutorily
and is thus covered by the non-impairment clause liable for the payment of the tax in the first place.
of the Constitution. (MCIAA v. Marcos, G.R. No. (Philippine Acetylene Co., Inc. v. CIR, G.R. No. L-
120082, 11 Sept. 1996) 19707, 17 Aug. 1967)

Q: Pursuant to Sec. 11 of the “Host Agreement” The exception is when the buyer (or whoever the
between the United Nations and the Philippine burden of tax falls to) is specifically exempted from
government, it was provided that the World payment of indirect taxes. (CIR v. John Gotamco &
Health Organization (WHO), “its assets, income Sons, Inc., G.R. No. L-31092, 27 Feb. 1987)
and other properties shall be: (a) exempt from
all direct and indirect taxes.” Precision Rationale or Grounds for Exemption
Construction Corporation (PCC) was hired to
construct the WHO Medical Center in Manila. The inherent power of the State to impose taxes
Upon completion of the building, the BIR naturally carries with it the power to grant tax
assessed a 12% VAT on the gross receipts of exemptions.
PCC derived from the construction of the WHO
building. The BIR contends that the 12% VAT is The rationale or grounds for tax exemption are the
not a direct nor an indirect tax on the WHO but same as the non-revenue/special or regulatory

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2023 GOLDEN NOTES
 I. GENERAL PRINCIPLES
purposes of taxation: PD 972. The Court agrees with the CTA that the tax
exemption provided under Sec. 16 of PD 972 was
1. Sumptuary or regulatory purpose – to not revoked, withdrawn or repealed — expressly or
promote the general welfare and to protect the impliedly — by Congress with the enactment of RA
health, safety, or morals of inhabitants; No. 9337. (CIR v. Semirara Mining Corporation, G.R.
No. 202922, 19 June 2017)
2. Tax exemptions implement the state’s police
power; and Q: The BTC Power Corporation (BTC) entered in
3. Compensatory purpose – to implement the a Build-Operate-Transfer (BOT) agreement
social justice provisions of the Constitution with National Power Corporation (NPC), a tax-
through the progressive system of taxation, exempt entity as provided by its Charter under
which would result to equal distribution of a special law. The BOT Agreement provided that
wealth etc. (Domondon, 2009) NPC shall be responsible for the payment of all
taxes imposed on the power station except
NOTE: There is no tax exemption based solely on income and permit fees. Later on, the City
the ground of equity. (Davao Gulf v. CIR, G.R. No. Treasurer demanded payment of business taxes
117359, 23 July 1998) and penalties. BTC contended that NPC should
be liable for such taxes and penalties, as
Q: SMC, a coal mining operator, has been selling provided for in their BOT agreement. NPC,
coal to NPC for years without paying VAT however, contends that it’s a tax-exempt entity.
pursuant to the exemption granted under Sec. Is NPC correct?
16 of PD 972 or the “Coal Development Act of
1976”. However, after RA No. 9337 took effect, A: NO. The 1991 LGC repealed NPC’s exemption
NPC started to withhold a tax of 5% from all taxes under its Charter. It removed the
representing the final withholding VAT on SMC's blanket exclusion of government instrumentalities
coal billings on the belief that the sale of coal by from local taxation as it expressed a general repeal
SMC was no longer exempt from VAT. It was of all statutes granting exemptions from local taxes.
argued that the provision which grants tax Considered as the most revolutionary piece of
exemption to SMC under Sec. 109 (e) of the NIRC legislation on local autonomy, the LGC effectively
of 1997 was withdrawn by the legislature when deals with the fiscal constraints faced by LGUs. It
RA No. 9337 was passed deleting the "sale or widens the tax base of LGUs to include taxes which
importation of coal and natural gas, in whatever were prohibited by previous laws. (Batangas Power
form or state" from the list of transactions Corporation v. Batangas City, G.R. No. 152675, 28
exempt from VAT. Does SMC’s sale of coal Apr. 2004)
remain exempt from VAT notwithstanding R.A.
No. 9337? Revocation of Tax Exemption

A: YES. SMC is exempt from the payment of VAT on Since taxation is the rule and exemption is the
the sale of coal produced under its COC, because Sec. exception, the exemption may thus be withdrawn at
16 (a) of PD 972, a special law, grants SMC the pleasure of the taxing authority. (Mactan Cebu
exemption from all national taxes except income International Airport Authority v. Marcos, G.R. No.
tax. 120082, 11 Sept. 1996)

SMC's claim for VAT exemption is anchored not on By granting exemptions, the State does not forever
the paragraph deleted by RA No. 9337 from the list waive the exercise of its sovereign prerogative.
of VAT exempt transactions under Sec. 109 of the Thus, in withdrawing the exemption of the press
NIRC of 1997, as amended, but on the tax incentives (media) from VAT, the law merely subjects the
granted to operators of COCs executed pursuant to same to the same tax burden to which other

45 UNIVERSITY OF SANTO TOMAS

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 TAXATION LAW
businesses have long ago been subject. It is not withheld at source. BCDA then wrote the BIR for
discriminatory as the exemptions are granted for a refund of the amount but to no avail. BCDA
purpose, in some cases, to encourage agricultural claimed that it was exempt from all taxes and
production and, in other cases, for the personal fees arising from or in relation to the sale, as
benefit of the end-user rather than for profit. provided under its charter, R.A No. 7227, as
(Tolentino v. Secretary of Finance, G.R. No. 115455, amended by RA 7917. Is BCDA exempt from
30 Oct. 1995) Creditable Withholding Tax (CWT) on the sale of
its BGC properties?
Restrictions on Revocation of Tax Exemptions
A: YES. Insofar as the sale of the "Expanded Big
1. Non-impairment clause Delta Lots" is concerned, R.A. No. 7227 as amended
by R.A. No. 7917 specifically exempts BCDA from
2. A municipal franchise once granted as a taxes. R.A. No. 7227, as amended is a special law.
contract cannot be altered or amended except The NIRC, being a general law, is not deemed to have
by actual consent of the parties concerned. amended or superseded the special law in the
absence of an express repeal thereof in the NIRC
3. Adherence to form (e.g., if the exemption is itself. Sec. 8 of R.A. No. 7227, as amended by R.A. No.
granted by the Constitution, its revocation may 7917, specifically governs BCDA's disposition of the
be affected through constitutional amendment properties enumerated therein and their sale
only) proceeds. The law exempts these sale proceeds
from all kinds of fees and taxes as the same law has
4. Where the tax exemption grant is in the form of already appropriated them for specific purposes
a special law and not by a general law, even if and for designated beneficiaries.
the terms of the general act are broad enough
to include the codes in the general law, unless It is settled that between a general law and a special
there is manifest intent to repeal or alter the law, the latter prevails. For a special law reveals the
special law. (CIR v. CA, G.R. No. 95022, 23 Mar. legislative intent more clearly than a general law
1992) does. Verily, the special law should be deemed an
exception to the general law. (CIR v. BCDA, G.R. No.
NOTE: Withdrawal of tax exemption is not to be 217898, 15 Jan. 2020)
construed as prohibiting future grants of tax
exemptions. (Domondon, 2009) Q: Differentiate Tax Exemption from Tax
Assumption.
The erroneous application and enforcement of the
law by public officers do not preclude subsequent A: A tax exemption is a grant of immunity from
correct application of the statute, and the payment of tax, while an assumption of tax liability
government is never estopped by the mistake or does not provide immunity from payment of tax as
error on the part of its agents. (Philippine Basketball it merely allows the shifting of the burden of
Association v. CA, G.R. No. 119122, 08 Aug. 2000) taxation to another entity. (BIR Ruling No. ITAD 023-
2017)
Q: BCDA was the owner of four (4) real
properties in BGC collectively referred to as the 7. EQUITABLE RECOUPMENT
"Expanded Big Delta Lots”. It entered into a
contract to sell with the NET GROUP. The total
Definition
purchase price was P2,032,749,327.96. NET
GROUP deducted the amount of
It is a principle which allows a taxpayer, whose
Php101,637,466.40 as CWT and issued to BCDA
claim for refund has been barred due to
the corresponding certificates of creditable tax
prescription, to recover said tax by setting off the

UNIVERSITY OF SANTO TOMAS 46

2023 GOLDEN NOTES
 I. GENERAL PRINCIPLES
prescribed refund against a tax that may be due and disfavors set-off or legal compensation of tax
collectible from him. Under this doctrine, the obligations for the following reasons:
taxpayer is allowed to credit such refund to his
existing tax liability. 1. Taxes are of a distinct kind, essence, and nature,
and these impositions cannot be so classed in
NOTE: Equitable recoupment is allowed only in merely the same category as ordinary
common law countries, not in the Philippines. (CIR obligations;
v. UST, G.R. No. L-11274, 28 Nov. 1958)
2. The applicable laws and principles governing
Q: True or False. The Doctrine of Equitable each are peculiar, not necessarily common to
Recoupment allows a taxpayer whose claim for each; and
refund has prescribed to offset tax liabilities
with his claim of overpayment. 3. Public policy is better subserved if the integrity
and independence of taxes be maintained under
A: TRUE. The Doctrine of Equitable Recoupment the Lifeblood Doctrine. The collection of a tax
arose from common law allowing offsetting of a cannot await the results of a lawsuit against the
prescribed claim for refund against a tax liability government. (Republic v. Mambulao Lumber
arising from the same transaction on which an Company, G.R. No. L-177725, 28 Feb. 1962;
overpayment is made, and underpayment is due. Francia v. IAC, G.R. No. L-67649, 28 June 1988;
The doctrine finds no application to cases where the Caltex Philippines, Inc. v. Commission on Audit,
taxes involved are totally unrelated, and although it G.R. No. 92585, 08 May 1992)
seems equitable, it is not allowed in our jurisdiction.
(Ibid.) XPN: Where both the claims of the government and
the taxpayer against each other have already
8. PROHIBITION ON COMPENSATION AND SET- become due, demandable, and fully liquidated,
OFF compensation takes place by operation of law and
both obligations are extinguished to their
concurrent amounts. In the case of the taxpayer’s
Definition
claim against the government, the government
must have appropriated the amount thereto.
Compensation or set-off shall take place when two
(Domingo v. Garlitos, G.R. No. L-18994, 29 June
persons, in their own right, are creditors and
1963)
debtors of each other. (Art. 1278, New Civil Code)

Offsetting can be allowed only if the determination

Rules Governing Compensation or Set-off as
of the taxpayer’s liability is intertwined with the
Applied in Taxation
resolution of the claim for tax refund of
erroneously or illegally collected taxes under Sec.
GR: No set-off is admissible against the demands
229 of the NIRC. However, it will not be allowed if
for taxes levied for general or local governmental
the period to assess deficiency taxes in the excess
purposes.
of the amount claimed for refund had already
prescribed. (CIR v. Toledo Power Company, G.R. No.
Taxes cannot be subject to compensation because
196415, 02 Dec. 2015)
the government and the taxpayer are not creditors
and debtors of each other. (Philex Mining
Q: Can an assessment for a local tax be the
Corporation v. CIR, G.R. No. 125704, 28 Aug. 1998;
subject of set-off or compensation against a final
CIR v. Toledo Power Company, G.R. No. 196415, 02
judgment for a sum of money obtained by a
Dec. 2015)
taxpayer against the local government that
made the assessment? (2005 BAR)
NOTE: The prevalent rule in our jurisdiction

47 UNIVERSITY OF SANTO TOMAS

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 TAXATION LAW
A: NO. Taxes and debts are of different nature and 2. Collector of Customs – with respect to customs
character. Taxes cannot be subject to duties limited to cases where the legitimate
compensation for the simple reason that the authority is specifically granted such as in the
government and the taxpayers are not creditors remission of duties. (Sec. 201, Customs
and debtors of each other, debts are due to the Modernization and Tariff Act)
government in its corporate capacity, while taxes
are due to the government in its sovereign 3. Customs Commissioner – subject to the
capacity. (South African Airways v. CIR, G.R. No. approval of the Secretary of Finance, in cases
180356, 16 Feb. 2010) involving the imposition of fines, surcharges,
NOTE: It is only when the local tax assessment and and forfeitures. (Sec. 1131, Customs
the final judgment are both overdue, demandable, Modernization and Tariff Act)
and fully liquidated that set-off or compensation
may be allowed. (Domingo v. Garlitos, G.R. No. L- Tax Cases that may be the Subject Matter of
18994, 09 June 1963) Compromise (D-A-C3)

1. Delinquent accounts;
9. COMPROMISE AND TAX AMNESTY
2. Cases under Administrative protest after
COMPROMISE issuance of the Final Assessment Notice to the
taxpayer which are still pending in the
Definition Regional Offices, Revenue District Offices,
Legal Service, Large Taxpayer Service (LTS),
A compromise is a contract whereby the parties, by Collection Service, Enforcement Service and
making reciprocal concessions, avoid a litigation or other offices in the National Office;
put an end to one already commenced. (Art. 2028,
New Civil Code) 3. Civil tax cases being disputed before the
courts;
NOTE: A compromise penalty could not be imposed
by the BIR, if the taxpayer did not agree. A 4. Collection cases filed in courts; and
compromise being, by its nature, mutual in essence
requires agreement. The payment made under 5. Criminal violations, other than those already
protest could only signify that there was no filed in court or those involving criminal tax
agreement that had effectively been reached fraud. (Sec. 2, Rev. Regs. No. 30-2002)
between the parties. (Vda. de San Agustn, v. CIR, G.R.
No. 138485, 10 Sept. 2001) Tax Cases that may NOT be the Subject Matter of
Compromise
Persons Allowed to Enter into Compromise of
Tax Obligations 1. Withholding tax cases, unless the applicant-
taxpayer invokes provisions of law that cast
1. BIR Commissioner – as expressly authorized by doubt on the taxpayer’s obligation to withhold;
the NIRC, and subject to the following
conditions: 2. Criminal tax fraud cases confirmed as such by
the Commissioner of Internal Revenue or his
a. When a reasonable doubt as to validity of duly authorized representative;
the claim against the taxpayer exists; or
3. Criminal violations already filed in court;
b. The financial position of the taxpayer
demonstrates a clear inability to pay the 4. Delinquent accounts with duly approved
assessed tax. (Sec. 204(A), NIRC) schedule of installment payments;

UNIVERSITY OF SANTO TOMAS 48

2023 GOLDEN NOTES
 I. GENERAL PRINCIPLES
5. Cases where final reports of reinvestigation or tax case. (Banas, Jr. v. Court of Appeals, et. al.,
reconsideration have been issued resulting to G.R. No. 102967, 10 Feb. 2000)
reduction in the original assessment and the
taxpayer is agreeable to such decision by Tax Amnesty and Tax Exemption Distinguished
signing the required agreement form for the
purpose. On the other hand, other protested TAX AMNESTY TAX EXEMPTION
cases shall be handled by the Regional
Evaluation Board (REB) or the National As to Scope of Immunity
Evaluation Board (NEB) on a case to case basis;
Immunity from all
6. Cases which become final and executory after criminal, civil and
final judgment of a court, where compromise is Immunity from civil
administrative
liability only
requested on the ground of doubtful validity of obligations arising
the assessment; and from non-payment of
taxes
7. Estate tax cases where compromise is As to Grantee
requested on the ground of financial incapacity
of the taxpayer. (Sec. 2, Rev. Regs. No. 30-2002) A freedom from a
General pardon given charge or burden to
TAX AMNESTY to all erring taxpayers which others are
subjected

Definition How Applied

Applied retroactively Applied prospectively

A tax amnesty is a general pardon or intentional
overlooking by the State of its authority to impose As to the Presence of Actual Revenue Loss
penalties on persons otherwise guilty of evasion or
violation of a revenue or tax law. (Domondon, 2009) None, because there
There is revenue loss
were no actual taxes
since there was
due as the person or
It partakes of an absolute waiver by the government actually taxes due, but
transaction is
of its right to collect what is due it and to give tax collection was waived
protected by tax
evaders who wish to relent a chance to start with a by the government.
exemption.
clean slate. A tax amnesty, much like a tax
exemption, is never favored nor presumed in law. Q: Does the mere filing of tax amnesty return
The grant of a tax amnesty, similar to a tax shield the taxpayer from immunity against
exemption, must be construed strictly against the prosecution?
taxpayer and liberally in favor of the taxing
authority. (Philippine Banking Corporation v. CIR, G. A: NO. The taxpayer must have voluntarily disclosed
R. No. 170574, 30 Jan. 2009 citing CIR v. Marubeni his previously untaxed income and must have paid
Corp., G.R. No. 137377, 18 Dec. 2001) the corresponding tax on such previously untaxed
income. (People v. Judge Castañeda, G.R. No. L-46881,
Purpose of Tax Amnesty 15 Sept. 1988)

1. Tax amnesty is a general pardon to taxpayers Q: Can a taxpayer claim tax amnesty if he is a
who want to start a clean tax slate. withholding tax agent?

2. It also gives the government a chance to collect A: The claim of a taxpayer under a tax amnesty shall
uncollected tax from tax evaders without be allowed when the liability involves the deficiency
having to go through the tedious process of a in payment of income tax. However, it must be
disallowed when the taxpayer is assessed on his

49 UNIVERSITY OF SANTO TOMAS

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 TAXATION LAW
capacity as a withholding tax agent because the tax amnesty because it falls under the exception
person who earned the taxable income was another of "delinquent accounts or accounts receivable
person other than the withholding agent. (LG considered as assets by the BIR or the
Electronics Philippines, Inc. v. CIR, G.R. No. 165451, 03 Government, including self-assessed tax."
Dec. 2014) Is CIR’s contention correct?

Q: The BIR assessed Garments Co deficiencies on A: NO. It remains undisputed that Transfield
taxes for non-payment of VAT on its undeclared complied with all the requirements pertaining to its
sales. While the case was pending before the SC, application for tax amnesty. A tax amnesty operates
Garment Co filed a Manifestation and Motion as a general pardon or intentional overlooking by
that it had availed and was able to comply with the State of its authority to impose penalties on
the government’s tax amnesty program under persons otherwise guilty of evasion or violation of a
the 2007 Tax Amnesty Law. However, BIR revenue or tax law. It is an absolute forgiveness or
contends that Garment Co is disqualified per waiver by the government of its right to collect what
“BIR RMC 19-2008” or “A Basic Guide on the Tax is due it and to give tax evaders who wish to relent
Amnesty Act of 2007” which disqualifies a chance to start with a clean slate. A tax amnesty,
taxpayers with issues and cases that were ruled much like a tax exemption, is never favored nor
by any court (even without finality) in favor of presumed in law. The grant of a tax amnesty is akin
the BIR prior to amnesty availment of the to a tax exemption. Thus, it must be construed
taxpayer. Did Garment Co qualify for the tax strictly against the taxpayer and liberally in favor of
amnesty program? the taxing authority. It is a basic precept of statutory
construction that the express mention of one
A: YES. While tax amnesty, similar to a tax person, thing, act, or consequence excludes all
exemption, must be construed strictly against the others as expressed in the maxim Expressio unius est
taxpayer and liberally in favor of the taxing exclusio alterius. In implementing tax amnesty laws,
authority. It is also a well-settled doctrine that the the CIR cannot now insert an exception where there
rule-making power of administrative agencies is none under the law. Indeed, a tax amnesty must
cannot be extended to amend or expand statutory be construed strictly against the taxpayer and
requirements or to embrace matters not originally liberally in favor of the taxing authority. However,
encompassed by the law. Administrative the rule-making power of administrative agencies
regulations should always be in accord with the cannot be extended to amend or expand statutory
provisions of the statute they seek to carry into requirements or to embrace matters not originally
effect, and any resulting inconsistency shall be encompassed by the law. Administrative
resolved in favor of the basic law. Thus, BIR RMC 19- regulations should always be in accord with the
2008 is invalid as the exception goes beyond the provisions of the statute they seek to implement,
scope of the provisions of the 2007 Tax Amnesty and any resulting inconsistency shall be resolved in
Law. (CS Garment, Inc. v. CIR, G.R. No. 182399, March favor of the basic law. (CIR v. Transfield Philippines,
12, 2014) Inc., G.R. 211449, 16 Jan. 2019)

Q: Transfield received Final Assessment Notices

issued by CIR. It filed a protest, but such was not
acted upon and BIR demanded immediate
payment of the assessments. Transfield availed
the benefits of the Tax Amnesty Program under
R.A. 9480, complying with all the requirements.
The CIR insists that Transfield is still liable for
deficiency taxes, contending that under RMC No.
19-2008, the latter is still disqualified to avail of

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 II. NATIONAL TAXATION
sitting in probate over the supposed will of the
II. NATIONAL TAXATION deceased because of the collection of estate tax is
executive in character. As such the estate tax is
exempted from the application of the statute of non-
claims, and this is justified by the necessity of
government funding, immortalized in the maxim
A. TAXING AUTHORITY that taxes are the lifeblood of the government.
(Marcos v. CIR, G.R. No. 120880, 05 June 1997)

Powers and Duties of the BIR (J-En-A-ReS) Q: In 2008, Apo Cement availed of the tax
amnesty under Republic Act No. 9480 which
1. Execution of Judgments in all cases decided in affects its 1999 deficiency documentary stamp
its favor (by the CTA and regular courts); taxes. It filed a Motion to Cancel Tax Assessment
which was granted by the CTA. The CTA found
2. Enforcement of all forfeitures, penalties, and that Apo Cement is a qualified tax amnesty
fines; applicant under Republic Act No. 9480 and fully
compliant with the requirements of the law. The
3. Assessment and collection of all national Commissioner of Internal Revenue filed a
internal revenue taxes, fees, and charges; Motion for Reconsideration on October 19,
2009. It disputes the correctness of Apo
4. Recommend to the Secretary of Finance all Cement’s 2005 SALN because it allegedly did not
needful rules and regulations for the effective include in its declaration of assets in the SALN
enforcement of the provision of the NIRC; and the 57,500,000 shares of stocks it acquired in
1999 from its subsidiary. Does the CIR have the
5. Give effect and administer the Supervisory and
standing to question the SALN of Apo Cement?
police powers conferred to it by the NIRC and
other laws. (Sec. 2, NIRC)
A: NO. Under Sec. 4 of Republic Act No. 9480, there
is a presumption of correctness of the SALN and
Composition of the BIR
only parties other than the Bureau of Internal
Revenue or its agents may dispute the correctness
The BIR is headed by the CIR and 4 Deputy
of the SALN. Even assuming that petitioner has the
Commissioners, who lead the following divisions:
standing to question the SALN, Republic Act No.
9480 provides that the proceeding to challenge the
1. Operations group;
SALN must be initiated within one year following
2. Legal Inspection Group;
the date of filing of the Tax Amnesty documents.
3. Resource and Management Group; and
Respondent asserts that it availed of the tax
4. Information Systems Group. (Sec. 3, NIRC)
amnesty program on January 25, 2008. Hence,
petitioner’s challenge made only in April 2009, was
Q: Is the BIR authorized to collect estate tax
already time-barred. (CIR v. APO, G.R. No. 193381, 08
deficiencies by the summary remedy of levy
Feb. 2017)
upon and sale of real properties of the decedent
without first securing the authority of the court
sitting in probate over the supposed will of the 1. JURISDICTION, POWER, AND FUNCTIONS OF
decedent? (1998 BAR) THE COMMISSIONER OF INTERNAL REVENUE

A: YES. The BIR is authorized to collect estate tax Jurisdiction of the CIR
deficiency through the summary remedy of levying
upon and sale of real properties of a decedent 1. Exclusive and original jurisdiction to interpret
without the cognition and authority of the court the provisions of NIRC and other tax laws,

51 UNIVERSITY OF SANTO TOMAS

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 TAXATION LAW
subject to review by the Secretary of Finance; the BIR, as allowed by law, can only ascertain the
and correctness of any return, or in making a return
2. Power to decide disputed assessments, refunds when none was made, or in determining the liability
of internal revenue taxes, fees or other charges, of any person for any internal revenue tax, or in
penalties imposed in relation thereto, or other collecting such liability, or evaluating the person's
matters arising under the NIRC or other laws or tax compliance. Lastly, the BOC is authorized to
portions thereof administered by the BIR, audit or examine all books, records, and documents
subject to the exclusive appellate jurisdiction of of importers necessary or relevant for the purpose
the Court of Tax Appeals. (Sec. 4, NIRC) of collecting the proper duties and taxes. In
consideration of the fact that there are no taxes or
Powers of the CIR (In-O-M-As-S) duties involved in this case, the BIR and the BOC
likewise have no power and authority to open and
1. Power to Interpret tax laws and to decide cases examine the books of accounts of the
(Sec. 4, NIRC); aforementioned domestic private juridical entity.
(Commission on Audit v. Hon. Pampilo, Jr., G.R No.
2. Power to Obtain information and to summon or 188760, 30 June 2020; Chevron Philippines, Inc. v.
examine and take testimony of persons.; (Sec. 5, Hon. Pampilo, Jr., G.R. No. 189060, 30 June 2020;
NIRC) Petron Corporation v. Hon. Pampilo, Jr., G.R. No.
189333, 30 June 2020, J. Hernando)
3. Power to Make assessments and prescribe
additional requirements for tax administration Q: When can the CIR suspend the business
and enforcement; (Sec. 6, NIRC) operation of a taxpayer?

4. Power to Assign internal revenue officers and A:

other employees; and (Secs. 16 and 17, NIRC)
1. In the case of VAT-registered person:
5. Power to Suspend the business operations of a a. Failure to issue receipts or invoices;
taxpayer for violations of VAT rules. (Sec. 115, a. Failure to file a VAT return as required
NIRC) under Sec. 114; or
b. Understatement of taxable sales or receipts
Purpose of the Powers by 30% or more of his correct taxable sales
or receipts for the taxable quarter.
1. To ascertain correctness of the return;
2. To make a return when none has been made; 2. Failure of any person to register as required
3. To determine liability of any person for any under Sec. 236:
internal revenue tax;
4. To collect such liability; and The temporary closure of the establishment
5. To evaluate tax compliance. (Sec. 5, NIRC) shall be for the duration of not less than 5 days
and shall be lifted only upon compliance with
Q: Can a Regional Trial Court order the whatever requirements prescribed by the CIR
Commission on Audit (COA), Bureau of Internal in the closure order. (Sec. 115, NIRC)
Revenue (BIR), and the Bureau of Customs
(BOC) to open and examine the books of Authority of the CIR
accounts of a domestic private juridical entity?
1. To terminate taxable period for reasons
A: NO. The RTC cannot order COA to open and provided in the NIRC:
examine the books of accounts of a domestic private
juridical entity because its audit jurisdiction a. Retiring from business subject to tax;
generally covers public entities. On the other hand,

UNIVERSITY OF SANTO TOMAS 52

2023 GOLDEN NOTES
 II. NATIONAL TAXATION
b. Intending to leave the Philippines or to The Commissioner shall forward the
remove his property therefrom or to hide information as promptly as possible to the
or conceal his property; or requesting foreign tax authority. To ensure
a prompt response, the Commissioner shall
c. Performing any act tending to obstruct the confirm receipt of a request in writing to
proceedings for the collection of the tax for the requesting tax authority and shall
the past or current quarter or year or to notify the latter of deficiencies in the
render the same totally or partly ineffective request, if any, within sixty (60) days from
unless such proceedings are begun receipt of the request.
immediately;
If the Commissioner is unable to obtain and
2. To make or amend return in case taxpayer fails provide the information within ninety (90)
to file a return or files a false or fraudulent days from receipt of the request, due to
return; obstacles encountered in furnishing the
information or when the bank or financial
3. To examine returns and determine tax due;
institution refuses to furnish the
information, he shall immediately inform
4. To prescribe any additional requirements for
the requesting tax authority of the same,
the submission or preparation of financial
explaining the nature of the obstacles
statements accompanying tax returns;
encountered or the reasons for refusal.
5. To inquire into bank deposits of:
a. Decedent to determine his gross income; The term “foreign tax authority,” as used
herein, shall refer to the tax authority or tax
administration of the requesting State
b. A taxpayer who filed application to
compromise payment of tax liability by under the tax treaty or convention to which
reason of financial incapacity; and the Philippines is a signatory or a party of;

c. A specific taxpayer or taxpayers subject of 6. To delegate powers vested upon him to

a request for the supply of tax information subordinate officials with rank equivalent to
from a foreign tax authority pursuant to an Division Chief or higher, subject to limitations
international convention or agreement on and restrictions imposed under the rules and
tax matters to which the Philippines is a regulations;
signatory or a party of. Provided, that the
7. To prescribe property or zonal values;
information obtained from the banks and
other financial institutions may be used by
8. To take inventory of goods of any taxpayer, and
the BIR for tax assessment, verification,
place any business under observation or
audit, and enforcement purposes.
surveillance IF there is reason to believe that
such is not declaring his correct income, sales or
NOTE: In case of a request from a foreign
receipts for tax purposes; and
tax authority for tax information held by
banks and financial institutions, the 9. To accredit and register tax agents based on
exchange of information shall be done in a their professional competence, integrity and
secure manner to ensure confidentiality moral fitness, individuals and general
thereof under such rules and regulations as professional partnerships and their
may be promulgated by the Secretary of representatives who prepare and file tax
Finance, upon recommendation of the returns, statements, reports, protests, and
Commissioner. other papers with or who appear before, the
Bureau for taxpayers. (Sec. 6, NIRC)

53 UNIVERSITY OF SANTO TOMAS

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Q: What are the powers of the BIR which cannot
be delegated? NOTE: In the CIR v. Citytrust (G.R. No. 106611, 21
July 1994), which involves a claim for refund, the
A: (R-I-C-A) error or neglect was the failure of the Solicitor
General to present its evidence, as counsel for the
1. To Recommend promulgation of rules and
CIR, due to the unavailability of the necessary
regulations by the Secretary of Finance.
records from BIR, prompting the Solicitor to submit
the case for decision without presenting any
2. To Issue rulings of first impression or to
evidence. While in CIR v. Goodrich, the error
reverse, revoke or modify any existing rule of
committed refers to the neglect of the BIR to make
the BIR.
assessment within the 3-year period as required in
Sec. 203, NIRC.
3. To Compromise or abate any tax liability.
a) INTERPRETING TAX LAWS AND DECIDING
XPN: The Regional Evaluation Board may
TAX CASES
compromise assessments involving deficiency
taxes of P500,000 or less and minor crime
Power to Interpret
violations.
The power to interpret the provisions of the NIRC
4. To Assign or reassign internal revenue officers
and other tax laws shall be under the exclusive and
to establishments where articles subject to
original jurisdiction of the Commissioner, subject to
excise tax are kept. (Sec. 7, NIRC)
review by the Secretary of Finance. (Sec. 4, NIRC)

Q: Will errors or mistakes of administrative

Power to Decide
officials bind the government as to the collection
of taxes?
The power to decide disputed assessments, refunds
of internal revenue taxes, fees or other charges,
A:
penalties imposed in relation thereto, or other
GR: Errors or mistakes of administrative officials matters arising under the NIRC or other laws or
(including the BIR) should never be allowed to portions thereof administered by the BIR is vested
jeopardize the financial position of the government. in the Commissioner, subject to the exclusive
appellate jurisdiction of the Court of Tax Appeals.
Rationale: Taxes are the lifeblood of the nation (Sec. 4, NIRC)
through which the government agencies continue to
operate and with which the State effects its The scope of the power to decide: (D-R-O-P)
functions for the welfare of its constituents. (CIR v.
1. Disputed assessments,
Citytrust, G.R. No. 106611, 21 July 1994)
2. Refunds of internal revenue taxes,
3. Other matters arising under the NIRC or other
XPN: For the purpose of safeguarding taxpayers
laws or portions thereof administered by the
from any unreasonable examination, investigation,
BIR, and
or assessment, our tax law provides a statute of
4. Fees or other charges, and Penalties imposed in
limitations in the collection of taxes. Thus, the law
relation thereto.
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. (CIR v. Goodrich Philippines Inc., G.R No.
104171, 24 Feb. 1999)

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2023 GOLDEN NOTES
 II. NATIONAL TAXATION
b) NON-RETROACTIVITY OF RULINGS the Bureau. They can be relied upon by taxpayers
and are valid until otherwise determined by the
Non-Retroactivity of BIR Rulings courts or modified or revoked by a subsequent
ruling or opinion. They are accorded great weight
The rulings of the BIR are not retroactive. Any and respect, but not binding on the courts.
revocation, modification, or reversal of any of the (Commission v. Ledesma, G.R. No. L-17509, 30 Jan.
rules and regulations promulgated or any of the 1970)
rulings or circulars promulgated by the CIR shall not
be given retroactive application if it will be b. What is required to make a BIR ruling of first
prejudicial to the taxpayers, except in the following impression a valid one?
cases: (Mi-Ma-Ba)
A: A BIR ruling of first impression, to be a valid
ruling, must be issued within the scope of authority
1. Where the taxpayer deliberately Misstates or
granted to the CIR, and not contravene any law or
omits material facts from his return or any
decision of the SC. (CIR v. Michel Lhuillier Pawnshop,
document required of him by the BIR;
Inc., G.R. No. 150947, 15 July 2003; Sec. 7, NIRC)
2. Where the facts subsequently gathered by the c. Does a BIR ruling have a retroactive effect,
BIR are Materially different from the facts on considering the principle that tax
which the ruling is based; or exemptions should be interpreted strictly
against the taxpayer? (2007 BAR)
3. Where the taxpayer acted in Bad faith (Sec. 246,
NIRC) A: A BIR ruling cannot be given retroactive effect if
it would be prejudicial to the taxpayer. Sec. 246 of
NOTE: If the revocation is due to the fact that the the NIRC provides for retroactive effect in the
regulation is erroneous or contrary to law, such following cases:
revocation shall have retroactive operation as to
affect past transactions, because a wrong 1. Where the taxpayer deliberately misstates
construction of the law cannot give rise to a vested or omits material facts from his return, or
right that can be invoked by a taxpayer. any document required of him by the BIR;

Q: XYZ Corporation, an export-oriented 2. Where the facts subsequently gathered by

company, was able to secure a BIR Ruling in June the BIR are materially different from the
2005 that exempts from tax the importation of facts on which the rulings are based; or
some of its raw materials. The ruling is of first
impression, which means the interpretation 3. Where the taxpayer acted in bad faith.
made by the CIR is one without established
precedents. Subsequently, however, the BIR Q: Due to an uncertainty whether or not a new
issued another ruling which in effect would tax law is applicable to printing companies, DEF
subject to tax such kind of importation. XYZ Printers submitted a legal query to the BIR on
Corporation is concerned that said ruling may that issue. The BIR issued a ruling that printing
have a retroactive effect, which means that all companies are not covered by the new law.
their importations done before the issuance of Relying on this ruling, DEF Printers did not pay
the second ruling could be subject to tax. said tax. Subsequently, however, the BIR
reversed the ruling and issued a new one stating
a. What is a BIR Ruling? that the tax covers printing companies. Could
the BIR now assess DEF Printers for back taxes
A: A BIR ruling is an administrative interpretation corresponding to the years before the new
of the Revenue Law as applied and implemented by ruling? Reason briefly. (2004 BAR)

55 UNIVERSITY OF SANTO TOMAS

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 TAXATION LAW
A: NO. Reversal of a ruling shall not be given a 6. Revenue Special Orders (RSOs) –
retroactive application if said reversal will be Administrative order issued by the CIR
prejudicial to the taxpayer. Therefore, the BIR assigning revenue officers and employees of the
cannot assess DEF printers for back taxes because it BIR to special duties which shall not exceed 1
would be violative of the principle of non- year.
retroactivity of rulings and doing so would result in
grave injustice to the taxpayer who relied on the 7. BIR Rulings – official positions of the CIR to
first ruling in good faith. (Sec. 246, NIRC; CIR v. queries raised by taxpayers and other
Burroughs, Inc., G.R. No. L-66653, 19 June 1986) stakeholders relative to clarification and
interpretation of tax laws. Rulings may come in
Various Kinds of Revenue Issuances by the CIR different forms:

1. Revenue Regulations (RRs) – Issuances signed a. BIR Rulings

by the Secretary of Finance, upon b. VAT Rulings
recommendation of the CIR, that specify, c. Rulings issued by International Tax Affairs
prescribe or define rules and regulations for the Division (ITAD); and
effective enforcement of the provisions of the d. Rulings issued thru delegated authorities
Tax Code. or unnumbered rulings

2. Revenue Memorandum Orders (RMOs) - 8. Revenue Audit Memorandum Orders

Issuances signed by the CIR that provide (RAMOs) – Declarations of audit programs of
directives or instructions; prescribe guidelines; the BIR for a specific taxable year signed by the
and outline processes, operations, activities, CIR.
workflows, methods and procedures necessary
in the implementation of stated policies, goals, 9. Revenue Memorandum Rulings (RMRs) –
objectives, plans and programs of the BIR in all Rulings, opinions, and interpretations signed by
areas of operations, except auditing. the CIR with respect to the 1997 Tax Code as
amended, as applied to a specific set of facts,
3. Revenue Memorandum Circulars (RMCs) - with or without established precedents, for
Issuances signed by the CIR which publish guidance of taxpayers.
pertinent and applicable portions, as well as
amplifications, of laws, rules, regulations, and 10. Revenue Bulletins (RBs) – periodic issuances,
precedents issued by the BIR and other notices, and official announcements of the CIR
agencies/offices. that consolidate the BIR’s position on certain
issues, for the guidance of the public signed by
4. Revenue Administrative Orders (RAOs)- the CIR.
Issuances signed by the CIR that cover subject
matters dealing strictly with the permanent 11. Revenue Travel Assignment Orders (RTAOs)
administrative set-up of the BIR, more – issued by the CIR transferring, assigning, or
specifically, the organizational structure, re-assigning revenue officers or employees to
statements of functions and/or responsibilities other or special duties connected with the
of BIR offices, definitions and delegations of enforcement or administration of revenue laws
authority, staffing and personnel requirements as the exigencies of the services may require.
and standards of performance.

5. Revenue Delegation of Authority Orders

(RDAOs) - Issuances signed by the CIR which
refer to functions delegated by the CIR to
revenue officials in accordance with law.

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2023 GOLDEN NOTES
 II. NATIONAL TAXATION

2. RULE-MAKING AUTHORITY OF THE 4. The conditions to be observed by revenue

SECRETARY OF FINANCE officers respecting the institutions and conduct
of legal actions and proceedings.

The Secretary of Finance, upon recommendation of

5. The conditions under which goods intended for
the Commissioner, shall promulgate all needful
storage in bonded warehouses shall be
rules and regulations for the effective enforcement
conveyed thither, their manner of storage and
of the provisions of NIRC. (Sec. 244, NIRC)
method of keeping entries and records, also
the books to be kept by Revenue Inspectors
General Principles Relative to the Rule-Making
and the reports to be made by them in
Power
connection with their supervision of such
houses.
1. Rules and regulations, as well as administrative
opinions, and rulings, ordinarily should deserve
6. The conditions under which denatured alcohol
weight and respect by the courts.
may be removed and dealt in, the character and
2. All such issuances must not override but must quantity of the denaturing material to be used,
remain consistent and in harmony with the law the manner in which the process of denaturing
they seek to apply and implement. shall be effected, so as to render the alcohol
suitably denatured and unfit for oral intake,
3. Administrative rules and regulations are the bonds to be given, the books and records to
intended to carry out, neither to supplant nor to be kept, the entries to be made therein, the
modify, the law. (CIR v. CA, G.R. No. 108358, 20 reports to be made to the CIR, and the signs to
Jan. 1995) be displayed in the business or by the person
for whom such denaturing is done or by whom,
Specific Provisions to be Contained in the Rules such alcohol is dealt in;
and Regulations
7. The manner in which revenue shall be collected
Rules and regulations must contain provisions and paid, the instrument, document or object
specifying, prescribing, or defining: to which revenue stamps shall be affixed, the
mode of cancellation, the manner in which the
1. The time and manner in which Revenue proper books, records, invoices and other
Regional Director shall canvass their papers shall be kept, and entries therein made
respective Revenue Regions to discover by the person subject to the tax, as well as the
persons and property liable to national manner in which licenses and stamps shall be
internal revenue taxes, and the manner their gathered up and returned after serving their
lists and records of taxable persons and taxable purposes.
objects shall be made and kept.
8. The conditions to be observed by revenue
2. The forms of labels, brands or marks to be officers respecting the enforcement of Title III
required on goods subject to excise tax, and the imposing a tax on estate of a decedent, and
manner how the labeling, branding or marking other transfers Mortis causa, as well as on gifts
shall be effected. and such other rules and regulations which the
CIR may consider suitable for the enforcement
3. The condition and manner for goods intended of the said Title III.
for export, which if not exported would be 9. The manner tax returns, information, and
subject to an excise tax, shall be labeled, reports shall be prepared and reported, and
branded or marked. the tax collected and paid, as well as the
conditions under which evidence of payment

57 UNIVERSITY OF SANTO TOMAS

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 TAXATION LAW
shall be furnished the taxpayer, and the sources. It is a system that does not provide for the
preparation and publication of tax statistics. taxation of property. (Domondon, 2013)

10. The manner in which internal revenue taxes, Q: GHI, Inc. is a corporation authorized to engage
such as income tax, including withholding tax, in the business of manufacturing ultra-high
estate and donor's taxes, value-added tax, density microprocessor unit packages. After its
other percentage taxes, excise taxes and registration on July 5, 2005, GHI, Inc.
documentary stamp taxes shall be paid constructed buildings and purchased
through the collection officers of the BIR or machineries and equipment. As of December 31,
through duly authorized agent banks which 2005, the total cost of the machineries and
are hereby deputized to receive payments of equipment amounted to P250,000,000.00.
such taxes and the returns, papers and However, GHI, Inc. failed to commence
statements that may be filed by the taxpayers operations. Its factory was temporarily closed
in connection with the payment of the tax: effective September 15, 2010. On October 1,
Provided, however, that notwithstanding the 2010, it sold its machineries and equipment to
other provisions of the NIRC prescribing the JKL Integrated for P300,000,000.00. Thereafter,
place of filing of returns and payment of taxes, GHI, Inc. was dissolved on November 30, 2010.
the CIR may, by rules and regulations require
that the tax returns, papers and statements and Is the sale of the machineries and equipment to
taxes of large taxpayers be filed and paid, JKL Integrated subject to normal corporate
respectively, through collection officers or income tax or capital gains tax? Explain. (2019
through duly authorized agent banks: BAR)
Provided, further, that the CIR can exercise this
power within 6 years from the approval of R.A. A: The sale of machineries and equipment to JKL
No. 7646 or the completion of its Integrated subject to normal corporate income tax.
comprehensive computerization program, Under Sec. 27(D)(5) of the NIRC, a corporation is
whichever comes earlier: Provided, finally, only subject to capital gains tax for the sale of land
that separate venues for the Luzon, Visayas and buildings. In this case, GHI Inc., a corporation,
and Mindanao areas may be designated for the sold machineries and equipment. Hence, the sale is
filing of tax returns and payment of taxes by subject to normal corporate income tax.
said large taxpayers. (Sec. 245, NIRC)
Income Tax System

B. INCOME TAX 1. Global tax system – system employed where

the tax system views indifferently the tax base
and generally treats in common all categories of
taxable income of the individual. (Tan v. Del
1. DEFINITION, NATURE, AND Rosario, Jr., G.R. Nos. 109289 and 109446, 03 Oct.
GENERAL PRINCIPLES 1994)

Income tax is a tax on all yearly profits arising from 2. Schedular tax system – system employed
property, profession, trade, or business, or a tax on where the income tax treatment varies and is
person’s income, emoluments, profits and the like. made to depend on the kind or category of
(Fisher v. Trinidad, G.R. No. L-19030, 20 Oct. 1922) taxable income of the taxpayer. (Tan v. Del
Rosario, Jr., G.R. Nos. 109289 & 109446, 03 Oct.
Income taxation is in the nature of an excise taxation 1994)
system, or taxation on the exercise of privilege, the
privilege to earn yearly profits from various 3. Semi-schedular or semi-global tax system.

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Schedular Treatment and Global Treatment a. On his worldwide income, if he resides in
Distinguished (1994 BAR) the Philippines;
b. Only on his income from sources within the
SCHEDULAR Philippines, if he qualifies as a non-resident
GLOBAL TREATMENT
TREATMENT citizen.
Different tax rates Unitary or single tax rate
Different categories No need for 2. Residence – a resident alien is liable to pay
of taxable income classification as all Philippine income tax on his income from
taxpayers are subjected sources within the Philippines, but is exempt
to a single tax rate from tax on his income from sources outside the
(Business income, (Business income, Philippines.
professional income, professional income,
passive income, passive income, illegal 3. Source – an alien is subject to Philippine income
illegal income) income) tax because he derives income from sources
within the Philippines.
You cannot add all of All of them are added
A non-resident alien or non-resident foreign
them together, due to together and subjected
corporation is liable to pay Philippine income
different tax rates. to a single tax rate.
tax on income from sources within the
Philippines, despite the fact that he has not set
Features of the Philippine Income Tax Law
foot in the Philippines. (Mamalateo, 2014)

1. Direct tax
NOTE: Only resident citizens and domestic
corporations are taxable on worldwide income.
Tax burden is borne by the income recipient
upon whom the tax is imposed. It is a tax
WITHIN OUTSIDE
demanded from the very person who, it is
THE PH THE PH
intended or desired, should pay it (i.e., income
tax, donor’s tax, estate tax). RC ✓ ✓
NRC ✓ X
2. Progressive tax
RA ✓ X
Tax base increases as the tax rate increases. It is NRA ✓ X
founded on the “ability to pay” principle.
DC ✓ ✓
3. Comprehensive
FC ✓ X

It adopted the citizenship principle, the

residence principle, and the source principle.
General Principles relative to Income Taxation
4. Semi-schedular or semi-global tax system
(Mamalateo, 2014) Except when otherwise provided in the NIRC:

a) CRITERIA IN IMPOSING PHILIPPINE INCOME 1. A RC is taxable on all income derived from

TAX LAW sources within and without the Philippines.

1. Citizenship – a citizen of the Philippines is 2. An NRC is taxable only on income derived from
subject to Philippine income tax: sources within the Philippines.

59 UNIVERSITY OF SANTO TOMAS

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3. An individual citizen who is working and c) TAXABLE PERIOD
deriving income from abroad as an overseas
contract worker (OCW) is taxable only on Definition
income from sources within the Philippines.
Taxable period is a period within which the net
4. An alien, (RA or NRA), is taxable only on income income is computed as a whole for income tax
within the Philippines. purposes.

5. A domestic corporation (DC) is taxable on all Kinds of Taxable Periods

income derived within and without the
Philippines. 1. Calendar period – the 12 consecutive months
starting from January 1 and ending December
6. A foreign corporation, (engaged or not in trade 31.
or business in the Philippines), is taxable only
on income derived from sources within the Instances when calendar year shall be the basis
Philippines. for computing net income:

b) TYPES OF PHILIPPINE INCOME TAXES a. When the taxpayer is an individual;

b. When the taxpayer does not keep books of
1. Minimum corporate income tax (MCIT), account;
2. Capital gains tax on sale or exchange of unlisted c. When the taxpayer has no annual
shares of stock of a domestic corporation accounting period; or
classified as capital asset, d. When the taxpayer is an estate or a trust.
3. Capital gains tax on sale or exchange of real
property located in the Philippines classified as NOTE: Taxpayers other than a corporation are
capital asset, required to use only the calendar year. The final
4. Final withholding tax on certain passive adjustment return shall be filed on or before the
investment incomes, fifteenth (15th) day of April.
5. Final withholding tax on income payments
made to non-resident individuals or 2. Fiscal period – it is a period of 12 months
corporations, ending on the last day of any month other than
6. Fringe benefit tax (FBT), December. (Sec. 22(Q), NIRC)
7. Branch profit remittance tax,
8. Improperly accumulated earnings tax (IAET), NOTE: The final adjustment return shall be
filed on or before the fifteenth (15th) day of the
NOTE: The IAET shall no longer be imposed on fourth (4th) month following the close of the
corporations upon the effectivity of the CREATE fiscal year.
Act.
3. Short period
9. Normal corporate income tax on corporations,
10. Graduated income tax on individuals, GR: The taxable period, whether it is a calendar
11. Optional income tax of 8% for individuals, and year or fiscal year always consists of 12 months.
12. Special income tax on certain corporations.
XPN: Instances when the taxpayer may have a
taxable period of less than 12 months:

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a. When the corporation is newly organized iii. Special Alien
and commenced operations on any day
within the year c. Special class of individual employees
b. When the corporation changes its i. Minimum wage earner
accounting period 2. Corporations
c. When a corporation is dissolved
d. When the Commissioner of Internal a. Domestic
Revenue, by authority, terminates the b. Foreign
taxable period of a taxpayer (Sec. 6(D), i. Resident foreign corporation (RFC)
NIRC) ii. Non-resident foreign corporation
e. In case of final return of the decedent and (NRFC)
such period ends at the time of his death c. Joint venture and consortium
d. Partnership
Q: Differentiate between a calendar year and a
fiscal year. (2019 BAR) 3. Estates
4. Trusts
A: Calendar year means an accounting period of
twelve months ending on the last day of December. Who are Deemed Citizens
On the other hand, fiscal year means an accounting
period of twelve months ending on the last day of The following are deemed citizens of the
any month other than the month of December. Philippines:

Q: When is the deadline for the filing of a 1. Those who are citizens of the Philippines at the
corporation's final adjustment return for a time of the adoption of the 1987 Constitution;
calendar year? How about for a fiscal year? 2. Those whose fathers or mothers are citizens of
(2019 BAR) the Philippines;
3. Those born before January 17, 1973, of Filipino
A: For a calendar year, the final return should be mothers, who elect Philippine Citizenship upon
filed on or before the 15th day of April following the reaching the age of majority; and
close of the taxable year. For a fiscal year, the final 4. Those who are naturalized in the accordance
return is filed on or before the 15th day of the 4th with law. (Sec. 1, Art. IV, 1987 Constitution)
month following the close of the taxable year.
Resident Citizen (RC) and Non-Resident Citizen
d) KINDS OF TAXPAYERS (NRC) Distinguished

1. Individuals RC NRC
A citizen of the A citizen of the
a. Citizen Philippines who stays in Philippines who:
i. Resident Citizen (RC) the Philippines without
ii. Non-Resident Citizen (NRC) the intention of 1. Establishes to the
transferring his physical satisfaction of the
b. Aliens presence abroad CIR the fact of his
i. Resident Alien (RA) whether to stay physical presence
ii. Non-Resident Alien (NRA) permanently or abroad with a
(1) Engaged in Trade or Business temporarily as an definite intention to
(NRA-ETB) overseas contract reside therein;
(2) Not Engaged in Trade or Business worker.
(NRA-NETB)

61 UNIVERSITY OF SANTO TOMAS

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2. Leaves the
Philippines during
the taxable year to Resident Alien (RA) and Non-Resident Alien
reside abroad, either (NRA) Distinguished
as an immigrant or
for employment on a RA NRA
permanent basis; An individual whose An individual whose
residence is within the residence is not within
3. Works and derives Philippines but who is the Philippines and
income from abroad not a citizen thereof. who is not a citizen
and whose (Sec. 22(F), NIRC) thereof. (Sec. 22(G),
employment thereat NIRC)
requires him to be
physically present
Non-Resident Alien Engaged in Trade or
abroad most of the
Business (NRA-ETB) and Not Engaged in Trade
time during the
or Business (NRA-NETB) Distinguished
taxable year;

NRA-ETB NRA-NETB
NOTE: “Most of the
An alien who stays in An alien who stays in
time during the
the Philippines for an the Philippines for
taxable year” has
aggregate period of 180 days or less. (Sec.
been interpreted to
more than 180 days. 25(B), NIRC)
be at least 183 days.
(Sec. 25(A), NIRC)
4. Has been previously
considered as a non- Minimum Wage Earner
resident citizen and
who arrives in the A worker in the private sector paid the statutory
Philippines at any minimum wage or to an employee in the public
time during the sector with compensation income of not more than
taxable year to the statutory minimum wage in the non-agricultural
reside permanently sector where he is assigned. (Sec. 24(HH), NIRC)
in the Philippines.
Domestic Corporation
NOTE: Treated as
NRC with respect to Corporations created or organized in the
income derived from Philippines or under its laws. (Sec. 22(C), NIRC)
sources abroad until
the date of his arrival. Foreign Corporation

Taxpayer shall submit A corporation which is not domestic. (Sec. 22(D),

proof to the CIR to show NIRC)
his intention of leaving
the Philippines to reside Resident Foreign Corporation
permanently abroad or
to return to and reside in A foreign corporation engaged in trade or business
the Philippines. (Sec. within the Philippines. (Sec. 22(H), NIRC)
22(E), NIRC)

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NOTE: In order that a foreign corporation may be NOTE: Sec. 25(FF) of the NIRC as amended by
regarded as doing business within a State, there CREATE Act provides that the preferential tax
must be continuity of conduct and intention to treatment of special aliens will no longer be
establish a continuous business, such as the applicable after January 1, 2018. Hence, special
appointment of a local agent, and not one of a aliens will now be subject to the regular income tax
temporary character. (CIR v. British Overseas rate, without prejudice to preferential tax rates
Airways Corporation, G.R. No. L-65773-74, 30 Apr. under existing tax treaties. (R.R. 8 - 2018)
1987)
Meaning of Seamen as Contemplated by Law
Non-resident Foreign Corporation
Seafarers or seamen are Filipino citizens who
A foreign corporation not engaged in trade or receive compensation for services rendered abroad
business within the Philippines. (Sec. 22(I), NIRC) as a member of the complement vessel engaged
exclusively for international trade. To be considered
Special Classes of Aliens as an OCW or Overseas Filipino Worker (OFW), they
must be duly registered as such with the Philippine
Special aliens are individuals with Overseas Employment Administration (POEA) with
managerial/highly technical positions working in: a valid Overseas Employment Certificate (OEC) with
(R-O-P) Seafarers Identification Record Book (SIRB) or
Seaman’s Book issued by the Maritime Industry
1. Regional or area headquarters and regional Authority (MARINA). (Tabag, 2019)
operating headquarters of multinational
companies established in the Philippines; NOTE: They should be working in a ship engaged
exclusively in international trade or commerce. If
2. Offshore banking units (OBU) established in the engaged only in local trade or commerce, they are
Philippines. OBUs are foreign banks allowed to just considered as normal employees.
operate in the Philippines and to conduct
foreign currency transactions; Determination of Classification of Taxpayers

3. Petroleum service contractors and sub- Tax treatments for those enumerate above varies
contractors in the Philippines. from one taxpayer to another.

NOTE: When a special alien leases a property, he The classification of a taxpayer will determine the
shall be taxed under NRA-EBT and NRA-NEBT, applicable: (G-R-E-E-D)
depending on the number of stay.
1. Gross income
Special aliens are not required to submit ITR 2. Income tax Rates
because the obligation to file income ITR rests upon 3. Exclusions from gross income
his employer. 4. Exemptions
5. Deductions
Instances where Alternative Taxation may be
Applied

1. Filipino considered as special alien;

2. When a taxpayer’s capital asset is sold to the
Government. (Involuntary Sale or
Expropriation)

63 UNIVERSITY OF SANTO TOMAS

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2. INCOME e. Parent’s share in the accumulated and

current equity on subsidiaries’ net earnings
prior to distribution;
a) DEFINITION AND NATURE

f. Money earmarked for some other persons

Definition
not included in gross income;

Income refers to all wealth which flows into the

g. Money or property borrowed; and
taxpayer other than as mere return of capital. It
includes the forms of income specifically described
NOTE: Borrowed money has to be repaid by
as gains and profits, including gains derived from
the debtor. On the other hand, the creditor
the sale or other disposition of capital assets. (Sec.
does not receive any income upon payment
36, RR No. 2)
because it is merely a return of capital.

Income is a flow of service rendered by capital by

h. Increase in net worth resulting from
payment of money from it or any benefit rendered
adjusting entries. (Domondon, 2013)
by a fund of capital in relation to such fund through
a period of time. (Madrigal v. Rafferty, G.R. No.
Security Advances and Security Deposits
12287, 08 Aug. 1918)
Paid by a Lessee to a Lessor

b) WHEN INCOME IS TAXABLE

The amount received by the lessor as security
advances or deposits is not considered income
The factors to consider in determining whether or
because it will eventually be returned to the
not there is income for tax purposes:
lessee; hence the lessor did not earn, gain, or
1. Existence of income – a primary consideration
profit therefrom. (Tourist Trade and Travel v.
in income taxation is that there must be income
CIR, CTA Case No. 4806, 19 Jan. 1996)
before there could be income taxation.
(Domondon, 2013)
2. Realization of income – under the Realization
Principle, revenue is generally recognized when
Receipts Not Considered as Income
both of the following conditions are met:

a. Advance payments or deposits for payments;

a. The earning process is complete or
Advances are not revenues of the period in
virtually complete.
which they are received but as revenue of the
b. An exchange has taken place. (Manila
period or periods in which they are earned.
Mandarin Hotels, Inc. v. CIR, CTA Case No.
5046, 24 Mar. 1997)
b. Property received as compensation but
subject to forfeiture;
NOTE: Mere increase in the value of property is
not considered as income for tax purposes since
c. Assessments for additional corporate
it is an unrealized increase in capital.
contributions;

Increase in the Net Worth of a Taxpayer

d. Increments resulting from revaluation of
property;
The increase in the net worth of a taxpayer is
taxable if it is the result of the receipt of
NOTE: Until the revalued property is
unreported or unexplainable tax income.
disposed of, there is no income realized.
However, if they are merely shown as
correction of errors in its entries in its books

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2023 GOLDEN NOTES
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relating to its indebtedness to certain creditor c. Interest coupons that have matured
which had been erroneously overstated or and are payable but have not been
listed as outstanding when they had in fact been encashed
duly paid, they are not taxable.
d. Transfer of the amounts retained by
NOTE: If and when there are substantial the payor to the account of the
limitations or conditions under which payment contractor
is to be made, such does not constitute
constructively realized. e. Undistributed Share of a partner in the
profits of a general professional
3. Recognition of income – when income partnership
considered received for Philippines income tax
purposes: Q: Mr. X borrowed P10,000 from his friend Mr. Y
payable in one year without interest. When the
1. If actually or physically received by loan became due, Mr. X told Mr. Y that he (Mr. X)
taxpayer; or was unable to pay because of business reverses.
2. If constructively received by taxpayer. Mr. Y took pity on Mr. X and condoned the loan.
Mr. X was solvent at the time he borrowed the
Actual vis-a-vis Constructive Receipt P10,000 and at the time the loan was condoned.
Did Mr. X derive any income from the
a. Actual receipt – Income may be actual cancellation or condonation of his
receipt or physical receipt. indebtedness? Explain. (1995 BAR)

b. Constructive receipt – Occurs when A: NO. Mr. X did not derive any income from the
money consideration or its equivalent is cancellation or condonation of his indebtedness.
placed at the control of the person who Since it is obvious that the creditor merely desired
rendered the service without restriction to benefit the debtor in view of the absence of
by the payor. (Sec. 4.108-4, RR 16-2005) consideration for the cancellation, the amount of the
debt is considered as a gift from the creditor to the
The income is credited to the account of debtor and need not be included in the latter’s gross
the taxpayer and set apart for him which income.
he can withdraw at any time without
restrictions and/or conditions although Q: Petitioner condominium corporation filed a
not yet actually received by him physically case seeking to invalidate RMC No. 65-2012,
or reduced to his possession is already which subjects condominium association dues,
taxable to him. membership fees and other assessments to
income tax and VAT. Petitioner contends that
Examples of income constructively membership fees, assessment dues, and other
received: (B-I2-T-S) fees of similar nature only constitute
contributions to and/or replenishment of the
a. Deposits in Banks which are made funds for the maintenance and operations of the
available to the seller of services facilities offered by recreational clubs to their
without restrictions exclusive members and thus, they do not
constitute profit or gain. Are the petitioners
b. Issuance by the debtor of a notice to correct?
offset any debt or obligation and
acceptance thereof by the seller as A: YES. Condominium corporations are not engaged
payment for services rendered in activities that generate profit. The collection of

65 UNIVERSITY OF SANTO TOMAS

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 TAXATION LAW
association dues, membership fees, and other declaratory relief and upheld the validity and
assessments/charges is purely for the benefit of the constitutionality of RMC No. 35-2012. Is the RTC
condominium owners. It is a necessary incident to correct?
the purpose of effectively overseeing, maintaining
and governing the common areas of the A: NO. RMC No. 35-2012 erroneously foisted a
condominium. Therefore, they are not subject to sweeping interpretation that membership fees and
income tax because they do not constitute profit or assessment dues are sources of income of
gain. Furthermore, they are also not included as recreational clubs from which income tax liability
sources of gross income under Sec. 32 of the Tax may accrue. Membership fees, assessment dues, and
Code. Consequently, they are not subject to other fees of similar nature only constitute
VAT/Withholding tax because they neither arise contributions to and/or replenishment of the funds
from transactions involving the sale, barter, or for the maintenance and operations of the facilities
exchange of goods or property nor are generated by offered by recreational clubs to their exclusive
the performance of services. (BIR v. First E-Bank members. They represent funds “held in trust” by
Tower Condominium Corp., G.R. No. 215801, 15 Jan. these clubs to defray their operating and general
2020; First E-Bank Tower Condominium Corp. v. BIR, costs and hence, only constitute infusion of capital.
G.R. No. 218924., 15 Jan. 2020)
In fine, for as long as these membership fees,
Q: Bureau of Internal Revenue (BIR) issued RMC assessment dues, and the like are treated as
No. 35-2012, entitled "Clarifying the Taxability collections by recreational clubs from their
of Clubs Organized and Operated Exclusively for members as an inherent consequence of their
Pleasure, Recreation, and Other Non-Profit membership, and are, by nature, intended for the
Purposes," which was addressed to all revenue maintenance, preservation, and upkeep of the clubs'
officials, employees, and others concerned for general operations and facilities, then these fees
their guidance regarding the income tax and cannot be classified as “the income of recreational
Value Added Tax (VAT) liability of the said clubs from whatever source” that are “subject to
recreational clubs. income tax.” Instead, they only form part of capital
from which no income tax may be collected or
On the income tax component, RMC No. 35-2012 imposed.
states that "clubs which are organized and
operated exclusively for pleasure, recreation, In the same way, the Court declares as invalid the
and other non-profit purposes are subject to BIR's interpretation in RMC No. 35-2012 that
income tax under the National Internal Revenue membership fees, assessment dues, and the like are
Code (NIRC) of 1997, as amended (1997 NIRC)." part of “the gross receipts of recreational clubs” that
are “subject to VAT.”
Likewise, on the VAT component, RMC No. 35-
2012 provides that "the gross receipts of As ANPC aptly pointed out, membership fees,
recreational clubs including but not limited to assessment dues, and the like are not subject to VAT
membership fees, assessment dues, rental because in collecting such fees, the club is not selling
income, and service fees are subject to VAT." its service to the members. Conversely, the
members are not buying services from the club
Association of Non-profit Clubs Inc. (ANPC), on when dues are paid; hence, there is no economic or
behalf of its club members, filed a petition for commercial activity to speak of as these dues are
declaratory relief before the RTC on September devoted for the operations/maintenance of the
17, 2014, seeking to declare RMC No. 35-2012 facilities of the organization. As such, there could be
invalid, unjust, oppressive, confiscatory, and in no “sale, barter or exchange of goods or properties,
violation of the due process clause of the or sale of a service” to speak of, which would then
Constitution. RTC denied the petition for be subject to VAT under the 1997 NIRC. (Association

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 II. NATIONAL TAXATION
of Non-Profit Clubs, Inc. (ANPC) v. BIR, G.R. 228539, Q: Isabela Cultural Corporation (ICC) incurred
26 June 2019) professional fees for legal services that pertain
to the 1984 and 1985. ICC did not claim
Q: Mr. Castillo is a resident Filipino citizen. He deductions for said expenses in 1984 and 1985
purchased a parcel of land in Makati in 1970 at since the cost of the services was not yet
a consideration of P1 million. In 2011, the land determinable at that time. It claimed
had a fair market value of P20 million. Mr. Ayala deductions only in 1986 when ICC received the
offered to buy the same for P20 million. Is Mr. billing statements for said services. BIR,
Castillo liable to pay for income tax in 2011 however, contends that since ICC is using the
based on the offer to buy by Mr. Ayala? (2011 accrual method of accounting, expenses for
BAR) professional services that accrued in 1984 and
1985, should have been declared as deductions
A: NO. Mr. Castillo is not liable for income tax in from income during the said years and the
2011 was for income tax attaches only if there is a failure of ICC to do so bars it from claiming said
gain realized resulting from a closed and completed expenses as deduction for the taxable year
transaction. (Madrigal v. Rafferty, G.R. No. L12287, 1986. Decide.
07 Aug. 1918)
A: The expenses should have been claimed as
c) TESTS IN DETERMINING WHETHER INCOME deductions in 1984 and 1985. For a taxpayer using
IS EARNED FOR TAX PURPOSES the accrual method, the accrual of income and
expense is permitted when the all-events test has
(1) REALIZATION TEST been met.

Refer to previous discussion on “When Income is The all-events test requires the right to income or
Taxable” – p.64 liability be fixed, and the amount of such income or
liability be determined with reasonable accuracy.
Claim of Right Doctrine or Doctrine of However, the test does not demand that the amount
Ownership, Command or Control of income or liability be known absolutely, only that
a taxpayer has at his disposal the information
A taxable gain is conditioned upon the presence of necessary to compute the amount with reasonable
a claim of right to the alleged gain and the absence accuracy. The amount of liability does not have to
of a definite unconditional obligation to return or be determined exactly; it must be determined with
repay. (CIR v. Javier, G.R. 78953, 31 July 1991) "reasonable accuracy."

The propriety of an accrual must be judged by the

(2) ECONOMIC BENEFIT TEST OR DOCTRINE OF facts that a taxpayer knew, or could reasonably be
PROPRIETARY INTEREST expected to have known, at the closing of its books
for the taxable year. Accrual method of accounting
Taking into consideration the pertinent provisions presents largely a question of fact; such that the
of law, income realized is taxable only to the extent taxpayer bears the burden of proof of establishing
that the taxpayer is economically benefited. the accrual of an item of income or deduction. From
the nature of the claimed deductions and the span
(3) SEVERANCE TEST of time during which the firm was retained, ICC can
be expected to have reasonably known the retainer
Income is recognized when there is separation of fees charged by the firm as well as the
something which is of exchangeable value. (Eisner v. compensation for its legal services. The failure to
Macomber, 252 US 189) determine the exact amount of the expense during
the taxable year when they could have been claimed

67 UNIVERSITY OF SANTO TOMAS

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as deductions cannot thus be attributed solely to exchanges his securities in such
the delayed billing of these liabilities by the firm. corporation, solely for stock or securities in
For one, ICC, in the exercise of due diligence could another corporation, a party to the merger
have inquired into the amount of their obligation to or consolidation.
the firm, especially so that it is using the accrual
method of accounting. For another, it could have Tax-free Exchange Transactions
reasonably determined the amount of legal and
retainer fees owing to its familiarity with the rates The entire amount of the gain or loss shall be
charged by their long-time legal consultant. (CIR v. recognized upon the sale or exchange of property,
Isabela Cultural Corp., G.R. No. 172231, 12 Feb. 2007) except as herein provided:
1. No gain or loss shall be recognized on a
d) TAX-FREE EXCHANGES corporation or on it stocks or securities if such
corporation is a party to a reorganization and
Tax-free Exchanges exchanges property in pursuance of a plan of
reorganization solely for stock or securities in
Tax-free exchanges refer to those instances another corporation that is a party to the
enumerated in Sec. 40(C)(2) of the NIRC of 1997 reorganization.
that are not subject to Income Tax, Capital Gains
Tax, Documentary Stamp Tax and/or Value-added 2. No gain or loss shall also be recognized if
Tax, as the case may be. property is transferred to a corporation by a
Kinds of Tax-Free Exchanges person, alone or together with others, not
exceeding four (4) persons, in exchange for
1. Transfer to a controlled corporation – No gain stock or unit of participation in such a
or loss shall be recognized if property is corporation of which as a result of such
transferred to a corporation by a person in exchange the transferor or transferors,
exchange for stock or unit of participation in collectively, gains or maintains control of said
such corporation of which as a result of such corporation: Provided, That stocks issued for
exchange said person, alone or together with services shall not be considered as issued in
others, not exceeding four persons, gains return for property. (Sec. 40(C)(2), NIRC as
control of said corporation; and amended)

2. Merger or consolidation – No gain or loss shall Definition of Reorganization

be recognized if in pursuance of a plan of
merger or consolidation: 1. A corporation, which is a party to a merger or
consolidation, exchanges property solely for
a. A corporation, which is a party to a merger stock in a corporation, which is a party to the
or consolidation, exchanges property solely merger or consolidation; or
for stock in a corporation, which is a party
to the merger or consolidation; 2. The acquisition by one corporation, in exchange
solely for all or a part of its voting stock, or in
b. A shareholder exchanges stock in a exchange solely for all or part of the voting
corporation, which is a party to the merger stock of a corporation which is in control of the
or consolidation, solely for the stock of acquiring corporation, of stock of another
another corporation also a party to the corporation if, immediately after the
merger or consolidation; or acquisition, the acquiring corporation has
control of such other corporation whether or
c. A security holder of a corporation, which is not such acquiring corporation had control
a party to the merger or consolidation, immediately before the acquisition; or

UNIVERSITY OF SANTO TOMAS 68

2023 GOLDEN NOTES
 II. NATIONAL TAXATION
3. The acquisition by one corporation, in exchange Q: B transferred his ownership over a 1,000-
solely for all or a part of its voting stock or in square meter commercial land and three-door
exchange solely for all or part of the voting apartment to ABC Corp., a family corporation of
stock of a corporation which is in control of the which B is a stockholder. The transfer was in
acquiring corporation, of substantially all of the exchange of 10,000 shares of stock of ABC Corp.
properties of another corporation. In As a result, B acquired 51 % ownership of ABC
determining whether the exchange is solely for Corp., with all the shares of stock having the
stock, the assumption by the acquiring right to vote. B paid no tax on the exchange,
corporation of a liability of the others shall be maintaining that it is a tax avoidance scheme
disregarded; or allowed under the law. The Bureau of Internal
Revenue, on the other hand, insisted that B's
4. A recapitalization, which shall mean an alleged scheme amounted to tax evasion. Should
arrangement whereby the stock and bonds of a B pay taxes on the exchange? Explain. (2019
corporation are readjusted as to amount, BAR)
income, or priority or an arrangement of all
stockholders and creditors to change and A: NO. B should not pay taxes on the said exchange.
increase or decrease the capitalization or debts
of the corporation or both; or As a general rule, upon the sale or exchange of
property, the entire amount of the gain or loss, as
5. A reincorporation, which shall mean the the case may be, shall be recognized. One of the
formation of the same corporate business with accepted exceptions to the said rule is when a
the same assets and the same stakeholders property is transferred to a corporation by a person
surviving under a new charter. (Ibid.) in exchange for stock or unit of participation in such
a corporation of which as a result of such exchange
Requisites for Non-recognition of Gain or Loss said person, alone or together with others, not
exceeding four persons, gains control of said
1. Transferee is a corporation; corporation: provided, that stocks issued for
2. Transferee exchanges its shares of stock for services shall not be considered as issued in return
property/ies of the transferor; for property. (Sec. 40(C)(6)(c), NIRC)
3. The transfer is made by a person, acting alone
or together with others, not exceeding four In the case, B transferred his ownership over a
persons; and 1,000-square meter commercial land and three-
4. As a result of the exchange the transferor, alone door. As a result, B acquired 51% ownership of ABC
or together with others, not exceeding four (4), Corp., with all the shares of stock having the right to
gains control of the transferee. (CIR v. Filinvest vote.
Development Corporation, G.R. Nos. 163653 &
167689, 19 Jul. 2011) Sale of Principal Residence

Exchange of Property Refer to discussion on “Income from Dealings in

Property – Sale of Principal Residence” – p. 91
Gain or loss arising from the acquisition and
subsequent disposition of property is realized only e) SITUS OF INCOME TAXATION
when as the result of a transaction between the
owner and another person, the property is Territoriality Principle
converted into another property that has a market
value. Taxation may be exercised only within the
territorial jurisdiction of the taxing authority. (61
Am. Jur. 88) Within its territorial jurisdiction, the

69 UNIVERSITY OF SANTO TOMAS

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 TAXATION LAW
taxing authority may determine the “place of wherever it is actually kept or located,
taxation” or “tax situs.” (2013 BAR) pursuant to the principle of the Mobilia
sequntur personam, i.e., movable follows the
Situs of Taxation person/owner.

It is the place or authority that has the right to XPNs:

impose and collect taxes. (CIR v. Marubeni
i. When the property has acquired a
Corporation, G.R. No. 137377, 18 Dec. 2001)
business situs in another jurisdiction, such
Factors to Determine the Situs of Taxation
that it has definite location there,
(Re-Ci-N-S2)
accompanied by some degree of
permanency; or
1. Residence of the taxpayer,
2. Citizenship of the taxpayer,
ii. When an express provision of the statute
3. Nature of the tax,
provides for another rule.
4. Subject matter of the tax, and
5. Source of income.
NOTE: Under Sec. 104 of the NIRC, in case of
donor’s and estate tax, the following properties
Rules Observed in Fixing Tax Situs
are considered as situated, thus taxed, in the
Philippines and the residence of their owners
1. Poll/Capitation/Community Tax – taxed upon
are immaterial, except where the foreign
the residence of taxpayer, regardless of the
country grants exemption or does not impose
source of income or location of property of the
taxes on intangible properties to Filipino
taxpayer.
citizens:

2. Property Tax
i. Franchise which must be exercised in the
Philippines;
a. Real property – taxed upon the location of
the property (lex rei sitae/lex situs),
ii. Shares, obligations, or bonds issued by any
regardless of whether the owner is a
corporation Sociedad anonima organized
resident or a non-resident.
or constituted in the Philippines in
accordance with its laws;
Rationale:
i. The taxing authority has control
iii. Shares, obligations, or bonds by any
because of the stationary and fixed
foreign corporation 85% of its business is
character of the property; and
located in the Philippines;

ii. The place where the real property is

iv. Shares, obligations, or bonds issued by any
situated gives protection to the real
foreign corporation if such shares,
property. Hence, the property or its
obligations or bonds have acquired a
owner should support the
business situs in the Philippines; and
government of that place.
v. Shares or rights in any partnership,
b. Personal property
business or industry established in the
i. Tangible personal property – taxed
Philippines.
upon the location of the property
ii. Intangible personal property

GR: Taxed upon the domicile of the owner,

UNIVERSITY OF SANTO TOMAS 70

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 II. NATIONAL TAXATION
Application of the Doctrine of Mobilia Sequuntur transaction is made (perfected and
Personam not Mandatory in all Cases consummated) outside of the Philippines,
we can no longer tax such transaction.
Such doctrine has been decreed as a mere "fiction of (Dimaampao, 2021)
law having its origin in considerations of general
convenience and public policy and cannot be NOTE: Situs of taxation of excise tax is the place
applied to limit or control the right of the State to tax where the privilege is exercised. In case of a
property within its jurisdiction," and must "yield to franchise, which is a right or privileges granted
established fact of legal ownership, actual presence to it by the government, the situs of taxation is
and control elsewhere, and cannot be applied if to the place where the franchise holder exercises
do so would result in inescapable and patent its franchise regardless of the place where its
injustice." (Wells Fargo Bank and Union Trust v. services or products are delivered. Thus, in a
Collector, G.R. No. L-46720, 28 June 1940) franchise of electric power distribution, the
franchisee is liable within the jurisdiction it
3. Excise Tax – excise taxes are taxes imposed on exercises its privilege. (City of Iriga v. Camarines
the exercise of a right or privilege or Sur III Electric Cooperative, G.R. No. 192945, 05
performance of an act. (Dimaampao, 2021) Sept. 2012)

a. Income tax Income from Sources Within the Philippines

Refer to previous discussion on “Criteria on 1. Interests derived from sources within the
Imposiing Philippine Income Tax Law”. Philippines;

NOTE: The source of an income is the property, 2. Dividends from domestic and foreign
activity or service that produces the income. For corporations, if more than 50% of its gross
the source of income to be considered as coming income for the three-year period ending with
from the Philippines, it is sufficient that the the close of the taxable year prior to the
income is derived from activity within the declaration of dividends was derived from
Philippines. (CIR v. British Overseas Airways sources within the Philippines;
Corp., G.R. Nos. L-65773-74, 30 Apr. 1987)
3. Compensation for services performed within
b. Donor’s Tax and Estate Tax the Philippines;

CLASS OF 4. Rentals and royalties from properties located

SOURCES
TAXPAYER in the Philippines or any interest in such
property including rentals or royalties for the
Resident or
Properties within and use of or for the privilege of using within the
Citizen of the
without the Philippines Philippines intellectual property rights such as
Philippines
trademarks, copyrights, patents, etc.;
Properties within the
Philippines 5. Gains on sale of real property located in the
Non-Resident,
Philippines;
Non-Citizen of
NOTE: Intangible personal
the Philippines
property is subject to the rule 6. Gains on sale of personal property other than
of reciprocity. (Ingles, 2018) shares of stock within the Philippines; and

7. Gains on sale of shares of stock in a domestic

c. Value-Added Tax – taxed upon the place
corporation.
where the transaction is made. If the

71 UNIVERSITY OF SANTO TOMAS

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 TAXATION LAW
Income from Sources Without the Philippines Place of farming
Farming income
activities
1. Interest and dividends derived from sources
other than those within the Philippines; Gain on sale of Income within the
2. Compensation for services performed outside domestic stock Philippines
the Philippines; and
Residence of the
Interest
debtor
3. Rentals and royalties from properties located
outside the Philippines or any interest in such Gain on sale of
property including rentals or royalties for the Place of activity that
transport
use of or for the privilege of using outside the produces the income
document
Philippines intellectual property rights such as
Manufacturing:
trademarks, copyrights, patents, etc.
1. Produced in Income purely within
Income Derived Partly Within and Partly whole within
and sold
Without the Philippines
within
Gains, profits, or incomes other than those 2. Produced in Income purely without
whole without
enumerated above shall be allocated or
apportioned to sources within or without the and sold
Philippines. without Income partly within
3. Produced and partly without
within and
SUMMARY RULES ON DETERMINATION OF sold without
SITUS ACCORDING TO KINDS OF INCOME 4. Produced Income partly within
without and and partly without
KINDS OF INCOME TAX SITUS sold within
Service or
Place of performance Dividend income
compensation
of service from:
income
1. Domestic Income within
Location of property Corporation
Rent
(real or personal) 2. Foreign
Place of use of Corporation –
Royalties If for the 3-
intangibles
year period
Merchandising Place of sale preceding the
declaration of
Gain on sale of dividend, the
personal property ratio of such
Place of sale
purchased and not corporation’s
produced Phil income to
the world
Gain on sale of (total) was:
Location of property - Less than
real property Entirely without
50%
Mining income Location of the mines - More than
50% Proportionate*

UNIVERSITY OF SANTO TOMAS 72

2023 GOLDEN NOTES
 II. NATIONAL TAXATION
*Formula (Proportionate) received through mistake. (Gutierrez v. CIR, CTA
Case No. 65, 31 Aug. 1955)
𝑃𝑃ℎ𝑖𝑖𝑖𝑖. 𝐺𝐺𝐺𝐺𝐺𝐺𝐺𝐺𝐺𝐺 𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼
× 𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷 𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟
𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸 𝐺𝐺𝐺𝐺𝐺𝐺𝐺𝐺𝐺𝐺 𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼 Q: Explain briefly whether the following items
= 𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼 𝑤𝑤𝑤𝑤𝑤𝑤ℎ𝑖𝑖𝑖𝑖 are taxable or non-taxable:
1. Income from jueteng;
3. GROSS INCOME 2. Gain arising from expropriation of
property;
a) DEFINITION 3. Taxes paid and subsequently refunded
4. Recovery of bad debts previously charged
Except when otherwise provided, gross income off; and
means all income derived from whatever source, 5. Gain on the sale of a car used for personal
including but not limited to the following items: (C- purposes. (2005 BAR)
G2I- R2D-A-P3) A:
1. TAXABLE. Gross income includes "all income
1. Compensation for services in whatever form
derived from whatever source" (Sec. 32(A),
paid, including, but not limited to fees, salaries,
NIRC), which was interpreted as all income not
wages, commissions, and similar items;
expressly excluded or exempted from the class
2. Gross income derived from the conduct of trade
of taxable income, irrespective of the voluntary
or business or the exercise of a profession;
or involuntary action of the taxpayer in
3. Gains derived from dealings in property;
producing the income. Thus, the income may
4. Interests;
proceed from a legal or illegal source such as
5. Rents;
from jueteng. Unlawful gains, gambling
6. Royalties;
winnings, etc. are subject to income tax. The
7. Dividends;
NIRC stands as an indifferent neutral party on
8. Annuities;
the matter of where the income comes from.
9. Prizes and winnings;
(CIR v. Manning, G.R. No. L-28398, 06 Aug. 1975)
10. Pensions; and
11. Partner’s distributive share from the net
2. TAXABLE. Sale, exchange or other disposition
income of the general professional partnership
of property to the government of real property
(Sec. 32 (A), NIRC)
is taxable. It includes taking by the government
through condemnation proceedings. (Gonzales
NOTE: The above enumeration of gross income
v. CTA, G.R. No. L-14532, 26 May 1965)
under NIRC is not exclusive.
3. TAXABLE if the taxes were paid and
b) CONCEPT OF INCOME FROM WHATEVER subsequently claimed as deduction and which
SOURCE DERIVED are subsequently refunded or credited. It shall
be included as part of gross income in the year
Q: Is money received under payment by mistake, of the receipt to the extent of the income tax
income subject to income tax? benefit of said deduction. (Sec. 34(C)(1), NIRC)
However, it is not taxable if the taxes refunded
A: Income paid or received through mistake may be were not originally claimed as deductions.
considered as “income from whatever source
derived” irrespective of the voluntary or 4. TAXABLE under the tax benefit rule. Recovery
involuntary action of the taxpayer in producing of bad debts previously allowed as deduction in
income. Moreover, under the Claim of Right the preceding years shall be included as part of
Doctrine, the recipient even if he has the obligation the gross income in the year of recovery to the
to return the same has a voidable title to the money extent of the income tax benefit of said

73 UNIVERSITY OF SANTO TOMAS

FACULTY OF CIVIL L AW
 TAXATION LAW
deduction (Sec. 34(E) (1), NIRC) This is Simplifies the income Confusing and
sometimes referred as the Recapture Rule. tax system complex process of
filing income tax
NOTE: Tax Benefit Rule refers to the principle return
that if a taxpayer recovers a loss or expense that
was deducted in a previous year, the recovery Substantial reduction Vulnerable to
must be included in the current year’s gross in corruption and tax corruption on
income to the extent that it was previously evasion since the account of margin of
deducted (Black, 2004); exercise of discretion in the
discretion, to allow or grant of deductions
5. TAXABLE. Since the car is used for personal disallow deductions,
purposes, it is considered as a capital asset is dispensed with
hence the gain is considered income (Secs. 32 More Provides equitable
(A)(3) and 39(A (1), NIRC) administratively reliefs in the form of
feasible deductions,
c) GROSS INCOME VS. NET INCOME VS. exemptions and tax
TAXABLE INCOME credit

Does away with Tax audit minimizes

Gross Income, Net Income and Taxable Income wastage of fraud
Distinguished manpower and
supplies
BASIS DEFINITION
All income derived from
Gross
whatever source. (Sec. 32(A), Gross Income
Income
NIRC)
Gross Income less allowable Gross income is equal to all income less exclusions
Net Income deductions. (Dimaampao, (1983, 1980 BAR)
2018)
The pertinent items of gross Net Income Taxation
income specified in this Code,
Taxable less deductions, if any, Net income taxation is a system of taxation where
Income authorized for such types of the income subject to tax may be reduced by
income by this Code or other allowable deductions.
special laws. (Sec. 31, NIRC)
Taxable Income
Gross Income and Net Income Distinguished
The term “taxable income” means the pertinent
items of gross income specified in this Code, less the
GROSS INCOME NETINCOME
deductions, if an, authorized for such types of
As to deductions income by this Code or other special laws. (Sec. 31,
Allows no deductions Allows deductions NIRC)
As to exemptions
Q: Lao is a big-time swindler. In one year, he was
Grants no Grants exemptions
able to earn P1 Million from his swindling
exemptions
activities. When the CIR discovered his income
As to tax base
from swindling, the CIR assessed him a
Gross Income Net Income
deficiency income tax for such income. The
Advantages/Disadvantages

UNIVERSITY OF SANTO TOMAS 74

2023 GOLDEN NOTES
 II. NATIONAL TAXATION
lawyer of Lao protested the assessment on the realized a taxable income from his swindling
following grounds: activities and will not affect his obligation to make
restitution. Payment of the tax is a civil obligation
a. The income tax applies only to legal income, imposed by law while restitution is a civil liability
not to illegal income; arising from a crime.

A: The ground is unmeritorious. Sec. 32 of the NIRC The tax implication when there is exchange of
includes within the purview of gross income all services without compensation is that both parties
income from whatever source derived. Hence, the are taxable as if both each sold their services.
illegality of the income will not preclude the
imposition of the income tax thereon. Self-help income is the amount saved for doing a
work by the taxpayer himself instead of hiring
b. Lao’s receipts from his swindling did not someone to do the work. Self-help income is exempt
constitute income because he was under from tax. For example, a person wants to repaint his
obligation to return the amount he had house. Instead of hiring a painter, that person did
swindled, hence, his receipt from swindling the painting job himself to save money.
was similar to a loan, which is not income,
because for every peso borrowed he has a d) SOURCES OF INCOME SUBJECT TO TAX
corresponding liability to pay one peso; and
(1) COMPENSATION INCOME
A: The ground is unmeritorious. When a taxpayer
acquires earnings, lawfully or unlawfully, without
Definition
the consensual recognition, express or implied, of
an obligation to repay and without restriction as to
Compensation income includes all remuneration for
their disposition, he has received taxable income,
services rendered by an employee for his employer
even though it may still be claimed that he is not
unless specifically excluded under the NIRC. (Sec.
entitled to retain the money, and even though he
2.78.1, RR No. 2-1998)
may still be adjudged to restore its equivalent. To
treat the embezzled funds as not taxable income
Q: As a way to augment the income of the
would perpetuate injustice by relieving embezzlers
employees of DEF, Inc., a private corporation,
of the duty of paying income taxes on the money
the management decided to grant a special
they enrich themselves with, by embezzlement,
stipend of P50,000.00 for the first vacation leave
while honest people pay their taxes on every
that any employee takes during a given calendar
conceivable type of income. (James v. U.S., 202 US
year. In addition, the senior engineers were also
401)
given housing inside the factory compound for
the purpose of ensuring that there are available
c. If he has to pay the deficiency income tax
engineers within the premises every time there
assessment there will be hardly anything
is a breakdown in the factory machineries and
left to return to the victims of the swindling.
equipment.
How will you rule on each of the three
grounds for the protest? (1995 BAR)
a. Is the special stipend part of the taxable
income of the employees receiving the
A: The ground is unmeritorious. The deficiency
same? If so, what tax is applicable and what
income tax assessment is a direct tax imposed on
is the tax rate? Explain.
the owner which is an excise on the privilege to earn
an income. It will not necessarily be paid out of the A: YES, the special stipend is part of the taxable
same income that was subjected to the tax. Lao’s income of the employees since the same may very
liability to pay the tax is based on him having well be considered income on his part.

75 UNIVERSITY OF SANTO TOMAS

FACULTY OF CIVIL L AW
 TAXATION LAW
b. Is the cash equivalent value of the housing incidents to proper performance of the military
facilities received by the senior engineers personnel’s duties.
subject to fringe benefits tax? Explain.
(2019 BAR) Refer to discussion on “Inclusions and Exclusions
for Taxation on Compensation Income” – p. 153
A: NO. The cash equivalent value of the housing
facilities received by the senior engineers is not
(2) FRINGE BENEFITS
subject to fringe benefits tax. The same is exempt
from FBT since the housing is located within the
Refer to discussion on “Inclusions and Exclusions
Company’s premises and is generally for the
for Taxation on Compensation Income” – p. 152
convenience of the employer.

Q: Mr. Gipit borrowed from Mr. Maunawain (3) PROFESSIONAL INCOME

P100,000.00, payable in five (5) equal monthly
installments. Before the first installment Definition
became due, Mr. Gipit rendered general cleaning
services in the entire office building of Mr. Professional income refers to the fees received by a
Maunawain, and as compensation therefor, Mr. professional from the practice of his profession,
Maunawain cancelled the indebtedness of Mr. provided that there is no employer-employee
Gipit up to the amount of P75,000.00. Mr. Gipit relationship between him and his clients.
claims that the cancellation of his indebtedness
cannot be considered as gain on his part which The existence or nonexistence of employer-
must be subject to income tax, because employee relationship is material to determine
according to him, he did not actually receive whether the income is a compensation income or
payment from Mr. Maunawain for the general professional income. If the employer-employee
cleaning services. Is Mr. Gipit correct? Explain. relationship is present, then it is considered
(2014 BAR) compensation income. Otherwise, it is a
professional income.
A: NO. The cancellation of the indebtedness of up to
P75,000.00 is intended as a compensation for the For purposes of taxation, there is no deduction
general cleaning services rendered by Mr. Gipit. allowed against compensation income, whereas
Compensation for services in whatever form paid is allowable deductions may be made from
part of gross income. (Sec. 32(A), NIRC) professional income.

Q: Capt. Canuto is a member of the Armed Forces NOTE: Professional income shall be subject to
of the Philippines. Aside from his pay as captain, creditable withholding tax rates prescribed. (RR No.
the government gives him free uniforms, free 3-1998)
living quarters in whatever military camp he is
assigned, and free meals inside the camp. Are
these benefits income of Capt. Canuto? Explain.
(1995 BAR)

A: NO. The free uniforms, free living quarters and

the free meals inside the camp are not income to
Capt. Canute because these are facilities or
privileges furnished by the employer for the
employer’s convenience which are necessary

UNIVERSITY OF SANTO TOMAS 76

2023 GOLDEN NOTES
 II. NATIONAL TAXATION
Compensation Income and Professional Income (4) INCOME FROM BUSINESS
Distinguished
Definition
COMPENSATION PROFESSIONAL
Business income refers to income derived from
INCOME INCOME
merchandising, mining, manufacturing, and farming
Definition
operations.
Income derived by self-
employed from trade NOTE: Business is any activity that entails time and
All remuneration for
or business (trading, effort of an individual or group of individuals for
services rendered by
manufacturing, purposes of livelihood or profit.
an employee for his
merchandising,
employer unless
farming, and others), Gross Income Derived from Business
specifically excluded
and income derived by
under the Tax Code.
professionals from the The term “gross income” derived from business shall
(RR No. 12-1998)
practice of professions. be equivalent to gross sales less sales returns,
(Dimaampao, 2018) discounts and allowances and cost of goods sold. In
Entitlement to 8% income tax the case of taxpayers engaged in the sale of service,
Not entitled Entitled “gross income” means gross receipts less sales
Possibility of substituted filing returns, allowances and discounts. (Sec. 27 (A),
Yes, the employer files NIRC)
the income tax return
of the employee. If the Cost of Goods Sold
None, should file
amount of tax is
quarterly income tax
correctly withheld by It includes all business expenses directly incurred to
returns and an annual
the employer, the produce the merchandise, to bring them to their
return
employee no longer present location and use such as invoice cost of the
needs to file an annual goods sold, for a trading concern, or cost of
income tax return. production for a manufacturing concern.
Rate/amount of withholding
1. Individual payee – Cost of Services
5% if gross income
for the curreny All direct costs and expenses necessarily incurred to
year did not provide the service required by the customers and
exceed P3 million; clients including:
10% if it exceeds
P3 million or VAT- 1. Salaries and employee benefits of personnel,
Based on graduated
registered consultants, and specialists directly rendering
withholding tax rates
regardless of the the service; and
ranging from 0% to
amount
35% on net taxable
Non-individual payee – 2. Cost of facilities directly utilized in providing the
compensation.
10% if gross income service. (Sec. 27(E)(4), NIRC)
for the current year did
not exceed P720,000;
15% if gross income
exceeds P720,000 (Sec.
2.57.2, RR. NO. 14-
2018)

77 UNIVERSITY OF SANTO TOMAS

FACULTY OF CIVIL L AW
 TAXATION LAW
(5) INCOME FROM DEALINGS IN PROPERTY d. Stock and securities held by taxpayers
other than dealers of securities
Types of Properties from which Income may be
Derived (2003 BAR) Construction and Interpretation of Capital
Assets
1. Ordinary assets – properties held by the
taxpayer used in connection with his trade or The general rule has been laid down that the
business which includes the following: (S-O-U- codal definition of a capital asset must be
R) narrowly construed while the exclusions from
such definitions must be interpreted broadly.
a. Stock in trade of the taxpayer or other (Tuazon v. Lingad, G.R. No. L-24248, 31 July
property of a kind which would properly be 1974)
included in the inventory of the taxpayer if
on hand at the close of the taxable year; Guidelines in Determining whether a Real
b. Property held by the taxpayer primarily for Property is a Capital Asset or Ordinary Asset
sale to customers in the Ordinary course of
trade or business; CLASS OF TAXPAYER ASSETS
All real properties
c. Property Used in the trade or business of a Real estate dealer acquired are ordinary
character which is subject to the allowance assets.
for depreciation provided in the NIRC; or All real properties
which are:
d. Real property used in trade or business of 1. Acquired whether
the taxpayer. developed or
undeveloped;
Examples of Ordinary Assets 2. Held by the real
estate developer
a. Condominium building owned by a realty primarily for sale
company, the units of which are for rent or or for lease in the
for sale ordinary course of
trade or business
b. Machinery and equipment of a or which would be
Real estate developer
manufacturing concern subject to included in the
depreciation inventory of the
taxpayer if on hand
c. Motor vehicles of a person engaged in at the close of the
transportation business taxable year; and
Used in trade or
2. Capital assets – include property held by the business, whether in
taxpayer (whether or not connected with his the form of land,
trade or business) other than S-O-U-R above. building, or
improvements shall be
Examples of Capital Assets considered as ordinary
assets
a. Jewelry not used for trade or business All real properties
b. Residential houses and lands owned and whether land and/or
used as such Real estate lessor
other improvements,
c. Automobiles not used in trade or business which are for

UNIVERSITY OF SANTO TOMAS 78

2023 GOLDEN NOTES
 II. NATIONAL TAXATION
lease/rent or being business by a taxpayer
offered for lease/rent, engaged in business
or for use or being used other than real estate
in the trade or business as defined in
business, shall be Sec. 2(g) hereof are
considered as ordinary automatically
assets. converted into capital
All real properties assets upon showing of
Taxpayers habitually acquired in the course proof that the same
engaged in the real of trade or business have not been used in
estate business shall be considered as business for more than
ordinary assets. two (2) years prior to
Real properties the consummation of
whether land, building, the taxable
or other transactions involving
improvements, which said properties. (RR No.
Taxpayers not
are used or being used 7-2003)
engaged in the real
or have been Real property subject No effect on the
estate business
previously used in the of involuntary classification of the
trade or business shall transfer (including property in the hands
be considered as expropriation or of the involuntary
ordinary assets. foreclosure sale) seller.
It will not result in the
Taxpayer changing
reclassification of real Determination of Asset Classification
business from real
property from
estate to non-real
ordinary to capital Tax treatment varies for capital assets and ordinary
estate business
asset. assets. There are special rules that apply only to
Taxpayers originally capital asset transactions, to wit:
All real properties
registered to be
originally acquired by
engaged in the real 1. Holding period rule
them shall continue to
estate business but 2. Capital loss limitation
be treated as ordinary
failed to subsequently 3. Net capital loss carry-over (NCLCO)
assets.
operate
Real property initially Q: State with reason the tax treatment of the
acquired by a taxpayer following in the preparation of annual income
engaged in the real tax returns: Income realized from sale of:
estate business shall a. Capital assets; and
not result in its b. Ordinary assets. (2005 BAR)
conversion into a
capital asset even if the A:
Abandoned and idle
same is subsequently a. Generally, what are to be reported in the annual
real property
abandoned or becomes income tax return are the capital gains derived
idle. from the disposition of capital assets other than
real property or shares of stocks in domestic
Provided, however, corporations, which are not subject to final tax.
that properties Capital gains derived from real properties and
classified as ordinary shares of stock not traded in the stock exchange
assets for being used in are subject to final tax (Capital Gains Tax).

79 UNIVERSITY OF SANTO TOMAS

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 TAXATION LAW
b. Income realized from sale of ordinary assets is NOTE: Gain is the difference between the proceeds
part of Gross Income, included in the Income of the sale or exchange and the acquisition value of
Tax Return (Sec.32(A)(3), NIRC) the property disposed by the taxpayer (tax basis).

Q: May a capital asset be reclassified as ordinary Rules on Determining Adjusted Basis or Cost of
asset? the Property Sold (Sec. 40(B), NIRC)

A: YES. Property initially classified as capital asset

PROPERTY RULES
may thereafter be treated as an ordinary asset if a
combination of the factors indubitably tends to Acquired on or after March 1,
By purchase
show that the activity was in furtherance of or in the 1913 – Cost plus expenses of
course of the taxpayer’s trade or business. acquisition

Q: In January 1970, Juan bought 1 hectare of Included in the

Its latest inventory value
agricultural land in Laguna for P100,000. This inventory
property has a current fair market value of P10
By devise,
million in view of the construction of a concrete FMV or value of such property
bequest or
road traversing the property. Juan agreed to at the time of the acquisition –
inheritance
exchange his agricultural lot in Laguna for a one- death of the decedent
half hectare residential property located in
Batangas, with a fair market value of P10 The same basis as if it would
million, owned by Alpha Corporation, a be in the hands of the donor or
domestic corporation engaged in the purchase the last preceding owner by
and sale of real property. Alpha Corporation whom it was acquired by gift,
acquired the property in 2007 for P9 million. except that if such basis is
What is the nature of the real properties By Gift greater than the fair market
exchanged for tax purposes – capital or ordinary value of the property at the
asset? (2008 BAR) time of the gift, then for the
purpose of determining the
A: The one-hectare agricultural land owned by Juan loss, the basis shall be such fair
is a capital asset because it is not a real property market value.
used in trade or business. The one-half hectare
residential property owned by Alpha Corporation is Acquired
an ordinary asset because the owner is engaged in (other than
the purchase and sale of real property. (Sec. 39, capital assets)
NIRC, RR No. 7-2003) for less than Amount paid by the transferee
adequate
Gains Derived from Dealings in Property consideration
in money or
All income derived from the disposition of property money’s worth
whether real, personal or mixed for:

1. Money, in case of sale

2. Property, in case of exchange
3. Combination of both sales and exchange, which
results in gain

UNIVERSITY OF SANTO TOMAS 80

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 II. NATIONAL TAXATION
Capital Gain and Capital Loss Distinguished
Stock or
security
CAPITAL GAIN CAPITAL LOSS
property
The loss that may be
received if the The same as the basis of the
sustained from the
exchange is stock, or security or property
sale or exchange of an
one where given in exchange It includes the gain
asset not connected
gain or loss derived from the sale
with the trade or
may not be or exchange of an
business.
recognized asset not connected
(1994 BAR) with the trade or
Capital loss may not
business.
exceed capital gains
Basis of the property, when used as a
Stock of
stock, or security given deduction to income.
security
in exchange:
received if the
exchange is
Less: Cash and FMV of Ordinary Gain and Capital Gain Distinguished
one where the
property given in
gain or loss
exchange ORDINARY GAIN CAPITAL GAIN
may not be
Add: Dividend and/or A gain derived from
recognized
gain recognized the sale or exchange of
(1985 BAR)
= Basis of stock or A gain derived from capital assets or
security received the sale or exchange of property whether or
ordinary assets such not connected with
as S-O-U-R the trade or business
Property of the tax payer other
transferred in than S-O-U-R
the hands of The same basis as it would be
the transferee in the hands of transferor Actual Gain and Presumed Gain Distinguished
if exchange is increased by the amount of the
one where the gain recognized to the ACTUAL GAIN PRESUMED GAIN
gain, if any, but transferor on the transfer. The law presumes
not the loss is that the seller of real
to be property classified as
recognized Excess of the selling capital asset realized
price over the cost of gains, which is taxed
the asset at 6% of the selling
Ordinary Income and Ordinary Loss price or fair market
Distinguished value, whichever is
higher.
ORDINARY INCOME ORDINARY LOSS Treatment of Capital Gains and Losses of
It includes the gain The loss that may be Individuals and Corporations Distinguished
derived from the sale sustained from the
or exchange of sale or exchange of
ordinary asset. ordinary asset. INDIVIDUAL CORPORATION
Availability of holding period

Holding period
Not applicable
available

81 UNIVERSITY OF SANTO TOMAS

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 TAXATION LAW

Extent of recognition (taxability) Capital Gains Subject to Final Tax and Capital
Gains Reported in the Income Tax Return
Distinguished
The percentages of
gain or loss to be SUBJECT TO FINAL REPORTED IN THE
taken into account TAX ITR
shall be the ff.: As to deductions
Capital gains and
100% - if the capital
losses are taxable to
assets have been held
the extent of 100%
for 12 months or less;
and
50% - if the capital
asset has been held The capital gains are
for more than 12 aggregated with
months There is a fixed rate other income to
for the tax constitute gross
income subject to
Deductibility of capital losses deductions
GR: Non-deductibility
of Net Capital losses

XPN: If any domestic

Non-deductibility of bank or trust company,
Net Capital losses a substantial part of As to actual gains
whose business is the GR: It does not matter
Capital losses are receipt of deposits, whether or not capital
allowed only up to the sells any bond, gains are actually
extent of the capital debenture, note or earned (presumed
gains; hence, the net certificate or other gains) There must be
capital loss is not evidence of actual capital gains
deductible. indebtedness issued by XPN: Disposition of earned
any corporation shares not traded in
(including one issued the stock exchange or
by a government or thru initial public
political subdivision) offering

Availability of NCLCO As to holding period

NCLCO allowed for a GR: Holding period is

NCLCO not allowed
period of one (1) year immaterial

XPN: Disposition of Holding period is

shares not traded in considered.
the stock exchange or
thru initial public
offering

UNIVERSITY OF SANTO TOMAS 82

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 II. NATIONAL TAXATION

As to Net Loss Carry Over applicability of such limitation to other

losses. (Sec. 39(C), NIRC)
Not allowed Could be availed
Q: Can a taxpayer deduct ordinary loss from
ordinary gain and from capital gain?
Special Rules on Income or Loss from Dealings in
Property Classified as Capital Asset A: YES, in both cases. Ordinary loss may be
deducted from ordinary gain while only from
1. Loss limitation rule – Losses from sale or certain types of capital gain may ordinary loss
exchanges of capital assets shall be allowed only be deducted.
up to the extent of the gains from such sales or
exchanges. (Sec. 39(C), NIRC) Rule on Matching Cost

Thus, under this capital loss limitation rule, Under this rule, only ordinary and necessary
capital loss is deductible only up to the extent expenses are deductible from gross income or
of capital gain. The taxpayer can only deduct ordinary income. Capital loss is a non-business
capital loss from capital gain. If there is no connected expense as it can be sustained only
capital gain, then no deduction is allowed from capital transactions. To allow that capital
because you cannot deduct capital loss from loss as a deduction from ordinary income
ordinary gain. would run counter to the rule on matching cost
against revenue.
Rationale: To allow the deduction of non-
business (capital) losses from business 2. Loss carry-over rule/Net Capital Loss
(ordinary) income or gain could mean the Carry Over (NCLCO) – If any taxpayer,
reduction or even elimination of taxable income other than a corporation, sustains in any
of the taxpayer through personal, non-business taxable year a net capital loss, such loss (in
related expense, resulting in substantial losses an amount not in excess of the net income
of revenue to the government. (Mamalateo, for such year) shall be treated in the
2014) succeeding taxable year as a loss from the
sale or exchange of a capital asset held for
Where the Capital Loss Limitation Rule will not more than 12 months. (Sec. 39(D), NIRC)
NOT Apply
Rules on NCLCO
1. If a bank or trust company is incorporated
under the laws of the Philippines; 1. NCLCO is allowed only to individuals,
including estates and trusts;
2. A business whose substantial part is the
receipt of deposits; 2. The net loss carry-over shall not exceed the
net income for the year sustained and is
3. Sells any bond, debenture, note or deductible only for the succeeding year;
certificate or other evidence of
indebtedness issued by any corporation, 3. The capital assets must not be real
with interest coupons or in registered property or stocks listed and traded in the
form; and stock exchange; and

4. Any losses resulting from such sale shall 4. Capital asset must be held for not more
not be subject to the above limitations and than 12 months.
shall not be included in determining the

83 UNIVERSITY OF SANTO TOMAS

FACULTY OF CIVIL L AW
 TAXATION LAW
NCLCO and Net Operating Loss Carry Over Net Capital Gain and Net Capital Loss
(NOLCO) Distinguished Distinguished

NCLCO NOLCO
As to source NET CAPITAL GAIN NET CAPITAL LOSS
Excess of the gains Excess of the losses
Arises from ordinary
Arises from capital from sales or from sales or
transactions meaning
transactions meaning exchanges of capital exchanges of capital
involving ordinary
involving capital asset assets over the losses assets over the gains
asset
from such sales or from such sales or
As to who can avail exchanges exchanges
Can be availed of by Can be availed of by
individual taxpayer individual and Recognition of Gain or Loss in Exchange of
only corporate taxpayer Property

As to period of carry-over
Refer to previous discussion on “Tax-free
Allows carryover of Exchanges” – p. 68
May be carried over operating loss in 3
only in the next succeeding taxable Tax Treatment of Capital Gains and Losses
succeeding taxable years or 5 years, in the
year case of mining
companies SOURCE TAX TREATMENT
1. Stocks Traded in the
3. Holding period rule (long-term capital gain Stock Exchange –
vis-à-vis short-term capital gain) – subject to six-tenths of
Where the taxpayer held the capital asset sold for one percent (6/10 of
more than 12 months, the gain derived 1%) of the gross selling
therefrom is taxable only to the extent of 50%. price or gross value in
Consequently, if the taxpayer held the capital money of the shares of
asset sold for a year or less, the whole gain shall stock sold, bartered,
be taxable. The same also applies to capital loss. exchanged or otherwise
It is a form of tax avoidance since the taxpayer disposed which shall be
can exploit it in order to reduce his tax due. (Sec. paid by the seller or
39(B), NIRC) transferor (Sec. 127(A),
From Sale of
NIRC)
Stocks of
However, holding period does not find
Corporations
application in the case of disposition of: 2. Stocks Not Traded in the
Stock Exchange –
a. Shares of stock of a domestic subject to capital gains
corporation held as capital asset; and tax
b. Real property considered as capital
asset, whether the seller is an NOTE: Under R.A. No. 11534
individual, trust, estate or a private or CREATE Act, foreign
corporation. corporations are now
subject to 15% capital gains
NOTE: Only individual taxpayers can avail tax on from the sale, barter,
of the holding period rule. It is not allowed exchange or other
to corporations. disposition of shares of

UNIVERSITY OF SANTO TOMAS 84

2023 GOLDEN NOTES
 II. NATIONAL TAXATION
stock in a domestic real property with respect to
corporation not traded in individual taxpayers, estate
the stock exchange. (Sec. 7, and trust but also speaks of
R.A. No. 11534, amending land and/or building with
Sec. 28, NIRC) respect to domestic
corporations.
What is controlling is
whether or not the shares of CGT on sale or disposition of
stock are traded in the local real properties shall apply
stock exchange and not only to domestic
where the actual sale corporations, since foreign
happened. (Del Rosario v. corporations (RFC and
CIR, CTA Case No. 4796, 01 NRFC) cannot own
Dec. 1994) properties in the
Capital gains tax shall be Philippines.
imposed based on the higher Gains realized from the sale,
amount between: exchange or other
disposition of real property
1. The gross selling price; not located in the
or Philippines by resident
From Sale of citizens or domestic
2. Whichever is higher Real corporations shall be
between the current fair Properties/Land subject to ordinary income
market value as and/or taxation (Sec. 4(F), RR No. 7-
determined by: Buildings 2003) but subject to foreign
a. Zonal Value – outside the tax credits.
prescribed zonal Philippines
value of real Such income may be exempt
From Sale of properties as in the case of non-resident
Real determined by the citizens, alien individuals
Properties/Land CIR; or and foreign corporations
and/or b. Assessed Value – (Sec. 4(F), RR No. 7-2003)
Buildings in the the fair market The taxpayer has the option
Philippines value as shown in to either:
the schedule of 1. Include as part of gross
values of the income subject
Provincial and City allowable deductions
assessors (NIRC, From Sale of
and personal
Sec. 24(D) (1)) Real Property
exemptions, then
held as Capital
subject to the
NOTE: Actual gain or loss is Asset to the
schedular tax; or
immaterial since there is a Government
conclusive presumption of NOTE: This is not
gain. available to a corporate
taxpayer.
As regards transactions
affected by the 6% capital
gain tax, the NIRC speaks of

85 UNIVERSITY OF SANTO TOMAS

FACULTY OF CIVIL L AW
 TAXATION LAW
2. Subject to final tax of 4. If the FMV of the shares of stock disposed is
6% on capital gains higher than the amount of amount and/or fair
(Sec. 24(D), NIRC) market value of the property received, the
excess of the FMV of the shares of stock
disposed over the amount of money and the
FMV of the property, shall be deemed a gift
subject to the donor’s tax. (RR 6-2008)
Included in gross income
subject to the graduated
5. In the case of shares of stock not listed and
From Sale of rates for individuals and the
traded in the local stock exchange, the value of
Other Capital normal corporate income
the shares of stock at the time of sale shall be
Assets tax for corporations, and not
the FMV. In determining the value of the shares,
subject to capital gains tax
the Adjusted Net Asset Method shall be used
whereby all assets and liabilities are adjusted
to FMV. The net of adjusted asset minus the
Transactions Covered by the “Presumed” CGT on liability values is the indicated value of the
Real Property equity.

1. Sale; 6. The appraised value of real properties shall be

2. Exchange; or the highest of the three:
3. Other disposition, including Pacto de retro and a. FMV determined by the Commissioner,
other forms of conditional sales. (Sec. 24 D(1), b. FMV as shown in the schedule of values
NIRC) fixed by provincial and city assessors, or
c. FMV as determined by independent
NOTE: “Sale, exchange, or other disposition” appraiser (RR No. 6-2013)
includes taking by the government through
expropriation proceedings. NOTE: The basis of determining the Capital Gains
Tax (CGT) is the capital gain and not the fair market
Persons Liable for CGT on the Sale of Shares of value.
Stock Not Traded in the Stock Exchange
The above rules apply to DC, RFC, and NRFC.
1. Individuals – both citizens and aliens
2. Corporations – both domestic and foreign Principles Relative to Capital Gains from Sale of
3. Estates and Trusts Shares of Stock

Rules in Determining the Selling Price of the 1. No capital loss carry-over for capital losses
Shares Disposed sustained during the year (not listed and
traded in a local stock exchange) shall be
1. In case of cash sale – the selling price is the total allowed but capital losses may be deducted on
consideration as indicated in the deed of sale. the same taxable year only.

2. If the consideration is partly in money and 2. The entire amount of capital gains and capital
partly in kind – the selling price is the cash or loss (not listed and traded in a local stock
money received plus the fair market value of exchange) shall be considered without taking
the property received. into account the holding period irrespective of
the type/kind of taxpayer.
3. In case of exchange – the selling price is the fair
market value (FMV) of the property received.

UNIVERSITY OF SANTO TOMAS 86

2023 GOLDEN NOTES
 II. NATIONAL TAXATION
3. Non-deductibility of losses on wash sales and A: The shares of stock (whether listed and traded in
short sales. the local stock exchange, listed but not traded in the
local stock exchange, or not listed) shall be treated
4. Gain from sale of shares of stock in a foreign as ordinary assets and the ordinary gain, if any,
corporation is not subject to capital gains tax from the sale or transfer thereof shall be subject to
but to graduated rates either as capital gain or the graduated income tax rates in the case of an
ordinary income depending on the nature of individual seller, or to the normal corporate income
the trade of business of the taxpayer. tax, in the case of corporate seller. It will not be
subject to Stock Transaction Tax (STT), but subject
Q: As to tax implication, distinguish shares of to VAT.
stocks not listed and traded through stock
exchange from those listed and traded through Q: John, US citizen residing in Makati City,
stock exchange (2011, 2008 BAR) bought shares of stock in a domestic
corporation whose shares are listed and traded
A: in the Philippine Stock Exchange at the price of
P2 Million. A day after, he sold the shares of
NOT LISTED AND stock through his favorite Makati stockbroker
LISTED AND TRADED
TRADED at a gain of P200,000.
As to nature
a. Is John subject to Philippine income tax on
Income Business the sale of his shares through his
stockbroker? Is he liable for any other tax?
As to kind of tax
b. If John directly sold the shares to his best
Capital gains tax Percentage tax friend, a US citizen residing in Makati, at a
gain of P200,000, is he liable for Philippine
As to rate
income tax? If so, what is the tax base and
Before TRAIN Law: rate?
Not over P100,000 –
5% A:
In excess of P100,000 – a. NO. The gain on the sale or disposition of
10% shares of stock of a domestic corporation held
Before TRAIN Law:
½ of 1% as capital assets will not be subjected to income
Under TRAIN Law: tax if these shares sold are listed and traded in
15% final tax, if the stock exchange (Sec. 24(C), NIRC)
Under TRAIN Law:
covered by the TRAIN
6/10 of 1%
Law However, the seller is subject to the percentage
tax of ½ of 1% of the gross selling price (Sec.
Under CREATE Act: 127(A), NIRC)
15% final tax for RFCs
and NRFCs NOTE: The current rate is 6/10 of 1%.
As to tax base
b. YES. The sale of shares of stocks of a domestic
Net capital gain Gross selling price corporation held as capital, not through a
trading in the local stock exchange, is subject to
Q: What is the effect if the sale is made by a capital gains tax based on the net capital gain
dealer in securities? during the taxable year. The tax rate is 15%.

87 UNIVERSITY OF SANTO TOMAS

FACULTY OF CIVIL L AW
 TAXATION LAW
Q: Federico, a Filipino citizen, migrated to the considered as an
United States some six years ago and got a income.
permanent resident status or green card.
Should he pay Philippine income tax on the May be subject to
gains he derived from the sale in the New York percentage tax on
Stock Exchange of shares of stock in PLDT, a initial public offerings.
Philippine corporation? (2011 BAR) If sold through LSE:
subject to stock
transaction tax of 6/10
A: YES. The gain from the sale of shares of stock in of 1%
a domestic corporation shall be treated as derived
entirely from sources within the Philippines, If not sold through
regardless of where the said shares are sold. (Sec. LSE: treated as a
42(E), NIRC) capital asset

Tax Treatment of Shares of Stocks Corporation selling If domestic stocks

stocks of another were sold: Subject to
TRANSACTION TAX TREATMENT corporation 15% capital gains tax
Treated as an ordinary
asset whose ordinary If foreign stocks were
Sold by a dealer in
gains and losses are sold: Subject to regular
securities
subject to regular income tax (NOT
income tax. subject to capital loss
If sold through LSE: limitation rule, holding
subject to stock period rule, and net
transaction tax of 6/10 capital loss carry over)
of 1%.

If not sold through Q: Hopeful Corporation obtained a loan from

LSE: treated as a Generous Bank and executed a mortgage on its
capital asset real property to secure the loan. When Hopeful
Corporation failed to pay the loan, Generous
If domestic stocks Bank extrajudicially foreclosed the mortgage
were sold: Subject to on the property and acquired the same as the
Sold by an individual 15% capital gains tax highest bidder. A month after the foreclosure,
non-dealer in based on net gain Hopeful Corporation exercised its right of
securities redemption and was able to redeem the
If foreign stocks were property. Is Generous Bank liable to pay capital
sold: Subject to regular
gains tax as a result of the foreclosure sale?
income tax (also
subject to capital loss Explain. (2014 BAR)
limitation rule, holding
period rule, and net A: NO. In a foreclosure of a real estate mortgage, the
capital loss carry over) capital gains tax accrues only after the lapse of the
Only gain from sources redemption period because it is only then that there
within the Philippines exists a transfer of property. Thus, if the right to
is subject to capital
redeem the foreclosed property was exercised by
gains tax.
the mortgagor before the expiration of the
Not subject to income redemption period, as in this case, the foreclosure
A corporation selling is not a taxable event. (RR No. 4-1999; Supreme
tax. Excess of price
its own stocks
above par is not

UNIVERSITY OF SANTO TOMAS 88

2023 GOLDEN NOTES
 II. NATIONAL TAXATION
Transliner, Inc. v. BPI Family Savings Bank, Inc. G.R. A:
No. 165617, 25 Feb. 2011)
a. NO. The BIR officer’s tax assessment is wrong
for two reasons. First, the rate of income tax
Q: The Department of Agriculture (DA), through
used is the corporate income tax although the
its Secretary, executed a Deed of Assignment of
taxpayer is an individual. Second, the
a parcel of land in favor of the Bureau of
computation of the gain recognized from the
Fisheries and Aquatic Resources (BFAR)
sale did not consider the holding period of the
without any monetary consideration. By virtue
asset. The capital asset having been for more
of the Deed, BFAR applied for the issuance of a
than 12 months, only 50% of the gain is
land title in its own name. Is the assignment
recognized. (Sec. 39(B), NIRC)
subject to CGT or regular corporate income tax?
b. I will advise him to ask for the issuance of the
A: NO. While the conveyance of property by the DA
final assessment notice and request for the
in favor of the BFAR was pursuant to a Deed of
crediting of the capital gains tax paid against
Assignment, the assignment was made without
the income tax due. The taxpayer should
monetary consideration. Hence, it is not subject to
explain that the capital gains tax was paid in
CGT. Neither is it subject to the regular corporate
good faith because the property sold is a capital
income tax since the DA and the BFAR, which are
asset and considering that what was paid is
both government agencies exercising purely
also an income tax it should be credited against
governmental functions when the Deed was
the income tax assessment on the ground of
executed, are exempt from such regular corporate
equity. Once the final assessment is made, I will
income tax. (BIR Ruling No. 229-2017)
advise him to protest within 30 days from
receipt, invoking the holding period and the
Q: Manalo, Filipino citizen residing in Makati
wrong tax rate used.
City, owns a vacation house and lot in Tagaytay,
which he acquired in 2000 for P15 million. On
Q: A corporation, engaged in real estate
Jan. 10, 2013, he sold said real property to
development, executed deeds of sale on various
Mayaman, another Filipino residing in Quezon
subdivided lots. One buyer, after going around
City for P20 million. On Feb. 9, 2013, Manalo
the subdivision, bought a corner lot with a good
filed the capital gains return and paid P1.2
view of the surrounding terrain. He paid P1.2
million representing 6% capital gains tax. Since
million, and the title to the property was issued.
Manalo did not derive any ordinary income, no
A year later, the value of the lot appreciated to a
income tax return was filed by him for 2013.
market value of P1.6 million, and the buyer
After the tax audit conducted in 2014, the BIR
decided to build his house thereon. Upon
officer assessed Manalo for deficiency income
inspection, however, he discovered that a huge
tax computed as follows: P5 million (P20million
tower antenna had been erected on the lot
less P15 million) x 30%= P1.5 million, without
frontage totally blocking his view. When he
the capital gains tax paid being allowed as tax
complained, the realty company exchanged his
credit. Manalo consulted a real estate broker
lot with another corner lot with an equal area
who said that the P1.2 million capital gains tax
but affording a better view. Is the buyer liable
should be credited from the P1.5 million
for capital gains tax on the exchange of the lots?
deficiency income tax.
(1997 BAR)
a. a. Is the BIR officer’s tax assessment correct?
Explain.
A: YES. The buyer is subject to capital gains tax on
the exchange of lots on the basis of prevailing fair
b. b. If you were hired by Manalo as his tax
market value of the property transferred at the time
consultant, what advice would you give him
of the exchange or the fair market value of the
to protect his interest? Explain. (2008 BAR)

89 UNIVERSITY OF SANTO TOMAS

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property received, whichever is higher (Sec. 21(E), b. Is Juan Gonzales subject to income tax on the
NIRC) exchange of property? If so, what is the tax
based and rate? Explain.
Real property transactions subject to capital gains c. Is Alpha Corporation subject to income tax
tax are not limited to sales. It also includes on the exchange of property? If so, what is
exchanges of property unless exempted by a the tax base and rate? Explain. (2008 BAR)
specific provision of law.
A:
Q: A, a doctor by profession, sold in the year a. The one-hectare agricultural land owned by
2000 a parcel of land which he bought as a form Juan Gonzales is a capital asset because it is not
of investment in 1990 for P1 million. The land a real property used in trade or in business.
was sold to B, his colleague and at a time when The one-half hectare residential property
the real estate prices had gone down, for only owned by Alpha Corporation is an ordinary
P800,000 which was then the fair market value asset because the owner is engaged in the
of the land. He used the proceeds to finance his purchase and sale of real property. (Sec. 39,
trip to the United States. He claims that he NIRC; RR No. 7-2003)
should not be made to pay the 6% final tax
because he did not have any actual gain on the b. YES. The tax base in a taxable disposition of a
sale. Is his contention correct? (2001 BAR) real property classified as a capital asset is the
higher between two values; the fair market
A: NO. The 6% capital gains tax on sale of a real value of the property received in exchange and
property held as capital asset is imposed on the the fair market value of the property
income presumed to have been realized from the exchanged. Since the fair market value of these
sale, which is the fair market value or selling price two properties is the same, the said fair market
thereof, whichever is higher. (Sec. 24(D), NIRC) value should be taken as the tax base which is
P10 Million. The income tax rate is 6 %. (Sec.
Actual gain is not required for the imposition of the 24(D)(1), NIRC)
tax, but it is the gain by fiction of law which is
taxable. Thus, capital gains tax is imposed even c. YES. The gain from the exchange constitutes an
though the sale results in net loss. item of gross income, and being a business
income, it must be reported in the annual
Q: In January 1970, Juan bought 1 hectare of income tax return of Alpha Corporation. From
agricultural land in Laguna for P100,000. This the pertinent items of gross income,
property has a current fair market value of P10 deductions allowed by law from gross income
million in view of the construction of a concrete can be claimed to arrive at the net income
road traversing the property. Juan agreed to which is the tax base for the corporate income
exchange his agricultural lot in Laguna for a tax rate of 30%. (Secs. 27(A) & 31, NIRC)
one-half hectare residential property located in
Batangas, with a fair market value of P10 Q: Sps. Salvador are the registered owners of a
million, owned by Alpha Corporation, a parcel of land. The Republic, represented by the
domestic corporation engaged in the purchase DPWH, filed a Complaint before the RTC for the
and sale of real property. Alpha Corporation expropriation of a portion of said parcel of land
acquired the property in 2007 for P9 million. for the construction of a highway. The RTC
rendered judgment in favor of the Republic
a. What is the nature of real properties condemning the subject property. The RTC
exchanged for tax purposes – capital asset or likewise directed the Republic to pay
ordinary asset? Explain. respondents consequential damages equivalent
to the value of the capital gains tax and other

UNIVERSITY OF SANTO TOMAS 90

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 II. NATIONAL TAXATION
taxes necessary for the transfer of the subject Sale of Principal Residence by an Individual
property in the Republic's name. The RTC
reasoned that the payment of capital gains tax A sale of principal residence by an individual is
and other transfer taxes is but a consequence of exempt from capital gains tax provided the
the expropriation proceedings. Is the RTC following requisites are present:
correct in awarding consequential damages to
the Sps. Salvador as the payment for capital 1. Sale or disposition of the old actual principal
gains tax? residence;

A: NO. It is settled that the transfer of property 2. By a citizen or resident alien;

through expropriation proceedings is a sale or
exchange within the meaning of Secs. 24(D) and 3. Proceeds from which is fully utilized in
56(A)(3) of the NIRC, and profit from the acquiring or constructing a new principal
transaction constitutes capital gain. Since capital residence within 18 calendar months from the
gains tax is a tax on passive income, it is the seller, date of sale or disposition;
or respondents in this case, who are liable to
shoulder the tax. 4. Notify the CIR within 30 days from the date of
sale or disposition through a prescribed return
In fact, BIR Ruling No. 476-2013 has constituted the of his intention to avail the tax exemption;
DPWH as a withholding agent tasked to withhold
the 6% final withholding tax in the expropriation of 5. Can be availed of once every 10 years;
real property for infrastructure projects. As far as
the government is concerned, the capital gains tax 6. The historical cost or adjusted basis of his old
in expropriation proceedings remains a liability of principal residence shall be carried over to the
the seller, as it is a tax on the seller's gain from the cost basis of his new principal residence;
sale of real property. (Republic of the Philippines,
represented by the DPWH vs. Spouses Salvador, G.R. 7. If there is no full utilization, the portion of the
No. 205428, 07 June 2017) gains presumed to have been realized shall be
subject to capital gains tax; and
Sale of Principal Residence
8. The 6% capital gains tax due shall be deposited
Principal residence refers to the dwelling house, with an authorized agent bank subject to
including the land on which it is situated, where the release upon certification by the RDO that the
individual and members of his family reside, and proceeds of the sale have been utilized. (RR No.
whenever absent, the said individual intends to 14-2000)
return. Actual occupancy is not considered
interrupted or abandoned by reason of temporary Q: Mr. H decided to sell the house and lot
absence due to travel or studies or work abroad or wherein he and his family have lived for the past
such other similar circumstances. (RR No. 14-2000) 10 years, hoping to buy and move to a new
NOTE: The address shown in the ITR is conclusively house and lot closer to his children’s school.
presumed as the principal residence. If the taxpayer Concerned about the capital gains tax that will
is not required to file a return, certification from be due on the sale of their house, Mr. H
Barangay Chairman or Building Administrator (for approaches you as a friend for advice if it is
Condominium units) shall suffice. possible for the sale of their house to be
exempted from capital gains tax and the
conditions they must comply with to avail
themselves of said exemption. How will you
respond? (2015 BAR)

91 UNIVERSITY OF SANTO TOMAS

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A: Mr. H may avail the exemption from capital gains to the government as a final settlement of the
tax on sale of principal residence by natural income tax due on said income. The recipient is no
persons. Under the law, the following are the longer required to include the item of income
requisites: subjected to “final tax” as part of his gross income in
his income tax returns.
1. Proceeds of the sale of the principal residence
have been fully utilized in acquiring or An example is interest income from bank deposits.
constructing new principal residence within 18 The bank (payor) deducts and/or withholds the
calendar months from the date of sale or final withholding tax from the interest income. The
disposition. bank is required to remit the tax to the government.
On the other hand, the taxpayer need not declare the
2. The historical cost or adjusted basis of the real interest income in his/her income tax return.
property sold or disposed will be carried over
to the new principal residence built or Interest
acquired.
It is the amount of compensation paid for the use of
3. The Commissioner has been duly notified, money or forbearance from such use.
through a prescribed return, within 30 days
from the date of sale or disposition person’s Tax-exempt Interest Income (R-I-L2-D)
intention to avail of the tax exemption.

1. Regional or international financing institutions

4. Exemption was availed only once every 10
established by foreign government (Sec.
years.
25(A)(2), NIRC);
Q: If the taxpayer constructed a new residence
2. On bonds, debentures, and other certificate of
and then sold his old house, is the transaction
Indebtedness received by any of the above-
subject to capital gains tax?
mentioned entities;
A: YES. Exemption from capital gains tax does not
NOTE: The recipient must be a non-resident
find application since the law is clear that the
alien or non-resident foreign corporation.
proceeds should be used in acquiring or
Otherwise, it is subject to final tax of 15%.
constructing a new principal residence. Thus, the
3. From Long term investment or deposit with a
old residence should first be sold before acquiring
maturity period of 5 years or more.
or constructing the new residence.
(6) PASSIVE INVESTMENT INCOME NOTE: The recipient must an individual
taxpayer.
Passive income refers to income derived from any
activity in which the taxpayer has no active 4. On Loans extended by any of the above-
participation or involvement. mentioned entities; and

Q: What is meant by “income subject to final 5. From bank Deposits. The recipient must be any
tax?” (2001 BAR) following tax-exempt recipients:
a. Foreign government
A: Income subject to final tax refers to an income b. Financing institutions owned, controlled,
wherein the tax due is fully collected through the or financed by foreign government
withholding tax system. Under this procedure, the
payor of the income withholds the tax and remits it

UNIVERSITY OF SANTO TOMAS 92

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 II. NATIONAL TAXATION
Long-term Deposits or Investments

Certificate of time deposit or investment in the form

of savings, common or individual trust funds,
deposit substitutes, investment management
accounts or other investments, with maturity of not
less than 5 years, the form of which shall be
prescribed by the Bangko Sentral ng Pilipinas (BSP)
and issued by banks (not by nonbank financial
intermediaries and finance companies) to
individuals in denominations of P10,000 and other
denominations as may be prescribed by the BSP.
(Sec. 22(FF), NIRC)

Deposit Substitute

It is the alternative form of obtaining funds from the

public other than deposits, through the issuance,
endorsement, or acceptance of debt instruments for
the borrower’s own account, for the purpose of re-
lending or purchasing of receivables and other
obligations or financing their own needs or the
needs of their agent or dealer. (Sec. 22(Y), NIRC)

In order for an instrument to qualify as a deposit

substitute, the borrowing must be made from
twenty (20) or more individual or corporate
lenders at any one time. The mere flotation of a debt
instrument is not considered to be a public
borrowing and is not deemed a deposit substitute,
if there are only 19 or less individual or corporate
lenders at any one time. (RR No. 14-2012) This is
called the 19-lender Rule.

Foreign Currency Deposit System

It is the conduct of banking transactions whereby

any person whether natural or judicial may deposit
foreign currencies forming part of the Philippine
international reserves, in accordance with the
provisions of R.A. No. 6426, An Act Instituting a
Foreign Currency Deposit System in the Philippines,
and for other purposes.

93 UNIVERSITY OF SANTO TOMAS

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Tax Treatment of Interest Income as Applied to Corporations

NATURE OF INCOME DC RFC NRFC

Interests from any
currency bank deposits,
yield, or any other
monetary benefits from
deposit substitutes and
from trust fund and
similar arrangement
and Royalties derived
Short-term interest: 20% Shall be considered as
from sources within the
20% part of gross income
Philippines
Long term interest: 30% subject to 25% NCIT.

NOTE: Interest income or

yield earned by DC from
sources outside the
Philippines shall not be
subject to final tax of 20%
but included in the gross
income and subject to
NCIT.

Interest Income derived

under expanded foreign 15% 15% Exempt
currency deposit system

Interest derived by
depositary bank under
the expanded foreign
currency deposit system
from foreign currency
loans granted to
residents other than
offshore banking units
10% 10% Exempt
(OBUs)

NOTE: If granted to non-

residents, local
commercial banks or
branches foreign banks
authorized by BSP to
transact business –
EXEMPT

Interest received by
NRFC on foreign loans – – 20%
(NIRC, Sec. 28 (5a))

UNIVERSITY OF SANTO TOMAS 94

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 II. NATIONAL TAXATION
Dividends received from
Domestic Corporation 15% (subject to tax
Exempt Exempt
(Inter-corporate credit sparing rule)
Dividend)

NOTE: Under R.A. No. 11534 or CREATE, 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
15% (previously taxed at 7.5%). (Sec. 7, R.A. No. 11534 amending Sec. 28, NIRC)

Tax Treatment of Interest Income as Applied to Individuals

NATURE OF
RC NRC NRAETB NRANETB
INCOME
Interests from any
currency bank
deposits, yield, or
any other
monetary benefits
20% 20% 20% 25%
from deposit
substitutes and
from trust fund
and similar
arrangement
Interest received
from a depository
bank under the
15% Exempt Exempt Exempt
expanded foreign
currency deposit
system
Interest income
from long term
deposit or
investment Exempt Exempt Exempt –

NOTE: If pre-
terminated before
the 5th year, the final
tax would be:
5% 5% 5% –
4 years to less than 12% 12% 12% –
5 years 20% 20% 20% –
3 years to less than
4 years
Less than 3 years

95 UNIVERSITY OF SANTO TOMAS

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Interest Income Subject to Final Withholding a. Are the interest incomes on the bank
Tax and Income Subject to Gross Receipts Tax on deposits of spouses Renato and Judy Garcia
Banks Distinguished subject to income tax? Explain.

20% FWT ON 5% GROSS RECEIPTS b. Is the bank correct in withholding the 20%
INTEREST INCOME TAX ON BANKS final tax on the entire interest income?
Explain.
It is an income tax It is a business tax
under Title II of the (percentage tax) under
A:
NIRC (Tax on Title V (Other
Income). Percentage Taxes). a. YES. The interest income from the peso bank
deposit is subject to 20% final withholding tax.
FWT is imposed on Gross Receipts Tax
The interest income from the dollar deposit is
the gross interest (GRT) is measured by a
subject to 15% final withholding tax but only on
income realized in a certain percentage on
the portion of the interest attributable to Judy
taxable year. the gross receipts or
or $500. The interest on the dollar deposit
earnings.
attributable to Renato, a non-resident is exempt
FWT is a withholding GRT is not a from income tax. (Sec. 24(B)(1), NIRC)
tax. withholding tax.
b. NO. Only the interest income on a peso deposit
is subject to 20%. The interest income from a
NOTE: The 20% final tax withheld on a bank’s dollar deposit is subject to 15% if the earner is
passive income should be included in the a resident individual. (Sec. 24(B), NIRC)
computation of GRT. (China Banking Corporation v.
CIR, G.R. No. 175108, 27 Feb. 2013) Q: What is the tax treatment of the following
interest on deposits with:
Q: Maribel, a retired public school teacher, relies a. BPI Family Bank?
on her pension from the GSIS and the Interest b. A local offshore banking unit of a foreign
Income from a time deposit of P500,000 with bank? (2005 BAR)
ABC Bank. Is Maribel liable to pay any tax on her
income? A:
a. It is a passive income subject to a withholding
A: YES. Maribel is exempt from tax on the pension tax rate of 20%.
from the GSIS (Sec. 32(B)(6)(f), NIRC). However,
with her time deposit, the interest she receives b. It is a passive income subject to final
thereon is subject to 20% final withholding tax. withholding tax rate of15% (Sec. 24(B)(1),
NIRC)
Q: In 2007, spouses Renato and Judy Garcia
opened peso and dollar deposits at the Both interests are not to be declared as part of gross
Philippine branch of the Hong Kong Bank in income in the income tax return.
Manila. Renato is an overseas worker in Hong
Kong while Judy lives and works in Manila. Q: In 2004, Edison Bataan Cogeneration
Corporation (EBCC) received from the CIR a
During the year, the bank paid interest income Formal Letter of Demand and Final Assessment
of P10,000 on the peso deposit and US$1,000 on Notice assessing EBCC of deficiency Final
the dollar deposit. The bank withheld final Withholding Tax (FWT) for the taxable year
income tax equivalent to 20% of the entire 2000. Upon the CIR’s inaction to the letter-
interest income and remitted the same to the protest filed by EBCC, the latter elevated the case
BIR. to the CTA. The CTA Division held, among others,

UNIVERSITY OF SANTO TOMAS 96

2023 GOLDEN NOTES
 II. NATIONAL TAXATION
that EBCC was not liable for the deficiency FWT 3. Stock dividend – one paid by a corporation
assessment on interest payments on loan with its own stock.
agreements for the taxable year 2000 since its
liability for interest payment became due and Stock dividends, strictly speaking, represent
demandable only in 2002. The CIR contended capital and do not constitute income to its
that EBCC was liable to pay the interest from the recipient. So that the mere issuance thereof is
date of the execution of the contract in 2000, not not subject to income tax as they are nothing
from the date of the first payment in 2002, as the but enrichment through increase in value of
loan agreement clearly indicated that the capital investment. In a loose sense, stock
interest was to be paid separately from the dividends issued by the corporation, are
principal. The decision of the CTA Division was considered unrealized gain, and cannot be
affirmed by the CTA en banc. Is EBCC liable for subjected to income tax until that gain has been
deficiency FWT for the year 2000? realized. Before the realization, stock dividends
are nothing but a representation of an interest
A: NO. EBCC's liability for interest payment became in the corporate properties. (Commissioner v.
due and demandable starting 2002. The obligation ANSCOR, G.R. No. 108576, 20 Jan. 1999)
of EBCC to deduct or withhold tax arises at the time
an income is paid or payable, whichever comes first, XPNs:
and considering further that under the RR 2-98, the a. Change in the stockholder’s equity, right, or
term "payable" refers to the date the obligation interest in the net assets of the corporation
becomes due, demandable or legally enforceable, b. Recipient is other than the shareholder
the CTA en banc correctly ruled that EBCC had no c. Cancellation or redemption of shares of
obligation to withhold any taxes on the interest stock
payment for the year 2000 as the obligation to d. Distribution of treasury shares
withhold only commenced on June 1, 2002, and thus e. Dividends declared in the guise of treasury
canceling the assessment for deficiency FWT on stock dividend to avoid the effects of
interest payments arising from EBCC' s loan from income taxation
Ogden. (Edison (Bataan) Cogeneration Corporation f. Different classes of stock were issued
vs. CIR, G.R. No. 201665 & 201668, 30 Aug. 2017)
NOTE: A stock dividend does not constitute
Dividend taxable income if the new shares did not confer
new rights nor interests than those previously
existing, and that the recipient owns the same
Dividend is any distribution made by a corporation
proportionate interest in the net assets of the
to its shareholders out of its earnings or profits and
corporation. (RR No. 2, Sec. 252)
payable to its shareholders, whether in money or in
other property.
4. Scrip dividend – one that is paid in the form or
promissory notes.
Kinds of Dividends
5. Indirect dividend – one made through the
exercise of right or other means of payment
1. Cash dividend – paid in given sum of money.
e.g., Cancellation or condonation of
indebtedness.
2. Property dividend – one paid in corporate
property such as bonds, securities or stock
6. Liquidating dividend – one resulting from the
investments held by the corporation, not its
distribution by a corporation of all its property
own stock. They are taxable to the extent of the
or assets in compete liquidation or dissolution.
fair market value of the property received at
It is generally a return of capital, and hence, it
the time of distribution.

97 UNIVERSITY OF SANTO TOMAS

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 TAXATION LAW
is not income. However, it is taxable income The 15% represents the difference
with respect to the excess of amount received between the NCIT of 30% on corporations
over cost of the shares surrendered. and the 15% tax on dividends.
(Dimaampao, 2015)
2. Dividends received from a foreign
Inter-corporate Dividends corporation

a. Dividends received by a DC from a foreign

There is inter-corporate dividend when a dividend
corporation shall be subject to 25% NCIT;
is declared by one corporation and received by
another corporation which is a stockholder to the
XPN: Foreign-sourced dividends received
former. The following rules shall apply:
by domestic corporations shall be exempt
when the following requisites are present:
1. Dividends received from a domestic
corporation
1. Such dividends are reinvested in the
business operations of the DC in the
a. Dividends received by a DC and RFC from a
Philippines within the next taxable
domestic corporation shall not be subject
year from receipt thereof;
to tax (Sec. 27(D)(4), Sec. 28(A)(7)(d),
NIRC);
2. The use thereof shall be limited to
funding the working capital
Rationale: The law assumes that the
requirements, capital expenditures,
dividends received will be incorporated to
dividend payments, investment in
the capital which will eventually be taxed
domestic subsidiaries, and
when the corporation gets income from its
infrastructure projects; and
use of the capital.
3. The domestic corporation directly
b. Dividends received by a NRFC from a DC
holds at least 20% in value of the
shall be subject to 15% FWT. This is known
outstanding shares of the foreign
as the Tax Sparing Rule. (Sec. 28(B)(5)(b),
corporation, and has held the same
NIRC)
uninterruptedly for a minimum of 2
years at the time of the dividend’s
Tax Sparing Rule
distribution. (Sec. 27(D)(4), NIRC as
amended; RR No. 5-2021)
Under this rule, the dividends received
shall be subject to 15% FWT, provided, that
b. Dividends received by RFC and NRFC from
the country in which the corporation is
a foreign corporation shall be subject to
domiciled either (i) allows a tax credit of
25% NCIT, if the income of the foreign
15% against the taxes due from the foreign
corporation is derived from sources within
corporation for taxes deemed paid; or (ii)
the Philippines; IF the said income is
does not impose income tax on such
derived from sources outside the
dividends. (CIR v. Wander Philippines Inc.,
Philippines, the dividends received shall be
G.R. No. L-68375, 15 Apr. 1988); otherwise,
exempt from tax.
the dividend shall be subject to 30%.
The phrase “deemed paid” “tax credit” does
NOTE: In determining whether income is
not mean tax credit actually granted by the
derived from sources within or without the
foreign country. There is no statutory
Philippines, the ratio of the foreign
provision or revenue regulation requiring
corporation’s Philippine gross income to
“actual grant”.

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2023 GOLDEN NOTES
 II. NATIONAL TAXATION
the world gross income within the 3-year
period preceding the declaration of such 2. Inter-corporate
dividend should be considered. dividends
received from
Determination of Income Derived from Sources domestic
within or without the Philippines (Sec. corporation by
42(A)(2)(b), NIRC) non-resident
foreign
PHILIPPINE GROSS corporation
SOURCE OF
INCOME = % WORLD
INCOME
GROSS INCOME 3. Share of an
Entirely without individual in the
Less than 50%
distributable net
Proportionate income after tax
More than 50% (partly within; of a partnership
partly without) (other than a
GPP) which he is
a partner
Tax Treatment of Dividend Income (Tabag, 2015) 4. Share of an
TAX individual in the
SOURCE OF INCOME net income (after
TREATMENT
1. Dividends from tax) of an
foreign association, joint
corporation account, or a
joint venture or
2. Share in the Subject to basic tax consortium
income of a GPP taxable as
corporation for
Share in income of an which he is a
exempt joint venture member or co-
1. Cash and/or venturer
property Inter-corporate
dividends dividends received
actually or from domestic
constructively corporation by
Exempt from tax
received by another domestic
individuals from corporation and
domestic resident foreign
corporation or corporation
Subject to final tax
from a joint stock
company, Q: Does tax on income and dividends amount to
insurance or double taxation?
mutual fund
company and A: NO. Tax on income is different from tax on
regional dividend because they have different tax basis.
operating (Afisco Insurance Companies v. CA, G.R. No. 1123675,
headquarters of 25 Jan. 1999)
multinationals

99 UNIVERSITY OF SANTO TOMAS

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Q: What are disguised dividends in income A:
taxation? (1994 BAR) a. A final withholding tax of 10% shall be imposed
upon cash dividends actually or constructively
A: Disguised dividends are those income payments received by a resident citizen from BBB, Inc.
made by a domestic corporation, which is a (Sec. 24(B)(2), NIRC)
subsidiary of a non-resident foreign corporation, to
the latter ostensibly for services rendered by the b. A final withholding tax of 20% shall be imposed
latter to the former, but which payments are upon cash dividends actually or constructively
disproportionately larger than the actual value of received by a non-resident alien engaged in
the services rendered. In such case, the amount over trade or business from BBB, Inc. (Sec. 24(A)(2),
and above the true value of the service rendered NIRC)
shall be treated as a dividend and shall be subjected
to the corresponding tax on Philippine sourced c. A final withholding tax equal to 25% of the
gross income, e.g., royalty payments under a entire income received from all sources within
corresponding licensing agreement. the Philippines, including the cash dividends
received from BBB, Inc. (Sec. 25(B), NIRC)
Q: Suppose the creditor is a corporation and the
debtor is its stockholder, what is the tax d. Dividends received by a domestic corporation
implication in case the debt is condoned by the from another domestic corporation, such as
corporation? BBB, Inc., shall not be subject to tax. (Sec.
27(D)(4), NIRC)
A: This may take the form of indirect distribution of
dividends by a corporation. On the part of the e. Dividends received by a non-resident foreign
stockholder whose indebtedness has been corporation from a domestic corporation are
condoned he is subject to 10% final tax, on the generally subject to an income tax of 30% to be
masked dividend payment. On the part of the withheld at source. (Sec. 28(B)(1), NIRC)
corporation, said amount cannot be claimed as
deduction. When the corporation declares NOTE: However, a final withholding tax of 15%
dividends, it can be considered as interest on capital is imposed on the amount of cash dividends
therefore not deductible. received from a domestic corporation like BBB,
Inc. if the tax sparing rule applies (Sec.
Q: BBB, Inc., a domestic corporation, enjoyed a 28(B)(5)(b), NIRC). Pursuant to this rule, the
particularly profitable year in 2014. In June lower rate of tax would apply if the country in
2015, its Board of Directors approved the which the non-resident foreign corporation is
distribution of cash dividends to its domiciled would allow as a tax credit against
stockholders. BBB, Inc. has individual and the tax due from it, taxes deemed paid in the
corporate stockholders. What is the tax Philippines of 15% representing the difference
treatment of the cash dividends received from between the regular income tax rate and the
BBB, Inc. by the following stockholders? preferential rate.
a. A resident citizen
b. Non-resident alien engaged in trade or Q: Fred, was a stockholder in the Philippine
business American Drug Company. Said corporation
c. Non-resident alien not engaged in trade or declared a stock dividend and that a
business proportionate share of stock dividend was
d. Domestic corporation issued to Fred. The CIR, demanded payment of
e. Non-resident foreign corporation (2015 income tax on the aforesaid dividends. Fred
BAR) protested the assessment made against him and
claimed that the stock dividends in question are

UNIVERSITY OF SANTO TOMAS 100

2023 GOLDEN NOTES
 II. NATIONAL TAXATION
not income but are capital and are, therefore, A: YES. The general rule states that a stock dividend
not subject to tax. Are stock dividends income? representing the transfer of surplus to capital
account shall not be subject to tax. However, if a
A: NO. Stock dividends are not income and are corporation cancels or redeems stock issued as a
therefore not taxable as such. A stock dividend, dividend at such time and in such manner as to
when declared, is merely a certificate of stock which make the distribution and cancellation or
evidences the interest of the stockholder in the redemption, in whole or in part, essentially
increased capital of the corporation. A declaration of equivalent to the distribution of a taxable dividend,
stock dividend by a corporation involves no the amount so distributed in redemption or
disbursement to the stockholder of accumulated cancellation of the stock shall be considered as
earnings and the corporation parts with nothing to taxable income to the extent it represents a
its stockholder. The property represented by a stock distribution of earnings or profits accumulated.
dividend is still that of the corporation and not of
the stockholder. The stockholder has received The redemption converts into money the stock
nothing but a representation of an interest in the dividends which become a realized profit or gain
property of the corporation and as a matter of fact, and consequently, the stockholder’s separate
he may never receive anything, depending upon the property. Profits derived from the capital invested
final outcome of the business of the corporation. cannot escape income tax. As realized income, the
(Fisher v. Trinidad, G.R. No. L-21186, 27 Feb. 1924) proceeds of the redeemed stock dividends can be
reached by income taxation regardless of the
Q: The JV was tasked to develop and manage existence of any business purpose for the
FDC’s 50% ownership of its PBCom Office Tower redemption. (CIR v. CA, G.R. No. 108576, 20 Jan. 1999)
Project “the Project”. FDC paid its subscription
by executing a Deed of Assignment of its rights
and interests in the Project worth P5.7M in favor
of the JV. The BIR assessed deficiency income tax
on the gain on the supposed dilution and/or
increase in the value of FDC’s shareholdings in
FAC. Did the BIR properly impute deficiency
income taxes to FDC which was supposedly
incurred by it as a consequence of the dilution of
its shares in FAC?

A: NO. The mere appreciation of capital is not

taxable. Gain is realized upon disposition. No
deficiency income tax can be assessed on the gain
on the supposed dilution and/or increase in the
value of FDC’s shareholdings in FAC. (CIR v. Filinvest
Development Corporation, G.R. Nos. 163653 &
167689, 19 Jul. 2011)

Q: Is the redemption of stocks of a corporation

from its stockholders as well as the exchange of
common with preferred shares considered as
“essentially equivalent to the distribution of
taxable dividend” making the proceeds thereof
taxable?

101 UNIVERSITY OF SANTO TOMAS

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Summary of Rules on Dividends

SOURCE OF DIVIDENDS
RECIPIENT
DC RFC NRFC
Regular income tax Regular income tax (0-
RC 10% final tax
(0- 35%) 35%)
Less than 50% of income of RFC/NRFC is from PH:
RA 10% final tax
Non-taxable Income from sources outside PH are
not taxable for RA, NRC, NRAETB, and NRANETB)
NRC 10% final tax
If more than 50% of income of RFC/NRFC is from
NRAETB 20% final tax PH, a proportion of the income is considered as
income within the Philippines, subject to regular
NRANETB 25% final tax income tax (or 25% final tax for NRANETB)

Regular corporate income tax (25%) unless the

following requisites for exemption are met:
1. Such dividends are reinvested in the business
operations of the DC in the Philippines within
the next taxable year from receipt thereof;
2. The use thereof shall be limited to funding the
working capital requirements, capital
Exempt (intercorporate expenditures, dividend payments, investment
DC
dividends) in domestic subsidiaries, and infrastructure
projects; and
3. The domestic corporation directly holds at
least 20% in value of the outstanding shares of
the foreign corporation, and has held the same
uninterruptedly for a minimum of 2 years at
the time of the dividend’s distribution.

Exempt (intercorporate Less than 50% of income of RFC/NRFC is from PH:

RFC
dividends) Non-taxable Income from sources outside PH are
not taxable for RFC and NRFC)

15% subject to credit If more than 50%of income of RFC/NRFC is from

NRFC sparing rule; 25% if not PH, a proportion of the income is considered as
applicable income within the Philippines, subject to regular
income tax (or 30% final tax on gross income for
NRFC)

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Royalty Income Rental income

No definition was provided for royalty income It is a fixed sum, either in cash or in property
under the NIRC. Nonetheless, Webster Dictionary equivalent, to be paid at a definite period for the use
defined the same as a share of the earnings as from or enjoyment of a thing or right. All rentals derived
invention, book or play, paid to the inventor, writer, from lease of real estate or personal property, of
etc. for the right to make, use or publish the same. copyrights, trademarks, patents and natural
(Tabag, 2015) resources under lease.

Moreover, in Universal Food Corporation vs. CA, it Prepaid Rent or Advance Rental
was defined to be the compensation for the use of a
patented invention.
It is taxable income to the lessor in the year
Tax Treatment of Royalty Income (Tabag, 2015) received, if received under a claim of right and
TAX without restriction as to its use, regardless of
SOURCE OF INCOME method of accounting employed.
TREATMENT
Royalties on books,
Security Deposits
other literary works
and musical
GR: Security deposits are not taxable as these are
composition from
sources within the refundable in nature.
10% final tax
Philippines.
Security deposit applied to the rental of terminal
NOTE: The tax rate month or period of contract must be recognized as
income at the time it is applied. The purpose of
only applies if the
security deposit is to ensure contract compliance. It
income earner is an
individual taxpayer is not income to the lessor until the lessee violates
any provision of the contract.
other than a NRANETB.
Royalties derived
Rent Subject to Special Rate
from sources within
the Philippines other 20% final tax
than royalties subject 1. Those paid to non-resident Cinematographic
to 10% to final tax Film owner or lessor or distributor – 25% of its
Royalties derived by gross income from all sources within the
RC and DC from Philippines. (Sec. 28(B)(2), NIRC)
Basic tax
sources without the
Philippines. 2. Those paid to non-resident owner or lessor of
vessels chartered by Philippine national – 4.5%
Rent and Royalty Distinguished of gross rentals. (Sec. 28(B)(3), NIRC)

RENT ROYALTY
3. Those paid to non-resident owner or lessor of
As to reporting
aircraft, machineries, and other equipment –
Need not be reported
Must be reported as 7.5% of gross rental or fees. (Sec. 28(B)(4),
since subject to final
part of gross income NIRC)
tax.
As to tax rate
Regular progressive Additional Rent Income may be Grouped into
Final tax
tax if individual
1. Obligations of Lessors to 3rd parties assumed by

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the lessee: aliquot part thereof in addition to the regular
a. Real estate taxes on leased premises; rent income.
b. Insurance premiums paid by lessee on
property; NOTE: With the outright method it would only be
c. Dividends paid by lessee to stockholders of counted for one (1) rental payment unlike with the
lessor-corporation; and spread-out method it would be distributed to the
d. Interest paid by lessee to holder of bonds remaining term of the lease contract.
issued by lessor-corporation.
Q: X leased his vacant lot in Binondo to Y for a
2. Value of permanent improvement made by term of 10 years at an annual rental of P600,000.
lessee on leased property of the lessor upon The contract provides that Y will put up a
expiration of the lease building on the lot and after 10 years, the
building will belong to X.
Lease of Personal Property
The building was erected at a cost of P6,000,000
Rental income on the lease of personal property
and has an estimated useful life of 30 years.
located in the Philippines and paid to a non-resident
Assuming the fair value of the completed
taxpayer shall be taxed as follows:
building is the same as the construction cost,
what is the total income of X if he opts to report
NRFC NRA
his income on the leasehold improvements
Vessel 4.5% 25%
using:
Aircraft, a. Outright method
machineries b. Spread out method
7.5% 25%
and other
equipment A:
Other assets 30% 25% a. If X reports his income on the improvements in
the year it was completed, his total rental
Tax Treatment of Leasehold Improvements by income shall be:
Lessee

Where the lease contract provides that the lessee FMV of the building in the
P 6,000,000
will erect a permanent improvement on the rented year of completion
property and after the term of the lease, the Add: Annual rental 600,000
improvement shall become the property of the Total rental income P 6,600,000
lessor, the lessor may, at his option, report the
income therefrom upon either of the following b. If X reports his income on the improvements
methods: using the spread out method, his total rental
income shall be:
1. Outright Method or Lumpsum-Method – the
fair market value of the building or Cost of the building P 6,000,000
improvement shall be reported as additional Less: Accumulated
rent income at the time when such building or depreciation at the end of
improvements are completed; and lease term 2,000,000
(P6,000,000/30 years x 10
2. Spread Out Method or Annual-Method – years)
allocate over the life of the lease the estimated Book value of the building
4,000,000
book value of such buildings or improvements at the expiration of lease
at the termination of the lease and report as Divided by: Lease term 10
additional rent for each year of the lease an Annual income of X on the 400,000

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improvement G.R.: Non- Taxable at
Regular rental income 600,000 taxable the time it is
Total annual rental income P 1,000,000 applied
A security XPN: Security
deposit deposit
Tax Treatment of Advance Rental/Long Term
Lease which applied to
restricts the rental shall
If the advance payment by the lessee is really a loan lessor as to be subject to
to the lessor, or an option money for the property or its use VAT at the
a security deposit for the faithful performance of time of its
certain obligations of the lessee, the lessor realizes application
no taxable income in the year the advance payment
is received. If the advance payment is, in fact, a Taxable In the year it
prepaid rental, there is taxable income to the lessor is received
Prepaid
whether the latter is using the cash or accrual irrespective
rental
method of accounting. of the
without
accounting
restriction
FORMS OF method
TAX WHEN as to its use
ADVANCE employed by
TREATMENT TAXABLE
PAYMENT the lessor
G.R.: Non-
taxable (7) ANNUITIES, PROCEEDS FROM LIFE
INSURANCE OR OTHER TYPES OF INSURANCE
A loan to the XPN: If the
lessor from lessee Definition
the lessee violates the
terms of the It refers to the periodic installment payments of
contract income or pension by insurance companies during
the life of a person or for a guaranteed fixed period
G.R. Non- of time, whichever is longer, in consideration of
taxable capital paid by him.

An option XPN: If the The portion representing return of premium is not

money for lessee taxable while that portion that represents interest is
the property violates the taxable.
terms of the
contract NOTE: The portion of annuity net of premiums is
taxable being interest or earnings of the premium
G.R.: Non-
and not return of capital.
A security taxable
deposit to Q: X purchased a life annuity for P100,000 which
insure the XPN: If the
will pay him P10,000 a year. The life expectancy
faithful lessee
of X is 12 years. How much is excluded from the
performance violates the
gross income of X?
of the lease terms of the
contract
A: The P100,000 is excluded from the gross income
of X since it represents a return of premiums which
is not income but a return of capital.

105 UNIVERSITY OF SANTO TOMAS

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Proceeds of Life Insurance Oriente Fabrica de Tabacos v. Posadas, G.R. No.
34774, 21 Sept. 1931)
GR: Amounts received under a life insurance,
endowment, or annuity contact, whether in a single
sum or in installments, paid to the beneficiaries Tax Treatment of Life Insurance Proceeds under
upon the death of the insured are excluded from the Income and Estate Taxation Distinguished
gross income of the beneficiary.
In estate taxation, the concept of revocability or
irrevocability in the designation of the beneficiary is
XPNs:
necessary to determine whether the life insurance
1. If such amounts, when added to amounts
proceeds are included in the gross estate or not.
already received before the taxable year under
However, if the appointed beneficiary is the estate,
such contract, exceed the aggregate premiums
executor, or administrator, the proceeds shall be
or considerations paid, the excess shall be
included in the gross estate.
included in the gross income.

NOTE: Under the Insurance Code, the insured shall

NOTE: However, in the case of a transfer for a
have the right to change the beneficiary he
valuable consideration by assignment or
designated in the policy unless he has expressly
otherwise, of a life insurance, endowment or
waived this right in said policy. Notwithstanding the
annuity contract or any interest therein, only
foregoing, in the event the insured does not change
the actual value of such consideration and the
the beneficiary during his lifetime, the designation
amount of the premiums and other sums
shall be deemed irrevocable. (Sec. 11, R.A. No.
subsequently paid by the transferee are exempt
10607)
from taxation.
On the other hand, in income taxation, there is no
2. Interest payments thereon if such amounts are
need for the determination of revocability or
held by the insurer under an agreement to pay
irrevocability of the beneficiary for purposes of
interest shall be taxable. If paid to a transferee
exclusion of such proceeds from the gross income.
for a valuable consideration, the proceeds are
They are non-taxable regardless of who the
not exempt.
recipient is.

NOTE: The life insurance proceeds must be

Q: ABC Corp. took two insurance policies
paid by reason of the death of the insured.
covering the life of its employee, Y. The first
Payments for reasons other than death are
insurance designated W, wife of Y as the
subject to tax up to the excess of the premiums
beneficiary; while in the second insurance, it
paid.
was ABC Corp. which was the designated as the
irrevocable beneficiary. In both insurances, it
Any policy loans or borrowings made on the policy
was ABC Corp. paying the premiums. Y died.
shall be deducted as advances from the life
insurance proceeds received upon death.
a. Do the proceeds form part of the taxable
income of the recipients?
Recipients of Non-taxable Life Insurance
b. Are the proceeds part of the taxable estate of
Proceeds
the deceased?
Proceeds of life insurance policies paid to individual
beneficiaries upon the death of the insured are A:
exempt. Also, it has been held that proceeds of life a. NO. The proceeds are not part of the taxable
insurance policies taken by a corporation on the life income of the recipients. Sec. 32(B)(1)
of an executive to indemnify it against loss in case of expressly excludes from income taxation
his death do not constitute taxable income. (El proceeds of life insurance. This is based on the

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2023 GOLDEN NOTES
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theory that such proceeds, for income tax RECIPIENT TAX TREATMENT
purposes, are considered as forms of indemnity. Citizen, resident alien
Thus, they are non-taxable regardless of who or non-resident
20% final withholding
the recipient is. engaged in trade or
tax
business in the
b. NO. The proceeds of the two policies are Philippines
excluded as part of the gross estate. For estate Non-resident alien
tax purposes, the determining factor on not engaged in trade 25% final withholding
whether the proceeds of insurance shall be or business in the tax
excluded in the gross estate is when the Philippines
designation of the beneficiary is made Corporation 25% corporate income
irrevocable. Pursuant to the amendment (domestic or foreign) tax
introduced by R.A. No. 10607, the second
paragraph of Sec. 11 of the Insurance Code now
reads “Notwithstanding the foregoing, in the Prizes and Winning Subject to Income Tax
event the insured does not change the
beneficiary during his lifetime, the designation 1. Prizes derived from sources within the
shall be deemed irrevocable”. Thus, since Y did Philippines not exceeding P10,000 are included
not exercise his right to change W, as his in the gross income subject to regular income
beneficiary, the designation is deemed tax.
irrevocable and hence, the proceeds of the
insurance not taxable. 2. Winnings derived from sources within the
Philippines is subject to final tax on passive
income
(8) PRIZES AND AWARDS
3. PCSO and lotto winnings is subject to final tax
Definition on passive income
It refers to amount of money in cash or in kind
received by chance or through luck and is generally NOTE: These are only taxable if the amount
taxable except if specifically mentioned under the exceeds P10,000 for RC, NRC, RA and NRA-ETB.
exclusion from computation of gross income under (Sec. 25(B)(1), NIRC)
Sec. 32(B) of NIRC.
However, these are always subject to tax for
Tax Treatment for Prizes and Winnings NRA-NETB. (Sec. 25(B), NIRC)

Generally, prizes exceeding P10,000 and other 4. Prizes and winnings from sources outside the
winnings from sources within the Philippines shall Philippines
be subject to 20% final withholding tax, if received
by a citizen, resident alien or non-resident engaged NOTE: These are only taxable for DC and RC.
in trade or business in the Philippines. If the
recipient is a non-resident alien not engaged in Prizes and Awards Exempt from Income Tax
trade or business in the Philippines, the prizes and
other winnings shall be subject to 25% final 1. Prizes and awards made primarily in
withholding tax. If the recipient is a corporation recognition of religious, charitable, scientific,
(domestic or foreign), the prizes and other winnings educational, artistic, literary, or civic
are added to the corporation’s operating income achievement provided, the following
and the net income is subject to 30% corporate conditions are met:
income tax.
a. The recipient was selected without any

107 UNIVERSITY OF SANTO TOMAS

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action on his part to enter the contest or (10) INCOME FROM ANY SOURCE
proceeding; and
Definition
b. The recipient is not required to render
“Income from whatever source derived” implies
substantial future services as a condition to
that all income not expressly exempted from the
receiving the prize or award.
class of taxable income under our laws form part of
the taxable income, irrespective of the voluntary or
2. All prizes and awards granted to athletes in local
involuntary action of the taxpayer in producing the
and international sport competitions and
income. The source of the income may be legal or
tournaments whether held in the Philippines or
illegal.
abroad and sanctioned by their national sports
associations
Examples of “Income from Whatever Source
Derived” which Form Part of the Taxable
NOTE: The national sports association referred Income
to by law that should sanction said sport activity
is the Philippine Olympic Committee. (Sec. 13,
R.A. No. 6847) 1. Gains arising from expropriation of property
which would be considered as income from
3. Prizes that winning inventors receive from the dealings in property;
nationwide contest for the most innovative New
and Renewable Energy Systems jointly 2. Gains from gambling;
sponsored by the PNOC and other organizations
during the first ten years reckoned from the date 3. Gains from embezzlement or stealing money;
of the first sale of the invented products,
provided that such sale does not exceed 4. Gains, money or otherwise derived from
P200,000 during any twelve-month period. extortion, illegal gambling, bribery, graft and
(Secs. 5 and 6, R.A. No. 7459; BIR Ruling 069- corruption, kidnapping, racketeering, etc.;
2000)
Rationale: These are taxable because title is
(9) PENSIONS, RETIREMENT BENEFIT OR
merely voidable.
SEPARATION PAY
5. In stock options, the difference between the
Definition
fair market value of the shares at the time the
It refers to amount of money received in lump sum option is exercised, and the option price
or on staggered basis in consideration of services constitutes additional compensation income
rendered given after an individual reaches the age to the employee (Commissioner v. Smith, 324
of retirement. U.S. 177);

Pension being part of gross income is taxable to the 6. Money received under Solutio indebiti;
extent of the amount received except if there is a
BIR approved pension plan. (Sec. 32(B)(6), NIRC) Rationale: Under the claim of right doctrine,
the recipient, even if he has the obligation to
The amounts that do not qualify as exclusions are return the same, has a voidable title to the
considered as part of income subject to tax. money received through mistake.
(Domondon, 2013)
7. Condonation of indebtedness for a
Refer to discussion on “Inclusions and Exclusions consideration.
for Taxation on Compensation Income” – p. 152

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2023 GOLDEN NOTES
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Rationale: This is because when a creditor receive payment from Mr. Maunawain for the
cancels a debt as part of a business transaction, general cleaning services. Is Mr. Gipit correct?
the debtor is enriched or receives financial Explain. (2014 BAR)
advantages thereby increasing his net assets,
and thus realizes taxable income. A: NO. Sec. 50 of Revenue Regulations No. 2,
otherwise known as Income Tax Regulations,
Rules on Condonation of Indebtedness provides that if a debtor performs services for a
creditor who cancels the debt in consideration for
such services, the debtor realizes income to that
1. When cancellation of debt is income – If an
amount as compensation for his services. In the
individual performs services for a creditor, who
given problem, the cancellation of Mr. Gipit’s
in consideration thereof, cancels the debt, it is
indebtedness up to the amount of P75,000.00 gave
income to the extent of the amount realized by
rise to compensation income subject to income tax,
the debtor as compensation for his services.
since Mr. Maunawain condoned such amount as
consideration for the general cleaning services
2. When cancellation of debt is a gift – If a creditor
rendered by Mr. Gipit.
merely desires to benefit a debtor and without
any consideration therefore cancels the amount
Tax Benefit Rule or Equitable Doctrine of Tax
of the debt, it is a gift from the creditor to the
Benefit
debtor and need not be included in the latter’s
income. The creditor is subject to donor’s tax.
It is a principle that if a taxpayer recovers a loss or
3. When cancellation of debt is a capital expense that was deducted in a previous year, the
transaction. If a corporation to which a recovery must be included in the current year's
stockholder is indebted forgives the debt, the gross income up to the extent that it was previously
transaction has the effect of payment of a deducted.
dividend. (Sec. 50, RR No. 2,)
Application of Tax Benefit Rule
4. An insolvent debtor does not realize taxable
income from the cancellation or forgiveness. 1. Recovery of bad debts – the recovery of bad
(CIR v. Gin Co., 43 F.2d 327) debts previously allowed as deduction in the
preceding year or years shall be included as
5. The insolvent debtor realizes income resulting part of the taxpayer’s gross income in the year
from the cancellation or forgiveness of of such recovery to the extent of the income tax
indebtedness when he becomes solvent. benefit of said deduction.
(Lakeland Grocery Co. v. CIR, 36 BTA 289)
If the taxpayer did not benefit from deduction
Q: Mr. Gipit borrowed from Mr. Maunawain of the baddebt written-off because it did not
P100,000.00, payable in 5 equal monthly result in any reduction of his income tax in the
installments. Before the first installment year of such deduction as in the case where the
became due, Mr. Gipit rendered general result of the taxpayer’s business operation was
cleaning services in the entire office building of a net loss even without deduction of the bad
Mr. Maunawain, and as compensation therefor, debts written-off, his subsequent recovery
Mr. Maunawain cancelled the indebtedness of thereof shall be treated as a mere recovery or a
Mr. Gipit up to the amount of P75,000.00. Mr. return of capital, hence, not treated as receipt
Gipit claims that the cancellation of his of realized taxable income.
indebtedness cannot be considered as gain on
his part which must be subject to income tax, 2. Receipt of tax refunds or credit – if a taxpayer
because according to him, he did not actually receives tax credit certificate or refund for

109 UNIVERSITY OF SANTO TOMAS

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erroneously paid tax which was claimed as a technical know-how relative to such program. In
deduction from his gross income that resulted consideration for such rights, ABC agreed to pay
in a lower net taxable income or a higher net 5% of the revenues it receives from customers
operating loss that was carried over to the who will use and apply the program in the
succeeding taxable year, he realizes taxable Philippines. Discuss the tax implication of the
income that must be included in his income tax transaction. (2010 BAR)
return in the year of receipt.
A: The amount payable under the agreement is in
XPN: The foregoing principle does not apply to the nature of a royalty. The term royalty is broad
tax credits or refunds of the following taxes enough to include compensation for the use of an
since these are not deductible from gross intellectual property and supply of technical know-
income: how as a means of enabling the application or
a. Income tax (except FBT); enjoyment of any such property or right (Sec. 42(4)
b. Estate tax; NIRC). The royalties paid to the non-resident US
c. Donor’s tax; Corporation, equivalent to 5% of the revenues
d. Special assessments; derived by ABC for the use of the program in the
e. VAT; and Philippines, is subject to a 30% final withholding tax
f. Stock Transactions Tax. (now taxed at 25% under CREATE Act), unless a
lower tax rate is prescribed under an existing tax
Taxation of Debts treaty. (Sec. 28(B)(1) NIRC)

GR: Borrowed money is not part of taxable income

e) EXCLUSIONS
because it has to be repaid by the debtor. On the
other hand, the creditor does not receive any
income upon payment because it is merely a return Concept
of the investment. These refer to the flow of wealth to the taxpayers
which are not considered part of gross income for
James Doctrine purposes of computing the taxpayer’s taxable
income due to the following:
This doctrine provides that even though the law
imposes a legal obligation upon an embezzler or
1. It does not come within the definition of
thief to repay the funds, the embezzled or stolen
income; or
money still forms part of the gross income since the
2. It is exempted by the fundamental law or by
embezzler or thief has no intention of repaying the
statute.
money. (James v. United States, 366 U.S. 213, 1961)

The exclusion of income should not be confused

Proceeds of Stolen or Embezzled Property are
Taxable with the reduction of gross income by application
of allowable deductions. Exclusions are not taken
The money or other proceeds of the sale or other into account in determining gross income, however,
disposition of stolen property is subject to income deductions are subtracted from the gross income.
tax because the proceeds are received under a claim (Tabag, 2015)
of right.
Construction of Exclusions
Q: ABC, a domestic corporation, entered into a
software license agreement with XYZ, a non- Exclusions are in the nature of tax exemptions; thus,
resident foreign corporation based in the U.S. they must be strictly construed against the taxpayer
Under the agreement which the parties forged in and liberally in favor of the Government. It
the U.S., XYZ granted ABC the right to use a behooves upon the taxpayer to establish them
computer system program and to avail of convincingly.

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2023 GOLDEN NOTES
 II. NATIONAL TAXATION
Rationale: There are exclusions from the gross 4. Creditable Tax Withheld per BIR Form No. 2307
income either because they: for the 4th Quarter,
1. Represent return of capital; 5. Creditable Tax Withheld per BIR Form No.
2. Are not income, gain or profit; 2316,
3. Are subject to another kind of internal revenue 6. Tax Paid in Return Previously Filed, if this is an
tax; or Amended Return,
4. Are income, gain or profit that is expressly 7. Special Tax Credits, if applicable, and
exempt from income tax under the 8. Other Tax Credits/Payments.
Constitution, Tax treaty, NIRC, or general or a
special law. Exclusion from Gross Income and Deductions
from Gross Income Distinguished
(1) TAXPAYERS WHO MAY AVAIL

EXCLUSION FROM DEDUCTION FROM

Who may Avail
GROSS INCOME GROSS INCOME
All kinds of taxpayers – individuals, estates, trusts As to Definition
and corporations, whether citizens, aliens, whether
residents or non-residents may avail of the It refers to a flow of
exclusions. wealth to the taxpayer
which are not treated
as part of gross
(2) DISTINGUISHED FROM DEDUCTIONS AND income, for purposes
TAX CREDITS of computing the
Exclusions, Deductions and Tax Credits taxpayer’s taxable
Distinguished income, due to the
following reasons:
TAX
EXCLUSIONS DEDUCTIONS a. It is expressly
CREDITS
exempted from
Income These are It refers to It refers to amounts
income tax by
received or included in the foreign taxes which the law allows to
the fundamental
earned but gross income paid be deducted from gross
law or statute;
are not but are later beforehand income in order to
b. It is subject to
taxable deducted to but are arrive at net income.
another kind of
because of arrive at net claimed as internal revenue
exemption by income credits tax; and
virtue of a law against c. It does not come
or treaty; Philippine within the
hence, not income tax definition of
included in to arrive at income as when
the the tax due the amount
computation and payable received
of gross represents
income. return of capital.
As to the Basis of Computation
Other Tax Credits
Pertains to the Pertains to the
1. Prior Year’s Excess Credits, computation of gross computation of net
2. Tax Payments for the First Three (3) Quarters, income income
3. Creditable Tax Withheld for the First Three (3)
As to its Nature
Quarters,

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4. DEDUCTIONS FROM GROSS INCOME

Something received or Definition

earned by the Something spent or
taxpayer which do not paid in earning gross These refer to amounts or expenses authorized by
form part of gross income law to be subtracted from gross income to arrive at
income the taxable income. (Sec. 34, NIRC)

Nature of Deductions

Examples The items of amounts allowed as deductions

Example of an represent the expenses (reduction of wealth) of the
exclusion from gross taxpayer (other than personal expenses and capital
income is proceeds of expenditures) in earning the income (increase of
life insurance wealth) subject to tax as well as reasonable living
received by the expenses.
beneficiary upon the
death of the insured Example of a deduction General Rules on Deductions
which is not an is business rental 1. Deductions must be paid or incurred in
income or 13th month connection with the taxpayer’s trade, business,
pay of an employee or profession.
not exceeding
P82,000 which is an Matching Concept of Deductibility
income not
recognized for tax This posits that the deductions must, as a
purposes general rule, “match” the income, i.e., helped
earn the income. (Domondon, 2013)
Q: Differentiate tax exclusions from tax
deductions. (2019 BAR) Ordinary and necessary expenses must have
been paid or incurred during the taxable year
A: Tax exclusions pertain to the computation of for it to be deductible from gross income.
gross income while tax deductions pertain to the Further, the deduction shall be taken for the
computation of net income. Tax exclusions are taxable year in which 'paid or accrued' or 'paid
something received or earned by the taxpayer or incurred.' Otherwise, the expenses are
which do not form part of gross income while tax barred as deductions in subsequent years. (CIR
deductions are something spent or paid in earning v. Isabela Cultural Corporation, G.R. No. 172231,
gross income. Lastly, the former is the flow of wealth 12 Feb. 2007)
to the taxpayer which is not treated as part of gross
income for purposes of computing the taxpayer’s 2. Deductions must be supported by adequate
taxable income due to the following reasons: receipts or invoices.

1. It is exempted by the fundamental law; XPN: standard deduction

2. It is exempted by a statute; and
3. It does not fall within the definition of income. 3. The withholding and payment of tax required
(Sec. 61, RR No. 02-40) must be shown.

On the other hand, tax deductions are the amounts Any income payment which is otherwise
which the law allows to be subtracted from gross deductible shall be allowed as a deduction from
income in order to arrive at net income.

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gross income only if it is shown that the income Deductions that can be Claimed by a
tax required to be withheld has been paid to the Corporation
BIR. (Sec. 2.58.5, RR No. 2-98)
1. Domestic Corporations (DC) and Resident
Where No Withholding Made but Still Deductible Foreign Corporation (RFC) may opt between
the Optional Standard Deduction (OSD) or the
A deduction will also be allowed in the following Itemized Deductions.
cases where no withholding of tax was made:
2. Non-Resident Foreign Corporation (NRFC)
1. The payee reported the income and the which is subject to final tax on its gross income
withholding agent/taxpayer pays the tax, from sources within the Philippines (no
including the interest incident to the failure to deduction allowed).
withhold the tax, and surcharges, if applicable,
at the time of the original audit and a) CONCEPT AS RETURN OF CAPITAL
investigation;
The mere return of capital is allowed as deduction
2. The recipient/payee failed to report the income from gross income in order to arrive at income
on the due date thereof, but the withholding subject to tax. While in general, the nomenclature
agent/taxpayer pays the tax, including the of “cost of sales or cost of goods sold” is applied, the
interest incident to the failure to withhold the return of capital have different components
tax and surcharges, if applicable, at the time of depending upon the nature of the business being
the original audit and investigation; or taxed. (Domondon, 2013)

3. The withholding agent erroneously The amount representing return of capital should
underwithheld the tax but pays the difference be deducted from the proceeds from the sales of
between the correct amount and the amount of assets and should not be subject to income tax.
tax withheld, including the interest, incident to
such error, and surcharges, if applicable, at the Cost of goods purchased for resale, with proper
time of the original audit and investigation. (Sec. adjustment for opening and closing inventories are
2.58.5, RR 2-98) deducted from gross sales in computing gross
income. (Sec. 65, RR No. 2)
Persons Not Allowed to Claim Deductions from
Gross Income Cost of Goods Sold (CGS)

1. Subject to final tax on their gross income CGS shall include the purchase price or cost to
derived from sources within the Philippines, produce the merchandise and all expenses directly
hence, no deductions allowed to them: incurred in bringing them to their present location
a. NRANETB and use.
b. NRFC
For trading or merchandising concern, CGS means
2. When their income is purely compensation the invoice cost of goods sold, plus import duties,
income they are not entitled to deductions: freight in transporting the goods to the place where
a. RC the goods are actually sold, including insurance
b. NRC while the goods are in transit.
c. RA
For manufacturing concern, CGS means all costs
incurred in the production of the finished goods
such as raw materials used, direct labor and

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manufacturing overhead, freight cost, insurance Deduction
premiums and other costs incurred to bring the raw Individuals:
materials to the factory or warehouse. The term 40% of total sales/
may be used interchangeably with "cost of goods Deductible items revenues/ receipts/ fees
manufactured and sold". allowed by the law
Corporations: 40% of
Cost of services (COS) gross income
Who may avail?
COS means all direct costs and expenses necessarily
All taxpayers who are
incurred to provide the services required by the
subject to tax on taxable
customers and clients including:
net income (RC, NRC, RA,
All taxpayers except
NRA-ETB, DC, RFC) can
1. Salaries and employee benefits of personnel, those subject to tax
claim deductions except
consultants and specialists directly rendering on gross income
the following:
the service, and (NRA-NETB &
1. NRA-ETB
NRFC).
2. Taxpayers mandate
2. Cost of facilities directly utilized in providing
to use itemized
the service such as depreciation or rental of
deductions
equipment used and cost of supplies.
Substantiation of claim

NOTE: COS shall not include interest expense except It must be

It requires no proof of
in the case of banks and other financial institutions. substantiated by
expenses incurred.
(RR No. 16-2008) receipts.
(Banggawan, 2019)
b) ITEMIZED DEDUCTIONS vs. OPTIONAL
STANDARD DEDUCTION The election to claim either the OSD or itemized
deductions must be signified in the income tax
Itemized Deductions and Optional Standard return filed for the first quarter of the taxable year.
Deduction Distinguished Unless the corporation signified in his return his
intention to elect optional standard deduction, it
ITEMIZED OPTIONAL STANDARD shall be considered as having availed itself of the
DEDUCTIONS DEDUCTION itemized deduction.
Definition
Once the election is made, the same type of
deduction must be consistently applied for all
succeeding quarters and in the annual income tax
Under the itemized In lieu of the itemized return. In other words, the choice shall be
deductions, deductions, regular or irrevocable for the taxable year for which the return
taxpayers list every special, including is made.
item of business NOLCO. The deduction is
expense they claim merely presumed as a NOTE: A taxpayer who is required but fails to file
as deductions. fixed percentage of gross the quarterly income tax return for the first quarter
Deductions are income for corporations shall be deemed to have elected to avail of itemized
strictly construed and gross sales or gross deductions for the taxable year.
against the taxpayer. receipts for individuals.

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Requirements for Deductible Items 5. Depletion of oil and gas wells and mines;
6. Bad Debts;
1. There must be specific provision of law 7. Interest expense;
allowing the deductions since deductions do 8. Taxes;
not exist by implication. 9. Losses; and
10. Pension trust contribution. (Sec. 34, NIRC)
2. The requirements of deductibility must be met.
EXPENSES
Refer to discussions on itemized deductions for
the requirements of each deduction.
Requisites for Deductibility of Expenses (D–S-T-
3. There must be proof of entitlement to the
R-O-W-N)
deductions.
1. Paid or incurred During the taxable year;
NOTE: The burden of proof to establish the
validity of claimed deduction is on the taxpayer.
2. The expense must be Substantiated by proof;
This is consistent with the rule that tax
(Substantiation Rule)
exemptions must be strictly construed against
the taxpayer and liberally in favor of the State.
3. The expense must be incurred in Trade or
business carried on by the taxpayer
4. The deductions must not have been waived.
NOTE: It must be directly attributable to the
development, management, operation, and or
5. The withholding and payment of tax required
conduct of trade or business of the taxpayer, or
must be shown. (Domondon, 2013)
in the exercise of the taxpayer’s profession;

6. Expenses which are ordinary and necessary for

4. The expense must be Reasonable;
the conduct of trade or business, or profession.
5. The expense must be Ordinary and necessary;
7. It must be a legitimate and legal expenditure.
6. If subject to Withholding taxes, proof of
8. As a general rule, there is no limitation as to the
payment to BIR; and
amount of expense, however, it must be
reasonable.
7. Expenses must Not be against public policy,
public moral or law such as bribes, kickbacks,
Itemized Deductions
for immoral purposes.

Except for taxpayers earning compensation income Ordinary Expenses

arising from personal services rendered under an
employer-employee relationship where no It is any expense that is normal or usual in relation
deductions shall be allowed other than premium to the taxpayer’s business and the surrounding
payments on health and/or hospitalization circumstances. (General Electric, Inc. v. Collector,
insurance, in computing taxable income subject to CTA Case No. 1117, 14 July 1963)
income tax there shall be allowed the following
deductions from gross income: (C-R-E-D3-I-T–L-P) Necessary expenses

1. Charitable and other contributions; Appropriate and helpful in the development of

2. Research and development; taxpayer’s business and is intended to minimize
3. Expenses (ordinary and necessary); losses or to increase profits (Ibid.)
4. Depreciation;

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Test to Determine Ordinary and Necessary Q: When there are no receipts to prove a
Expenses deduction, can the taxpayer still claim it as a
deduction?
If they are directly attributable to the development,
management, operation, and or conduct of trade or A: NO. All taxpayers are required to preserve their
business of the taxpayer, or in the exercise of the books of accounts, including subsidiary books and
taxpayer’s profession, including: other accounting records, for a period of ten (10)
years reckoned from the day following the deadline
1. Reasonable allowances for salaries, wages and in filing a return, or if filed after the deadline, from
other compensation for personal services the date of the filing of the return, for the taxable
actually rendered, including gross monetary year when the last entry was made in the books of
value of fringe benefits; accounts. (Sec. 2, RR No. 17-2013)

2. Travel expenses in pursuit of trade or business; Cohan Rule

3. Rental and other payments for the continued Under this principle, taxpayers may use estimates
use or possession of property, for the purpose when they can show that there is some factual
of trade, business or profession; and foundation on which to base a reasonable
approximation of the expense, they can prove that
4. Entertainment, amusement and recreation they had made a deductible expenditure but just
expenses during the taxable year. cannot prove how much that expenditure was.
(Cohan v. CIR, 39 F (2d) 540)
Ordinary Expenses and Capital Expenditures It is the use of estimates or approximations of the
Distinguished amount of cash and other assets where the taxpayer
lacks adequate records.
Ordinary expenses are those which are common to NOTE: If there is showing that expenses have been
incur in trade or business. These are usually incurred but the exact amount thereof cannot be
incurred during a taxable year and benefits such ascertained due to the absence of receipts and
taxable year. On the other hand, capital vouchers of the expenditures involved, the BIR will
expenditures are those incurred to improve assets make an estimate of deduction that may be
and benefits for more than one (1) taxable year. allowable in computing the taxpayer's taxable
income bearing heavily against the taxpayer whose
Substantiation Rule inexactitude is of his own making. That
disallowance of 50% of the taxpayer’s claimed
The taxpayer shall substantiate the expense being deduction is valid. (RMC No. 23-2000)
deducted with sufficient evidence such as official
receipts or other adequate records showing: Examples of Ordinary and Necessary Expenses
1. Salaries, wages and other forms of
1. The amount of the expense being deducted;
compensation for personal services actually
and
rendered;
2. The direct connection or relation of the
2. Travelling expenses;
expense being deducted to the development,
3. Rental expenses;
management, operation and/or conduct of the
4. Entertainment, amusement and recreation;
trade, business or profession of the taxpayer.
5. Advertising and promotional expenses;
(Sec. 34(A)(1)(B), NIRC)
6. Cost of materials and supplies; and
7. Repairs.

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Q: MC, a contractor who won the bid for the Even if the company was made the beneficiary,
construction of a public highway, claims as whether directly or indirectly, the premium is not
expense, facilities fee which according to them allowed as a deduction from gross income. (Sec.
is standard operating procedure in transactions 36(A)(14), NIRC)
with the government. Are these expenses
allowable as deduction from gross income? Q: Masarap Food Corporation (MFC) incurred
substantial advertising expenses in order to
A: NO. The alleged facilitation fees which they claim protect its brand franchise for one of its line
as standard operating procedure in transactions products. In its income tax return, MFC included
with the government comes in the form of bribes or the advertising expense as deduction from gross
“kickback” which are not allowed as deductions income, claiming it as an ordinary business
from gross income as they are illegal. (Sec. expense. Is MFC correct? Explain. (2009 BAR)
34(A)(1)(c), NIRC)
A: NO. The protection of taxpayer’s brand franchise
Q: OXY is the president and CEO of ADD is analogous to the maintenance of goodwill or title
Computers, Inc. When OXY was asked to join the to one’s property which is in the nature of a capital
government service as director of a bureau expenditure. An advertising expense, of such nature
under the Department of Trade and Industry, he does not qualify as an ordinary business expense,
took a leave of absence from ADD. Believing that because the benefit to be enjoyed by the taxpayer
its business outlook, goodwill and goes beyond one taxable year. (CIR v. General Foods
opportunities improved with OXY in the Inc. 401 SCRA 545)
government, ADD proposed to obtain a policy of
insurance on his life. On ethical grounds, OXY Q: Freezy Corporation, a domestic corporation
objected to the insurance purchase but ADD engaged in the manufacture and sale of ice
purchased the policy anyway. Its annual cream, made payments to an officer of Frosty
premium amounted to P100,000. Is said Corporation, a competitor in the ice cream
premium deductible by ADD Computers, Inc.? business, in exchange for said officer’s
(2004 BAR) revelation of Frosty Corporation’s trade secrets.
May Freezy Corporaton claim the payment to the
A: NO. The premium is not deductible because it is officer as deduction from its gross income?
not an ordinary business expense. The term Explain. (2014 BAR)
"ordinary" is used in the income tax law in its
common significance and it has the connotation of A: NO. Payments made in exchange for the
being normal, usual, or customary. (Deputy v. Du revelation of a competitor’s trade secrets is
Pont, 308 US 488 (1940)) Paying premiums for the considered as an expense which is against law,
insurance of a person not connected to the morals, good customs or public policy, which is not
company is not normal, usual or customary. deductible. (3M Philippines, Inc. v. CIR, G.R. No.
Another reason for its non-deductibility is the fact 82833, 26 Sept. 1988)
that it can be considered as an illegal compensation
made to a government employee. This is so because Also, the law will not allow the deduction of bribes,
if the insured, his estate or heirs were made as the kickbacks and other similar payments. Applying the
beneficiary (because of the requirement of principle of ejusdem generis, payment made by
insurable interest), the payment of premium will Freezy Corporation would fall under “other similar
constitute bribes which are not allowed as payments” which are not allowed as deduction from
deduction from gross income. (Sec. 34(A)(1)(c), gross income. (Sec. 34(A)(1)(c), NIRC)
NIRC)

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Q: How can the taxpayer prove that the expense 3. A person who uses the accrual method,
has been paid or incurred during the taxable whereby an expense is deductible for the
year? taxable year in which all the events had
occurred which determined the fact of the
A: It is a basic requirement that all expenses must liability and the amount thereof could be
be substantiated by original copy of receipts or in determined with reasonable accuracy; or
the absence thereof, a taxpayer can still prove that 4. A person who uses the completed method,
the claimed deduction was really paid or incurred whereby the construction project has been
by providing other evidence such as certified true completed during the year the contract
copies of the official receipts in case of loss, payment was signed.
vouchers and checks. (Sec. 34(A)(1)(b), NIRC)
Requisites for an Employer to Deduct
Q: Amounts of income accrue where the right to Compensation
receive them become fixed, where there is
created an enforceable liability. Similarly, The following are the requisites before an employer
liabilities are accrued when fixed and can deduct compensation payments to employees:
determinable in amount, without regard to
indeterminacy merely of time of payment. For a 1. The payments must be reasonable;
taxpayer using the accrual method, when do the 2. They are, in fact, payments for personal
facts present themselves in such a manner that services rendered; and (Sec. 70, RR No. 2)
the taxpayer must recognize income or 3. Subjected to withholding tax.
expense? (2012 BAR)
NOTE: Reasonable and true compensation is only
A: The accrual of income and expense is permitted such amount as would ordinarily be paid for
when the ALL-EVENTS TEST has been met. This test services like enterprises in like circumstances.
requires: (1) fixing of a right to income or liability to
pay, and (2) the availability of the reasonable Compensation for Services which are Allowed
accurate determination of such income or liability. as Deductions from Gross Income
The all-events test requires the right to income or
liability be fixed, and the amount of such income or 1. Wages, salaries, commissions, professional
liability be determined with reasonable accuracy. fees, vacation-leave pay, retirement pay, and
(CIR v. Isabela Cultural Corporation, G.R. No. 172231, other compensation;
12 Feb. 2007) 2. Bonuses in good faith;
3. Pensions and compensation for injuries if not
Q: When is “all-events” test applicable? compensated for by insurance or otherwise;
and
A: It is applicable when: 4. Grossed-up monetary value of fringe benefit
provided for, as long as the final tax imposed
1. A person who uses the cash method where has been paid.
all sales have been fully paid by the buyers
thereof; NOTE: The fringe benefit must have been
granted to managerial and supervisory
2. A person who uses the installment sales employees, otherwise it cannot be availed as
method, where the full amount of deduction.
consideration is paid in full by the buyer
thereof within the year of sale; Q: What are the requisites for deductibility of
bonus? (2006 BAR)

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A: When the income tax return of the corporation
was reviewed by the BIR the following year, it
1. The payment of the bonus is made in good faith
disallowed as item of deduction the P75 million
for additional compensation;
bonus the corporation gave its officials and
2. It must be for personal services actually
employees on the ground of unreasonableness.
rendered;
The corporation claimed that the bonus is an
3. The bonus when added to salaries is
ordinary and necessary expense that should be
“reasonable” when measured by the amount
allowed. If you were the CIR, how will you
and quality of the services performed with
resolve the issue? (2006 BAR)
relation to the business of the particular
taxpayer; and
A: I will rule against the deductibility of the bonus.
4. Must be subjected to withholding tax.
The extra bonus is not normal to the business and
unreasonable. Giving an extra bonus at a time that
Bonuses to employees made in good faith and as
the company suffers operating losses is not a
additional compensation for the services actually
payment done in good faith and is not normal to the
rendered by the employees are deductible, provided
business, hence unreasonable and would not
such payments, when added to the stipulated
qualify as ordinary and necessary expense.
salaries, do not exceed a reasonable compensation
for the services rendered. (Kuenzle & Streiff, Inc. v.
Q: Noel is a bright computer science graduate.
CIR, G.R. No. L-18840, 29 May 1969)
He was hired by Hewlett Packard. To entice him
to accept the job, he was offered the
Bonuses given to corporate officers out of sale of
arrangement that part of his compensation
corporate land are not deductible as an ordinary
would be an insurance policy with a face value of
business expenses in the absence of showing what
P20 million. The parents of Noel are made the
role said officers performed to effectuate said sale.
beneficiaries of the insurance policy. Can the
The taxpayer must show that personal services had
company deduct from its gross income the
been rendered and that the amount was reasonable.
amount of the premium?
(Aguinaldo Industries Corporation v. CIR, G.R. No. L-
29790, 25 Feb. 1982)
A: YES, the premiums paid are ordinary and
necessary business expenses of the company. They
The following conditions may be taken into
are allowed as a deduction from gross income so
consideration:
long as the employer is not a direct or indirect
beneficiary under the policy of insurance. Since the
1. The payment made in good faith;
parents of the employee were made the
2. The character of the taxpayer’s business; e.g.,
beneficiaries, the prohibition for their deduction
the volume and amount of its net earnings; its
does not exist. (Sec. 36(A)(4), NIRC)
locality; the type and extent of the services
rendered; the salary policy of the corporation;
Travelling/Transportation Expenses
3. The size of the particular business;
4. The employees’ qualification and contributions
The following are the requisites for its deductibility:
to the business venture; and
5. General economic conditions. (C.M. Hoskins &
1. Reasonable and necessary expenses;
Co., Inc. v. CIR, G.R. No. L-24059, 28 Nov. 1969)
2. Incurred or paid while away from home; and
3. In pursuit of trade, business or profession.
Q: Gold and Silver Corporation gave extra 14th
month bonus to all its officials and employees in
NOTE: Travelling expense includes transportation,
the total amount of P75 million. When it filed its
meals and lodging, whether local or foreign. (RR No.
corporate income tax return the following year,
2)
the corporation declared a net operating loss.

119 UNIVERSITY OF SANTO TOMAS

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Expenses partly for business and partly for other Costs of Materials
purposes shall be apportioned. (Jamir v. Collector,
G.R. No. L-16552; 30 Mar. 1962; Gutierrez v. Materials and supplies are deductible only to the
Collector, G.R. No. L-19537, 20 May 1965) In amount actually consumed or used in the operation
combined business and pleasure trip, those that are during the taxable year, provided that the cost of
related to the trade of business are deductible such materials and supplies has not been deducted
whereas, those spend on pleasure are non- in determining the net income for any previous
deductible. (Lim, 2021) year.

Meaning of “Away from Home” Methods Utilized to Determine Materials Used

It means away from the location of the employee’s 1. Actual consumption method or inventory
principal place of employment regardless of where method; or
the family residence is maintained. (Sec. 2. Direct purchase method.
34(A)(1)(a)(ii), NIRC)
Q: Assuming the taxpayer purchases materials
Rules in Deducting Travel Expenses but has no record of consumption, is it
deductible?
1. The employer cannot claim as a deduction the
excess over the cost of a business plane ticket A: YES, provided the net income is clearly reflected
or its equivalent, whether paid directly by the by direct purchase method.
employer to the airline company or
reimbursed to the employee; If a taxpayer carries incidental materials or supplies
on hand for which no record of consumption is kept
2. Deductions to be claimed by the employer for or of which physical inventories at the beginning
the allowance which are pre-computed by the and end of the year are not taken, it will be
employer on a daily basis, or reimbursement permissible for the taxpayer to include in his
for the cost of meals and lodging in foreign expenses and deduct from gross income the total
trips by the employee for the pursuit of cost of such supplies and materials as were
employer’s trade or business may not exceed; purchased during the year for which the return is
made, provided the net income is clearly reflected
3. Reimbursement for travel taxes, airport fees by this method. (Sec. 67, RR No. 2)
and other charges, if duly receipted or
substantiated, may be deducted by the Rentals and/or Other Payments for Use or
employer as business expenses; and Possession of Property

4. Subject to the above rules, expenses incurred The following are the requisites for its deductibility:
in attending two foreign professional
conventions a year shall constitute a 1. Payment was made as a condition to the
deductible expense. continuous use of or possession of the
property;
NOTE: These maybe considered as fringe benefit 2. Taxpayer has not taken or is not taking title to
subject to fringe benefits tax. In such cases, it is the property or has no equity other than that of
deductible from the employer’s gross income. a lessee, user or possessor;
(Domondon, 2009) 3. Property must be used in the trade or business;
and
4. The withholding tax must have been withheld
and paid.

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Rental Expense such sum each year, based on the number of years
the lease will run.
1. Aliquot part of the amount used to acquire
leasehold over the number of years the lease Taxes paid by a tenant to or for a landlord for
will run; business property are additional rent and constitute
a deductible item to the tenant and taxable income
2. Taxes and other obligations of the lessor paid to the landlord; the amount of the tax being
by the lessee; and deductible by the latter.

3. Annual depreciation of the cost of the The costs of leasehold improvements are not
leasehold improvements introduced by the considered business expenses since they are capital
lessee over the remaining period of the lease, investments.
or over the life of the improvements,
whichever period is shorter. In order to return to such taxpayer his investment
of capital, an annual deduction may be made from
NOTE: It is not the cost of the leasehold gross income of an amount equal to the cost of such
improvements but only its annual depreciation that improvements divided by the number of years
is considered as rental expense. remaining of the term of the lease, and such
deduction shall be in lieu of a deduction for
Repairs and Maintenance depreciation. If the remainder of the term of lease is
greater than the probable life of the building
Repairs are allowed as deduction when it is minor erected, or of the improvements made, this
and ordinary, and keeps the asset in its ordinary deduction shall take the form of an allowance for
working condition. Major and extraordinary depreciation. (Sec. 74, RR No. 2)
repairs are capitalized and included in determining
depreciation expense because they tend to prolong Expenses of Professionals
the life of the asset.
1. Supplies expense;
Expenses under Lease Agreements 2. Expenses paid in the operation and repair of
transportation equipment used in making
Expenses under the lease agreement which may be professional calls
allowed as deductions by the lessor. 3. Membership dues to professional associations
or societies and subscriptions to journals;
Since the rentals are considered as income of the 4. Office rentals;
lessor (owner of the property), such lessor may 5. Utilities expense for water and electricity
deduct all ordinary and necessary expenses paid or consumed in connection with the exercise of
incurred during the taxable year to the earning of the profession;
the income. (Sec. 2.01, RR No. 19-86) 6. Communication expense;
7. Expenses for hiring employees or office
Among such deductions may be cost of repairs and assistants; and
maintenance, salaries and wages of employees 8. Expenses incurred for books, furniture and
attendant to such lease, interest payment, property professional instruments and equipment with
taxes, etc. short useful life.

Where a leasehold is acquired for business NOTE: Those of a permanent character are not
purposes for a specified sum, the purchaser may allowable as deductions.
take deduction in his return for an aliquot part of

121 UNIVERSITY OF SANTO TOMAS

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Entertainment/Representation Expenses lease of properties – 1% of net revenue (i.e.,
gross revenue less discounts)
The following are the requisites to avail of this
deduction: 3. For taxpayers deriving income from both
sale of goods and services – the allowable
1. Paid or incurred during the taxable year; deduction shall in all cases be determined
2. Directly connected to the development, based on an apportionment formula taking into
management, and operation of the business, consideration the percentage of the net
trade or profession of the taxpayer; or directly sales/net revenue to the total net sales/net
related to or in furtherance of the conduct of its revenue, but which in no case shall exceed the
trade, business or exercise of a profession; maximum percentage ceiling provided (Sec. 5,
3. Not contrary to law, morals, good customs, RR No. 10-2002)
public policy or public order;
4. Must not constitute as a bribe, kickback, or Apportionment Formula
other similar payment;
5. Duly substantiated by adequate proof or 𝑁𝑁𝑁𝑁𝑁𝑁 𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆 𝑜𝑜𝑜𝑜 𝑁𝑁𝑁𝑁𝑁𝑁 𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅
× 𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴 𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸
receipt; 𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇 𝑁𝑁𝑁𝑁𝑁𝑁 𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠 𝑜𝑜𝑜𝑜 𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟
6. Withholding tax, if any, should have withheld
therefrom and paid; and Q: What are included as entertainment,
7. Must be reasonable. amusement, and recreation expenses?

Q: Who may claim entertainment, amusement, A: They include representation expenses and/or
and recreation expenses? depreciation or rental or public order; expense
relating to entertainment facilities.
A:
1. Individuals engaged in business, including NOTE: “Representation expenses” shall refer to
taxable estates and trusts; expenses incurred by a taxpayer in connection with
2. Individuals engaged in practice of profession; the conduct of his trade, business or exercise of
3. Domestic corporation; profession, in entertaining, providing amusement
4. Resident foreign corporation; and and recreation to, or meeting with, a guest or guests
5. General professional partnerships, including at a dining place, place of amusement, country club,
its members. theater, concert, play, sporting event and similar
events or places.
Ceiling or Limitation on the Amount Allowed as If the taxpayer is the registered member of a
Entertainment, Amusement, and Recreation country, golf, or sports club, the presumption is that
Expense the expenses are fringe benefits subject to the FBT
unless the taxpayer can prove these are actually
Entertainment, amusement and recreation expense representation expenses. (Ingles, 2015)
shall be allowed as a deduction from gross income “Entertainment facilities” shall refer to a yacht,
but in no case shall exceed: vacation home or condominium; and any other
similar item of real or personal property used by
1. For taxpayers engaged in sale of goods or the taxpayer primarily for the entertainment,
properties – 0.50% of net sales (i.e., gross sales amusement, or recreation of guests or employees
less sales returns or allowances and sales (Sec. 2, RR No. 10-2002)
discounts)
To be considered an entertainment facility, it must
2. For taxpayers engaged in sale of services, be owned or form part of the taxpayer’s trade,
including exercise of profession and use or

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business, or profession for which he claims as business expenses, provided the amount
depreciation or rental expense. incurred is reasonable.

A yacht is considered an entertainment facility if its 2. Advertising designed to stimulate the future
use is not restricted to specified officers or sale of merchandise or use of services must be
employees. If the yacht is restricted to them, it spread over a reasonable period of time that it
would be a fringe benefit, subject to the FBT. help earn the income.

Expenses Not Considered Entertainment, Rationale: Matching concept of deductibility.

Amusement, and Recreation Expenses
3. Advertising to promote the sales of shares of
1. Expenses which are treated as compensation stock or to create a corporate image is not
or fringe benefits for services rendered under deductible as an advertisement. (Domondon,
an employer-employee relationship; 2009)
2. Expenses for charitable or fund-raising events;
3. Expenses for bona fide business meeting of Expenses paid to advertising firms to promote sale
stockholders, partners or directors; of capital stock for acquisition of additional capital
4. Expenses for attending or sponsoring an is not deductible from taxable income. Efforts to
employee to a business league or professional establish reputation are akin to acquisition of
organization meeting; capital assets, and therefore, expenses related
5. Expenses for events organized for promotion, thereto are not business expense but capital
marketing and advertising including concerts, expenditures. (Atlas Consolidated Mining &
conferences, seminars, workshops, Development Corporation v. CIR, G.R. No. L-26911, 27
conventions, and other similar events; and Jan. 1981)
6. Other expenses of similar nature. (Sec. 3, RR No.
10-2002) Q: Algue, Inc. is a domestic corporation engaged
in engineering, construction and other allied
Advertising and Promotional Expenses activities. Philippine Sugar Estate Development
Company (PSEDC) appointed Algue as its agent,
The following are the requisites for the deductibility authorizing it to sell its land, factories and oil
of advertising and promotional expenses: (Sub- manufacturing processes. Pursuant to said
Pro-Ser) authority and through the joint efforts of the
officers of Algue, they formed the Vegetable Oil
1. Substantiated with sufficient evidence; Investment Corporation, inducing other
persons to invest in it. This new corporation
2. All payments for the purchase of Promotional later purchased the PSEDC properties. For this
giveaways, contest prizes or similar material sale, Algue received as an agent a commission of
must be properly receipted; and P125,000 and from this commission the P75,000
promotional fees were paid to the officers of
3. All payments for Services such as radio and TV Algue. Is the promotional expense deductible?
time, print ads, talent fees, advertising
expense or know-how must be subjected to A: YES. The promotional expense paid by PSEDC to
withholding tax. Algue amounting to P75,000 is deductible for it was
reasonable and not excessive. Algue proved that the
Kinds of Advertising and their Deductibility payment of the fees was necessary and reasonable
in the light of the efforts exerted by the payees in
1. Advertising to stimulate the current sale of inducing investors and prominent businessmen to
merchandise or use of services are deductible venture in an experimental enterprise (Vegetable

123 UNIVERSITY OF SANTO TOMAS

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Oil Investment Corporation) and involve A: Interest shall refer to the payment for the use or
themselves in a new business requiring millions of forbearance or detention of money, regardless of
pesos. (CIR v. Algue, G.R. No. L-28896, 17 Feb. 1988) the name it is called or denominated. It includes the
amount paid for the borrower’s use of money during
Training Expenses the term of the loan, as well as for his detention of
money after the due date for its repayment (Sec.
Grants for manpower training and special studies 2(a), RR No. 13-2000)
given to rank-and-file employees pursuant to a
program prepared by the labor-management Q: What are the deductible interest expenses?
committee for development skills identified as
necessary by the appropriate government agencies A: Interest:
shall entitle the business enterprise to a special
deduction from gross income equivalent to fifty 1. On taxes, such as those paid for deficiency or
percent (50%) of the total grants over and above delinquency, since taxes are considered
the allowable ordinary and necessary business indebtedness (provided that the tax is a
deductions for said grants under the NIRC. (Sec. deductible tax.) However, fines, penalties, and
7(2), R.A. No. 6071; Sec. 1, RMC No. 102-90) surcharges on account of taxes are not
deductible. The interest on unpaid business tax
shall not be subjected to the limitation on
INTEREST
deduction;
The amount of interest paid or incurred within a
2. Paid by a corporation on scrip dividends;
taxable year on indebtedness in connection with the
taxpayer's profession, trade or business shall be
3. On deposits paid by authorized banks of the
allowed as deduction from gross income. (Sec 34(B),
BSP to depositors, if shown that the tax on such
NIRC)
interest was withheld and paid; and
The following are the requisites for deductibility:
4. Paid by a corporate taxpayer, liable on a
mortgage upon real property of which the said
1. There must be an indebtedness;
corporation is the legal or equitable owner,
2. The indebtedness must be that of the taxpayer;
even though it is not directly liable for the
3. The interest must be legally due and stipulated
indebtedness.
in writing;
4. The interest must be paid or incurred during
Non-Deductible Interest Expense
the taxable year;
5. The indebtedness must be connected with the
1. Interest on preferred stock, which in reality is
taxpayer’s trade, business, or exercise of
dividend;
profession;
6. The interest arrangement must not be between
NOTE: Preferred shares are considered
related taxpayers; and
capital regardless of the conditions under
7. The allowable deduction has been reduced by
which such shares are issued and
an amount equivalent to 20% of the interest
consequently, dividends or “interest” paid
income subjected to final tax. (Sec. 7 (B), RR No.
thereon shall not be allowed as a deduction
5-2021, in relation to Sec. 21, R.A. No. 11534)
from gross income of the corporation. (Phil.
Trust Co. v. Collector, CTA Case No. 367, 30 Jan.
Q: How is interest as a deduction from gross
1961)
income defined? (1992 BAR)

2. Interest on unpaid salaries and bonuses;

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 II. NATIONAL TAXATION
3. Interest calculated for cost keeping; arose in independent transaction with or between
4. Interest paid where parties provide no unrelated parties under similar circumstances.
stipulation in writing to pay interest; (RMO No. 63-1999)
5. If the indebtedness is incurred to finance
petroleum exploration; Theoretical Interest is Not Deductible
6. Interest paid on indebtedness between
related taxpayers; and It is not deductible because:
1. It is not paid or incurred for it is merely
Related Taxpayers computed or calculated; and
2. It does not arise from interest bearing
a. Members of the same family, brothers obligation. (PICOP v. CA, G.R. Nos. 106949-50;84-
and sisters, whether in full or half blood, 85, 01 Dec. 1995)
spouse, ancestors and lineal
descendants; Q: Does the CIR have the power to impute
theoretical interest?
b. Stockholders and a corporation, when he
holds more than 50% in value of its A: NO. CIR’s powers of distribution, apportionment,
outstanding capital stock, except in case or allocation of gross income and deductions under
of distribution in liquidation; Sec. 43 (now Sec. 50) of the NIRC and Sec. 179 of RR
No. 2 does not include the power to impute
c. Corporation and another corporation, “theoretical interests” to the controlled taxpayer’s
with interlocking stockholders; transactions. There must be proof of actual receipt
or realization of income. (CIR v. Filinvest
d. Grantor and fiduciary in a trust; Development Corporation, G.R. Nos. 163653 &
167689, 19 July 2011)
e. Fiduciary of a trust and fiduciary in
another trust, if the same person is a Interest Paid in Advance
grantor with respect to each trust; and
Interest paid in advance through discount or
f. Fiduciary of a trust and beneficiary of otherwise in case of cash basis, the taxpayer is
such trust. (Sec. 36(B), NIRC) allowed to claim as deduction such interest in the
year the debt is paid.
7. Interest on indebtedness paid in advance
through discount or otherwise and the Optional Treatment of Interest Expense on
taxpayer reports income on cash basis. Capital Expenditure

NOTE: Interest is allowed as a deduction in the year Interest incurred to acquire property used in trade,
the indebtedness is paid, not when the interest was business or profession may be allowed either:
paid in advance. If the indebtedness is payable in 1. Treated as capital expenditure, i.e., it forms part
periodic amortizations, the amount of interest of the cost of the asset; or
which corresponds to the amount of the principal 2. As a deduction. (Sec. 34(B)(2), NIRC)
amortized or paid during the year shall be allowed
as deduction in such taxable year. NOTE: Interest paid in advance, interest
periodically amortized, and interest incurred to
Arm’s Length Interest Rate acquire property used in trade or business is also
treated the same, the taxpayer can deduct it as an
It is the rate of interest which was charged or would outright deduction or capital expenditure.
have been charged at the time the indebtedness

125 UNIVERSITY OF SANTO TOMAS

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Interest Periodically Amortized This is a method of borrowing without entering into
a debtor-creditor relationship to resolve financing
If indebtedness is payable in periodic amortizations, and exchange control problem. Oftentimes, it is used
interest is deducted in proportion to the amount of to circumvent the law and has the effect of lowering
the principal paid. the taxes due the government. (Lim, 2021)

Q: Is the interest on loans used to acquire

TAXES
capital equipment or machinery deductible
from gross income? (1999 BAR)
Taxes paid or incurred within the taxable year in
connection with the taxpayer's profession, trade or
A: YES. The law gives the taxpayer the option to
business, shall be allowed as deduction. (Sec 34(C),
claim it as a deduction or treat it as capital
NIRC)
expenditure interest incurred to acquire property
used in trade, business, or exercise of a profession.
The requisites for deductibility are:
(Sec. 34(B)(3), NIRC)
1. Payments must be for taxes;
Reduction of Interest Expense or Interest 2. Tax must be imposed by law on, and payable by
Arbitrage the taxpayer;
3. Paid or incurred during the taxable year in
The taxpayer’s otherwise allowable deduction for connection with taxpayer’s trade, business or
interest expense shall be reduced by an amount profession; and
equal to 20% of the interest income subject to final 4. Taxes are not specifically excluded by law from
tax. (Sec. 34(B)(1), NIRC, as amended by R.A. No. being deducted from the taxpayer’s gross
11534) income.

This is to safeguard from tax arbitrage schemes. Examples of Taxes which are Deductible
This limitation on the deductibility of interest 1. Import duties;
expense was legislated to specifically address the 2. Business licenses, excise and stamp taxes;
tax arbitrage arising from the difference between 3. Local government taxes such as real property
the 20% final tax on interest income and the normal taxes, license taxes, professional taxes,
corporate income tax rate under which interest amusement taxes, franchise taxes and other
expense can be claimed as a deduction. similar impositions;
4. Fringe benefit tax;
This limitation shall apply regardless of whether or 5. Documentary stamp tax;
not a tax arbitrage scheme was entered into by the 6. Percentage taxes; and
taxpayer or regardless of the date of the interest- 7. Foreign Income Tax if not claimed as tax credit.
bearing loan and the date when the investment was
made, for as long as, during the taxable year, there Limitation on the Deduction
is an interest expense incurred on one side and an
interest income earned on the other side, which In the case of RA, NRC, NRA-ETB and RFC, the
interest income had been subjected to final deductions for taxes shall be allowed only if and to
withholding tax. the extent that they are connected with income
from sources within the Philippines. (Sec. 34(C)(2),
Tax Arbitrage NIRC)

It is a strategy which takes advantage of the

difference in tax rates or tax systems as the basis for
profit.

UNIVERSITY OF SANTO TOMAS 126

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When to Claim Deductions for Taxes 2. Estate tax and donor’s taxes;

GR: Taxes may be deducted only on the year it was 3. Special assessments – taxes assessed against
paid or incurred. local benefits of a kind tending to increase the
value of property assessed;
XPN: In the case of contingent tax liability, the
obligation to deduct arises only when the liability is 4. Stock transaction tax – taxes on sale, barter,
finally determined. exchange of shares of stock listed and traded
through the local stock exchange or through
Q: In 2006, Sally, a fruit market operator initial public offering;
received an assessment for customs duties for
her imported market equipment in the amount 5. Final taxes;
of P75,000. Believing that the amount is
excessive, she paid the same under protest. 6. Presumed capital gains tax; and
Because of the assurances from her retained
CPA that she stands a good chance of being able 7. VAT.
to secure a refund of P50,000 she did not deduct
the same anymore from her income tax return. Treatment of Surcharges, Interests and Fines
She deducted only the P25,000 which she for Delinquency
believed was due from her. She received the
refund amounting to P50,000 in 2008. What These are not considered as taxes, hence they are
should have been the proper tax treatment of not allowed as deductions. However, interest on
the payment of P75,000 in 2006? delinquent taxes is deductible as they considered as
interest on indebtedness and not as taxes. (CIR v.
A: Sally should have deducted the total P75,000 Palanca, Jr., G.R. No. L-16626, 29 Oct. 1966)
customs duties in 2006. When she received the
refund of P50,000 in 2008, she should have included Treatment of Special Assessment
the amount as part of her income. Under the tax
benefit rule, taxes allowed as deductions, when Special assessments are deductible as taxes where
refunded or credited shall be included as part of these are made for the purpose of maintenance or
gross income in the year of receipt to the extent of repair of local benefits, if the payment of such
the income tax benefit of said deduction. assessment is ordinary and necessary in the
conduct of trade, business or profession.
Non-deductible Taxes
Where the assessments are made for the purpose of
The following are the taxes not allowed as constructing local benefits tending to increase the
deduction from gross income to arrive at taxable value of the property assessed, the payments are in
income: the nature of capital expenditures that are not
deductible.
1. Income tax provided under the NIRC
(Philippine income tax); Treatment to Income Taxes Paid in Foreign
GR: Income taxes imposed by authority of any Countries
foreign country
The taxpayer may either claim it as:
XPN: When the taxpayer does not signify in his 1. Foreign tax credits against Philippine income
return his desire to avail of the tax credit tax due of citizens and domestic corporations;
(except FBT). or
2. A deduction from gross income of citizens and

127 UNIVERSITY OF SANTO TOMAS

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 TAXATION LAW
domestic corporations. Income) bears to his entire taxable income for
the same taxable year; and
Foreign Tax Credit
2. The total amount of the credit shall not exceed
It is the right of an income taxpayer to deduct from the same proportion of the tax against which
income tax payable the foreign income tax he has such credit is taken, which the taxpayer’s
paid to a foreign country subject to certain income from sources without the Philippines
limitations. This is to avoid the rigors of indirect taxable under Title II of the NIRC (Tax on
double taxation, although not prohibited by the Income) bears to his entire taxable income for
Constitution for being violative of the due process, the same taxable year. (Sec. 34(C)(4), NIRC)
results to a tax being paid twice on the same subject
matter or transaction. Q: Are taxes paid and subsequently refunded
taxable or non-taxable? (2005 BAR)
Tax Credit and Tax Deduction Distinguished
A: Taxable only if the taxes were paid and claimed
TAX CREDIT TAX DEDUCTION as deduction and which are subsequently refunded
Subtracted from or credited. It shall be included as part of gross
Tax due Income before tax income in the year of the receipt to the extent of the
Reduces income tax benefit of said deduction. (Sec. 34(C)(1),
The taxpayer’s tax Income upon which tax NIRC) Not taxable if the taxes refunded were not
liability peso for peso liability is computed originally claimed as deductions.

Persons Entitled to Claim Tax Credit LOSSES

1. Resident citizens; Losses actually sustained during the taxable year

2. Domestic corporations (Sec. 34(C)(3)(a), NIRC); and not compensated for by insurance or other
3. Members of a GPP; and forms of indemnity shall be allowed as deductions:
4. Beneficiary of an estate or trust. (Sec. 1. If incurred in trade, profession or business
34(C)(3)(b), NIRC) 2. Of property connected with the trade, business
or profession, if the loss arises from fires,
Persons Not Entitled to Claim Tax Credit storms, shipwreck, or other casualties, or from
robbery, theft or embezzlement (Sec. 34(D),
1. Alien individuals, whether resident or non- NIRC)
residents;
2. Foreign corporation, whether resident or non- The requisites for deductibility are: (T-A-E-T-I-E-
residents; and C45)
3. Non-resident citizen including overseas
contracted workers and seamen. 1. Loss belongs to the Taxpayer;

Limitations on Claiming Tax Credit 2. Actually sustained and charged off during the
taxable year;
1. The amount of the credit in respect to the tax
paid or incurred to any country shall not 3. Evidenced by a closed and completed
exceed the same proportion of the tax against transaction;
which such credit is taken, which the taxpayer’s
taxable income from sources within such 4. Must be connected with taxpayer’s Trade,
country under Title II of the NIRC (Tax on business or profession or incurred in any
transaction or incurred by an individual in any

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2023 GOLDEN NOTES
 II. NATIONAL TAXATION
transaction entered into for profit though not Actual loss shall be reduced by insurance recovery
connected with his trade, business or or any form of indemnity. Any excess of cost to
profession; restore over the book value shall be capitalized.
(Tabag, 2015)
5. Not compensated by Insurance or other forms
of indemnity; Q: X, a travelling salesman in Sulu. In the course
of his travel, a band of MNLF seized his car by
6. Not claimed as a deduction for Estate tax force and used it to kidnap a foreign missionary.
purposes in case of individual taxpayers; and The next day, the military and the MNLF band
had a chance encounter which caused X’s car to
7. If it is Casualty loss, it is evidenced by a be a total wreck. Can X deduct the value of his car
declaration of loss filed within 45 days with the from his income as casualty loss? (1993 BAR)
BIR.
A: It depends. Before the TRAIN Law if X is an
Types of Losses employee of a company, he cannot deduct the losses
incurred since an individual taxpayer who derives
1. Ordinary losses – incurred in trade, profession income from compensation is allowed only personal
or business. and additional deductions and the reasonable
premiums for health and hospitalization insurance.
These are losses that are incurred by a taxable Under the TRAIN Law, personal and additional
entity as a result of its day-to-day operations deductions are no longer applicable.
conducted for profit or otherwise. (Domondon,
2013) If X is engaged in trade or business, he can deduct
the value of the car from his gross income provided
2. Casualty losses – The loss is of property he can recover only up to the amount of the casualty
connected with trade, business or profession loss that does not exceed its book value, and that it
arising from fire, storm, shipwreck or other is not compensated by insurance or otherwise.
casualty, or from robbery, theft or
embezzlement. Net Operating Loss Carry-over (NOLCO)

These are the loss or physical damage suffered Net operating loss refers to the excess of allowable
by property used in trade, business or the deduction over gross income of the business in a
profession that results from unforeseen taxable year. The net operating loss of the business
identifiable events that are sudden, or enterprise for any taxable year immediately
unexpected and unusual in character. preceding the current taxable year, which had not
(Domondon, 2013) been previously offset as deduction from gross
income shall be carried over as a deduction from
A declaration of loss must be filed with the BIR gross income for the next three (3) consecutive
within 45 days after the date of event. taxable years immediately following the year of
such loss, provided that:
1. The taxpayer was not exempt from income tax
Measurement of Casualty Loss
in the year of such net operating loss; and
2. There has been no substantial change in the
1. Total loss – Actual loss is the book value of the
ownership of the business or enterprise.
asset.

NOTE: NOLCO is on a first-in first-out basis. (RR 14-

2. Partial loss – Book value or cost to restore the
2001)
asset to its normal operating condition,
whichever is lower.

129 UNIVERSITY OF SANTO TOMAS

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Meaning of “Substantial Change in Ownership of 2. Domestic and Resident foreign corporation
the Business or Enterprise” subject to the normal income tax or
preferential tax rates; and
The 75% equity rule (or ownership or interest rule) 3. Estates and trusts.
shall only apply to transfer or assignment of the
taxpayer’s net operating losses as a result of or Effect of NOLCO when the Corporate Taxpayer is
arising from the said taxpayer’s merger or Subject to MCIT
consolidation or business combination with
another person. The running of the 3-year period for the expiry of
NOLCO is not interrupted by the fact that such
The transferee or assignee shall not be entitled to corporation is subject to MCIT in any taxable year
claim the same as a deduction from gross income during such 3-year period. However, such
except when as a result of the said merger, corporation cannot enjoy the benefit of NOLCO for
consolidation or combination, the shareholders of as long as it is subject to MCIT in any taxable period.
the transferor/assignor, or the transferor gains
control of: An individual who claims the 40% OSD cannot claim
1. At least 75% or more in nominal value of the deduction of NOLCO simultaneously. Even if NOLCO
outstanding issued shares or paid up capital of was not claimed, the 3-year period shall continue to
the transferee/assignee, if a corporation; run. (RR No. 14-2001)

2. At least 75% or more interest in the business of Those who are Not Qualified to Avail NOLCO
the transferee/assignee, if not a corporation.
(75% equity rule) (Sec. 2.4, RR 14-2001) 1. OBUs for a foreign banking corporation and
FCDU of a domestic banking corporation;
Determination of Substantial Change in 2. Enterprise registered with the BOI enjoying
Ownership the Income Tax Holiday Incentive;
3. PEZA-registered enterprise;
Substantial change in ownership shall be 4. SBMA-registered enterprise;
determined on the basis of any change in the 5. Foreign corporations engaged in international
ownership in said business or enterprise arising shipping or air carriage business in the
from or incident to its merger, consolidation, or Philippines; and
combination with another person. It shall be 6. Any person, natural or juridical, enjoying
determined as of the end of the taxable year when exemption from income tax. (RR No. 14-2001)
NOLCO is to be claimed as deduction. (Sec. 5.1, RR
No. 14-2001) Capital Losses

Q: In case of mines other than oil and gas wells, Losses from sale or exchange of capital assets. It is
NOLCO shall be allowed for what period? deductible to the extent of capital gains only.

A: A net operating loss during the first 10 years of Q: What is the rationale for the rule prohibiting
operation shall be allowed as NOLCO for the next 5 the deduction of capital losses from ordinary
years immediately following the year of such loss. gains? Explain. (2003 BAR)

Persons Entitled to Deduct NOLCO from Gross A: It is to insure that only costs or expenses incurred
Income in earning the income shall be deductible for income
tax purposes consonant with the requirement of the
1. Individuals engaged in trade or business or in law that only necessary expenses are allowed as
the exercise of his profession; deductions from gross income. The term “necessary

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2023 GOLDEN NOTES
 II. NATIONAL TAXATION
expenses” presupposes that in order to be allowed considered to have incurred a capital loss as of the
as deduction, the expense must be business last day of the taxable year and therefore, deductible
connected, which is not the case insofar as capital to the extent of capital gains. This deduction,
losses are concerned. This is also the reason why all however, is not allowed to a bank or trust company.
nonbusiness connected expenses like personal, (Sec. 34(D)(4), Sec. 34(E)(2), NIRC)
living and family expenses, are not allowed as
deduction from gross income. (Sec. 36(A)(1) of the Special Losses
1997, NIRC)
1. Wagering losses – deductible only to the
Refer to discussion on “Income from Dealings in extent of gain or winnings deemed to only
Property”. apply to individuals. (Sec. 34(D)(6), NIRC)

Securities Becoming Worthless 2. Losses on wash sales of stocks

If securities become worthless during the taxable Wash sale - A sale of stock or securities where
year and are capital assets, the loss resulting substantially identical securities are acquired
therefrom shall be considered as a loss from the sale or purchased within 61-day period, beginning
or exchange, on the last day of such taxable year, of 30 days before the sale and ending 30 days
capital assets. (Sec. 34(D), NIRC) after the sale.

Losses from shares of stock, held as capital asset, GR: Losses from wash sale are not deductible
which have become worthless during the taxable since these are considered as artificial loss.
year shall be treated as capital loss as of the end of
the year. However, this loss is not deductible against XPN: When a taxpayer is a dealer in securities,
the capital gains realized from the sale, barter, and the transaction from which the loss
exchange, or other forms of disposition of shares of resulted was made in the ordinary course of
stock during the taxable year, but must be claimed business of such dealer, the loss is deductible
against other capital gains. For 15% net capital in full.
gains (for individuals, DC, RC and NRFC) tax to
apply, there must be an actual disposition of shares Non-deductible Losses
of stock held as capital asset, and the capital gain
and capital loss used as the basis in determining net 1. Losses not incurred in trade, profession, or
capital gain, must be derived and incurred business or in any transaction entered into
respectively, from a sale, barter, exchange or other profit;
disposition of shares of stock. (RR No. 06-2008)
2. Losses from sales or exchanges of property
NOTE: Securities becoming worthless refer to entered into between related taxpayers are not
shares when offered for sale or requested for share deductible as provided under Sec. 36 of the
redemption, no amount can be realized by the NIRC but the gains are taxable;
owner of the share. (RR No. 06-2008)
Q: Are worthless securities deductible from 3. Losses from exchanges of property in a
gross income for income tax purposes? (1999 corporate readjustment;
BAR)
4. Losses from illegal transactions; and
A: Worthless securities, which are ordinary assets,
are not allowed as deduction from gross income 5. Loss on voluntary removal of building on land
because the loss is not realized. However, if these purchased with a view to erect another
worthless securities are capital assets, the owner is

131 UNIVERSITY OF SANTO TOMAS

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building. Such loss shall form part of the cost of
the new building to be erected. (Tabag, 2015)

Marcelo Doctrine

A loss in one line of business is not permitted as a

deduction from gain in another line of business.
(Marcelo Steel Corporation v. CIR, G.R. No. L-12401,
31 Oct. 1960)

UNIVERSITY OF SANTO TOMAS 132

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Rules on Deductibility of Losses

LOSSES TAX TREATMENT

Deductible, net of indemnity

Ordinary losses
NOTE: May be deducted from capital gains

Capital losses Deductible to the extent of capital gains only

Deductible – if worthless securities are capital assets (except where the

Securities becoming taxpayer is a bank or trust company)
worthless
Non-deductible - If worthless securities are ordinary assets

GR: Losses from wash sale are not deductible

Losses on wash sales of XPN: When taxpayer is a dealer in securities, and the transaction from which
stocks / securities the loss resulted was made in the ordinary course of business of such dealer,
the loss is deductible in full.

Wagering losses Deductible only to the extent of wagering gains.

Deductible for the next 3 consecutive years following the year of such loss.
Provided that:

i. The taxpayer was not exempt from income tax in the year of such net
operating loss; and
ii. There has been no substantial change in the ownership of the business
NOLCO
or enterprise.

NOTE: A net operating loss during the first 10 years of operation shall be
allowed as NOLCO for the next 5 years in case of mines other than oil and gas
wells,

i. When a contract area where petroleum operations are undertaken is

partially or wholly abandoned, all accumulated exploration and
development expenditures pertaining thereto shall be allowed as a
deduction.
ii. When a producing well is subsequently abandoned, the unamortized
Abandonment losses in costs thereof, as well as the undepreciated costs of equipment directly
petroleum operations used therein, shall be allowed as a deduction in the year of abandonment.

NOTE: If such abandoned well is re-entered and production is resumed, or if

such equipment or facility is restored into service, the said costs shall be
included as part of gross income in the year of resumption or restoration.

133 UNIVERSITY OF SANTO TOMAS

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BAD DEBTS 5. Actually Ascertained to be worthless and
uncollectible as of the end of the taxable year;
These are debts due to the taxpayer actually NOTE: In lieu of requisite No. 5, the BSP, thru
ascertained to be worthless and charged off in the its Monetary Board, shall approve the writing
books of the taxpayer within the taxable year except off of said indebtedness from the banks’ books
those: of accounts at the end of the taxable year. (RR
No. 5-1999)
1. Not connected with trade, business or
profession; and In no case may a receivable from an insurance
2. Between related taxpayers. (Sec. 36(B), NIRC) or surety company be written off from the
taxpayer’s books and claimed as bad debts
Bad debts refer to debts resulting from the deduction unless such company has been
worthlessness or uncollectibility, in whole or in declared closed due to insolvency or for any
part, of amount due to the taxpayer by others, such similar reason by the Insurance
arising from money lent or from uncollectible Commissioner. (RR No. 5-1999)
amounts of income from goods sold or services
rendered. (Sec. 2, RR No. 5-99) 6. Must not be sustained in a transaction entered
into between Related Parties.
NOTE: A mere recording in the taxpayer’s books of
account of estimated uncollectible accounts does Refer to previous discussion on “Interests –
not constitute a write-off of the said receivable. Related Taxpayers” – p. 125
Hence, it shall not be a valid basis for its deduction
as a bad debt expense. Bad Debt Theory

The requisites for deductibility are: (U-S-T-C-A- Absence of creditor is not bad debt.
RPart)
Q: What factors will determine whether or not
1. The debts are Uncollectible despite diligent the debts are bad debts? (2004 BAR)
effort exerted by the taxpayer;
A: The factors to be considered include, but are not
To prove that the taxpayer exerted diligent limited to, the following:
efforts to collect the debts:
a. Sending of statement of accounts; 1. The debtor has no property or visible
b. Sending of collection letters; income;
c. Giving the account to a lawyer for 2. The debtor has been adjudged bankrupt or
collection; and insolvent;
d. Filing a collection case in court. 3. There are numerous debtors with small
amounts of debts and further action on the
2. Existing indebtedness Subsisting due to the accounts would entail expenses exceeding
taxpayer which must be valid and legally the amounts sought to be collected;
demandable; 4. The debt can no longer be collected even in
the future; and
3. Connected with the taxpayer’s Trade, business 5. Collateral shares have become worthless.
or practice of profession;
NOTE: "Worthless" is not determined by an
4. Actually Charged off in the books of accounts of inflexible formula or slide rule calculation, but upon
the taxpayer as of the end of the taxable year; the exercise of sound business judgment. In order

UNIVERSITY OF SANTO TOMAS 134

2023 GOLDEN NOTES
 II. NATIONAL TAXATION
that debts be considered as bad debts because they obsolescence) of property used in the trade or
have become worthless, the taxpayer should: business. (Sec. 34(F), NIRC)

1. Ascertain the debt to be worthless in the year The requisites for deductibility are:
for which the deduction is sought; and
2. Act in good faith in ascertaining the debt to be 1. The property subject to depreciation must be
worthless. (CIR v. Goodrich International Rubber property with life of more than 1 year;
Co., G.R. No. L-22265, 22 Dec. 1967) 2. The property depreciated must be used in
trade, business, or exercise of a profession;
Testimony of a CPA as Substantial Evidence for 3. The depreciation must have been charged off
the Deductibility of a Claimed Worthless Debt during the taxable year;
4. The depreciation method used must be
Mere testimony of a CPA explaining the reasonable and consistent; and
worthlessness of said debts is seen as nothing more 5. A depreciation schedule should be attached to
than as a self-serving exercise which lacks probative the income tax return.
value. Mere allegations cannot prove the
worthlessness of such debts. (Philippine Refining Co. Person Entitled to Claim Depreciation Expense
v. CA, G.R. No. 118794, 8 May 1996)
The person entitled to claim depreciation expense is
Deductibility of “Reserves for Bad Debts” from the person who sustains an economic loss from the
Gross Income for Tax Purposes decrease in property value due to depreciation
which is usually the owner.
Bad debts must be charged off during the taxable
year to be allowed as deduction from gross income. In the case of a non-resident alien individual
The mere setting up of reserves will not give rise to engaged in trade or business or resident foreign
any deduction. (Sec. 34(E), NIRC) corporation, a reasonable allowance for the
deterioration of property arising out of its use or
Effect of Recovery of Bad Debts employment or its non-use in the business, trade or
profession shall be permitted only when such
That recovery of bad debts previously allowed as property is located in the Philippines. (Sec. 34(F)(6),
deduction in the preceding years shall be included NIRC)
as part of the gross income in the year of recovery
to the extent of the income tax benefit of said Depreciable and Non-Depreciable Assets for Tax
deduction. (Sec. 34(E), NIRC) This is also known as Purposes
the Tax Benefit Rule.
1. Depreciable assets:
a. Only property that is used for trade,
DEPRECIATION
business or exercise of a profession or held
for the production of income;
Definition
It is the gradual diminution in the useful value of b. All kinds of tangible property (other than
tangible property resulting from exhaustion, wear land) with life of more than 1 year and do
and tear and obsolescence. (Domondon, 2013) not form part of the stock in trade that are
part of the inventory;
There shall be allowed as a depreciation deduction
a reasonable allowance for the exhaustion, wear, c. All kinds of intangible property (other than
and tear (including reasonable allowance for shares of stock) with life of more than 1
year; and

135 UNIVERSITY OF SANTO TOMAS

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d. Subject to exhaustion within a Methods for Computing Depreciation Allowance
determinable period of time, that is it has a under NIRC
limited useful life.
1. Straight line method – annual depreciation
2. Non-depreciable assets: charge is calculated by allocating the amount to
a. Land, apart from the improvements of be depreciated equally over the number of
physical development added to it, cannot years of the estimated useful life of the tangible.
be depreciated; It results in a constant charge over the useful
life.
b. Inventories or stock in trade;
2. Declining balance method – accelerated
c. Personal effects or clothing, except method of depreciation which writes off a
costumes used in theatrical business; relatively larger amount of the asset’s cost
nearer the start of its useful life than that of the
d. Bodies of minerals subject to depletion; straight line.

e. Automobiles and other transportation 3. Sum of the years digit method – accelerated
equipment used solely by the taxpayer for method of depreciation expense in the earlier
pleasure; years and lower charges in the later years.

f. Building used solely by the taxpayer as his 4. Any other method which may be prescribed
residence, and the furniture or furnishing by DOF upon recommendation of the CIR.
used in said building; and
Determination of Depreciation Method
g. Intangibles, the use in trade, business or
exercise of profession is not of limited The BIR and the taxpayer may agree in writing on
duration. the useful life of the property to be depreciated
subject to modification if justified by facts or
Q: Is depreciation of goodwill deductible from circumstances. The change shall not be effective
gross income? (1999 BAR) before the taxable year on which notice in writing
by certified mail or registered mail is served by the
A: Goodwill may or may not be subject to party initiating. However, if there is no agreement
depreciation. and the BIR does not object to the rate and useful life
being used by the taxpayer, the same shall be
GR: Depreciation for goodwill is not allowed as binding.
deduction from gross income. While intangibles
maybe allowed to be depreciated or amortized, it is Method in Depreciating Properties Used in
only allowed to those intangibles whose use in the Petroleum Operations
business or trade is definitely limited in duration
(Basilan Estates, Inc. v. CIR, G.R. No. L-22492, 05 Sept. It may either be straight line or declining balance
1967). Such is not the case with goodwill. method with a useful life of 10 years or shorter, as
allowed by the CIR.
XPN: If the goodwill is acquired through capital
outlay and is known from experience to be of value NOTE: If the property is not directly related to
to the business for only a limited period. (Sec. 107, production, depreciation is for an estimated useful
RR No. 2) In such case, the goodwill is allowed to be life of five (5) years using the straight-line method.
amortized over its useful life. (Sec. 34(F)(4), NIRC)

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Method to be used in depreciation of properties DEPLETION
used in mining operations other than petroleum
operations: Definition
It refers to the deduction from gross income arising
1. At the normal rate of depreciation if the
from the exhaustion of natural resources like mines
expected life is less 10 years or less; or
and oil and gas wells as a result of production or
2. Depreciated over any number of years
severance from such mines or wells.
between 5 years and the expected life if the
latter is more than 10 years and the
The requisites for deductibility are: (C-O-I-L-E)
depreciation thereon is allowed as deduction
from taxable income.
1. The method allowed under the rules and
regulations prescribed by the Secretary of
NOTE: Provided, that the contractor notifies the CIR
Finance is Cost depletion method.
at the beginning of the depreciation period which
depreciation rate allowed will be used.
2. Can be availed of by Oil and gas wells and mines.

Q: What is the annual depreciation of a

3. The basis of cost depletion is the capital
depreciable fixed asset with a cost of P100,000
Invested in the mine which is the accumulated
having a salvage value of P10,000 and an
exploration and development expenses.
estimated useful life of 20 years under the
straight-line method?
4. In case of RFC, allowance for depletion shall be
authorized only in respect to oil and gas wells
A: The annual depreciation is P4,500 computed as
and mines Located in the Philippines.
follows: Acquisition cost less salvage value, then
divide the difference by its useful life. (100,000 –
5. When the allowance shall Equal the capital
10,000 = 90,000) then (90,000/20 = 4,500).
invested no further allowance shall be granted.

Q: Z purchased fully depreciated machineries

Persons Entitled to Claim Deduction for
and entered the machineries in his books at
Depletion Expense
P120,000. Based on the independent appraisal
and engineering report, Z assigned to the
Annual depletion deductions are allowed only to
machineries an economic life of 5 years.
mining entities which own an economic interest in
Adopting the straight-line method, Z claimed a
mineral deposits. (Sec. 3, RR No. 5-76)
depreciation deduction of P24,000 in his
income tax return. Is the deduction proper,
Economic interest
considering that in the hands of the original
owner, the said machineries were already fully
It means interest in minerals in the place of
depreciated? (1983 BAR)
investment therein or secured by operating or
contract agreement for which income is derived,
A: YES. The starting point for the computation of
and return of capital expected, from the extraction
the deductions for depreciation is the reasonable
of mineral.
cost of acquiring the asset and its economic life. The
fact that the machineries were already depreciated
by its original owner does not matter. Z is allowed a CHARITABLE AND OTHER CONTRIBUTIONS
depreciation allowance for the exhaustion, wear,
and tear (including reasonable allowance for Contributions or gifts actually paid or made within
obsolescence) of the machineries which he is using the taxable year:
in his trade or business. (Sec. 34 (F), NIRC)

137 UNIVERSITY OF SANTO TOMAS

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1. To, or for the use of the Government of the e. Education
Philippines or any of its agencies or any political f. Science
subdivision thereof exclusively for public g. Youth and Sports development
purposes, or to accredited domestic
corporations, or NOTE: NEDA determines annually which will
be considered as a priority activity.
2. Associations organized and operated
exclusively for religious, charitable, scientific, 2. Donations to Accredited NGO’s
youth and sports development, cultural or a. Exclusively for: (C2-H-E-S2-Y-R-C)
educational purposes or for the rehabilitation i. Cultural
of veterans, or to social welfare institutions, or ii. Charitable
to nongovernment organizations. iii. Health
iv. Educational
NOTE: Provided, no part of the net income of which v. Scientific
inures to the benefit of any private stockholder or vi. Social welfare
individual; and in an amount not in excess of: vii. Character building & Youth and
sports Development
1. 10% in the case of an individual, and viii. Research
2. 5% in the case of a corporation, of the ix. Any Combination of the above
taxpayer’s taxable income derived from trade,
business or profession as computed without the b. Donation must be utilized not later than
benefit of this and the following subparagraphs. the 15th day of the 3rd month following the
(Sec 34(H)(1), NIRC) close of taxable year.

The requisites for deductibility are: (A-W-S-E-A) c. Administrative expense must not exceed
30% of the total expenses.
1. The contribution or gift must be Actually paid;
2. It must be paid Within the taxable year; d. Upon dissolution, assets shall be
3. It must be given to the organization Specified transferred to another non-profit domestic
by law; corporation or to the State.
4. It must be Evidenced by adequate receipts or
records; and 3. Donations to Foreign institutions and
5. The amount of charitable contribution of international organizations in compliance with
property other than money shall be based on treaties and agreements with the Government
the Acquisition cost of said property.
4. Donations of prizes and awards to Athletes
Contributions that are Deductible in Full (G-A- (Sec. 1, R.A. No. 7549)
F-A)
Donations that are Deductible in Full under
1. Donations to the Government of the Special Laws
Philippines, or political subdivisions including
fully-owned government corporation to be 1. The Integrated Bar of the Philippines (P.D. No.
used exclusively in: (C-H2-E-E-S-Y) 81)
2. Development Academy of the Philippines (P.D.
a. Culture 205)
b. Health 3. Aquaculture Department of the Southeast
c. Human Settlement Asian Fisheries and Development Center (P.D.
d. Economic Development 292)

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2023 GOLDEN NOTES
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4. National Social Action Council (P.D. 294) 4. Donations to domestic corporations organized
5. National Museum, Library and Archives; (P.D. exclusively for: R2-E-C2-S2
373) a. Religious
6. University of the Philippines and other state b. Rehabilitation of veteran
colleges and universities c. Educational
d. Cultural
NOTE: Gifts and donations to the University of e. Charitable
the Philippines shall be exempt from donor’s f. Scientific
tax and the same shall be allowable as a g. Social welfare
deduction up to 150% of the value of the
donation (R.A. No. 9500) Limitations on Deductions
Amount deductible shall not exceed:
7. Philippine Rural Reconstruction Movement
8. The Cultural Center of the Philippines (CCP)
1. For individuals – 10% of taxable income
9. Trustees of the Press Foundation of Asia
before contributions
10. Humanitarian Science Foundation
11. Artesian Well Fund (R.A. No. 1977)
2. For corporations – 5% of taxable income
12. International Rice Research Institute
before contributions (Sec. 34(H)(1), NIRC)
13. National Science Development Board (now the
DOST) and its agencies and to public or
Q: On December 6, 2001, LVN Corp. donated a
recognized non-profit, non-stock educational
piece of vacant lot situated in Mandaluyong City
institutions (R.A. No. 3589)
to an accredited and duly registered non-stock,
non-profit educational institution to be used by
14. Ministry of Youth & Sports Development (P.D.
the latter in building a sports complex for
604)
students.
15. Social Welfare, Cultural & Charitable
Institution (P.D. 507)
May the donor claim in full as deduction from its
16. Museum of Philippine Costumes (P.D. 1388)
gross income for the taxable year 2001 the
17. Intramuros Administration; (P.D. 1616)
amount of the donated lot equivalent to its fair
18. Lungod ng Kabataan; and (P.D. 1631)
market value/zonal value at the time of the
19. Foster child agencies. (R.A. No. 10165)
donation? (2002 BAR)
20. National Book Trust Fund
A: NO. Donations and/or contributions made to
NOTE: It shall likewise be exempt from donor’
qualified institutions consisting of property other
tax and the same shall be allowable as a
than money shall be based on the acquisition cost
deduction up to 150% of the value of the
of the property. The donor is not entitled to claim
donation (R.A. No. 9521)
as full deduction the fair market value/zonal value
of the lot donated. (Sec. 34(H), NIRC)
Donations that are Subject to Limitations
Q: The Filipinas Hospital for Crippled Children is
1. Donations that are not in accordance with the
a charitable organization. X visited the hospital
priority plan;
and gave P100,000 to the hospital and P5,000 to
2. Donations whose conditions are not complied
a crippled girl whom he particularly pitied. A
with;
crippled son of X is in the hospital as one of its
3. Donations to the Government of the Philippines
patients. X wants to exclude both the P100,000
or political subdivision exclusive for public
and the P5,000 from his gross income. Discuss.
purposes; and
(1993 BAR)

139 UNIVERSITY OF SANTO TOMAS

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A: If X is earning from compensation income, he Amortization Period of Deferred Research and
could not deduct either the P100,000 and the Development Expenditures
P5,000. If he is earning from trade or business, he
could deduct the P100,000 if the hospital is In computing taxable income, such deferred
accredited as an institution. If not, then no expenses shall be allowed as deduction and ratably
deduction is allowed. distributed over a period of not less than 60
months, beginning with the month in which the
However, he could not deduct the P5,000 because taxpayer first realizes benefits from such
to qualify for exemption, the charitable expenditures.
contribution must be given to accredited
organizations or associations. (Sec. 34(H)(1), NIRC) Research and Development Expenditures that
are Not Deductible
Q: On the part of the contributor, are
contributions to a candidate in an election 1. For the acquisition or improvement of land or
allowable as a deduction from gross income? for the improvement of property to be used in
(1998 BAR) connection with research and development
subject to depreciation and depletion; and
A: The contributor is not allowed to deduct the
contributions because the said expense is not 2. Paid or incurred for the purpose of
directly attributable to the development, ascertaining the existence, location, extent or
management and/or operation and/or conduct of quality of any deposit of ore or other mineral
trade or business or profession. including oil or gas. (Sec. 34 (I)(3), NIRC)

RESEARCH AND DEVELOPMENT EXPENDITURE

PENSION TRUSTS
Taxpayer may treat research or development
expenditures which are paid or incurred by him An employer establishing or maintaining a pension
during the taxable year in connection with his trust to provide for the payment of reasonable
trade, business, or profession as: pensions to his employees shall be allowed as a
deduction in addition to the contributions to such
1. Ordinary and necessary expenses which are: trust during the taxable year to cover the pension
a. not chargeable to capital account, and liability accruing during the year:
b. shall be allowed as deduction during the
taxable year when paid or incurred, or 1. A reasonable amount transferred or paid into
such trust during the taxable year in excess of
2. Deferred expenses which are: such contributions.
a. paid or incurred by the taxpayer in
connection with his trade, business, or 2. But only if such amount:
profession; a. Has not theretofore been allowed as a
b. not treated as ordinary expenses; and deduction, and
b. Is apportioned in equal parts over a
c. chargeable to capital account but not period of 10 consecutive years beginning
chargeable to property of a character with the year in which the transfer or
which is subject to depreciation or payment is made. (Sec. 34(J), NIRC)
depletion. (Sec. 34(I), NIRC)
The requisites for deductibility are: (P-F-R-A-N-C)

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1. The employer must have established a Pension paid to cover pension liability applicable to the
or retirement plan to provide for the payment preceding ten (10) years.
of reasonable pensions to his employees;
NOTE: When an employer makes a contribution to
2. It must be Funded by the employer; his employee’s Personal Equity and Retirement
Account (PERA), the employer can claim this
3. The pension plan is Reasonable and actuarially amount as a deduction but only to the extent of the
sound; employer’s contribution that would complete the
maximum allowable PERA contribution of an
4. The deduction is Apportioned in equal parts employee. (RR No. 17-2011; R.A. No. 9505)
over a period of 10 consecutive years beginning
with the year in which the transfer or payment Q: When can an employer claim as deduction the
is made; payment of reasonable pension?

5. The payment has Not yet been allowed as a A: If the employer contributes to a private pension
deduction; and plan for the benefit of its employee.

6. The amount contributed must no longer be Q: Are the following expenses deductible from
subject to the Control and disposition of the gross income:
employer. a. Employer’s contribution to the Christmas
fund of his employees
Additional Requirements for Deductibility b. Contribution to the construction of a chapel
of a university that declares dividends to its
1. Taxpayers who claim deductions for expenses, stockholders
the amounts of which are subject to c. Premiums paid by the employer for the life
withholding tax, must prove that said insurance of his employees
deductions were in fact subjected to proper d. Contribution to a newspaper fund for needy
withholding. If no withholding was made, then families when such newspaper organizes a
claimed deductions will not be allowed. (Sec. group of civic spirited citizens solely for
(34)(K), NIRC) charitable purposes. (1968 BAR)

2. No deduction shall be allowed notwithstanding A:

payments of withholding tax at the time of the
a. YES. Under No. 27 RAMO 1-87 subject to the
audit investigation or
condition that the contribution does not exceed
reinvestigation/reconsideration in cases where
½ month’s basic salary of all the employees. It
no withholding of tax was made. (RR No. 12-
is part of the ordinary and necessary expenses.
2013)
b. NO. Part of the net income of the university
Payments to Pension Trusts that are Deductible
inures to the benefit of its private stockholders.
(Sec. 34(H), NIRC)
1. Employer’s current liability or Current Service
Cost – amount contributed during the taxable
c. NO. The beneficiary is the employer. (Sec.
year shall be treated as an ordinary and
36(A)(4), NIRC)
necessary expense.
d. NO. Contributions to a newspaper fund for
2. Employer’s liability for past services or Past
needy families are not deductible for the
Service Cost – 1/10 of the reasonable amount
reason that the income inures to the benefit of

141 UNIVERSITY OF SANTO TOMAS

FACULTY OF CIVIL L AW
 TAXATION LAW
the private stockholder of the printing previously paid by
company. them.
2. Interest paid upon
those amounts between
SPECIAL DEDUCTIONS
the date of
ascertainment and the
Special deductions allowable under the NIRC:
date of its payment.
(Sec. 37(B), NIRC)
1. Private proprietary educational institutions
– In addition to the expenses allowed as Mutual
insurance –
deduction, they have the option to treat the 1. Portion of the premium
mutual fire
amount utilized for the acquisition of deposits returned to the
depreciable assets for expansion of school and mutual
policy holders.
employer’s
facilities as: 2. Portion of the premium
liability and
deposits retained for
a. Outright expense (the entire amount is mutual
the payment of losses,
workmen’s
deducted from gross income); or expenses and
compensation
b. Capital asset and deduct only from the reinsurance reserve.
gross income an amount equivalent to its and mutual
(Sec. 37(C), NIRC)
casualty
depreciation every year (Sec. 34(A)(2),
NIRC) insurance
Amount actually deposited
2. Estates and trusts – can deduct the: with officers of the
a. Amount of income paid, credited or Government of the
Assessment Philippines pursuant to
distributed to the heirs/beneficiaries; and Insurance
b. Amount applied for the benefit of the law as addition to
grantor (Sec. 61, NIRC) guarantee or reserve
funds. (NIRC, Sec. 37 (D))
3. Insurance companies – can deduct:
Deductions under Special Laws
TYPE OF
SPECIAL DEDUCTIONS
INSURANCE 1. Special deductions for productivity bonus and
1. Net additions, if any, manpower training under the Productivity
required by law to be Incentives Act of 1990;
made within the year to 2. Deductions for training expenses of qualified
reserve funds. jewelry enterprises;
2. Sum paid on the policy 3. Deductions under the Adopt-a-School Act of
within the year and 1998;
Non-Life annuity contracts other 4. Deductions under the Magna Carta for Persons
than dividends, with Disability;
provided that the 5. Deduction under Free Legal Assistance Act of
released reserve be 2010;
treated as income for 6. Deductions under the Expanded Senior Citizen
the year of release. (Sec. Act of 2003; and
37(A), NIRC) 7. Deductions under the Sports Benefits and
Mutual 1. Amounts repaid to Incentives Act of 2001.
marine policy holders on
insurance account of premiums

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Other Business Expenses Allowed by Special expenses incurred in developing skilled or
Laws as Deductions unskilled labor or for managerial or other
management development programs incurred
1. Discounts granted by establishments for senior by enterprises in the economic zone (ecozone)
citizens and PWDs. (RR No. 8-2010 and RR No. can be deducted from the National
5-2017) Government’s 3% share as provided in Sec. 24
of the law.
2. Expenses incurred by a private health and non-
health facility, establishment, or institution, in Sales Discounts Granted to Persons with
complying with the Expanded Breastfeeding Disabilities (PWD)
Promotion Act of 2009 – up to twice the actual
amount incurred. (R.A. No. 10028) PWDs are entitled to claim at least 20% discount
from:
3. Expenses incurred in training schemes
pursuant to the Jewelry Industry Development 1. Establishments relative to the sale of goods or
Act of 1998 – additional 50% of actual amount services for their exclusive use or enjoyment:
incurred. (R.A. No. 8502)
a. Hotels and similar lodging establishments
4. Expenses incurred for adopting a school based and restaurants;
on the Adopt-a-School program – additional
50% of actual amount incurred. (R.A. No. 8525) b. Sports and recreation centers;
5. A lawyer or professional partnerships
rendering actual free legal services, as defined c. Theatres, cinema houses, concert halls,
by the Supreme Court, shall be entitled to an circuses, carnivals, and other similar places
allowable deduction from gross income, the of culture, leisure, and amusement;
amount that could have been collected for the
actual free legal services rendered up to ten d. Drugstore regarding purchase of
percent (10%) of gross income derived from medicines;
the actual performance of the legal profession,
whichever is lower. (R.A. No. 9999) e. Medical and dental privileges in
government facilities such as but not
6. Private companies that employ PWDs as limited to diagnostic and laboratory fees
regular employee, apprentice or learner are including professional fees of attending
entitled to a gross income deduction equivalent doctors in private facilities, subject to
to 25 percent (25%) of the total amount paid as guidelines to be issued by the DOH, in
salaries and wages to PWDs. (IRR of R.A. No. coordination with the PHIC;
10524) f. Domestic air and sea transportation based
on the actual fare except promotional fare.
7. Qualified business enterprises that promote If the promotional fare discount is higher
green jobs are entitled to a special deduction than the 20% discount privilege, the PWD
from the taxable income equivalent to 50% of may choose the promotional fare and
the total expense for skills training and should no longer be entitled to the 20%
research development expenses. (R.A. No. discount privilege; and
10771)
g. Land transportation privileges in bus fares
8. Sec. 42 of R.A. No. 7916 or the PEZA Law such as ordinary, aircon fares, and on
provides that an additional deduction public railways such as LRT, MRT, PNR, and
equivalent to half the value of training such other similar infrastructures that will

143 UNIVERSITY OF SANTO TOMAS

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be constructed, established, and operated Free Legal Assistance Act of 2010
by public or private entity.
A lawyer or professional partnerships rendering
2. Toll fees of skyways and expressways are actual free legal services, as defined by the Supreme
likewise subject to 20% discount which can be Court, shall be entitled to an allowable deduction
availed of only by a person with disability from the gross income.
owning the vehicle. (RR No. 1-2009)
Deduction would be the amount that could have
NOTE: Provided, however, that the foregoing been collected for the actual free legal services
privileges granted to PWDs shall not be claimed if rendered or up to 10% of the gross income derived
the said PWD claims a higher discount as may be from the actual performance of the legal profession,
granted by the commercial establishment and/or whichever is lower.
existing laws or in combination with other discount
program/s. NOTE: It shall be deductible provided that the
actual free legal services contemplated shall be
Thus, if a PWD is also a senior citizen, he can only exclusive of the minimum 60-hour mandatory legal
claim one 20% discount on a particular sales aid services rendered to indigent litigants as
transaction. required under the Rule on Mandatory Legal Aid
Conditions for Availment of Sales Discounts as Services for Practicing Lawyers, under Bar Matter
Special Deduction from Gross Income by No. 2012, issued by the Supreme Court.
Establishments
Expanded Senior Citizen Act of 2003
1. Allowed as deduction from gross income for the
same taxable year when the discount is granted; 1. Deduction from gross income of private
establishments for the 20% sales discount
2. Only that portion of the gross sales exclusively granted to senior citizens on the sale of goods
used, consumed, or enjoyed by the PWD shall be and/or services; and
eligible for the deduction; 2. Additional deduction from gross income of
private establishments for compensation paid
3. Only the actual amount of the sales discount to senior citizens.
granted or a sales discount not exceeding 20%
of the gross selling price or gross receipt can be Tax Treatment of Senior Citizens’ Discount
deducted from the gross income, net of VAT, if
applicable, for income tax purposes and from This discount shall be considered as a deductible
gross sales or receipts of the business expense from gross income and no longer as tax
enterprise concerned, for VAT or other credit. (CIR v. Central Luzon Drug Corp., G.R. No.
percentage tax purposes and shall be subject to 159610, 12 June 2008)
proper documents under pertinent provisions
of the tax code; and Persons Entitled to Deduct 20% Senior Citizen’s
Discount
4. The business establishment giving sales
discount to qualified person with disability is 1. Resident citizens and domestic corporations;
required to keep separate and accurate record and
of sales, which shall include the name of the 2. Non-resident citizens, aliens (whether
PWD, ID Number, gross sales or receipts, sales residents or not) and foreign corporations,
discounts granted, date of transactions and from their income arising from their profession,
invoice number for every sale transaction to trade or business, derived from sources within
PWD. the Philippines.

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Establishments Entitled to Claim the Deduction which shall include the name of the senior
of Senior Citizens’ Discount citizen, OSCA ID, gross sales/receipts, sales
discounts granted, dates of transaction and
1. Hotels and similar lodging establishments; invoice number for every sale transaction to
2. Restaurants; senior citizen.
3. Recreation centers;
4. Theaters, cinema houses, concert halls, 6. Only those establishments selling any of the
circuses, carnivals, and other similar places of qualified goods and services to a Senior Citizen
culture, leisure and amusement; where an actual discount was granted can claim
5. Drug stores, hospitals, pharmacies, medical and the deductions.
optical clinics, and similar establishments
dispensing medicines; 7. The seller must not claim the optional standard
6. Medical and dental services in private facilities; deduction during the taxable year. (Sec. 7, RR
7. Domestic air and sea transportation companies; No. 7-2010)
8. Public land transportation utilities; and
9. Funeral parlors and similar establishments. Additional Deduction from Gross Income of
Private Establishments for Compensation Paid
Conditions for Availment of Senior Citizens’ to Senior Citizens
Discount as Deduction from Gross Income by
Establishments Private establishments employing senior citizens
shall be entitled to additional deduction from their
1. Only that portion of the gross sales exclusively gross income equivalent to 15% of the total amount
used, consumed, or enjoyed by the senior paid as salaries and wages to senior citizens
citizen shall be eligible for the deductible sales provided the following are present:
discount.
1. Employment shall have to continue for a period
2. The gross selling price and the sales discount of at least 6 months; and
must be separately indicated in the official
receipt or sales invoice issued by the 2. Annual taxable income of the senior citizen does
establishment from the sale of goods or services not exceed the poverty level as may be
to the senior citizen. determined by the NEDA thru the National
Statistical Coordination Board (NSCB). For this
3. Only the actual amount of the discount on a purpose, the senior citizen shall submit to his
sales discount not exceeding 20% of the gross employer a sworn certification that his annual
selling price can be deducted from the gross taxable income does not exceed the poverty
income, net of value-added tax, if applicable, for level. (Sec. 12, RR No. 7-2010)
income tax purposes, and from gross sales or
gross receipts of the business enterprise Sports Benefits and Incentives Act of 2001
concerned, for VAT or other percentage tax
purposes. 1. The grant of twenty percent (20%) discount
from all establishments relative to the
4. The discount can only be allowed as deduction utilization of transportation services, hotels
from gross income for the same taxable year and other lodging establishments, restaurants
that the discount is granted. and recreation centers, and purchase of
medicine and sports equipment anywhere in
5. The business establishment giving sale the country for the actual and exclusive use or
discounts to qualified senior citizens is required enjoyment of the national athlete and coach.
to keep separate and accurate record of sales,

145 UNIVERSITY OF SANTO TOMAS

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2. Minimum of twenty percent (20%) discount on NOTE: It should be emphasized that the “cost of
admission fees charged by theaters, cinema sales” in case of individual seller of goods, or the
houses and concert halls, circuses, carnivals, “cost of service” in case of individual seller of
and other similar places of culture, leisure and services, is not allowed to be deducted for purposes
amusement for the actual and exclusive use of determining the basis of the OSD pursuant to R.A.
and enjoyment of the national athlete and No. 9504. (RR No. 16-2008)
coach.
Persons Entitled to Claim OSD
NOTE: Such privately-owned establishments shall
enjoy tax deductions equivalent to the discounts 1. Individuals
extended to the national athletes and coaches. (Sec. a. Resident citizens (RC)
4, RA. No. 10699) b. Non-resident citizens (NRC)
c. Resident aliens (RA)
OPTIONAL STANDARD DEDUCTION (OSD)

NOTE: An individual who avails of the OSD is

It is a fixed percentage deduction which is allowed
not required to submit final statements
to certain taxpayers without regard to any
provided that said individual shall keep such
expenditure. This is in lieu of the itemized
records pertaining to his gross sales or gross
deduction.
receipts.
The OSD is an amount not exceeding:
2. Corporations
1. 40% of the gross sales or gross receipts of a
a. Domestic Corporations (DC)
qualified individual taxpayer; or
b. Resident foreign corporations (RFC)
2. 40% of the gross income of a qualified
corporation. (Sec. 34(L), NIRC)
NOTE: A corporation is still required to submit
its financial statements when it files its annual
Illustration:
income tax return and keep such records
pertaining to its gross income.
A corporation has gross sales of P1 million, sales
return of P25,000, cost of goods sold of P600,000,
3. Partnerships
rental income of P275,000 and with an itemized
deductions of P200,000.
4. Estates and trusts
OSD ITEMIZED
Persons Not Entitled to Claim OSD
Gross Sales 1,000,000 1,000,000
Rental Income 275,000 275,000
1. Non-resident aliens (NRA), whether or not
TOTAL REVENUE 1,275,000 1,275,000
engaged in trade or business in the Philippines;
Less: Sales Returns 25,000 25,000
and
Cost of goods 600,000 600,000
sold
2. Non- resident foreign corporations (NRFC)
GROSS INCOME 650,000 650,000
Less: Deductions
3. Corporation, partnerships and other non-
OSD (650k x 260,000
individuals that are:
40%)
a. Exempt under the NIRC and other special
Itemized 200,000
laws, with no other taxable income;
TAXABLE INCOME 390,000 450,000
Rate of Tax 30% 30% b. With income subject to special or
INCOME TAX DUE 117,000 135,000 preferential tax rates;

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c. With income subject to special or Determination of Allowable OSD for
preferential tax rates, plus income subject Individuals, Corporations, and GPPs
to income tax under Sec. 27(A) and Sec. 28
(A)(1) of the NIRC; and TAXPAYER ALLOWABLE OSD
It depends on the
d. Juridical entities whose taxable base is accounting method used by
gross revenue or receipts, e.g., special RFC; the taxpayer in recognizing
NRFC; special NRFC. (RR No. 2-2014) income and deductions:
1. Accrual basis – the OSD
Q: In 2012, Dr. K decided to return to his shall be based on the
hometown to start his own practice. At the end gross sales during
of 2012, Dr. K found that he earned gross taxable year.
professional income in the amount of 2. Cash Basis – the OSD
P1,000,000.00; while he incurred expenses Individual shall be based on the
amounting to P560,000.00 constituting mostly gross receipts during
of his office space rent, utilities, and the taxable year.
miscellaneous expenses related to his medical
practice. NOTE: Costs of sales or
costs of services are not
However, to Dr. K’s dismay, only P320,000.00 of allowed to be deducted for
his expenses were duly covered by receipts. purposes of determining
What are the options available for Dr. K so he the basis of the OSD in case
could maximize the deductions from his gross of an individual taxpayer.
income? (2015 BAR) In case of a corporation,
the basis of the OSD is the
A: Dr. K may opt to use the optional standard gross income. Sales
deduction (OSD) in lieu of the itemized deduction. returns, discounts and
OSD is a maximum of 40% of gross receipts during allowances and cost of
the taxable year. Proof of actual expenses is not goods (or cost of services)
required, but Dr. K shall keep such records Corporation
are deducted from the
pertaining to his gross receipts. (Sec. 34(L), NIRC) gross receipts to arrive at
gross income. The method
of accounting is not taken
into consideration unlike
in the case of an individual.
1. For purposes of
computing the
distributive share of the
partners, the net income
of the GPP shall be
General
computed in the same
Professional
manner as a
Partnerships
corporation. As such, a
(GPPs)
GPP may claim either
the itemized deductions
allowed under Sec. 34 or
in lieu thereof, it can opt
to avail of the OSD

147 UNIVERSITY OF SANTO TOMAS

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allowed to a depreciation is the amount that is considered as
corporation. deductible expense.

2. If the GPP avails of These shall not apply to intangible drilling and
itemized deductions development costs incurred in petroleum
under Sec. 34 of the operations which are deductible under
NIRC in computing net Subsection (G)(1) of Sec. 34 of the NIRC.
income, the partners
may still claim itemized 3. Any amount expended in restoring property or
deductions on their net in making good the exhaustion thereof for
distributive share that which an allowance is or has been made (major
have not been claimed repairs);
by the GPP.
4. Premiums paid on any life insurance policy
The partners, however, covering the life of any officer or employee, or
are not allowed to claim of any person financially interested in any trade
OSD on their share of net or business carried on by the taxpayer,
income because the OSD individual, or corporate, when the taxpayer is
is a proxy for all items of directly or indirectly a beneficiary under such
deductions allowed in policy; (Sec. 36(A), NIRC)
arriving at taxable
income. NOTE: A person is said to be financially
interested in the taxpayer’s business, if he is a
If the GPP avails of OSD in stockholder thereof or if he receives as
computing net income, the compensation his share of the profits of the
partners may no longer business.
claim further deductions
from their net distributive 5. Interest expense, bad debts, and losses from
share, whether itemized or sales of property between related parties;
OSD. (RR 2-2010)
6. Bribes, kickbacks, and other similar payments;
c) ITEMS NOT DEDUCTIBLE and

In computing net income, no deduction shall in any 7. Items where the requisites for deductibility are
case be allowed in respect to: not met.

1. Personal, living or family expenses;

NOTE: These are personal expenses and not

related to the conduct of trade or business.

2. Any amount paid out for new buildings or for

permanent improvements, or betterments
made to increase the value of any property or
estate;

NOTE: These are capital expenditures added to

the cost of the property and the periodic

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 II. NATIONAL TAXATION
Summary on the Rules of Deductions with Limitations

DEDUCTION LIMIT

1. Engaged in sale of goods or properties – 0.50% of net sales (i.e., gross sales less
Entertainment,
sales returns or allowances and sales discounts)
Amusement, And
Recreational
2. Engaged in sale of services, including exercise of profession and use or lease
Expense
of properties – 1% of net revenue (i.e., gross revenue less discounts)

The allowable deduction has been reduced by an amount equal to 20% of the interest
Interest Expense
income subject to final tax.

In the case of NRAETB and RFC, the deductions for taxes shall be allowed only if and
Taxes to the extent that they are connected with income from sources within the
Philippines.

Capital Losses Deductible up to the extent of capital gains

Wagering Losses Deductible only to the extent of wagering gains

149 UNIVERSITY OF SANTO TOMAS

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5. INCOME TAX ON INDIVIDUALS 4. An alien individual, whether a resident or not of

the Philippines, is taxable only on income
derived from sources within the Philippines.
a) RESIDENT CITIZENS, NON-RESIDENT
(Sec. 23, NIRC)
CITIZENS, AND RESIDENT ALIENS
The general rule is that resident citizens are taxable
Refer to previous discussion on “Kinds of on income from all sources within and without the
Taxpayers” – p. 61 Philippines. Whereas, non-resident citizens,
overseas contract workers, seamen who are
Formula in Determining Taxable Income members of the complement of a vessel engaged
exclusively in international trade, resident aliens,
The term taxable income means the pertinent items and non-resident aliens are taxable only on income
of gross income specified in this Code, less the from sources within the Philippines.
deductions, if any, authorized for such types of
income by this Code or other special laws. (Sec. 31, Q: Ms. C, a resident citizen, bought ready-to-
NIRC) wear goods from Ms. B, a non-resident citizen.

Gross Compensation P xxx a. If the goods were produced from Ms. B’s
Income factory in the Philippines, is Ms. B’s income
Net Compensation Income xxx from the sale to Ms. C taxable in the
Add: Philippines? Explain.
Net business xxx
income or b. If Ms. B is an alien individual and the goods
Net professional xxx were produced in her factory in China, is Ms.
income B’s income from the sale of the goods to Ms.
Other income xxx C taxable in the Philippines? Explain. (2015
Taxable income subject to P xxx BAR)
graduated rates
A:
Scope of Taxability a. YES. The income of Ms. B from the sale of ready-
to-wear goods to Ms. C is taxable. A non-
1. A citizen of the Philippines residing therein is resident citizen is taxable only on income
taxable on all income derived from sources derived from sources within the Philippines. In
within and without the Philippines. line with the source rule of income taxation,
since the goods are produced and sold within
2. A non-resident citizen is taxable only on income the Philippines, Ms. B’s Philippine-sourced
derived from sources within the Philippines. income is taxable in the Philippines. (Sec. 23,
NIRC)
3. An individual citizen of the Philippines who is
working and deriving income from abroad as an b. YES. But only a proportionate part of the
OFW is taxable only on income derived from income. Gains, profits and income from the sale
sources within the Philippines: Provided, that a of personal property produced by the taxpayer
seaman who is a citizen of the Philippines and without and sold within the Philippines, shall be
who receives compensation for services treated as derived part. (Sec. 42(E), NIRC)
rendered abroad as a member of the
complement of a vessel engaged exclusively in
international trade shall be treated as an
overseas contract worker.

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Summary on the Rules of Taxability of Individuals

INCOME INCOME
DERIVED DERIVED
CLASS OF GROSS INCOME TAXATION (GIT)
FROM FROM TAX RATE
TAXPAYER OR NET INCOME TAXATION (NIT)
SOURCES SOURCES
WITHIN PH OUTSIDE PH
1. Employee: NIT

2. Businessman: NIT or GIT, if he

availed of the OSD

3. Self-employed: NIT or 8% tax

on gross sales or receipts and
non-operating income in excess
of P250,000
RC ✓ ✓ 0% - 35%
NOTE: Gross sales or gross receipts
and other non-operating income do
not exceed the VAT Threshold (P3M)

NRC ✓ X NIT 0% - 35%

OCW/Seaman ✓ X NIT 0% - 35%

RA ✓ X NIT 0% - 35%

NRA-EBT ✓ X NIT 0% - 35%

NRA-NEBT ✓ X GIT 25%

Special Alien ✓ X NIT 0% - 35%

Estate Under
Judicial ✓ ✓ NIT 0% - 35%
Settlement
Irrevocable Trust ✓ ✓ NIT 0% - 35%
Co-owners ✓ ✓ NIT 0% - 35%

151 UNIVERSITY OF SANTO TOMAS

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(1) INCLUSIONS AND EXCLUSIONS FOR income because it is derived from the exercise of
TAXATION ON COMPENSATION INCOME profession classified as professional income.
Inclusions on Compensation Income
Scope of Compensation Income
1. Monetary compensation
Compensation income includes all remuneration for
a. Regular salary/wage
services rendered by an employee for his employer
b. Separation pay/retirement benefit not
unless specifically excluded under the NIRC. (Sec.
otherwise exempt
2.78.1, RR No. 2-1998)
c. Bonuses, 13th month pay, and other
benefits not exempt
The name by which the remuneration for services is
d. Director’s fees
designated is immaterial. Thus, salaries, wages,
2. Non-monetary compensation
emoluments, honoraria, allowances, commissions
3. Fringe benefit not subject to tax
(i.e., transportation, representation, entertainment
and the like); fees including director’s fees, if the Exclusions on Compensation Income
director is, at the same time, an employee of the 1. Fringe benefit subject to tax
employer/ corporation; taxable bonuses and fringe 2. De minimis benefit
benefits except those which are subject to the fringe 3. 13th month pay and other benefits and
benefits tax; taxable pensions and retirement pay; payments specifically excluded from taxable
and other income of a similar nature constitute compensation income
compensation income. (Sec. 2.78.1, RR No. 2-1998)
FRINGE BENEFITS
The test is whether such income is received by
virtue of an employer-employee relationship. Definition
Fringe benefit is any good, service, or other benefit
The requisites for taxability are: (S-A-R) furnished or granted by an employer in cash or in
kind, in addition to basic salaries, to an individual
1. Payment is for such Services rendered; employee, except rank-and-file employee, such as
2. Personal services Actually rendered; and but not limited to: (H-E-V-H-I-M-H-E-E-L)
3. Payment is Reasonable.
1. Housing;
Payment for Services Rendered by an 2. Expense account;
Independent Contractor 3. Vehicle of any kind;
Payment for the services of an independent 4. Household personnel such as maid, driver and
contractor is not classified as compensation income others;
since there is no employer-employee relationship. 5. Interest on loans at less than market rate to the
The income of the independent contractor is extent of the difference between the market
derived from the conduct of his trade or business, rate and the actual rate granted;
which is considered as business income and not 6. Membership fees, dues and other expenses
compensation income. borne by the employer for the employee in
social and athletic clubs or other similar
Q: Give an instance that payment is made for organizations;
services rendered yet it may not qualify as 7. Holiday and vacation expenses;
compensation income. 8. Expenses for foreign travel;
9. Educational assistance to the employee or his
A: The share of a partner in a general professional dependents; and
partnership. The general partner rendered services 10. Life or health insurance and other non-life
and the payment is in the form of a share in the insurance premiums or similar amounts in
profits is not within the meaning of compensation

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 II. NATIONAL TAXATION
excess of what the law allows (Sec. 33(B), NIRC; Grossed-up Monetary Value
Sec. 2.33(B), RR No. 3-1998)
This represents the whole amount of income
Tax Treatment for Fringe Benefits
realized by the employee, which includes the net
amount of money or net monetary value of
If the benefit is not tax-exempt and the recipient is:
property which has been received, plus the amount
of fringe benefit tax thereon otherwise due from the
1. A rank-and-file employee – the value of such
employee but paid by the employer for and in
fringe benefit shall be considered as part of the
behalf of his employee. (Sec. 2.33, RR No. 3-1998)
compensation income of such employee
subject to tax payable by the employee.
Computation of Grossed-up Monetary Value
2. A managerial or supervisory employee – the
It shall be determined by dividing the monetary
value shall not be included in the compensation
value of the fringe benefit by the grossed-up divisor.
income of such employee subject to tax. The
The grossed-up divisor is the difference between
fringe benefit tax (FBT) is payable by the
100% and the applicable individual tax rates.
employer on behalf of the employee. (Sec. 33,
NIRC)
GROSSED-UP FBT
EMPLOYEE
DIVISOR RATE
Managerial, Supervisory, and Rank-and-File
Citizen, RA, NRA-
Employees Distinguished 65% 35%
EBT

RANK-AND- NRA-NEBT 75% 25%

MANAGERIAL SUPERVISORY
FILE Special alien and
Employees any Filipino
who are given Employees who employees who
powers or effectively are employed and
prerogatives to recommend occupying the 65% 35%
lay down and such managerial Employees same position as
execute actions, if the who are those occupied or
management exercise of such holding held by the special
policies authority is not neither alien employees.
and/or to hire, merely managerial Employees in
transfer, routinary or nor special economic
suspend, lay- clerical in supervisory zones (Clark
off, recall, nature but position. Special Economic
65% 35%
discharge, requires the use Zone and Subic
assign or of independent Special Economic
discipline judgment. and Free Trade
employees. Zone)

Nature of Fringe Benefit Tax (FBT) If the fringe benefit is granted or furnished in:
FBT is a final withholding tax imposed on the
1. Money, or is directly paid for by the employer
grossed-up monetary value (GMV) of fringe benefit
– the value is the amount granted or paid.
furnished, granted or paid by the employer to the
employee, except rank-and-file employees. (Sec.
2. Property other than money and ownership is
2.33(A), RR No. 3-1998)
transferred to the employee – the value of the
fringe benefit shall be equal to the fair market

153 UNIVERSITY OF SANTO TOMAS

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 TAXATION LAW
value of the property as determined in firm. The problem of allocating the benefits among
accordance with the authority of the individual employees is avoided. Collection of the
Commissioner to prescribe real property FBT is also ensured because the FBT is withheld at
values (zonal valuation). the source and does not depend on the self-
declaration of the individual. (Dimaampao, 2011)
3. Property other than money but ownership is
NOT transferred to the employee – the value Deductible Fringe Benefit Tax
of the fringe benefit is equal to the depreciation
value of the property. (Sec 2.33, RR 3-1998) FBT is not an additional tax on the employer.
Rather, the employer can claim the fringe benefit
NOTE: These guidelines are only used in instances and the FBT as a deductible expense from his gross
where there are no specific guidelines. For example, income. The deduction for the employer is the
there are specific guidelines for the valuation of real grossed-up monetary value of the fringe benefit.
property and automobiles. (Sec. 32(B)(3), NIRC)

Rationale Salaries and Wages of Managerial or

Supervisory Employee
The FBT is a measure to ensure that an income tax
is paid on fringe benefits. If they were given in cash, Basic salary of managerial or supervisory employee
an income is automatically withheld and collected is excluded and not subject to FBT because it is part
by the government. An additional compensation of his compensation income.
which is given in non-cash form is virtually untaxed.
Compensation Income and Fringe Benefit
Such a situation has caused inequity in the
Distinguished
distribution of the tax burden. The FBT can enhance
the progressiveness and fairness of the tax system.
COMPENSATION
(Dimaampao, 2011) FRINGE BENEFIT
INCOME
As part of gross income of an employee
Q: Who is required to pay the Fringe Benefit
Tax? (2003 BAR)

A: It is the employer who is legally required to pay

an income tax on the fringe benefit. The fringe
benefit tax is imposed as a final withholding tax
placing the legal obligation to remit the tax on the
GR: Not reported as
employer, such that, if the tax is not paid, the legal
part of the gross
recourse of the BIR is to go after the employer. Any
income of an employee.
amount or value received by the employee as a
fringe benefit is considered tax paid hence, net of Part of the gross
the income tax due thereon. The person who is income of an employee. XPN: Fringe benefits
legally required to pay (same as statutory incidence given to a rank-and-file
as distinguished from economic incidence) is that employee are included
person who, in case of non-payment, can be legally in his gross income.
demanded to pay the tax.

Reasons why the FBT is Collected from the

Employer

Valuation of benefits is easier at the level of the

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As to who should pay the tax
The employee is liable The employer pays the 6. Fringe benefits granted for the convenience of
to pay the tax on his fringe benefit tax on the employer. (Employer’s Convenience Rule)
income earned. behalf of the employee. (Secs. 32 & Sec. 33(A), NIRC; Sec. 2.33(C), RR No.
3-1998)

NOTE: The person who NOTE: The person who NOTE: Although a fringe benefit may be exempted
is legally required to is legally required to from the FBT, it may still fall under a different tax
pay is that person who, pay is that person who, under another law, such as the compensation
in case of non- in case of non- income tax or the like.
payment, can be legally payment, can be legally
demanded to pay the demanded to pay the Convenience of the Employer Rule
tax. tax.
An exemption from taxation is granted to benefits
As to taxpayers covered
which are given to the employee for the exclusive
Managerial, benefit or convenience of the employer.
Managerial and
supervisory, and rank-
supervisory employees
and-file employees Requirements for the Application of the
As to withholding tax treatment Convenience of the Employer Rule
Subject to creditable 1. Where the Employer Furnished Living
withholding tax – the Quarters – such shall not be considered as part
employer withholds Subject to final of the employee’s gross compensation income
the tax upon the withholding tax if:
payment of the a. It is furnished in the employer’s business
compensation income. premises, and
b. Employee is required to accept such
Fringe Benefits Exempt from FBT
lodging as a condition of his employment
(No. 2.2, RAMO No. 1-1987)
1. Fringe benefits which are authorized and
exempted from tax under the NIRC or special
2. In Case of Free Meals – such shall not be
laws. (e.g., separation benefits which are given
considered as part of the employee’s gross
to employees who are involuntarily separated
income if:
from work)
a. Furnished to the employee during his work
day; or
2. Contributions of the employer for the benefit of
b. To have the employee available for work
the employee to retirement, insurance and
during his meal period. (No. 2.3, RAMO No.
hospitalization benefit plans.
1-1987)

3. Benefits given to the rank-and-file employees, Benefits Considered Necessary to the Business
whether granted under a collective bargaining of the Employer or are Granted for the
agreement or not. Convenience of the Employer
1. Housing privilege of military officials of the
4. De minimis benefits, whether given to rank and Armed Forces of the Philippines, consisting of
file employees or to supervisory or managerial officials of the Philippine Army, Philippine
employees. (Sec 32(3), NIRC) Navy and Philippine Air Force.

5. Fringe benefits granted to employee as 2. A housing unit which is situated inside or

required by the nature of, or necessary to the adjacent to the premises of a business or
trade, business or profession of the employer. factory – it is considered adjacent to the

155 UNIVERSITY OF SANTO TOMAS

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premises if it is located within the maximum 50 employees are entitled to a fringe benefit subject to
meters from the perimeter of the business the FBT. Even assuming that he is a managerial or
premises. supervisory employee, the small hut is provided for
the convenience of the employer, hence does not
3. Temporary housing for an employee who stays constitute a taxable fringe benefit. (Secs. 3 & 33,
in a housing unit for 3 months or less. NIRC)

4. The use of aircraft (including helicopters) Housing Privilege Subject to FBT

owned and maintained by the employer.
1. Employer leases residential property for use of
5. Reasonable business expenses which are paid the employee;
for by the employer for the foreign travel of his 2. Employer owns a residential property and
employee for the purpose of attending business assigns the same for the use by the employee;
or conventions.
3. Employer purchases a residential property on
6. A scholarship grant to the employee by the installment basis and allows use by the
employer, if the education or study involved is employee;
directly connected with the employer’s trade,
business or profession, and there is a written 4. Employee purchases a residential property and
contract between them that the employee is transfers ownership to the employee; or
under obligation to remain in the employ of the
employer for a period of time that they have 5. The employee provides a monthly fixed
mutually agreed upon. amount for the employee to pay his landlord.

7. Cost of premiums borne by the employer for Housing Privilege Exempt from FBT
the group insurance of his employees.
1. Housing privilege of military officials of the
8. Expenses of the employee which are Armed Forces of the Philippines consisting of
reimbursed, if they are supported by receipts officials of the Philippine Army, Philippine
in the name of the employer and do not partake Navy, and Philippine Air Force. (Sec.
the nature of a personal expense of the 2.33(D)(1)(f), NIRC);
employee.
NOTE: Benefit to said officials shall not be
9. Motor vehicles used for sales, freight, delivery treated as taxable fringe benefit in accordance
service and other non-personal uses. (RR No. 3- with the existing doctrine that the State shall
1998) provide its soldiers with necessary quarters
which are within or accessible from the
Q: X was hired by Y to watch over Y’s fishponds military camp so that they can readily be on call
with a salary of P10,000. To enable him to to meet the exigencies of their military service.
perform his duties well, he was also provided a
small hut, which he could use as his residence in 2. A housing unit which is situated inside or
the fishponds. Is the fair market value of the use adjacent to the premises of a business or
of the small hut by X a “fringe benefit” that is factory.
subject to the 35% tax imposed by Sec. 33 of the
NIRC? (2001 BAR) NOTE: A housing unit is considered adjacent to
the premises if it is located within the
A: NO. X is neither a managerial nor a supervisory maximum 50 meters from the perimeter of the
employee. Only managerial or supervisory business premises.

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3. Temporary housing for an employee who stays Expenses Treated as Non-taxable Fringe
in a housing unit for three (3) months or less. Benefits
(Sec. 2.33(D)(1)(g), RR No. 3-98)
1. Expenditures incurred by the employee and
Q: As a way to augment the income of the paid by his employer but are duly receipted for
employees of DEF Inc., a private corporation, and in the name of the employer, and such do
the senior engineers were given housing inside not partake the nature of a personal expense
the factory compound for the purpose of attributable to the said employee.
ensuring that there are available engineers
within the premises every time there is a 2. Expenditures paid for by the employee and
breakdown in the factory machineries and reimbursed by his employer but are duly
equipment. Is the cash equivalent value of the receipted for and in the name of the employer,
housing facilities received by the senior and such do not partake the nature of a
engineers subject to fringe benefit tax? (2019 personal expense attributable to the said
BAR) employee.

A: NO, the cash equivalent value of the housing 3. Representation and transportation allowances
facilities received by the senior engineers is not which are fixed in amounts and are regularly
subject to fringe benefits tax. The same is exempt received by the employees as part of their
from FBT since the housing is located within the monthly compensation income.
Company’s premises and is generally for the
convenience of the employer. (Sec. 2.33(A), RR 3- 4. Business expenses which are paid for by the
1998) employer for foreign travel of his employees in
connection with business meetings or
Expenses Treated as Taxable Fringe Benefits conventions. (RR 3-1998)

1. Expenses incurred by the employee but which Motor Vehicle Subject to FBT
are paid by his employer.
A motor vehicle shall be subjected to fringe benefits
2. Expenses paid for by the employee but tax whenever the employer:
reimbursed by his employer.
1. Purchases vehicle in employee’s name,
3. Personal expenses of the employee (like regardless of usage of vehicle;
purchases of groceries for the personal 2. Provides employee cash for vehicle purchase;
consumption of the employee and his family 3. Purchases car on installment in the name of the
members, salaries of household personnel, employee;
etc.) paid for or reimbursed by the employer to 4. Shoulders a portion of the purchase price;
the employee, whether or not the same are duly 5. Owns and maintains a fleet of motor vehicle for
receipted for in the name of the employer. the use of the business and employees; or
6. Leases and maintains a fleet of motor vehicles
4. Membership fees, dues, and other expenses for the use of the business and employees.
borne by the employer for his employee, in
social and athletic clubs or other similar NOTE: The use of aircraft (including helicopters)
organizations shall be treated as taxable fringe owned and maintained by the employer shall be
benefits of the employee in full. treated as business use and not be subject to the
fringe benefits tax.

157 UNIVERSITY OF SANTO TOMAS

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Interest on Loan at Less than Market Rate 3. The educational assistance extended to the
dependents of the employee was provided
If the employer lends money to his employees free through a competitive scheme. (Sec.
of interest or at a rate lower than 12%, such interest 2.33(D)(9)(b), RR 3-98)
foregone by the employer or the difference of the
interest assumed by the employee and the rate of Life or Health Insurance
12% shall be treated as fringe benefit.
GR: The cost of life or health insurance and other
The rule shall apply to installment payments or non-life insurance premiums borne by the
loans with interest rate lower than 12%. (Sec. employer are taxable fringe benefits.
2.33(D)(5), RR No. 3-1998)
XPNs:
Expenses for Foreign Travel
1. Contributions of the employer for the benefit of
employee to the SSS, GSIS, or similar
GR: Fixed and variable transportation,
contributions arising from provisions of any
representation and other allowances are subject to
existing law; and
FBT.
XPN: They are subject to FBT if incurred or
2. The cost of premiums borne by the employer
reasonably expected to be incurred by the
for the group of insurance of employees. (Sec.
employee in the performance of his duties, subject
2.33(D)(10), RR No. 3-1998)
to the following conditions:
Stock Options
1. Ordinary and necessary in the pursuit of
employer’s business and paid or incurred by
The difference between the fair market value and
employee; and
the exercise price at the time of exercise of stock
options are subject to FBT.
2. Liquidated or substantiated by receipts or
other adequate documentation. (Sec.
NOTE: Employees receive stock options as part of
2.33(D)(7)(c), RR No. 3-1998)
their payment for the services they rendered to
their employer, which entitles them to buy their
Educational Assistance to the Employee or his
employer’s shares of stock at an agreed price.
Dependents
DE MINIMIS BENEFITS
GR: The cost of the educational assistance to the
employee which is borne by the employer shall be Definition
treated as taxable fringe benefit. These are facilities or privileges furnished or
offered by an employer to his employees
XPN: A scholarship grant shall not be treated as (managerial, supervisory, or rank and file) that are
taxable fringe benefit if: of relatively small value and are offered or
furnished by the employer merely as a means of
1. Education/study is directly connected with promoting the health, goodwill, contentment and
employer’s trade, business or profession; efficiency of his employees.

2. There is written contract that the employee Q: Mapagbigay Corporation grants all its
shall remain employed with the employer for a employees (rank-and-file, supervisors, and
period of time mutually agreed upon by the managers) 5% discount of the purchase price of
parties; and its products. During an audit investigation, the
BIR assessed the company the corresponding

UNIVERSITY OF SANTO TOMAS 158

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tax on the amount equivalent to the courtesy Uniforms and
Not exceeding P6,000 per
discount received by all the employees, clothing
annum (RR No. 11-2018)
contending that the courtesy discount is allowances
considered as additional compensation for the Actual Medical
rank-and-file employees and additional fringe Assistance
benefit for the supervisors and managers. In its (e.g., medical
defense, the company argues that the discount allowance to cover
given to the rank-and-file employees is a de medical and
minimis benefit and not subject to tax. As to its healthcare needs,
Not exceeding P10,000
managerial employees, it contends that the annual
per annum
discount is nothing more than a privilege and its medical/executive
availment is restricted. check-up,
maternity
Is the BIR assessment correct? (2016 BAR) assistance, and
routine
A: YES. Items, even though of small value, if not consultations)
included in the list of de minimis benefits in Not exceeding P300 per
accordance with regulations, may be taxable. Laundry allowance
month
Q: What are de minimis benefits and how are
these taxed? Give three (3) examples of de Employee
minimis benefits. (2015 BAR) achievement
awards under an
A: De minimis fringe benefits and their respective established In the form of tangible
ceiling amounts: (RR Nos. 2-98 & 3-98, as amended) written plan which personal property other
does not than cash or gift
FRINGE BENEFIT CEILING AMOUNT discriminate in certificate with an annual
Qualify: favor of highly paid monetary value not
1. Private employees: employees exceeding P10,000
a. Vacation leave - (e.g., for length of
exempt up to 10 days service or safety
b. Sick leave – always achievement)
Monetized unused
taxable
vacation leave
Gifts given during
credits of
2. Government Christmas and Not exceeding P5,000 per
employees
employees: major anniversary employee per annum
Vacation and sick leave celebrations
are always tax exempt
regardless of the number Daily meal Not exceeding 25% of the
of days. allowance for basic minimum wage on a
overtime work per region basis
Medical cash
Not exceeding P1,500 per
allowance to Benefits received by
semester or P250 per
dependents of virtue of collective Not exceeding P10,000
month (RR No. 11-2018)
employees bargaining per employee per annum
P2,000 or one sack of 50- agreement (cba) from the two items
kg rice per month and productivity combined (RR 1-2015)
Rice subsidy amounting to not more incentive scheme
than P2,000 (RR No. 11-
2018)

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All other benefits given by employers, which are not 2. Other benefits, such as Christmas bonus,
included in the above enumeration shall not be productivity-incentive bonus, loyalty award,
considered as de minimis benefits, and hence, shall gifts in cash or in kind and other benefits of
be subject to income tax, as well as to withholding similar nature actually received by officials and
tax on compensation income. The benefits provided employees of both government and private
in the Regulations shall apply to income earned offices.
starting the year 2011. (RR No. 5-2011)
NOTE: In no case shall the exemption apply to other
NOTE: Flowers, fruits, books, similar items given to compensation received by an employee under an
employees under special circumstances (e.g., on employer employee relationship, such as basic
account of illness, marriage, birth of baby, etc.) are salary and other allowances. (R.A. No. 10653 as
now taxable. clarified by RR No. 3-2015)

De minimis benefits in Excess of Respective Summary of Tax Implications of Employees

Ceilings
1. Fixed salary – Taxable
The amount of benefits exceeding their respective
ceilings shall be considered as part of “other 2. Other Benefits (ECOLA,
benefits” under Sec. 32(B)(7)(e) of the NIRC. 13th month pay,
Christmas Bonus,
Under Sec. 32(B)(7)(e) of the NIRC, 13th month pay Transportation/Represe
and other benefits are excluded from gross income, ntation allowances, tips,
provided that they do not exceed P90,000 any etc.) – the 1st P90,000 is
excess thereof is considered part of the exempted from income
compensation income of an individual, hence, Salary tax, any excess is taxable.
subject to income tax.
3. Transportation/
13TH MONTH PAY AND OTHER BENEFITS Representation
allowances
Exclusion of 13th Month Pay and other Benefits a. If there is liquidation,
The 13th month pay and other benefits are excluded not taxable.
from gross income, provided that they do not b. If there is no
exceed P90,000. Any excess thereof is considered liquidation, taxable.
part of the compensation income of an individual,
1. If paid or availed of as
hence, subject to income tax. (Sec. 32(B)(7)(e),
salary of an employee
NIRC)
who is on vacation or on
sick leave
The threshold amount of P90,000 shall apply to the
notwithstanding his
13th-month pay and other benefits which covers Sick leave/ absence from work – it
only the following: vacation constitutes taxable
leave/servic compensation. (RR No. 6-
1. Thirteenth month pay equivalent to the e incentive 1982)
mandatory one-month basic salary of officials leave (SIL)
and employees of the government, (whether 2. Monetized value of
national or local), including government- unutilized vacation
owned or -controlled corporations, and or leave credits of private
private offices received after the 12th-month employees (RR No. 2-
pay; and 1998)

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 II. NATIONAL TAXATION
a. 10 days or below – employer is legally bound
not taxable by contract, statute, or
b. Any excess over 10 otherwise, to make such
days is taxable payment. (Sec.
2.78.1(B)(1)(b), RR No. 2-
3. Sick leave credits of 1998)
private employees –
NOTE: Financial assistance
Always taxable
with the condition that you
have to leave the company –
4. Vacation and sick leave
amount is taxable.
credits of government
employees – Always tax- Taxable because it is income
exempt Back wages actually given by the employer.

5. Service Incentive Leave Generally, retirement benefits

– Not taxable are tax-exempt because they
1. It is only taxable if are mere provisions for the
voluntarily availed of by person’s impending state of
the employee. unemployment.

2. If due to any cause beyond The following retirement

the control of the official benefits are tax-exempt:
or employee, it is not
taxable. 1. SSS or GSIS retirement
NOTE: The phrase “for any pays;
cause beyond the control of the
said official or employee” 2. Optional Retirement Plan
connotes involuntariness on - Retirement pay due to
his/her part. old age under R.A. 7641,
subject to the following
Examples of involuntary Retirement conditions:
Separation separation: benefits a. The retirement
pay a. Death program is
b. Sickness approved by the BIR
c. Disability Commissioner;
d. Reorganization
e. Company at the b. It must be a
brink of bankruptcy reasonable benefit
plan, i.e., it must be
3. 2nd, 3rd, 4th Ad infinitum fair and equitable
separation pay is not for the benefit of all
taxable as long as the employees.
employee is not at fault.
c. The retiree should
4. Any payment received on
have been employed
account of dismissal
for at least 10 years
constitutes compensation
in the said company;
regardless of whether the

161 UNIVERSITY OF SANTO TOMAS

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d. The retiree should Mixed Income Earners
have been 50 years
old at the time of 1. All income from compensation – schedular
retirement; and tax rate (Sec. 24(A)(2)(a), NIRC)
2. All income from business or practice of
e. It should have been profession
availed of for the
first time. a. If gross sales and/or gross receipts and
other non-operating income does not
In DBP Case, tax free was exceed P3 million – shall have the option
defined as taxes that will be to avail of:
shouldered by the company.
i. Schedular tax rate (Sec 24(A)(2)(a),
NOTE: It does not include pre- NIRC); or
terminated annuity and ii. 8% of the gross sales/gross
gratuity programs (they are receipts and other non-operating
taxable except if the employee income
is more than 60 years old).
They are not taxable NOTE: P250,000 shall not be
regardless of whether the deducted. (No. 22, RMC No. 50-
Terminal 2018)
leave pay recipient is a government or
private employee. b. If gross sales and/or gross receipts and
other non-operating income exceeds P3
million – schedular tax rate (Sec.
(2) TAXATION OF BUSINESS INCOME/ INCOME 24(A)(2)(a), NIRC)
FROM PRACTICE OF PROFESSION
Graduated Income Tax Rates Effective January 1,
Purely Self-Employed and/or Professionals 2018 until December 31, 2022

1. Self-employed individuals and/or

INCOME APPLICABLE
professionals with gross sales/gross receipts
BRACKET TAX RATE
and other non-operating income not more
than P3 million – shall have the option to avail Not over – 0%
of: P250,000
a. Schedular tax rate (Sec. 24(A)(2)(a) of the
NIRC); or Over – 20% of the
b. 8% of the gross sales/gross receipts and P250,000 excess over
other non-operating income in excess of but not over P250,000
P250,000 (No. 22, RMC No. 50-2018) P400,000

2. Self-employed individuals and/or Over P30,000 25% of the

professionals with gross sales/gross receipts P400,000 excess over
and other non-operating income more than but not + P400,000
P3 million – schedular tax rate only (Sec. over
24(A)(2)(a), NIRC) P800,000

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Optional 8% Income Tax Rate
Over P130,000 30% of the
P800,000 excess over
+ Self-employed individuals and/or professionals
but not over P800,000
shall have the option to avail of an eight percent
P2,000,000
(8%) tax on gross sales or gross receipts and other
Over P490,000 32% of the non-operating income in excess of two hundred fifty
P2,000,000 excess over thousand pesos (P250,000) in lieu of the graduated
+ income tax rates under Subsection (A)(2)(a) of this
but not over P2,000,000
P8,000,000 Section and the percentage tax under Sec. 116 of this
Code. (Sec. 24(A)(2)(b), NIRC)
Over P2,410,000 35% of the
P8,000,000 + excess over Tax Base of the 8% Income Tax Rate
P8,000,000
The 8% income tax rate shall be based on the gross
sales/receipts and other non-operating income, net
Graduated Income Tax Rates Effective January 1,
of returns and cash discounts. However, if the
2023 onwards
individual earns purely from business or practice of
profession, he/she is entitled to the reduction of
INCOME APPLICABLE P250,000 before computing for the 8% income tax.
BRACKET TAX RATE (No. 22, RMC No. 50-2018)

Not over Tax exempt Persons Not Entitled to Claim the 8% Income
P250,000 Tax Rate

Over 15% of the

1. Purely compensation income earner;
P250,000 excess over
but not over P250,000 2. VAT-registered taxpayers, regardless of the
P400,000 amount of gross sales/receipts and other non-
operating income;
Over P22,500 20% of the
P400,000 excess over
3. Non-VAT taxpayers whose gross sales/receipts
but not + P400,000
and other non-operating income exceeded the
over
P3,000,000 VAT threshold;
P800,000
4. Taxpayers who are subject to OPT, except those
Over P102,500 25% of the
under Sec. 116;
P800,000 excess over
+
but not over P800,000
5. Partners of a GPP since their distributive share
P2,000,000
from the GPP is already net of costs and
Over P402,500 30% of the expenses; and
P2,000,000 excess over
+ 6. Individuals enjoying income tax exemption
but not over P2,000,000
such as those registered under the BMBEs, etc./,
P8,000,000
since taxpayers are not allowed to avail of
Over P2,202,500 35% of the double or multiple tax exemptions under
P8,000,000 + excess over different laws, unless specifically provided by
P8,000,000 law. (No. 16, RMC No. 50-2018)

(Sec. 24(A)(2), TRAIN Law)

163 UNIVERSITY OF SANTO TOMAS

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Salient Features of Graduated and 8% Income
2. If OSD – no FS
Tax Rate Distinguished (RMC No. 50-2018)
required

Graduated IT Rate 8% IT Rate

Applicability

May be availed only by

qualified individuals
engaged in the business
or practice of profession Taxation of Partners in a General Professional
In general, applicable
whose gross Partnership
to all individuals
sales/receipts and other
non-operating income A general professional partnership (GPP) shall not
does not exceed be subject to the income tax. Persons engaging in
P3,000,000 business as partners in a GPP shall be liable for
income tax only in their separate and individual
Tax Base capacities.

Gross sales/receipts, and For purposes of computing the distributive share of

Net taxable income other non-operating the partners, the net income of the partnership shall
income be computed in the same manner as a corporation.

Allowable deductions Each partner shall report as gross income his

distributive share, actually or constructively
Allowed reduction of received, in the net income of the partnership. (Sec.
Allowable itemized only P250,000 from an 26, NIRC)
deductions or individual whose income
Optional Standard comes purely from A GPP is not a taxable entity for income tax purposes
Deduction (OSD) business or practice of because it only acts as a “pass-through entity where
profession its income is ultimately passed to the partners.”
(Ingles, 2018)
Business tax
Special Rule on GPPs
Other Percentage Tax If qualified – not subject In computing a GPP’s distributable taxable income,
or VAT to OPT the GPP may avail of the following deductions:
1. Itemized expenses; or
Required financial statements (FS) 2. 40% optional standard deduction.

1. If itemized: The GPP then distributes the net income to the

a. FS – if gross is partners. The share of each partner, actually or
less than constructively received, is taxable income of each
P3M; partner.
If qualified – no FS
b. Audited FS –
required
if gross is NOTE: The partners cannot claim further
more than deductions from their distributive share.
P3M
The partners cannot avail of the 8% income tax rate

UNIVERSITY OF SANTO TOMAS 164

2023 GOLDEN NOTES
 II. NATIONAL TAXATION
either because the distributive share from the GPP
is already net of cost and expenses. But if the
partner also derives income from other sources
distinct from the share in the GPP, he or she can
claim either itemized deductions or OSD from the
other source of income. (Ingles, 2018)

165 UNIVERSITY OF SANTO TOMAS

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(3) TAXATION OF PASSIVE INCOME

Summary on the Tax Treatment of Certain Passive Income as Applied to Individuals

(Secs. 24(B) and 25(A)(B), NIRC)

NRA - NRA -
NATURE OF INCOME RC & RA NRC
ETB NETB

Interest from any currency bank deposit and 20% 20% 20% 25%
yield or any other monetary benefit from deposit
substitutes and from trust funds and similar
arrangements.

Royalties, in general 20% 20% 20% 25%

Royalties on books, as well as other literary

works and musical compositions 10% 10% 10% 25%

Prizes amounting to more than ten thousand 20% 20% 20% 25%
pesos (>10,000)
Schedular Schedular Schedular
Prizes amounting to less than or equal to ten Income Tax Income Tax Income Tax 25%
thousand pesos (<=10,000) Rate Rate Rate

Other winnings (regardless of amount) 20% 20% 20% 25%

Other winnings from the Philippine Charity

Sweepstakes Office (PCSO):

Amount is more than ten thousand pesos 20% 20% 20% 25%
(>10,000)

Amount is less than or equal to ten thousand Exempt Exempt Exempt 25%
pesos (<=10,000)

Interest from a depositary bank under the 15% Exempt Exempt Exempt
expanded foreign currency deposit system

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Interest income from long-term deposit or Exempt Exempt Exempt 25%

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)

If pre-terminated before the fifth (5th year), a

final tax shall be imposed on the entire income
based on the remaining maturity thereof:

Four (4) years to less than five (5) years 5% 5% 5% 25%

Three (3) years to less than four (4) years 12% 12% 12% 25%

Less than three (3) years 20% 20% 20% 20% 25%

NOTE: The rates are only applicable for passive income earned within the Philippines. Passive income earned by
an RC outside the Philippines would be subject to the regular income tax rate.

Refer to previous discussions on “Passive Investment Income” – p. 92

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(4) TAXATION OF CAPITAL GAINS income derived from sources without the
Philippines which is the income he earns from his
Refer to previous discussions on “Income from U.S. business. (Sec. 23(A), NIRC)
Dealings in Property” – p. 78
c) INCOME TAX ON NON-RESIDENT ALIENS
(5) CAPITAL ASSET VS. ORDINARY ASSET NOT ENGAGED IN TRADE OR BUSINESS

Refer to previous discussions on “Income from Nonresident Aliens Not Engaged in Trade or
Dealings in Property” – p. 78 Business within the Philippines

b) INCOME TAX ON NON-RESIDENT ALIENS Non-Resident Aliens Not Engaged in Trade or

ENGAGED IN TRADE OR BUSINESS Business are taxed on their entire income received
from all sources within the Philippines as interest,
cash, and/or property dividends, rents, salaries,
Nonresident Aliens Engaged in Trade or
wages, premiums, annuities, compensation,
Business within the Philippines
remuneration, emoluments, or other fixed or
They are taxed on their income derived from all determinable annual or periodic or casual gains,
sources within the Philippines in the same manner profits, and income, and capital gains, a tax equal to
as an individual citizen or a resident alien twenty-five percent (25%) of such income.
individual, subject to the schedule rate of 0%-35%,
subject to the rule of reciprocity. Capital gains realized from the sale of shares of
stock in any domestic corporation and real property
A non-resident alien individual who shall come to shall be subject to capital gains tax.
the Philippines and stay therein for an aggregate
period of more than one hundred eighty (180) days Refer to previous discussions on “Income from
during any calendar year shall be deemed a non- Dealings in Property” – p. 78
resident alien doing business in the Philippines.
Q: Assuming X, a resident citizen, married and
Q: Patrick is a successful businessman in the has 4 qualified dependents. In 2009, he earned a
United States and he is a sole proprietor of a monthly compensation income of P25,000. In
supermarket which has a gross sales of $10 addition to his compensation income, he earned
million and an annual income of $3 million. He P150,000 as net income from his retail business.
went to the Philippines on a visit and, in a party, How much is his taxable income for the year
he saw Atty. Agaton who boasts of being a tax 2009?
expert. Patrick asks Atty. Agaton: if he (Patrick)
decides to reacquire his Philippine citizenship A: X’s taxable income for the year 2009 is P300,000
under RA 9225, establish residence in this computed as follows:
country, and open a supermarket in Makati City,
will the BIR tax him on the income he earns from Gross Compensation P300,000
his U.S. business? If you were Atty. Agaton, what Income (P25,000 x 12)
advice will you give Patrick? (2016 BAR) Net Compensation 300,000
Income
A: I will advise Patrick that if he reacquires his Add:
Philippine citizenship and establish residence in the Net business 150,000
Philippines, he shall be considered as a resident income
citizen subject to tax on incomes derived from Taxable income P450,000
sources within or without the Philippines.
Consequently, the BIR could now tax him on his Q: How much is his income tax payable?

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A: From the taxable income of P300,000, the income GR: Qualified senior citizens deriving returnable
tax payable is P65,000. income during the taxable year, whether from
compensation or otherwise, are required to file
Over P250,000 P50,000+30% of the their income tax returns and pay the tax as they file
but not over excess over P250,000 the return.
P500,000
XPN: If the returnable income of a senior citizen is
NOTE: The tax rate used was the effective tax rate in the nature of compensation income but he
in 2009. qualifies as a minimum wage earner under R.A. No.
9504, he shall be exempt from income tax on the
Q: Assume that X is a non-resident alien not said compensation income subject to the Rules
engaged in trade or business. He earned gross provided under R.R. 10-2008 applicable to
income in the amount of P1.5 million from his minimum wage earners. (Tabag, 2019)
one-night concert in the Philippines. How much
will he pay for his income tax? (2) MINIMUM WAGE EARNERS

A: X must pay P375,000 as income tax (P1,500,000

GR: Minimum wage earners shall be exempt from
x 25%). Since X is a non-resident alien not engaged the payment of income tax on their taxable income.
in trade or business, his gross income within the
Holiday pay, overtime pay, night shift differential
Philippines is subject to 25% final tax and is not
pay and hazard pay received by such minimum
allowed any deductions. wage earners shall likewise be exempt from income
tax. (Sec. 24(A)(2), NIRC, as amended by R.A. No.
Aliens Employed by Regional Headquarters,
9504)
Regional Operating Headquarters, Offshore
Banking Units, and Petroleum Service
XPN: Minimum wage earners receiving “other
Contractors
benefits” exceeding P90,000 limit shall be taxable
on the excess benefits. (Sec. 32(B)(7)(e), NIRC)
According to RR No. 8-2010 issued by the BIR,
preferential income tax rate under subsection (C), Statutory Minimum Wage
(D) and (E) of Sec. 25 of the Tax Code shall no longer
be applicable to special aliens (like those employed
It refers to the rate fixed by the Regional Tripartite
by regional headquarters, regional operating Wage and Productivity Board, as defined by the
headquarters, offshore banking units, and
Bureau of Labor and Employment Statistics (BLES)
petroleum service contractors), without prejudice
of the Department of Labor and Employment
to preferential tax rates under existing tax treaties. (DOLE). (Sec. 22(GG), NIRC)
As such, these special aliens are now subject to
regular income tax rate. (RR No. 8-2018)
NOTE: Effective June 4, 2022, the daily minimum
wage rate in NCR for Non - Agricultural sector is
d) INDIVIDUAL TAXPAYERS EXEMPT FROM P570.00 and P533.00 for Agriculture (plantation
INCOME TAX and non - plantation), Service/Retail
Establishments employing 15 workers or less, and
(1) SENIOR CITIZENS Manufacturing regularly employing less than 10
workers (National Wages and Productivity
Definition Commission Per Wage Order No. NCR-23)

A senior citizen refers to any resident citizen of the However, effective July 16, 2023, the daily
Philippines who is at least 60 years of age. (Sec. 3, minimum wage in NCR is P610 for the non-
R.A. No. 9994) agriculture sector, and P573 for the agriculture

169 UNIVERSITY OF SANTO TOMAS

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sector, service, and retail establishments employing b. When the wages received exceed the minimum
15 or less workers, and manufacturing wage anytime during the taxable year, the
establishments regularly employing less than 10 employee loses the MWE qualification.
workers. (National Wages and Productivity Therefore, wages become taxable as the
Commission Per Wage Order No. NCR-24) employee ceased to be an MWE. But the
exemption of the employee from tax on the
Q: R.A. 9504 was approved and took effect on income previously earned as an MWE remains.
July 6 2008. The law granted MWEs exemption The improvement of one's wage cannot justly
from payment of income tax on their minimum operate to make the employee liable for tax on
wage, holiday pay, overtime pay, night shift the income earned as an MWE.
differential pay and hazard. On September 24
2008, the BIR issued RR 10-2008 implementing c. Secs. 1 and 3 of RR 10-2008 add a requirement
the provisions of R.A. 9504. Decide the not found in the law by effectively declaring that
following: an MWE who receives other benefits in excess
of the statutory limit of P30,000 is no longer
a. Whether an MWE is exempt for the entire entitled to the exemption provided by R.A. No.
taxable year 2008 or from 6 July 2008 only; 9504.

b. Whether an MWE who becomes non-MWE R.A. No. 9504 is explicit as to the coverage of the
during the year still qualifies for the exemption: the wages that are not in excess of
exemption; the minimum wage as determined by the wage
boards, including the corresponding holiday,
c. Whether Secs. 1 and 3 of RR 10-2008 are overtime, night differential and hazard pays.
consistent with the law in providing that an The minimum wage exempted by R.A. No. 9504
MWE who receives other benefits in excess is distinct and different from other payments
of the statutory limit of P30,000 (Now at including allowances, honoraria, commissions,
P90,000) is no longer entitled to the allowances, or benefits that an employer may
exemption provided by R.A. No. 9504. pay or provide an employee.

A: The treatment of bonuses and other benefits

a. The MWE is exempt for the entire taxable year that an employee receives from the employer in
2008. As it stands, the calendar year 2008 excess of the P30,000 (now at 90,000) is
remained as one taxable year for an individual taxable. The treatment of this excess cannot
taxpayer. Therefore, RR 10-2008 cannot operate to disenfranchise the MWE from
declare the income earned by a minimum wage enjoying the exemption explicitly granted by
earner from January 1, 2008 to July 5, 2008 to R.A. 9504. (Soriano v. Secretary of Finance, G.R.
be taxable and those earned by him for the rest Nos. 184450, 184508, 184538 & 185234, 24 Jan.
of that year to be tax-exempt. To do so would be 2017)
to contradict the NIRC and jurisprudence, as
taxable income would then cease to be
(3) EXEMPTIONS GRANTED UNDER
determined on a yearly basis.
INTERNATIONAL AGREEMENTS

NOTE: The above ruling that the MWE

Only the following shall be exempt from Philippine
exemption is available for the entire taxable
Income Taxes:
year 2008 is premised on the fact of one's status
as an MWE during the entire year of 2008.
1. Diplomatic agents who are not nationals or
permanent residents of the Philippines;

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2. Members of family of the diplomatic agent no part of the income of which is derived from
forming part of his/her household who are not engaging in any trade or business;
Philippine nationals;
NOTE: The distributive share of each partner in
3. Members of the administrative and technical
a general professional partnership shall form
staff of the mission together with members of
part of partner’s gross income in its individual
their families forming part of their respective
tax returns subject to graduated income tax
households who are not nationals or
rates.
permanent residents of the Philippines;
2. A joint venture or consortium formed for
4. Members of the service staff of the mission
purposes of undertaking construction projects;
who are not nationals or permanent residents
and
of the Philippines; and
5. Private servants of members of the mission 3. A joint venture or consortium formed for the
who are not nationals or permanent residents purpose of engaging in petroleum, coal,
of the Philippines. (RMC No. 31-2013 citing geothermal and other energy operations
Vienna Convention on Diplomatic Relations) pursuant to an operating or consortium
agreement under a service contract with the
6. INCOME TAX ON CORPORATIONS government. (Sec. 22(B), NIRC as amended)

Corporation Classification of Corporations

It is an artificial being created by operation of law,
having the right of succession and the powers, Refer to previous discussion on “Kinds of
attributes and properties expressly authorized by Taxpayers” – p. 61
law or incidental to its existence. (Sec. 2, Revised
Corporation Code) Special Types of Corporations

Entities Considered as Corporations for 1. Special DC

Taxation Purposes
a. Proprietary educational institutions;
1. One-person corporations (OPC) or b. Non-profit hospitals;
corporations with a single stockholder; c. Government-owned or controlled
corporations, agencies, instrumentalities;
NOTE: Only a natural person, a trust, or an and
estate may form an OPC. d. Domestic depositary banks (foreign
currency deposit units).
2. Partnerships no matter how created or
organized; 2. Special RFC
3. Joint stock companies;
4. Joint accounts (cuentas en participacion); a. International carriers
5. Associations; and b. Regional or Area Headquarters (RHQs)
6. Insurance companies.
NOTE: Pursuant to Offshore Banking Units
Entities Not Considered as Corporations for (OBUs) and Regional Operating
Taxation Purposes Headquarters (ROHQs) of multinational
companies are now subject to regular
1. General Professional Partnerships (GPP) – corporate tax rate of 25%.
partnerships formed by persons for the sole
purpose of exercising their common profession, 3. Special NRFC

171 UNIVERSITY OF SANTO TOMAS

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a. Non-resident cinematographic film
owners, lessors or distributors;
b. Non-resident owners or lessors of vessels
chartered by Philippine nationals; and
c. Non-resident lessors of aircraft, machinery
and other equipment.

Q: Weber Realty Company, which owns a 3-

hectare land in Antipolo entered into a Joint
Venture Agreement (JVA) with Prime
Development Company for the development of
said parcel of land. Weber Realty as the owner of
the land contributed the land to the Joint
Venture and Prime Development agreed to
develop the same into a residential subdivision
and construct residential houses thereon. They
agreed that they would divide the lots between
them. Does the JVA entered into by and between
Weber and Prime create a separate taxable
entity? (2007 BAR)

A: NO. Since the arrangement between Weber

Realty Co. and Prime Development Co. is for the
purpose of undertaking a construction project,
there is no separate taxable entity pursuant to Sec.
22 (B) of the NIRC.

The term 'corporation' shall include one person

corporations, 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. (Sec.
22(B), NIRC as amended)

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Summary of Taxability of Corporate Taxpayers (2008 BAR)

INCOME INCOME
DERIVED DERIVED
CLASS OF TAXPAYER FROM FROM TAX BASE TAX RATE
SOURCES SOURCES
WITHIN PH OUTSIDE PH

25% or 20%

NOTE: Beginning July 1,

2020, the regular income
tax rate for DCs in general is
25%.

For DCs with net taxable

Net taxable
Domestic Corporations ✓ ✓ income not exceeding P 5
income
Million AND total assets not
exceeding P100 Million,
excluding the land on
which the particular
business entity’s office,
plant, equipment are
situated, the tax rate is 20%
beginning July 1, 2020.

25%

Net taxable
Resident Foreign Corporations ✓ X NOTE: Beginning July 1,
income
2020, the regular corporate
tax rate for RFCs is 25%.

25% final tax

Non-resident Foreign Gross

✓ X NOTE: Beginning July 1,
Corporations income
2021, NRFCs are subject to
25% final tax

173 UNIVERSITY OF SANTO TOMAS

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Special Domestic
Corporations: 10%

1. Proprietary educational NOTE: From July 1, 2020 to

institutions June 30, 2023, the
Net taxable
✓ ✓ preferential tax rate is 1%.
income
XPN: Those whose gross
income from unrelated From July 1, 2023 onwards,
sources exceeds 50% of their the preferential tax rate
total gross income, which reverts to 10%.
shall be subject to 30% tax on
the entire taxable income

10%

NOTE: From July 1, 2020 to

June 30, 2023, the
Net taxable
✓ ✓ preferential tax rate is 1%.
2. Non-profit hospitals income

From July 1, 2023 onwards,

the preferential tax rate
reverts to 10%.

3. Government-owned or
controlled corporations
including the PCSO Net taxable
✓ ✓ 25%
income
XPN: Those exempt GOCCs
(GSIS, SSS, HDMF, PHIC, and
the local water districts)

4. Domestic Depositary Banks Interest

✓ X 10% final tax
under the Foreign Currency Income
Deposit System

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Special Resident Foreign

Gross 2 ½% of Philippine gross
Corporations: ✓ X
revenue billings

1. International carrier

Total profits
2. Branch profit remittances
applied or 15% of the total profits
✓ X earmarked applied or earmarked for
XPN: those registered with
for remittance
PEZA (they have their own
remittance
tax rules as incentives)

3. Regional or area ✓ X – Tax-exempt

headquarters

Special Non-resident Foreign

Gross
Corporations: ✓ X 25% of gross income
income
1. Cinematographic film
owner/lessor/distributor
2. Lessor of machinery, Gross
equipment, aircraft and ✓ X rentals or 7 ½% of gross income
others fees

Gross
3. Lessor of vessels chartered rentals,
✓ X 4 1/2% of gross income
by Philippine nationals lease or
charter fees

175 UNIVERSITY OF SANTO TOMAS

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a) INCOME TAX ON DOMESTIC CORPORATIONS and income subject to final withholding tax. (RR No.
AND RESIDENT FOREIGN CORPORATIONS 12-2007)

Domestic Corporations (DCs) Cost of Goods Sold (COGS) in General

DC is a corporation created or organized in the It includes all business expenses directly incurred to
Philippines or under its laws and is liable for its produce the merchandise and bring them to their
income from sources within and without. (Sec. 22 present location and use.
(C), NIRC)
COGS for Trading or Merchandising Concern
Taxes Imposed on DCs
This shall include the invoice cost of the goods sold,
1. Normal corporate income tax (NCIT) or Regular plus import duties and freight in transporting the
corporate income tax (RCIT), goods to the place where they are actually sold,
2. Minimum corporate income tax (MCIT), including insurance while the goods are in transit.
3. Final tax on passive income, and
4. Capital Gains Tax. COGS for Manufacturing Concern

NOTE: The 15% Gross Income Tax (Optional This shall include all costs of production of finished
Corporation Income Tax) imposed on qualified goods, such as raw materials used, direct labor and
corporate taxpayers and 10% Improperly manufacturing overhead, freight cost, insurance
Accumulated Tax (IAET) of 10% were repealed premiums and other costs incurred to bring the raw
upon effectivity of R.A. No. 11534. Thus, these tax materials to the factory or warehouse.
rates will no longer apply.
Cost of Services for Service Concern
NORMAL CORPORATE INCOME TAX OR REGULAR
CORPORATE INCOME TAX This shall mean all direct costs and expenses
necessarily incurred to provide the services
Normal Corporate Income Tax required by the customers and clients, including
An income tax rate of 25% effective July 1, 2020 salaries and employee benefits of personnel,
(previously taxed at 30%) shall be imposed upon consultants and specialists directly rendering the
the taxable income derived during each taxable year service, and cost of facilities directly utilized in
from all sources within and without the Philippines providing the service, such as depreciation or rental
by DCs. of equipment used and cost of supplies.

For DCs with net taxable income not exceeding Illustration:

P5,000,000 and with total assets not exceeding
P100,000,000, excluding the land on which the Gross Sales P xxx
particular business entity's office, plant, and Less:
equipment are situated during the taxable year for Sales Returns/
(xxx)
which the tax is imposed, shall be taxed at 20%. (Sec. Allowances/ Discounts
27, NIRC as amended) Cost of Goods Sold/Cost
(xxx)
of Services
Gross Income Gross Income xxx
Less:
It includes all items enumerated under Sec. 32(A) of Allowable Deductions (xxx)
the NIRC, except income exempt from income tax Taxable Income xxx
Multiply:

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25% or Being a minimum income tax, a corporation should
Tax Rate
20% pay the MCIT whenever its normal corporate
NCIT due P xxx income tax (NCIT) is lower than the MCIT, or when
the firm reports a net loss in its tax return.
MINIMUM CORPORATE INCOME TAX Conversely, the NCIT is paid when it is higher than
the MCIT. (Dimaampao, 2015)
Minimum Corporate Income Tax
Therefore, the taxable due for the taxable year will
MCIT is a new concept introduced by R.A. 8424 to be NCIT (25% of taxable income) or MCIT (2% or
the Philippine taxation system. It came about as a 1% of gross income), whichever is higher.
result of the perceived inadequacy of the self-
assessment system in capturing the true income of Instances where MCIT is Imposed
corporations.
1. If taxable income is zero;
Rationale: Congress intended to put a stop to the 2. If taxable income is negative; or
practice of corporations which, while having large 3. If MCIT is greater than the NCIT due (Sec. 27(E),
turnovers, report minimal or negative net income NIRC)
resulting in minimal or zero income taxes year in
and year out, through under-declaration of income Q: When shall the MCIT commence to be
or over-deduction of expenses otherwise called Tax imposed on a corporation?
Shelters. The MCIT serves to put a cap on such tax
shelters. A: The MCIT is imposed beginning on the 4th year
immediately following the year in which the
As a tax on gross income, it prevents tax evasion and corporation commenced its business operations.
minimizes tax avoidance schemes achieved through For purposes of the MCIT, the taxable year in which
sophisticated and artful manipulations of business operations commenced shall be the year in
deductions and other stratagems. Since the tax base which the domestic corporation registered with the
was broader, the tax rate was lowered. (Chamber of BIR, regardless of whether the corporation is using
Real Estate and Builders’ Association, Inc. v. Hon. the calendar year or fiscal year.
Executive Secretary, G.R. No. 160756, 09 Mar. 2010)
Firms which were registered with BIR in 1994 and
Q: What is the purpose of MCIT? (2001 BAR) earlier years shall be covered by the MCIT beginning
January 1, 1998. (Sec. 27(E)(1), NIRC; RR No. 9-98;
A: The imposition of the MCIT is designed to Manila Banking Corporation v. CIR, G.R. No. 168118,
forestall the prevailing practice of corporations of 28 Aug. 2006)
over claiming deductions in order to reduce their
income tax payments. NOTE: Recognizing the birth pangs of businesses
and the reality of the need to recoup initial major
Nature of MCIT capital expenditures, MCIT commences only on the
4th taxable year.
The MCIT is equal to 2% of the gross income at the
end of the taxable quarter, except income exempt Q: What is the gross income for purposes of
from income tax and income subject to final computing MCIT?
withholding tax.
A:
NOTE: From July 1, 2020 to June 30, 2023, the MCIT 1. As to sale of goods – it shall mean gross sales
rate imposable upon DCs and RFCs is 1%. (Secs. less sales returns, discounts and allowances and
27(E) & 28(A), NIRC as amended) cost of goods sold.

177 UNIVERSITY OF SANTO TOMAS

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2. As to sale of services – it shall mean gross Q: When is MCIT reported and paid?
receipts less sales returns, allowances,
discounts and cost of services. A: The MCIT shall be paid in the same manner
prescribed for the payment of the normal corporate
Illustration: income tax which is on a quarterly and on a yearly
basis. The taxpayer shall pay the MCIT whenever it
1. A domestic corporation in its 4th year of is greater than the regular or normal corporate
operations had a gross income of P300,000 and income tax.
net taxable income of P100,000. How much is
the income tax due for the year? The MCIT shall likewise apply to the quarterly
corporate income tax but the final comparison
MCIT (P300,000 x 1%) P3,000 between the NCIT payable by the corporation and
NCIT (P100,000 x 25%) P25,000 the MCIT shall be made at the end of the taxable
Income tax due – NCIT P25,000 year. The payable or excess payment in the Annual
(whichever is higher) Income Tax Return shall be computed taking into
consideration corporate income tax payment made
2. A domestic corporation in its 4th year of at the time of filing of quarterly corporate income
operations had a gross income of P400,000 and tax return, whether this be MCIT or normal income
net taxable income of P10,000. How much is tax. (RR 12-2007)
the income tax due for the year?
Q: Can MCIT be allowed as a deduction from
MCIT (P400,000 x 1%) P4,000 gross income?
NCIT (P10,000 x 25%) P2,500
Income tax due – MCIT P4,000 A: No. Since MCIT is an estimate of the normal
(whichever is higher) income tax, it cannot be claimed as a deduction.

Coverage of MCIT (2001 BAR) Q: CREBA assails the constitutionality of MCIT on

the contention that it violates due process. Is the
The MCIT covers domestic and resident foreign imposition of MCIT unconstitutional?
corporations which are subject to the 25% normal
corporate income tax; hence, corporations which A: NO. The imposition of MCIT is not violative of due
are subject to special corporate taxes do not fall process for the following reasons:
within the coverage of the MCIT.
1. MCIT is imposed on gross income and not on
The minimum corporate income tax is a proxy for capital. Thus, it is not arbitrary or confiscatory;
the normal corporate income tax of 25%, not the
special corporate taxes paid by a corporation. For 2. It is not an additional tax imposition but is
instance, a proprietary educational institution may imposed in lieu of normal net income tax and
be subject to a regular corporate income tax of 10% only if said tax is suspiciously low; and
(depending on its dominant income), but it is
exempt from the imposition of MCIT because the 3. There is no legal objection to a broader tax base
latter is not intended to substitute special tax rates. or taxable income resulting from the
So is with PEZA enterprises, CDA enterprises etc. elimination of all deductible items and, at the
same time, reduction of the applicable tax rate.
NOTE: From July 1, 2020 to June 30, 2023, the In as much as deductions are a matter of
preferential rate imposable upon proprietary legislative grace, Congress has the power to
educational institutions shall be 1%. (Sec. 27(B), condition, limit or deny deductions from gross
NIRC as amended) income in order to arrive at the net that it

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2023 GOLDEN NOTES
 II. NATIONAL TAXATION
chooses to tax. (CREBA, Inc. v. Romulo, G.R. No. iv. As to period of applicability – regular
160756, 09 Mar. 2010) corporate income tax is applicable once the
corporation commenced its business
Q: KKK Corp. secured its Certificate of operation, while minimum corporate
Incorporation from the Securities and Exchange income tax is applicable beginning on the
Commission on June 3, 2013. It commenced 4th taxable year following the
business operations on August 12, 2013. In April commencement of business operations.
2014, Ms. J, an employee of KKK Corp. in charge
of preparing the annual income tax return of the v. As to imposition – the minimum corporate
corporation for 2013, got confused on whether income tax is imposed whenever it is
she should prepare payment for the regular greater than the regular corporate income
corporate income tax or the minimum corporate tax o the corporation. (Sec. 27(A) and (E),
income tax. NIRC; RR No. 998)

a. As Ms. J's supervisor, what will be your Excess MCIT Carry-over

advice?
b. What are the distinctions between regular 1. The excess of MCIT over the NCIT shall be
corporate income tax and minimum carried forward on an annual or quarterly
corporate income tax? (2015 BAR) basis.

A: 2. The excess shall be credited against the NCIT

due for the three (3) immediately succeeding
a. As Ms. J’s supervisor, I will advise that KKK taxable years.
Corp. should prepare payment for the regular
corporate income tax and not the minimum 3. Any excess not credited in the next three years
corporate income tax (MCIT) Under the NIRC, shall be forfeited.
MCIT is only applicable beginning the 4th
taxable year following the commencement of 4. Carry forward (annually or quarterly) is
business operation. (Sec. 27(E)(1), NIRC) possible only if MCIT is greater than NCIT.

b. The distinctions between regular corporate 5. The maximum amount that can be credited is
income tax and the minimum corporate income only up to the amount of the NCIT, there can be
tax are the following: no negative NCIT.

i. As to taxpayer – regular corporate income

tax applies to all corporate taxpayers while
minimum corporate income tax applies to
domestic corporations and resident foreign
corporations.

ii. As to tax rate – regular corporate income

tax is 25% while minimum corporate
income tax is 2%.

iii. As to tax base – regular corporate income

tax is based on the net taxable income while
minimum corporate income tax is based on
gross income.

179 UNIVERSITY OF SANTO TOMAS

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 TAXATION LAW
Illustration: 2. Force Majeure – a cause due to an irresistible
force as by ‘Act of God’ like lightning,
A domestic corporation had the following data on earthquake, storm, flood and the like, and shall
computations of the NCIT and MCIT for five years: also include armed conflicts like war or
insurgency; or
YEAR YEAR YEAR YEAR YEAR
4 5 6 7 8 3. Legitimate Business Reverses – include
MCIT 80k 50k 30k 40k 35k substantial losses due to fire, theft or
NCIT 20k 30k 40k 20k 70k embezzlement or for other economic reason, as
Excess: (60k) (20k) (20k) determined by the Secretary of Finance (Sec. 27
(E)(3), NIRC; Sec. 2.27 (E)(4)(b-d), RR No. 9-98,)
NCIT 40k 70k
higher Limitations of MCIT

Less: 1. MCIT does not apply on the first 3 years of

Excess business operation of a corporation.
of
MCIT 2. MCIT is not applicable to DC or RFC not subject
to NCIT.
From (40k)
Year 4 a. Domestic proprietary educational
From (20k) institutions subject to 10% tax.
Year 5
From (20k) NOTE: From July 1, 2020 to June 30, 2023,
Year 7 the preferential rate imposable upon
TAX 80k 50k 0 40k 30k proprietary educational institutions shall
DUE: be 1%.

NOTE: While only P40,000 out of P60,000 excess b. Domestic non-profit hospital subject to
MCIT in Year 4 was used in Year 6, the unused 10% tax.
P20,000 cannot be applied on Year 8 because it was
already beyond three (3) years from Year 4. NOTE: From July 1, 2020 to June 30, 2023,
the preferential rate imposable upon non-
Suspension of the Imposition of MCIT profits hospitals shall be 1%.

Since certain businesses may be incurring genuine c. Domestic depository banks under the
repeated losses, the law authorizes the Secretary of expanded foreign currency deposit system
Finance, upon recommendation of the BIR, to otherwise known as FCDUs.
suspend the imposition of MCIT if a corporation
suffers losses due to any of the following: d. Resident foreign international carrier
subject to tax at 2 ½% of their Gross
1. Prolonged Labor Dispute – losses arising from Philippines Billings.
a strike staged by the employees which lasted
for more than 6 months within a taxable period e. Firms enjoying special income tax rate
and which has caused the temporary shutdown under the PEZA Law (R.A. 7916), Bases
of business operations; Conversion and Development Act of 1992
(R.A. 7227) and those enjoying income tax
holiday incentives. (Sec. 2.27 (E)(8), RR No.

UNIVERSITY OF SANTO TOMAS 180

2023 GOLDEN NOTES
 II. NATIONAL TAXATION
9-98) However, the related income from TAX ON CORPORATE CAPITAL GAINS
unregistered activities (or those not
covered by the tax incentives) is subject to Refer to previous discussions on “Income from
MCIT. Dealings in Property” and “Passive Investment
Income” – pp. 78 & 92
3. For domestic corporation, whose operations
are partly covered by NCIT and partly covered IMPROPERLY ACCUMULATED EARNINGS TAX
under a special income tax system, MCIT shall
apply only on operations covered by NCIT.
The IAET shall no longer be imposed on
corporations upon the effectivity of the CREATE on
4. For resident foreign corporation, MCIT is
April 11, 2021. This shall apply to the entire taxable
applicable only to gross income from sources
year for all fiscal or taxable years ending after the
within the Philippines.
effectivity of the CREATE. (Sec. 6, RR No. 5-2021)

5. When, by authority of the Secretary of Finance,

Resident Foreign Corporations (RFCs)
the imposition of the MCIT is suspended upon
submission of proof by the applicant
GR: RFCs shall be liable for a 25% income tax on
corporation that the corporation sustained
their income from within the Philippines.
substantial losses:
a. on account of a prolonged labor dispute;
XPNs:
b. because of “force majeure”; or
1. International carriers – RFCs shall be taxed at
c. because of legitimate business reverses;
2 ½% on their Gross Philippine Billings; and
(Sec 28(A)(3), NIRC)
Applicability of MCIT on Corporations Partly
Governed by NCIT and Special Income Tax
2. Regional or area headquarters of multi-
System
national corporations – RFCs shall not be
subject to income tax. (Sec. 28(A)(6), NIRC)
In the case of a domestic corporation whose
operations or activities are partly covered by the
NOTE: Beginning January 1, 2021, a RCIT rate of
normal income tax system and partly covered
25% shall be imposed upon offshore banking units
under a special income tax system, the MCIT will
and regional operating headquarters of muti-
apply only on operations covered by the regular
national corporations. (Secs. 28(A)(4) and
income tax system.
28(A)(6)(b), NIRC as amended)

For example, if a BOI-registered enterprise has a

Taxes Imposed on RFCs
"registered" and an "unregistered" activity, the
MCIT shall apply to the unregistered activity. (RR
1. Normal corporate income tax (NCIT) or Regular
No. 9-1998)
corporate income tax (RCIT),
2. Minimum corporate income tax (MCIT),
TAX ON CORPORATE PASSIVE INCOME
3. Final tax on passive income
4. Capital gains tax; and
Refer to previous discussions on “Income from 5. Branch profit remittance tax.
Dealings in Property” and “Passive Investment
Income” – pp. 78 & 92 NOTE: The 15% Gross Income Tax (Optional
Corporation Income Tax) imposed on qualified
corporate taxpayers was repealed upon effectivity
of R.A. No. 11534. Thus, the tax rate will no longer
apply.

181 UNIVERSITY OF SANTO TOMAS

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 TAXATION LAW
NORMAL CORPORATE INCOME TAX OR REGULAR TAX ON CORPORATE PASSIVE INCOME
CORPORATE INCOME TAX
Refer to previous discussions on “Income from
An income tax rate of 25% effective July 1, 2020 Dealings in Property” and “Passive Investment
(previously taxed at 30%) shall be imposed upon Income” – pp. 78 & 92
the taxable income derived during each taxable year
from all sources within the Philippines by RFCs. TAX ON CORPORATE CAPITAL GAINS

Gross Income Refer to previous discussions on “Income from

Dealings in Property” and “Passive Investment
It includes all items enumerated under Sec. 32(A) of Income” – pp. 78 & 92
the NIRC, except income exempt from income tax
and income subject to final withholding tax. (RR No.
12-2007) (1) BRANCH PROFIT REMITTANCE TAX

Cost of Goods Sold or Cost of Services Branch Profit Remittance Tax

Any profit remitted by branch office of a
Refer to discussion on “Domestic Corporations – multinational corporation to its head office is
Normal Corporate Income Tax or Regular Corporate subject to 15% final tax based on total profits
Income Tax”. applied or earmarked for remittance without
deduction for the tax component. The profit
Illustration: remitted must be effectively connected with the
conduct of its trade or business in the Philippines.
Gross Sales P xxx (Marubeni Corporation v. CIR, G.R. No. 76573, 14
Less: Sept. 1989)
Sales Returns/
Allowances/ (xxx) NOTE: A branch is classified as a resident foreign
Discounts corporation. As such, it is subject to income tax at
Cost of Goods the rate of 25% on its net income derived within the
(xxx)
Sold/Cost of Services Philippines.
Gross Income xxx
Less: Meaning of “Effectively Connected”
Allowable Deductions (xxx)
Taxable Income xxx For purposes of branch profit remittance, income
Multiply: items which are not effectively connected with the
Tax Rate 25% conduct of its trade or business in the Philippines
NCIT/RCIT due P xxx are not considered branch profits. To be ‘effectively
connected’, it is not necessary that the income be
derived from the actual operation of the branch’s
MINIMUM CORPORATE INCOME TAX trade or business. It is sufficient that the income
arises from the business activity in which the
branch is engaged. (Tabag, 2015)
Refer to previous discussion on “Domestic
Corporations – Minimum Corporate Income Tax”
– p. 177

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 II. NATIONAL TAXATION
Activities Not Subject to Branch Profit c. Non-resident owner or lessor of aircraft,
Remittance Tax machineries and other equipment – 7 ½% of
gross rentals or fees.
Activities registered with the Philippine Economic
Zone Authority (PEZA) are exempt from the TAX ON PASSIVE INCOME
imposition of Branch Profit Remittance Tax.
Refer to previous discussions on “Income from
(2) ITEMIZED DEDUCTIONS vs. OPTIONAL Dealings in Property” and “Passive Investment
STANDARD DEDUCTIONS Income” – pp. 78 & 92

c) INCOME TAX ON SPECIAL CORPORATIONS

Refer to previous discussion on “Deductions from
Gross Income – Itemized Deductions vs. Optional
Special Corporations
Standard Deduction” – p. 114

1. Special DCs
b) INCOME TAX ON NON-RESIDENT FOREIGN
a. Proprietary educational institutions
CORPORATIONS
and non-profit hospitals;

Nonresident Foreign Corporation (NRFC) b. Non-stock, non-profit education

NRFC is corporation organized, authorized, or institutions; and
existing under the laws of any foreign country, not
engaged in trade or business within the Philippines. c. Government-owned or controlled
(Sec. 22(I), NIRC) corporations, agencies or
instrumentalities.
Taxes imposed on NRFCs
2. Special RFCs
1. Corporate income tax; and a. International carriers;
2. Final tax on passive income b. Offshore banking units (OBUs);
c. Foreign currency deposit units
CORPORATE INCOME TAX (FCDUs);
d. Regional or are headquarters of
Corporate Income Tax multinational companies (RHQs); and
e. Regional operating headquarters of
Beginning January 1, 2021, a corporate income tax multinational companies (ROHQs).
of 25% (previously taxed at 30%) shall be imposed
on gross income received during each taxable year 3. Special NRCs
from all sources within the Philippines by NRFCs. a. Non-resident cinematographic film
(Sec. 28(B), NIRC as amended) owner, lessor or distributor;

b. Non-resident owner or lessor of

NRFs Subject to Preferential Tax Rates
vessels chartered by Philippine
nationals; and
a. Non-resident cinematographic film owner,
lessor or distributor – 25% of its gross income
c. Non-resident owner or lessor of
from all sources within the Philippines
aircraft, machineries and other
equipment.
b. Non-resident owner or lessor of vessels
chartered by Philippine nationals – 4 ½% of
gross rentals, lease, or charter fees; and

183 UNIVERSITY OF SANTO TOMAS

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 TAXATION LAW
PROPRIETARY EDUCATIONAL INSTITUTIONS Tax Treatment of Proprietary and Non-stock,
AND NON-PROFIT HOSPITALS Non-profit Educational Institution
Distinguished
Proprietary Educational Institutions
NON-STOCK,
PROPRIETARY
A proprietary educational institution is any private NON-PROFIT
school maintained and administered by private Taxed at 10% on their
individuals or groups with an issued permit to taxable income,
operate from the Department of Education (DepEd) except on certain
or the Commission on Higher Education (CHED), or passive incomes
the Technical Education and Skills Development which are subject to
Authority (TESDA), as the case may be, in final tax: Provided,
accordance with existing laws and regulations. that if the gross
Exempt from tax on its
income from
revenues and assets
It is not tax-exempt but rather taxed at a preferential unrelated trade,
actually, directly and
rate of 10% on their taxable income, except on business or other
exclusively used for
certain passive incomes which are subject to final activity exceeds 50%
educational purposes.
tax. of the total gross
(Sec. 30, NIRC; Sec.
income derived from
4(3), Art. XIV, 1987
NOTE: Beginning July 1, 2020 until June 30, 2023, all sources, the entire
Constitution)
the preferential rate imposable upon proprietary taxable income of the
educational institutions and non-profit hospitals proprietary
shall be 1%. (Sec. 27(B), NIRC as amended) educational
institution shall be
Predominance Test subject to the regular
corporate tax rate of
If the gross income from unrelated trade, business, 30%. (Sec. 27 (B),
or other activity exceeds 50% of the total gross NIRC)
income from all sources, the entire taxable income
of the proprietary educational institution shall be Special Deduction for Proprietary Education
subject to the regular corporate tax rate of 25%. Institutions

Meaning of “Unrelated Trade, Business or Refer to previous discussion on “Special

Activity” Deductions” – p. 142

The trade, business or other activity of a proprietary Exemptions Granted to Educational Institutions
educational institution is unrelated when the
conduct of which is not substantially related to the 1. Donor’s Tax – Art. XIV, Sec. 4(4) which provides
exercise or performance by such educational that “all grants, endowments, donations, or
institution of its primary purpose or function. contributions used actually, directly and
exclusively for educational purposes shall be
NOTE: Related activities include auxiliary activities exempt from tax” is not self-executing as it
such as school-owned canteen, cafeteria, dormitory requires legislative enactment providing
and bookstore within the school premises. (BIR certain conditions for exemption. However,
Ruling 237-87) since Sec. 101(a)(3) of NIRC under donor’s tax
declared its exemption, then these donations
are tax exempt. (Dimaampao, 2015)

UNIVERSITY OF SANTO TOMAS 184

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 II. NATIONAL TAXATION
2. Estate Tax – non-stock, non-profit educational Summary of Taxation of Proprietary Non-profit
institutions are not included under the exempt Educational Institutions and Non-profit
transfers Mortis causa, hence, they are not tax Hospitals
exempt.
CLASS OF TAXPAYER TAX RATE
3. VAT – pursuant to Sec. 109(H), private Private, non-profit hospitals
educational institutions shall be exempt from and proprietary educational
VAT on their educational services, provided institutions whose gross
they are duly accredited by DepEd, CHED or income from unrelated
TESDA. However, this does not extend to other trade, business or other
activities involving the sale of goods and activity exceeds 50% of total
services. gross income from all
sources. 25%
NOTE: However, they shall be subject to internal
revenue taxes on income from trade, business or Hospitals and educational
other activity, the conduct of which is not related to institutions claiming to be
the exercise or performance of their educational proprietary non-profit but do
purposes or functions. (Dimaampao, 2015) not meet the definition
thereof. (Sec. 27(B), NIRC)
Non-Profit Hospitals
Private, non-profit hospitals
and proprietary educational
A non-stock, non-profit hospital that is operated for
institutions whose gross
charitable and social welfare purposes is exempt
income from unrelated
from income tax. (Sec. 30(E, G), NIRC) 10%
trade, business or other
activity does not exceed 50%
It must satisfy the following requisites in order to
of total gross income from all
be entitled to the exemption from income tax:
sources.
1. It is a non-stock corporation. Organized and operated
2. It is operated exclusively for charitable exclusively for charitable
purposes; and purposes, and no part of its
3. No part of its net income or asset shall belong net income or asset shall
to or inure to the benefit of any member, belong to or inure to the Exempt
organizer, officer or any specific person. benefit of any member,
organizer, officer or any
NOTE: The only qualifications for hospitals are that specific purpose.
they must be (1) proprietary; and (2) non-profit.
“Proprietary” means private, following the
Q: De La Salle University leases out a portion of
definition of a “proprietary educational institution”
its property to private concessionaires, i.e.,
as “any private school maintained and administered
commercial canteens and bookstores. The lease
by private individuals or groups” with a government
payments were factually proven to be used for
permit. “Non-profit” means no net income or asset
educational purposes.
accrues to or benefits any member or specific
person, with all the net income or asset devoted to
a. Is the land owned by De La Salle
the institution’s purposes and all its activities
University subject to real property tax?
conducted not for profit. (CIR v. St. Luke’s Medical
Center, Inc., G.R. Nos. 195909 & 195960, 26 Sept.
2012)

185 UNIVERSITY OF SANTO TOMAS

FACULTY OF CIVIL L AW
 TAXATION LAW
b. Are the lease payments received by De NON-STOCK, NON-PROFIT EDUCATIONAL
La Salle University subject to income INSTITUTIONS
tax?
Exemption Granted to Non-stock Non-Profit
c. Are the lease payments received by De Educational Institutions
La Salle University subject to VAT?
All revenues and assets of non-stock, non-profit
(2016 BAR)
educational institutions used actually, directly, and
exclusively for educational purposes shall be
A:
exempt from taxes and duties. (Art. XIV, Sec. 4(3),
a. YES. The leased portion of the building may be
1987 Constitution)
subject to real property tax. The test of
exemption from taxation is the use of the
Non-stock, non-profit educational institutions
property for purposes mentioned in the
owned and operated by religious organizations
Constitution. The lease of a portion of a school
including public schools are exempt from property
building for commercial purposes, removes
and income taxes. (Lim, 2021)
such asset from the property tax exemption
granted under the Constitution. There is no
Q: Under Art. XIV, Sec. 4(3) of the 1987
exemption because the asset is not used
Constitution, all revenues and assets of non-
actually, directly and exclusively for
stock, non-profit educational institutions, used
educational purposes. The commercial use of
actually, directly and exclusively for
the property is also not incidental to and
educational purposes, are exempt from taxes
reasonably necessary for the accomplishment
and duties. Are incomes derived from
of the main purpose of a university, which is to
dormitories, canteens and bookstores as well as
educate its students. (Abra Valley College, Inc.
interest income on bank deposits and yields
v. Aquino, G.R. No. L-39086, 15 June 1988 cited
from deposit substitutes automatically exempt
in CIR vs. De La Salle University, Inc., G.R. No.
from taxation? (2000 BAR)
196596, 09 Nov. 2016)
A: NO. The interest income on bank deposits and
b & c.
yields from deposit substitutes are not
NO. If the university actually, directly and
automatically exempt from taxation. There must be
exclusively uses for educational purposes the
a showing that the incomes are used actually,
revenues earned from the lease of its school
directly, and exclusively for educational purposes.
building, such revenues shall be exempt from
taxes and duties. The tax exemption no longer
The income derived from dormitories, canteens and
hinges on the use of the asset from which the
bookstores are not also automatically exempt from
revenues were earned, but on the actual, direct
taxation. There is still a requirement for evidence to
and exclusive use of the revenues for
show actual, direct and exclusive use for
educational purposes. To avail of the
educational purposes.
exemption, the taxpayer must factually prove
that it used actually, directly and exclusively
NOTE: The 1987 Constitution does not distinguish
for educational purposes the revenues or
with respect to the source or origin of the income.
income sought to be exempted.
The distinction is with respect to the use which
should be actual, direct and exclusive for
In sum, the crucial point of inquiry then is on educational purposes. Where the Constitution does
the use of the assets or on the use of the not distinguish with respect to source or origin, the
revenues. These are two things that must be NIRC should not make distinctions. (Mamalateo,
viewed and treated separately. (Ibid.) 2008)

UNIVERSITY OF SANTO TOMAS 186

2023 GOLDEN NOTES
 II. NATIONAL TAXATION
Q: UP Los Banos, a government education instrumentality is deemed a GOCC. (PRA v. City of
institution, requested for a confirmation for its Paranaque, G.R. No. 191109 , 18 July 2012)
tax exemption under Sec. 30(l) of the Tax Code.
Is UP Los Banos exempt from income tax? Taxability of GOCCs

A: YES. Pursuant to Sec. 30(l) of the Tax Code, in GR: All corporations owned or controlled by the
relation to Article XIV of the 1987 Philippine Government are taxed in the same manner that
Constitution, Government education institutions domestic private corporations are taxed.
are exempt from tax on income used actually,
directly and exclusively for educational purposes. XPNs:
1. Government Service Insurance System
(GSIS)
GOVERNMENT-OWNED OR CONTROLLED
CORPORATIONS, AGENCIES, OR
2. Social Security System (SSS)
INSTRUMENTALITIES

3. Home Development Mutual Fund (HDMF)

Government-owned or Controlled Corporation
(Sec. 27(c), NIRC as amended)
1. Any agency organized as a stock or non-stock
4. Philippine Health Insurance Corporation
corporation,
(PHIC)
2. Vested with functions relating to public needs
5. Local Water District (LWD)(Sec. 27(c),
whether governmental or proprietary in
NIRC as amended)
nature, and

NOTE: Under Sec. 32(B)(7) of the NIRC, even if the

3. Owned by the Government directly or through
GOCC is not one of those enumerated under Sec.
its instrumentalities either wholly, or, where
27(C), it may still be exempt if it is performing
applicable as in the case of stock corporations,
governmental function. Thus, income derived from
to the extent of at least fifty-one percent (51%)
any public utility or from the exercise of any
of its capital stock.
essential government function accruing to the
Government of the Philippines or to any political
Instrumentality
subdivision shall be exempt from income tax.
1. Any agency of the National Government not
Withdrawal of Exemptions
integrated within the department framework,

1. Philippine Amusement and Gaming

2. Vested with special functions or jurisdiction by
Corporation (PAGCOR)
law,

PAGCOR is no longer exempt from corporate

3. Endowed with some if not all corporate powers,
income tax as it has been effectively omitted
administering special funds, and
from the list of GOCCs that are exempt from the
payment of the income tax. However, it remains
4. Enjoying operational autonomy, usually
exempt from income tax for its income arising
through a charter.
from casino operations which are subject to
franchise tax in lieu of all taxes. (PAGCOR v. BIR,
NOTE: Many government instrumentalities are
G.R. No. 215427, 10 Dec. 2014)
vested with corporate powers, but they do not
become stock or non-stock corporations, which is a
2. Philippine Charity Sweepstakes Office (PCSO)
necessary condition before an agency or

187 UNIVERSITY OF SANTO TOMAS

FACULTY OF CIVIL L AW
 TAXATION LAW
The exemption of PCSO was withdrawn upon the place of sale or issue and the place of payment of
the effectivity of the TRAIN Law. the ticket or passage document. (Dimaampao, 2015)

Off-line International Carrier

INTERNATIONAL CARRIERS

It refers to any foreign air carrier not certificated by

International Carrier
the (Civil Aeronautics) Board, but who maintains
It refers to foreign airline corporation doing office or who has designated or appointed agents or
business in the Philippines which has landing rights employees in the Philippines, who sells or offers for
in any Philippine port to perform international air sale any air transportation in behalf of said foreign
transportation services or flight operations air carrier and/or others, or negotiate for, or holds
anywhere in the world. itself out by solicitation, advertisement, or
otherwise sells, provides, furnishes, contracts, or
GR: They shall be taxed at 2.5% on their Gross arranges for such transportation. (Sec. 2(b), Chap. I,
Philippine Billings (GPB). Civil Aeronautics Board Economic Regulation No. 4,
cited in Air Canada v. CIR, G.R. No. 169507, 11 Jan.
XPNs: 2016)
1. It is subject to preferential rate, or
2. Exempt from tax on the basis of applicable tax Tax Imposed on Off-line International Carrier
treaty/international agreement to which the
Philippines is a signatory or on the basis of An off-line airline having a branch office or a sales
reciprocity. agent in the Philippines which sells passage
documents for compensation or commission to
Rule on Reciprocity cover off-line flights of its principal or head office, or
for other airlines covering flights originating from
The domestic law of the Home Country granting Philippine ports or off-line flights, is not considered
exemption shall cover income taxes and shall not engaged in business as an international air carrier in
refer to other types of taxes that may be imposed by the Philippines and is, therefore, not subject to
the relevant taxing jurisdiction. The fact that the tax Gross Philippine Billings Tax (Sec. 28(A)(3)(a),
laws of the Home Country provide for exemption NIRC) nor three percent (3%) common carrier's tax.
from business tax, such as gross sales tax, in respect (Sec. 118(A), NIRC)
of the operations of Philippine carriers shall not be
considered as valid and sufficient basis for If an international air carrier maintains flights to
exempting an international carrier from Philippine and from the Philippines, it shall be taxed at the rate
income tax on account of reciprocity. of 2 1/2% of its Gross Philippine Billings, while
international air carriers that do not have flights to
NOTE: Reciprocity requires that Philippine carriers and from the Philippines but nonetheless earn
operating in the Home Country of an international income from other activities in the country will be
carrier are actually enjoying the income tax taxed at the rate of 25% (previously taxed at 30%)
exemption. (RR No. 15-2013) of such income. (South African Airways v. CIR, 16 Feb.
2010; Air Canada v. CIR, G.R. No. 169507, 11 Jan.
Definition of Gross Philippine Billings? (2005 2016)
BAR)
Q: Petitioners in assailing the validity of RR 15-
It refers to the amount of gross revenue realized 2013 this RR subjects demurrage and detention
from carriage of persons, excess baggage, cargo and fees collected by international shipping carriers
mail originating from the Philippines in a to regular corporate income tax rate. They
continuous and uninterrupted flight, irrespective of contend that the RR unduly widened the scope of

UNIVERSITY OF SANTO TOMAS 188

2023 GOLDEN NOTES
 II. NATIONAL TAXATION
RA 10378 by imposing additional taxes on Beginning January 1, 2021, OBUs are subject to 25%
international shipping carriers not authorized (previously taxed at 10%) regular corporate income
or provided by law. They state that demurrage tax. (R.A. No. 11534)
and detentions fees are not income but penalties
FOREIGN CURRENCY DEPOSIT UNITS
imposed by the carrier on the charterer,
shipper, consignee, or receiver, to allow the
Foreign Currency Deposit (FDCU)
carrier to recover losses or expenses associated
with or caused by the undue delay in the loading FDCU is a department of a local bank or in an
and/or discharge of the latter's shipments from existing local branch of a foreign bank which is
the containers. Assuming that demurrage and authorized by the BSP to operate under the
detention fees may be treated as income, these Expanded Foreign Currency Deposit System. (Ingles,
fees are taxable only if they form part of Gross 2021)
Philippine Billings (GPB) and taxed at the
preferential rate of 2.5%. Are the contentions of Offshore Income
the Petitioners correct?
It refers to income from foreign currency
A: NO. RR 15-2013 merely sums up the rules by transactions with non-residents, OBUs in the
which international carriers may avail of Philippines and local commercial banking units
preferential rates or exemption from income tax on including Philippine branches of foreign banks
their gross revenues derived from the carriage of under the Foreign Currency Deposit System.
persons and their excess baggage based on the (Soriano, Manuel & Laco, 2021)
principle of reciprocity or an applicable tax treaty or
international agreement to which the Philippines is Onshore Income
a signatory. Interpretative regulations are intended
to interpret, clarify or explain existing statutory It refers to interest income derived from foreign
regulations under which the administrative body currency loans granted to residents other than
operates. Their purpose or objective is merely to other OBUs or local commercial banks under the
construe the statute being administered and Foreign Currency Deposit System. (Ibid.)
purport to do no more than interpret the statute.
(Association of International Shipping Lines, Inc. v. Taxability of FCDUs
Secretary of Finance, G.R. No. 222239, 15 Jan. 2020)
TRANSACTION TAX RATE
Income from foreign 10% final tax
OFFSHORE BANKING UNITS
currency loans granted
to Philippine residents
Offshore Banking Unit (OBU)
other than OBUs, etc.
OBU is a branch, subsidiary or affiliate or a foreign (Onshore Income)
banking corporation located in an Offshore
Financial Center which is duly authorized by the Income from foreign Exempt
BSP to transact offshore banking business in the currency transactions
Philippines. OBUs are allowed to provide all with non-residents,
traditional banking services to non-residents in any OBUs, etc. (Offshore
currency other than Philippine national currency. Income)
OBUs are forbidden to make any transactions in (Ingles, 2021)
Philippine Peso. Banking transactions to residents
are omitted and restricted. (Tabag, 2015)

189 UNIVERSITY OF SANTO TOMAS

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Foreign Currency Transactions Exempt from NOTE: Beginning January 1, 2022, ROHQs are
Tax subject to 25% regular corporate income tax. (R.A.
No. 11534)
1. With non-residents,
2. With local commercial banks,
SPECIAL NON-RESIDENT FOREIGN
3. With branches of foreign banks authorized by
CORPORATIONS
the BSP, and
4. With OBUs in the Philippines.
Refer to previous discussions on “Income Tax on
Non-resident Foreign Corporations” – p. 183
REGIONAL OR AREA HEADQUARTERS OF
MULTINATIONAL COMPANIES d) EXEMPTIONS FROM TAX ON
CORPORATIONS
Regional Headquarters (RHQ)
RHQ is a branch established in the Philippines by Exempted Corporations
multinational companies and which headquarters The following organizations shall not be taxed in
do not earn or derive income from the Philippines respect to income received by them as such:
and which act as supervisory, communications and
coordinating center for its affiliates, subsidiaries, or 1. Labor, agricultural or horticultural
branches in the Asia-Pacific region and other organization, not organized principally for
foreign markets. (Sec. 22(D), NIRC) It is exempt from profit
income tax.
a. Provincial fairs and like associations of a
REGIONAL OPERATING HEADQUARTERS OF quasi-public character designed to
MULTINATIONAL COMPANIES encourage development of better
agricultural and horticultural products
Regional Operating Headquarters (ROHQ) through a system of awards, prizes and
premiums, and whose income derived from
ROHQ is a branch established in the Philippines by gate receipts, entry fees, donations, etc. is
multinational companies to offer services to its used exclusively to meet necessary
affiliates outside the Philippines, and engaged in: expenses of upkeep and operation are thus
exempt.
1. General administration and planning;
2. Business planning and coordination; b. The holding of periodical race meets by
3. Sourcing/procurement of raw materials and associations, the profits from which inure
components; to the benefit of their stockholder are not
4. Corporate finance advisory services; tax exempt. Similarly, corporations
5. Marketing control and sales promotion; engaged in growing agricultural or
6. Training and personnel management; horticultural products or raising livestock
7. Logistics services; or similar products for profits are subject to
8. Research and development services, and product tax (Sec. 25, RR No. 2)
development;
9. Technical support and maintenance; 2. Mutual savings banks and cooperative banks,
10. Data processing and communication; and either domestic or foreign, provided that:
11. Business development.
ROHQ shall pay a tax of ten percent (10%) of their a. No capital represented by shares.
taxable income. (Sec. 28(A)(6), NIRC)

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b. Earnings, less only the expenses of Center, Inc., G.R. Nos. 195909 & 195960, 26 Sept.
operating, are distributable wholly among 2012)
the depositors; and
6. Business, Chamber of Commerce, or Board of
c. It is operated for mutual purposes and Trade, provided that:
without profit. a. It is an association of persons having some
common business interest;
NOTE: If the deposits are made compulsory b. Its activities are limited to work for such
under contract between the bank and the common interests;
depositors and is operated for speculation c. Not engaged in a regular business for profit;
rather for savings, the bank is not qualified and
as a mutual savings bank. d. No part of the net income inures to the
3. A Beneficiary Society, Order or Association, benefit of any private stockholder or
provided that: individual.
7. Civic league, provided that:
a. It must be operated under lodge system or
for the exclusive benefit of the members of a. It is not organized for profit but operated
society, with parent and local organizations exclusively for purposes beneficial to the
which are active; community as a whole. In general,
organizations engaged in promoting the
b. There must be an established system of welfare of mankind;
payment to its members or their
dependents of life, sick, accident or other b. Sworn affidavit filed with the BIR showing
benefits; and the following:
i. Character of the league or organization
c. No part of the net income inures to the ii. Purpose for which it was organized
benefit of the stockholders/members. iii. Actual activities
iv. Sources of income and disposition
4. Cemetery Companies, provided that: thereof, and
a. It must be owned and operated exclusively v. All facts relating to the operation of the
for the benefit of their owners; and organization which affects it right to
b. It is not operated for profit. exemption.
vi. The copy of articles of incorporation,
5. Religious, Charitable, Scientific, Athletic or by laws and financial statements
Cultural Corporations, provided that: should be attached to the sworn
a. It is organized and operated for one or affidavit.
more specified purposes; and
b. No part of the net income inures to the 8. Government Educational Institutions
benefit of the any private stockholder or
individual. 9. Mutual Fire Insurance Companies and like
Organizations
NOTE: St. Luke’s Medical Center, Inc. fails to
meet an indispensable requirement under Sec. The requisites for exemption are:
30(E) – operated exclusively for charitable a. Income is derived solely from assessments,
purposes – to be completely tax exempt from all dues and fees collected from members; and
its income. It admitted paying patients from b. Fees collected from members are for the
which profit is derived. (CIR v. St. Luke’s Medical sole purpose of meeting its expenses.

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NOTE: To be exempt from income tax, Sec. imposed on said items of income irrespective of
30(E) of the NIRC requires that a charitable their disposition. (CIR v. YMCA, G.R. No. 124043, 14
institution must be “organized and Oct. 1998)
operated exclusively” for charitable
purposes. Likewise, to be exempt from However, in case of non-stock, non-profit
income tax, Sec. 30 (G) requires that the educational institution, as long as the income is
institution be “operated exclusively” for actually, directly and exclusively used for
social welfare. (CIR v. St. Luke’s Medical educational purpose, such income is exempt. (Sec. 3,
Center, Inc., G.R. Nos. 195909 & 195960, 26 Art. XIV, 1987 Constitution)
Sept. 2012)
Other Corporations Exempt from Income Tax
10. Farmers, Fruit Growers, or like Associations under Special Laws

The requisites for exemption are: 1. Cooperatives (R.A. No. 6938 or the “Cooperative
a. Formed and organized as sales agent for the Code of the Philippines”) – since interest from
purpose of marketing the product of its any Philippine currency bank deposit and yield
members; or any other monetary benefit from deposit
b. No net income to the members; and substitutes are paid by banks, cooperatives are
c. Proceeds of the sale shall be turned over to not required to withhold the corresponding tax
them less necessary selling expenses on the on the interest from savings and time deposits
basis of the quantity of goods produced by of their members.
them.
NOTE: The amendment in Art. 61 of R.A. No.
NOTE: The income of whatever kind and character 9520, specifically providing that members of
of the foregoing organizations from any of their cooperatives are not subject to final taxes on
properties, real or personal, or from any of their their deposits, affirms the interpretation of the
activities conducted for profit regardless of the BIR that Sec. 24 (B)(1) of the NIRC does not
disposition made of such income, shall be subject to apply to cooperatives and confirms that such
tax imposed under the NIRC. (Sec. 30, NIRC) ruling carries out the legislative intent.
(Dumaguete Cathedral Cooperative v. CIR, G.R.
Common Requisites for Exemption (Pr-In-S-E) No. 182722, 22 Jan. 2010)

1. Not organized and operated principally for 2. Foundations created for scientific purposes
Profit; (Sec. 24, R.A. 2067 or the “Act to Integrate,
2. No part of the net income Inures to the benefit Coordinate, and Intensify Scientific and
of any member or individual; Technological Research and Development and to
3. No capital is represented by Shares of stock; Foster Invention”)
and
4. Educational or instructive in character. Taxability of Partnerships

NOTE: The moment they invest their income or Partnerships for tax purposes are classified into:
receive income from their properties, real or 1. General professional partnerships (GPPs); and
personal conducted for profit, such income derived 2. Business partnership.
from those properties is subject to tax.
General Professional Partnership and Business
If religious, charitable or social welfare corporations Partnership Distinguished (1981 BAR)
derive income from their properties or any of their
activities conducted for profit, income tax shall be

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BUSINESS Registration of Partnership
GENERAL
PARTNERSHIP/
PROFESSIONAL
GENERAL Registration of a partnership is immaterial for
PARTNERSHIP (GPP)
PARTNERSHIP income tax purposes. It is taxable as long as the
As to nature following requisites concur: (A-I)

1. There is an Agreement, oral or writing, to

Formed by persons for
contribute money, property, or industry to a
the sole purpose of
common fund; and
exercising their Formed by persons
common profession, for the sole purpose of
2. There is an Intention to divide the profits.
no part of income of engaging in any trade
which is derived from or business
Distributive Share of a Partner in the Net Income
engaging in any trade
of a Business Partnership
or business
It is equal to each partner’s distributive share of the
As to taxability of entity net income declared by the partnership for a taxable
year after deducting the corresponding corporate
Considered as a income tax. A partner’s distributive share is already
corporation hence a being subjected to a final tax; hence, it is no longer
not a taxable entity taxable entity and its needed to be reported in each partner’s individual
income is taxable as tax return.
such
NOTE: In a business partnership, there is no
As to taxability of distributable shares
constructive receipt of distributive share in the net
The distributive share income.
The share of an
of the partners in the
individual in the Q: Do co-heirs who own inherited properties
net income is
distributable net which produce income automatically be
reportable and taxable
income after tax of a considered as partners of an unregistered
as part of the partner’s
general partnership is corporation hence subject to income tax?
gross income subject
subject to a final tax.
to the scheduled rates.
A: NO. They are not automatically considered as
As to filing of return partners and not subject to income tax due to the
No need to file an following reasons:
Must file an income
income tax return but
tax return 1. The sharing of gross returns does not of itself
an information return
establish a partnership, whether or not the
As to double taxation persons sharing them have a joint or common
right or interest in any property from which the
Taxed once on its
returns are derived. There must be an
income and again
Not subject to double unmistakable intention to form a partnership or
when the share in the
taxation being taxed joint venture. (Obillos, Jr. v. CIR, G.R. No. L-68118,
profits of the partners
only once 19 Oct. 1985)
is distributed; then
taxed as dividends
2. There is no contribution or investment of
additional capital to increase or expand the
inherited properties, merely continuing the

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dedication of the property to the use to which it Each partner shall report his distributive share in
had been put by their forebears. (Ibid.) the net income of the partnership as gross income in
his separate return, whether actually or
3. Persons who contribute property or funds to a constructively received.
common enterprise and agree to share the
gross returns of that enterprise in proportion to Treatment of Partnership Loss
their contribution, but who severally retain the
title to their respective contribution, are not Results of operation of a partnership shall be
thereby rendered partners. They have no treated in the same way as a corporation. In case of
common stock capital, and no community of loss, it will be divided as agreed upon by the
interest as principal proprietors in the business partners and shall be taken by the individual
itself from which the proceeds were derived. partners in their respective returns.
(Pascual v. CIR, G.R. No. 78133, 18 Oct. 1988)
NOTE: The partners shall be entitled to deduct their
NOTE: The income from the rental of the house, respective shares in the net operating loss from
bought from the earnings of co-owned properties, their individual gross income.
shall be treated as the income of an unregistered
partnership to be taxable as a corporation because Q: A, B, and C, all lawyers, formed a partnership
of the clear intention of the co-owners to join called ABC Law Firm so that they can practice
together in a venture for making money out of their profession as lawyers. For the year 2012,
rentals. ABC Law Firm received earnings and paid
expenses, among which are as follows:
GPPs Not Subject to Income Tax
Earnings:
GPPs are not subject to income tax but are required
1. Professional/legal fees from various
to file information returns for their income for the
clients;
purpose of furnishing information as to the share in
2. Cash prize received from a religious society
the net income of the partnership, which each
in recognition of the exemplary service of
partner should include in his individual return.
ABC Law Firm; and
Partners shall be liable for income tax in their
3. Gains derived from sale of excess
separate and individual capacities.
computers and laptops.

GPP is only required to file a return for its income,

Payments:
except income exempt under Sec. 32(B) of the NIRC,
setting forth the items of gross income and of 1. Salaries of office staff;
deductions allowed, and the names, Taxpayer 2. Rentals for office space; and
Identification Numbers (TIN), addresses and shares 3. Representation expenses incurred in
of each of the partners. (Sec. 55, NIRC) meetings with clients.

Partners shall nonetheless be liable for income tax a. What are the items in the above-mentioned
in their separate and individual capacities. earnings which should be included in the
computation of ABC Law Firm’s gross
Computation of Net Income income? Explain.

For purposes of computing the distributive share of b. What are the items in the above-mentioned
the partners, the net income of the partnership shall payments which may be considered as
be computed in the same manner as a corporation. deductions from the gross income of ABC
(Sec. 26, NIRC) Law Firm? Explain.

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c. If ABC Law Firm earns net income in 2012, report as gross income his distributive shares,
what, if any, is the tax consequence on the actuality or constructively received, in the net
part of ABC Law Firm insofar as the income of the partnership. The partnership is
payment of income tax is concerned? What, merely treated for income tax purposes as a
if any, is the tax consequence on the part of pass-through entity so that its net income is not
A, B, and C as individual partners, insofar as taxable at the level of the partnership bur said
the payment of income tax is concerned? net income should be attributed to the
(2014 BAR) partners, whether or not distributed to them,
and they are liable to pay the income tax based
A: on their respective taxable income as
individual taxpayers. (Sec. 26, NIRC)
a. The three (3) items of earnings should be
included in the computation of ABC Law Firm’s
Taxability of Co-Ownerships
gross income. The professional or legal fees
from various clients are included as part of
1. As a rule, co-ownership is tax exempt. It
gross income being in the nature of
becomes taxable if it is converted into an
compensation for services. (Sec. 32(A)(1),
unregistered partnership. It is converted into
NIRC). The cash prize from a religious society
partnership if the properties and income are
in recognition of its exemplary services is also
used as common fund with the intention to
included there being no law providing for its
produce profits. If after partition, the shares of
exclusion. This is not a prize in recognition of
the heirs are held under a single management
any of the achievements enumerated under the
for profit making, unregistered partnership is
law hence, should form part of gross income.
formed. (Ona v. CIR, G.R. No. L-19342, 25 May
(Sec. 32(B)(7)(c), NIRC) The gains from sale of
1972)
excess computers and laptops should also be
included as part of the firm’s gross income
2. A joint purchase of land, by two, does not
because the term gross income specifically
constitute a co-partnership in respect thereto,
includes gains derived from dealings in
nor does an agreement to share the profits and
property. (Sec. 32(A)(3), NIRC)
losses on the sale of land create a partnership;
the parties are only tenants in common. Where
b. The law firm being formed as general
the transactions are isolated, in the absence of
professional partnership is entitled to the same
other circumstances showing a contrary
deductions allowed to corporation. (Sec. 26,
intention, the case can only give rise to a co-
NIRC) Hence, the three (3) items of deductions
ownership. (Pascual v. CIR, G.R. No. 78133, 18
mentioned in the problem are all deductible,
Oct. 1988)
they being in the nature of ordinary and
necessary expenses incurred in the practice of
3. Co-heirs who own inherited properties which
profession. (Sec. 34(A), NIRC) However, the
produce income should not automatically be
amount deductible for representation
considered as partners of an unregistered
expenses incurred by a taxpayer engaged in
partnership or corporation subject to income
sale of services, including a law firm, is subject
tax.
to a ceiling of 1% of net revenue. (RR No. 10-
2002)
Rationale: Sharing of gross returns does not by
itself establish a partnership; there must be an
c. The net income having been earned by the law
unmistakable intention to form a partnership or
firm which is formed and qualifies as a general
joint venture. There is no contribution or
professional partnership, is not subject to
investment of additional capital to increase or
income tax because the earner is devoid of any
expand the inherited properties, merely
income tax personality. Each partner shall

195 UNIVERSITY OF SANTO TOMAS

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continuing the dedication of the property to the between the two (2) of them. The Commissioner
use to which it had not been put by their contended that they formed an unregistered
forbears. (Obillos, Jr. v. CIR, G.R. No. L-68118, 19 partnership or joint venture taxable as a
Oct. 1985) corporation under the Code and its income is
subject to the NIRC. Is there an unregistered
4. Co-ownership is not taxable if the activities of partnership formed?
the co-owners are limited to the preservation of
the property and the collection of income. In A: NONE. The sharing of returns does not in itself
such case, the co-owners shall be taxed establish a partnership whether or not the sharing
individually on their distributive share in the therein has a joint or common right or interest in the
income of the co-ownership. property. (NCC, Art. 1769) There is no adequate
basis to support the proposition that they thereby
Investment of Income in a Business for Profit formed an unregistered partnership. The two
isolated transactions whereby they purchased
If the co-owners invest the income in a business for properties and sold the same few years thereafter
profit, they would constitute themselves into a did not make them partners. The transactions were
partnership and such shall be taxable as a isolated. The character of habituality peculiar to
corporation. business transactions for the purpose of gain was
not present. (Pascual and Dragon v. CIR, G.R. No.
Q: Brothers A, B, and C borrowed a sum of money 78133, 18 Oct. 1988)
from their father which amount together with
their personal monies was used by them for the Q: On March 2, 1973, Joe Obillos Sr. transferred
purpose of buying real properties. The real his rights under contract with Ortigas Co. to his
properties they bought were leased to various 4 children to enable them to build residences on
tenants. The BIR demanded the payment of the lots. TCTs were issued. Instead of building
income tax on corporations, real estate dealer’s houses, after a year, Obillos children sold them
tax, and corporation residence tax. However, A, to Walled City Securities Corporation and Olga
B, and C seek to reverse the letter of demand and Cruz Canda. The BIR required the children to pay
be absolved from the payment of taxes in corporate income tax under the theory that they
question. Are they subject to tax on formed an unregistered partnership or joint
corporations? venture. Are they liable for corporate income
tax?
A: YES. As defined in the NIRC, the term
“corporation” includes partnership, no matter how A: NO. The Obillos children are co-owners. It is an
created or organized. This qualifying expression isolated act which shows no intention to form a
clearly indicates that a joint venture need not be partnership. It appears that they decided to sell it
taken in any of the standard form, or conformity after they found it expensive to build houses. The
with the usual requirements of the law on division of profits was merely incidental to the
partnerships, in order that one could be deemed dissolution of the co-ownership, which was in the
constituted for the purposes of the tax on nature of things a temporary state. (Obillos, Jr. v. CIR,
corporations. (Evangelista v. Collector of Internal G.R. No. L-68118, 29 Oct. 1985)
Revenue, G.R. No. L-9996, 15 Oct. 1957)
Taxability of Joint Ventures and Consortia
Q: Pascual and Dragon bought 2 parcels of land
from Bernardino and 3 from Roque. Thereafter, A joint venture is a commercial undertaking by two
the first two were sold to Meirenir Development or more persons, differing from a partnership in
Corporation and the remaining were sold to that it relates to the disposition of a single lot of
Reyes and Samson. They divided the profits goods or the completion of a single project. Joint

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2023 GOLDEN NOTES
 II. NATIONAL TAXATION
venture or consortium, in general, is taxable as Absent any one the aforesaid requirements, the
corporation. (Tabag, 2015) joint venture or consortium formed for the purpose
of undertaking construction projects shall be
Joint Venture or Consortium Undertaking considered as taxable corporations.
Construction Projects
NOTE: The tax-exempt joint venture or consortium
A joint venture or consortium formed for the as herein defined shall not include those who are
purpose of undertaking construction projects is not mere suppliers of goods, services or capital to a
considered as corporation under Sec. 22 of the NIRC construction project.
provided:
The member to a joint venture not taxable as
1. The joint venture was formed for the purpose of corporation shall each be responsible in reporting
undertaking a construction project; and paying appropriate income taxes on their
respective share to the joint ventures profit. (RR 10-
2. Should involve joining/pooling of resources by 2012)
licensed local contracts; that is, licensed as
general contactor the Philippine Contractors Tax Treatment of Corporate Venturer Share and
Accreditation Board (PCAB) of the Department Individual Co-venturer Share Distinguished
of Trade and Industry (DTI);
CORPORATE INDIVIDUAL CO-
3. The local contractors are engaged in VENTURER VENTURER
construction business; and Taxable Joint Venture
The respective share The respective share
4. The joint venture itself must likewise be duly in the joint venture in the joint venture
licensed as such by the Philippines Contractors profit is considered as profit is considered as
Accreditation Board (PCAB) of the Department dividend income dividends income
of trade Industry (DTI). received by a DC from received by an
a DC. Hence, it shall be individual taxpayer
Joint Ventures Involving Foreign Contractors treated as inter- from a DC.
corporate dividend Consequently, it shall
Joint ventures involving foreign contractors may which is tax exempt. be subject to 10% final
also be treated as a non-taxable corporation only if withholding tax.
the member foreign contractor is:
NOTE: This applies if
1. Covered by a special license as contractor by the the venturer is a RC/
PCAB of the DTI; and NRC/ RA.
Taxable Joint Venture
2. The construction project is certified by the
The respective share The respective share
appropriate Tendering Agency (government
in the joint venture in the joint venture
office) that the project is a foreign financed or
profit shall be included profit shall be subject
internationally-funded project and that
in the computation of to creditable
international bidding is allowed under the
the corporate withholding tax.
Bilateral Agreement entered into by and
venturer’s taxable Consequently, the
between the Philippine Government and the
income subject to same be included in
foreign or international financing institution
normal corporate the computation of the
pursuant to the implementing rules and
income tax of 30%. individual taxpayer’s
regulations of Republic Act No. 4566 otherwise
taxable income.
known as Contractor’s License Law.
(Tabag, 2015)

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Summary of Changes in Corporate Tax Rates under R.A. No. 11534 or CREATE Act

TYPE OF CORPORATION CIT RATE MCIT RATE

25% Beginning July 1% From July 1,
1, 2020 2020 to
June 30, 2023
Domestic Corporations
2% Beginning July
1, 2023

For corporations with net 20% Beginning July 1% From July 1,

taxable income not exceeding P 1, 2020 2020 to
5 Million AND total assets not June 30, 2023
exceeding P100 Million, 2%
excluding the land on which the Beginning July
particular business entity’s 1, 2023
office, plant, equipment are
situated.

1% From July 1, Not applicable

2020 to
Proprietary Educational June 30, 2023
Institutions and Hospitals
10% Beginning July
1, 2023

25% Beginning July 1% From July 1,

1, 2020 2020 to
June 30, 2023
Resident Foreign Corporations
2% Beginning July
1, 2023

Offshore Banking Units (OBUs) 25% Beginning 1% From July 1,

January 1, 2021 2020 to
NOTE: OBUs shall now be taxed as June 30, 2023
RFC upon effectivity of the
CREATE 2% Beginning July
1, 2023

1% From July 1,
25% Beginning 2020 to
Regional Operating
January 1, 2022 June 30, 2023
Headquarters (ROHQs)

2% Beginning July
1, 2023

UNIVERSITY OF SANTO TOMAS 198

2023 GOLDEN NOTES
 II. NATIONAL TAXATION

Non-Resident Foreign 25% Beginning Not applicable

Corporations January 1, 2021

(RR No. 5-2021)

199 UNIVERSITY OF SANTO TOMAS

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e) PERIOD WITHIN WHICH TO FILE INCOME
TAX RETURN OF INDIVIDUALS AND 2. Individual taxpayer receiving purely
CORPORATIONS compensation income, regardless of amount,
from only one employer in the Philippines for
INDIVIDUAL RETURN the calendar year, the income tax of which has
been withheld correctly by said employer
Persons Required to File ITR (Substituted Filing);

GR: The following individuals are required to file an 3. An individual whose sole income has been
income tax return: subjected to final withholding tax; and

1. Every Filipino citizen residing in the 4. A minimum wage earner or an individual who
Philippines; is exempt from income tax. (Sec. 51(A)(2),
NIRC)
2. Every Filipino citizen residing outside the
Philippines, on his income from sources within NOTE: Individuals not required to file an income tax
the Philippines; return may nevertheless be required to file an
information return. (Sec. 51(A)(3), NIRC)
3. Every alien residing in the Philippines, on
income derived from sources within the Q: Mr. C is employed as a Chief Executive Officer
Philippines; and of MNO Company, receiving an annual
compensation of P10M, while Mr. S is a security
4. Every non-resident alien engaged in trade or guard in the same company earning an annual
business or in the exercise of profession in the compensation of P200,000. Both of them source
Philippines. (Sec. 51(A)(1), NIRC) their income only from their employment with
MNO Company. (2019 Bar)
The following persons are also required to file ITR:
a. At the end of the year, is Mr. C personally
1. A citizen of the Philippines and any alien required to file an annual income tax
individual engaged in business or practice of return?
profession within the Philippines, regardless of b. How about Mr. S? Is he personally
the amount of gross income; required to file an annual income tax
return?
2. An individual deriving compensation
concurrently from two or more employers at A:
any time during the taxable year; and a. NO. Individuals receiving purely
compensation income from a single
3. An individual whose pure compensation employer, which has been correctly
income derived from sources within the withheld are no longer required to file their
Philippines exceeds Two Hundred Fifty annual ITR.
thousand pesos (P250,000). (RMC 50-2018)
b. NO. Individuals receiving purely
XPNS: The following individuals shall not be compensation income from a single
required to file an income tax return: employer, which has been correctly
withheld are no longer required to file their
1. An individual whose taxable income does not annual ITR.
exceed Two Hundred Fifty thousand pesos
(P250,000);

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 II. NATIONAL TAXATION
Special Rules on Filing ITR and pay estimated income tax every quarter as
follows:
1. ITR of married individuals – Married
individuals, whether citizens, resident or non- QUARTER ITR DEADLINE
resident aliens, who do not derive income
First Quarter return May 15
purely from compensation, shall file a return for
the taxable year to include the income of both Second Quarter
August 15
spouses. return
Where it is impracticable to file one return, each Third Quarter return November 15
spouse may file a separate return of income, but
Final adjusted April 15 of the
the returns so filed shall be consolidated by the
(annual) return succeeding year
Bureau for purposes of verification for the
taxable year. (Sec. 51(D), NIRC)
2. Final Withholding Tax on Passive Income
(Manual Filing)
2. Income of unmarried minors/children –
GR: The income of unmarried minors derived
a. Quarterly return – filed and the payment
from property received from a living parent
made not later than the last day of the
shall be included in the return of the parent.
month following the close of the quarter
during which withholding was made.
XPNs:
1. When the donor’s tax has been paid on such
b. Annual Information Return – filed on or
property; or
before January 31 of the year following the
2. When the transfer of such property is
calendar year in which income payments
exempt from donor’s tax. (Sec. 51(E), NIRC)
subjected to final withholding taxes were
paid or accrued.
3. Filing a return for a disabled taxpayer – If the
taxpayer is unable to make his own return, the
Place to File ITR
return may be made by his:
a. Duly authorized agent;
Except in cases where the Commissioner otherwise
b. Representative;
permits, the return shall be filed with any of the
c. Guardian; or
following:
d. Other person charged with the care of his
1. Authorized agent bank,
person or property, the principal and the
2. Revenue district officer,
representative or guardian assuming the
3. Collection agent,
responsibility of making the return and
4. Duly authorized city treasurer where he is
incurring penalties provided for erroneous,
legally residing, or
false or fraudulent returns. (Sec. 51(F),
5. Office of the Commissioner.
NIRC)
For non-resident citizens, the return shall be filed
Period to File ITR
with the
1. Philippine Embassy, or
1. Basic Tax – The return of any individual
2. nearest Philippine Consulate, or
required to file the same shall be filed on or
3. be mailed directly to the CIR. (Sec. 51(B), NIRC)
before April 15th day of each year covering
income for the preceding taxable year.
However, individuals who are self-employed or
in practice of a profession are required to file

201 UNIVERSITY OF SANTO TOMAS

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 TAXATION LAW
CORPORATE RETURNS 2. For final return – on or before April 15, or the
15th of the 4th month following the close of the
Quarterly Income Tax fiscal year.

Every corporation shall file in duplicate a quarterly Place to File ITR

summary declaration of its gross income and
deductions on a cumulative basis for the preceding Except in cases where the Commissioner otherwise
quarter or quarters. The tax so computed shall be permits, the return shall be filed with any of the
decreased by the amount of tax previously paid or following:
assessed during the preceding quarters. 1. Authorized agent bank;
2. Revenue District Officer;
3. Collection Agent; or
Final Adjustment Return 4. Duly authorized city of municipal Treasurer in
which such person has his legal residence or
Every corporation liable to tax under Sec. 27 of the principal place of business, or if there be no
NIRC shall file a final adjustment return covering the legal residence or principal place of business,
total taxable income for the preceding calendar or with the Office of the Commissioner.
fiscal year.
Return of Corporations Contemplating
Dissolution or Reorganization
If the sum of the quarterly return is not equal to the
total tax due, the corporation shall either:
Within thirty (30) days after the adoption of a
1. Pay the balance; resolution or plan for its dissolution, or for the
2. Carry over the excess credit perpetually; or liquidation of the whole or any part of its capital
3. Be credited or refunded with the excess stock, including a corporation which has been
amount. notified of possible involuntary dissolution by the
SEC of for its reorganization, shall render a correct
NOTE: In case the corporation is entitled to a tax return to the CIR, verified under oath, setting forth
credit or refund of the excess estimated quarterly the items of such resolution or plan and such other
income taxes paid, the excess amount shown on its information. (Sec. 52(C), NIRC)
final adjustment return may be carried over and
credited against the estimated quarterly income tax Return on Capital Gains Realized from Sale of
liabilities for the taxable quarters of the succeeding Shares of Stock and Real Estate
taxable years.
1. Shares of stock
Once the option to carry-over and apply the excess a. Ordinary Return – 30 days after each
quarterly income tax against income tax due for the transaction
taxable quarters of the succeeding taxable years has b. Final Consolidated Return – on or before
been made, such option shall be considered April 15 of the following year
irrevocable for that taxable period and no
application for cash refund or issuance of a tax Q: I-Remit is a domestic corporation listed with
credit certificate shall be allowed therefor. (Sec. 76, the Philippine Stock Exchange. JPSA Global
NIRC) Services Co., JTKC Equities, Inc., and Surewell
Equities, Inc., all constituted under the laws of
Period to File ITR the Philippines, are shareholders of I-Remit and
have constituted the latter as their attorney-in-
1. For quarterly declarations – within 60 days fact for their claim for refund. I-Remit offered to
following the close of the quarter. the public 140,604,000 shares by way of an
initial public offering at the offer price of P4.68

UNIVERSITY OF SANTO TOMAS 202

2023 GOLDEN NOTES
 II. NATIONAL TAXATION
each share. Of these shares, 107,417,000 shares On this score, the second paragraph of Sec. 127(B)
were offered in primary offering by I-Remit as precisely provides for the types of sales involved:
the issuing corporation, and 33,187,000 shares sale by the issuing corporation in primary offering,
were offered in secondary offering by JTKC, and sale by each of the corporation's shareholders
JPSA, and Surewell, as selling shareholders of in secondary offering. Further, the distinction is
petitioner. In compliance with Sec. 127(B) readily apparent from a reading of Sec. 127 (C) of
requiring payment of tax in accordance with the the NIRC, which expressly provides for a separate
"shares of stock sold, bartered, exchanged or time and manner of payment of tax in primary and
otherwise disposed" in proportion to the "total secondary offerings as well as the party liable to pay
outstanding shares of stock after the listing," I- the corresponding tax. (I-Remit, Inc v. CIR, G.R. No.
Remit paid the tax in the amount of 209755, 9 Nov. 2020, J. Hernando)
P26,321,069.00. The dividend used by I-Remit in
2. Real Property – 30 days following each sale or
arriving at the corresponding tax rate of 4% was
other disposition (Sec. 51(C)(2), NIRC)
140,604,000, which was the total amount of
shares sold to the public in both primary and
secondary offerings. The divisor used was f) SUBSTITUTED FILING
562,417,000, which was obtained after adding
50,000 treasury shares to I-Remit's 562,367,000 Substituted filing applies only if all of the following
outstanding shares of stock. I-Remit filed a claim requirements are present:
for refund. I-Remit believed that there was an
overpayment in the amount of P13,160,534.06 1. The employee received purely
resulting from the use of the 4% tax rate, which compensation income (regardless of
was in turn due to the addition of the 50,000 amount) during the taxable year;
treasury shares to the 562,367,000 outstanding
shares of stock. By excluding the 50,000 2. The employee received the income from
treasury shares from the divisor, the resulting only one employer in the Philippines
tax rate would only be 2%. I-Remit filed a during the taxable year;
Petition for Review before the CTA after the CIR
failed to act on the claim for refund and in order 3. The amount of tax due from the employee
to toll the running of the prescriptive period at the end of the year equals the amount of
arguing that the treasury shares should be tax withheld by the employer;
excluded from the divisor. I-Remit stated that
the tax under Sec. 127(B) should be based on the 4. The employee’s spouse also complies with
total shares sold in primary and secondary all 3 conditions stated above;
offerings in proportion to the total outstanding
shares of stock of the corporation after listing. Is 5. The employer files the annual information
the argument of I-Remit valid and therefore return (BIR Form No. 1604-CF); and
entitles it to refund?
6. The employer issues BIR Form No. 2316 to
A: YES. The tax on sale of shares of stock in closely each employee.
held corporations sold or exchanged through initial
public offering under Sec. 127(B) is separately Q: Indicate whether each of the following
computed as to shares offered in primary and individuals is required or not required to file an
secondary offerings. income tax return:

Since tax is imposed on every sale of shares of stock, a. Filipino citizen residing outside the
there is a need to determine which sales are covered Philippines on his income from sources
in the sale of shares through initial public offering. outside the Philippines.

203 UNIVERSITY OF SANTO TOMAS

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 TAXATION LAW
b. Resident alien on income derived from be assessed, or a proceeding in court for the
sources within the Philippines. collection of such tax may be filed without
assessment, at any time within ten (10) years after
c. Resident citizen earning purely the discovery of the falsity, fraud or omission. (Sec.
compensation income from two employers 222(A), NIRC)
within the Philippines, whose income taxes
have been correctly withheld. Refer to discussion on “False Returns vs.
Fraudulent Returns vs. Non-Filing of Returns” – p.
d. Resident citizen who falls under the 285
classification of minimum wage earners.
7. WITHHOLDING TAX
e. An individual whose sole income has been
subjected to final withholding tax. (2015
a) CONCEPT
BAR)

A: Withholding tax is a method of collecting income tax

in advance from the taxable income of the income
a. NOT REQUIRED. The income of a non-resident earner. Thus, if the income is exempt from income
Filipino citizen is taxable only on income tax, no withholding of tax is required to be made by
sourced within the Philippines. Accordingly, his the payor of such income. (Mamalateo, 2019)
income from sources outside the Philippines is
exempt from income tax. (Sec. 51(A)(1)(b), NIRC) In the operation of the withholding tax system, the
payee is the taxpayer– the person on whom the tax
b. REQUIRED. A resident alien is taxable only on is imposed, while the payor, a separate entity, acts
income derived from sources within the no more than an agent of the government for the
Philippines. (Sec. 51(A)(1)(c), NIRC) collection of the tax in order to ensure its payment.

c. REQUIRED. A resident citizen who is earning Taxes imposed or prescribed by the NIRC are to be
purely compensation income from two deducted and withheld by the payor-corporations
employers should file income tax return. If the and/or persons for the former to pay the same
compensation income is received concurrently directly to the BIR. Hence, the taxes are collected
from two employers during the taxable year, the practically at the same time the transaction is made
employee is not qualified for substituted filing. or when the taxable transaction occurs. It is taxation
at source. (Domondon, 2013)
d. NOT REQUIRED. Under the law, all minimum
wage earners in the private and public sector NOTE: The duty to withhold is different from the
shall be exempt from payment of income tax. duty to pay income tax. Indeed, the revenue officers
(Sec. 51(A)(2)(d), NIRC in relation to R.A. No. generally disallow the expenses claimed as
9504) deductions from gross income, if no withholding tax
e. NOT REQUIRED. Under the law, an individual as required by law or regulations was withheld and
whose sole income has been subjected of final remitted to the BIR within the prescribed dates.
withholding tax pursuant to Sec. 57(A), NIRC, (Mamalateo, 2008)
need not file a return. What he received is a tax
paid income. (Sec. 51(A)(2)(c), NIRC) Purpose of the Withholding Tax System

g) FAILURE TO FILE RETURNS 1. Provide the taxpayer a convenient manner to

meet his probable income tax liability;
In the case of a false or fraudulent return with intent
to evade tax or of failure to file a return, the tax may

UNIVERSITY OF SANTO TOMAS 204

2023 GOLDEN NOTES
 II. NATIONAL TAXATION
2. Ensure the collection of the income tax which jurisdiction over the place where the business
would otherwise be lost or substantially is located.
reduced through the failure to file the
corresponding returns; 2. Deduct and withhold – To deduct tax from all
money payments subject to withholding tax.
3. Improve the government’s cash flow; and
3. Remit the tax withheld – To remit tax withheld
4. Minimize tax evasion, thus resulting in a more at the time prescribed by law and regulations.
efficient tax collection system. (CREBA vs.
Romulo, G.R. No. 160756, 09 Mar. 2010) 4. File Annual Return – To file the corresponding
Annual Information Return at the time
Withholding Agent prescribed by law and regulations.

A withholding agent is a separate entity acting no 5. Issue Withholding Tax Certificates – To furnish
more than an agent of the government for the Withholding Tax Certificates to recipient of
collection of tax in order to ensure its payments. income payments subject to withholding.

A withholding agent is explicitly made personally Persons Required to Withhold Taxes

liable under Sec. 251 of the NIRC for the payment of
the tax required to be withheld, in order to compel The withholding taxes shall be withheld by the
the withholding agent to withhold the tax under any person having control over the payment and who at
and all circumstances. In effect, the responsibility the same time claims the expenses. The following
for the collection of the tax as well as the payment persons are constituted as withholding agents:
thereof is concentrated upon the person over whom
the Government has jurisdiction. (Filipinas 1. Juridical person, whether or not engaged in
Synthetic Fiber Corporation v. CA, G.R. Nos. 118498 & trade or business;
124377, 12 Oct. 1999)
2. Individuals, with respect to payments made in
NOTE: In applications for refund, the withholding connection with his trade or business;
agent is considered a taxpayer because if he does
not pay, the tax shall be collected from him. (CIR v. 3. Individual buyers, whether or not engaged in
P&G, G.R. No. L-66838, 2 Dec. 1991) trade or business insofar as taxable sale,
exchange or transfer of real property is
The withholding agent is liable for the correct concerned; and
amount of the tax that should be withheld. The
withholding agent is, moreover, subject to and liable 4. All government offices including GOCCs as well
for deficiency assessments, surcharges and as provincial, city and municipal governments
penalties should the amount of the tax withheld be and barangay (Sec. 2.57.3, RR No. 2-1998)
finally found to be less than the amount that should
have been withheld under the law. Given this Withholding Agent where the Employer is the
responsibility, a withholding agent can validly claim Government of the Philippines
for tax refund.
If the employer is the Government of the
Duties of a Withholding Agent Philippines or any of its political subdivision,
agency, or instrumentality thereof, the return of the
1. Register – To register within ten (10) days after amount deducted and withheld upon any wage
acquiring such status with the RDO having shall be made by the officer or employee having
control of the payment of such wage, or by any

205 UNIVERSITY OF SANTO TOMAS

FACULTY OF CIVIL L AW
 TAXATION LAW
officer or employee duly designated for the withholding tax due. (RCBC vs. CIR, G.R. No. 170257,
purpose. (Sec. 82, NIRC) 07 Sept. 2011)

Period to Withhold Taxes b) CREDITABLE vs. FINAL WITHHOLDING

TAXES
It arises at the time an income payment is paid or
payable or accrued or recorded as an expense or Final Withholding Tax (FWT)
asset, whichever is applicable in the payor’s books,
whichever comes first. (Sec. 2.57.4, RR No. 2-1998 as Final withholding tax shall no longer form part of
amended) the gross income to be reported in the ITR. The tax
withheld, being a final tax, represents the true and
NOTE: The term “payable” refers to the date the actual tax due on the income. (Ingles, 2021)
obligation becomes due, demandable or legally
enforceable. (Sec. 2.57.4, RR No. 2-1998 as amended) Principles relative to FWT

Consequences for Failure to Withhold 1. The amount of tax withheld is final and full.

1. Liable for surcharges and penalties; 2. The liability for payment of the tax rests
primarily on the withholding agent as payor.
2. Liable upon conviction to a penalty equal to the
total amount of the tax not withheld, or not 3. In case he fails to withhold, the withholding
accounted for and remitted; and (Sec. 251, agent will be liable for the deficiency.
NIRC)
4. The payee is not required to file any income tax
3. Any income payment which is otherwise return for the particular income.
deductible from the payor’s gross income will
not be allowed as a deduction if it is shown that 5. The finality of the withheld tax is limited on that
the income tax required to be withheld is not particular income and will not extend to the
paid to the BIR. (Sec. 2, RR No. 18-2013) payee’s other tax liability. (Ibid.)

Q: In case of failure by the withholding agent to Creditable Withholding Tax (CWT)

perform his duty to withhold and remit tax, is
the taxpayer absolved of liability? Income subject to creditable withholding tax shall
form part of the gross income to be reported in the
A: The liability of the withholding agent is ITR of the recipient. Tax already withheld shall then
independent from that of the taxpayer. The former be claimed as tax credit. (Ingles, 2021)
cannot be made liable for the tax due because it is
the latter who earned the income subject to Principles relative to CWT
withholding tax. The withholding agent is liable only
insofar as he failed to perform his duty to withhold 1. Taxes withheld on certain income payments
the tax and remit the same to the government. The are intended to equal or at least approximate
liability for the tax, however, remains with the the tax due of the payee on said income.
taxpayer because the gain was realized and received However, the subsequent remittal does not
by him. xxx (The taxpayer) remains liable for the remover the burden on the income recipient.
payment of tax as (he) shares the responsibility of He still has to file a tax credit.
making certain that the tax is properly withheld by
the withholding agent, so as to avoid any penalty 2. Creditable tax must be withheld at source, but
that may arise from the non-payment of the should still be included in the tax return of the

UNIVERSITY OF SANTO TOMAS 206

2023 GOLDEN NOTES
 II. NATIONAL TAXATION
recipient. Any excess shall be refunded to and As to the effect of the tax withheld
any deficiency shall be paid by the tax payer.

3. The liability to withhold arises upon the

accrual, not upon the actual remittance. The
The tax withheld can
purpose of the withholding tax is to compel the
be claimed as a tax The tax withheld
agent to withhold under all circumstances.
credit or may be cannot be claimed as
(Ingles, 2015)
deducted from the tax tax credit.
due or payable.
Creditable Withholding Tax and Final
Withholding Tax Distinguished

CWT FWT
As to income subject of the system As to filing of ITR
1. Compensation If the only source of
Income income is subject to
2. Professional/talen final tax, the earner
t fees may no longer file an
1. Certain passive
3. Rentals ITR. However, with the
incomes The earner is required
4. Cinematographic new income tax forms
2. Fringe benefits to file an ITR.
film rentals and (RR No. 2-2014),
other payments taxpayers need to
5. Income payments declare those income
to certain subjected to final tax in
contractors their ITR.
As to whether or not income should be
reported as part of the gross income Kinds of CWT

1. 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.
The recipient may not
report the said income The Secretary of Finance may, upon the
in his gross income recommendation of the Commissioner, require
The income is required
because the tax the withholding of tax on the items of income
to be included in the
withheld constitutes payable to natural or juridical persons residing
gross income in ITR.
final and full in the Philippines, by payor-
settlement of the tax corporation/persons as provided for by law, at
liability. the rate of not less than one percent (1%) but
not more than thirty-two percent (32%),
provided, that, beginning January 1, 2019, the
rate of withholding shall not be less than one
percent (1%) but not more than fifteen percent
(15%) of the income payment, which shall be

207 UNIVERSITY OF SANTO TOMAS

FACULTY OF CIVIL L AW
 TAXATION LAW
credited against the income tax liability of the
taxpayer for the taxable year. (Sec. 57(B), NIRC) C. VALUE-ADDED TAX (VAT)

2. Withholding tax on compensation – applies to

all employed individuals whether citizens or
Definition
aliens deriving income from compensation for
services rendered in the Philippines.
VAT is a business tax imposed and collected on
every:
The employer is considered the withholding
1. sale, barter, or exchange of goods or properties
agent. Every employer making payments of
(real or personal);
wages shall deduct from and withhold tax,
2. lease of goods or properties (real or personal);
except for MWEs. Employer shall be liable if he
3. rendition of services, all in the course of trade
fails to withhold and remit. (Sec. 79(A), NIRC)
or business; and
4. importation of goods (whether or not in the
Nature of Withholding Tax on the Income of
course of trade or business).
Government Employees

It is an indirect tax that may be shifted or passed on

The withholding tax on compensation income is
to the buyer, transferee or lessee of goods,
creditable in nature. Thus, pursuant to Sec.
properties or services. (CIR v. SEAGATE Technology
79(C)(2) of the NIRC, the amount deducted and
Philippines, G.R. No. 153866, 11 Feb. 2005)
withheld during any calendar year, shall be allowed
as a credit to the recipient of such income against
The seller is the one statutorily liable for the
the tax imposed under Sec. 24(A).
payment of the tax but the amount of the tax may be
shifted or passed on to the buyer, transferee or
Obligation of an Employer Required to Deduct
lessee of the goods, properties or services. (Sec.
and Withhold Tax
4.105-2, RR No. 16- 2005)

An employer shall furnish to each employee in

NOTE: This rule shall likewise apply to existing
respect of his employment during the calendar year,
contracts of sale or lease of goods, properties or
on or before January 31 of the succeeding year, or if
services at the time of the effectivity of R.A. No.
his employment is terminated before the close of
7716. (Sec. 105, NIRC) However, in the case of
such calendar year, on the same day of which the
importation, the importer is the one liable for the
last payment of wages is made, a written statement
VAT. (Sec. 107, NIRC)
confirming the wages paid by the employer to such
employee during the calendar and the amount of tax
Q: Is VAT regressive?
deducted and withheld in respect of such wages.

A: YES. The principle of progressive taxation has no

He shall also submit to the Commissioner on or
relation with the VAT system in as much as the VAT
before January 31 of the succeeding year, an annual
paid by the consumer or business for every goods
information return containing a list of employees,
bought or services enjoyed is the same regardless
the total amount of compensation income of each
of income. In other words, the VAT paid eats the
employee, the total amount of taxes withheld
same portion of an income, whether big or small.
therefrom during the year, accompanied by copies
The disparity lies in the income earned by a person
of the statement referred to in the preceding
or profit margin marked by a business, such that the
paragraph, and such other information as may be
higher the income or profit margin, the smaller the
deemed necessary.
portion of the income or profit that is eaten by VAT.
A converse, the lower the income or profit margin,
the bigger the part that the VAT eats away. At the

UNIVERSITY OF SANTO TOMAS 208

2023 GOLDEN NOTES
 II. NATIONAL TAXATION
end of the day, it is really the lower income group Tax on Consumption
or businesses with low-profit margins that is
always hardest hit. (ABAKADA Guro v. Ermita, G.R. Every sale of goods, properties or services at the
No. 168056, 01 Sept. 2005) levels of manufacturers or producers and
distributors is subject to VAT. However, the tax
Q: Is VAT a withholding tax? burden rests on the final consumers. (Mamalateo,
2014)
A: NO. Indirect taxes, like VAT and excise tax, are
different from withholding taxes. To distinguish, in Elements of a VATable Transaction
indirect taxes, the incidence of taxation falls on one
person but the burden thereof can be shifted or 1. It must be done in the ordinary course of trade
passed on to another person. On the other hand, in or business;
withholding taxes, the incidence and burden of
taxation fall on the same entity, the statutory 2. There must be a sale, barter, exchange, lease of
taxpayer. The burden of taxation is not shifted to the goods or properties, or rendering of service in
withholding agent who merely collects, by the Philippines; and
withholding, the tax due from income payments to
entities arising from certain transactions and remits 3. It is not VAT-exempt or VAT zero-rated.
the same to the government (Asia International
Auctioneers, Inc., v. CIR, G.R. No. 179115, 26 Sept., Absence of one element will not make the
2012) transaction subject to VAT. (Ingles, 2021)

1. CONCEPT AND ELEMENTS OF VATABLE Sale of Goods or Properties

TRANSACTIONS
1. Those held for sale to customers in the ordinary
course of trade or business;
Tax on Value Added
2. Those held for lease in the ordinary course of
trade or business; and
VAT is a tax on value added of a taxpayer arising
3. Those used in the trade or business of the seller
from the sales of goods, properties or services
(as it is incidental to the taxpayer’s main
during the quarter. “Value added” is the difference
business).
between the total sales of the taxpayer for the
taxable quarter subject to VAT and his total
Output tax shall be recognized by the seller and
purchases for the same period subject also to value
input tax shall accrue to the buyer at the time of the
added tax. (Mamalateo, 2014)
execution of the instrument of sale (at the time of
consummation of sale) Payments that are
Sales Tax
subsequent to “initial payments” shall no longer be
subject to output VAT. (RR No. 4–2007)
VAT is a tax on the taxable sale, barter or exchange
of goods, properties or services. A barter or
exchange has the same tax consequence as a sale. A
sale may be an actual or deemed sale, or an export
sale or local sale. (Mamalateo, 2014) The buyer is
informed that the price includes VAT and it is shown
in the official receipt/sales invoice.

209 UNIVERSITY OF SANTO TOMAS

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 TAXATION LAW
Summary of Taxability of Sale of Real Properties

TRANSACTION TAX TREATMENT

Real properties held primarily for sale to customers, in
general 12% VAT

Residential lot with gross selling price exceeding

*P1,500,000 (seller is a real estate dealer or developer) 12% VAT

Residential lot with gross selling price not exceeding

VAT-exempt, not subject to percentage
*P1,500,000 (seller is a real estate dealer or developer)
tax

Residential house and lot or other residential dwellings

exceeding *P2,500,000 (seller is a real estate dealer or 12% VAT
developer)

Residential house and lot or other residential dwellings not

exceeding *P2,500,000 (seller is a real estate dealer or VAT-exempt, not subject to percentage
developer) tax

Not subject to VAT or OPT; may be

Residential house and/or lot by a seller not engaged in subject to CGT, except sale of principal
business residence, which may be exempt
subject to certain conditions

Commercial place or lot (seller uses property in business) 12% VAT

Real property used in business, taxpayer is not engaged in 12% VAT (incidental transaction)
dealing with real estate

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2023 GOLDEN NOTES
 II. NATIONAL TAXATION
Price Index Values The term "fair market value" shall mean whichever
is the higher of:
AMOUNT IN ADJUSTED 1. The fair market value as determined by the
SECTION PESOS THRESHOLD Commissioner (zonal value), or
(2005) AMOUNTS 2. The fair market value as shown in schedule of
Sec. 109(P) 1,500,000 1,919,500 values of the Provincial and City Assessors (real
Sec. 109(P) 2,500,000 3,199,200 property tax declaration)
(RR. No.16-2011)
However, in the absence of zonal value, gross selling
NOTE: RR No. 13-2018 clarified that the thresholds price refers to the market value shown in the latest
to be used until December 31, 2020 are the real property tax declaration or the consideration,
thresholds as adjusted in 2011 using the 2010 whichever is higher.
Consumer
Allowable Deductions from Gross Selling Price
Beginning January 1, 2021, the VAT exemption shall
only apply to sale of real properties not primarily In computing the taxable base during the month or
held for sale to customers or held for lease in the quarter, the following shall be allowed as
ordinary course of trade or business, sale of real deductions from gross selling price:
property utilized for socialized housing as defined
by R.A. No. 7279, sale of house and lot, and other 1. Discounts
residential dwellings with selling price of not more
than two million pesos (P2,000,000). (Sec. 109(P), a. Determined and granted at the time of sale;
NIRC) b. Which are expressly indicated in the
invoice;
Tax Base c. The amount thereof forming part of the
gross sales duly recorded in the books of
The value-added tax rate is 12% on the gross selling accounts;
price or gross value in money of the good or d. The grant of which is not dependent upon
properties sold, bartered or exchanged, such tax to the happening of a future event; and
be paid by the seller or transferor. (Sec. 106(A),
NIRC) 2. Sales returns and allowances for which a proper
credit or refund was made during the month or
Gross Selling Price quarter to the buyer for sales previously
recorded as taxable sales. (Sec. 106(D), NIRC)
It means the total amount of money or its equivalent
which the purchaser pays or is obligated to pay to Meaning of “In the Course of Trade or Business”
the seller in consideration of the sale, barter or
exchange of goods or properties, excluding the The phrase “in the course of trade or business”
value-added tax. The excise tax, if any, on such goods means the regular conduct or pursuit of a
or properties shall form part of the gross selling commercial or an economic activity, including
price. (Sec. 106(A)(1), NIRC) transactions incidental thereto, by any person,
regardless of whether or not the person engaged
Gross Selling Price in Sale or Exchange of Real therein is a non-stock, non-profit private
Property organization (irrespective of the disposition of its
net income and whether or not it sells exclusively to
It is the consideration stated in the sales document members or their guests) or government entity.
or the fair market value whichever is higher. (Sec. 105(3), NIRC)

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Transaction that are undertaken incidental to the for VAT regardless of the fact that there was no
pursuit of a commercial or economic activity are profit realized from the sale.
considered as entered into in the course of trade or
business. (Mamalateo, 2014) IMPORTATION OF GOODS

Conditions under “in the Ordinary Course of Importation

Trade or Business” (C-R)
It refers to an act of bringing goods and
1. Commercial or economic activity – It implies merchandise into a country (Philippines) from a
that a transaction is conducted for profit; and foreign country.

2. Regularity or habituality in the action – There shall be levied, assessed and collected on
Regularity involves more than one isolated every importation of goods a value-added tax
transaction and involves repetition and equivalent to 12% based on the total value used by
continuity of action. (Ingles, 2018) the Bureau of Customs in determining tariff and
customs duties, plus customs duties, excise taxes, if
XPNs: any, and other charges, such tax to be paid by the
importer prior to the release of such goods from
a. Non-resident aliens who perform services customs custody: Provided, that where the customs
in the Philippines are deemed to be making duties are determined on the basis of the quantity or
sales in the course of trade or business, volume of the goods, the value-added tax shall be
even if the performance of services is not based on the landed cost plus excise taxes, if any.
regular; and (Sec. 4.105-3, RR No. 16-2005) (Sec. 107(A), NIRC)

b. Importations are subject to VAT whether in VAT is imposed on goods brought into the
the course of trade or business or not. Philippines, whether for use in business or not,
except those specifically exempted under Sec.
Q: Masarap Kumain, Inc. (MKI) is a Value-Added 109(1) of the NIRC.
Tax (VAT)-registered company which has been
engaged in the catering business for the past 10 Rationale: This is to protect our local or domestic
years. It has invested a substantial portion of its goods or articles and to regulate the entry or
capital on flat wares, table linens, plates, chairs, introduction of foreign articles to our local market.
catering equipment, and delivery vans. MKI sold
its first delivery van, already 10 years old and Tax Base
idle, to Magpapala Gravel and Sand Corp.
(MGSC), a corporation engaged in the business GR: The tax base shall be based on the total value
of buying and selling gravel and sand. The used by the BOC in determining tariff and customs
selling price of the delivery van was way below duties plus customs duties, excise taxes, if any, and
its acquisition cost. Is the sale of the delivery van other charges to be paid by the importer prior to the
by MKI to MGSC subject to VAT? (2014 BAR) release of such goods from customs custody.
(Transaction value)
A: YES. For VAT purposes, a transaction “in the
course of trade or business” includes “transactions XPN: In case the valuation used by the BOC in
incidental thereto.” In the course of business, MKI computing customs duties is based on volume or
bought and eventually sold the delivery van. Prior to quantity of the imported goods, the landed cost shall
the sale, the motor vehicle was used as part of MKI’s be the basis for computing VAT.
property, plat, and equipment. Therefore, the sale of
the delivery van is an incidental transaction made in
the course of MKI’s business which should be liable

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 II. NATIONAL TAXATION
Landed Cost goods, superior to all charges/or liens, irrespective
of the possessor of said goods. (Sec. 107(B), NIRC)
It consists of the invoice amount, customs duties,
freight, insurance and other charges. If the goods Q: Anshari, an alien employee of Asian
imported are subject to excise tax, the excise tax Development Bank (ADB) who is retiring soon
shall form part of the tax base. has offered to sell his car to you, which he
imported tax-free for his personal use. The
NOTE: The same rule applies to technical privilege of exemption from tax is recognized by
importation of goods sold by a person located in a tax authorities. If you decide to purchase the car,
Special Economic Zone to a customer located in a is the sale subject to tax? Explain. (2005 BAR)
customs territory. (Sec. 4.107-1, RR No. 16-2005)
A: YES. The sale is subject to tax. Sec. 107 (B) of the
Persons Liable for Tax on Imported Goods NIRC provides that “In case of tax-free importation
of goods into the Philippines by persons, entities or
The VAT on importation shall be paid by the agencies exempt from tax, where the goods are
importer prior to the release of such goods from subsequently, sold, transferred or exchanged in the
customs custody. Philippines to non-exempt persons or entities, the
purchasers, transferees or recipients shall be
Importer refers to any person who brings goods into considered the importer thereof, who shall be liable
the Philippines, whether or not made in the course for any internal revenue tax on such importation.
of his trade or business. It includes non-exempt
persons or entities who acquire tax-free imported SALE OF SERVICES AND USE
goods from exempt persons, entities or agencies. OR LEASE OF PROPERTIES

Beginning and End of Importation

Sale of services in the course of trade or business
includes those performed or rendered by:
Importation begins when the carrying vessel or
aircraft enters the Philippine territory with the
1. Construction and service contractors;
intention to unload therein. Importation is deemed
terminated when the duties, taxes, and other
2. Stock, real estate, commercial, customs and
charges due upon the goods have been paid or
immigration brokers;
secured to be paid at the port of entry or in case the
goods are deemed free of duties, taxes and other
3. Lessors of property, whether personal or real;
charges, when the goods have legally left the
jurisdiction of the Bureau. (Sec. 103, CMTA)
NOTE: Lease of property shall be subject to VAT
regardless of the place where the contract of
Transfer of Imported Goods by Tax-exempt
lease or licensing agreement was executed if the
Persons to Non-exempt Persons
property leased or used is located in the
Philippines.
In case of tax-free importation of goods into the
Philippines by persons, entities, or agencies exempt
VAT on rental and/or royalties payable to non-
from tax where such goods are subsequently sold,
resident foreign corporations or owners for the
transferred, or exchanged in the Philippines by a
sale of services and use or lease of properties in
non-exempt person, entities, the purchaser or
the Philippines shall be based on the contract
transferee shall be considered as an importer and
price agreed upon by the licensor and the
shall be held liable for VAT and other internal
licensee. The licensee shall be responsible for
revenue tax due on such importation. The tax due on
the payment of VAT on such rentals and/or
such importation shall constitute a lien on the

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royalties in behalf of the non-resident foreign but not limited to, biomass, solar, wind,
corporation or owner. hydropower, geothermal, ocean energy, and
other emerging energy sources using
If the advance payment constitutes a pre-paid technologies such as fuel cells and hydrogen
rental, then such payment is taxable to the fuels shall be subject to 0% VAT.
lessor in the month when received, irrespective
of the accounting method employed by the 15. Franchise grantees of electric utilities,
lessor. telephone and telegraph, radio and/or
television broadcasting and all other franchise
4. Transmission of electricity by electric grantees, except franchise grantees of radio
cooperatives; and/or television broadcasting whose annual
gross receipts of the preceding year do not
5. Persons engaged in warehousing services; exceed P10,000,000, and franchise grantees of
gas and water utilities;
6. Lessors or distributors of cinematographic
films; NOTE: Franchise grantees of radio and/or
television broadcasting whose annual gross
7. Persons engaged in milling, processing, receipts of the preceding year do not exceed
manufacturing or repacking goods for others; P10,000,000, shall have an option to be
registered as a VAT taxpayer and pay the tax
8. Proprietors, operators, or keepers of hotels, due thereon. Once the option is exercised, said
motels, rest houses, pension houses, inns, option shall be irrevocable. (Sec. 119, NIRC)
resorts, theaters, and movie houses;
16. Non-life insurance companies (except their
9. Proprietors or operators of restaurants, crop insurances), including surety, fidelity,
refreshment parlors, cafes and other eating indemnity and bonding companies; and
places, including clubs and caterers;
17. Similar services regardless of whether or not
10. Dealers in securities; the performance thereof calls for the exercise or
use of the physical or mental faculties.
11. Lending investors;
This shall likewise include: (SU4-LE4)
12. Transportation contractors on their transport
of goods or cargoes, including persons who 1. The Supply of scientific, technical, industrial or
transport goods or cargoes for hire and other commercial knowledge or information;
domestic common carriers by land relative to
their transport of goods or cargoes; 2. The Supply of any assistance that is ancillary
and subsidiary to and is furnished as a means of
13. Common carriers by air and sea relative to their enabling the application or enjoyment of any
transport of passengers, goods or cargoes from such property, or right as is mentioned in
one place in the Philippines to another place in subparagraph (2) or any such knowledge or
the Philippines; information as is mentioned in subparagraph
(3);
14. Sales of electricity by generation, transmission,
and/or distribution companies; 3. The Supply of services by a non-resident person
or his employee in connection with the use of
NOTE: That sale of power or fuel generated property or rights belonging to, or the
through renewable sources of energy such as, installation or operation of any brand,

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 II. NATIONAL TAXATION
machinery or other apparatus purchased from Tax base
such non-resident person;
4. The Supply of technical advice, assistance or The value-added tax rate is 12% of gross receipts
services rendered in connection with technical derived from the sale or exchange of services,
management or administration of any scientific, including the use or lease of properties. (Sec. 108
industrial or commercial undertaking, venture, (A), NIRC)
project or scheme;
The phrase “sale or exchange of services” broadly
5. The Lease or the use of or the right or privilege embraces the performance of all kinds of services in
to use any copyright, patent, design or model the Philippines for others for a fee, remuneration or
plan, secret formula or process, goodwill, consideration, regardless of whether the
trademark, trade brand or other like property performance thereof calls for the exercise of the
or right; physical or mental faculties and is not expressly
exempt from value added tax under the Tax Code or
6. The Lease or the use of, or the right to use of any special law. (Mamalateo, 2014)
industrial, commercial or, scientific equipment;
Gross Receipts
7. The Lease of motion picture films, films, tapes
and discs; and It pertains to the total amount of money or its
equivalent representing the contract price,
8. The Lease or the use of or the right to use radio, compensation, service fee, rental or royalty,
television, satellite transmission and cable including the amount charged for materials
television time. (RR 16-2005) supplied with the services and deposits and
advanced payments (1) actually or (2)
NOTE: The above list is not exclusive. constructively received during the taxable quarter
for the services performed or to be performed for
Requisites for Taxability (S-P-C-Va-N) another person, excluding VAT, except those
amounts earmarked for payment to unrelated third
1. There is a Sale or exchange of service or lease or (3rd) party or received as reimbursement for
use of property enumerated in the law or other advance payment on behalf of another which do not
similar services; redound to the benefit of the payor (service
provider).
2. The service is performed or to be performed in
the Philippines; Payment to a Third Party

3. The service is in the Course of trade of A payment is a payment to a third (3rd) party if the
taxpayer’s trade or business or profession; same is made to settle an obligation of another
person. Such obligation should be evidenced by the
4. The service is for a Valuable consideration sales invoice/official receipt issued by the said third
actually or constructively received; and party to the customer/client of the service provider.

5. The service is Not exempt under the NIRC, Advance Payment

special law or international agreement.
It is an advance payment on behalf of another if the
NOTE: Absence of any of the requisites renders the same is paid to a third (3rd) party for a present or
transaction exempt from VAT but may be subject to future obligation of said customer or client which
other percentage tax under Title V of the NIRC. obligation is evidenced by a sales invoice or official
receipt issued by the creditor (3rd party) to the
customer or client (the aforementioned another

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party) for the sale of goods or services by the former Second, VAT is imposed on “franchise grantees”. The
to the latter. word “franchise” broadly covers government grants
of a special right to do an act or series of acts of
Meaning of “Unrelated Party” public concern and is not limited to legislative
franchises. Tollway operators are, owing to the
“Unrelated party” shall not include taxpayer’s nature and object of their business, “franchise
employees, partners, affiliates (parent, subsidiary grantees.” The construction, operation, and
and other related companies), relatives by maintenance of toll facilities on public
consanguinity or affinity within the fourth (4th) civil improvements are activities of public consequence
degree, and trust fund where the taxpayer is the that necessarily require a special grant of authority
trustor, trustee or beneficiary, even if covered by an from the state.
agreement to the contrary. (Sec. 11, RR No. 04-2007)
Third, the public nature of the services rendered by
Constructive Receipt tollway operators does not exclude such services
from the vatable services. In specifically including
It occurs when the money consideration or its by way of example electric utilities, telephone,
equivalent is placed at the control of the person who telegraph, and broadcasting companies in its list of
rendered the service without restrictions by the VAT-covered businesses, Sec. 108 opens other
payor. companies rendering public service for a fee to the
imposition of VAT.
Examples:
Fourth, on the argument that toll fee is a “user’s tax”
1. Deposit in banks which are made available to
and to impose VAT on toll fees is tantamount to
the seller without restrictions.
taxing a tax, it is established that tollway fees are not
taxes. Indeed, they are not assessed and collected by
2. Issuance by the debtor of a notice to offset any
the BIR and do not go to the general coffers of the
debt or obligation and acceptance thereof by
government. Toll fees are collected by private
the seller as payment for services rendered.
tollway operators as reimbursement for the costs
and expenses incurred in the construction,
3. Transfer of the amounts retained by the payor
maintenance and operation of the tollways, as well
to the account of the contractor. (RR No. 16-
as to assure them a reasonable margin of income.
2005)
(Diaz v. Sec. of Finance, G.R. No. 193007, 19 July 2011)
Q: Are non-stock, non-profit entities liable to
Q: Are gross receipts derived from sales of
pay VAT for sale of goods and services?
admission tickets in showing motion pictures
subject to VAT?
A: YES. As long as the entity provides service for a
fee, remuneration or consideration, then the service
A: NO. The legislative intent is not to impose VAT on
rendered is subject to VAT. (CIR v. CA, G.R. No.
persons already covered by the amusement tax. The
125355, 30 Mar. 2000)
repeal by the LGC of 1991 of the Local Tax Code
transferring the power to impose amusement tax on
Q: Are toll fees collected by tollway operators
cinema/theater operators or proprietors to the
are subject to VAT?
local government did not grant nor restore the said
power to the national government nor did it expand
A: YES. First, VAT is imposed on “all kinds of
the coverage of VAT. Since the imposition of a tax is
services” When a tollway operator takes a toll fee
a burden on the taxpayer, it cannot be presumed nor
from a motorist, the fee is in effect for the latter’s use
can it be extended by implication. As it is, the power
of the tollway facilities over which the operator
to impose amusement tax on cinema/theater
enjoys private proprietary rights.

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operators or proprietors remains with the local as real properties used in trade or business. Is
government. the CIR correct?

A contrary ruling will subject cinema/theater A: NO. Applying our ruling in G.R. No. 198146
operators or proprietors to a total of 40% tax, the involving the same parties and similar issues, the
10% (now taxed at 12%) VAT being on top of the sale of the generating assets - the Masinloc,
30% (now taxed at 10%) amusement tax imposed Ambuklao-Binga and Pantabangan power plants - in
by the Local Government Code of 1991, thereby the present case is likewise not subject to VAT, since
killing the “(goose) that lays the golden egg(s).” the sale was pursuant to the mandate of PSALM
under the EPIRA to privatize NPC assets. The sale of
The “lease of motion picture films, films, tapes and the power plants is not in pursuit of a commercial or
discs” under Sec. 108 of the NIRC is not the same as economic activity but a governmental function
the showing or exhibition of motion pictures or mandated by law to privatize NPC generation assets.
films. “Exhibition” is defined as “to show or to The sale of the power plants is clearly not the same
display. x xx To produce anything in public so that it as the sale of electricity by generation companies,
may be taken in possession”. On the other hand, transmission, and distribution companies, which is
“lease” is defined as “a contract by which one subject to VAT under Sec. 108 of the NIRC. Thus, we
owning such property grants to another the right to do not find any merit in the arguments raised by the
possess, use and enjoy it on specified period of time CIR. Under the EPIRA, PSALM, as the conservator of
in exchange for periodic payment of a stipulated NPC assets, operates and maintains NPC assets and
price, referred as rent.” Thus, the legislature never manages its liabilities in trust for the national
intended to include cinema/theater operator government, until the NPC assets could be sold or
operators or proprietors in the coverage of VAT. disposed of. Thus, during its corporate life, PSALM
(CIR v. SM Prime Holdings, Inc., G.R. No. 183505, 26 has powers relating to the management of its
Feb. 2010) personnel and leasing of its properties as may be
necessary to discharge its mandate. (Power Sector
Q: Power Sectors Assets and Liabilities Assets and Liabilities Management Corporation v.
Management (PSALM), a government-owned CIR, G.R. 226556, 03 July 2019)
and controlled corporation is mandated to
manage the orderly sale, disposition, and Q: The Bureau of Internal Revenue (BIR) issued
privatization of the National Power Corporation Rvenue Memorandum Circular (RMC) No. 65-
(NPC) generation assets, real estate and other 2012 imposing Value-Added Tax (VAT) on
disposable assets, and Independent Power association dues and membership fees collected
Producer contracts with the objective of by condominium corporations from its member
liquidating all NPC financial obligations and condominium-unit owners. The RMC’s validity is
stranded contract costs in an optimal manner. challenged before the Supreme Court (SC) by the
(BIR) issued a Final Assessment Notice (FAN) condominium corporations. The Solicitor
covered by Assessment No. VT-08-00072 General, counsel for BIR, claims that association
alleging that, for taxable year ending 31 dues, membership fees, and other assessment/
December 2008, PSALM is liable to pay a charges collected by a condominium
deficiency VAT amounting to corporation are subject to VAT since they
P10,103,158,715.06, inclusive of penalties and constitute income payments or compensation
interests. PSALM filed its administrative protest for the beneficial services it provides to its
against the FAN, alleging that the privatization of members and tenants. On the other hand, the
NPC assets is an original mandate of PSALM and lawyer of the condominium corporations argues
not subject to VAT. The CIR held that the sale of that such dues and fees are merely held in trust
electricity is subject to VAT under R.A. 9337 and by the condominium corporations exclusively
the real properties sold by PSALM are regarded for their members and used solely for
administrative expenses in implementing the

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condominium corporations’ purposes. which were being collected for services
Accordingly, the condominium corporations, do allegedly rendered "in the course of trade or
not actually render services for a fee subject to business" by ABC Village Homeowners'
VAT. Whose argument is correct? Decide. (2014 Association.
BAR)
Is Mr. X correct in stating that the association
A: THE LAWYER OF THE CONDOMINIUM dues are subject to VAT?
CORPORATIONS IS CORRECT. The association
dues, membership fees, and other A: YES. Mr. X is correct in stating that the association
assessment/charges do not constitute income dues are subject to VAT. Association dues,
payments because they were collected for the membership fees, and other assessments and
benefit of the unit owners and the condominium charges are exempt from VAT but only to the extent
corporation is not created as a business entity. The of those collected on a purely reimbursement basis
collection is the money of the unit owners pooled by homeowners’ associations. In this case, the
together and will be spent exclusively for the association dues were being collected for services
purpose of maintaining and preserving the building allegedly rendered “in the course of trade or
and its premises which they themselves own and business”. Thus, the association dues collected by
possess. (First e-Bank Tower Condominium Corp., v. ABC Village Homeowners’ association are subject to
BIR, G.R. No. 125801 & 218924, 15 Jan. 2020) VAT.

When an affiliate provides funds to a taxpayer who 2. IMPACT AND INCIDENCE OF TAX
then uses the funds to pay a third party, the
transaction is not subject to VAT, as there was no
Impact and Incidence of Tax Distinguished
sale, barter, or exchange between the affiliate and
the taxpayer. The money was simply given as a dole-
An indirect tax is a tax demanded in the first
out. (CIR v. Sony Philippines, Inc., G.R. No. 178697, 17
instance from one person in the expectation and
Nov. 2010)
intention that he can shift the burden to someone
else. The impact of taxation is on the seller upon
However, if a taxpayer renders service to an affiliate
whom the tax has been imposed, while the incidence
for a fee (even if the fee is merely to reimburse
of tax is on the final consumer, the place at which the
costs), the service is subject to VAT. Thus, the
tax comes to rest. (Mamalateo, 2014)
collection of condominium corporations of
association dues and membership fees from its
VAT on Toll Way Operations
member condominium-unit owners are subject to
VAT even if receives payments for services
VAT on toll way operations cannot be deemed a tax
rendered to its affiliates in trust and on
on tax due to the nature of VAT as an indirect tax.
reimbursement-of-cost basis only, without realizing
The seller remains directly and legally liable for the
profit.
payment of VAT, but the buyer bears its burden
since the amount of VAT paid by the former is added
Q: All the homeowners belonging to ABC Village
to the selling price. Once shifted, the VAT ceases to
Homeowners' Association elected a new set of
be a tax and simply becomes part of the cost that the
members of the Board of Trustees for the
buyer must pay in order to purchase the good,
Association effective January 2019. The first
property or service. (Renato V. Diaz v. Secretary of
thing that the Board looked into is the need to
Finance, G.R. No. 193007, 19 July 2011)
increase the prevailing association dues. Mr. X,
one of the trustees, proposed an increase of
100% to account for the payment of the 12%
value-added tax (VAT) on the association dues

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 II. NATIONAL TAXATION
3. DESTINATION PRINCIPLE AND CROSS- Gainsburg remitted its payment through
BORDER DOCTRINE Citibank which converted the remitted
US$1,000 to pesos and deposited the converted
amount in the XYZ Law Offices account. What are
Definition
the tax implications of the payment to XYZ Law
Offices in terms of VAT?
The destination of the goods determines taxation or
exemption from tax. Export sales of goods are
A: The payment is subject to VAT but at a zero-rate.
subject to 0% rate while imports of goods are
The zero-rating applies because the services were
subject to 12% VAT. Exports are zero-rated because
rendered to a non-resident person who is engaged
the consumption of such goods will be made outside
in business outside the Philippines, the
of the Philippines, while imports of goods are
consideration for which was paid for in acceptable
subject to 12% VAT because they are for
foreign currency and accounted for in accordance
consumption within the Philippines. (Mamalateo,
with the BSP rules. Consequently, the law office is
2014)
entitled to claim the input tax attributable to such
zero-rated sale as a credit against its output tax or,
Q: Is the destination principle absolute?
at its option, apply for refund or issuance of a tax
credit certificate to the extent that such input tax
A: NO. The law clearly provides for an exemption to
was not utilized as a credit against output tax. (Secs.
the destination principle; that is, for a 0% VAT rate
108(B)(2), 110(A)(1) and 112, NIRC; Accenture, Inc.
for services that are performed in the Philippines,
vs. CIR, G.R. No. 190102, 11 July 2012)
paid for in acceptable foreign currency and
accounted for in accordance with the rules of BSP.
Q: SMZ Inc., is a VAT-registered enterprise
(Sec. 108(B)(2); CIR v. American Express
engaged in the general construction business.
International, Inc., G.R. No. 152609, 29 June 2005)
HP International contracts the services of SMZ,
Inc. to construct HP International’s factory
Consistent with the destination principle, the
building located in the Laguna Techno Park, a
purchases of goods and services destined for
special economic zone. HP International is
consumption within an ECOZONE should be free of
registered with the Philippine Economic Zone
VAT; hence, no input VAT should then be paid on
Authority (PEZA) as an ecozone export
such purchases. With no input VAT paid, there is
enterprise, and, as such, enjoys income tax
nothing to be refunded or credited under Sec. 112 of
holiday pursuant to the Special Economic Zone
the NIRC. (Coral Bay Nickel Corp. v. CIR, G.R No.
Act of 1995.
190506, 13 June 2016)

SMZ, Inc., files an application with the BIR for the

Q: XYZ Law Offices, a law partnership in the
VAT zero-rating of its sale of services to HP
Philippines and a VAT-registered taxpayer,
International. However, the BIR denies SMZ,
received a query by e-mail from Gainsburg
Inc.’s application on the ground that HP
Corporation, a corporation organized under the
International already enjoys income tax holiday.
laws of Delaware, but the e-mail came from
California where Gainsburg has an office.
Is the BIR correct in denying SMZ, Inc.’s
Gainsburg has no office in the Philippines and
application? Explain your answer. (2017 BAR)
does no business in the Philippines.

A: NO. All sales of goods, properties, and services

XYZ Law Offices rendered its opinion on the
made by a VAT registered supplier from the
query and billed Gainsburg US$1,000 for the
Customs Territory to an ecozone enterprise shall be
opinion.
subject to VAT, at 0% rate, regardless of the latter’s
type or class of PEZA registration. (Coral Bay Nickel
Corporation v. CIR, G.R. No. 190506, 13 June 2016; CIR

219 UNIVERSITY OF SANTO TOMAS

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 TAXATION LAW
v. Toshiba Information Equipment Phils., Inc., G.R. No. In transactions deemed sale, the seller is also the
350154, 09 Aug. 2005) buyer and no valuable consideration is thus paid.
(Mamalateo, 2014)
Moreover, under Sec. 108(B)(3), of the 1997 NIRC
as amended, services rendered to persons or For example, if the owner withdraws goods for
entities whose exemption under special laws personal use from his inventory, he derives a tax
effectively subjects the supply of such services to advantage from the input tax, which he has already
0% rate are considered zero-rated. Considering the credited at the time of purchase against his output
law does not provide for any additional qualification tax. Since the withdrawal or transfer of goods
or disqualification, the BIR cannot deny the results in the use or consumption of such goods by
application on the ground that HP International a person (seller himself) who is effectively the final
already enjoys income tax holiday. consumer, such withdrawal or transfer is deemed a
sale subject to value added tax. The rationale of the
An administrative agency may not enlarge, alter or transaction deemed sale provision recapture the
restrict a provision of law. It cannot add to the value added tax that was claimed as input tax at the
requirements provided by law. To do so constitutes time of purchase.
lawmaking, which is generally reserved for
Congress. (Soriano v. Secretary of Finance, G.R. Nos. Transactions Deemed Sale Subject to VAT (C-O-R-
184450, 184508, 184538 & 185234, 24 Jan. 2017) D)

4. IMPOSITION OF VAT ON TRANSFER OF 1. Consignment of goods if actual sale is not made

GOODS BY TAX EXEMPT PERSONS within sixty (60) days following the date such
goods were consigned.

Refer to previous discussions on “Transfer of

NOTE: Consigned goods returned by the
Imported Goods by Tax-exempt Persons to Non-
consignee within the 60-day period are not
exempt Persons” – p. 213
deemed sold.

5. TRANSACTIONS DEEMED SALE SUBJECT TO 2. Transfer, use, or consumption not in the course
VAT of business of goods or properties Originally
intended for sale or for use in the course of
Concept business (i.e., when a VAT-registered person
withdraws goods from his business for his
Transaction deem sale entails no actual sale, but by personal use).
their nature, are considered as “sales” subject to
VAT. (Soriano, Manuel & Laco, 2021) 3. Retirement from or cessation of business with
respect to all goods on hand, whether capital
Rationale: In a transaction deemed sale, the input goods, stock-in-trade, supplies or materials as
VAT was already used by the seller as a credit of the date of such retirement or cessation,
against output VAT. However, since there was no whether or not the business is continued by the
actual sale, no output VAT is actually charged to new owner or successor.
customers. Consequently, the State will be deprived
of its right to collect the output VAT. To avoid the 4. Distribution or transfer to:
situation where a VAT registered taxpayer avail of
input VAT credit without being liable for a. Shareholders or investors as share in the
corresponding output VAT, certain transactions profits of the VAT-registered persons
should be considered sales even in the absence of
actual sale. (Tabag, 2015)

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NOTE: Property dividends which Tax Base of Transactions Deemed Sale
constitute stocks in trade or properties
primarily held for sale or lease declared The Commissioner shall determine the appropriate
out of retained earnings on or after tax base in cases where:
January 1, 1996 and distributed by the
company to its shareholders shall be 1. a transaction is deemed a sale, barter or
subject to VAT based on the zonal value or exchange of goods or properties, or
fair market value at the time of 2. where the gross selling price is unreasonable
distribution, whichever is applicable. (Sec. lower than the actual market value.
106.7, RR 16-2005)
NOTE: The gross selling price is unreasonably
b. Creditors in payment of debt. (Sec. lower than the actual market value if it is lower
106(A)(2)(B), NIRC) by more than 30% of the actual market value of
the same goods of the same quantity and quality
Transactions Considered as Retirement or sold in the immediate locality on or nearest the
Cessation of Business date of sale. (Sec. 4.106-7, RR No. 16-2005)

a. Change of ownership of the business – There TRANSACTION

TAX BASE
is change in the ownership of the business when DEEMED SALE
a single proprietorship incorporates; or the Transfer, use, or
proprietor of a single proprietorship sells his consumption not in the
entire business. course of business of goods or
properties originally
b. Dissolution of a partnership and creation of a intended for sale or for use in
new partnership which takes over the the course of business
business (Sec. 4.106-7, RR 16-2005)

Inventory Used for Promotions and Office Distribution or transfer to:

Supplies Market value of
1. Shareholders or the goods
Goods given for free in the course of trade or investors as share in the deemed sold as
business in order to promote sales efforts are not profits of the VAT- of the time of
considered deemed sale transactions. (VAT Ruling registered persons the occurrence
No. 109-88)
2. Creditors in payment of
Determination whether a Transaction is debt.
“Deemed Sale” Consignment of goods if
actual sale is not made
Before considering whether the transaction is within sixty (60) days
“deemed sale,” it must first be determined whether following the date such goods
the sale was in the ordinary course of trade or were consigned.
business or not. Even if the transaction was
“deemed sale” if it was not done in the ordinary
course of trade or business or was not originally
intended for sale in the ordinary course of business,
the transaction is not subject to VAT. (CIR v.
Magsaysay Lines Inc., G.R. No. 146984, 28 July 2006)

221 UNIVERSITY OF SANTO TOMAS

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3. Approval of a request for cancellation of
Retirement from or cessation Acquisition cost registration due to a desire to revert to exempt
of business with respect to all or the current status after the lapse of 3 consecutive years
goods on hand, whether market price of from the time of registration by a person who
capital goods, stock-in-trade, the goods or voluntarily registered despite being exempt
supplies or materials as of properties, under Sec 109 (2) of the NIRC.
the date of such retirement whichever is
or cessation, whether or not lower 4. Approval of a request for cancellation of
the business is continued by registration of one who commenced business
the new owner or successor. with the expectation of gross sales or receipt
exceeding P3 million but who failed to exceed
this amount during the first 12 months of
In the case of a sale where the Actual market operations.
gross selling price is value
unreasonably lower than the Instances where Changes in or Cessation of Status
fair market value of VAT-registered Persons are Not Subject to VAT

NOTE: Nonetheless, if one of the 1. Change of control in the corporation of as

parties in the transaction is the corporation by the acquisition of controlling
government as defined and interest of the corporation by another
contemplated under the stockholder or group of stockholders.
Administrative Code, the output
VAT on the transaction shall be NOTE: The goods or properties used in the
based on the actual selling business or those comprising the stock-in-
price. (Sec. 7, RR No. 4-2007) trade of the corporation will not be considered
sold, bartered, or exchanged despite the
change in the ownership interest. However, the
Change or Cessation of Status as VAT-registered exchange of real estate properties held for sale
Person or for lease, for shares of stocks, whether
resulting to corporate control or not, is subject
The 12% VAT rate in Sec. 106(A) shall also apply to to VAT, subject to exceptions provided under
goods disposed of or existing as of a certain date if Sec. 4.106-3 (Sale of real properties) hereof. On
under circumstances to be prescribed in rules and the other hand, if the transferee of the
regulations to be promulgated by the Secretary of transferred real property by a real estate
Finance, upon recommendation of the dealer is another real estate dealer, in an
Commissioner, the status of a person as a VAT- exchange where the transferor gains control of
registered person changes or is terminated. (Sec. the transferee-corporation, no output VAT is
106(A)(2)(C), NIRC) imposable on the said transfer. (Sec. 8, RR No.
4-2007)
Instances where Changes in or Cessation of Status
of VAT-registered Persons are Subject to VAT 2. Change in the trade or corporate name of the
business.
1. Change of business activity from VAT taxable
status to VAT-exempt status. 3. Merger or consolidation of corporations.

2. Approval of a request for cancellation of NOTE: The unused input tax of the dissolved
registration due to reversion to exempt status. corporation, as of the date of merger or

UNIVERSITY OF SANTO TOMAS 222

2023 GOLDEN NOTES
 II. NATIONAL TAXATION
consolidation, shall be absorbed by the shipping or international air transport
surviving or new corporation. operations, provided that:

6. ZERO-RATED AND EFFECTIVELY ZERO- i. Goods, supplies, equipment, and fuel

RATED SALES OF GOODS OR PROPERTIES shall be used; and
ii. For international shipping or air
transport operations. (Sec. 106(A)(2)(a),
Concept
NIRC)
Zero-rated sale by a VAT-registered person is a
taxable transaction for VAT purposes but the sale c. Sales to persons or entities whose
does not result in any output tax. However, the input exemption under special laws or
tax on the purchases of goods, properties or services International agreements to which the
related to such zero-rated sale shall be available as Philippines id s signatory effectively subjects
tax credit or refund. such sales to zero rate. (Sec. 106(A)(2)(b),
NIRC)
To be subject to zero tax-rate, however, the seller
must be a VAT-registered person because if he is not d. Sale of raw materials or packaging materials
VAT registered, the transactions entered into by him by a VAT-registered entity to a Non-resident
are exempt from the tax. buyer:

Rationale: To exempt the transaction completely i. For delivery to a resident local export-
from VAT previously collected since input taxes oriented enterprise;
passes to him may be recovered as refund or credits.
(Ingles, 2018) ii. Used in the manufacturing, processing,
packing, repacking in the Philippines of
The zero-rated seller becomes internationally the said buyer’s goods;
competitive by allowing the refund or credit of input
taxes that are attributable to export sales. (CIR v. iii. Paid for in acceptable foreign currency
Seagate Technology Philippines, G.R. No. 153866, 11 and accounted in accordance with the
Feb. 2005) rules of BSP.

ZERO-RATED SALE OF GOODS e. Sale of raw material or packaging materials

to Export oriented enterprise whose export
1. Export sales – The term export sales means: (F- sales exceed 70% of total annual production;
I2-N-E-G-O)
f. Sale of goods or properties by VAT-
a. The sale and actual shipment of goods from registered persons to OGLs subject to the
the Philippines to a Foreign country: Gaming tax under Sec. 125-A of the Tax
Code; and (Sec. 106(A)(2)(c), NIRC)
i. Irrespective of any shipping
arrangement; and g. Those considered as export sales under the
ii. Paid for in acceptable foreign currency Omnibus Investment Code of 1987. (E.O.
or its equivalent in goods or services and 226)
accounted for in accordance with the
rules and regulations of BSP. Enhanced VAT Refund System

b. The sale of goods, supplies, equipment and Sales of raw materials to non-resident buyer under
fuel to persons engaged in International the aforementioned, sale of raw materials to export-
oriented enterprise whose export sales exceed 70%

223 UNIVERSITY OF SANTO TOMAS

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 TAXATION LAW
of total annual production, and those under the 4. Sales to diplomatic missions and other agencies
Omnibus Investments Code shall be under 12% VAT and/or instrumentalities granted tax
and no longer be considered as export sales subject immunities, of locally manufactured, assembled
to 0% VAT rate upon the following: or repacked products whether paid for in
foreign currency or not. (Sec. 4.106-5, RR No. 13-
1. Successful establishment of VAT refund system 2018)
which grants refunds of creditable input tax
within ninety (90) days from the filing of the Rationale of Zero-rated Export Sales
VAT refund application with the Bureau; and
The Philippine VAT system adheres to the cross-
2. Pending VAT refund claims as of December 31, border doctrine, according to which, no VAT shall be
2017 shall be fully paid in cash by December imposed to form part of the cost of goods destined
31, 2019. (RR No. 9-2021) for consumption outside of the territorial border of
the taxing authority.
NOTE: Upon the issuance of RR No. 15-2021, the
implementation of RR No. 9-2021 was deferred until Exempted and Zero-Rated Export Sale
the issuance of an amendatory revenue regulation. Distinguished

Meaning of “Considered Export Sales under E.O. EXPORT SALE TAX TREATMENT
226” By a Non-VAT
VAT-exempt
registered
“Considered export sales under EO 226” shall mean
the Philippine port F.O.B. value determined from VATable at 0% (zero
By a VAT registered
invoices, bills of lading, inward letters of credit, rated)
landing certificates, and other commercial
documents, of export products exported directly by Q: Is the sale of goods to ecozone, such as PEZA,
a registered export producer, or the net selling price considered as export sale?
of export products sold by a registered export
producer to another export producer, or to an A: YES. While an ecozone is geographically within
export trader that subsequently export the same; the Philippines, it is deemed a separate customs
Provided, that sales of export products to another territory and is regarded in law as foreign soil. Sales
producer or to an export trader shall only be by suppliers from outside the borders of the
deemed export sales when actually exported by the ecozone to this separate customs territory are
latter, as evidenced by landing certificates or similar deemed as exports and treated as export sales.
commercial documents. These sales are zero-rated or subject to a tax rate of
zero percent. (CIR v. Sekisui Jushi Philippines, Inc.,
Constructive Exports G.R. No. 149671, 21 July 2006)

1. Sales to bonded manufacturing warehouses of An ecozone or a Special Economic Zone has been
export-oriented manufacturers; described as selected areas with highly developed
or which have the potential to be developed into
2. Sales to export processing zones; agro-industrial, industrial, tourist, recreational,
commercial, banking, investment and financial
3. Sales to registered export traders operating centers whose metes and bounds are fixed or
bonded trading warehouses supplying raw delimited by Presidential Proclamations. An
materials in the manufacture of export products ecozone may contain any or all of the following:
under guidelines to be set by the Board in industrial estates (IEs), export processing zones
consultation with the BIR and the BOC; (EPZs), free trade zones and tourist/recreational

UNIVERSITY OF SANTO TOMAS 224

2023 GOLDEN NOTES
 II. NATIONAL TAXATION
centers. The national territory of the Philippines Effectively Zero-rated vs. Automatic Zero-rated
outside of the proclaimed borders of the ecozone Transaction Distinguished
shall be referred to as the Customs Territory. (CIR v.
Toshiba Information Equipment (Phils.), Inc., G.R. No. EFFECTIVELY AUTOMATIC
150154, 09 Aug. 2005) ZERO-RATED ZERO-RATED
TRANSACTION TRANSACTION
NOTE: Export enterprises are now taxed at 5% As to nature
based on the gross income earned, in lieu of all Refers to sales to Refers to export sales
national and local taxes. (Sec. 294(B), NIRC as persons or entities and foreign currency
amended) whose exemption denominated sales
under special laws or
The VAT exemption on importation and VAT zero- international
rating on local purchases shall only apply to goods agreements to which
and services directly and exclusively used in the the Philippines is a
registered project or activity of export enterprises, signatory
during the period of registration of the said As to the need to apply for zero-rating
registered project or activity with the concerned
An application for No need to file an
IPA; Provided, that transactions falling under Secs.
zero-rating must be application form and
106(A)(2)(a)(3), (4), and (5) and Secs. 108(B1(1)
filed and the BIR to secure BIR approval
and (5) of the NIRC, as amended, shall be subject to
approval is necessary before the sale is
the twelve percent (12%) VAT pursuant to RR No.
before the transaction considered zero-rated.
09-2021. Provided, further, that excess input taxes
may be considered
attributable to zero-rated sales by VAT-registered
effectively zero-rated.
RBEs, may at the RBEs option, be refunded or
applied for a tax credit, subject to the guidelines As to whose benefit is it intended
provided under RR No. 13-2018, as amended. Intended to benefit Primarily intended to
the purchaser who, be enjoyed by the
Meaning of “Direct and Exclusive Use in the not being directly and seller who is directly
Registered Project or Activity” legally liable for the and legally liable for
payment of the VAT, the VAT, making such
It refers to raw materials, inventories, supplies, will ultimately bear seller internationally
equipment, goods, services, and other expenditures the burden of the tax competitive by
necessary for the registered project or activity shifted by the allowing the refund or
without which the registered project or activity suppliers. credit of input taxes
cannot be carried out. that are attributable to
export sales.
2. Effectively zero-rated transactions – The term
As to stamping of “zero-rated” on VAT invoice
“effectively zero-rated sale of goods and or receipt
properties” shall refer to the local sale of goods
Required. The buyer, Not required. The
and properties by a VAT-registered person to a
as shown by his buyer, as shown by his
person or entity who was granted indirect tax
address in the sales address in the sales
exemption under special laws or international
invoice and shipping invoice and shipping
agreement.
documents, is located documents, is located
outside the outside the
Since the buyer is exempt from indirect tax, the
Philippines merely by Philippines.
seller cannot pass on the VAT and therefore, the
fiction of law.
exemption enjoyed by the buyer shall extend to the
seller, making the sale effectively zero-rated. (R.M.C.
50-2007)

225 UNIVERSITY OF SANTO TOMAS

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As to effect Q: SEAGATE is registered with the PEZA to
engage in the manufacture of recording
Results in no tax chargeable against the
purchaser. components primarily used in computers for
export. SEAGATE is a VAT-registered entity. An
The seller can claim a refund or a tax credit administrative claim for refund of VAT input
certificate for the VAT previously charged by taxes with supporting documents was filed with
suppliers. Revenue District Office in Cebu. The
administrative claim for refund was not acted
upon by the petitioner prompting the
Q: Cebu Toyo Corp., an export enterprise, duly respondent to elevate the case to the CTA. The
registered with the Philippine Economic Zone CIR contended that since ‘taxes are presumed to
Authority pursuant to PD 66 and is also have been collected in accordance with laws and
registered with the BIR as a VAT taxpayer. It regulations, Seagate has the burden of proof that
sells 80% of its products to its mother the taxes sought to be refunded were
corporation, and the rest are sold to various erroneously or illegally collected.
enterprises doing business in the Mactan Export Unfortunately, Seagate failed to do so. Is Seagate
Processing Zone. Inasmuch as both sales are entitled to the refund or issuance of Tax Credit
considered export sales subject to VAT at 0% Certificate representing alleged unutilized input
rate under the National Internal Revenue Code, VAT paid on capital goods purchased?
as amended, it filed an application for tax
credit/refund of VAT paid for the said period A: YES. As a PEZA-registered enterprise within a
representing excess VAT input payments. The special economic zone, it is entitled to the fiscal
CIR belies the claim for refund. Is the grant of a incentives and benefits provided for in either PD 66
refund representing unutilized input VAT to or EO 226 which would not subject Seagate to
Cebu Toyo proper? internal revenue laws and regulations, among
others. Thus, Seagate enjoys preferential tax
A: YES. Cebu Toyo is engaged in taxable rather than treatment. The VAT on capital goods is an internal
exempt transactions. Taxable transactions are those revenue tax from which the entity is exempt.
transactions which are subject to VAT either at the Although the transactions involving such tax are not
rate of 12% or 0%. In taxable transactions, the seller exempt, Seagate as a VAT-registered person,
shall be entitled to tax credit for the VAT paid on however, is entitled to their credits.
purchases and leases of goods, properties or
services. An exemption means that the sale of goods, Since the purchases of Seagate are not exempt from
properties or services and the use or lease of the VAT, the rate to be applied is zero. Its exemption
properties is not subject to VAT (output tax) and the under both PD 66 and R.A. 7916 effectively subjects
seller is not allowed any tax credit on VAT (input such transactions to a zero rate, because the
tax) previously paid. A VAT-registered purchaser of ecozone within which it is registered is managed
goods, properties or services that are VAT exempt, and operated by the PEZA as a separate customs
is not entitled to any input tax on such purchases territory. This means that in such zone is created the
despite the issuance of a VAT invoice or receipt. legal fiction of foreign territory. Under the cross-
Under the system, a zero-rated sale by a VAT- border principle of the VAT system being enforced
registered person, which is a taxable transaction for by the BIR, no VAT shall be imposed to form part of
VAT purposes, shall not result in any output tax, but the cost of goods destined for consumption outside
the input tax on his purchase of goods, properties or of the territorial border of the taxing authority. If
services related to such zero-rated sale shall be exports of goods and services from the Philippines
available as tax credit or refund. (CIR v. Cebu Toyo to a foreign country are free of the VAT, then the
Corporation, G.R. No. 149073, 16 Feb. 2005) same rule holds for such exports from the national
territory – except specifically declared areas – to an

UNIVERSITY OF SANTO TOMAS 226

2023 GOLDEN NOTES
 II. NATIONAL TAXATION
ecozone. (CIR v. Seagate Technology (Phil.), G.R. No. Philippines or to a non-resident person not
153866, 11 Feb. 2005) engaged in business who is outside the
Philippines when the services are performed,
Refer to previous discussion on “Zero-Rated Export the consideration for which is paid for in
Sales”. acceptable foreign currency and accounted for
in accordance with the rules and regulations of
Q: A contractor constructed an office building the BSP, i.e., recruitment;
for the World Health Organization (WHO) BIR
assessed the contractor of VAT, contending that, 3. Services rendered to persons or entities whose
although WHO is exempt, the tax is being exemption under special laws or international
assessed on the contractor, and not on WHO. Is agreements to which the Philippines is a
the BIR correct? signatory effectively subjects the supply of such
services to 0% rate;
A: NO. As an international organization, WHO
enjoys privileges and immunities such as exemption 4. Services rendered to persons engaged in
from all direct and indirect taxes. The contention of international shipping or international air
BIR should be rejected. In context, direct taxes are transport operations, including leases of
those that are demanded from the very person who, property for use thereof; provided, that these
it is intended or desired, should pay them; while services shall be exclusive for international
indirect taxes are those that are demanded in the shipping or air transport operations;
first instance from one person in the expectation
and intention that he can shift the burden to 5. Services performed by subcontractors and/or
someone else. The VAT is of course payable by the contractors in processing, converting, or
contractor but in the last analysis it is the owner of manufacturing goods for an enterprise whose
the building that shoulders the burden of the tax export sales exceed 70% of total annual
because the same is shifted by the contractor to the production;
owner as a matter of self-preservation. Thus, it is an
indirect tax. And it is an indirect tax on the WHO 6. Transport of passengers and cargo by domestic
because, although it is payable by the contractor, the air or sea vessels from the Philippines to a
latter can shift its burden on the WHO. (CIR v. John foreign country;
Gotamco & Sons, Inc., G.R. No. L-31092, 27 Feb. 1987)
7. Sale of power or fuel generated through
Zero-rated Sales of Services renewable sources of energy such as, but not
limited to, biomass, solar, wind, hydropower,
The following services performed in the Philippines geothermal, ocean energy, and other emerging
by VAT-registered persons shall be subject to zero energy sources using technologies such as fuel
percent (0%) rate: cells and hydrogen fuels; and

1. Processing, manufacturing, or repacking goods 8. Services rendered to:

for other persons doing business outside the a. Registered enterprises within a separate
Philippines which goods are subsequently customs territory as provided for by special
exported, where the services are paid for in law; and
acceptable foreign currency and accounted for
in accordance with the rules and regulations of b. Registered enterprises within tourism
the BSP; enterprise zones as declared by TIEZA. (Sec.
108(B), NIRC)
2. Services other than those mentioned in the
preceding paragraph rendered to a person
engaged in business conducted outside the

227 UNIVERSITY OF SANTO TOMAS

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 TAXATION LAW
Services other than Processing, Manufacturing, Philippines directly to a foreign port without
or Repacking of Goods docking or stopping at any port in the Philippines.

1. The services other than “processing, Accordingly, the services provided by hotels to their
manufacturing or repacking of goods” must be clients engaged in international air transport
performed in the Philippines; operations pertaining to room accommodations and
food and beverage services should be subject to the
2. That the payment for such services be in 12% VAT. As they are rendered within the hotel's
acceptable foreign currency accounted for in premises, they have no direct connection with the
accordance with BSP rules; and transport of goods or passengers, and as such, they
cannot be considered as services directly
3. That the recipient of such services is doing attributable to the transport of goods and
business outside of the Philippines. passengers from a Philippine port directly to a
foreign port entitled to zero-rating. (RMC No. 031-
NOTE: The recipient of the service must be 11)
doing business outside the Philippines for the
transaction to qualify for zero-rating under Sec. Q: Are the following transactions subject to VAT?
108(B) of the NIRC. To come within the purview If yes, what is the applicable rate for each
of Sec. 108(B)(2), it is not enough that the transaction. State the relevant authority/ies for
recipient of the service be proven to be a foreign your answer.
corporation; rather, it must be specifically
proven to be a non-resident foreign a. Construction by XYZ Construction Co. of
corporation. (Accenture Inc. vs CIR, G.R. No. concrete barriers for the Asian
190102, 11 July 2012) Development Bank in Ortigas Center to
prevent car bombs from ramming the ADB
In CIR vs. American Express International, Inc., gates along ADB Avenue in Mandaluyong
the Court ruled that the Legislature does not City.
intend to impose the condition of being
"consumed abroad" in order for services b. Call Center operated by a domestic
performed in the Philippines by a VAT- enterprise in Makati that handles
registered person to be zero-rated. In this case, exclusively the reservations of a hotel chain
the taxpayer renders services in the Philippines which are all located in North America. The
and facilitates the collection and payment of services are paid for in US$ and duly
receivables belonging to its non-resident accounted for with the Bangko Sentral ng
foreign client, for which it gets paid in Pilipinas. (2010 BAR)
acceptable foreign currency inwardly remitted
and accounted for in conformity with BSP rules A:
and regulations.
a. The transaction is subject to VAT at the rate of
zero percent (0%) ADB is exempt from direct
Services Rendered to Persons Engaged in
and indirect taxes under a special law, thereby
International Shipping or International Air
making the sale of services to it by a VAT-
Transport Operations
registered construction company effectively
zero-rated. (Sec. 108(B)(3), NIRC)
In order to qualify for zero-rating, the services
rendered by a VAT-registered person to a person
b. The sale of services subject to VAT at zero
engaged in international air transport operations
percent (0%) Zero-rated sale of services
must pertain to or must be attributable to the
includes services rendered to a person engaged
transport of goods and passengers from a port in the
in business outside the Philippines and

UNIVERSITY OF SANTO TOMAS 228

2023 GOLDEN NOTES
 II. NATIONAL TAXATION
consideration is paid in acceptable foreign and turkey. Livestock or poultry does not
currency duly accounted for by the Bangko include fighting cocks, racehorses, zoo
Sentral ng Pilipinas. (Sec. 103(B)(2), NIRC) animals and other animals generally
considered as pets.
7. VAT-EXEMPT TRANSACTIONS
Marine food products shall include fish and
crustaceans, such as, but not limited to, eels,
Exempt Party and Exempt Transaction
trout, lobster, shrimps, prawns, oysters,
Distinguished
mussels, and clams.

EXEMPT
EXEMPT PARTY Meat, fruit, fish, vegetables and other
TRANSACTION
agricultural and marine food products
A person or entity
Involves goods or classified under this paragraph shall be
granted VAT
services which, by considered in their original date even if
exemption under the
their nature are they have undergone the simple processes
NIRC, special law or
specifically listed in of preparation or preservation for the
international
and expressly market, such as freezing, drying, salting,
agreement to which RP
exempted from the broiling, roasting, smoking or stripping,
is a signatory, and by
VAT under the NIRC, including those using advanced
virtue of which its
without regard to the technological means of packaging, such as
taxable transactions
tax status of the parties shrink wrapping in plastics, vacuum
become exempt from
in the transactions. packing, tetra-pack, and other similar
the VAT.
packaging methods.
Such party is not
subject to the VAT, but Transaction is not
Polished and/or husked rice, corn grits,
may be allowed a tax subject to VAT, but the
raw cane sugar and molasses, ordinary salt
refund or credit of seller is not allowed
and copra shall be considered as
input tax paid, any tax refund or
agricultural food products in their original
depending on its credit for any input
state.
registration as a VAT taxes paid.
or non-VAT taxpayer.
Sugar whose content of sucrose by weight,
in the dry state, has a polarimeter reading
Exempt Transactions of 99.5o and above are presumed to be
refined sugar.
1. Sale or importation of:
a. Agricultural and marine food products in Cane sugar produced from the following
their original state,
shall be presumed, for internal revenue
purposes, to be refined sugar:
b. Livestock and poultry of:
i. A kind generally used as, or yielding or 1. Product of a refining process;
producing foods for human
consumption; and 2. Products of a sugar refinery; or

ii. Breeding stock and genetic materials 3. Product of a production line of a sugar
therefor. mill accredited by the BIR to be
producing and/or capable of producing
NOTE: Livestock shall include cows, bulls sugar with polarimeter reading of 99.5o
and calves, pigs, sheep, goats and rabbits. and above, and for which the quedan
Poultry shall include fowls, ducks, geese
issued therefor, and verified by the

229 UNIVERSITY OF SANTO TOMAS

FACULTY OF CIVIL L AW
 TAXATION LAW
Sugar Regulatory Administration, i. Residents of the Philippines returning
identifies the same to be of a from abroad, and
polarimeter reading of 99.5º and ii. Non-resident citizens coming to
above. resettle in the Philippines,

Bagasse is not included in the exemption b. Provided, that such goods are exempt from
provided for under this section. (Sec. 4.109- customs duties under the Tariff and
1(B)(1)(a), RR No. 16-2005) Customs Code of the Philippines;

Refined Sugar Subject to VAT 4. Importation of professional instruments and

implements, tools of trade, occupation or
Raw Sugar refers to sugar produced by employment, wearing apparel, domestic
simple process of conversion of sugar cane animals, and personal household effects,
without a need of any of mechanical or except any vehicle, vessel, aircraft, machinery
similar device such as muscovado. For this and other goods for use in the manufacture
purpose, raw sugar refers only to and merchandise of any kind in commercial
muscovado sugar. quantity
a. Belonging to:
Centrifugal process of producing sugar is i. Persons coming to settle in the
not in itself a simple process. Therefore, any Philippines, or
type of sugar produced therefrom is not ii. Their families and descendants who
exempt from VAT. (RR. No. 13-2013) are now residents or citizens of other
countries (overseas Filipinos),
2. Sale or importation of:
a. Fertilizers b. In quantities and of the class suitable to the
profession, rank or position of the persons
b. Seeds, seedlings and fingerlings, importing said items,

c. Fish, prawn, livestock and poultry feeds, c. For their own use and not for barter or sale,
including ingredients, whether locally
produced or imported, used in the d. Accompanying such persons, or arriving
manufacture of finished feeds: within a reasonable time,

i. Except specialty feeds for racehorses, e. Provided, that the Bureau of Customs may
fighting cocks, aquarium fish, zoo exempt such goods from payment of duties
animals and other animals generally and taxes upon the production of
considered as pets; satisfactory evidence that:

NOTE: Specialty feeds refer to non- i. Such persons are actually coming to
agricultural feeds or food for race horses, settle in the Philippines, and
fighting cocks, aquarium fish, zoo animals
and other animals generally considered as ii. The goods are brought from their
pets. former place of abode, exempt such
goods from payment of duties and
3. Importation of personal and household taxes
effects:
a. Belonging to: f. Provided, further, That the vehicles,
vessels, aircrafts, machineries and other

UNIVERSITY OF SANTO TOMAS 230

2023 GOLDEN NOTES
 II. NATIONAL TAXATION
similar goods for use in manufacture, shall payment of “deficiency VAT” and DST for taxable
not fall within this classification and shall years 1996 to 1997.
therefore be subject to duties, taxes and
other charges; PHILHEALTH filed a protest with the
Commissioner but the latter did not take action
5. Services subject to percentage tax; on its protest. Consequently, PHILHEALTH
brought the matter to the CTA. The CTA declared
6. Services by: that VAT Ruling 231-88 is void and without force
a. Agricultural contract growers, and and effect and ordered it to pay the VAT
b. Milling for others of: deficiency, but canceling the payment of DST.
i. Palay into rice, After a Motion for Partial Reconsideration, CTA
ii. Corn into grits, and overruled its decision with respect to the
iii. Sugar cane into raw sugar; payment of deficiency VAT and held that
PHILHEALTH was entitled to the benefit of non-
NOTE: Agricultural contract growers refer to retroactivity of rulings guaranteed under Sec.
those persons producing for others poultry, 246 of the NIRC, in the absence of showing of bad
livestock or other agricultural and marine food faith on its part. Are the services of PHILHEALTH
products in their original state. subject to VAT?

7. Medical, dental hospital and veterinary A: YES. PHILHEALTH’s services are not VAT-
services, except those rendered by exempt. Those exempted from VAT are those
professionals; engaged in the performance of medical, dental,
hospital and veterinary services except those
NOTE: Laboratory services are exempted. If the rendered by professionals. PHILHEALTH is not
hospital or clinic operates a pharmacy or drug actually rendering medical service but merely
store, the sale of drugs and medicine is subject acting as a conduit between the members and their
to VAT. accredited and recognized hospitals and clinics. It
merely provides and arranges for the provision of
Q: PHILHEALTH, operates a health care delivery pre-need health care services to its members for a
system or a health maintenance organization to fixed prepaid fee for a specified period of time; that
take care of the sick and disabled persons it then contracts the services of physicians, medical
enrolled in the health care plan, inquired before and dental practitioners, clinics and hospitals to
the CIR whether the services it provided to the perform such services to its enrolled members; and
participants in its health care program were that it enters into contract with clinics, hospitals,
exempt from the payment of VAT. The medical professionals and then negotiates with
Commissioner issued VAT Ruling 231-88 stating them regarding payment schemes, financing and
that PHILHEALTH, as a provider of medical other procedures in the delivery of health services.
services, was exempt from the VAT coverage. (CIR v. Philippine Health Care Providers Inc., G.R. No.
168129, 24 Apr. 2007)
Meanwhile, R.A. 7716 (E-VAT Law) took effect,
amending further the NIRC of 1977. 8. Educational services rendered by:
Subsequently, R.A. 8424 (NIRC of 1997) took a. Private educational institutions duly
effect, substantially adopting and reproducing accredited by the:
the provisions of E.O. 273 on VAT and the E-VAT i. Department of Education (DepED),
law. With the passage of these laws, the BIR sent
PHILHEALTH a Preliminary Assessment Notice ii. Commission on Higher Education
for deficiency in its payment of the VAT and (CHED),
documentary stamp taxes (DST) for taxable
years 1996 and 1997 and a letter demanding

231 UNIVERSITY OF SANTO TOMAS

FACULTY OF CIVIL L AW
 TAXATION LAW
iii. Technical Education and Skills their importation of direct farm inputs,
Development Authority (TESDA), and machineries and equipment, including spare
parts thereof, to be used directly and
b. Government educational institutions; exclusively in the production and/or
processing of their produce;
NOTE: Educational services shall refer to
academic, technical or vocational education 13. Gross receipts from lending activities by
provided by private educational institutions credit or multi-purpose cooperatives duly
duly accredited by the DepED, the CHED and registered and in good standing with the
TESDA and those rendered by government Cooperative Development Authority;
educational institutions and it does not include
seminars, in-service training, review classes 14. Sales by non-agricultural, non-electric and
and other similar services rendered by persons non-credit cooperatives duly registered with
who are not accredited by the DepED, the CHED and in good standing with the CDA; Provided,
and/or the TESDA. That the share capital contribution of each
member does not exceed Fifteen Thousand
9. Services rendered by individuals pursuant to Pesos (P15,000.00) and regardless of the
an employer-employee relationship; aggregate capital and net surplus ratably
distributed among the members;
10. Services rendered:
a. By regional or area headquarters NOTE: Importation by non-agricultural, non-
established in the Philippines by electric and non-credit cooperatives of
multinational corporations, machineries and equipment, including spare
parts thereof, to be used by them are subject to
b. Which act as: VAT.
i. Supervisory,
ii. Communications, and Summary of Taxability of Cooperatives
iii. Coordinating centers in the Asia Pacific
Region for their: TO/FROM
SALES/GROSS TO/FROM
1. Affiliates, NON-
RECEIPTS BY MEMBERS
2. Subsidiaries, or MEMBERS
3. Branches, and Agricultural
c. Do not earn or derive income from the Cooperatives:
Philippines;
Exempt Exempt
Own produce
11. Transactions which are exempt under (processed or at its
international agreements to which the original state)
Philippines is a signatory or under special
laws except those granted under PD No. 529
which refers to Petroleum Exploration
Concessionaires under the Petroleum Act of Other that own
1949; produce (i.e., from Exempt *VAT
traders)
12. Sales by agricultural cooperatives duly
registered 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;

UNIVERSITY OF SANTO TOMAS 232

2023 GOLDEN NOTES
 II. NATIONAL TAXATION
Credit or b. Sale of real properties utilized for low-cost
Multipurpose housing as defined by R.A. No. 7279,
Cooperatives: otherwise known as the "Urban
Exempt Exempt Development and Housing Act of 1992" and
From lending other related laws;
activities
NOTE: “Low-cost housing" refers to
housing projects intended for homeless
From non-lending VAT VAT low-income family beneficiaries,
activities undertaken by the Government or private
developers, which may either be a
Electric
subdivision or a condominium registered
Cooperatives, in VAT VAT
and licensed by the Housing and Land Use
general
Regulatory Board/Housing (HLURB).
Non-agricultural,
non-lending and c. Sale of real properties utilized for
multipurpose, non- socialized housing as defined under R.A. No.
electric: Exempt Exempt 7279, and other related laws, such as R.A.
No. 7835 and R.A. No. 8763, wherein the
Contribution per price ceiling per unit is P450,000 or as may
member < P15K from time to time be determined by the
HUDCC and the NEDA and other related
laws
Contribution per VAT VAT
member > P15K NOTE: "Socialized housing" refers to
housing programs and projects covering
NOTE: Exempt if referring to agricultural food houses and lots or home lots only
product at its original state. (Tabag, 2015) undertaken by the Government or the
private sector for the underprivileged and
15. Export sales by persons who are not VAT- homeless citizens which shall include sites
registered; and services development, long-term
financing, liberated terms on interest
Refer to previous discussions on “Rationale of payments, and such other benefits in
Zero-rated Export Sales, and Exempted and Zero- accordance with the provisions of R.A. No.
Rated Export Sale Distinguished”. 7279, otherwise known as the "Urban
Development and Housing Act of 1992" and
16. Sales of real properties, namely: R.A. No. 7835 and R.A. No. 8763.
a. Sale of real properties not primarily held
for sale to customers or held for lease in the "Socialized housing" shall also refer to
ordinary course of trade or business; projects intended for the underprivileged
and homeless wherein the housing package
NOTE: However, even if the real property is selling price is within the lowest interest
not primarily held for sale to customers or rates under the Unified Home Lending
held for lease in the ordinary course of Program (UHLP) or any equivalent housing
trade or business but the same is used in program of the Government, the private
the trade or business of the seller, the sale sector or non-government organizations.
thereof shall be subject to VAT being a
transaction incidental to the taxpayer’s
business.

233 UNIVERSITY OF SANTO TOMAS

FACULTY OF CIVIL L AW
 TAXATION LAW
17. Sale of the following: Summary of Taxability of Sale of Real Property
a. Residential lot valued at P1,919,500 and
TAX
below, or TRANSACTION
TREATMENT
b. House and lot and other residential
dwellings valued at P3,199,200 and below Sale not in the ordinary course VAT -
of trade or business, in general exempt
NOTE: Beginning January 2021, the VAT
Sale of residential lot by a real
exemption shall only apply to:
estate dealer:
VAT -
1. Sale of real properties not primarily held exempt
Selling price < *P1,919,500
for sale to customers or held for lease in the
ordinary course of trade or business,
Selling price > *P1,919,500 VAT
2. Sale of real property utilized for socialized
housing as defined by R.A. 7229, Sale of residential lot by a non-
dealer
3. Sale of house and lot, and other residential VAT
dwelling with selling price of not more than Use in business (incidental
P2,000,000. Provided, further, that every transaction)
three (3) years thereafter, the amount
herein stated shall be adjusted to its Not use in business (regardless
6% CGT
present value using the Consumer Price of amount)
Index, as published by the Philippine
Sale of residential house & lot
Statistics Authority (PSA). (Sec. 109(P),
and other residential dwellings
NIRC)
by a real estate dealer: VAT –
exempt
If two or more adjacent residential lots are sold
Selling price < *P3,199,200
or disposed in favor of one buyer, for the
purpose of utilizing the lots as one residential Selling price > *P3,199,200 VAT
lot, the sale shall be exempt from VAT only if the
Sale of residential house & lot
aggregate value of the lots do not exceed
and other residential dwellings
P1,500,000. Adjacent residential lots, although
by a non-dealer:
covered by separate titles and/or separate tax VAT
declarations, when sold or disposed to one and
Use in business (incidental
the same buyer, whether covered by one or
transaction)
separate deed of conveyance, shall be
presumed as a sale of one residential unit. Not use in business (regardless
6% CGT
of amount)
This does not include the sale of parking lot Sale of real property classified VAT –
which may or may not be included in the sale of as low-cost housing, in general exempt
condominium units. The sale of parking lots in a
condominium is a separate and distinct Sale of real property classified
VAT –
transaction and is not covered by the rules on as socialized housing, in
exempt
threshold amount not being a residential lot, general
house and lot or a residential dwelling. Thus,
the sale is subject to VAT regardless of the NOTE: Beginning January 1, 2021, the VAT
selling price. (R.R. 13-2012) exemption shall only apply to sale of real properties
not primarily held for sale to customers or held for

UNIVERSITY OF SANTO TOMAS 234

2023 GOLDEN NOTES
 II. NATIONAL TAXATION
lease in the ordinary course of trade or business, In case of mixed transactions, the
sale of real property utilized for socialized housing abovementioned rule should be observed.
as defined by Republic Act No. 7279, sale of house
and lot, and other residential dwellings with selling The term “residential units” shall refer to
price of not more than two million pesos apartments and houses & lots used for
(P2,000,000). (Sec. 109(P), NIRC) residential purposes, and buildings or parts or
units thereof used solely as dwelling places
18. Lease of residential units with a monthly (e.g., dormitories, rooms and bed spaces)
rental per unit not exceeding P15,000, except motels, motel rooms, hotels and hotel
regardless of the amount of aggregate rooms, lodging houses, inns and pension
rentals received by the lessor during the year; houses. (RR No. 13–2018)

NOTE: Every 3 years thereafter, the amount The term “unit” shall mean an apartment unit in
shall be adjusted to its present value using the the case of apartments, house in the case of
Consumer Price Index, as published by the residential houses; per person in the case of
Philippine Statistic Authority. Such adjustment dormitories, boarding houses and bed spaces;
shall be published through revenue regulations and per room in case of rooms for rent.
to be issued not later than March 31 of each
year. Illustration 1:

The foregoing notwithstanding, lease of A lessor rents his 15 residential units for P14,500
residential units where the monthly rental per per month. During the taxable year, his accumulated
unit exceeds P15,000 but the aggregate of such gross receipts amounted to P2,610,000. He is not
rentals of the lessor during the year do not subject to VAT since the monthly rent per unit does
exceed P3,000,000 shall likewise be exempt not exceed P15,000. He is also not subject to 3%
from VAT, however, the same shall be subjected Percentage Tax. Using the same example, assuming
to 3% percentage tax. he has 20 residential units with the same monthly
rent per unit and his accumulated gross receipts
In cases where a lessor has several residential during the taxable year amounted to P3,480,000, he
units for lease, some are leased out for a is still not subject to VAT even if the accumulated
monthly rental per unit of not exceeding earnings exceeded P3,000,000 since the monthly
P15,000 while others are leased out for more rent per unit does not exceed P15,000. He is also not
than P15,000 per unit, his tax liability will be as subject to 3% Percentage Tax.
follows:
Illustration 2:
1. The gross receipts from rentals not
exceeding P15,000 per month per unit A lessor rents his 15 residential units for P15,500
shall be exempt from VAT regardless of the per month. During the taxable year, his accumulated
aggregate annual gross receipts. gross receipts amounted to P2,790,000. He is not
subject to VAT since his accumulated gross receipts
2. The gross receipts from rentals exceeding did not exceed P3,000,000. He is, however, subject
P15,000 per month per unit shall be to 3% Percentage Tax since the monthly rent per
subject to VAT if the aggregate annual unit is more than P15,000.00. Using the same
gross receipts from said units only exceeds example, assuming he has 20 residential units with
P3,000,000. Otherwise, the gross receipts the same monthly rent per unit and his accumulated
will be subject to the 3% tax imposed gross receipts during the taxable year amounted to
under Sec. 116 of the NIRC. (RR No. 13- P3,720,000, he is already subject to VAT since the
2018) accumulated earnings exceeded P3,000,000 and the
monthly rent per unit is more than P15,000.00.

235 UNIVERSITY OF SANTO TOMAS

FACULTY OF CIVIL L AW
 TAXATION LAW
Illustration 3:
Monthly rental
VAT-exempt under Sec.
above P15,000 but
A lessor rents his 2 commercial and 10 residential 109 (W) but shall pay
annual gross sales
units for monthly rent of P60,000 and P15,000 per 3% percentage tax
do not exceed
unit, respectively. During the taxable year, his under Sec. 116 of NIRC
P3,000,000
accumulated gross receipts amounted to
P3,240,000 (P1,440,000 from commercial units and Monthly rental
P1,800,000 from residential units) The P1,440,000 above P15,000 and
from commercial units is not subject to VAT since it Subject to VAT
annual gross sales
did not exceed P3,000,000. It is, however, subject to exceed P3,000,000
3% Percentage Tax. On the other hand, the
P1,800,000 accumulated receipts from the
NOTE: Lease of commercial units, regardless of the
residential units are not subject to Percentage Tax
amount of monthly rental is subject to VAT unless
and exempt from VAT since the monthly rent is not
the lessor is non-VAT registered and annual gross
more than P15,000. Using the same example,
receipts < P3,000,000. (Tabag, 2015)
assuming the lessor has 5 commercial units and his
accumulated gross receipts during the taxable year
Q: X operates a dormitory beside the school
amounted to P5,400,000 (P3,600,000 from
compound. Student bed-spacers are charged
commercial units and P1,800,000 from residential
P2,500 each per month. X has an average of 40
units), he is subject to VAT with respect to
students every month. Since “Lease” is VATable,
P3,600,000 since it exceeded P3,000,000. The
can X pass the 12% VAT to the students? Why?
P1,800,000 accumulated receipts from residential
units are not subject to Percentage Tax and exempt
A: The lease is VAT exempt because the monthly
from VAT since the monthly rent is not more than
rental per student is less than P15,000 regardless of
P15,000.
the total annual aggregate income of X received
during the year.
Illustration 4:
NOTE: If the rent of an apartment is more than
A lessor rents his 5 commercial and 10 residential
P15,000 per unit but the aggregate rent income of
units for monthly rent of P60,000 and P15,500 per
the lessor does not exceed P3,000,00, the lessor is
unit, respectively. During the taxable year, his
not VATable, but he is subject to the 3% direct
accumulated gross receipts amounting to
percentage tax. (Lim, 2014)
P5,460,0000 (P3,600,000 from commercial units
and P1,860,000 from residential units) shall be
19. Sale, importation, printing or publication of
subject to VAT since it exceeded the P3,000,000
books, and any newspaper, magazine,
threshold and the monthly rent of residential units
journal, review bulletin, or any such
is more than P15,000.
educational reading material covered by the
UNESCO Agreement on the Importation of
Summary of Taxability of Lease of Residential
Educational, Scientific and Cultural
Units
Materials, including the digital or electronic
format thereof: Provided, that the materials
AMOUNT OF
TAX TREATMENT enumerated herein are not devoted
MONTHLY RENTALS
principally to the publication of paid
Monthly rental advertisements;
P15,000 or less VAT exempt and no
regardless of annual percentage tax NOTE: A newspaper, magazine, review, or
gross sales bulletin must be:

UNIVERSITY OF SANTO TOMAS 236

2023 GOLDEN NOTES
 II. NATIONAL TAXATION
1. Printed or published at regular Transport of passengers by
intervals; international air and
2. Available for subscription and sale at shipping carriers
fixed prices; and
3. Are not principally devoted to the NOTE: In case of transport of
EXEMPT
publication of paid advertisements. cargoes, the international air
or shipping carrier shall be
Sale of books, newspapers, magazines, etc. in subject to 3% percentage tax
electronic format are also VAT- exempt. on international carriers

20. Transport of passengers by international

carriers; 21. Sale, importation or lease of passenger or
cargo vessels and aircraft, including engine,
NOTE: The transport of cargo by international equipment and spare parts thereof for
carriers doing business in the Philippines shall domestic or international transport
be exempt from VAT as the same is subject to operations;
Common Carrier's Tax (Percentage Tax on
International Carriers) International carriers NOTE: Provided, that the exemption from VAT
exempt under Secs. 109(1)(S) and 109(1)(E) of on the importation and local purchase of
the NIRC, as amended, shall not be allowed to passenger and/or cargo vessels shall be subject
register for VAT purposes. (RR No. 15-2015) to the requirements on restriction on vessel
retirement program of Maritime Industry
Summary of Taxability of Transport of Authority (MARINA).
Passengers or Cargoes
22. Importation of fuel, goods and supplies by
TAX persons engaged in international shipping or
TRANSACTION
TREATMENT air transport operations;
Domestic transport of
NOTE: Provided, that the fuel, goods and
passengers or cargoes by air
supplies shall be used for international shipping
and sea
or air transport operations.
NOTE: If domestic transport of 12% VAT
Thus, said fuel, goods and supplies shall be used
passengers or cargoes by land,
exclusively or shall pertain to the transport of
the common carrier is liable to
goods and/or passenger from a port in the
percentage tax on common
Philippines directly to a foreign port, or vice
carriers
versa, without docking or stopping at any other
International transport of port in the Philippines unless the docking or
passengers or cargoes by air stopping at any other Philippine port is for the
or sea purpose of unloading passengers and/or
cargoes that originated from abroad, or to load
NOTE: Transport should be 0% VAT passengers and/or cargoes bound for abroad.
done by domestic carriers with
international flights such as Provided, further, that if any portion of such
PAL, Cebu Pacific, etc., fuel, goods or supplies is used for purposes
otherwise, exempt other than that mentioned in this paragraph,
such portion of fuel, goods and supplies shall be
subject to 12% VAT.

237 UNIVERSITY OF SANTO TOMAS

FACULTY OF CIVIL L AW
 TAXATION LAW
Taxability of Fuel and 10754 or An Act Expanding the Benefits and
Privileges of Persons with Disability)
Fuel is exempt if imported by persons engaged in
international shipping or air transport operations. 25. Transfer of property pursuant to Sec.
On the other hand, fuel is zero-rated when sold to 40(C)(2) of the NIRC, as amended or tax-free
persons engaged in international shipping or exchanges;
international air transport operations without
docking or stopping at any other port in the 26. Association dues, membership fees, and other
Philippines. assessments and charges collected on a
purely reimbursement basis by homeowners
23. Services of: associations and condominium corporations;
a. Banks, (R.A. Nos. 9904 or Magna Carta for Homeowners
b. Non-bank financial intermediaries and Homeowners’ Association, and 4726 or The
performing quasi-banking functions, and Condominium Act)
c. Other non-bank financial intermediaries
such as money changers and pawnshops, 27. Sale of gold to the Bangko Sentral ng
subject to percentage tax under Secs. 121 Pilipinas;
and 122 of the NIRC;
28. Sale of or importation of prescription drugs
NOTE: In Tambunting Pawnshop, Inc. vs. CIR, and medicines for:
since the taxpayer (pawnshop) is a non-bank a. Diabetes, high cholesterol, and
intermediary, it is subject to 10% (now 12%) hypertension beginning January 1, 2020;
VAT for the tax years 1996-2002; however, with b. Cancer, mental illness, tuberculosis, and
the levy, assessment and collection of VAT from kidney diseases beginning January 1, 2021
non-bank intermediaries being specifically
deferred by law, then taxpayer is not liable for NOTE: Provided, That the DOH shall issue a list
VAT during these tax years. But with the full of approved drugs and medicines for this
implementation of the VAT system on non-bank purpose within sixty (60) days from the
financial intermediaries starting January 1, effectivity of this Act
2003, taxpayer is liable for 10% VAT for the said
tax year. And beginning 2004 up to the present, 29. Sale or importation of the following
by virtue of R.A. No. 9238, taxpayer is no longer beginning January 1, 2021 to December 31,
liable for VAT but it is subject to percentage tax 2023:
on gross receipts from 0% to 5% as the case a. Capital equipment, its spare parts and raw
may be. materials, necessary for the production of
personal protective equipment
Pawnshops are not Liable to Pay VAT components such as coveralls, gown,
surgical cap, surgical mask, N-95 mask,
Pawnshops are not classified as lending investors scrub suits, goggles and face shield, double
and therefore, they are not subject to VAT. They are or surgical gloves, dedicated shoes, and
subject to percentage tax as imposed on Sec. 122 of shoe covers, for COVID-19 prevention; and
NIRC. (Tambunting Pawnshop, Inc., v CIR, G.R. No.
179085, 21 Jan. 2010; R.A. No. 9238; RMC 74-2005) b. All drugs, vaccines and medical devices
specifically prescribed and directly used for
24. Sale or lease of goods and services to senior the treatment of COVID-19; and
citizens and persons with disability; (R.A. Nos.
9994 or Expanded Senior Citizens Act of 2010,) c. Drugs for the treatment of COVID-19
approved by the Food and Drug

UNIVERSITY OF SANTO TOMAS 238

2023 GOLDEN NOTES
 II. NATIONAL TAXATION
Administration (FDA) for use in clinical 1. Sale of fresh vegetables by Aling Ining at the
trials, including raw materials directly Pamilihang Bayan ng Trece Martirez.
necessary for the production of such drugs
2. Services rendered by Jake's Construction
NOTE: Provided, That the Department of Trade Company, a contractor to the World Health
and Industry (DTI) shall certify that such Organization in the renovation of its offices
equipment, spare parts or raw materials for in Manila.
importation are not locally available or
insufficient in quantity, or not in accordance 3. Sale of tractors and other agricultural
with the quality or specification required. implements by Bungkal Incorporated to
Provided, further, That for item (ii), within sixty local farmers.
(60) days from the effectivity of this Act, and
every three (3) months thereafter, the 4. Sale of RTW by Cely's Boutique, a Filipino
Department of Health (DOH) shall issue a list of dress designer, in her dress shop and other
prescription drugs and medical devices covered outlets.
by this provision: Provided, finally, That the
exemption claimed under this subsection shall 5. Fees for lodging paid by students to Bahay-
be subject to post audit by the Bureau of Bahayan Dormitory, a private entity
Internal Revenue or the Bureau of Customs as operating a student dormitory (monthly fee
may be applicable. (Sec. 12, R.A. No. 11534) P1,500). (1998 BAR)

30. Sale or lease of goods or properties or

services other than the transactions
mentioned above wherein the gross annual A:
sales or receipts do not exceed P3,000,000
1. VAT EXEMPT. Sale of agricultural products,
pesos.
such as fresh vegetables, in their original state,
of a kind generally used as, or producing foods
NOTE: Every three (3) years thereafter, the
for human consumption is exempt from VAT.
amount shall be adjusted to its present value
(Sec. 109(A), NIRC)
using the Consumer Price Index, as published
by the NSO. Such adjustment shall be published
2. VAT AT 0%. Since Jake's Construction
through revenue regulations to be issued not
Company has rendered services to the World
later than March 31 of each year.
Health Organization, which is an entity
exempted from taxation under international
For purposes of the threshold, the husband and
agreements to which the Philippines is a
the wife shall be considered separate taxpayers.
signatory, the supply of services is subject to
However, the aggregation rule for each
zero percent (0%) rate. (Sec. 108(B)(3), NIRC)
taxpayer shall apply. For instance, if a
professional, aside from the practice of his
3. VAT AT 12%. Tractors and other agricultural
profession, also derives revenue from other
implements fall under the definition of goods
lines of business which are otherwise subject to
which include all tangible objects which are
VAT, the same shall be combined for purposes
capable of pecuniary estimation. (Sec.
of determining whether the threshold has been
106(A)(1), NIRC)
exceeded. Thus, the VAT-exempt sales shall not
be included in determining the threshold.
4. VAT AT 12%. This transaction also falls under
the definition of goods which include all
Q: State whether the following transactions are:
tangible objects which are capable of
(a) VAT Exempt, (b) subject to VAT at 12%; or (c)
pecuniary estimation. (Sec. 106(A)(1), NIRC)
subject to VAT at 0%:

239 UNIVERSITY OF SANTO TOMAS

FACULTY OF CIVIL L AW
 TAXATION LAW
5. VAT EXEMPT. The monthly fee paid by each tax credit allowed. In the case of 0% rated
student falls under the lease of residential transaction of a VAT registered person, the sale of
units with a monthly rental per unit not goods or properties is multiplied by 0%; thus, his
exceeding P15,000, which is exempt from VAT output tax is P 0.00. If the person is VAT-registered,
regardless of the amount of aggregate rentals he may claim such input tax as tax credit or refund.
received by the lessor during the year. (RR No.
13 – 2018) The term unit shall mean per person Example:
in the case of dormitories, boarding houses and Output tax P0
bed spaces. (Sec. 4.103-1, RR No. 7-95) Less:
Input tax (5,000)
Zero-rated and VAT-exempt Transactions Excess input tax P5,000
Distinguished
EXEMPT ZERO-RATED
1. Zero-rated transactions – It generally refers to As to nature of transaction
the export sale of good and supply of services. Not taxable; removes Transaction is taxable
The output tax rate is set at zero. When applied VAT at the exempt for VAT purposes
to the tax base, such rate obviously results in no stage although the tax levied
tax chargeable against the purchaser. is 0%

The seller of such transactions charges no As to by whom made

output tax but can claim a refund or tax credit Need not be a VAT- Made by a VAT-
certificate for the VAT previously charged by registered person registered person
suppliers. (AT&T Communications Services
As to input tax
Phils., Inc. v. CIR, G.R. No. 182364, 03 Aug. 2010)
Not subject to output May claim input tax
No VAT shall be shifted or passed-on by VAT- tax, thus cannot claim credit although the
registered sellers or suppliers from the input tax credit. transaction resulted to
Customs Territory on their sale, barter or zero output tax.
exchange of goods, properties or services to the As to tax credit/refund
subject registered Freeport Zone enterprises. Cannot avail of tax Can claim or enjoy tax
credit or refund. Thus, credit/refund (Total
2. VAT-exempt transactions – The may result in increased Relief)
taxpayer/seller shall not bill any output tax on prices (Partial Relief)
his sales to his customers and corollary, is not
allowed any credit or refund of the input taxes
he paid on his purchases. 8. INPUT AND OUTPUT TAX

This non-crediting of input taxes is exempt

Output Tax
transactions is the underlying reason why the
NIRC adopted the rule on apportionment of tax
It refers to the value-added tax due on the sale or
credits under Sec. 104(A) whenever a VAT-
lease of taxable goods or properties or services by:
registered taxpayer engages in other VAT
1. any person registered, or
taxable and non-VAT taxable sales (CIR v.
2. required to register under Sec. 236 of the NIRC.
Eastern Telecomm. Phils., Inc., G.R. No. 163835,
(Sec. 110(A)(3), NIRC)
07 July 2010)
Output tax is what the taxpayer-seller passes on to
NOTE: Simply put, the difference lies in the input the purchases. Note that what is output tax for the
tax. In VAT-exempt transactions, there is no input
seller is input tax to the purchaser. (Ingles, 2015)

UNIVERSITY OF SANTO TOMAS 240

2023 GOLDEN NOTES
 II. NATIONAL TAXATION
Output tax may come from: Input tax Not a Property Right under the Due
1. Actual sale; or Process Clause
2. Transaction deemed sales.
A VAT-registered person’s entitlement to the
Input Tax creditable input tax is a mere statutory privilege
which may be limited or removed by law.
It refers to the value-added tax due on or paid by a
VAT-registered person on importation of goods or Kinds of Input Tax
local purchase of goods, properties or services,
including lease or use of properties, in the course of INPUT TAX TAX RATE
his trade or business. It shall also include the
Input tax on importation of
transitional input tax and the presumptive input tax 12%
goods and local purchases of
determined in accordance with Sec. 111 of the NIRC. standard or
goods, properties and services
(Sec. 110(A)(3), NIRC) 0%
(Sec. 110, NIRC)

It includes input taxes which can be: Presumptive input tax credit
(Sec. 111(B), NIRC) – may be
1. Directly attributed to transactions subject to
claimed by persons engaged in
the VAT, plus
the business of processing
2. A ratable portion of any input tax which cannot
sardines, mackerel and milk;
be directly attributed to either the taxable or
manufacturing refined sugar and
exempt activity. (RR No. 16-2005) 4%
cooking oil; and noodle based
Input tax is what is passed on to the instant meals; all of which are
purchaser/taxpayer by the seller. If the purchaser substantially produced from
is VAT-registered person, then he can use the input primary agricultural and marine
tax as credit to the output taxes that he is liable to food produces, the supply of
remit to the BIR. (Ingles, 2015) which is exempt from VAT

Transitional input tax credit

Input VAT or input tax represents the actual
(Sec. 111 (A), NIRC) – may be
payments, costs and expenses incurred by a VAT-
claimed by persons who become 2%
registered taxpayer in connection with his purchase
liable to VAT for the first time transitional
of goods and services. On the other hand, when that
and such represent input tax on or 12%
person or entity sells his/its products or services,
inventories goods, materials and actual input
the VAT-registered taxpayer generally becomes
supplies existing on the date of tax rate
liable for 10% (now taxed at 12%) of the selling
commencement of a person’s
price as Output VAT or output tax. (CIR v. Benguet
status as a taxable person
Corporation, G.R. No. 145559, 14 July 2006)
Final withholding tax credit
Effect of VAT-exempt Purchases to Input Tax
(Sec. 114(C), NIRC) – is based on
the amount paid to the supplier
VAT exempt transactions cannot be credited for
of goods or services by the
input tax. However, a transaction which cannot be 5%
government and is required to be
directly attributed in either the taxable or exempt
withheld by the government to
activity, a ratable portion of the input tax may be
the BIR (refer to withholding of
credited.
final tax on sales to government)

241 UNIVERSITY OF SANTO TOMAS

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 TAXATION LAW
Excess input tax credit Presumptive Input Tax

Not It is an input tax credit allowed to persons or firms

Refer to discussion on
applicable engaged in the: (S-M2-R-C-N)
“Application on Tax Refund or Tax
Credit Certificate” 1. Processing of:
a. Sardines
Sources of Creditable Input Tax b. Mackerel
c. Milk
Any input tax evidenced by a VAT invoice or official
2. Manufacturing of:
receipt issued in accordance with Sec. 113 of the
a. Refined sugar
NIRC on the following transactions shall be
b. Cooking oil
creditable against the output tax:
c. Packed Noodle based instant meals
1. Purchase or importation of goods:
The allowed input tax shall be equivalent to four
a. For sale; or
percent (4%) of the gross value in money of their
purchases of primary agricultural products which
b. For conversion into or intended to form
are used as inputs to their production. (Sec. 111 (B),
part of a finished product for sale including
NIRC)
packaging materials; or

They are given this 4% presumptive input tax

c. For use as supplies in the course of
because the goods used in the said enumeration are
business; or
VAT-exempt. (Ingles, 2015)
d. For use as materials supplied in the sale of
NOTE: The term “processing” shall mean
service; or
pasteurization, canning and activities which
through physical or chemical process alter the
e. For use in trade or business for which
exterior texture or form or inner substance of a
deduction for depreciation or
product in such manner as to prepare it for special
amortization is allowed under NIRC,
use to which it could not have been put in its original
except automobiles, aircraft and yachts.
form or condition.
(Capital Goods)

Q: COFA is a multi-purpose agricultural

2. Purchases of real properties for which a VAT
cooperative. Its farmer-members deliver
has actually been paid
sugarcane to be milled and processed in COFA’s
name with the sugar mill. An Authorization from
3. Purchases of services in which a VAT has
BIR is required before the refined sugar is
actually been paid (Sec. 110, NIRC)
released. In several instances, BIR issued the
Authorization without requiring COFA to pay
4. Transactions “deemed sales”
advanced VAT, pursuant to the latter’s tax
exemption under the law. Later on, BIR required
5. Presumptive input tax
payment of advance VAT for the issuance of the
Authorization. COFA paid under protest. Later,
6. Transitional input tax credits allowed under
COFA filed an administrative claim for refund. Is
the transitory and other provisions. (Sec.
COFA’s claim with merit?
4.110-1, RR No. 16- 2005)

A: YES. COFA is a VAT-exempt agricultural

cooperative. Exemption from the payment of VAT
on sales made by the agricultural cooperatives to

UNIVERSITY OF SANTO TOMAS 242

2023 GOLDEN NOTES
 II. NATIONAL TAXATION
members or to non-members necessarily includes through the remittance of the output VAT at a stage
exemption from the payment of "advance VAT" when the person is yet unable to credit input VAT
upon the withdrawal of the refined sugar from the payments. (Fort Bonifacio Development Corporation
sugar mill. VAT is a tax on transactions, imposed at v. CIR, G.R. No. 173425, 04 Sept. 2012)
every stage of the distribution process on the sale,
barter, exchange of goods or property, and on the Persons Entitled to Transitional Input VAT
performance of services, even in the absence of
profit attributable thereto, so much so that even a It can be availed by taxpayers who become VAT
non-stock, non-profit organization or government registered persons upon:
entity, is liable to pay VAT on the sale of goods or 1. Exceeding the minimum turnover of P3 million
services. There are, however, certain transactions in any 12-month period; or
exempt from VAT such as the sale of agricultural
products in their original state, including those 2. Who voluntarily register even if they do not
which underwent simple processes of preparation reach the threshold, except for franchise
or preservation for the market, such as raw cane grantees of radio and TV broadcasting whose
sugar. threshold is P10,000,000.

For an agricultural cooperative to be exempted from The said taxpayers shall be entitled to a transitional
the payment of advance VAT on refined sugar, it input tax on the inventory on hand as of the
must be (a) a cooperative in good standing duly effectivity of their VAT registration on the following:
accredited and registered with the CDA; and (b) the
producer of the sugar. Having established that COFA 1. Goods purchased for resale in the present
is a cooperative in good standing and duly condition;
registered with the CDA and is the-producer of the
sugar, its sale then of refined sugar whether sold to 2. Raw materials - Materials purchased for further
members or non-members, following the express processing but which have not yet undergone
provisions of Sec. 109(L) of R.A. 8424, as amended, processing;
is exempt from VAT. As a logical and necessary
consequence then of its established VAT exemption, 3. Manufactured goods;
COFA is likewise exempted from the payment of
advance VAT required under RR No. 13-2008. (CIR 4. Goods in process for sale; and
v. Negros Consolidated Farmers Multi-Purpose
Cooperative, G.R. 212735, 05 Dec. 2018) 5. Goods and supplies for use in the course of the
taxpayer’s trade or business as a VAT-
Transitional Input Tax registered person. (Sec. 4.110-1(a), RR No. 16-
2005)
Transitional input tax credit operates to benefit
newly VAT-registered persons, whether or not they Allowable Transitional Input Tax
previously paid taxes in the acquisition of their
beginning inventory of goods, materials, and The allowed input tax shall be whichever is higher
supplies. During that period of transition from non- between:
VAT to VAT status, the transitional input tax credit 1. 2% of the value of the taxpayer’s beginning
serves to alleviate the impact of the VAT on the inventory of goods, materials and supplies; or
taxpayer. At the very beginning, the VAT-registered 2. The actual value-added tax paid on such goods.
taxpayer is obliged to remit a significant portion of (Sec.111(A), NIRC)
the income it derived from its sales as output VAT.
The transitional input tax credit mitigates this initial NOTE: Transitional input tax credit may only be
diminution of the taxpayer’s income by affording availed once. It may be carried over to the next
the opportunity to offset the losses incurred taxing period, until fully utilized.

243 UNIVERSITY OF SANTO TOMAS

FACULTY OF CIVIL L AW
 TAXATION LAW
Prior payment of taxes is not necessary before a using the rate of VAT as numerator and one hundred
taxpayer could avail of transitional input tax credit. percent (100%) plus rate of VAT as the
All that is required from the taxpayer is to file a denominator. Accordingly, the input tax that can be
beginning inventory with BIR. claimed by the buyer shall be the corrected amount
of VAT computed in accordance with the formula
A transitional input tax credit is not a tax refund per herein prescribed.
se but a tax credit. Sec. 112 of the NIRC does not
prohibit cash refund or tax credit of transitional There shall be allowed as a deduction from the
input tax. The grant of a refund or issuance of tax output tax the amount of input tax deductible to
credit certificate in this case would not contravene arrive at VAT payable on the monthly VAT
the above provision. The refund or tax credit would declaration and the quarterly VAT returns. (RR No.
not be unconstitutional because it is precisely 16-2005)
pursuant to Sec. 105 of the old NIRC which allows
refund/tax credit. (Fort Bonifacio Development Determination of Input Tax Creditable
Corporation vs. CIR, G.R. No. 173425, 22 Jan. 2013)
The amount of input taxes creditable during a
Q: Is Transitional Input Tax Credit applicable to month or quarter shall be determined by adding all
real property? creditable input taxes arising from the input tax
transactions during the month or quarter plus any
A: YES. Under Sec. 105 of the old NIRC (now Sec. amount of input tax carried-over from the preceding
111(A)), the beginning inventory of “goods” forms month or quarter, reduced by the amount of claim
part of the valuation of the transitional input tax for VAT refund or tax credit certificate (whether
credit. Goods, as commonly understood in the filed with the BIR, the Department of Finance, the
business sense, refer to the product which the VAT- Board of Investments or the BOC) and other
registered person offers for sale to the public. With adjustments, such as purchases returns or
respect to real estate dealers, it is the real properties allowances, input tax attributable to exempt sales
themselves which constitute their “goods”. Such real and input tax attributable to sales subject to final
properties are the operating assets of the real estate VAT withholding.
dealer. (Ibid.)
Computation of Output Tax, Input Tax, and Net
Determination of Output Tax VAT Payable or Excess Tax Credits

1. In a sale of goods or properties – the output vatable gross sales or

tax is computed by multiplying the gross selling Output tax receipts (exclusive of VAT) x
price by the regular rate of VAT. applicable VAT rate

2. For sellers of services – the output tax is vatable purchases

computed by multiplying the gross receipts by Input tax (exclusive of VAT) x VAT
the regular rate of VAT. applicable VAT rate

output tax less input tax

NOTE: In all cases where the basis for computing
the output tax is either the gross selling price or the Net VAT Payable
NOTE:
gross receipts, but the amount of VAT is erroneously or Excess tax
Net VAT payable = Output
billed in the invoice, the total invoice amount shall credits
tax > Input tax;
be presumed to be comprised of the gross selling Excess tax credits = Output
price/gross receipts plus the correct amount of VAT. tax < Input tax)
Hence, the output tax shall be computed by
multiplying the total invoice amount by a fraction

UNIVERSITY OF SANTO TOMAS 244

2023 GOLDEN NOTES
 II. NATIONAL TAXATION
Illustration: NOTE: Input tax attributable to VAT-exempt
Sale of hanky P112.00 sales shall not be allowed as credit against the
Purchase of materials P56.00 output tax but should be treated as part of cost
of goods sold.
Output Tax P12.00
For persons engaged in both zero-rated sales and
P112/1.12 = P100.00 VAT- non-zero-rated sales, the aggregate input taxes shall
exclusive amount be allocated ratably between the zero-rated and
P100*12% = P12.00 non-zero-rated sales (RR No. 16-2005)
Input Tax P6.00
VAT Payable or Excess Tax Credits
P56/1.12 = P50.00 VAT-exclusive
amount The resulting computation of output tax and
P50*12% = P6.00 crediting of input tax shall result to either the net
Net VAT Payable or Excess tax P6.00 VAT payable or excess tax credits.
credits
Net VAT Payable (NVP)
P12-P6 = P6.00
If at the end of any taxable quarter the output tax
NOTE: VAT-exempt transactions do not result to exceeds the input tax, the excess shall be paid by the
any output or input taxes. VAT-registered person.

Allocation of Input Tax on Mixed Transactions Excess Tax Credits (ETC)

A VAT-registered person who is also engaged in If the input tax inclusive of input tax carried over
transactions not subject to VAT shall be allowed to from the previous quarter exceeds the output tax,
recognize input tax credit on transactions subject to the excess input tax shall be carried over to the
VAT as follows: succeeding quarter or quarters.

1. All the input taxes that can be directly NOTE: Provided, that any input tax attributable to
attributed to transactions subject to VAT may zero-rated sales by a VAT-registered person may at
be recognized for input tax credit: Provided, his option be refunded or applied for a tax credit
that input taxes which are directly attributable certificate which may be used in the payment of
to VAT taxable sales of goods and services from internal revenue taxes
the Government or any of its political
subdivisions, instrumentalities or agencies, Thus, input tax, attributable to zero-rated sales may
including GOCCs shall not be credited against either be:
output taxes arising from sales to non- 1. Refunded, or
government entities, and 2. Credited against other internal revenue taxes
of the VAT taxpayer (e.g., income tax)
2. If any input tax cannot be directly attributed to
either a VAT taxable or VAT-exempt Illustration:
transaction, the input tax shall be pro-rated to
the VAT taxable and VAT-exempt transactions; OUTPUT INPUT
only the ratable portion pertaining to PERIOD NVP OR ETC
TAX TAX
transactions subject to VAT may be recognized
for input tax credit. January P12M P 6M NVP P 6M
February 6M 18M ETC (12M)
March 6M 18M ETC (12M)

245 UNIVERSITY OF SANTO TOMAS

FACULTY OF CIVIL L AW
 TAXATION LAW

Q1 P 24M P 42M ETC (P18M) Inventory of goods as

Transitional input shown in a detailed list
tax to be submitted to the
For the months of January and February, only the BIR
monthly taxes are computed. However, for the
month of March, the accumulated taxes for the first Input tax on
quarter will be aggregated to determine the NVP or “deemed sale Required invoices
ETC. transaction”
Monthly Remittance
In the example, the excess tax credit of P18 million Return of Value Added
can be refunded or credited against the other Input tax from
Tax Withheld (BIR Form
internal revenue taxes of the taxpayer after the payments made to
1600) filed by the
application and approval from the BIR non-residents
resident payor in behalf
Commissioner. (such as for
of the non-resident
services, rentals, or
evidencing remittance of
Substantiation of Input Tax Credits royalties)
VAT due which was
withheld by the payor.
TRANSACTIONS REQUIRED SUPPORT
Payment order showing
Import entry or other Advance VAT on
payment of the advance
equivalent document sugar
Importation of VAT
showing actual payment
goods
of VAT on imported
goods NOTE: Cash register machine tape issued to a
registered buyer constitute valid proof of official
Input taxes on
receipt. All purchases covered by invoices/receipts
domestic purchases Invoice showing
other than VAT Invoice/VAT Official Receipt shall
of goods or information required
not give rise to any input tax. (Sec. 4.113-1(A), RR No.
properties made in under Sec. 113 and 237
16-2005)
the course of trade of the NIRC
or business
Persons Entitled to Avail Input Tax Credit
Public instrument (i.e.,
deed of absolute sale, The input tax credit on importation of goods or local
deed of conditional sale, purchases of goods, properties or services by a VAT-
Input tax on registered person shall be creditable:
contract/agreement to
purchases of real 1. To the importer upon payment of the VAT
sell, etc.) together with
property prior to the release of the goods from the
the VAT invoice for the
entire selling price and customs custody;
a. Cash/deferred
non-VAT Official Receipt
basis 2. To the purchaser of the domestic goods or
for the initial and
b. Installment properties upon consummation of the sale; or
succeeding payments
basis
Public instrument and
VAT Official Receipt for 3. To the purchaser of the services or the lessee
every payment or the licenses upon payment of the
compensation, rental, royalty or fee (RR No. 16-
Official receipt showing 2005)
Input tax on
the information required
domestic
in Sec. 113 and 237 of NOTE: As long as the invoices from the suppliers are
purchases of service
the NIRC issued in the name of the taxpayer and expenses

UNIVERSITY OF SANTO TOMAS 246

2023 GOLDEN NOTES
 II. NATIONAL TAXATION
were actually incurred by the taxpayer, then the 2. Under cancellation of VAT registration – A
input tax pertaining to such expenses must be VAT-registered person whose registration has
credited to the taxpayer. Where the money came been cancelled due to retirement from or
from to pay these expenses is another matter all cessation of business, or due to changes in or
together but it does not change the fact that input cessation of status under Sec. 106 (C) of the Tax
tax has been incurred. (CIR v. Sony Philippines, Inc., Code may, within two (2) years from the date of
G.R. No. 178697, 17 Nov. 2010) cancellation, apply for the issuance of tax credit
certificate for any unused input tax which he
9. TAX REFUND OR TAX CREDIT may use in payment of his other internal
revenue taxes.
Persons Entitled to Claim Refund or Apply for
NOTE: Provided, however, that he shall be
Issuance of Tax Credit Certificate (TCC)
entitled to a refund if he has no internal revenue
tax liabilities against which the tax credit
1. Under zero-rated and effectively zero-rated
certificate may be utilized.
sales – Any VAT-registered person, whose sales
are zero-rated or effectively zero-rated. (Sec.
Provided, further, that the date of cancellation
112 (A), NIRC)
being referred hereto is the date of issuance of
tax clearance by the BIR, after full settlement of
A VAT-registered person whose sales of goods,
all tax liabilities relative to cessation of business
properties or services are zero-rated or
or change of status of the concerned taxpayer.
effectively zero-rated may apply for the
issuance of a tax refund of input tax attributable
Provided, finally, that the filing of the claim shall
to such sales. The input tax that may be subject
be made only after completion of the
of the claim shall exclude the portion of input
mandatory audit of all internal revenue tax
tax that has been applied against the output tax.
liabilities covering the immediately preceding
The application should be filed within two (2)
year and the short period return and the
years after the close of the taxable quarter when
issuance of the applicable tax clearance/s by the
such sales were made.
appropriate BIR Office which has jurisdiction
over the taxpayer.
In case of zero-rated sales under Secs.
106(A)(2)(a)(1) and (3), Secs. 108(B)(1) and
Requirements to Claim for VAT Refund
(2) of the Tax Code, the payments for the sales
must have been made in acceptable foreign
1. The taxpayer is VAT-registered;
currency duly accounted for in accordance with
the BSP rules and regulations.
2. The taxpayer is engaged in zero-rated or
effectively zero-rated sales;
Where the taxpayer is engaged in both zero-
rated or effectively zero-rated sales and in
3. The input taxes are due or paid;
taxable (including sales subject to final
withholding VAT) or exempt sales of goods,
4. The input taxes are not transitional input taxes
properties or services, and the amount of
as it cannot be claimed as a refund or credit;
creditable input tax due or paid cannot be
directly and entirely attributed to any one of the
5. The input taxes have not been applied against
transactions, only the proportionate share of
output taxes during and in the succeeding
input taxes allocated to zero-rated or effectively
quarters;
zero-rated sales can be claimed for refund or
issuance of a tax credit certificate.
NOTE: In Chevron Holdings, Inc. v. CIR, the
Supreme Court ruled that the taxpayer only

247 UNIVERSITY OF SANTO TOMAS

FACULTY OF CIVIL L AW
 TAXATION LAW
needs to prove non-application or non- were made. (Luzon Hydro Corporation v. CIR,
charging of the input VAT subject of the claim. G.R. No. 188260, 13 Nov. 2013)
There is nothing in the law and rules that
mandate the taxpayer to deduct the input tax NOTE: The taxpayer must prove the following for a
attributable to zero-rated sales from the tax refund to prosper:
output tax from regular twelve percent (12%)
1. That it is a VAT-registered entity; and
VAT-able sales first and only the "excess" may
2. It must substantiate the input VAT paid by
be refunded or issued a tax credit certificate.
purchase invoices or official receipts.
(Commissioner v. Manila Mining Corporation,
The remedies accorded by law to the taxpayer
G.R. No. 153204, 31 Aug. 2005)
are alternatives. Requiring taxpayers to prove
that they did not charge the input tax claimed
Failure to Comply with Invoicing Requirements
for refund against the output tax is one thing;
requiring them to prove that they have In a claim for tax refund or tax credit, the applicant
"excess" input tax after offsetting it from must prove not only entitlement to the claim but
output tax is another. The former is essential to also compliance with all the documentary and
the entitlement of the refund under Sec. evidentiary requirement. (Eastern
112(A); the latter is not. The reason is that a Telecommunication Philippines, Inc. v. CIR, G.R. No.
taxpayer who enjoyed a lower (or zero) output 183531, 25 Mar. 2015)
tax payable because it deducted the input tax
from zero-rated sales from the output tax Sec. 110(A)(1) of the NIRC provides that creditable
cannot benefit twice by applying for the refund input taxes must be evidenced by a VAT invoice or
or tax credit of the same input tax used to official receipt, which must, in turn, comply with
reduce its output tax liability. Proof of non- Sec. 113 of RA. 10963.
charging the input tax subject to the refund or
credit against the output tax is to avert double NOTE: Substantiation requirements to be entitled
recovery. (Chevron Holdings, Inc. v. CIR, G.R. No. to refund or tax credit under Sec. 112, NIRC. The
215159, 05 July 2022) claimant’s duties are two-fold:
1. Prove payment of input VAT to supplier; and
6. The input taxes claimed are attributable to
zero-rated or effectively zero-rated sales; 2. Prove zero-rated sales to purchasers – The
documents required are VAT receipt for sale of
7. For zero-rated sales under Sec. 106(A)(2)(1) services or lease of property and VAT invoice
and (2); 106(B); and 108(B)(1) and (2), the for sale of goods. The words ‘zero-rated’ must
acceptable foreign currency exchange also be stated in the VAT receipt or invoice.
proceeds have been duly accounted for in (Western Mindanao Power Corporation v. CIR,
accordance with the rules and regulations of G.R No. 181136, 13 June 2012)
the BSP;
The VAT invoice and VAT receipt should not be
8. Where there are both zero-rated or effectively confused as referring to one and the same thing; the
zero- rated sales and taxable or exempt sales, law did not intend the two to be used alternatively.
and the input taxes cannot be directly and The taxpayer tried to substantiate its input VAT on
entirely attributable to any of these sales, the purchases of goods with official receipts and on
input taxes shall be proportionately allocated purchases of services with invoices. Claim denied.
on the basis of sales volume; and (KEPCO v. CIR, G.R No. 181858, 24 Nov. 2010)

9. The claim is filed within two years after the In one case, the claim for refund/tax credit was
close of the taxable quarter when such sales denied because the proof for the zero-rated sale
consisted of secondary evidence like financial

UNIVERSITY OF SANTO TOMAS 248

2023 GOLDEN NOTES
 II. NATIONAL TAXATION
statements. (Luzon Hydro Corp. v. CIR G.R. No. (Takenaka Corporation – Philippine Branch vs. CIR,
188260, 13 Nov. 2013) G.R. No. 193321, 19 Oct. 2016)

In another case, the proofs for zero-rated sales of Q: May a taxpayer who has pending claims for
services were sales invoices. The claim was denied. VAT input credit or refund, set off said claims
(Takenaka Corp.-Philippine Branch v. CIR, G.R. No. against his other tax liabilities? Explain your
193321, 19 Oct. 2016) answer. (2001 BAR)

Q: Are sales invoices sufficient as evidence to A: NO. Set-off is available only if both obligations are
prove zero-rated sale of services by a taxpayer liquidated and demandable. Liquidated debts are
thereby entitling him to claim the refund of its those where the exact amounts have already been
excess input VAT? determined. In the instant case, a claim of the
taxpayer for VAT refund is still pending and the
A: NO. The claim for refund must be denied on the amount has still to be determined.
ground that the taxpayer had not established its
zero-rated sales of services through the A fortiori, the liquidated obligation of the taxpayer
presentation of official receipts. to the government cannot, therefore, be set-off
against the unliquidated claim which the taxpayer
As evidence of an administrative claim for tax conceived to exist in his favor. (Philex Mining Corp.
refund or tax credit, there is a certain distinction v. CIR, G.R. No. 125704, 28 Aug. 1998)
between a receipt and an invoice.
Q: Petitioner X Cola, Inc. (X Cola) failed to
Sec. 113 of the R.A. 10963 provides that a VAT declare certain input taxes in its VAT return for
invoice is necessary for every sale, barter or the 3rd and 4th quarters of 2007. X Cola alleged
exchange of goods or properties, while a VAT official overpayment of VAT for the said taxable periods
receipt properly pertains to every lease of goods or since the undeclared input taxes were not
properties, as well as to every sale, barter or credited against output tax.
exchange of services.
Since X Cola could not amend its VAT returns
A "sales or commercial invoice" is a written account due to the issuance of a BIR Letter of Authority
of goods sold or services rendered indicating the for 2007, it filed with the BIR claims for refund
prices charged therefor or a list by whatever name of alleged overpaid VAT for the 3rd and 4th
it is known which is used in the ordinary course of quarters of 2007. The BIR failed to act on the
business evidencing sale and transfer or agreement claims, so X Cola filed a Petition for Review with
to sell or transfer goods and services. the CTA. Is X Cola entitled to its claims for
refund?
A "receipt" on the other hand is a written
acknowledgment of the fact of payment in money or A: NO. X Cola is not entitled to the refunds as the
other settlement between seller and buyer of goods, amounts claimed represent undeclared input taxes,
debtor or creditor, or person rendering services and not erroneously paid taxes, as contemplated under
client or customer. Sec. 229 of the NIRC. Sec. 229 of the NIRC allows
recovery of any national internal revenue tax
The taxpayer submitted sales invoices, not official (including VAT) which was erroneously or illegally
receipts, to support its claim for refund. In light of assessed or collected.
the aforestated distinction between a receipt and an
invoice, the submissions were inadequate to comply X Cola’s input taxes for the 3rd and 4th quarters of
with the substantiation requirements for 2007 should have been declared in its quarterly VAT
administrative claims for tax refund or tax credit. returns so that these could be creditable against the
output tax for the same taxable periods. Since it

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failed to report the input taxes in its VAT returns, it foreign corporations, but also are not doing
could not offset the undeclared input taxes against business in the Philippines. Such proof must be
the output VAT. Under RR No. 16-2005, input taxes especially required from ROHQs such as AWSPI.
must be substantiated and reported in the VAT (CIR v. Deutsche Knowledge Services Pte. Ltd., G.R. No.
returns to be able to claim credit against the output 234445, 15 July 2020)
tax. While X Cola was able to substantiate a portion
of its claims, the input taxes were not reported in its Q: Team Energy filed with the BIR its Quarterly
VAT Returns. (Coca-cola Bottlers Phils., Inc. v. CIR, VAT Returns and its Monthly VAT Declaration.
CTA Case Nos. 7986 & 8028, 14 June 2013) CIR thereafter filed an administrative claim for
cash refund or issuance of tax credit certificate
Q: AWSPI is the Philippine branch of a corresponding to the input VAT reported in its
multinational company organized and existing Quarterly VAT Returns. Due to CIR’s inaction on
under and by virtue of the laws of Australia. It its claim, Team Energy filed a Petition for
rendered qualifying services to its foreign Review. However, in its Answer, the CIR argued
affiliates-clients, from which it generated that the alleged claim for refund is still subject
service revenues. As a value-added tax (VAT)- to administrative investigation/examination
registered enterprise, can AWSPI file for an and that Team Energy failed to prove
Application for Tax Refund/Credit with the compliance with the requirements. Is the CIR’s
Philippine Tax Authorities? contention correct?

A: YES. AWSPI may file for an application for tax A: NO. Respondent's failure to submit a Certificate
refund provided that it follows the requisites under of Compliance issued by the Energy Regulatory
Sec. 4.112-1 (a) of Revenue Regulations No. (RR) 16- Commission does not disqualify it from claiming a
05, otherwise known as the Consolidated VAT tax refund or tax credit. Given that respondent in
Regulations of 2005, in relation to Sec. 112 of the this case likewise anchors its claim for tax refund or
Tax Code, which states that a claimant's entitlement tax credit under Sec. 108(B)(3) of the Tax Code, it
to a tax refund or credit of excess input VAT cannot be required to comply with the
attributable to zero-rated sales hinges upon the requirements under the EPIRA before its sale of
following requisites: (1) the taxpayer must be VAT- generated power to NPC should qualify for VAT
registered; (2) the taxpayer must be engaged in zero-rating. Sec. 108(B)(3) of the Tax Code in
sales which are zero-rated or effectively zero-rated; relation to Sec. 13 of the NPC Charter, clearly
(3) the claim must be filed within two years after the provide that sale of electricity to NPC is effectively
close of the taxable quarter when such sales were zero-rated for VAT purposes.
made; and (4) the creditable input tax due or paid
must be attributable to such sales, except the The basis for the VAT zero-rated treatment of the
transitional input tax, to the extent that such input supplier is the tax exemption of the purchaser of
tax has not been applied against the output tax. services, and not the qualification of the supplier
itself, in order to relieve the tax-exempt purchaser
It is worth noting that for purposes of zero-rating from tax burden considering that it may not be able
under Sec. 108 (B) (2) of the Tax Code, the claimant to offset or utilize any input tax passed on by its
must establish the two components of a client's supplier of services, had the services it purchased
NRFC status, viz.: (1) that their client was been subject to VAT of 12%. (CIR v. Team Energy
established under the laws of a country not the Corporation, G.R. No. 230412, 27 Mar. 2019)
Philippines or, simply, is not a domestic
corporation; and (2) that it is not engaged in trade Q: On March 30, 2005, XYZ Company filed an
or business in the Philippines. To be sure, there application for tax credit of its excess/unused
must be sufficient proof of both of these input taxes attributable to zero-rated sales for
components: showing not only that the clients are the taxable year 2004 in the total amount of

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 II. NATIONAL TAXATION
P27,828,748.95. By reason of the inaction by the petitioner's sales of services. (Nippon Express
BIR, XYZ Company filed a Petition for Review (Philippines) Corporation v. CIR, G.R. 191495, 23 July
before the CTA on March 31, 2006. In its Answer, 2018)
respondent CIR interposed the defense, among
others, that XYZ Company’s excess input VAT Period to file Claim for Refund or Apply for
paid for its domestic purchases of goods and Issuance of Tax Credit Certificate
services attributable to zero-rated sales for the
four quarters of taxable year 2004 was not fully The claim, which must be in writing, for both cases,
substantiated by proper documents. CTA must be filed within two (2) years after the close of
Division denied the latter's claim for failure to the taxable quarter when the sales were made.
submit the required VAT official receipts as
proof of zero-rated sales. Reckoning Point for the Two (2) Year Period

In its appeal before the CTA En Banc, XYZ 1. Zero-rated or effectively zero-rated sales –
Company alleged that it had fully complied with Any VAT-registered person, whose sales are
the invoicing requirements when it submitted zero-rated or effectively zero-rated may, within
sales invoices to support its claim of zero-rated two (2) years after the close of the taxable
sales. XYZ Company argued that there is nothing quarter when the sales were made. (Sec. 112(A),
in the tax laws and regulations that requires the NIRC)
sale of goods or properties to be supported only
by sales invoices, or the sale of services by The two-year period should be reckoned from
official receipts only. Is XYZ Company's the close of the taxable quarter when the
contention correct? relevant sales were made pertaining to the
input VAT regardless of whether said tax was
A: NO. Sales invoices and documents other than paid or not. (CIR vs. Mirant Pagbilao
official receipts are not proper in substantiating Corporation, G.R. No. 172129, 12 Sept. 2008)
zero-rated sales of services in connection with a
claim for refund. VAT official receipts are Thus, when a zero-rated VAT taxpayer pays its
indispensable to prove sales of services by a VAT- input VAT for the purchase from its supplier a
registered taxpayer. When a VAT-taxpayer claims to year after the pertinent transaction of its sale to
have zero-rated sales of services, it must its purchaser, the said taxpayer only has a year
substantiate the same through valid VAT official to file claim for refund or tax credit of the
receipts, not any other document, not even a sales unutilized creditable input VAT. (Ingles, 2015)
invoice which properly pertains to a sale of goods or
properties. A VAT invoice is necessary for every In case the taxpayer is engaged in zero-rated
sale, barter or exchange of goods or properties and also in taxable or exempt sale, and the
while a VAT official receipt properly pertains to amount of creditable input tax due or paid
every lease of goods or properties, and for every cannot be directly and entirely attributed to any
sale, barter or exchange of services. Thus, a VAT one of the transactions, it shall be allocated
invoice and a VAT receipt should not be confused as proportionately on the basis of the volume of
referring to one and the same thing; the law did not sales.
intend the two to be used alternatively.
Q: Kepco Ilijan Corporation, a duly registered
In this case, the documentary proofs presented by domestic corporation, claimed a refund or
XYZ Company to substantiate its zero-rated sales of issuance of the tax credit certificate for
services consisted of sales invoices and other P74,000,000.00 for the VAT incurred in taxable
secondary evidence like transfer slips, credit year 2002. It filed its quarterly VAT returns for
memos, cargo manifests, and credit notes. It is very the four quarters of taxable year 2002. On April
clear that these are inadequate to support the 13, 2004, it brought its administrative claim for

251 UNIVERSITY OF SANTO TOMAS

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 TAXATION LAW
refund with RDO of the BIR, claiming excess used in payment of his other internal revenue taxes.
input VAT amounting to P74,000,000.00 for (Sec. 112(B), NIRC)
taxable year 2002. Nine days after filing the
administrative claim, the petitioner filed its Rules on Prescriptive Periods for Claiming
petition for review with the CTA. CTA dismissed Refund or Credit of Input Tax
the petition on the ground that it did not acquire
jurisdiction for Kepco’s failure to observe the CLAIM PRESCRIPTIVE PERIOD
120-30 day period in filing administrative and
judicial claims. Rule on the following: Only the administrative
claim that must be filed
1. the proper reckoning of the periods under within the period
Secs. 112(A) and 112(C) of the NIRC for
bringing the administrative and judicial GR: The reckoning date is
claims to seek the refund or issuance of the the close of the taxable
tax credit certificate of the VAT; and quarter when the relevant
sales were made
Administrative
2. the jurisdiction of the CTA over the case. Claim:
XPN: From June 8, 2007 to
Two-Year
A: September 12, 2008 the
Prescriptive
two-year prescriptive
1. The Court in Mirant held that "the reckoning Period
period for filing a claim for
frame would always be the end of the quarter
tax refund or credit should
when the pertinent sales or transaction was
be counted from the date of
made, regardless when the input VAT was
filing of the VAT return and
paid," applying Sec. 112(A) of the NIRC and no
payment of the tax. (Atlas
other provisions that pertained to erroneous
Consolidated Mining and
tax payments. (Kepco Ilijan Corporarion v. CIR,
Dev. Corp v CIR, G.R. No.
G.R. No. 205185, 26 Sept. 2018)
141104, 08 June 2007)

2. In San Roque, the Court acknowledged an Two ways of filing an appeal

instance when a premature filing in the CTA to the CTA:
was allowed. The mandatory and jurisdictional 1. Within 30 days after the
nature of the 120-30 period rule (now 90-30 CIR denies the claim
day period rule under TRAIN Law) did not within the 90-day
apply to claims for refund that were period, or
prematurely filed during the interim period 2. Within 30 days from the
from the issuance of BIR Ruling No. DA-489-03 expiration of the 90-
on December 10, 2003 to October 6, 2010. The day period if the CIR
Judicial Claim:
CTA could still take cognizance of the claims does not act within the
90+30 Day
because they were filed within the period 90-day period.
Period
exempted from the mandatory and
jurisdictional 120-30 period rule (now 90-30 GR: The 30-day period to
day period rule under TRAIN Law). (Ibid.) appeal always applies as it is
both mandatory and
Cessation of Business or VAT-registered Status jurisdictional.

The person may, within two (2) years from the date XPN: As an exception,
of cancellation, apply for the issuance of a tax credit premature filing is allowed
certificate for any unused input tax which may be only if filed between 10

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2023 GOLDEN NOTES
 II. NATIONAL TAXATION
December 2003 and 5 Q: Team Sual Corporation (TSC) is a domestic
October 2010, when BIR corporation principally engaged in the business
Ruling No. DA-489-03 was of power generation and sale to National Power
still in force Corporation (NPC) under a Build, Operate, and
Transfer scheme.
NOTE: Late filing is
absolutely prohibited. TSC applied for zero-rating VAT registration for
(CIR v. Mindanao II its sale of power generation services to NPC for
Geothermal Partnership, G.R. the taxable year 2001. For the first, second,
No. 191498, 15 Jan. 2014) third, and fourth quarters of 2001, TSC reported
excess input VAT amounting to P37,985,009.25,
NOTE: The rule on a claim for refund or credit of an P29,298,556.12, P32,869,835.40, and
erroneously or illegally collected tax under Sec. 229 P66,566,967.02, respectively. The total excess
of the NIRC is different. Under such, both the input VAT claimed by TSC for the taxable year
administrative and judicial claim must be filed amounted to P166,720,367.79.
within the two (2)-year prescriptive period from the
date of payment. The claim for refund or credit and On March 20, 2003, TSC filed with the BIR an
the appeal to CTA may occur simultaneously. administrative claim for refund for the
aggregate amount of its unutilized input VAT for
Period of Grant of Tax Credit Certificates or the taxable year 2001. On March 31, 2003, it
refund for Creditable Input Taxes by BIR filed with the CTA Division a petition for review
Commissioner praying for the refund or issuance of tax credit
certificates for its unutilized input VAT for the
The Commissioner may grant TCC/refund for first quarter of taxable year 2001. On July 23,
creditable input taxes within 90 days from the day 2003, TSC filed another petition for review
of submission of the complete documents in support praying for the refund or issuance of tax credit
of the application filed Provided, That, should the certificates for its unutilized input VAT for the
Commissioner find that the grant of refund is not second, third, and fourth quarters of taxable
proper, the Commissioner must state in writing the year 2001.
legal and factual basis for the denial. (Sec. 112, NIRC;
RR No. 13-2018) The CTA En Banc rendered a Consolidated
Decision granting petitioner's claim for refund
NOTE: The 90-day period begins to run from the of input VAT for the second, third, and fourth
submission of complete documents supporting the quarters of taxable year 2001 amounting to
administrative claim. If there is no evidence P123,110,001.68. Insofar as the refund of the
showing that the taxpayer was required to submit – input VAT for the first quarter of taxable year
or actually submitted – additional documents after 2001 is concerned, the CTA En Banc ruled that
the filing of the administrative claim, it is presumed the CTA did not acquire jurisdiction over it as it
that the complete documents accompanied the had been filed prematurely. Is the ruling of the
claim when it was filed. (Silicon Philippines, Inc., v. CTA En Banc correct?
CIR, G.R. No. 182737, 02 Mar. 2016)
A: YES. In order for the CTA to acquire jurisdiction
If the claim for VAT is not acted upon by the over a judicial claim for refund or tax credit arising
Commissioner within 90-day period as required by from unutilized input VAT, the said claim must first
law, such inaction shall be deemed a denial of the comply with the mandatory 120+30-day waiting
application for tax refund or credit. In such case, the period. Any judicial claim for refund or tax credit
CTA acquires jurisdiction. (Sec. 7(a)(2), R.A. 1125 as filed in contravention of said period is rendered
amended) premature, depriving the CTA of jurisdiction to act
on it.

253 UNIVERSITY OF SANTO TOMAS

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The CIR is then given a period of 120-days from the failed to apprise Company A of the completeness
submission of complete documents in support of the and adequacy of its supporting documents
application to either grant or deny the claim. If the within the 120-day period under Sec. 112 (C) of
claim is denied by the CIR or the latter has not acted the NIRC. Can Company A file a petition for
on it within the 120-day period, the taxpayer- review with the CTA Division after the lapse of
claimant is then given a period of 30 days to file a the 120-day period without any action from the
judicial claim via petition for review with the CTA. CIR?

TSC filed its administrative claim for refund for A: YES. Sec. 112 of the Tax Code, as amended,
taxable year 2001 on March 20, 2003, well within provides the periods relative to the filing of a claim
the two-year period provided for by law. TSC then for VAT refunds. Preliminarily, the law allows the
filed two separate judicial claims for refund: one on taxpayer to file an administrative claim for refund
March 31, 2003 for the first quarter of 2001, and the with the BIR within two years after the close of the
other on July 23, 2003 for the second, third, and taxable quarter when the purchase was made (for
fourth quarters of the same year. the input tax paid on capital goods) or after the close
of the taxable quarter when the zero-rated or
Given the fact that TSC's administrative claim was effectively zero-rated sale was made (for input tax
filed on March 20, 2003, the CIR had 120 days or attributable to zero-rated sale). The CIR must then
until July 18, 2003 to act on it. Thus, the first judicial act on the claim within 120 days from the
claim covering the first quarter of 2001 was submission of complete documents in support of the
premature because TSC filed it a mere 11 days after application. In the event of an adverse decision, the
filing its administrative claim. taxpayer may elevate the matter to the CTA by way
of a petition for review within 30 days from the
On the other hand, the second judicial claim filed by receipt of the CIR's decision. If, on the other hand,
TSC was filed on time because it was filed on July 23, the 120-day period lapses without any action from
2003 or five days after the lapse of the 120-day the CIR, the taxpayer may validly treat the inaction
period. Accordingly, it is clear that the second as denial and file a petition for review before the
judicial claim complied with the mandatory waiting CTA within 30 days from the expiration of the 120-
period of 120 days and was filed within the day period. An appeal taken prior to the expiration
prescriptive period of 30 days from the CIR's action of the 120-day period without a decision or action
or inaction. Therefore, the CTA division only of the CIR is premature, without a cause of action,
acquired jurisdiction over TSC's second judicial and, therefore, dismissible on the ground of lack of
claim for refund covering its second, third, and jurisdiction. (CIR v. Chevron Holdings, Inc., [Formerly
fourth quarters of taxable year 2001. (Team Sual Caltex (Asia) Limited, G.R. No. 233301, 17 Feb. 2020)
Corporation v. CIR, G.R. 201225-26, 18 Apr. 2018)
NOTE:, The mandatory period shall be 90 days
NOTE:, The mandatory period shall be 90 days (from 120 days) upon the effectivity of TRAIN Law.
(from 120 days) upon the effectivity of TRAIN Law.
Failure to Submit Complete Supporting
Q: Company A filed an administrative claim for Documents to Judicial Claim of Refund
refund with the BIR for its excess and unutilized
input VAT credits. In support of its application A distinction must be made between administrative
for refund, the company submitted documents it cases appealed due to:
deemed necessary for the grant of its refund
claim. It even authorized the examination of 1. Inaction of the CIR or the Commissioner;
voluminous supporting documents which were 2. Failure of the taxpayer to submit supporting
kept in its office and granted revenue officers documents – If the CIR dismissed an
access thereto. This notwithstanding, the CIR administrative claim due to the taxpayer's

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 II. NATIONAL TAXATION
failure to submit complete documents despite CTA does not acquire jurisdiction over the
notice/request, then the judicial claim before taxpayer's petition.
the CTA would be dismissible, not for lack of
jurisdiction, but for the taxpayer's failure to One of the conditions for a judicial claim of refund
substantiate the claim at the administrative or credit under the VAT System is compliance with
level. the 90+30 day mandatory and jurisdictional
periods. Thus, strict compliance with the 90+30 day
NOTE: When a judicial claim for refund or tax credit periods is necessary for such a claim to prosper,
in the CTA is an appeal of an unsuccessful whether before, during or after the effectivity of the
administrative claim, the taxpayer has to convince Atlas doctrine, except for the period from the
the CTA that the CIR had no reason to deny its claim. issuance of BIR Ruling No. DA-489-03 on December
It, thus, becomes imperative for the taxpayer to 10, 2003 to October 6, 2010 when the Aichi doctrine
show the CTA that not only is he entitled under was adopted, which again reinstated the 120+30
substantive law to his claim for refund or tax credit, (90+30 day period under TRAIN Law) day periods
but also that he satisfied all the documentary and as mandatory and jurisdictional. (CIR v. Mirant
evidentiary requirements for an administrative Pagbilao Corp., G.R. No. 180434, 20 Jan. 2016)
claim. It is, thus, crucial for a taxpayer in a judicial
claim for refund or tax credit to show that its Exception to the Mandatory and Jurisdictional
administrative claim should have been granted in Nature of the 90+30 Day Period (BIR Ruling No.
the first place. DA-489-03)

Consequently, a taxpayer cannot cure its failure to 1. During the effectivity of BIR Ruling No. DA-
submit a document requested by the BIR at the 489-03, and
administrative level by filing the said document 2. BIR Specific Ruling which misleads a particular
before the CTA. (Pilipinas Total Gas, Inc. v. CIR, G.R. taxpayer to prematurely file a judicial clam
No. 207112, 08 Dec. 2015) with the CTA.

Lapse of the 90-day period Before Taxpayer can As an exception to the mandatory and jurisdictional
Appeal to CTA 90+30 day period, it was emphasized that from the
time of issuance of BIR Ruling No. DA-489-03 on
The second paragraph of Sec. 112(C) of the R.A. December 10, 2003 up to its reversal by the
No.10963 envisions two scenarios: Supreme Court in the Aichi case on 6 Oct. 2010,
1. When a decision is issued by the CIR before the taxpayers/claimant need not wait for the lapse of
lapse of the 90-day period; and 120-day period (90-day period under TRAIN Law)
2. When no decision is made after the 90-day before it could seek judicial relief with the CTA by
period. way of Petition for Review. (RMC 54-2014)

In both instances, the taxpayer has 30 days within Before and after the aforementioned period (i.e.,
which to file an appeal with the CTA. As we see it December 10, 2003 to October 6, 2010), the
then, the 90-day period is crucial in filing an appeal observance of the 120-day period (90-day period
with the CTA. (CIR v. Aichi Forging Company of Asia, under TRAIN Law) is mandatory and jurisdictional
Inc., G.R. No. 184823, 06 Oct. 2010) to the filing of judicial claim for refund of excess
input VAT. (CE Luzon Geothermal Power Co., Inc. v.
Failure to comply with the 90-day waiting period CIR, G.R. No. 200841-42, 26 Aug. 2015)
violates a mandatory provision of law. It violates the
doctrine of exhaustion of administrative remedies NOTE: There is no need for a taxpayer to specifically
and renders the petition premature and thus invoke BIR Ruling No. DA-489-03 to benefit from
without a cause of action, with the effect that the the same. As long as the judicial claim was filed
between December 10, 2003 and October 6, 2010,

255 UNIVERSITY OF SANTO TOMAS

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then the taxpayer would not be required to wait for the 1997 NIRC on 1 January 1998, up to the present.
the lapse of 120-day period (90-day period under By way of an exception, judicial claims filed during
TRAIN Law). (CIR v. Air Liquide Phils. Inc., G.R. No. the window period from 10 December 2003 to 6
210646, 29 July 2015) October 2010, need not wait for the exhaustion of
the 120-day period. In this case, the two judicial
Q: Y Company is a VAT-registered taxpayer claims filed by the petitioner fell within the window
which was granted by the BIR a zero-rating on its period, thus, the CTA can take cognizance over
sales of electricity to National Power them. (San Roque Power Corporation v. CIR, G.R.
Corporation. On 22 December 2005 and 27 203249, 23 July 2018)
February 2006, they filed two separate
administrative claims for refund of its alleged NOTE:, The mandatory period shall be 90 days
unutilized input tax for the period January 2004 (from 120 days) upon the effectivity of TRAIN Law.
up to March 2004, and April 2004 up to
December 2004, respectively. Taxpayer Remedies

Due to the inaction of respondent CIR, Y 1. CIR’s inaction – The taxpayer may also appeal
Company filed petitions for review before the to the CTA within 30 days after the lapse of 90
CTA. The CTA Division partially granted the days from the submission of the complete
refund claim of the petitioner. The CIR moved documents, if no action has been taken by the
for reconsideration but to no avail. Thus, the CIR Commissioner.
filed a petition for review with the CTA En Banc
sided with the CIR in ruling that the judicial 2. CTA’s denial – The taxpayer may appeal the full
claims of Y Company were prematurely filed in or partial denial of the claim to the Court of Tax
violation of the 120-day and 30- day periods Appeal (CTA) within 30 days from the receipt of
prescribed in Sec. 112(D) of the NIRC. The court said denial, otherwise the decision shall become
held that by reason of prematurity of its final.
petitions for review, Y Company failed to
exhaust administrative remedies which is fatal Q: Gangwam Corporation (GC) filed its quarterly
to its invocation of the court's power of review. tax returns for the calendar year 2012 as
Is the court correct? follows:
First quarter - April 25, 2012
A: NO. The 120-day and 30-day periods are Second quarter - July 23, 2012
mandatory and jurisdictional. Thus, noncompliance Third quarter - October 25, 2012
with the mandatory 120+30-day period renders the Fourth quarter - January 27, 2013
petition before the CTA void. However, it is to be
noted that BIR Ruling No. DA-489-03 provides, “A On December 22, 2013, GC filed with the Bureau
taxpayer-claimant need not wait for the lapse of the of Internal Revenue (BIR) an administrative
120-day period before it could seek judicial relief claim for refund of its unutilized input Value-
with the CTA by way of Petition for Review.” Added Tax (VAT) for the calendar year 2012.
After several months of inaction by the BIR on its
It is a general interpretative rule issued by the CIR claim for refund, GC decided to elevate its claim
pursuant to its power under Sec. 4 of the NIRC, directly to the Court of Tax Appeals (CTA) on
hence, applicable to all taxpayers. Thus, taxpayers April 22, 2014. In due time, the CTA denied the
can rely on this ruling from the time of its issuance tax refund relative to the input VAT of GC for the
on 10 December 2003. first quarter of 2012, reasoning that the claim
was filed beyond the two-year period
In other words, the 120+30-day period is generally prescribed under Sec. 112(A) of the National
mandatory and jurisdictional from the effectivity of Internal Revenue Code (NIRC)

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a. Is the CTA correct? Q: Is Team Energy's (A VAT-registered entity)

b. Assuming that GC filed its claim before the failure to comply with the 120 + 30-day
CTA on February 22, 2014, would your prescriptive period is fatal to its claim?
answer be the same? (2014 BAR)
A: YES. A claim for input VAT refund or credit is
A: construed strictly against the taxpayer. Accordingly,
there must be strict compliance with the
a. NO. The CTA is not correct. The two-year period
prescriptive periods and substantive requirements
to file a claim for refund refers to the
set by law before a claim for tax refund or credit may
administrative claim and does not refer to the
prosper. The mere fact that Team Energy has
period within which to elevate the claim to the
proved its excess input VAT does not entitle it as a
CTA. The filing of the administrative claim for
matter of right to a tax refund or credit. The 120+30-
refund was timely done because it is made
day periods (90 + 30 day period under TRAIN Law)
within two years from the end of the quarter
in Sec. 112 is not a mere procedural technicality that
when the zero-rated transaction took place
can be set aside if the claim is otherwise
(Sec. 112 (A), NIRC) When GC decided to elevate
meritorious. It is a mandatory and jurisdictional
its claim to the CTA on April 22, 2014, it was
condition imposed by law. Team Energy's failure to
after the lapse of 120 days (90-day period
comply with the prescriptive periods is, thus, fatal
under TRAIN Law) from the filing of the claim
to its claim. (Team Energy v. CIR, G.R. No. 197663, 14
for refund with the BIR, hence, the appeal is
Mar. 2018)
seasonably filed. The rule on VAT refunds is two
years to file the claim with the BIR, plus 120
Q: For calendar year 2011, FFF, Inc., a VAT-
(90-day period under TRAIN Law) for the
registered corporation, reported unutilized
Commissioner to act and inaction after 120
excess input VAT in the amount of Pl ,000,000.00
days (now 90 days) is a deemed adverse
attributable to its zero-rated sales. Hoping to
decision on the claim, appealable to the CTA
impress his boss, Mr. G, the accountant of FFF,
within thirty (30) days from the lapse of the
Inc., filed with the BIR on January 31, 2013 a
120-day (now 90-day) period. (CIR v. Aichi
claim for tax refund/credit. Not having received
Forging Company of Asia, Inc., G.R. No. 184823,
any communication from the BIR, Mr. G filed a
06 Oct. 2010)
Petition for Review with the CTA on March 15,
2013, praying for the tax refund/credit of the
b. YES. The two-year prescriptive period to file a
Pl,000,000.00 unutilized excess input VAT of
claim for refund refers to the administrative
FFF, Inc. for 2011.
claim with the BIR and not the period to elevate
the claim to the CTA. Hence, the CTA cannot
a. Did the CTA acquire jurisdiction over the
deny the refund for reasons that the first
Petition of FFF, Inc.?
quarter claim was filed beyond the two-year
b. Discuss the proper procedure and
period prescribed by law. However, when the
applicable time periods for administrative
claim is made before the CTA on February 24,
and judicial claims for refund/credit of
there is definitely no appealable decision as yet
unutilized excess input VAT. (2015 BAR)
because the 120-day (90-day under TRAIN
Law) period for the Commissioner to act on the
A:
claim for refund has not yet lapsed. Hence, the
a. NO. The CTA has not acquired jurisdiction over
act of the taxpayer in elevation the claim to the
the Petition of FFF, Inc. because the juridical
CTA is premature and the CTA has no
claim has been prematurely filed on March 15,
jurisdiction to rile thereon. (CIR v. Aichi Forging
2013. The Supreme Court ruled that the 30-day
Company of Asia, Inc., G.R. No. 184823, 06 Oct.
period after the expiration of the 120-day
2010)
period (90-day period under TRAIN Law) fixed

257 UNIVERSITY OF SANTO TOMAS

FACULTY OF CIVIL L AW
 TAXATION LAW
by law for the Commissioner of Internal services, capital goods and payments for
Revenue to act on the claim for refund is services rendered by non-residents, which were
jurisdictional and failure to comply would bar all attributable to petitioner’s zero-rated sales
the appeal and deprive the CTA of its for the period of January 1, 2007 to December
jurisdiction to entertain the appeal. 31, 2007, pursuant to Sec. 112 (A) of the Tax
Code of 1997, as amended.
In this case, Mr. G filed the administrative claim
on January 31, 2013. The petition for review The next day, March 27, 2009, petitioner filed a
should have been should have been filed on petition for review with the Court of Tax Appeals
June 30, 2013. Filing the judicial claim on March since respondent had not yet issued a final
15, 2013 is premature, thus the CTA did not decision on its administrative claim. BIR raised
acquire jurisdiction. prematurity of judicial claim as one of its
defenses in its answer. Did the petitioner timely
b. The administrative claim must be filed with the filed its judicial claim for the issuance of tax
CIR within the two-year prescriptive period. credit certificate. If yes, when is the reckoning
The proper reckoning period date for the two- period for the 90 day period to file an
year prescriptive period is the close of the administrative claim for refund/credit of input
taxable quarter when the relevant sales were VAT.
made. However, as an exception, are claims
applied only from June 8, 2007 to September 12, A: Compliance with the 120-day and the 30-day
2008, wherein the two-year prescriptive period periods under Sec. 112 of the Tax Code, save for
for filing a claim for tax refund or credit of those Value-added Tax refund cases that were
unutilized input VAT payments should be prematurely (i.e., before the lapse of the 120-day
counted from the date of filing of the VAT return period) filed with the Court of Tax Appeals between
and payment of the tax. December 10, 2003 (when the Bureau of Internal
Revenue Ruling No. DA- 489-03 was issued) and
The taxpayer can file a judicial claim in one of October 6, 2010,is mandatory and jurisdictional.
two ways: (1) file the judicial claim within thirty Petitioner filed its judicial claim on March 27, 2009,
days after the Commissioner of Internal only a day after it had filed its administrative claim
Revenue denies the claim within the 120-day on March 26, 2009. Clearly, petitioner failed to
period, or (2) file the judicial claim within 30 comply with the 120-day waiting period, the time
days from the expiration of the 120-day period expressly given by law to the Commissioner of
if the Commissioner does not act within the Internal Revenue to decide whether to grant or deny
120-day period. its application for tax refund or credit.

As a general rule, the 30-day period to appeal is Sec. 112(A) of the Tax Code, as amended, provides
both mandatory and jurisdictional. As an that the reckoning period in filing an administrative
exception, premature filing is allowed only if claim is from the close of the taxable quarter when
filed between December 10, 2003 and October the sales were made and not from the date of filing
5, 2010, when the BIR Ruling No. DA-489-03 of the return and payment of the tax due. (CBK
was still in force. Power V. CIR, G.R. No. 202066, 30 Sept. 2014)

Q: On March 26, 2009, petitioner filed an NOTE:, The mandatory period shall be 90 days
administrative claim with the Bureau of Internal (from 120 days) upon the effectivity of TRAIN Law.
Revenue Laguna Regional District Office for the
issuance of a tax credit certificate. This amount Q: On September 26, 2007, CE Casecnan filed
represented "unutilized input taxes on its local before the Bureau of Internal Revenue an
purchases and/or importation of goods and administrative claim for refund or issuance of

UNIVERSITY OF SANTO TOMAS 258

2023 GOLDEN NOTES
 II. NATIONAL TAXATION
tax credit certificate for the excess or unutilized As to the Commencement of the Judicial Claim
input VAT in the total amount of P
The 30-day period of
26,066,286.96.
appeal to the CTA need
not necessarily fall
On March 14, 2008, CE Casecnan filed its Petition
within the two-year
for Review, docketed as CTA Case No. 7739, due
prescriptive period, as
to the inaction of the Commissioner of Internal
long as the
Revenue on its administrative claim.
administrative claim
before the CIR is filed
On December 2, 2010, the Court of Tax Appeals
within the two-year
Former Second Division denied CE Casecnan's
prescriptive period.
judicial claim.
This is because Sec.
112(C) of the 1997
Did CTA En Banc erred in denying CE Casecnan
NIRC mandates that a
claim for refund due to prescription?
taxpayer can file the
judicial claim: (1) only
A: NO. Resort to an appeal before the Court of Tax Period to file an
within thirty days after
Appeals should be made only within thirty (30) days administrative claim
the Commissioner
either from receipt of the decision denying the claim before the CIR and
partially or fully denies
or the expiration of the one hundred twenty (120)- judicial claim with the
the claim within the
day period given to the Commissioner to decide the CTA must fall within
120-day period (90-
claim. the 2-year prescriptive
day period under
period.
TRAIN Law) , or
The thirty (30)-day period provided in Sec. 112 of
(2) only within thirty
the 1997 National Internal Revenue Code to appeal
days from the
the decision of the Commissioner of Internal
expiration of the 120-
Revenue or its inaction is statutorily provided.
day (90-day period
Failure to comply is a jurisdictional error. The
under TRAIN Law)
window of exemption created in Commissioner of
period if the
Internal Revenue v. San Roque Power Corporation
Commissioner does
is limited to premature filing of the judicial remedy.
not act within the 120-
It does not cure lack of jurisdiction due to late filing.
day period (now 90-
(CE Casecnan v. CIR, G.R. No. 203928, 22 July 2015)
day period). (CIR v. San
Roque Power
NOTE:, The mandatory period shall be 90 days
Corporation, G.R. Nos.
(from 120 days) upon the effectivity of TRAIN Law.
187485, 196113,
197156, 12 Feb. 2013)
Sec. 112 on Refund for VAT and Sec. 229 on
Refund of Other Taxes Distinguished
Manner of Refund
SEC. 229
SEC. 112 (VAT)
(OTHERTAXES) Refund shall be made upon warrants drawn by the
As to Reckoning Point of the 2-year period Commissioner or by his duly authorized
representative without the necessity of being
Period is 2 years after countersigned by the Chairman of Commission on
Period is 2 years from
the close of the taxable Audit (COA) the provision of the Revised
the date of payment of
quarter when the sales Administrative Code to the contrary
the tax.
were made. notwithstanding: Provided, that refunds under this
paragraph shall be subject to post audit by the COA.

259 UNIVERSITY OF SANTO TOMAS

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Persons Required to register for VAT Failure to Register as VAT Taxpayer

Any person who, in the course of trade or business, He shall be held liable to pay the tax as if he is a VAT
sells, barters or exchanges goods or properties, ore registered person but he cannot avail of the input
engages in the sale or exchange of services, shall be tax credit for the period that he has not properly
liable to register for value-added tax if: registered. (Sec. 236(G), NIRC)

1. His gross sales or receipts for the past twelve Rules for VAT Registration
(12) months, other than those that are exempt
under Sec. 109(A) to (BB), have exceeded three BUSINESS REQUIREMENT
million pesos (P3,000,000); or
Mandatory VAT
Gross sales exceed
registration; generally
2. There are reasonable grounds to believe that P3,000,000
liable to pay 12% VAT
his gross sales or receipts for the next twelve
(12) months, other than those that are exempt Subject to optional VAT
under Sec. 109(A) to (BB), will exceed three registration
million pesos (P3,000,000).
If VAT-registered,
Gross sales do not generally liable to pay
Every person who becomes liable to be registered
exceed P 3,000,000 12% VAT.
under paragraph (1) of this subsection shall register
with the Revenue District Office which has If non-VAT registered,
jurisdiction over the head office or branch of that generally liable to pay
person. If he fails to register, he shall be liable to pay 3% percentage tax
the tax under Title IV as if he were a VAT-registered
person, but without the benefit of input tax credits
NOTE: This does not include the sale of parking lot
for the period in which he was not properly
which may or may not be included in the sale of
registered. (Sec. 236, NIRC)
condominium units. The sale of parking lots in a
condominium is a separate and distinct transaction
Optional VAT Registration for Exempt Persons
and is not covered by the rules on threshold amount
not being a residential lot, house & lot or a
1. Any person who is not required to register for
residential dwelling, thus, should be subject to VAT
value-added tax under Subsection (G) hereof
regardless of amount of selling price. (RR No. 13-
may elect to register for value-added tax by
2012)
registering with the Revenue District Office
that has jurisdiction over the head office of that
It is only the sale of real properties primarily held
person, and paying the annual registration fee
for sale to customers or held for lease in the
in Subsection (B) hereof; or
ordinary course of trade or business of the seller
which shall be subject to VAT. As such, transactions
2. Any person who elects to register under this
involving real properties held as capital asset of
Subsection shall not be entitled to cancel his
individuals are not subject to VAT. However, it may
registration under Subsection (F)(2) for the
give rise to capital gains tax liability.
next three (3) years.
Only persons engaged in real estate business either
NOTE: Provided that any person taxed under Sec.
as a real estate dealer, developer or lessors, are
24(A)(2)(b) and 24(A)(2)(c)(2)(a) of the NIRC who
subject to VAT.
elected to pay the eight percent (8%) tax on gross
sales or receipts shall not be allowed to avail of this
option. (Sec. 236, NIRC)

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2023 GOLDEN NOTES
 II. NATIONAL TAXATION
Invoicing Requirements d. If the sale involves goods, properties or
services some of which are subject to and
A VAT-registered person shall issue: some of which are VAT zero-rated or VAT-
1. A VAT invoice for every sale, barter or exempt, the invoice or receipt shall clearly
exchange of goods or properties; and indicate the breakdown of the sale price
between its taxable, exempt and zero-
2. A VAT official receipt for every lease of goods rated components, and the calculation of
or properties, and for every sale, barter or the value-added tax on each portion of the
exchange of services. (Sec. 113, NIRC) sale shall be shown on the invoice or
receipt: "Provided, That the seller may
NOTE: Only VAT-registered persons are required to issue separate invoices or receipts for the
print their TIN followed by the word "VAT" in their taxable, exempt, and zero-rated
invoice or official receipts. Said documents shall be components of the sale.
considered as a "VAT Invoice" or VAT.
3. The date of transaction, quantity, unit cost and
Information Required in VAT Invoice or VAT description of the goods or properties or
Official Receipts nature of the service; and

1. A statement that the seller is a VAT-registered 4. In the case of sales in the amount of P1,000 or
person, and the taxpayer's identification more where the sale or transfer is made to a
number (TIN); VAT-registered person, the name, business
style, if any, address and taxpayer
2. The total amount which the purchaser pays or identification number (TIN) of the purchaser,
is obligated to pay to the seller with the customer or client. (Sec. 113(B), NIRC)
indication that such amount includes the VAT.
Provided that: NOTE: The appearance of the word “zero rated” on
the face of invoices covering zero rated sales
a. The amount of the tax shall be shown as a prevents buyers from falsely claiming input VAT
separate item in the invoice or receipt; from their purchases when no VAT was actually
paid. If, absent such word, a successful claim for
NOTE: In case of failure to indicate the input VAT is made, the government would be
VAT as a separate item in the sales invoice refunding money it did not collect. Further, the
or official receipt, a fine of not less than printing of the word “zero-rated” on the invoice
P1,000 but not more than P50,000 shall, helps segregate sales that are subject to 12% VAT
upon conviction, be collected for each act from those sales that are zero-rated. Unable to
or omission in addition to imprisonment submit the proper invoices, taxpayer has been
of not less than 2 years but not more than unable to substantiate its claim for refund. (Eastern
4 years. (RR 18-2011) Telecommunication Phils. Inc. v. CIR, G.R. No. 183531,
25 Mar. 2015)
b. If the sale is exempt from value-added tax,
the term "VAT-exempt sale" shall be The failure to print the word “zero-rated” in the
written or printed prominently on the invoice or receipts is fatal to a claim for credit or
invoice or receipt; refund of input VAT on zero rated sales. (JRA
Philippines, Inc. v. CIR, G.R. No. 177127, 11 Oct. 2010)
c. If the sale is subject to 0% VAT, the term
"zero-rated sale" shall be written or
printed prominently on the invoice or
receipt; or

261 UNIVERSITY OF SANTO TOMAS

FACULTY OF CIVIL L AW
 TAXATION LAW
Invoicing Requirements in Deemed Sale If the business is to be liquidated and the goods
Transactions in the inventory are sold or disposed of to VAT-
registered buyers, an invoice or instrument of
1. In the case of transfer, use or consumption sale or transfer shall to prepared citing the
not in the ordinary course of business of invoice number wherein the tax was imposed
goods or properties originally intended for on the deemed sale. At the same time the tax
sale or for use in the ordinary course of paid corresponding to the goods sold should be
business – a memorandum entry in the separately indicated in the instrument of sale.
subsidiary sales journal to record withdrawal of (Sec. 4.113-2, RR No. 16-2005)
goods for personal use is required.
Issuing Erroneous VAT Invoices or VAT Official
2. In the case of distribution or transfer to Receipts
shareholders or creditors and consignment
of goods if actual sale is made within 60 days 1. In case of non-VAT registered person who
after the date of such consignment – an issues a VAT invoice/receipt shall be held
invoice shall be prepared at the time of the liable for:
occurrence of the transaction, which should a. Payment of percentage tax if applicable;
include, all the information prescribed in Sec. b. Payment of VAT without input tax;
113-1. The data appearing in the invoice shall c. 50% surcharge on tax due as provided for
be duly recorded in the subsidiary sales journal. under Sec. 248(B); and
The total amount of “deemed sale” shall be
included in the return to be filed for the month 2. In case a VAT-registered who issues a VAT
or quarter. invoice/official receipt for a VAT-exempt sale
without the words “VAT Exempt Sale,” the
3. In the case of retirement or cessation of transaction shall become taxable and the issuer
business – an inventory shall be prepared and shall be liable to pay VAT thereon. The
submitted to the RDO who has jurisdiction over purchaser shall be entitled to claim an input tax
the taxpayer’s principal place of business not credit on his purchase.
later than 30 days after retirement or cessation
from business. 10. FILING OF RETURNS AND PAYMENT

An invoice shall be prepared for the entire

Filing of Return
inventory, which shall be the basis of the entry
into the subsidiary sales journal. The invoice
Every person liable to pay the value-added tax
need not enumerate the specific items
imposed under this Title shall file a quarterly return
appearing in the inventory, but it must show the
of the amount of his gross sales or receipts within
total amount. It is sufficient to just make a
twenty-five (25) days following the close of each
reference to the inventory regarding the
taxable quarter prescribed for each taxpayer:
description of the goods. However, the sales
invoice number should be indicated in the
NOTE: Provided, however, That VAT-registered
inventory filed and a copy thereof shall form
persons shall pay the value-added tax on a monthly
part of this invoice.
basis: provided, finally. that beginning January 1,
2023, the filing and payment required under this
NOTE: If the business is to be continued by the
Subsection shall be done within twenty-five (25)
new owners or successors, the entire amount of
days following the close of each taxable quarter.
output tax on the amount deemed sold shall be
(Sec. 114, NIRC)
allowed as input taxes.

UNIVERSITY OF SANTO TOMAS 262

2023 GOLDEN NOTES
 II. NATIONAL TAXATION
Period to File and Pay VAT XPN: As the Commissioner otherwise permits.

VAT-registered persons shall pay VAT on a monthly Rules on Withholding of Final VAT on Sales to
basis. the Government

Period of Filing Monthly (Form 2550-M) and The Government or any of its political subdivisions,
Quarterly (Form 2550-Q) VAT Returns instrumentalities or agencies, including
Distinguished government owned or controlled corporations
(GOCCs) shall, before making payment on account of
FORM 2550-M FORM 2550-Q its purchase of goods and/or services taxed at 12%
shall deduct and withhold a final VAT of 5% of the
AS to scope
gross payment.
Quarterly sales and/or
receipts within 25 days The payment for lease or use of properties or
after the close of each property rights to non-resident owners shall be
taxable quarter. subject to 12% withholding tax at the time of
Monthly sales and/or
payment. The payor or person in control of the
receipts within 20 days
The VAT payable for payment shall be considered as the withholding
following the end of
each calendar quarter agent. (Sec. 114(C), NIRC)
month.
shall be reduced by the
total amount of taxes NOTE: The five percent (5%) final VAT withholding
Accomplished only for
previously paid for the rate shall represent the net VAT payable to the
each of the first 2
preceding 2 months seller.
months of each taxable
and/or the sum of the
quarter.
allowance excess input The remaining seven percent (7%) effectively
tax carried over and accounts for the standard input VAT for sales of
the VAT withheld by goods or services to government or any of its
the government. political subdivisions, instrumentalities or agencies
including GOCCs, in lieu of the actual Input VAT
As to deadline
directly attributable or ratably apportioned to such
20th day of following 25th day of following sales.
month calendar quarter
Actual Input VAT Exceeds Standard Input VAT
NOTE: Beginning January 1, 2023, the period for
filing and payment of VAT shall be within 25 days Should actual input VAT attributable to sale to
following the close of each taxable quarter. (R.A. No. government exceed seven percent (7%) of gross
10963) payments, the excess may form part of the seller’s
expense or cost.
Place to File and Pay VAT
Standard Input VAT exceeds Actual Input VAT
GR: VAT shall be filed and paid to:
1. An Authorized Agent Bank (AAB); If actual input VAT attributable to sale to
2. Revenue Collection Officer (RCO); or government is less than 7% of gross payment, the
3. Duly authorized city or municipal Treasurer, difference must be closed to expense or cost.
where such Treasurer is:
a. Within the Philippines; and Transactions with Non-Residents
b. Located within the revenue district where
the taxpayer is registered or required to The government or any of its political subdivisions,
register. (Sec. 114(B), NIRC) instrumentalities or agencies, including GOCCs, as

263 UNIVERSITY OF SANTO TOMAS

FACULTY OF CIVIL L AW
 TAXATION LAW
well as private corporations, individuals, estates Power of Commissioner to Suspend the Business
and trusts, whether large or non-large taxpayers, Operations of Taxpayer
shall withhold twelve percent (12%) VAT with
respect to the following payments: The Commissioner or his authorized representative
is empowered to suspend the business operations
1. Lease or use of properties or property rights and temporarily close the business establishment
owned by non-residents; for any of the following violations:

2. Services rendered to local insurance 1. In case of a VAT-registered person:

companies, with respect to reinsurance
premiums payable to non-residents; and a. Failure to issue receipts or invoices,
b. Failure to file a value-added tax return as
3. Other services rendered in the Philippines by required under Sec. 114, or
non-residents. c. Understatement of taxable sales or receipts
by thirty percent (30%) or more of his
VAT withheld and paid for the non-resident correct taxable sales or receipts for the
recipient (remitted using BIR Form No. 1600), taxable quarter;
which VAT is passed on to the resident withholding
2. Failure of any person to register as required
agent by the non-resident recipient of the income,
under Sec. 236
may be claimed as input tax by said VAT-registered
withholding agent upon filing his own VAT Return,
NOTE: The temporary closure of the establishment
subject to the rule on allocation of input tax among
shall be for the duration of not less than five (5) days
taxable sales, zero-rated sales and exempt sales. The
and shall be lifted only upon compliance with
duly filed BIR Form No. 1600 is the proof or
whatever requirements prescribed by the
documentary substantiation for the claimed input
Commissioner in the closure order. (Sec. 115, NIRC)
tax or input VAT.

Nonetheless, if the resident withholding agent is a

non-VAT taxpayer, said passed-on VAT by the non- D. TAX REMEDIES UNDER THE NATIONAL
INTERNAL REVENUE
resident recipient of the income, evidenced by the
duly filed BIR Form No. 1600, shall form part of the
cost of purchased services, which may be treated
Legal Bases of Tax Remedies
either as an "asset" or "expense", whichever is
applicable, of the resident withholding agent.
1. Government – Lifeblood Doctrine
The VAT withheld shall be remitted within 10 days
NOTE: Taxes are the lifeblood of the State,
following the end of the month the withholding was
through which the government and its agencies
made. (Sec. 4.114-2, RR No. 16-2005)
continue to operate and with which the State
effects its functions for the welfare of its
NOTE: Since it has not been shown that the class
constituents. (CIR v. CTA, G.R. No. 106611, 21 July
subject to the 5% final withholding tax has been
1994)
unreasonably narrowed, there is no reason to
invalidate the provision. It applies to all those who
2. Taxpayer – Due Process Clause of the
deal with the government. (Abakada Guro Partylist
Constitution
v. Ermita, G.R. No. 168056, 01 Sept. 2005)

Refer to previous discussions of

“Constitutional Limitations of Taxation” – p.
13

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2023 GOLDEN NOTES
 II. NATIONAL TAXATION
Remedies of the Government settlement of the taxpayer’s liability.

1. Administrative or Extrajudicial Remedies: Remedies of the Taxpayer

a. Assessment;
It is an action available to either the government or
b. Compromise;
a taxpayer whether judicial or extrajudicial, to
c. Tax lien;
enforce collection of taxes, on the part of the former,
d. Distraint;
or to prevent arbitrary collection of taxes, abuses, or
e. Levy;
harassment, by those enforcing the tax and payment
f. Garnishment;
of illegal taxes, in the part of the latter.
g. Forfeiture of real property;
h. Public sale of forfeited properties;
1. Administrative or Extrajudicial Remedies
i. Suspension of business operation;
j. Enforcement of administrative fines
a. Before payment:
(surcharge and interest);
k. Requiring the filing of bond to secure tax i. Tax minimization (Tax avoidance);
liability; ii. Secure BIR ruling or opinion of the
l. Requiring proof of filing Income Tax CIR;
Return; iii. Amendment of the tax return –
m. Deportation of aliens; within three (3) years from
n. Use of national tax registry; submission of that which is to be
o. Use of authorized cash machines by amended provided there is no
business establishments; investigation/ audit or assessment
p. Requiring printers to secure authority from yet;
BIR to print receipts/invoices;
q. Obtaining information from others about NOTE: This may trigger tax audit
subject taxpayer; investigation – in order for the BIR to
r. Abatement; check whether amendment is
s. Inventory taking/Surveillance; proper.
t. Prescribing presumptive gross sale or
gross receipts; iv. Disputing an assessment;
u. Prescribing real estate values; v. Compromise of the administrative,
v. Termination of tax period; civil, criminal case;
w. Arrest, search and seizure in certain cases; vi. Abatement of tax liability; and
x. Giving informer’s rewards; and vii. Abandonment of imported goods.
y. Inquiring into bank deposits in certain
cases. b. After payment:
i. Tax refund following the periods
2. Judicial Remedies:
prescribed by law;
a. Ordinary civil action: ii. Amendment of return with payment
i. Court collection filed in court; and claim for refund or credit within
ii. Hold-order against the departure of two (2) years from payment;
erring taxpayer; iii. Payment of the assessed tax without
b. Criminal action – pursuing criminal disputing the same and claim for tax
prosecution of taxpayer. refund or credit within two (2) years
from payment;
NOTE: The government may use these remedies iv. Question the validity of forfeiture;
singly or independently of each other, repeated or and
some or all of them simultaneously until there is full v. Redemption of real property.

265 UNIVERSITY OF SANTO TOMAS

FACULTY OF CIVIL L AW
 TAXATION LAW
2. Judicial Remedies of an assessment. An assessment informs the
taxpayer that he or she has tax liabilities. But not all
a. Civil Remedies: documents coming from the BIR containing a
computation of the tax liability can be deemed
i. Appeal to the CTA;
assessments. (CIR v. Pascor Realty & Development
ii. Secure injunction order or file a
Corporation, G.R. No. 128315, 29 June 1999)
motion to suspend collection of taxes
from the CTA;
In the context in which it is used in the NIRC, an
iii. Appeal from CTA to SC;
assessment is a written notice and demand made by
iv. Sue internal revenue officer for
the BIR on the taxpayer for the settlement of a due
damages caused in the performance
tax liability that is there definitely set and fixed.
of their duties arbitrarily;
(Adamson v. CA, G.R. No. 120935 & 124557, 21 May
v. Action to contest forfeiture of chattel,
2009)
enjoin its sale or recover
proceeds of sale; and
Tax assessment is the official action of an officer
vi. Action to question the validity of sale
authorized by law in ascertaining the amount of tax
of properties under distraint, levy,
due under the law from a taxpayer. This action
garnishment, or tax lien.
necessarily involves:
1. The computation of the sum due;
b. Criminal Remedies – criminal action
2. Giving notice to that effect to the taxpayer; and
against tax officials in the ordinary courts
3. The making, simultaneously with or sometime
for harassment, injury, and the like.
after the giving of notice, of a demand upon him
for the payment of the deficiency stated. (Tabag,
c. Special Remedies
2015)
i. Appeal to the President of the
Republic in case of revocation of
Importance of a Tax Assessment
license to do business in the country;
ii. Secure favorable legislation by
participating public hearing; TO THE
TO THE TAXPAYER
iii. Publishing tax views in the media or GOVERNMENT
use of broadcast media; 1. To enforce 1. To be informed of
iv. Lobbying in Congress; taxpayer liabilities his deficiency tax
v. People’s power or initiatives; and certain liabilities;
vi. Use of ballot boxes to choose public matters that relate 2. To determine the
officials that are sympathetic to to them, such as period to protest;
taxpayers; and the imposition of and
vii. Running for a seat in the Congress to surcharges and 3. To determine the
influence revenue bills. interests; prescription of
2. Statute of government claim.
Limitations;
1. ASSESSMENT OF INTERNAL REVENUE TAXES
3. Establishment of tax
liens; and
Tax Assessment 4. In estimating the
revenues that may
A formal written notice/communication with the be collected.
computation of the tax liability sent to the taxpayer
and demanding for the settlement of a due tax What Does Not Constitute an Assessment
liability within the indicated period thereof.
The NIRC defines the specific functions and effects 1. The Advice of Tax Deficiency and Preliminary

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Five-Day Letter given by the CIR to an employee (Tupaz v. Ulep, G.R. No. 127777, 01 Oct. 1999) The
of the taxpayer are not valid substitutes for the NIRC follows the pay-as-you-file system of taxation
mandatory notice in writing of the legal and under which the taxpayer computes his own tax
factual bases of the assessment. liability, prepares the return, and pays the tax as he
files the return.
2. The Revenue Officers’ Affidavit-Report, which
was attached to the Criminal Complaint filed XPNs:
with the Department of Justice, does not
1. When the taxable period of a taxpayer is
constitute an assessment. (CIR v. Pascor Realty
terminated (Sec. 6 (D), NIRC)
& Development Corporation, G.R. No. 128315, 29
2. In case of deficiency tax liability arising from a
June 1996)
tax audit conducted by the BIR (Sec. 56 (B), NIRC)
3. Tax lien (Sec. 219, NIRC)
3. A Written Communication by a revenue officer
4. Dissolving corporation (Sec. 52 I, NIRC)
of the tax liability of the taxpayer, giving him an
5. Improperly Accumulated Earnings Tax (Sec. 29,
opportunity to contest or disprove the BIR
NIRC)
examiner’s findings is not an assessment since
it is yet indefinite. The said recommendation
Modes of Service
letter served merely as the prima facie basis for
filing criminal information for the violation of
1. Personal service,
the NIRC. (Adamson v. Court of Appeals, G.R.
2. Service by mail, and
Nos. 120935 & 124557, 21 May 2009)
3. Substituted delivery.

4. A Letter Notice (LN) is entirely different and

NOTE: Service to the tax agent/practitioner, who is
serves a different purpose than a Letter of
appointed by the taxpayer, shall be deemed service
Authority (LOA). Due process demands that
to the taxpayer. (RR No. 18-2013)
after an LN has served its purpose, the Revenue
Officer should properly secure a LOA before
When Assessment is Made
proceeding with the further examination and
assessment of a taxpayer. (Medicard
An assessment is deemed made only when the
Philippines, Inc. v. CIR, G.R. No. 222743, 05 Apr.
Collector of Internal Revenue releases, mails or
2017)
sends such notice to the taxpayer. (CIR, v. Pascor
Realty and Development Corporation, et. al. G.R. No.
Kinds of Assessments
128315, 29 June 1999)

1. Self-assessment (Sec. 56(A), NIRC) – When the

Principles relative to Tax Assessments (P-A-D3)
taxpayer computes his own liability, files his
return, and pays the tax based on his
1. Prima facie presumed correct and made in
computation.
good faith

2. Deficiency assessment (Sec. 56(B), NIRC) – this

GR: Assessments are Prima facie presumed
occurs upon discovery of the BIR that the self-
correct and made in good faith, with the
assessment was either deficient or when no
taxpayer having the burden of proving
return was made by the taxpayer. (Ingles, 2015)
otherwise. (FELS Energy, Inc. v. The Province of
Batangas, et al., G.R. No. 168557, 16 Feb. 2007)
Issuance of Assessment
In the absence of any irregularities in the
performance of official duties, an assessment
GR: Internal Revenue Taxes are self-assessing and
will not be disturbed. Failure to present proof
do not require the issuance of an assessment notice
of error in assessments will justify judicial
in order to establish the tax liability of a taxpayer.

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affirmance of said assessment. (Atlas burden of proof is upon the complaining party
Consolidated Mining and Development to show clearly that the assessment is
Corporation v. Court of Appeals, G.R. No. 105563, erroneous. Failure to present proof of error in
10 Mar. 1995) the assessment will justify the judicial
affirmance of the said assessment. (RMC No. 23-
The burden of proof is on the taxpayer 2000)
contesting the validity or correctness of an
assessment to prove not only that the CIR is 3. Discretionary on the part of the
wrong, but the taxpayer is right. Otherwise, the Commissioner
presumption in favor of correctness of tax
assessment stands. Mandamus cannot lie to compel the CIR to
impose deficiency tax assessment. The CIR’s
Reasons for Presumption of Correctness of power to assess is a discretionary one. (Meralco
Assessments: v. Sevillano, G.R. No. L-46245, 23 Oct. 1982)

a. Lifeblood Theory; 4. Must be Directed to the right party

b. Presumption of regularity in the
performance of public functions; An affidavit, which was executed by the revenue
c. The likelihood that the taxpayer will have officers stating the tax liabilities of the taxpayer
access to the relevant information; and and attached to a criminal complaint for tax
d. The desirability of bolstering the record- evasion cannot be deemed a valid assessment,
keeping requirements of the NIRC. not having been received by the taxpayer and
thus the taxpayer was not informed of the law
XPN: Upon proof that an assessment is utterly and facts in which the assessment was made.
without foundation, meaning it is arbitrary and (CIR v. Pascor Realty Dev. Corp., G.R. No 128315,
capricious. Where the BIR has come out with a 19 June 1999)
“naked assessment” i.e., without any foundation
character, the determination of the tax due is 5. The authority vested in the Commissioner to
without rational basis. (CIR v. Hantex Trading assess taxes may be Delegated (Sec. 7, NIRC)
Co. Inc., G.R, No. 136975, 31 Mar. 2005)
The authority to make tax assessments may be
2. Should be based on Actual facts (CIR vs. delegated to subordinate officers. Said
Benipayo, G.R. No. L-13656, 31 Jan. 1962) assessment has the same force and effect as that
issued by the CIR if not revised or reviewed by
However, in the absence of the accounting the latter. (Oceanic Network Wireless Inc. v. CIR,
records of a taxpayer, his tax liability may be G.R. No. 148380, 09 Dec. 2005)
determined by estimation. The CIR is not
required to compute such tax liabilities with Before the delegated revenue officer can
mathematical exactness. Approximation in the conduct examination or assessment, there must
calculation of the taxes due is justified. be a clear grant of authority. This authority is
However, the rule does not apply where the embodied in a Letter of Authority (LOA) (CIR vs.
estimation is arrived at arbitrarily and Sony Philippines, Inc. G.R. No. 178697, 17 Nov.
capriciously. (CIR v. Hantex Trading Co. Inc., G.R, 2010)
No. 136975, 31 Mar. 2005)
Best Evidence Obtainable
An assessment on estimates is prima facie valid
Pursuant to CIR’s power to make assessment, the
and lawful where it does not appear to have
CIR shall assess the proper tax on the Best Evidence
been arrived at arbitrarily or capriciously. The
Obtainable when: (F-I-N)

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1. Any such report is False, Incomplete or furnished by an informer, the taxpayer
Erroneous, or understated its importations. However, the BIR
failed to secure certified true copies of the
2. When a report required by law as a basis for subject Consumption Entries from the Bureau of
assessment of any internal revenue tax shall Customs since, according to the custodian, the
Not be forthcoming within the time fixed by law originals had been eaten by termites. Can the
or regulation. (Sec. 6(B), NIRC) BIR base its assessment on mere photocopies of
records/documents?
This rule applies when a tax report is required by
law for the purpose of assessment, and it is not A: NO. While it is true that the CIR can assess
available or when the report is incomplete or taxpayers based on the “best evidence obtainable,”
fraudulent. (Sy Po vs. CTA, G.R. No. 81446, 18 Aug. such best evidence obtainable does not include
1988) photocopies of records/documents which are mere
scraps of paper and are of no probative value as
The "Best Evidence" includes the corporate and basis for any deficiency income or business taxes
accounting records of the taxpayer who is the against a taxpayer. (CIR v. Hantex Trading Co., Inc.,
subject of the assessment process, the accounting GR 136975, 31 Mar. 2005)
records of other taxpayers engaged in the same line
of business, including their gross profit and net When CIR shall Compute Income for Taxation
profit sales. Such evidence also includes data,
record, paper, document or any evidence gathered The CIR shall compute income for taxation in
by internal revenue officers from other taxpayers accordance with the method as in his opinion clearly
who had personal transactions or from whom the reflects income:
subject taxpayer received any income; and record, 1. If no method of accounting was employed by
data, document and information secured from the taxpayer, or
government offices or agencies. 2. The accounting method employed does not
clearly reflect the income. (Sec. 43, NIRC)
The law allows the BIR access to all relevant or
material records and data in the person of the
a) PROCEDURAL DUE PROCESS IN TAX
taxpayer. It places no limit or condition on the type
ASSESSMENTS
or form of the medium by which the record subject
to the order of the BIR is kept. The purpose of the
Assessment Process
law is to enable the BIR to get at the taxpayer's
records in whatever form they may be kept. Such
The assessment process starts with the self-
records include computer tapes of the said records
assessment by the taxpayer of his tax liability, the
prepared by the taxpayer in the course of business.
filing to the tax return, and the payment of the entire
tax due shown in his tax return in accordance with
NOTE: The best evidence obtainable may consist of
the methods and within the dates prescribed in the
hearsay evidence, such as the testimony of third
law and regulations. (Mamalateo, 2014)
parties or accounts or other records of other
taxpayers similarly circumstanced as the taxpayer
After filing a return, the Commissioner or his or her
subject of the investigation. As a rule, administrative
representative may allow the examination of any
agencies such as the BIR are not bound by the
taxpayer for assessment of proper tax liability. The
technical rules of evidence. (CIR v. Hantex Trading
Commissioner can examine records or other data
Co., Inc., GR No. 136975, 31 Mar. 2005)
relevant to his or her inquiry in order to verify the
correctness of any return, or to make a return in
Q: BIR assessed the taxpayer for alleged
case of noncompliance, as well as to determine and
deficiency taxes. The assessment was based on
collect tax liability. (CIR v. Fitness by Design, G.R. No.
photocopies of 77 Consumption Entries
215957, 09 Nov. 2016)

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a LOA. Any tax assessment issued without a LOA
Upon discovery of the BIR that the self-assessment renders the investigation null and void. (Medicard
was either deficient or when no return was made by Philippines, Inc. v. CIR, GR No. 222743, 05 Apr. 2017)
the taxpayer, the BIR issues deficiency assessment.
(Ingles, 2015) LOA must be Issued and Signed

Deficiency Assessment Process The only BIR officials authorized to issue and sign
Letters of Authority are the Regional Directors, the
1. Issuance of Letter of Authority Deputy Commissioners and the Commissioner. The
2. Tax Audit other officials may be authorized to issue and sign
3. Notice of Discrepancy Letters of Authority but only upon prior
4. Issuance of Preliminary Assessment Notice authorization by the Commissioner himself. (CIR v.
(PAN) McDonalds Philippines Realty Corp., GR No. 242670,
5. Reply 10 May 2021)
6. Issuance of Formal Letter of Demand and Final
Assessment Notice (FAN) Covered Period of LOA
7. Protest
8. Issuance of Final Decision of Disputed A LOA should cover a taxable period not exceeding
Assessment one taxable year. The practice of issuing LOAs
covering audit of “unverified prior years” is
Letter of Authority therefore prohibited. (CIR v. Sony Philippines, Inc.,
G.R. No. 178697, 17 Nov. 2010)
A Letter of Authority (LOA) is an official document
that authorizes a revenue officer to examine and Cases Need Not be Covered by a Valid LOA:
scrutinize a taxpayer’s books of accounts and other
accounting records, in order to determine the 1. Cases involving civil or criminal tax fraud which
taxpayer’s correct internal revenue tax liabilities. fall under the jurisdiction of the tax fraud
(Sec. 13, NIRC) division of the Enforcement Services; and
2. Policy cases under audit by the Special Teams in
There must be a grant of authority before any the National Office. (RMO 36-1999)
revenue officer can conduct an examination or
assessment and the revenue officer must not go Service of LOA
beyond authority. Otherwise, the assessment or
examination is a nullity. It must be served to the taxpayer within 30 days
from its date of issuance; otherwise, it shall become
The LOA commences the audit process and informs null and void. The taxpayer shall then have the right
the taxpayer that it is under audit for possible to refuse the service of this LA, unless the LA is
deficiency tax assessment. It is the authority given revalidated. (Medicard Philippines, Inc. v. CIR, G.R.
to the appropriate revenue officer to examine the No. 222743, 05 Apr. 2017)
books and accounting records of the taxpayer to
determine correct internal revenue liabilities for Q: How is LOA revalidated? How often can it be
collection. (CIR v. De La Salle University, Inc., G.R. Nos. revalidated?
196596, 198841 & 198941, 09 Nov. 2016)
Effect of Absence of LOA A: It is revalidated through the issuance of a new
LOA:
The absence of LOA violates the taxpayer’s right to 1. only once, if issued by the Regional Director;
due process. No assessments can be issued without 2. twice, if issued by the CIR.
prior approval and authorization of the CIR through

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NOTE: The suspended LOAs must be attached to the 235, NIRC)
new issued LOA. (RMO No. 38-1988)
Q: In 2010, pursuant to a LOA issued by the
Tax Audit Regional Director, Mr. Abcede was assessed
deficiency income taxes by the BIR for the year
This includes the examination of books of accounts 2009. He paid the deficiency. In 2011, Mr.
and other accounting records of the taxpayers by Abcede received another LA for the same year
revenue officers to determine the correct tax 2009, this time from the National Investigation
liability. (Mamalateo, 2014) Division, on the ground that Mr. Abcede's 2009
return was fraudulent. Mr. Abcede contested
Period within which Revenue Officer Should the LA on the ground that he can only be
Conduct an Audit investigated once in a taxable year. Decide.
(2013 BAR)
A revenue officer is allowed only 120 days to
conduct the audit and submit the required report of A: Mr. Abcede’s contention is not correct. While
investigation from the date of receipt of a LOA by the the general rule is to the effect that for income tax
taxpayer. If the RO is unable to submit his final purposes, a taxpayer must be subject to
report of investigation within the 120-day period, examination and inspection by the internal revenue
he must then submit a Progress Report to his Head officers only once in a taxable year, this will not
of Office and surrender the LOA for revalidation. apply if there is fraud, irregularity or mistakes as
determined by the Commissioner. In the instant
Q: How many times can a taxpayer be subjected case, what triggered the second examination is the
to examination and inspection for the same findings by the BIR that Mr. Abcede’s 2009 return
taxable year? was fraudulent, accordingly, the examination is
legally justified. (Sec. 235, NIRC)
A: GR: Only once per taxable year
Principle of Estoppel
XPNs: (F-R-C3)
1. When the CIR determines that Fraud, The error made by a tax official in the assessment of
irregularities, or mistakes were committed by his tax liabilities does not have the effect of relieving
the taxpayer; the taxpayer from the obligation to pay the full
amount of his tax liability, for taxes are fixed by law
2. When the taxpayer himself requests for the Re- and the government is never estopped to collect the
investigation or re-examination of his books of legitimate taxes because of errors committed by its
accounts and it was granted by the agents. (Commissioner v. Atlas Consolidated Mining
Commissioner; Co., G.R. No. L-26911, 27 Jan. 1981)

3. When there is a need to verify the taxpayer’s Notice of Discrepancy

Compliance with withholding and other
internal revenue taxes as prescribed in a This replaces the Notice of Informal Conference.
Revenue Memorandum Order issued by the Presently, there is no requirement for the issuance
Commissioner; of a Notice for Informal Conference since RR No. 18-
2013 deleted such requirement.
4. When the taxpayer’s Capital gains tax liabilities A Notice of Discrepancy (ND) will be issued to the
must be verified; or taxpayer if he is found to be liable for deficiency
taxes during investigation conducted by a revenue
5. When the Commissioner chooses to exercise his officer.
power to obtain information relative to the
examination of other taxpayers. (Secs. 5 and It is not yet a deficiency tax assessment. It only aims

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to fully afford the taxpayer with an opportunity to NOTE: Prior to the issuance of the PAN, the taxpayer
present and explain his side on the discrepancies may be allowed to make voluntary payments of
found. probable deficiency taxes and penalties. (RMO 11-
2014)
Covered Period of ND
Requirements of a Valid PAN
The taxpayer must be able to present and explain its
side on the discrepancies noted by the BIR within 1. Due process requirements – That the
five (5) days from receipt of the notice. If the assessment must be in writing and must state
taxpayer needs more time to present documents, he the facts and the law upon which it is based;
may submit such documents after the discussion
but within 30 days from receipt of the ND. The NOTE: The sending of PAN to taxpayer to
discussion of discrepancies shall not extend beyond inform him of the assessment made is but part
30 days from the receipt of the notice. of the “due process requirement in the issuance
of a deficiency tax assessment,” the absence of
If the taxpayer disagrees with the discrepancies which renders nugatory any assessment made
detected during the audit, the taxpayer must by the tax authorities. Therefore, for its failure
present an explanation and provide supporting to send the PAN stating the facts and the law on
documents. Should the taxpayer need more time to which the assessment was made as required by
present the documents, he may submit such the law, the assessment made by the CIR is void.
documents that support his explanation within (CIR v. Metro Star Suprema, Inc., G.R. No. 185371,
thirty (30) days after receipt of the ND. 08 Dec. 2010)

If after being allowed to present his side through the 2. The amount must be definitely set; and
Discussion of Discrepancy, it is still found that the
taxpayer is still liable for deficiency taxes and the 3. It must contain a due date. (Soriano, Manuel &
taxpayer does not address the discrepancies Laco, 2021)
through payment of the deficiency taxes, or the
taxpayer does not agree with the findings, the Issuance of PAN
investigating officer shall endorse the case to the
reviewing office and approving official for issuance GR: There must be a PAN issued by the BIR before
of a deficiency tax assessment in the form of a issuing a Formal Letter of Demand (FLD)/ Final
Preliminary Assessment Notice (PAN) within ten Assessment Notice (FAN).
(10) days from the conclusion of the Discussion. (RR
No. 22-2020) XPN: PAN is not required in the following instances:
(M-E-D-E-C)
Preliminary Assessment Notice (PAN)
1. When the finding for any deficiency tax is the
If after review and evaluation by the Commissioner result of Mathematical error in the computation
or his duly authorized representative, as the case of the tax appearing on the face of the tax return
may be, it is determined that there exists sufficient filed by the taxpayer; or
basis to assess the taxpayer for any deficiency tax or
taxes, the said Office shall issue to the taxpayer a 2. When the Excise tax due on excisable articles
PAN for the proposed assessment. It shall show in has not been paid; or
detail the facts and the law, rules and regulations, or
jurisprudence on which the proposed assessment is 3. When a Discrepancy has been determined
based. (RR No. 18-2013) between the tax withheld and the amount
actually remitted by the withholding agent; or

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4. When an article locally purchased or imported deficiency tax assessment as a result of a
by an Exempt person, such as, but not limited to, mathematical error in the computation of his
vehicles, capital equipment, machineries and income tax, as appearing on the face of his
spare parts, has been sold, traded or transferred income tax return for the year 2011, which he
to non-exempt persons (Sec. 228, NIRC); or filed on April 15, 2012. Mr. Tiaga believes that
there was no such error in the computation of
5. When a taxpayer who opted to claim a refund or his income tax for the year 2011. Based on the
tax credit of excess creditable withholding tax assessment received by Mr. Tiaga, may he
for a taxable period was determined to have already file a protest thereon? (2014 BAR)
Carried over and automatically applied the
same amount claimed against the estimated tax A: YES. Mr. Tiaga may consider the assessment
liabilities for the taxable quarter or quarters of notice as a final assessment notice and his right to
the succeeding taxable year. (Sec. 3.1.2, RR No. protest within 30 days from receipt may now be
18-2013) exercised by him.

In the above-cited cases, an FLD/FAN shall be issued When the finding of a deficiency tax is the result of
outright. (2002 BAR) mathematical error in the computation of the tax
appearing on the face of the return, a pre-
Q: In the investigation of the withholding tax assessment notice shall not be required, hence, the
returns of AZ Medina Security Agency (AZ) for assessment notice is a final assessment notice. (Sec.
the taxable years 1997 and 1998, a discrepancy 228, NIRC; RR No. 18-2013)
between the taxes withheld from its employees
and the amounts actually remitted to the Q: On July 15, 2009, the CIR issued to DEF, Inc. a
government was found. Accordingly, before the Letter Notice (LN) informing it of the
period of prescription commenced to run, the discrepancy found after comparing its tax
BIR issued an assessment and a demand letter returns for Calendar Year (CY) 2007 with the
calling for the immediate payment of the Reconciliation and Third-Party Matching under
deficiency withholding taxes in the total amount the Tax Reconciliation System. The LN was
of P250,000.00. Counsel for AZ protested the received and signed by a certain Malou Bohol on
assessment for being null and void on the July 24, 2009. Subsequently, the BIR issued a
ground that no pre-assessment notice had been follow-up letter dated August 24, 2009. The
issued. Is the contention of the counsel tenable? letter was received and signed by a certain
(2002 BAR) Amado Ramos. Due to the inaction of DEF, Inc.,
the CIR issued to it, on January 12, 2010, the
A: NO. The contention of the counsel is untenable. following: (1) Letter of Authority (LOA) for the
Sec. 228, NIRC expressly provides that no pre- examination of its book of accounts; and other
assessment notice is required when a discrepancy accounting records and (2) a Notice of Informal
has been determined between the tax withheld and Conference (NIC). On March 29, 2010, the CIR
the amount actually remitted by the withholding issued a Preliminary Assessment Notice (PAN)
agent. Since the amount assessed relates to with attached Details of Discrepancies that
deficiency withholding taxes, the BIR is correct in found DEF, Inc. liable for deficiency income tax
issuing the assessment and demand letter calling for (IT) and value-added tax (VAT). On July 20,
the immediate payment of the deficiency 2010, the CIR issued a Final Assessment Notice
withholding taxes. (FAN), assessing DEF, Inc. with deficiency VAT
and deficiency IT. On November 28, 2012, the
Q: Mr. Tiaga has been a law-abiding citizen Revenue District Officer (RDO) issued a
diligently paying his income taxes. On May 5, Preliminary Collection Letter requesting DEF,
2014, he was surprised to receive an assessment Inc. to pay the assessed tax liability within 10
notice from the BIR informing him of a days from notice. On January 23, 2013, the RDO

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issued a Final Notice Before Seizure (FNBS) Effect of Taxpayer’s Failure to Respond to PAN
giving DEF, Inc. the last opportunity to settle its
tax liability within 10 days from notice. Are the The taxpayer shall be considered in default, in which
assessments made against DEF, Inc. for the case, a FLD/FAN shall be issued calling for payment
deficiency IT and deficiency VAT are void? of the taxpayer's deficiency tax liability, inclusive of
the applicable penalties. (Sec. 3.1.1(2), RR No. 18-
A: YES. Sec. 228 of the National Internal Revenue 2013)
Code (NIRC) of 1997, as amended, requires the
assessment to inform the taxpayer in writing of the For the purpose of contesting in writing the findings
law and the facts on which the assessment is made; contained in a PAN, the regulations use the term
otherwise, the assessment shall be void. Sec. 3 of RR “reply” to distinguish the written objections against
No. 12- 1999 dated 06 Sep. 1999 highlights the due a FAN issued by the BIR, where the generic term
process requirement in Sec. 228 of the NIRC. Service “protest” or the specific term “request for
of the PAN or the FAN to the taxpayer may be made reconsideration” or “request for reinvestigation” is
by registered mail. utilized.

Under Sec. 3(v), Rule 131 of the Rules of Court, there The failure to file a reply to PAN will not bar the
is a disputable presumption that "a letter duly taxpayer from protesting the FAN because PAN is
directed and mailed was received in the regular not the final assessment which can be protested as
course of the mail." However, the presumption is contemplated under the NIRC.
subject to controversy and direct denial, in which
case the burden is shifted to the party favored by the Formal Letter of Demand and Final Assessment
presumption to establish that the subject mailed Notice
letter was actually received by the addressee. In
view of DEF, Inc.'s categorical denial of due receipt The FLD or FAN are notices issued to taxpayers who
of the PAN and the FAN, the burden was shifted to fail to respond to the PAN within the prescribed
the CIR to prove that the mailed assessment notices period, or those who respond to the PAN without
were indeed received by DEF, Inc. or by its merit.
authorized representative. As ruled by the CTA En
Banc, the CIR's mere presentation of Registry A final assessment is a notice "to the effect that the
Receipt Nos. 5187 and 2581 was insufficient to amount therein stated is due as tax and a demand
prove DEF, Inc.'s receipt of the PAN and the FAN. It for payment thereof." This demand for payment
held that the witnesses for the CIR failed to identify signals the time "when penalties and interests begin
and authenticate the signatures appearing on the to accrue against the taxpayer and enabling the
registry receipts; thus, it cannot be ascertained latter to determine his remedies." Thus, it must be
whether the signatures appearing in the documents "sent to and received by the taxpayer and must
were those of DEF, Inc.'s authorized demand payment of the taxes described therein
representatives. (CIR v. T Shuttle Services, Inc., G.R. within a specific period.” (CIR v. Fitness by Design,
No. 240729, 24 Aug. 2020) Inc., G.R. No. 215957, 09 Nov. 2016)

Period for the Taxpayer to Respond to PAN via Issuance of FLD or FAN
“Reply”
The CIR or his duly authorized representative may
The taxpayer has 15 days from receipt of PAN to file issue FLD or FAN:
a written reply contesting the proposed assessment.
1. If there is no need to issue a PAN because the
circumstances show that it falls within the
exceptions for the issuance of PAN;

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2023 GOLDEN NOTES
 II. NATIONAL TAXATION
2. If the taxpayer is in default for failure to Q: Who issues the FAN?
respond to a PAN within a period of 15 days
from the receipt of PAN; or A: It shall be issued by the Commissioner of Internal
Revenue or his duly authorized representative.
3. If the CIR or his duly authorized representative
does not agree with the justifications stated by The term “duly authorized representative” under
the taxpayer in his reply to the PAN. Sec. 6(A) of the NIRC which may authorize
(Domondon, 2014) examination of taxpayers refers to a Revenue
Regional Director in accordance with Secs. 10 and
The FLD/FAN calling for payment of the taxpayer's 13 of the NIRC. The term likewise refers to other tax
deficiency tax or taxes shall state the facts, the law, officials with the rank equivalent to a division chief
rules and regulations, or jurisprudence on which the or higher, pursuant to the CIR’s authority to
assessment is based; otherwise, the assessment delegate powers vested in him under Sec. 7 of the
shall be void. (RR No. 18-2013) NIRC. (CIR v. Linde Philippines, Inc., C.T.A. EB Case No.
2194, 05 Jan. 2021)
The FAN and FLD should always go together. The
law requires that the factual and/or legal bases of Q: In what form shall the FAN be and what
the assessment must be stated, and this should it contain?
requirement is not satisfied by the issuance of FAN
alone, a letter of demand fills up the void and A:
explains to the taxpayer how the deficiency
1. In writing; and
assessment was arrived at, including the reasons
2. Shall state the facts, the law, rules and
and legal bases for the assessment. (Mamalateo,
regulations, or jurisprudence on which the
2014)
assessment is based, otherwise, the FAN shall
be void. (Sec. 228, NIRC; Sec. 3.1.3, RR No. 18-
Period to Issue FLD or FAN
2013)

If the taxpayer, within 15 days from date of receipt

NOTE: If the FAN is deemed insufficient insofar as
of the PAN, responds that he/it disagrees with the
compliance with Sec. 228 of the NIRC is concerned,
findings of deficiency tax or taxes, an FLD/FAN shall
such insufficiency can be cured if the FLD can show
be issued within 15 days from filing/submission of
the legal and factual bases relied upon in the
the taxpayer’s response, calling for payment of the
issuance of the assessment which the FAN failed to
taxpayer's deficiency tax liability, inclusive of the
detail.
applicable penalties. (RR No. 18-2013)
Q: What does the phrase “in writing” under Sec.
NOTE: Issuance of the FAN/FLD without waiting for
228 mean?
the 15-day period to reply to PAN is a violation of
due process. (CIR vs. Next Mobile, Inc., CTA EB Case
A: It does not exclusively mean written words.
No. 1419, 21 Nov. 2016)
“Writing” consists of letters, word, numbers, or their
An FLD or FAN issued beyond 15 days from filing or
equivalent, set down by handwriting, typewriting,
submission of the taxpayer’s response to the PAN
printing, photostating, photographing, magnetic
shall be valid, provided that, it is issued within the
impulse, mechanical or electronic recording, or
period of limitation to assess internal revenue taxes.
other form of data compilation. Indubitably, figures
The non-observance of the 15-day period, however,
are also “writings” and if the numerical presentation
shall constitute an administrative infraction and the
is understandable enough, then there is no reason
revenue officers who caused the delay shall be
why it should be automatically rejected as
subject to administrative sanctions as provided for
inadequate compliance with the law. (Sevilla, v. CIR,
by law and pertinent revenue issuances. (RMO No.
CTA Case 6211, 04 Oct. 2004)
11-2014)

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Q: Is substantial compliance of the notice on the part of BIR. The taxpayer cannot be blamed
requirement under Sec. 228 of the NIRC for not filing a protest against the FAN since the
allowed? language used and the tenor of the demand letter
indicate that it is the final decision of the CIR on the
A: YES. The notice requirement under Sec. 228 of matter. The CIR must indicate, in a clear and
the NIRC is substantially complied with whenever unequivocal language, whether its action on a
the taxpayer had been fully informed in writing of disputed assessment constitutes its final
the factual and legal bases of the deficiency taxes determination thereon in order for the taxpayer
assessment, which enabled the latter to file an concerned to determine when his or her right to
effective protest. appeal to the tax court accrues. Thus, the CIR is now
estopped from claiming that it did not intend the
In the case of Samar I Electric Cooperative v. CIR, the FAN to be a final decision. (Allied Banking Corp. v.
Court held that although the FAN and demand letter CIR, G.R. No. 175097, 05 Feb. 2010)
were not accompanied by a written explanation of
the legal and factual bases of the assessed deficiency NOTE: An FLD/FAN issued reiterating the
taxes, the records showed that CIR responded to immediate payment of deficiency taxes and
taxpayer’s letter-protest, explaining at length the penalties previously made in the PAN is a denial of
factual and legal bases of the deficiency tax the response to the PAN. A final demand letter for
assessments and denying the protest. payment of delinquent taxes may be considered a
decision on a disputed assessment. This includes a
Considering the foregoing exchange of disputed PAN. So long as the parties are given the
correspondence and documents between the opportunity to explain their side, the requirements
parties, the requirement of Sec. 228 was of due process are satisfactorily complied with.
substantially complied with. Respondent had fully (RMO No. 11-2014)
informed petitioner in writing of the factual and
legal bases of the deficiency taxes assessment, b) REQUISITES OF A VALID ASSESSMENT
which enabled the latter to file an “effective” protest.
Taxpayer’s right to due process was thus not Requisites
violated. (Samar-I Electric Corp v. CIR, G.R. No. 1. It must be in writing and signed by the BIR;
193100, 10 Dec. 2014) 2. It must contain the law and the facts on which
the assessment is based (basis must be
Q: Taxpayer duly protested a PAN it received provided);
from the BIR. Subsequently, the BIR issued a FAN 3. It must contain a demand for payment within
to the taxpayer. The demand letter states: “This the prescribed period; and
is our final decision based on investigation. If you 4. It must be served on and received by the
disagree, you may appeal the final decision taxpayer.
within 30 days from receipt hereof, otherwise
said deficiency tax assessment shall become final, NOTE: The taxpayers shall be informed in writing of
executory and demandable.” Instead of filing a the law and the facts on which the assessment is
protest on the assessment, the taxpayer filed a made; otherwise, the assessment shall be void.
petition for review with the CTA. The BIR filed a
motion to dismiss on the ground that the Moreover, the regulations provide that the FLD and
taxpayer failed to exhaust administrative FAN shall be issued by the Commissioner or his duly
remedies by filing a protest on the assessment. authorized representative.
Should the motion be granted?
Q: After examining the books and records of EDS
A: NO. This case is an exception to the rule on Corporation, the 2004 final assessment notice,
exhaustion of administrative remedies, i.e., estoppel showing basic tax of P1,000,000 deficiency

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interest of P400,000 and due date for payment 2. Deficiency tax amount of tax in
of April 30, 2007, but without the demand letter, assessed by the the taxpayer’s
was mailed and released by the BIR on April 15, BIR becomes final return; or
2007. The registered letter, containing the tax and executory and
assessment, was received by the EDS the taxpayer has 2. If there is no
Corporation on April 25, 2007. not paid it within amount tax in his
the period given in return, then the
a. What is an assessment notice? What are the the notice of amount by which
requisites of a valid assessment? Explain assessment. the tax as
b. As tax lawyer of EDS Corporation, what legal determined by the
defense(s) would you raised against the CIR or his
assessment? Explain. (2008 BAR) authorized
representative
A: exceeds the
amounts
a. An assessment notice is formal notice to the
previously
taxpayer stating that the amount thereon is due
assessed or
as a tax and containing a demand for the
collected without
payment thereof (CIR v. Pascor Realty and
assessment as
Development Corp., G.R. No. 128315, 29 June
deficiency. (Sec.
1999) To be valid, the taxpayer must be
56(B), NIRC)
informed in writing of the law and the facts on
which assessment is made. (Sec. 228 NIRC)
As to collection
b. I will question the validity of the assessment Can immediately be Cannot be collected
because of the failure to send the demand letter collected through: immediately as the
which contains a statement of the law and the 1. administrative taxpayer may file the
facts upon which the assessment is based. If an action - the protest assessment &
assessment notice is sent without informing the issuance of a there should be a
taxpayer in writing about the law and facts on warrant of denial of such protest
which the assessment is made, the assessment distraint and levy; by the BIR.
is void. (Sec. 228, NIRC; Azucena T Reyes v. CIR, and
G.R. Nos. 159694 & 163581, 27 Jan. 2006)
2. judicial action
c) TAX DELINQUENCY vs. TAX DEFICIENCY
As to the filing of civil action
Tax Delinquency and Tax Deficiency The filing of a civil The filing of a civil
Distinguished action for the collection action at the ordinary
of the delinquent tax in court for collection
DELINQUENCY TAX DEFICIENCY TAX the ordinary court is a during the pendency of
As to when liable proper remedy. protest may be the
1. Self-assessed tax 1. The amount by subject of a motion to
per return filed by which the tax dismiss. In addition to
the taxpayer on the imposed by law as a motion to dismiss, the
prescribed date determined by the taxpayer must file a
was not paid at all CIR or his petition for review
or only partially authorized with the CTA to toll the
paid; or representative running of the
exceeds the prescriptive period.

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assessment, the taxpayer may be required to
execute a waiver of the statute of limitations.

d) PRESCRIPTIVE PERIOD FOR ASSESSMENT

Rules on Prescription
As to penalties
Subject to Not subject to the 25% 1. When the tax law itself is silent on prescription,
administrative surcharge, although the tax is imprescriptible;
penalties such as 25% subject to interest and
surcharge, interest, compromise penalty. 2. When no return is required, tax is
and compromise imprescriptible and tax may be assessed at any
penalty. time as the prescriptive periods provided in
Secs. 203 and 222, NIRC are not applicable.
Remedy of the taxpayer is to file a return for the
prescriptive period to commence.
Illustration:

NOTE: Limitation on the right of the

If a taxpayer computes an income tax due of
government to assess and collect taxes will not
P2,000,000.00 and pays only P1,000,000.00 or none
be presumed in the absence of a clear legislation
at all, then there is delinquency tax. However, if a
to the contrary.
taxpayer computes an income tax due of
P2,000,000.00, but the BIR finds out that there are
3. Prescription is a matter of defense, and it must
undeclared income and the correct income tax due
be proved or established by the taxpayer
should have been P3,000,000.00, then there is
relying upon it.
deficiency tax.

It is incumbent upon a taxpayer who wants to

Jeopardy Assessment
avail of the defense of prescription to prove that
he indeed submitted a return. If he fails to do so,
A delinquency tax assessment made without the
the conclusion should be that no such return
benefit of a complete or partial investigation by an
was filed, in which the Government has 10 years
authorized revenue officer who has a reason to
within which to make the corresponding
believe that the assessment and collection of a
assessments. (Taligaman Lumber Co., Inc., v. CIR,
deficiency tax will be jeopardized by delay caused
G.R. No. L-15716, 31 Mar. 1962)
by the taxpayer’s failure to:

4. Defense of prescription is waivable, such

1. Comply with audit and investigation
defense is not jurisdictional and must be raised
requirements to present his books of accounts
seasonably, otherwise it is deemed waived;
and/or pertinent records, or

5. Being a remedial measure, it should be

2. Substantiate all or any of the deductions,
interpreted liberally in order to protect the
exemptions or credits claimed in his return (Sec.
taxpayer; and
3 (1)(a), RR No. 30-2002)

6. If the last day of the period falls on a Saturday, a

NOTE: This is issued when the revenue officer finds
Sunday or a legal holiday in the place where the
himself without enough time to conduct an
Court sits, the time shall not run until the next
appropriate or thorough examination in view of the
working day. (Sec. 1, Rule 22, ROC)
impending expiration of the prescriptive period for
assessment. To prevent the issuance of a jeopardy

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Three (3) Important Prescriptive Periods Depends on the agreement of the parties
provided that the agreement to extend is
1. Period to assess tax; executed prior to the expiration of the original
2. Period to collect tax; and period of assessment
3. Period to file a criminal action. (Mamalateo,
2014)
Prescriptive Periods for Making Assessments
Prescriptive Period of Assessment and
Collection Distinguished GR: The BIR has the right to assess within 3 years
from the date of:
PRESCRIPTIVE PRESCRIPTIVE 1. Actual filing of the return, or
PERIOD OF PERIOD OF 2. From the last date prescribed by law for the
ASSESSMENT COLLECTION filing of such return, whichever is later.
Filing of returns before due date
5 years from receipt of Rationale of “whichever is later” – This is to
FAN by taxpayer; benefit the government, so they have more time
to make the assessment on the taxpayer. (Ingles,
NOTE: If taxpayer files 2015)
fraudulent return or
did not file any return, XPNs:
3 years from due date
the BIR may collect
without assessment 1. False or fraudulent return with intent to evade
within ten (10) years of tax: within ten (10) years from discovery of
filing of fraudulent falsity or fraud;
return or discovery of
non-filing 2. Failure to file any return at all: within ten (10)
years from discovery of omission to file a return;
Filing of returns on the due date
and
5 years from receipt of
3 years from due date 3. Waiver of statute of limitations in writing, which
FAN by taxpayer
must be made before the expiration of the period
Filing of returns beyond due date of assessment of taxes: period agreed upon.

3 years from actual 5 years from receipt of NOTE: The period agreed upon may be extended
filing FAN by taxpayer by subsequent written agreements made before
Fraudulent filing the period previously agreed upon.

10 years from Q: STI filed its Amended Annual Income Tax

5 years from receipt of
discovery of bad Return for fiscal year 2003 on August 15, 2003;
FAN by taxpayer
faith/fraud its Quarterly VAT Returns on July 23, 2002,
October 25, 2002, January 24, 2003, and May 23,
Non-filing
2003; and its Bureau of Internal Revenue (BIR)
10 years from 5 years from receipt of Form for EWT from May 10, 2002 to April 15,
discovery of non-filing FAN by taxpayer 2003. On May 30, 2006, STI's Sangalang signed a
Waiver of the Defense of Prescription Under the
Waiver
Statute of Limitations of the NIRC. On June 2,
2006, the waiver was accepted by the Large
Taxpayers District Officer of Makati and was
notarized on even date. On December 12, 2006,

279 UNIVERSITY OF SANTO TOMAS

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another waiver was executed extending the collect the alleged deficiency income tax, deficiency
period to assess and collect. It was also signed by EWT and deficiency VAT were not extended. The
Sangalang and accepted by the same officer and assessments subject of this case, which were issued
notarized on the same date. A third waiver was by the BIR beyond the three-year prescriptive, are
executed by the same signatories extending therefore considered void and of no legal effect. (CIR
further the period to June 30, 2007. On June 28, v. Systems Technology Institute., G.R. No. 220835, 26
2007, STI received a Formal Assessment Notice July 2007)
from the CIR, assessing STI for deficiency income
tax, VAT and EWT for fiscal year 2003, in the Rationale for Prescriptive Period or Statute of
amount of P161M. However, the CIR maintains Limitations for Assessments
that prescription had not set in because the
parties validly executed a waiver of statute of This is for the benefit of both the government and
limitations under Sec. 222(b) of the NIRC, as taxpayers. The reasons are:
amended. Are the waivers executed valid? Thus,
prescription has set in against the assessments 1. The government is benefited because the
for deficiency income tax, deficiency VAT and officers would be obliged to act properly and
deficiency expanded withholding tax? promptly in making assessments;

A: NO. The last day for the CIR to issue an 2. The taxpayers are benefited because after the
assessment on STI's income tax was on August 15, lapse of the period of prescription, they would
2006; while the latest date for the CIR to assess STI have a feeling of security against unscrupulous
of EWT was on April 17, 2006; and the latest date tax agents who will take advantage of every
for the CIR to assess STI of deficiency VAT for the opportunity to molest law-abiding citizens;
four quarters was on May 25, 2006. Clearly, on the
basis of these dates, the final assessment notice 3. Without such legal defense, the taxpayers
which STI received on June 28, 2007, was issued would furthermore be under obligation to
beyond the three-year prescriptive period. always keep their books and to keep them open
Furthermore, STI's signatory to the three waivers for inspection subject to harassment by
had no notarized written authority from the unscrupulous tax agents.
corporation's board of directors. RDAO No. 05-01
mandates the authorized revenue official to ensure NOTE: Thus, for the purpose of safeguarding
that the waiver is duly accomplished and signed by taxpayers from any unreasonable examination,
the taxpayer or his authorized representative investigation or assessment, our tax laws
before affixing his signature to signify acceptance of provide a statute of limitations in the collection
the same; and in case the authority is delegated by of taxes as well as their assessments.
the taxpayer to a representative, as in this case, the (Domondon, 2014)
concerned revenue official shall see to it that such
delegation is in writing and duly notarized. The Determining Whether Prescription to Assess
waiver should not be accepted by the concerned BIR had Set In
office and official unless notarized. Similar to
Standard Chartered Bank, the waivers in this case The important date to remember is the date when
did not specify the kind of tax and the amount of tax the demand letter or notice is released or mailed or
due. There can be no agreement if the kind and sent by the CIR to the taxpayer.
amount of the taxes to be assessed or collected were
not indicated. Hence, specific information in the Provided the release was effected before the
waiver is necessary for its validity. Verily, prescription sets in, the assessment is deemed made
considering the foregoing defects in the waivers on time, even if the taxpayer actually receives it
executed by STI, the periods for the CIR to assess or after the prescriptive period.

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However, the fact that the assessment notice was 1. original, and
mailed before the prescription period sets in must 2. amended return. (Mamalateo, 2014)
be proved with substantial evidence by the CIR. The
presumption that a letter duly directed and mailed In order that the filing of return may serve as the
was received in the regular course of mail cannot be starting point of the period of the making of
applied if there is no substantial evidence to prove assessment, the return must be substantially
that the notice was indeed sent. (Ingles, 2015) complete as to include the needed details on which
the full assessment may be made.
Q: GJM filed its Annual Income Tax Return for
the taxable year 1999 on April 12, 2000. BIR If the taxpayer files an amended return which is
sent FAN through registered mail on 14 Apr. substantially different from the original return, the
2003, well within the 3-year prescriptive period. period of prescription of the right to issue the
GJM however denies having received any FAN. deficiency assessment should be counted from the
BIR failed to prove that GJM received the FAN. filing of the amended return and not the original
Should the assessment be given due course? return. To hold otherwise would pave the way for
taxpayers to evade payment of taxes by simply
A: NO. When an assessment is made within the reporting in their original return heavy losses and
prescriptive period, as in the case at bar, receipt by amending the same after the CIR has lost his
the taxpayer may or may not be within said period. authority to assess the proper tax.
But the rule does not dispense with the requirement
that the taxpayer should actually receive the Instances where Amendment is Considered
assessment notice, even beyond the prescriptive Substantial
period. If the taxpayer denies having received the
assessment from the BIR, it then becomes 1. There is under declaration (exceeding 30% of
incumbent upon the latter to prove by competent that declared) of taxable sales, receipts or
evidence that such notice was indeed received by income; or
the addressee.
2. There is overstatement (exceeding 30% of
Here, the Onus probandi has shifted to the BIR to deductions). (Sec. 248 (B), NIRC)
show by contrary evidence that GJM indeed
received the assessment in the due course of mail. NOTE: If the taxpayer files the wrong return, it is as
While it is true that an assessment is made when the though the taxpayer filed no return at all. This is true
notice is sent within the prescriptive period, the even if all the necessary information was reflected
release, mailing, or sending of the same must still be in the erroneous return. In situations like this, the
clearly and satisfactorily proved. (CIR v. GJM, G.R. No. 10-year prescriptive period will apply. (Ingles,
202695, 29 Feb. 2016) 2015)

Return as the Starting Point of the Prescriptive Computation of the Three (3)-Year Period
Period
The computation of the three-year period is based
Tax return refers to the form prescribed by the BIR on the Administrative Code, where a "year” shall be
showing basic information about the taxpayer and understood to be twelve (12) calendar months.
the computation of his tax liability, which is
required to be filed within the periods prescribed by The Administrative Code of 1987 governs the
law and used as the basis for payment of tax assess computation of legal periods, being the more recent
by the taxpayer. law than the Civil Code which provides that a year is
equivalent to 365 days whether it be a regular year
The two (2) types of returns are: or a leap year. (CIR v. Primetown Property Group,
Inc., G.R. No. 162155, 28 Aug. 2007)

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Q: A Co., a domestic corporation, filed its 1995 the last day prescribed by law for its filing, hence the
ITR on Apr. 15, 1996 showing a net loss. On Nov. law considers it as being filed on the last day
10, 1996, it amended its 1995 ITR to show more prescribed by law for the filing of the same, which is
losses. April 15, 2005. The assessment issued on April 15,
2008 is therefore within the three-year prescriptive
After an investigation, the BIR disallowed period.
certain deductions claimed by A Co., putting A
Co., in a net income position. As a result, on Aug. Q: Mr. Sebastian is a Filipino seaman employed
5, 1999, the BIR issued a deficiency income by a Norwegian company which is engaged
assessment against A Co. A Co. protested the exclusively in international shipping. He and his
assessment on the ground that it has prescribed. wife, who manages their business, filed a joint
Decide. (2002 BAR) ITR for 1997 on Mar. 15, 1998. After an audit of
the return, the BIR issued on Apr. 20, 2001 a
A: The right of the BIR to assess the tax has not deficiency income tax assessment for the sum of
prescribed. The rule is that internal revenue taxes P250,000 inclusive of interest and penalty. For
shall be assessed within three years after the last failure of Mr. and Mrs. Sebastian to pay the tax
day prescribed by law for the filing of the return within the period stated in the notice of
(Sec. 203, NIRC) However, if the return originally assessment, the BIR issued on Aug. 19, 2001
filed is amended substantially, the counting of the warrants of distraint and levy to enforce
three-year period starts from the date the amended collection of the tax.
return was filed. (CIR v. Phoenix Assurance Co., Ltd.,
G.R. No. L-199727, 20 May 1965) If you are the lawyer of Mr. and Mrs. Sebastian,
what possible defenses will you raise in behalf of
There is a substantial amendment in this case your clients against the action of the BIR in
because a new return was filed declaring more enforcing collection of the tax? (2002 BAR)
losses, which can only be done either (1) in reducing
gross income or (2) in increasing the items of A: I will raise the defense of prescription. The right
deductions, claimed. of the BIR to assess prescribes after three years
counted from the last day prescribed by law for the
Q: Mr. Reyes, a Filipino citizen engaged in the filing of the income tax returns when the said return
real estate business, filed his 2004 ITR on Mar. is filed on time. (Sec. 203, NIRC) The last day for
30, 2005. On Dec. 30, 2005, he left the filing the 1997 income tax return is April 15, 1998.
Philippines as an immigrant to join his family in Since the assessment was issued only on Apr. 20,
Canada. After investigation of said return, the 2001, the BIR's right to assess has already
BIR issued a notice of deficiency income tax prescribed on April 15, 2001.
assessment on Apr. 15, 2008. Mr. Reyes returned
to the Philippines as a balikbayan on Dec. 8, Waiver of Statute of Limitations
2008. Finding his name to be in the list of
delinquent taxpayers, he filed a protest against Sec. 222(b) of the NIRC provides that the CIR or her
the assessment on the ground that he did not duly authorized representative and the taxpayer or
receive a notice of assessment and the its authorized representative may agree in writing
assessment had prescribed. Will the protest as to a specific future date within which to assess the
prosper? (2000 BAR) taxpayer for internal revenue taxes for a given
taxable period, before the expiration of the period to
A: NO. The assessment has not yet prescribed since assess taxes.
the BIR has a period of 3 years from the last day
prescribed by law for the filing of the return. The The waiver of the Statute of Limitations should not
return was filed on March 30, 2005, that is, before be construed as a waiver of the right to invoke the

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defense of prescription but rather an agreement 5. It is the duty of the taxpayer to submit his
between the taxpayer and the BIR to extend the Waiver to the officials listed in the said RMO
period to a date certain, within which the latter prior to the expiration of the period to assess or
could still assess or collect taxes due. The waiver to collect as the case may be.
does not mean that the taxpayer relinquishes the
right to invoke prescription unequivocally. (BPI v. 6. In addition to the previously authorized
officials, the RDO or Group Supervisor as
CIR, GR No. 139736, 17 Oct. 2005)
designated in the Letter of Authority or
Memorandum of Assignment can accept the
A waiver of the statute of limitation under the NIRC,
waiver.
to a certain extent, is a derogation of the taxpayer’s
right to security against prolonged and 7. The date of acceptance by the BIR Officer is no
unscrupulous investigations and must therefore be longer required to be indicated for the Waivers
carefully and strictly construed. (Phil. Journalists, validity.
Inc. v. CIR, G.R. No. 162852, 16 Dec. 2004)
8. The taxpayer shall have the duty to retain a
The CIR cannot validly agree to reduce the copy of the submitted Waiver.
prescriptive period to less than that granted by law
because it would result to the detriment of the State. 9. Notarization of the Waiver is not a requirement
Such reduction diminishes the Government’s for its validity.
opportunity to collect taxes. (Republic v. Lopez, G.R. 10. The taxpayer is charged with the burden of
L-18007, 30 Mar. 1967) The taxpayer’s waiver of ensuring that his Waiver is validly executed
statute of limitation does not cover taxes already when submitted to the BIR. Thus, the taxpayer
must ensure that his Waiver:
prescribed. (Republic v. Lim De Yu, G.R. No. L-17438,
30 Apr. 1964)
a. Is executed before the expiration of the
period to assess or to collect taxes.
Extended Assessment
b. Indicates the expiry date of the
An assessment issued as a result of the waiver of the extended period.
prescriptive period is known as an “extended
assessment”, which has a prescriptive period for c. Indicates the type of tax (for waiver of
collection of five (5) years from the time of issuance the prescriptive period to collect). d. Is
of the assessment. signed by his authorized
representative.
Guidelines on Proper Execution of Waivers
11. There is no strict format for the Waiver. The
1. The Waiver is a unilateral and voluntary taxpayer may utilize any form with no effect on
undertaking which shall take legal effect and be its validity. (RMC No. 141-2019)
binding on the taxpayer immediately upon his
execution thereof. Burden of Ensuring Valid Execution of Waiver

2. The Waiver need not specify the type of taxes to The taxpayer is charged with the burden of ensuring
be assessed nor the amount thereof. that his waiver is validly executed when submitted
to the BIR. Thus, the taxpayer must ensure that his
3. It is no longer required that the delegation of waiver:
authority to a representative be in writing and
notarized. 1. Is executed before the expiration of the period
to assess or to collect taxes;
4. The taxpayer cannot seek to invalidate his 2. Indicates the expiry date of the extended
Waiver by contesting the authority of his own
period;
representative.

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3. Indicates the type of tax (for waiver of Commissioner prescribed?
prescriptive period to collect; and
4. Is signed by his authorized representative. A: YES. The Court held that the Commissioner’s
(RMC No. 141-2019) right to collect has prescribed. The period to assess
and collect deficiency taxes may be extended only
Failure to Comply with Requirements of Waiver upon a written agreement between the
of Statute of Limitations Commissioner and the taxpayer prior to the
expiration of the three-year prescribed period. The
It is invalid and ineffective to extend the BIR cannot claim the benefits of extending the
prescriptive period to assess taxes. (CIR v. Next period when it was the BIR’s inaction which is the
Mobile Inc., G.R. No. 212825, 07 Dec. 2015) proximate cause of the defects of the waiver. (CIR v.
The Stanley Works Sales (Phils.), Incorporated, G.R.
Taxpayer Estopped from Questioning Validity of No. 187589, 03 Dec. 2014)
Waivers
Q: What is the effect of the execution by a
In case a taxpayer executed five waivers and taxpayer of a "waiver of the statute of
delivered them to CIR, one after the other and limitations" on his defense of prescription?
allowed the latter to rely on them and did not raise (2010 BAR)
any objection against their validity until he was
assessed, said taxpayer is estopped from A: The waiver of the statute of limitation executed
questioning the validity of its waivers. The by a taxpayer is not a waiver of the right to
application of estoppel is necessary to prevent the invoke the defense of prescription. The waiver of
undue injury that the government would suffer the statute of limitation is merely an agreement
because of the cancellation of assessment of in writing between the taxpayer and the BIR that
taxpayer’s tax liabilities. (CIR v. Next Mobile Inc., G.R. the period to assess and collect taxes due is
No. 212825, 07 Dec. 2015) extended to a date certain. If prescription has
already set in at the time of the execution of the
Taxpayer is also estopped from questioning the waiver is invalid, the taxpayer can still raise
waiver if it had impliedly admitted the validity of the prescription as a defense. (Phil. Journalists Inc., v.
said waivers. Had it believed that the waiver was CIR, G.R. No. 162852, 16 Dec. 2004)
invalid and that the period to assess had effective
prescribed, the taxpayer could have refused to make NOTE: Applying Sec. 222(b) of the NIRC, the
any payment based on any assessment against it. Supreme Court held that the period agreed upon
(RCBC v. CIR, G.R. No. 170257, 07 Sept. 2011) may be extended by subsequent written agreement
made before the expiration of the period previously
NOTE: The period to assess can likewise be agreed upon. Failure to do so renders the extension
ineffective. (La Flor Dela Isabela, Inc. v. CIR, G.R. No.
suspended under Sec. 223 of the NIRC.
202105, 28 Apr. 2021, J. Hernando)
Refer to discussion on “Suspension of the Running
of Statute of Limitations ” – p. 288

Q: In 1993, the BIR issued against respondent

assessment notice for deficiency income tax for
1989. A waiver of the defense of prescription
was executed but it was not signed by the
Commissioner or any of his authorized
representatives and did not state the date of
acceptance. Has the right to collect of the

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(1) FALSE RETURNS VS. FRAUDULENT RETURNS VS. NON-FILING OF RETURNS

FALSE RETURNS FRAUDULENT RETURNS FAILURE TO FILE A RETURN

As to nature

Contains wrong information due

Intentional and deceitful with the Omission to file a return in the date
to mistake, carelessness, or
sole aim of evading the correct tax prescribed by law.
ignorance. (Aznar v. CTA, G.R. No. L-
due.
20569, 23 Aug. 1974)

As to intention

Deviation from the truth, whether Intentional or deceitful entry with

Omission can be intentional or not
intentional or not intent to evade the taxes due

As to liability of taxpayer

Filing a fraudulent return will

The mere omission is already a
make the taxpayer liable for the
violation regardless of the
crime of moral turpitude as it
Does not make the taxpayer fraudulent intent or willfulness of
entails willfulness and fraudulent
criminally liable the individual. (CIR vs. Bank of
intent on the part of the individual.
Commerce, CTA EB Case No. 654, 14
(Republic v. Marcos II, G.R. Nos.
Mar. 2011)
130371 & 130855, 04 Aug. 2009)

As to penalty

Not subject to 50% penalty Not subject to 50% penalty

Subject to 50% penalty surcharge
surcharge surcharge

As to period of assessment

The tax may be assessed, or a proceeding in court for the collection of such tax may be begun without
assessment, at any time within ten years after the discovery of the falsity, fraud, or omission.

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Protest of Assessment

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Note: MR with the CIR does not toll period to file with the CTA.

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Fraud Not Presumed for Neglect to File Required 50% penalty surcharge. For the surcharge to apply,
Return it must be intentional fraud.

Fraud is a question of fact and the circumstances Negligence, whether slight or gross, is not
constituting fraud must be alleged and proved in the equivalent to fraud with intent to evade the tax
court. Fraud is never lightly to be presumed contemplated by law. (Ingles, 2015)
because it is a serious charge. Hence, if fraud is not
proven, the Government cannot use the 10-year Just because the 10-year period applies, it doesn’t
period to make the assessment. (CIR v. Ayala necessarily mean that the taxpayer will be penalized
Securities Corporation, G.R. No. L-29485, 31 Mar. with the 50% surcharge. When a taxpayer files a
1976) Fraud must be established. false return and not a fraudulent one, the 10-year
period applies but the 50% surcharge will not.
Claiming fictitious expenses as deductions is a proof (Aznar v. CTA, G.R. No. L-20569, 23 Aug. 1974)
of falsity or fraud in the income tax return. (Tan
Guan v. CTA, G.R. L-23676, 27 Apr. 1967) Q: Danilo, who is engaged in the trading
business, entrusted to his accountant the
An honest mistake as to the valuation of the preparation of his income tax return and the
property cannot be indicative of fraud. (Republic v. payment of the tax due. The accountant filed a
Heirs of Jalandoni, G.R. No. L-18384, 20 Sept. 1965) falsified tax return by under declaring the sales
and overstating the expense deductions by
Q: What constitutes prima facie evidence of a Danilo. Is Danilo liable for the deficiency tax and
false or fraudulent return to justify the the penalties thereon? What is the liability, if
imposition of a 50% surcharge on the deficiency any, of the accountant? Discuss. (2005 BAR)
tax due from a taxpayer? Explain. (2002 BAR)
A: Danilo is liable for the deficiency tax as well as for
A: There is Prima facie evidence of false or the deficiency interest. He should not be held liable
fraudulent return when the taxpayer substantially for the fraud penalty because the accountant acted
underdeclared his taxable sales, receipts or income, beyond the limits of his authority. There is no
or substantially overstated his deductions. The showing in the problem that Danilo signed the
taxpayer’s failure to report sales, receipts or income falsified return or that it was prepared under his
in an amount exceeding 30% of that declared per direction. On the other hand, the accountant may be
return, and a claim of deduction in an amount held criminally liable for violation of the NIRC when
exceeding 30% of actual deduction shall render the he falsified the tax return by under declaring the
taxpayer liable for substantial under declaration sale and overstating the expense deductions. If
and over declaration, respectively, and will justify Danny's accountant is a Certified Public Accountant,
the imposition of the 50% surcharge on the his certificate as a CPA shall automatically be
deficiency tax due from the taxpayer. (Sec. 248, revoked or cancelled upon conviction.
NIRC)
(2) SUSPENSION OF THE RUNNING OF STATUTE
Importance of Distinguishing Between a “False OF LIMITATIONS
Return” and a “Fraudulent Return”
Grounds for suspension of the prescriptive period
The two returns are different but have the same for both the power to assess and the power to
prescriptive periods to be assessed, which is 10- collect: (L-O-W-P-A-R-A)
years. The importance in distinguishing the two lies
in the application of the penalty surcharge. 1. When taxpayer cannot be Located in the
address given by him in the return;
Actual fraud, not constructive fraud, is subject to

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XPN: He informs the CIR of any change in his proceeding may suspend the said collection and
address thru a written notice to the BIR. require the taxpayer either to deposit the amount
2. When the taxpayer is Out of the Philippines; claimed or to file a surety bond for not more than
double the amount with the Court. (Sec. 11, R.A. No.
3. When the Warrant of distraint and levy is duly 1125)
served upon the taxpayer, his authorized
representative or a member of his household Q: Do the provisions of the Civil Code on
with sufficient discretion and no property is suspension of the prescriptive period by
located; extrajudicial demand suspend the running
period of prescription of actions in tax collection
NOTE: Only period to collect is suspended. cases?

4. Where the CIR is prohibited from making the A: NO. The provisions of the NIRC being a special
assessment or beginning distraint or levy or a law take precedence over the provisions of the Civil
proceeding in court for 60 days thereafter, such Code, a general law. Furthermore, the provisions of
as where there is a Pending petition for review the NIRC were crafted to ensure expeditious
in the CTA from the decision on the protested collection of tax money to ensure the continuous
assessment; (Republic v. Ker & Co., GR L-21609, delivery of government services.
29 Sep. 1966)
2. TAXPAYER’S REMEDIES
5. Where CIR and the taxpayer Agreed in writing
for the extension of the assessment, the tax may
1. Remedies Before Payment
be assessed within the period so agreed upon;
(Waiver)
a. Administrative remedies:
i. Protest of assessment
6. When the taxpayer Requests for reinvestigation
1. Reconsideration
which is granted by the Commissioner; and
2. Reinvestigation
ii. Compromise
NOTE: Only the period to collect is suspended
iii. Abatement
because assessment has been done at this point.
(Ingles, 2015) b. Judicial remedies

The request must be granted by the CIR. A 2. Remedies After Payment

request for reconsideration alone does not
suspend the period to collect. a. Administrative remedies
i. Tax refund
7. When there is an Answer filed by the BIR to the ii. Tax credit
petition for review in the CTA. (Hermanos v. CIR,
GR. No. L-24972, 29 Sept. 1969) Where the court b. Judicial remedies
justified this by saying that in the answer filed
by the BIR, it prayed for the collection of taxes. Guidelines on Administrative Remedies

When Commissioner is Prohibited from Making GOVERNMENT TAXPAYER

the Assessment or Collection of Taxes in a
Proceeding in Court If express
Must observe the legal Must observe the
When in the opinion of the CTA, the collection by the parameters set forth in doctrine of exhaustion
BIR may jeopardize the interest of the Government the law: of administrative
and/or the taxpayer, the Court in any stage of the 1. procedure for remedies. Thus, before

289 UNIVERSITY OF SANTO TOMAS

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distraint of the taxpayer may a. Name of the taxpayer and address for the
personal property question an immediate past 3 taxable years;
(Sec.207(A), NIRC), assessment before the b. Nature of the request, specifying the newly
CTA, he must first file discovered evidence to be presented;
2. procedure for levy an administrative c. Taxable periods covered by the
on real property, protest before the BIR. assessment;
(Sec. 207(B), NIRC) (Same is true with d. Amount and kind of tax involved and the
and claims for refunds) assessment notice number;
e. Date of receipt of the assessment notice or
3. procedure for letter of demand;
enforcement of tax f. Itemized statement of the finding to which
lien (Sec. 219, the taxpayer agrees (if any) as basis for the
NIRC) computation of the tax due, which must be
paid upon filing of the Protest;
If implied g. Itemized schedule of the adjustments to
which the taxpayer does not agree;
Both may avail of the usual remedies for
h. Statements of facts or law in support of the
convenience and expediency.
Protest; and
i. Documentary evidence as it may deem
a) PROTESTING AN ASSESSMENT necessary and relevant to support its
Protest to be submitted 60 days from the
Administrative Protest filing thereof.

The taxpayer or its authorized representative or tax NOTE: Protested assessment is the same as
agent may protest administratively against the disputed assessment.
aforesaid FLD/FAN within thirty (30) days from
date of receipt thereof. Effect of a Protest against an Assessment

Administrative Protest is the act by the taxpayer of Prescriptive period provided by law to make
questioning the validity of the imposition of the collection by distraint or levy or by a proceeding in
corresponding delinquency increments for internal court is interrupted once a taxpayer protests the
revenue taxes as shown in the notice of assessment Assessment and requests for its cancellation.
and letter of demand.
(1) PERIOD TO FILE PROTEST
Requisites of a Protest
Period to Protest
1. It must be in writing.
The taxpayer or its authorized representative or tax
agent may protest administratively against the
2. It must be addressed to the CIR or his duly
FLD/FAN within thirty (30) days from date of
authorized representative;
receipt thereof.

3. It must state the facts, applicable law, rules and

Kinds of Protest
regulations or jurisprudence on which the
protest is based otherwise the protest would
The taxpayer protesting an Assessment may file a
be void; and
written request for reconsideration or
reinvestigation defined as follows:
4. It must contain the following:
1. Request for Reconsideration — refers to a plea

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of re-evaluation of an Assessment on the basis of which will be limited to the evidence already at
existing records without need of additional hand; this justifies why the reinvestigation can
evidence. It may involve both a question of fact suspend the running of the statute of limitations on
or of law or both.; or collection of the assessed tax, while the
reconsideration cannot. (BPI v. CIR, G.R. No. 181836,
2. Request for Reinvestigation — refers to a plea 9 July 2014)
of re-evaluation of an Assessment on the basis of
newly discovered or additional evidence that a Contents of a Protest
taxpayer intends to present in the
Reinvestigation. It may also involve a question of The taxpayer shall state in his Protest:
fact or of law or both.
1. The nature of the Protest whether
Request for Reconsideration and Reconsideration or Reinvestigation, specifying
Reinvestigation Distinguished newly discovered or additional evidence he
intends to present if it is a Request for
REQUEST FOR REQUEST FOR Reinvestigation,
RECONSIDERATION REINVESTIGATION
As to basis 2. Date of the Assessment Notice; and

3. The applicable law, rules and regulations, or

A claim for re- jurisprudence on which his protest is based,
A claim for re-
evaluation of the otherwise, his protest shall be considered void
evaluation of the
assessment based on and without force and effect.
assessment based on
existing records
newly discovered or
without need of Protest against Validity of Some of the Issues
additional evidence.
additional evidence.
1. If there are several issues involved in the FLD or
FAN but the taxpayer only disputes or protests
As to issues involved against the validity of some of the issues raised,
It may involve a It may also involve a the assessment attributable to the undisputed
question of fact or law question of fact or law issue or issues shall become final, executory
or both. or both. and demandable; and the taxpayer shall be
required to pay the deficiency tax or taxes
As to effect on tolling statute of limitations
attributable thereto, in which case, a collection
It does not toll the It tolls the statute of letter shall be issued to the taxpayer calling for
statute of limitations. limitations. payment of the said deficiency tax or taxes,
inclusive of the applicable surcharge and/or
interest.
NOTE: A motion for reconsideration of the denial of
the Administrative Protest administrative protest
2. If there are several issues involved in the
does not toll the 30-day period to appeal to the CTA.
disputed assessment and the taxpayer fails to
(Fishwealth Canning Corporation v. CIR, G.R. No.
state the facts, the applicable law, rules and
179343, 21 Jan. 2010)
regulations, or jurisprudence in support of his
Protest against some of the several issues on
There is a distinction between a Request for
which the assessment is based, the same shall
Reconsideration and a Request for Reinvestigation.
be considered undisputed issue or issues, in
A reinvestigation which entails the reception and
which case, the Assessment attributable
evaluation of additional evidence will take more
thereto shall become final, executory and
time than a reconsideration of a Tax Assessment,
demandable; and the taxpayer shall be

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required to pay the deficiency tax or taxes withholding tax returns for November 2005
attributable thereto and a collection letter were filed on December 2005. Hence, the BIR
shall be issued to the taxpayer calling for had only until 9 December 2008 within which to
payment of the said deficiency tax, inclusive of assess the alleged deficiency withholding taxes
the applicable surcharge and/or interest. for compensation and expanded withholding for
the months of July to November 2005.
Q: A taxpayer receives two final assessments,
one for Net Income Tax (NIT) and one for VAT. If 1. Did CIR prove the issuance and receipt of a
the taxpayer would only like to protest the one PAN by Unioil?
for NIT and not the one for VAT, what should he 2. Did CIR’s assessment of Unioil for deficiency
do to file a protest for the NIT? withholding taxes prescribed?
A: The taxpayer should first pay the tax due under 3. Are the FLD and FAN issued by the CIR valid?
the VAT, where he does not intend to file a Protest. A:
1. NO. The Supreme Court is not a trier of
NOTE: This is not payment under protest for this is facts. The CIR did not proffer a proof of
neither a tax under the TCC nor a Real Property Tax. Unioil's receipt of the PAN in their petition
(RR No. 12-1999) for review before the CTA En Banc. Since it
was not offered as evidence, there is
Q: On January 26, 2009, respondent received a nothing for this Court to consider. The CIR
Formal Letter of Demand and Final Assessment failed to establish the fact of issuance of the
Notice (FAN) finding it liable for deficiency PAN to Unioil. Hence, its failure to comply
withholding tax on compensation and deficiency with the notice requirements under Sec.
expanded withholding tax for the year ending 228 of the 1997 NIRC effectively denied
December 31, 2005. Unioil of its right to due process.

Unioil filed its protest to the FAN on February 2. YES. The CIR’s assessment of Unioil for
25, 2009 and submitted its supporting deficiency withholding taxes has
documents on April 24, 2009. Thereafter, Unioil prescribed. Sec. 203 of the NIRC mandates
filed the instant Petition for Review on the government to assess internal revenue
November 20, 2009, considering that the CIR taxes within three years from the last day
failed to act on its protest and the one hundred prescribed by law for the filing of the tax
eighty (180)-day period had already expired. return or the actual date of filing of such
return, whichever comes later. From the
The CTA Third Division and CTA En Banc ruled date of the Formal Letter of Demand and
that CIR failed to comply with the notice the FAN which were simultaneously issued
requirements, thereby denying respondent of on January 14, 2009, and only received by
its right to due process, hence, effectively Unioil on January 26, 2009, the three-year
voiding the assessments issued. prescriptive period reckoned from the
deadline set by law for the filing of the
Obtaining no relief from the CTA, the CIR filed return, assessment of the January to
this petition for review on certiorari and November 2005 monthly remittance
submitted for the first time proof of its issuance returns has palpably prescribed. As for the
of a PAN and Unioil's actual receipt thereof. assessment for December 2005, suffice to
state that all the circumstances obtaining
Unioil maintains that the CIR's assessments for herein lead to no other conclusion that the
deficiency withholding taxes were issued assessment has likewise prescribed.
beyond the three-year prescriptive period
provided in Sec. 203 of the NIRC. The

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3. NO. The FLD and FAN are void because they reinvestigation through the issuance of an FDDA.
did not state the factual and legal bases for
the assessment. In CIR v. Avon Products, the NOTE: The sixty (60)-day period for the submission
CIR, in exercising its power to assess and of all relevant supporting documents shall not apply
collect taxes if these are owed, ought to give to requests for reconsideration.
due consideration to the arguments and
evidence submitted by the affected party.
(3) EFFECT OF FAILURE TO FILE PROTEST
In the case, the CIR only perfunctorily
assessed Unioil for deficiency withholding
tax on compensation and expanded If the taxpayer fails to file a valid protest against the
withholding tax and went through just the FLD/FAN within thirty (30) days from date of
motions without due consideration. This is receipt thereof, the Assessment shall become final,
apparent from the haste in which the executory, and demandable. No request for
Formal Letter of Demand and the FAN were reconsideration or reinvestigation shall be granted
issued on January 14, 2009 in order to on tax assessments that have already become final,
ostensibly beat the three-year prescriptive executory, and demandable.
period which set after January 15, 2009.
(4) ACTION OF THE COMMISSIONER ON THE
(CIR v. Unioil Corp., G.R. No. 204405, 04 Aug.
PROTEST FILED
2021, J. Hernando)

(2) SUBMISSION OF SUPPORTING DOCUMENTS Period to Act upon or Decide on the Protest filed

Submission of Documents
1. By the duly authorized representative
For requests for reinvestigation, the taxpayer shall
a. Request for Investigation – within 180 days
submit all relevant supporting documents in
from submission of relevant documents
support of his protest within sixty (60) days from
b. Request for Reconsideration – within 180
date of filing of his letter of protest. Otherwise, the
days from filing of protest
assessment shall become final.
2. By the CIR
The BIR can only inform the taxpayer to submit
additional documents. The BIR cannot demand a. In case of Protest – within 180 days from
what type of supporting documents should be filing of protest
submitted. Otherwise, a taxpayer will be at the b. In case of Administrative Appeal – within
mercy of the BIR, which may require the production 180 days from the filing of Administrative
of documents that a taxpayer cannot submit. (CIR vs. Appeal
First Express Pawnshop Co., Inc., G.R. Nos. 172045-46,
16 June 2009) NOTE: Administrative appeal – Request for
Reconsideration filed with the CIR to
When Assessment shall Become Final elevate the denial made by his duly
authorized representative.
The failure of the taxpayer who requested for a
reinvestigation to submit all relevant supporting Decision on the Protest Filed
documents within the 60-day period shall render
the FLD/FAN “final” by operation of law. The 1. Direct grant or denial of protest – Final
taxpayer shall be barred from disputing the Decision on a Disputed Assessment (FDDA)
correctness of the FLD/FAN by the introduction of
newly discovered or additional evidence because The decision of the Commissioner or his duly
he/it is deemed to have lost the chance to present authorized representative shall state:
evidence. The BIR shall then deny the request for

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a. The facts, the applicable law, rules and contention correct?
regulations, or jurisprudence on which
such decision is based, otherwise, the A: NO. The CTA, being a court of special jurisdiction,
decision shall be void, and can take cognizance only of matters that are clearly
within its jurisdiction. Under the law, it is clear that
b. That the same is his final decision. a protesting taxpayer like V.Y. Domingo has only
three options to dispute an assessment:
2. Indirect denial of protest
a. Formal and final letter of demand from the 1. If the protest is wholly or partially denied by the
BIR to the taxpayer; CIR or his authorized representative, then the
b. Civil collection can also be considered as taxpayer may appeal to the CTA within 30 days
denial of protest of assessment; from receipt of the whole or partial denial of the
c. Filing of criminal action against the protest;
taxpayer; or
d. Issuance of warrant of distraint and levy to 2. If the protest is wholly or partially denied by the
enforce collection of deficiency assessment CIR's authorized representative, then the
is outright denial of the request for taxpayer may appeal to the CIR within 30 days
reconsideration. (Hilado v. CIR, CTA EB Case from receipt of the whole or partial denial of the
1256, 25 Feb. 1964) protest; and

3. Inaction by the CIR or his duly authorized 3. If the CIR or his authorized representative
representative failed to act upon the protest within 180 days
from submission of the required supporting
Q: Bureau of Internal Revenue issued a documents, then the taxpayer may appeal to the
Preliminary Assessment Notice which CTA within 30 days from the lapse of the 180-
represented deficiency income tax and value- day period. (CIR v. V.Y. Domingo Jewellers, Inc.,
added tax, inclusive of interest of V.Y. Domingo. G.R. No. 221780, 25 Mar. 2019)
V.Y. Domingo thereafter filed a Request for Re-
evaluation or Re-investigation and Q: The Court previously issued a resolution for
Reconsideration. However, V.Y. Domingo then G.R. No. 241338, resolving to deny the petition
received a Preliminary Collection Letter (PCL) for failure to sufficiently show that the Court of
from the Revenue District Office (RDO) Tax Appeals En Banc committed any reversible
informing it of the existence of two Assessment error with regards to its ruling pertaining to the
Notice for collection of its tax liabilities. Upon Final Assessment Notice issued by the
receipt of the requested copies of the notices, Commissioner of Internal Revenue. Roca
V.Y. Domingo filed a Petition for Review praying Security is arguing that the Final Assessment
that Assessment Notices and the PCL be declared Notice is violative of its right to due process. Is
null and void for allegedly having been issued the contention of Roca correct?
beyond the prescriptive period for assessment
and collection of internal revenue taxes. A: YES. The Final Assessment Notice issued by the
CIR is void as it violates the taxpayer’s right to due
The CIR filed a Motion to Dismiss the petition, process. Sec. 228 of the National Internal Revenue
arguing that it is neither the assessment nor the Code gives the taxpayer being assessed a period of
formal letter of demand that is appealable to the 60 days from the date of filing a protest assailing the
CTA but the decision of the CIR on a disputed Preliminary Assessment Notice within which to
assessment. Furthermore, CIR argued that there submit the relevant supporting documents. In this
was no disputed assessment to speak of, and case, the respondent filed its protest on April 18,
that the CTA had no jurisdiction. Is the CIR’s 2013 and still had 60 days from that date or until

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June 17, 2013 to present the documents. (CIR v. Roca for its failure to pay its purported tax
Security and Investigation Agency, Inc., G.R. No. deficiencies. On October 31, 2007, PDCI initiated
241338, 10 Apr. 2019) a petition before the Court of Tax Appeals
seeking to nullify the Final Notice Before
Q: On January 6, 2003, Bureau of Internal Seizure, Warrant of Distraint and Levy, and the
Revenue (BIR) issued Letter of Authority (LOA) auction sale, with prayer for restraining order to
to petitioner Philippine Dream Co., Inc. (PDCI) prevent CIR from taking possession of MV
for examination of its financial records for the Philippine Dream and turning it over to the
following alleged tax deficiencies. Under winning bidder. Did PDCI timely file its appeal to
Memorandum dated May 30, 2003, the the CTA?
corresponding investigation was not completed.
On December 19, 2005, a Preliminary A: NO. Sec. 228 of the Tax Code provides the
Assessment Notice (PAN) was issued to PDCI for taxpayer’s remedy to dispute a tax assessment, viz.:
its supposed VAT and EWT deficiencies for “Appeals within thirty (30) days from receipt of the
taxable year 2002. PDCI protested. By Letter said decision, or from the lapse of the one hundred
dated March 24, 2006, the protest was denied. eighty (180)-day period; otherwise, the decision
On the VAT assessment, it was firmly ruled that shall become final, executory and demandable.” As
PDCI had already ceased its operations as shown found by the CTA-second Division, PDCI mistakenly
in its tax returns filed from 2002 to 2005. computed the period of appeal. Having chosen the
remedy of appeal against the CIR’s supposed
This finding was bolstered by the report of the inaction on its protest, PDCI should have reckoned
Maritime Industry Authority (MARINA) that its thirty-day period for appeal from the lapse of one
PDCI’s operations had already ceased as of hundred eighty (180) days from the time it filed its
August 30, 2003. In view thereof, PDCI’s assets protest against the Final Letter of Demand and
were deemed sold and subjected to VAT. As for Assessment Notice. Thus, the petition should have
the EWT assessment, PDCI failed to prove that it been filed on December 6, 2006, and not on October
remitted withholding taxes on rental payments 31, 2007.
made.
Since petitioner did not submit additional relevant
Consequently, Formal Letter of Demand and documents in support of its protest, the 180-day
Assessment Notices dated March 31, 2006 were period within which respondent should act on the
issued to PDCI for payment of the following protest should be reckoned from the filing of
deficiency taxes, inclusive of interests and petitioner’s protest on May 10, 2006. Accordingly,
surcharges, for taxable year 2002. PDCI received respondent had until November 6, 2006 within
the notices on April 10, 2006. On May 10, 2006, which to act on the protest. Respondent failed to act
PDCI interposed its protest against the VAT on the protest on or before November 6, 2006. Thus,
assessment. It, nonetheless, signified its petitioner had thirty days from November 6, 2006
willingness to pay its tax liabilities, and on this or until December 6, 2006 within which to appeal
score, prayed that the penalties be waived. On respondent’s inaction before this Court. However,
May 18, 2006, it paid the EWT assessment but records prove that no appeal was filed before this
not in full. On November 22, 2006, Preliminary Court on or before December 6, 2006. The failure of
Collection Letter was issued on PDCI’s EWT and petitioner to appeal the inaction on time rendered
VAT liabilities. On January 4, 2007, PDCI the assessment final, executory, demandable, and
received a Final Notice Before Seizure giving it incontestable. (Philippine Dream Company, Inc. v.
ten (10) days from notice to settle its tax CIR, G.R. No. 216044, 27 Aug. 2020)
liabilities, otherwise, a warrant of distraint
and/or levy and garnishment shall be issued to
enforce collection. On February 21, 2007, PDCI
was served a Warrant of Distraint and/or Levy

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Remedies of the Taxpayer in Case of Denial or not acted upon, the taxpayer may either:
Inaction by the Commissioner
i. Appeal to the CTA within 30 days from
after the expiration of the 180-day
1. By the CIR’s duly authorized representative
period; or
a. If the Protest is denied, in whole or in part,
ii. Await the final decision of the CIR on
the taxpayer may either:
the disputed assessment and appeal
i. appeal to the CTA within 30 days from
such final decision to the CTA within 30
date of receipt of the said decision; or
days after the receipt of a copy of such
decision.
ii. elevate his Protest through Request for
Reconsideration to the CIR within 30
NOTE: Items a and b are mutually exclusive. The
days from date of receipt of the said
exercise of one option bars the other.
decision.

When the law provided for the remedy to appeal the

NOTE: No Request for Reinvestigation shall
inaction of the CIR, it did not intend to limit it to a
be allowed in administrative appeal and
single remedy of filing an appeal after the lapse of
only issues raised in the decision of the
180-day prescribed period. When a taxpayer
CIR’s duly authorized representative shall
protested an Assessment, he naturally expects the
be entertained by the CIR.
CIR to decide either positively or negatively. A
taxpayer cannot be prejudiced if he chooses to wait
b. If the Protest is not acted upon, the
for the final decision of the CIR on the protested
taxpayer may either:
Assessment. (Lascona Land Co., Inc. v. CIR, G.R. No.
i. appeal to the CTA within 30 days after
171251, 05 Mar. 2012)
the expiration of the 180-day period; or

Q: The FDDA issued by the CIR to Liquigaz

ii. await the final decision of the CIR’s
merely contained a table of Liquigaz’ supposed
duly authorized representative on the
tax liabilities, without providing any details.
disputed Assessment.
The CIR explains that the FDDA still complied
with the requirements of the law as it was issued
NOTE: Items a and b are mutually exclusive. The
in connection with the PAN and FLD/FAN, which
exercise of one option bars the other.
had an attachment of the details of
discrepancies. Hence, the CIR concludes that
2. By the CIR
Liquigaz was sufficiently informed in writing of
the factual bases of the assessment. Is the CIR
a. If the Protest or administrative appeal, as
correct?
the case may be, is denied, in whole or in
part, the taxpayer may appeal to the CTA
A: NO. It is undisputed that the FDDA merely
within 30 days from date of receipt of the
showed Liquigaz’ tax liabilities without any details
said decision. Otherwise, the assessment
on the specific transactions which gave rise to its
shall become final, executory and
supposed tax deficiencies. While it provided for the
demandable.
legal bases of the assessment, it fell short of
A motion for reconsideration of the CIR’s informing Liquigaz of the factual bases thereof. The
denial of the protest or administrative CIR erred in claiming that Liquigaz was informed of
appeal, as the case may be, shall not toll the the factual bases of the assessment because the
30-day period to appeal to the CTA. FDDA made reference to the PAN and FAN/FLD,
which were accompanied by details of the alleged
b. If the Protest or administrative appeal is discrepancies.

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The rules specifically require that the decision of the entitle him to appeal to the Court of Tax
CIR or his duly authorized representative on a Appeals? Decide with reasons. (2005 BAR)
disputed assessment shall state the facts, law and
rules and regulations, or jurisprudence on which the A: YES. The final notice before seizure was in effect
decision is based. Failure to do so would invalidate a denial of the taxpayer's request for
the FDDA. To rule otherwise would tolerate abuse reconsideration, not only was the notice the only
and prejudice. Taxpayers will be unable to file an response received, its nature, content, and tenor
intelligent appeal before the CTA as they would be support the theory that it was the BIR's final act
unaware on how the CIR or his authorized regarding the request for reconsideration. (CIR v.
representative appreciated the defense raised in Isabela Cultural Corporation, G.R. No. 135210, 11 July
connection with the assessment. (CIR v. Liquigaz 2001)
Philippines Corp., G.R. No. 215534, 18 Apr. 2016)
Q: PAGCOR received a FAN on January 17, 2008
Q: What is the effect of a void FDDA? for payment of deficiency Fringe Benefit Tax. 7
days later, it filed a protest to the FAN addressed
A: FDDA that does not inform the taxpayer in to RD Misajon of Revenue Region No. 6 of the
writing of the facts and law on which it is based BIR. On August 14, 2008, PAGCOR elevated its
renders the decision void. The written notice protest to CIR, there being no action taken
requirement for both the FLD and the FAN is in thereon as of that date. On March 11, 2009,
observance of due process — to afford the taxpayer PAGCOR filed a Petition for Review before the
adequate opportunity to file a protest on the CTA alleging respondent’s inaction in its protest.
assessment and thereafter file an appeal in case of CTA Division dismissed the petition for being
an adverse decision. filed out of time. CTA En banc affirmed CTA
Division’s ruling. In its Petition for Review before
However, a void FDDA does not ipso facto render the the SC, PAGCOR argues that its protest before the
assessment void. The assessment remains valid CIR on August 14, 2008 starts a new period from
notwithstanding the nullity of the FDDA because the which to determine the last day to file its
assessment itself differs from a decision on the petition before the CTA. Is PAGCOR correct?
disputed assessment. An FDDA that does not inform
the taxpayer in writing of the facts and law on which A: NO. The rules give a protesting taxpayer three
it is based renders the decision void. Therefore, it is options:
as if there was no decision rendered by the CIR. It is
1. If the protest is wholly or partially denied by the
tantamount to a denial by inaction by the CIR, which
CIR or his authorized representative, then the
may still be appealed before the CTA and the
taxpayer may appeal to the CTA within 30 days
assessment evaluated on the basis of the available
from receipt of the whole or partial denial of the
evidence and documents. (CIR v. Liquigaz
protest.
Philippines Corp., G.R. No. 215534, 18 Apr. 2016)
2. If the protest is wholly or partially denied by the
Q: A taxpayer received a tax deficiency
CIR's authorized representative, then the
assessment of P1.2 million from the BIR
taxpayer may appeal to the CIR within 30 days
demanding payment within 10 days, otherwise,
from receipt of the whole or partial denial of the
it would collect through summary remedies. The
protest.
taxpayer requested for a reconsideration
stating the grounds therefor. Instead of
3. If the CIR or his authorized representative
resolving the request for reconsideration, the
failed to act upon the protest within 180 days
BIR sent a Final Notice Before Seizure to the
from submission of the required supporting
taxpayer. May this action of the Commissioner of
documents, then the taxpayer may appeal to the
Internal Revenue be deemed a denial of the
CTA within 30 days from the lapse of the 180-
request for reconsideration of the taxpayer to

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day period. On March 28, 2011, MISNET received an
Amended Assessment Notice reflecting an
To further clarify the three options: A whole or amended deficiency EWT after reinvestigation.
partial denial by the CIR’s representative may be On the same date, MISNET received a Final
appealed to the CIR or the CTA. A whole or partial Decision on Disputed Assessment (FDDA)
denial by the CIR may be appealed to the CTA. The stating that after reinvestigation, there was still
CIR or the CTA’s authorized representative’s failure due from petitioner the amount of
to act may be appealed to the CTA. There is no P14,564,323.34. On April 8, 2011, petitioner
mention of an appeal to the CIR from the failure to filed a letter-reply to the Amended Assessment
act by the CIR's authorized representative. Notice and FDDA, which was received by the CIR
on April 11, 2011.
PAGCOR did not wait for the RD or the CIR’s decision
on its protest. PAGCOR made separate and On May 9, 2011, the CIR sent a letter to MISNET
successive filings before the RD and the CIR before which states in part that MISNET's letter-reply
it filed its petition with the CTA. PAGCOR rendered dated April 8, 2011 produced no legal effect
the second option moot when it formulated its own since it availed of the improper remedy. It
rule and “elevated an appeal” to the CIR without any should have appealed the final decision of the
decision from the RD. The third option states that CIR to the Court of Tax Appeals within thirty
the remedy for failure to act by the CIR or his (30) days from the date of receipt of the said
authorized representative is to file an appeal to the Decision, otherwise, the assessment became
CTA within 30 days after the lapse of 180 days from final, executory and demandable. Is the CIR
the submission of the required supporting correct?
documents. PAGCOR clearly failed to do this. If we
consider, for the sake of argument, PAGCOR’s A: NO. Court has on several occasions relaxed this
submission before the CIR as a separate protest and strict requirement. We have on several instances
not as an appeal, then such protest should be denied allowed the filing of an appeal outside the period
for having filed out of time. It is clear that PAGCOR prescribed by law in the interest of justice, and in
failed to make use of any of the three options the exercise of its equity jurisdiction. MISNET's
described above. Indeed, PAGCOR’s lapses in belated filing of an appeal with the CTA is not
procedure have made the BIR’s assessment final, without strong, compelling reason. We could say
executor and demandable. (PAGCOR v. BIR, G.R. No. that petitioner was merely exhausting all
208731, 27 Jan. 2016) administrative remedies available before seeking
recourse to the judicial courts. While the rule is that
Q: On November 29, 2006, MISNET INC received a taxpayer has 30 days to appeal to the CTA from the
a Preliminary Assessment Notice (PAN) from final decision of the CIR, the said rule could not be
respondent Commissioner of Internal Revenue applied if the Assessment Notice itself clearly states
(CIR) stating that after examination, there was that the taxpayer must file a protest with the CIR or
an alleged deficiency in taxes for taxable year the Regional Director within 30 days from receipt of
2003 amounting to P11,329,803.61, the Assessment Notice. Under the circumstances
representing the expanded withholding tax obtaining in this case, we opted not to apply the
(EWT) and final withholding VAT. MISNET filed statutory period within which to appeal with the
a letter-protest on the PAN. CTA considering that no final decision yet was
issued by the CIR on petitioner's protest. The
On January 23, 2007, MISNET INC received a subsequent appeal taken by petitioner is from the
Formal Assessment Notice (FAN) which states inaction of the CIR on its protest. (Misnet, Inc. v. CIR,
that petitioner's tax deficiency for the year G.R. 210604, 03 June 2019)
2003, amounted to P11,580,749.31, inclusive of
P25,000.00 Compromise Penalty.

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b) COMPROMISE AND ABATEMENT OF TAXES Requisites for Compromise

Compromise and Abatement of Taxes 1. Tax liability of the taxpayer;

Distinguished 2. An offer of the taxpayer of an amount to be paid
by him; and
3. The acceptance (the CIR or the taxpayer) of the
COMPROMISE ABATEMENT
offer in the settlement of the claim
As to nature
Involves a reduction of Involves the Authority of the CIR to Compromise Taxes
the taxpayer’s liability cancellation of the
through a mutual entire tax liability of a The CIR may compromise the payment of any
agreement. taxpayer. internal revenue tax, when:
As to Authorized Officer
1. A reasonable doubt as to the validity of the
CIR, REB, NEB CIR
claim against the taxpayer exists provided that
As to grounds the minimum compromise entered into is
1. Reasonable doubt 1. The tax or any equivalent to 40% of the basic tax (Doubtful
as to the validity of portion thereof Validity).
assessment; or appears to be
2. Financial unjustly or 2. The financial position of the taxpayer
incapacity of the excessively demonstrates a clear inability to pay the
taxpayer. assessed; or assessed tax provided that the minimum
2. The compromise entered into is equivalent to 10%
administration of the basic assessed tax (Financial Incapacity).
and collection
costs involved do Minimum Compromise Rates
not justify the
collection of the BASIS MINIMUM RATES
amount due. Based on doubtful 40% of the basic
validity assessed tax
Based on financial 10% of the basic
Compromise incapacity assessed tax

In case of tax assessment, compromise is the NOTE: Where the basic tax involved exceeds P1M or
contract between the government and the taxpayer where the settlement offered is less than the
to settle the liability. prescribed minimum rates, the compromise shall be
subject to the approval of the National Evaluation
Court cannot compel the CIR to compromise in cases Board (NEB). In other words, compromise
when such is allowed, in order to assure that no settlement lower than the minimum amount
improper compromise is made to the prejudice of prescribed above may be entered subject to the
the Government. approval of NEB.
NOTE: Compromise as amount of paid by the
taxpayer to settle his tax liability is different from Offers of compromise of assessments issued by the
compromise penalty which is the amount paid by Regional Offices involving basic deficiency taxes of
the taxpayer to compromise tax violation and paid P500,000 or less and for minor criminal violations
in lieu of criminal prosecution. discovered by the Regional and District Offices, shall
be subject to the approval by the Regional
Evaluation Board (REB). However, if the offer of
compromise is less than the prescribed rates, the

299 UNIVERSITY OF SANTO TOMAS

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same shall always be subject to the approval of the adverse decision of the CIR, or his authorized
NEB. (RR No. 30-2002) representative, in some cases, within 30 days
from receipt thereof and there is reason to
Doubtful Validity believe that the assessment is lacking in legal
and/or factual basis.
There is reasonable doubt on the validity of the
assessment when: (J-A-B-A-W-F4) 9. The assessment was issued on or after January
1, 1988, where the demand notice allegedly
1. The delinquent account or disputed assessment failed to comply with the Formalities
is one resulting from a Jeopardy assessment. prescribed under Sec. 228 of the NIRC of 1997.

2. The assessment seems to be Arbitrary in Financial Incapacity

nature, appearing to be based on presumptions
and there is reason to believe that it is lacking The offer for compromise based on financial
in legal and/or factual basis. incapacity may be accepted upon showing that: (Co-
I-N-B-A-L-D)
3. Assessments made based on the “Best Evidence
Obtainable Rule” and there is reason to believe 1. The taxpayer is a Compensation income earner
that the same can be disputed by sufficient and with no other source of income and the family’s
competent evidence. gross monthly compensation income does not
exceed the levels of compensation income
4. The assessment is based on an issue where a provided for Sec. 4.1.1. of RR No. 30-2002 and it
court of competent jurisdiction made an appears that the taxpayer possesses no other
Adverse decision against the bureau, but for leviable/distrainable assets, other than his
which the Supreme Court has not decided upon family home.
with finality. (RR No. 8-2004)
NOTE: If taxpayer is an individual whose only
5. Assessment was issued within the prescriptive source of income is from employment and
period for assessment as extended by the whose monthly salary, if single, is P10,500 or
taxpayer’s execution of Waiver of the Statute of less, or if married, whose salary together with
Limitations the validity or authenticity of which his spouse is P21,000 per month, or less, and it
is being questioned or at issue and there is appears that the taxpayer possesses no other
strong reason to believe and evidence to prove leviable/distrainable assets, other than his
that it is not authentic. (Sec. 3.1, RR 30-2002) family home. (Sec. 4.1.1, RR No. 30-2002)

6. The taxpayer Failed to file an administrative 2. The taxpayer, as reflected in its latest Balance
protest on account of the alleged failure to Sheet supposed to be filed with the Bureau of
receive notice of assessment and there is reason Internal Revenue, is suffering from surplus or
to believe that the assessment is lacking in legal earnings deficit resulting to Impairment in the
and/or factual basis. original capital by at least 50%.

7. The taxpayer Failed to file a request for 3. The taxpayer is suffering from a Net worth
reinvestigation/reconsideration within 30 days deficit (total liabilities exceed total assets)
from receipt of final assessment notice and computed by deducting total liabilities (net of
there is reason to believe that the assessment is deferred credits and amounts payable to
lacking in legal and/or factual basis. stockholders/owners reflected as liabilities,
except business related transactions) from total
8. The taxpayer Failed to elevate to the CTA an assets (net of pre-paid expenses, deferred

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charges, pre-operating expenses, as well as of Finance One-Stop-Shop Tax Credit and Duty
appraisal increases in fixed assets,) taken from Drawback Center (Tax Revenue Group or
the latest audited financial statements. Investment Incentive Group) and/or the courts;

4. The taxpayer has been declared by any 3. If the taxpayer has an existing finalized
competent tribunal, or authority, or body, or Agreement or prospect of future agreement
government agency as Bankrupt or insolvent. with any party that resulted or could result to
an increase in the equity of the taxpayer at the
5. That amounts payable or due to stockholders time of the offer for compromise or at a definite
other than business-related transactions which future time; or
are properly includible in the regular “Accounts
payable” are by fiction of law considered as part 4. If the taxpayer failed to execute a Waiver of his
of capital and not liability, and that the taxpayer privilege of the secrecy of bank deposits under
has no sufficient liquid asset to satisfy the tax Republic Act No. 1405 or under other general or
liability. special laws. (RR No. 30-2002)

6. In the case of an individual taxpayer, he/she has Q: Can the CIR inquire into the bank deposits of
no other Leviable properties under the law a taxpayer? If so, does this power of the
other than his family home. Commissioner conflict with R.A. 1405 (Secrecy
of Bank Deposits Law)? (1998 BAR)
7. The corporation ceased operation or is already
Dissolved. A: The CIR is authorized to inquire into the bank
deposits of:
NOTE: The tax liabilities corresponding to the 1. A decedent to determine his gross estate;
Subscription Receivable or Assets 2. Any taxpayer who has filed an application for
distributed/distributable to the stockholders compromise of his tax liability by means of
representing return of capital at the time of financial Incapacity to pay his tax liability. (Sec.
cessation of operation or dissolution cannot be 6(F), NIRC)
compromised.
The limited power of the CIR does not conflict with
Requisites For Financial Incapacity as Ground R.A. No. 1405 because the provisions of the NIRC
for Compromise Settlement granting this power is an exception to the Secrecy of
Bank Deposits Law as embodied in a later
1. Clear inability to pay the tax; and legislation.

2. The taxpayer must waive in writing his Furthermore, in case a taxpayer applies for an
privilege of the secrecy of bank deposit under application to compromise the payment of his tax
RA 1405 or other general or special laws, which liabilities on his claim that his financial position
shall constitute as the CIR’s authority to inquire demonstrates a clear inability to pay the tax
into said bank deposits. (Sec. 6(F), NIRC) assessed, his application shall not be considered
unless and until he waives in writing his privilege
Grounds for Denial of Compromise Settlement under R.A. No. 1405, and such waiver shall
Based on Financial Incapacity: (C-R-A-W) constitute the authority of the CIR to inquire into the
bank deposits of the taxpayer.
1. If the taxpayer has a Tax Credit Certificate,
issued under the NIRC; Q: May the CIR compromise the payment of
withholding tax where the financial position of
2. If the taxpayer has a pending claim for tax the taxpayer demonstrates a clear inability to
Refund or tax credit with the BIR, Department pay the assessed tax? (1998 BAR)

301 UNIVERSITY OF SANTO TOMAS

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A: NO. A taxpayer who is constituted as withholding incapacity which the CIR shall not accept unless
agent who has deducted and withheld at source the accompanied by a waiver of the secrecy of bank
tax on the income payment made by him holds the deposits (Sec. 6 (F), NIRC) The waiver will enable the
taxes in trust for the government (Sec. 58 (D), NIRC) CIR to ascertain the financial position of the
and is obligated to remit them to the BIR. The taxpayer, although the inquiry need not be limited
subsequent inability of the withholding agent to only to the bank deposits of the taxpayer but also as
pay/remit the taxes withheld is not a ground for to his financial position as reflected in his financial
compromise because the withholding tax is not a tax statements or other records upon which his
upon the withholding agent but it is only a property holdings can be ascertained.
procedure for the collection of a tax.
If indeed, the financial position of NX as determined
Q: May the tax liability of a taxpayer be by the CIR demonstrates a clear inability to pay the
compromised during the pendency of an tax, the acceptance of the offer is legal and ethical
appeal? (1996 BAR) for the ground upon which the compromise was
anchored is within the context of the law and the
A: YES, as long as any of the grounds for a rate of compromise is well within and far exceeds
compromise i.e., doubtful validity of assessment and the minimum prescribed by law which is only 10%
financial incapacity of taxpayer is present. A of the basic tax assessed.
compromise of a tax liability is possible at any stage
of litigation, even during appeal, although legal Q: Does the Court of Appeals have the power to
propriety demands that prior leave of court should review compromise agreements forged by the
be obtained. (Pasudeco v. CIR, G.R. No. L-39387, 29 Commissioner of Internal Revenue and a
June 1982) taxpayer? Explain. (2010 BAR)

Q: After the tax assessment had become final A: As a general rule, the Court of Appeals does not
and unappealable, the CIR initiated the filing of have the power to review compromise agreements
a civil action to collect the tax due from NX. After made between the Commissioner of Internal
several years, a decision was rendered by the Revenue and the taxpayer considering that the
court ordering NX to pay the tax due plus Commissioner is vested with the authority to
penalties and surcharges. The judgment became compromise and such authority is exercised
final and executory but attempts to execute the according to his discretion. Such authority should
judgment award were futile. be exercised in accordance with the CIR discretion
and courts have no power, as a general rule, to
Subsequently, NX offered the CIR a compromise compel him to exercise such discretion one way or
settlement of 50% of the judgment award, another. If the CIR abuses his discretion by not
representing that this amount is all he could following the parameters set by law, the CTA, not
really afford. Does the CIR have the power to the CA, may correct such abuse if the matter is
accept the compromise offer? Is it legal and appealed to it. In case of arbitrary or capricious
ethical? (2004 BAR) exercise by the CIR of the power to compromise, the
compromise can be attacked and reversed through
A: YES. The CIR has the power to accept the offer of judicial process. It must be noted however, that a
compromise if the financial position of the taxpayer compromise is considered as other matters arising
clearly demonstrates a clear inability to pay the tax. under the NIRC which vests the CTA with
(Sec. 204, NIRC) jurisdiction and since the decision of the CTA is
appealable to the Supreme Court, the Court of
As represented by NX in his offer, only 50% of the Appeals is devoid of any power to review a
judgment award is all he could really afford. This is compromise settlement forged by the CIR.
an offer for compromise based on financial

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Limitations on the Power to Compromise a Tax compromise rate equivalent to 40% of the
Liability basic tax assessed (Sec. 4, RR 30-2002)

The CIR is allowed to enter into a compromise only 2. Subject to approval of Evaluation Board
if the basic tax involved does not exceed P1M and
a. When basic tax involved exceeds
the settlement offered is not less than the
P1,000,000;
prescribed percentages. (Sec. 204(A), NIRC)
b. Where the settlement offered is less than
1. Minimum compromise rate
the prescribed minimum rates (Sec. 204,
a. For cases of “financial incapacity”: NIRC);

i. If taxpayer is an individual whose only c. When the CIR is not authorized to

source of income is from employment compromise.
and whose monthly salary, if single is
P10,500 or less or if married, whose Cases which May be Compromised (2005, 2002,
salary together with his spouse is 1998 BAR) (D-A-N-C3)
P21,000 per month, or less and it
appears that the taxpayer possesses no 1. Delinquent accounts;
other available distrainable assets
other than his family home – 10%; 2. Cases under Administrative protest after
issuance of the Final Assessment Notice to the
ii. If taxpayer is an individual without any taxpayer which are still pending in the RO, RDO,
source of income – 10%; Legal Service, Large Taxpayer Service,
Collection Service, Enforcement Service, and
iii. Taxpayer is under any of the following other offices in the National Office;
conditions:
3. Cases covered by pre-assessment notices, but
1. zero net worth – 10%
taxpayer is Not agreeable to the findings of the
2. negative net worth – 10%
audit office as confirmed by the review office;
3. dissolved corporations – 20%
4. already non-operating companies
4. Civil tax cases disputed before the courts;
for a period of:
a. 3 years or more as of the date
5. Collection cases filed in courts; and
of application for compromise
settlement - 10%;
6. Criminal violations except:
b. less than 3 years – 20% 1. Those already filed in courts; and
2. Those involving criminal tax fraud. (Sec. 3,
5. Surplus or earning deficit resulting RR 30-2002)
to impairment in the original
capital by at least 50% - 40% Cases which cannot be Compromised (F3-E-W-C-
6. Declared insolvent or bankrupt D)
unless taxpayer falls squarely
under any situation as discussed 1. Criminal tax Fraud cases confirmed as such by
above, thus resulting to the the CIR or his duly authorized representative.
application of the appropriate rate
– 10% 2. Cases where Final reports of reinvestigation or
reconsideration have been issued resulting to
b. cases of “doubtful validity” – a minimum reduction in the original assessment and the

303 UNIVERSITY OF SANTO TOMAS

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taxpayer is agreeable to such decision by Extent of Commissioner’s Power to
signing the required agreement form for the Compromise Criminal Violations
purpose.
a. Before the complaint is filed with the
3. Cases which become Final and executory after Prosecutor’s Office – full discretion to
final judgment of a court, where compromise is compromise except those involving fraud.
requested on the ground of doubtful validity of
the assessment. b. After the complaint is filed with the
Prosecutor’s Office but before the
4. Estate tax cases where compromise is information is filed with the court – can
requested on the ground of financial incapacity still compromise provided that the
of the taxpayer. prosecutor gives his consent.

5. Withholding tax cases, unless the applicant – c. After the information is filed with the
taxpayer invokes provisions of law that cast court – no longer permitted to compromise
doubt on the taxpayer’s obligation to withhold. with or without the consent of the
Prosecutor. (People v. Magdaluyo, G.R. No. L-
6. Criminal violations already filed in courts. 1595, 20 Apr. 1961)

7. Delinquent accounts with duly approved 2. Civil cases – Before litigation or at any stage of
schedule of installment payments. (Sec. 3, RR the litigation, even during appeal, although
30-2002) legal propriety demands that prior leave of
court should be obtained.
NOTE: The CTA may issue an injunction to prevent
the government from collecting taxes under a Remedies in Case the Taxpayer Refuses or Fails
compromise agreement when such would be to Follow the Tax Compromise
prejudicial to the government.
1. Enforce the compromise
When must Compromise be Made
a. If it is a judicial compromise, it can be
enforced by mere execution. A judicial
1. Criminal cases – It must be entered into prior
compromise is one where a decision based
to the institution of the corresponding criminal
on the compromise agreement is rendered
action arising out of a violation of the provisions
by the court on request of the parties.
of the NIRC. A compromise can never be
entered into after final judgment because by
b. Any other compromise is extrajudicial and
virtue of such final judgment the Government
like any other contract can only be enforced
had already acquired a vested right. (Roviro v.
by court action.
Amparo, G.R. No. L- 5482, 05 May 1982)
2. Regard it as rescinded and insist upon original
NOTE: A compromise validly entered into
demand. (Art. 2041, NCC)
between the CIR and the taxpayer prior to the
institution of the corresponding criminal action
Prescriptive Period to Enforce Compromises
arising out of a violation of the provisions of the
NIRC becomes a bar to such criminal action.
As a rule, the obligation to pay tax is based on law.
(People v. Magdaluyo, G.R. No. L-16235, 20 Apr.
But when, for instance, a taxpayer enters into a
1965)
compromise with the BIR, the obligation of the
taxpayer becomes one based on contract.
Compromise is a contract whereby the parties, by

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 II. NATIONAL TAXATION
reciprocal concessions, avoid litigation or put an involved do not justify the collection of the
end to one already commenced. (Art. 2028, NCC) amount due: (A-W-O-R-D)
Since it is a contract, the prescriptive period to
enforce the same is 10 years based on Art. 1144, a. Abatement of penalties on assessment
NCC reckoned from the time the cause of action confirmed by the lower court but Appealed
accrued. by the taxpayer to a higher court;

Abatement and Cancellation of Tax Liability b. Abatement of penalties on Withholding tax

assessment under meritorious
Grounds for abatement (Sec. 204(B), NIRC): circumstances;

1. The tax or any portion thereof appears to be c. Such Other circumstances which the CIR
unjustly or excessively assessed: (Wrong-L-I- may deem analogous to the enumeration
C-E) above. (Sec. 3, RR No. 13-2001)

a. The filing of the return/payment is made at d. Abatement of penalties on assessment

the Wrong venue; reduced after Reinvestigation but taxpayer
i. The taxpayer fails to file the return and is still contesting reduced assessment;
pay the tax on time due to:
ii. Substantial losses from prolonged e. Abatement of penalties on Delayed
labor dispute; installment payment under meritorious
iii. Force majeure; or circumstances; or
iv. Legitimate business reverses;
NOTE: For items a to e, the abatement of
NOTE: The abatement shall only cover the the surcharge and compromise penalty
surcharge and the compromise penalty and shall be allowed only upon written
not the interest imposed under Sec. 249, application by the taxpayer, signifying his
NIRC. willingness to pay the basic tax and interest
or basic tax only, whichever is applicable
b. There is Late payment of the tax under under prevailing circumstance.
meritorious circumstances (i.e., Failure to
beat bank cut-off time, surcharge Q: Explain the extent of the authority of the CIR
erroneously imposed); to compromise and abate taxes. (1996 BAR)

c. The assessment is brought about or A: The authority of the CIR to compromise

resulted from taxpayer’s non-compliance encompasses both civil and criminal liabilities of the
with the law due to a difficult taxpayer. The civil compromise is allowed only in
Interpretation of said law; cases: (1) where the tax assessment is of doubtful
validity, or (2) when the financial position of the
d. The taxpayer fails to file the return and pay taxpayer demonstrates a clear inability to pay the
the correct tax on time due to tax. All criminal violations may be compromised
Circumstances beyond his control; and except: (1) those already filed in court, or (2) those
involving fraud.
e. The taxpayer’s mistake in payment of his
tax is due to Erroneous written official The compromise settlement of any tax liability shall
advice of a revenue officer. (Sec. 2, RR No. be subject to the following minimum amounts: (1)
13-2001) ten percent (10%) of the basic assessed tax in case
of financial capacity; and (2) forty percent (40%) of
2. The administration and collection costs the basic assessed tax in other cases.

305 UNIVERSITY OF SANTO TOMAS

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Where the basic tax involved exceeds P1 million or There is a violation of No violation of the law
where the settlement offered is less than the certain provisions of but there is a mistake in
prescribed minimum rates, the compromise shall be tax law or statute. collection.
subject to the approval of the Evaluation Board
On the part of the taxpayer
which shall be composed of the CIR and the four (4)
Deputy Commissioners. The tax was paid by The payment was made
him under duress. under a mistake of fact.
The CIR may also abate or cancel a tax liability
when: (1) the tax or any portion thereof appears to On the part of the taxpayer
have been unjustly or excessively assessed; or (2) The tax was collected The collection was
the administrative and collection costs involved do in patent disregard of made based on a
not justify collection of the amount due. (Sec. 204, the law. misapplication of the
NIRC) law.

c) RECOVERY OF TAX ERRONEOUSLY OR Tax Refund and Tax Credit Distinguished

ILLEGALLY COLLECTED
TAX REFUND TAX CREDIT
Remedies of Taxpayer After Payment
As to purpose
1. Tax refund – Actual reimbursement of tax The taxpayer asks for The taxpayer asks that
restitution of the the money paid be
2. Tax credit – Government issues Tax Credit money paid as tax. applied to his existing
Certificate (TCC) which may be applied against There is actual tax liability except
any internal revenue tax, excluding withholding reimbursement withholding taxes
taxes, for which the taxpayer is directly liable.
As to reckoning point of two-year period
(Sec. 204 (C), NIRC)
2-yr period to file the 2-yr period starts from
NOTE: All TCCs issued by the BIR shall not be claim with the CIR the date such credit was
allowed to be transferred or assigned to any starts after the allowed – in case credit
person. (Sec. 2, RR No. 14-2011) payment of the tax or is wrongly made
penalty
Grounds for Filing Claim for Refund or Issuance
of Tax Credit Certificate Requisites for Claim of Tax Refund or Tax Credit
(2005, 2002 BAR)
1. Tax is erroneously or illegally assessed or
collected; 1. There is tax collected erroneously or illegally, or
a penalty collected without authority, or a sum
2. Penalty is imposed without authority; and excessively or wrongfully collected. (Sec. 229,
NIRC)
3. Sum collected is excessive or in any manner
wrongfully collected. NOTE: Payment under protest is not required.

Illegally and Erroneously Collected Tax 2. There must be a written claim for refund filed
Distinguished by the taxpayer with the CIR; (Vda. De
Aguinaldo v. CIR, G.R. No. L-19927, 26 Feb. 1965)
ILLEGALLY ERRONEOUSLY
COLLECTED TAX COLLECTED TAX XPNs:
Definition a. When on the face of the return upon which

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2023 GOLDEN NOTES
 II. NATIONAL TAXATION
payment was made, such payment appears discount, can it claim reimbursement of the
clearly to have erroneously paid - the CIR discount from the government on the
may refund or credit the tax even without a ground that without such reimbursement,
written claim (Sec. 229, NIRC) the law constitutes taking of private
property for public use without just
b. A return filed showing an overpayment compensation? (2006 BAR)
shall be considered as a written claim for
credit or refund (Sec. 204 (C), NIRC) (2010, A:
2002 BAR) a. NO. There is nothing in the law that grants a
refund when the bookstore has no tax liability
3. Must be a categorical claim for refund or credit; against which the tax credit can be used. A tax
credit is in the nature of a tax exemption and in
NOTE: It is for the CIR to afford an opportunity case of doubt, the doubt should be resolved in
to correct the action of subordinate officers; Strictissimi juris against the claimant. (CIR v.
and Central Luzon Drug, G.R. No. 159647, 15 Apr.
2005)
To notify the Government that such taxes have
been questioned and the notice should then be b. NO. Tax credit which reduces the tax liability is
borne in mind in estimating the revenue different from a tax deduction which merely
available for expenditure. (Bermejo v. CIR, G.R. reduces the tax base. Since the law allowed the
No. L-3029, 25 July 1950) bookstores to claim the discount in full as a tax
credit, the BIR is not allowed to expand or
4. Must be filed within 2 years from date of contract the legislative mandate. (CIR v.
payment of the tax or penalty regardless of any Bicolandia Drug Corporation, G.R. 148083, 21
supervening cause that may arise after July 2006)
payment. No suit or proceeding shall be
instituted after the expiration of the period; and c. NO. If the business continues to operate at a loss
(2008 BAR) and no other taxes are due, thus compelling it to
close shop, the credit can never be applied and
5. The taxpayer must present proof of payment of will be lost altogether. (CIR v. Central Luzon
the tax. Drug, G.R. No. 159647, 15 Apr. 2005) The grant
of the discount to the taxpayer is a mere
Q: Congress enacts a law granting grade school privilege and can be revoked anytime.
and high school students a 10% discount on all
school-prescribed textbooks purchased from Q: Is a deficiency tax assessment a bar to a claim
any bookstore. The law allows bookstores to for tax refund or tax credit? (2005 BAR)
claim the discount in full as a tax credit.
A: YES. The deficiency tax assessment is a bar to a
a. If in a taxable year a bookstore has no tax tax refund or credit. The taxpayer cannot be entitled
due on which to apply the tax credits, can the to a refund and at the same time liable for a tax
bookstore claim from the BIR a tax refund in deficiency assessment for the same year. The
lieu of tax credit? deficiency assessment creates a doubt as to the
truth and accuracy of the Tax Return. Said Return
b. Can the BIR require the bookstores to cannot therefore be the basis of the refund. (CIR v.
deduct the amount of the discount from CA, G.R. No. 106611, 21 July 1994)
their gross income?
Q: On June 16, 1997, the BIR issued against the
c. If a bookstore closes its business due to Estate of Mott a notice of deficiency estate tax
losses without being able to recoup the assessment, inclusive of surcharge, interest and

307 UNIVERSITY OF SANTO TOMAS

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compromise penalty. The Executor of the Estate required attachments. PNB thereafter filed its
of Mott filed a timely protest against the claim for refund or issuance of tax credit
assessment and requested for waiver of the certificate of its excess creditable withholding
surcharge, interest and penalty. The protest was taxes. Due to the CIR’s inaction to the claim, PNB
denied by the CIR with finality on Sept. 13, 1997. filed a petition for review for its claim. CTA
Consequently, the Executor was made to pay the Third Division found that PNB’s evidence was
deficiency assessment on Oct. 10, 1997. The insufficient to support its claim for a refund or
following day, the Executor filed a Petition with issuance of tax credit certificate, ruling that the
the CTA praying for the refund of the surcharge, presentation of the succeeding Quarterly ITRs
interest and compromise penalty. The CTA took was vital to its claim. PNB is contending that the
cognizance of the case and ordered the CIR to presentation of the ITRs is not indispensable to
make a refund. The CIR filed a Petition for its claim for refund. Is PNB’s contention correct?
Review with the CA assailing the jurisdiction of
the CTA and the Order to make refund to the A: YES. The presentation of the claimant's quarterly
Estate on the ground that no claim for refund returns is not a requirement to prove entitlement to
was filed with the BIR. the refund. Once the minimum statutory
requirements have been complied with, the
a. Is the stand of the CIR correct? claimant should be considered to have successfully
b. Why is the filing of an administrative claim discharged its burden to prove its entitlement to the
with the BIR necessary? (2000 BAR) refund. After the claimant has successfully
established a prima facie right to the refund by
A: complying with the requirements laid down by law,
a. YES. For there was no claim for refund or credit the burden is shifted to the opposing party to
that has been duly filed with the CIR which is disprove such claim. To rule otherwise would be to
required before a suit or proceeding can be filed unduly burden the claimant with additional
in any court. (Sec. 229, NIRC) The denial of the requirements which has no statutory nor
claim by the CIR is the one which will vest the jurisprudential basis.
CTA jurisdiction over the refund case should the
taxpayer decide to appeal on time. Thus, once the claimant has successfully established
that its claim was (1) filed within the two-year
b. The filing of an administrative claim for refund prescriptive period; (2) that the income related to
with the BIR is necessary in order: the claimed CWT formed part of the return during
the taxable year when the refund is claimed for; and
i. To afford the CIR an opportunity to (3) the fact of withholding of said taxes, it shall be
consider the claim and to have a chance to deemed to be entitled to its claimed CWT refund.
correct the errors of subordinate officers. (CIR v. Philippine National Bank, G.R. No. 212699, 13
(Gonzales v. CTA, G.R. No. 14532, 26 May Mar. 2019)
1965); and
Q: Lucio L. Co, Susan P. Co, Ferdinand Vincent P.
ii. To notify the Government that such taxes Co and Pamela Justine P. Co, collectively were
have been questioned and the notice the majority shareholders of Kareila
should be borne in mind in estimating the Management Corporation. They were also
revenue available for expenditures. shareholders of Puregold Price Club, Inc. On May
(Bermejo v. Collector, G.R. No. L-3028, 29 11, 2012, they entered into a Deed of Exchange
July 1950) with Puregold wherein they agreed to transfer
all their Kareila shares to Puregold in exchange
Q: PNB electronically filed its Annual Income for Puregold shares. Under the Share swap per
Tax Return and manually filed the same with the Deed of Exchange, they each would receive 450

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 II. NATIONAL TAXATION
Puregold shares for every one Kareila share that between respondents and Puregold is not covered
they would transfer to Puregold. by the tax-free exchange as provided in Sec. 40
(C)(2) in relation to Sec. 40 (C)(6)(c) of the NIRC of
As a result of the share swap under the Deed of 1997, as amended. It is undisputed that after the
Exchange: (1) Puregold acquired majority exchange, respondents collectively increased their
ownership of Kareila; and, (2) Respondents, control over Puregold from 66.57% to 75.83%.
who, prior to the share swap, already Accordingly, respondents cannot be held liable for
collectively owned 66.5720% of the outstanding income taxes on the supposed gain which may have
capital stock of Puregold consequently resulted from such transfer. The CGT paid by
increased their stockholdings to 75.8329% after respondents on the subject transfer are considered
the swap erroneously paid taxes and must perforce be
refunded pursuant to Sec. 229 of the NIRC of 1997,
On June 26 and 28, 2012, respondents as amended. (CIR v. Lucio Co, et al. G.R. No. 241424,
collectively paid capital gains tax (CGT) 26 Feb. 2020)
including interest and/or compromise penalty
on the said transfer pursuant to Sec. 24(C) of the Payment under Protest Not a Requirement
NIRC. They, however, contend that their
payments of CGT were erroneous because, A suit or proceeding for tax refund may be
under Sec. 40(C)(2) of the NIRC, their transfer of maintained “whether or not such tax, penalty or
shares through the Deed of Exchange was a tax- sum has been paid under protest or duress” (Sec.
exempt transaction. Thus, on May 21, 2014, or 229, NIRC)
within the two-year prescriptive period, they
filed their administrative claims for refund of When Payment under Protest Required
the CGT including interest and/or compromise
penalty with their respective Revenue District It is necessary in claims for refund for:
Offices. Are the respondents liable to pay capital 1. real property taxes, (Sec. 252, LGC) and
gains tax by virtue of the transaction under the 2. customs duties. (Sec. 2308, TCC)
share swap under the Deed of Exchange?
Rule on Government’s Liability for Interests on
A: NO. The requisites for the non-recognition of gain Tax Refunds
or loss are as follows:
GR: There can be no interest on refund of tax in the
1. the transferee is a corporation; absence of statutory provision clearly and expressly
2. the transferee exchanges its shares of stock for directing or authorizing such payment.
property/ies of the transferor;
3. the transfer is made by a person, acting alone or XPNs:
together with others, not exceeding four 1. If interest is authorized by law;
persons; and 2. Arbitrariness in the collection of tax;
4. as a result of the exchange the transferor, alone
or together with others, not exceeding four, NOTE: An action is not arbitrary when
gains control of the transferee. exercised honestly and upon due consideration
where there is room for two opinions, however
much it may be believed that an erroneous
The element of control is satisfied even if one of the
conclusion was reached. Arbitrariness
transferors is already owning at least 51% of the presupposes inexcusable or obstinate
shares of the transferee corporation, as long as after disregard of legal provisions. (Philex Mining
the exchange, the transferors, not more than five, Corp. v. CIR, G.R. 120324, 21 Apr. 1999)
collectively increase their equity in the transferee
corporation by 51% or more. Thus, there has no 3. Under Sec. 79(C)(2) of NIRC with respect to
basis to claim that the share swap transaction income taxes withheld on the wages of the

309 UNIVERSITY OF SANTO TOMAS

FACULTY OF CIVIL L AW
 TAXATION LAW
employees.
It is necessary that the tax be paid in full, and that
Tax Refund or Tax Credit May be Forfeited to the the claim for refund in the BIR as well as the
Government proceedings in the CTA be commenced within two
(2) years counted from the payment of the tax.
1. Tax Refund – When a refund check or warrant
remains unclaimed or uncashed within 5 years Thus, as a rule, the two-year prescriptive period
from date of mailing or delivery. runs from the payment of tax. However, the
following instances provide for different
2. Tax Credit – a Tax Credit Certificate which commencement of the two-year period:
remains unutilized after 5 years from date of
issue, shall be invalid, unless revalidated. (Sec. 1. Tax is paid in installments (for individuals) –
230, NIRC) From the date of the final payment.

Q: State the conditions required by the Tax Code 2. Payments effected through the withholding
before the Commissioner of Internal Revenue tax system – From the date it falls due at the end
could authorize the refund or credit of taxes of the taxable year.
erroneously or illegally received. (2005, 2002
BAR) NOTE: In case of payments effected through
withholding tax system, the tax liability is
A: The conditions are: deemed paid when the same falls due at the end
of the tax year. This is because a taxpayer,
1. A written claim for refund is filed by the
resident or non-resident, who contributes to the
taxpayer with the Commissioner of Internal
withholding tax system, not really deposit an
Revenue;
amount to the CIR, but, in truth, performs and
extinguishes his tax obligation for the year
2. The claim for refund must be a categorical
concerned. (Gibbs v. CIR, G.R. No. L-17406, 29 Nov.
demand for reimbursement (Bermejo v. CIR, G.R.
1965)
No. L-3029, 25 July 1950);
3. Overpaid quarterly corporate income tax –
From the date the final adjustment return is filed
3. The claim for refund or tax credit must be filed
after the end of the taxable year. The period is
with the Commissioner, or the suit or
counted from the actual filing, not the last day
proceeding therefore must be commenced in
allowed by law to file.
court within 2 years from date of payment of
the tax or penalty regardless of any
NOTE: The filing and payment of the quarterly
supervening cause.
income tax should only be considered as mere
installments of the annual tax due. These
Two-year Prescriptive Period
quarterly payments should be treated as
advances or portions of the annual income tax
No credit or refund of taxes or penalties shall be
due, to be adjusted at the end of the year, its Final
allowed unless the taxpayer files in writing with the
Adjustment Return. (CIR v. TMX Sales, G.R. No.
CIR a claim for credit or refund within two (2) years
83736, 15 Jan. 1992 reiterated in CIR v. CA, G.R.
after the payment of the tax or penalty. (Sec. 204(C),
No. 117254, 21 Jan. 1999)
NIRC)

Two-year Period for Filing Tax Refund is

No suit or proceeding shall be filed after the
Jurisdictional
expiration of two (2) years from the date of payment
of the tax or penalty regardless of any supervening
The Supreme Court held that Sec. 204 applies to
cause that may arise after payment. (Sec. 229, NIRC)

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2023 GOLDEN NOTES
 II. NATIONAL TAXATION
administrative claims for refund, while Sec. 229 to Communications, G.R. No. 211348, 22 Feb. 2022, J.
judicial claims for refund. In both instances, the Hernando)
taxpayer's claim must be filed within two (2) years
from the date of payment of the tax or penalty. Q: On Mar. 12, 2001, REN paid his taxes. Ten
However, Sec. 229 of the NIRC further states the months later, he realized that he had overpaid
condition that a judicial claim for refund may not be and immediately filed a claim for refund with
maintained until a claim for refund or credit has the CIR. On Feb. 27, 2003, he received the
been duly filed with the Commissioner. Timeliness decision of the CIR denying REN's claim for
of the filing of the claim is mandatory and refund. On Mar. 24, 2003, REN filed an appeal
jurisdictional. Thus, the CTA cannot take cognizance with the CTA. Was his appeal filed on time or
of a judicial claim for refund filed either not? (2004 BAR)
prematurely or out of time. (CIR v. Carrier Air
Conditioning Philippines, Inc., G.R. No. 226592, 27 July A: NO. His appeal was not filed on time. The 2-year
2021) period for filing a claim for refund is not only a
limitation for pursuing the claim at the
Q: PBCOM filed an amended ITR for the year administrative level but also for appealing the case
2006 reflecting a net loss and a creditable tax to the CTA. The law provides that "no suit or
withheld for the fourth quarter of 2006. After proceeding shall be filed after the expiration of 2
two years, they filed a letter to the BIR. PBCOM years from the date of the payment of the tax or
filed a petition for review with the CTA, praying penalty regardless of any supervening cause that
for the issuance of a TCC due to the inaction of may arise after payment. Since the appeal was only
the CIR on the former's claim for a TCC. The CIR made on Mar. 24, 2003, more than two years had
essentially argued that PBCOM's claim for the already elapsed from the time the taxes were paid
issuance of a TCC is in the nature of a refund and on Mar. 12, 2003. Accordingly, REN had lost his
is thus subject to administrative examination by judicial remedy because of prescription.
the BIR. Is the CIR correct?
Q: XCEL Corp. filed its quarterly income tax
A: NO. The Supreme Court affirmed the CTA En return for the first quarter of 1985 and paid
Banc’s ruling that the failure of the taxpayer to P500.000 on May 15, 1985. In the subsequent
comply with the requirements of its administrative quarters, XCEL suffered losses. On Apr. 15, 1986
claim for refund/credit does not preclude its judicial it declared a net loss of P1,000,000 in its annual
claim. With reference to Sec. 229 of the NIRC, the income tax return. After failing to get a refund,
only requirement for a judicial claim of tax XCEL filed on Mar. 1, 1988 a case with the CTA to
credit/refund to be maintained is that a claim of recover the P500.000 in taxes paid on May 15,
refund or credit has been filed before the CIR; there 1985. Is the action to recover the taxes filed
is no mention in the law that the claim before the timely? (1994 BAR)
CIR should be acted upon first before a judicial claim
may be filed. A: YES. The action for refund was filed with the CTA
on time. In the case of overpaid quarterly corporate
The legislative intent is to treat the judicial claim as income tax, the two-year period for filing claims for
independent and separate action from the refund in the BIR as well as in the institution of an
administrative claim; provided that the latter must action for refund in the CTA, the two-year
be filed in order for the former to be maintained. prescriptive period for tax refunds is counted from
While the CIR should be given opportunity to act on the filing of the final, adjustment return under Sec.
PBCOM's claim, PBCOM should not be faulted for 67 of the NIRC, and not from the filing of the
lawfully filing a judicial claim before the expiration quarterly return and payment of the quarterly tax.
of the two-year prescriptive period, The CTA action on Mar. 1, 1988 was clearly within
notwithstanding the alleged defects in its the reglementary 2-year period from the filing of the
administrative claim. (CIR V. Philippine Bank of final adjustment return of the corporation on Apr.

311 UNIVERSITY OF SANTO TOMAS

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15, 1986. for tax credit with the BIR, arising from
erroneously paid income taxes covering the
Q: On July 8, 2011, Univation Motor Philippines, years 2004 and 2005. The following day, DEF
Inc. filed its amended Annual Income Tax Return Corporation filed a petition for review with the
(ITR) for 2010 showing a total gross income of Court of Tax Appeals involving the tax credit
P117,084,174.00 and an overpayment of income claim for 2004 and 2005.
taxes amounting to P26,103,898.52. Univation As a BIR lawyer handling the case, would you
Motor Philippines filed its Application for Tax raise the defense of prescription in your answer
Credit in the amount of P12,868,745.00. Since to the claim for tax credit? Explain. (2008 BAR)
the BIR has not yet acted upon respondent's
administrative claim, petitioner filed a Petition A: YES. The claim for refund for the 2004
for Review with the CTA on April 12, 2013. CIR erroneously paid income tax was filed out of time
argued that respondent prematurely filed its because the claim was only filed after more than two
judicial claim with the CTA depriving it with the years had elapsed from the payment thereof. (Secs.
opportunity to act on the administrative claim 204(C) & 229, NIRC)
for refund/tax credit in violation of the doctrine
of exhaustion of administrative remedies. Is the Taxpayer’s Remedy in Case of Denial of Claim for
petitioner’s contention correct? Refund

A: NO. Indeed, the two-year period in filing a claim The taxpayer may appeal to CTA in case of denial by
for tax refund is crucial. While the law provides that CIR of the claim for refund. It must be filed within 30
the two-year period is counted from the date of days from receipt of the decision of the CIR but not
payment of the tax, jurisprudence, however, to exceed the 2-year period from date of payment of
clarified that the two-year prescriptive period to the tax or penalty regardless of any supervening
claim a refund actually commences to run, at the cause that may arise after payment.
earliest, on the date of the filing of the adjusted final In case the decision of the CIR takes too long and the
tax return because this is where the figures of the 2-year period is about to end, proceedings in the
gross receipts and deductions have been audited CTA must be commenced and without the need to
and adjusted, reflective of the results of the wait for the decision of the CIR.
operations of a business enterprise. “Thus, it is only
when the Adjustment Return covering the whole Remedies on Tax Assessment and Claim for
year is filed that the taxpayer would know whether Refund Distinguished
a tax is still due or a refund can be claimed based on
the adjusted and audited figures.” (CIR v. Univation AGAINST AN CLAIM FOR REFUND
Motor Philippines, Inc. (Formerly Nissan Motor ASSESSMENT (SEC. 229)
Philippines, Inc.), G.R. 231581, 10 Apr. 2019) As to manner and period to be contested
A tax assessment A denial by the CIR of
Q: DEF Corporation is a wholly owned
becomes final unless it a claim for refund
subsidiary of DEF, Inc., California, USA. Starting
is disputed or contested must be appealed to
December 15, 2004. DEF Corporation paid
within 30 days from the CTA within 30
annual royalties to DEF, Inc., for the use of the
receipt thereof by the days from receipt of
latter's software, for which the former, as
taxpayer. If the action notice of denial and
withholding agent of the government, withheld
taken by the CIR on the within 2 years from
and remitted to the BIR the 15% final tax based
request for the day of full and final
on the gross royalty payments. The withholding
reconsideration is payment.
tax return was filed and the tax remitted to the
unacceptable to the
BIR on January 10 of the following year. On April
taxpayer, the latter
10, 2007, DEF Corporation filed a written claim
must then appeal, by

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 II. NATIONAL TAXATION
way of Petition for Theater goers can goers by theater
Review to the CTA claim the illegally owners are owned by
within 30 days from exacted taxes not the the theater goers. Only
receipt of the decision theater owners. owners of property
of the CIR. (Medina v. Baguio, G.R. have the right to claim
No. L-4060, 29 Aug. it. The theater owners
The taxpayer may also Continued inaction by 1952) merely acted as agents
opt to pay the tax before the CIR on claims for of the theater goers
the finality of the refund may thus be and as such they
assessment (e.g., within taken as a denial cannot claim the
30 days from receipt of appealable to the CTA, amount illegally
the assessment) and in order to permit the imposed by the
then file within 2 years appeal to be municipality. (Medina
from payment a written considered or having v. Baguio, ibid.)
claim for the refund of been made within the
the tax. two-year mandatory Where the payer is the 1. The withholding
period. withholding agent – agent is
considered a
1. The withholding ‘taxpayer” under
Proper Party to File Claim for Refund or Tax agent (CIR v. the NIRC as he is
Credit Procter and personally liable
Gamble, G.R. No. L- for the
GR: The “taxpayer” is the person entitled to claim a 66838, 02 Dec. withholding tax as
tax refund. He is the “party adversely affected” who 1991) well as for
is given the right to appeal the decision or ruling of deficiency
the Commissioner. 2. Withholding agent assessments,
may file a claim for surcharges, and
XPN: Under the following situations: refund for taxes penalties, should
which was the amount of the
PERSON ENTITLED
REASON withheld and paid tax withheld be
FOR THE REFUND
on behalf of a non- finally found to be
Where the tax has The sales tax is
resident foreign less than the
been shifted – imposed directly on
corporation amount that
the seller. Once
(Filipinas Synthetic should have been
The taxpayer (even if recovered, the seller
Fiber Corporation withheld under
the tax was shifted by must hold the refunded
v. CA, G.R. Nos. law.”
the taxpayer to his taxes in trust for the
118498 & 124377,
customers as in sales individual purchasers
12 Oct. 1999) 2. As an agent of the
tax and even if the tax who advanced taxpayer, the
has been billed as a payment thereof and 3. In case the withholding agent
separate item in the whose name must taxpayer does not has the authority
invoice). (CIR v. appear on his record. file a claim for to file the
American Rubber, G.R. refund, the necessary income
No. L-19667, 29 Nov. withholding agent tax return and to
1966) has the right to file remit the tax
the claim, even withheld to the
Where the payer is The amount collected when it is government
not the taxpayer – (the illegal municipal unrelated to, or is impliedly includes
taxes) from the theater not a wholly the authority to file

313 UNIVERSITY OF SANTO TOMAS

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owned subsidiary a claim for refund refund with the CIR. Silkair claims that it is
of, the principal and to bring an exempt from the payment of excise tax under
taxpayer. (CIR vs. action for recovery the NIRC, specifically Sec. 135, and under Art. 4
Smart of such claim.” (CIR of the Air Transport Agreement between the
Communications, v. Smart Governments of the Republic of the Philippines
Inc, G.R. Nos. Communications, and the Republic of Singapore (Air Agreement)
179045-46, 25 Aug. Inc., ibid.) The CIR denied the claim contending that since
2010) the liability for the excise tax payment is
imposed by law on Petron as the manufacturer
NOTE: Since this is of the petroleum products, any claim for refund
merely an exception, should only be made by Petron as the statutory
the rule is that the taxpayer.
withholding agent is
not considered as the a. Decide whether or not Silkair is the proper
taxpayer, hence he is party to claim a refund for the excise taxes
not entitled to a tax paid.
amnesty due for the b. What is the proper remedy of the Silkair?
taxpayer’s account.
A:
Where the donor’s tax – a. Silkair is not the proper party to claim a refund
was assumed by the for the excise taxes paid. The SC held that “the
donee – proper party to question or seek a refund of an
indirect tax is the statutory taxpayer, the person
Donee is the proper on whom the tax is imposed by law and who
party to claim the paid the same even if he shifts the burden
refund of the donor’s thereof to another.”
tax (even if the tax was
advanced by the Excise tax on petroleum is an indirect tax.
donor). Although the burden to pay an indirect tax can
be passed on to the purchaser of the goods, the
liability to pay the indirect tax remains with the
Proper Party to Question or Seek a Tax Refund petroleum manufacturer or seller. When the
on Indirect Taxes manufacturer or seller decides to shift the
burden of the excise tax to the tax-exempt
The proper party is the statutory taxpayer, the purchaser, the tax becomes a part of the price of
person on whom the tax is imposed by law and who the commodity. Thus, in this case, the petroleum
paid the tax even when he shifts the burden thereof manufacturer who is the statutory taxpayer is
to another because once shifted, it is no longer in the the proper party to claim the refund.
nature of a tax, but part of the purchase price or the
cost of goods or services sold. (Exxon Mobil b. The exempt entity’s remedy is to invoke its tax
Petroleum and Chemical Holdings, Inc. v. CIR, G.R. No. exemption before buying the petroleum so that
180909, 19 Jan. 2011; Silkair (Singapore) Pte., Ltd. v. the petroleum manufacturer would not pass on
CIR, G.R. No. 166482, 25 Jan. 2012) the excise taxes as part of the purchase price.
(Silkair Singapore PTE. Ltd. v. CIR, G.R. No.
Q: Silkair purchased aviation jet fuel from 171383 & 172379, 14 Nov. 2008)
Petron for use on Silkair international flights.
Silkair, contending that it is exempt from the Q: Chevron filed a claim for refund or tax credit
payment of excise taxes, filed a formal claim for for the excise taxes paid on its importation of

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 II. NATIONAL TAXATION
petroleum products that it had sold to the Clark Corporate Taxpayer’s Options in case of Excess
Development Corporation (CDC), an entity Quarterly Income Taxes Paid
exempt from direct and indirect taxes. Is
Chevron entitled to the tax refund or tax credit? If the sum of the quarterly tax payments made
during the said taxable year exceeds the total tax
A: Excise tax is a tax on property; hence, the due on the entire taxable income of that year, the
exemption from the excise tax expressly granted corporation shall either:
under Sec. 135 of the NIRC must be construed in
favor of the petroleum products on which the excise 1. Carry-over the excess credit against the
tax was initially imposed. Accordingly, the excise estimated quarterly income tax liabilities for
taxes that Chevron paid on its importation of the taxable quarters of the succeeding taxable
petroleum products subsequently sold to CDC were years; or
illegal and erroneous and should be credited or
refunded to Chevron in accordance with Sec. 204 of 2. Be credited (TCC); or
NIRC.
3. Refunded with the excess amount paid. (Sec. 76,
In cases involving excise tax exemptions on NIRC)
petroleum products under Sec. 135 of the NIRC, the
Court has consistently held that it is the statutory NOTE: The above options are alternative and not
taxpayer, not the party who only bears the economic cumulative in nature, that is, the choice of one
burden, who is entitled to claim the tax refund or tax precludes the other. The logic behind the rule is to
credit. The general rule applies here because ease tax administration, particularly the self-
Chevron did not pass on to CDC the excise taxes paid assessment and collection aspects. (Republic v.
on the importation of the petroleum products, the Team (Phils.) Energy Corp., G.R. No. 188016, 14 Jan.
latter being exempt from indirect taxes. (Chevron 2015)
Phil. Inc. v. CIR, G.R. No. 210836, 01 Sept. 2015)
Irrevocability Rule
Q: Does a withholding agent have the right to file
Once the option to carry-over and apply the excess
an application for tax refund? Explain. (2005
quarterly income tax against income tax due for the
BAR)
taxable quarters of the succeeding taxable years has
been made, such option shall be considered
A: YES. A withholding agent should be allowed to
irrevocable for that taxable period and no
claim for tax refund, because under the law said
application for cash refund or issuance of a tax
agent is the one who is held liable for any violation
credit certificate shall be allowed therefor. (Sec. 76,
of the withholding tax law should such violation
NIRC)
occur. (CIR v. Wander Philippines Inc., G.R. No. No. L-
68375, 15 Apr. 1988) The phrase “such option shall be considered
irrevocable for that taxable period” means that the
Furthermore, since the withholding agent is made option to carry over the excess tax credits of a
personally liable to deduct and withhold any tax particular taxable year can no longer be revoked.
under Sec. 53(c) of the NIRC, it is imperative that he (SYSTRA Phil., Inc. v. CIR, G.R. No. 176290, 21 Sept.
be considered the taxpayer for all legal intents and 2007)
purposes. Thus, by any reasonable standard, such
person should be regarded as a party in interest to NOTE: Under the old provision, the option to carry-
bring suit for refund of taxes. (CIR v. Procter and over the excess or overpaid income tax for a given
Gamble Philippines Manufacturing Corporation and taxable year is limited to the immediately
CTA, G.R. No. 66838, 02 Dec. 1991) succeeding taxable year only. In contrast, under Sec.
76 of the NIRC of 1997, the application of the option
to carry over the excess of creditable tax is not

315 UNIVERSITY OF SANTO TOMAS

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limited only to the immediately following taxable irrevocability also applies to the option of refund,
year but extends to the next succeeding taxable such would be an interpretation of the BIR that is
years. The clear intent in the amendment under Sec. contrary to the intent of the law. It must be stressed
76 is to make the option, once exercised, irrevocable that such erroneous interpretation is not binding on
for the “succeeding taxable years”. (Asiaworld the court. (University Physicians Services, Inc. v. CIR,
Properties Philippines Corporation v. CIR, G.R. No. G.R. 205955, 07 Mar. 2018)
171766, 29 Jul. 2010)
Q: On April 17, 2006, Z Company filed its Annual
Q: In its 2006 Annual ITR, UPSI-MI chose the Income Tax Return ("ITR") for taxable year
option "To be issued a tax credit certificate" with 2005, and reflected a tax overpayment of
respect to the amount P2,927,834.00, P1,500,653.00. In said Annual ITR for taxable
representing unutilized excess creditable taxes year 2005, Z Company indicated that its excess
for the taxable year ending 31 December 2006. creditable withholding tax ("CWT") for the year
2005 was "To be refunded". However, on its
In the following year, UPSI-MI changed its Quarterly Income Tax Return for the first to
taxable period from calendar year to fiscal year third quarter of the taxable year 2006, it
ending on the last day of March. Thus, it filed on reflected prior year excess credits of
14 November 2007 an Annual ITR covering the P1,500,653.00. On December 29, 2006,
short period from January 1 to March 31 of respondent filed with the Revenue Region No. 8
2007. In the original 2007 Annual ITR, UPSI-MI an administrative claim for refund of its alleged
opted to carry over as "Prior Year's Excess excess/unutilized CWT for the year 2005 in the
Credits" the total amount of P5,159,341.00 amount of P1,500,653.00. On April 2, 2007,
which included the 2006 unutilized creditable respondent filed its Annual Income Tax Return
withholding tax of P2,927,834.00. Thereafter, for taxable year 2006 showing prior year's
UPSI-MI amended the return by excluding the excess credits of P0.00.
sum of P2,927,834.00 under the line "Prior
Year's Excess Credits" which amount is the On December 7, 2007, pending CIR's action on Z
subject of the refund claim. Is UPSI-MI still Company's claim for refund or issuance of a tax
entitled to the refund of its 2006 excess tax credit certificate of its excess or unutilized CWT
credits in the amount of P2,927,834 even though for the year 2005 and before the lapse of the
it initially filed its income tax return (for the period for filing an appeal, Z Company filed a
short period ending 31 March 2007) indicating Petition for Review with the CTA.
the option of carry-over?
The CIR alleged: assuming without admitting
A: NO. The Court interpreted Sec. 76 of the NIRC that respondent filed a claim for refund, the
that the irrevocability is limited only to the option of same is subject to investigation by the BIR; Z
carry-over such that a taxpayer is still free to change Company failed to demonstrate that the tax was
its choice after electing a refund of its excess tax erroneously or illegally collected; taxes paid and
credit. But once it opts to carry over such excess collected are presumed to have been made in
creditable tax, after electing refund or issuance of accordance with laws and regulations, hence,
tax credit certificate, the carry-over option becomes not refundable; it is incumbent upon
irrevocable. Accordingly, the previous choice of a respondent to show that it has complied with
claim for refund, even if subsequently pursued, may the provisions of Sec. 204(C), in relation to Sec.
no longer be granted. 229 of the Tax Code, as amended, upon which its
claim for refund was premised. Is Z Company
Further, nothing in the contents of BIR 1702 barred by the irrevocability rule in claiming for
expressly declares that the option of refund or TCC the refund of its excess and/or unutilized
is irrevocable. Even on the assumption that the creditable withholding tax?

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 II. NATIONAL TAXATION
A: NO. In case the corporation is entitled to a tax refund, should one still choose this option later on.
credit or refund of the excess estimated quarterly Despite the failure of taxpayer to make the
income taxes paid, the excess amount shown on its appropriate marking in the BIR form, the filing of its
final adjustment return may be carried over and written claim effectively serves as an expression of
credited against the estimated quarterly income tax its choice to request a tax refund, instead of a tax
liabilities for the taxable quarters of the succeeding credit. To assert that any future claim for a tax
taxable years. Once the option to carry over and refund will be instantly hindered by a failure to
apply the excess quarterly income tax against signify one's intention in the FAR is to render
income tax due for the taxable years of the nugatory the clear provision that allows for a two-
succeeding taxable years has been made, such year prescriptive period. (Philam Asset Management
option shall be considered irrevocable for that Inc. v. CIR, G.R. Nos. 156637 & 162004, 14 Dec. 2005)
taxable period and no application for cash refund or
issuance of a tax credit certificate shall be allowed Claim for Tax Refund or Credit of Excess and
therefor. Unutilized Creditable Withholding Tax

The CTA En Banc thereby misappreciated the fact The requirements for entitlement of a corporate
that Z Company had already exercised the option for taxpayer for a refund or the issuance of TCC
its unutilized creditable withholding tax for the year involving excess withholding taxes are as follows:
2005 to be refunded when it filed its annual ITR for (T-I-F)
the taxable year ending December 31, 2005. Based
on the disquisition in Republic v. Team Phils. Energy 1. That the claim for refund was filed within the
Corporation, supra, the irrevocability rule took Two-year reglementary period pursuant to Sec.
effect when the option was exercised. In the case of 229 of the NIRC;
Z Company, therefore, its marking of the box "To be
refunded" in its 2005 annual ITR constituted its 2. When it is shown on the ITR that the income
exercise of the option, and from then onwards Z payment received is being declared part of the
Company became precluded from carrying-over the taxpayer's gross income; and
excess creditable withholding tax. The fact that the
prior year's excess credits were reported in its 2006 3. When the Fact of withholding is established by
quarterly ITRs did not reverse the option to be a copy of the withholding tax statement, duly
refunded exercised in its 2005 annual ITR. As such, issued by the payor to the payee, showing the
the CTA En Banc erred in applying the irrevocability amount paid and income tax withheld from that
rule against Z Company. (Rhombus Energy, Inc. v. amount.
CIR, G.R. No. 206362, 01 Aug. 2018)
The contention of the BIR that a taxpayer in claim
Failure to Signify Preference in the Return Not for tax refund should submit its quarterly returns to
Outright Bar a Claim for Refund show that it did not carry-over the excess
withholding tax to the succeeding quarter is without
The corporation must signify its intention by merit. When the taxpayer is able to establish prima
marking the corresponding option box provided in facie its right to the refund by testimonial and object
the Final Adjustment Return (FAR) While a taxpayer evidence, the BIR should present rebuttal evidence
is required to mark its choice in the form provided to shift the burden of evidence back to the taxpayer.
by the BIR, this requirement is only for facilitating (Republic v. Team (Phils.) Energy Corp., G.R. No.
tax collection to ease tax administration, 188016, 14 Jan. 2015)
particularly the self-assessment and collection
aspects. There is no question that those who claim must not
only prove its entitlement to the excess credits, but
Failure to signify one's intention in the FAR does not likewise must prove that no carry-over has been
mean outright barring of a valid request for a made in cases where refund is sought. Proving that

317 UNIVERSITY OF SANTO TOMAS

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no carry-over has been made does not absolutely taxpayer entitled to refund?
require the presentation of the quarterly ITRs. The
rule is that any document, other than quarterly ITRs A: NO. Inasmuch as the respondent already opted to
may be used to establish that indeed the non-carry carry over its unutilized CWT of P1.2M to taxable
over clause has been complied with, provided that year 1998, the carry-over could no longer be
such is competent, relevant and part of the records. converted into a claim for tax refund because of the
Thus, quarterly ITRs are not indispensable in a irrevocability rule provided in Sec. 76 of the NIRC of
claim for refund for no court can limit a party to the 1997. Thereby, the respondent became barred from
means of proving a fact for as long as they are claiming the refund.
consistent with the rules of evidence and fair play.
To stress, what the NIRC merely requires is to However, in view of its irrevocable choice, the
sufficiently prove the existence of the non-carry respondent remained entitled to utilize that amount
over of excess CWT in a claim for refund. of P1.2M as tax credit in succeeding taxable years
(Winebrenner & Iñigo Insurance Brokers, Inc. v. CIR, until fully exhausted. In this regard, prescription did
G.R. No. 206526, 28 Jan. 2015) not bar it from applying the amount as tax credit
considering that there is no prescriptive period for
Q: In its final adjustment return for the 2010 the carrying over of the amount as tax credit in
taxable year, ABC Corp. had excess tax credits subsequent taxable years. (CIR v. PL Management
arising from its over-withholding of income International Philippines, Inc., G.R. No. 160949, 04
payments. It opted to carry over the excess tax Apr. 2011)
credits to the following year. Subsequently, ABC
Corp. changed its mind and applied for a refund Q: XYZ, Inc. is a registered real estate developer.
of the excess tax credits. Will the claim for On 15 April 2003, XYZ, Inc. filed with the BIR its
refund prosper? (2013 BAR) ITR for the year ending 31 December 2002. XYZ,
Inc. indicated in its ITR and amended ITR for
A: NO. It is barred by the irrevocability rule. If the taxable year 2002 that it is opting to be issued a
corporation opts to carry-over its excess credit in tax credit certificate (TCC) for the alleged
the final adjustment return, its choice shall be overpayment of P18,992,055.00. On 4 March
irrevocable for that taxable period. The purpose of 2005, XYZ, Inc. filed with the BIR a written claim
this rule is to prevent a taxpayer from claiming for a TCC in the amount of P18,992,055.00.
excess tax credits twice. In the given problem, ABC When CIR failed to act upon XYZ, Inc.'s claim,
Corp. opted to carry-over its excess tax credits for XYZ, Inc. filed a Petition for Review with the CTA
the 2010 taxable year. Consequently, ABC Corp. can First Division on 15 April 2005.
no longer revoke its choice to carry-over the excess
tax credits and instead claim for a refund. (Sec. 76, The Court commissioned Independent CPA filed
NIRC) his Final and Consolidated Report which stated
that they found that the total CWT’s claimed per
Q: In its 1997 ITR, PM Management December 31, 1998 Amended ITR are as follows,
International Inc. expressly signified that it had Real Estate Sales- P6,067,093.08, Real Estate
a CWT of P1.2M for taxable year 1997 to be Leasing- P2,800,461.83, Other Income-
claimed as tax credit in taxable year 1998. Management Fees - P124,500.00.
However, due to its net-loss position in 1998, the
taxpayer was unable to claim the P1.2M as tax The CTA First Division agreed with the findings
credit. of the Independent CPA, except for the amount
of P3,857.33 which was erroneously included as
On April 12, 2000, the taxpayer filed with BIR a part of the Creditable Withholding Taxes
written claim for the refund of the P1.2M (CWTs) filed out of period in the amount of
unutilized CWT for taxable year 1997. Is the P2,818,260.83. It found that the certificate

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supporting the creditable tax of P3,857.33 of withholding for the amount of
shows that the same was withheld in taxable P15,752,461.03. (CIR v. Cebu Holdings, Inc., G.R.
year 2002. It further held that out of the total 189792, 20 Jun. 2018)
creditable tax withheld of P18,992,055.00, only
the amount of P15,877,961.02 represents XYZ, b. YES. XYZ, Inc. erroneously carried over the
Inc.'s valid claim for taxable year 2002. amount of P16,194,108.00 as prior year's
excess credits, to which it is not entitled, to the
a. Can the XYZ, Inc. claim a refund of excess succeeding taxable year 2003 as shown in XYZ,
creditable withholding tax? Inc.'s Annual ITR for the year 2003. (Ibid.)
b. Is the XYZ, Inc. liable for deficiency income
tax for taxable year 2003? Q: Commissioner of Internal Revenue (CIR)
issued RMO No. 23-2014 on the "Reiteration of
A: the Responsibilities of the Officials and
a. YES. The requisites for claiming a refund of Employees of Government Offices for the
excess creditable withholding taxes are: (l) the Withholding of Applicable Taxes on Certain
claim for refund was filed within the two-year Income Payments and the Imposition of
prescriptive period; (2) the fact of withholding Penalties for Non-Compliance Thereof” in order
is established by a copy of a statement duly to clarify the responsibilities of the public sector
issued by the payor (withholding agent) to the to withhold taxes on its transactions as a
payee, showing the amount of tax withheld customer and as an employer.
therefrom; and (3) the income upon which the
taxes were withheld was included in the income In G.R. No. 213446, petitioners filed a Petition
tax return of the recipient as part of the gross for Prohibition and Mandamus before the SC,
income. XYZ, Inc. complied with all the imputing grave abuse of discretion on the part of
requisites. However, the CTA First Division CIR in issuing RMO No. 23-2014. According to
found some discrepancies with the claimed petitioners, the said RMO classified some items
refund and the amount to which XYZ, Inc. is of income of government employees as taxable
entitled for refund. compensation which they alleged to be
considered by law as non-taxable fringe and de
First, XYZ, Inc. filed the claim for refund within minimis benefits.
the two-year prescriptive period.
In G.R. No. 213658, petitioners filed a Petition
Second, as proof of taxes withheld, XYZ, Inc. for Certiorari and Prohibition before the SC
submitted the Certificate Authorizing seeking to nullify RMO No. 23-2014 on the
Registration, Withholding Tax Remittance following grounds: (1) CIR is bereft of any
Returns, and Certificates of Creditable Tax authority to issue the assailed RMO. The NIRC of
Withheld at Source, upon which the 1997 expressly vests to the Secretary of Finance
Independent CPA based his report. the authority to promulgate rules and
regulations for the effective enforcement of tax
Third, XYZ, Inc. submitted its amended 2002 provisions; and (2) CIR committed grave abuse
ITR to show that the income upon which the of discretion when it subjected to withholding
taxes were withheld was included in its ITR. tax allowances of court employees which are
However, upon comparison with the tax-exempt such as Special Allowance for
Certificates of Creditable Tax Withheld at Judiciary (SAJ) and additional cost of living
Source and Withholding Tax Remittance allowance (AdCOLA), among others.
Returns, the CTA First Division and the CTA En
Banc found certain discrepancies and held that Did the RMO go beyond the provisions of the
out of the total claimed CWT of P15,877,961.02, NIRC when it imposed new or additional taxes to
XYZ, Inc. was only able to provide valid proofs allowances, benefits or bonuses granted to

319 UNIVERSITY OF SANTO TOMAS

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government employees claimed by petitioners Chinabank, PBCom, and Standard Chartered.
to be non-taxable?
PAL questions the denial of its refund claim and
A: NO. The RMO did not go beyond the provisions of argues that it adequately presented Certificates
the NIRC when it imposed new or additional taxes of Final Taxes Withheld issued by these Agent
to allowances, benefits or bonuses granted to Banks. The Commissioner argues that PAL is not
government employees claimed by petitioners to be entitled to the refund as it failed to present its
non-taxable. documentary evidence before the BIR. Is the
BIR’s claim with merit?
The RMO merely mirrors the relevant provisions of
the NIRC and its implementing rules on the A: NO. PAL is exempt from paying the income tax on
withholding tax on compensation income. It simply interest earned under its franchise, P.D. 1590.
reinforces the rule that every form of compensation Hence, PAL is entitled to its claim for refund for
arising from employer-employee relationship is taxes withheld by Chinabank, PBCom, and Standard
deemed subject to income tax and, consequently, to Chartered. Remittance need not be proven. PAL
withholding tax, unless specifically exempted or needs only to prove that taxes were withheld from
excluded by the NIRC. While Sec. III of the RMO its interest income.
enumerates certain allowances, which may be
subject to withholding tax, it does not exclude the To claim a refund, this Court rules that PAL needs
possibility that these allowances may fall under the only to prove that taxes were withheld. Taxes
exemptions, thus, the phrase “subject to the withheld by the withholding agent are deemed to
exemptions enumerated herein.” (Confederation for be the full and final payment of the income tax due
Unity, Recognition and Advancement of Government from the income earner or payee. Certificates of
Employees (Courage) v. CIR, G.R. Nos. 213446 & Final Taxes Withheld issued by the Agent Banks are
213658, 03 July 2018) sufficient evidence to establish the withholding of
the taxes.
Q: In 2002, PAL made US dollar and Philippine
peso deposits and placements in Chinabank, Proof of remittance is not necessary to claim a tax
JPMorgan, PBCom, and Standard Chartered. The refund of final withholding taxes. The same
agent banks withheld final taxes from interest principles used to rationalize the ruling apply to
income earned from these deposits. final withholding taxes: (i) the payor-withholding
agent is responsible for the withholding and
In 2003, PAL filed with the BIR a written request remitting of the income taxes; (ii) the payee-refund
for a tax refund claiming that it was exempt claimant has no control over the remittance of the
from final withholding taxes under its franchise taxes withheld from its income; (iii) the Certificates
based on Presidential Decree No. 1590. Upon of Final Tax Withheld at Source issued by the
failure to act by the Commissioner, PAL withholding agents of the government are prima
elevated the case to the CTA in Division. The facie proof of actual payment by payee-refund
CTA Special First Division partially granted claimant to the government itself and are declared
PAL’s petition and ordered Commissioner to under perjury. (Philippine Airlines, Inc. v. CIR, G.R.
refund PAL for the final income tax withheld No. 206079-80, 17 Jan. 2018)
and remitted by JPMorgan and denied the claim
for refund for other banks. It ruled that PAL was Excess Input VAT (Sec. 112) and Excessively
exempted from final withholding tax on interest Collected Tax (Sec. 229) Distinguished
on bank deposits, but PAL failed to adequately
substantiate its claim for the other banks’ In a claim for refund or credit of “excess” input VAT
remittances. The CTA En Banc sustained that under Sec. 110(B) and Sec. 112(A), the input VAT is
PAL failed to prove the remittance by not “excessively” collected as understood under Sec.

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229. At the time of payment of the input VAT the judicial claim need not which to appeal his
amount paid is the correct and proper amount. The fall within the two-year claim. However, if
person legally liable for the input VAT cannot claim prescriptive period. there is an inaction on
that he overpaid the input VAT by the mere the part of the
existence of an “excess” input VAT. The term Commissioner and the
“excess” input VAT simply means that the input VAT two-year period is
available as credit exceeds the output VAT. about to lapse, the
remedy is to file an
From the plain text of Sec. 229, it is clear that what appeal also with the
can be refunded or credited is a tax that is CTA.
“erroneously, illegally, excessively or in any manner
wrongfully collected.” In short, there must be a
wrongful payment because what is paid, or part of Transitional Input Tax Credit Not a Form of Tax
it, is legally due. Refund

Application of Two-year Prescriptive Period A transitional input tax credit is not a tax refund per
under Sec. 112 And Sec. 229 Distinguished se but a tax credit. Prior payment of taxes is not
required before a taxpayer could avail of
SECTION 112 SECTION 229 transitional input tax credit. A tax credit is not
synonymous to tax refund. Tax refund is defined as
As to application of two-year period the money that a taxpayer overpaid and is thus
The two-year The decision of the CIR returned by the taxing authority. Tax credit, on the
prescriptive period is appealable to the other hand, is an amount subtracted directly from
applies only to the CTA sitting in division one’s total tax liability. It is any amount given to a
administrative claim within thirty (30) days taxpayer as a subsidy, a refund, or an incentive to
before the CIR and not after the receipt but encourage investment. (Fort Bonifacio Development
to judicial claim before must be within the Corporation v. CIR, G.R. No. 173425, 22 Jan. 2013)
the CTA because the two-year period from
taxpayer always has payment or filing of Statutory Basis for Tax Refund
thirty (30) days from the final adjusted
the decision of the CIR return. Thus, if the Tax refunds are not founded principally on
or from the lapse of the Commissioner denies legislative grace. It is based on legal principle which
120-day period (or 90- the claim for refund underlies in all quasi-contracts abhorring a person’s
day period under within the two-year unjust enrichment at the expense of another. The
TRAIN) even after the period, the remedy is dynamic of erroneous payment of tax fits to a tee the
lapse of two (2) years to file an appeal with prototypic quasi-contract, Solutio indebiti, which
from the taxable the CTA thirty (30) covers not only mistake in fact but also mistake in
quarter where the sales days from the receipt law. (Dimaampao, 2015)
were made (CIR v. of such denial. But,
Mindanao Geothermal II such thirty-day period The Government is not exempt from the application
Partnership, G.R. No. must also be within of Solutio indebiti. Indeed, the taxpayer expects fair
191498, 15 Jan. 2014) the two-year period. dealing from the Government, and the latter has the
For example, if there duty to refund without any unreasonable delay
NOTE: Thus, it is only are only ten (10) days what it has erroneously collected. (CIR. v. Fortune
the administrative left within such two- Tobacco, Corp., G.R. No. 167274-75, 21 July 2008)
claim that must be filed year period, then, the
within the two-year taxpayer has only ten The pertinent laws governing this principle are
prescriptive period; the (10) days within found in Arts. 2142 and 2154 of the NCC.

321 UNIVERSITY OF SANTO TOMAS

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Provisions of the NIRC relative to Refund Burden of Proof for Claim of Refund

1. Corporations entitled to refund of excess GR: Being in the nature of a claim for exemption,
estimated quarterly income paid as shown on refund is construed in Strictissimi juris against the
its final adjustment return. (Secs. 75 and 76, entity claiming the refund and in favor of the taxing
NIRC) power. This is the reason why a claimant must
positively show compliance with the statutory
2. Claims for refund of VAT-registered persons, requirements provided for under the NIRC in order
whose sales are zero-rated or effectively zero- to successfully pursue one's claim. (Winebrenner &
rated, with regard to their creditable input tax Iñigo Insurance Brokers, Inc. v. CIR, G.R. No. 206526,
due, except transitional input tax, to the extent 28 Jan. 2015)
that such input tax has not been applied against
output tax. (Sec. 112, NIRC) In order to discharge this burden, the law intends
the filing of an application for a refund to
3. Locally produced or manufactured goods, necessarily include the filing of complete
whether in their original state or as ingredients, supporting documents to prove entitlement for the
any excise tax paid thereon shall be credited or refund. Otherwise, the mere filing of an application
refunded upon submission of proof of actual without any supporting document would be as good
exportation and upon receipt of the as filing a mere scrap of paper. (Hedcor v. CIR, G.R.
corresponding foreign exchange payment. (Sec. No. 207575, 15 July 2015)
130(d), NIRC)
XPN: The contention that a tax refund takes on the
4. National Internal Revenue Tax: a) erroneously nature of a tax exemption does not apply where the
or illegally assessed or collected; b) any penalty claim for refund is premised on erroneous payment
claimed to have been collected without of tax.
authority; or c) any sum allegedly to have been
excessively or in any manner wrongfully 3. GOVERNMENT REMEDIES FOR COLLECTION
collected, may be recovered in a suit or OF DELINQUENT TAXES
proceeding for that purpose. (Secs. 229 and
204(c), NIRC)
Tax Collection

Evidence that Best Substantiate Claim For Tax

The government is given two ways to collect:
Refund
1. Summary or administrative remedies, and
2. Judicial remedies.
The pertinent invoices, receipts, and export sales
documents are the best and competent pieces of
NOTE: The legislature may adopt any reasonable
evidence required to substantiate a taxpayer’s claim
method for the effective enforcement of the
for tax credit or refund. No evidence which has not
collection of taxes, subject to:
been formally offered shall be considered and
1. The right of the person to notice; and
where the pertinent invoices or receipts
2. The opportunity to be heard.
purportedly evidencing the VAT paid by the
taxpayer were not submitted, the court may not
The power to impose taxes is clothed with the
determine the veracity of the amount of VAT that
implied authority to devise ways and means to
the taxpayer paid. Mere allegations of the figures in
accomplish collection in the most effective manner.
the amended return are not sufficient proof of the
Without this implied power, the ends of government
amount of its refund entitlement. (Atlas
may fail. (CIR v. Pineda, G.R. No. L-22734, 15 Sept.
Consolidated Mining and Development Corporation v.
1967)
CIR, G.R. No.159490, 18 Feb. 2018)

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 II. NATIONAL TAXATION
a) REQUISITES respect to the unpaid amount of tax.

GR: Collection is only allowed when there is already 2. When final assessment is not protested
a final assessment made for the determination of administratively within thirty (30) days from
the tax due. the date of receipt;

XPN: Judicial action to collect the tax liability is 3. Failure to question assessment served upon the
permitted even without an assessment when the decedent’s heirs (Marcos II v. Court of Appeals,
taxpayer: G.R. No. 120880, 5 June 1997);
1. Files a false or fraudulent return with intent to
evade the tax; or 4. Non-compliance with the condition laid in the
2. Fails to file a return. approval of protest - construed as if no protest
was filed; or
In the above cases, collection must be done within
ten (10) years after the discovery of falsity, fraud, or 5. Failure to file a timely appeal to the CTA on the
omission. final decision of the Commissioner or his
authorized representative on the disputed
However, once an assessment is made against the assessment.
taxpayer, the government cannot avail of the 10-
year period in Sec. 222(A). If the assessment is Refer to discussion on “Taxpayer’s Remedies
made, then the period to collect is five years from – Protesting an Assessment” – p. 288
the assessment and not 10 years. (Ingles, 2015)
b) PRESCRIPTIVE PERIODS
NOTE: In sum, as a rule, the government can only
file a proceeding in court to collect once the GR: The prescriptive period to collect taxes due is
assessment has become final and unappealable. five (5) years from the date of assessment.

When Assessments are Deemed Final XPNs:

1. False or fraudulent return with intent to evade
1. The taxpayer failed to file a protest thirty (30)
the tax – within ten (10) years from discovery
days from receipt of the assessment;
without need of assessment;

2. After the 180-day period and the CIR has not yet
2. Failure or omission to file return – within ten
acted on the protest, the taxpayer fails to appeal
(10) years from discovery without need of
it; or
assessment; or

3. After thirty (30) days from the receipt of the

3. Waiver in writing executed before the five-year
decision of the CIR the taxpayer fails to appeal.
period expires – period agreed upon.

Instances where Collectability of Tax Liability

Governing Law on Prescriptive Period to Assess
Arises
or Collect Deficiency Tax

1. Self-assessed tax shown in the return was not

The prescriptive period to assess or collect
paid within the date prescribed by law;
deficiency tax is governed by NIRC (a special law)
and not the Civil Code (a general law). The same can
Internal revenue taxes are self-assessing and no
be said between NIRC and the Rules of Court. Hence,
further assessment by the government is
claims for taxes may be collected even after the
required to create the tax liability. The taxpayer
distribution of the decedent’s estate. Claims for
is immediately considered as delinquent with

323 UNIVERSITY OF SANTO TOMAS

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estate taxes are exempted from the application of to pay the assessed DST in the CTA is not deemed
the statute of non-claims. (Ingles, 2015) compliance with the NIRC which provides that
assessed tax must be collected by distraint or levy
Summary of Prescriptive Periods to Collect and/or court proceeding within the prescribed
Deficiency Tax period. (China Banking Corporation vs. CIR, G.R. No.
172509, 04 Feb. 2015)
FALSE,
FRAUDULENT, OR Tax Deemed Collected for Purposes of
RETURN WAS MADE
FAILURE TO FILE A Prescriptive Period
RETURN
Collection with prior assessment 1. If collection is through summary remedies
(distraint and levy), when the government
Collection should be Collection should be
avails of a distraint and levy procedures
made within 5 years made within 5 years
prescribed under NIRC.
from the date of from the date of
assessment, either by: assessment, either by:
NOTE: Distraint and Levy proceedings are
begun by the issuance of warrant and service
1. Summary 1. Summary
thereof to the taxpayer. (BPI v. CIR, G.R. No.
proceedings; or proceedings; or
139736, 17 Oct. 2005)
2. Judicial 2. Judicial
proceedings. (Sec. proceedings. (Sec.
2. If collection is through judicial remedies (civil
222(c), NIRC) 222(c), NIRC)
or criminal), when the government files the
complaint with the proper court.
Collection without prior assessment
Collection is within 10 A judicial action for the collection of a tax may
years from discovery, be initiated by:
of the falsity, fraud or
omission to file a a. Filing a complaint with the proper regular
return. trial court, or where the assessment is
–
appealed to the CTA; or
Limited to purely
judicial remedies (Sec. b. By filing an answer to the taxpayer’s
222(A)) petition for review wherein payment of the
tax is prayed for. (PNOC v. CA, G.R. No.
109976, 26 Apr. 2005)
Computation of Prescriptive Period
Q: What is the prescriptive period where the
The assessment of the tax is deemed made and the government action is on a bond which the
period for collection of the assessed tax begins to taxpayer executes in order to secure the
run on the date the assessment notice had been payment of his tax obligation?
released, mailed or sent by the BIR to the taxpayer.
Thus, failure of the BIR to file a warrant of distraint A: Ten (10) years under Art. 1144(1) of the New
or serve a levy on taxpayer's properties nor file Civil Code and not three (3) years under the NIRC.
collection case within the prescriptive period is In this case, the Government proceeds by court
fatal. action to forfeit a bond. The action is for the
enforcement of a contractual obligation. (Republic v.
Also, the attempt of the BIR to collect the tax Araneta, G.R. No. L-14142, 30 May 1961)
through its Answer with a demand for the taxpayer

UNIVERSITY OF SANTO TOMAS 324

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Q: May the collection of taxes be barred by predicated on a judgment. The tax claim must be
prescription? Explain your answer. (2001 BAR) given preference over any other claim of any other
creditor, in respect of any and all properties of the
A: YES. The collection of taxes may be barred by insolvent. (Republic v. Peralta, G.R. No. L-56568, 20
prescription. The prescriptive periods for collection May 1987)
of taxes are governed by the tax law imposing the
tax. However, if the tax law does not provide for When Tax Lien is Applied
prescription, the right of the government to collect
taxes becomes imprescriptible. 1. With respect to personal property – Tax lien
attaches when the taxpayer neglects or refuses
Administrative Remedies to pay tax after demand. Thus, the tax lien
attaches not from the service of the warrant of
1. Tax lien; distraint of personal property but from the
2. Distraint of personal property; levy and sale of time the tax became due and payable.
real property;
3. Forfeiture of real property to the government 2. With respect to real property – from time of
for want of bidder; registration with the Register of Deeds.
4. Suspension of business operation; and
5. Non-availability of injunction to restrain NOTE: The residue, if any, goes back to the taxpayer
collection of tax. or owner of the property.

Tax Lien Extinguishment of Tax Lien

It is a legal claim or charge on property, personal or 1. By payment or remission of the tax;

real, established by law as a sort of security for the 2. By prescription of the right of government to
payment of tax obligations. (HSBC v. Rafferty, G.R. assess or collect;
No. L-13188, 15 Nov. 1918) 3. By failure to file notice of such tax lien in the
office of Register of Deeds;
NOTE: Tax in itself is not a lien even upon the 4. By destruction of property subject to tax lien;
property against which it is assessed, unless and
expressly made so by statute. 5. By replacing it with a bond.

Nature and Extent of Tax Lien NOTE: A buyer in an execution sale acquires only
the rights of the judgment creditor.
When a taxpayer neglects or refuses to pay his tax
liability after demand, the amount shall be a lien in Distraint and Levy
favor of the Government from the time when the
assessment was made by the CIR until paid, with Distraint is a summary remedy in which the
interests, penalties, and costs that may accrue in collection of tax is enforced on the taxpayer’s
addition thereto upon all property and rights to personal property. When enforced to taxpayer’s
property belonging to the taxpayer. Provided, that personal property not in his possession, it is called
this lien shall not be valid against any mortgagee, garnishment. Meanwhile, levy is enforced on real
purchaser or judgment creditor until notice of such property.
lien shall be filed by the CIR in the Register of Deeds
of the province or city where the property is
situated or located (Sec. 219, NIRC)

The claim of the government predicated on a tax lien

is superior to the claim of a private litigant

325 UNIVERSITY OF SANTO TOMAS

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Warrants of Distraint, Garnishment and Levy 2. Requires notice of sale, and
Distinguished 3. May not be resorted to if the amount involved is
less than P100.
DISTRAINT GARNISHMENT LEVY
Distraint
As to subject matter
It is a summary remedy whereby the collection of
tax is enforced on the goods, chattels or effects of the
Personal Real
taxpayer (including other personal property of
property Personal property property whatever character as well as stocks and other
owned by owned by the owned and securities, debts, credits, bank accounts and interest
and in taxpayer but in the in the
in or rights to personal property.) The property may
possession possession of the possession be offered in a public sale, if taxes are not voluntarily
of the third party of the paid.
taxpayer taxpayer
Lien and Distraint Distinguished

As to acquisition by the Government

LIEN DISTRAINT
Personal Real property
As to directed against
property Personal subject to
distrained is property levy is The property subject to Need not be directed
purchased garnished is forfeited to the tax against the property
by the purchased by the the subject to tax
Governmen Government and Government
t and resold resold to meet then sold to As to whom directed
to meet deficiency. meet the The property itself The property should be
deficiency. deficiency. regardless of the presently owned by the
present owner of the taxpayer
As to advertisement of sale
property
Newspaper
No publication is
No newspaper
newspaper required once
publication Q: Who is authorized to issue the warrant of
publication a week for 3
required distraint?
required consecutive
weeks.
A:
1. CIR or his duly authorized representative – if
Requisites for the Exercise of Distraint and Levy the amount involved is in excess of P1 million;
(De-F-De-P) or

1. Taxpayer is Delinquent in payment of tax; 2. Revenue District Officer – if the amount

2. Taxpayer Failed to pay delinquent tax on time; involved is P1 million or less (Sec. 207(A), NIRC)
3. There must be subsequent Demand to pay; and
4. Period within which to assess and collect the Effect of Service of Warrant of Distraint or Levy
tax due has not yet prescribed.
Its timely service suspends the running of the
Similarities between Distraint and Levy prescriptive period to collect the tax deficiency in
the sense that the disposition of the attached
1. Summary in nature, properties might well take time to accomplish,

UNIVERSITY OF SANTO TOMAS 326

2023 GOLDEN NOTES
 II. NATIONAL TAXATION
extending even after the lapse of the statutory other responsible officer of the
period for collections. (Republic v. Hizon, G.R. No. corporation.
130430, 13 Dec. 1999)
iii. As to debts and/or credits:
Kinds of Distraint
1. Upon the person owing the debt; or
2. The person having control over the
1. Actual distraint – resorted to when at the time
credit or his agent.
required for payment, a person fails to pay his
delinquent tax obligation (Sec. 207 (A), NIRC)
iv. As to bank accounts:
Distraint consists in the actual seizure and
taking possession of personal property of the 1. Upon the taxpayer; and
taxpayer. 2. The president, manager, treasurer
or other responsible officer of the
How Actual Distraint Effected bank.

Upon failure to pay the delinquent tax at the NOTE: Distraint of bank accounts is
time required, the proper officer shall seize and called garnishment.
distraint any goods, chattels, or effects, and the
personal property, including stocks and other c. Posting of notice in not less than two (2)
securities, debts, credits, bank accounts and public places in the municipality or city and
interests in and rights to personal property of notice to taxpayer specifying the time and
the taxpayer in sufficient quantity to satisfy the place of sale and the articles distrained;
tax, expenses of distraint and the cost of the
subsequent sale. (Sec. 207(A), NIRC) d. Release of distrained property upon
payment prior to sale;
Procedure in Effecting Actual Distraint
NOTE: The taxpayer may recover his
a. Commencement of distraint proceedings property prior to the consummation of the
by the CIR or his duly authorized sale if, at any time prior to the
representatives or by the revenue district consummation of the sale, all proper
officer as the case may be; charges are paid to the officer conducting
the sale, the goods or effects distrained
b. Service of warrant of distraint upon shall be restored to the owner. (Sec. 210,
taxpayer or upon any person in possession NIRC)
of the property;
e. Sale at public auction to be held not less
To Whom Warrant of Distraint is Served than twenty (20) days after notice to the
owner or possessor of the property and
i. As to tangible goods: publication or posting of such notice; and

1. The owner or person in

Rules Governing the Sale at Public
possession; or
Auction
2. Someone of suitable age and
discretion at the dwelling or place
i. The sale must be held at the time and
of business of such person.
place stated in the notice.

ii. As to stocks and/or securities:

ii. It may be conducted by the Revenue
1. Upon the taxpayer; and Officer or through a licensed commodity
2. President, manager, treasurer or or stock exchange.

327 UNIVERSITY OF SANTO TOMAS

FACULTY OF CIVIL L AW
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iii. If the sale is conducted by the Revenue sums of money owned by a delinquent taxpayer
Officer, it must be a public auction and which is in the possession of a third party (i.e.,
the property shall be sold to the highest bank accounts.) Bank accounts are garnished by
bidder for cash. serving a warrant upon the taxpayer and upon
the president, manager, treasurer, or other
iv. If the sale is through a licensed responsible officer of the bank.
commodity or stock exchange, it must
be with the approval of the CIR. Q: Is the BIR authorized to issue a warrant of
garnishment against the bank account of a
v. In case of stocks and other securities, taxpayer despite the pendency of taxpayer’s
the officer making the sale shall execute protest against the assessment with the BIR
a bill of sale, which shall be delivered to or appeal with the CTA? (1998 BAR)
the buyer and to the corporation,
company or association which issued A: YES. The BIR is authorized to issue a warrant
the stocks or other securities. Upon of garnishment against the bank account of a
receipt of the copy of the bill of sale, an taxpayer despite the pendency of protest. (Yabes
entry of transfer should be made in the v. Flojo, GR L-46954, 20 July 1982) Nowhere in the
company or association’s book and a NIRC is the CIR required to first, rule on the
corresponding certificate of stock shall protest before he can institute collection
be issued if required. proceedings on the tax assessed. The legislative
policy is to give the CIR much latitude in the
vi. Residue over and above what is speedy and prompt collection of taxes because it
required to pay the entire claim, is in taxation that the Government depends to
including expenses, shall be returned to obtain the means to carry on its operations.
the owner of the property sold.
NOTE: The taxpayer may request that the
vii. The officer making the sale shall make a warrant be lifted. The CIR may, in his discretion,
written report of the proceedings to the allow the lifting of the order of distraint. He may
CIR within 2 days after the sale (Sec. 211, ask for a bond as a condition for the cancellation
NIRC) of the warrant. (Sec. 207, NIRC)

f. Purchase by government at sale upon 2. Constructive distraint – a preventive remedy

distraint. which aims at forestalling a possible dissipation
of the taxpayer’s assets when delinquency sets
NOTE: The CIR or his deputy may purchase in. No actual tax delinquency of the taxpayer is
the property in behalf of the National necessary before the same is resorted to by
Government for the amount of taxes, government.
penalties and cost due thereon when the
bid amount for the property under distraint How Constructive Distraint is Effected
is:
a. Not equal to the amount of tax; or It is effected by requiring the taxpayer or any
b. Very much less than the actual market person having possession of the property:
value of the property offered for sale.
(Sec. 212, NIRC) a. To sign a receipt covering the property
distrained;
Garnishment b. To obligate himself to preserve it intact and
unaltered; and
It is the taking of personal properties, cash or c. Not to dispose of it without the express

UNIVERSITY OF SANTO TOMAS 328

2023 GOLDEN NOTES
 II. NATIONAL TAXATION
authority of the CIR. taxpayer will hide or conceal his property;

Cases when Constructive Distraint is Proper f. Taxpayer keeps Bank deposits and other
(R-A-L) properties under the name of other
persons, whether or not related to him, and
a. Retirement from any business subject to the same are not under any lawful fiduciary
the tax, or trust capacity; or

b. Intending to perform any Act tending to g. Taxpayer uses Aliases in bank accounts
obstruct the proceedings for collecting the other than the name for which he is legally
tax due or which may be due from him, or and/or popularly known. (RMO No. 5-
2001)
c. Intending to Leave the Philippines or to
remove his property therefrom; or to hide In case where Taxpayer or Person Having
or conceal his property. (Sec. 206, NIRC) Possession of the Property Refuses or Fails
to Sign the Receipt
Specific Cases when Notice or Warrant of
Constructive Distraint over Property of a The officer shall:
Taxpayer May be Issued (L-R-T-C-U-B-A) a. Prepare a list of such property; and
b. Leave a copy of such list in the premises
a. Taxpayer has a record of Leaving the where the property is located, in the
Philippines at least twice a year, unless presence of two (2) witnesses.
such business is justified and/or connected
with his trade, business or profession; NOTE: Property levied upon by the order of a
competent court can be subsequently
b. Taxpayer applying for Retirement from distrained. Such property may, with the consent
business has a huge amount of assessment of such court, be subsequently distrained,
pending with the BIR; subject to the prior lien of the attachment
creditor. (CIR v. Flores, G.R. No. L- 9675, 28 Sept.
NOTE: An assessment is huge if the amount 1957)
thereof is equal to or bigger than the net
worth or equity of the taxpayer. Actual and Constructive Distraint Distinguished

c. Taxpayer has record of Transferring his ACTUAL CONSTRUCTIVE

bank deposits and other personal
As to nature
properties in the Phil. to any foreign
country except if taxpayer is a banking Summary Remedy
institution;
As to subject matter

d. The BIR receives information or Complaint Personal Property

pertaining to undeclared income in an
As to availability
amount of more than 30% of gross sales,
receipt or revenue, and there is enough
reason to believe that said information is Cannot be availed of if tax is not more than P100.
correct as when it is supported by
substantial and credible evidence; As to whom made
e. There is big amount of Undeclared income Delinquent taxpayer Any taxpayer
known to the public and to the BIR and (delinquent or not)
there is a strong reason to believe that the

329 UNIVERSITY OF SANTO TOMAS

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As to how made d. The Registry of Deeds of the place where
the property is located shall also be
Taking of possession Mere prohibition from
notified.
or transfer of control disposing the property
As to how effected Q: Suppose an auction sale of land for the
Leaving a list of Requiring taxpayer to collection of delinquent taxes was held, is
property distrained or sign a receipt or notice by publication enough or must there
service of warrant leaving a list of such be personal service of notice?
property
A: Notice by publication is not enough there
As to effect on collection
must be a personal notice to the registered
Immediate step to Merely to prevent the
owner of the property for cases involving an
collect taxpayer from
auction sale of land for the collection of
disposing his property
delinquent taxes are in personam. (Talusan v.
Tayag, G.R. No. 133698, 04 Apr. 2001)
Levy
NOTE: Failure of the heirs to receive a copy of
notices of levy does not bar its effectivity since
It is the seizure of real property and interest in or
the taxpayer is in fact the estate. (Marcos II vs.
rights to such properties for the satisfaction of taxes
CA, G.R. No. 120880, 05 June 1997)
due from the delinquent taxpayer.

3. Advertisement of the time and place of sale

When Levy on Real Property May be Made
within twenty (20) days after the levy by
posting of notice and by publication for three
It may be made before, simultaneously or after the
consecutive weeks;
distraint of personal property of the same taxpayer.

4. Sale at a public auction;

It may be effected by serving upon the taxpayer a
written notice of levy in the form of a duly
NOTE: The taxpayer may recover his property
authenticated certificate prepared by Revenue
prior to the consummation of the sale. At any
District Officer containing: (D-N-A)
time before the day fixed for the sale, the
1. Description of the property upon which levy is
taxpayer may discontinue all proceeding by
made;
paying the taxes, penalties and interest (Sec.
2. Name of the taxpayer; and
213, NIRC)
3. Amount of tax and penalty due.

5. Redemption of property sold; and

Procedure in Levy of Real Property

NOTE: Within one (1) year from the date of sale,

1. Preparation of a duly authenticated certificate
the taxpayer or anyone for him, may pay to the
which shall operate with force of a legal
Revenue District Officer the total amount of the
execution throughout the Philippines;
following:
a. Public taxes;
2. Service of the written notice to the:
b. Penalties;
a. Delinquent taxpayer;
c. Interest from the date of delinquency to the
b. If he is absent from the Philippines, to his
date of sale; and
agent or the manager of the business in
d. Interest on said purchase price at the rate
respect to which the liability arose;
of 15% per annum from the date of sale to
c. If there be none, the occupant of the
the date of redemption.
property; or

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2023 GOLDEN NOTES
 II. NATIONAL TAXATION
If the property was forfeited in favor of the NOTE: Further distraint and levy does not
government – the Redemption price shall apply when the real property was forfeited to
include only the taxes, penalties and interest the government for it is in satisfaction of the
plus costs of sale – no interest on purchase price claim in question. (Sec. 215, NIRC)
since the Government did not “purchase” the
property, for it was forfeited. (Sec. 214, NIRC) Q: Glowide and PMI are clients of TICO, an
insurance company. While Glowide and PMI's
Effect of Redemption to the Property Sold fire insurance policy with TICO over certain
properties was in effect, a fire broke out that
It shall entitle the taxpayer, the delivery of the destroyed the said properties. Due to TICO's
certificate issued to the purchaser and a failure to pay the full amount of the insurance
certificate from the Revenue District Officer proceeds despite demand, Glowide and PMI
that he has redeemed the property. The filed a Complaint for sum of money and
Revenue District Officer shall pay the purchaser damages, which was granted. On January 8,
the amount by which such property has been 2002, Glowide and PMI moved for execution as a
redeemed and said property shall be free from matter of right, which was also granted.
lien of such taxes and penalties. (Sec. 214, NIRC) Meanwhile, on April 22, 2002, the Insurance
Commission placed TICO under liquidation.
Persons Entitled to the Possession of the TICO moved to hold in abeyance the
Property Levied implementation of Glowide and PMI’s writ of
execution claiming, among others, that it has tax
The owner shall not be deprived of the property assessments from 1996-1998 which enjoy
until the expiration of the redemption period preference above all other credits. For its part,
and shall be entitled to rents and other income the BIR alleged that on January 31, 2000, it
until the expiration of the period for served on TICO several final assessment notices
redemption. (Sec. 214, NIRC) for its alleged deficiency in internal revenue
taxes. The BIR averred that TICO's tax liabilities
Final Deed of Purchaser remained unpaid. Thus, it resorted to the
issuance and service to TICO, and the Register of
In case the taxpayer shall not redeem the Deeds, of a warrant of distraint and/or levy on
property, the Revenue District Officer (RDO) condominium units owned by TICO, and a notice
shall, as grantor, execute a deed conveying to of tax lien. Is BIR entitled to the condominium
the purchaser so much of the property as has units?
been sold, free from all liens of any kind
whatsoever, and the deed shall succinctly recite A: NO. It is settled that execution is enforced by the
all the proceedings upon which the validity of fact of levy and sale. As a result of such execution,
the sale depends. (Sec. 204, NIRC) title over the subject property vests immediately in
the purchaser. On the other hand, the Tax Code
6. Further distraint and levy. provides that a tax lien is enforceable against all
property and rights to property belonging to the
The remedy of distraint and levy may be taxpayer and retroacts to the time when the tax
repeated, if necessary, until the full amount of assessment was made. However, the tax lien shall
the tax delinquency due including all expenses not be valid against any judgment creditor until
is collected from the taxpayer. (Sec. 217, NIRC) notice of such lien is filed with the Register of Deeds.
Otherwise, a clever taxpayer who is able to BIR's tax lien could only have been enforceable
conceal most of the valuable part of his against Glowide and PMI when it annotated its tax
property would escape payment of his tax lien on February 15, 2005, which was already after
liability by sacrificing an insignificant portion of the annotation of their levy on attachment and sale
his holdings. of the condominium units in Glowide and PMI's

331 UNIVERSITY OF SANTO TOMAS

FACULTY OF CIVIL L AW
 TAXATION LAW
favor. At this point, Glowide and PMI already had The CIR may:
rights over the condominium units. (Bureau of
1. Sell and dispose of the same of public auction
Internal Revenue v. Tico Insurance Co., Inc., G.R. No.
upon the giving of not less than twenty (20)-day
204226, April 19, 2022, J. Hernando)
notice; or
2. Dispose of the same at private sale with prior
Forfeiture of Real Property
approval of the Secretary of Finance.

BIR is allowed to forfeit the property subject to levy

NOTE: In either case, the proceeds of the sale shall
only if:
be deposited with the National Treasury, and an
1. There is no bidder; or
accounting of the same shall rendered to the
2. The bid amount is insufficient to pay the taxes,
Chairman of the Commission on Audit. (Sec. 216,
penalties and costs. (Sec. 215, NIRC)
NIRC)

Forfeiture
Forfeiture and Seizure to Enforce a Tax Lien
Distinguished
It is the divestiture of property without
compensation, in consequence of a default or
offense. It transfers the title to the specific thing FORFEITURE SEIZURE
from the owner to the government. Also, there As to ownership
would no longer be any further levy for such would
Ownership is Taxpayer retains
be for the total satisfaction of the tax due.
transferred to the ownership of property
Government seized
NOTE: The erring taxpayer may still be criminally
prosecuted even if the property has already been As to disposition of the proceeds of sale
forfeited. (Garcia v. CIR, G.R. No. L-44372, 03 Nov.
1938) Excess not returned to Excess returned to
the taxpayer taxpayer
Redemption of Forfeited Property
Suspension of Business Operation
The Register of Deeds shall transfer the title of
forfeited property to the Government without The CIR or his authorized representative is
necessity of a court order. empowered to suspend the business operations and
temporarily close the business establishment of any
Within one (1) year from the date of forfeiture, the person for any of the following violations:
taxpayer, or any one for him may redeem said
property by paying to the CIR or Revenue Collection 1. In the case of VAT-registered person –
Officer the full amount of the taxes and penalties, a. Failure to issue receipts or invoices;
together with interest thereon and the costs of sale, b. Failure to file a VAT return as required
but if the property be not thus redeemed, the under Sec. 114; or
forfeiture shall become absolute. (Sec. 215, NIRC) c. Understatement of taxable sales or receipts
by 30% or more of his correct taxable sales
Resale of Real Estate Taken for Taxes or receipts for the taxable quarter.

The CIR shall have charge of any real estate obtained 2. Failure of any person to Register as required
by the Government in payment or satisfaction of under Sec. 236 – The temporary closure of the
taxes, penalties or costs or in compromise or establishment shall be for the duration of not
adjustment of any claim. less than 5 days and shall be lifted only upon
compliance with whatever requirements

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prescribed by the CIR in the closure order. (Sec. a. Showing that collection of the tax may
115, NIRC) jeopardize the interest of the government
and/or the taxpayer; (Sec. 2, Rule 10,
Judicial Remedies RRCTA)

1. Ordinary civil action, and b. Deposit of the amount claimed or file a

2. Criminal action. surety bond in an amount not more than
In case the CIR decides adversely or if no decision double the disputed amount or value; (Sec.
yet after the lapse of 180 days, the taxpayer may 6, Rule 10, RRCTA); or
appeal to the CTA Division, 30 days from the receipt
of the decision or from the lapse of the 180 days c. Showing by taxpayer that appeal is not
otherwise the decision shall become final, executory frivolous nor dilatory.
and demandable. (RCBC v. CIR, G.R. No. 168498, 24
Apr. 2007) 2. The SC, on exceptional cases of suits
questioning the constitutionality of a tax law.
If the decision is adverse to the taxpayer, he may file (Tolentino v. Executive Secretary, G.R. No.
a motion for reconsideration or new trial before the 115455, 25 Aug. 1994)
same Division of the CTA within fifteen (15) days
from notice thereof. 3. In case of local taxes, RTCs may issue an
injunction upon a suit questioning their
NOTE: A Motion for Reconsideration is required to validity.
be filed to the division that decided the case, before
filing Petition for Review with the CTA En Banc. NOTE: In the case of the collection of local taxes,
there is no express prohibition in the Local
In case the resolution of a Division of the CTA on a Government Code prohibiting courts from
motion for reconsideration or new trial is averse to issuing an injunction to restrain local
the taxpayer, he may file a petition for review with governments from collecting taxes. Such
the CTA En Banc. statutory lapse or intent, however it may be
viewed, may have allowed preliminary
The ruling or decision of the CTA En Banc may be injunction where local taxes are involved.
appealed with the Supreme Court through a verified (Angeles City v. Angeles Electric Corporation, G.R.
petition for review on certiorari pursuant to Rule 45 No. 166134, 29 June 2010)
of the 1997 Rules of Civil Procedure.
Rationale: The Lifeblood Doctrine requires that the
Refer to discussion on “Court of Tax Appeals” – p. collection of taxes cannot be enjoined, without
415 taxation, a government can neither exist nor endure.

No Injunction Rule Q: Standard Insurance Co., Inc., a non-life

insurance company, received from the BIR a
GR: No court shall have the authority to grant an Final Decision on Disputed Assessment (FDDA)
injunction to restrain the collection of any national dated November 25, 2014, declaring its liability
internal revenue, tax, fee, or charge. (Sec. 218, R.A. for the DST deficiency, including interest and
No. 8424) compromise penalty, totaling P400,000.00.
Standard, after its request for reconsideration
was denied, filed a Civil Case before the RTC with
XPNs: prayer for issuance of a temporary restraining
order (TRO) or of a writ of preliminary
1. Filing of Injunction with the CTA as an incident
injunction and for the judicial determination of
to its appellate jurisdiction:
the constitutionality of Secs. 108 and 184 of the

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NIRC with respect to the taxes to be paid by non- until the amount is fully paid. (Sec. 249(A),
life insurance companies. The RTC promulgated NIRC)
a judgment permanently enjoining the BIR, its
agents, representatives, or any persons acting 2. Deficiency interest – Any deficiency in the tax
on its behalf from proceeding with the due shall be subject to interest at the rate of
implementation or enforcement of Secs. 108 and 12% per annum (double the legal interest rate
184 of the NIRC against Standard. Decide on the prescribe in Sec. 249 (A), which interest shall be
propriety of the RTC ruling. assessed and collected from the date prescribed
for its payment until the full payment thereof,
A: The injunctive relief is not available as a remedy or upon issuance of a notice and demand by the
to assail the collection of a tax. Sec. 218 of the NIRC CIR, whichever comes earlier. (Sec. 249(B),
provides that no court shall have the authority to NIRC)
grant an injunction to restrain the collection of any
national internal revenue tax, fee or charge imposed NOTE: The new interest rate shall be applied
by the NIRC. Also, decisions or rulings of the only in cases of deficiency taxes for 2018
BIR/CIR, among others, assessing any tax, or onwards. If the deficiency taxes were for earlier
levying, or distraining, or selling any property of taxable period, it shall be computed pro-rata
taxpayers for the satisfaction of their tax liabilities i.e., 20% for 2017 and earlier (R.A. No. 8424)
are immediately executory, and their enforcement and the 12% for 2018 onwards (R.A. No. 10963).
is not to be suspended by any appeals thereof to the
CTA unless in the opinion of the CTA, the collection 3. Delinquency interest –
by the BIR or the Commissioner of Customs may
jeopardize the interest of the Government and/or There shall be assessed and collected on the
the taxpayer, in which case the CTA at any stage of unpaid amount, interest at the rate of 20% per
the proceeding may suspend the said collection and annum until the amount is fully paid, which
require the taxpayer either to deposit the amount interest shall form part of the tax, in case of
claimed or to file a surety bond for not more than failure to pay:
double the amount.
a. Amount of tax due on any return required
The adequate remedy upon receipt of the Final to be filed, or
Decision on Disputed Assessment (FDDA) was not b. Amount of tax due for which no return is
the action for declaratory relief but an appeal taken required, or
in due course to the CTA. (CIR v. Standard Insurance c. Deficiency tax, or any surcharge on interest
Co., Inc., G.R. No. 219340, 07 Nov. 2018) thereon on the due date appearing in the
notice and demand of the CIR. (Sec. 249 (C),
4. CIVIL PENALTIES NIRC)

NOTE: Deficiency interest on deficiency

a) DELINQUENCY INTEREST AND DEFICIENCY
income tax accrues and commences from
INTEREST
the date of assessment as shown in the
assessment notice.
Kinds of Interest for Tax Purposes
Interest on Extended Payment
1. Interest in general – There shall be assessed
and collected on any unpaid amount of tax, There shall be assessed and collected interest at the
interest at the rate of double the legal interest rate of 20% per annum on the tax or deficiency tax
rate for loans or forbearance of any money in or any part thereof unpaid from the date of notice
the absence of an express stipulation as set by and demand until it is paid:
the BSP, from the date prescribed for payment

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1. If any person required to pay the tax is qualified filed under the provisions of the NIRC or
and elects to pay the tax on installment, but fails rules and regulations, or the full amount of
to pay the tax or any installment hereof, or any tax due for which no return is required to
part of such amount or installment on or before be filed, on or before the date prescribed
the date prescribed for its payment; or for its payment. (Sec. 248(A), NIRC)

2. Where the CIR has authorized an extension of NOTE: There is no 25% surcharge when tax
time within which to pay a tax or a deficiency return is filed on time and paid the full
tax or any part thereof. (Sec. 249(D), NIRC) amount stated in the return, but
subsequently discovered that the return
b) SURCHARGE filed, and the amount paid was erroneous.
(Ingles, 2015)
Definition
2. 50% Surcharge:
A civil penalty, also known as surcharge, is imposed
by law as an addition to the basic tax required to be a. Willful neglect to file the return within the
paid. (Sec. 248, NIRC) period prescribed.; or

A surcharge is a civil administrative sanction NOTE: If the taxpayer voluntarily files the
provided as a safeguard for the protection of the return without notice from BIR, only 25%
State revenue and to reimburse the government for surcharge shall be imposed for late filing and
the expenses of investigation and the loss resulting late payment of tax. But if the taxpayer files
from the taxpayer’s fraud. A surcharge added to the the return after prior notice in writing from
main tax is subject to interest. BIR, then the 50% surcharge will be
imposed. Thus:
Kinds of Civil Penalties i. No demand from the BIR and the
taxpayer pays, albeit late, 25%
1. 25% Surcharge: (F-T-O-P) ii. With demand by the BIR, 50%
a. Failure to File any return and pay the tax (Ingles, 2015)
due thereon as required under the
provisions of the NIRC or rules and b. False or fraudulent return is willfully made.
regulations on the date prescribed.; or
NOTE: The fraud contemplated by law is
b. Failure to pay the deficiency tax within the actual fraud, not constructive fraud. It must
Time prescribed for its payment in the be intentional fraud, consisting of deception
notice of assessment.; or willfully and deliberately done or resorted
to. Negligence, whether slight or gross, is
NOTE: In cases of late payment of a not equivalent to fraud with intent to evade
deficiency tax assessed, taxpayer shall be the tax contemplated by law. (Aznar vs. CTA,
liable for the delinquency interest incident G.R. No. L-20569, 23 Aug. 1974)
to late payment. (RR No. 18-2013)
Q: Businessman Lincoln filed an income tax
c. Unless otherwise authorized by the CIR, return for 1993 showing business net income of
filing a return with an internal revenue P350,000 on which he paid an income tax of
officer Other than those with whom the P61,000. After filing the return, he realized that
return is required to be filed.; or he forgot to include an item of business income
in 1993 for P50,000.
d. Failure to Pay the full or part of the amount
of tax shown on any return required to be Being an honest taxpayer, he included this

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income in his return for 1994 and paid the c. Lincoln should file a protest questioning the
corresponding income tax thereon. In the 50% surcharge and ask for the abatement
examination of his 1993 return the BIR thereof.
examiner found that Lincoln failed to report this
item of P50,000 and assessed him a deficiency d. Lincoln should file a written claim for refund
income tax on this item, plus a 50% fraud with the CIR of the taxes paid on the P50,000
surcharge. income included in 1994 within 2 years from
payment pursuant to Sec. 229 of the NIRC.
a. Is the examiner correct? Should this remedy fail in the administrative
level, a judicial claim for refund can be
b. If you were the lawyer of Lincoln, what instituted before the expiration of the two-year
would you have advised your client before period.
he included in his 1994 return the amount of
P50,000 as 1993 income to avoid the fraud c) COMPROMISE PENALTY
surcharge?
Definition
c. Considering that Lincoln had already been It is a certain amount of money which the taxpayer
assessed a deficiency income tax for 1993 pays to compromise a tax violation. Compromise
for his failure to report the P50,000 income, penalties are paid in lieu of criminal prosecution
what would you advise him to do to avoid and cannot be imposed in the absence of a showing
the penalties for tax delinquency? that the taxpayer consented thereto. If an offer of
compromise is rejected by the taxpayer, the
d. What would you advise Lincoln to do with compromise penalty cannot be enforced through an
regard to the income tax he paid for the action in court or by distraint and levy. The CIR
P50,000 in his 1994 return? In case your should file a criminal action if he believes that the
remedy fails, what is your other recourse? taxpayer is criminally liable for violation of the tax
(1995 BAR) law as the only way to enforce a penalty.
(Dimaampao, 2015)
A:
a. The examiner is correct in assessing a Q: A domestic corporation failed to withhold and
deficiency income tax for taxable year 1993 but remit the tax on income received from
not in imposing the 50% fraud surcharge. The Philippine sources by a non-resident foreign
amount of all items of gross income must be corporation.
included in gross income during the year in
which received or realized (Sec. 38, NIRC) The In addition to the civil penalties provided for
50% fraud surcharge attaches only if a false or under the NIRC, a compromise penalty was
fraudulent return is willfully made by Lincoln imposed for violation of the withholding tax
(Sec. 248, NIRC) The fact that Lincoln included it provisions. May the Commissioner of Internal
in his 1994 return belies any claim of Revenue legally enforce the collection of
willfulness but is rather indicative of an honest compromise penalty? (2000 BAR)
mistake which was sought to be rectified by a
subsequent act that is the filing of the 1994 A: NO. There is no showing that the compromise
return. penalty was imposed by the Commissioner of
b. Lincoln should have amended his 1993 income Internal Revenue with the agreement and
tax return to allow for the inclusion of the conformity of the taxpayer. (Wonder Mechanical
P50,000 income during the taxable period it Engineering Corporation v. CTA, G.R. Nos. L-22805 &
was realized. L-27858, 30 June 1975)

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NOTE: In an appeal before CTA, if the taxpayer
shows his willingness to pay compromise penalty,
such penalty may be collected as part of the
judgement (CIR v. Guerrero, G.R. No. 19074, 31 Jan.
1967)

Fraud Penalty

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.

NOTE: Provided, that a substantial under-

declaration of taxable sales, receipts or income, or a
substantial overstatement of deductions, as
determined by the Commissioner pursuant to the
rules and regulations to be promulgated by the
Secretary of Finance, shall constitute prima facie
evidence of a false or fraudulent return.

Provided, further, that failure to report sales,

receipts or income in an amount exceeding thirty
percent (30%) of that declared per return, and a
claim of deductions in an amount exceeding thirty
percent (30%) of actual deductions, shall render
the taxpayer liable for substantial under-
declaration of sales, receipts or income or for
overstatement of deductions, as mentioned herein.
(Sec. 248(B), NIRC)

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Process of Assessment from Self-Assessment to Protesting FAN

If taxpayer does not

protest within 30 Days
Effect: Assessment
becomes final,
executory, and
demandable.

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Government Remedies if FLD/FAN becomes Final

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Taxpayer’s Remedies upon Issuance of FLD/FAN

REQUEST FOR RECONSIDERATION

No need to submit additional evidence.

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2023 GOLDEN NOTES
 II. NATIONAL TAXATION

Taxpayer’s Remedies for Tax Refund or Tax Credit

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III. LOCAL TAXATION 4. The revenues collected pursuant to the

provisions of the LGC shall Inure solely to the
benefit of, and be subject to the disposition
by, the LGU levying the tax, fee, charge or
Local Taxes
other imposition unless otherwise
Local taxes are taxes that are imposed and collected by specifically provided herein; and
the Local Government Units (LGUs) in order to raise
revenues to enable them to perform the functions for 5. Taxes, fees, charges and other impositions
which they have been organized. shall: (E-P-U-C)

Aspects of Local Taxation a. be Equitable and based as far as

1. Local Government Taxation (Secs. 128-196, LGC) practicable on the taxpayer's ability to
2. Real Property Taxation (Secs. 197-283, LGC) pay;

Local Government and Real Property Taxation b. be levied and collected only for Public
Distinguished purposes;

c. shall not be Unjust, excessive,

LOCAL GOVERNMENT REAL
oppressive, or confiscatory; and
TAXATION PROPERTY TAXATION

System of levy on real d. not be Contrary to law, public policy,

property imposed on a national economic policy, or in the
country-wide basis but restraint of trade. (Sec. 130, LGC)
Imposition of license,
authorizing, to a limited
taxes, fees and other NOTE: The fundamental principles of local
extent and within
impositions, including taxation are also known as the requisites of
certain parameters,
community tax. municipal taxation.
local governments to
vary the rates of
taxation. Constitutional and Statutory Fundamental
Principles

The fundamental principles of local taxing power

A. LOCAL GOVERNMENT TAXATION may be grouped according to several categories:

1. Principles which are either inherent or

1. GENERAL PRINCIPLES constitutional limitations on the taxing
power, in general:
The fundamental principles are: (L-U-P-I-T)
a. Uniformity of taxation;
1. The collection of local taxes, fees, charges and b. Equitability and progressivity of
other impositions shall in no case be Let to any taxation;
private person; c. Public purpose of taxes; and
d. Taxes must accrue exclusively to the
2. Taxation shall be Uniform in each LGU; benefit of the local government unit.

3. Each LGU shall, as far as practicable, evolve a 2. Principles which are statutory in origin:
Progressive system of taxation.

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 III. LOCAL TAXATION
a. Local taxes must not be unjust, excessive, 2. NATURE AND SOURCE OF TAXING POWER
oppressive or confiscatory;

b. They must not be contrary to law, public Characteristics of Taxing Power of LGUs: (D-
policy, national economic policy or in O-N2-G)
restraint of trade; and
1. Direct grant from the Constitution – while a
c. The collection of taxes, fees, charges and other direct grant, the same is subject to limitations
impositions shall in no case be let to any as may be set by Congress;
private person. (Aban, 1994)

Q: The City of Makati, in order to solve the traffic 2. Exercised by the Sanggunian of the LGU
problem in its business districts, decided to concerned through an appropriate
impose a tax, to be paid by the driver, on all Ordinance;
private cars entering the city during peak hours
from 8:00 a.m. to 9:00 a.m. from Mondays to 3. Not inherent – may only be exercised if
Fridays, but exempts those cars carrying more delegated to them by national legislature or
than two occupants, excluding the driver. Is the conferred by the Constitution itself;
ordinance valid? (2003 BAR)
4. Not absolute – subject to limitations and
A: The ordinance is in violation of the Rule of guidelines as may be provided by law and the
Uniformity and Equality, which requires that all Constitution such as progressivity etc.;
subjects or objects of taxation, similarly situated must
be treated in equal footing and must not classify the NOTE: It is a fundamental principle that
subjects in an arbitrary manner. In this case, the municipal ordinances are inferior in status
ordinance exempts cars carrying more than two and subordinate to the laws of the state. An
occupants from coverage of the ordinance. Further, ordinance in conflict with a state law of
the ordinance only imposes the tax on private cars and general character and statewide application
exempts public vehicles from the imposition of the tax, is universally held to be invalid. (Batangas
although both contribute to the traffic problem. There CATV, Inc. v. Court of Appeals, G.R. No. 138810,
exists no substantial distinction used in the 29 Sept. 2004)
classification by the City of Makati.
5. Its application is bounded by the
Another issue is the fact that the tax is imposed on the Geographical limits of the LGU that
driver of the vehicle and not on the registered owner. imposes the tax – gross receipts realized by
Clearly, the tax imposed is also unjust because it a specialty contractor from its overseas
places the burden on someone who has no control construction projects are not subject to tax.
over the route of the vehicle. Therefore, the ordinance (Bureau of Local Government Finance
is invalid for violating the rule of uniformity and Opinion, 16 May 2017)
equality, and for being unjust.
National and Local Taxation Distinguished
NOTE: A city can validly tax the sales to customers
outside the city as long as the orders were booked and NATIONAL LOCAL
paid for in the company’s branch office in the city. A TAXATION TAXATION
different interpretation would defeat the tax As to the nature of the power
ordinance in question or encourage tax evasion by An inherent power of Not an inherent power.
simply arranging for the delivery at the outskirts of the the state. Thus, there Thus, there must be an
city. (Philippine Match Company v. City of Cebu, G.R. No. is no need for a enabling law for the LGU
L-30745, 18 Jan. 1978) statute for the power to impose tax
to be exercised

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As to the limitations Limitations of the Congress
Subject to the Subject to the following The Congress shall ensure that:
following limitations limitations to be valid:
to be valid: 1. Inherent limitations; 1. The taxpayers will not be overburdened or
1. Inherent 2. Constitutional saddled with multiple and unreasonable
limitations; and limitations; and impositions;
2. Constitutional 3. Statutory limitations.
limitations. (Sec. 133, LGC) 2. Each LGU will have its fair share of available
As to imposition resources;
Imposed by the Imposed by the
3. The resources of national government will
Congress through Sanggunian through
not be unduly disturbed; and
passage of law passage of ordinance
(Sec. 132, LGC)
4. Local taxation will be fair, uniform and just.

a) GRANT OF LOCAL TAXING POWER UNDER THE Q: Does the ARMM and CAR have the same
LOCAL GOVERNMENT CODE source of power as the LGUs?

Local Taxing Authority A: NO. The LGUs derive their power to tax from
Sec. 5, Article X of the 1987 Constitution. The
The power to impose tax, fee, or charge to generate constitutional provision is self-executing. This is
revenue under the LGC shall be exercised by the applicable only to LGUs outside the Autonomous
Sanggunian of the LGU concerned through an Region of Muslim Mindanao and the Cordillera
appropriate ordinance. (Sec 132, LGC) Administrative Region since the authority to tax
the LGUs within their region is delegated by the
Q: What are the bases for the exercise of the LGUs Organic Act creating them.
of the power to impose tax?
Sec. 20, Article X of the 1987 Constitution
A: authorizes the Congress to pass the Organic Act
1. Art. X, Sec. 5, 1987 Constitution – “Each LGU shall which shall provide for legislative powers over
have the power to create their own sources of creation of sources of revenues. This provision is
revenues and to levy taxes, fees and charges not self-executing unlike Sec. 5, Article X of the
subject to such guidelines and limitations as the Constitution.
Congress may provide, consistent with the basic
policy of local autonomy. Such taxes, fees and NOTE: The LGU’s power to tax is subject to such
charges shall accrue exclusively to the local guidelines and limitations as Congress may
governments.” provide while the ARMM and CAR’s power to tax
is based on the Organic Act which the
2. Sec. 129, LGC – “Each LGU shall exercise its power Constitution authorizes Congress to pass.
to create its own sources of revenue and levy
taxes, fees, and charges subject to the provisions Paradigm Shift in Local Government Taxation
herein, consistent with the basic policy of local The power to tax is no longer vested exclusively
autonomy. Such taxes, fees, and charges shall on Congress. Local legislative bodies are now
accrue exclusively to the LGUs.” given direct authority to levy taxes, fees, and
other charges pursuant to Art. X, Sec. 5 of the
3. Charter of Cities – additional taxing authority Constitution. (NAPOCOR v. City of Cabanatuan,
exclusively granted to cities include the power to G.R. No. 149110, 09 Apr. 2003)
impose percentage tax and taxes on articles
subject to specific tax. The reason of the shift results from the

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2023 GOLDEN NOTES
 III. LOCAL TAXATION
realization that genuine development can be achieved appropriate ordinance.
only by strengthening local autonomy and promoting
decentralization of governance. (Ibid.) However, an ordinance must pass muster the test
of constitutionality and the test of consistency
Nature of the Taxing Power of Provinces, with the prevailing laws. Otherwise, it shall be
Municipalities, and Cities void. It is not disputed that at the time the
ordinance in question was enacted in 1992, the
It is directly conferred by the Constitution by giving local government of Pasig, then a municipality,
them the authority to create their own sources of had no authority to levy franchise tax. Being void,
revenue. The LGUs do not exercise the power to tax as it cannot be given any legal effect. An assessment
an inherent power or by a valid delegation of the and collection pursuant to the said ordinance is,
power by Congress, but pursuant to a direct authority perforce, legally infirm.
conferred by the Constitution. (2007 BAR)

In this case, the validity of the municipal

The Congress, under the 1987 Constitution, cannot
ordinance imposing a franchise tax cannot be
abolish the power to tax of local governments
made to rest upon the ambiguity of a provision of
law operating supposedly, albeit mistakenly,
It is expressly granted by the fundamental law. The
under the context of promoting local autonomy.
only authority conferred to Congress is to provide the
Regard, too, must be made for the equally
guidelines and limitations on the local government's
important doctrine that a doubt or ambiguity
exercise of the power to tax. (Sec. 5, Art. X, 1987
arising out of the term used in granting the power
Constitution) (2003 BAR)
of taxation must be resolved against the local
government unit.
NOTE: The authority to tax of LGUs within the
Autonomous Regions (Muslim Mindanao and the
In fine, the City of Pasig cannot legally make a
Cordilleras) is not delegated by the Constitution, but
demand for the payment of taxes under the
by the Organic Act creating them.
challenged ordinance, which is void, even after its
conversion into a city. The CA, thus, committed no
Q: On December 26, 1992, the Municipality of Pasig
reversible error. (City of Pasig and Crispina V
enacted Ordinance No. 25 which imposed a
Salumbre, in her capacity as OIC-City Treasurer of
franchise tax at the rate of fifty percent (50%) of
Pasig City v. Manila Electric Company, G.R. 181710,
one percent (1%) of gross receipts derived from
07 Mar. 2018)
the operation of business during the preceding
calendar year. Subsequently, the Municipality of
Pasig was converted into a highly urbanized city by b) AUTHORITY TO PRESCRIBE PENALTIES
virtue of R.A. No. 7829 on January 25, 1995. The FOR TAX VIOLATIONS
Treasurer’s Office of the City Government of Pasig
informed MERALCO that it is liable to pay taxes for It is limited as to the amount of imposable fine as
the period of 1996 to 1999 amounting to well as the length or period of imprisonment.
P435,332,196.00, exclusive of penalties. Is 1. Sanggunian of an LGU – authorized to
MERALCO liable to pay the franchise tax levied by prescribe fines or other penalties for
the municipality of Pasig, and does the conversion violation of tax ordinances but in no case
of Pasig into a city rectify the defect of said shall such fines be less than P1,000.00 nor
ordinance? more than P5,000.00, nor shall
A: NO. The power to impose franchise tax belongs to imprisonment be less than one (1) month nor
the province by virtue of Sec. 137 of the LGC. The LGC more than six (6) months.
further provides that the power to impose a tax, fee, or
charge or to generate revenue shall be exercised by the NOTE: Such fine or other penalty, or both,
Sanggunian of the LGU concerned through an shall be imposed at the discretion of the

345
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court. a. They shall be granted only to new
investments in the locality and the
2. Sangguniang barangay – may prescribe a fine of ordinance shall prescribe the terms and
not less than P100.00 nor more than P1,000.00. conditions thereof.
(Sec. 516, LGC)
b. The grant shall be for a definite period
c) AUTHORITY TO GRANT LOCAL TAX not exceeding one (1) calendar year.
EXEMPTIONS
c. The grant shall be through an ordinance
Authority of the Local Government to Grant Tax passed prior to the 1st day of January of
Exemptions any year.

Local government units may, through ordinances duly d. Tax incentive granted to a type or kind of
approved, grant tax exemptions, incentives or reliefs business shall apply to all businesses
under such terms and conditions as they may deem similarly situated. (Art. 282(b), Rules and
necessary. (Sec. 192, LGC) Regulations Implementing the LGC)

NOTE: The power to grant tax exemptions, tax NOTE: Tax exemption is conferred through the
incentives and tax reliefs shall not apply to regulatory issuance of a non-transferable tax exemption
fees which are levied under the police power of the certificate. (Art. 282, IRR of LGC)
LGU. (Sec. 1, Malacañang Memorandum Circular No.
153, s. 1992) Q: The LGC took effect on January 1, 1992.
PLDT’s legislative franchise was granted
Guidelines for Granting Tax Exemptions, sometime before 1992. Its franchise provides
Incentives and Reliefs that PLDT will pay only 3% franchise tax in
lieu of all taxes.
1. Tax Exemptions and Reliefs:
The legislative franchise of Smart and Globe
a. They may be granted in cases of natural Telecoms were granted in 1998. Their
calamities, civil disturbance, general failure of legislative franchises state that they will pay
crops or adverse economic conditions such as only 5% franchise tax in lieu of all taxes.
substantial decrease in prices of agricultural
or agri-based products. The Province of Zamboanga del Norte passed
an ordinance in 1997 that imposes a local
b. The grant shall be through an ordinance. franchise tax on all telecommunications
companies operating within the province. The
c. Any exemption or relief granted to a type or tax is 50% of 1% of the gross annual receipts
kind of business shall apply to all businesses of the preceding calendar year based on the
similarly situated. incoming receipts, or receipts realized, within
its territorial jurisdiction.
d. The same may take effect only during the
calendar year not exceeding twelve (12) Is the ordinance valid? Are PLDT, Smart and
months as may be provided in the ordinance. Globe liable to pay franchise taxes? Reason
e. In case of shared revenues, the relief or briefly (2007 BAR)
exemption shall only extend to the LGU
granting such. A: The ordinance is valid as it was passed
pursuant to the powers of provinces and cities to
2. Tax incentives: impose taxes on businesses with franchises

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2023 GOLDEN NOTES
 III. LOCAL TAXATION
under the Local Government Code (LGC). The LGC, 10. Bangko Sentral ng Pilipinas,
which took effect on January 1, 1992, withdrew tax 11. Philippine Fisheries Development Authority,
exemptions or incentives previously enjoyed by all 12. Cebu Port Authority,
persons, except certain entities. (Sec. 193, LGC) 13. Cagayan De Oro Port Authority,
14. San Fernando Port Authority,
PLDT is liable to pay the local franchise taxes because 15. Government Service Insurance System,
its legislative franchise was granted by Congress prior 16. Laguna Lake Development Authority, and
to the passage of the LGC. Thus, the provision of the 17. Bases Conversion Development Authority.
LGC withdrawing tax exemptions or incentives applies
to PLDT. Smart and Globe are exempt from the local NOTE: Exemption likewise applies to real
franchise taxes imposed by the province since their property taxation.
respective legislative franchises were granted in 1998,
or after the enactment of the LGC. d) WITHDRAWAL OF EXEMPTIONS

Therefore, with respect to Smart and Globe, the GR: Tax exemptions or incentives granted to, or
withdrawal of tax exemptions or incentives under the presently enjoyed by all persons, whether natural
LGC was superseded by the legislative franchise or juridical, including GOCCs, were withdrawn
requiring payment of the 5% franchise tax “in lieu of upon the effectivity of the LGC. (Sec. 193, LGC)
all taxes.” (PLDT v. City of Davao, G.R. No. 143867, 22
Aug. 2001 & 25 Mar. 2003) XPNs:
1. Unless otherwise provided in the LGC;
Q: Is Smart Communications, Inc. (SMART) exempt 2. Local water districts;
from local taxation? 3. Cooperatives duly registered under R.A. No.
6938 or “The Cooperative Code of the
A: Under its franchise, SMART is not exempt from local Philippines”;
business and franchise taxes. Moreover, Sec. 23 of the 4. Non-stock and non-profit hospitals; and
Public Telecommunications Act does not provide legal 5. Non-stock and non-profit educational
basis for Smart’s exemption from local business and institutions.
franchises taxes. The term “exemption” in Sec. 23 of
the Public Telecommunications Act does not mean tax NOTE: However, withdrawal of tax exemption is
exemption; rather, it refers to exemption from certain not to be construed as prohibiting future grants
regulatory or reporting requirements imposed by of tax exemptions. The grant of taxing powers to
government agencies such as the National LGU’s under the LGC does not affect the power of
Telecommunications Commission. (City of Iloilo v. Congress to grant exemptions to certain persons,
Smart Communications Inc., G.R. No. 167260, 27 Feb. pursuant to a declared national policy.
2009)
Necessity of Re-enactment
Government Instrumentalities Exempt from Local
Taxation The person claiming the exemption has the
burden of proving its claim by clear grant of
1. Philippine Amusement and Gaming Corporation, exemption after the enactment of the LGC.
2. Philippine Reclamation Authority, (NAPOCOR v. City of Cabanatuan, G.R. No. 149110,
3. Manila International Airport Authority, 09 Apr. 2003)
4. Mactan Cebu International Airport Authority,
5. Philippine Economic Zone Authority, The rule that special law must prevail over the
6. Philippine Rice Research Institute, provisions of a later general law does not apply as
7. Philippine Ports Authority, the legislative purpose to withdraw tax privileges
8. Philippine National Railways, enjoyed under existing laws or charters is
9. University of the Philippines, apparent from the express provisions of the LGC.

347
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 TAXATION LAW
(City of San Pablo, Laguna v. Reyes, G.R. No. 127780, 25 newspaper of local circulation or posted in at
Mar. 1999) least two conspicuous and publicly
accessible places. (Sec. 188, LGC)
Rationale: The intention of the law in withdrawing
the tax exemptions is to broaden the tax base of LGU to Taxes, Fees, and Charges Imposed by LGUs
assure them of substantial sources of revenue. Distinguished
(Philippine Rural Electric Cooperatives Association v.
The Secretary of DILG, G.R. No. 143076, 10 June 2003) TAXES FEES CHARGES
Enforced
Q: Prior to the enactment of the Local Government proportional
Code, consumer's cooperatives registered under contributions
the Cooperative Development Act enjoyed from persons
exemption from all taxes imposed by a local and property A charge
government. With the Local Government Code’s A pecuniary
levied by the fixed by law
withdrawal of exemptions, could these liability, as
law-making or ordinance
cooperatives continue to enjoy such exemption? rents or fees
body of the for the
(2011 BAR) against
State by regulation or
persons or
A: YES. Their exemption is specifically mentioned virtue of its inspection of
property.
among those not withdrawn by the Local Government sovereignty a business or
(Sec. 131(g),
Code. (Sec. 193, LGC) for the activity. (Sec.
LGC)
support of 131(l), LGC)
3. SCOPE OF TAXING POWER the
government
and for public
Q: What are the bases for the scope of taxing power
needs. (Aban,
of LGUs?
1994)
1. Each LGU shall exercise its power to create its own
sources of revenue and to levy taxes, fees, and 4. SPECIFIC TAXING POWER OF LOCAL
charges, consistent with the basic policy of local GOVERNMENT UNITS
autonomy. Such taxes, fees, and charges shall
exclusively accrue to it. (Sec. 129, LGC) TAXING POWER OF PROVINCES

2. All LGUs are granted general powers to levy taxes, Taxes, Fees, and Charges which a Province or
fees or charges on any base or subject not a City may Levy
otherwise specifically enumerated herein or taxed
under the provisions of the NIRC or other 1. Tax on transfer of real property ownership;
applicable laws. The levy must not be unjust, (Sec. 135, LGC)
excessive, oppressive, confiscatory or contrary to 2. Tax on business of printing and publication;
a declared national economic policy. (Sec. 186, (Sec. 136, LGC)
LGC)
3. Franchise Tax; (Sec. 137, LGC)
3. No such taxes, fees or charges shall be imposed
without a public hearing having been held prior to 4. Tax on sand, gravel and other quarry
the enactment of the ordinance. (Sec. 187, LGC) resources; (Sec. 138, LGC)

4. Copies of the provincial, city, and municipal tax 5. Professional tax; (Sec. 139, LGC)
ordinances or revenue measures shall be
published in full for three consecutive days in a 6. Amusement tax; (Sec. 140, LGC)

UNIVERSITY OF SANTO TOMAS 348

2023 GOLDEN NOTES
 III. LOCAL TAXATION

7. Annual fixed tax for every delivery truck or van of

manufacturers or producers, wholesalers of,
dealers, or retailer in certain products; (Sec. 141,
LGC)

8. Annual ad valorem tax on real property such as

land, building, machinery, and other improvement
not specifically exempted at the rate not exceeding
1% of the assessed value of the real property; (Sec.
232, LGC)

9. Special levies on real property;

10. 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 provincial government; (Sec.
155, LGC)

11. Reasonable fees and charges for services

rendered; (Sec. 153, LGC)

12. Charges for the operation of public utilities owned,

operated, and maintained by the provincial
government; (Sec. 154, LGC)

13. Slaughter fees, corral fees, market fees, charges for

holding benefits; and

14. Tuition fees from the operation of the provincial

high school, except in the public elementary
grades.

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Rules on the Taxing Power of Provinces

TRANSACTION TAX BASE TAX RATE EXCEPTION

Tax on Transfer of Real Property
Ownership – Sale, donation,
barter, or on any other mode of
transferring ownership or title of
real property Whichever is higher between:
1. Total consideration
Person Liable to Pay: Seller, donor, involved in the acquisition Transfer under
transferor, executor, or of the property; or the
Not more
administrator Comprehensive
than 50% of
2. The fair market value in Agrarian
the 1%
Time of Payment: within 60 days case the monetary Reform
from the date of the execution of the consideration involved in Program
deed or from the date of the the transfer is not
decedent’s death substantial.

XPN: If buyer is a foreign

government, no tax is due.

1. Gross annual receipts for Not exceeding

the preceding calendar year 50% of 1%

Tax on the Business of Printing In the case of School texts or

and Publication – Business of a newly references,
printing and publication of books, started prescribed by
cards, poster, leaflets, handbills, business, the the DepEd shall
certificates, receipts, pamphlets, 2. Capital Investment tax shall not be exempt from
and others of similar nature exceed one- tax.
twentieth
(1/20) of 1%

1. Gross annual receipts for

the preceding calendar year
Not exceeding
based on the incoming
50% of 1%
receipt, or realized, within
its territorial jurisdiction
Franchise Tax – Businesses
enjoying a franchise In the case of –
a newly
started
2. Capital investment business, the
tax shall not
exceed 1/20
of 1%

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2023 GOLDEN NOTES
 III. LOCAL TAXATION
TRANSACTION TAX BASE TAX RATE EXCEPTION
Tax on Sand, Gravel, and Other
Quarry Services – Sand, gravel and
other resources extracted from
public lands or from the beds of
seas, lakes, rivers, streams, creeks,
and other public waters within its
territorial jurisdiction

Who issues permit: issued

exclusively by the provincial
governor pursuant to the ordinance
of the Sangguniang Panlalawigan

Distribution of Tax Proceeds:

1. Province – 30%
2. Component city or municipality
– 30%
3. Barangay where resources were
extracted – 40%

NOTE: The authority to impose

Fair market value in the locality
taxes and fees for extraction of sand
per cubic meter of ordinary Not more –
and gravel belongs to the province,
stones, sand, gravel, earth, and than 10%
and not to the municipality where
other quarry resources.
they are found. (Municipality of San
Fernando La Union vs. Sta. Romana,
G.R. No. L-30159, 31 Mar. 1998)

Regalian Doctrine is NOT

applicable – Province may not
invoke the doctrine to extend the
coverage of its ordinance to quarry
resources extracted from private
lands. Such tax is a tax upon the
performance, carrying on, or
exercises of an activity, hence an
excise tax upon an activity already
being taxed under the NIRC.

Rationale: Tax statutes are

construed Strictissimi juris against
the government. (Province of
Bulacan v. CA, G.R. No. 126232, 27
Nov. 1998)

351
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 TAXATION LAW
TRANSACTION TAX BASE TAX RATE EXCEPTION
Professional Tax – Exercise or
practice of profession requiring
government licensure
examination

Date of Payment: Payable annually

on or before January 31 or before
beginning the practice of the
Professionals
profession.
exclusively
employed in the
Place of Payment: Province where At such amount and reasonable
Not to exceed government
he practices his profession or where classification as the Sanggunian
P300 shall be exempt
the principal office is located. Panlalawigan may impose
from the
payment of this
NOTE: Tax to be paid only once –
tax.
Person who has paid the
corresponding professional tax shall
be entitled to practice his profession
in any part of the Philippines
without being subjected to any other
national or local tax, license, or fee
for the practice of such profession.

Amusement Tax – Ownership,

Holding of:
lease, or operation of theaters,
1. Operas,
cinemas, concert halls, circuses,
2. Concerts,
boxing stadia and other places of
3. Dramas,
amusement
Gross receipts from admission 4. Recitals,
fees 5. Painting
NOTE: Amendments to the VAT law
and art
have been consistent in exempting
NOTE: In case of theaters or exhibition,
persons subject to amusement tax
cinemas, the tax shall first be Not more 6. Flower
under the NIRC from the coverage of
deducted and withheld by their than 10% of shows,
VAT. Only lessor or distributors of
proprietors, lessees, or gross receipts 7. Musical
cinematographic films are included
operators and paid to the from programs,
in the coverage of VAT. This reveals
provincial treasurer before the admission 8. Literary
the legislative intent not to impose
gross receipts are divided fees and
VAT on persons already covered by
between said proprietors, oratorical
the amusement tax. This holds true
lessees, or operators and the presentatio
even in the case of cinema/theater
distributors of the n
operators taxed under the LGC
cinematographic films.
precisely because the VAT law was
XPN to the XPN:
intended to replace the percentage
Holding of pop,
tax on certain services. (CIR v. SM
rock, or similar
Prime Holdings, Inc. etc., G.R. No.
concerts
183505, 26 Feb. 2010)

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2023 GOLDEN NOTES
 III. LOCAL TAXATION
TRANSACTION TAX BASE TAX RATE EXCEPTION

Distribution of Proceeds: Tax shall

be shared equally by the province
and municipality where such
amusement places are located.

NOTE: Resorts, swimming pools,

bath houses, hot springs, and tourist
spots do not belong to the same
category or class as theaters,
cinemas, concert halls, and boxing
stadia because the latter class are
venues primarily “where one seeks
admission to entertain oneself by
seeing or viewing the show or
performances”. It follows that they
cannot be considered as among the
‘other places of amusement’
contemplated by Sec. 140 of LGU
and which may properly be subject
to amusement taxes. (Pelizloy Realty
Corporation v. Province of Benguet,
G.R. No. 183137, 10 Apr. 2013)

Tax on Delivery Truck or Van –

Use by manufacturers, producers,
wholesalers, dealers or retailers of
truck, van or any vehicle in the
delivery or distribution of distilled Exempt from tax
spirits, fermented liquors, soft Not exceeding on peddlers
Every truck, van, or vehicle
drinks, cigars and cigarettes, and P500 imposed by
other products as may be municipalities
determined by the Sangguniang
Panlalawigan, to sales outlets or
consumers, whether directly or
indirectly

353
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 TAXATION LAW
Definition of Franchise Q: CASURECO III is an electric cooperative
duly organized and existing by virtue of PD
The Congress defined “franchise”, in relation to Sec. 269 and registered with the National
137 of the LGC, in the sense of a secondary or special Electrification Administration (NEA). It is
franchise. It is not levied on the corporation simply for engaged in the business of electric power
existing as a corporation, upon its property or income, distribution to various end-users and
but on its exercise of the rights or privileges granted to consumers within the City of Iriga and the
it by the government. municipalities of Nabua, Bato, Baao, Buhi,
Bula and Balatan of the Province of Camarines
Q: Ferremaro, Inc., a manufacturer of handcrafted Sur, otherwise known as the “Rinconada
shoes, maintains its principal office in Cubao, area.”
Quezon City. It has branches/sales offices in Cebu
and Davao. Its factory is located in Marikina City Sometime in 2003, Petitioner City of Iriga
where most of its workers live. Its principal office required CASURECO III to submit a report of
in Quezon City is also a sales office. its gross receipts for the period 1997-2002 to
serve as the basis for the computation of
Sales of finished products for calendar year 2009 franchise taxes, fees and other charges. The
in the amount of P10 million were made at the latter complied and was subsequently
following locations: assessed taxes.

Cebu branch 25% CASURECO III refused to pay for the assessed
Davao branch 15% taxes, asserting that the computation of the
Quezon City branch 60% petitioner was erroneous because it included
Total 100% gross receipts from service areas beyond the
latter’s territorial jurisdiction. Is Casureco
Where should the applicable local taxes on the liable for the payment of the franchise tax on
shoes be paid? Explain. (2010 BAR) the Rinconada area?

A: Under the LGC, the manufacturers maintaining a A: YES. CASURECO III is liable for franchise tax on
branch or sales outlet shall record the sale in the gross receipts within Iriga City and Rinconada
branch or sales outlet making the sale and pay the tax area. It should be stressed that what the
in the city or municipality where the branch or sales petitioner seeks to collect from CASURECO III is a
outlet is located. Since Ferremaro, Inc., maintains one franchise tax, which as defined, is a tax on the
factory, the sales recorded in the principal office shall exercise of a privilege. As Sec. 137 of the LGC
be allocated and 30% of said sales are taxable in the provides, franchise tax shall be based on gross
place where the principal office is located while the receipts precisely because it is a tax on business,
70% is taxable in the place where the factory is rather than on persons or property. Since it
located. partakes of the nature of an excise tax, the situs of
taxation is the place where the privilege is
Hence, 25% of total sales or P2.5M shall be taxed in exercised, in this case in the City of Iriga, where
Cebu and 15% of total sales or P1.5M shall be taxed in CASURECO III has its principal office and from
Davao. For the remaining 60% sales amounting to where it operates, regardless of the place where
P6.0M which is recorded in the principal office, 30% its services or products are delivered. Hence,
thereof or P1.8M is taxable in Quezon City where the franchise tax covers all gross receipts from Iriga
principal office is located and 70% or P4.2M is taxable City and the Rinconada area.
In Marikina City where the factory is located.
Q: CASURECO III maintains that it is exempt
from payment of franchise tax because of its

UNIVERSITY OF SANTO TOMAS 354

2023 GOLDEN NOTES
 III. LOCAL TAXATION
nature as a non-profit cooperative, as Q: Mr. Fermin, a resident of Quezon City, is a
contemplated in PD 269, and insists that only Certified Public Accountant-Lawyer engaged
entities engaged in business, and not non-profit in the practice of his two professions. He has
entities like itself, are subject to the said franchise his main office in Makati City and maintains a
tax. Is this correct? branch office in Pasig City. Mr. Fermin pays his
professional tax as a CPA in Makati City and
A: NO. In National Power Corporation v. City of his professional tax as a lawyer in Pasig City.
Cabanatuan, the Court declared that “a franchise tax is
a tax on the privilege of transacting business in the a. May Makati City, where he has his main
state and exercising corporate franchises granted by office, require him to pay his professional
the State.” It is not levied on the corporation simply for tax as a lawyer? Explain.
existing as a corporation, upon its property or its
income, but on its exercise of the rights or privileges b. May Quezon City, where he has his
granted to it by the government.” It is within this residence and where he also practices his
context that the phrase “tax on businesses enjoying a two professions, go after him for the
franchise‟ in Sec. 137 of the LGC should be interpreted payment of his professional tax as a CPA
and understood.” and a lawyer? Explain. (2005 BAR)

To be liable for local franchise tax, the following

A:
requisites should concur:
a. NO. Makati City where Mr. Fermin has his
main office may not require him to pay his
1. That one has a “franchise” in the sense of a
professional tax as a lawyer. Mr. Fermin has
secondary or special franchise; and
the option of paying his professional tax as a
2. That it is exercising its rights or privileges under
lawyer in Pasig City where he practices law
this franchise within the territory of the pertinent
or in Makati City where he maintains his
LGU.
principal office. (Sec. 139(b), LGC)
There is a confluence of these requirements in the case
b. NO. The situs of the professional tax is the
at bar. By virtue of P.D. 269, NEA granted CASURECO
city where the professional practices his
III a franchise to operate an electric light and power
profession or where he maintains his
service for a period of 50 years from June 6, 1979, and
principal office in case he practices his
it is undisputed that CASURECO III operates within
profession in several places. The local
Iriga City and the Rinconada area. It is, therefore, liable
government of Quezon City has no right to
to pay franchise tax notwithstanding its non-profit
collect the professional tax from Mr. Fermin
nature (City of Iriga v. Camarines Sur III Electric
as the place of residence of the taxpayer is
Cooperative Inc. G.R. No. 192945, 05 Sept. 2012)
not the proper situs in the collection of the
professional tax.
Scope of Professional Tax

Definition of Amusement and Amusement

Professionals who have passed the bar examinations,
Places
or any board or examinations conducted by the
Professional Regulation Commission (e.g., A lawyer
1. Amusement is a pleasurable diversion and
who is also a Certified Public Accountant (CPA) must
entertainment. It is synonymous to
pay for professional tax imposed on lawyer and that
relaxation, avocation, pastime, or fun.
fixed for CPAs, if he is to practice both professions).
2. Amusement places include theaters, cinemas,
concert halls, circuses and other places of
NOTE: Municipalities cannot impose professional tax
amusement where one seeks admission to
since such power is reserved only to provinces and
entertain oneself by seeing or viewing the
cities.

355
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL L AW
 TAXATION LAW
show or performances. (Sec. 131(b) and (c), LGC) statutory provisions. (Alta Vista Golf and Country
Club v. City of Cebu, G.R. No. 180235, 20 Jan. 2016)
Amusement Places upon which Provinces or Cities
cannot Impose Amusement Taxes Q: A Provincial Tax Ordinance provided for
the levying a 10% amusement tax on gross
1. Cockpits, receipts from admissions to “resorts,
2. Cabarets, swimming pools, bath houses, hot springs and
3. Night or day clubs, tourist spots”. Pelizloy, an owner of a resort
4. Boxing exhibitions, located in the same province, is arguing that
5. Professional basketball games, the Tax Ordinance imposed a percentage tax
6. Jai-Alai, and in violation of the limitation on the taxing
7. Racetracks. powers of LGUs thus, it was null and void ab
initio. The Province of Benguet argued that
NOTE: There can be no imposition of amusement taxes the phrase ‘other places of amusement’ in Sec.
on the above amusement places since Sec. 125 of NIRC 140 (a) of the LGC encompasses resorts,
already imposes amusement taxes on them. swimming pools, bath houses, hot springs,
and tourist spots which are subject to
Therefore, LGUs cannot collect amusement taxes on amusement tax. Is the province authorized to
admission tickets to the Philippine Basketball impose an amusement tax on admission fees
Association (PBA) games including the income from to resorts, swimming pools, bath houses, hot
cession of streamers and advertising spaces. springs, and tourist spots for being
(Philippine Basketball Association v. CA, G.R. No. “amusement places” under the LGC?
119122, 08 Aug. 2000)
A: NO. Resorts, swimming pools, bath houses, hot
Golf Course cannot be Considered a Place of springs, and tourist spots are not among those
Amusement places expressly mentioned by Sec. 140 of the
LGC as being subject to amusement taxes and
Sec. 42 of the Revised Omnibus Tax Ordinance, as cannot be considered venues primarily “where
amended, imposing amusement tax on golf courses is one seeks admission to entertain oneself by
null and void as it is beyond the authority of seeing or viewing the show or performances”.
respondent Cebu City to enact under the LGC. A golf While it is true that they may be venues where
course cannot be considered a place of amusement. people are visually engaged, they are not
People do not enter a golf course to see or view a show primarily venues for their proprietors or
or performance. Proprietor or operators of the golf operators to actively display, stage or present
course, do not actively display, stage, or present a shows and/or performances. Thus, resorts,
show or performance. People go to a golf course to swimming pools, bath houses, hot springs and
engage themselves in a physical sport activity. tourist spots do not belong to the same category
or class as theaters, cinemas, concert halls,
An LGU may exercise its residual power to tax when circuses, and boxing stadia. It follows that they
there is neither a grant nor a prohibition by statute; or cannot be considered as among the ‘other places
when such taxes, fees, or charges are not otherwise of amusement’ contemplated by Sec. 140 of the
specifically enumerated in the LGC, NIRC, or other LGC and which may properly be subject to
applicable laws. In the present case, Sec. 140, in amusement taxes. (Pelizloy Realty Corporation v.
relation to Sec. 131(c) of the LGC already explicitly and Province of Benguet, G.R. No. 183137, 10 Apr.
clearly cover amusement tax and Cebu City must 2013)
exercise its authority to impose amusement tax within
the limitations and guidelines as set forth in said

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2023 GOLDEN NOTES
 III. LOCAL TAXATION
TAXING POWER OF CITIES passed by the Sangguniang Panlungsod of
Cagayan de Oro, which imposed a tax on the
Scope of Taxing Power of a City lease or rental of electric and/or
telecommunication posts, poles or towers by
The city may levy the taxes, fees, and charges which pole owners to other pole users at the rate of
the province or municipality may impose, except as 10% of the annual rental income derived
otherwise provided in the LGC. Those levied and therefrom. CEPALCO contends that if it is a
collected by highly urbanized and independent city which imposes it, it can only impose up to
component cities shall accrue to them and distributed ½ of what the province or municipality may
in accordance with the provisions of LGC. (Sec. 151, impose, and since under Sec. 137, a province
LGC) may impose 50% of 1%, a city may therefore
only impose 25% of 1%. Is this correct?
NOTE: The rates of taxes that the city may levy may
exceed the maximum rates allowed for the province or A: NO. Sec. 151 of the LGC states that, subject to
municipality by not more than 50% except the rates of certain exceptions, a city may exceed by “not
professional and amusement taxes. (Ibid.) more than 50%” the tax rates allowed to
provinces and municipalities. Therefore, a city
Cities have the broadest taxing powers, embracing may impose a franchise tax of up to 0.75% of a
both specific and general powers as provinces and business’ gross annual receipts for the preceding
municipalities may impose. calendar year based on the incoming receipt, or
realized, within its territorial jurisdiction.
Classification of Cities
In the same manner, since a municipality may
Under the LGC, there are three types of cities: impose a business tax at a rate not exceeding “two
1. Component Cities, percent of gross sales or receipts” under Sec. 143,
2. Independent Component Cities (ICCs), and a city may impose a business tax of up to 3% of a
3. Highly Urbanized Cities (HUCs). business’ gross sales or receipts of the preceding
calendar year (May exceed by not more than 50%
NOTE: ICCs and HUCs are independent of the province. means it may impose up to 50% more than what
(Sec. 451-452, LGC) This means that taxes, fees, and a province or municipality could impose).
charges levied and collected by ICCs and HUCs accrue
solely to them. (Sec. 151, LGC) CEPALCO also erred when it equates Sec. 137’s
“gross annual receipts” with Ordinance No. 9503-
Specific Limitations on the Taxing Power of Cities 2005’s “annual rental income.” Sec. 2 of the
ordinance imposes “a tax on the lease or rental of
GR: A city shall not levy the taxes and other electric and/or telecommunication posts, poles
impositions enumerated under the common or towers by pole owners to other pole users at
limitations on the taxing powers of local governments. the rate of 10% of the annual rental income
derived therefrom,” and not on CEPALCO’s gross
XPNs: annual receipts. Thus, although the tax rate of
1. Tax that may be levied by cities on the transfer of 10% is definitely higher than that imposable by
real property ownership; and cities as franchise or business tax, the tax base of
2. Wharfage on wharves constructed and annual rental income of “electric and/or
maintained by the city. telecommunication posts, poles or towers by pole
owners to other pole users” is definitely smaller
Q: Cagayan Electric Power and Light Company, Inc. than that used by cities in the computation of
(CEPALCO), who is leasing for a consideration the franchise or business tax.
use of its posts, poles or towers to other pole users,
assails the validity of Ordinance No. 9503-2005

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Q: The City of Cagayan de Oro contends that the assessed tax due plus 25% surcharge and
allowable rate of increase provided under Sec. 151 interest of 2% per month of the unpaid tax,
of the LGC applies only to those businesses and costs of suit. Is the yearly accrual of the
identified and enumerated under Sec. 143 thereof. 25% surcharge unconscionable?
Thus, the City of Cagayan de Oro submits that the
2% limitation prescribed under Sec. 143(h) A: Respondent’s yearly imposition of the 25%
applies only to the tax rates on the businesses surcharge, which was sustained by the trial court
identified thereunder and does not apply to those and the Court of Appeals, resulted in an aggregate
that may thereafter be deemed taxable under Sec. penalty that is way higher than petitioner’s basic
186 of the LGC. On the same vein, the City of tax liabilities.
Cagayan de Oro submits that the limitation under
Sec. 151 likewise does not apply in this particular Furthermore, it effectively exceeded the
instance; otherwise, it will run counter to the prescribed 72% ceiling for interest under Sec.
intent and purpose of Sec. 186 of the LGC. Is the City 168 of the Local Government Code. The law
of Cagayan correct? allows the local government to collect an interest
at the rate not exceeding 2% per month of the
A: NO. The City of Cagayan de Oro’s imposition of a tax unpaid taxes, fees, or charges including
on the lease of poles falls under Sec. 143(h) which surcharges, until such amount is fully paid.
speaks of any business, not otherwise specified in the However, the law provides that the total interest
preceding paragraphs, which the Sanggunian on the unpaid amount or portion thereof should
concerned may deem proper to tax. The treatment of not exceed thirty-six (36) months or three (3)
the lease of poles as a separate line of business is years. In other words, respondent cannot collect
evident in Sec. 4(a) of the Ordinance requiring a total interest on the unpaid tax including
CEPALCO to apply for a separate business permit. And surcharge that is effectively higher than 72%.
since “any person, who in the course of trade or Here, respondent applied the 25% cumulative
business xxx leases goods or properties xxx shall be surcharge for more than three years. Its
subject to the value-added tax,” the imposable tax rate computation undoubtedly exceeded the 72%
should not exceed two percent (2%) of gross receipts ceiling imposed under Sec. 168 of the Local
of the lease of poles of the preceding calendar year. Government Code. Hence, respondent’s
computation of the surcharge is oppressive and
Sec. 143(h) states that “on any business subject to xxx unconscionable. (NPC v. City of Cabanatuan, G.R.
value-added xxx tax under the NIRC, as amended, the No. 177332, 01 Oct. 2014)
rate of tax shall not exceed 2% of gross sales or
receipts of the preceding calendar year” from the lease TAXING POWER OF MUNICIPALITIES
of goods or properties. Hence, the 10% tax rate
imposed by the ordinance clearly violates Sec. 143(h) Scope of Taxing Power of a Municipality
of the LGC. (Cagayan Electric Power and Light Co., Inc.
v. City of Cagayan de Oro, G.R. No. 191761, 14 Nov. 2012) Municipalities may levy taxes, fees, and charges
not otherwise levied by provinces, except as
Q: The City of Cabanatuan (the City) assessed the otherwise provided in the LGC. (Sec. 142, LGC)
National Power Corporation (NAPOCOR) a
franchise tax amounting to P808,606.41, Under the LGC, a municipality may impose the
representing 75% of 1% of its gross receipts for following taxes:
1992. NAPOCOR refused to pay, arguing that it is
exempt from paying the franchise tax. 1. Fees and charges on business and
Consequently, on November 9, 1993, the City filed occupation; (Sec. 147, LGC)
a complaint before the Regional Trial Court of
Cabanatuan City, demanding NAPOCOR to pay the

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2023 GOLDEN NOTES
 III. LOCAL TAXATION
2. Fees for sealing and licensing of weights and be taxed on both activities but may avail
measures; (Sec. 148, LGC) of the concession or the reduced tax.

3. Fishery rentals, fees, and charges; (Sec. 149, LGC) e. On Contractors;

4. Tax on business: (Sec. 143, LGC) f. Banks and other financial institutions;

a. On Manufacturers, assemblers, repackers, NOTE: Bank income not subject to local

processors, brewers, distillers, rectifiers, and taxation:
compounders of liquors, distilled spirits, and
wines or manufacturers of any article of i. Interest earned under the expanded
commerce of whatever kind or nature; foreign currency deposit system;

b. On Wholesalers, distributors, or dealers in ii. Interest accumulated by lending

any article of commerce of whatever kind or institutions on mortgages insured
nature; under Home Financing Act (R.A. No.
480), as amended; and
c. On exporters, and on manufacturers, millers,
producers, wholesalers, distributors, dealers iii. Receipts form filing fees, service,
or retailers of essential commodities such as: and other administrative charges.

i. Rice and corn; g. Peddlers; and

ii. Wheat or cassava flour, meat, dairy h. Other business not specified which the
products, locally manufactured, Sanggunian concerned may deem proper
processed or preserved food, sugar, salt to tax.
and other agricultural, marine and fresh
water products, whether in their original Definition of Wholesale, Dealer, Retail,
state or not; Contractor, and Peddler

iii. Cooking oil and cooking gas; 1. Wholesale – A sale where the purchaser buys
or imports the commodities for resale to
iv. Laundry soap, detergents, and medicine; persons other than the end user regardless of
the quantity of the transaction.
v. Agricultural implements, equipment and
post-harvest facilities, fertilizers, 2. Dealer – One whose business is to buy and
pesticides, insecticides, herbicides, and sell merchandise, goods, and chattels as a
other farm inputs; merchant. He stands immediately between
the producer or manufacturer and the
vi. Poultry feeds and other animal feeds; consumer and depends for his profit not
upon the labor he bestows upon his
vii. School supplies; and commodities but upon the skill and foresight
with.
viii. Cement.
3. Retail – A sale where the purchaser buys the
d. On Retailers; commodity for his own consumption,
irrespective of the quantity of the commodity
NOTE: Retailers who are at the same time sold.
wholesalers within the same tax period shall

359
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FACULTY OF CIVIL L AW
 TAXATION LAW
4. Contractor – Includes persons, natural or A: NO. The City of Makati is wrong in assessing
juridical, not subject to professional tax under Sec. ABC Corp. as a contractor. First, ABC Corp. is not
139 of LGC, whose activity consists essentially of a contractor as defined in Sec. 131(h) of LGC. A
the sale of all kinds of services for a fee, regardless contractor as a person, natural or juridical, not
of whether or not the performance of the service subject to professional tax under the LGC, but
calls for the exercise of the use of the physical or whose activity consists essentially of the sale of
mental faculties of such contractor or his all kinds of services for a fee, regardless of
employees. whether or not the performance of the service
calls for the exercise or use of the physical or
5. Peddler – Any person who, either for himself or on mental faculties of such contractor or his
commission, travels from place to place and sells employees.
his goods or offers to sell and deliver the same.
(Sec. 131(t), LGC) In the given problem, ABC Corp. is merely a
holding company whose earnings are limited to
Conditions upon Other Businesses Not Specified dividends, interests on bank deposits and foreign
which the Sanggunian Concerned may Deem exchange gains from foreign currency account.
Proper to Tax Evidently, ABC Corp. is not engaged in the sale of
services for a fee. Second, Sec. 186 of LGC
1. Business not subject to VAT or percentage tax provides that LGUs cannot levy taxes, fees or
under the NIRC; and charges on any base or subject tax under the
provisions of the NIRC.
2. Tax rate not to exceed 2% of the gross
sales/receipts of the preceding calendar year. In the given problem, ABC Corp.’s dividends,
(Sec. 143(h), LGC) interest income and foreign exchange gains from
foreign currency account are already subject to
NOTE: When a municipality or city has already final income tax under the NIRC, specifically, Secs.
imposed a business tax on manufacturers, etc. of 27(D)(4), 27(D)(1), 32(A), respectively.
liquors, distilled spirits, wines, and any other article of Consequently, the City of Makati cannot levy from
commerce pursuant to Sec. 143(a) of the LGC, said ABC Corp. taxes on these incomes.
municipality or city may no longer subject the same
manufacturers, etc. to a business tax under Sec. 143(h)
of the same Code. Sec. 143(h) may be imposed only on
businesses that are subject to excise tax, VAT, or
percentage tax under the NIRC, and that are not
otherwise specified in preceding paragraphs. (City of
Manila v. Coca-Cola Bottlers Philippines, Inc., G.R. No.
181845, 04 Aug. 2009)

Q: ABC Corp. is registered as a holding company

and has an office in the City of Makati. It has no
actual business operations. It invested in another
company and its earnings are limited to dividends
from this investment, interests on its bank
deposits, and foreign exchange gains from its
foreign currency account. The City of Makati
assessed ABC Corp. as a contractor or one that sells
services for a fee. Is the City of Makati correct?
(2013 BAR)

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 III. LOCAL TAXATION
Rules on the Taxing Power of Municipalities

PERSONS OR ENTITIES TAX BASE TAX RATE EXCEPTION

Graduated
Based on the taxpayer’s gross
annual fixed
Manufacturers, assemblers, sales or receipts for the –
tax
repackers, processors, brewers, preceding calendar year
distillers, rectifiers, and
Ceases to be a
compounders of liquors,
fixed tax,
distilled spirits and wines or
Gross sales or receipts amount instead a
manufacturers of any article of
to P6,500,000 or more for the percentage tax
commerce of whatever kind or
preceding calendar year of 37.5% of
nature (Sec. 143(a))
1% is imposed

Based on the gross sales or Graduated

receipts for the preceding annual fixed
calendar year. tax
Wholesalers, distributors or
dealers in any article of Tax becomes a
–
commerce of whatever kind or PERCENTAGE
Gross sales or receipts
nature (Sec. 143(b), LGC) TAX at the
amounting to P2,000,000 or
rate of 50% of
more
1%

Not exceeding
one-half (1/2)
Exporters and manufacturers, of the rates
millers, producers wholesalers, prescribed
distributors, dealers or retailers Gross Sales or Receipts under –
of the following essential subsections
commodities (Sec. 143(c), LGC) (a), (b) and (d)
of Sec. 143

Gross sales or receipts for the Annual 1. Gross

preceding calendar year percentage tax sales or
P400,000 or less of 2% receipts in
cities
P50,000
or less;
and
Retailers (Sec. 143(d), LGC) 2. Gross
Annual sales or
Sales or receipts exceeding receipts in
percentage tax
P400,000 municipali
of 1%
ties
P30,000
or less

361
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL L AW
 TAXATION LAW
NOTE:
However,
barangays
shall have the
exclusive
power to levy
such taxes
under Sec.
152.

Gross receipts for the preceding Graduated

calendar year annual fixed
Contractors and other tax
independent contractors (Sec. –
143(e), LGC) Gross receipts amounting to Percentage tax
P2,000,000 or more of 50% of 1%

Gross receipts of the preceding

calendar year derived from
interests, commission and
discounts from lending
Banks and other financial activities, income from financial
50% of 1% –
institutions (Sec. 143(f), LGC) leasing, dividends, rentals on
property and profit from
exchange or sale of property
insurance premium.

Peddlers engaged in the sale of

any merchandise or article of Not exceeding
Per peddler –
commerce (Sec. 143(g), LGC) P50

On any business, not otherwise

specified above which the
Sanggunian concerned may Graduated
deem proper to tax schedule
imposed by
NOTE: Provided, that on any the
business subject to the excise, Sanggunian
value-added or percentage tax Gross sales or receipts concerned, but –
under the National Internal in no case to
Revenue Code, as amended, the exceed the
rate of tax shall not exceed 2% of rates
gross sales or receipts of the prescribed
preceding calendar year (Sec. under Sec. 143
143(h), LGC)

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2023 GOLDEN NOTES
 III. LOCAL TAXATION
NOTE: Municipal Non-Revenue Fees and Charges – b. Different rates of tax – the gross sales
Municipalities may impose and collect reasonable fees or receipts of each business shall be
and charges on business and occupation and, except in separately reported for the purpose of
case of professional tax on the practice of any computing the tax due from each
profession or calling commensurate with the cost of business.
regulation, inspection & licensing before any person
may engage in such business, occupation, or practice Regulation and Licensing Fees, and Charges
of such profession or calling. (Sec. 147, LGC)
1. The municipality may impose and collect
Ceiling on Business Taxes Imposed by LGUs within such reasonable fees and charges on
Metro Manila business and occupation except professional
taxes reserved for provinces. (Sec. 147, LGC)
The municipalities in Metro Manila may levy taxes at
rates which shall not exceed by 50% the maximum 2. Imposition of fees for sealing and licensing of
rates prescribed in Sec. 143 of the LGC. (Sec. 144, LGC) weights and measures. (Sec. 148, LGC)

Tax on Retirement of Business 3. Imposition of fishery rentals, fees and

charges, including the authority to grant
1. A business subject to tax shall, upon termination fishery privileges within municipal waters,
thereof, submit a sworn statement of its gross as well as issue licenses for the operation of
sales or receipts for the current year. fishing vessels of three tons or less.

2. If the tax paid during the year be less than the tax 4. The Sanggunian may penalize the use of
due on said gross sales of receipts of the current explosives, noxious, or poisonous
year, the difference shall be paid before the substances, electricity, Muro–Ami, and other
business is considered officially retired. (Sec. 145, deleterious methods of fishing and prescribe
LGC) a criminal penalty thereof. (Sec. 149, LGC)

Rules on Payment of Business Taxes

1. Taxes 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.

2. The tax on a business must be paid by the person

conducting the same.

3. In cases where a person conducts or operates

two (2) or more of the businesses under Sec. 143
of the LGC which are subject to:

a. Same rates of tax – the tax shall be

computed on the combined total gross sales
or receipts of the said two (2) or more
related business.

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FACULTY OF CIVIL L AW
 TAXATION LAW
Situs of Tax Imposed by Municipalities

CIRCUMSTANCE RECOGNITION OF SALE PAYMENT OF TAX

With branch or sales office or
warehouse

NOTE: Branch office – A fixed

place in a locality which conducts
operations of the business as an
All sales made in the locality where The tax shall be payable to the city
extension of the principal office.
the branch or office or warehouse or municipality where the same is
is located. located.
Principal office – Head or main
office of the business appearing in
pertinent documents submitted to
the SEC and specifically mentioned
in the Articles of Incorporation.

The municipality where the sale or

transaction is made; The sale shall
The tax shall accrue to the city or
Where there is no branch or sales be recorded in the principal office
municipality where said principal
office or warehouse along with the sales made by said
office is located.
principal office.

Of all sales recorded in the

Where there is a factory, project
principal office:
office, plant or plantation in
1. 30% taxable to the city or
pursuit of business
municipality where the
principal office is located.
If plantation is at a place other
than where the factory is located 2. 70% taxable to the city or
municipality where the
factory, plant, etc. is located.

NOTE: The 70% (above) shall

be divided as follows:
All sales shall be recorded in the
a. 60% to the city or
principal office.
municipality where the
If manufacturer, contractor, etc. factory is.
has two or more factories,
project offices, plants or b. 40% to the city or
plantations located in different municipality where the
localities. plantation is located.

The 70% shall be pro-rated

among the localities where
such factories, project
offices, plants and
plantations are located

UNIVERSITY OF SANTO TOMAS 364

2023 GOLDEN NOTES
 III. LOCAL TAXATION
based on their respective
volumes of production.

NOTE: In case of manufacturers or producers which

engage the services of an independent contractor to
produce or manufacture some of their products, these
rules shall apply except that the factory or plant and
warehouse of the contractor utilized for the
production and storage of the manufacturers’
products shall be considered as the factory or plant
and warehouse of the manufacturer.

The city or municipality where the port of loading is

located shall not levy and collect reasonable fees
unless the exporter maintains in said city or
municipality its principal office, a branch, sales office,
or warehouse, factory, plant or plantation in which
case, the rule on the matter shall apply accordingly.

Situs According to Jurisprudence

1. Excise tax – Tax is imposed on the performance of

an act or occupation, enjoyment of a privilege.

NOTE: The power to levy such tax depends on the

place in which the act is performed or the
occupation is engaged in; not upon the location of
the office. (Allied Thread Co., Inc. v. City Mayor of
Manila, G.R. No. L-40296, 21 Nov. 1984)

2. Sales Tax – 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,
G.R. No. L-30745, 18 Jan. 1978)

365
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FACULTY OF CIVIL L AW
 TAXATION LAW
TAXING POWER OF BARANGAYS

Scope of the Taxing Power of a Barangay

FEES AND
SOURCE TAX BASE TAX RATE
CHARGES
Gross sales receipts for
preceding calendar year
of:
1. P50,000 or less (for
Barangay Taxes – On stores or barangay in the Not exceeding 1%
retailers with fixed business cities); and of such gross sales –
establishments or receipts.
2. P30,000 or less (for
barangay in
municipalities)

Services rendered in
connection with the
regulation or the use of
barangay-owned
Reasonable fees
Service Fees or Charges properties; or –
or charges
Service facilities such as
palay, copra, or tobacco
dryers

Reasonable fee as
the Sangguniang
Barangay Clearance – – Barangay may
impose

Other Fees and Charges:

1. Commercial breeding of
fighting cocks, cockfights
and cockpits Reasonable fees
2. Places of recreation which and charges as the
– –
charge admission fees barangay may
3. Billboards, signboards, levy
neon signs and outdoor
advertisements

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2023 GOLDEN NOTES
 III. LOCAL TAXATION
NOTE: Above enumeration shall accrue exclusively A: NO. Essentially, LBT are taxes imposed by local
to them. government units on the privilege of doing business
within their jurisdictions. To be sure, the phrase
Q: A sari-sari store initially paid the barangay “doing business” means some “trade or commercial
treasurer of Barangay T the amount of P120.00 activity regularly engaged in as a means of
representing 1% of the gross sales of P12,000.00 livelihood or with a view to profit.” Particularly, the
CY 1994 in accordance with the barangay tax LBT imposed pursuant to Sec. 143 (f) is premised on
code. Subsequently, the same store also filed the fact that the persons made liable for such tax are
application for business license with the banks or other financial institutions by virtue of
Municipality of T for which a municipal business their being engage in the business as such.
tax and other regulatory fees was assessed for
the same store based on its capital investment of In this case, it is clear that RAVI is neither a bank nor
P12,000.00. Are the tax assessments by the other financial institution, i.e., an NBFI. RAVI is a
barangay and the municipality correct? CIIF holding company. The SMC preferred shares
held by it are considered government assets owned
A: The tax assessment by the barangay of 1% on the by the National Government for the coconut
gross sales of P12, 000.00 is in accordance with Sec. industry. Thus, RAVI’s management of the dividends
152(a) of the LGC. The assessment of the from the SMC preferred shares, including placing
municipality of an additional business tax, however, the same in a trust account yielding interest, is not
is erroneous since pursuant to Sec. 143(d) of the tantamount to doing business whether as a bank or
LGC the barangays “shall have exclusive power to other financial institution, i.e., an NBFI, but rather an
levy taxes as provided under Sec. 152” of the same activity that is essential to its nature as a CIIF
Code. The municipality, nevertheless, may have to holding company. Since RAVI is not a bank or other
issue the corresponding business permit/license in financial institution, i.e., an NBFI, it cannot be held
accordance with Sec. 152(c) of the LGC, and may liable for LBT under Sec. 143 (f) of the LGC. (City of
impose as well reasonable regulatory fees on the Davao v. Randy Allied Ventures, Inc., G.R. No. 241697,
sari-sari store. 29 July 2019)

Q: RAVI is one of the Coconut Industry Q: The Coconut Industry Investment Fund (CIIF)
Investment Fund (CIIF) holding companies invested in six (6) oil mills, the CIIF Oil Mills
established to own and hold the shares of stock Group (CIIF OMG). The CIIF OMG bought shares
of SMC. On January 24, 2012, the SC rendered its of stock from SMC. It also established fourteen
decision in Philippine Coconut Producers (14) holding companies, one of which is APHI,
Federation, Inc. v. Republic, declaring the CIIF for the sole purpose of owning and holding such
companies, including RAVI, and the CIIF block of shares. Over time, APHI received cash and stock
SMC shares as “public funds necessarily owned dividends from its SMC preferred shares. These
by the Government.” On January 17, 2013, RAVI dividends were deposited in a trust account.
filed with the RTC a claim for refund or credit of
erroneously and illegally collected local Petitioner City of Davao issued a Business Tax
business taxes (LBT) for the taxable year of 2010 Order of Payment directing APHI to pay 0.55%
in the amount of P503,346, corresponding to its local business tax. The tax was assessed on the
dividends from its SMC preferred shares, on the dividends and interests APHI earned from its
mistaken assumption that it is a non-bank SMC preferred shares and money market
financial intermediary (NBFI). The RTC denied placements, respectively. Is APHI Liable to pay
the claim for refund or credit ruling that RAVI’s dividends tax on its SMC shares?
dividends and interests are subject to LBT under
Sec. 143 (f) of R.A. No. 7160. Is RAVI an NBFI A: NO. In the recent case of City of Davao, et al. v.
subject to LBT under Sec. 143 (f) of R.A. No. Randy Allied Ventures, Inc. (RAVI), the Court
7160? ordained that RAVI, a CIIF holding company like

367
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL L AW
 TAXATION LAW
APHI, was exclusively established to own and hold so requires. Thereafter, the said facility shall be free
SMC shares of stock. As such, it is not liable to pay and open for public use. (Sec. 155, LGC)
local business taxes on the dividends earned from
its SMC preferred shares as the same shares are 6. COMMUNITY TAX
government assets owned by the national
government for the benefit of the coconut industry.
It is a poll or capitation tax imposed upon residents
(City of Davao and Mr. Erwin Alparaque, in his official
of a city or municipality. It replaced the former
capacity as Acting City Treasurer of the City of Davao.
residence tax. It may be levied by a city or
Petitioner v. AP Holdings, Inc. Respondent., G.R. No.
municipality but not a province.
245887., 22 Jan. 2020, as penned by J. Lazaro – Javier)

Persons Liable to Pay Community Tax

5. COMMON REVENUE RAISING POWERS
1. Individuals – Every inhabitant of the
1. Fees, service or user charges – LGUs may Philippines 18 years of age or over:
impose and collect such reasonable fees and
charges for services rendered. (Sec. 153, LGC) a. who has been regularly employed on a
wage or salary basis for at least 30
2. Public utility charges – LGUs may fix the rates consecutive working days during any
for the operation of public utilities owned, calendar year;
operated, and maintained by them within their
jurisdiction. (Sec. 154, LGC) b. who is engaged in business or occupation;

3. Toll fees or charges – The Sanggunian c. who owns real property with an
concerned may prescribe the terms and aggregate assessed value of P1,000.00 or
conditions and fix the rates for the imposition of more; or
toll fees or charges for the use of any public
road, pier, or wharf, waterway, bridge, ferry or d. who is required by law to file an income
telecommunication system funded and tax return. (Sec. 157, LGC)
constructed by the LGU concerned. (Sec. 155,
LGC) 2. Juridical Persons – Every corporation no
matter how created or organized, whether
Persons Exempted from Payment of Toll, Fees, domestic or resident foreign, engaged in or
or Other Charges: (H-O-P) doing business in the Philippines. (Sec. 158,
LGC)
1. Physically Handicapped and disabled citizens
who are 65 years or older; Amount of Community Taxes

2. Officers and enlisted men of the Armed Forces 1. Individuals:

of the Philippines and members of PNP on a. Basic – P5.00
mission; and
b. Additional – Additional tax of P1.00 for
3. Post office personnel delivering mail. (Ibid.) every P1,000.00 of income regardless of
whether from business, exercise of
Instances when LGUs may Discontinue profession or from property which in no
Collection of Toll case shall exceed P5,000.00.

The Sanggunian concerned may discontinue the NOTE: In case of husband and wife, the
collection of the tolls when public safety and welfare additional tax shall be based on the total

UNIVERSITY OF SANTO TOMAS 368

2023 GOLDEN NOTES
 III. LOCAL TAXATION
property, gross receipts or earnings Community Tax Certificate
owned or derived by them.
It is issued to every person or corporation upon
2. Juridical persons – additional tax, which, in no payment of the community tax. It may also be issued
case, shall exceed P10,000.00 in accordance to any person or corporation not subject to the
with the following schedule: community tax upon payment of P1.00. (Sec. 162,
LGC)
a. For every P5,000.00 worth of real
property in the Philippines owned by it Barangay Treasurer
during the preceding year based on the
valuation used for the payment of real The city or municipal treasurer shall deputize the
property tax under existing laws, found in barangay treasurer to collect the community tax in
the assessment rolls of the city or their respective jurisdictions.
municipality where the real property is
situated – two pesos (P2.00); and NOTE: Provided, however, that said barangay
treasurer shall be bonded in accordance with
b. For every P5,000.00 of gross receipts or existing laws. (Sec. 164, LGC)
earnings derived by it from its business in
the Philippines during the preceding year Proceeds of the community tax collected through
– two pesos (P2.00). (Secs. 157-158, LGC) the barangay treasurers shall be apportioned as
follows:
Venue of Payment
1. 50% shall accrue to the general fund of the city
Residence of the individual, or in the place where or municipality concerned; and
the principal office of the juridical entity is located. 2. 50% shall accrue to the barangay where the tax
(Sec. 160, LGC) is collected. (Ibid.)

Period of Payment of Community Tax Instances where Presentation of Community

Tax Certificate is Required
It accrues on the 1st day of January of each year
which shall be paid not later than the last day of 1. Acknowledgment of any document before a
February of each year. (Sec. 161, LGC) notary public;

Penalty in Case of Delinquency NOTE: This is in accordance with the provisions

of the LGC, note that this is no longer included
An interest of 24% per annum from the due date under the competent evidence of identity under
until it is paid shall be added to the amount due. the Revised Rules on Notarial Practice.
(Sec. 161, LGC)
2. Taking an oath of office upon election or
Persons Exempt from Community Tax appointment to any position in the government
service;
1. Diplomatic and consular representatives, and
2. Transient visitors when their stay in the 3. Receiving any license, certificate or permit from
Philippines does not exceed three (3) months. any public authority;
(Sec. 159, LGC)
4. Paying any tax or fee;

5. Receiving any money from any public fund;

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6. Transacting other official business; and the guise of charges for wharfage, tolls for
bridges or otherwise, or other taxes, fees, or
7. Receiving any salary or wage from any person charges in any form whatsoever upon such
or corporation. (Sec. 163, LGC) goods or merchandise;

7. COMMON LIMITATIONS ON THE TAXING 6. Taxes, fees, or charges, on Countryside and

POWERS OF LOCAL GOVERNMENT UNITS Barangay Business Enterprises and
cooperatives duly registered under R.A. No.
6810 and R.A. No. 6938 or the “Cooperative
Limitation on the Taxing Powers of LGUs
Code of the Philippines”, respectively.
Unless otherwise provided in the LGC, the exercise
of the taxing powers of provinces, cities, 7. Taxes, fees, or charges on Agricultural and
municipalities, and barangays shall not extend to aquatic products when sold by marginal
the levy of the following: (I-D-E-C3-A-P3-M-E2-N-T) farmers or fishermen;

1. Income tax, except when levied on banks and 8. Taxes on business enterprises certified to by
other financial institutions; the Board of Investments as Pioneer or non-
pioneer for a period of six (6) and four (4) years,
2. Documentary stamp tax; respectively from the date of registration;

3. Taxes on Estates, inheritance, gifts, legacies and 9. Percentage or VAT on sales, barters, or
other acquisitions mortis causa, except as exchanges or similar transactions on goods or
provided herein; services except as otherwise provided herein.

GR: Taxes on estates, inheritance, gifts, legacies, NOTE: Amusement Tax, as a form of percentage
and other acquisitions mortis causa, except as tax, is expressly allowed by the LGC to be
otherwise provided under the LGC. imposed by the LGU. (Sec. 140, LGC)

XPN: Tax on transfer of real property (Sec. 135, 10. Taxes on Premiums paid by way or reinsurance
LGC) or retrocession.

4. Customs duties, registration fees of vessel and 11. Taxes, fees, or charges for the registration of
wharfage on wharves, tonnage dues, and all Motor vehicles and for the issuance of all kinds
other kinds of customs fees, charges and dues of licenses or permits for the driving thereof,
except wharfage on wharves constructed and except tricycles.
maintained by the LGU concerned;
12. Taxes, fees, or other charges on Philippine
NOTE: Item I of Sec. 133 must be correlated products actually Exported, except as otherwise
with Sec. 155 which provides for toll fees or provided in the LGC. (i.e., Sec. 143(I), LGC)
charges. Applying the foregoing provisions,
while imported products are exempt from 13. Excise taxes on articles enumerated under the
custom duties when passing through an LGU, NIRC, as amended, and taxes, fees, or charges on
they are, however, not exempt from toll fees and petroleum products.
charges.
NOTE: LGUs may impose tax on a petroleum
5. Taxes, fees, and charges and other impositions business. A tax on business is distinct from a tax
upon goods Carried into or out of, or passing on the article itself. (Phil. Petroleum Corporation
through, the territorial jurisdictions of LGUs in vs. Municipality of Pililia Rizal, G.R. No. 90776, 03

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2023 GOLDEN NOTES
 III. LOCAL TAXATION
June 1991) imposing business taxes. Thus, no levy can be
imposed as long as the subject matter of the taxing
Sec. 133(h) clearly specifies the two kinds of powers of the LGUs is the petroleum products per se,
taxes which cannot be imposed by LGUs: or the activity or privilege related to petroleum
a. excise taxes on articles enumerated under products such as, manufacturing and distribution of
the NIRC, as amended; and said products as these are covered by the limitation
b. taxes, fees or charges on petroleum provided by law.
products. (Batangas City v. Pilipinas Shell
Petroleum Corp., G.R. No. 187631, 08 July Art. 232(h) of the Implementing Rules and
2015) Regulations (IRR) of the LGC of 1991 states that the
Municipality may impose taxes on businesses
14. Taxes, fees or charges of any kind on the except any business engaged in the production,
National Government, its agencies and manufacture, refining, distribution or sale of oil,
instrumentalities, and LGUs. (Sec. 133, LGC) gasoline, and other petroleum products. (Batangas
City v. Pilipinas Shell Petroleum, G.R. No. 187631, 08
NOTE: Item O of Sec. 133 must be correlated July 2015)
with Sec. 193. Thus, tax exemptions of GOCCs
created before the effectivity of the 1991 LGC Q: Can LGUs validly impose business tax on the
are revoked. Conversely, tax exemptions of gross receipts of transportation contractors?
GOCCs created after the effectivity of the 1991
LGC are not revoked. A: NO. The well-established principle that the
power to tax is inherent in the State cannot be
15. Taxes on the gross receipts of transportation applied to the LGUs. The power to tax of the LGUs is
contractors and persons engaged in the delegated by Congress and is subject to the
Transportation of passengers or freight by hire guidelines and limitations provided and imposed by
and common carriers by air, land, or water, the latter. In this case, the Sanggunian of the
except as provided in this Code. municipality or city cannot enact an ordinance
imposing business tax on the gross receipts of
NOTE: An examination of the above enumeration transportation contractors, persons engaged in the
reveals that those taxes, charges, and fees already transportation of passengers or freight by hire, and
imposed and collected by the National Government common carriers by air, land, or water, as it is
such as income taxes, estate taxes, donor’s taxes, specifically prohibited from doing so. Any exception
documentary stamp taxes. Under the Reservation to the express prohibition under Sec. 133(j) of the
Rule or Exclusionary Rule, the LGUs cannot exercise LGC should be just as specific and unambiguous.
taxing powers reserved to the National
Government. Sec. 21(B) of the Manila Revenue Code, as amended,
is null and void for being beyond the power of the
Q: May LGUs impose taxes on petroleum City of Manila and its public officials to enact,
products? approve, and implement under the LGC. (City of
Manila vs. Colet, G.R. No. 120051, 10 Dec. 2014)
A: NO. The power of LGUs to impose business taxes
derives from Sec. 143 of the LGC. However, the same Principle of Pre-emption or Exclusionary
is subject to the explicit statutory impediment Doctrine
provided for under Sec. 133(h) which prohibits
LGUs from imposing “taxes, fees or charges on It refers to an instance where the National
petroleum products.” Therefore, it can be deduced Government elects to tax a particular area, it
that although petroleum products are subject to impliedly withholds from the local government the
excise tax, such are specifically excluded from the delegated power to tax the same field. This doctrine
broad power granted to LGUs under Sec. 143(h) in principally rests on the intention of the Congress.

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Conversely, should the Congress allow municipal Pheleco questioned ‘the legality of the ordinance
corporations to cover fields of taxation it already on the ground that it imposes an income tax
occupies then the doctrine of pre-emption will not which LGUs are prohibited from imposing. Rule
apply. (Victorias Milling Co., Inc. v. Municipality of on the validity of the ordinance. (2013 BAR)
Victorias Negros Occidental, G.R. No. L-21183, 27
Sept. 1968) A: THE ORDINANCE IS VOID. The fee is based on
rental income; therefore, it is a tax on income. The
Instances when Principle of Pre-emption or Sec. 32(A)(5) of the NIRC includes “rents” in the
Exclusionary Doctrine does Not Apply enumeration of taxable income. Under Sec. 133 (a)
of the LGC, the exercise of the taxing powers of
1. Taxes levied under: provinces, cities, municipalities, and barangays shall
a. the NIRC, unless otherwise provided by the not extend to the levy of income tax except when
LGU; levied on banks and other financial institutions.
b. the Tariff and Customs Code;
c. special laws; Q: The Sangguniang Panlungsod of Cagayan de
Oro (City Council) passed an ordinance
2. Taxes, fees, and other charges the imposition of imposing a tax on the lease or rental of electric
which contravenes existing governmental and/or telecommunication posts, poles or
policies, or which violates the fundamental towers by pole owners to other pole users 10%
principles of taxation; of the annual rental income derived from such
lease or rental.
3. When Congress allows municipal corporations
to cover fields of taxation it already occupies; Cagayan Electric Power and Light Company, Inc.
(CEPALCO), who is leasing for a consideration
4. It does not apply beyond a certain level of sales the use of its posts, poles or towers to other pole
or receipts for the preceding year, e.g., sales users, assails its validity on the ground that the
subject to VAT and sales tax imposed by the tax imposed by the disputed ordinance is in
LGU; and reality a tax on income which the City of Cagayan
de Oro may not impose, the same being
5. If the subjects of the taxes levied by the national expressly prohibited by Sec. 133(a) of LGC. Is the
and local governments are different from each ordinance valid?
other. (Lim, 2021)
A: YES. The ordinance is a tax on business not a tax
Levy of Income Taxes on income. Business is defined by Sec. 131(d) of the
LGC as “trade or commercial activity regularly
GR: The exercise of the taxing authority of LGUs engaged in as a means of livelihood or with a view
shall not extend to the levy of income tax. to profit.”

XPN: Income tax may be levied on banks and other CEPALCO’s act of leasing for a consideration the use
financial institutions. (Sec. 133(a), LGC) of its posts, poles or towers to other pole users falls
under the LGC’s definition of business. In relation
Q: Pheleco is a power generation and thereto, Secs. 131(d) and 143(h) of the LGC provide
distribution company operating mainly from that the city may impose taxes, fees, and charges on
the City of Taguig. It owns electric poles which it any business which is not specified in Sec. 143(a) to
also rents out to other companies that use poles (g) and which the Sanggunian concerned may deem
such as telephone and cable companies. Taguig proper to tax. (Cagayan Electric Power and Light Co.,
passed an ordinance imposing a fee equivalent Inc. v. City of Cagayan de Oro, G.R. No. 191761, 14 Nov.
to 1% of the annual rental for these poles. 2012)

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 III. LOCAL TAXATION
Wharfage two additional taxes, which are now being
assailed as unconstitutional. The taxes are (1) a
It is a fee assessed against the cargo of a vessel socialized housing tax (SHT) which is imposed at
engaged in foreign or domestic trade based on a rate of 0.5% based on the assessed value of the
quantity, weight, or measure received and/or land, and (2) a garbage fee, which is imposed in
discharged by the vessel. varying amounts based on land/floor area,
classifying between residential lots and
Authorization Limitation condominium units. Are the taxes valid?

With the exception of cities, each LGU could not A: The SHT is a valid tax, and its legal basis is found
exercise the taxing powers granted to others. Hence, in R.A. No. 7279 or the “Urban Development and
a province could not exercise the powers granted to Housing Act of 1992”. It must be noted that the use
municipality and vice-versa. However, a city could of property bears a social function, thus, all
exercise the taxing powers of both a province and a economic agents must contribute to the common
municipality. good. Here, the imposition of SHT is an implement
of police power. Police power is the plenary power
8. REQUIREMENTS FOR A VALID TAX vested in the legislature to make statutes and
ORDINANCE ordinances to promote the health, morals, peace,
education, good order or safety and general welfare
of the people. In the exercise of police power,
To be valid, an ordinance must conform to the
property rights of individuals may be subjected to
following substantive requirements: (C-U-P2-G-Un)
restraints and burdens in order to fulfill the
objectives of the government. In this regard, the
1. It must not Contravene the Constitution or any
general welfare clause of the LGC allows local
statute;
governments to exercise police power.
2. It must not be Unfair or oppressive;
3. It must not be Partial or discriminatory;
Meanwhile, the garbage fee is an invalid tax.
4. It must not Prohibit but may regulate trade;
Although the authority of a LGU to regulate garbage
5. It must be General and consistent with public
falls within its police power to protect public health,
policy; and
safety, and welfare, the garbage fee violates the
6. It must not be Unreasonable. (Municipality of
equal protection clause provided by the
San Mateo, Isabela v. Smart Communications,
Constitution and the LGC. An ordinance must be
Inc. G.R. No. 219506, 23 June 2021)
equitable and must be based on the taxpayer’s
ability to pay, and must not be unjust, excessive,
Q: Which of the following statements is NOT a
oppressive, or confiscatory.
test of a valid ordinance?

Further, with regard to the purpose of garbage

a. It must not contravene the Constitution or
collection, there is no substantial distinction
any statute;
between an occupant of a lot and an occupant of a
b. It must not be unfair or oppressive;
unit in a condominium, socialized housing project or
c. It must not be partial or discriminatory;
apartment. Moreover, the classifications under
d. It may prohibit or regulate trade. (2012
Quezon City’s tax ordinance are not germane to its
BAR)
purpose of “promoting shared responsibility with
the residents to attack their common mindless
A: It may prohibit or regulate trade. To be valid, an
attitude in over-consuming the present resources
ordinance must not prohibit but may regulate
and in generating waste.” (Ferrer v. Bautista, G.R. No.
trade. (Magtajas v. Pryce Properties Corporation,
210551, 30 June 2015)
Inc., G.R. No. 111097, 20 July 1994)

Q: The City Government of Quezon City imposed

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 TAXATION LAW
Procedure for Approval and Effectivity of Tax period, stating the nature of the levy, the
Ordinances amount of deficiency, the surcharges, interests,
and penalties.
1. The procedure applicable to local government
ordinances in general should be observed. (Sec. 2. Within 60 days from receipt of the assessment,
187, LGC) the taxpayer may file a written Protest of the
The following procedural details must be assessment with the local treasurer contesting
complied: the assessment; otherwise, the assessment shall
a. Necessity of a quorum; become final and executory.
b. Submission for approval by the local chief
executive; and 3. The local treasurer shall decide the protest
c. The matter of veto and overriding the same within 60 days from the time of its filing. If the
d. Publication and effectivity. (Secs. 54-55 and local treasurer finds the assessment to be
59, LGC) wholly or partly correct, he shall deny the
protest wholly or partly with notice to the
2. Public hearings are required before any local taxpayer.
tax ordinance is enacted. (Sec. 187, LGC)
4. The taxpayer shall have 30 days from the
3. Within ten (10) days after their approval, receipt of the denial of the protest or from the
publication in full for three (3) consecutive lapse of the 60-day period prescribed herein
days in a newspaper of general circulation. In within which to appeal with the court of
the absence of such newspaper in the province, competent jurisdiction otherwise the
city or municipality, the ordinance may be assessment becomes conclusive and
posted in at least two conspicuous and publicly unappealable. (Sec. 195, LGC)
accessible places. (Secs. 188 & 189, LGC)
5. The competent court referred to is the RTC, or
NOTE: The requirement of publication for three (3) MTC, or MeTC, or MCTC which act in the
consecutive days is mandatory for a tax ordinance exercise of its original jurisdiction, depending
to be valid. The tax ordinance will be null and void if on the amount. Local tax cases originally
it fails to comply with the requirement. (Coca-Cola v. decided by the MTC, or MeTC, or MCTC may be
City of Manila, G.R. No. 161893, 27 June 2006) appealed to RTC.

Effectivity of an Ordinance NOTE: When an assessment is seasonably disputed,

the collection of tax, fee, or charge subject matter of
In case the effectivity of any tax ordinance or the assessment should be held in abeyance pending
revenue measure falls on any date other than the final determination thereof.
beginning of the quarter, the same shall be
considered as falling at the beginning of the next
ensuing quarter, and the taxes, fees, or charges due
shall begin to accrue therefrom.

9. TAXPAYER’S REMEDIES

a) PROTEST

1. When the correct tax, fee, or charge is not paid,

the Local Treasurer shall issue a Notice of
Assessment within the applicable prescriptive

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 III. LOCAL TAXATION
Protest of Assessment on Local Taxes

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b) REFUND a. Can a taxpayer who protested an
assessment later on institute a judicial
Procedure for Refund action for refund?
1. A written claim for refund or credit is filed with b. May the alleged deficiency taxes be used to
the local treasurer. offset claim for refund?

2. A claim or proceeding is then filed with the A:

court of competent jurisdiction, depending a. YES. On the first point, the Court has settled in
upon the jurisdictional amount, within two (2) the case of City of Manila v. Cosmos Bottling
years from the date of the payment of such tax, Corporation that a taxpayer facing an
fee, or charge, or from the date the taxpayer is assessment issued by the local treasurer may
entitled to a refund or credit. (Sec. 196, LGC) protest it and alternatively: (1) appeal the
assessment in court, or (2) pay the tax, and
NOTE: The filing of a written claim for refund thereafter, seek a refund. In this case, after
with the local treasurer is a condition precedent respondent received the assessment on January
for maintaining a court action. If the local 17, 2007, it protested such assessment on
treasurer does not act on the written claim for January 19, 2007.
refund and the 2-year statute of limitation is
about to expire, the taxpayer should forthwith After payment of the assessed taxes and
initiate the court action and consider the charges, respondent wrote petitioner another
treasurer’s inaction as a denial of his claim for letter asking for the refund and reiterating the
refund. grounds raised in the protest letter.

Q: The City Treasurer of Manila issued a SOA to Then, on February 6, 2007, respondent
Philippine Beverage Partners, Inc. showing that received the letter denying its protest. Thus, on
it is liable to pay local business taxes and March 8, 2007, or exactly thirty (30) days from
regulatory fees for the first quarter of 2007 in its receipt of the denial, respondent brought the
the total amount of P2,930,239.82. Philippine action before the RTC of Manila. Hence,
Beverage Partners protested the assessment respondent was justified in filing a claim for
arguing that Tax Ordinance Nos. 7988 and 8011, refund after timely protesting and paying the
amending the Revenue Code of Manila (RCM), assessment. (City Treasurer of Manila v.
have been declared null and void. It further Philippine Beverage Partners, Inc., G.R. No.
argued that the collection of local business tax 233556, 11 Sept. 2019)
under Sec. 21 of the RCM in addition to Sec. 14 of
the same code constitutes double taxation. The b. NO. On the second point, Sec. 195 of the LGC
City Treasurer of Manila, however, denied provides that “When the local treasurer or his
Philippine Beverage Partners’ protest. duly authorized representative finds that
correct taxes, fees, or charges have not been
After payment of the amount being collected, paid, he shall issue a notice of assessment
Philippine Beverage Partners filed a written stating the nature of the tax, fee, or charge, the
claim for refund of erroneously/illegally amount of deficiency, the surcharges, interests
collected tax with the City Treasurer of Manila and penalties.”
amounting to P2,424,158.93. Further, it filed a
complaint for the revision of the SOA and for Thus, suffice it to say that the issuance of a
refund or credit of LBT erroneously/illegally notice of assessment is mandatory before the
collected with the RTC which ruled in the local treasurer may collect deficiency taxes
affirmative. The City Treasurer of Manila raised from the taxpayer.
two points on its arguments:

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2023 GOLDEN NOTES
 III. LOCAL TAXATION
The notice of assessment is not only a of taxes, fees, or charges, the same may be assessed
requirement of due process but it also stands within 10 years from discovery of the fraud or intent
as the first instance the taxpayer is officially to evade payment. (Sec. 184 (a) and (b), LGC)
made aware of the pending tax liability. The
local treasurer cannot simply collect deficiency Grounds for Refund of Local Government Taxes,
taxes for a different taxing period by raising it Fees, or Charges
as a defense in an action for refund of
erroneously or illegally collected taxes. (Ibid) 1. Erroneously collected, or
2. Illegally collected. (Sec. 196, LGC)
c) ACTION BEFORE THE SECRETARY OF
JUSTICE Procedure for Refund of Local Government
Taxes, Fees, or Charges
Procedure before the Secretary of Justice
1. Administrative appeal questioning the 1. A written claim for refund or credit is filed with
constitutionality or legality within 30 days from the local treasurer.
the effectivity of the tax ordinance or revenue
measure. 2. A claim or proceeding is then filed with the
court of competent jurisdiction, depending
2. Secretary of Justice shall render a decision upon the jurisdictional amount, within two (2)
within 60 days from date of receipt of the years from the date of the payment of such tax,
appeal. fee, or charge, or from the date the taxpayer is
entitled to a refund or credit (Ibid.)
3. Within 30 days after receipt of the decision or
the lapse of 60-day period without action from a) REMEDIES OF LOCAL GOVERNMENT UNITS
the Secretary of Justice, aggrieved party may
file appropriate proceedings with a court of 1. Local government lien – Local taxes, fees,
competent jurisdiction. charges, and other revenues constitute a lien,
superior to all liens, charges or encumbrances
NOTE: Such appeal shall not have the effect of in favor of any person, enforceable by
suspending the effectivity of the ordinance and appropriate administrative or judicial action,
the accrual of the payment of the tax, fee, or not only upon any property or rights therein
charge levied therein. (Sec. 187, LGC) which may be subject to the lien but also upon
property used in business, occupation, practice
The three separate periods (30-30-60) are of profession or calling, or exercise of privilege
given for compliance as a pre-requisite before with respect to which the lien is imposed. (Sec.
seeking redress in a competent court. (Jardine 173, LGC)
Davies Insurance Brokers, Inc. vs. Aliposa, G.R.
No. 118900, 27 Feb. 2003) The lien may only be extinguished upon full
payment of the delinquent local taxes fees and
10. ASSESSMENT AND COLLECTION OF LOCAL charges including related surcharges and
TAXES interest.

2. Civil remedies
GR: Local taxes, fees, or charges shall be assessed
within five (5) years from the date they became due. a. Distraint of personal property,
No action for the collection of such taxes, fees, or b. Levy of real property, or
charges, whether administrative or judicial, shall be c. Judicial action. (Secs. 173-174, LGC)
instituted after the expiration of such period.

XPN: In case of fraud or intent to evade the payment

377
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 TAXATION LAW
Levy of Real Property may be Simultaneously employment;
Issued with Warrant of Distraint 2. One horse, cow, carabao, or other Beast of
burden, such as the delinquent taxpayer may
The levy of a real property may be made before or select, and necessarily used by him in his
simultaneous with distraint. In case the levy on real ordinary occupation;
property is not issued before or simultaneously
with the warrant of distraint on personal property, 3. His necessary Clothing, and that of all his family;
and the personal property of the taxpayer is not
sufficient to satisfy his delinquency, the provincial, 4. Household furniture and utensils necessary for
city or municipal treasurer, as the case may be, shall housekeeping and used for that purpose by the
within 30 days after execution of the distraint, delinquent taxpayer, such as he may select, of a
proceed with the levy on taxpayer’s real property. value not exceeding P10,000.00;
(Sec. 176, LGC)
5. Provisions, including crops, actually provided
Instances when LGU has the Right to Purchase for individual or family use sufficient for four
Real Property Advertised for Sale (4) months;

1. No bidder for the real property, or 6. The professional Libraries of doctors,

2. If the highest bid is for an amount insufficient to engineers, lawyers and judges;
pay the taxes, fees, or charges, related
surcharges, interests, penalties and costs. 7. One fishing Boat and net, not exceeding the total
value of P10,000.00, by the lawful use of which
Instance when LGU may Repeat Remedies of a fisherman earns his livelihood; and
Distraint and Levy
8. Any Material or article forming part of a house
The remedies by distraint and levy may be repeated, or improvement of any real property. (Sec. 185,
if necessary, until the full amount due, including all LGC)
expenses, is collected. (Sec. 184, LGC)

Penalty of the Local Treasurer for Failure to

Issue and Execute the Warrant

Automatically dismissed from service after notice

and hearing, if found guilty of abusing the exercise
thereof by competent authority, without prejudice
to criminal prosecution under the RPC and other
applicable laws. (Sec. 177, LGC)

Properties Exempt from Distraint or Levy

The following properties 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: (To-Be-C-Ho-P-L-B-M)

1. Tools and implements necessarily used by the

delinquent taxpayer in his trade or

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2023 GOLDEN NOTES
 III. LOCAL TAXATION
Procedure for Distraint

379
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FACULTY OF CIVIL L AW
 TAXATION LAW
Procedure for Levy

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2023 GOLDEN NOTES
 III. LOCAL TAXATION
Enforcement of Judicial Remedy in the Corp. v. City Treasurer of Manila, G.R. No. 204117, 01
Collection of Taxes July 2015)

The LGU concerned may enforce the collection of Q: Doña Evelina, a rich widow engaged in the
delinquent taxes, fees, charges and other revenues business of currency exchange, was assessed a
by civil action in any court of competent jurisdiction. considerable amount of local business taxes by
The civil action shall be filed by the local treasurer the City Government of Bagnet by virtue of Tax
within five (5) years from delinquent taxes, fees or Ordinance No. 24. Despite her objections
charges become due. (Sec. 183, LGC) thereto, Doña Evelina paid the taxes.
Nevertheless, unsatisfied with said Tax
Mode of Appeal from the Decision of the RTC Ordinance, Doña Evelina, through her counsel
Involving Local Taxes Atty. ELP, filed a written claim for recovery of
said local business taxes and contested the
R.A. 9282 expanded the jurisdiction of the CTA to assessment. Her claim was denied, and so Atty.
include, among others, the power to review by ELP elevated her case to the RTC.
appeal decisions, orders or resolutions of the RTC in
local tax cases originally decided or resolved by The RTC declared Tax Ordinance No. 24 null and
them in the exercise of their original or appellate void and without legal effect for having been
jurisdiction. (City of Iriga vs Camarines Sur Electric enacted in violation of the public action
Cooperative, Inc., G.R. No. 192945, 05 Sept. 2012) requirement of tax ordinances and revenue
measures under the Local Government Code
The authority to exercise either original or appellate (LGC) and on the ground of double taxation. On
jurisdiction over local tax cases depended on the appeal, the CTA affirmed the decision of the RTC.
amount of the claim. In cases where the amount No motion for reconsideration was filed and the
sought to be refunded is below the jurisdictional decision became final and executory.
amount of the RTC, the MeTC, MTC, MCTC are
clothed with ample authority to rule on such claims. a. If you are Atty. ELP, what advice will you give
Doña Evelina so that she can recover the
In cases where the RTC exercises appellate subject local business taxes?
jurisdiction, it necessarily follows that there must be
a court capable of exercising original jurisdiction – b. If Doña Evelina eventually recovers the local
otherwise there would be no appeal over which the business taxes, must the same be considered
RTC would exercise appellate jurisdiction. The income taxable by the national government?
Court cannot consider the City Treasurer as the (2014 BAR)
entity that exercises original jurisdiction not only
because it is not a “court” within the context of B.P. A:
Blg. 129, but also because B.P. 129 expressly
a. Atty. ELP should move for the execution of the
delineates the appellate jurisdiction of the Regional
judgment which is final and executory. The
Trial Courts, confining as it does said appellate
issuance of a writ of execution may eventually
jurisdiction to cases decided by MeTC, MTC, and
force the local treasurer to make the refund.
MCTC. Verily, unlike in the case of the CA, B.P. 129
does not confer appellate jurisdiction on the RTC
b. YES. It is subject to the tax benefit rule. The local
over rulings made by non-judicial entities. The RTC
business tax paid is a business-connected tax
exercises appellate jurisdiction only from cases
hence, deductible from gross income. If at the
decided by the MeTC, MTC, and MCTC in the proper
time of its deduction it resulted to a tax benefit
cases. The nature of the jurisdiction exercised by
to Doña Evelina, then the recovery will form
these courts is original, considering it will be the
part of gross income to the extent of the tax
first time that a court will take judicial cognizance of
benefit on the previous deduction. (Sec.
a case instituted for judicial action. (China Banking
34(c)(1), NIRC)

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 TAXATION LAW
b) PRESCRIPTIVE PERIOD If principal
amount of The RTC shall
Period of Assessment taxes, fees exercise
exclusive of appellate
Local taxes, fees, or charges shall be assessed within charges and jurisdiction over
five (5) years from the date they become due. (Sec. penalties all cases decided
194(a), LGC) RTC exceeds by the MeTC,
P300,000 or MTC, and MCTC
Period of Collection P400,000 in in their
Metro Manila, respective
Local taxes, fees, or charges may be collected within provided, the territorial
five (5) years from the date of assessment by amount is less jurisdiction.
administrative or judicial action. (Sec. 194(c), LGC) than P1 million.

Suspension of Running of Prescriptive Period Over appeals

from the
The running of the periods of prescription shall be If principal
judgments,
suspended for the time during which: (P-R-O) amount of
resolutions or
taxes, fees
orders of the RTC
1. The treasurer is legally Prevented from making CTA exclusive of
in tax collection
the assessment of collection; DIVISION charges and
cases originally
penalties is P 1
decided by them
2. The taxpayer Requests for a reinvestigation and million or
in their
executes a waiver in writing before expiration above.
respective
of the period within which to assess or collect; jurisdiction.
and
1. Decisions or
3. The taxpayer is Out of the Country or otherwise resolutions
cannot be located. (Sec. 194(d), LGC) over
petitions for
Jurisdiction of MTC, RTC, CTA Division and En review of the
Banc Distinguished Court in
Divisions in
the exercise
COURT ORIGINAL APPELLATE
of its
If principal exclusive
amount of CTA EN – appellate
taxes, fees, BANC jurisdiction
exclusive of over local
charges and taxes
MTC
penalties does decided by
not exceed the RTC in
P300,000 or the exercise
P400,000 in of their
Metro Manila. original
jurisdiction;
or

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 III. LOCAL TAXATION
2. Petitions for 1. FUNDAMENTAL PRINCIPLES
review of the
judgments,
The appraisal, assessment, levy and collection of
resolutions
real property tax shall be guided by the following:
or orders of
(C-A-U-L-E)
the RTC in
the exercise
1. Real property shall be appraised at its Current
of their
and fair market value;
appellate
jurisdiction
2. Real property shall be classified for assessment
over tax
purposes on the basis of its Actual use;
collection
(Doctrine of Usage)
cases
originally
NOTE: Actual use refers to the purpose for
decided by
which the property is principally or
the MeTC,
predominantly utilized by the person in
MTC and
possession of the property.
MCTC in
their
3. Real property shall be assessed on the basis of a
respective
Uniform classification within each LGU;
territorial
jurisdiction.
4. The appraisal, assessment, levy, and collection
of real property tax shall not be Let to any
private person; and

B. REAL PROPERTY TAXATION 5. The appraisal and assessment of real property

shall be Equitable. (Sec. 198, LGC)

Real Property Tax NOTE: Real Property shall be classified, valued and
assessed on the basis of its actual use regardless of
Real property tax is a direct tax on ownership of where located, whoever owns it, and whoever uses
lands and buildings or other improvements thereon it. (Sec. 217, LGC)
not specially exempted and is payable regardless of
whether the property is used or not, although the 2. NATURE
value may vary in accordance with such factor.
Characteristics of Real Property Tax (L-A-P-I-D)
It is a fixed proportion of the assessed value of the
property being taxed and requires, therefore, the
1. It is a Local tax;
intervention of assessors.
2. It is an Ad valorem tax;
The present law on real property taxation (R.A.
7160, LGC) adopts actual use of real property as
NOTE: Ad valorem tax is a levy on real property
basis of assessment (Sec. 199(b), LGC), even if the
determined on the basis of a fixed proportion of
user is not the owner. (Province of Nueva Ecija v.
the value of money.
Imperial Mining Co., Inc. G.R. No. 59463, 19 Nov.
1982)
3. It is Proportionate because the tax is calculated
on the basis of a certain percentage of the value
assessed;

383
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4. It creates a single Indivisible obligation; and and may qualify as “machinery” subject to real
property tax under the LGC. Both electric lines and
5. It is Direct tax on the ownership of real communications cables, in the strictest sense, are
property. not directly adhered to the soil but pass-through
posts, relays or landing stations, but both may be
NOTE: The impact and incidence of taxation classified under the term “machinery” as real
devolves on the same person. (Aban, 2001) property under Art. 415(5) of the Civil Code because
such pieces of equipment serve the owner’s
Administration of Real Property Tax business or tend to meet the needs of his industry or
works that are on real estate.
The provinces and cities, including the
municipalities within the Metropolitan Manila Area, Moreover, a portion of the submarine cable falls
shall be primarily responsible for the proper, within what the UNCLOS would define as the
efficient, and effective administration of the real country’s territorial sea to the extent of 12 nautical
property tax. (Sec. 200, LGC) miles outward from the nearest baseline over which
the country has sovereignty. Further, under Art. 79
3. IMPOSITION of the UNCLOS, the Philippines clearly has
jurisdiction with respect to cables laid in its
territory that are utilized in support of other
a) POWER TO LEVY
installations and structures under its jurisdiction.
As far as LGUs are concerned, the areas described
Extent of the Local Taxing Power in Real above are to be considered subsumed under the
Property Taxation term “municipal waters” which, under the LGC,
includes “not only streams, lakes, and tidal waters
Provinces, cities, and municipalities do not only within the municipality, but also marine waters
have the power to levy real estate taxes, but they included between two lines drawn perpendicularly
may also fix real estate tax rates. Sec. 233 of the LGC to the general coastline from points where the
provides that they shall fix a uniform rate of basic boundary lines of the municipality or city touch the
real property tax applicable to their respective sea at low tide and a third line parallel with the
localities. general coastline and 15 kilometers from it.”
(Capitol Wireless, Inc. vs. Provincial Treasurer of
NOTE: Municipalities outside Metro Manila cannot Batangas, G.R. No. 180110, 30 May 2016)
levy real property taxes. They can, however, impose
special levies. NOTE: No public hearing shall be required before
the enactment of a local tax ordinance levying the
Q: Capitol Wireless is in the business of basic real property tax.
providing international telecommunications
services. Capwire has signed agreements with LGUs may refrain from imposing the real property
other local and foreign telecommunications tax. The use of the words “may levy and collect”
companies covering an international network of gives the impression that a province, city or
submarine cable systems. The local government municipality within Metropolitan Manila Area, may
of Batangas considered the submarine cable or may not, at its discretion impose real property
systems as real property subject to real tax. The word “may” in the law generally interpreted
property tax. Is the local government of as only permissive or discretionary and operates to
Batangas correct? confer discretion. This is also being consistent as
well with local autonomy which is the hallmark of
A: YES. Submarine or undersea communications the LGC itself.
cables are akin to electric transmission lines which
are “no longer exempted from real property tax”

UNIVERSITY OF SANTO TOMAS 384

2023 GOLDEN NOTES
 III. LOCAL TAXATION
NOTE: Recourse may be taken to Sec. 5 of the Code the laws. (Spouses Cruz v. City of Makati, G.R. No.
itself which provides for the rules of its 210894, 18 Sept. 2018)
interpretation, to wit:
Real Property
“Any provision on a power of a LGU shall be liberally
construed in its favor, and in case of doubt, any Under Art. 415 of the New Civil Code, the following
question thereon shall be resolved in favor of are immovable property:
devolution of powers and of the LGU. Any fair and
reasonable doubt as to the existence of the power 1. Land, buildings, roads and constructions of all
shall be interpreted in favor of the LGU concerned.” kinds adhered to the soil;

Q: The City of Makati levied and auctioned off a 2. Trees, plants, and growing fruits, while they are
real property after the registered owners failed attached to the land or form an integral part of
to pay the corresponding taxes. Spouses Cruz, an immovable;
owners of the property, claimed that the sale
was null and void because the notice of billing 3. Everything attached to an immovable in a fixed
statements for real property were mistakenly manner, in such a way that it cannot be
sent to a different unit; no warrant of levy was separated therefrom without breaking the
ever received by them; the notice of delinquency material or deterioration of the object;
sale was not posted; the delinquency sale was
not published; the Makati Treasurer's Office did 4. Statues, reliefs, paintings or other objects for
not notify them of the warrant of levy; and the use or ornamentation, placed in buildings or on
City did not remit the excess of the proceeds of lands by the owner of the immovable in such a
the sale to them. Is the delinquency sale valid? manner that it reveals the intention to attach
them permanently to the tenements;
A: NO. The Local Government Code provides that
notice of delinquency and notice of delinquency sale 5. Machinery, receptacles, instruments or
must be posted at the main hall and in a publicly implements intended by the owner of the
accessible and conspicuous place in each barangay tenement for an industry or works which may
of the local government unit concerned. They shall be carried on in a building or on a piece of land,
also be published once a week for two (2) and which tend directly to meet the needs of the
consecutive weeks, in a newspaper of general said industry or works;
circulation in the province, city, or municipality.
Failure to strictly comply with the requisites of the 6. Animal houses, pigeon-houses, beehives, fish
LGC renders the delinquency sale null and void. As ponds or breeding places of similar nature, in
the tax sale was null and void, the title of the buyer case their owner has placed them or preserves
therein is also null and void. them with the intention to have them
permanently attached to the land, and forming
There can be no presumption of regularity in any a permanent part of it; the animals in these
administrative action which results in depriving a places are included;
taxpayer of his property; due process of law must be
followed in tax proceedings, because a sale of land 7. Fertilizer actually used on a piece of land;
for tax delinquency is in derogation of private
property and the registered owner's constitutional 8. Mines, quarries, and slag dumps, while the
rights. The principle of strict adherence to the matter thereof forms part of the bed, and waters
statutes governing tax sales is imperative, not only either running or stagnant;
for the protection of the taxpayers, but also to allay
any possible suspicion of collusion between the 9. Docks and structures which, though floating,
buyer and the public officials called upon to enforce are intended by their nature and object to

385
UNIVERSITY OF SANTO TOMAS
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 TAXATION LAW
remain at a fixed place on a river, lake, or coast; essential to the conduct of business. The property to
and be considered as immobilized for RPT must be
“essential and a principal element” of an industry
10. Contracts for public works, and servitudes and without which such industry would be unable to
other real rights over immovable property. carry on the principal industrial purpose for which
it was established.
NOTE: An object used indirectly for the general
purpose of the business shall not be treated as real Examples:
property.
1. Gasoline station equipment and machineries
The SC has generally held that Art. 415 of the Civil like above ground and underground tanks,
Code provides an exclusive enumeration of what elevated water tanks, water tanks, gasoline
constitutes real property, for tax purposes, pumps, computing pumps water pumps, car
however, it is common for otherwise personal washers, car lifts, air compressors, tire inflators
properties under the Civil Code to be classified as and the like attached to the pavement and to the
real property. (Mindanao Bus Co. v. City Assessor, G.R. shed. (Caltex Phils. v. CBAA, GR No. 50466, 31
No. L-17870, 29 Sept. 1962) May 1982)

Improvement 2. A mining Company’s siltation dam and decant

system are not machineries but improvements
It is a valuable addition made to a property or an subject to real property tax. (Provincial Assessor
amelioration in its condition, amounting to more of Marinduque v. CA, G.R. No. 170532, 30 Apr.
than a mere repair or replacement of parts involving 2009)
capital expenditures and labor, which is intended to
enhance its value, beauty, or utility or to adapt it for 3. Pipelines embedded and attached to the land
new or further purposes. (Sec. 199 (m), LGC) which cannot be removed therefrom without
dismantling the steel pipes welded to it to form
Requisites for Taxability of Improvement: (E-S- the pipeline. (MERALCO v. CBAA, G.R. No. L-
I) 46245, 31 May 1982)

1. It must Enhance the value of the property; Kinds of Real Property Tax and Special Levies:
2. It must be Separately assessable; and (S-I-R-E)
3. It can be treated Independently from the main
property. 1. Special levy by LGUs; (Sec. 240, LGC)
2. Additional ad valorem tax on Idle lands; (Sec.
NOTE: Whenever real property has been divided 236, LGC)
into condominium, each condominium owned shall 3. Basic Real property tax; and
be separately assessed, for purposes of real 4. Additional levy on real property for the Special
property taxation and other tax purposes to the Education Fund. (Sec. 235, LGC)
owner thereof and tax on each such condominium
shall constitute a lien solely thereof. (Sec. 25, R.A. No. Socialized Housing Tax
776 or “The Condominium Act”)
LGUs are authorized to impose an additional one-
Doctrine of Essentiality half percent (0.5%) on the assessed value of all
lands in urban areas in excess of P50,000, except
Properties considered as personal under the Civil those from lands which are exempted from the
Code may nonetheless be considered as real coverage of R.A. 7279. (R.A. No. 7279, 24 Mar. 1992)
property for tax purposes where said property is

UNIVERSITY OF SANTO TOMAS 386

2023 GOLDEN NOTES
 III. LOCAL TAXATION
Real Properties Subject to Tax Special Levy or Special Assessment by LGUs

1. For Basic Real Property Tax and Special Levy GR: A province, city or municipality may impose a
on Education Fund: special levy on the lands within its territorial
jurisdiction specially benefited by public works
a. Land
projects or improvements by the LGU concerned.
b. Building
c. Machinery
XPN: It shall not apply to lands exempt from basic
d. Other improvements (Sec. 232, LGC)
real property tax and the remainder of the land,
portions of which have been donated to the LGU
2. For Special Levy on Idle Lands and Special
concerned for the construction of such projects or
Levy on Public Works (Special Assessments):
improvements. (Sec. 240, LGC)
a. Land Only
NOTE: The special levy shall not exceed 60% of the
Ceiling on Real Property Tax Rates actual cost of such projects and improvements,
including the costs of acquiring land and such other
1. Province – can impose a real property tax rate real property in connection therewith.
not exceeding 1% of the assessed value of the
property. Additional Levy on Real Property for Special
Education Fund
2. City or municipality within the Metro Manila
area – can impose a real property tax rate not A province, city, or a municipality within the Metro
exceeding 2% of the assessed value of the Manila area may levy and collect an annual tax of 1%
property. (Sec. 233, LGC) on the assessed value of real property, which shall
be in addition to the basic real property tax. The
Ordinance on Special Levy for Public Works proceeds thereof shall exclusively accrue to the
Special Education Fund created under R.A. 5447.
1. The ordinance shall: (Sec. 235, LGC)
a. Describe the nature, extent, and location of
the project; Q: The Sangguniang Panlalawigan of Palawan
b. State estimated cost; and enacted Provincial Ordinance No. 332-A, Series
c. Specify metes and bounds by monuments of 1995, entitled “An Ordinance Approving and
and lines. Adopting the Code Governing the Revision of
Assessments, Classification and Valuation of
2. It must state the number of annual installments, Real Properties in the Province of Palawan”
not less than five (5) years nor more than ten (Ordinance) Chapter 5, Sec. 48 of the Ordinance
(10) years. provides for an additional levy on real property
tax for the special education fund at the rate of
NOTE: In the apportionment of special levy, the one-half percent or 0.5% as follows: Sec. 48-
Sanggunian may fix different rates depending Additional Levy on Real Property Tax for Special
on whether such land is more or less benefited Education Fund. There is hereby levied an
by the proposed work. annual tax at the rate of one-half percent (1/2%)
of the assessed value property tax. The proceeds
3. There must be notice to the owners and public thereof shall exclusively accrue to the Special
hearing. (Sec. 242, LGC) Education Fund (SEF).

4. The Owner can appeal to the Local Board of On post-audit, the auditor noticed supposed
Assessment Appeals (LBAA) and Central Board deficiencies in the special education fund
of Assessment Appeals (CBAA). collected by the Municipality of Narra. He

387
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL L AW
 TAXATION LAW
questioned the levy of the special education or perennial crops with at least fifty (50) trees
fund at the rate of only 0.5% rather than at 1%, to a hectare shall not be considered idle lands.
the rate stated in Sec. 235. Does the local Lands actually used for grazing purposes shall
government unit have discretion on the rate at likewise not be considered idle lands.
which they are to collect the real property tax
for special education fund? 2. Lands other than agricultural:
a. Located in a city or municipality;
A: YES. The limits on the level of additional levy for b. More than one thousand square meters
the special education fund under Sec. 235 of the (1,000 sqm.) in area; and
Local Government Code should be read as granting c. One-half (1/2) of which remain unutilized
fiscal flexibility to local government units. Sec. 235’s or unimproved by the owner or person
permissive language is unqualified. Moreover, there having legal interest.
is no limiting qualifier to the articulated rate of 1%
which unequivocally indicates that any and all NOTE: Regardless of land area, this shall apply
special education fund collections must be at such to residential lots in subdivisions duly
rate. approved by proper authorities, the ownership
of which has been transferred to individual
At most, there is a seeming ambiguity in Sec. 235. owners, who shall be liable for the additional
Consistent with what has earlier been discussed tax: Provided, however, that individual lots of
however, any such ambiguity must be read in favor such subdivisions, ownership of which has not
of local fiscal autonomy. Fiscal autonomy entails been transferred to the buyer shall be
"the power to create own sources of revenue." In considered as part of the subdivision and shall
turn, this power necessarily entails enabling local be subject to the additional tax payable by
government units with the capacity to create subdivision owner or operator. (Sec. 237, LGC)
revenue sources in accordance with the realities
and contingencies present in their specific contexts. Grounds for Exemption from Idle Lands Tax
(Demaala v. Commission on Audit, G.R. No. 199752, 17
Feb. 2015) 1. Force majeure;
2. Civil disturbance;
Additional Ad Valorem Tax on Idle Lands 3. Natural calamity; or
4. Any cause or circumstance which physically or
A province or city or a municipality within the Metro legally prevents the owner or person having
Manila area may levy an annual tax on idle lands at legal interest from improving, utilizing or
the rate not exceeding 5% of the assessed value of cultivating the same. (Ibid.)
the property which shall be in addition to the basic
real property tax. (Sec. 236, LGC) Purpose of Ad Valorem Taxes on Idle Land

Idle Lands To penalize property owners who do not use their

property productively. It is also designed to
1. Agricultural lands: encourage utilization of land resources in order to
a. More than one (1) hectare in area; contribute to national development.
b. Suitable for cultivation, dairying, inland
fishery, and other agricultural uses; and Q: May local governments impose an annual
c. One-half (1/2) of which remain realty tax in addition to the basic real property
uncultivated or unimproved by the owner tax on idle or vacant lots located in residential
or person having legal interest. subdivisions within their respective territorial
jurisdictions? (2000 BAR)
NOTE: Agricultural lands planted to permanent

UNIVERSITY OF SANTO TOMAS 388

2023 GOLDEN NOTES
 III. LOCAL TAXATION
A: Not all LGUs may do so. Only provinces, cities, and or convents appurtenant thereto, mosques,
municipalities within the Metro Manila area (Sec. non-profit or religious cemeteries, and all lands,
232, LGC) may impose an ad valorem tax not buildings, and improvements actually, directly
exceeding five percent (5%) of the assessed value and exclusively used for religious, charitable, or
(Sec. 236, LGC) of idle or vacant residential lots in a educational purposes.
subdivision, duly approved by proper authorities
regardless of area. (Sec. 237, LGC) NOTE: The tax exemption here rests on the
premise that the real property is actually,
Q: A city outside of Metro Manila plans to enact directly and exclusively used by said entities or
an ordinance that will impose a special levy on institutions for their stated purposes and not
idle lands located in residential subdivisions necessarily because they are owned by
within its territorial jurisdiction in addition to religious, charitable or educational
the basic real property tax. If the lot owners of a institutions.
subdivision located in the said city seeks your
legal advice on the matter, what would your 3. All machineries and equipment that are
advice be? Discuss. (2005 BAR) actually, directly and exclusively used by local
Water utilities and GOCCs engaged in the supply
A: I would advise the lot owners that a city, even if it and distribution of water and/or generation
is outside Metro Manila, may levy an annual tax on and transmission of electric power.
idle lands at the rate not exceeding five percent
(5%) of the assessed value of the property which 4. All real property owned by duly registered
shall be in addition to the basic real property tax. Cooperatives as provided for under R.A. No.
(Sec. 236, LGC) I would likewise advise them that the 6938.
levy may apply to residential lots, regardless of land
area, in subdivisions duly approved by proper 5. Machinery and equipment used for Pollution
authorities, the ownership of which has been control and environmental protection. (Sec.
transferred to individual owners who shall be liable 234, LGC)
for the additional tax. (Sec. 237, LGC)
NOTE: Pollution control and infrastructure
Finally, I would advise them to construct or place devices refers to infrastructure, machinery,
improvements on their idle lands by making equipment and/or improvements used for
valuable additions to the property or ameliorations impounding, treating or neutralizing,
in the land's conditions so the lands would not be precipitating, filtering, conveying and cleansing
considered as idle. (Sec. 199(m), LGC) In this manner mine industrial waste and tailings as well as
their properties would not be subject to the ad eliminating or reducing hazardous effects of
valorem tax on idle lands. solid particles, chemicals, liquids, or other
harmful by-products and gases emitted from
b) EXEMPTION FROM REAL PROPERTY TAX any facility utilized in mining operations for
their disposal. (Sec. 3, R.A. No. 7942)
The following are exempted from Real Property
Tax: (R-C-W-C-P) Other Properties Exempt from Real Property
1. Real property owned by the Republic of the Tax
Philippines or any of its political subdivisions
except when the beneficial use thereof has been 1. Real property in any one city or municipality
granted for consideration or otherwise to a belonging to a single owner, the entire assessed
taxable person. (Testate Estate of C.T. Lim v. City valuation of which is not in excess of P1,000.00;
of Manila, G.R. No. 90639, 21 Feb. 1990)
2. Land acquired by grant, purchase, or lease from
2. Charitable institutions, churches, parsonages, the public domain for conversion into dairy

389
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL L AW
 TAXATION LAW
farms for a period of five (5) years from the time same is owned by City R? Explain. (2019 BAR)
of such conversion;
A: YES. Under Sec. 234 of the Local Government
3. Machinery of a pioneer and preferred industry Code, real property owned by the Republic of the
as certified by the Board of Investments used or Philippines or any of its political subdivision is
operated for industry, agriculture, exempt from payment of real property tax except
manufacturing, or mining purposes, during the when the beneficial use thereof has been granted,
first three (3) years of the operation of the for consideration or otherwise, to a taxable person
machinery; or entity.

4. Perennial trees and plants of economic value Q: Are the transformers, electric posts,
except where the land upon which they grow is transmission lines, insulators, and electric
planted principally to such growth; and meters of MERALCO exempt from real property
taxes?
5. Properties owned by non-stock or non-profit
educational institutions, the total assessed A: NO. The transformers, electric posts,
value of which does not exceed P3,000.00, transmission lines, insulators, and electric meters of
including those owned by Educational MERALCO are no longer exempted from real
Foundations organized under R.A. No. 6055. property tax based on its franchise and may qualify
as "machinery" subject to real property tax under
Withdrawal of Real Property Tax Exemption the LGC. MERALCO is a public utility engaged in
electric distribution, and its transformers, electric
Except as provided under Sec. 234 of the LGC, any posts, transmission lines, insulators, and electric
exemption from payment of real property tax meters constitute the physical facilities through
previously granted to, or presently enjoyed by all which MERALCO delivers electricity to its
persons, whether natural or juridical, including all consumers. Each may be considered as one or more
GOCCs, are hereby withdrawn upon the effectivity of of the following: a "machine," "equipment,"
the LGC. "contrivance," "instrument," "appliance,"
"apparatus," or "installation."
Claim of Real Property Tax Exemption
Under Sec. 199(o) of the LGC, machinery, to be
A taxpayer claiming exemption must submit deemed real property subject to real property tax,
sufficient documentary evidence to the local need no longer be annexed to the land or building as
assessor within thirty (30) days from the date of the these "may or may not be attached, permanently or
declaration of real property; otherwise, it shall be temporarily to the real property," and in fact, such
listed as taxable in the Assessment Roll. (Sec. 206, machinery may even be "mobile." The same
LGC) provision requires that for machinery subject to real
property tax, the physical facilities for production,
Q: City R owns a piece of land which it leased to installations, and appurtenant service facilities,
V Corp. In turn, V Corp. constructed a public those which are mobile, self-powered or self-
market thereon and leased the stalls to vendors propelled, or not permanently attached to the real
and small storeowners. The City Assessor then property (a) must be actually, directly, and
issued a Notice of Assessment against V Corp. for exclusively used to meet the needs of the particular
the payment of real property taxes (RPT) industry, business, or activity; and (2) by their very
accruing on the public market building, as well nature and purpose, are designed for, or necessary
as on the land where the said market stands. Is for manufacturing, mining, logging, commercial,
the City Assessor correct in including the land in industrial, or agricultural purposes.
its assessment of RPT against V Corp., even if the

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Q: Is PEZA a government instrumentality or a property taxes? Explain. (2010 BAR)
GOCC? Is it exempt from real property taxation?
A: NO. The property is exempt from real property
A: PEZA IS AN INSTRUMENTALITY OF THE tax by virtue of the beneficial use thereof by the
NATIONAL GOVERNMENT. Thus, it cannot be Tibetan monks for their religious rituals and
taxed by LGUs. Instrumentality is "any agency of the ceremonies. A property that is actually, directly and
National Government, not integrated within the exclusively used for religious purposes is exempt
department framework, vested with special from real property tax. The test of exemption from
functions or jurisdiction by law, endowed with some the tax is not ownership but the beneficial use of the
if not all corporate powers, administering special property.
funds, and enjoying operational autonomy, usually
through a charter." Examples of instrumentalities of Q: The Light Rail Transit Authority (LRTA)
the national government are the MIAA, Philippine resolutely argues that the improvements such
Fisheries Development Authority, GSIS, and as, carriageways, passenger terminal stations
Philippine Reclamation Authority. These entities and similar structures are not of its properties
are not integrated within the department but of the government-owned national roads to
framework but are nevertheless vested with special which they are immovably attached. Thus, they
functions to carry out a declared policy of the are not taxable as improvements under the Real
national government. Property Tax Code. It contends that to impose a
tax on the carriageways and terminal stations
Moreover, PEZA is not integrated within the would be to impose taxes on public roads. Are
department framework but is an agency attached to the LRT improvements subject to real property
the DTI. PEZA is also vested with special functions tax?
or jurisdiction by law as it was created by Congress
to operate, administer, manage and develop special A: YES. While it is true that carriageways and
economic zones in the Philippines. terminal stations are anchored, at certain points, on
public roads, said improvements do not form part of
Although PEZA is a body corporate vested with the public roads since the former are constructed
some corporate powers, it is not a GOCC taxable for over the latter in such a way that the flow of
real property taxes. To be considered a GOCC, the vehicular traffic would not be impaired. These
entity must be organized as a stock or non-stock carriageways and terminals serve a function
corporation. While the PEZA was created under its different from the public roads. The carriageways
Charter as a body corporate endowed with some are part and parcel of the LRT system while the
corporate powers, it was not organized as a stock or terminal stations are not open to use by the general
non-stock corporation. Further, nothing its Charter public. The carriageways are accessible only to the
provides that the PEZA’s capital is divided into LRT trains, while the terminal stations have been
shares. Moreover, the PEZA has no members who built for the convenience of LRTA itself and its
shall share in its profits. Therefore, PEZA is not a customers who pay the required fare. Even granting
GOCC liable for real property tax. (PEZA v. Lapu-lapu that the national government owns the
City, G.R. Nos. 184203 & 187583, 26 Nov. 2014) carriageways and terminal stations, the property is
not exempt because their beneficial use has been
Q: Group of Tibetan monks approached A and granted to LRTA which is a taxable entity. (LRTA v.
offered to lease the building in order to use it as CBAA, G.R. No. 127316, 12 Oct. 2000)
a venue for their Buddhist rituals and
ceremonies. A accepted the rental of P1 million Q: Are the airport lands and buildings of Manila
for the whole year. The following year, the City International Airport Authority (MIAA) exempt
Assessor issued an assessment against A for from real estate tax under existing laws?
non-payment of real property taxes. Is the
assessor justified in assessing A’s deficiency real A: YES. First, MIAA is not a GOCC but an

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instrumentality of the National Government, thus, Marcos, G.R. No. 120082,
exempt from local taxation. MIAA is a government 11 Sept. 1996)
instrumentality vested with corporate powers to
perform efficiently its governmental functions.
MIAA is like any other government instrumentality; Q: MWSS claims that it is an instrumentality of
the only difference is that MIAA is vested with the Republic; thus, its real properties should be
corporate powers. Second, the real properties of exempt from real property tax. Is the contention
MIAA are owned by the Republic of the Philippines, of MWSS correct?
thus, exempt from real estate tax. Airport lands and
buildings are outside the commerce of man. Since A: YES. After the promulgation of Manila
the airport lands and buildings of MIAA are devoted International Airport Authority, then President
to public use, they are properties of public Gloria Macapagal-Arroyo issued E.O. No. 596, which
dominion. (MIAA v. CA, City of Paranaque, et al., G.R. recognized the Court’s categorization of
No. 155650, 20 July 2006) “government instrumentalities vested with
corporate powers.” Under Sec. 2 of E.O. No. 596,
Tax Treatment of MCIAA and MIAA MWSS is categorized with other government
Distinguished agencies that were found to be exempt from the
payment of real property taxes. Also, in 2011,
MCIAA MIAA Congress passed R.A. No. 10149 or the GOCC
Mactan Cebu Manila International Governance Act of 2011, which adopted the same
International Airport Airport Authority categorization and explicitly lists petitioner
Authority (MCIAA) is a (MIAA) is NOT a GOCC together with the other government agencies that
GOCC since, upon the but an instrumentality were previously held by the Court to be exempt
effectivity of the LGC, of the National from the payment of real property taxes. (MWSS v.
the last paragraph of Government. The Local Government of Quezon City, G.R. No. 194388, 07
Sec. 234 withdrew exception to the Nov. 2018)
exemption from exemption in Sec.
payment of real 234(a) does not apply Q: The Quezon City Local Government assessed
property tax granted to to MIAA because it is real property taxes on MWSS’s properties
natural or juridical not a taxable entity located in Quezon City. MWSS received several
persons including under the LGC. The Final Notices of Real Property Tax Delinquency
GOCCs. Thus, the exception applies only from the Local Government of Quezon City,
exemption from tax if the beneficial use of covering various taxable years, in the total
granted to it in Sec. 14 of real property owned amount of P237,108,043.83 on MWSS’s real
R.A. No. 6958 has been by the Republic is properties. MWSS argues that it is exempt from
withdrawn. given to a taxable taxation as it is an instrumentality of the
entity. (Ibid.) government holding properties of the public
Further, the phrase dominion. The local government argues that
“and any GOCC so MWSS holds properties in the exercise of its
exempt by its charter” proprietary functions, thus, are susceptible to
was excluded in the real property tax and points out that tax
enumeration of exemption granted in Sec. 18 of R.A. No. 6234
exemption from real has been repealed by Sec. 234 of the LGC. May
property tax as the local government unit assess real property
provided by Sec. 40(a) taxes on MWSS, a government entity?
of P.D. 464, which was
reproduced in Sec. A: NO. The general rule is that any real property
234(a). (MCIAA v. owned by the Republic or its political subdivisions

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 III. LOCAL TAXATION
is exempt from the payment of RPT except when the NIRC. Lastly, it is an elementary rule in taxation that
beneficial use of the real property was granted to a exemptions are strictly construed against the
taxable person. E.O. No. 596 categorizes MWSS as a taxpayer and liberally in favor of the taxing
government instrumentality vested with corporate authority. (Radio Communications of the Philippines,
powers. R.A. No. 10149 or the GOCC Governance Act Inc. v. Provincial Assessor of South Cotabato, A.C. No.
of 2011 adopted the same categorization and 5637, 13 Apr. 2005)
explicitly lists MWSS as exempt from the payment of
RPT. Thus, the real properties of the MWSS are Q: NAPOCOR entered into a build-operate-
exempt from real property taxes, except if the transfer (BOT) agreement with First Private
beneficial use of its properties has been extended to Power Corporation (FPPC) for the construction
a taxable person. (Metropolitan Waterworks and of a power plant in Bauang, La Union and the
Sewerage System v. Local Government of Quezon creation of Bauang Private Power Corporation
City, G.R. No. 194388, 07 Nov. 2018) (BPPC), a corporation that will own, manage and
operate the power plant. When BPPC was
Q: In 1957, R.A. No. 2036 granted RCPI a 50-year assessed for real property taxes on the
franchise and Sec. 14 thereof mandates it to pay machineries and equipment, NAPOCOR sought
the taxes required by law on real estate, the exemption of the machineries and
buildings and other personal property except equipment from RPT on the ground of its
radio equipment, machinery and spare parts exemption from taxes and the provision under
needed in connection with its business. In the BOT Agreement whereby Napocor assumes
consideration of the franchise, a tax equal to 1 responsibility for all real estate taxes. Is
½% of all gross receipts from the business Napocor liable to pay tax?
transacted under this franchise by the grantee
shall be paid and such shall be in lieu of any tax A: NO. Under Sec. 234(c) of the LGC of 1991,
collected by any authority. The municipal machineries and equipment actually, directly and
treasurer of Tupi, South Cotabato subsequently exclusively used by a government-owned or
assessed RCPI real property tax on its radio controlled corporation are exempt from real
station building, machinery shed, radio station property tax. BPPC, not being a GOCC, is not entitled
tower and its accessories and generating sheds. to the Sec. 234(c) exemption. NAPOCOR, not being
RCPI protested such assessment. Is RCPI liable the actual, direct and exclusive user of the
to pay real property tax on the said properties? machineries and equipment, cannot invoke the Sec.
234(c) exemption either. (National Power Corp. v.
A: YES. RCPI’s radio relay station tower, radio CBAA, G.R. No. 171470, 30 Jan. 2009)
station building, and machinery shed are real
properties that are subject to real property tax. The Q: Is GSIS exempt from real property taxes?
“in lieu of all taxes” clause in Sec. 14 of R.A. No. 2036,
as amended by R.A. No. 4054, cannot exempt RCPI A: YES. Pursuant to Sec. 33 of P.D. No. 1146, GSIS
from the real estate tax because Sec. 14 expressly enjoys tax exemption from real estate taxes, among
states that RCPI “shall pay the same taxes on real other tax burdens, until 01 January 1992 when the
estate buildings.” Subsequent legislations have LGC took effect and withdrew exemptions from
amended the “in lieu of all taxes” clause in franchises payment of real estate taxes privileges granted
of public utilities. The LGC of 1991 “withdrew all the under P.D. No. 1146. R.A. No. 8291 restored in 1997
tax exemptions existing at the time of its passage — the tax-exempt status of GSIS by reenacting under
including that of RCPI’s” with respect to local taxes Sec. 39 what was once Sec. 33 of P.D. No. 1146. If
like the real property tax. Also, R.A. No. 7716 any real estate tax is due, it is only for the interim
abolished the franchise tax on telecommunications period, or from 1992 to 1996, to be precise. (GSIS v.
companies effective 01 January 1996. To replace the City Treasurer of Manila, G.R. No. 186242, 23 Dec.
franchise tax, R.A. No. 7716 imposed a 10% VAT on 2009)
telecommunications companies under Sec. 102,

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Q: Is the National Grid Corporation of the The roads that Filipinas Palm constructed within
Philippines (NGCP) exempt from real property the leased area should not be assessed with real
taxes? property taxes. The roads constructed became
permanent improvements on the land owned by the
A: YES. Sec. 9 of R.A. No. 9511 states that NGCP’s NGPI-NGEI by right of accession under Arts. 440 and
payment of franchise tax is in lieu of payment of 445 of the Civil Code. Hence, whatever is
“income tax and any and all taxes, duties, fees and incorporated in the land, either naturally or
charges of any kind, nature or description levied, artificially, belongs to the NGPI-NGEI as the
established or collected by any authority landowner. Although the roads were primarily built
whatsoever, local or national, on its franchise, for Filipinas Palm’s benefit, the roads were also
rights, privileges, receipts, revenues and profits, and being used by the members of NGPI and the public.
on properties used in connection with its franchise.”
Thus, in contrast to Smart’s franchise as quoted However, the assessment pertaining to the
above, Sec. 9 of R.A. No. 9511 clearly stated that the machinery is proper. The definition of “machinery”
NGCP’s “in lieu of all taxes” clause includes taxes under Sec. 199 of the LGC includes machines which
imposed by the local government on properties may or may not be attached, permanently or
used in connection with NGCP’s franchise. However, temporarily, to the real property. (Provincial
NGCP’s tax exempt status on real property due to Assessor of Agusan del Sur vs. Filipinas Palm Oil
the “in lieu of all taxes” clause is qualified: NGCP Plantation, Inc., G.R. No. 183416, 05 Oct. 2016)
shall be liable to pay the same tax as other
corporations on real estate, buildings and personal Q: Upon acquisition via execution sale in August
property exclusive of their franchise. (National Grid 2004, thirteen (13) parcels of land located in Sta.
Corporation of the Philippines vs. Oliva, G.R. No. Ana, Calatagan, Batangas are registered since
213157, 10 Aug. 2016) 2006 in the name of G Corporation under
Transfer Certificate of Title (TCT) Nos. T-105907
Q: Filipinas Palm Oil Plantation, Inc. is a private to T-105919. From 02 March 2006 up to 12
organization engaged in palm oil plantation. It August 2009, the Subject Property had been in
leases the land from NGPI-NGEI Cooperative. actual possession of Mr. C and D in their capacity
The LBAA assessed Filipinas of real property as assignees in an involuntary insolvency
taxes on the land it leases, on the road it built proceeding against the Spouses Santos pending
primarily for the benefit of the plantation, and before the Muntinlupa City RTC Br. 204. It was
on the machineries that are not attached to the only on 13 August 2009 that G Corporation was
land. Is the assessment of LBAA proper? able to take full possession and control of the
subject property by virtue of the 31 July 2009
A: NO. Under Sec. 133(n) of the LGC, the taxing Order of the Makati City RTC Br. 56 granting the
power of LGUs shall not extend to the levy of taxes, issuance of a writ of execution, which, in turn,
fees, or charges on duly registered cooperatives was based on the final and executory Decision of
under the Cooperative Code. NGPI-NGEI, as the the Court of Appeals in CA - G.R. SP Nos. 93818
owner of the land being leased by respondent, falls and 93823.
within the purview of the law. Sec. 234 of the LGC
exempts all real property owned by cooperatives In a letter dated 09 October 2012, Provincial
without distinction. Nothing in the law suggests that Treasurer of Batangas sent to G Corporation a
the real property tax exemption only applies when Statement of Real Property Tax Liabilities to
the property is used by the cooperative itself. collect the amount of P8,093,256.89, which
Similarly, the instance that the real property is included the unpaid RPT on the subject property
leased to either an individual or corporation is not a for 2007, 2008, and January to August 2009
ground for withdrawal of tax exemption. (covered period). The demand was reiterated in
letters dated 23 October 2012 and 21 November

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 III. LOCAL TAXATION
2012. The assessment was paid under protest liabilities. Was NPC correct in contending that
on 20 November 2012. Less than a month after, the machinery and equipment were exempted
G Corporation filed a petition for prohibition from paying real property tax?
and mandamus against respondents. G
Corporation believes that the RPT assessment is A: NO. Real property tax liability rests on the owner
illegal and erroneous because the subject of the property or on the person with the beneficial
property was not in its possession during the use thereof such as taxes on government property
covered period. Is G Corporation liable for the leased to private persons or when tax assessment is
real property tax? made on the basis of the actual use of the property.
In either case, the unpaid realty tax attaches to the
A: YES. In real estate taxation, the unpaid tax property but is directly chargeable against the
attaches to the property. The personal liability for taxable person who has actual and beneficial use
the tax delinquency is generally on whoever is the and possession of the property regardless of
owner of the real property at the time the tax whether or not that person is the owner. NPC was
accrues. This is a necessary consequence that correct in arguing that a beneficial user may also be
proceeds from the fact of ownership. legally burdened with the obligation to pay for the
tax imposed on a property and as such, has legal
Nonetheless, where the tax liability is imposed on interest therein and the personality to protest an
the beneficial use of the real property, such as those assessment or claim exemption from tax liability.
owned but leased to private persons or entities by However, NPC is neither the owner nor the
the government, or when the assessment is made on possessor or beneficial user of the subject facilities.
the basis of the actual use thereof, the personal Therefore, it cannot be considered to have any legal
liability is on any person who has such beneficial or interest in the subject property to clothe it with the
actual use at the time of the accrual of the tax. personality to question the assessment and claim
Beneficial use means that the person or entity has for exemptions and privileges. (National Power
the use and possession of the property. Actual use Corporation v. Province of Pangasinan, G.R. No.
refers to the purpose for which the property is 210191, 04 Mar. 2019)
principally or predominantly utilized by the person
in possession thereof. Q: ABC Corp. acquired through foreclosure sales
two different properties located at PEZA,
G Corporation is an entity that is not tax exempt Rosario, Cavite. ABC Corp. became the owner of
under the law since it is the registered owner of the Property 1 in March 2014, and Property 2 in
real property. Therefore, it is personally liable for August 2014. Upon the lapse of the redemption
the RPT at the time it accrued. (Herarc Realty periods, ABC Corp. started and tried to
Corporation v. Provincial Treasurer of Batangas, G.R. consolidate its tax declarations over the two
No. 210736, 05 Sept. 2018) properties, but ABC Corp. could not obtain the
necessary tax clearance from Provincial
Q: NPC entered into an Energy Conversion Government of Cavite and the Provincial
Agreement with CEPA Pangasinan Electric Treasurer of Cavite in order to transfer the TDs
Limited for the construction, operation, and over the Maxon and Ultimate properties under
maintenance of the Sual Coal-Fired Thermal its name because of unpaid real property taxes.
Power Plan. CEPA agreed to supply a coal-fired From the records of the Provincial Treasurer of
thermal power station to NPC, while NPC Cavite, the two properties have unpaid real
assumed all real property taxes. NPC thereafter property taxes in the following amounts: (1)
religiously paid real property taxes for the land, Property 1 - P15,888,089.09 (for the years 2000-
buildings, machinery, and equipment for the 2013); and (2) Property 2 - P6,238,407.76 (for
power plant. However, NPC later stopped paying the years 1997-2013).
taxes pursuant to R.A. No. 7160 that grants
certain exemptions from real property tax The Provincial Treasurer of Cavite issued a tax

395
UNIVERSITY OF SANTO TOMAS
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 TAXATION LAW
assessment and a warrant of levy after having and Ultimate properties which are now owned
declared the properties as delinquent. It also set by ABC Corp. To do so would effectively make
the same for public auction on 10 December ABC Corp. liable for the payment of real
2014, in order to satisfy the unpaid real property taxes due on the Maxon property for
property taxes assessed against them. However, the years 2000-2013 and on the Ultimate
the scheduled auction did not push through as properties for the years 1997-2013 when it did
the RTC issued a timely preliminary writ of not yet own or had actual or beneficial use of
injunction enjoining the prospective sale. the properties. As the Court has discussed
above, such is not only contrary to law, but is
1. Is the RTC correct in issuing a preliminary also unjust. (Provincial Government of Cavite v.
writ of injunction enjoining the prospective CQM Management, Inc., G.R. No. 248033, 15 July
sale? 2020)

2. ABC Corp.‘s Registration and Lease 2. YES. ABC Corp. is exempt from paying real
Agreements with the PEZA indicate that property taxes over the Maxon and Ultimate
respondent was registered as an Ecozone properties from the time it had acquired
Facilities Enterprise. Is ABC Corp. exempt ownership and/or actual or beneficial use of
from payment of real property taxes? the properties pursuant to Sec. 24 of R.A. No.
7916, as amended by R.A. No. 8748. There is
A: nothing in Sec. 24 which requires prior
1. YES. In National Power Corp. v. Province of concurrence from the LGU before ABC Corp.
Quezon et al., the Court explained that the can avail itself of the exemption provided
unpaid tax attaches to the property and is under the law. In fact, under Sec. 35 of R.A. No.
chargeable against the taxable person who had 7916, the only requirement for business
actual or beneficial use and possession of it enterprises within a designated ECOZONE to
regardless of whether he is the owner. In this avail themselves of all incentives and benefits
case, ABC Corp. was not yet the owner or entity provided for under R.A. No. 7916 is to register
with the actual or beneficial use of the with the PEZA. This requirement was satisfied
properties during the years for which by ABC Corp. ABC Corp.’s Registration and
Provincial Government and Provincial Lease Agreements with the PEZA indicate that
Treasurer of Cavite (Provincial Government of respondent was registered as an Ecozone
Cavite) sought to collect real property taxes. Facilities Enterprise.
Specifically, Provincial Government of Cavite
sought to collect from ABC Corp. real property Significantly, in response to queries made by
taxes due on the Maxon property for the years registered economic zone enterprises as to
2000-2013 and on the Ultimate property for whether they are exempted from securing LGU
the years 1997-2013. Permits and from payment of local taxes, fees,
licenses, etc., the PEZA issued Memorandum
However, ABC Corp. became the owner of the Circular (M.C.) No. 2004-024 which provides in
Maxon property and the Ultimate property part that “PEZA-registered economic zone
only in March 2014, and August 2014, enterprises availing of the 5% [gross income
respectively. To impose the real property taxes tax] incentive are exempted from payment of
on ABC Corp., which was neither the owner nor all national and local taxes, except real
the beneficial user of the property during the property tax on land owned by developers.” In
designated periods would not only be contrary this case, there is nothing to indicate that
to law but is also unjust. Given the foregoing, respondent is a developer. Thus, considering
Provincial Government of Cavite cannot R.A. No. 7916, as amended, its IRR, and M.C. No.
conduct a tax delinquency sale of the Maxon 2004-024, it is evident that, save for the

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 III. LOCAL TAXATION
payment of 5% gross income tax, ABC Corp. is b) ASSESSMENT BASED ON ACTUAL USE
exempt from the payment of national and local
taxes including real property tax on the two Real property shall be classified, valued and
properties. (Ibid.) assessed on the basis of its actual use regardless of
where located, whoever owns it, and whoever uses
4. APPRAISAL AND ASSESSMENT it. (Sec. 217, LGC)

Concept Meaning of “Actual Use”

All real property shall be appraised at the current It refers to the purpose for which the property is
and fair market value prevailing at the locality principally or predominantly utilized by the person
where the property is situated. (Sec. 201, LGC) This in possession thereof. (Sec. 199(b), LGC)
implies that an LGU may only collect real estate
taxes on properties falling within its territorial NOTE: The contractual assumption to pay real
jurisdiction. property tax, by itself, is not sufficient to make one
legally compellable by the government to pay the
NOTE: Fair market value (FMV) is the price at which taxes due; the person liable must also have use and
a property may be sold by a seller who is noy possession of the property. (Ingles, 2021)
compelled to sell and bought by a buyer who is not
compelled to buy. (Sec. 199(l), LGC) Unpaid real estate taxes attach to the property and
is generally chargeable against the owner of the
a) CLASSES OF REAL PROPERTY property at the time the tax accrues. (Herarc Realty
Corp. v. Provincial Treasurer of Batangas, G.R. No.
Real property shall be classified as: 210736, 05 Sept. 2018)
1. Residential;
2. Agricultural; Q: The real property of Mr. and Mrs. Angeles,
3. Commercial; situated in a commercial area in front of the
4. Industrial; public market, was declared in their Tax
5. Mineral; Declaration as residential because it had been
6. Timberland; or used by them as their family residence from the
7. Special: time of its construction in 1990. However, since
January 1997, when the spouses left for the
a. Lands, buildings, and other improvements United States to stay there permanently with
actually, directly, and exclusively used for their children, the property has been rented to a
hospitals, cultural, or scientific purposes, single proprietor engaged in the sale of
and appliances and agri-products. The Provincial
Assessor reclassified the property as
b. Those owned and used by local water commercial for tax purposes starting January
districts and GOCCs rendering essential 1998. Mr. and Mrs. Angeles appealed to the Local
public services in the supply and Board of Assessment Appeals, contending that
distribution of water and electricity. (Sec. the Tax Declaration previously classifying their
215 and 216, LGC) property as residential is binding. How should
the appeal be decided? (2002 BAR)
NOTE: A hospital which was previously classified as
“special” cannot be reclassified to “commercial” A: The appeal should be decided against Mr. and
simply because it charges rental for the use of its Mrs. Angeles. The law focuses on the actual use of
offices by its accredited physicians. (Ingles, 2021) the property for classification, valuation and
assessment purposes regardless of ownership. Real
property shall be classified, valued, and assessed on

397
UNIVERSITY OF SANTO TOMAS
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 TAXATION LAW
the basis of its actual use regardless of where including the discovery, listing, classification, and
located, whoever owns it, and whoever uses it". (Sec. appraisal of properties. (Sec. 199(f), LGC)
217, LGC)
Reassessment of Property
Q: The Philippine-British Association, Inc.
(Association) is a non-stock, non-profit It is the assigning of new assessed values to
organization which owns the St. Michael's property, particularly real estate, as the result of a
Hospital (Hospital) Sec. 216 in relation to Sec. general, partial, or individual reappraisal of the
215 of the LGC classifies all lands, buildings and property. (Sec. 199(q), LGC)
other improvements thereon actually, directly,
and exclusively used for hospitals as "special." A Effect of Assessment
special classification prescribes a lower
assessment than a commercial classification. An assessment fixes and determines the tax liability
of the taxpayer. It is a notice to the effect that the
Within the premises of the Hospital, the amount therein stated is due as tax and a demand
Association constructed the St. Michael's for payment thereof.
Medical Arts Center (Center) which will house
medical practitioners who will lease the spaces Classification, Appraisal, and Assessment of Real
therein for their clinics at prescribed rental Property by the Provincial, City, or Municipal
rates. The doctors who treat the patients Assessor or his Duly Authorized Deputy: (1st-G-
confined in the Hospital are accredited by the R)
Association.
Irrespective of any previous assessment or
The City Assessor classified the Center as taxpayers’ valuation thereon, a classification,
"commercial" instead of "special" on the ground appraisal, and assessment of real property shall be
that the Hospital owner gets income from the made when:
lease of its spaces to doctors who also entertain
out-patients. Is the City Assessor correct in 1. Real property is declared and listed for taxation
classifying the Center as "commercial?" Explain. purposes for the 1st time;
(2016 BAR)
2. There is an ongoing General revision of
A: NO. The City Assessor is not correct in classifying property classification and assessment; or
the Center as “commercial”. The fact alone that the
separate St. Michael’s Medical Arts Center will 3. A Request is made by the person in whose name
house medical practitioners who shall treat the the property is declared assessor shall make a
patients confined in the Hospital and are accredited classification, appraisal and assessment or
by the Association takes away the said Medical Arts taxpayer's valuation. (Sec. 220, LGC)
Center from being categorized as “commercial”
since a tertiary hospital is required by law to have a NOTE: Provided, however, that the assessment of
pool of physicians who comprise the required real property shall not be increased oftener than
medical departments in various medical fields. (City once every three (3) years except in case of new
Assessor of Cebu City v. Association of Benevola de improvements substantially increasing the value of
Cebu, Inc., G.R. No. 152904, 08 June 2007) said property or of any change in its actual use.

Assessment of Property Assessment Level

It is the act or process of determining the value of a It is the percentage applied to the fair market value
property, or proportion thereof subject to tax, to determine the taxable value of the property. (Sec.

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2023 GOLDEN NOTES
 III. LOCAL TAXATION
199(g), LGC) partly completed, but occupied by the owner, shall
be subject to RPT beginning from the year following
NOTE: The assessment levels to be applied to the that in which the same was completed or rendered
fair market value of real property to determine its habitable. Under Sec. 221, LGC, the date of
assessed value shall be fixed by ordinances of the effectivity of the assessment or reassessment made
Sangguniang Panlalawigan, Sangguniang after January 1 shall take effect on the January 1 of
Panlungsod or Sangguniang Bayan of a municipality the succeeding year.
within the Metropolitan Manila Area, at the rates
not exceeding those enumerated under Sec. 218 of The Manual on Real Property Appraisal and
the LGC. Assessment Operation under Local Assessment
Regulation No. 1-04 provides that the appraisal of
General Revisions of Assessments and Property the building shall be in accordance with the
Classifications approved Schedule of Base Unit Construction Cost
(SBUCC) for buildings and supported by a copy of
The provincial, city, or municipal assessor shall the approved building permit, building plan, and/or
undertake a general revision of real property Certificate of Completion or Certificate of
assessments within two (2) years after the Occupancy permit from local official concerned,
effectivity of this Code and every three (3) years among others.
thereafter. (Sec. 219, LGC)
In sum, the real property assessment of St. Thomas
Effectivity of Assessment or Reassessment Mall can only be made no earlier than the issuance
of the Certificate of Occupancy permit in 2016, and
All assessments or reassessments made after the 1st the resulting assessment thereon can only take
day of January of any year shall take effect on the 1st effect in 2017, which is the year following the date
day of January of the succeeding year. of assessment. (BLGF Opinion, 3 Nov. 2016)

NOTE: Provided, however, that the reassessment of Assessment of Real Property Subject to Back
real property due to its partial or total destruction, Taxes
or to a major change in its actual use, or to any great
and sudden inflation or deflation of real property Real property declared for the first time shall be
values, or to the gross illegality of the assessment assessed for taxes (back taxes) for the period during
when made or to any other abnormal cause, shall be which it would have been liable but in no case of
made within 90 days from the date of any such cause more than ten (10) years prior to the date of initial
or causes occurred, and shall take effect at the assessment: Provided, however, that such taxes
beginning of the quarter next following the shall be computed on the basis of the applicable
reassessment. (Sec. 221, LGC) schedule of values in force during the
corresponding period.
Q: St. Thomas Mall has requested that its real
property assessment be made effective on 2017, NOTE: If such taxes are paid on or before the end of
considering that the soft opening of the mall was the quarter following the date the notice of
on 12 September 2015 and the formal opening assessment was received by the owner, no interest
was in March 2016 only with a Certificate of for delinquency shall be imposed thereon;
Occupancy permit being issued by the Office of otherwise, taxes shall be subject to interest at the
the City Engineer. Is the RPT assessment rate of 2% per month or a fraction thereof from the
reckoned from the date the building was date of the receipt of the assessment until such taxes
completed or from the time it was issued a are fully paid. (Sec. 222, LGC)
certificate of occupancy?

A: A new building, whether wholly completed or

399
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL L AW
 TAXATION LAW
Notification of New or Revised Assessments year of use;
b. Remaining value shall be fixed at not less
Assessor shall give a written notice to the person than 20% of the cost; and
whose property is assessed in case of new or revised c. Machinery remains useful and in operation.
assessment.
5. COLLECTION
When real property is assessed for the first time or
when an existing assessment is increased or
a) DATE OF ACCRUAL
decreased, the provincial, city, or municipal
assessor shall within 30 days give written notice of
such new or revised assessment to the person in When Real Property Tax shall Acrue
whose name the property is declared. The notice For any year, the real property tax shall accrue on
may be delivered personally or by registered mail or the first day of January, and from that date, it shall
through the assistance of the Punong Barangay to constitute a lien on the property which shall be
the last known address of the person to be served. superior to any other lien, mortgage, or
(Sec. 223, LGC) encumbrance of any kind whatsoever, and shall be
extinguished only upon the payment of the
Classification of Machinery delinquent tax. (Sec. 246, LGC)

1. Realty by Destination – machinery essential to Q: XYZ Company is an Ecozone Export Enterprise

the business; and registered with the Philippine Economic Zone
Authority (PEZA) It started its operations in
NOTE: Movable equipment to be immobilized October 2014 and enjoys a four-year income tax
in contemplation of the law must first be holiday (ITH) which will expire on 30 September
“essential and principal elements” of an 2018, after which it shall become subject to the
industry or works without which such industry 5% gross income tax (GIT), in lieu of all national
or works would be “unable to function or carry and local taxes.
on the industrial purpose for which it was
established”. (Mindanao Bus Co. v. City Assessor, For fiscal year 2018, XYZ Company paid in
G.R. no. L-17870, 29 Sept. 1962) advance its RPT. However, it paid under protest
the RPT for the fourth quarter of FY 2018
2. Realty by Incorporation – machinery claiming that by that time, XYZ Company is
permanently attached. (Sec. 199(o), LGC) already under the GIT tax incentive.

Appraisal and Assessment of Machinery Is XYZ Company subject to RPT for the fourth
quarter of 2018?
1. For brand new machinery – FMV is the A: YES. The RPT for any year shall accrue on the first
acquisition cost day of January from the start of the commercial
operation (e.g., January of every year) and not on the
2. In all other cases: date of the start of its commercial operation (e.g.,
October 2014) While it may be true that the 5% GIT
𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸 𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒 𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙
𝐹𝐹𝐹𝐹𝐹𝐹 = × incentive shall be applied to XYZ Company at the
𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅 𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒 𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙
𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅 𝑜𝑜𝑜𝑜 𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅 𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶 time of expiration of its ITH, it cannot, however,
apply to RPT since its accrual begins on the first day
3. Depreciation allowance: of January on the year following its operation. Hence
for RPT purposes, the GIT incentive claimed by XYZ
a. Rate not exceeding 5% of original cost OR Company. will be applied in January 2019 and not
replacement or reproduction cost for each on the fourth quarter of FY 2018. Thus, XYZ

UNIVERSITY OF SANTO TOMAS 400

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 III. LOCAL TAXATION
Company. is subject to RPT for the whole year of Tax Code (RPTC) do not have any provision on
2018. (BLGF Opinion, 11 July 2017) prescription of the assessment and collection of
government taxes and other revenues.
Collecting Authority
However, the LTC does not prohibit the local
GR: It shall be the responsibility of the city or government from providing for prescription in its
municipal treasurer to collect the real property tax, tax ordinances, and under Sec. 25 of RPTC, real
with interest thereon and related expenses, as well properties declared for the first cannot be assessed
as the enforcement of the remedies provided for by for back taxes for more than 10 years.
the LGC or any applicable laws. (Sec. 247, LGC)
Period of Collection
XPN: The City or Municipal Treasurer may deputize
the Barangay Treasurer to collect all taxes on real GR: The basic real property tax and any other tax
property located in the barangay, provided that: levied under the Title of Real Property Taxation
shall be collected within five (5) years from the date
1. The barangay treasurer is properly bonded for they became due. No action for the collection of the
the purpose; and tax, whether administrative or judicial, shall be
2. The premium on the bond shall be paid by the instituted after the expiration of such period.
city or municipal government concerned. (Ibid.)
XPN: In case of fraud or intent to evade the payment
Duty of Assessor to Furnish Local Treasurer of tax, such action may be instituted for the
with Assessment Rolls collection of the same within ten (10) years from
discovery of the fraud or intent to evade payment.
The provincial, city, or municipal assessor shall (Sec. 270, LGC)
prepare and submit to the treasurer of the LGU, on
or before the 31st day of December each year, an Suspension of Period of Prescription
assessment roll containing a list of all persons
whose real properties have been newly assessed or The period of prescription within which to collect
reassessed and the values of such properties. (Sec. shall be suspended for the time during which: (P-R-
248, LGC) O)
1. The local treasurer is legally Prevented from
Notice of Collection of Taxes collecting the tax;

Treasurer shall post the notice of the dates when the 2. The owner of the property or the person having
tax may be paid without interest in a publicly legal interest therein Requests for
accessible place at the city or municipal hall. Notice reinvestigation and executes a waiver in writing
shall likewise be published in a newspaper of before the expiration of the period within which
general circulation in the locality once a week for to collect; and
two consecutive weeks on or before the 31st day of
January each year in the case of the basic real 3. The owner of the property or the person having
property tax and the additional tax for the Special legal interest therein is Out of the country or
Education Fund or any other date to be prescribed otherwise cannot be located. (Ibid.)
by the Sanggunian concerned in the case of any
other tax levied under this title. (Sec. 249, LGC) Tax Discount on Advance or Prompt Payment

b) PERIODS TO COLLECT If the basic real property tax and the additional tax
accruing to the Special Education Fund (SEF) are
Prescription paid in advance the Sanggunian may grant a
discount not exceeding 20% of the annual tax due.
Both the Local Tax Code (LTC) and the Real Property

401
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL L AW
 TAXATION LAW
(Sec. 251, LGC) b. Component barangays – 30% shall be
distributed among the component
NOTE: For prompt payment – discount not barangays of the cities where the property
exceeding 10% of annual tax due. (Art. 342, IRR of is located in the following manner:
the LGC)
i. 50% shall accrue to the barangay
Installment Payment of Real Property Taxes where the property is located; and

The owner or the person having legal interest may ii. 50% shall accrue equally to all
pay the basic real property tax and the additional component barangays of the city.
tax for Special Education Fund (SEF) due without
interest in four equal installments (on or before 3. In the case of a municipality within the
March 31, June 30, September 30, or December 31). Metropolitan Manila Area:
(Sec. 250, LGC)
a. Metropolitan Manila Authority – 35% shall
Interest on Unpaid Real Property Taxes accrue to the general fund of the authority;

The rate is (2%) per month on the unpaid amount b. Municipality – 35% shall accrue to the
until the delinquent tax shall have been fully paid. general fund of the municipality where the
Provided, in no case shall the total interest on the property is located; and
unpaid tax or portion thereof exceed 36 months.
(Sec. 255, LGC) c. Barangays – 30% shall be distributed
among the component barangays of the
Disposition of Proceeds of Real Property Tax municipality where the property is located
in the following manner:
Proceeds of real property tax, including interest
thereon plus proceeds from the use, lease or i. 50% shall accrue to the barangay
disposition, sale or redemption of property where the property is located; and
acquired at a public auction shall be distributed as
follows: ii.50% shall accrue equally to all
component barangays of the
1. In the case of provinces: municipality. (Sec. 271, LGC)
NOTE: The share of each barangay shall be released,
a. Province – 35% shall accrue to the general without need of any further action, directly to the
fund; barangay treasurer on a quarterly basis within five
(5) days after the end of each quarter and shall not
b. Municipality – 40% to the general fund of be subject to any lien or holdback for whatever
the municipality where the property is purpose.
located; and
Application of the Proceeds of Additional 1%
c. Barangay – 25% shall accrue to the SEF Tax
barangay where the property is located.
The proceeds from the additional 1% tax on real
2. In the case of cities: property accruing to the SEF shall be automatically
released to the local school boards, provided, in case
a. City – 70% shall accrue to the general fund of provinces, the proceeds shall be divided equally
of the city; and between the provincial and municipal school
boards.

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2023 GOLDEN NOTES
 III. LOCAL TAXATION
The proceeds shall be allocated for the: property tax as security for the payment of tax
obligation.
1. Operation and maintenance of public schools;
2. Construction and repair of school buildings, 2. It is constituted on the property subject to the
facilities and equipment; tax from the date the RPT accrued, i.e., January
3. Educational research; 1. (Sec. 246, LGC)
4. Purchase of books and periodicals; and
5. Sports development as determined and 3. It is superior to any lien, mortgage, or
approved by the Local School Board. encumbrance of any kind whatsoever (Sec. 246,
LGC) in favor of any person, irrespective of the
Proceeds of Tax on Idle Lands owner or possessor thereof. (Sec. 257, LGC)

It shall accrue to the: 4. It is enforceable by administrative or judicial

action. (Sec. 257, LGC)
1. Respective general fund of the province or city
where the land is located; and 5. It may be extinguished only upon payment of
the tax and related interests and expenses. (Sec.
2. In the case of a municipality within the 246 and 257, LGC)
Metropolitan Manila Area, the proceeds shall
accrue equally to the Metropolitan Manila Remedies of LGUs for the Collection of Real
Authority and the municipality where the land Property Tax
is located. (Sec. 273, LGC)
1. Administrative action
Proceeds of Special Levy
a. Exercise of lien on the property subject to
The proceeds of the special levy on lands benefited tax;
by public works, projects and other improvements
shall accrue to the general fund of the LGU which NOTE: Superior to all liens, charges or
financed such public works, projects or other encumbrances and is enforceable by
improvements. (Sec. 274, LGC) administrative or judicial action. It is
extinguished only upon payment of tax
c) REMEDIES OF LOCAL GOVERNMENT UNITS and other expenses (Sec. 257, LGC)

Issuance of Delinquency Notice on Real Property b. Levy on the real property subject of the
Tax Payment tax; and

When real property tax or other tax imposed c. Distraint of personal property.
becomes delinquent, the local treasurer shall
immediately cause a notice of the delinquency to be 2. Judicial action
posted at the main hall and in a publicly accessible
and conspicuous place in each barangay of the LGU Right of Redemption of Delinquent Property
concerned. Notice of delinquency shall also be Owner
published once a week for two (2) consecutive
weeks, in a newspaper of general circulation in the Within one (1) year from the date of sale, the owner
province, city, or municipality. of the delinquent real property or person having
legal interest therein, or his representative, shall
Exercise of Local Government Lien have the right to redeem the property upon
payment to the local treasurer of the:
1. A legal claim on the property subject on the real

403
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL L AW
 TAXATION LAW
1. Amount of the delinquent tax; Q: Quezon City published on 30 January 2006 a
list of delinquent real property taxpayers in 2
2. Interest due thereon; newspapers of general circulation and posted
this in the main lobby of the City Hall. The notice
3. Expenses of sale from the date of delinquency to requires all owners of real properties in the list
the date of sale; and to pay the real property tax due within 30 days
from the date of publication, otherwise the
4. Interest of not more than 2% per month on the properties listed shall be sold at public auction.
purchase price from the date of sale to the date
of redemption. (Sec. 261, LGC) Joachin is one of those named in the list. He
purchased a real property in 1996 but failed to
Effect of Redemption of the Delinquent Property register the document of sale with the register of
Deeds and secure a new real property tax
Such payment shall invalidate the certificate of sale declaration in his name. He alleged that the
issued to the purchaser and the owner of the auction sale of his property is void for lack of due
delinquent real property or person having legal process considering that the City Treasurer did
interest therein shall be entitled to a certificate of not send him personal notice. For his part, the
redemption which shall be issued by the local City Treasurer maintains that the publication
treasurer or his deputy. (Ibid.) and posting of notice are sufficient compliance
with the requirements of the law.
NOTE: From the date of sale until the expiration of
the period of redemption, the delinquent real a. If you were the judge, how will you resolve
property shall remain in possession of the owner or this issue?
person having legal interest therein who shall be b. Assuming Joachin is a registered owner, will
entitled to the income and other fruits thereof. your answer be the same? (2006 BAR)

Effect of Failure to Redeem A:

a. I will resolve the issue in favor of Joachin. In
In case the owner or person having legal interest
auction sales of property for tax delinquency,
fails to redeem the delinquent property, the
notice to delinquent landowners and to the
treasurer shall execute a deed conveying to the
public in general is an essential and
purchaser said property, free from lien of the
indispensable requirement of law, the non-
delinquent tax, interest due thereon and expenses of
fulfillment of which vitiates the same. (Tiongco
sale.
v. Phil. Veterans Bank, G.R. No. 82782, 05 Aug.
1992)
Right of Pre-emption
The failure to give notice to the right person i.e.,
At any time before the date fixed for the sale, the
the real owner, will render an auction sale void.
taxpayer may stay the proceedings by paying the
(Tan v. Bantegui, G.R. No. 154027, 24 Oct. 2005;
taxes, fees, charged, penalties, and interests.
City Treasurer of Quezon City v. CA, G.R. No.
120974, 22 Dec. 1997)
Effect of Distraint of Personal Property
b. YES. The law requires that a notice of the
When notice of delinquency has been accordingly
auction sale must be properly sent to Joachin
posted and published, the local treasurer shall
and not merely through publication. (Tan v.
proceed to sell the personal property of the
Bantegui, G.R. No, 154027, 24 Oct. 2005; Estate of
delinquent taxpayer in order to satisfy his unpaid
Mercedes Jacob v. CA, G.R. No. 120435, 22 Dec.
obligation. (Sec. 254, LGC)
1997)

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2023 GOLDEN NOTES
 III. LOCAL TAXATION

Instances when LGUs may Purchase Real

Property Advertised for Sale

1. There is no bidder; or
2. The highest bid is for an amount insufficient to
pay the real property tax, fees, charges,
surcharges, interests or penalties. (Sec. 263,
LGC)

Resale of Real Estate Taken for Taxes, Fees, Or

Charges

The Sanggunian concerned may, by ordinance duly

approved an 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 LGU concerned. (Sec. 264, LGC)

Further levy until Full Payment of Amount Due

Levy may be repeated if necessary, until the full

amount due, including all expenses, is collected.
(Sec. 265, LGC)

405
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL L AW
 TAXATION LAW
Procedure for Levy for Purposes of Satisfying Real Property Taxes

UNIVERSITY OF SANTO TOMAS 406

2023 GOLDEN NOTES
 III. LOCAL TAXATION
6. TAXPAYER’S REMEDIES prescriptive periods?

b. May Madam X refuse to pay the deficiency

1. Dispute assessment (Protest);
tax assessment during the pendency of her
appeal? (2014 BAR)
a. Any owner or person having legal interest
in the property who is not satisfied with the
A:
action of the assessor in the assessment of
his property; or a. The administrative remedies available to
Madam X to contest the assessment and their
b. Any owner of real property affected by a respective prescriptive periods are as follows:
special levy or any person having legal
interest therein may protest the 1. Pay the deficiency real property tax under
assessment by filing an appeal to the LBAA protest (Sec. 252, LGC);
within 60 days from receipt of notice of the
assessment. 2. File the protest with the local treasurer –
The protest in writing muse be filed within
2. Claim for refund or tax credit; 30 days from payment of the tax to the
provincial, city, or municipal treasurer, in
3. Redemption of real property; and (Sec. 261, the case of a municipality within
LGC) Metropolitan Manila Area, who shall decide
the protest within 60 days from receipt
4. Judicial (Sec. 252, LGC);

a. Court action: 3. Appeal to the LBAA – If protest is denied or

i. Appeal to the CTA En banc within upon the lapse of the 60-day period for the
fifteen (15) days from receipt in case of treasurer to decide, the taxpayer may
adverse decision by the CBAA; appeal to the LBAA within 60 days and the
case decided within 120 days; and (Sec. 226
ii. Appeal by certiorari with the SC within & 229, LGC)
fifteen (15) days from notice in case of
adverse decision by the CTA; 4. Appeal to the CBAA – If not satisfied with
the decision of the LBAA, appeal to the
b. Suit assailing the validity of the tax sale. CBAA within 30 days from receipt of a copy
(Sec. 267, LGC) of the decision. (Sec. 229(c), LGC)

NOTE: Deposit of amount for which the real b. NO. The payment of the deficiency tax is a
property was sold together with interest of condition before she can protest the deficiency
2% per month from date of sale to the time assessment. It is the decision on the protest or
of institution of action. inaction thereon that gives her the right to
appeal. This means that she cannot refuse to
Q: Madam X owns real property in Caloocan City. pay the deficiency tax assessment during the
On 1 July 2014, she received a notice of pendency of the appeal because it is the
assessment from the City Assessor, informing payment itself which gives rise to the remedy.
her of a deficiency tax on her property. She The law provides that no protest (which is the
wants to contest the assessment. beginning of the disputation process) shall be
entertained unless the taxpayer first pays the
a. What are the administrative remedies tax. (Sec. 252, LGC)
available to Madam X in order to contest the
assessment and their respective

407
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL L AW
 TAXATION LAW
a) CONTESTING AN ASSESSMENT claiming entitlement to the tax exemptions
provided under Sec. 234 of the Local
Any owner or person having legal interest in the Government Code (LGC) The real property taxes
property not satisfied with the action of the assessor assessed were not paid prior to the protest. The
in the assessment of his property may within 60 LBAA dismissed Napocor’s petition for
days from the date of receipt of the written notice of exemption for its failure to comply with Sec. 252
assessment appeal to the Board of Assessment of the LGC requiring payment of the assailed tax
Appeals of the provincial or city by filing a petition before any protest can be made. The Central
under oath in the form prescribed for the purpose, Board of Assessment Appeals (CBAA) ultimately
together with copies of the tax declarations and dismissed Napocor’s appeal for failure to meet
such affidavits or documents submitted in support the requirements for tax exemption; however,
of the appeal. (Sec. 226, LGC) the CBAA agreed with Napocor’s position that
the protest contemplated in Sec. 252(a) is
(1) PAYMENT UNDER PROTEST; EXCEPTIONS applicable only when the taxpayer is
questioning the reasonableness or
excessiveness of an assessment. The CBAA ruled
Necessity of Prior Payment before Protest
that the requirement of payment prior to
protest does not apply where the legality of the
The basis for requiring payment before protest can
assessment is put in issue on account of the
be entertained is that taxes are the lifeblood of the
taxpayer’s claim that it is exempt from tax. The
nation and as such collection cannot be restrained
CTA en banc agreed with the CBAA’s discussion.
by injunction or any like action. (Manila Electric
Company v. Barlis, G.R. No. 114231, 18 May 2001)
a. If the taxpayer claims that the property is
exempt from real property tax, is the
GR: The taxpayer must pay the real property tax
taxpayer required to pay the tax pursuant to
assessed prior to protesting a real property tax
Sec. 252?
assessment. (Sec. 252, LGC)

b. Is Napocor’s action before the LBAA

XPN: The payment of the tax prior to protest is not
prematurely filed?
necessary where the taxpayer questions the
authority and power of the assessor to impose the
A:
assessment and of the treasurer to collect the tax.
a. YES. By claiming exemption from realty
(Ty v. Trampe, G.R. No. 117577, 01 Dec. 1995)
taxation, NAPOCOR is simply raising a question
of the correctness of the assessment. As such,
NOTE: The protest contemplated under Sec. 252 is
the real property tax must be paid prior to the
required where there is a question as to the
making of a protest. On the other hand, if the
reasonableness or correctness of the amount
taxpayer is questioning the authority of the
assessed. Hence, if a taxpayer disputes the
local assessor to assess real property taxes, it is
reasonableness of an increase in a real property tax
not necessary to pay the real property tax prior
assessment, he is required to “first pay the tax”
to the protest. A claim for tax exemption,
under protest. Otherwise, the city or municipal
whether full or partial, does not question the
treasurer will not act on his protest. (Ibid.)
authority of local assessor to assess real
property tax.
Q: The Province of Quezon assessed Mirant
Pagbilao Corporation (Mirant) for unpaid real
b. YES. It was an ill-advised move for NAPOCOR to
property taxes. Napocor, which entered into a
directly file an appeal with the LBAA under Sec.
Build-Operate-Transfer (BOT) Agreement with
226 without first paying the tax as required
Mirant, protested the assessment before the
under Sec. 252. Secs. 252 and 226 provide
Local Board of Assessment Appeals (LBAA),

UNIVERSITY OF SANTO TOMAS 408

2023 GOLDEN NOTES
 III. LOCAL TAXATION
successive administrative remedies to a the taxpayer may appeal with the CBAA within
taxpayer who questions the correctness of an 30 from receipt of the adverse decision by the
assessment. Sec. 226, in declaring that “any LBAA.
owner or person having legal interest in the
property who is not satisfied with the action of NOTE: The protest contemplated in Sec. 252 of the
the provincial, city, or municipal assessor in the LGC is needed when there is a question as to the
assessment of his property may appeal to the reasonableness of the amount assessed, not where
Board of Assessment Appeals,” should be read the question raised is on the very authority and
in conjunction with Sec. 252(d), which states power of the assessor to impose the assessment and
that in the event that the protest is denied, the of the treasurer to collect the tax. (Ty v. Trampe, G.
taxpayer may avail of the remedies as provided R. No. 117577, 01 Dec. 1995)
for in Chapter 3, Title II, Book II of the LGC
(Chapter 3 refers to Assessment Appeals, which By posting the surety bond, a taxpayer may be
includes Secs. 226 to 231). The “action” referred considered to have substantially complied with Sec.
to in Sec. 226 (in relation to a protest of real 252 of the LGC for the said bond already guarantees
property tax assessment) thus refers to the the payment to the Office of the Local Treasurer of
local assessor’s act of denying the protest filed the total amount of real property taxes and
pursuant to Sec. 252. Without the action of the penalties due. (Camp John Hay Development
local assessor, the appellate authority of the Corporation v. CBAA, G.R. No. 169234, 02 Oct. 2013)
LBAA cannot be invoked. NAPOCOR’s action
before the LBAA was thus prematurely filed Q: ABC, Inc. owns a 950-square meter
(NAPOCOR v. Province of Quezon, G.R. No. commercial lot in Quezon City. It received a
171586, 25 Jan. 2010) notice of assessment from the City Assessor,
subjecting the property to real property taxes
Rules in Paying Tax under Protest (RPT) Believing the assessment was erroneous,
ABC, Inc. filed a protest with the City Treasurer.
1. No protest shall be entertained unless the However, for failure to pay the RPT, the City
taxpayer first pays the tax. There shall be Treasurer dismissed the protest.
annotated on the tax receipts the words “paid
under protest” The protest in writing must be a. Was the City Treasurer correct in dismissing
filed within 30 days from payment of the tax to ABC, Inc.’s protest?
treasurer who shall decide the protest within
60 days from receipt. b. Assuming that ABC, Inc. decides to appeal
the dismissal, where should the appeal be
2. The tax or a portion paid under protest shall be filed? (2019 BAR)
held in trust by the treasurer concerned.
A:
3. In the event that the protest is finally decided in a. YES. The City Treasurer was correct in
favor of the taxpayer, the amount or portion of dismissing ABC Inc.’s protest. No protest shall
the tax protested shall be refunded to the be entertained unless the taxpayer first pays
protestant or applied as tax credit against his the tax, in which the words “paid under protest”
existing or future tax liability. shall be annotated on the tax receipts. Here,
ABC, Inc. failed to first pay the real property tax
4. In the event that the protest is denied or upon assessed by the Quezon City when it filed a
the lapse of the 60-day period, the taxpayer may protest before the City Treasurer. (Sec. 252,
avail appeal the assessment before the Local LGC)
Board of Assessment Appeals. (Sec. 252, LGC)
b. Assuming that ABC, Inc. decides to appeal the
5. In case there is adverse decision by the LBAA, dismissal, the appeal should be filed with the

409
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL L AW
 TAXATION LAW
Local Board of Assessment Appeals (LBAA). If Procedure for Tax Refund Based on
the local treasurer denies the protest or fails to Unreasonable Collection and Solutio Indebiti
act upon it within the 60-day period, the Distinguished
taxpayer/real property owner may then appeal
or directly file a verified petition with the LBAA UNREASONABLE SOLUTIO
within 60 days from denial of the protest or COLLECTION OF RPT INDEBITI
receipt of the notice of assessment. (Secs. 226 & Payment under protest
252, LGC) at the time of payment
or within 30 days Payment under protest
Remedy of Taxpayer in Case of Excessive thereafter is is not required.
Collections mandatory.

The taxpayer may file a written claim for refund or Treasurer has 60 days
Treasurer has 60 days
credit for taxes and interests with the local from claim for refund to
from receipt of the
treasurer, in case an assessment of RPT or any other decide on the claim.
protest to decide.
tax under Real Property Taxation (Title II, LGC) is
found to be illegal or erroneous (Sec. 253, LGC) Taxpayer may appeal
the decision or inaction
Period for Claim for Refund of the treasurer to the Treasurer’s denial
LBAA within 30 days would bring the case
The claim must be filed with the local treasurer from receipt of the within the original
within two (2) years from the date the taxpayer is decision or after the jurisdiction of the RTC.
entitled to such reduction or adjustment (Ibid.) expiration of 60 days.

Procedure for Claim for Refund or Credit The decision of the RTC
The LBAA has 120 days is appealable to the CTA
Taxpayer files a written claim for refund or from receipt of the Division by way of
credit with the treasurer within 2 years from the appeal to decide. Petition for Review.
date the taxpayer is entitled to such reduction or
Taxpayer may appeal
the decision of LBAA to The decision of CTA in
Provincial or City Treasurer should decide the CBAA within 30 days division may be the
claim within 60 days from receipt of the claim. from receipt of the subject of a review by
decision. CTA En banc.

The decision of CTA En

In case of denial, appeal to the LBAA within 30
days as in protest case. banc may be appealed
The adverse decision of
to the SC by way of
CBAA may be appealed
Petition for Review on
to the CTA Division
Certiorari within 15
Appeal to CBAA within 30 days if LBAA gives an within 30 days from
days from the receipt of
adverse decision. receipt of decision.
decision.

The decision of CTA

division may be
subjected to a Motion
for Reconsideration or
New Trial before the

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2023 GOLDEN NOTES
 III. LOCAL TAXATION
CTA En banc, and and
thereafter, an appeal to 3. The provincial or city engineer as a member
SC by means of Petition (Sec. 227, LGC)
for Review on
Certiorari. NOTE: The composition of the board shall serve as
such in an Ex officio capacity without additional
compensation. (Ibid.)
Q: In view of the street widening and cementing
of roads and improvement of drainage and Jurisdiction of the LBAA
sewers in the district of Ermita, the City Council
of the City of Manila passed an ordinance LBAA has Jurisdiction to hear appeals of owners or
imposing and collecting a special levy on lands persons having legal interest in the property who
in the district. Jose filed a protest against the are not satisfied with the action of the assessor on
special levy fifteen (15) days after the last an assessment of his property.
publication of the ordinance alleging that the
maximum rate 60% of actual cost of the project NOTE: In the exercise of its appellate jurisdiction,
allowed under Sec. 240 of the LGC was exceeded. the LBAA shall have the power to:

Assuming that Jose Reyes is able to prove that 1. summon witnesses;

the rate of special levy is more than the 2. administer oaths;
aforesaid percentage limitation, will his protest 3. conduct ocular inspection;
prosper? (1991 BAR) 4. take depositions; and
5. issue subpoena and subpoena Duces tecum.
A: NO. His basis for the protest was the
unreasonably excessive payment. Payment under The proceedings of the Board shall be conducted
protest is thus an administrative precondition for solely for the purpose of ascertaining the facts
the suit. without necessarily adhering to technical rules
applicable in judicial proceedings. (Sec. 229(b), LGC)
Remedy Available for Taxpayer whose Real
Property was Erroneously Assessed Period for Decision of Appeal

When an assessment of basic real property tax, or The LBAA shall decide the appeal within 120 days
any other tax levied under this Title, is found to be from the date of receipt of such appeal. The Board,
illegal or erroneous and the tax is accordingly after hearing, shall render its decision based on
reduced or adjusted, the taxpayer may file a written substantial evidence or such relevant evidence on
claim for refund or credit for taxes and interests record as a reasonable mind might accept as
with the provincial or city treasurer within two (2) adequate to support the conclusion. (Sec 229(a),
years from the date the taxpayer is entitled to such LGC)
reduction or adjustment. (Sec. 253, LGC)
(2) APPEAL TO THE CENTRAL BOARD OF
b) CONTESTING A VALUATION OF PROPERTY ASSESSMENT APPEALS

(1) APPEAL TO THE LOCAL BOARD OF Composition of the CBAA

ASSESSMENT APPEALS
1. A chairman; and
Composition of the LBAA 2. Two (2) members. (Sec. 230, LGC)

1. The Registrar of Deeds, as chairman; NOTE: The composition of the LBAA shall be
2. The provincial or city prosecutor as member; appointed by the President. They will serve for a

411
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL L AW
 TAXATION LAW
term of seven (7) years, without reappointment. Q: A Co., a Philippine corporation, is the owner
(Ibid.) of machinery, equipment and fixtures located at
its plant in Muntinlupa City. The City Assessor
Jurisdiction of the CBAA characterized all these properties as real
properties subject to the real property tax. A Co.
The Board shall have appellate jurisdiction over all appealed the matter to the Muntinlupa Board of
assessment cases decided by the LBAA. (Sec. 230, Assessment Appeals. The Board ruled in favor of
LGC) the City. A Co. brought a petition for review
before the CTA to appeal the decision of the City
NOTE: The CBAA can be appointed by the SC to act Board of Assessment Appeals. Is the Petition for
as a court-appointed fact-finding commission to Review proper? Explain. (1999 BAR)
assist the Court in resolving the factual issues raised
in the cases before it. In that regard, the CBAA is not A: NO. The CTA’s devoid of jurisdiction to entertain
acting in its appellate jurisdiction. (Mathay v. appeals from the decision of the City Board of
Undersecretary of Finance, G.R. Nos. 97618, 97760 & Assessment Appeals. Said decision is instead
102319, 16 Dec. 1993) appealable to the Central Board of Assessment
Appeals, which under the LGC, has appellate
The owner of the property or the person having jurisdiction over decisions of LBAA. (Caltex Phils. v.
legal interest therein or the assessor who is not CBAA, G.R. No. L50466, 31 May 1982)
satisfied with the decision of the Board may, within
30 days after receipt of the decision of said Board, CTA En Banc Exclusive Appellate Jurisdiction
appeal to the Central Board of Assessment Appeals, over Cases Filed with CBAA
as herein provided. The decision of the Central
Board shall be final and executory. (Sec. 229(c), LGC) 1. In the exercise of its appellate jurisdiction;
2. Over cases involving the assessment and
CBAA Not Authorized to Hear Purely Legal taxation of real property; and
Issues 3. Originally decided by the provincial or CBAA.

Such authority is lodged with the regular courts. Period for CBAA to Decide a Case
Thus, the issue of whether R.A. 7160 repealed P.D.
921, is an issue which does not find referral to the The Central Board shall decide cases brought on
CBAA before resort is made to the courts. (Ty, v. appeal within twelve (12) months from the date of
Trampe, G.R. No. 117577, 01 Dec. 1995) receipt thereof, which decision shall become final
and executory after the lapse if fifteen (15) days
Appeal to LBAA or CBAA does Not Suspend from the date of receipt thereof by the appellant.
Collection of Tax
Prior Resort to Administrative Remedies
An appeal on assessments of real property shall in
no case, suspend the collection of the corresponding In disputes involving real property taxation, the
realty taxes the property involved as assessed. This general rule is to require the taxpayer to first avail
is without prejudice to subsequent adjustment of administrative remedies and pay the tax under
depending upon the final outcome of the appeal. protest before allowing any resort to a judicial
(Sec. 231, LGC) action, except when the assessment itself is alleged
to be illegal or is made without legal authority.
NOTE: “No Injunction Rule” provides that no court
shall have the authority to enjoin or restrain the NOTE: For example, prior resort to administrative
collection of any tax, fee, or charge collected by the action is required when among the issues raised is
provincial, city or municipal treasurer. an allegedly erroneous assessment, like when the

UNIVERSITY OF SANTO TOMAS 412

2023 GOLDEN NOTES
 III. LOCAL TAXATION
reasonableness of the amount is challenged, while
direct court action is permitted when only the
legality, power, validity or authority of the
assessment itself is in question.

Stated differently, the general rule of a prerequisite

recourse to administrative remedies applies when
questions of fact are raised, but the exception of
direct court action is allowed when purely
questions of law are involved. (Capitol Wireless, Inc.
vs. Provincial Treasurer of Batangas, G.R. No. 180110,
30 May 2016)

(3) EFFECT OF PAYMENT OF TAXES

Effect of Payment
Appeal on assessments of real property shall, in no
case, suspend the collection of the corresponding
realty taxes on the property involved as assessed by
the provincial or city assessor, without prejudice to
subsequent adjustment depending upon the final
outcome of the appeal. (Sec. 231, LGC)

c) COMPROMISE OF REAL PROPERTY TAX

ASSESSMENT

Instances which the Sanggunian may Condone

or Reduce Real Property Tax

The Sanggunian, by ordinance passed prior to the 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 in cases of: (Cro-Pri-Cal)

1. General failure of Crops;

2. Substantial decrease in the Price of agricultural
or agri-based products;
3. Calamity in any province, city or municipality.
President’s Power to Condone or Reduce Real
Property Tax

The president 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.
(Sec. 277, LGC)

413
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL L AW
 TAXATION LAW
Taxpayer’s Remedies Involving Collection of Real Property Tax

UNIVERSITY OF SANTO TOMAS 414

2023 GOLDEN NOTES
 IV. JUDICIAL REMEDIES

IV. JUDICIAL REMEDIES 3. To render Decision on cases brought before it;

4. To require Production of papers or documents

by subpoena Duces tecum;

A. COURT OF TAX APPEALS (CTA) 5. To prescribe Rules and regulations for the
conduct of its business;

6. To issue Order authorizing distraint of personal

Court of Tax Appeals
property and levy of real property;

CTA is a highly specialized body specifically created 7. To punish for Contempt for the same causes
for the purpose of reviewing tax cases. The CTA is, under the same procedure and with the same
by the very nature of its function, dedicated penalties provided for in the rules of court;
exclusively to the study and consideration of tax
problems. (CIR v. CA, G.R. No. 115349, 18 Apr. 1997) 8. To receive Evidence;

9. To Summon witnesses by subpoena; and

Nature of the CTA
10. To Suspend collection of tax pending appeal.
1. It is a highly specialized body created for the (RA. No. 1125, as amended)
purpose of reviewing tax cases. (CIR v. General
Foods, Inc., G.R. No. 143672, 24 Apr. 2003) NOTE: Power to issue writs of prohibition and
injunction is supplementary to its appellate
2. Proceedings therein are judicial in nature, jurisdiction. (CIR v. Yuseco, G.R. No. L-12518, 28 Oct.
although the CTA is not bound by technical 1961)
rules of evidence. (Perez v. CTA, G.R. No. L-
10507, 30 May 1958) CTA Proceedings

3. It is a court of special or limited jurisdiction and The CTA may sit En banc or in three (3) Divisions,
as such, it can only take cognizance of such each Division consisting of three (3) Justices. The
matters as are clearly within its jurisdiction. presiding justice shall be the chairperson of the first
(Ker & Company, Ltd. vs. CTA, G.R. No. L-12396, division and the two (2) most senior associate
justices shall serve as chairpersons of the second
31 Jan. 1962)
and third divisions, respectively. (Sec. 2, RA. No.
1125, as amended)
Composition of the CTA
CTA Quorum
1. A Presiding Justice, and
2. Eight Associate Justices:
1. For Sessions En Banc – Five Justices shall
a. Each of whom shall be appointed by the constitute a quorum. The presence at the
President; and deliberation and the affirmative vote of 5
b. upon the nomination by the Judicial and members of the Court en banc shall be
Bar Council for each vacancy. (Sec. 2, RA. No. necessary to reverse the decision of a Division
1125, as amended) but only a simple majority of the justices
present shall be necessary to promulgate a
resolution or decision in all other cases.
Powers of the CTA: (A-D-D-P-R-O-C-E-S-S)
2. For Sessions of a Division – Two Justices shall
1. To Administer oath;
constitute a quorum and a concurrence of 2
members of Division shall be necessary for the
2. To assess Damages against the appellant if the rendition of decision or resolution in Division
appeal to CTA is found to be frivolous and level (Sec. 2, RA 1125, as amended)
dilatory;

415
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL L AW
 TAXATION LAW
Q: What if the required quorum in a division jurisdiction to review by appeal the following: (A-R-
cannot be constituted? Mo-R)

A: When the required quorum cannot be constituted 1. Decisions or resolutions on motions for
due to any vacancy, disqualification, inhibition, reconsideration or new trial of the Court in
disability, or any other lawful cause, the presiding Divisions in the exercise of its exclusive
justice shall designate any justice of other divisions
Appellate jurisdiction over: (A-L-T)
of the CTA to sit temporarily therein. (Ibid.)
a. Cases arising from Administrative agencies
Jurisdiction of the CTA
– BIR, BOC, DoF, DTI, and DA;
The CTA has jurisdiction over both civil and criminal
b. Local tax cases decided by the RTC in the
aspects of a tax case. The concentration of tax cases
exercise of their original jurisdiction; and
in one court will enhance the disposition of these
cases since it will take them out of the jurisdiction of
c. Tax collection cases decided by the RTC in
regular courts which, admittedly, do not have
the exercise of their original jurisdiction
expertise in the field of taxation. (Dimaampao, 2015)
involving final and executory assessments
for taxes, fees, charges and penalties, where
Salient Features of R.A. No. 9282
the principal amount of taxes and penalties
claimed is less than P1 million pesos;
The decisions of the CTA are no longer appealable to
the CA. The decision of a division of the CTA may be
2. Decisions, resolutions or orders of the RTC in
appealed to the CTA En banc, which in turn may be
cases decided or resolved by them in the
appealed directly to the SC only on questions of law.
exercise of their appellate jurisdiction over:
Q: Does the CTA have jurisdiction over a special
a. Local tax cases, and
civil action for certiorari assailing an
b. Tax collection cases;
interlocutory order issued by the RTC in a local
tax case?
3. Decisions, resolutions or orders on Motions for
reconsideration or new trial of the Court in
A: YES. Although there is no categorical statement
Division in the exercise of its exclusive original
under R.A. No. 1125 as well as the amendatory R.A.
jurisdiction over tax collection cases; and
No. 9282, which provides that the CTA has
jurisdiction over petitions for certiorari assailing
4. Decisions of the Central Board of Assessment
interlocutory orders issued by the RTC in local tax
Appeals (CBAA) in the exercise of its appellate
cases filed before it, the prevailing doctrine is that a
jurisdiction over cases involving the
court may issue a writ of certiorari in aid of its
assessment and taxation of Real property
appellate jurisdiction if said court has jurisdiction to
originally decided by the provincial or city
review, by appeal or writ of error, the final orders or
board of assessment appeals. (Sec. 2, Rule 4,
decisions of the lower court. (The City of Manila v.
RRCTA)
Hon. Grecia-Cuerdo, G.R. No. 175723, 04 Feb. 2014)

NOTE: Decisions, orders, and resolutions of the

1. EXCLUSIVE ORIGINAL AND APPELLATE RTC in local tax cases do not include real
JURISDICTION OVER CIVIL CASES property tax which is an Ad valorem tax. The
jurisdiction of the CTA En banc involves only
Cases within Jurisdiction of the CTA En Banc those real property tax cases originally decided
by the CBAA in the exercise of its appellate
The Court En banc shall exercise exclusive appellate jurisdiction under Sec. 7(a)(5) of R.A. No. 9282

UNIVERSITY OF SANTO TOMAS 416

2023 GOLDEN NOTES
 IV. JUDICIAL REMEDIES
and under R.A. 7160. (Habawel v. CTA, G.R. No. arguing that the City of Davao’s taxation of its
174759, 07 Sept. 2011) properties and their subsequent auction and
sale to satisfy the alleged tax liabilities were
Q: A Co., a Philippine corporation, is the owner without or in excess of its jurisdiction and
of machinery, equipment and fixtures located at contrary to law. It argued that it had no other
its plant in Muntinlupa City. The City Assessor speedy and adequate remedy except to file a
characterized all these properties as real petition for certiorari with the Court of Appeals.
properties subject to the real property tax. A Co. While the petition was pending with the Court of
appealed the matter to the Muntinlupa Board of Appeals, the Court of Tax Appeals promulgated
Assessment Appeals. The Board ruled in favor of a decision, granting the Philippine Ports
the City. In accordance with R.A. No. 1125, A Co. Authority’s appeal, ordering that its properties
brought a petition for review before the CTA to and buildings in the site are exempt from real
appeal the decision of the Board. Is the Petition estate tax imposed by Davao City, and voiding all
for Review proper? Explain. (1999 BAR) the real estate tax assessments issued by Davao
City on such properties. The Court of Appeals
A: NO. The CTA is devoid of jurisdiction to entertain dismissed the petition and held that the Court of
appeals from the decision of the Municipal Board of Tax Appeals had exclusive jurisdiction to
Assessment Appeals. The proper remedy is to determine the matter and said that the
appeal such decision to the CBAA, which under the Philippine Ports Authority “should have applied
LGC, has appellate jurisdiction over decisions of for the issuance of writ of injunction or
Local Board of Assessment Appeals. (Caltex Phil, prohibition before the Court of Tax Appeals.”
Foe. v. CBAA, L-50466, 31 May 1982) Does the Court of Appeals have jurisdiction to
issue the injunctive relief prayed for by PPA?
R.A. No. 9282 provides that CTA has jurisdiction
over decisions of the CBAA in the exercise of its A: NO. CA had no jurisdiction to issue the injunctive
appellate jurisdiction over cases involving the relief prayed for by PPA. Sec. 7, paragraph (a)(5) of
assessment and taxation of real property originally Republic Act No. 1125, as amended by Republic Act
decided by the provincial or city board of No. 9282, provides that the Court of Tax Appeals has
assessment appeals. exclusive appellate jurisdiction over: “(5) Decisions
of the Central Board of Assessment Appeals in the
Q: PPA received a letter from the City Assessor exercise of its appellate jurisdiction over cases
of Davao for the assessment of real property involving the assessment and taxation of real
taxes against administered properties. It property originally decided by the provincial or city
appealed the assessment to the Local Board of board of assessment appeals.” (Philippine Ports
Assessment Appeals. While the case was Authority v. City of Davao, G.R. 190324, 06 June 2018)
pending, the City of Davao posted a notice of sale
of delinquent real properties. The Local Board of Cases within Jurisdiction of the CTA in Divisions
Assessment Appeals dismissed the PPA appeal
for having been filed out of time, and for its lack 1. Exclusive Appellate Jurisdiction (Sec. 3(c), Rule
of jurisdiction on the latter’s tax exemption. The 4, RRCTA): (D-I-R-C-A-P)
PPA appealed before the Central Board of )
Assessment Appeals but was subsequently a. Decisions of the CIR in cases involving: (D-
denied. Thus, it filed an appeal with the Court of R-O)
Tax Appeals. The Philippine Ports Authority
claimed that it did not receive any warrant of i. Disputed assessments;
levy for its properties which were sold to
respondent City of Davao, or any notice that they Q: Which court has jurisdiction over
were going to be auctioned. Thus, the PPA filed a undisputed assessments?
petition for certiorari with the Court of Appeals,

417
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL L AW
 TAXATION LAW
A: Being an action for the collection of sum taxes had already prescribed is a subject
of money, the CTA has exclusive original matter falling under the NIRC. In
jurisdiction over undisputed assessments connection therewith, the NIRC also states
when the amount involved is P1 million or that the collection of taxes is one of the
more; and appellate jurisdiction over duties of the BIR. Thus, from the foregoing,
appeals from the judgments, resolutions, or the issue of prescription of the BIR’s right
orders of the RTC in tax collection cases to collect taxes may be considered as
originally decided by them within their covered by the term “other matters” over
jurisdiction. (Sec. 3(c), Rule 4, RRCTA) which the CTA has appellate jurisdiction.

However, where the amount is less than P1 Q: BDO questions a BIR ruling subjecting
million, it is the RTC or the MTC that has interest income from zero-coupon
jurisdiction, as the case may be, depending bonds issued by the government to the
on the jurisdictional amount. 20% final withholding tax as they are
deemed to be deposit substitutes. BDO
NOTE: Undisputed assessments are filed it to the CTA, not with the Secretary
already final and collectible. The taxpayer of Finance. CIR contends that it violates
failed to seasonably protest the assessment the principle of exhaustion of
within a period of 30 days from receipt of administrative remedies. Is BDO
the notice of assessment. correct?

ii. Refunds of internal revenue taxes, fees A: YES. The jurisdiction to review the
or other charges and penalties rulings of the CIR pertains to the CTA. The
imposed thereto; questioned BIR Rulings were issued in
connection with the implementation of the
iii. Other matters arising under NIRC or NIRC. Under Sec. 7 of R.A. No. 1125 as
other laws administered by the BIR. amended by R.A. No. 9282, the CTA shall
exercise exclusive appellate jurisdiction to
Q: What does “Other Matters” under the review by appeal on the Decisions of the
NIRC or the TCCP mean? CIR in cases involving disputed
assessments, refunds of internal revenue
A: The term “other matters” includes cases taxes, fees or other charges, penalties in
which can be considered within the scope relation thereto or other matters arising
of the function of the BIR and BOC by under the NIRC or other laws administered
applying the Ejusdem generis rule (i.e., such by the BIR. Sec. 11 is likewise worded as
cases should be of the same nature as those follows: Any party adversely affected by a
that have preceded them). decision, ruling or inaction of the CIR, the
Commissioner of Customs, the Secretary of
In CIR v. Hambrecht & Quist Philippines, Inc., Finance, the Secretary of Trade and
the term “other matters” is limited only by Industry or the Secretary of Agriculture or
the qualifying phrase that follows it. The the Central Board of Assessment Appeals or
appellate jurisdiction of the CTA is not the Regional Trial Courts may file an appeal
limited to cases which involve the decisions with the CTA within 30 days after the
of the CIR on matters relating to receipt of such decision or ruling. (Banco de
assessments or refunds. It covers other Oro v. Republic, G.R. No. 198756, 13 Jan.
cases that arise out of the NIRC or related 2015)
laws administered by the BIR. The issue of
whether or not the BIR’s right to collect b. Inaction by the CIR in cases involving: (D-

UNIVERSITY OF SANTO TOMAS 418

2023 GOLDEN NOTES
 IV. JUDICIAL REMEDIES
R-O-W) and conniving customs collectors.
(Yaokasin v. COC, G.R. No. 84111, 22 Dec.
i. Disputed assessments; 1989)

ii. Refunds of internal revenue taxes, fees f. Decisions of the Secretary of Trade and
or other charges and penalties Industry, in the case of non-agricultural
imposed thereto; Product, commodity or article, and the
Secretary of Agriculture in the case of
iii. Other matters arising under NIRC or
agricultural product, commodity or article,
other laws administered by the BIR,
involving dumping and countervailing
Where the NIRC provides a specific
duties under Secs. 301 and 302,
period for action.
respectively of the TCCP, and safeguard
measures under R.A. No. 8800, where
NOTE: The inaction by the CIR within
the 180-day period under Sec. 228 of either party may appeal the decision to
the NIRC, and the 90-day period for impose or not to impose said duties.
VAT refund cases, under the TRAIN
Law, shall be deemed a denial, which NOTE: The SC held that the lower courts
shall be appealable to the CTA, within can acquire jurisdiction over a claim for
30 days from the expiration of the 180 collection of deficiency taxes only after the
or 90 days, as the case may be.
assessment made by the CIR has become
final and appealable, not where there is still
c. Decisions, Orders or Resolutions of the RTC
a pending CTA case. (Yabes v. Flojo, G.R. No.
in the exercise of their original jurisdiction
L-46954, 20 July 1982)
over local tax cases and tax collection cases.

d. Decisions of the Commissioner of Customs Q: Does the CTA have the power to review
(COC) in cases involving: (D-S-F-O) tax cases motu proprio? (1977 BAR)

i. Liability for customs Duties, fees or A: NO. The CTA has no power motu proprio to
other money charges; review tax cases. It can resolve cases only if a
ii. Seizure, detention or release of civil action for collection of sum of money is
property affected; filed before it in the exercise of its exclusive
iii. Fines, forfeitures or other penalties in original jurisdiction, or a petition for review is
relation thereto; or filed in the exercise of its exclusive appellate
iv. Other matters arising under Customs jurisdiction. An information may be filed with
Law or other laws administered by the the CTA directly where the principal amount of
BOC. taxes and fees, exclusive of charges and
penalties, is P1 million or more.
e. Decisions of the Secretary of Finance on
customs cases elevated for Automatic Q: Does the CTA have jurisdiction to rule on
review from decisions of the COC which are validity of a Rule or Regulation issued by an
adverse to the Government under Sec. 2315 administrative agency?
of the TCCP (now Sec. 1128 of the CMTA).
A: NO. While the law confers on the CTA
NOTE: The purpose and rationale of the jurisdiction to resolve tax disputes in general,
automatic review in customs cases – the this does not include cases where the
provision for automatic review by the COC constitutionality of a law or rule is challenged.
and the Secretary of Finance of unappealed Where what is assailed is the validity or
seizure and protest cases was conceived to constitutionality of a law, or a rule or regulation
protect the government against corrupt issued by the administrative agency in the

419
UNIVERSITY OF SANTO TOMAS
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 TAXATION LAW
performance of its quasi-legislative function, revenue laws. Tax rulings, on the other hand,
the regular courts have jurisdiction to pass are official positions of the Bureau on inquiries
upon the same. (British American Tobacco v. of taxpayers who request clarification on
Camacho, G.R. No. 163583, 20 Aug. 2008) certain provisions of the National Internal
Revenue Code, other tax laws, or their
NOTE: However, in the case of Banco de Oro vs. implementing regulations. Hence, the
Republic of the Philippines, the Supreme Court determination of the validity of these issuances
ruled that the Court of Tax Appeals has clearly falls within the exclusive appellate
undoubted jurisdiction to pass upon the jurisdiction of the Court of Tax Appeals under
constitutionality or validity of a tax law or Sec. 7(1) of R.A. No. 1125, as amended, subject
regulation when raised by the taxpayer as a to prior review by the Secretary of Finance, as
defense in disputing or contesting an required under R.A. No. 8424. (Banco de Oro vs.
assessment or claiming a refund. It is only in the Republic of the Philippines, G.R. No. 198756, 16
lawful exercise of its power to pass upon all Aug. 2016)
maters brought before it, as sanctioned by Sec.
7 of R.A. No. 1125, as amended. Q: Disputing the assessment, PAGCOR
appealed to the Secretary of Justice, on the
This Court, however, declares that the Court of basis of Secs. 66 and 67 of the Revised
Tax Appeals may likewise take cognizance of Administrative Code, which provides that
cases directly challenging the constitutionality “all disputes/claims and controversies,
or validity of a tax law or regulation or solely between or among the departments,
administrative issuance (revenue orders, bureaus, offices, agencies and
revenue memorandum circulars, rulings). instrumentalities of the National
Government, including government-owned
In other words, within the judicial system, the and controlled corporations, such as those
law intends the Court of Tax Appeals to have arising from the interpretation and
exclusive jurisdiction to resolve all tax application of statues, contracts or
problems. Petitions for writs of certiorari agreements shall be administratively
against the acts and omissions of the said quasi- settled or adjudicated by the Secretary of
judicial agencies should, thus, be filed before Justice as Attorney-General of the National
the Court of Tax Appeals. Government and as ex officio legal adviser of
all government-owned or controlled
R.A. No. 9282, a special and later law than BP corporations if involving only questions of
Blg. 129 provides an exception to the original law.”
jurisdiction of the Regional Trial Courts over
actions questioning the constitutionality or The CIR contends that the CTA has
validity of tax laws or regulations. Except for jurisdiction pursuant to Sec. 7(1) of R.A. No.
local tax cases, actions directly challenging the 1125, which grants the CTA the exclusive
constitutionality or validity of a tax law or appellate jurisdiction to review, among
regulation, or administrative issuance may be others, the decisions of the Commissioner of
filed directly before the Court of Tax Appeals. Internal Revenue “in cases involving
disputed assessments, refunds of internal
Furthermore, with respect to administrative revenue taxes, fees or other charges,
issuances (revenue orders, revenue penalties imposed in relation thereto, or
memorandum circulars, or rulings), these are other matters arising under the NIRC or
issued by the Commissioner under its power to other law or part of law administered by the
make rulings or opinions in connection with the Bureau of Internal Revenue. Is PAGCOR
implementation of the provisions of internal correct?

UNIVERSITY OF SANTO TOMAS 420

2023 GOLDEN NOTES
 IV. JUDICIAL REMEDIES
A: NO. Following the rule on statutory P1 million shall be tried by the proper MTC,
construction involving a general and a special MeTC, or RTC, depending on their
law, then P.D. No. 242 should not affect R.A. No. respective jurisdiction. The jurisdiction of
1125. R.A. No. 1125, specifically Sec. 7 thereof the CTA in these cases shall be appellate.
on the jurisdiction of the CTA, constitutes an (Sec. 7(b)(1), R.A. No. 1125, as amended)
exception to P.D. No. 242. Disputes, claims and
controversies, falling under Sec. 7 of R.A. No. b. Appellate jurisdiction over appeals from
1125, even though solely among government the judgments, resolutions or orders of the
offices, agencies, and instrumentalities, Regional Trial Courts in tax collection cases
including GOCCs, remain in the exclusive originally decided by them within their
appellate jurisdiction of the CTA. Such a respective territorial jurisdiction.
construction resolves the alleged inconsistency
or conflict between the two statutes. (Philippine 2. EXCLUSIVE ORIGINAL AND APPELLATE
National Oil Company v. Court of Appeals, G.R. JURISDICTION OVER CRIMINAL CASES
Nos. 109976 and 112800, 26 Apr. 2005)

1. Exclusive original jurisdiction – The CTA in

In CIR v. Secretary of Justice, to restate, as a
Division have exclusive original jurisdiction
general rule, all disputes/claims and
over all criminal offenses arising from
controversies, solely between or among the
violations of the NIRC or TCCP and other laws
departments, bureaus, offices, agencies and
administered by the BIR or the BOC, where the
instrumentalities of the National Government,
principal amount of taxes and fees, exclusive of
including GOCCs, such as those arising from the
charges and penalties, claimed is P1 million or
interpretation and application of statues,
more.
contracts or agreements shall be
administratively settled or adjudicated by the
Regular courts shall have jurisdiction in
Secretary of Justice or the Solicitor General.
offenses or felonies where:
(Secs. 66-68, RAC)

a. The principal amount of taxes and fees,

As an exception, when the disputes/claims and
exclusive of charges and penalties claimed
controversies involve a tax assessment, even
is less than P1 million; or
when the parties to the dispute are departments,
b. No specified amount is claimed.
bureaus, offices, agencies and instrumentalities
of the National Government, including GOCCs,
NOTE: The jurisdiction of the CTA in these cases
the exclusive appellate jurisdiction remains with
shall be appellate. (Sec. 7(b)(1), R.A. No. 1125, as
the CTA. (Sec. 7, R.A. 1125)
amended)

2. Exclusive jurisdiction over tax collections

Institution of Civil Action in the Criminal
cases (Sec. 3(c), Rule 4, RRCTA)
Action

a. Original jurisdiction in tax collection cases

Despite any provision of law or the Rules of
involving final and executory assessments
Court, the criminal action and the
for taxes, fees, charges and penalties, where
corresponding civil action for the recovery of
the principal amount of taxes and fees,
the civil liability for taxes and penalties, shall at
exclusive of charges and penalties, claimed
all times be simultaneously instituted with, and
is P1 million pesos or more.
jointly determined in the proceeding before the
CTA. The filing of the criminal action is deemed
NOTE: Collection cases where the principal
to necessarily carry with it the filing of civil
amount of taxes and fees, exclusive of
action, and no right to reserve the filing of such
charges and penalties claimed is less than
civil action separately from the criminal action

421
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 TAXATION LAW
will be recognized. (Sec. 7, R.A. No. 1125, as iii. Decisions, Resolutions or Orders of the
amended) RTC decided or resolved by them in the
exercise of their appellate jurisdiction
2. Exclusive appellate jurisdiction over criminal offenses arising from
violations of the NIRC or TCCP and
a. CTA in Divisions: other laws administered by the BIR or
BOC where the principal amount of
i. Appeals from the Judgments, taxes and fees, exclusive of charges and
Resolutions or Orders of the RTC in penalties claimed is less than P1
their original jurisdiction in criminal million.
offenses arising from violations of the
NIRC or TCCP and other laws
administered by the BIR or BOC, where B. PROCEDURES
the principal amount of taxes and fees,
exclusive of charges and penalties,
claimed is less than P1 million or 1. FILING OF AN ACTION FOR COLLECTION OF
where there is no specified amount TAXES
claimed; and

ii. Criminal offenses over Petitions for a) INTERNAL REVENUE TAXES

Review of the Judgments, Resolutions
or Orders of the RTC in the exercise of Procedures before the MTC and RTC in the
their appellate jurisdiction over tax Exercise of their Exclusive Original Jurisdiction
cases originally decided by the MeTC,
MTC and MCTC. (Sec. 7(b)(2)(b), RA. No. 1. Initiatory action – Where the assessment has
1125 as amended) attained a state of finality because the
assessment has not been disputed, the BIR files
b. CTA En Banc: an ordinary suit for the collection of a sum of
money with the court of appropriate
i. Decisions, Resolutions or Orders on jurisdiction.
Motions for Reconsideration or New
Trial of the Court in division in the 2. Appealed cases – Decisions of the MTCs
exercise of its exclusive original rendered in the exercise of their original
jurisdiction over criminal offenses jurisdiction are appealed to the RTC by means of
arising from violations of the NIRC or notice of appeal.
TCCP and other laws administered by
the BIR or BOC where the principal Decision of the RTC on local tax cases or
amount of taxes and fees, exclusive of collection cases rendered in aid of their
charges and penalties is P1 million or appellate jurisdiction shall be appealed to the
more; CTA En Banc, by means of petition for review.

ii. Decisions, Resolutions or Orders on Adverse decisions of the CTA En Banc shall be
Motions for Reconsideration or New appealed to the SC by means of petition for
Trial of the Court in division in the review.
exercise of its exclusive appellate
jurisdiction over criminal offenses
arising from violations of the NIRC or
TCCP and other laws administered by
the BIR or BOC; and

UNIVERSITY OF SANTO TOMAS 422

2023 GOLDEN NOTES
 IV. JUDICIAL REMEDIES
Decisions or Judgment Rendered by the CTA in A: YES. The LGC does not specifically prohibit an
Divisions in the Exercise of their Exclusive injunction enjoining the collection of local taxes
Original Jurisdiction unlike in the NIRC where there is an express
prohibition. Nevertheless, the Court noted that
1. If no MR or MNT – execution of judgment injunctions enjoining the collection of local taxes are
frowned upon and should therefore be exercised
2. If there is a motion filed with the Division that with extreme caution. (Angeles City v. Angeles City
rendered the judgment: Electric Corporation G.R. No.166134, 29 June 2010)

a. If denied – appeal by means of a petition for Prescriptive Period for Local Taxes
review before the CTA En Banc; and
1. Assessment
b. If denied by CTA En Banc – appeal to the SC
by means of a petition for review on GR: Prescriptive period is within five (5) years
certiorari. from the date they become due. Thus, no action
for collection of such taxes, fees, or charges,
b) LOCAL TAXES whether administrative or judicial, shall be
instituted after the expiration of such period.
The procedures for internal revenue taxes are the
same for local and real property taxes if the case is XPN: In case of fraud or intent to evade the
brought before the CTA in division in the exercise of payment of taxes, fees, or charges, the
its original jurisdiction. assessment may be made ten (10) years from
discovery of fraud or intent to evade payment.
Remedies Available to Taxpayer Prior
Assessment 2. Collection – within five (5) years from date of
assessment by administrative or judicial action.
1. To question the constitutionality or legality of
tax ordinances or revenue measures on appeal Grounds for Suspension of the Running of
(Sec. 187, LGC); or Prescriptive Period on Assessment and
Collection of Local Taxes: (P-R-O)
2. Petition for declaratory relief, when applicable.
1. The treasurer is legally Prevented from making
Q: How does the LGU concerned enforce the the assessment or collection;
judicial remedy in collection of taxes?
2. The taxpayer requests for a Reinvestigation and
A: The LGU may enforce collection of delinquent executes a waiver in writing before the
taxes, fees, charges and other revenues by civil expiration of the period within which to assess
action in any court of competent jurisdiction. The or collect; and
civil action shall be filed by the local treasurer
within five (5) years from the date of assessment. 3. The taxpayer is Out of the country or otherwise
(Sec. 194, LGC) cannot be located. (Sec. 194, LGC)

NOTE: The LGU files an ordinary suit for the Remedies Available to Taxpayer after
collection of sum of money before the MTC, RTC or Assessment
CTA depending upon the jurisdictional amount.
1. Protest of assessment (Sec. 195, LGC)
Q: May regular court issue injunction to restrain
LGUs from collecting taxes? Within 60 days from the receipt of the notice of
assessment, the taxpayer may file a written

423
UNIVERSITY OF SANTO TOMAS
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 TAXATION LAW
protest with the local treasurer; otherwise, the d. Secretary of Trade and Industry;
assessment shall become final and executory. e. Secretary of Agriculture; or
The local treasurer shall decide the protest f. RTC in the exercise of its original
within 60 days from the time of its filing. jurisdiction.

The taxpayer shall have 30 days from the 2. To the CTA En Banc – any party adversely
receipt of the denial of the protest or from the affected by a decision or ruling of:
lapse of the 60-day prescribed period within
which to appeal with the court of competent a. The CTA in Division on a MR or MNT;
jurisdiction. b. The CBAA, in the exercise of its appellate
jurisdiction; or
NOTE: In case of an illegal assessment where c. The RTC, in the exercise of its appellate
the assessment was issued without authority, jurisdiction. (Sec. 11, R.A. No. 1125, as
exhaustion of administrative remedies is not amended)
necessary and the taxpayer may directly resort
to judicial action. The taxpayer shall file a Q: Will the CTA acquire jurisdiction even in the
complaint for injunction before the RTC to absence of a decision of the CIR or COC?
enjoin the local government unit from
collecting real property taxes. (City of Lapu- A:
Lapu v. PEZA, G.R. No. 187853, 26 Nov. 2014) GR: CTA has jurisdiction only, if there is a decision
of the CIR or COC.
2. Claim for refund or tax credit (Sec. 196, LGC)
XPNs:
Prior to a judicial action for recovery of tax
1. If COC has not rendered a decision and the suit
erroneously or illegally collected, a written
is about to prescribe.
claim for refund or credit must first be filed with
the local treasurer.
Rationale: If the taxpayer waits, then his right
of action prescribes.
In any case, the judicial action for claim for
refund or credit must be made within two (2)
2. Deemed Denial / Inaction of the CIR in a refund
years from the date of the payment of such tax,
of illegally or erroneously collected tax and the
fee, or charge, or from the date the taxpayer is
2-year prescriptive period is about to expire or
entitled to a refund or credit.
after the lapse of 120-day period or 90-day
period (for claims for refund 2018 onwards
2. CIVIL CASES under TRAIN) to decide in case of refund of
unutilized input VAT; or
a) WHO MAY APPEAL, MODE OF APPEAL, AND
EFFECT OF APPEAL Rationale: The taxpayer would be left at the
mercy of the Commissioner, who by his delay
WHO MAY APPEAL leaves the taxpayer without any positive and
expedient relief from the courts.
1. To the CTA in Division – any party adversely
3. Deemed denial or inaction – where the CIR has
affected by a decision, ruling, or inaction of the:
not acted upon a protested assessment within
a. CIR on disputed assessments or claims for 180 days from submission of all relevant
refund of internal revenue taxes; documents supporting the protest, the taxpayer
b. COC; adversely affected by the inaction may appeal to
c. Secretary of Finance; the CTA within 30 days from the lapse of the

UNIVERSITY OF SANTO TOMAS 424

2023 GOLDEN NOTES
 IV. JUDICIAL REMEDIES
180-day period. assessments or claim for refund of internal
revenue taxes erroneously or illegally collected,
Q: On January 15, 1996, a taxpayer received an the COC, the Secretary of Finance, the Secretary
assessment for an internal revenue tax of Trade & Industry, the Secretary of
deficiency. On 10 February 1996, he filed a Agriculture, and the RTC in the exercise of their
petition for review with the CTA. Could the Tax original jurisdiction.
Court entertain the petition?
NOTE: The 30-day period to appeal decisions of
A: NO. Before a taxpayer can avail of judicial remedy the RTC to CTA is extendible. (SM Land v. City of
he must first exhaust administrative remedies by Manila, G.R. No. 197151, 22 Oct. 2012)
filing a protest within 30 days from receipt of the
assessment. Disputed Assessments

It is the Commissioner’s decision on the protest that Inaction of the CIR within the 180-day period
gives the Tax Court jurisdiction over the case shall be deemed a denial, thus, appealable via a
provided that the appeal is filed within 30 days from petition for review to the CTA within 30 days
receipt of the Commissioner’s decision. An from receipt of copy of decision. Should the
assessment by the BIR is not the Commissioner’s taxpayer opt to await the final decision of the
decision from which a petition for review may be CIR beyond the 180-day period, appeal to the
filed with the CTA. Rather, it is the action taken by CTA should be made within 30 days after
the Commissioner in response to the taxpayer’’ receipt of copy of such decision.
protest on the assessment that would constitute the
appealable decision. (Sec. 7, R.A. No. 1125, as Claims for Refund of Internal Revenue Taxes
amended) Erroneously or Illegally Collected

Q: Under the above factual setting, the taxpayer, In case of inaction of the CIR, the 30-day period
instead of questioning the assessment he to file the petition for review before the CTA
received on 15 January 1996 paid, on 1 March after the lapse of 180 days must be within the 2-
1996 the "deficiency tax" assessed, the taxpayer year period prescribed by law from payment of
requested a refund from the Commissioner by tax.
submitting a written claim on 1 March 1997. It
was denied. The taxpayer, on 15 March 1997, Claim for Refund of Unutilized Input VAT
filed a petition for review with the CA. Could the Payments
petition still be entertained? (1997 BAR)
The 2-year period does not refer the filing of
A: NO. The petition for review cannot be judicial claim with the CTA but to the filing of
entertained by the CA since decisions of the the administrative claim with the CIR. (CIR v.
Commissioner on cases involving claim for tax San Roque power Corporation, G.R. No. 187485,
refunds are within the exclusive and primary 12 Feb. 2013) The taxpayer will always have 30
jurisdiction of the CTA. (Ibid.) days to file the judicial claim regardless of his
action or inaction. (CIR v. Mindanao II
MODE OF APPEAL Geothermal Partnership, G.R. No. 191498, 15 Jan.
2014)
1. To the CTA in Division – by filing a Petition for
Review under a procedure analogous to that NOTE: 120 + 30 days is mandatory and
provided for under Rule 42 of the ROC, within jurisdictional. (now 90 days under TRAIN Law)
30 days from the receipt of the decision or
ruling or from the expiration of the period fixed Q: Energy Development Corporation (EDC)
by law or inaction of the CIR on disputed is a domestic corporation registered with

425
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL L AW
 TAXATION LAW
the Bureau of Internal Revenue (BIR) as a Is the Aichi case the controlling doctrine in
VAT taxpayer. On various dates, EDC filed its cases involving claims for refund of
quarterly VAT Returns and the unutilized input vat?
amendments. EDC filed with the BIR Large
Taxpayers District Office an administrative A: YES. In case of full or partial denial of the
claim for tax credit or refund of its claim for tax refund or tax credit, or the failure
unutilized input VAT for its zero-rated. on the part of the Commissioner to act on the
application within the period prescribed above,
On 18 June 2009, respondent Commissioner the taxpayer affected may, within thirty (30)
of Internal Revenue (CIR) opposed the claim days from the receipt of the decision denying
of EDC, arguing that EDC failed to the claim or after the expiration of the one
substantiate its claim for input VAT tax hundred twenty day-period, appeal the
credit or refund by the submission of proper decision or the unacted claim with the Court of
documents. Tax Appeals.

On 6 October 2010, the Supreme Court Notably, the recent amendment to Sec. 112(C)
promulgated its Decision in Aichi which finally removed the confusion on the reckoning
delineated the prescriptive periods for filing period for judicial claims by legislating a
separate administrative and judicial claims singular action for the CIR to decide on the
for input VAT refund or tax credit of the then administrative claim for input VAT tax credit or
Sec. 112(A) and (C), of the National Internal refund within a period of ninety (90) days.
Revenue Code of 1997 (NIRC).
As held in Aichi, there is nothing in Sec. 112 of
On 25 March 2011, the CIR filed a Motion to the NIRC which sanctions the simultaneous
Dismiss EDC's Petition for Review citing filing of administrative and judicial claims, and
EDC's failure to comply with the prescriptive the filing of the judicial claim prior to the action
periods under Sec. 112(C) of the NIRC. The of the CIR or the lapse of the 120-day period
CIR alleged that EDC did not wait for: (a) the (now 90-day period under TRAIN Law) within
CIR's action on its administrative claim for which the CIR is required to act on the
input VAT tax credit or refund before administrative claim.
appealing to the CTA within 30 days, and (b)
in the alternative of the CIR's inaction, Therefore, Sec. 112(A) simply cannot be
reckon the 30-day period to appeal from the invoked as the prescriptive period for both
expiration of 120 days from the date of the administrative and judicial claims of input VAT
submission of complete documents to tax refund or credit with the CIR. The taxpayer
support the administrative claim under Sec. claiming input VAT tax credit or refund should
112(A). not ignore subsection (C) on judicial claims, and
persist in the notion that the correct
EDC opposed the CIR's motion to dismiss prescriptive period to file any of the claims can
arguing that Aichi cannot be applied be found in an entirely separate provision and
retroactively to cases where the claim for Chapter III on "Protesting, Assessment, Refund,
input VAT tax credit or refund arose Etc." (Energy Development v. CIR, G.R. No.
before Aichi's promulgation and especially 203367, 17 Mar. 2021, J. Hernando)
since the period relied upon for availment of
remedies was based on prevailing
jurisprudence.

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2023 GOLDEN NOTES
 IV. JUDICIAL REMEDIES
Rules Laid Down in Mindanao II Geothermal Partnership Case

TYPE OF CLAIM INACTION APPEAL

Inaction within 180-day period is a Appealable 30 days to CTA from receipt
Disputed assessments deemed denial. of denial.

Inaction within the 2-year prescriptive Appealable 30 days to CTA from receipt
Claims for refund of
period (from date of payment). of denial, provided it is within two (2)
internal revenue taxes
years from date of payment.
erroneously paid

Inaction within 120-day or 90-day Appealable 30 days to CTA from receipt

period, as the case may be, is a deemed of denial or from the lapse of the 120-
denial. 2-year period refers to day or 90-day period to decide.
institution of administrative claim, and
Claims for unutilized it is jurisdictional.
input VAT
NOTE: 90-day period to decide the
claim for refund for VAT under the
TRAIN law.

427
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FACULTY OF CIVIL L AW
 TAXATION LAW
Remedy of Party Affected by the Ruling or pendency, the movant shall appeal to the SC.
Decision of the CTA Division (Sec. 1, Rule 16, R.A. No. 9282)

The adverse party may file a MR or MNT before 30-day Prescriptive Period of Appeal with the
the same Division of the CTA within 15 days CTA
from notice thereof.
1. It runs from the date the taxpayer receives the
However, in criminal cases, the general rule appealable decision or 30 days after the lapse of
applicable in regular courts on matters of 180 days within which the BIR should act.
prosecution and appeal shall apply.
NOTE: The two periods are mutually exclusive.
2. In appeals to the CTA En Banc: (RCBC v. CIR, G.R. No. 168498, 16 June 2006)

a. By filing a Petition for Review under a 2. It is jurisdictional and mandatory. (CIR v. First
procedure analogous to that provided for Express Pawnshop Company, Inc., G.R. No.
under Rule 43 of the ROC, within 15 days 172045-46, 16 June 2009)
from receipt of decision or resolution of the
Court in Division on a MR or MNT. Upon 3. It is non-extendible. (Filipinas Investment and
proper motion and the payment of the full Finance Corporation v. CIR, G.R. No. L-23501, 16
amount of the docket and other lawful fees May 1967)
and deposit for costs before the expiration
of the reglementary period herein fixed, the NOTE: After the 30-day period, an assessment
Court may grant an additional period not may no longer be disputed through the simple
exceeding 15 days from the expiration of expedient of paying the protested tax and by
the original period within which to file the subsequently claiming it as a refund within the
petition for review. period of two (2) years from date of payment.
(Sec. 3, Rule 8, RRCTA)
NOTE: An MR/MNT filed before the Court
in Division is required before filing a Q: Does the motion for reconsideration toll the
Petition for Review to the Court En Banc. 30-day period to appeal to the CTA?

b. By filing a Petition for Review under a A: NO. A motion for reconsideration of the denial of
procedure analogous to that provided for the administrative protest does not toll the 30-day
under Rule 43 of the ROC, within 30 days period to appeal to the CTA. (Fishwealth Canning
from a decision or ruling of the CBAA or the Corporation v. CIR, G.R. No. 179343, 21 Jan. 2010)
RTC in the exercise of their appellate
jurisdiction. (Sec. 4, Rule 8, RRCTA) Q: A Co., a Philippine corporation, received an
income tax deficiency assessment from the BIR
Remedy of Party Affected by the Decision or on 5 May 1995. On 31 May 1995, A Co. filed its
Ruling of the CTA En Banc protest with the BIR. On 30 July 1995, A Co.
submitted to the BIR all relevant supporting
The adverse party may file a Petition for Review documents. The CIR did not formally rule on the
on Certiorari under Rule 45 of the ROC, through protest but on 25 January 1996, A Co. was served
a verified petition before the Supreme Court, a summons and a copy of the complaint for
within 15 days from receipt thereof. (Sec. 1, Rule collection of the tax deficiency filed by the BIR
16, R.A. No. 9282) with the RTC. On 20 February 1996, A Co.
brought a Petition for Review before the CTA.
NOTE: The MR or MNT filed before the Court The BIR contended that the Petition is
shall be deemed abandoned if, during its

UNIVERSITY OF SANTO TOMAS 428

2023 GOLDEN NOTES
 IV. JUDICIAL REMEDIES
premature since there was no formal denial of July 2001)
the protest of A Co. and should therefore be
dismissed. Does the CTA have jurisdiction over NOTE: A final demand letter for payment of
the case? (2002, 1999 BAR) delinquent taxes may be considered a decision on a
disputed or protested assessment if no final
A: YES. The CTA has jurisdiction over the case decision on disputed assessment has been issued
because this qualifies as an appeal from the prior to the final demand letter for payment.
Commissioner’s decision on disputed assessment.
When the Commissioner decided to collect the tax EFFECT OF APPEAL
assessed without first deciding on the taxpayer’s
Effect of Appeal on Collection of Taxes (2010,
protest, the effect of the Commissioner’s action of
2004 BAR)
filing a judicial action for collection is a decision of
denial of the protest, in which event the taxpayer
GR: An appeal to the CTA shall not suspend
may file an appeal with the CTA. (Dayrit v. Cruz, G.R.
payment, levy, distraint and/or sale of any property
No. L-39910, 26 Sept. 1988)
of taxpayer for the satisfaction of his tax liability.

Q: Does the RTC have jurisdiction over the

XPN: However, when in the opinion of the CTA, the
collection case filed by the BIR? Explain.
collection of tax may jeopardize the interest of the
government and/or the taxpayer, the Court may
A: NO. The filing of an appeal with the CTA has the
suspend or restrain collection of tax and require the
effect of divesting the RTC of jurisdiction over the
taxpayer either to:
collection case. There is no final, executory and
demandable assessment which can be enforced by
1. Deposit the amount claimed; or
the BIR, once a timely appeal is filed.
2. File a surety bond for not more than double the
amount of the tax due. (Sec. 11, R.A. No. 1125)
Q: A taxpayer received a tax deficiency
assessment of P1.2 Million from the BIR Q: On 1 June 2003, Global Bank received a final
demanding payment within 10 days; otherwise, notice of assessment from the BIR for deficiency
it would collect through summary remedies. The documentary stamp tax in the amount of P5
taxpayer requested for a reconsideration Million. On 30 June 2003, Global Bank filed a
stating the grounds therefor. Instead of request for reconsideration with the
resolving the request for reconsideration, the Commissioner of Internal Revenue. The
BIR sent a Final Notice before Seizure to the Commissioner denied the request for
taxpayer. reconsideration only on 30 May 2006, at the
same time serving on Global Bank a warrant of
May this action of the CIR be deemed a denial of distraint to collect the deficiency tax. If you were
the request for reconsideration of the taxpayer its counsel, what will be your advice to the bank?
to entitle him to appeal to the CTA? Decide with Explain. (2006 BAR)
reasons. (2005 BAR)
A: The denial for the request for reconsideration is
A: YES. The Final Notice before Seizure constitutes the final decision of the CIR. I would advise Global
as a decision on a disputed or protested assessment, Bank to appeal the denial to the CTA within 30 days
hence, appealable to the CTA. The Final Notice from receipt. I will further advise the bank to file a
before Seizure should be considered as the CIR’s motion for injunction with the CTA to enjoin the
decision of disposing the request for Commissioner from enforcing the assessment
reconsideration. The content and tenor of the letter pending resolution of the appeal. While an appeal to
itself supports the theory that it was the BIR’s final the CTA will not suspend the payment, levy,
act regarding the request for reconsideration. (CIR distraint, and/or sale of any property of the
v. Isabela Cultural Corporation, G.R. No. 135210, 11 taxpayer for the satisfaction of its tax liability, the

429
UNIVERSITY OF SANTO TOMAS
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 TAXATION LAW
CTA is authorized to give injunctive relief if the statements.
enforcement would jeopardize the interest of the
taxpayer, as in this case, where the assessment has a. May the collection of taxes be suspended?
not become final (Lascona Land Co. v. CIR, CTA Case
No. 5777, 04 Jan. 2000) b. Is the CTA Division justified in requiring
Globesmart to post a surety bond as a
Q: RR disputed a deficiency tax assessment and condition for the suspension of the
upon receipt of an adverse decision by the CIR, deficiency tax collection? (2017 BAR)
filed an appeal with the CTA. While the appeal is
pending, the BIR served a warrant of levy on the A:
real properties of RR to enforce the collection of a. YES. As provided by R.A. No. 1125, as amended
the disputed tax. Granting arguendo that the BIR by R.A. No. 9282, that when in the opinion of the
can legally levy on the properties, what could RR Court the collection by the aforementioned
do to stop the process? Explain briefly. (2004 government agencies may jeopardize the
BAR) interest of the Government and/ or the
taxpayer, the Court any stage of the proceeding
A: RR should file a motion for injunction with the may suspend the said collection and require the
CTA to stop the administrative collection process. taxpayer either to deposit the amount claimed
An appeal to the CTA shall not suspend the or to file a surety bond for not more than double
enforcement of the tax liability, unless a motion to the amount with the Court.
that effect shall have been presented in court and
granted by it on the basis that such collection will b. NO. The Supreme Court, in the case of
jeopardize the interest of the taxpayer or the Tridharma Marketing Corporation v. CTA, cited
Government (Pirovano v. CIR, 14 G.R. No. L-19865, 31 the case of Pacquiao v. CTA, where it ruled that
July 1965) the CTA should first conduct a preliminary
hearing for the proper determination of the
Q: Globesmart Services, Inc. received a FAN with necessity of a surety bond or the reduction
FLD from the BIR for deficiency income tax, VAT, thereof. In the conduct of its preliminary
and withholding tax for the taxable year 2016 hearing, the CTA must balance the scale
amounting to P48 million. Globesmart filed a between the inherent power of the State to tax
protest against the assessment, but the CIR and its right to prosecute perceived
denied the protest. Hence, Globesmart filed a transgressors of the law, on one side; and the
petition for review in the CTA with an urgent constitutional rights of petitioners to due
motion to suspend the collection of tax. process of law and the equal protection of the
laws, on the other. In this case, the CTA failed to
After hearing, the CTA Division issued a consider that the amount of the surety bond
resolution granting the motion to suspend but that it is asking Globesmart to pay is more than
required Globesmart to post a surety bond its net worth. Thus, it is necessary for the CTA
equivalent to the deficiency assessment within to first conduct a preliminary hearing to give
15 days from notice of the resolution. taxpayer an opportunity to prove its inability to
Globesmart moved for the partial come up with such amount.
reconsideration of the resolution and for the
reduction of the bond to an amount it could b) SUSPENSION OF COLLECTION OF TAXES
obtain. The CTA Division issued another
resolution reducing the amount of the surety Requisites for Suspension of Tax Collection
bond to P24 million. The latter amount was still
more than the net worth of Globesmart Services, 1. There is an appeal to the CTA from a decision of
Inc. as reported in its audited financial the CIR;

UNIVERSITY OF SANTO TOMAS 430

2023 GOLDEN NOTES
 IV. JUDICIAL REMEDIES
2. In the opinion of the CTA, the collection may writ of injunction. (Collector v. Zulueta, G.R. No.
jeopardize the interest of the government L-8840, 08 Feb. 1957)
and/or the taxpayer;
NOTE: The prohibition on the issuance of a writ
3. The taxpayer may be required to deposit the of injunction to enjoin the collection of taxes is
amount claimed or to file a surety bond for not applied only to national internal revenue taxes,
more than double the amount with the Court not to local taxes. (Angeles City v. Angeles
(Sec. 11, R.A. No. 1125); and Electric Corp., G.R. No. 166134, 29 June 2010)

4. That the appeal is not frivolous or dilatory. Q: In the investigation of the withholding tax
returns of AZ Medina Security Agency (AZ
NOTE: The motion for the suspension of the Medina) for the taxable years 1997 and 1998, a
collection of tax shall be verified and shall state discrepancy between the taxes withheld from its
clearly and distinctly the facts and the grounds employees and the amounts actually remitted to
relied upon in support of the motion. (Sec. 4, Rule 10, the government was found. Accordingly, before
RRCTA) the period of prescription commenced to run,
the BIR issued an assessment and a demand
Exceptions to Posting of Bond Requirement letter calling for the immediate payment of the
deficiency withholding taxes in the total amount
1. Allegations of prescription of administrative of P250,000.00. Counsel for AZ Medina
action for collection – Collector of Internal protested the assessment for being null and void
Revenue cannot, after three (3) years from the on the ground that no pre-assessment notice
time the taxpayer has filed his income tax had been issued. However, the protest was
returns or from the time when he should have denied. Counsel then filed a petition for
filed the same, make any summary collection of prohibition with the CTA to restrain the
the deficiency income taxes demanded thru collection of the tax.
administrative methods and that the warrant of
distraint and levy as well as the contemplated Will the special civil action for prohibition
sale at public auction of the properties of the brought before the CTA under Sec. 11 of R.A. No.
taxpayer are null and void being as they are in 1125 prosper? Discuss your answer. (2002 BAR)
violation of Sec. 51(d) of the NIRC. (Collector v.
Avelino, G.R. No. L-9202, 19 Nov. 1956) A: NO. The special civil action for prohibition will
not prosper because the CTA has no jurisdiction to
2. Method of collection contrary to law – CTA has entertain the same. The power to issue writ of
ample authority to issue injunctive writs to injunction provided for under Sec. 11 of R.A. No.
restrain the collection of tax and to even 1125 is only ancillary to its appellate jurisdiction.
dispense with the deposit of the amount The CTA is not vested with original jurisdiction to
claimed or the filing of the required bond, issue writs of prohibition or injunction
whenever the method employed by the CIR in independently of and apart from an appealed case.
the collection of tax allegedly jeopardizes the The remedy is to appeal the decision of the BIR.
interests of a taxpayer for being patently in (Collector v. Yuseco, L-12518, 28 Oct. 1961)
violation of the law. (Sps. Pacquiao v. CTA, G.R. Receipt of Evidence
No. 213394, 06 Apr. 2016)
CTA may receive evidence in the following cases:
It would certainly be an absurdity on the part of
the CTA to declare that the collection by the 1. In all cases falling within the original
summary methods of distraint and levy was jurisdiction of the CTA in division pursuant to
violative of the law, and then, on the same Sec. 3, Rule 4 of RRCTA.
breath, require the petitioner to deposit or file
a bond as a pre-requisite of the issuance of a

431
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 TAXATION LAW
2. In appeals in both civil and criminal cases 1. A summary of the invoices or receipts and the
where the court grants new trial pursuant to amount of taxes paid; and
Sec. 2, Rule 53 and Sec. 12, Rule 124 of the ROC.
2. A certification of the independent CPA attesting
Persons Authorized to Receive Evidence to the correctness of the contents of the
summary after making an examination,
1. Justice of the CTA –It may be made motu evaluation and audit of voluminous receipts,
proprio or upon proper motion, when: invoices or long accounts. (Sec. 5, Rule 12,
RRCTA)
a. The determination of a question of fact
arises at any stage of the proceedings; Motion for Reconsideration or New Trial
b. The taking of an account is necessary; or
c. The determination of an issue of fact Any aggrieved party may seek a reconsideration or
requires the examination of a long account. new trial of any decision, resolution or order of the
(Sec. 3, Rule 12, RRCTA) Court within fifteen (15) days from the date he
received notice of the decision, resolution or order
2. Court official of the Court in question. The adverse party may file
an opposition to the MR or MNT within ten (10)
a. Clerk of court; days after receipt of a copy of such MR or MNT.
b. Division clerk of court; (Secs. 1 and 2, Rule 15, RRCTA)
c. their assistants who are members of the
Philippine Bar; and Grounds for Filing Motion for New Trial (F-A-M-
d. Court attorney. (Sec. 4, Rule 12, RRCTA) E-N)

NOTE: The taking of evidence by Court official 1. Fraud, Accident, Mistake or Excusable
applies only in default or ex parte hearings, or negligence which ordinary prudence could not
where the parties agree in writing. have guarded against and by reason of which
such aggrieved party has probably been
It shall be for the sole purpose of marking, impaired in his rights; or
comparison with the original, and identification
by witnesses of such documentary evidence. 2. Newly discovered evidence, which he could not,
with reasonable diligence, have discovered and
The court official has no power to rule on produced at the trial and, which, if presented,
objections to any question or to the admission would probably alter the result.
of exhibits, which objections shall be resolved
by the Court upon submission of his report and NOTE: A motion for new trial shall include all
the transcripts within 10 days from termination grounds then available and those not included shall
of the hearing. (Sec. 4, Rule 12, RRCTA) be deemed waived. (Sec. 5, Rule 15, RRCTA)

Q: How are evidence taken in the proceedings Effect of Filing Motion for Reconsideration or
before the CTA? New Trial

A: In case of voluminous documents or long The filing of MR or MNT shall suspend the running
accounts, the party who desires to introduce in such of the period within which an appeal may be
evidence must, upon motion and approval by the perfected. (Sec. 4, Rule 15, RRCTA)
Court, refer the voluminous documents to an
independent CPA for the purpose of presenting: NOTE: No second MR or MNT shall be allowed. (Sec.
7, Rule 15, RRCTA)

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2023 GOLDEN NOTES
 IV. JUDICIAL REMEDIES
The motion shall be in writing stating its grounds, a 3. CRIMINAL CASES
written notice of which shall be served by the
movant on the adverse party. A motion on the
a) INSTITUTION AND PROSECUTION OF
ground of F-A-M-E shall be supported by affidavits
CRIMINAL ACTION
of merits, while a motion on the ground of newly
discovered evidence shall be supported by affidavits
of the witnesses by whom such evidence is expected 1. All criminal actions before the Court in Division
to be given, or by duly authenticated documents in the exercise of its original jurisdiction shall
which are proposed to be introduced in evidence. be instituted by the filing of an information in
Failure to comply shall render the MR or MNT “Pro the name of the People of the Philippines.
forma”, which shall not suspend the period. Also, if
2. In criminal actions involving violations of the
the MR is directed to the Secretary of Finance, it
NIRC and other laws enforced by BIR, the CIR
shall not suspend the period.
must approve their filing.

c) INJUNCTION NOT AVAILABLE TO RESTRAIN 3. In criminal actions involving violations of the

COLLECTION TCCP and other laws enforced by the BOC, the
When Injunction is Available COC must approve their filing. (Sec. 2, Rule 9,
RRCTA)
Collection of taxes should not be enjoined except
upon clear showing of a right to an exemption. This 4. All criminal actions will be under the direction
is founded under the Lifeblood Theory. (Northern and control of the public prosecutor.
Lines Inc. v. CA, G.R. No. L-41376-77, 29 June 1988)
NOTE: The institution of the criminal action shall
GR: Collection of internal revenue taxes and interrupt the running of the period of prescription.
customs duties cannot be enjoined. Even an appeal (Ibid.)
to the CTA shall not suspend the payment, levy,
distraint and sale of taxpayer’s property as a rule. b) INSTITUTION OF CIVIL ACTION IN CRIMINAL
ACTION
XPNs: However, the CTA is empowered to suspend
the collection of internal revenue taxes and custom
Institution of Civil Action with the Criminal
duties in cases pending appeal only when:
Action (2010 BAR)

1. In the opinion of the court the collection by the

The criminal action and the corresponding civil
BIR may jeopardize the interest of the
action for the recovery of civil liability for taxes and
government and/ or taxpayer; and
penalties shall be deemed jointly instituted in the
same proceeding. The filing of the criminal action
2. The taxpayer is willing to deposit the amount
shall necessarily carry with it the filing of the civil
being collected or to file a surety bond for more
action. No right to reserve the filing of such civil
than double the amount of the tax to be fixed by
action separately from the criminal action shall be
the court (Sec. 11, R.A. No. 1125)
allowed or recognized (Sec. 11, Rule 9, RRCTA)

NOTE: The CTA may issue injunction only in the

Q: How are criminal actions prosecuted?
exercise of its appellate jurisdiction. (CIR v. Yuseco,
G.R. No. L-12518, 28 Oct. 1961)
A: In criminal actions involving violation of the NIRC
or other laws enforced by the BIR, and violations of
the TCCP or other laws enforced by the BOC, the
prosecution may be conducted by their respective
duly deputized legal officers. (Sec. 3, Rule 9, RRCTA)

433
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL L AW
 TAXATION LAW
Q: After filing an Information for violation of Sec. of the Philippines and government officials sued in
254 of the NIRC (Attempt to Evade or Defeat Tax) their official capacity in all cases brought to the CTA
with the CTA, the Public Prosecutor manifested in the exercise of its appellate jurisdiction. He may
that the People is reserving the right to file the deputize the legal officers of the BIR in cases
corresponding civil action for the recovery of brought under the NIRC or other laws enforced by
the civil liability for taxes. As counsel for the the BIR, or the legal officers of the BOC in cases
accused, comment on the People's brought under the TCCP or other laws enforced by
manifestation. (2015 BAR) the BOC, to appear on behalf of the officials of said
agencies sued in their official capacity: Provided,
A: I will move for the denial of the manifestation. however, such duly deputized legal officers shall
Any provision of law or the ROC to the contrary remain at all times under the direct control and
notwithstanding, the criminal action and the supervision of the Solicitor General. (Sec. 10, Rule 9,
corresponding civil action for the recovery of civil RRCTA)
liability for taxes and penalties shall at all times be
simultaneously instituted with, and jointly 4. APPEAL TO THE CTA EN BANC
determined in the same proceeding by the CTA, the
filing of the criminal action being deemed to
Q: May a decision or resolution of the CTA in
necessarily carry with it the filing of the civil action,
Division be appealable directly to the CTA En
and no right to reserve the filing of such civil action
Banc in its exercise of its exclusive appellate
separately from the criminal action shall be
jurisdiction?
recognized.

A: NO. The petition for review of a decision or

c) PERIOD TO APPEAL resolution of the Court in Division must be preceded
by the filing of a timely motion for reconsideration
1. Appeal to the Court in criminal cases decided or new trial with the Division. (Sec. 1, Rule 8, RRCTA)
by a RTC in the exercise of its original
jurisdiction – by filing a notice of appeal NOTE: The word “must” clearly indicate the
pursuant to Secs. 3(a) and 6, Rule 122 of the mandatory and not directory of the nature of a
ROC within fifteen (15) days from receipt of a requirement.
copy of the decision or final order with the court
which rendered the final judgment or order Q: On 15 May 2013, CCC, Inc. received the Final
appealed from and by serving a copy upon the Decision on Disputed Assessment issued by the
adverse party. The Court in Division shall act on CIR dismissing the protest of CCC, Inc. and
the appeal. affirming the assessment against said
corporation. On 10 June 2013, CCC, Inc. filed a
2. Appeal to the CTA En Banc in criminal cases Petition for Review with the CTA in division. On
decided by the Court in Division or the RTC in 31 July 2015, CCC, Inc. received a copy of the
the exercise of their appellate jurisdiction – Decision dated 22 July 2015 of the CTA division
by filing a petition for review as provided in dismissing its Petition. CCC, Inc. immediately
Rule 43 of the ROC within fifteen (15) days from filed a Petition for Review with the CTA En Banc
receipt of a copy of the decision or resolution on 6 August 2015. Is the immediate appeal by
appealed from. (Sec. 9, Rule 9, RRCTA) CCC, Inc. to the CTA En Banc of the adverse
Decision of the CTA division the proper remedy?
Q: Who shall act as a representative of the (2015 BAR)
People and the Government in the criminal
action? A: NO. CCC, Inc. should first file a motion for
reconsideration with the CTA Division. Petition for
A: The Solicitor General shall represent the People review of a decision or resolution of the Court in

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2023 GOLDEN NOTES
 IV. JUDICIAL REMEDIES
Division must be preceded by the filing of a timely Q: Judy Anne was criminally charged for filing a
motion for reconsideration or new trial with the fraudulent income tax return before the CTA.
Division. Before the CTA En Banc could take Thereafter, she filed a Motion to Quash in the
cognizance of the petition for review concerning a CTA First Division which has been denied. The
case falling under its exclusive appellate Motion for reconsideration filed was also
jurisdiction, the litigant must sufficiently show that denied. A Motion for Extension of time was filed
it sought prior reconsideration or moved for a new for her Petition for review in CTA En Banc.
trial with the concerned CTA division. Thereafter, the Petition for Review before the
CTA En Banc was filed. Both the motion for
Q: Asiatrust Development Bank, Inc. (Asiatrust) extension of time and the petition for review
received from the CIR Formal Letters of Demand were denied by the CTA En Banc on the ground
(FLD) with Assessment Notices for deficiency that a Motion to Quash is an interlocutory order
internal revenue taxes. Asiatrust timely therefore, unappealable. Was the dismissal by
protested the assessment notices. Due to the the CTA En Banc proper?
inaction of the CIR on the protest, Asiatrust filed
before the CTA a Petition for Review praying for A: YES. The Petitioner cannot file a Petition for
the cancellation of the tax assessments for Review before the CTA En Banc to appeal the
deficiency taxes and also claimed that it availed resolution of the CTA First Division denying her
of the Tax Amnesty Law. The CTA Division Motion to Quash. The Resolution is interlocutory,
partially affirmed the CIR’s decision but thus, unappealable. (Santos v. People, G.R. No.
declared void some tax assessments for having 173176, 26 Aug. 2008)
been issued beyond the three-year prescriptive
period. CIR filed a Motion for Partial The CTA En Banc has jurisdiction over final order or
Reconsideration of the assessments assailing judgment but not over interlocutory orders issued
the CTA Division's finding of prescription. The by the CTA in division. Considering that no appeal
CTA Division amended its decision. Unsatisfied, can be taken from interlocutory CTA Orders, the
both parties appealed to CTA En Banc. The CTA aggrieved party may file an appropriate special civil
En Banc denied the CIR' s appeal for failure to file action under Rule 65 pursuant to Sec. 1, Rule 41 of
a prior motion for reconsideration of the the ROC, as in this case. (CIR v. CTA and CBK Power
Amended Decision. The CIR contends that the Co. Ltd., G.R. Nos. 203054-55, 29 July 2015)
CTA En Banc erred in dismissing his appeal for
failing to file a motion for reconsideration on the Q: In response to an adverse BIR ruling against
Amended Decision as a perusal of the Amended it and as reviewed by the Secretary of Finance,
Decision shows that it is a mere resolution, GGG, Inc. filed with the Court of Appeals a
modifying the original Decision. Is the Petition for Review under Rule 43 of the ROC.
contention of CIR meritorious? The CA, however, dismissed the petition for lack
of jurisdiction declaring that it is the CTA which
A: NO. Sec. 1, Rule 8 of the Revised Rules provide has jurisdiction over the issues raised. Before
that an appeal to the CTA En Banc must be preceded which Court should GGG, Inc. seek recourse from
by the filing of a timely motion for reconsideration the adverse ruling of the Secretary of Finance in
or new trial with the CTA Division. Failure to do so the exercise of the latter's power of review?
is a ground for the dismissal of the appeal as the (2015 BAR)
word "must" indicates that the filing of a prior
motion is mandatory, and not merely directory. Due A: GGG should file its petition with the CTA. The
to this procedural lapse, the Amended Decision has Supreme Court held that the jurisdiction to review
attained finality insofar as the CIR is concerned. The the rulings of the Commissioner of Internal Revenue
CIR, therefore, may no longer question the merits of pertains to the CTA which has the authority to issue,
the case before the SC. (Asiatrust Development Bank, among others, a writ of certiorari in the exercise of
Inc. v. CIR, G.R. No. 201530, 19 Apr. 2017) its appellate jurisdiction.

435
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FACULTY OF CIVIL L AW
 TAXATION LAW
Q: The City of Liwliwa assessed local business of procedure (RRCTA) do not sanction such a
taxes against Talin Company. Claiming that procedure.
there is double taxation, Talin Company filed a
Complaint for Refund or Recovery of Illegally The CTA sitting En Banc cannot annul a decision of
and/or Erroneously collected Local Business one of its divisions. The divisions are not considered
Tax; Prohibition with Prayer to Issue separate and distinct courts but are divisions of one
Temporary Restraining Order and Writ of and the same court; there is no hierarchy of courts
Preliminary Injunction with the RTC. The RTC within the Court of Tax Appeals, for they each
denied the application for a Writ of Preliminary remain as one court notwithstanding that they also
Injunction. Since its motion for reconsideration work in divisions. By analogy, the Supreme Court
was denied, Talin Company filed a special civil sitting En Banc is not an appellate court vis-à-vis its
action for certiorari with the CA. The divisions, and it exercises no appellate jurisdiction
government lawyer representing the City of over the latter. Thus, it appears contrary to these
Liwliwa prayed for the dismissal of the petition features that a collegial court, sitting En Banc, may
on the ground that the same should have been be called upon to annul a decision of one of its
filed with the CTA. Talin Company, through its divisions which had become final and executory, for
lawyer, Atty. Frank, countered that the CTA it is tantamount to allowing a court to annul its own
cannot entertain a petition for certiorari since it judgment and acknowledging that a hierarchy exists
is not one of its powers and authorities under within such court. (CIR v. Kepco Ilijan Corporation,
existing laws and rules. Decide. (2014 BAR) G.R. No. 199422, 21 June 2016)

A: The petition for certiorari before the CA must be Q: For the first quarter of 2007, the City of
dismissed, since such petition should have been Manila assessed Cosmos local business taxes
filed with the CTA. As stated in City of Manila v. and regulatory fees in the total amount of
Grecia-Cuerdo, the CTA has the power to determine P1,226,781.05, as contained in the Statement of
whether or not there has been grave abuse of Account dated 15 January 2007. Cosmos
discretion amounting to lack or excess of protested the assessment through a letter dated
jurisdiction on the part of the RTC in issuing 18 January 2007, arguing that Tax Ordinance
interlocutory orders in cases falling within the Nos. 7988 and 801, amending the Revenue Code
CTA’s exclusive appellate jurisdiction. The CTA of Manila (RCM), have been declared null and
therefore has jurisdiction to issue writs of certiorari void. Cosmos received a letter from the City
in such cases. Furthermore, its authority to Treasurer denying their protest. On 8 March
entertain petitions for certiorari questioning 2007, Cosmos filed its complaint with the RTC of
interlocutory orders issued by the RTC is included Manila praying for the refund or issuance of a
in the powers granted by the Constitution and tax credit certificate in the amount of
inherent in the exercise of its appellate jurisdiction. P1,094,786.82. The RTC in its decision ruled in
favor of Cosmos but denied the claim for refund.
Q: Can the CTA En Banc entertain a petition for The petition for review was raffled to the CTA
annulment of a decision of the CTA Division? Division.

A: NO. Annulment of judgment implies power by a The CTA Division essentially ruled that Cosmos
superior court over a subordinate one, as provided Bottling Corporation's (Cosmos) local business
for in Rule 47 of the Rules of Court, wherein the tax liability for the calendar year 2007 shall be
appellate court may annul a decision of the regional computed based on the gross sales or receipts
trial court, or the latter court may annul a decision for the year 2006.
of the municipal or metropolitan trial court. The
laws creating the CTA and expanding its jurisdiction Instead of filing a motion for reconsideration or
(R.A. Nos. 1125 and 9282) and the court’s own rules new trial, the petitioners directly filed with the

UNIVERSITY OF SANTO TOMAS 436

2023 GOLDEN NOTES
 IV. JUDICIAL REMEDIES
CTA En Banc a petition for review praying that Where an assessment is to be protested or
the decision of the CTA Division be reversed or disputed, the taxpayer may proceed (a) without
set aside. In its Resolution of 16 February 2011, payment, or (b) with payment of the assessed
the CTA En Banc ruled that the direct resort to it tax, fee or charge. Whether there is payment of
without a prior motion for reconsideration or the assessed tax or not, it is clear that the
new trial before the CTA Division violated Sec. protest in writing must be made within sixty
18 of R.A. No. 1125, as amended by R.A. No. 9282 (60) days from receipt of the notice of
and R.A. No. 9503, and Sec. 1, Rule 8 of the assessment; otherwise, the assessment shall
Revised Rules of the CTA (CTA Rules). become final and conclusive. Additionally, the
subsequent court action must be initiated
a. Did the CTA En Banc correctly dismiss the within thirty (30) days from denial or inaction
petition for review before it for failure of the by the local treasurer; otherwise, the
petitioners to file a motion for assessment becomes conclusive and
reconsideration or new trial with the CTA unappealable.
Division?
i. Where no payment is made, the taxpayer's
b. Can a taxpayer who had initially protested procedural remedy is governed strictly by
and paid the assessment may shift its Sec. 195. That is, in case of whole or partial
remedy to one of refund? denial of the protest, or inaction by the local
treasurer, the taxpayer's only recourse is to
A: appeal the assessment with the court of
competent jurisdiction. The appeal before
a. YES. The CTA En Banc correctly dismissed the
the court does not seek a refund but only
petition for review. The filing of a motion for
questions the validity or correctness of the
reconsideration or new trial before the CTA
assessment.
Division is an indispensable requirement for
filing an appeal before the CTA En Banc.
ii. Where payment was made, the taxpayer
may thereafter maintain an action in court
The CTA En Banc was correct in interpreting
questioning the validity and correctness of
Sec. 18 of R.A. No. 1125, as amended by R.A. No.
the assessment (Sec. 195, LGC) and at the
9282 and RA. No. 9503
same time seeking a refund of the taxes. In
truth, it would be illogical for the taxpayer
The rules are clear. Before the CTA En Banc
to only seek a reversal of the assessment
could take cognizance of the petition for review
without praying for the refund of taxes.
concerning a case failing under its exclusive
Once the assessment is set aside by the
appellate jurisdiction, the litigant must
court, it follows as a matter of course that
sufficiently show that it sought prior
all taxes paid under the erroneous or
reconsideration or moved for a new trial with
invalid assessment are refunded to the
the concerned CTA division. Procedural rules
taxpayer. (Ibid.)
are not to be trifled or be excused simply
because their noncompliance may have
resulted in prejudicing a party’s substantive 5. PETITION FOR REVIEW ON CERTIORARI TO
rights. (City of Manila and Office of the City THE SC
Treasurer of Manila v. Cosmos Bottling
Corporation, G.R. No. 196681, 27 June 2018) Effect of Appeal to the Supreme Court
The MR or MNT filed before the Court shall be
b. YES. A taxpayer who had protested and paid an
deemed abandoned if, during its pendency, the
assessment may later on institute an action for
movant shall appeal to the Supreme Court (Sec. 1,
refund.
Rule 16, RRCTA)

437
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FACULTY OF CIVIL L AW
 TAXATION LAW
Q: Who may file an appeal to the Supreme Court
by petition for review on certiorari? Procedures on Appeal of Decision to the CTA and
Beyond
A: A party adversely affected by a decision or ruling
of the Court En Banc may appeal therefrom by filing
1. Appeal within thirty (30) days from receipt of
with the Supreme Court a verified petition for
decision or period of inaction of the CIR, COC,
review on certiorari within fifteen (15) days from
Secretary of Finance, or the CBAA or the RTC
receipt of a copy of the decision or resolution, as
provided in Rule 45 of the ROC. GR: Appeal to the CTA Division by a petition for
review under Rule 42 within thirty (30) days.
If such party has filed a MR or MNT, the period
herein fixed shall run from the party’s receipt of a XPNs: In case of decisions of the CBAA or RTC
copy of the resolution denying the MR or MNT. (Sec. in the exercise of its appellate jurisdiction,
1, Rule 16, RRCTA) appeal to En Banc by a petition for review under
Rule 43.
Q: Does the CTA have jurisdiction over an action
to collect on a bond used to secure payment of In criminal cases, appeal from the decision of
taxes? the RTC decided in the exercise of its original
jurisdiction is via a notice of appeal filed within
A: NO. An action filed by the BOC against a bonding
fifteen (15) days from the receipt of decision.
company to collect on a bond used to secure
payment of taxes is not a tax collection case but
If the RTC acted in the exercise of its appellate
rather a simple case for enforcement of a
jurisdiction, appeal to the En Banc by a petition
contractual liability. Hence, appellate jurisdiction
for review under Rule 43 within fifteen (15)
over the case properly lies with the CA rather than
days from the receipt of decision.
the CTA. (Phil. British Assurance Co., Inc. v. Republic
of the Phil., G.R. No. 185588, 02 Feb. 2010)
2. In case the decision of the Division was
adverse – file an MR or MNT with the same
Q: Can the SC take cognizance of a petition for
division within fifteen (15) days from the
annulment of a decision of the CTA Division or of
receipt of the decision.
the CTA En Banc?
A: NO. A direct petition for annulment of a judgment NOTE: The MR or the MNT is a condition
of the CTA to the Supreme Court, meanwhile, is precedent before bringing the case to the CTA
unavailing, for the same reason that there is no En Banc. (COC vs. Marina Sales, G.R. No. 183868,
identical remedy with the High Court to annul a final 22 Nov. 2010)
and executory judgment of the Court of Appeals. R.A.
No. 9282, Sec. 1 puts the CTA on the same level as 3. In case the resolution of the Division on the
the Court of Appeals, so that if the latter’s final MR is still adverse – file a petition for review
judgments may not be annulled before the SC, then with the CTA En Banc under Rule 43 within
the CTA’s own decisions similarly may not be so fifteen (15) days from the receipt of the
annulled. And more importantly, annulment of decision. The same rule applies for criminal
judgment is an original action, yet, it is not among cases.
the cases enumerated in the Constitution’s Sec. 5,
Art. VIII over which the SC exercises original 4. In case the decision of the CTA En Banc is still
jurisdiction. Annulment of judgment also often adverse – file an MR before CTA EB or a review
requires an adjudication of facts, a task that the on certiorari with the SC under Rule 45 within
Court loathes to perform, as it is not a trier of facts. fifteen (15) days from receipt of the decision.
(CIR v. Kepco Ilijan Corporation, G.R. No. 199422, 21 (Ingles, 2015)
June 2016)

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 IV. JUDICIAL REMEDIES
CTA Jurisdiction Matrix

SCOPE
1. Decisions of the CIR in cases involving:
a. Disputed assessments
b. Refunds of internal revenue taxes, fees or other charges and
penalties imposed thereto
c. Other matters arising under NIRC or other laws (under BIR)

2. Inaction by the CIR in cases involving:

a. Disputed assessments
b. Refunds of internal revenue taxes, fees or other charges and
penalties imposed thereto
c. Other matters arising under NIRC or other laws (under BIR),
where the NIRC provides a specific period for action, in which
case the inaction shall be deemed a denial.

3. Decisions, orders or resolutions of the RTCs in local tax cases

originally decided or resolved by them in the exercise of their
original or appellate jurisdiction.

4. Decisions of the Commissioner of Customs in cases involving:

a. Liability for customs duties, fees or other money charges
b. Seizure, detention or release of property affected
Exclusive Appellate Jurisdiction c. Fines, forfeitures or other penalties in relation thereto
to Review by Appeal d. Other matters arising under Customs Law or other laws (under
BOC)
5. Decisions of the Central Board of Assessment Appeals in the exercise
of its appellate jurisdiction over cases involving the assessment and
taxation of real property originally decided by the provincial or city
board of assessment appeals;

6. Decisions of the Secretary of Finance on custom cases elevated to

him automatically for review from decisions of the Commissioner of
Customs which are adverse to the Government under Sec. 2315 of
the TCCP (now Sec. 1128, Custom Modernization & Tariff Act of
2016, as amended).

7. Decisions of the Secretary of Trade and Industry, in the case of non-

agricultural product, commodity or article, and the Secretary of
Agriculture in the case of agricultural product, commodity or article,
involving dumping and countervailing duties under Secs. 301 and
302, respectively of the TCCP, and safeguard measures under R.A.
No. 8800, where either party may appeal the decision to impose or
not to impose said duties.

8. Decisions of the Secretary of Agriculture in the case of agricultural

product, commodity or article, involving dumping and
countervailing duties under Secs. 301 and 302, respectively of the

439
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL L AW
 TAXATION LAW
TCCP, and safeguard measures under R.A. No. 8800, where either
party may appeal the decision to impose or not to impose said
duties.
Criminal Cases Civil Cases
Violations of:
1. NIRC,
2. TCCP, Tax collection cases involving final
3. Other laws administered by and executory assessments for
BIR and BOC taxes, fees, charges, and penalties
Exclusive Original Jurisdiction
where the principal amount of
NOTE: Where the principal taxes and fees, exclusive of charges
amount of taxes and fees, exclusive and penalties claimed is P1M and
of charges and penalties claimed is above.
P1M and above.

Criminal Cases Civil Cases

1. Violations of:
a. NIRC
b. TCCP,
c. Other laws administered
by BIR and BOC 1. Tax collection cases from
judgments, resolutions or
NOTE: Originally decided by the orders of the RTC in tax cases
regular court where the principal originally decided by them.
amount of the taxes is less than
P1M or no special amount claimed. 2. Tax collection cases from
Exclusive Appellate Jurisdiction
judgments, resolutions or
1. Judgments, resolutions, or orders of the RTC in the
orders of the RTC in tax cases exercise of its appellate
originally decided by them. jurisdiction over tax cases
originally decided by the
2. Judgments, resolutions, or MeTC, MTC and MCTC.
orders of the RTC in the
exercise of its appellate
jurisdiction over tax cases
originally decided by the
MeTC, MTC and MCTC.

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 IV. JUDICIAL REMEDIES
FLOWCHART – MODE OF APPEAL

Procedure for Assessment

Legend:

= Discretionary upon the Commissioner on Internal Revenue

= Days within receipt of the Notice

*Note: The prescriptive period for “assessment” shall be 10 years from the discovery of non-filing or false or
fraudulent return.

441 UNIVERSITY OF SANTO TOMAS

FACULTY OF CIVIL LAW
 TAXATION LAW
Protest under the NIRC

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 IV. JUDICIAL REMEDIES
Elevation of Disputes to CTA Division, CTA En Banc, and the Supreme Court

443 UNIVERSITY OF SANTO TOMAS

FACULTY OF CIVIL LAW
 TAXATION LAW

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2023 GOLDEN NOTES