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ATTY. VICTORINO C. MAMAI,ATEO (T]M)
LL.M. (IIARVARD), LL.B. (MLQU), MBA (UE), BBA-CPA
Bar Examiner (2008 and 2012)
Author: Value Added Tax (2013);
PhiliPPine Income Tax (2010);
Tax Rights and Remedies (2011);
Pre-Week Bar Reviewer: Ateneo University (2011);
San Sebastian College-Recoletos (2003-2013);
LYceum ofthe PhiliPPines (2007);
(1989-to date);
Professor oflaw: University ofthe Philippines
Pamantasan ng Lungsod ng Maynila (2007);
De La Salle Universitv/St. Benilde-CREB A (2002-20I3)i
Managing Heacl, Tax Division (1994-2001): Punongbayan & Araullo' -CPAs^
(1993-1994)
Assistani Cimmissioner (Asqessment): Bureau oflnternal Revenue
(2006 to date)'
Managing Partner, V.C. Mamalateo & Associates

Third Edition
20L4

Published & Distributed bY

REX Book Store


856 Nicanor ReYes, Sr' St.
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Philippino Copyright, 2014

bv
Foreword
kt
VICTORIN O C. MAMALA TEO
Many bar candid ates said. "Ta.xation is otn of the m,ore diffrcult
bar subjects to pass." There could be some truth to ttris statement
rsBN 978.97 t-23-87 40_3 because our tax laws are described to be complicated and highly
technical, necessitating a well-rounded knowledge thereof that is
acquired generally through years of studies, experience, and active
No portion of this book may be copied or practice. Taxation becomes even more difficult because our tax laws
re-produced in books, pamphlets, ouflines or notes, are very dynamic, particularly when the tax administration takes
whether printed, mimoographed, typewritten, copied extra-aggressive positions in the interpretation and application oftax
in different oloctronic dsvices or in any other form, for Iaws to be able to generate revenues. As a result thereo{ numerous
distribution or salo, without the wriiten permission deficiency tax assessments issued, which are considered by taxpay-
of the authoroxcept briofpaseages in books, articles, ers as without factual or legal basis, are protested, and tax refund/
reviews, legal paperr, and judicial or other officiai credit cases are filed by taxpayers to recover taxes erroneously paid,
proceedings wil,h proper cltaiion. and necessarily, many decisions on such tax cases are promulgated
by the Supreme Court and the Court of Tax Appeals for the proper
Any copy ofthh book without the corresponding interpretation and guidance of tax officials, taxpayers, and students
number and tho slgnal,ure ofthe author on this pagi oflaw under their power ofjudicial review. The Tax Code, Supreme
either proceodr llom an lllegitimate source or is In Court decisions, and revenue regulations are the basic sources oftax
possession ofono who has no authority to tlispose of laws that must be studied and learned by heart by any bar candidate.
the same.
It is the object ofthis updated Reviewer on Taxation to help the
bar candidates acquire a strong understanding and good knowledge
ALL FIOHTS BESERVED of the principles of tax law, such that no bar question or problem
would be too difficult to answer. T?re discussions ofthe tax principles
in the book have been expalrded to cover not only the 2005 National
..
No,
0610 Internal Revenue Code and Local Government Code, as amended by
the latest tax laws passed by Congress ofthe Philippines, but also the
978-971-23-67 recent relevant decisions of the Supreme Court and administrative
issuances promulgated by the Secretary ofFinance and the Commis-
sioner of Internal Revenue, which also form part of the laws of the
ilr ilililIililil iltil|ililililililil1il land. To inform the reader about the areas and types of questions
given in the past bar examinations, the author included too the bar
05-RV-00079 examination questions in the past years up to 2013 as well as the
suggested answers thereto. For this, I am deeply grateful to the vari-
1ilil ous honorable justices and respected professors oflaw who compose
897 1
ilhm by the Bar Examination Committee on Taxation at the UP College of
Law, for allowing me to make use of the urofficial answers to the bar
nfx pnirviq cor4pANy, iNc. examination questions in this book.
rylx4gply & cRarivE lirhoqnphy
l. i lbnnuno St, Quezon City
Ill Noa, 712.4r'ol. 71241-08
CONTENTS

PART I
GENERAL PRINCIPLES AND
LIMITATIONS ON THE PO1VER OF TAXATION

CIIAFIER I
GENERAL PRINCIPLES

l)efinition of Taxation.. 1
Nature of the Power of Taxation.. 1
It is an attribute ofsovereignty 2
It is legislative in character................... 2
It is generally not delegated to executive orjudicial
department. 3
It is subject to constitutional and inherent limitations 4
Aspects of Taxation.. 5
'l'heory or underlying basis of taxation... 6
Lifeblood theory.......... 6
Benefits-Protection Theory 7
'f'lrc Power to Tax involves the Power to Destroy.... 7
l)r'linition of Taxes 8
Al,tributes or Characteristics of Taxes................... 8
I'rrrposes and Objectives of Taxation.................. 11
'l'rrxcs Distinguished from Other Impositions 13
'Iaxation Distinguished from Eminent Domain
and Police Power.......... 13
'lax v. Debt.. 16
Tax v. Toll 16
'[':rx v. License Fee.......... L7
'l'ax v. Pena1ty................. 19
l)orrlrlc'laxation 19
l,lxcrrrption from Taxation................... 25
'f'rrx l,nws 29
Stututes levying taxes are construed against the government... 29
( lonstruction of statute by predecessors is not binding
on the successors.... 29
lkrtrouctivo zrpplication .. 30
I'rirrt:iplcr ol'lcgislative approval by re-enactment....................... 31,
llcgrrlrrl,iorrs 32
Classifi cation of Regulations 34 PAR'T II
Necessity for Notice and Hearing 35 INCOME AND SITIIHOLDING TA)(ES
Publication.. 35
Special laws prevail over general laws............. 36 CIIAPTER III
Tax Evasion v. Tax Avoidance ............ 37 II{TRODUCTION
Income Tax Systems 81
CIIAPTER II Global Tax System 81
INHEREI{T AND CONSTITUTIONAL Schedular Tax System 83
LIMITATIONS Semi-Schedular or Semi-Global Tax System ........ 85
Features of the Income Tax Law.... 87
Inherent Limitations 42 Criteria in imposing income tax............... 89
The levy must be for a public purpose. 42 Citizenship Principle 89
Non-delegation of the legislative power to tax. ............. 45 Residence Principle 89
Exemption from taxation of government entities. 46 Source Principle...... 90
International comity. 46 When is income taxable? 90
Territorial jurisdiction. 48
Constitutional Limitations ................... 49 CHAPTERIV
No person shall be deprived of life, liberty.or property KINDS OF TA)PAYERS
without due process of law ......... 49
Nor shall any person be denied the equal protection Kinds ofTaxpayers 91
Citizens 92
of the laws 51
Resident citizen v. nonresident citizen 95
The rule oftaxation shall be uniform and equitable.
Engaged in trade or business or exercise ofprofession v.
The Congress shall evolve a progressive system
salaried employee 95
oftaxation 57
Types of nonresident citizens 96
No law impairing the obligation of contracts shall
AIiens.......... 97
be passed 63
The free exercise and enjoyment ofreligious profession
Definition of "residence.' ................. 97
Nonresident Alien Engaged in Trade or Business
and worship, without discrimination or preference,
shall forever be allowed in the Philippines ........... 98
66
Freedom ofthe press Nonresident Alien Not Engaged in Trade or Business
66
Tax exemption ofproperties for religious, charitable, in the Philippines............ 99
Employees entitled to preferential tax rates 100
and educational purposes 68
All appropriation, revenue or tariffbills shall originate Filipino employees of multinational corporations ....................... 100
Iiistates and Trusts... r02
from the House ofRepresentatives, but the Senate ( )o-ownership...................
may propose or concur with amendments............., 72 104
( lo-ownership Due to Death of a Decedent.....
No law granting any tax exemption shall be passed without t04
( icneral Professional Partnerships (GPP) ..........
the concurrence of a majority of all the members 109
I )omestic Corporations and Foreign Corporations 111
of the Congress................ 76
'lbst in determining Status of Corporations................. TI2
Every bill passed by Congress shall embrace only
I )oing Business.................. 113
one subject, which shall be expressed in
I'rr rl,nerships 113
the title thereof ........ 78
.loi rr t Ventures................. t1.4
Congress shall evolve a progressive system oftaxation. 79
Fllements of joint venture tL4
Supremacy of the national government over local
governments in taxation. F)xemptjoint venture or consortium is an unincorporated
79
joint venture or consortium engaged in construction
activity or energy-related project. 115
llllt rrrlings prior to Revenue Regulations No. 10-2012 Lt7
'llrxrrlrk' .lrint Vt:nturos ................. 118
Resident Foreign Corporation. 119 Trade or business income or professional income..... 1b8
Philippine branch ofa foreign corporation is merely an extension Gross income from business....... 159
of the foreign head office 119 property
Lease ofreal 1G0
Types of Resident Foreign Corporations 721 income
Professional 169
Capital Assets 164
CIIAI'TER V Shares ofstock ofa domestic corporation 164
GROSS INCOME Real property 169
Gross income ......,.......... 125 Deed of Exchan9e............ I7l
Net income ........... ....::.::.:.:::::.:...:.::: :::...:..:.:::....... 125 Rules on non-redemption ofproperty sold during
To whom income is taxable..... 126 involuntary sa1es............. I7I
Source Rules........... L28 Real property located outside the Philippines................. r72
Interests: Residence ofthe debtor or obligor \28 Other capital assets 178
Dividends: Residence of the corporation paying diuidend..'...'.... 729 Passive Investment Income......... 179
Services: Place of perforrrlance of the seru ice t29 Interest income t79
Income from turnkey contract with onshore Revenue Memorandum Circular (RMC) Nos. 77-2012,81-2012,
and offshore Portions...'. " 130 and84-2012 clarified Revenue Regulations No. L4-2012. r82
International shipping line .............. 131 Dividend income 186
International air carrier .......'.'....'..1... 131 Distinctions between Cash Dividend and Stock Dividend 187
Rentals and royalties: Location or use of the property Stock dividends ................. 188
or interest in such property......'....... L34 Rules on taxation of dividends 189
Sale ofreal property: Location of real property 135 Dividend is paid by a domestic corporation 189
Sale of personal property 135 Royalty income......... L94
Definition of Income..... 136 Royalty paid by a Domestic Corporation. 195
Distinctions between Capital and Income ' t40 Royalty paid by a foreign corporation 197
Tests in determining income t40 Rental income......... t97
Realization test ............. 140 Other Income................... 198
Claim of right doctrine 140 Income from any source whatever 198
Income from whatever source L40 Prizes and awards 199
Economic benefit test ............. 14t
742
CIIAPTERVI
Significance of knowing the \pe or Character of Income
EXCLUSIONS FROM GROSS INCOME
Compensation Income...... L42
Who is an employee? .................. 743 Items of exclusion representing Return of Capital 2r2
Compensation Income of Philippine Nationals and Aliens ltem of exclusion because it is subject to another internal
Employed by Foreign Governments and International revenue tax 2t2
Organizations in the Philippines.. 744 Items of exclusion because they are expressly exempt
Foreign Embassies and Diplomatic Missions. t45 from income tax .............. 2I2
Aid Agencies of Foreign Governments.'.. "............. 745 Under the Constitution................ ZI2
Advisory Committee on Voluntary Foreign Aid-USA...... 745 Under a tax treaty. 212
Aid Agencies 145 Llnder Special Laws ZIg
Asian Development Bank (ADB) 746 n. llnder R.A. 6938 (Cooperatiue Code of the Philippines) 2Ig
Statutory Minimum Wage........... r46 lr. Llnder R.A. 7279 (Urban Deueloprnent Housing Act of 1g92) .... 2IB
Backwages, Allowances, and Benefits Awarded (' Ljnder R.A. 7653 (New Central Bank Act) ............. 2I4
in Labor Dispute........ 147 rl. lJnder R.A. 7916 (PEZALav) ........... 2L4
Items Not Included as Compensation Income 148 ('. [lnder R.A. 9178 (Barangay Micro Business Enterprises
Fringe Benefits 150 Act of2002) 2t5
De minimis benefits 153 l'. Itx:al Water Districts are erempt from income ta.x ,.............,.,..... 2IE
Stock option p1ans............ l5ilr g. Inutn.tiues under R.A. 9856 (The Real Estate Inuestment

xl
Trust Act of 2009) 2L6 Failure to strictly comply with Revenue Memorandum
Persons entitled to enjoy incentiues.... 2r7 Order No. 1-2000, which requires the taxpayer
Requisites for Exe mption................... 2r7 to secure prior tax treaty relief from the BIR, will
Ta* Incentiues ................. 218 not deprive taxpayers of the benefit of a tax treaty .......... 242
h. R.A. 9505 (Personal Equity and Retirement Non-stock, non-profit private educational institution 252
Account [PERA] Act of2008) 2r9 Requirement for revalidation of tax exemption for non-stock,
Under the 2005 Tax Code 220 non-profit corporations and associations 254
Exempt corporations and associations .............. 220
Exclusions from Gross Income 221 CIIAPTERVII
Proceeds of life insurance policies 221 RETURN OF CAPITAL AND DEDUCTIONS
Amounts received under life insurance, endowment Return of Capital 255
or annuity contracts...... 222
Sale ofinventory ofgoods by manufacturers and dealers
Value ofproperty acquired by gift, bequest, devise, of properties
223 255
or descent Sale ofstock in trade by a real estate dealer and dealer
Amounts received through accident or health insurance............ 223 in securities 255
Income exempt under treaty 226 Sale of services.................. 256
Retirement benefits, pensions, gratuities, etc. ............. 227 Deductions from Gross Income 258
Retirement benefits receiued under R.A. 7641, Business Expenses..... 259
n.A.4917, and Section 60(8) of the 1997 Additional requirements for deductibility of certain payments........... 261
Tax Code 227 Interests...... 266
Separation pay for causes beyond the control Optional treatment of interest expense on capital expenditure........... 267
of the employee ................. 229 Conditions for deductibility of interest.................
Retirement benefits from foreign gouernrnent agencies ...... 230
.. 267
Taxes 270
P ay rnent s under U. S. Vete rans Adminis tration . -...... -........ 230 Losses 27L
SSS benefits 230 Bad Debt Theory 277
GSIS benefi,ts 230 Losses must be Evidenced by Closed and Completed
Miscellaneous items 23r Transaction 272
Income of foreign gouernments 23L Bad Debts 274
Income deriued from any public utility .......... 232 Tax Benefit Rule 276
Prizes and awards in recognition of religious and Depreciation 277
charitable accomp lis hments ............. 233 Who may take Depreciation 278
Prizes and awards for sports competitions 233 Depreciation cannot go beyond acquisition cost ofproperty
13th month pay and other gross benefits 234 and cannot be based on appraisal value ........... 278
GS/S, SSS, Medicare and Pag -ibig contributions.............. 234 Rules on Depreciation of Vehicles... 278
Gains realized from the sale or exchange or retirement Conditions for deductibility of depreciation ......... 279
of bonds....... 234 Charitable contributions................... 280
Exempt Corporations 235 Optional Standard Deduction (OSD) ......... 283
Charitable Organizations ................... 237 Basic personal exemptions ................... 284
Clubs for Pleasure, Recreation and Other Non-Profit Purposes.......... 237 Additional exemptions for taxpayer with dependents ............... 284
Non-stock, Non-Profit Hospital...... 238 R.A. 10165 (Foster Care Act of 2012) 284
Educational institutions 241 Status-at-the-end-of-the-year rule ....... 286
Income of non-stock, non-private educational institution Non-Deductible Expenses 287
exempt from taxation under the 1987 Constitution.......... 241
Isolated sale ofproperty by non-stock, non-profit CIIAFTERVIII
foundation 241 TAX BASES AND RATES
Failure to observe requirement does not constitute waiver (ilobal tax system
of right to exemption 242 290
lndividuals.. 2g7

xill
Domestic corporations 292 Income Constructively Received 327
Resident Foreign Corporations 294 When expense is to be claimed as Deduction from Gross Income........ 327
Resident Foreign Corporations that are Subject to Preferential Transactions between Related Parties and Transfer pricing............... 328
Tax Rates 294 Filing of Tax Returns....... 329
International carrier 294 Individuals deriving purely compensation income...... 329
Offshore banking units .........'. 296 Individual deriving purely trade, business or professional
Regional operating headquarters ................... 296 income, or mixed income 331
Branch Profit Remittance Tax on Philippine branch Domestic corporation and resident foreign corporation.. 333
of Foreign Corporations 297 Cumulative computation of quarterly and annual tax liabilities ........ 333
Tax base 297 Capital Gains Tax Returns........ 334
Income ofnonresident foreign corporation subject to preferential Shares of stock of a domestic corporation 334
tax rates 297 Real property located in the Philippines............ 335
Gain from Sale of Property................ 298 Passive Investment Income 335
Transfer for inadequate consideration... ".........' 299
Nature of Asset or ProPertY 301 CIIAPTERXII
Presumed income or gain...'..... 302 WITHHOLDING TA)GS
Passive Investment Incomes 302 Importance of Withholding Taxes...... 336
Remittance of withheld taxes is the responsibility
CIIAPTER D(
of the withholding agent-payor of income .......................... 336
ORDINARY ASSETS AND CAPITAL ASSETS Final Withholding Tax..... 337
Importance of Knowing Nature of Asset 303 Creditable withholding tax................ 339
Sale or Exchange..... 303 Expanded Withholding Tax.............. 339
Capital Assets 305 Persons exempt from withholding tax 340
The income is fixed or determinable at the time of payment...... 34t
CHAT'TERX The income payment is listed in the regulations as subject
TAX.FREE EXCIIANGES to withhoIdinC................... 347
The recipient of income is a resident of the philippines............. 34L
Tax-Free Exchanges 311
The payor-withholding agent is resident of the philippines....... 341
Exchange ofproperty.. 313
3L7
Withholding Agent........... ............................. 343
Original basis of properby to be transferred................... 'lime to Withhold and Remit Tax...............
318 343
Sale of principal residence................'.. 'l'ime to Credit Expanded Withholding Tax From Income Tax............
344
Requisites for Exemption from Tax of Sale of Principal Residence ""' 319 ()onsequences of Non-Withholding of Tax By
the payor of Income ..... 344
()onsequences of Non-Remittance of Tax Withheld
CIIAPTERXI by the
ACCOT]NTING METIIODS AND PERIODS Withholding Agent With Respect to the payee of Income .......... B4E
llrrses of Withholding Tax.............. 845
Methods of Accounting 321 Withholding tax based on gross income......... 845
In case ofconflict, tax rule prevails over accounting Withholding tax based on g"oss selling price or
principle 322 fair market value, whichever is higher 846
Cash method 322 Wit,hholding Tax Rates.... 847
Accrual method........ 322 Vcnuc firr filing withholding tax returns and time
Income is recognized when earning process is complete firr payment of tax 349
and exchange has taken place.....'...... 323
323 PART III
"All events test" is followed for expenses TRANSFER TA)(ES
Installment method 323
Sale of real property involving deferred payments.... 324 CIIAPTER XIII
Percentage of completion method 324 ESTATE TAX
Long-term contracts...... 325
326 'l'rrr rrsfi'r'l'irxcs ..
When included in Gross Income......... 350

xlv
Distinctions between donation inter uiuos and Donation Donation of Conjugal Property...... 388
mortis causa........... 350 Right of Accretion............. 388
Estate Tax ............. 352 Transfer for Insufficient Consideration............... 391
Nature and Object of Estate Tax .............. 352 Exemptions under Special Laws......... 392
Rates of estate tax........... 352 Procedure for computing net gifts.... 395
Justification of Estate Tax.............. 353
PART IV
Reasons for Taxability of Transfers of Property 354
VALTIE ADDED TAX (VAT)
Death is the Generating Source of Power...... 354
Law and Market Value at the Time of Death is Applied.... 354 CIIAPTERXV
Residence 355 II{TRODUCTION
Gross Estate 355
Settlement of Estate 356 Characteristics of Value Added Tax ............. 399
Tax on value added. 399
Partition and Distribution of Estate................... 356
Tax Credit Method........ 400
Decedent's Gross Estate 358
Sales tax 40r
Kinds of Property Embraced Under Decedent's Interest 358
Taxable transactions 402
Intangible personal property...... 361.
Broad-based tax on consumption in the Philippines ........... 402
Reciprocal Exemption as to Intangible Personal Property 362
Destination Principle...... 402
Transfer in Contemplation of Death................:. 362
Indirect Tax.............. 403
Circumstances taken into account 363
Revocable transfers (Transfer With Retention or Reservation
Cumulative through the chain of distribution of goods
and performance of services................ 404
of Certain Rights) 364
Tax-inclusive method./separate indication of VAT ... 404
Transfer of Property Under General Power of Appointment .............. 365
Value added tax does not cascade. 405
Proceeds of Life Insurance.... 367
Principle of Recoupment of Tax 405
Exclusive property 368
Exemptions under special Iaws........... 369 CHAPTER XVI
Funeral expenses 370 PERSONS LIABLE TO TAX
Claims against the estate.... 37L
Claims against insolvent persons 372 Taxable persons 406
Unpaid mortgages and taxes..... 372 Husband and wife 406
Losses.......... 373 Joint venture .................. 407
Family home............ 373 Government 407
Standard Deduction.... 373 Non-stock, non-profit association or organi2ation ....................... 408
Medical Expenses..... 374 Condominium corporation 408
Property Previously Taxed (or Vanishing Deduction) 374 Subdivisions or Villages Homeowners Associations 409
Limitations as to Amount of Deduction Allowable .t /D Recreational or sports club ............. 4r0
Assunta 377 Importer...... 477
Valuation of Property 378
CHAPTERXVII
CIIAPTER)ilV OUTPUT TAX ON SALE
DONOR'S TAX OF GOODS OR PROPERTIES

Nature of gift tax..... 383 l,lkrrrrcnts of taxable sale of goods or properties 41.4
Purposes of Donor's Tax .............. 384 Srrk: olgoods or properties 474
Rates of Donor's Tax....... 384 'l'.y1xrs of sales ................... 415
Taxable Transfers 385 At:tual sale ............. 415
Essentials of a Taxable Donation..... 387 I )oemed sale.............. 415
Donative Intent.......... 387 l,lxlxrrt sale.............. 416
Consideration .................. 388 ( irxxls or properties 4I7

xvii
For valuable consideration 4I8
ln the course oftrade or business. Advance rental payments.............. 44r
418 Reimbursement of expenses ................. 442
Goods are consumed or for consumption in the philippines. 419 Tax implications and recording of deposits/advances made
Absence of profit or margin does not make the perfoimance
by clients to GPP for expenses 442
of taxable serwices for a fee exempt from VAT 420 Tax implications and recording of depositVadvances
CIIAPTERXVIII for expenses received by taxpayers not covered
OUTPUT TAX ON SALE OF SER\rICES by RMC 89-2072 443
Deposits/advances part of gross receipts 443
Categories of services... 422 Claim for deduction ofexpenses 443
ProfessionaVtechnical consultancy. 422 Income pa;rments are subject to appropriate WT........................ 443
Transfer oftechnolory 422 Issuing ORs for deposits and advances .................. 444
Lease or use ofintangible property 423 Customs broker 444
Lease or use oftangible property 423 Media advertising 445
Requisites for taxability of services 423 Travel agency......... 445
Sale of services ................. 423 Hotel, restaurant, and caterer 445
Service in the course of trade or business 424 Hotel guests, regardless ofnationality, are subject
Lease of properties owned by non-residents....-.........
425 to value added tax..... 445
Actual or constructive receipt 425 Providing limousine service by a hotel to customers 446
Dealer in securities 426 Gross receipts do not include monies or receipts entrusted
Franchise grantees....... 426 to the taxpayer which do not belong to them and do
Lending investor 428 notredound to the taxpayer's benefit.. 446
Categories of exemptions .................. 430 Tolling fees received by a hotel for PLDT is not part
Exempt persons 430 ofits gross receipts 447
Exempt transactions 430 VAT on operator of tollways 448
Transactions with exempt persons 430 Non-life insurance company...... 449
Scope of exemption............
43I Dealer in securities 449
Partial exemption... 431 Security agencies 449
Total exemption.............. 431 Movie and Cinema Houses 450
Effectively zero-rated transaction.. 434
Exemption based on location 434
CIIAPTER)O(
RATES OF VAT
CIIAPTERXD(
TAXBASES Output Tax.............. 455
Input Tax.... 455
Actual sale ofgoods or properties 435 Sale ofgoods 455
Sale ofgoods 435 Service charges to foreign vessels engaged in international
Sale of real property....... 436 shipping is zero-rated 462
Sales discounts, returns, and allowances ................. 437 Effectively zero-rated sales to PEZA and BOl-registered
Transactions deemed sale............... 437 firms........... 462
Commissioner's power to determine tax base 437 Zero percent (02,) vAr;; *I#;;;;;:.:..::.......... 463
Sale of services ................. 438 Services other than processing, manufacturing,
The GPP shall be treated as a separate and distinct or repacking of goods must likewise be performed
taxable person from the individual partners for persons doing business outside the Philippines........... 464
composing the partnership............... 440 Zero-rating does not require that the services be destined
VAT is based on income actually received 440 for consumption abroad or be exported .................. 467
VAT is not based on gross billings......... 447 Source offoreigrr currency is not required by law
Gross receipts of HMO includes amounts paid to be zero-rated ............... 467
to hospitals and clinics 441 Sale ofservice to NPC is effectively zero-rated 467
Distinctions between automatically zero-rated and effectively Mandatory Registration 507
zero-rated transactions 468 When to Register as Non-VAT Taxpayer..... 509
Automatic zero rating 468 Optional VAT Registration.....'...... 510
Effectively zero-rated transactions 468 VAT Books of Accounts.. 512
Foreign embassies in the Philippines ........... 468 Invoicing Requirements.....'............ 513
Sales invoice v. Official receipt.....'.... 515
CIIAPTER)Oil 515
EXEMPT TRANSACTIONS
Principalv.Supplementaryinvoicesandreceipts.......'...........
Official receipts and invoices cannot be used
Increased threshold effective January I,20L2 472 interchangeably .............'." 517
Sale of adjacent lots or units within a 12-month period Information in VAT invoice or official receipt......... 518
and parking slots to the same buyer for purposes Additional information in VAT invoice or receipt..... 519
of utilizing as one residential area.............. 473 Issuance of VAT Invoice or Receipt for Non-VAT
or Exempt Sales............ 520
Tax due on transaction
- VAT or OPI?
Theater operators are exempt from VAT....
475
476 Penalties..... 521.
Services subject to percentage taxes......... 477 Consequence of issuing erroneous VAT invoice
or official receipt......... 521
CIIAPTER)OilI F'iling of Return and Payment of Tax 523
II\PUT TAXES VAT returns and declarations .............. 523
Payment of tax............ 523
Sources of input tax credits ... 479
Refund or Tax Credit ofExcess Input Tax 481 Requirement to pay in advance VAT on sale of flour
Categories of Refunds or Tax Credits 482 and time of pa;'rnent of advance VAT...........'. 524
Zero-r ated or effectively zero-rated sales ............ 482 l'inal Withholding Tax..... 525
Excess input tax on purchase ofreal property 483 PART V
Requirements for claims for refund or tax credit arising TAXREMEDIES
from zero-rated or effectively zero-rated sa1es........ 484
Transitional input tax...... 487 CHAPTER)O(rV
Input taxes that may be refunded or credited... 489 INTRODUCTION
Input tax attributable to goods exported 489
lllllOrganizational Structure..... 527
Sale of raw materials to BOl-registered enterprises
whose export sales exceed 70Vo oftotal annual
Agcnts in the Collection of National Internal Revenue Taxes.'...""" " 527
Itrwcrs and Duties of BIR.......... 528
production 489
Power to interpret tax laws and to decide tax case 529
Excess input tax arising from purchase of capital goods............ 489
Petitions involving validity or constitutionality
"Capital goods or properties" 490
oflaw or regulations.- 530
Excess input tax of dissolving unincorporated joint
l\lwer to decide disputed assessments, refunds oftaxes,
venture 490
fees or other charges, penalties.. 531
Allocation of input tax ............... 490
l\rwe r to examine books and other accounting records
Claim for refund or tax credit 49t
and obtain information. 532
Deadline for submission of claim 49L
l'owcr to inquire into banks deposits oftaxpayers. 534
Atlas Consolidated Mining Case (SC-2007) ............ 492 (larnishment of bank deposits .' 535
Mirant Pagbilao Case (SC-2008) ................ 493
I'owrrr lo iissess and collect the correct amount of tax...'.'........" 537
Aichi Forging Company (SC-2010).... 493
Asscssment of correct or proper taxes............ 538
Taganito Mining Case (CTA EB-2011)..... 494
I\rwcr to impute "theoretical interest" to taxpayer's
San Roque, Taganito and Philex Cases (SC-2013) ...................... 495
transactions 538
CTIAPTER )OilII I'owrrr ttot, ttt allow withdrawal of any return, statement
COMPLIANCE REQUIREMENTS or tlecluralion, although the same may be amended......... 539
l'owr,r Lo tlclcgitl,c powors to subordinate officials.... 540
Rcgistrartion Requirements ................... 504

xx
Definition of remedies.. 540 B. Power to Collect Taxes........... 559
Types of remedies under the 1997 Tax Code..... 540 Delinquency tax v. deficiency tax........ 559
Substantive Remedies 54r Distinction between remedies in the collection
Imposition of withholding tax on certain income of deficiency tax and delinquency tax..........'.'.. 559
pa;rments.... 54r Administrative remedies of the government to collect
Issuance of revenue regulations by administrative assessed taxes ........... 560
4gency......... 54L Tax lien 561
Failure to obey summons, including subpoenas... 543 Distraint, levy, or garnishment 563
Declaration under penalties of pedury 543 Distraint of personal property...... 563
Administrative interpretations ehould be respected 543 Levy of real property....... 564
Principle of legislative approval by re-enactment............... 544 Distraint and levy proceedings are validly begun
or commenced by the issuance of the warrant
CHAPTER )OW and service thereofon the taxpayer 564
ADMIMSTRATIVE REMEDIES property................
Sale of 566
OF GOVER}IMENT Forfeiture.... 567
A. Power to Assess 545 Forfeiture of property for want of bidder...... 567
Presumption of correctness...............,... 545 Compromise and abatement................. 567
Basis of Assessment........ ......r.............. 546 Compromise 567
Power of Commissioner to compromise is not absolute "............ 577
Questicn of Fact.......... 546
Question of Law.......... 546 Abatement.. 573
Assessment Process........ 547 Penalties and fines...... 573
1. Examination ofbooks ofaccounts and other CHAPTER)O(VI
accounting records oftaxpayers by revenue officers .II.]DICIAL REMEDIES OF GOVERNMENT
to determine correct tax liability 547
Best evidence obtainable. 548 Civil action 576
Networth method of investigation................. 548 .Iurisdiction over civil actions......... 577
2. Preparation oftentative findings and holding When collectibility of tax liability arises.......... 577
of informal conference 549 Self-assessed tax shown in the return was not paid within
Administrative due process .................. 549 the date prescribed by law 577
Principle ofestoppel 550 Final assessment is not protested administratively within
Power to allocate income and deductions among 30 days from date ofreceipt 578
affiliated taxpayers .... 550 Non-compliance with the condition laid in the approval
3. Issuance of Preliminary Assessment Notice (PAN)........... 551 of protest..... 578
4. Reply.......... 551 Failure to file a timely appeal to the CTA on the final
Tax amnesty as a defense. 552 decision of the Commissioner or his authorized
5. Issuance of Formal Assessment Notice (FAN) representative on the disputed assessment .. 580
and letter of demand 553 Wlrcn to go to court? 581
Legal effects of issuance of FAN/DL.. 556 Wlro approves the filing of civil action? 582
6. Filing of administrative protest by the taxpayer llrrslxrndents in a civil action for the collection of tax........'.. 582
against the assessment................. 557 ( irirrrinal actions 583
7. Submission of documentary evidence and arguments....... 558 A tlnder the 1997 Tax Code 583
8. Denial of protest by the Commissioner or his lnrportant principles on criminal actions......... 587
authorized representative ................. 558 Willful means not merely voluntary, but with a bad purpose.... 591
9. Appealbythe taxpayer ofthe final decision ll t lnder the Tariffand Customs Code ............ 599
of the Commissioner or his authorized lriling of criminal action under the Tax Code during
representative on the disputed assessment I,lrc pctrdency of protest .. 600
to the Court of Tax Appeals ................. 559 l\rrsons liable for criminal prosecution.. 605

xxll xxllt
CIIAPTER )O(VII Significance of assessment'.....'............ 644
CTVIL PENALTIES When must an assessment be made? 644
Basis of assessment......... 645
Surcharges 607 When is a tax assessment made or deemed made?.-.....'.. 647
Deficiency and delinquency interests 610 Issue date 647
Compromise penalties 612 Date of service or mailing 648
Date of receipt.... "............. 649
CIIAPTER )O(VIII Who may sign an assessment notice? 649
REMEDIES OF TAXPAYERS Revised assessment 650
Administrative remedies 615 Forms of protest 651
Judicial remedies 615 When to file administrative protest? ................. 656
Substantive remedies 616 Administrative appeal to the Commissioner........ 659

Questioning the constitutionality or validity oftax statutes Motion for reconsideration on the Final Decision
or regulations................... 616 on Disputed Assessment. 659
Non-retroactivity of rulings ................. 617 Meaning of CIR "decisions" appealable to CTA......... 660
Failure to inform the taxpayer in writing of the legal Denial ofprotest 661
and factual bases of assessment makes it void.................. 618 Direct denial of protest..........'.... 662
Preservation of books of accounts and once-a-year Indirect Denial of Protest..... 663
examination 618 Inaction of the CIR on the protest against assessment may
Publication of RMC and RMO 619 be deemed a denial of protest or taxpayer may wait
Power of CIR to distribute or allocate gross income for CIR final decision on the disputed assessment.. 667
and deductions does not include the power CIIAPTER)OO(
to impute "theoretical interests" to the controlled PRESCRIPTION
taxpayer's transactions 619
Availment of tax amnesty................. 620 Purpose of Statute of Limitations....-........'.'... 670
Procedural remedies 622 Tax Code provisions prevail over Civil Code provisions
The issuance of PAN is mandatory 624 on prescription................. 67I
Assessment is null and void for having been issued on the day Construction of law on prescription (Bar Question [2010]).....' 67I
the PAN was received by the petitioner.... 625 Prescriptive periods under the Tax Code 674
\rpes of taxes................. 629 Period to assess the tax 675
Self-assessing taxes which do not require issuance Burden ofproof 677
of assessment ................... 629 Period to collect the assessed tax.-........'.... 677
Taxes which require assessment to establish liabiIity................ 629 What is a tax return? 678
Tax period of a taxpayer is terminated 629 Effect of filing an amended return....... 680
Deficiency tax liability arising from a tax audit False or fraudulent tax return 681
conducted by the BIR.............. 630 When must fraud be raised by government? 686
Tax lien....... 631 Consequence of failure to prove fraud '.......... 687
Dissolving corporation.. 631 Prescription. 689
When must issue on prescription be raised? 689
CIIAPTER)O(D( Waiver of the defense of prescription......-......'.. 690
ASSE SSMEI{T AND PROTEST
Prescription in relation to acts or delays oftaxpayer.. 692
What is an assessment? ............... 632 Effect offraud assessments which are final and executory 693
Essential requirements for valid assessment.. 632 Extension ofthe prescriptive period. 694
Assessment based on Presumption 634 Differences between extension and interruption
64t ofprescriptive Periods 694
fssuance of LA for discrepancy noted in LN...............
Issuance of valid L4................ 64t llules in cases of more than one waiver signed.......... 697
Forms of assessment................... 643 lnterruption ofthe prescriptive period 700

xxtv
Prescriptive period is not suspended ............. 70t Effectivity of ordinances (Sec. 59, LGC) '......--.' 763
Request for Reinvestigation is granted by BIR 704 Appeal to Secretary of Justice..... 764
Review of tax ordinances............. 764
CIIAPTER)OOil Appeal ofordinances to Secretary ofJustice..... 766
TAX CREDIT OR REFI.]ND Remedies of Taxpayers Against Tax Ordinance....."........'. 767
All national internal revenue taxes, except VAT............. 709 Remedies for the collection of tax............ 769
Value Added Tax (VAT)... 717 Prescriptive Periods........ 770
Tax Credit v. Tax Deduction 7\3 Period to assess local taxes and fees '- 770
Refunds are in the nature oftax exemptions and are construed Period to Collect the Assessed Tax.............. 77L
strictly against the person claiming the same 720 Remedies ofTaxpayers 772
Principle of Exhaustion of Administrative Remedies.... 724
Prior toassessment.. 772
Inaction of the Commissioner on a claim for refund or tax After an assessment.. 772
credit must be construed as a denial of the claim 724
Protest of assessment................... 772
Starting date for counting the two-year period.......... 725
Injunction available against collection oftaxes 773
Income Tax.............. 725
protest 775
Withholding Tax .............. 727
claim for refund.......... 775
Value Added Tax.............. 728 CIIAPTER)OOilII
Interpretation of phrase "regardless of any supervening cause RDAL PROPERTY TAX
that may have arisen after payment" ................. 730
Filing of written claim is mandatory 732 Nature of Real Property Tax.............. 777
Accrual and Payment ofTax 777
PART VI Types of Real Property Tax.............. 778
LOCAL GOVERNMEIVT CODE Real Property Subject to Tax.......... 781
CIIAPTER)OOilI BOT Agreement is not merely a Financing Scheme...'..-- 783
LOCAL BUSINESS TAXES Fundamental Principles 785
Classes ofreal property 788
Constitutional basis ........ 739 Exemptions from real property tax............'.. 789
Local Government Code (R.A. 7160).. 740 Supreme Court decisions on real property taxes ........... .- 791
Scope of Taxing Power of LGUs 74L Manila International Airport Authority (MIAA) v'
Fundamental Principles 742 Paraflaque City (2006)... 79I
Common Limitations 743 MIAA v. Pasay City (2009) 79I
Tax on goods or merchandise passing thru territorial Philippine Fisheries Development Authority (PFDA)
jurisdictions 745 v. CA & Iloilo City.... 792
Excise tax on petroleum products 745 Light Rail Transportation Authority (LRTA) v.
Taxes that may be imposed by provinces 748 Central Board of Assessment Appeals (CBAA) 793
Press ........... 749 Government Service Insurance System (GSIS) v.
Franchise tax................ 749 (2009)..'........
Assessor of Manila 794
Tax on quarry resources 750 of tax............
Civil remedies for the collection 795
Tax on amusements places.......... 751 Power to subpoena does not include contempt power.....'.... 799
Taxes that may be imposed by municipalities and cities..................... 751 Prescriptive periods 799
Double Taxation 752 Taxpayer's Remedies 800
Accrual and payment of tax......... 758 Exhaustion of Administrative Remedies....'....'.'.... 801
Situs of Taxes ................... 760 No Motion for Reconsideration is Allowed Before
Principal office v. branch 761. the Assessor's Office....... 801
Tax Ordinances ............... 762 Payment of tax under protest.......'. 806

xxvl KXVU
PARTVII
TARIFFAND CUSTOMS CODE
CIIAPTER)OOilV
FT]NDAMET{TAL PRINCIPLES
Customs Duties 809
Imported Articles Subject to Duty 809
Prohibited Importations 809
PART I
Conditionally Free Importations 811
When importation begins and ends 82r GENERAT PRINCIPLES ANI)
Bases of Assessment of Duty........
Entry, Withdrawal from Warehouse, for Consumption
822
823
LIMTIATIONS ON IIIE POWER OF TAXATION
Due Process 825
Automatic Review........ 825
Publication.. 826 CIIAPIER I
Claim for Refund......... 827
Seizure and forfeiture proceedings ................... 828 GENERAL PRINCIPLES
Remedies under the Tariffand Customs Code............. 836
Smuggling... 842
Refund of customs duties 845 Definition of Taxation
nTq,rotion'is the power by which the sovereign raises revenue
to defray the expenses of government. It is a way of apportioning the
cost of government among those who in some measure are privileged
to enjoy its benefits and must bear its burden (51 Am. Jur. 34).
Taxation is described as a destructive power which interferes with
the personal and property rights ofthe people and takes from them
a portion of their property for the support of the government (Paseo
Realty & Deaeloptnent Corporation a. Court of Appeals, G.R.
No. 779286, October 73, 2004).

Nature of the Power of Taxation


Bar Question (2005)
Describe the power of taxation. May a legislative body enact
laws to raise revenues in the absence of a constitutional provision
granting said body the power to tax? Explain.

Suggested answer:
The power of ta&ation is inherent in the State, being an attribute
of souereignty. As q.n incident of souereignty, the power to tax has
been described as unlimited in its range, acknowledging in its uery
n.ature no limits, so that security against its abuse is to be found only
in the responsibility of the legislature which imposes the tax on the
Rrvrewrn oN TAxATToN - GpNnnu PnrNcrpr.* PownR r.rr Trxarrox 3
T""#ilffffii#t
cotlstituency who are to pay it (Mactan cebu InternotianolAirport or provide for the administrative as well as judicial remedies that
Authority u. Marcos,26l SCRA GGZ t1g96D. either the government or the taxpayers may avail themselves in the
Being an inherent power, the legislature can enact laws to raise proper implementation of the tax measure (Petron a. Pililla, 798
revenues even without the grant of said power in the constitution. SCRA 82).
It must be noted that constitutional provisions relating to the power
of taxation do not operate as grants of power to the Government, 3. It is generally not delegated to executive or judicial
but instead merely constitute as limitations upon a power which department
would otherwise be practically without limit (cooley, constitutional The power to tax is purely legislative, and which the central
Lirnitations, 1927 8th ed., p. 787). legislative body cannot delegate either to the executive or judicial
department of the government without infringing upon the theory of
Bar Question (1996) separation of powers (Pepsi-Cola Bottling Company of the PhiI.
1. It is an attribute of sovereignty u. Mun. of Tanauan, Leyte, supro,). Delegation of the power to tax
is, however, allowed in the following cases:
The power of taxation is an essential and inherent attribute
of sovereignty, belonging as a matter of right to every independent a. To local governments in respect of matters of local concern
government, without being expressly conferred by the people (pepei- to be exercised by the local legislative bodies thereof(Sec.
Cola Bottling Company of the Phil. a. Mun. of Tanaua.nr Lqsrte, 5, Art. X, 1987 Constitution);
69 SCRA460). b. When allowed by the Constitution. Thus, the Congress
may, by law, authorize the President to fix within specified
Bar Question (2003) limits, and subject to such limitations and restrictions as it
mayimpose, tariffrates, import and exportquotas, tonnage
Why is the power to tax considered inherent in a sovereign State?
and wharfage dues, and other duties or imposts within the
framework of the national development program of the
Suggested answer:
Government (Sec. 28t21, Art. VI, 1987 Constitution);
It is considered inherent in a souereign State because it is a Delegation of legislative powers to the President is
necessary attribute of souereignty. Without this power, no souereign
permitted in Sections 23(2) and 28(2) of Article VI of the
state can exist nor endure. The power to tax proceeds upon the theory
Constitution. By virtue of a valid delegation of legislative
that the existence of a gouernment is a necessity. The power to to,x is an
power, it may also be exercised by the President and
essential and inherent attribute of souereignty, belonging as a matter
administrative boards, as well as the lawmaking bodies of
of right to euery independent state. No souereign state can continue
all municipal levels, including thebarangay (Cannarines
to exist without the means to pay its expenses, and for those means, it
Norte Electric Cooperatiue u. Torres, G.R. No, 727249,
has the right to compel all citizens and property within its rimits to
February 27, L998). Such delegation confers upon the
contribute; hence, the emergence of the power to tan.
President quasi-legislative power which may be defined
as the authority delegated by the lawmaking body to
2. It is Iegislative in character the administrative body to adopt rules and regulations
The power of taxation is essentially a legislative function. The intended to carry out the provisions of the law and
power to tax includes the authority to: (1) determine the (a) nature implement legislative policy.
(kind); (b) object (purpose); (c) extent (amount or rate); (d) coverage
To be valid, an administrative issuance, such as an
(subjects and objects); (e) apportionment of the tax (general or limited
exccutive order, must comply with the following requisites:
application); (f) situs (place) of the imposition; and (g) method of
collection; (2) grant tax exemptions or condonations; and (3) specify l. lts promulgation must be authorized by the
k,gislirl,rrn';
Rnlrnwrn ou Taxlrrox Gonrnar, Pniucpr,es lNo Lnr.trrauoxs oN TrrE Powrn or TexarroN 5
General Principles

2. It must be promulgated in accordance with the In our jurisdiction, which of the following statements may be
prescribed procedure; erroneous?
3. It must be within the scope of the authority given by 1. Taxes are pecuniary in nature.
the legislature; and
2. Taxes are enforced charges and contributions.
4. It must be reasonable (Hon. Exec. Secretanyt u.
Southwing Heauy Ind.ustries, et al., G..R. No. 3. Taxes are imposed on persons and property within the
764777, Febrwary 20, 200G). territorial jurisdiction of a State.
c. When the delegation relates merely to administrative 4. Taxes are levied by the executive branch of the government.
implementation that may call for some degree of 5. Taxes are assessed according to a reasonable rule of
discretionary powers under a set of sufficient standards apportionment.
expressed by law (Ceruantes u. Auditor General, gL
Phil. 359), or implied from the policy and purpose of the Justifu your answer or choice briefly.
Act (Maceda u. Mocaraig, 797 SCRA ZZI).
Suggested answer:
Bar Question (2003) Taxes qre leuied by the executiue branch ofgouernment.
May Congress, under the 1987 Constitution, abolish the power This statement is erroneous because "leuy' refers to the act of
to tax of local governments? imposition by the legislature which is done through the enactment of
s tax law. Leuy is an exercise of the potuer to tax, which is exclusiuely
Suggested answer: legislatiue in nature and character. Clearly, taxes are not leuied by
the executiue branch of gouernment (NPC a. Albay, 186 SCRA lgS
No, Congress cannot abolish what is expressly granted, by the
tleeoD.
fundamentol law. The only authority conferred to Congress is to
prouide the guidelines and limitations on the local gouernment's
exercise of the power to tax (Sec. 5, Art. X, lg87 Constitution). Aspects of Taxation
Well-known authors describe that the exercise of taxation
4. It is subject to constitutional and inherent limitations has three (3) aspects, namely: (a) levy; (b) assessment; and (c)
The power to tax is said to be the strongest of all the powers of collection. The power to levy taxes is vested with the Congress of
goyernment. It is unlimited, plenary, comprehensive and supreme, the Philippines, and all revenue or tariff bills shall originate from
in the absence of constitutional restrictions, the principal check the House of Representatives, but the Senate may propose or concur
on its abuse resting in the responsibility of members of Congress with amendments.l The power to levy taxes, which involves tax
to their constituents. However, the power of taxation is subject to policy, is essentially legislative in character, although the power may
constitutional and inherent limitations. lre delegated to executive agencies with respect to administrative
rnatters, provided that adequate guidelines or safeguards prescribed
rrre fbllowed in the administration of tax laws. This delegated power
Bar Question (2004)
l,r the executive department has been described as "administrative
Taxes are assessed for the purpose ofgenerating revenue to be rcgulation" or "subordinate legislation."2 The power to assess and
used for public needs. Taxation itself is the power by which the state collect taxes involves tax administration and is exercised by the
raises revenue to defray the expenses ofgovernment. Ajurist said
that a tax is that we pay for civilization. rStx:. 24, Arl.. Vl, l1)ll7 (lonstitution.
)Scc.244, Nllt(l; ()rrlrrlrrng v. Williurrrs, ?0 lrhil.
?26
RrvrnwnR oN TaxetIoN Gpxrnnr- PnrNcreres eNn L:Tilfiffiil* pownn or TexarroN 7

executive department of government, particularly the BIR with of taxes is generally withheld by the laws imposing such taxes. Euen
respect to internal revenue taxes. when it is not so under procedural laws, such an injunction may not
be obtained os held in the case of Valley Ttad.ing Co. v. Court of
First rnstance, L-49529, March gr, 7ggg, where the suprente court
Bar Question (2006) ruled that the damages thot may be caused to the tarpayer by being
Enumerate the 3 stages or aspects of taxation. Explain each. made to pay the tares cannot be said to be as irreparable as it would
be against the gouernment's inability to collect tares.
Suggested answer:
The three stages or aspects of taxation are:
2. Benefits-ProtectionTheory
Taxes are what we pay for civilized society. Without taxes,
Leuy. - This refers to the enactment of a law by Congress,
the government would be paralyzed for lack of the motive power
imposing a tax.
to activate and operate it. Hence, despite the natural reluctance to
Assessment and collection. This is the act of administration
- surrender part of their hard-earned income to the government, every
and. irnplementation of the tuc law by the executiue department through person who is able to must contribute his share in the running of the
the qdminis t retiue agencies. government. The government, for its part, is expected to respond in
the form of tangible and intangible benefits intended to improve the
Payment. - This is the act of compliance by the taxpayer,
lives of the people and enhance their moral and material vafues. This
includ.ing such options, schernes or remedies as nxay be legally
symbiotic relationship is the rationale of taxation and should dispel
auailable to him.
the erroneous notion that it is an arbitrary method of exaction by
those in the seat of power (Comtnissioner u. Algue, I5g SCRA gj.
Theory or Underlying Basis of Taxation
1. Lifeblood Theory The Power to Tax involves the power to Destroy
The existence of government is a necessity; it cannot exist nor This principle is pertinent only when there is no power to tax
endure without the means to pay its expenses; and for those means, a particular subject and has no relation to a case where such right
the government has the right to compel all its citizens and property to tax exists. Instead ofbeing regarded as a branket authorization of
within its limits to contribute in the form of taxes. the unrestrained use ofthe taxing power for any and all puqposes,
this maxim is reasonably construed as an epigrammatic statement
Bar Question (1991) of the political and economic axiom that since the financial needs of a
state may outrun any human calculation, so the power to meet those
Discuss the meaning and the implications of the following needs by taxation must not be limited even though taxes become
,,Taxes are the lifeblood of government and their prompt
statement: burdensome or confiscatory. The phrase describes not the purpose
and certain availability is an imperious need." for which the taxing power may be used but the degree of vigor with
which the taxing power may be employed in order to raise
Suggested answer: (McCulloch a. Maryland, US 4 Wheat. 816). ""rr"no"
*tatres are the tifeblood' of government, etc'"
The phrase The power of taxation is sometimes also called the \touter to
ex.presses the underlying basis of taxation which is gouernmental destroy."Therefore, it should be exercised with caution to minimize
nicessity, for ind.eed, without taxation, a gouernnxent can neither erist l,he injury to the proprietary rights of a taxpayer. It must be exercised
nor end.ure. Taration is the indispensable and ineuitable price for firirly, equally and uniformly, lest the tax collector kill the "hen that
ciuilized. society; without tq.xes, the gouernrnent would be paralyzed. l.ys the golden eggs." In order to maintain the general public's trust
This phrase has been usedto justify the ualidity of the laws prouiding rrnd confidence in the government, this power must be used justly
for simmary remedies in the collection of toxt's. ls e utn,s?trteru:c ol'
'the, rrnd nrrt tretrcherrusly (Roro,e y Cia o. Court of Tar Appeatsr 23
aboue nil<:, on iniuncti,ort t44rittsl /ltr'tts'..lr'ssrttt'ttl tttttl ttllu'littrt
Rpunwnn oN TaxerroN GrNnRar, Pnructplns aNn Lrurtatrots oN THE pownR or Taxarlot g
General Principles

scRA 276).Taxation does not necessarily and unavoidably destroy. C o. v . C olle c tor of Int ernal Rea e nu. e, L- I 0 5 Z 4, May 2 8,
To carry it to the excess of destruction would be an abuse; to presume 1958).
it would banish that confidence which is essential to all governments. 2. It is assessed in accordance with some reasonable rule of
apportionment which means that conformably with the
Bar Question (2000, 1996) constitutional mandate for Congress to evolve a progressive
tax system, taxes must be based on taxpayer,s ability to
Justice Holmes once said: "The power to tax is not the power
PaY (Sec. 28[a], Art. VI, 1987 Constitution).
to destroy while this court (the supreme court) sits." Describe the
power to tax and its limitations. 3. It is a pecuniary burden payable in money, but backpay
certificates may be used in payment oftax (Borja v. Gella,
Suggested answer: 8 SCRA 602).The taxpayer is not allowed to settle his tax
liability by conveying property (real or personal) in view
The power to ta.x is an inherent power of the souereign which is
ofthe problem ofassigning value to such property.
exercised,ihrough the legislature, to impose burdens upon subjects and
objects within its jurisdiction for the purpose of raising reuenues to 4. It is imposed by the State on persons, property, or excises
cirry out the legitimate objects of gouernment. The underlying basis within its jurisdiction, in accordance with the principle of
gouernment
for its exercise is gouernm.ental necessity for without it no territoriality.
cq,n exist nor end.ure. Accordingly, it has the broqdest scope of all
the powers of gouernment because in the absence of limitations, it is
5. It is levied by the legislative body of the State. Taxes
are obligations created by law (Vera u. Fernand.ez, 8g
coniidered as unlimited, plenary, comprehensiue and supreme' The two
SCRA 199). Atax creates a civil liability on the part ofthe
limitq,tions on the power of ta*ation are the inherent and constitutional
delinquent taxpayer, although the non-payment thereof
lirnitations which are intended to preuent abuse on the exercise of the
creates a criminal liability which could be the subject
otherwise plenary and unlimited power. It is the Court's role to see to
of criminal prosecution under existing laws. It is one's
it thqt the exercise of the power does not transgress these lirnitations. civil liability to pay national internal reyenue taxes that
gives rise to criminal liability, not the other way around.
Definition of Taxes Criminal cases cannot operate to discharge defendant-
"Ta,*es" are the enforced proportional contributions from appellee from the duty of paying the taxes which the law
persons and property levied by the lawmaking body of the state by requires to be paid, since that duty is imposed by statute
.\ri"to" of its sovereignty for the support of government and for all prior to and independently of any attempts by the taxpayer
public (1 cootey 62). Ataxis a financial obligation imposed by a to evade payment (Republic u. Patanao, ZO SCRA ZIZ).
-stutu needs
otr persons, whether natural or juridical, within its jurisdiction, 6. It is levied for a public purpose.
or property owned, income earned, business or profession engaged in,
o" uny such activity analogous in character for raising the necessary 7. It is personal to the taxpayer. A corporation's tax
revenues to take care of the responsibilities of government (Republic delinquency cannot be enforced against its stockholders.
u. Philippine Rabbit Bus Lines, 32 SCRA 21L). A corporation is vested by law with a personality that is
separate and distinct from those of the persons composing
Attributes or Characteristics of Taxes it as well as that of any other legal entity to which it
may be related (Sunio a. National Lobor Relations
1. It is a forced charge, imposition or contribution' As such, Comm.ission, 727 SCRA 390). Stockholders may be held
it operates q'd' inuitum; i'e., it is in no way dependent liable for the unpaid taxes of a dissolved corporation, if it
opott th" will or contractual assent, express or implied, of appelrs that the corporate assets have passed into their
the person taxed. It is not contractual, either express or hands without the payment of taxes. The creditor of a
inrpiitlcl, but p,sitiv. trcts rl{'g'vtlrnmtrnt' (Panay Electric tlir.qsolvc<l r:orponrtion rnay firll<lw its assets once they passed
10 Rnvmwrn oN Taxetlot'I GnNencL PRwcrpt ts eNn Lrnarrartons oN THE powrn or TlxauoN 11
General Principles

into the hands ofthe stockholders. The legal death ofthe Bar Question (2000, 2006)
corporation does not prevent such action that would the
Among the taxes imposed by the Bureau of Internal Revenue are
physical death of an individual prevent the government
income tax, estate and donor's tax, value added tax, excise tax, other
from assessing and collecting taxes from his administrator
percentage taxes, and documentary stamp tax. classify these taxes
who holds the property which the decedent had formerly
into direct and indirect taxes, and differentiate direct from indirect
possessed.
taxes.
The coconut levy funds are deemed as an exercise of
the State's police and taxing power. Coconut levy funds Suggested answer:
partake of the nature of taxes which, in general, are Income tax, estate tar a,nd donofs tar are considered, os direct
enforced proportional contributions from persons and taxes. on the other hand, ualue added tax, excise tax, other percentage
properties exacted by the State by virtue ofits sovereignty tax, and documentary stamp tq,x are indirect tu,xes.
for the support of government and for all public needs.
Based on this definition, a tax has three (3) elements, A direct to.x is demanded from the uery person who, as intend.ed,,
namely: (a) it is an enforced proportional contribution from should pay the tax which he cqnnot shift to another, while an ind.irect
persons and properties; (b) it is imposed by the State by tar is demanded in the first insta,ce from one person with the
virtue ofits sovereignty; and (c) it is levied for the support expectation thqt he can shift the burden to someone else, not as a tqx
of the government. The coconut levy funds fall squarely but as part of the purchase price (Maced.a a. Macaraigr Z2g SCRA
into these elements (Republic u. COCOFED, et al., G.B,, 217).
Nos. L47O62-64, December 14, 2OO1) -
Purposes and Objectives of Taxation
Bar Question (2004) Taxation is used not only to raise revenues but also for other
For failure to comply with certain corporate requirements, essential purposes of government. The following are the objectives
the stockholders of ABC corp. were notified by the securities and of taxation:
Exchange Commission that the corporation would be subject to 1. Revenue To raise revenue to promote the general
involuntary dissolution. The stockholders did not do anything to -
welfare and protection of its citizens. The power of taxation
comply with the requirements, and the corporation was dissolved. is circumscribed by inherent and constitutional limitations.
can the stockholders be held personally liable for the unpaid taxes
ofthe dissolved corporation? Explain briefly. 2. Regulatory - Taxation is no longer envisioned as a
measure merely to raise revenue to support the existence of
Suggested answer: government; taxes may be levied with a regulatory purpose
to provide means for the rehabilitation and stabilization of
No. As a general rule, stochholders cannot be held personally a threatened industry which is affected with public interest
Iiable for the unpaid taxes of a dissolued corporation. The rule as to be within the police power of the state. There can be
preuailing under our jurisdiction is that a corporation is uested by no doubt that the oil industry is greaily imbued with public
7aw with a personality that is separate and distinct frorn those of the interest and stabilization of oil prices is a prime concern
persons composing it (Sunio u. NLRC, 127 SCRA 390 t19841). which the state via its police power may properly address
( C altex P hils. o. C ommis sion on Au d.it, 2 0 8 SC RA
Howeuer, stockholders may be held liable for the unpaid tones Z2 6).
ofa dissolued corporation, ifit appears that the corporate assets haue The ulawful subjects', and rrlawful m,eansu tests are used
passed into their hands (Tan Tiong Bio a. CIR, 4 SCRA 986 I 1962 I )' to determine the validity of a law enacted under the police
-Likewise, power. While police power is inherent in the state, it is not
when stochholders haue unpaid subscriptions to the capital
of the corporatiln, they can be m<ulc liahle for wtJt<t'id' kwes of thc in nrrrnicipal corporations (Balacuit a. CFI of Agusan
atrporul.i ttrt I o I,l u' rxl a n l ol' l h ei r u.nlxtitl ar bsc riptittrt s' del Norle, 163 SCITA ISZ).
12 ltt';vtt':wt';tt ot't'l'lx,l't'ttttt ( it,lttt,:ttnt, IttttNt'tt't,t'tri nrutr l,tttt,t,n't.toNs ( )N 't.lil,1 Itowt,It 0t,. 'l'ifXnf,t<)I.t 13
( ft ,rrt.rrrl lrri rrr:iplcs

Section 73 of Commonwealth Act 123 and Section I,:n's. Hotrt:uer, police pouer moy be exercised, jointry with the power
61 of the Land Transportation and Traffic Code requires rl'ltttcttiltn t'ir
the purpose of raising reuenues (Lutz a. Araneta, gg
owners ofvehicles to pay registration fee in the registration Phit. t48).
of their vehicles. The purpose of the law is to raise funds
for the construction and maintenance of highways and to 4. Reduction of social inequality
-
progressive system
a much lesser degree, pay for the operating expenses of oftaxation prevents the undue concentration ofwealth in
the administering agency. The Court ruled that the fees the hands of a few individuals. progressivity is keystoned
may be regarded as taxes even though they also serve as on the principle that those who are able to pay shoulder
an instrument of regulation (Philippine Airlines,Inc' the bigger portion ofthe tax burden.
v. Ed'u, G..R. .l\/o. L'47383' August 75, 1988).
5. Encourage economic gfowth by granting incentives
The amount of license fees that may be imposed upon and exemptions
the operation of slot machines, which includes juke box,
- The power to tax and the power to
exempt are inherent in the State and in local governments.
pinball and other coin-operated contrivances, based on an But the power to condone taxes does not exist, save in the
ordinance passed by the Municipal Board of Manila for condonation of taxes (e.g., real property tax) which can be
regulatory purposes, cannot be prohibitive, extortionate, granted only for certainjustifiable reasons expressly stated
confiscatory or in an unlawful restraint oftrade, but should in the law (Sec. 2ZG, Local Gouernment Cod,e).
be approximately commensurate with and sufficient to
cover all the necessary or porbable expenses for issuing the
6. Protectionism - To protect rocal industries from foreign
competition.
license and ofsuch inspection, regulation and supervision
as may be lawful (Morcoin Co. Ltd.. u. City of Manila,
Taxes Distinguished from Other lmpositions
et al., G.R.No. L-75357, January 28,7967)'
3. Promotionofgeneralwelfare - Taxationmaybeused l. Taxation distinguishedfromEminentDomainandpolice
police power to promote the general Power
as an implement of the
welfare of the PeoPle.
Taxation Eminent Domain Police Power
Authority May be exercised
Bar Question (1991) who Exer- only by the govern-
May be:
(1) Exercised
May be exer-
by the cised only by the
The police power, the power to tax and the power of eminent cises the ment or its political government or its government or its
Power subdivisions. political subdivi- political subdivi-
domain aie inherent powers of government. May a tax be validly
sions; sions.
imposed in the exercise of the police power and not of the power to (2) Granted to public
tax? If your answer is in the affirmative, give an example. serwice companies
or public utilities.
Suggested answer: I)urpose The property (gen- The property is The use ofthe
erally in the form "taken" for public property is
The police power may be exercised for the purpose of requiring of money) is taken use; it must be com- "regulated" for
licenses for which license fees may haue to be paid. The amount of the for the support of pensated. the purpose of
Iicense fees for the regulation of useful occupations should only be the government. promoting the
sufficient to pay for the cost of the license q.nd the necessary qcpense general welfare;
it is not compen-
of police surueillance and regulation. For non-useful occupations, sable.
ihl li""n"" fee rnay be sufficiently high to discourage the particular Ihrr.urns Opcrates upon a Operates on an Operates upon a
actiuity sought to be regulated. It is clear from the foregoing that police Alli,r:t,rxl (l)Community;or irrdividull as the (1) Community; or
pouer may not be exercised by itself alone for the purpose of raising (2) (llrrss of inrlivirl .
owrrcr ol'rr lltrrt.ir:tt- (2) Class of indi-
rrrr ls. Irrr pro;x'rl,y. viduals.
(ll:Nntuv, l)ttttirctt,t,t,:s nrt l,ttr,ttt'it't'lrHH oN't'lu,: l'owl:tt o!"lhxn'rroN 15
74 Iltrvtlwutr <ll.t'l'axe't'lott
( lonorrrl IDrint:ipkts

Taxation Eminent Domain Police Power 3. A zoning ordinance, reclassifying residential into
commercial or light industrial area, is a valid exercise of
Effect The money contrib- There is a trans- . There is no the police power (Ortigas a. Feati Bank,94 SCRA 533;
uted becomes part fer ofthe right to transfer of ti-
property. tle. Sangolong a. Gaston, G.R. jVo. 77769, December 22,
ofthe public funds.
. At most, there 1988).
is restraint on
the injurious 4. The ordinance penalizingpersons chargingfull payment for
use ofproperty. admission ofchildren, ages7 to 12, in movie houses was an
He receives the The person af- invalid exercise of the power, for being unreasonable and
Benefits It is assumed that
Received the individual re- market value of the fected receives oppressive on business of petitionerc (Balacuit v. CFI of
ceives the equiva- property taken from indirect benefits Agusan del Norte,lffi SCRA n2).
lent ofthe tax in him. as may arise from
the form ofprotec- the mainfenance 5. The act of the Municipal Mayor in opening Jupiter and
tion and benefits of a healthy eco- Orbit Streets, BeI-Air Subdivision, to the public was
he receives from nomic standard of
deemed a valid exercise of police power (Sa.ngalang a,
the government. society.
Intertned.iate Appellate Courtr 176 SCRA 7W).
Amount Generally, there No amount imposed Amount imposed
of Imposi- is no limit on the but rather the owner should not be The collection of universal charge under R.A. 9136
tion amount of tax that is paid the market more than suffi- (EPIRA Law) is an exercise of police power, not of its taxing
may be imposed. value ofproperty cient to cover the
power. The distinction lies in the purpose. Ifthe generation
taken. cost of the license
and necessary of revenue is the primary purpose and regulation is merely
expenses. incidental, the imposition is a tax. However, if regulation is
Relation- . Is subject to Inferior to the . Relatively free the primary pu{pose, the fact that revenue is incidentally
ship to certain consti- impairment prohibi- from constitu- raised does not make the imposition a tax.
Constitu- tutional limita- tion; government tional limita-
tion tions. cannot expropriate tions.
. Includingthe private property, . Is superior to Bar Question (1996)
prohibition which under a con- the impair- 1(" is the owner of a residential lot situated at Quirino Avenue,
against impair- tract it had previ- ment of con-
ment of the ously bound itselfto tract provision. Pasay City. The lot has an area of 300 square meters. On June 1,
obligation of purchase from the 1994, 100 square meters of said lot owned by 'X" was expropriated
contracts. other contracting hy the government to be used in the widening of Quirino Avenue,
party.
for ?300,000.00, representing the estimated assessed value of said
portion. From 1991 to 1995, 1(," who is a businessman, has not been
Cases: payinghis income taxes. Xis nowbeing assessed forthe unpaid income
1. The ordinance requiring owners of commercial cemeteries tuxes in the total amount of F150,000.00. 'X,'claims his income tax
to reserve six percent (6Vo) of their burial lots for burial liability has already been compensated by the amount of F300,000.00,
grounds of paupers was held invalid; it was not an exercise which the government owes him for the expropriation of his property.
of tn" police power, but of eminent domain (Quezon City l)ocide-
a. Ericta, 122 SCRA 759).
lluggeeted answer:
2. The Manila ordinance prohibiting barbershop shops from
conducting massage business in another room was held 'fhe income to.x liability cannot be compensated with the amount
valid, as it was passed for the protection of public morals owed hy the gouernment as compensation for his expropriated
(Velasco u.Villegas, 720 SCRA 568). 1tnt1x,rty. Tores are of distinct kin.cl., ess'c nce and nature than ordinary
ohl.iguliorts. 'I\ues and debts cunrt.ol. lx' lhc subicct of compensation

*
(il,:lrt,:l,tt,I'rrl'rlll'r,r,;ri,ttttrl,tttt,t,,t't,tot,ts{)N
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t.til,: I'owt,:rror,,'['lxnt,tot,t t7
( l,rrr,rrrl Itrirtr.i Jrlls

because the gouernrnent and "X' e,re rnt mutually creditors and debtors No limit as to the Amount of toll depends
of each other and a claim for tanes is not a debt, demand contract, Amount amount oftax- upon the cost ofconstruc-
or jud.gment as is allowable to be set off (Francia v. Interm'ediate tion or maintenance of the
76749, June 28, 1988), public improvement used.
Appeltote Court, GR. No.
May be imposed only May be imposed by the
2. Taxv.Debt
Tax v. Debt Authority by the government. government or private
individuals or entities.
TAX DEBT

orjudg'
.1. Tax v. License Fee
Based on law. Based on contract
Basis ment.
TAX LICENSE
Taxpayer may be No imprisonment for
Effect ofNon- imprisoned for his failure to pay a debt. Imposed for revenue Imposed for regulatory
Purpose
Payment failure to pay the tax purposes. purposes.
(except poll tax).
Imposed under the Imposed under the police
May be payable in moneY, Basis
Mode of Generally payable in power oftaxation. power ofthe State.
Pa5rment money. property or services.
No limit as to the Amount of license fee
Assignability Not assigrrable. Can be assigrred. amount of tax. that can be collected is
Amount limited to the cost of the
Does not draw inter- Draws interest if stiPu- license and the expenses
Interest est unless delinquent. lated or delayed. of police surveillance and
regulation.
Imposed by public Can be imposed by Private
Authority authority. individuals. Tirne of Normally paid after the Normally paid before the
Pa5rment start of a business. commencement of the
business.
Prescriptive periods Civil Code governs the
Prescription for tax are determined prescriptive period of
under the NIRC. debts. Effect ofNon- Failure to pay the tax Failure to pay a license
does not make the busi- fee makes the business
Pa5rment
ness illegal. illegal.
.). Tax v. Toll
Taxes, being the License fee may be with
DEBT lifeblood ofthe State, or without consideration.
TAX Surrender cannot be surrendered
except for lawful consid-
Enforced proportional A sum of money for the eration.
contributions from use of something, a con-
persons and property. sideration which is Paid
Definition for the use of a propertY The term otax" applies generally to all kinds of exactions which
which is of a public na-
bccome public funds. The term is loosely used to include levies for
t:ure e.g., road, bridge.
rcvenue as well as for regulatory purposes. Thus, license fees are
(x)mmonly called taxes. Legally speaking, license fee is a legal concept
A demand of sover- A demand ofproprietor-
Basis eigrty. ship. r;uite distinct from tax; the former is imposed in the exercise of porice
power for purposes of regulation, while the latter is imposed under the
18 ll.r,:vlr,rwt,:tr on 'l'nxA't tt tl.t
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^ii: ljlil]i^;;ll;.::;',i
I'owt'rtt ot"l'nxn't'toN l9
'1lr'

taxing power for the purpose of raising revenue (McQ uiLLin, Municipal lrrrrl,oso is prim.rrily revenue, or if revenue is, at least, one of the
Corporations, VoI. 9, Srd ed., p. 26) . Bott' a license fee and a tax may r.rrl irntl substantial purposes, then the exaction is properly called
be imposed on the same business or occupation, or for selling the same r Lux (Land. Transportation Office a. City of Butuan, G.R. No.
article, this not being a violation ofthe rule against double taxation l :t 1 512, January 20, 2OOO).
(Bentley Gray Drug Good's Co. a, City of Tampa, 737 Fha.647, The motivation behind many taxation measures is the
188 5O.758). ir'plcmentation of police power goals. Progressive income taxes
The term "license tar" has not acquired a fixed meaning' It rrlle viate the margin between rich and poor; the so-called nsin tq.res'
is often "used indiscriminately to designate impositions exacted orr alcohol and tobacco manufacturers help dissuade the consumers
for the exercise of various privileges." It does not refer solely to a I''m excessive intake ofthese potentially harmful products. Taxation
license for regulation. In many instances, it refers to "revenue raising is distinguished from police power as to the means employed to
exactions on privileges or activities." On the other hand, "license fees" irrrplement these public good goals. These doctrines that are unique
are commonly called taxes but, in contrast to the former which are irr ltrxation arose from peculiar considerations such as those especially
imposed "in the exercise of police power for purposes of regulation." punitive effects oftaxation, and the beliefthat taxes are the lifeblood of
Accordingly, the designation given by the municipal authorities l,hc state. These considerations necessitated the evolution oftaxation
does not decide whether the imposition is properly a license tax or rrs a distinct legal concept from police power. Yet, at the same time, it
a license fee. The determining factors are the purpose and effect has been recognized that taxation may be made the implement of the
of the imposition as may be apparent from the provisions of the slate's police power (Planters Products a. Fertiphjl Corporation,
ordinance (Victorias Milling Co. u. Mun. of Victorias, Prou. of G-R. No. 766006, March 74,2008).
Negros Occid.ental, GJ,. No. L'21L83, Septem.ber 27' L968). Thus,
if the generating of revenue is the primary purpose and regulation 6. Tax v. Penalty
is merely incidental, the imposition is a tax; but if regulation is the
primary purpose, the fact that incidental revenue is also obtained
TAX PENALTY
does not make the imposition a tax. To be considered a license fee, the
imposition must relate to an occupation or activity that so engages Definition Enforced proportional Sanction imposed as a
the public interest in health, morals, safety and development as to contributions from punishment for violation
require regulation for the protection and promotion of such public persons and properby. of a law or acts deemed
interest; the imposition must also bear a reasonable relation to the injurious; violation of
probable expenses of regulation, taking into account not only the tax laws may give rise to
imposition of penalty.
costs ofdirect regulation but also its incidental consequences as well.
When an activity, occupation or profession is of such a character Purpose Intended to raise Designed to regulate
that inspection or supervision by public officials is reasonably revenue. conduct.
necessary for the safeguarding furtherance of public health, morals
and safety, or the general welfare, the legislature may provide that Authority May be imposed only by May be imposed by:
such inspection or supervision or other form of regulation shall be the government. (1) Government; or
carried out at the expense ofthe persons engaged in such occupation (2) Privateindividualsor
or performing such activity, and that no one shall engage in the entities,
occupation or carry out the activity until a fee or charge sufficient
to cover the cost of the inspection or supervision has been paid.
Accordingly, a charge of a fixed sum which bears no relation at all to
Double Taxation
the cost of inspection and regulation may be held to be a tax rather In order to constitute double taxation in the objectionable or
than an exercise of the police power (Progressiae Deaelopmcnt prohibited sense, the same property must be taxed twice when it
Corp. a. Quezon City, GR. No. L-36087, April24, 7989). lf t}l'e should be taxed but once; both taxes must be imposed on the same
20 llr,:vtt,:wt,:tt on'l'nx,r't'tott
( it,;trt,:tr,t. l'rrr'tltt't,t,l r nrutr l,tr'tt t',l t'l rlli oN 't'tl.: Itowt,:tt ot. 'l'nxn't'tot.t 2t
(l'ttlrrrl I't'ittcipL's

property or subject matter, for the same purpose, by the same State, Ordinance No. llllSfl is tr liccnse f'ee, while the three (3)
-Gorr"rtt-"ttt
or taxing authority, within the same jurisdiction or other rlrdinances impose a tax on sales of the merchandise.
taxing district, during the same taxing period, and they must be the Both a license fee and a tax may be imposed on the same
Su-" kittd or character of tax (Yillanueua u' City of lloilo, 26 SCRA business or occupation, or for selling the same article. This
578). is not being in violation of the rule against double taxation
(Compania General de Tabacos d.e Filipinas u. City
In the broadsense, double taxation means indirect duplicate of Manila, I SCRA 367).
taxation. It extends to all cases in which there are two or more
pecuniary impositions. The constitution does not prohibit the 4. The tax on the sale or disposal ofevery bottle or container
imposition of double taxation in the broad sense. of liquor or intoxicating beverages is a revenue measure,
whereas the sum of F600.00 San Miguel pays annually
Cases: is for a second-class wholesale liquor license, which is a
license to engage in the business of wholesale liquor in
1. Regulation and taxation are two (2) different things, the Cebu City, and constitutes a regulatory measure, in the
first being an exercise of police power' whereas the latter exercise of police power (San Miguel Brewery u. City of
involves the exercise of the power of taxation' While R'A' Cebu,43 SCRA 275).
2264 provides that no city may impose taxes on forest
products and although lumber is a forest product, the tax 5. Subjecting the interest on bank deposits to the five percent
in question is imposed not upon the lumber but upon its (1Vo) gross receipts tax (GRT) does not result in double
sale. There is no double taxation involved, and even if taxation. The taxes are imposed on two (2) different
there was, it is not prohibited by law (Serafica a' City subject matters - 207o FWT is imposed on the passive
T?easurer ofOrmnc, L'24873, April 28,7968)' income generated in the form of interest on deposits,
while GRT is imposed on the privilege of engaging in the
2. A warehouseman is one who receives and stores goods business ofbanking. A tax based on receipts is a tax on
of another for compensation. The fact that Hawaiian- business rather than on the property; hence, it is an excise
Philippine Co. (HPC) stores the planters'sugar for free for tax rather than a property tax. GRT is not an income tax,
the first 90 days does not exempt it from liability' If this but a percentage tax not subject to withholding tax, unlike
were the case, the law imposing the tax would be rendered the FWT, which is an income tax subject to withholding.
ineffectual. Neither is the fact that HPC's warehousing Also, the taxing periods they affect are different: FWT is
business is carried on in addition to or in relation to the deducted and withheld as soon as the income is earned,
operation of its sugar central suffrcient to exempt it' Under and is paid after every calendar quarter in which it is
Section 178 of the old Tax Code, the tax on business is earned; GRT is neither deducted nor withheld, but is paid
payable for every separate or distinct establishment or only after every taxable quarter in which it is earned.
place where the business subject to the tax is conducted, The fact that the FWT is a special trust fund belonging
and one line of business or occupation does not become to the government and that the bank did not benefit from
exempt by being conducted with some other business or it while in custody of the borrower does not justify its
occupation for which such tax has been paid' There can be exclusion from the computation of interest income subject
no double taxation where the State merely imposes a tax to GRT(Commissioneru.Bank of Commcrce, G.R.No.
on every separate and distinct business in which a party 749636, June 8,2005).
is engaged in (Com'missioner u. Hanoaiian'Phihppine
Co., 7L SCRA 256). 6. The authority of city mayors to issue or grant licenses
and business permits is beyond cavil. It is provided for
3. That Tabacalera is being subjected to double taxation by law, particularly in Section l7l, par.2(n) of BP 337.
is more apparent than real. What is collected under In the present case, the objective of the imposition of
,),)
Itt.:t, t r,;wr,;rr or.r'l'A \,r'nlr'r ( ir,:r.,r,:rrnr, I'rtrrll'r.r,:r l'owl;rt ol 'l'rxn'r'ror.r 23
^lll;';l;^;;lli:1,,,i :l'''

subject conditions on petitioner's businoss pertnit could described as the middle case, where there is no wholesale
be attained by requiring the optometrists in petitioner's ban on motels and hotels but the services offered by these
employ to produce a valid certificate of registration as establishments have been'severely restricted. At its core,
optometrist, from the Board of Examiners in Optometry. this is another case about the extent to which the State
A business permit is issued primarily to regulate the can intrude into and regulate the lives of its citizens.
conduct of business and the City Mayor cannot, through
the issuance of such permit, regulate the practice of The test of a valid ordinance is well established. A
a profession, like that of optometry. Such a function long line of decisions, including City of Manllo, has held
is within the exclusive domain of the administrative that for an ordinance to be valid, it must not only be within
agency specifically empowered by law to supervision the the corporate of the local government unit to enact and
profession (Acebed.o Optical Company a. CA, et al., pass according to the following substantive requirements:
(a) must not contravene the Constitution or any statute;
G.R. No. 700752, Mo.rch 31,2000).
(b) must not be unfair or oppressive; (c) must not be
t. The City of Manila passed an ordinance prohibiting partial or discriminatory; (d) must not prohibit but may
short time admission in hotels, motels, lodging houses, regulate trade; (e) must be general and consistent with
pension houses and similar establishments in the City of public policy; and (f) must not be unreasonable.
Manila, and consequently, wash-up rate or other similarly
concocted terms in hotels, motels, inns, lodging houses, The Ordinance prohibits two (2) specific and distinct
pension houses and similar establishments. The Supreme business practices, namely: wash rate admissions and
Court, speaking through Justice Dante Tinga said: renting out a room more than twice a day. The ban evidently
sought to be rooted in the police power as conferred on
"To students ofjurisprudence, the facts ofthis case local government units by the Local Government Code
will recall to mind not only the recent City of Manila through such implements as the general welfare clause.
ruling, but our 1967 decision in Ermita-Malate Hotel The apparent goal of the Ordinance is to minimize if
and Motel Operations Association u. Hon. City Mayor not eliminate the use of the covered establishments for
of Manila. Ermita-Malate concerned the City ordinance illicit sex, prostitution, drug use and alike. These goals,
requiring patrons to fill up a prescribed form stating by themselves, are unimpeachable and certainly fall
personal information such as name, gender, nationality, within the ambit of the police power of the State. Yet
age, address and occupation before they could be admitted the desirability of these ends do not sanctify any and all
to a motel, hotel or lodging house. This earlier ordinance means for their achievements. Those means must align
was precisely enacted to minimize certain practices with the Constitution, and our emerging sophisticated
deemed harmful to public morals. A purpose similar to analysis of its guarantees to the people. The Bill of Rights
the annulled ordinance in City of Manila was sought a stands as rebuke to the seductive theory of Macchiavelli,
blanket ban on motels, inns and similar establishments and, sometimes even, the political majorities animated
in the Ermita-Malate area. However, the constitutionality by his cynism. Lacking the concurrence of the requisites,
of the ordinance in Ermita-Malate was sustained bv the the police measure shall be struck down as an arbitrary
Court. instrusion into private rights."
The common thread that runs through those
decisions and the case at bar goes beyond the singularity Bar Question (2004)
ofthe localities covered under the respective ordinances. A municipality, BB, has an ordinance which requires that all
All three (3) ordinances were enacted with a view of stores, restaurants, and other establishments selling liquor should
regulating public morals, including particular illicit pay a fixed annual fee of F20,000. Subsequently, the municipal board
activity in transient lodging establishments. This could be proposed an ordinance imposing a sales tax equivalent to \Vo of the
24 li.t,;vrr'rwr':rr oN'l'AXA'r'roN (it,;tt,;tr,rr l,trttr tt,t.t:l .rNrr l,tntil \ililNri,,N illt, llrwItir)t,'l'\\,\r.tr)N '2ll
( i('nr'r'irl I't tttltpl,'r;

amount paid for the purchase or consumption ol'liquor in stores, (h) Yes, bul i.t is tn l.y o (tst' ol'i.ntl,i,ru'|, d,upl,il:u,te lttxutiort which
restaurants and other establishments. The municipal mayor, CC, is not legally prohibitul hecause the taxes are imposed by
refused to sign the ordinance on the ground that it would constitute different taxing aut horities.
double taxation.
(c) The usual methods of auoiding the occurrence of double
Is the refusal of the mayor justified? Reason briefly. taxation are:

Suggested answer: I. Allowing reciprocal exemption either by law or by


treaty;
No. The refusal of the mayor is not justified. The impositions are
of dffirerut nature and charcr,cter. The fited annual fee is in the nature
2. Allowance of tax credit fbr foreign taxes paid;
of a license fee imposed through the exercise of police power, while the 3. Allowance of deduction for foreign' toxes paid; and
SVo tax on purchase or consumption is a local tax imposed through the
exercise of taxing powers. Both a license fee and a tax may be imposed
4. Reductian of the Philippirue tax rate.
on the same business or occupation, or for selling the sq.me article and
this is not in uiolation of the rule against double tq.xation (Compania
Bar Question (1996)
General d.e Tabacos d.e Filipinas u. City of Manila, S SCRA 367 "X," a lessor of a property, PaYS real estate tax on the premises,
t1e63l). a real estate dealer's tax based on rental receipts and income tax on
the rentals. He claims that this is double taxation. Decide.
Bar Question (1997)
Suggested answer:
(a) Is double taxation a valid defense against the legality of a
tax measure? There is no double taxation. "Double taxation" means toxing for
the sq.me tax period the same thing or actiuity twice, wheru it should' be
(b) When an item of income is taxed in the Philippines and the taxed but once, by the same taxing authority for the same purpose and
same income is taxed in another country, is there a case of with the same kind or character of tax. The real estate tax is a tax on'
double taxation? property; the real estate dea.lef s tax is a tolc on the priuilege to engage
(c) What are the usual methods of avoiding the occurrence of in business; while the income tax is a tax on the priuilege to earn an
double taxation? income. These ta;ces are imposed by different taxing uuthorities and
are essentially of different h,ind qnd charecter Uillanueua a. City
Suggested answer: of lloilo,26 SCRA 578).
(a) No, double taxation standing alone and not being forbidden Exemption from Taxation
by our fundamental law is not a ualid defense against the
le g ality of a ton me a s ure ( P ep si - C ola Bottling Comp any Art"eremption from taxation" is a grant of immunity, express
of the Phil. u. Mun. of Tanauan, Leyte, 69 SCRA 460). or implied, to particular persons or corporations or to persons or
Howeuer, if double taxation amo to a direct duplicate corporations of a particular class, from a tax upon property or an
taxation, in that the same subject is taxed twice when it excise which persons and corporations generally within the same
should be taxed but once, in a fashion thut both taxes are taxing district are obliged to pay. It is a freedom from a charge or
imposed for the same purpose by the same taeing authority, burden to which others are subject (Greenfield a. Meer, 77 PhiI.
within the same jurisdiction or taxing district, for the sqme 394).
taxable period and for the same kind or character of a tax, Exemptions from taxation are construed in strictissimi juris
then it becomes legally objectionable for being oppressiue against the taxpayer and liberally in favor ofthe taxing authority. It
and inequitable. is the lawmakingbody and not the local chief executive who can make
26 lit,rvt t,:wt,:tr oN'l'nxn'rror.r (it.:t'tt,ttrlt.l'trlrur'tt't,l':lti\Nt,l,tNlttr\ilrltii, rril tltl,: llrwt,ltr ot 'l'AxAttot'l 27
( llttltttI I't tttr'tpllri

the exemption (Philippine Petroleurn Corporation u. Pililla, tax lon inrportirt,iorr ol goorls lirr personal usel, but to an
rc8 SC&A 82 tL991/). He who claims the exemption must point to exe rnption from a dirccl tax - the property tax. The second
some provision of law creating the right. It cannot be allowed to exist ref'erence, the phrase: "in lieu of all taxes and assessments"
upon a mere vague implication or inference. It must be indubitably cannot include the compensating tax, since the phrase is
shown to exist, for every presumption is against it and a well-founded followed and modified by "upon the privileges, earnings,
doubt is fatal to the claim (Floro Cemcnt a, Gorospe,200 SCRA income, franchise, and poles, wires, transformers, and
48O t19911). insulators of the grantee." This provision merely reiterates
the privilege granted in the first sentence - the exemption
Bar Question (1996) ofwires, poles, etc. from property taxes. The provision does
not mean that Meralco is exempt from paying all other
Why are tax exemptions strictly construed against the taxpayer? taxes aside from those required in paragraph 9. Moreover,
compensating taxes (i.e., taxes imposed on imported goods
Suggested answer: for personal use of the importer thereof) could not have
Tax exemptions are strictly construed against the taxpayer been intended to be included in the exemption found in
because such prouisions are highly disfauored and may alrnost be the franchise, since the franchise was made earlier before
said to be odious to the la.w (Monila, Electric Company u. Vera, the act imposing compensating taxes (Meralco u. Vera,
67 SCRA 357). The exception contained in the tax statutes must be 67 SCRA 351).
strictly construed against the one claiming the exemption because the 2. The petitioner cannot avail of the privilege with respect
law does not look with fauor on tq.rc exemptions, they being contrary to to the imported machinery since it was found to be not
the lifeblood theory which is the underlying basis for ta^tces. directly necessary, but merely incidental, to the operation
The natural rule is that eueryone in the State rnust contribute to of the industry itself. The exemption clearly refers only to
the support of gouernment. Exemptions are in derogation of souereignty; "machinery and equipment to be used exclusively in the
hence, they must be strictly construed against the person claiming it new and necessary industry," not merely in connection
(Commissioner a. Guerrero,2l SCRA 180). therewith. The operation of the transportation, while it
may bring convenience and economy to the petitioner,
Cases: is not indispensable to or form part of the business of
manufacturing plywood (Marli Plywood' & Veneer
1. Meralco claimed exemption because of paragraph 9 of its Corporation u. Aranaq 109 Phil.664).
franchise. First, the opening sentence imposes a tax on
enumerated properties, but "not including poles, wires, 3. Petitioner is taxable on its income derived from the sale
transformers and insulators." Second, they are required of its property to the government, including portion of the
by law to pay a certain percentage tax in lieu of all taxes purchase price of the property paid by the government
and assessments of whatever nature and by whatsoever in the form of tax-exempt bonds. The income from the
authority. sale of the land and the bonds are two (2) different and
distinct taxable items so that the exemption of one does
Tax exemptions are construed strictly against the not operate to exempt the other, unless the law expressly
taxpayer. Exemptions are highly disfavored and may so provides. The tax here involved is on the income from
almost be said to be odious to the law. The claimant to the sale of petitioner's property to the government, not the
the exemption must point to a clear and unambiguous income from the sale or exchange of the bonds. Income from
provision, and not rely on a mere inference or implication. A expropriation proceedings is income from sales or exchange
well-founded doubt is fatal to the claim. The first paragraph of properby and therefore taxable (Rod'riguez u. Coll'ector,
found in the opening sentence refers not to an exemption L-23047, July 31, 1969).
from compensating tax which is an indirect tax or excise
-
28 or'l',llrvr'tor.r
(ir,;r.rr,;rrnr,r,ri,r.l,r,r,r,;, r,.w,,:rr,rr,r,nr,r,r,roN 29
ll.r';r,rr,;wr,:ri ^ll,il:::ll,^;,f;l.11,,,i,1,,,

4. Section 193 of the Code prescribes the general rule: r'orrcsponding Lo the lax passt:d ott l,o iL, since iL is tax exempt. Is the
tax exemptions or incentives granted to or presently r:luiln ol' AIJO Corp. meritoritlus?
enjoyed by natural or juridical persons are withdrawn
upon the effectivity of the Code, except with respect to Suggested answer:
those entities expressly enumerated, (City Gou't of So,n a. No. Exemption from taxes is personal in nature and couers
Pablo a. Reyes, supra). However, this provision does only taxes for which the taxpayer'grantee is directly liable'
not affect contractual tax exemptions which are agreed The sales ta$ is a tqx. on the seller who is not exempt from
to by the taxing authority in contracts. Contractual tax taxes. Since XYZ, Inc. is directly liable for the sales tax and
exemptions, in the real sense of the term and where the no tax exemption priuilege is euer giuen to it, therefore, its
non-impairment clause of the Constitution can rightly be clq.im that the sale is exempt is not tenable. A tafr exemption
invoked, are those agreed to by the taxing authority in is construed in strictissimi juris qnd it cannot be permitted
contracts, such as those contained in government bonds or to erist upon uague implications (Asiatic Petroleurn Co,,
debentures, lawfully entered into by them under enabling Ltd.. a. Llanes,49 Phil.466 [1926]).
laws in which the government, acting in its private
capacity, sheds its cloak of authority and waives its b. No. The cloim of ABC Corp. is not meritorious. Although the
government immunity. These contractual tax exemptions, tq,x was shifted to ABC Corp. by the seller, what is paid by it
however, are not to be confused with tax exemptions is not a tan but part of the cost it has assumed. The toxpayer
granted under franchises. A franchise partakes the who cq.n file a claim for refund is the person statutorily
nature of a grant which is beyond the purview of the liable for the payment of the tax. Since ABC Corp. is not said
non-impairment clause. Indeed, Article XII, Section 11, toxpayer, it has no capacity to file a claim for refund.
of the 1987 Constitution is explicit that no franchise for
the operation ofa public utility shall be granted, except Tax Laws
under the condition that such privilege shall be subject
Statutes levying taxes are construed against the government
to amendment, alteration or repeal by Congress as and
when the common good so requires (Manila Electric It is a general rule in the interpretation ofstatutes levying taxes
Company u. Proa. of Laguna, 306 SCRA 75O t19991). or duties, that in case of doubt, such statutes are to be construed
rnost strongly against the government and in favor of the subjects or
Bar Question (2004) citizens, because burdens are not to be imposed, nor presumed to be
imposed beyond what the statutes expressly and clearly import. The
As an incentive for investors, a law was passed giving newly purpose of imposing documentary stamp taxes is to raise revenue
established companies in certain economic zone exemption from all and the corresponding amount has already been paid and has become
taxes, duties, fees, imposts and other charges for a period of three part of the revenue of government. There is no justification for the
years. ABC Corp. was organized and was granted such incentive. In government which has already realized. the revenue to require the
the course of business, ABC Corp. purchased mechanical equipment payment of the same tax for the same documents (Collector u,
fromY{Z, Inc. Normally, the sale is subject to a sales tax. Fireman's Fund Insurance Co., 748 SCRA 315),
XYZ, Inc. claims, however, that since it sold the equipment to
ABC Corp., which is tax exempt,Y{Z should not be liable to pay the Construction of statute by predecessors is not binding on the
sales tax. Is this claim tenable? successors
Assume arguendo LhaL){J{Z had to and did pay the sales tax. The power to pass upon the validity of General Circular No.
ABC Corp. later found, however, thatXI{Z merely shifted or passed V-t23 is vested exclusively in our courts in view of the principle of
on to ABC the amount of the sales tax by increasing the purchase separation of powers. The Secretary of Finance acted without valid
price. ABC Corp. now claims for a refund from the BIR in an amount authority in revoking General Circular No. V-123 and in approving, in
30 lit'rt'tt,rwt,:tr oN'l',,rrA'noN
(ir,:r.l:rmr.t,nrr,,l.rl,,r,;:r^lll.i;illli^l,l1lXl,,,i::,,t',wr,,rr,r,,'t'nxn,r,roN :.|1

lieu thereof, General Circular No. V-139. It cannot be denied, however, When the Supremc Court clecid.et a case, it d'oes not pass o
that the Secretary ofFinance is vested with authority to revoke, repeal neu) lau), but mercIy intetprets a pre'eristing ona-Fven though
or abrogate the acts or previous rulings ofhis predecessor in office the taxpayer's petition was filed before the decision in case of CIR u.
because the construction of a statute by those administering it is not BWSC Mindanao was promulgated, the pronouncement made in that
binding on their successors, if thereafter the latter becomes satisfied case may be applied to the present case without violating the rule
that a different construction should be given (Hilad.o u. Collector, against retroactive application. when the court interpreted section
100 PhiI.288). 102(b) of the 1977 Tax Code in the Burmeister case, this interpreta-
tion became part of the law from the moment it became effective. It
Retroactive application is elementary that the interpretation of a law by the court constitutes
part of that law from the date it was originally passed, since the
As a rule, taxing statutes must be applied prospectively, except
Court's construction merely establishes the contemporaneous legisla-
by express provision of the law. The mere fact that a tax law is tive intent that the interpreted law carried into effect (Accenture u.
retroactive does not make it invalid or against due process because
CIR, GR. No. 790702, July 1-L,2012).
retroactivity must be so harsh and oppressive in its application in
order to invalidate the law. This principle finds application in R.A.
Principle of legislative approval by Re-enactment
9238. Thus, the enrolled bill, exempting banks, finance companies,
doctors of medicine and lawyers from the value added tax, was The validity of the questioned rules can be sustained by the
submitted to the President of the Philippines on January 5,2004,for application of the principle of legislative approval by re-enactment.
her approval. Since the President did not exercise her right to veto Under this concept, where a statute is susceptible of the meaning
the bill within the 30-day period prescribed in Section 27(1), Article placed upon it by a ruling of the government agency charged
VI of the 1987 Constitution, the enrolled bill became a law (R.A. 9238) with its enforcement and the legislature thereafter re-enacts the
onFebruary 5,2004. provisions without substantial change, such action is to some extent
confirmatory that the ruling carries out the legislative purpose.
The above situation created some significant tax issues for
Revenue Regulations No. 6-66, implementing Section 192 of the
lawyers who became exempt from the value added tax beginning
C.A. 466 (Tax Code of 1939), has over the decades been substantially
January l,20}A,pursuant to the express provision ofthe amendatory
reproduced with every amendment of the Tax Code, up until its
law, which was published in a newspaper of general circulation only
recent reincarnation in Section 118 of the 1997 Tax Code. The
on February 16,2004. Following the doctrine enunciated in the case
legislature is presumed to have full knowledge of the existing revenue
of Tuuera u. Tafi.ad.a (GR. No. 63975, April 24, 1985), some tax
regulations interpreting the provisions of law, and with its subsequent
practitioners believe that said law became effective only after its
substantial re-enactment, there is a presumption that the lawmakers
publication on February 16,2004. This legal issue of when R.A. 9238
have approved and confirmed the rules in question as carrying out
became effective became moot and academic when the Secretary of
the legislative purpose. Thus, absent any showing that Revenue
Finance, upon the recommendation of the Commissioner of Internal
Regulations No. 6-66 is inconsistent with the provisions of the Tax
Revenue, promulgated Revenue Regulations No. 7-2004 on May 7,
Code, its applications shall be upheld and applied accordingly. This
2004, specifically providing that lawyers became exempt from value
is in keeping with our primary duty of interpreting and applying the
added tax on January I,2004, confirming what has been previously
law. Regardless ofour reservations as to the wisdom or the perceived
declared by the Commissioner of Internal Revenue in RMC 9-04 and
ill-effects of a particular legislative enactment, the court is without
10-04 dated February 2004. This position finds support from the
authority to modifr the same as it is the exclusive province of the
provision of Article 2 of the New Civil Code (R.A. 386), which states
lawmaking body to do so. Even with the best motives, the Court can
"that laws shall take effect after 15 days following the completion
only interpret and apply the law and cannot, despite doubts about
of their publication in the Official Gazette or newspaper of general
its wisdom, amend or repeal it (Saguiguit u. People, cited' in Gulf
circulation, unless it is otherwise provided." Since the law itself
Air Company, Phil. Branch a. CIR, G.R. No. 782045, September
expressly provides for its date of effectivity, it shall take effect on
19,2072).
January 1,2004.
I ol"'l'lxn't'tlrru iJJ
32 Itt,tvtt'rwl'rtr .ru'l'A\,l lror.r ( it,:rut,:trnt, Ittrttt|tt't,t,}i nnlr l,ttvll'l'n't'tot'ts rlN'l'lll,t I'owl'ltt
( lt'ttcrttl I'rittt'i1rh'r

Case: to what is provided fbr in the legislative enactment. The


implementing rules and regulations of a law cannot extend
The Commissioner's contention that Burroughs Ltd. is no longer
the law or expand its coverage, as the power to amend
entitled to refund of overpaid branch profit remittance tax because
or repeal a statute is vested in the legislature. However,
Revenue Memorandum Circular (RMC) No. 8-82 dated March 17,
administrative bodies are allowed, under their power of
1982 had revoked and,/or repealed BIR Ruling of January 21, 1980
subordinate legislation, to implement the broad policies
is without merit. What is applicable here is still the BIR Ruling
of January 21, 1980 because respondent paid the tax in question
laid down in the statute by "filling in" the details' All
that is required is that the regulation be germane to the
on March 14, 1979. RMC 8-82 dated March 17, t982 cannot be
objectives and purposes ofthe law; that the regulation does
given retroactive effect in the light of Section 327 (now Sec. 246)
not contract but conforms with the standards prescribed by
[prospectiue application of rulings] of the Tax Code (Comtnissioner
law ( Public Sc hools District Superuisors Ass ociq.tion
a. Burroughs, 742 SCRA 324).
a. Hon. Ed.ilberto d'e Jesus, G.R. No. 757299, June 79,
2006).
Bar Question (2004)
Rules and regulations, which are the product of
Due to an uncertainty whether or not a new tax law is applicable a delegated power to create new and additional legal
to printing companies, DEF Printers submitted a legal query to the provisions that have the effect of law, should be within
Bureau of Internal Revenue (BIR) on that issue. The BIR issued a the scope of the statutory authority granted by the
ruling that printing companies are not covered by the new law. Relying legislature to the administrative agency. It is required
on this ruling, DEF Printers did not pay said tax. that the regulation be germane to the objects and purposes
Subsequently, however, the BIR reversed the ruling and issued of the law, and that it be not in contravention to, but in
a new one stating that the tax covers printing companies. Could the conformity with, the standards prescribed by law. In this
BIR now assess DEF Printers for back taxes corresponding to the case, the Commissioner of Customs went beyond his powers
years before the new ruling? Reason briefly. when the regulation (CMO 23-2007) limited the customs
officer's duties mandated by Section 1403 of the Tariff
Suggested answer: and Customs Law, as amended. The provision mandates
that the customs officer must first assess and determine
No. The reuersal of a ruling shall not be giuen a retroactiue the classification of the imported article before tariffmay
application, if said reuersal will be prejudicial to the taxpayer. be imposed. Unfortunately, CMO 23-2007 has already
Therefore, the BIR cannot ossess DEF Printers for bach taxes becquse classified the article, even before the customs officer had
it would be uiolatiue of the principle of non-retroactiuity of rulings and the chance to examine it (Commissioner of Customs
doing so would result in graue injustice to the taxpayer who relied on a. Hypermir Feed.s Corporation, G.R, No. 179579,
the first ruling in good faith (Sec. 246, NIRC; CIR u. Burcoughs, February 1,2012),
lnc.,742 SCftA 324 [1986]).
Section 109(L) of R.A. 9337 as well as in the
Regulations documentary evidence presented that petitioner's sale
of sugar produce made by petitioner to its members as
Requisites for validity of regulations: well as non-members is exempt from the payment of
1. It is issued under authority of law (Olsen u. Ald.anese, VAT. In declaring that in order to be exempt from VAT,
43 Phit 64);
a cooperative must be the agricultural producer of its
sugar produce, the Commissioner has not engaged in
2. It must be within the scope and purview of the law. The mere interpretation, but has gone into unauthorized
power of administrative officials to promulgate rules in modification or amendment of the law. Only Congress can
the implementation of a statute is necessarily limited do this. Sections 3 and 4 of Revenue Regulations No. 13-
34 lll,;vrr,:wr,:rr oN'l'nxrvrLolr
! (ir';rut';ttirt I'Ittr'tt't.Lli ,tND l,t^tttit'r'tot'tiirN lllt': llrwt,:ttot.'l'lln't'tott 3l-r
( ir,trlt rrl l'r'rrrlilrL's

2008, insofar as it imposes this requirement is, therefore, Club u. Court of Appeals, G.R. No. 703533, Decernber
ultr a - u ire s and invalid (N e gro s C o ns olid.at e d. F orm"ers 15, 1998).
Association Multi-Pufpose Cooperatiue a. CIR, CTA
Case No.7994, FebruanTt 77,2012). Necessity for Notice and Hearing
3. It is reasonable (Lupangco u. Court of Appeals, 760 There is no constitutional requirement for a hearing in the
SCRA848); promulgation of a general regulation by an administrative body.
4. It must be published in the Official Gazette or in a Where the rule is procedural, or where the rules are, in effect, merely
newspaper of general circulation, as provided in E.O. 200. legal opinions, there is no notice required. Neither is notice required
However, interpretative rules and regulations, or those in the preparation ofsubstantive rules where the class to be affected
that are merely internal in nature, issued by administrative is large and the questions to be resolved involve the use ofdiscretion
superiors concerning the rules and guidelines to be followed c<rmmitted to the rule-making body (Corona u. United Harbor
by their subordinates in the performance of their duties, Pil.ots Association of the Phil., GR. No. 777953' December 72,
may be simply posted in conspicuous places in the agency 1997).
itself. Such posting already complies with the publication Many regulations, however, bear directly on the public. It is here
requirement. Publication must !e in full, or it is no that administrative legislation must be restricted in its scope and
publication at all (Taft.ad.a u.Tfu.vera, 146 SCRAlU6). application. Regulations are not supposed to be a substitute for the
5. Where the regulations impose penal sanctions, the law general policy-making that Congress enacts in the form of a public
itself must declare as punishable the violation of the law. Although administrative regulations are entitled to great respect,
administrative rule or regulation (People u. Moeeren, 79 the authority to prescribe rules and regulations is not an independent
SCRA 450), and, the law should fix or define the penalty source of power to make laws (Reaiew Center Association a. Exec.
for the violation of the rule or regulation. Secretary, G.R. No. 1"80046, April2' 2009).

Classifi cation of Regulations Publication


1. Rules in the nature of subord.inate legislation. The memorandum circular is merely for purposes of internal
Administrative -
rule in the nature of subordinate legislation administration of the BIR and not a regulation within the
is designed to implement a law by providing its details, contemplation of the Tax Code and the Revised Administrative
and before it is adopted, there must be a hearing under Code. As such, said circular needs no publication in the Official
the Administrative Code of 1987. When an administrative Gazette as erroneously argued by the petitioners. Section 79(b) of
rule substantially adds to or increases the burden ofthose the Revised Administrative Code provides that chiefs of bureaus
concerned, an administrative agency must accord those may be authorized to promulgate circulars or information for the
directly affected a chance to be heard before its issuance officers and employees in the interior administration of the business
(CIR u. Court of Appeals,26l SCRA 236). ofeach bureau or office, and in such case said circular shall not be
required to be published. When an administrative agency renders
2. Interpretatiae rules. The rules and regulations an opinion by means of a memorandum circular, it merely interprets
construing or interpreting- the provisions of a statute to a pre-existing law and no publication is necessary for its validity.
be enforced are binding on all concerned until they are Construction bv an executive branch of government of a particular
changed. They have the effect oflaw and are entitled to law, although not binding upon the courts, must be given weight as
great respect; they have in their favor the presumption of the construction comes from the branch of government called upon to
legality (Gonzales v. Land. Bank,783 SCRA 520).T\e implement the law. In this case, the memorandum circular has the
erroneous application of the law by public officers does force and effect of law. In fact, the petitioners admitted that copies
not bar a subsequent correct application (Monilo Joekey of said memorandum were distributed to and received by t}lem (La
(;
:l Itt,:vtt,:wt,:tr oN'l'Axn'r'roru ( lr,:r.,r,:rrnr, l',rrlrl,,'r,r.::i lrrwr,;rl,r,''l'rxn'r,ror.r 37
^ll:,i;llj]i^;;ll.;;;|":"-,

Suerte Cigar & Cigarette Factory u. Commissioner, G.Il. Ncr. subject to value added tax, according to the BIR. However,
L-36737, January 77, 1985). PAGCOR, a government-owned corporation authorized to
engage in and operate gambling casinos in the country,
Bar Question (1991) claims exemption from all taxes based on its charter
or legislative franchise and anchors its position on the
In view of the unfavorable balance of payment condition and
fact that the charter is a special law; hence, its repeal
the increasing budget deficit, the President of the Philippines,
or modification by a subsequent general law must be
upon recommendation of the National Economic and Development
express and not just implied. Indeed, the Supreme Court
Authority, issues during a recess of Congress, an Executive Order
recently ruled that under P.D. 1869, PAGCOR is exempt
imposing an additional duty on all imports at the rate of ten percent
(10Vo) ad ualorem. The Executive Order also provides that the same
from all taxes, direct and indirect, including value added
tax.3 Moreover, because R.A. 7716, a general law, merely
shall take effect immediately. Ricardo San Miguel, an importer,
impliedly repealed the PAGCOR charter, which is a special
questions the legality of the Executive Order on the grounds that
law, the former cannot prevail over the latter. It must be
only Congress has the authority to fix the rates of import taxes and,
noted that R.A. 9337 (R-VAT Law) expressly repealed the
in any event, such an Executive Order can take effect only thirty days
PAGCOR charter, effective November I,2005.
after promulgation and the President has no authority to shorten said
period.
Tax Evasion v. Tax Avoidance
Are the objections of Mr. San Miguel tenable?
Tax avoidance and tax evasion are the two (2) most common ways
Suggested answer: used by taxpayers in escaping from taxation. "Tax aaoidance" is the
tax sauing deuice within the means sanctioned by law. This method
No, the objections qre not tena,ble as the Executiue Order connot should be used by the taxpayer in good faith and at arm's length.
take effect immediately. Being an external law q,nd hauing the effect of "Tar eaasion," on the other hand, is q. scheme used outside of those
law, the Executiue Order canruot becorne effectiue without publication, Iawful ftLe&ns and when auailed of, it usually subjects the taxpayer to
a requirement of due process (Tafi.ad.a u, Tuuera, 186 SCRA 2Z; further or additional ciuil or criminq.l liabilities. Tax euasiorl connotes
E.O.2O2). the integration of three factors: (1) the end to be achieued; i.e., the
payment of less thqn that known by the taxpayer to be legally due,
Special laws prevail over general laws or the non-payment of tax when it is shown thq.t a tax is due; (2) a.n
accompanying state of mind which is described as being "euil," in "bad
Cases:
faith,'"willful," or "deliberate and not q.ccidental"; and (3) a course
a. The demand on the taxpayer to pay is an assessment for of action or failure of action which is unlawful.
deficiency franchise tax. As such, the right to assess and
collect the same is governed by Section 331 of the Tax Code,
All these factors are present in the instant tax case. It is
significant to note that as early as 4 May 1989, prior to the purported
rather than Article ll45(2) in relation to Articles 1154
sale of the Cibeles property by CIC to Altonaga on 30 August 1989,
and 1155 of the Civil Code which provide for prescription
CIC received P40 million from RMI, and not from Altonaga. That
after six (6) years. The Tax Code is a special law which
F40 million was debited by RMI and reflected in its trial balance as
must prevail over the Civil Code, a general law (Guagua
"other investment-Cibeles Bldg." Also, as of 31 July 1989, another
Electric Light Plant Co. u. Commissioner, 7g SCRA
F40 million was debited and reflected in RMI's trial balance as "other
790).
investment-Cibeles Bldg." This would show that the real buyer of the
b. Since January 1, 1996, when R.A. 7716 (E-VAT Law) properties was RMI, and not the intermediary Altonaga.
became effective, all franchise grantees other than
franchise grantees of electricity, water and gas became sCommissioner of Internal Revenue v. Acesite Hotel Corporation, G.R. No
L-147295, February 16, 2007 .
;ifr oN'l'AxA't'tlN ( tr,:,,rr,;rtnr, t,rrrr,, ,r
lr.r,;,i t 1 rwr,:rr ,r,. 't',rxn'r'r,r., g9
ll.r,rvt t,:wt,;tr
^ll :;:l]i^;,i:i;.,:;,i,:,',,

The investigation conducted by the BIR disclosed that Altonaga Bar Question (2000)
was a close business associate and one of the many trusted corporate
executives of Toda. This information was revealed by Mr. Boy Prieto,
Mr. Pascual's income f'rom leasing his property reaches the
the assistant accountant of CIC and an old timer in the company. maximum rate of tax under the law. He donated one-half of his said
But Mr. Prieto did not testify on this matter, hence, that information property to a non-stock, non-profit educational institution whose
remains to be hearsay and is thus inadmissible in evidence. It was not irr"o-" and assets are actually, directly and exclusively used for
verified either, since the letter-request for investigation ofAltonaga educational purposes, and therefore qualified for tax exemption
was unserved, Altonaga having left for the United States in January,
under Article XIV, Section 4(3) of the constitution and section 3(h)
of the Tax Code. Having thus transferred a portion of his said asset,
1990. Nevertheless, that Altonaga was a mere conduit finds support
in the admission of respondent Estate that the sale to him was part Mr. Pascual succeeded in paying a lesser tax on the rental income
of the tax planning scheme of CIC. Thus, the scheme resorted to by derived from his property. Is there tax avoidance or tax evasion?
CIC in making it appear that there were two (2) sales of the subject Explain.
properties; i.e.,from CIC to Altonaga, and then from Altonaga to RMI,
cannot be considered a legitimate tax planning. Such scheme is tainted Suggested arrswer:
with fraud. "Fraud" in its general sense is deemed to compromise There is tax q'uoidance. Mr. Pascual has exploited a legally
anything calculated to deceive, including all acts, omissions, and -transferring alternq,tiue
permissiue method to reduce his income tax by
concealment involving a breach of legal or equitable duty, trust or part of his rental incorne to a tax exempt entity through a
confidence justly reposed, resulting in the damage to another, or by d.onation of one-half of the income producing property. The donation
which an undue and unconscionable advantage is taken of another.a is likewise exempt from the donor's tax. The donq.tion is the legal
nxeans employei to transfer the incidence of income tq.x on the rental
Here, it is obvious that the objective of the sale to Altonaga was
income.
to reduce the amount of tax to be paid especially that the transfer from
him to RMI would then subject to income to only five percent (\Vo)
(now six percent [67o]) individual capital gains tax, and not ltre BSVo Bar Question (1996)
(now 32Vo) corporate income tax. Altonaga's sole purpose of acquiring
Distinguish tax evasion from tax avoidance'
and transferring title of the subject properties on the same day was
to create a tax shelter. Altonaga never controlled the property and Suggested answer:
did not enjoy the normal benefits and burdens of ownership. The sale
to him was merely a tax ploy, a sham, and without business purpose "Ton euasion' is a scheme used outside of those lawful rleans
and economic substance. The intermediary transaction, which was to escape tax tiability and., when availed of, it usually subjects the
prompted more on the mitigation of tax liabilities than for legitimate taxpayer to further or additional ciuil or criminal liabilities. "Tax
business purpose constitutes one of tax evasion.sTo permit the true auoidorce," on the other hand, is a tox sauing deuice within the means
nature of the transaction to be disguised by mere formalisms, which sanctioned by law; hence, legal.
exist solely to alter tax liabilities, would seriously impair the effective
administration of the tax policies of Congress.6 Bar Question (1996)
When may a taxpayer's suit be allowed?

aCommissioner v. Court of Appeals, 327 Phil. 1. Suggested answer:


5Commissioner v. Norton Harrison Co., 120 Phil. 6B4, and Cornmissioner
v. A tanpayet's suit may only be allowed when an act complained
Rufino, 148 SCRA 42, cited, in Commissioner v. Estate of Benigno P. Toda, Jr., G.R.
No. 147188, September L4,2004. The opinion rendered by the BIR in response to a
of, which rnay include a legislatiue enactment, directly inuolues the
query ofAltonaga's counsel did not negate the existence offraud. t iilegal d.isbursemerut of public funds deriued from taxation (Pascual
GCommissioner v. Court Holding Co.,324 U.S. 334 (194b). o. Eecretary of pubtic Worhs, 170 Phil.331). No ffIoney shall be
40 Itt'tv t t,:wt,:tt oru'l'nxn't'tor,,r ( lr,iNr,ranr, I'lrrr'rltt't,t,:s nntr l,tvt't'n't'toNs ()N'r'tl: llrwt,;tt ot,"l'nxn't'tott 4l
( icnrrrrrl I tritrr:iplcs

paid out of the Treasury, except in pwsuance of an appropriation It is only when the local tax assessment and the final judgment
made by law (Sec. 29, Art. VI, 1987 Constitution). ure both ouerdue, demandable, as u)ell fuUy liquidated may set-off
or compensation be allowed (Domingo a. Garlitos, I SCRA 443).
Bar Question (2005)
1. May taxes be the subject of set-off or compensation?
Explain.

Suggested answer:
No. Taxes cannot be the subject of set-off or compensation for the
following reasons: (1) taxes are of distinct kind, esseruce and nature,
andthese im.positions cannot be classed in merely the same category as
ordinary obligations; (2) the applicable laws and principles gouerruing
each ere peculiar, not necessarily common, to each; and (3) public
policy is better subserued, ifthe integrity and independence oftaxes are
maintained (Republic o. Mambulao Lumber Cornpanyr 4 SCRA
622 t19621).
Howeuer, if the obligation to pay taxes crnd the taxpayef s cloim
against the gouernment are both ouerdue, demandable, as well as fully
liquidated, compensation takes place by operation of law and both
obligations are ertinguished to their concurrent amounts (Domingo
u. Garlitos, 8 SCRA 443 t19631).

Bar Question (2005)


2. Can an assessment for a local tax be the subject of set-offor
compensation against a final judgment for a sum of money
obtained by the taxpayer against the local government that
made the assessment? Explain.

Suggested answer:
No. Tqxes and debts are of different na.ture and character; hence,
no set-off or compensation between these two (2) different classes of
obligations is allowed. The taxes assessed are the obligations of the
taxpayer arising from law, while the money judgment against the
gouernment is an obligation arising from corutract, whether express
or implied. Inasrruuch as taxes are not debts, it follows that the
two obligations q,re not susceptible to set-off or legal compensation
(Francio. a. Intermediate Appellate Court, 162 SCRA 753
t1e881).

i
(it,:Nt,:rrnt, l'tuNlu't,t,:rr nntr l,ttr.tt't',1't'tols ()N'l'lll'l I'owl'ltt ott'l'nx,n't'tttt't 43
Itthcrcrtt. rrrrrl ( )orrsl.it,utiontrl l,imitations

Cases:
1. A statute which authorizes towns to issue bonds in aid of
manufacturing enterprises of individuals is void, because
CIIAPTER II the taxes necessary to pay bonds would, ifcollated, be a
transfer ofthe property ofindividuals to aid the projects of
INHERENT AND CONSTITUTIONAL gain and profit ofothers, and not for public ruse (Citizens
LIMITATIONS Sc.;oings and.I'oan Association of Cleaeland', Ohio u.
Topeha City, 20 WaIl. 655, 22 L. Ed. 455).

The power to tax is the strongest of all the powers of government 2. Commonwealth Act No. 567 was a valid exercise of police
( Honghon g & Sha.nghai Banking Corporation u. Cornmissioner, power of the State. Since the promotion of the sugar
39 Phil. L45).The power to tax is an incident of sovereignty and is industry is a matter of public concern, the legislature may
unlimited in its range, acknowledging in its very nature no limits, so determine within reasonable bounds what is necessary for
that security against its abuse is to be found only in the responsibility its protection and expedient for its promotion. Thus, the
of the legislature which imposes the tax on the constituency who are increase in the existing tax on the manufacture of sugar
to pay it. Nevertheless, effective limitations thereon maybe imposed and the levying oftax on lands devoted to the production of
by the people through their Constitution (Roro;s y Cia a. Court sugar is considered as a public purpose (Lutz a. Araneta,
of Tor Appeals, supra). Accordingly, no matter how broad and supra).
encompassing the power of taxation, it is still subject to inherent and 3. The entrusting of collection of fees does not destroy the
constitutional limitations. public purpose of the ordinance. So long as the purpose
is public, it does not matter whether the agency through
lnherent Limitations (Bar Question [2009]) which the money is dispensed is public or private. The
right to tax depends upon the ultimate use, purpose and
The inherent limitations are those limitations which exist
object for which the fund is raised. It does not depend
despite the absence of an express constitutional provision thereon.
on the nature and character ofthe person or corporation
These include the following:
whose intermediate agency is to be used in applying it.
The people may be taxed for a public purpose although it is
1. The levy must be for a public purpose.
under the direction ofan individual or private corporation
The right oftaxation can only be used in aid ofa public object, (Bagatsing a. Ratnirez' 74 SCRA 306).
an object which is within the purpose for which government is 4. It is the essential character of the direct object of
established. It cannot be exercised in aid ofenterprises strictly private,
expenditure and not the magnitude of interests to be
for the benefit of individuals, though in a remote or collateral way, the
affected, nor the degree to which the general advantage
public may be benefited thereby. Though the line which distinguishes
of the community and ultimately the public welfare may
public use for which taxes may be assessed, from private use for which
be benefited by their promotion, which must determine its
they may not, is not always easy to discern, it is always the duty of validity as justifying a tax. Incidental advantage to the
the court to interpose when properly called on for the protection of public or the State, which results from the promotion of
the rights ofthe citizen and aid to prevent his private property from private interests and the prosperity ofprivate enterprises
being lawfully appropriated to the use of others. or businesses, does notjustify their aid by the use ofpublic
money. Where the land on which feeder roads were to be
constructed belongs to a private person, an appropriation
made by Congress for that purpose is null and void, and
42 a donation to the government made five (5) months after
44 Itt,:v r r':wr';rr on'l'lxA't'roN (lt,:Nt,:talt, Itlttrur'tt't,t,:lr ANtr l,tMr'r'AttoNr oN't'tlt,r llrwt,:tt rtt,''l'nxn't'tot't 45
Irrlrcrr,rrl, rrnrl ( iotrxl,tl,rl,iorrrrl l,irrrit.rrt,i<tns

the approval of the Act does not cure the basic def'ect of the ol'U.S. sanctions against an Alricun country, Congress passes a
law. law increasing the existing tax on the manufacture of sugar on a
graduated basis. All collections made under the law are to accrue
Tarpayefs suit to a special fund to be spent only for the purposes enumerated
A taxpayer, or group of taxpayers, is proper to question the therein, among which are to place the sugar industry in a position
validity of a law appropriating public funds (Tolentino u. Comclec, to maintain itself and ultimately to insure its continued existence
41 SCRA 702; Sanid.ad. a. Comelec, 73 SCRII 333; Chaaez a. despite the loss of that quotq, and to afford laborers employed in
Public Estates Authority, GR. No. 733250, ,Iuly 9,2002; Tatad, the industry a living wage and to improve their working conditions.
a. Garciar 24S SCRA 436; Information Technology Found.ation "X," a sugar planter, fiIes a suit questioning the constitutionality
a. Comcl.ec, GR, No. 759L39, Januany 73, 2O04; Jumamil a. Caf6, of the law alleging that the tax is not for a public purpose as the
G.B. .|Vo. 744570, September 21,2(n0. Aproper party is one who has same is being levied exclusively for the aid and support of the sugar
sustained or is in imminent danger of sustaining an injury as a result industry. Decide the case.
of the act complained of. To be a proper party, one must have"legal
stand.ing" (locus stand.i), which is defined as a right of appearance Suggested answer:
in a court ofjustice on a given question. Generally, the validity of a The suit filedby the sugar planter questioning the constitutionality
statute may be contested only by one who will sustain a direct injury of the sugar industry stabilization nleasure is untenable. Tarcation is no
in consequence ofits enforcement (1.e., direct injury test). However, longer m.erely for raising reuenue to support the existence of gouernrnent;
a taxpayer may cause the nullification of laws providing for the the power may also be exercised to carry out legitimate objects of the
disbursement of public funds, upon the theory that "the expenditure of gouernrnent, It is a legitirnate object of gouernment to protect its local
public funds by an officer of the State for the purpose of administering industries on which the nq.tional econom.y largely depends. Where the
an unconstitutional act constitutes a misapplication of such funds," aim of the tq.x measure is to achieue such ct. gouernnxental objectiue,
which may be enjoined at the request of a taxpayer. Taxpayers have the tuc imposition can be said to be for a public purpose (Gaston a.
sufficient interest in preventing the illegal expenditure of moneys Republic Bank, 158 SCRA 626).
raised by taxation and may, therefore, question the constitutionality
of statutes requiring expenditure of public moneys (Pascual u, Sec. 2. Non-delegation of the legislative power to tax.
of Public Works and Cornmunicationq 17O Phil.337).
The subdivision streets belong to the owner of the subdivision Bar Question (1991)
until donated to the government or until expropriated upon payment
The Municipality of Malolos passed an ordinance imposing
of just compensation (White Plains Association a. Court of
Appeals,297 SCRA 547). The use of LGU funds for the widening a tax on any sale or transfer of real property located within the
municipality at a rate of one-fourth (I/4) of one percent (I7o) of the
and improvement of privately-owned sidewalks is unlawful as it
total consideration of such transaction. 'X" sold a parcel of land in
directly contravenes Section 335, R.A. 7160. This finds support in
Malolos which he inherited from his deceased parents and refused to
the language of Section 17, R.A. 7160, which mandates LGUs to
pay the aforesaid tax. He instead filed appropriate case asking that
efficiently and effectively provide basic services and facilities (Albon
the ordinance be declared null and void since such a tax can only be
a. Fernand.o, G.R. No. 748357, June 30,2006).
collected by the national government, as in fact he has paid BIR the
required capital gains tax. The Municipality countered that under
Bar Question (1991) the Constitution, each local government is vested with the power to
To provide means for rehabilitation and stabilization of the create its own sources of revenue and to levy taxes, and it imposed
sugar industry so as to prepare it for the eventuality of the loss the subject tax in the exercise ofsaid constitutional authority. Resolve
of the quota allocated to the Philippines resulting from the lifting the controversy.
t
4t; ll,r,:vrr,:wr,rrr oN 'l'A\A uoN ( lttttt,ttrirt, l)Httctt't,l:s irlrrr l,tr,,lt'r'l't'totH oN 't'lt,r I'owt,lr or, 'l'nxn'r'ror.r 47
I nhercnt tnd ( iorrsl,il,rrl,iorrll l,irn il,al,iong

Suggested answer: Suggested anawer:


The ordinance passed by the Municipality of Malolos imposing Mr. Cortez, being a non-resident alien indiuidua.l who has stayed
a tax on the sale or transfer of real property is uoid. The Local Tax lir an aggregate period of more than 180 days during the calendar
Code only allows prouinces and cities to impose a tax on the transfer year 1999, shall for that taxable year be deemed to be a non-resident
of ownership of real property (Secs. 7 and 23, Local Tar Code). ulien doing business in the Philippines.
Municipalities are prohibited from imposing said tax that prouinces
are specifically authorized to leuy (Sec. 22, Local Tax Code). Considering the aboue, Mr. Cortez sha.Il be subject to an income
ktr in the same rnanner as an indiuidual citizen and a resident alien
While it is true that the Constitution has giuen broad powers of indiuidual, on toxable income receiued from all sources within the
taxation to local gouernment units, this delegation, howeuer, is subject Philippines ( Sec. 25[A][ IJ, NIRC).
to such limitations as may be prouided, by law (Sec. 5, Art. X, 1g87
Constitution). Thus, he is allowed to auail of the itemized deductions including
the personal and add.itional exemptions but subject to the rule on
3. Exemption from taxation of government entities. reciprocity on the personal exemptions (Sec. 34[A] to [J] and [M] in
relq,tion to Sec.25tAlt1l and Sec. 35[DJ, NIRC).
Bar Question (1998)
Bar Question (1996)
Ace Tobacco Corporation bought a parcel of land situated in uX," a multinational corporation doing business in the
Pateros and donated it to the Municipal Government of Pateros for the
sole purpose ofdevoting the said land as a relocation site for the less Philippines, donated 100 shares of stock of said corporation to Mr.
fortunate constituents of said municipality. In accordance therewith, 'Y," its resident manager in the Philippines. What is the tax liability,
the Municipal Government of Pateros issued to the occupants/ if any, of 'X" corporation?
beneficiaries Certificates ofAward giving to them the respective areas
where their houses are erected. Through Ordinance No. 2, Series of Suggested answer:
1998, the said municipal government ordained that the lots awarded Foreign corporations effecting a donation are subject to donor's
to the awardees/donees be finally transferred and donated to them. tax only if the property donated. is located in the Philippines.
Determine the tax consequence of the foregoing dispositions with Accordingly, donation of a foreign corporation of its own shares of
respect to the Municipal Government of Pateros. stocks in fauor of resident employees is not subject to donor's tar
(BIR Ruling No. 018-87, January 26, 1987). Howeuer, if 85Vo of the
Suggested answer: business of the foreign corporation is located in the Philippines or
The Municipality of Pateros is not subject to any donof s tax on the shares donated haue acquired business situs in the Philippines,
the ualue of land it subsequently donated, it being exempt from taxes the donation nxay be taxed in the Philippines subject to the rule of
as a political subdiuision of the National Gouernment. reciprocity.

4. Internationalcomity. Bar Question (1992)


The President of the Philippines and the Prime Minister of
Bar Question (2000) Japan entered into an executive agreement in respect of a loan
Mr. Cortez is a non-resident alien based in Hong Kong. During facility to the Philippines from Japan, whereby it was stipulated
the calendar year 1999, he came to the Philippines several times and that interest on loans granted by private Japanese financial
stayed in the country for an aggregate period ofmore than 180 days. institutions to private financial institutions in the Philippines shall
How will Mr. Cortez be taxed on his income derived from sources not be subject to Philippine income taxes. Is this tax exemption
within the Philippines and from abroad? valid? Explain.
48 Itt,:vtt,twt,;tr or'r'l'nxllror.r (lt.:trtt,:l,rt,l'lttltt'r r,lrAr.rrl,rnrlr',r'r'roNri()N't'll,l l'owt,ltt,ot,"l'nx,t't'tot't 49
Ittltcrt,trl irtrrl ( lrnsl.it,tttional Limitations

Suggested answer: Code does not require a foreign corporation to engage in


business in the Philippines subjecting its income to tax. It
Yes. The tax exemption is ualid because an executiue agreement
suffices that the activity creating the income is performed
has the force and effect of a treaty under the prouision of the Reuenue
or done in the Philippines. What is controlling, therefore,
Code. Taration is subject to international cornity.
is not the place of business but the place of activity
( P hilippine Gu aranty C o. u. C ommis sioner, 7 5 SCRA
5. Teruitorialjurisdiction. 1).
Cases: c. The sale of tickets in the Philippines by its general sales
agent is the activity that produced the income. The tickets
Where the insured is within the Philippines, the risk
exchanged hands here and pa;rments for fares were also
insured against is also within the Philippines, and certain
made in Philippine currency. The sllus of the source of
incidents of the contract are to be attended to in the
payments is in the Philippines. The flow ofwealth proceeded
Philippines, such as payment of dividends, sending of an
from, and occurred within Philippine territory, enjoying
adjuster into the Philippines in case of dispute, or making
the protection accorded by the Philippine Government. In
of proof of loss, the Government of the Philippines has the
consideration ofsuch protection, the flow ofwealth should
power to impose the tax upon the insured, regardless of
share the burden of supporting the government. Thus,
whether the contract is executed in a foreign country and
British Overseas Airways Corporation is a resident foreign
with a foreign corporation. Under such circumstances, corporation subject to tax upon its total net income from all
substantial elements of the contract may be said to be so
sources within the Philippines. The source of the income is
situated in the Philippines as to give its government the
the property, activity or service that produced the income.
power to tax.
For the source of income to be considered as coming from
Even if it be assumed that the tax imposed upon the the Philippines, it is sufficient that the income is derived
insured will ultimately be passed on to the insurer, thus from the activity within the Philippines (Commissioner
constituting an indirect tax upon the foreign corporation, u. British Oaerseas Airuays Corporation, 749 SCftlt
it would still be valid, because the foreign corporation, by 395).
stipulations ofits contract, has subjected itselfto the taxing
jurisdiction of the Philippines. After all, the Government Gonstitutional Limitations
of the Philippines, by protecting the properties insured,
benefits the foreign corporation. It is thus reasonable that 1. No person shall be deprived of life, liberty or property
the latter should pay ajust contribution therefor (Manila without due process of law (Sec. 7, Art. III, 7987
Eleetric Company a. Yatco, 69 Phil. 89). Constitution).
b. Reinsurance premiums are taxable in the Philippines. Adversely affecting as it does property rights, both the due
Foreign corporations are taxable on their income from process and equal protection clauses may be invoked to invalidate
sources within the Philippines. "Sozrces'has been a revenue measure. Where the due process and equal protection
interpreted as the activity, property or service giving rise clauses are invoked, considering that they are not fixed rules but
to the income. rather broad standards, there is a need for proofofsuch persuasive
character as would lead to such a conclusion. It is undoubted that
The foreign insurers' place of business should not the due process clause may be invoked where a taxing statute is so
be confused with their place of activity. Business implies arbitrary that it finds no support in the Constitution. Absent such a
continuity and progression of transactions, while activity showing, however, the presumption of validity must prevail (Sison
may consist of only a single transaction. An activity may a. Ancheta, 130 SCRA 654).
occur outside the place of business. Section 24 of the Tax
50 l},:vr r,:wr,:rr or.r'l'nxn'r'roru ( it.:nt,;tr,rt, l'tilttItt't,t,:li ;\Ntr l,tMilr\|t()N]l0N illt,, l'owt,ttr ot''l',rx,r't tott l-r I
I trlrr:r't'rrl, rrrrrl ( lorrsl.il rrl,iorrrl l,irrrrl,rrl,iorrs

Cases: c. 'l'lre Provincial Assessrlr of'Atrra levied a tax assessment on


the properties of the Roman Catholic Bishop of Bangued.
a. Sison, as taxpayer, alleges that he would be unduly
The latter filed for declaratory relief on the ground that
discriminated against by the imposition of higher rates
of tax upon his income arising from the exercise of his
it is exempt from real estate taxes. The Province of Abra
filed a motion to dismiss claiming that declaratory relief
profession uis-d.-uis those which are imposed by Batas
is not a proper relief and that there was failure to exhaust
Pambansa Blg. I35 upon fixed compensation income or
administrative remedies. After conducting summary
salaried individual taxpayers.
hearing, CFI Judge Hernando granted judgment exempting
It should be noted that while business and Roman Catholic Bishop of Bangued from real property
professional income are subject to the higher rates of tax taxes, without hearing the side of the Proyince of Abra.
ranging from five percent (\Vo) to 607o,lhe taxable base is Motion to dismiss filed by the Province ofAbra was denied.
net income (i.e., gross income less allowable deductions),
The 1973 Constitution added another requirement
while compensation income is subject to the graduated
for tax exemption of lands, buildings, and improvements
tax rates of zero percent (|Vo) to 357o but there is no used exclusively for religious, charitable or educational
deduction allowed therefrom, except the personal and
purposes. They should not only be "exclusively" but also
additional exemption. The basis of distinction is that wage
"actually" and "directly" used for religious or charitable
earners do not spend to produce income; their salary is
purposes. The law frowns on exemption from taxation;
produced by the sweat of their brow. Business income
hence, an exempting provision should be construed
requires expenditures for raw materials, labor and other
strictissimi juris. The Province of Abra is, therefore, fully
expenses. There can be no discrimination where the tax
justified in invoking the protection of procedural due
bases and rates for self-employed and professionals, on
process as proofis necessary to demonstrate that there is
one hand, and for salaried employees, on the other hand,
compliance with the constitutional provision that allows
are different (Sison a. Ancheta, ibid).
exemption (Proaince of Abra a. Hernandn, 107 SCRA
b. Manila City passed Ordinance No. 6537 making it unlawful 104).
for any person not a citizen of the Philippines to be
employed or engaged in trade or business within the city 2. Nor shall any person be denied the equal protection of
without first securing an employment permit. the laws (Sec. 7, Art.Iil, 7987 Constitution).
Ordinance No. 6537 violates the due process of law
Cases:
and equal protection rule of the Constitution. Requiring
a person before he can be employed to get a permit from a. The Commissioner of Customs issued CMO 2l-2003, which
the City Mayor of Manila, who may withhold or refuse for tariff purposes, wheat was classified according to the
it at will is tantamount to denying him the basic right following: (1) importer or consignee; (2) country of origin;
of the people in the Philippines to engage in a means of and (3) port of discharge. The regulation provided an
livelihood. While it is true that the Philippines as a State exclusive list ofcorporations, ports of discharge, commodity
is not obliged to admit aliens within its territory, once an descriptions, and countries of origin. Depending on these
alien is admitted, he cannot be deprived of life without factors, factor would be classified either as food grade or
due process of law. This guarantee includes the means of feed grade. The corresponding tarifffor food grade wheat
livelihood. The shelter ofprotection under the due process was three percent (T%o);for feed grade, seven percent(7o/o).
and equal protection clause is given to all persons, both
aliens and citizens Uillegas u. Hiu Chiong Tsai Pao ' fhe Supreme Court declared the contents of CMO
27-2003 as unconstitutional, for being violative of the
Ho,86 SCRA270).
equal protection clause. The equal protection clause means
52 Itr,:vtt,twt,;rr oN'l'Axrr't'toN (it,;ttt,ttt,U,l'trl'tr'il,t,t,:li ,lrulrl,luu,1iloNiioN iltt,: l1rwt,;trot.'l'AxAttoN l-ri I
Irrlrr.rt.rtl, rrrrrl ( iorrslilttl iottirl l,itttil,itl,iorts

that no person or class of persons shall be deprived of VAT is oppressive, discriminatory, regressive, and it
the same protection of laws enjoyed by other persons or violates the due process and equal protection clauses of
other classes in the same place in like circumstances. the Constitution.
The guarantee of equal protection of laws is not violated,
The Supreme Court sustained the constitutionality of
ifthere is a reasonable classification. For a classification the law by applying the doctrine ofseparation ofpowers,
to be reasonable, it must be shown that: (i) it rests on
because the grounds questioned by Petitioners merely
substantial distinctions; (ii) it is germane to the purpose
attacked the wisdom of the law. The High Court stated
of the law; (iii) it is not limited to existing conditions only;
that "the first Congress, created and elected under the
and (iv) it applies equally to all members of the same
1987 Constitution, was convened on27 July 1987. Hence,
class. Unfortunately, CJ$.{O 27-2003 does not meet these
the enactment of E.O. 273 on 25 July 1987 by the former
requirements. The Court does not see how the quality of
President two (2) days before Congress convened on 27 July
wheat is affected by who imports it, where it is discharged,
1987, was within the President's constitutional power and
or which country it came from. On one hand, even if other
authority to legislate." Petitioners claimed that Congress
millers excluded from CMO 27-2003 have imported food
was really convened on 30 June 1987 and contended that
grade wheat, the product would still be declared as feed
the word "convene" is s;rnonymous with "the date when
grade wheat, a classification subjecting them to seven
the elected members of Congress assumed office." This
percent(77o). On the other hand, even if the importers listed
contention is without merit according to the High Court.
under CN,IO 27-2003 have imported feed grade wheat, they
"The word 'conuene,'which has been interpreted to mean
would only be liable to pay three percent (37o) tariff, thus
'to call together, cause to assemble, or convoke'is clearly
depriving the state ofthe taxes due. The regulation does
different from assumption of office by the individual
not become disadvantageous to respondent only, but even to
members of Congress or their taking the oath of office. To
the State (Commissioner of Customs v. H5tperrnix Feed,s
uphold the submission of Petitioners would stretch the
Corporation, G.fi. No. 779579, Februany 1,20L2). definition of the word 'convene' a bit too far. It would also
b. On July 25, 1987, former President Corazon C. Aquino defeat the purpose of the framers of the 1987 Constitution
signed Executive Order (E.O.) No. 273, pursuant to her and render meaningless some other provisions of said
constitutional power to legislate laws under the then Constitution."
Freedom Constitution that was promulgated immediately
Petitioners also asserted that 8.O.273 is oppressive,
after the peaceful EDSA Revolution of 1986. Effective
discriminatory, unjust and regressive, and violates the
January 1, 1988, E.O. 273 levied a I07o VAT on sales provision that "the rule of taxation shall be uniform
and importation of goods and on sales of services, which
and equitable. The Congress shall evolve a progressive
replaced the then existing (1) complicated sales tax
system of taxation." On this point, the Court ruled that
structure, composed of(a) fixed and percentage taxes on
the Petitioners' assertions are not supported by facts and
original and subsequent sales of goods and services; (b)
circumstances to warrant their conclusions. They have
excise tax on certain selected articles; and (c) mining taxes
failed to show that the VAT is oppressive, discriminatory or
on mineral and mineral products, and (2) percentage taxes
unjust. Petitioners merely relied upon newspaper articles,
on certain services based mainly on gross receipts.
which are actually hearsay and have no evidentiary value.
The constitutionality of E.O. 273 was assailed in the To justify the nullification of a law, there must be a clear
case of Kapatiran ng mga Naglilinghod sa Pamahalaan and unequivocal breacil ofthe Constitution, not a doubtful
ng Pilipirtas, Inc., et al. u. Tant.,t on the ground that the and argumentative implication. As the Court saw it, E.O.
273 satisfies all the requirements of a valid tax. The Court,
lG.R. No. 81311, June 30, 1988. in City of Baguio u. De Leon, said:
lr4 lit,;vt t,:wt,;tr ott'l'rtxn't lolt (it,:trt,:ttnt, Ittttt,lr'tt,t,t,;l;Atttrl,trut't'nt'rrNs()N't'ttt,) l'tlwt,:lttll"l'rtxa't'ttltt 55
I rrhcrorrI rr rrrl ( ]orrst,ituLional Limitations

" . . . In Philippine T'rust C<tmpuny u. Yetco Tax Code, and professional services performed
(69 Phil. 420), Justice Laurel, speaking for the by registered general professional partnerships;"
Court, stated: A tax is considered uniform when
On this matter, the High Court stated: "The phrase
it operates with the same force and effect in 'except customs brokers' is not meant to discriminate
every place where the subject may be found."'
against customs brokers. It was inserted in Section 1B@)
InEastern Theatricq.l Co. u. Alfonso (83 Phil. 852), the to cornplement the prouisions of Section 102 of the 1977 Ta"x
Court said: "Equality and unifonrrity in taxation means Code, which makes the services of custorns brokers subject
that all taxable articles or kinds of property of the same to the payment of the VAT and to distinguish customs
class shall be taxed at the same rate. The taxing power has brokers from other professionals, who are subject to the
the authority to make reasonable and natural classifications payment of an occupation tax under the Local Tox Code.
for purposes of taxation. To satisfu this requirement, all With the insertion of the clarificatory phrase'except custorns
that is needed is that the statute or ordinance in question brokers' in Section 103(R), a potential conflict between the
'applies equally to all persons, firms and corporations two sections (Secs. 102 and 103), insofar as customs brokers
placed in similar situation.'2 The sales tax adopted in E.O. are concerned, is auerted. At any rate, the distinction of the
273 is applied similarly on all goods and services sold to customs brokers from the other professionals who are subject
the public, which are not exempt, at the constant rate of to occupation tax under the Local Ta,x Code is based upon
zero percent (07o) or I07o. The disputed sales tax is also rnaterial dffirences, in that the artiuities of customs brokers
equitable. It is imposed only on sales of goods or services (like those of stock, real estate and immigration brokers)
by persons engaged in business with an aggregate gross partake more of a business, rather than a profession and
annual sales exceeding F200,000 (now F1.5 million). Small were thus subjected to the percentage tax under Section
corner sari-sari stores are consequently exempt from its 174 of the Tax Code prior to its amendment by E.O. 273.
application. Likewise exempt from the tax are sales of farm E.O. 273 abolished the percentage ta.x, and replaced it with
and marine products, so that the costs of basic food and the VAT. If the petitioner-association did not protest the
other necessities, spared as they are from the incident of classification of customs brokers then, the Court sees no
the VAT, are expected to be relatively lower and within reason why it should protest nout.'
the reach of the general public."
The Court noted that E.O. 273 has been in effect for
The Court also found no merit in the contention of more than five (5) months now, so that the fears expressed
the petitioner - Integrated Customs Brokers Association by the petitioners that the adoption ofthe VAT will trigger
of the Philippines3 - that E.O. 273, more particularly skyrocketing of prices of basic commodities and services, as
Section 103(R) ofthe 1977 Tax Code, unduly discriminates well as mass actions and demonstrations against the VAT,
against customs brokers. The contested provision states: should by now be evident. The fact that nothing ofthat sort
has happened shows that the fears and apprehensions of
"Sec. 103. Exempt transactions. - The
the petitioners appear to be more imagined than real.a
following shall be exempt from the value added
tax: On the claim ofregressivity, denial ofdue process and equal
protection under R.A. 7716, the Supreme Court said that
"(R) Service performed in the exercise of
profession or calling (except customs brokers) aKapatiran ng mga Naglilingkod sa Pamahalaan ng Pilipinas, et al. v. Hon.
subject to the occupation tax under the Local Bienvenido Tan, G.R. No. 81311, June 30, 1988; Kilusang Mayo Uno Labor Center, et
ul. v. Executive Secretary, et al., G.R. No. L81820, June 30, 1988; Integrated Customs
Brokers Association of the Phil. v. Commissioner of Internal Revenue, G.R. No. L81921,
'zUy Matias v. City of Cebu, 93 Phil. 300. .lune 30, 1988; and Ricardo Valmonte v. Executive Secretary, et al., G.R. No. L-82152,
3G.R. No. L-8t921, June 30, 1988. .lune 30, 1988.
56 ltr,rvtr,:wt.:rr oru 'l'nxlt toN ( it,tNt,:l{At, l'trtur'tt't.t,:lt tt,tlr l,ttlttt,tllot'tlioN llll,i llrwt,:tt ot"l'nxntlott 57
Ittltcrcttl rtttrl ('otrsl.il.ttl.tottltl l,itrril,itl,iotts

there is basis for passing upon claims that on its face the lhe resklen.t indiuiduaLs arul husinesses within the "secured areq,." The
statute violates the guarantees offreedom ofspeech, press nrsidents, heing in like circumsteruces to contributing directly to the
and religion. The possible"chilling effecf" which it may have achieuement of the end purpose of the law, are not categorizedfurther.
on the essential freedom of the mind and conscience and Instead, they are sirnilarly treated, both in priuileges granted and
the need to assure that the channels of communication are obligations required (Tiu a. Court of Appeals' 3OI SCRA 278).
open and operating importunately demand the exercise of
this Court's power of review. d. The Sarugguniang Bayan resolution ordering the closure or
the transfer of petitioney's gasoline station was not a ualid
There is, however, no justification for passing upon
exercise of the police pou)er. The Court found that there was
the claims that the law also violates the rule that taxation
a failure by the municipal offi,cials to comply with the due
must be progressive and thot it denies petitioners' right to
p roce s s cl aus e ( P aray no u. Jov e llano s, G R. No. 7 4 840 8,
due process and equal protection of the laws. The reason
JuIy 74,2006).
for this different treatment has been cogently stated by an
em.inent authority on constitutionql law. Thus:
3. The rule of taxation shall be uniform and equitable. The
"When freedom of the mind is imperiled Congress shall evolve a progressive system of taxation
by law, it is freedom that commands comments ( Sec. 28[ 7], Art. II\ 7987 Constitution).
of respect; when property is imperiled, it is the
Among the grounds cited by the petitioners in requesting for
lawmakers' judgment that commands respect.
the declaration of Section 114(C) (withholding of ualue added tq.x)
This dual standard may not precisely reverse the
of the Tax Code, as amended by R.A. 9337 , as unconstitutional
presumption of constitutionality in civil liberties
are:
cases, but obviously it does set up a hierarchy of
values within the due process clause." a. The law is violative of Article III, Section 1 of the 1987
Constitution in that it does not accord equal protection to
Bar Question (2000) similarly situated taxpayers; and
An Executive Order was issued pursuant to law, granting tax and b. The law is violative of Article VI, Section 28(1) of the 1987
duty incentives only to businesses and residents within the "secured Constitution in that it does not apply uniformly to all those
area" of the Subic Economic Special Zone, anddenying said incentives belonging to the same class.
to those who live within l};,'e Zone but outside such "secure area." Is Petitioners submit that the limitation of the amount of input
the constitutional right to equal protection ofthe law violated by the [ax that may be claimed as a credit against output tax, as well as
Executive Order? Explain. the requirement that the government deduct a five percenL(SVo)final
withholding tax on their gross payments on purchases of goods and
Suggested answer: services, effectively impose an arbitrary, unreasonable, oppressive,
No. Equal protection ofthe lau clause is subject to reasonable irnd excessive burden on the part of petitioner-taxpayers as to amount
classifi.cation. Classification, to be ualid, must: (a) rest on substantial to confiscation of property without due process of law. The limitation
distinctions; (b) be germane to the purpose of the law; (c) not be limited of the amount of input tax and the requirement that government
to existing conditions only; and (d) apply equally to all members of withhold a five percent (57o) final VAT on their gross payments on
the same clq.ss. purchases ofgoods and services constitute an arbitrary and oppressive
rrxercise of legislative power in violation of the due process clause of
There are substantial differences between big inuestors being t,he 1987 Constitution.
*secured
enticed to the aree," and the business operators outside that
are in q.ccord with the equal protection clq.use that does not require The Petitioners argue that by imposing a five percent(SVo)final
territorial uniformity of laws. The classification applies equally to aII withholding VAT on gross payments by the government, the law
58 Itt,:vt t,;wt,:rr on'l'rrxn'r'ror.r u,t,t,lt/\Nl l,tNllAltoNjioN t'll,r l'owt,;l ot,'l)txl'l'tot
(lt,;t,tt,;ttnt, l'tttt.t, 59
lnlrr,tr.rrl rrtrrl ( iorrsl rl,ul.iottitl l,iutit.ltl,iotts

actually imposes a cap on input tax equivalent to 7oo/o of the output classification applies, not only to present conditions, but also to future
tax. By limiting the amount of input tax that a taxpayer may claim conditions substantially identical to those ofthe present; and (4) the
against its output tax, Sections 110(.4.)(2), 110(B), and 114(C) of the classification applies equally to all those who belong to the same
Tax Code, as amended by R.A. 9337, are infringing on the property class."
rights ofa taxpayer. The input tax is an asset. In fact, for accounting
In ruling in favor of the constitutionality of the law (R.A. 9337),
purposes, unapplied input tax is recorded as a deferred tax asset.
the Supreme Court stated:
When an asset subject to VAT is acquired or an expense subject to
VAT is incurred, the appropriate asset or expense account is debited a. InJ.M. Tuason & Co.,Inc. u. Land Tenure Administration
for the amount of the disbursement net of VAT, the input tax account (31 SCRA 413 t19701), the Supreme Court ruled that "the
is debited for the VAT component, and cash or the appropriate payable guaranty of equal protection, which applies not only to
account is credited. Evidently, input tax is a property or property individuals but to juridical persons as well, ensures that
right that may not be appropriated, confiscated or limited without those falling within a class are treated in the same fashion
due process of law. Thus, the imposition of a 707o cap on input tax, under the law and that whatever restrictions cast on some
the requirement that input tax on depreciable goods be generally in the group are equally binding on the rest."
spread out over the depreciable life of the asset, and the imposition
of a five percent (|Vo) frnal withholding tax on gross payments made
b. The doctrine is that where the due process and equal
protection clauses are invoked, considering that they are
by government constitute an arbitrary exercise of legislative power.
not fixed rules but rather broad standards, there is a need
Uniformity in taxation. - "Uniformit5t" has been defined for proofofsuch persuasive character as would lead to such
as that principle by which all taxable articles or kinds of property a conclusion. Absent such a showing, the presumption of
of the same class shall be taxed at the same rate. The taxing power validity must prevail.
has the authority to make a reasonable and natural classification for
purposes of taxation, but the government's act must not be prompted
c. Petitioner's contention that the new law imposes limitations
on the amount of input tax that may be claimed and that
by a spirit of hostility, or at the very least discrimination that finds
in effect, a portion of the input tax that has already beeru
no support in reason. It suffices then that the laws operate equally
paid cannot now be credited against the output tax, is not
and uniformly on all persons under similar circumstances or that aII
absolute. It assumes that the input tax exceeds 707o of the
persons must be treated in the same manner, the conditions not being
output tax, and therefore, the input tox in eJccess of 70Vo
different both in the privileges conferred and the liabilities imposed.s
remains uncredited. Howeuer, to the extent that the input
Uniformity in taxation does not prohibit the classification of the tax is less than.707o ofthe output tax, then 100Vo of such
objects oftaxation or the entities or subjects upon which taxes are input tax is still creditable. The excess input ta"x, if any,
imposed. However, to withstand any constitutional infirmity, such is retained in e business's boohs of accounts and remains
classification must comply with certain guidelines. Thus, in Pepsi- creditable in the succeeding quarter(s). In addition, Section
Cola Bottling Co. of the Philippines,Inc. u. City of Butuan (24 SCRA 112(8) of the Tax Code allows a VAT-registered person to
789 t19681), the Supreme Court said: "It is true that the uniformity apply for the issuance of a tax credit certificate or refund
essential to the valid exercise ofthe power oftaxation does not require for any unused input taxes, to the extent that such input
identity or equality under all circumstances, or negate the authority tuces haue not been applied against the output taxes. Such
to classify the objects of taxation. The classification made in the unused input tax may be used in payment of his other
exercise of this authority, to be valid, must, however, be reasonable internal reuenue taxes.
and this requirement is not deemed satisfied, unless: (1) it is based
d. The non-application of the unutilized input tax in a given
upon substantial distinctions which make real differences; (2) these
quarter is not ad infinitum, as petitioners exaggeratedly
are germane to the purpose of the legislation or ordinance; (3) the
contend. Their analysis ofthe effect ofthe T0Tolirnitation
sChurchill v. Concepcion, 34 Phil. 969 (1916). is incomplete and one-sided. It ends at the net effect that
(;( )
ll.t,:vr r,:wr,:ri oN'l'AxA'r'roN (it,tttt,tttnt, lttatNr:tt,t,t,:ri lr.rtr l,tnt'tn't'tot.t:i ()N't'ttt,) Itowt,;tt ol,"l'nxn't'tttN 6l
Ittltcrcttl, rrttrl ( iottsl,il,ttl,ionul Limit.rtions

there will be unapplied/unutilized input tax for a given that all property belonging to the same class shall be toxed alihe. It
quarter. It does not proceed further to the fact that such does not signify an intrinsic, but simply a geographic, uniformity
unapplied,/unutilized input tax may be credited in the (Churchill & Tait u. Conception, S4 Phil.969). Uniformity does
subsequent periods as allowed by the carry-over provision not require the same treatment; it simply requires reasonable basis
of Section 110(8) or that it may later on be refunded or for classification.
covered by a tax credit certificate under Section 112(B) of
the Tax Code. Bar Question (2003)
The input tax is not a property or a property right within
The City of Makati, in order to solve the traffic problem in its
the constitutional purview of the due process clause. A business districts, decided to impose a tax, to be paid by the driver, on
VAT-registered person's entitlement to the creditable input
all private cars entering the city during peak hours from 8:00 a.m. to
tax is a mere statutory privilege. The distinction between
9:00 a.m. from Mondays to Fridays, but it exempts those cars carrying
statutory privileges and vested rights must be borne in more than two occupants, excluding the driver. Is the ordinance valid?
mind for persons have no vested rights in statutory privi_
Explain.
leges. The State may change or take away rights, which
were created by law of the State, although it may not take
Suggested answer:
a\May property, which was vested by virtue of such rights.
The ordinance is in. uiolq.tion of the rule of uniformity and
In this case, the law is uniform as it provides a standard. equality, which requires that all subjects or objects of taxation,
rate of zero percenL (\Vo) or L}Vo (or I2Vo) on all goods similarly situated m.ust be treated alihe q.nd must not be classifi.ed
and services. Neither does the law make any distinction in an arbitrary nx&nner. In the case at bar, the ordinance erempts
as to the type of industry or trade that will bear the cars carrying more than two occupants from the said ordinance.
TOVo limitation on the creditable input tax, five (S}year
Furthermore, the ordinance imposes the ton only on private cars and
amgrtizaLion of input tax paid on purchase of capital exempts public uehicles from the imposition of the tax, although both
goods, or the five percent (\Vo) finalwithholding tax by the
contribute to the traffic problem. There exists no substantial standard
government. The rule of uniform taxation does not deprive
used in the classification used by the City of Makati.
Corrgress of the power to classify subjects of taxation, and
only demands uniformity within the particular class. Another issue is the fact that the tax is imposed on the driuer
ofthe uehicle and not on the registered owner thereof. The ordinance
g
b. R.A. 9337 is also equitable. The law is equipped with a does not only uiolate the requirement of uniformity; the same is also
threshold margin. The VAT rate does not apply to sales of unjust because it places the burden on someone who has no control
goods or services with gross annual sales or receipts not
over the route of the uehicle. Hence, the ordinance is inualid for
exceeding F1.5 million. Also, basic marine and agricultural
uiolating the rules of uniformity and equality us well as for being
food products in their original state are still not subject to
unjust.
tax.
Cases:
Bar Question (1998)
1. The municipal council, in the exercise of its regulative
Explain the requirement of uniformity as a limitation in the authority, may require any person engaged in any business
imposition and./or collection of taxes. or occupation to obtain a permit for which a reasonable
fee (F10.00) may be charged. The ordinance is valid as
Suggested answer: Commonwealth Act No. 472 authorizes municipal councils
The ta^x is uniform when it operates with the same to impose municipal license taxes upon such persons, of
force and effect which the only criterion as to the amount to be imposed
in euery place where the subject of it is found. ,,IJniformitSt, means
62 li,t,:vt t.;wt.:lt oN'l'AxA't'toN
ot,'l"rxn't'tott
(lt,:Nt.:ttnt, Ittrtnr,tt't,t,;s ANt) l,tNil.t,At.t()Ns ()N'flll,l l'rlwt,ltt 63
Ittltcrcttl, tttttl ( )ottnl,il,ttt,iorrrrl l,inritutions

is that it should be just and uniform, and not percentage income and the public hardly profits from horse racing
taxes. Shell's installation manager is still classified as an and this business demands relatively heavy police power
occupation, even ifhe is a salaried employee. The mere fact supervision (Manila Race Horse TYainers Association
that there is no other person who exercises the privilege a. Dela Fuente,88 Phil.60).
of an installation manager does not make the ordinance 4. The Municipal Board ofManila passed Ordinance No. 3379,
discriminatory inasmuch as it is and will be applicable to levying a property tax on all motor vehicle operating within
any person or firm who exercises such occupation (Shell the City of Manila.
Company of Phil. Islands u. Mun. of Cord.oaa, 94 Phil.
389). The ordinance infringes the rule of uniformity of
taxation. The ordinance exacts the tax upon all motor
2. The Municipal Board of Manila passed Ordinance No. vehicles within the City of Manila. It does not distinguish
3398, pursuant to its city charter, imposing occupation between a motor vehicle for hire and one which is purely
tax on persons exercising various professions in Manila for private use. Neither does it distinguish between a
and penalizes non-payment thereof. Punzalan filed a suit, motor vehicle registered in the City of Manila and one
in behalf of other professionals, for the annulment of the which is registered in another place but occasionally comes
ordinance, claiming the ordinance is class legislation, to Manila and uses its streets and public highways. The
because the legislature withheld this power to tax from distinction is important, if we note that the ordinance
other chartered cities, and it is unjust and oppressive intends to burden only those registered in the City of
because it creates discrimination within the class (i.e., Manila as may be inferred from the wotd "operating"
professionals in Manila have to pay the tax; non-Manila used therein. The wotd"operating" denotes a connotation
professionals do not). which is akin to a registration, for under the Motor Vehicle
Punzalan makes a distinction that is unfounded. It Law, no motor vehicle can be operated without previous
should be noted that the ordinance imposes tax upon every payment of the registration fees. There is no pretense that
person "exercising" or "pursuing" in Manila any one of the ordinance equally applies to motor vehicles which come
the occupations named, but does not say that such person to Manila for a temporary stay or for short errands' and it
must have his office in Manila. What constitutes exercise cannot be denied that they contribute in no small degree
or pursuit of a profession in the city is a matter ofjudicial to the deterioration of the streets and public highways'
determination(Punzalan a. Mun.Board. of Manila, g5 The fact that they are benefited by their use, they should
Phit.46). also be made to share the corresponding burden. And yet
such is not the case. This is an inequality which renders
3. In taxing only boarding stables for race horses (not the ordinance offensive to the Constitution (Association
ordinary horses), the court believes that the ordinance of Customs Brokers a. City of Manila,93 Phil. 107).
does not make an arbitrary classification. Taxingboarding
stables for race horses to the exclusion ofboarding stables
for ordinary horses is not indefensible. The owners of 4. No law impairing the obligation of contracts shall be
passed (Sec. 70, Art. nI, 7987 Constitution).
boarding stables for race horses and, for that matter, the
race horse owners themselves , are a class by themselves The power of taxation cannot be exercised in a manner that
and appropriately taxed where owners of other kinds of would impair the obligation of contracts. what is prohibited is that
horses are taxed less or not at all, considering that equity a taxing statute be passed that would alter the relative rights ofthe
in taxation is generally conceived in terms of ability to pay pprties with each other. The mere fact that a tax makes the conduct
in relation to the benefits received by the taxpayer and by of a business more expensive or makes an activity more difficult does
the public from the business or property taxed. Race horses not result in the impairment of the obligation of contracts. contract
are devoted to gambling if legalized, the owners derive is impaired only if the relative position of the parties to a contract
64 l(t,:vt r,:wr,:rr oN'l'rxA't'toN (it,:t'.tt,:tt,tt, lttttttt tt't,t,:rt.lttl l,llrltntl.t'.ts ()N'l'lll': ltowt'ltt ot"'l'nxn't'tot't 65
I ttltcrt'ttl. trtrrl ( iolrn(,il.ttt,iotlrtl l,irrlit:rIions

(i.e., equality that is assumed when the contract was entered into) is requires (Cagayan Electric Power & Light Co. u.
disturbed by the operation ofa taxing statute. Commissioner, L-601,26, September 25, 1985).

Bar Question (1997)


2. Petitioner's claim that it is only liable for the two percent
(2Vo) (now three percentl3%oD franchise tax rate is without
'X" Corporation was the recipient in 1990 oftwo tax exemptions merit. Nowhere in the franchise of the petitioner can
both from Congress, one law exempting the company's bond issues a provision that the franchise tax prescribed therein
from taxes and the other exempting the company from taxes in "shall be in lieu of all other taxes" be found. It is thus
the operation of its public utilities. The two laws extending the tax subject to the five percent (\Vo) (now three percent [37o])
exemptions were revoked by Congress before their expiry dates. Were franchise tax provided in Section 259 (now Sec. 119) of
the revocations constitutional? the Tax Code. Having accepted said franchise subject
to the condition that it may be amended, altered or
Suggested answer: repealed by Congress, petitioner cannot now assert that
the imposition and collection of the higher rate of five
Yes. The exempting statutes are both granted unilaterally by percent (57o)isin violation of the impairment clause of our
Congress in the exercise of taxing powers. Since taxation is the rule ond
Constitution (Philippine Power & Deueloptnent Co. v.
tax eremption, the exception, any tax exemption unilaterally granted
Commissioner, CTA Case No. 1752, October 37, L965) -
cqn be withdrawn at the pleasure of the taxing authority without
uiolating the Constitution (Mactan Cebu International Airport
Bar Question (2004)
Authority u. Marcos,261 SCRA 667).
A law was passed granting tax exemption to certain industries
Neither of these was issued by the taxing authority in a contrsct
and investments for a period of five years. But three years later, the
lawfully entered by it so that their reuocation would not constitute an Iaw was repealed. With the repeal, the exemptions were considered
impairrnent of the obligations of contracts.
revoked by the BIR, which assessed the investing companies for
unpaid taxes effective on the date of the repeal of the law.
Cases:
NPC and KTR companies questioned the assessments on the
1. Cagayan Electric Power & Light Company is the holder ground that, having made their investments in full reliance with
of a legislative franchise under which its payment of the period of exemption granted by the law, its repeal violated their
three percent (3Va) tax on its gross earnings from the sale
constitutional right against the impairment of the obligations and
of electricity is "in lieu of all taxes and assessments of contracts. Is the contention of the companies tenable or not? Reason.
whatever authority upon privileges, earnings, income,
franchise, and poles, wires, transformers, and insulators
Suggested answer:
of the grantee, from which taxes and assessments the
grantee is hereby expressly exempted" (Sec. 3, R.A. B42Z). The contention is not tenable. The exernption granted is in the
R.A. 5431 amended Section 24 of the Tax Code by making nature of a unilaterql tuc exem.ption. Since the exemption giuen is
liable for income tax all corporate taxpayers not specifically spontaneous on the part of the legislature an'd no seruice or duty or
exempt therefrom. Franchise companies were made subject other remuneratiue conditions haue been imposed on the taxpayers
to income tax in addition to franchise tax. receiuing the exemption, it may be reuohed at will by the legislature
(Christ Church u. Philad.elphia, 24 How. 300 t18601). Whq't
Congress could impair petitioner's legislative franchise
constitutes an impairment of the obligation of contract is the reuocution
by making it liable for income tax. The Constitution of an exemption which is founded on a uqluable consideration because
provides that fianchise is subject to amendment, alteration,
it takes the fonn and essence of a contract (Casanouas o. Hord', 8
or repeal by the Congress when the public interest so Phil. 125 t1907l; Maniln Ro'ilroad. Compan5t a.Insul'ar Collector
of Customs, T2 Phil.146 t19151).
66 ll.l:vn.:wr.:rr oru 'l'nxn lror.r (It,:trt':trlt,Ittrtrur'tt't,t,;:i,tIt,Lttuttn't'tol',tfi{}N't'trr.r Itowt,;trot"'l',lx,n't'tott 67
lnlttrrt'nl. rttttl ( lrttsl.i(.ttl.iorrrrl l,itrtikttions

5. The free exercise and enjoyment of rerigious profession the Secretary's power to grant exemption for two (2) reasons: (a) the
and worship, without discrirnination or preference, shall Secretary of Finance has no power to grant tax exemption because
forever be allowed (Sec. 5, Art. nI, IggT Constitution). this is vested in Congress and requires for its exercise the vote ofa
The City of Manila passed two (2) ordinances. Ordinance majority of all its members; and (b) the Secretary's duty is to execute
2529, imposing a tax on sale of Bibles and other religious literature, the law.
cannot be applied to the plaintiff, for in doing so it would impair its The Supreme Court ruled that it is unnecessary to pass upon
constitutional right to free exercise and enjoyment of its religious the contention that the exemption granted is beyond the authority of
profession and worship as well as it rights of dissemination of the Secretary ofFinance to give, in view ofPPI's contention that even
religious beliefs. such ordinance, if applied, would provide for religious with the exemption of the circulation revenue of print media, there
censorship by restraining the free distribution and sale of Bibles is still an unconstitutional abridgment of press freedom because of
and other religious literature. But with respect to ordinance 8000, the imposition of the VAT on the gross receipts of newspapers from
requiring a person to secure a Mayor's permit before he can engage in advertisements and on their acquisition of paper, ink and services for
business, trade or occupation, the court held that it does not impair publication. Even on the assumption that no exemption has effectively
the plaintiffs constitutional right (Amcrican Bibte Soeietgt u. btty been granted to print media transactions, we find no violation of press
of Manila, 101 Phil.386). freedom in these cases.
6. Freedom ofthe press. To be sure, we are not dealing here with a statute that on its face
operates in the area of press freedom. The PPI's claim is simply that,
R.A. 7716 amended Section 103 of the Tax Code by deleting as applied to newspapers, the law abridges press freedom. Even with
paragraph (f) with the result that print media became subject to due recognition of its high estate and its importance in a democratic
vAT with respect to all aspects of their operations. Latnr,however, society, however, the press is not immune from general regulation by
based on a memorandum of the secretary of Justice, respondent the State. PPI does not dispute this point. What it contends is that
secretary of Finance issued Revenue Regulations No. 11-94, dated by withdrawing the exemption previously granted to print media
June 27, 1994, exempting the "circulation income of print media transactions involving printing, publication, importation or sale of
pursuant to section 24, Article III of the 1982 philippine constitution newspapers , R.A. 7776 has singled out the press for discriminatory
guaranteeing against abridgment of freedom of the press, among treatment and that within the class of mass media, the law
others." The exemption of "circulation income" has left. income from discriminates against print media by giving broadcast media favored
advertisements still subject to the VAT. treatment. We have carefully examined this argument, but we are
The Philippine Press Institute (PpI) is a non-profit organization unable to find a differential treatment of the press by the law, much
of newspaper publishers established for the improvlment of less any censorial motivation for its enactment. If the press is now
journalism in the Philippines. on the other hand, the plilippine Bible required to pay a value added tax on its transactions, it is not because
society (PBS) is a non-profit organization engaged in the printing and it is being singled out, much less targeted, for special treatment but
distribution of bibles and other religious articles. Both petitioners only because of the removal of the exemption previously granted to it
claim violations of their rights under sections 4 and s or the Bill of by law. The withdrawal of exemption is all that is involved in these
Rights as a result of the enactment of the VAT law. cases. Other transactions, likewise previously granted exemption,
have been delisted as part of the scheme to expand the base and
PPI questions the law insofar as ithas withdrawn the exemption the scope of the VAT system. The law would perhaps be open to the
previously granted to the press under Section 109(f) of the NIRC. charge of discriminatory treatment, if the only privilege withdrawn
Although the exemption was subsequently restored by administrative had been that granted to the press.6
re_gulation with respect to the circulation income of newspapers, the
PPI presses its claim because ofthe possibility that the oruy
-secretary
still be removed by mere revocation of the regulation by"""*ption 6Philippine Press Institute, et al. v. Chato, et al., G.R. No. 115754, August 25,
the
of Finance. on the other hand, the PBS goes so far as to question 1994
6rl Itr,:vr':wr'rrr oN'l'AxA'r'roN (lt,:r'rt,;ttnr, Itrtrr'rlrlr,r':s nlrr l,rrrrr'tn't'tottrs ()N'l'llt Itowt,;tr ot,''l'lxn'ttot,t tig
I rr hcrt,rrt, rr rrtl ( iorrgLitutional Limitations

7. Tax exemption of properties for religious, charitable, and institution as a public charity. Where rendering charity is
educational purposes. its primary object, and the funds derived from payments
made by patients able to pay are devoted to the benevolent
Charitable institutions, churches, parsonages, or convents
purposes of the institution, the mere fact that profit has
appurtenant thereto, mosques, and non-profit cemeteries, and all
been made will not deprive the hospital of its benevolent
lands, buildings and improvements actually, directly and exclusively
character (Praire Du Chian Sanitarium Co. a. City
used for religious, charitable or educational purposes shall be exempt
of Praire Du Chian,242 Wis.262,7 NW [2d] 832, 144
from taxation (Sec. 2B[3], Art. III, 1987 Constitution).
ALR 1480).
Important principles in tax exemption of properties:
d. The exemption extends to facilities which are incidental
Exemption of religious, charitable and educational to and reasonably necessary for the accomplishment of
institutions applies to real property tax only. The test is said purposes, such as school for training nurses, nurses'
usage, not ownership. home, and recreational facilities (Herrera a.8C Board
of Assessnzent Appeals,3 SCRA 186).
b. M.B. Estate donated cash to the church through Rev. Fr.
Ruiz, predecessor ofRev. Fr. Lladoc, for the construction
of a new church in the locqlity. The donor filed donof s tax Bar Question (2006, 2000)
return. Donee did not fi.le tax return nor paid the tax. BIR Article \lI, Section 28(3) of the 1987 Philippine Constitution
assessed deficierucy donee's gift tax, uthich was protested by provides that charitable institutions, churches and parsonages or
Reu. Fr. Lladoc. The court ruled thot the exemption of the convents appurtenant thereto, mosques, non-profit cemeteries and all
church is only from the payment of taxes clssessed on such lands, buildings and improvements actually, directly and exclusively
property enumerated, as property taxes, as distinguished used for religious, charitable or educational purposes shall be exempt
from excise tax. Manifestly, gift tax is not within the from taxation.
exemption prouisions of the section mentioned. A gift tar is
rlot a property tax, but q.n excise tax imposed on the transfer a) To what kind of tax does this exemption apply?
of property by way of Sift inter uiuos, the imposition of which
on property used exclusiuely for religious purposes, does not Suggested answer:
constitute an impairment of the Constitution. uExernption This exemption applies only to property ta.cces. What is exempted
frorn taxationr" as employed in the Constitution, should is not the institution itself but the lands, buildings and improuements
not be interpreted to meq.n exemption from all h,inds of taxes. actually, directly and erclusiuely used for religious, charitable, and
Howeuer, petitioner is not liable personally for the gift tar educational purposes.
end the Head of the Diocese or the Roman Catholic Bishop
is the recrl party in interest (Llo.doc a. Commissioner, b) Is proofofactual use necessary for tax exemption purposes
14 SCRA 292). TNOTE: Under existing law, gifts in fauor under the Constitution?
of an educational andlor charitable, religious, cultural
or social welfare institution shall be exempt from gift tax, Suggested answer:
prouided that not more than 307o of said gift is used for
administratio n p utp o s e s ( S ec. 1 0 1 {A}, N I R C ).1 Yes, because tax exemptions are strictly construed against the
taxpayer. There must be euidence to show that the taxpayer has
c. The word "exclusiae"means primarily rather than solely complied with the requirements for exemption. Furthermore, real
(Hospital d,e San Juan d.e Dios u. Pasay City, 76 property tq.xq.tiorl is bq.sed on use and not on ownership; hence, the
SCRA 226).Thtrs, the admission of pay patients does not sctine rule must also be applied for real property tax exemptions
detract from the charitable character ofa hospital ifall its (Commissioner a. Court of Appeals, G.R. No. L-724043, October
funds are devoted exclusively to the maintenance of the 14,1998).
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I tr lrcrr,tr l, rr rul ( )onst.il.utionul l,imitations

Bar Question (2005) a parcel of land for the construction of a building to the PUP Alumni
The Roman Catholic Church owns a 2-hectare lot in a town in Association, a non-stock, non-profit organization. Portions of the
Tarlac province. The southern side and middle part are occupied by building shall be leased to generate income for the association. Is the
the Church and a convent, the eastern side, by a school run by the donation to the parish church subject to tax?
church itself, the southern side, by some commercial establishments,
while the rest of the property, in particular, the northwestern side, Suggested answer:
is idle or unoccupied. The donation of F80,000.00 to the parish church, euen assuming
May the Church claim tax exemption on the entire land? Decide that it is exclusiuely for religious purposes, zs not tox-erempt because the
with reasons. exemption granted under Article VI, Section 28(3) of the Constitution
applies only to real estate ta"tces (Llnd.oc a. Cotnrnissioner, 14 SCRA
Suggested answer: 292).

No. The portions of the land occupied and used by the Church,
Bar Question (1993)
conuent q.nd school run by the church are exempt from real property
tax.es, while the portion of the land occupied by commercial ')C' sold a piece of land to the United Church of Christ of Quezon
establishments and the portion, which is idle, are subject to reql City, Inc. The land is to be devoted strictly for religious purposes by
property tares. The "usage" of the property and not the*ownership" the Church. When the Church tried to register the title of the land,
is the determining factor whether or not the property is tqxable the Register of Deeds refused claiming that the capital gains tax
(Lung Center of the Philippines a. Quezon City, 4SS SCRA was not paid. Is the transaction exempt from the capital gains tax?
1Ie t2004l). Reasons.

Bar Question (1996) Suggested answer:

The constitution exempts from taxation charitable institutions, No. Under Section 21(e) to relation to Section 49(q.X4) of the
churches, parsonages or convents appurtenant thereto, mosques National Internal Reuenue Code, the seller is the one liable for the
and non-profit cemeteries and lands, buildings and improvements payment of the capital gains tax from the sale of real property by an
actually, directly and exclusively used for religious, charitable and indiuidual taxpayer. Meanwhile, the Church in this instant case is the
educational purposes. buyer. Hence, Section 28(4) of the 1987 Constitution, which exempts
church lands, buildings, and im.prouen'Lents, does not apply because
Mercy Hospital is a 100-bed hospital organized for charity the obligation to pay the capital gains tax herein is irnposed on nX,' the
patients. May said hospital claim exemption from taxation under the seller, q.nd not on the Church. Since payment of the capital gains ta.x
above-quoted constitutional provision? Explain. is a condition precedent for the registration ofthe transfer certificate
oftitle to real property, the non-pqynxent herein by the seller is a ualid
Suggested answer: reason for the Registry of Deeds to deny the transfer of title to the
Yes. Mercy Hospital can claim exemption from taxation under subject land.
the prouision of the Constitution, but only with respect to real property
taxes prouided that such real properties q,re used actually, directly and. Bar Question (2000)
exclusiuely for charitable purposes.
Under Article XIV, Section 4(8) of the 7987 Philippine
Constitution, all revenues and assets of non-stock, non-profit
Bar Question (1994) educational institutions, used actually, directly and exclusively
In 1991, Imelda gave her parents a Christmas gift of F100,000.00 for educational purposes, are exempt from taxes and duties. Are
and a donation of F80,000.00 to her parish church. She also donated income derived from dormitories, canteens and bookstores as well as
72 Itt,:vt t.:wt,;rt oN'l'nxn'r'roru (lt,;r.tt,;ttnr. Ittttr.r|ll't,1,;s ANDl/t['il't'AilrrNrrilt'] uil, l'owr,rr ill''l'nx,t't'toN '13
I trlrcrctrl. rrtrl ( lonrrl rl ul rorrrrl l,rnrrl rrl iorrs

interest income on bank deposits and yields from deposit substitutes out that although Article Vl, Scctiorr 24 ol' Lhe Constitution was
automatically exempt from taxation? Explain. adopted from the American Federal Constitution, it is notable in two
(2) respects: the verb "shall originate" is qualified in the Philippine
Suggested answer: Constitution by the word "exclusively," and the phrase "as on other
No. The interest income on banh deposits and yields from d,eposit bills" in the American version is omitted. This means, according to
substitutes are not automatically exempt from taxation. There must be them, that to be considered as having originated in the House, R.A.
a showing that the incomes are included in the school's annuar infor- 7716 must retain the essence of H.B. 11197.
mation return and duly audited financial statements, together with: The Supreme Court ruled: "This argument will not bear analysis.
(a) certifications from depository banks as to the amount of interest To begin with, it is not the law - but the revenue bill - which is
income earned from passiue inuestments not subject to the 20vo final required by the Constitution to'originate exclusively'in the House
withholding tax; and (b) certification of actual, direct und, excrusiue of Representatives. It is important to emphasize this, because a bill
utilization of said income for educational purposes; (c) Board resolu- originating in the House may undergo such extensive changes in the
tion on proposed project to be funded out ofthe n'Loney deposited, in Senate that the result may be a rewriting of the whole bill. There is
banks or placed in money market placements (Finance Departmnnt also a possibility of a third version by the conference committee. At
Ord.er No. 149-95 issued. Noaember 24, IggS), which must be used. this point, what is important to note is that, as a result of the Senate
actually, directly qnd exclusiuely for educational purposes. action, a distinct bill may be produced. To insist that a revenue
The income deriued from dormitories, canteens and boohstores statute - and not only the bill which initiated the legislative process
are not also automatically exempt from taxation. There is still the culminating in the enactment of the law - must substantially be the
requirement for euidence to show actual, direct and exclusit)e use same as the House bill would be to deny the Senate's power not only
for educational purposes. It is to be noted that the 1gB7 philippine to'concur with amendments'but also to 'propose amendments.' It
constitution does not distinguish with respect to the source or origin would violate the co-equality of legislative power of the two houses
of the income. The distinction is with respect to the use which should, of Congress and in fact make the House superior to the Senate. The
be actual, direct u.nd exclusiue for educational purposes. contention the constitutional design is to limit the Senate's power in
respect of revenue bills in order to compensate for the grant to the
Consequently, the prouisions of Section S0 of the NIRC of 1gg7, Senate of the treaty-ratifying power and thereby equalize its powers
that a non-stoch and non-profit educationel institution is exempt from and those of the House overlooks the fact that the powers being
taxation only "in respect to income receiued by them as such" courd, not compared are different. We are dealing here with the legislative
affect the constitutionql tax exemption. where the constitution d.oes power, which under the Constitution, is vested not in any particular
not distinguish with respect to source or origin, the Tux code should chamber but in the Congress of the Philippines, consisting of"a Senate
not make distinctions. and a House of Representatives." The exercise of the treaty-ratifying
power is not an exercise of legislative power. It is an exercise of a
8. All appropriation, revenue or tariff bills shall originate check on the executive power. There is, therefore, no justification
from the Ifouse of Representatives, but the Senate may for comparing the legislative powers of the House and of the Senate
propose or coneur with amendments (5ec.24, Art.VI, Iggz on the basis of the possession of such non-legislative power by the
Constitution). Senate. The possession of a similar power by the U.S. Senate has
Case: never been thought of as giving it more legislative powers than the
House of Representatives. What the Constitution simply means is that
Petitioners contended that R.A. 7216 did not originate exclusively the initiative of filing revenue, tariff, or tax bills, bills authorizing an
in the House of Representatives as required by Article vI, section increase of the public debt, private bills and bills of local application
24 of the 1987 constitution, because it is in fact the result of the must come from the House of Representatives on the theory that,
consolidation of two (2) distinct bills, House Bill (H.8.) No. 11192 and elected as they are from the districts, the members of the House can
Senate Bill (S.8.) No. 1630. In this connection, petitioners pointed be expected to be more sensitive to the local needs and problems. On
74 llt:vtt,twr,:rt ol'l'itxl'ttor.t ( it,lr.tt,:nnt, Ittrrr,.rlrlr,t.:s ,tr.ttr l,ttvtt'l',1't'tottri ()N 't'ilt,:
Itowt'ttt ol, 'l'nxn't,toN 75
I trltr,rr.trl, rrrrrl ( lrrrnl,il,rrl,iorrrrl l,irnit:rl,ions

the other hand, the senators, who are elected at large, are expected The enactment of Senate Bill (S.8.) 1630 is not the only
to approach the same problems from the national perspective. Both instance in which the Senate, in the exercise of its power to propose
views are thereby made to bear on the enactment of such laws. Nor amendments to bills required to originate in the House, passed its
does the Constitution prohibit the filing in the Senate of a substitute
own version of a House revenue measure. It is noteworthy that, in
bill in anticipation of its receipt of the bill from the House, so long the particular case of S.B. 1630, petitioners Tolentino and Roco,
as action by the Senate as a body is withheld pending receipt of the as members of the Senate, voted to approve it on second and third
House bill." readings. On the other hand, amendment by substitution, in the
It is claimed that the Bicameral Conference Committee report manner urged by petitioner Tolentino, concerns a mere matter of
included provisions not found in either the House bill or the Senate form. Petitioner has not shown what substantial difference it would
bill and that these provisions were "surreptitiously" inserted by the make if, as the Senate actually did in this case, a separate bill like
Conference Committee. Much is made of the fact that in the last S.B. 1630 is instead enacted as a substitute measure, "taking into
two (2) days of its session on April 21 and 25, L994, the Conference consideration ... H.B. 11197." The power of the Senate to propose or
Committee met behind closed doors. We are not told, however, concur with amendments is apparently without restriction. It would
whether the provisions were not the result of the give and take that seem that by virtue of this power, the Senate can practically rewrite
often marks the proceedings of Conference Committee. Nor is there a bill required to come from the House and leave only a trace of the
anything unusual or extraordinary about the fact that the Conference original bill.8
Committee met in executive sessions. Often the only way to reach The jurisdiction of the Conference Committee is not limited
agreement on conflicting provisions is to meet behind closed doors, to resolving differences between the Senate and the House. It may
with only the conferees present. Otherwise, no compromise is likely propose an entirely new provision. What is important is that its report
to be made. The Court is not about to take the suggestion ofa cabal or is subsequently approved by the respective Houses ofCongress.e
sinister motive attributed to the conferees on the basis solely oftheir
"secret meetings" on April 2L and 25, 1994, nor read anything into
the incomplete remarks of the members, marked in the transcript of
Bar Question (1997)
stenographic notes by ellipses. The incomplete sentences are probably The House of Representatives introduced House Bill No. 7000,
due to the stenographer's own limitations or to the incoherence that which was envisioned to levy a tax on various transactions. After
sometimes characterize conversations. the bill was approved by the House, the bill was sent to the Senate
as so required by the Constitution. In the upper house, instead of a
The only requirement in the third version drafted by the
deliberation on the House Bill, the Senate introduced Senate Bill
Conference Committee, which is considered an "amendment in the
No. 8000 which was its own version of the same tax. The Senate
nature of a substitute," is that the third version be germane to the
deliberated on this Senate Bill and approved the same. The House
subject ofthe House and Senate bills. Indeed, th[e] Court recently held
that it is within the power of the Conference Committee to include BiIl and the Senate Bill were then consolidated in the Bicameral
Committee. Eventually, the consolidated bill was approved and sent
in its report an entirely new provision that is not found either in
to the President who signed the same. The private sectors affected
the House bill or in the Senate bill. If the committee can propose an
amendment consisting of one or two (2) provisions, there is no reason
by the new law questioned the validity of the enactment on the
ground that the constitutional provision requiring that all revenue
why it cannot propose several provisions, collectively considered as an
bills should originate from the House of Representatives had been
"amendment in the nature of a substitute," so long as such amendment
violated. Resolve the issue.
is germane to the subject of the bill before the committee. After all,
its report was not final but needed the approval ofboth Houses of
Congress to become valid as an act of the legislative department.?
sResolution, Tolentino v. Secretary of Finance and Commissioner, G.R. No
?Tolentino v. Secretary of Finance and Commissioner, 115455, October 30, 1995.
G.R. No. 11548b, August
25, 1994. 'gPhilippine Judges Association v. Prado, 227 SCRA 703 (1993).
76 llt,:vtt,;wt,;tr oN'l'nxn'rror.r (lt,:Nt,rttrrt, Ittrtnrrtt't,t,;lrANtrl,tMt't'it't'totllr)N't'ttr,l Itowuttot,"l'nxn'tttll'.t 77
lnhcrrrnt rrnrl ( lrrrsl,rl.rrl.rorrrrl l,itrtil,ations

Suggested answer: Tuition fees;


There is no uiolation of the constitutional requirement that all Dormitory fees;
reuenue bills should originate from the House of Representatiues. What
is prohibited is for the Senate to enqct reuenue measures on its own Rentals from canteen concessionaires;
without a bill originating frorn the House. But once the revenue bill Interest from money market placements of the tuition fees;
was passed by the House and sent to the Senate, the latter cdn pass
its own uersion on the same subject matter consonq,nt with the lattetts Donation of a lot and building by school alumni.
power to propose or concur with amendrlents. This follows from the 1. Which of these above-cited income and donation would not
co-equality of the two chambers of Congress (Tolentino u. Secretanyt be exempt from taxation? Explain briefly.
of Finanee, G.B. No. 775455, October 30, 1995).
2. Suppose that XYZ Colleges is a proprietary educational
9. No law granting any tax exemption shall be passed institution owned by the Archbishop's family, rather than
without the concunrence of a majority of all the members the Archdiocese, which of those above-cited income and
of the Congress (Sec.28[4], Art.VI, 7987 Constitution). donation would be exempt from taxation?

In order to place all the special economic zones created under Suggested answer:
R.4.7227 (otherwiseknown as the Bases Conversion and Development
Act) on equal footing and entitled to the same tax benefits granted to (1) All of the income deriued by the non-stock, non-profit
enterprises registered with the Subic special economic zone, former educational institution will be exempt frorn taxation,
Presid.ent Fidel V . Rq.mos promulgated Proclamation No . 420 on July 5 , prouided they are used actually, directly and exclusiuely
1994. The court ruledthat the grant of preferentialtaxrateof fiue percent for educational purposes. The Constitution prouides that
(57o) bq.sed on gross income earned in fauor of enterprises registered all reuenues and assets ofnon-stock, non-profit educational
with the Camp John Hay special economic zone under Proclamation institution which are actually, directly and exclusiuely used
No.420 contrauenes ArticleVl, Section 28(4) of the 1987 Constitution, for educational purposes a,re exentpt from toxation (Sec. 4,
whirh prouides that "No law granting any tax exemption shall be passed par. 3, Art. XIV, 1987 Constitution).
without the concurrence of a majority of all the members of Congress." The donation is likewise exempt from donor's tax,
It is clear that under Section 12 of RA.7227, it is only the Subic special if actually, directly and exclusiuely used for educational
economic zone which was granted by Congress with tatc exemption purposes, prouided that not ntore than 30Vo ofthe d.onation
inuestment incertiues and the like. There is no express extension of the is used by the donee for administration purposes. The donee,
aforesaid benefits to other special economic zones (i.e., Clnrh, Camp being a non-stock, non-profit educational institution, is a
John Hay, and Poro Point) under Section 15 of said Act. Therefore, the qualifi,ed entity to receiue an exempt donation, subject to
second sentence of Section 3, Proclamation No. 42 0, w hich extended the conditions prescribed by law (Sec. 4, par. 4, Art. XIV, 1987
preferentialtax rate grantedby RA. 7227 only to enterprises registered Constitution, in relation to Sec. 101[A][3], NIRC).
with the Subic special econornic zone also to enterprises registered with
the Camp John Hay and other special economic zones, is d.eclared nuII Accordingly, none of the cited income and donation
and uoid (John Hay Peoples Alternatiue Coalition, et al. u. Lirn, collected and receiued by the non-stock, non-profit
G.R. No. 7L9775, Octoher 24,2009). educationq.l institution would not be exempt from tonation.
(2) If XYZ Colleges is a proprietary educational institution, all
Bar Question (2004) of its income from school-related and non-school-related
XYZ Colleges is a non-stock, non-profit educational institution,
, actiuities will be subject to the income tox, based on its
aggregate net income deriued from both a.ctiuities (Sec.
run by the Archdiocese of BP City. It collected and received the
27[B], NIRC). Accordingly, all of the income enumerated
following:
in the problem will be ta"tcable.
7tl ltr,:vrr,;wr,;rt or 'l',rxn rron (it,:Nt,:ttlt. Ittuttt ttt,t,:lr rrutr l,tltt't'n't'toll ()N't'lt,: l'owlltr ot, 'l'nxn.ttot 79
InlrcnrrIl, ltrl ( ioltxt.il,rrl.iorrrrI Lirrril,rrl.ions

The donation of lot and building will liheutise be subject Bar Question (2011)
to the donoy's tax because a donation to an educational
institution is exempt only if the school is incorporated as a Anne Lapada, a student activist, wants to impugn the validity
non-stock entity paying no diuidends. Since the donee is a of a tax on text messages. On what grounds may she do so?
proprietary educotional institution, the donation is tq^?cable
(Sec. 10 1[A][3], NIRC). Suggested anawer:
She may clairn that the law aduersely affects her since she sends
10. Every bill passed by Congress shall embraee only one messqges by text and that the tox trloney is being extracted and spent
subject, which shall be expressed in the title thereof.r0 in uiolq.tion of the constitutionally guaranteed right to freedom of
communication.
On the question whether the amendment of Section 103 of
the National Internal Revenue Code (NIRC) is fairly embraced I l. Congress shall evolve a progressive system of taxation.
in the title of R.A. 7716, although no mention is made therein of
Presidential Decree (P.D.) No. 1590 as among those which the Regressivity is not a negative standard for courts to enforce.
statute amends, the Supreme Court believes it is, since the title What Congress is required by the Constitution to do is to "evolve
states that the purpose of the statute is to expand the VAT system, a progressive system of taxation." This is a directive to Congress,
and one way of doing this is to widen its base by withdrawing just like the directive to it to give priority to the enactment of laws
some of the exemptions granted before. To insist that P.D. 1Sg0 for the enhancement of human dignity and the reduction of social,
be mentioned in the title of the law, in addition to Section 105 of economic, and political inequalities, or for the promotion of the right
the NIRC, in which it is specifically referred to, would be to insist to quality education. These provisions are put in the Constitution as
that the title of a bill should be a complete index of its content. The moral incentives to legislation, not as judicially enforceable rights.
constitutional requirement is intended to preuent surprise upon the
members of Congress and to inform the people of pending legislation 12. Supremacy of the national government over local
so that, if they wish to, they can be heard regarding it. If, in the case governments in taxation.
at bar, petitioner did not know before that its exemption had been When local governments invoke the power to tax on national
withdrawn, it is not because of any defect in the title but perhaps for government instrumentalities, the exercise of the power is construed
the same reason other statutes, although published, pass unnoticed strictly against local governments. The rule is that a tax is never
until some euent somehow calls qttention to their existence. Indeed, presumed and there must be clear language in the law imposing
the title of R.A. 7716 is not any more general than the title of PAL's the tax (Manila Internotionol Airport Authority u. Court of
own franchise under P.D. 1590, and yet no mention is made of its Appeals, G3,. No. 755650, July 20,2006).
tax exemption. R.A. 7776 expressly amends PAL's franchise (p.D.
1590) by specifically excepting from the grant ofexemptions from the Congress has the power of control over local governments. If
ualue q.dded tax PAL's exemption under P.D. 1590. This is u)ithin Congress can grant a municipal corporation the power to tax certain
the power of Congress to do under Article XII, Section 11 of the matters, it can also provide for exemptions or even take back the
Constitution, which prouides that the grant of a franchise for the power. The power of local governments to impose taxes and fees is
operation of a public utility is subject to amendment, alteration or always subject to limitations which Congress may provide by law.
repeal by Congress, when the common good so requires.Lr Local government units have no power to tax instrumentalities of the
national government, such as PAGCOR, it being an instrumentality
of the national government (Basco u. Pagcor, 197 SCRA 52).

10Art. fV, Sec. 26(1), 1987 Constitution.


lrPhilippineAirlines v. Secretary of Finance and Commissioner,
G.R. No. 11bgZB,
August 25, 1994.
Inr r rMt,: lrur r Wr t trrlilt,t rtNr l'l'rtxt,:l; tJl
I rrl rrxlttcl.tott

or alien) or corporation (domestic or foreign)1, who is


not a dealer in securities (Secs. 24[C], 25[A][3], 27tDl
[2], and 28[A][c], NIRC) and capital gains tax on sale of
real property classified as a capital asset located in the
PART II Philippines by any person (other than a foreign cor?oration)
who is not a real estate dealer, developer, or lessor (Secs.
INCOME AND WIIIIHOTDING TAXES 24[D], 25[A][3], and 27[D][5], NIRC);
5. Tax on passive investment income, such as interest,
CHAPTER III dividend, and royalty (Secs. 24Bltll-t2l ; 25tAlt2l ; 27tDl
[1] and [3]-[4], NIRC);
INTRODUCTION 6. Fringe Benefits Tax (FBT) (9ec.33, NIRC);
7. Branch Profit Remittance Tax (BPRT) on Philippine
"htcome ta.xu is defined as a tax on all yearlyl profits arising branches of foreign corporations operatingin the Philippine
from property, professions, trades or offices, or as a tax on a person's customs territory (Sec. 27, NIRC);
income, emoluments, profits and the like.2 Income tax is a direct tax
8. Tax on Improperly Accumulated Earnings Tax (IAET) of
on actual or presumeds income (gposs or net) of a taxpayer received,
corporations (Sec. 29, NIRC); and.
accrued, or realized during the taxable year, which the law does not
expressly exempt from taxation. 9. Final Withholding Income Tax (FWT) on certain income
from sources within the Philippines payable to resident
There are different types of income taxes under Title II (Income (e.g., interest on bank deposits) or non-resident persons
Tax) ofthe 2005 Tax Code. These include: (e.g., interest on foreign loans or management fees paid
1. Personal income tax on individuals (Secs.24-25, NIRC); to non-resident foreign corporations), or to certain special
persons (e.g., OBU, ROHQ, PEZA- or SBMA-registered
2. Regular corporate income tax (RCIT) on corporations (Sec.
enterprises).
27[A], NIRC);
A taxable transaction shall be subject to only one kind
3. Minimum corporate income tax (MCIT) on corporations
of income tax. For example, sale of real property located in the
(Sec.27[E], NIRC);
Philippines, which is classified as a capital asset, by a domestic
4. Capital gains tax (CGT) on sale of shares of stocks of a corporation shall only be subject to the six percent (67o) capital gains
domestic corporation by any person [individual (citizen tax. Such gain from sale shall not be included in the gross income,
which is considered in determining the net income subject to the
lThe basis for computing income tax shall be the taxpayer's annual accounting regular or minimum corporate income tax. On the other hand, real
period (calendar year or fiscal year) in accordance with the method of accounting property classified as an ordinary asset is subject only to the ordinary
regularly employed in keeping the books of such taxpayer (Sec. 43, NIRC). income tax under the global tax system, whether the seller is an
2Fisher v. Trinidad, 43 Phil. 973.
individual or a corporation.
3Generally, there must be an actual income, gain or profit. However, in sale of
real property located in the Philippines classified as capital asset, the seller who is an
individual (citizen or alien) or a domestic corporation (and not a foreigrr corporation) is Income Tax Systems
subject to the six percent (6Vo) capital gains tax, based on the actual consideration or
fair market value, whichever is higher, regardless ofwhether or not the seller makes Bqr Question (1997)
a profit or incurs a loss from the sale (See Secs. 24,25, 27 and 28, NIRC).
1. Global Tax Systern. - Under the global tax system,
the totq,l allowable deductions as well as personal and
80
82 lir,rvrr,;wr,:rt on 'l'nxn'r'ror'r lrrrrMt,r Ar'llr W|r'ilil()l,t]tN(i'l'Axtts 83
In l,rtxluction

additionel exemptions, in the case of qualified indiuiduals, The special creditable income tax may arise by virtue
or the total allowable deductions only, in the case of of a special tax credit allowed under a special law. Thus,
corporations, are d,educted from the gross income (i.e., sum the Supreme Court declared: "Preliminarily, R.A. 7432
of all items of taxable income, profit and gq.in) to arriue at is a piece of social legislation aimed to grant benefits
the net ta,xable incomc subject to the gradua.ted income and privileges to senior citizens. Among the highlights
tar rates, in the case of indiuiduals, or to the corporate of this Act is the grant of sales discounts on the sale of
income tax rate, in the case of corporations. It did not medicines by establishments covered by the law (such
matter whether the income receiued by the taxpayer is as transportation services, hotels and similar lodging
classified as compensation income (e.g., salaries receiued by establishments, restaurants and recreation centers,
employees), business or professional income (e.g., gainfrom and medicines) to senior citizens, provided that private
sale of inuentories received by businessmen; professional establishments may claim the cost as tax credit. The
fees of lawyers and accountants; talent fees of actors and foregoingproulso specifi cally allows the 20Vo senior citizens
actresses), possiue inuestment incorne (e.9., interest, royalty, "discount to be claimed by the private establishment as a
or diuidend), capital gain (e.g., gain realized from the sale of tax credit and not merely as a tax deduction from gross
shares of stocks of a domestic corporation), or other income sales or gross income." In Bicolandia, we construed the
(e.g., raffle prize). All items of gross income, deductions, and term"cost" as "referring to the amount of the20Vo discount
personal and additional exemptions, if any, are reported extended by a private establishment to senior citizens in
in one inconte tq,tc return (BIR Fornt 1701 findiuidual] or their purchase of medicines." "We reiterated this ruling
1702 [corporation]) to be filed at least annually, and the in the 2008 case of Cagayan Valley Drug by holding that
applicable tax rate is applied on the talc base (net taxable petitioner therein is entitled to the tax credit for the full
incorne). The pure global tax system was enforced in the 207o sales discounts it extended to qualified senior citizens.
Philippines from 1913 up to December 31, 1981, with This holds true despite the fact that petitioner suffered
rnalcimum graduated ta.x rate of 70Vo being applied on net a net loss for that taxable year. We finally affirmed in
income of indiuiduals. M.E. Holding lhat the tax credit should be equivalent to
the actual 207o sales discount granted to qualified senior
The formula for computing income tax under the
global tax system shall be as follows: citizens." However, the Court clarified that R.A. 7432b.as
undergone two (2) amendments. The first was in 2003
Gross sales xxx by R.A. 9257, and, the second, by R.A. 9994 in 2010. The
Zess.'Sales discounts xxx court stressed that "the 207a sales discount granted by
Sales returns and allowances xxx xxx establishments to qualified senior citizens is now treated
Net sales xxx as tax deduction and not as tax credit" (Mercury Drug
.Less.'Cost of goods sold or services xxx Corporation a. CIR, G.R. No. 764050, July 20,2011).
income
Gross xxx
2. Sched.ular Tas Systent. Und.er the schedular ton sys-
Zess.'Deductions xxx
tem, dffirent
-
types of incomes are subject to different sets of
Personal and additional
graduated or flat income tuc rutes. The applicable tue rate(s)
exemptions (for individual) xxx xxx
Net taxable income
will depend on the classification of the tarcable income (e.g.,
xxx
compensation income, capital gain, passiue income, or other
Income tax due xxx
income) and the tqx base could be gross income (without
Zess; Creditable withholding tax xxx
deductions) or net income (i.e., gross incom.e less allowable
Special creditable income tax xxx
deductions). Separate regular income tqJc return or capital
Quarterly income tax paid xxx xxx
gains tox return, whicheuer is applicable, is filed by the
Tax still due and demandable xxx
recipient of income for appropriate types of income receiued
84 llt,;vt r,:wt,;tt ot't'l'nxt t tott lrrrn'1,; ANI Wltlttot,tlnrl'l'nxt,;s tls
I trl,trrrlttrl,iott

within the prescribed dates (e.g., 30 doys from date of'sole), c. Tax base is gross income (without any deduction)
but no income tuc return is filed by the recipient of'passiue Examples:
income subject to firwl withholding tq.x because the withhold-
ing agent is rnade primarily responsible for the filing of the Gross interest income on bank peso
withholding tox return and the payrnent of income tax to the deposit F 1,000
BIR on such passiue income of the inuestor or depositor. The Multiplied by: x 207o
pure schedular tqx systema was applied in the Philippines Final withholding tax P _2_q_q
from January 1, 1982 to December 31, 1985. Gross dividend income from domestic F50;000
corp. received by resident citizen
There are several ways of imposing final income tax on
certain incomes subject to final withholding tax. The three
Multiplied by: x TOVo
Final withholding tax F5,OAq
(3) general categories ofincome subject to the schedular
tax system are: 3. Semi-Sched.ular or Semi-Global Tax Systent.. -
a. Tax base is consideration or fair market value at the Effective January 7, 2008, the semi-schedular or
time of sale, whichever is higher. semi-global tax system was adopted under R.A. 8424.
Under the semi-schedular or semi-global tax system,5 the
Example:
compensation income, business or professional income,
Sale ofreal property classified as capital capital gain and passive income, and other income not
asset F900,000 subject to final withholding income tax under
Fair market value of real property 800,000 Section 57(A) of the 1997 Tax Code, are added together
Income tax due: F900,000 x 67o F54,000 to arrive at the gross income, and after deducting the sum
of allowable deductions from business or professional
b. Tax base is net capital gain (i.e., gross selling price income, capital gain, passive income and other income
less cost or adjusted basis).
not subject to final tax, in the case of corporations, as
Example: well as personal and additional exemptions, in the case of
i:
:i individual taxpayers, the taxable income (i.e., gross income
SaIe ofunlisted shares ofstocks
less allowable deductions and exemptions) is subjected to
of ABC Corp. F10,000
one set ofgraduated tax rates (ifan individual) or regular
Cost 5,000
corporate income tax rate (if a corporation). With respect
Income tax due: to the above incomes not subject to final withholding tax,
the computation of income tax is "global."
Selling price F10,000
Less.'Cost 5,000 However, passive investment income subject to final
Gain F 5,000 withholding tax and capital gains from the sale or transfer
Multiplied by: x \Vo of shares of stocks of a domestic corporation and of real
Capital gains tax F 250
5Effective January 1, 1986, E.O. 37 adopted the semi-global or semi-schedular
ttrx systetn by reducing the graduated rates on business and professional income from
aOn January I, 1982, B.P. Blg. 135 adopted the schedular tax system. Gross 6o0/o tn 35Vo and by increasing the preferential tax rates on capital gains and passive

compensation income (net of personal and additional exemptions) was subject to the investment incomes. R.A.8424 (1998) retained.t};re semi-global or semi-schedular tax
graduated tax rates ranging from zero percent (0Vo) to \1%o;business and professional system by introducing some structural and administrative reforms and by reducing
incomes were subject to graduated tax rates ranging from five percent (|Vo) to 60Vo on the-tax rates on corporations by one percent (IVo) every year from 35Vo to 32Vo. Tlrre
net taxable income; capital gains from sale ofshares ofstocks ofdomestic corporations same tax system was maintained under R.A. 9337 effective November 1, 2005, but
and real property located in the Philippines as well as passive investment incomes the corporate tax rate was increased to 35Vo and, it will be reduced to 307o effective
were subject to final withholding taxes at varying rates. January I, 2009.
lJ6 1il,:vrt,;wt,:u ,N 'l'AxA lr,N | rur r rMt,; nNt r Wt'r'r rt rot.t rttrr l'l'nx t,:s 87
Inl.rxlrtt'l,iotr

properties classified as capital assets located within the Suggested anawer:


Philippines remain subject to different sets of tax rates (a) A global system of totcation is one where the taxpayer is
and covered by different tax returns. The schedular tax
required to lump up all iterns of incorne earned during a
system applies to the compensation income, capital gains,
taxable period and pay tatc under a single set of income tax
passive investment income, and other income subject to
rates on these different items of income.
final income tax at preferential tax rates.
A schedular system oftasation prouides for a different
To summarize, either (a) the global tax system
(e.g., taxpayer with compensation income not subject to tax treatment of dffirent types of incorne so that a separate
final withholding tax, or business or professional income, or
tax return is required to be filed for each type of income
and the tar is computed on a per return or per schedule
mixed income
- compensation and business or professional
income), or (b) the schedular tax system G.g.,taxpayer
basis.
with compensation, capital gains, passive income, or other (b) The current method of tuxation under the Tax Code belongs
income subject to final withholding tax), or (c) both the to a systern which is partly schedular and partly global.
global and schedular tax systems, may be applied,
depending on the nature of the income realized by the Features of the Income Tax Law
taxpayer during the year.
Bar Question (1996, 1994)
Bar Question (1994) 1. Income tax is a "direct tax" because the tax burden is borne
Distinguish "schedular treatment" from "global treatment" as by the income recipient upon whom the tax is imposed.
used in income taxation. It is a tax demanded from the very person who, it is
intended or desired, should pay it, while "indirect tax" is
Suggested answer: a tax demanded in the first instance from one person in
the expectation and intention that he can shift the burden
Under q. schedular system, the uarious types literns of income to someone else (Cornmissioner u. Tours Speciulists, 183
(e.g., compensation; business /professional income) are classified scRA 402).
accordingly urud are accorded dffirent tax treatments, in accordance
with schedules characterized by graduated tax rates. Since these 2. Income tax is a progressive tax, since the tax base increases
types of income are treated separately, the allowable deductions shall as the tax rate increases. It is founded on the ability to
likewise uary for each type of income. pay principle and is consistent with the Constitutional
provision that "Congress shall evolve a progressive system
Under the global system, all income receiued by the taxpayer oftaxation" (Sec. 28[1], Art. III, 1987 Constitution).
are grouped together, without any distinction as to the type or nature
of the income, and after deducting therefrom ercpenses and other 3. The Philippines has adopted the most comprehensive
allowq.ble deductions, are subjected to tax at a graduated or fixed system of imposing income tax by adopting the citizenship
rate. principle, the residence principle, and the source principle.
Any one of the three principles is enough to justifii the
imposition of income tax on the income of a resident citizen
Bar Question (1997) and domestic corporation that are taxed on worldwide
(a) Discuss the meaning of the global and schedular systems income. Other types oftaxpayers (individual or corporation)
of taxation. are taxed only on their income from sources within the
(b) Philippines beginning January 1, 1998, following the
To which system would you say that the method of taxation
"territoriality principle. "
under the National Internal Revenue Code belongs?
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I rrI t orIrrr'l torr

4. The Philippines fbllows thc semi-schedular or semi- 2000 under R.A. U424. 'l'he utryxtrate tanc rate was increased
global system of income taxation, although certain kt Nouember 1, 2005 and was reduced to
iJ5(L, ellbctiue
passive investment incomes and capital gains from sale i)0(/i,, starting January 7, 2009, under R.A. 9337 starting
of capital assets, namely: (a) shares of stock of domestic Nouember 1,2005.1
corporations; and (b) real property are subject to final taxes
at preferential tax rates.
c. It has retained more schedular than global features with
respect to indiuidual taxpayers but has maintained d n'Lore
5. The Philippine income tax law is a law of American origin. global treatment on corporations.
Thus, the authoritative decision of the American official
charged with enforcing the U.S. Internal Revenue Code Bar Question (1994)
has peculiar force and persuasive effect for the Philippines.
Great weight should be given to the construction placed Distinguish a direct tax from an indirect tax.
upon a revenue law, whose meaning is doubtful, by the
department charged with its execution. Suggested answer:
A "direct tax" is one in which the toepayer who pays the tox
Bar Question (1996) is directly liable therefor; that is, the burden of paying the tax falls
tti.rectly on the person payirug the tax. The impact and incidence of
(l-) What are the basic features of the present "income tax
ltmation remain with the person upon whom the tax utas imposed.
system?"
An "ind.irect te-tr" is one paid by a person who is not directly
Suggested answer: lktble therefor, and who may therefore shift or pass on the ta.tc to
o.nother person or entity, which ultirnately assumes the tax burden
Our present income tax system can be said to haue the following (Maced.a u. Macaraig, 797 SCRA 777). In this case, the impact
basic features:
ol'taxation is with the taxable seller of goods or seruice, while the
a. It has adopted a comprehensiue tax situs by using the incidence of taxation rests with the final consumer.
nationality, residence, and source rules. This makes citizens
and resident aliens taxable on their income deriued from Criteria in lmposing lncome Tax
all sources while non-resident aliens are taxed only on
their income deriued from within the Philippines. Dornestic 1. Citizenship Principle. - A citizen of the Philippines
corporations are also taxed on uniuersal income while is subject to Philippine income tax (a) on his worldwide
income from within and without the Philippines, if he
foreign corporations are taxed only on income from within.
resides in the Philippines, or (b) only on his income from
INOTE: If the same question is ashed today , the answer sources within the Philippines, if he qualifies as a non-
should be: Resident citizens and domestic corporations are resident citizen; hence, the income of a non-resident citizen
subject to tax on their worldwide income, while the other from sources outside the Philippines shall be exempt from
types oftaepayers (whether indiuidual or corporation) are Philippine income tax.
taxed only from sources within the Philippines beginning
January 1, 1998 under R.4.8424.1 2. Residence Principle. - An alien was subject to
Philippine income tax on his worldwide income because
b. The indiuiduq,l income tax system. is mainly progressiue in of his residence in the Philippines. This principle was
nature in that it prouides graduated rates of income ta"tc. copied from the United States income tax law, but was
Corporations in general are taxed at a flat rate of 35Vo on ' discarded in R.A. 8424 (1998) in view of the complexity
net income. INOTE: The corporate ton rate was reduced to in tax administration it brings. Thus, an alien (whether
347o in 1998, 33Vo in 1999, and 32Vo beginning January 1, resident or non-resident) is now liable to pay Philippine
?
90 ltt,:vtt,:wt,:tt.N 'l'Axn'r't.t',t

income tax only on his income from sources within the


Philippines and is exempt from tax on his income from
sources outside the Philippines.
3. Source Principle. - An alien or foreign corporation is CIIAPTER IV
subjectto Philippine income taxbecause he derives income
from sources within the Philippines. Thus, a non-resident KINDS OF TAXPAYERS
alien or non-resident foreign corporation is liable to pay
Philippine income tax on his income from sources within
the Philippines, such as dividend, interest, rent, or royalty, Kinds of Taxpayers
despite the fact that he has not set foot in the Philippines.
A. Individuals

When is income taxable? 1. Citizens

Bar Question (2011)


a. Resident citizens
b. Nonresidentcitizens
Income, gain or profit is subject to income tax, when the following
requisites are present: 2. Aliens

a. The money or property received is income, gain or profit a. Resident aliens


(and not return ofcapital); b. Nonresident aliens
i
b. The income, gain or profit is received (actually or i. Engaged in trade or business in the Philippines
constructively), accrued, or realized during the taxable ii. Not engaged in trade or business in the
year; and
Philippines
c. The income, gain or profit is not exempt from income tax & 3. Estates and trusts
under the Constitution, treaty or statute. f
I a. Revocable trust
Return or recovery of capital is not subject to income tax.
Thus, payment of loan principal is exempt from income tax. Only the b. Irrevocable trust
interest earned on the loan is subject to income tax. Also, cost of sales R. Corporations
ofmanufacturers and dealers ofgoods or properties, which represents
1. Domestic corporations
return of capital, is not subject to income tax.
2. Foreign corporations
The income, gain or profit is taxable to the person who earns
the income, who is generally the recipient thereof. In the case a. Resident foreign corporation
of fringe benefits paid to a supervisory or managerial employee, the b. Nonresidentforeigncorporation
person taxed is the employee, but the employer is required under the
law to assume the payment of the fringe benefit tax in behalf of said 3. Partnerships
employee. Such employee is, however, allowed to claim as business a. Taxable partnership
expense deduction the grossed-up monetary value, consisting of the
value of the fringe benefits and the FBT paid thereon.
b. Exempt partnership
i. Generalprofessionalpartnership

91
?
92 lt,l,:vrr,;wr,;rr oN'l'Axn'r'roru I rur'otttt,; nrut, Wt t I tt tot,t rtNr i'l'nxl,tr'l 93
l(ttrrlrl ol'l'rrxlrrrycls

ii. Joint venture or consortium undertaking con- Bar Question (1997)


struction activity, or engaged in petroleum .Iunn, a Filipino citizen, has emigrated to the United States in
operations with operating contract with the
1997, where he is now a permanent resident. He owns certain income-
government.
carning property in the Philippines from which he continues to derive
substantial income. He also receives income from his employment in
Citizens lhe United States on which the US ineome tax is paid.
One tar status a. d.ual tar status of ind.iaid.uals. - On which of the above income is the taxable. If at all in the
Generally, a citizen has only one tax status during the calendar year, Philippines, and how, in general terms, would such income or incomes
either as a resident citizen or a non-resident citizen. However, it is be taxed?
possible for a citizen to have dual status (resident and non-resident)
during a calendar year for income tax purposes. He may be treated Suggested answer:
as a resident citizen and at the same a non-resident citizen during
the same taxable year, if at the beginning of the year, he derives Juan will be taxed on both his income from the Philippines
compensation and/or business or professional income, and sometime and on his income from the United States because his being a citizen
i mahes him taxable on all income whereuer deriued. For the income
later during the same year, he departs from the Philippines as an
immigrant, permanent worker, or a qualified non-resident citizen, or he deriues from his property iru the Philippines, Juan shall be taxed
!r on his net income under the Simplifi.ed Net Income Taxation Scheme
uice uersa. Where such citizen qualifies as a non-resident upon leaving
the country (e.9., immigrant and permanent worker), the income from (SNI?S) whereby he shall be considered as a self-employed indiuiduq.l.
sources outside the Philippines from the time he departs from the His income as employee in the United States, on the other hand, shall
Philippines is exempt from tax, while the income from sources within be taxed in accordqnce with the schedular graduated rq'tes of 7Vo, 27o
the Philippines shall remain subject to income tax. In the case of and 37o, based on the adjusted gross income deriued by non-resident
overseas contract worker, he becomes a qualified non-resident citizen citizens frorn all sources without the Philippines during each toxable
only if he stays outside the Philippines for more than 183 days during year. INOTE: Beginning 7998, business and professional income of
the calendar year. resident citizens and income from foreign sources of n'on-resident
citizens haue been modified or repealed. by R.A. 8424. Under this new
Citizen u . alien ind.iuidual employees of foreign embassies law, income from sources within the Philippines of a non-resident
and international organizations in the Philippines. - Resident citizen remains subject to Philippine income tax, but his income from
citizens who work for a foreign embassy or for an aid agency offoreign sources outside the Philippines is exempt.l
governments/international organization in the Philippines (e.g.,
JICA, GIZ, AUSAID, CIDA, Ford Foundation, Asia Foundation, etc.)
Bar Question (2011)
are still subject to Philippine income tax because resident citizens
are taxed on worldwide income, unless there is a law that expressly Federico, a Filipino citizen, migrated to the United States some
grants such tax exemption. In the case of Filipino citizens-employees six years ago and got a permanent resident status or green card.
of the Asian Development Bank, Section 45(b), Article XII of the Should he pay his Philippine income tax on the gains he derived
Agreement provide that only officers and staff of ADB who are not from the sale in the New York Stock Exchange in PLDT, a Philippine
Philippine nationals shall be exempt from Philippine income tax. corporate whose shares are listed thereat?
Exemption of Philippine nationals is "subject to the pouer of the
Gouernm.ent of the Philippines to ta* its nationa.ls" (RMC 31- Suggested answer:
2013, April 12, 2013). However, the alien individual employees of said
Yes. The gain from the sale of shares of stoch in a domestic
foreign embassies or international organizations in the Philippines
cdrporation shq.Il be treated as deriued entirely from sources within
are exempt from Philippine income tax based on the international
the Philippines, regardless of where the said shares are sold (Sec.
agreements entered into by the Philippines with said international
42[E], NIRC). By this prouision of law, the gain, if any, from the sale
organizations or under the Vienna Convention
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ofshares ofstocks ofa domestic corporation by any person shall always eurned ?1,000,000.00, which they used for the supporb of the orphans
be treated for income tax purposes as income from sources within the in the city. Who are liable to pay taxes?
Philippines.
Suggested answer:
Bar Question (1998)
The following are liable to pay income taxes:
From what sources of income are the following persons/
corporations taxable by the Philippine government? a. The four Catholic parishes because the income receiued by
them, not being income eqrned as such in the perforrrlance
1. Citizen of the Philippines residing therein; of their religious functions and duties, is taxable income
2. Nonresidentcitizen; under the last paragraph of Section 26, in relq'tion to
Section 26(e) of the Tax Code. In promoting and operating
3. An individual citizen of the philippines who is working the Binatra Show, they engaged in an actiuity conducted
and deriving income from abroad as an overseas contract for profit.
worker;
b. The incorne of Frank Binatra, a non-resident alien under
4. An alien individual, whether a resident or not of the our law, is taxable at the rate of 30Vo (now 257o) fi'nal
Philippines; withholding tax based on the gross income from the show.
5. A domestic corporation. Mr. Binatra is not engaged in any trade or business in the
Philippines.
Suggested answer:
Resid.ent citizen u. nonresid.ent citizen. - It is important to
1. A citizen of the Philippines residing therein is taxable on know whether a citizen is a resident or non-resident of the Philippines
all income deriued from sources within ond without the because he is (a) taxable on his worldwide income, ifhe is treated as a
Philippines. resident citizen, and (b) taxable only on his income from sources within
the Philippines and exempt on his income from sources outside the
2. A nonresident citizen is tax,able only on income d,eriued, from
Philippines, if he qualifies as a non-resident citizen (Sec. 23, NIRC).
sources within the Philippines.
Engaged. in trad.e or business or erercise of profession a.
3. An indiuidual citizen of the phitippines who is working salaried. employee. - It is important to determine whether or not
and deriuing income from abroad as an ouerseas contract
a resident citizen is engaged in trade or business or in the exercise
worher is taxable only on income from sources within the
of his profession, since he is entitled to deduct certain items of
Philippines.
deductions from his business or professional income, capital gain,
4. An alien indiuidual, whether e resident or not of the passive income, and other income not subject to final tax. However,
Philippines, is taxable only oru income deriued from sources no deductions are allowed (a) from his gross compensation income,
within the Philippines. although personal and additional exemptions, if any, and premiums
on insurance where the gross family income does not exceed F250,000
5- A domestic corporation is tarable on all incorne deriued during the year, may be deducted therefrom, and (b) from capital
from sources within and without the phitippines (Sec. 25, gains and passive incomes subject to final tax at preferential rates.
NIRC).
If a resident citizen derives non-business or professional income, he
receives either compensation income (because there is employer-
Bar Question (1994)
employee relationship between him and his employer), or he derives
pdssive investment income, or he realizes capital gain from the sale
- Four catholic parishes hired the services of Frank Binatra, a
foreign nonresident entertainer, to perform for four nights at the Folk or transfer of shares of stock of a domestic corporation or from sale
Arts Theatre. Binatra was paid F200,000.00 a night. The parishes ofreal property.
96 llt,:vtt,twt,;tt oru'l'rrx,r'r'ror.r
'"' "';,llill,ll,l;li,i,i,il-'^-' " e7

Types of nonresident citizena. of $4,500 and lireillt rurliltnal income taxes paid to arriue
- There are three (B) types
of nonresident citizens, namely: (1) immigrants; (2) employees of a at his adjustecl inatme during the year. His adjusted income
foreign entity on a permanent basis; and (3) overseas contract workers will be subject to the graduated tarc rates of l%o to 37o (Sec.
(Sec. 22[E], NIRC).Immigrants and employees of a foreign entity 2 llbl, Ton Code of 1 986 IPD 1 1 58, as amended by PD 1994]).
on a permanent basis are treated as nonresident citizens from the INOTE : The aboae proaision was anrcnd.ed' alread'y by
time they depart from the Philippines. However, overseas contract R-A.8424 (Ta"rCod.eof 1997) effictiae January 7,7998.
workers must be physically present abroad "most of the time" dtning Incorne ftom foreign sources of nonresid'ent citizens
the calendar year to qualify as nonresident citizens. The phrase "t rast is exempt frotn incom.e tax.I
of the time" means at least 183 days during the calendar year. His
presence abroad, however, need not be continuous (Sec. 24, NIRC). b. I will raise the defense of prescription. The right of the
BIR to assess prescribes after three years counted from the
last day prescribed by law for the filing of the income tatc
Bar Question (2002) return, when the said return is filed on time. The last day
Mr. Sebastian is a Filipino seaman employed by a Norwegian for filing the 1997 income tax return is April 15, 7998. Since
company which is engaged exclusively in international shipping. He the assessment was issued only on April 20, 2001, the BIR's
and his wife, who manages their business, filed a joint income tax right to @ssess has already prescribed.
return for 1997 on March 15, 1998. After an audit of the return, the
BIR issued on April 20,200L a deficiency income tax assessment for Aliens
the sum of F250,000.00, inclusive of interest and penalty. For failure
of Mr. and Mrs. Sebastian to pay the tax within the period stated in Alien individuals are classified into resident alien and non-
the notice of assessment, the BIR issued on August 19, 2001 warrants resident alien. Nonresident aliens are further classified into engaged
or not engaged in trade or business in the Philippines. The Philippines
ofdistraint and levy to enforce collection ofthe tax.
exercises limited taxation rights over income of aliens derived from
a. What is the rule of income taxation with respect to Mr. the economic activities done within the Philippines. The "country of
Sebastian's income in 1997 as a seaman on board the source" exercises its taxing rights due to the territorial link on the
Norwegian vessel engaged in international shipping? income.
Explain your answer.
Definition of uresid.ence.' - The 1997 Tax Code does not
b. If you are the lawyer of Mr. and Mrs. Sebastian, what define "residence," but the regulations provide relevant guidelines on
possible defense or defenses will you raise in behalf ofyour this matter. Thus, an alien actually present in the Philippines who
clients against the action of the BIR in enforcing collection is not a mere transient or sojourner is a resident of the Philippines
ofthe tax by the summary remedies of warrants of distraint for income tax purposes. A mere floating intention indefinite as to
and levy? Explain your answer. time, to return to another country is not sufficient to constitute him a
transient. If he lives in the Philippines and has no definite intention
Suggested answer: as to his stay, he is a resident. One who comes to the Philippines for a
The 7997 income of Mr. Sebastian as a seaman is considered definite purpose, which in its nature may be promptly accomplished,
as income of a nonresident citizen deriued from without the is a transient. But ifhis purpose is ofsuch a nature that an extended
Philippines. The total gross income, in (J.5. dollars (or if in stay may be necessary for its accomplishment, and to that end the
other foreign curcency, its dollar equiualent) from without alien makes his home temporarily in the Philippines,. he becomes
the Philippines shall be declared by him for income tax a resident, though it may be his intention at all times to return to
purposes ustng a separate income tax return which will his" domicile abroad when the purpose for which he came has been
not include his income from business deriued within the consummated or abandoned (Sec. 5, Reu. Regs. No. 2). A resident alien
Philippines (to be couered by another return). He is entitled l<,rses his residence status if he actually leaves the Philippines and
to deduct from his dollar gross income a personal exemption abandons his residency thereof without any intention of returning.
98 Itr,:vrr,:wr,:H oN'l'nxn'r'row I Nt r rMl,t Attt r W t tl tt tr tt,t tlrur l'l'n\1,;rl 99
l(ituls ol'l'rrxprtvcrs

What the law requires for an alien to be considered as a resident ln its activity ofacting us a buying ugent for foreign, buyers ofshirts
of the Philippines is merely physical or bodily presence in a given und dresses abroad and performing liaison work between its home
place for a period of time, not the intention to make it a permanent olfice and the Filipino garment manufacturers and exporbers, Newtex
place of abode (Gatrison a. Court of Appeals and Republic, 787 does not generate any income. To finance its office expenses here,
scnA525). its head office abroad regularly remits to it the needed amount. To
Nonresid.ent Alien Engaged in Tlade or Business in the oversee its operations and manage its office here, which had been in
Philippines. operation for two (2) years, the head office assigned three (3) foreign
- If the aggregate period of his stay in the Philippines
is more than 180 days during any calendar year, he shall be deemed personnel.
a "nonresident alien doing business in the Philippines," Section Are the three (3) foreign personnel subject to Philippine income
22(G) of the 1997 Tax Code notwithstanding. As such, an alien tax?
engaged in trade or business in the Philippines is taxed on his income
Suggested answer:
from sources within the Philippines (after deducting personal and
additional exemptions, if any) at the graduated income tax rates of The three (3) foreign personnel are subject to tux on the incorne
five percent (57o) to 327o, while his passive investment incomes shall that they receiue for seruices rendered in the Philippines. Non-resident
generally be subject to 20Vo final tax (Sec. 25[B], NIRC). uliens are subject to tax on income from sources within the Philippines.
Irucome is deemed deriued from sources within the coun'try when it is
Bar Question (2011) earned for seruices rendered in. the Philippines (Sec. 23, in relation to
Sec.42, NIRC).
Alain Descartes, a French citizen permanently residing in the
Philippines, received several items ofincome duringthe taxable year, Bar Question (2000)
such as consultancy fees received for designing a computer program
and installing the same in the Shanghai facility of a Chinese firm; Mr. Cortez is a nonresident alien based in Hong Kong. During
interests from his deposits in a local bank offoreign currency earned the calendar year 1999, he came to the Philippines several times and
abroad converted to Philippine pesos; dividends received from an stayed in the country for an aggregated period ofmore than 180 days.
American corporation which derived 607o of lts annual gross receipts How will Mr. Cortez be taxed on his income derived from sources
from Philippine sources for the past 7 years; and gains derived from within the Philippines and from abroad?
the sale of his condominium unit located in Taguig City to another
resident alien. Suggested answer:

Which item of income is not subject to Philippine income tax? Mr. Cortez, being a nonresident alien indiuidual who has stayed
for an aggregate period of more than 180 days during the calendar
Suggested answer: year 1999, shall for thut taxable year be deemed to be a nonresident
alien doing business in the Philippines.
The consultancy fees are not subject to Philippine incorne tax.
Beirug an alien, it is subject to income tax only on income frorl sources Considering the aboue, Mr. Cortez shall be subject to an income
within the Philippines (Sec. 23[DJ, NIRC). Since the consultancar fees tax,in the sanae nlanner as a resident citizen on taxable income receiued
are receiued by him for designing a computer program and installing from all sources within the Philippines (Sec. 25[N[1], NIRC).
the sarne in China, the same shall be treu,ted as incorne from sources Thus, he is q.llowed to q.uq.il of the itemized deductions including
outsid.e the Philippines (Sec. 42[cJ[3J, NIRC). the personal artd qdditional exemptions, but subject to the rule on
reciprocity on the personal exemptions (Sec. 34[A] to [J] and [M] in
Bar Question (1991) retation to Sec. 25[A][1], and, Sec. 35[D], NIRC).
Newtex International (Phils.), Inc. is an American firm duly Nonresid.ent Alien Not Engaged. in Tfad'e or Business in
authorized to engage in business in the Philippines as
a branch office. the Philippines.- If the aggregate period of the nonresident alien's
100 Itt,:vtt,:wt,:tr oN 'l'AxA ItoN Wt t ttttot,tltNtl'l'nxus
Irur r rMt,r,tttr r 101
Kirxls ol''l'axpa.yers

stay in the Philippines does not cxceed 180 d.rys during any calt:ndar Ilags. No. 6-2001). The preferential tax treatment granted to alien
year, he shall be deemed a "nonresident alien not doing business employees of the above entities must necessarily be extended to their
in the Philippines." As such, his compensation income, business or Filipino counterparts in order to put them at par with each other.
professional income, capital gain, passive investment income, and Alien employees of representative offices of multinational companies
other income from sources within the Philippines is taxed at the in the Philippines who were subject to the LSVo preferential tax rate
flat rate of25o/o, but capital gains from sale or exchange ofshares of on their gross income, pursuant to Revenue Regulations No. 2-98,
stocks in a domestic corporation and from real property located in the were deleted from the list of alien employees entitled to the reduced
Philippines shall be subject to capital gains tax or stock transaction tax rate beginning January 7,2002.
tax, as the case may be (Sec.25[BJ, NIRO.
The above rules in Revenue Regulations No. 2-98, as amended
Employees entitl.ed to preferential ta* rates. Cerbain alien in Revenue Regulations No. 6-2001, have been modified by Revenue
-
individuals who are employed in the Philippines are entitled to the Regulations No. 11-2010 on Oetober 28,2OlO. Thus, Filipinos
157o preferential income tax rate on their gross compensation income employed by ROHQs or RHQs in a managerial or technical position
from sources within the Philippines. These employees entitled to the shall have the option to be taxed at either 757o of their gross income
preferential tax rate are the alien individuals employed by: or at the regular income tax rate on taxable compensation income
a. Regional or area headquarters and regional operating in accordance with Section 24 of the Tax Code, if the employer is
governed by Book III of E.O. 226, as amended by R.A. 8756. All other
headquarters of multinational companies in the Philippines
(Sec.25[C], NIRC); employees are considered as regular employees who are subject to
the regular income tax rate on their taxable compensation income.
b. Offshore banking units established in the Philippines (Sec. To be entitled to the preferentialrale of L\Vo, the Filipino must meet
25[D], NIRC); and all of the following requirements:
c. Foreign service-contractor or sub-contractor engaged in a. Position and. Funetion Test. The employee must
petroleum operations in the Philippines (Sec. 25[E], NIRC). occupy a managerial position or -technical position AND
It does not matter whether the alien starts to work in the must actually be exercising such managerial or technical
Philippines at the start or end of the year. The only qualification functions pertaining to said position;
provided for in the law relates to the entity that employs him in the b. Compensation Threshold, Test. -- In order to be
Philippines. Moreover, the aggregate period of stay in the Philippines considered a managerial or technical employee for income
of the alien employee of the regional or area headquarters and tax purposes, the employee must have received, or is due
the foreign service contractor or sub-contractor will not create a to receive under a contract of employment, a gross annual
permanent establishment in the Philippines for its foreign head office, taxable compensation of at least F975,000 (whether or
even ifhe exceeds the 180-day rule provided for in the 1997 Tax Code, not this is actually received); provided, that a change in
or the 183-day threshold prescribed in the tax treaty. compensation as a consequence of which, such employee
Filipino etnployees of multinational corporations. - The subsequently receiving less than the compensation
same preferential tax treatment granted to alien individuals shall threshold stated in this section shall, for the calendar year
when the change becomes effective, result in the employee
apply to Filipinos employed and occupying the same position as
being subject to the regular income tax rate; and
those of aliens employed by the entities mentioned above, regardless
of whether or not there is an alien executive occupying the same c. Exclusiaity Test.-The Filipino managerial or technical
position. Filipino employees employed by Regional Headquarters or employee must be exclusively working for the RHQ or
Regional Operating Headquarters governed by E.O. 226, as amended ROHQ as a regular employee and not just a consultant or
by R.A. 8756, may choose to be taxed either at the 15% preferential contractual personnel. Exclusiuity means having just one
tax rate on their gross income or at the graduated tax rates (Sec. employer at a time (Reu. Regs. No. 11-2010, October 26,
2.57.1[5][D], Reu. Regs. No.2-98, April 17, 1998, as q,mended by Reu. 2010).
r0:l
L02 ll.r,:vr t,:wr,:H oN'l'nxn'r'ror.r
'-''''l l)i:lliiil,l,i;lilil'''^-'"
Estates and Trusts NIIl(). 'l'he income o1'a trust will be taxed to the trustor, where the
trust executed by him is revocable (Sec. 63, NIRC), and the income
An estate is created by operation of law, when an individual
of the trust is taxable to the trustee, where the trust is irrevocable
dies, Ieaving properties to his compulsory or other heirs, while a
(Secs. 60-61, NIRC).
trust is a legal arrangement whereby the owner of property (the
trustor) transfers ownership to a person (the trustee) who is to hold
and control the property belonging to the owner's instructions, for the Bar Question (2009)
benefit ofa designated person(s) (the beneficiaries). Legal title to the Johnny transferred a valuable 10-door commercial apartment
trust property is vested in the trustee, while equitable title belongs to a designated trustee, Miriam, naming in the trust instrument
to the benefi.ciaries. Santino, Johnny's 1O-year old son, as the sole beneficiary. The trustee
If the trust were an employee's trust, which forms part of an is instructed to distribute the yearly rentals amounting to F720'000'
employer's pension, stock or profit-sharing plan that complies with The trustee consults you if she has to pay the annual income tax on the
the requirements of tax exemption under Section 60(8) of the 1992 rentals received from the commercial apartment. (a) What advice will
Tax Code, as implemented by Revenue Regulations No. 1-68, as you give the trustee? (b) Will your advice be the same, if the trustee
amended, its income would be exempt from income tax. Since said is directed to accumulate the rental income and distribute the same
provision grants tax exemption, the requirements of Section 60(8) only when the beneficiary reaches the age of majority. Why or why
are mandatory and should be strictly construed (Comrnissioner u. not?
Visayan Electric Co.,23 SCRA 715),
Suggested answers:
Taxable estates and trusts are taxed in the same manner and
on the same basis as in the case of an individual, except that: (a) the ct.. It depends. Where the trust document transferring the
amount of income for the year which is to be distributed currently property is reuocable, the rental income shall be included in
by the fiduciary to the beneficiaries, and the amount of the income computing the taxable income of the grantor (Sec- 63, NIRC)-
collected by a guardian of an infant which is to be held or distributed On the other hand, if the trust document is irreuocable and
as the courb may direct, shall be allowed as deduction in computing the donor's tax on the ualue of the transferred property
taxable income of the estate or trust, but the amount so allowed as was duly paid by the grantor at the time of the creation of
deduction shall be included in computing the taxable income of the the trust (Secs. 98-99, NIRC), the rental income shall be
beneficiaries, whether distributed to them or not; (b) in the case of reported by the trustee in the income tax return to be filed
income received by estates ofdeceased persons during the period of by her. Income tq,rc shall apply to the income of the property
administration or settlement of the estate, and in the case of income hetd in trust, including income which is to be distributed
which, in the discretion of the fiduciary, may be either distributed to currently by the fiduciary to the beneficiary (Sec. 60, NIRC).
the beneficiary or accumulated, there shall be allowed as an additional Howeuer, the taxable income of the trust shall be computed
deduction in computing the taxable income of the estate or trust the by allowing as deduction the amount of the income of the
amount ofthe income of the estate or trust for its taxable year, which trust for the taxable year which is to be distributed currently
is properly paid or credited during such year to any legatee, heir or by the fi.duciary to the benefi'ciary, but the amount so allowed
beneficiary, butthe amount so allowed as a deduction shall be included as a deductioru shall be included in computing the ta"xcable
in computing the taxable income of the legatee, heir or beneficiary income of the beneficiary, whether distributed to them or
(5ec.61, NIRC). However, they are entitled onlyto personal exemption not (Sec.61[A], NIRC).
equivalent to a single individual in the amount of F20,0001 (Sec. 62, b. No, my aduice will be different if the trustee is directed to
accumulate the rental income an'd distribute the same only
rThe amount of personal exemption of an individual has been increased to ' *hen the beneficiary reaches the age of rnajority. Income
P50,000 under R.A. 9504 starting in July, 2008. Considering that an estate or trust
is taxed like an individual, it is believed that the same amount of personal exemption tax shall also apply to income accumulated or held for
granted to individuals must also be extended to taxable estates or trusts. future distribution under the terrns of the trust document.
104 ll,r,:vrr,:wr,rr rw 'l'nxn,r,r.w
'-' "'11,1)ll,T,lliill,i,i;llil-' ^'' " r 05

Howeuer, the trustee is u,llowed os an &dditional tletluction unregistercd purtncrship which is consequently subject to
in computing the taxable income ofthe trust the amount of' income tax as a corporation. The co-ownership of inherited
the income in the trust for the totcable year, which is properly properties is automatically converted into an unregistered
paid or credited during such yeqr to any beneficiary, but partnership the moment the said common properties and,ior
the qmount so allowed as deduction shctll be included in the incomes derived therefrom are used as a common fund
cornputing the toxoble income of the beneficiary (Sec. 61[8], with intent to produce profits for the heirs in proportion to
NIRC). their respective shares in the inheritance as determined in
a project partition either duly executed in an extrajudicial
Go-ownership settlement or approved by the court in the corresponding
testate or intestate proceeding. From the moment of such
There is co-ownership whenever the ownership of an undivided
partition, the heirs are already entitled to their respective
thing or right belongs to different persons. For income tax purposes,
definite shares of the estate and the income thereof, for
the individual co-owners in a co-ownership report their share of the
each of them to manage and dispose of the property as
income from the property owned in common by them in their individual
exclusively his own without the intervention of the other
tax returns for the year, and the co-ownership is not considered as a
heirs. Accordingly, the heir becomes liable individually
separate taxable entity or a corporation as defined in Section 22(B)
for all taxes in connection with his co-heirs. If after such
of the 1997 Tax Code. In a co-ownership arising from the death of
partition, he allows his shares to be held in common with
a decedent, the court clearly established that such co-ownership is
his co-heirs under a single management to be used with
automatically terminated upon the partition and distribution of the
properties ofthe estate and an unregistered partnership is created
the intent of making profit thereby in proportion to his
share, there can be no doubt that, even if no document
when the heirs invested the common properties and income and placed
or instrument were executed for the purpose, at least an
them under a single management. However, the co-ownership is not
unregistered partnership is formed for tax purposes (Ona
converted into a partnership where the transactions ofthe co-owners
u. Cornrnissioner,4S SCRA 74).
intended to liquidate the co-ownership are few or isolated, and the
element of habituality is not present. The intention of the co-owners
to establish a partnership should also be considered. Bar Question (1997)
Mr. Santos died intestate in 1989 leaving his spouse and five
Co-ownership Due to Death of a Decedent children as the only heirs. The estate consisted of a family home and
a four-door apartment which was being rented to tenants. Within the
l-. Before partition of property. - In general, co- year, an extrajudicial settlement of the estate was executed from the
ownerships are not treated as separate taxable entities.
heirs, each ofthem receiving his/her due share. The surviving spouse
The income of a co-ownership arising from the death of a
assumed administration of the property. Each year, the net income
decedent is not subject to income tax, ifthe activities of the
from the rental property was distributed to all, proportionately, on
co-owners are limited to the preservation of the property
which they paid respectively, the corresponding income tax.
and the collection of the income therefrom. In which case,
each co-owner is taxed individually on his distributive In 1994, the income tax returns of the heirs were examined
share. Before the partition and distribution of the estate and deficiency income tax assessments were issued against each of
of the deceased, all the income thereof belongs commonly them for the years 1989 to 1993, inclusive, as having entered into an
to all the heirs. unregistered partnership. Were the assessments justified?
2. After partition of property. - Should the co-owners Suggested answer:
invest the income of the co-ownership in any income-
producing properties after the extrajudicial partition of Yes, the assessments were justified becq.use for income tax
the estate, they would be constituting themselves into an purposes, the co-ownership of inherited property is automatically
106 Itr,:vrr,:wt,:H ol'l'nxa,ttoI
'."'";ll:i;Y':liilll,i;l,il.''^' " 107

conuerted into q,n unregistered partnership from the moment the said 1 ) The BIR claims that the sale of parcel A should be taxed as
properties are used ds o common fund with intent to produce profits a sale by an unregistered partnership. Is the BIR correct?
for the heirs in proportion to their shares in the inheritonce.
2) The BIR also claims that the sale of parcel B should be
From the mom.ent of such partition, the heirs are entitled already taxed as a sale by a corporation. Is the BIR correct?
to their respective definite shares of the estate and the income thereof,
for each of them to manage and dispose of as exclusiuely their own, Suggested answer:
without the interuention of the other heirs, and accordingly, he becomes
liable indiuidually for all taxes in connection therewith. If after such 1) The BIR is not cotect, since there is no showing that
partition, he allows his shq,res to be held in common with his co-heirs the acquisition of the property by Noel and Jouy Langit
under a single managerlent to be used with the intent of making profit as pro indiuiso owners, and prior to the formation of
thereby in proportion to his share, there can be no doubt that, euen the partnership, was used, intended for u'se, or bears
if no document or instrument were executed for the purpose, for tox. any relation whqtsoeuer to the pursuit or conduct of the
purposes, at least, an unregistered partnership is formed (Lorenzo partnership business. The sale of parcel A sholl therefore
Ona, et al. u. CIR,45 SCRA 74). not be treeted as a sale by aru unregistered partnership, but
an ordinary sale of a capital asset, and hence will be subject
Isolated. transactions of unintproaed. properties. to the SVo (now 67o) cq'pital gains tQ'xc and docurnentary
- The
petitioners bought two parcels of land in 1965. They did not sell the stamp tax on transfers of real property, said taxes to be
same nor make any improvements thereon. In 1966, they bought borne equally bY the co-ou)ners.
three more parcels of land from one seller. In 1968, they sold the two
(2) parcels at a profit after which they did not make any additional 2) The BIR is correct, since a "corporation" as deemed under
or new purchase. In 1970, they sold the remaining parcels also at a Section 2A@) fnow Sec. 22(b)] of the Tox Code includes
profit. It was held that there was no adequate basis to support the partnerships, no matter how created or organized,
proposition that they thereby formed an unregistered partnership. except general professional partnerships. The business
The character of habituality peculiar to business transactions for partnership, in the instant case, shall therefore be taxed in
the purpose of gain must be present to consider them so. Where the same manner as a corporation on the sale of parcel B'
the transactions are isolated, in the absence of other circumstances The sale shall thus be subject to the creditable withholding
showing a contrary intention, the case can only give rise to co- tq.tc urlder Reuenue Regulations No. 7-90, as amen'ded by
ownership. The sharing of the profits in a common properby does not 12-94 [now Reu. Regs. No. 2'98, as amended], on the sale of
ofitselfestablish a partnership that is but a consequence ofajoint parcel B, and the partnership shall report the gain realized
or common right or interest in the property. There must be a clear from the sale when it files its income ta'x return-
intent to form a partnership, the existence ofajuridical personality Transfer of property f-rom father to child'ren. - Aftet
different from the individual partners, and the freedom ofeach party completing payment on two (2) lots, the father transferred his rights
to transfer or assign the whole property (Pascual a. Comm.jssioner, to his four (4) children to enable them to build their residences.
166 SCRA 560). After having held the two (2) lots for more than a year, they sold
them at a profit. They treated the profit as a capital gain and paid
Bar Question (1994) income tax on one-half thereof. The court ruled that there was no
partnership. To regard them as having a taxable partnership would
Noel Langit and his brother, Jovy, bought a parcel of land
result in oppressive taxation and obliterate the distinction between
which they registered in their names as pro indiuiso owners (Parcel
a co-ownership and a partnership. The children had no intention of
A). Subsequently, they formed a partnership, duly registered with
forvning a partnership. The transaction was isolated. Their original
Securities and Exchange Commission, which bought another parcel of
purpose was to divide the lots for residential purposes. Iflater on they
land (Parcel B). Both parcels of land were sold, realizing a net profit
found it not feasible to build their residences on the lots because of
of P1,000,000.00 for parcel A and F500,000.00 for parcel B.
the high cost of construction, then they had no choice but to resell
r,e
108 Itt,:vr t,;wt,lrr or'l'nxn'r'ror.r
'"''''li,1li:I:rillll,i;l,ll-''^-",
the same to dissolve the co-ownership. The division of the profit was General Professional Partnerships (GPP)
merely incidental to the dissolution of the co-ownership, which was in
A "general professional par-tnership" is a partnership formed
the nature of things a temporary state. The sharing of gross returns
by persons for the sole purpose of exercising their common profession,
does not of itself establish a joint partnership whether or not the
no part of the income of which is derived from engaging in any trade
persons sharing them have a joint or common right or interest in the
property from which the returns are derived. There must instead be or business (Sec. 22[B], NIRC). To qualifr as such exempt entity, the
GPP must not derive any active business income (e.9., rentalincome),
an unmistakable intention to form that partnership or joint venture
(ObiWns v. Comtnissioner, 139 SCRA 436). but may receive interest income on bank deposits and from dividend
income.

Bar Question (1991) GPP is not a taxable entity for incomc tax purposes. - A
general professional partnership is not considered as a taxable entity
Roberto Ruiz and Conrado Cruz bought three (3) parcels ofland for income tax purposes. The partners themselves, not the partnership
from Rodrigo Sabado on 4 May 1976. Then on 8 July I9TT,theybought (although it is still obligated to file an income tax return), are liable
two (2) parcels of land from Miguel Sanchez. In 1988, they sold the for the payment of income tax in their individual capacity computed
first three parcels ofland to Central Realty, Inc. In 1989, they sold on their respective distributive shares ofthe partnership profit. In the
the two parcels to Jose Guerrero. Ruiz and Crrz realized a net profit determination of the tax liability, a partner does so as an individual,
of F100,000.00 for the sale in 1988 and F150,000.00 for the sale in and there is no choice on the matter. In fine, the general professional
1989. The corresponding capital gains taxes were individually paid partnership is deemed to be no more than a mere mechanism or a
by Ruiz and Cruz. flow-through entity in the generation ofincome by, and the ultimate
On 20 September 1990, however, Ruiz and Cruz received a mechanism distribution of such income to, respectively, each of the
letter from the Commissioner of Internal Revenue assessing them individual partners (?on u. Del Rosario,237 SCRA 324).
deficiency corporate income taxes for the years 1988 and 1989 because, Share of partners in partnership profit is d'eemed'
according to the Commissioner, during said years they, as co-owners d.istributed. to the partners in the year profi.t is earned'. - The
in the real estate transactions, formed an unregistered partnership net profit of a general professional partnership is distributed to
orjoint venture taxable as a corporation and that the unregistered the partners composing the partnership in accordance with their
partnership was subject to corporate income tax, as distinguished agreement. The share of an individual partner in the net profit of a
from profits derived from the partnership by them, which is subject general professional partnership is deemed to have been actually or
to individual income tax. constructively received by the partner in the same taxable year in
Are Robert Ruiz and Conrado Cruz liable for deficiency corporate which such partnership net income was earned, and shall be taxed to
income tax? them in their individual capacity, whether actually distributed or not,
at the graduated rates of income tax ranging from five percent (57o)
Suggested answer: to 327o (Sec. 26, NIRC) . Thus, the principle of constructive receipt of
income or profit is being applied to undistributed profits of general
Roberto Ruiz and Conrado Cruz qre not liable for corporate professional partnerships. The payment of such tax-paid profits by
income tuc. Euidently abandoning the Gatchalian ruling, the Supreme the GPP to the partners in another year should no longer be liable
Court in a recent ruling in Pascual u. Court of Tax Appeals (GR. to income tax.
No.78733, October 1"8, 1988) held that isolated transactions by two or
n'Lore persons do not wq.rrant their being considered as an unregistered
Bar Question (1995)
partnership. They will instead be considered as mere co-ou)ners; no
corporate income tox. is due on nl.ere co-ownerships. It was, therefore, . Five years ago, Marquez,Peneyra,Ja5rme, Posadas and Manguiat,
correct for Ruiz and Cruz to merely pay their indiuidual income tax all lawyers, formed a parbnership which they named Marquez and
liabilities on the gain from sale ofreal estate transactions. Peneyra Law Offices. The Commissioner of Internal Revenue
thereafter issued Revenue Regulationlsl No. 2-93 implementing R.A.
t10 ll.t,;vtt,:wt,:tt oN 'l'AxA ttr)N lII
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7496, known as the simplified Net lncome'raxation scherne (sNITS). (2) No. Reuenue Regulati<tns No. 2'93, implementing RA
Revenue Regulation[s] No. 2-93 provides in part: No. 7496, hos indeed significantly reduced the items of
"Sec. 6. General Professional Partnershlp. deduction by limiting it to direct costs and expenses' or
general professional - The
partnership and the partners are 40Vo of gross receipts maximurn deduction in cases where
covered by R.A. 7496. Thus, in determining profit of the the direct costs a.re dfficult to determine. The allowance
partnership, only the direct costs mentioned in said law are of the limited deductions, howeuer, is still in corusonance
to be deducted from partnership income. Also, the expenses with the net income ta,xation scheme rather than the gross
paid or incurred by partners in their individual capacities incorne method. While it is true that not aII the ercpenses
in the practice of their profession which are not reimbursed of earning the income might be allowed, this can weII be
or paid by the partnership but are not considered as direct
justified by the fact that deductions are not matters of right
costs are not deductible from his gross income." but are matters of legislatiue gra.ce. INOTE: R.A' 8424 (Tax
Reform Act of 1997) repealed R.A.7496 in 1998-l
(1) Marquez and Peneyra Law Offices filed a taxpayer,s
suit alleging that Revenue Regulations No. 2-93 violates Domestic Corporations and Foreign Gorporations
the principle of uniformity in taxation because general
professional partnerships are now subject to payment The term od,om'estic," when applied to a corporation means
of income tax and that there is a difference in the tax created or organized in the Philippines or under its laws (Sec.22[C],
treatment between individuals engaged in the practice NIRC), while the terrn"foreigz," when applied to a corporation,
of their respective professions and partners in general means a corporation which is not domestic (Sec.22[DJ, NIRC).The
professional partnerships. Is this contention correct? branches of a domestic corporation, whether located in the Philippines
Explain. or abroad, are merely extensions of the local head office. Accordingly,
their incomes in the Philippines and abroad of the head office and
(2) Is Revenue Regulations No. 2-93 now considered as having foreign branches are to be reported by the Philippine head office in
adopted a gross income method instead of retaining the net its corporate income tax return, and the branch profits remitted by
income taxation scheme? Explain. its forgign branches to the Philippine head office shall no longer be
subject\to the branch profit remittance tax because (a) the income of
Suggested answer: the foreign branch had already been subjected to Philippine income
(1) The contention is not correct. General professional tax, and (b) the branch profit remittance tax applies only to Philippine
partnerships remain to be a non-ta)c.able entity. The partners branches offoreign corporations operating in the Philippines operating
comprising the same are taxable and they are obligated to in the customs territory and exempts from the tax profits remitted
report as income their share in the income of the general by the Philippine branch operating in special economic zones to their
professional partnership during the tqtcable year, whether head offices abroad.
distributed or not. The Simplified Net Income Tax Systent A "resid.ent foreign corpora.tiort" is a foreign corporation
(SNI"S) treats professionals as one class of taxpayers so engaged in trade or business within the Philippines (Sec. 22[H]'
that they shall be treated alihe, irrespectiue of tahether NIRC), and a nnonreeid,ent foreign corporatioz" is a foreign
they practice their profession alone or in association corporation not engaged in trade or business within the Philippines
with other professionals under a general professional (Sec.22[IJ, NIRC).
partnership. What are taxed differently are indiuiduols
and corporations. All indiuiduals similarly situated are
taxed alike under the regulations. Therefore, the principle
Bar Question (2012)
of uniformity in taxation is not uiolated. On the contrary, all ' Anchor Banking Corporation, which was organized in 2000
the requirements of a ualid regulation haue been complied and existing under the laws of the Philippines and owned by the Sy
with (Tan u. del Rosario, G.R. No. 10g29g, October S, 1gg4). Family of Makati City, set up in 2010 a branch office in Shanghai
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City, China, to take advantage of the presence of many l'ilipin<r l)hilippinc ( )orportrtion Oorlo, provided that it is organized under the
workers in that area and its booming economy. During the year, the laws of'the Philippines. On the other hand, a corporation established
bank management decided not to include the F20 million net income by Filipino citizens under the laws of a foreign countrywill be treated
of the Shanghai Branch in the annual Philippine income tax return as a foreign corporation, and the branch that such foreign corporation
filed with the BIR, which showed a net taxable income of F30 million, f sets up in the Philippines is a resident foreign corporation. In other
because the Shanghai Branch is treated as a foreign corporation and words, the nationality of the owners of the corporation has no bearing
is taxed only on income from sources within the Philippines, and since in ascertaining the status or residence of corporations, for income tax
the loan and other business transactions were done in Shanghai, these purposes.
incomes are not taxable in the Philippines.
a. Is the bank correct in excluding the net income of its Doing Business
Shanghai Branch in the computation of its annual I The term "doing business" implies a continuity of commercial
corporate income tax for 2Ol0? Explain your answer. dealings and arrangements, and contemplates, to that extent, the
b. Should the Shanghai Branch of Anchor Bank remit profit performance of acts or works or the exercise of some of the functions
to its Head Office in the Philippines in 2011, is the branch normally incident to, and in progressive prosecution of commercial
liable to the l57o branch profit remittance tax imposed gain or for the purpose of business organization. In order that a
under Section 28(AX5) of the 1997 Tax Code? Explain your foreign corporation maybe regarded as doingbusiness within a State,
answer. there must be continuity of conduct and intention to establish
a continuous business, such as the appointment of a local agent,
Suggested answers: and not one of a temporary character (BOAC u. Comtnissioner, 749
SCRA 395).
No. A domestic corporation is tucable on all income deriued
from sources within and without the Philippines (Sec. 23, Partnerships
NIRC). The income of the foreign brq,nch and that of the
Head Office will be summed up for income tax purposes, Except for a general professional partnership and an unin-
following the "single entity" concept and uill all be included corporated joint venture or consortium engaged in construction or
inthe gross income of the dnmestic corporation in the annual enerry-qelated projects, which in reality are also parbnerships, Section
Philippine income tanc return. 22(B) ofthe 1997 Tax Code considers any other type ofpartnership
(described here as "business partnership") as acorporation subject
b. No, The branch profit remittance tax is imposed only
to income tax. Indeed, Section 24(B) of the 1997 Tax Code places a
on remittqnce by branches of foreigru corporation in the business partnership and an ordinary corporation on a similar foot-
Philippines to their Head Office abroad. It is the outbound
ing, by imposing the lOVo dividend tax on the cash and./or property
branch profits thq.t is subject to the tax, ruot the inbound
dividends actually or constructively received by an individual stock-
profits (Sec. 28[A] [5], NIRC).
holder of a corporation, or in the distributable net income after tax of
a partnership ofwhich he is a partner, except a general professional
Test in determining Status of Corporations partnership, received by a partner. The term"after'ta'x net profit"
Following the above provisions, it can be said that the Philippines means the net profit of the partnership computed in accordance
adopted the"lano of incorporation test'ander which a corporation with generally accepted principles of accounting, less the corporate
is considered (a) as a domestic corporation, if it is organized or income tax imposed in Section 27 of the Tax Code (Sec.2, Reu. Regs.
created in accordance with or under the laws of the Philippines, or No.2-84, January 16, 1984). Section 73(D) of the 1997 Tax Code,
(b) as a foreign corporation, ifit is organized or created in accordance however, provides that "the taxable income declared by a partner-
with or under the laws of a foreign country. Corollarily, a domestic
ta
ship for a taxable year which is subject to tax under Section 27(A) of
corporation may be formed or organized by foreigners under the this Code, after deducting the corporate income tax imposed therein,
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shall be deemed to have been actually or constructively received by nrako ar contribution, rroL necessarily of capital, but by way of
the partners in the same taxable year and shall be taxed to them in services, skill, knowledge, material or money; profits must be shared
their individual capacity, whether actually distributed or not." among the parties; there must be a joint proprietary interest and
right of mutual control over the subject matter of the enterprise;
Bar Question (2013) and usually, there is single business transaction (BIR Ruling No.
317-92).
Y{Z Law Offices, s l6w partnership in the Philippines and a
VAT-registered taxpayer, received a query by e-mail from Gainsburg Exempt joint uenture or consortium is an unincorporated'
Corporation, a corporation organized under the laws of Delaware, joint aenture or consortium engaged. in conetruction actiaity
USA, but the e-mail came from California, where Gainsburg has an or energy-related. project. - The terrn "ioint uenture or
office. Gainsburg has no office in the Philippines and does no business consortiu.nt," referred to in Section 22(B) ofthe 1997 Tax Code that is
in the Philippines. not considered as a separate taxable entity, means an unincorporated
entity formed by two (2) or more persons (individuals, partnerships
YYZ Law Offices rendered its opinion on the query and billed or corporations) for the purpose ofundertaking construction project
Gainsburg US$1,000 for the opinion. Gainsburg remitted its payment (P.D. 929, May 4, 1976), or engaging in petroleum and other energy
through Citibank, which converted the remitted US$1,000 to pesos operations with operating contract with the government. The
and deposited the converted amount in the XYZ Law Offices account. term "joint aenture' was clarified by the Secretary of Finance
What are the tax implicaf ions of the payment toYYZ Law Of;fices in when he issued Reaenue Regulations No. 10-2012 on June 7,
terms of VAT and income taxes? 2072.In said Regulation, the joint venture that is not taxable as a
corporation must comply with the following requisites: (a) the joint
Suggested answers: venture or consortium is formed for the purpose of undertaking
The payment to XYZ Law Offices by Gainsburg Corporation construction activity; (b) It involves jointing or pooling ofresources
is subject to income totc and VAT in the Philippines. For income tqrc by licensed local contractors; i.e., licensed as a general contractor
purpeseL, the compensation for seruices is part of the gross income of by the Philippine Contractors Accreditation Board (PCAB) of the
the law partnership. From its total gross income within and without, Department of Trade and Industry; (c) the local contractors are
it has to compute its net incorne in the same nlanner as a corporation. engaged in construction business; and (d) thejoint venture itselfis
The net income of the partnership, whether distributed or not, will licensed as suOh-by PCAB. If all the above requisites are not met,
be declared by the partners based on their agreement as part of their the joint venture becomes liable to the corporate income tax. Each
gross incorne who are to pay the income ta& thereon in their indiuidual member of the joint venture not taxable as a corporation shall report
capacity (Sec. 26, NIRC). and pay taxes on their respective shares to the joint venture profit.
Since it is not considered as a separate taxable entity, the net income
FoTVAT purposes, the transaction is a zero-rated sale ofseruices, or loss ofthejoint venture or consortium is taken up and reported
where the output tax is zero percent and XYZ is entitled to clq,im as by the co-venturers or consortium members in accordance with their
refund or tax credit certificate the input taxes attributable to the zero- participation in the project as set forth in their agreement. The
rated sale, if the same is not utilized by the partnership. The seruices
two (2) elements - unincorporated entity (or entity not registered
were rendered to a nonresident person, engaged in business outside the
with the Securities and Exchange Commission) and for the purpose
Philippines, which seruices are paid for in foreigrt currency inwardly of undertaking construction or energy-related project - must be
remitted through the banking systent, thereby making the sale of present in order that the joint venture or consortium may not be
seruices subject to tax at zero-rated (Sec. 108[8][2], NIRC).
considered as a separate taxable entity.

Joint Ventures Tax-exempt joint venture shall not include those who are mere
sirppliers of goods, services or capital to a construction project.
Elem,ents ofjoint aenlure. To constitute aujoint uentttrerD
-
certain factors are essential. Thus, each party to the venture must
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Joint Venture (JV) involving foreign contracto!.s may be BIR Rulings prior to Revenue Regulations No. l0-20l2z
treated as non-taxable corporation only if:
C orporation d.oe s not includ'e i oint a enture und'ertaking
1. Member foreign contractor is covered by a special license construction actiuity; allocation of floors, units, or lots is a
as contractor by PCAB; and mere return of capital. - The joint ventures described above
2. Construction project is certified by the appropriate are not subject to the corporate income tax under Section 27 of th.e
Tendering Agency (government office) that the project 1997 Tax Code, since the term "corporation" does not include a
joint venture or consortium formed for the purpose of undertaking
is a foreign-financed./internationally-funded project and
that international bidding is allowed under the Bilateral construction projects pursuant to Section 22(B) of t};,e 1997 Tax Code.
Agreement entered into by and between the Philippine Accordingly, the memorandum of agreement, jointventure agreement,
government and the foreign/international financing or exclusive development and marketing agreement between or among
institution, pursuant to the rules and regulations of R.A. the contracting parties, as the case may be, will not give rise to a
4566 (Contractor's License Law). taxablejoint venture, and the allocation ofspecific floors or units or
subdivision lots in the project is not a taxable event and is not subject
Each member ofjoint venture not taxable as corporation shall to income tax and expanded withholding tax, because the allocation
report and pay taxes on their respective shares to the joint venture is a mere return of the capital that each party has contributed to the
profit. project.
All licensed local contractors must enroll to BIR's eFPS at the Tlansfer of land. to ioint aenture is similar to capital
RDO where local contractors are registered as taxpayers. contribution; d.istribution of deaeloped.lotslunits is merely an
Foreign joint aenture or consortium that d.oes not sell act of partitioning cotnrnonly ouned' property. - Joint venture
agreements for the construction and development of real property
goods nor perfonn seruices in the Philippines.
- A joint venture
or consortium formed among non-resident foreign corporations in may or may not be treated as a separate taxable unit, depending on
connection with a local project in the Philippines is not subject to whether or not a separate taxable entity is established by the joint
Philippine income tax, where said foreign joint venture or consortium venture partners. Ifthe parties did not form nor register a separate
does not sell goods nor perform any service in the Philippines. This
entity and merely agreed to pool their resources to a common fund,
rule is anchored on the fact that a foreign corporation is taxable only no separate taxahle unit is created. In this case, eachjoint venture
on income from sources within the Philippines (81li Ruling No. 23-
partner has to account for his respective share in the net revenue
95). Accordingly, no withholding tax is required to be deducted and earned from thejoint venture project separate from otherjoint venture
withheld by the Philippine payor from income payments from foreign partners. Hence, the partners may file separate income tax returns
sources made to the foreign joint venture or consortium. for its net revenue for the project less its respective proportionate
share in thejoint venture expenses. The contribution ofland to the
Erempt joint aenture or consortium may become tarable joint venture is not a taxable event that will give rise to capital gains
partnership. - Arr exempt joint venture or consortium undertaking tax on sale or transfer of land. Such transfer is similar to a capital
a construction of ofifice tower project may subsequently become subject contribution that does not give rise to income tax. The distribution
to income tax as a separate joint venture or consortium, where afber of developed lotsrunits is merely an act of partitioning the commonly
the construction period, the joint venture partners engaged in the owned property. It is nothing more than an act of terminating the co-
business ofleasing the building floors or portions thereofseparately ownership by making each partner specific owner of the identifiable
owned by them (BIR Ruling No. 317-92, October 28, 1992). The tax lot or unit. At this stage, no taxable sum has yet been realized by the
exemption of the joint venture granted under the law is valid only joint venture partners. That act of allocation or assigning portions
up to the completion of the construction project and does not extend of the developed lots to each member of the joint venture cannot be
to the subsequent sale or lease of the developed condominium floors treated as a taxable event. The same is true despite the fact that the
or units to customers. shares allocated to or received by the partners may not necessarily
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correspond to the lot area originally contributed by thern to the Resident Foreign Corporation
joint venture. Hence, the titling of the land back to the joint venture
partners is not subject to income tax, expanded withholding tax, and A "resid.ent foreign corporation" is a foreign corporation
value added tax(BIR Ruling DA-165-03-18-99). rrrrgrrgcd in trade or business within the Philippines (Sec. 22[H],
N I It(:). Thus, the adjective"resid.ent" in the term"resid'ent foreign
Sale of deaeloped floor, unit or Int is subject to incomc corTtoration" is merely used to describe a corporation organized
tax. - Should the corporate landowner or developer sell any ofthe rrndcr the laws of a foreign country, which is engaged in trade or
floors or portions ofthe floors allocated to them to third parties, the
buuiness in the Philippines.
gain that may be realized by them from such sale will be subject to
the regular corporate income tax and to the expanded withholding IDhilippine branch of a foreign corporotion is merely an
tax under Revenue Regulations No. 6-85 (now Rev. Regs. No. 2-98), (xtension of the foreign head' office
as amended (BIR Ruling No.274-92, September 30, 1gg2). This rule
applies even ifthe sale takes place before or during the construction A good example of a resident foreign corporation is the Philippine
period. lrrunch ofa foreign corporation duly licensed by the Securities and
l,lxchange Commission. The Philippine branch is merely an extension
Taxable Joint Ventures ol'the foreign head office (i.e., non-resident foreign corporation); hence,
il, does not have nor issue Philippine shares of stocks, unlike that of
There are two (2) instances when a joint venture becomes t domestic corporation. There is only one foreign single entity. The
a taxable entity. First, a domestic corporation jointly owned by lbreign head office and the Philippine branch are one and the same
individuals and by two or more existing domestic corporations and,/ ontity. However, for income tax purposes, only the income of the
or foreign corporations that is incorporated under the laws of the l'hilippine branch from sources within the Philippines is subject to
Philippines (e.g., D.M. Consunji, Inc.), or duly registered with or income tax, and the income of the Philippine branch as well as that of
licensed by the Securities and Exchange Commission [e.g., Marubeni the foreign head office from sources outside the Philippines are exempt
Corporation - Philippine Branchl is a taxable corporation, even l'rom the Philippine income tax. Corollarily, the gross income from
if it is engaged in the business of construction or energy-related sources within the Philippines of the foreign head office is subject to
activity. Second, if the unincorporated joint venture or consortium the final incqrne tax that must be withheld and remitted to the BIR
(or unregistered partnership) is engaged in any other line ofbusiness by the Philippine payor, unless such income of the foreign head office
than construction or energl-related activity with operating contract is attributed and thus taxed to the Philippine branch.
with the government, the same will also be treated as a taxable
corporation. The income and expenses of the taxable joint venture Bar Question (1999)
must be reported by it during the taxable year.
HK Co. is a Hong Kong company, which has a duly licensed
Examples of taxable partnerships include: (a) joint emergency I'hilippine branch engaged in trading activities in the Philippines.
operations of two (2) bus/business companies (Collector a. Batangas HK Co. also invested directly in 407o of the shares of stock of A Co.,
Tlansportation Co., 102 PhjI. 822); (b) leasing of 24 properties by a Philippine corporation. These shares are booked in the Head Office
three (3) sisters to various tenants under common management for of HK Co. and are not reflected as assets of the Philippine branch. In
15 years (Euangelista u. Collector, 702 Phil. 140); (c) leasing by 1998, A Co. declared dividends to its stockholders. Before remitting the
father and son of lot and building to tenants under administration by dividends to HK Co., A Co. seeks your advice as to whether it will subject
a building administrator (Reyes a. Cornmissioner,24 SCRA 798); the remittance to withholding tax. No need to discuss withholding tax
(d) Insurance pool or clearing house, composed of41 nonJife insurance
rates, if applicable. Focus your discussion on what is the issue.
corporations, for the purpose ofallocating and distributing the risks
(AFISCO Insurance Corporation a. Commissioner, G.R. No. Strggested answer:
L-772675, January 25, 1999).
I will aduise ACo. to withhold and rernit the withholding tax on
the diuidends. While the general rule is that a foreign corporation is
r20 t21
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the sarne juridical entity as its branch office in the Philippines, when, hrnce, rutt torable to a lireign corporation in the Philippines
howeuer, the corporation trqnsacts business in the Phitippines directly (Sec. 42, NIRC; CIR o. Marubeni Corporation, G.R.
and independently of its branch, the taxpayer would be the foreign No. 137377, December 78, 2OO1). With respect to the
corporation itself and subject to the diuidend tax sintilarly imposed installation works which was sub-contracted by FC to PCC,
on nonresident foreign corporation. The diuidends attributable to the a dnmestic corporation, it is PCC (not FC) that does the work
Home Office would not qualify as diuid.ends earned by a resident foreign in the Philippines that should report the income thereon.
corporation, which is exempt from tax (Marubeni Corporation a.
Commissioner, GR. No. 76573, September 14, Iggg). h. Yes. PCC is liable to VAT as seller of seruices done in the
Philippines for a fee. Howeuer, the sale of seruices to FC
is subject to VAT at zero percent. Seruices rendered by a
Bar Question (2012)
VAT-registered local contractor to a non-resident foreign
Foster Corporation (FC) is a Singapore-based foreign corporation corporation who is outside the Philippines, paid for in
engaged in construction and installation projects. In 2010, Global foreign curcency inwardly remitted through the Philippine
Oil Corporation (GOC), a domestic corporation engaged in the banhing system are zero-rqted sales of seruices (Sec. 108[8]
refinery ofpetroleum products, awarded an anti-pollution project to [2], NIRC).
Foster Corporation, whereby FC shall design, supply machinery and
equipment, and install an anti-pollution device for GOC's refinery Types of Resident Foreign Corporations
in the Philippines, provided that the installation part of the project
may be sub-contracted to a local construction company. Pursuant to Under the 1997 Tax Code, there are two (2) general types of
the contract, the design and supply contracts were done in Singapore rcsident foreign corporations:
by FC, while the installation works were sub-contracted by FC with 1. Those that do not derive any income from sources within
Philippine Construction Corporation (PCC), a domestic corporation. the Philippines because they are not engaged in trade or
The project with a total cost of F100 million was completed in 2011 business and thus exempt from income tax; and
at the following cost components: (design - ?20 million; machinery
and equipment - F50 million; and installation - F30 million). Assume 2. Those that are engaged in trade or business in the
that the project was 407o complete in 2010 and l00o/o complete in Pfiilippines and thus subject to income tax at:
2011, based on the certificates issued by the architects and engineers a. Preferential tax rate under the Tax Code or special
working on the project. GOC paid FC as follows: F60 million in 2010 law like R.A. 7916 (PEZA law) and other special
and F40 million in 2011, and FC paid PCC inforeign currencythrough economic zone laws, and R.A. 7227 (BCDA law), as
a Philippine bank as follows: F10 million in 2010 and F20 million in amended, or
20tL.
b. Normal corporate income tax rate or minimum
a. Is FC liable to Philippine income tax, and if so, how much corporate income tax rate, whichever is higher.
revenue shall be reported by it in 2010 and in 2011? Explain
your answer. Under the first category are the (a) regional or area headquarters
(RHQ) established in the Philippines pursuant to the provisions of
b. Is PCC, which adopted the percentage of completion method 8.O.226, as amended by R.A. 8756, (b) representative offices, and (c)
of reporting income and expenses, liable to value added tax regional warehouses of multinational corporations in the Philippines.
in 2010 and in 20ll? Explain your answer. They are exempt from income tax because they are not engaged in
trade or business in the Philippines. They do not derive income from
Suggested answers: spurces within the Philippines and are merely cost centers. The
a. No. FC is not liable to
Philippine income tax. The reuenues regional or area headquarters (RHQ) is exempt from income tax only
fromthe design and supply contracts, hauing been all done if the amounts received by it do not include fees or compensation
in Singapore, are income from without the Philippines; for services rendered. The foreign operating companies give such
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amounts only as reimbursement of their shares in the allocated airlinc, onlyl,lrr: aliquot portion of the cost of the ticket
expenses ofthe regional or area headquarters. There should also be corresponding to the leg flown from the Philippines to the
no excess of amount received from the operating companies for the point of transshipment shall form part of GPB.
cost ofoperating the regional or area headquarters as its costs will
be shared among the operating companies and shourd not result in On March 27,2OL3, R.A. 10378 was enacted by
any income (BIR Ruling No.047-2007, Septernber 28,2001). Congress and signed by the President in order to promote
tourism in the country. Section 23(AXg) of the new law
Under the second category are branches engaged in trade or provides "that international air carriers doing business in
business in the Philippines. These branches entitled to preferential the Philippines may avail of a preferential rate or exemption
tax rates include: from the tax herein imposed on their gross revenue derived
1. The Regional Operating Headquarters (ROHe) of from the carriage of persons and their excess baggage
multinational corporations in the Philippines are on the basis of an applicable tax treaty or international
authorized to sell various services (excluding goods) in agreement to which the Philippines is a signatory or on
the Philippines to their affiliates, subsidiaries orbranches the basis of reciprocity such that an international carrier,
within the Asia-Pacific Region and they are taxed at IOVo whose home country grants income tax exemption to
on their net income from sources within the philippines. Philippine carriers, shall likewise be exempt from the tax
imposed under this provision." However, they remain liable
Income for services rendered abroad are exempt from
Philippine income tax (Sec. 28[A]tGl, NIRC); to the three percent (\Eo) percentage (common carrier's) tax
on their quarterly gross receipts derived from the transport
2. Offshore Banking Units (OBU) and Foreign Currency ofcargo from the Philippines to another country. Section
Deposit Units (FCDU) of Philippine branches of foreign 109(S) of the 2005 Tax Code was amended by including
banks are taxed at LDVo on their gross interest income "transport of passengers by international carriers" among
on foreign cun'ency loans to residents, other than OBU/ the exempt transactions from VAT (RMC 40-2013, May 2,
FCDUs or local commercial banks, including local 2013; Reu. Regs. No. 15-2013, September 20, 2013).
branches offoreign banks authorized by BSP to transact
For international shipping lines, GPB means gross
business with OBU/FCDUs. However, income derived
by OBU/FCDU authorizedby BSP from foreign currency fevenue whether for passenger, cargo or mail originating
'from the Philippines up to final destination (whether
transactions with non-residents, other OBUIFCDUs, local
commercial banks, including branches of foreign banks in there is transshipment of cargoes taking place outside the
the Philippines authorized by BSP to transact business Philippines in another foreign vessel) ( S ec. 2 8 [A] [2], N I RC ) ;
with OBU/FCDU shall be exempt from all taxes, except 4. Foreign service-contractors and sub-contractors engaged
net income from such transactions (Sec. 28tAJ[4], NIRC); in petroleum operations in the Philippines (P.D. 187, as
3. International air carriers (whether online or offl.ine), and amended); and
international shipping lines are taxed on their Gross 5. Registered enterprises with PEZA, SBMA, CDA, CJHDA,
Philippine Billings (GPB) at 2.5Vo. For international and other special zones and freeport zones (R.4. 7916
a,ir ca,rriers, GPB refers to the amount of gross revenue and 7227). Service enterprises accredited with the above
derived from carriage of persons, excess luggage, cargo zone authorities, Iike banks, janitorial services, security
and mail originating from the Philippines in a continuous agencies, and the like, are not entitled to the tax incentives
and uninterrupted flight, irrespective ofthe place ofsale under said laws, but are subject to the ordinary taxes
or issue and the place of payment of the ticket or passage provided for in the l-997 Tax Code.
document, provided that for a flight which originates
from the Philippines, but transshipment of passenger All other types of Philippine branches of foreign
takes place at any port outside the Philippines on another corporations are subject to the 307a corporate income tax
124 ltr,:vrr,:wr,;n oN 'l'nxn,r,ror.r

based on their net taxable income from sources within the


Philippines, unless the minimum corporate income tax that
is computed at two percent (27o) of their gross income from
sources within the Philippines is higher than the normal CIIAPIER V
corporate income tax.
A"non-resid,ent foreign corporation" is a foreign GROSS INCOME
corporation not engaged in trade or business within the
Philippines but deriving income from sources within nGross ittcome'means income, gain or profit subject to tax.
the Philippines (Sec. 22[A, NIRC). Thus, the term onon-
resid.ent" means and is sJrnonymous to "not engaged in
It includes compensation for personal and professional services,
business income, profits, and income derived from any source
trade or business in the Philippines." Except as otherwise
whatever (whether legal or illegal), unless exempt from tax under the
provided for in the Tax Code or special law, gross income
Constitution, tax treaty, or statute. The preceding definition is used
from sources within the Philippines paid to a nonresident
for purposes of computing the normal corporate income tax. The term
foreign corporation, shall be subject to the 307o ftnal "gross incomer" for purposes of computing the minimum corporate
corporate income tax, which must be withheld by the
income tax, shall include all items of income, gain or profit, except
Philippine payor of the income.
exempt income and income subject to final tax(Sec. 27[E][4], NIRC).
Revenue Regulations No. 9-98, however, expanded the definition of
Bar Question (2011) "gross income," by including "other or miscellaneous income" of the
Aplets Corporation is registered under the laws of the British corporation such as gain from non-recurring sale of equipment.
Virgrn Islands. It has extensive operations in Southeast Asia. In the "Net incontc" means gross income less statutory deductions and
Philippines, its products are imported and sold at a mark-up by its exemptions (Sec. 36, Reu. Regs. No. 2).It is referred to as "taxable
exclusive distributor, Kim's Trading, Inc. The BIR compiled a record income" undersection 3l- of the 1997 Tax Code. Net income must be
of all the imports of Kim from Aplets and imposed a tax on Aplets' computed with respect to a fixed taxable period. That taxable period
net income derived from its exports to Kim. Is the BIR correct? is twelve months ending December 31st of every year, except in the
case ofa corporation filing returns on a fiscal year basis, in which case
Suggested answer: net income will be computed on the basis of such fiscal year. Items of
No. Aplets Corporation is a non-resident foreign corporation not i
income and of expenditures, which, as gross income and deductions,
engaged in trade or business in the Philippines (Sec. 22[I], NIRC) are elements in the computation of net income, need not to be in the
q.nd its source of income is from outside the Philippines. As a foreign form of cash. It is sufficient that such items may be appraised in terms
corporation, it is subject to Philippine incorne tar only on income from of money (9ec.37, Reu. Regs. No.2).
sources within the Philippines (Sec. 23[F], NIRC). Gains, profits and
income from the sale of personal property outside the Philippines shall Bar Question (1995)
be treated as income from sources outside the Philippines (Sec. 42, (1) What is 'gross income" for purposes of the income tax?
NIRC).
(2) How does "income" differ from "capital?" Explain.

Suggested answer:
' (1) Gross income nleans all income from whateuer source
d,eriued, including (but not limited to) compensation' for

t25
126 lil,rvrr,:wr,;rr ,N 'l'Axn,r.rrr,,r I Nr oMt,: ANt r Wt't t tt tol.t rt t'tr l'l'lx t,:r'i 727
( iroxr I ttrrrtttt'

seruices, including fbes, commissions, and similer items; llr thc ringe benefits tax, the tax is imposed on the employee
crrsc ol'f
gross incorne from business; gains deriued from dealings wlro rcccives the l'ringe benefits paid by the employer on account of
in property; interest; rents; royalties; diuidends; annuities; tlrc cmployer-employee relationship, although the tax is assumed
prizes and winnings; pensions; and partner's distributiue rrnd puid by the employer to the BIR. The fringe benefit tax cannot
share ofthe gross income ofgeneral professional partnership lxr imposed on the employer that paid the fringe benefits because it
(5ec.28, NIRC). is the payor of the expense; otherwise, income tax can be said to be
(2) irnposed not on the income, but on expense. In the case ofbranch profit
Income differs from capital in that income is any wealth
rrrrnittance tax, the tax is imposed on the branch profit remitted by
which flows into the to,xpayer other than q return of capital,
l,lrc Philippine branch to its foreign head office, although the tax is
while capital constitutes the inuestment which is the source
puid by the Philippine branch to the BIR.
of income. Therefore, capital is fund, while income is the
flow. Capital is weqlth, while income is the seruice of wealth. Dividends are prima facie lhe income of the record-owner of the
Capital is the tree, while income is the fruit (Mad.rigal a. slock and are taxable to such owner. But where the record-owner has
Rafferty, 38 Phil. 474). Income is liable to income tar, nold the stock under an escrow agreement under which title is to be
while capital or return of capital is exempt from tax. rctained by him, the dividends received by such owner and applied
in reduction of the purchase price are not taxable to him (Moore u.
Bar Question (1995) Commissioner, 724 Ft2dl 99t ).
Mr. Francisco borrowed F10,000.00 from his friend, Mr. Ownership of building by an individual makes the assessment
Gutierrez, payable in one year without interest. when the loan became ugainst the corporation improper (Meret's, Ine. u. Cotnrnissioner,
due, Mr. Francisco told Mr. Gutierrez that he (Mr. Francisco) was CTA Case No.895, May L7, 1982).
unable to pay because of business reverses. Mr. Gutierrez took pity Final tq,x on interest income frorn loans to resid.ent
on Mr. Francisco and condoned the loan. Mr. Francisco was solvent horrowers i,s.a d.ireet ha,bility of FCDU. - The lOVo frnal tax on
at the time he borrowed the F10,000.00 and at the time the loan was interest income of a foreign currency deposit unit from loans extended
condoned. to resident clients is a direct liability of the FCDU. Although the
Did Mr. Francisco derive any income from the cancellation or payor-borrower is the one constituted by law to withhold and remit
condonation of his indebtedness? Explain. Lhe I\Vo tax, the laws and jurisprudence do not absolve the FCDU
f rom payment ofthe tax, if the payor-borrower fails to perform its duty

Suggested answer: us withholding agent. Corollarily, the withholding agent may also be
ussessed deficiency withholding tax as a penalty for failure to fulfill
No, Mr. Francisco did not deriue any income from the cancellation its obligation to withhold as required by law. This is different from
or condonation of his indebtedness. since it is obuious that the t,he FCDU's liability to the tax @CBC a. Com.missioner, CTA Case
creditor merely desired to benefit the debtor in uiew of the absence of No. 6207, Decernber 75, 2004). Failure of local borrower to withhold
consideration for the cancellation, the amount of the debt is considered and remitthe tax does not exempt OBU/FCDU on the onshore interest
as a gift from the creditor to the debtor and need not be included in i ncome ( ING Bank N.V. Maniln Branch a. Com.tnissioner, 2005).
the lattet's gross income. The gift may, howeuer, be subject to d,onof s
tqx at 30vo, since Mr. Francisco and Mr. Gutierrez are not mernbers Where legal title ouer the Fund is transferred to the
of the family. trustee, the ineome of the Fund. shall accrue to the trustee,
not to the trustor. - In a trust, one person has an equitable
To whom income is taxable ownership in the property, while another person owns the legal to
such property. The equitable ownership ofthe former entitles him to
Income from sale of goods or properties is taxable to the owner- the performance of certain duties and the exercise of certain powers
seller of the goods or properties, including rights thereto, but income by the latter. A person who establishes a trust is the trustor. One
from sale ofservices is taxable to the person who renders the services. in whom confidence is reposed as regards property for the benefit
l2u Itt,tvt t,;wt,;lt otrt'l'n xn't'totr I ttr'oM t': n ru I r W tt t rr tot,t rl t'tr l'l'nx t,:s 129
( lrrrxs I rrcotttt,

of another is the trustee. The person fbr whose benerit the trust is the loan proceeds will be used in a project inside or outside
created is the beneficiary. the country.
DBP alleges that it is the actual owner of the Fund and its 2. Dividendsz Resid'ence of the corporation paying
income, on the following grounds: (a) DBP made the contributions d.iaid.end. - Dividends received from a domestic
to the Fund; (b) the trustees of the Fund are merely administrators; corporation or from a foreign corporation are treated as
and (c) DBP employees only have an inchoate right to the Fund. income from sources within the Philippines, unless less
However, DBP counters that the Fund is subject of a trust, and that ttranSOVo ofthe gross income of the foreign corporation for
the Agreement transferred legal title over the Fund to the trustees. the three (3)-year period preceding the declaration ofsuch
The income of the Fund does not accrue to DBp. Thus, such income dividends was derived from sources within the Philippines,
should not be recorded in DBP's books of account. in which case, only the amount which bears the same ratio
Clearly, the trustees received and collected any income and to such dividends as the gross income of the corporation for
profit derived from the Fund, and they maintained separate books such period derived from sources within the Philippines
of account for this purpose. The principal and income of the Fund bears to its gross income from all sources shall be treated
will not revert to DBP, even if the trust is subsequently modified or as income from sources within the Philippines.
terminated. 3. Services: Place of performance of the seraice. - If
The resumption of the Salary Loan Program (SLp) of DBp the service is performed in the Philippines, the income is
did not eliminate the trust or terminate the transfer of legal title treated as from sources within the Philippines.
to the Fund's trustees. The records show that the Fund,s Board of Gross income from sources within the Philippines includes
Trustees approved the SLP upon the request of the DBp Career compensation for labor or personal services performed within the
officials Association. The DBP Board of Directors only confirmed Philippines, regardless of the residence of the payor, of the place in
the approval ofthe sLP by the Fund's trustees. The beneficiaries of which the contract for seruice was made, or of the place of payment.If
the Fund are the DBP officials and employees who will retire under a specific aqount is paid for labor or personal services performed in
Commonwealth Act No. 186, as amended by R.A. 1616. Also, it is not the Philippines, such amount shall be included in the gross income.
always necessary that the beneficiaries should be named or even be Ifthere is no accurate allocation or segregation ofcompensation for
in esse (existence) at the time the trust is created in his favor. It is labor or personal services performed in the Philippines, the amount to
enough that the beneficiaries are sufficiently certain or identifiable be included in the gross income shall be determined on apportionment
(DBP u. Cornrnission on Aud.it, G.R. No. 144516, Februaryt 1I, of time basis; i.e., there shall be included in the gross income an
2004). amount which bears the same relation to the total compensation as
the number of days of performance of the labor or services within the
Source Rules Philippines bears to the total number of days of performance of labor
or services for which the payment is made. Wages received for services
The source rules to determine whether income shall be treated
rendered inside the territorial limits of the Philippines and wages of
as income from within or outside the Philippines can be found in
an alien seaman earned on a coastwise vessel are to be regarded as
section 42 ofthe 1997 Tax code. There are different source rules for
from sources within the Philippines (Sec. 155, Reu. Regs. No. 2).
different types of income. The following incomes are considered as
income from sources within the Philippines: A non-resid.ent alien is taxed. only on her comrnission
incomn for seraices rend.ered. in the Philippines. - Baier-Nickel,
1. Interests: Resid.ence of the debtor or obligor.
- If the a non-resident German, is the President ofJubanitex, Inc., a domestic
obligor or debtor (corporation or otherwise) is a resident of corporation engaged in manufacturing, marketing, acquiring,
the Philippines, the interest income is treated as income
importing and exporting and selling embroidered textile products.
from within the Philippines. It does not matter whether the
Through its General Manager, the corporation engaged the services
loan agreement is signed in the Philippines or abroad or
of Baier-Nickel as commission agent, who will receive 107o sales
130 lit,:vtt,:wt,rH oN'l'rxtrroru I N( I rMl,r ANI I Wl l'l lt tot,t rtt'tr l'l'nxt'ls t3l
( irots lttt'rttttt'

commission on all sales actually concluded and collected through in


storage tanks and refrigeration units were made and completed
her efforts. In 1995, Baier-Nickel received commission income, which
Japan. They were already finished products when shipped to the
Jubanitex withheld r|vo and remitted to the BIR. Baier-Nickel filed Philippines. The other construction supplies listed under the offshore
her income tax return on October 17 ,IggT and on April 14, 199g, she
Portion such as steel sheets, pipes and structures, electrical and
filed a claim for refund, contending that her commission income is instrument apparatus, were not finished products when shipped
not taxable in the Philippines because it was compensation for her
to the Philippines. They, however, were likewise fabricated and
services rendered in Germany.
manufactured by the sub-contractors in Japan. All services for the
Non-resident aliens, whether or not engaged in trade or business, design, fabrication, engineering and manufacture ofthe materials and
are subject to Philippine income tax on their income received from equipment under Japanese Portion Yen I were made and completed
all sources within the Philippines. The underlying theory is that the in Japan. These services were rendered outside the taxingjurisdiction
consideration for taxation is protection oflife and property and that ofthe Philippines and are therefore not subject to tax on the part of
the income rightly to be levied upon to defray the burdens of the a foreign corporation (Commission'er a. Marubeni Corporation,
Government is that income which is created by activities and property G.R. No. 737377, December 78,2007).
protected by the Government or obtained by persons enjoying that
protection. The important factor, therefore, which determines the Bar Question (1994)
source ofincome ofpersonal services is not the residence ofthe payor,
or the place where the contract for service is entered into, or the place Bates Advertising Company is a non-resident corporation duly
of payment, but the place where the services were actually rendered organized and existing under the laws of Singapore. It is not doing
(Boier-Nickel v. Commissioner, GR, No. 156BO5, Febrttanyt IZ, business and has no office in the Philippines. Pilipinas Garment, Inc.,
2003). a domestic corporation, retained the services of Bates to do all the
advertising ofits products abroad. For said services, Bates'fees are
In this case, however, the appointment letter of Baier-Nickel, paid through outward remittances. Are the fees received by Bates
as agent of Jubanitex, stipulated that the activity or the service subject to any withholding tax?
which would entitle her to rovo commission income, are sales actually
concluded and collected through her efforts. what she presented as Suggested answer:
evidence to prove that she performed income-producing activities
abroad were copies of documents she allegedly faxed to Jubanitex The fees paid to Bq,tes Aduertising Company, a non-resident
foreigru corporation, are not subject to withholding tax, since they
are
and bearing instructions as to the sizes of, or designs and fabrics to
be used in the finished products as well as samples of sares orders not subject to Philippine income tox. They are exempt because they
purportedly relayed to her by clients. However, these documents d.o not constitute income from Philippine sources, the same being
do not show whether the instructions or orders faxed ripened into compensation for labor or personal seruices performed outside the
concluded or collected sales in Germany. At the very least, these pieces
Philippines ( Sec. 36tcl [3] and Sec. 2 5 [b] [ 1], N IRC).
of evidence show that while Baier-Nickel was in Germany, she sent International shipping line. - In the case of an international
instructions/orders to Jubanitex. Thus, claim for refund was denied shipping line, "Gross Philippine Billings" means gross revenue
(Commissioner a. Baier-Nickel, GJ. No. ISBZSB, August 2g, whether for passenger, cargo, or mail originating from the Philippines
2006). up to final destination, regardless of the place of sale or payments of
Income from turnkqy contract with onshore and, offshore the passage or freight documents (Sec. 28[A][3][b], NIRC).
portiona. - while the construction and installation work were International air canrier. - In the case of an international air
completed within the Philippines, the evidence is clear that some carrier, its Gross Philippine Billings (GPB) shall be subject to income
pieces of equipment and supplies were completely designed and tax. The term "Gross Philippine Billings" refers to the amount
engineered in Japan. The two (2) sets ofship unloader and loader, the of gross revenue derived from carriage of persons, excess baggage,
boats and the mobile equipment for the NDC project and the ammonia cargo and mail originating from the Philippines in a continuous
I:12 Itt'tvt t,;wt,;tc oN'l'AxA't'ror'r I NloMt,:,\Nt r Wt'l't tt tot,trtNr i'l'nxt,ts t33
( lrogs lrrrrrnrc

and uninterrupted flight, irrespective of the place of' sale or. issue (Commissioner u. British Overseas Airuays Corporation, 749
and the place of payment of the ticket or passage document. Tickets SCRA 395).
revalidated, exchanged and/or indorsed to another international
airline form part of the Gross Philippine Billings, if the passenger Bar Question (1994)
boards a place in a port or point in the Philippines. However, for a
flight which originates from the Philippines, but transshipment of Caledonia Aircargo is an off-line international carrier without
passenger takes place at any port outside the Philippines on another any flight operations in the Philippines. It has, however, a liaison
airline, only the aliquot portion ofthe cost ofthe ticket corresponding office in the Philippines which is duly licensed with the Securities
to the leg flown from the Philippines to the point of transshipment and Exchange Commission, established for the purpose of providing
shall form part of Gross Philippine Billings (Sec.28[A][S][a], NIRC, as passenger and flight information, reservation and ticketing services.
implemented by Reu. Regs. No. 15-2002). This new regulation removes
Are the revenues of Caledonia Aircargo from tickets reserved
the uncertainty as to the amount of GPB an international air carrier
by its Philippine office subject to tax?
shall declare for income tax purposes.
Beginning 2013, an international air carrier may be entitled to Suggested answer:
the preferential income tax rate under the tax treaty or even exempt
The reuenues in the Philippines of Caledonia Aircargo as an"off-
from Philippine income tax, subject to rules on reciprocity on revenues
line" q,irline from ticket reseruation seruices are taxable income from
from transport ofpassengers from the Philippines to a foreign port
"uthateuer sou.rce' under Section 28(a) of the Tax Code. This case is
(R.4. 10378, March 27,2013).
analogous to Commissioner u. BOAC (G.R. Nos. 65773-74, April 30,
British Overseas Airways Corporation (BOAC) is an offline 1987), where the Supreme Court ruled that the incon'te receiued in the
international air carrier. since it was not granted a certificate of Philippines frorn the sale of tichets by an "off-line' airline is tqxable
Public Convenience and Necessity to operate in the philippines, it as income from whateuer source.
did not carry passengers and./or cargo to and from the philippines,
although during the period covered by the assessment, it maintained Bar Question (2005; 2009)
a general sales agent in the Philippines not of a temporary character,
which was responsible for selling BOAC tickets covering passengers An international airline with no landing rights in the Philippines
and cargoes. The Court ruled that the source of an income is the sold tickets in the Philippines for air transportation. Is income
property, activity or service that produced the income. For the derived from such sales of tickets considered taxable income of the
source of income to be considered as coming from the philippines, said international air carrier from Philippine sources under the Tax
it is sufficient that the income is derived from activity within the Code? Explain.
Philippines. In BoAC's case, the sale of tickets in the philippines is the
activity that produces the income. The tickets exchanged hands here Suggested answer:
and payments for fares were also made here in philippine currency. No. While the tickets are sold here by the international airline,
T}:.e situs of the source of payments is the Philippines. The flow of this is for carriage of persons, etccess baggage, cargo and mail not
wealth proceeded from, and occurred within, Philippine territory, originating from the Philippines, because the airline has no landing
enjoying the protection accorded by the Philippine government. In rights in the Philippines. The income from the sale of tickets is actually
consideration for such protection, the flow ofwealth should share the the gross ret)enue deriued frorn the carriage ofpersons, excess baggage,
burden of supporting the government. A transportation ticket is not a cargo and mail (tnd these reuenues are considered as income from
mere piece of paper. When issued by a common carrier, it constitutes Philippine sources only if the flight originates from the Philippines
the contract between the ticket-holder and the carrier. The test of in a continuous and uninterupted flight, irrespectiue of the place of
taxability is the source, and the source of income is that activity piyment of the ticket or passoge d.ocu*ent (Sei. 28tAlt\ltal, NIRC).
which produced the income. The word "source" conveys one essential Accordingly, the income mentioned is not deriued from Philippine
idea, that of origin, and the origin of the income is the philippines sources.
t34 Itt,tvl t,:wt,:tt oN'l'nxrllllru I Nr r rMt,t,lttt r Wt't't tt tot,t rlrur l'l'nxt,ts 1:15
(lrosx ltrrrrrtrr,

Bar Question (1993) within tlrc PhiLippines (Sec. 42lAlL4l, NIRC). Considering that XYZ
is a non-resident foreign corporation, such royalty income is subject to
Pacific, Inc. is engaged in overseas shipping. It time chartered
one of its ships to a Japanese company on a five-year term. The charter
the 30Vr, final withholding income tax under Section 29(B) of the Tax
Oode, such tax to be withheld by ABC and paid in the sarne rnanner
was consummated through the efforbs of Kamino Moto, a Tokyo based
as prouided in Section 58 of the Toa Code. XYZ does not haue to file a
broker. The negotiation took place in Tokyo. The agreement calls for
Pacific, Inc. to pay Kamino Moto $SO,0OO.OO. your opinion is sought Philippine income tqx, return on the royalty incorne. FoTVAT purposes,
whether Pacific, Inc. should withhold the tax before sending ihe ABC must withhold q.nd assume the payment of the 12Vo VAT on the
compensation of Kamino Moto. royalty income, which input tax can be credited against ABC's output
tax for the taxable period.
Suggested answer: 5. Sale of real propertyz Location ofreal property. - lf
The compensation of Kamino Moto is not subject to withhotding
the real property sold is located within the Philippines, the
ta;x- compensation for labor or personal seruices performed outsid,e
gain is considered as income from the Philippines.
the Philippines are considered as income from sources without the 6. Sale ofpersonal property:
Philippines (Sec. 36[c][3] and [aJ[S], NIRC). Kamino Moto's effort in
consummating the Chq,rter is a form of labor or seruices. a. Personal properby produced (in whole or in part) by
the taxpayer within the Philippines and sold without
considering further that Kamino Moto is a Tokyo-based brolzer, the Philippines, or produced (in whole or in part) by
presumably q non-resident foreign corporation, it is taxuble only on the taxpa)'er without and sold within the Philippines
income within the Philippines. Any gain, profit or income shall be treated as
-derived partly from sources within and partly from
4. Rentals and royaltiesz Location or use of the propertgt sources without the Phiiippines.
or interest in such propefty. If the property or interest
-
is located or used in the Philippines, the gain or income is b. Purchase of personal property within and its sale
treated as income from sources within the philippines. without the Philippines, or purchase of personal
property without and its sale within the Philippines
Bar Question (2010) - Any gain, profit or income shall be treated as
derived entirely from sources within the country in
ABC, a domestic corporation, entered into a software license which sold. Accordingly, if the goods are shipped in
agreement with xYZ, a non-resident foreign corporation based in the a foreign port under "Free-on-Board (FOB) shipping
U.S. Under the agreement which the parties forged in the U.S., XyZ point" arrangement, title to the goods is transferred
granted ABC the right to use a computer system program and to avail at the foreign port and any gain from the sale ofsuch
oftechnical know-how relative to such program. In consideration for goods to a Philippine importer shall be treated as
such rights, ABC agreed to pay 1vo of Lhe revenues it receives from income from sources outside the Philippines.
customers who will use and apply the program in the philippines.
c. Shares of stock in a domestic corporation - Gain,
Discuss the tax implications of the transaction
profit or income is treated as derived entirely from
sources within the Philippines, regardless of where
Suggested ansvrer:
the said shares are sold. Thus, a non-resident alien
The royalty receiued by XYZ from ABC witt be subject to who owns shares of stocks of a domestic corporation
Philtppine income tax, because the source of the royarty iniome is acquired through a foreign stock exchange is
from the Philippines. Rentals and royalties frorn property rocoted still liable to the Philippine income tax even if
in the Philippines or from any interest in such property, incrud,ing such shares are sold also through a foreign stock
rentals or royalties therefrom shall be treated as income from sources exchange.
136 Itt,:vIt'rwt,:tt or,r'l'Axn'r'ror.t
'*'''''
nf,',:,Il';','lil;i;l:,"" '''^*'" t:t,

Enumeration of source rules aboae is not exelusivel disposition (James u. U.S., 366 U.S.2f3). Thus, income from illegal
reinsurance prentiums paid.to a foreign corporationis income drug and gambling activities is taxable as well
from sources utithin the Philippines. - Reinsurance premiums
remitted by a domestic insurance company to foreign reinsurance Income may include: (a) increase in inventory at the end of the
companies are considered income of the latter derived from sources taxable year; however, mere increase in the value of property is not
within the Philippines. Since Section 53 (now Sec. 57) of the Tax income but increase in capital; (b) transfer of appreciated property
Code subjects to withholding tax various specified income, among to employee for services rendered; and (c) just compensation paid by
them, premiums, the generic connotation of each and every word government for property acquired by expropriation.
or phrase composing the enumeration in subsection (b) is income. The following are not income: (a) deposit of property that does
Perforce, the word "prerniu.rns" which is neither qualified nor not increase networth of taxpayer (e.9., the increase in asset has a
defined by the law itself, should mean income and should include corresponding increase in liability); (b) increase in networth is due
all premiums constituting income, whether they are insurance or to correction oferrors in book entries; (c) voluntary assessments by a
reinsurance premiums. Section 24 (now Sec. 28) of the Tax Code corporation paid by its shareholders under Revenue Regulations No.
does not require a foreign corporation to be engaged in business 2; (d) security deposit paid to a lessor until it is applied in payment
in the Philippines, in order for its income from sources within the of accrued rent; (e) contributions by lot owners for the memorial park
Philippines to be taxable. It subjects foreign corporations not doing care fund; and (f) loan proceeds received by the borrower.
business in the Philippines to tax for income from sources within
the Philippines. If by source of income is meant the business of Bar Question (2012)
the taxpayer, foreign corporations not engaged in business in the
Philippines would be exempt from taxation on their income from Mr. Jose Castillo is a resident Filipino citizen. He purchased a
sources within the Philippines. Section BZ (now Sec. 42) of the parcel of land in Makati City in 1970 at a consideration of F1 million.
Tax Code is not an all-inclusive enumeration; it provides that*the In 2011, the land, which remained undeveloped and idle, had a fair
following items of gross income shall be treated as gross income market value of F20 million. Mr. Antonio Ayala, another Filipino
from sources within the Philippines." It does not state or imply that citizen, is very much interested in the property and he offered to buy
an income not listed therein is necessarily from sources outside the the same for F20 million. (a) Is Mr. Castillo liable for income tax in
Philippines (Alerand.er Howd.en & Co. a. Collector, L-Ig\g2, 2011 based oR the offer to buy by Mr. Ayala? (b) Should Mr. Castillo
April 74, 7965). agree to sell the land in 2Ol2 for F20 million, subject to the condition
as stated in the Deed of Sale that the buyer shall assume the capital
Definition of lncome gains tax thereon, how much is the Income tax due on the transac-
nlncom"e' means tion and when must the tax return be filed and the tax be paid by the
an amount of money coming to a person or taxpayer?
corporation within a specified time, whether as payment for services,
interest or profit from investment. Unless otherwise specified, income Suggested answers:
means cash or its equivalent (Conwi a. CTA and Comrnissioner,
213 SCRA83).Income is a flow of service rendered by capital bythe a. Mr. Castillo is not liable for income tax in 2077 because ruo
payment of money from it or any other benefit rendered by a fund of income is realized by him during that year. To'x liability for
capital in relation to such fund through a period of time (Mad,rigat incom.e tq.x attaches only if there is a gain reelized resulting
o. Rafferty, 38 Phil. 414) .I'nconte covers gain derived from capital, from a closed and complete transaction (Mad'rigal u.
from labor, or from both combined, provided it be understood to Rafferty, G.R. No. L-72287, August 7,7978).
include profit gained through a sale or conversion of capital assets b. He shall be liable to pay the 6Vo capital gains tax based on
(Fisher u. T?inid.ad,, supra).Income includes earnings, lawfully ' the gross selling price of the property of P20 million plus
or unlawfully acquired, without consensual recognition, express or the capital gains tq,x qssumed by the buyer (following the
implied, of an obligation to repay and without restriction as to their doctrine of constructiue receipt of income). He should file
138 llt,:vtt,:wt,:tt oru'l'nxrlrrr
I 'l'nxt,;s
lr.r lNrrrul,: ,tNn Wt't'trtt,t,trtt,trt l:t9
( lroxx I trcotrr,

the return within 30 days from the dote of sale and pay the 2l ls Lhe said assignment a gilt and, therefore, subject to gift
tar as he fi.les the return (Sec. 24[DJ, NIRC). l,ux?

Bar Question (2000) Hrrggcnted answer:


a) What is meant by taxable income? 'l'ltt ttssignment can neither be held to be a gift. To be considered
t gill uithin the context of the NIRC, there must be a transfer of
Suggested answer: ,ttuttt'rsh,ip or a quantifiable interest. More importantly, the transfer of
"Ta"rable incomc" means the pertinent items of gross income lltr ntenr,hership certificate was merely a designation of the consultant
Itt lx, Ihe "playing representatiue" of ABC Computer Corporation in
in the Tar Code, less the deductions and/or personal and
specifi.ed
additionql exemptions, if any , authorized for such types of incorne by tltt' (iu.lrrhor Golf Club.
the Tq.x Code or other special laws (Sec. 37, NIRC).
Bar Question (1996)
Bar Question (1991) X, a multinational corporation doing business in the Philippines
rkrrrrtcd 100 shares of stock of said corporation to Mr. Y, its resident
ABC Computer Corp. purchased some years ago Membership
nuur.rger in the Philippines.
Certificate No. 7 from the Calabar Golf Club., Inc. for F300,000.00.
In 4 September 1985, it transferred the same to Mr. John Johnson, (l) What is the tax liability, if any, of X corporation?
its American computer consultant, to enable him to avail of the (2)
facilities of the Club during his stay here. The consultancy agreement Assuming the shares of stocks were given to Mr. Yin
expired two (2) years later in the meantime, the value of the Club consideration of his services to the corporation what are
share appreciated and what was purchased by the corporation the tax implications? Explain.
at F300,000.00, commanded a market value of F800,000.00 in
1987. Before he returned home a few days after his tenure ended,
Suggested answer:
Mr. Johnson transferred the subject share to Mr. Robert James, (1) Foreign corporations effecting a donation are subject to
the new consultant of the firm and the newly designated playrng donot's tax only if the property donated is located in the
representative, under a Deed ofDeclaration ofTrust andAssignment Philippines. Accordingly , donation of a foreign corporation
of Shares, wherein the former acknowledged the absolute ownership of its own shares of stochs in fauor of resident employees is
of ABC Computer Corp. over the share, that the assignment was not subject to donor's tax (BIR Ruling No. 018-87, January
without any consideration and that the share was placed in his name 26, 1987). Howeuer, if 857o of the business of the foreign
because the Club required it to be done. corporation is locq.ted in. the Philippines or the shq.res
donated haue acquired business situs in the Philippines
1) Is the assignmenVtransfer of the shares from Johnson to
the donation m.ay be tqlced in the Philippines subject to the
James subject to income tax?
rule of reciprocity.
Suggested answer: (2) If the shares of stochs were giuen to Mr. Y in consideration
of his seruices to the corporation, the same shall constitute
The assignrnent or transfer of shares from Johnson to Jarnes is
tqxable compensation income to the recipient because it is
not subject to income tax. There had been no real change of ownership
a compensation for seruices rendered under an employer-
that took place. There hauing been no actual sale or exchange, no
employee relationship, hence, subject to income tax.
income tan, incidence can be said to haue occurced. In addition, there
was really no income realized or receiued considering that in the The par ualue or stq.ted ualue of the shares issued u.lso constitutes
Deed of Declaration of Trust and Assignment of Shares, the absolute tl.eductible ex,pense to the corporation, prouided it is subjected to
ownership of ABC Cornputer Corporation was explicitly recognized. ruithholding tox on wages.
t40 Itr,;vt t,:wt,:tt oN'l'AxA't'ror.r
I I Nr'ott4t,: nrul Wt't't tt tot,t rt ttr i'l'nxt,:s 14r
r (iross lntrrtrrc
f
Distinctions between Capital and lncome !
llunk. Accordingly, the First National Bank requested the
The essential differences between capital and income are as Mcllon Bank to effect the transfer. Unfortunately, the
follows: wire sent by Mellon Bank to Manufacturers Hanover
I3ank, a correspondent bank ofPrudential Bank, indicated
1. Capital is a fund, while income is a flow; the amount transferred as "US $1,000,000.00" instead
2. A fund of property existing at an instant of time is called of US $1,000.00. Hence, Manufacturers Hanover Bank
capital, while a flow of services rendered by that capital by transferred one million dollars less bank charges to
the payment of money from it or any otherbenefit rendered Prudential Bank for the account of Victoria Javier. On
by a fund of capital in relation to such fund through a period June 3, 1977, Javier opened a new dollar account (No.
of time is called income; 343) in the Prudential Bank and deposited $999,943.70.
Immediately thereafter, Victoria Javier and her husband,
3. Capital is wealth, while income is the service of wealth; Melchor Javier, Jr., made withdrawals from the account,
4. Capital is the tree, while income is the fruit; labor is a deposited them in several banks only to withdraw them
tree, income the fruit; property is a tree, income the fruit later in an apparent plan to conceal, launder and dissipate
(Mad.rigal a. Raffergt, supra); the erroneously sent amount. Spouses Melchor and Victoria
Javier filed their consolidated income tax return for the
5. Return or recovery of capital is not subject to income tax, year with the notation "The taxpayer was the recipient
while income is subject to income tax. of some money from abroad which he presumed to be a
gift but turned out to be an'error' and is now subject of
Tests in determining lncome litigation," but they did not declare it as income. The court
ruled that the amount received is income subject to tax,
a. Realization test. - There is no taxable income until there but the tax return filed cannotbe considered as fraudulent
is a separation from capital of something of exchangeable
because petitioner literally "laid his cards on the table" for
value, thereby supplying the realization or transmutation
respotrdent to examine. Error or mistake of fact or law is
which would result in the receipt of income (Eisner a.
not fraud (Cornmissioner a. Jaaier, L99 SCRA 824).
Macontberr 2S2 U.S. f89). Thus, stock dividends are not
income subject to income tax on the part of the stockholder,
because he merely holds more shares representing the
Income from whateuer source,
expressly excluded or exempted from the class oftaxable
- All income not
same equity interest in the corporation that declared the income, irrespective of the voluntary or involuntary action
stock dividends (Fisher a. T?inid.ad, supra). of the taxpayer in producing the income, and regardless
of the source of income, is taxable (Blas Gutierrez a.
b. Claimofright d.octrine. - Ataxable gain is conditioned Collector, 707 Phil. 773),
upon the presence ofa claim ofright to the alleged gain
and the absence of a definite unconditional obligation to d. Economic benefit test. - Any economic benefit to the
return or repay that which would otherwise constitute employee that increases his networth (i.e., total assets
a gain. To collect a tax would give the government an Iess total liabilities), whatever may have been the mode
unjustified preference as to the part of the money that by which it is effected, is taxable. Thus, in stock options,
rightfully and completely belongs to the victim. The the difference between the fair market value of the
embezzler's title is void (Commissioner a. Wilcox, 286 shares at the time the option is exercised and the option
u.s.417,424). price constitutes additional compensation income to the
employee at the time of exercise (not upon the grant or
On May 27, 1977, Dolores Ventosa requested the
vesting of the right) (Commissioner a. Smith, 324 AS
transfer of US$1,000 from the First National Bank, West
177).
Virginia to Victoria Javier in Manila through the Prudential
r42 Itr,;vrr,:wr,:rr or.r'l'AXn'r'ror.r
I r< r rnat,: lut r W t'tL tt tot,t rt ttr r'l'nxt,:s 143
(lross lrrr:orrrc

All of the above tests are followed in the Philippines l,lrrrrrlcrncnts that are generally considered are: (a) the selection and
for purposes of determining whether income is received by rrnxrg(|rnent of the employee; (b) the payment of wages; (c) the power
the taxpayer or not during the year. ol'rlismissal; and (d) the employer's power to control the employee
wil,lr respect to the means and methods by which the work is to
Significance of knowing the Type or Character of lncome lxr acr:omplished. It is the so-called "control test" that is the most
iurprrrtant element (Brotherhood. Labor Unity Moaemcnt of the
In general, it is important to know the types of income realized
by the taxpayer, since the Philippines has adopted the semi-global
Ithllippinee v. Zamora, L-48M5, Januany 7, 7987).
or semi-schedular tax system. Under this tax system, compensation
income, business and professional income, capital gains, passive Who is an employee?
income, and other income not subject to final income tax, are added [.'or taxation purposes, a director is considered an employee
together to arrive at the amount of gross income of an individual, rrrrrlrrr Section 5 of Revenue Regulations No. L2-86, to witi "An
and afber deducting the allowable deductions from business and irrdividual, performing services for a corporation, whether as an
professional income, capital gains, passive income, and other income ollicer and director or merely as a director whose duties are confined
srj
not subject to final income tax as well as personal and additional l,o attendance at and participation in the meetings of the Board of
exemptions, if qualified, the graduated income tax rates ranging I)irectors, is an employee." The non-inclusion of the names of some
from five percent (5Vo) to 32Vo are applied on the resulting net taxable of'petitioner's directors in the company's Alpha List for 1997 does
income to arrive at the income tax due and payable. rrot lpso facto create a presumption that they are not employees
The passive investment income are generally subject to the final ol'the corporation, because the imposition of withholding tax on
withholding tax; hence, the income recipient does not file a tax return mmpensation hinges upon the nature of work performed by such
covering such passive investment incomes, although the withholding individuals in the company. Moreover, Section 2.57.2.4(9) of Revenue
agent-payor of income is held responsible under the law to deduct, Regulations No. 2-98 cannot be applied to this case as the latter is
withhold and remit the final income tax thereon to the BIR. u later regulation, while the accounting books examined were for
Lhe year t997 (Fi\st Lepanto Taisho Insurance Corporation a.
Capital assets subject to the final capital gains tax such as CIR, Gn. No. 797777, April 10,2013). INOTE: Beginning L998, a
shares of stock of a domestic corporation and real property located director who is not an official or empl.oyee of a corporation is NOT an
in the Philippines, except when sold or transferred by a dealer in employee of said corporation; hence, the applicable withholding tax to
securities or real estate dealer, are covered by the capital gains tax he deducted from such income shall be 10Vo EWT, which is creditable
return; hence, not included in the taxable income of the individual against his ordinary income tos liability for the year, prouided it is
taxpayer subject to the global tax system and the graduated income euid.enced by BIR Form 2307. Howeuer, said directoy's fee is tqlced also
tax rates. under the global ta.x systernl.
The rules for individuals discussed above apply also to oetnployee"
a The term refers to any individual who is the recipient
corporation, except that the corporation does not receive compensation of wages and includes an officer, employee or elected official of the
income and are not entitled to deduct personal and additional government or any political subdivision, agency or instrumentality
exemptions from their gross income during the year. thereof. It includes also an officer of a corporation. Thus, a juridical
entity that performs services to another person is not an employee of
Compensation lncome the latter. Accordingly, the proper withholding tax on such income
payment is the expanded withholding tax (not withholding tax on
In general, the term ocompensation'meants all remuneration compensation income). To create an employer-employee relationship,
for services performed by an employee for his employer under an the person that performs the service to another must be an individual.
employer-employee relationship (See Sec. 2.78.3, Reu. Regs. No.
2-98, as amended), unless specifically excluded by the Tax Code. In The term ocompensation incorne" means all remuneration
determining the existence of an employer-employee relationship, for services performed by an individual employee for his employer,
144 llt,:vt t,rwr,:rr ott'l',nx,t'r'ton
'"''''"''nf,',:,Y*"ill'lil,',1',""
'''^"'" r45

including the cash value of all remuneration paid in any medium Foreign Embassies and Diplomatic Missions
other than cash. There are various types of taxable compensation Articles 34 and 37, Vienna Convention on Diplomatic Relations,
income, such as salaries, wages, bonus, remuneration, honorarium,
exempts: (a) diplomatic agents who are not nationals or permanent
benefits and allowances (including representation and transportation
residents of the Philippines; (b) members of family of diplomatic agent
allowance (RATA), personal emergency relief allowance (PERA), forming part of his/her household who are not Philippine nationals;
longevity pay, subsistence allowance, hazard pay, annuities, pensions, (c) members of administrative and technical staff of the mission plus
etc. Additional compensation allowance (ACA) given to government
members oftheir families who are not Philippine nationals orpermanent
employees pursuant to E.O. 219 shall not be subject to withholding
residents of the Philippines; (d) members of service staffof the mission
tax pending its formal integration into the basic pay. While its nature
who are not Philippine nationals who are not Philippine nationals or
shall continue to be that of compensation, it shall be treated as part of permanent residents of the Philippines; and (e) private servants of
the "other benefits" which are excluded from compensation income,
members ofthe mission who are not Philippine nationals or permanent
provided that the total amount does not exceed F30,000 (BIR Ruling
residents of the Philippines. The applicable mles are as follows:
No. 034-2002, August 16, 2002 modified BIR Ruling No. 779-99,
Nouember 22, 1999). BIR Ruling Nos. 120-96, November 8, 1996 and
Aid Agencies of Foreign Governments
062-2000, November 20,2000 exempt benefits and allowances such
as longevity pay, subsistence allowance, and hazard pay granted to JICA: Only JICA resident representatives and his/her staff
uniformed policemen and jail guards under R.A. 6975 (DILG who were "dispatched from Japan" shall not be subject to
Act of 1990). However, if the recipient is an AFP personnel, all Philippine income tax.
remunerations (monetary and non-monetary) are taxable, except GIZ (Germany): Only German specialist of German construction
allowances for quarters, clothing and subsistence which are exempt and consulting firms shall be exempt.
from income tax pursuant to RMC 15-87 (BIR Ruling No. 143-96,
December 24, 1996). AUSAID: Salaries and other remuneration paid by the
Gov.ernment of Australia or by Australian personnel, firms,
Compensation lncome of Philippine Nationals and Aliens institutions or organizations to any person performing work
under the Memorandum shall be exempt.
Employed by Foreign Governments and lnternataonal
Organizations in the Philippines CIDA: Only Canadian personnel who derive income from
Canadian aid funds as provided under a subsidiary
Section 23 of the Tax Code lays down the general principles agreement shall be exemPt.
in taxing citizens and alien individuals. Resident citizens are
taxed on worldwide income, while resident aliens are taxed only Advisory Committee on Voluntary Foreign Aid-USA
on their Philippine-source income. As an exception to the general
rule, most international agreements which grant withholding tax CARE: Only CARE employees who are not Philippine nationals
immunity to foreign governments/embassies/diplomatic missions are exempt.
and international organizations also provide exemption to their FPPI or PLAN: OnIy non-Filipino staffmembers of the PLAN
officials and employees who are foreign nationals and/or non- who receive salaries and stipends in US dollars shall be
Philippine residents from paying income taxes on their salaries and exempt.
other emoluments.
Aid Agencies
Since the withholding tax is merely a method of collection of
income tax, the exemption from withholding taxes on compensation Ford Foundation, Rockefeller Foundation, Agricultural Dev
income of foreign governments/embassies/diplomatic missions and
' Council, and Asia Foundation: Only non-Filipino staff
international organizations does not equate to the exemption from members thereof who receive salaries and stipends in US
paying the income tax itself by the recipients of said income. dollars shall be exempt.
146 ll,r,:vr,;wr,;rt ou 'l'nx,,r'r'ror.r lrurrrir.tt,; ,ltttr Wt't'tiltot,DtNrl'l',txr,:r; I47
( lross I rrt'orrrc

IRRI (PD 728 and RA 3538) Wlrrrrr irn awarrd of'backwages is made, there is an acceptance
llrrrl, l,lrc rrnrlrloyee was illegally or unjustly dismissed, and the
Catholic Relief Services - NCWC and Tools for Freedom lrrrckwrrgcs are the salaries he was supposed to have earned had
Foundation (R.A.4481) Irl rrol, becn dismissed. It is as though he was not separated from
Asian Development Bank (ADB) Section 45(b), Article XII crrrlrlo.yrrrent, and as though he actually rendered service (Escareal
-
of the Agreement between ADB and RP: Only officers and staff of t. (iourt of Tax Appeals, et al., CA-GR SPNo. 41989, September
ADB who are not Philippine nationals shall be exempt from Philippine :tlr, l99tl).In this connection, RMC 39-2012 dated August 3,2012
income tax (because exemption is "subject to the power of the lrrovirkrs that "the employee should report as income and pay the
Government to tax its nationals." Any exemption from Philippine r', rrrrrslxrnding income taxes by allocating or spreading his back wages,
income tax must be granted under duly recognized international u[uwulces and benefits through the years from his separation up
agreements or particular provisions of existing law. Affected l,o t,hct final decision of the court awarding the backwages. The said
individuals (of foreign embassies and international organizations) lrr rck wages, allowances and benefits are subject to withholding tax on
who were not granted such exemption must file their income tax wrl{()s. However, when the judgment awarded in a labor dispute is
returns and pay the tax due thereon on or before the 15th day ofApril lrrlirrced through garnishment of debts due to the employer or other
following the close ofthe taxableyear (RMC 31-2013, April 72,2013). t'rrr<lits to which the employer is entitled, the person owning such
rlobts or having in possession or control of such credits (e.g., banks
Statutory Minimum Wage or other financial institutions) would normally release and pay the
cntire garnished amount to the employee. As a result, employers who
Compensation income falling within the meaning of "statutory
are mandated to withholding taxes on wages pursuant to Section 79
minirnum u)age"t (SMW) under R.A. 9504, effective July 6, 2008, as
of the Tax Code, as implemented by Revenue Regulations No. 2-98,
implemented by Revenue Regulations No. 10-2008 dated July 8, 2008,
cannot withhold the appropriate tax due thereon. In this regard, the
shall be exempt from income tax and withholding tax. Holiday pay,
"employer" also refers to the person having control of the payment of
overtime pay, night shift differential pay, and hazard pay earned by
Minimum Wage Earner (MWE ) shall likewise be covered by the above the compensation in cases where the services are or were performed
exemption, provided that an employee who receives/earns additional
for a person ivho does not exercise such control. Thus, the person
compensation such as commissions, honoraria, fringe benefi.ts, owning or having possession or control of the credit shall withhold
benefits in excess of the allowable statutory amount of F30,000, the required tax.
taxable allowances and other taxable income other than the SMW,
holiday pay, overtime pay, hazard pay and night shift differential pay Backwages, Allowances, and Benefits Awarded in Labor
shall not enjoy the privilege of being a MWE and, therefore, his/leer Dispute
entire earnings are not exempt from income tax and withholding tax.
Backwages, allowances, and benefits awarded in a labor dispute
Hazard pay shall mean the amount paid by the employer to constitute remuneration for services that would have been performed
MWEs who were actually assigned to danger or strife-torn areas, by the employee in the year when actually received, or during the
disease-infested places, or in distressed or isolated stations and camps, period of his dismissal from the service which was subsequently ruled
which expose them to gteat danger of contagion or peril to life. Any to be illegal.
hazard pay paid to MWEs which does not satisfy the above criteria
The employee should report as income and pay the coruesponding
is deemed subject to income tax and withholding tax.z
income taxes by allocating or spreading his backwages, allowances
r"Statutory Minimum Wage" (SMW) shall refer to the rate fixed by Regional and benefits thru the )zears from his separation up to the final decision
Tripartite Wage and Productivity Board, as defined by the Bureau of Labor and of the court awarding the backwages.
Emplo;nnent Statistics ofDOLE. The RTWPB of each region shall determine the wage
rates in the different regions based on established criteria and shall be the basis of
' The backwages, allowances, and benefits are subject to
exemption from income tax for this purpose. withholding tax on wages.
2See Sec. 1, Rev. Regs. No. 10-2008, July 8, 2008.
I
l4rJ llt,rvt t,:wl,llt ot'l'nxn't'toI I Nr r rMt,: rtNt r Wt t t tt tr rt,t rtNr l'l"t\t,:li 149
( ltotlr Irrottr

However, when the judgment awarded in a labor disputc Hrrggoxl,orl unlrwcr:


is enforced thru garnishment of debts or having in possession or
control of such credits (e.g., banks or other financial institutions) t t) 'l'ltt lxtsis ol'X's income tax would depend on whether
would normally release and pay the entire garnished amount to the Iti,s t'nt.phryer is an employee or a practicing corporate
l11.11tyttt'. ll'his employer is an employee, the basis of Xs
employee. As a result, employers who are mandated to withhold taxes
on wages cannot withhold the appropriate tax due thereon. irtcrtrru' tux is P6,500.00 equiualent to the total of the
httsi.c sulory and the ualue of the board and lodging.
In order to ensure the collection of the appropriate withholding 'l'h is is so becquse the employer hqs no place of business
tax on wages, garnishees of a judgment award in a labor dispute are tohere the free bo&rd and lodging may be giuen. On the
constituted as withholding agents with the duty to withhold tax on ril.h.er hand, if the corporate lawyer is a practicin g lawyer
wages equivalent to five percent (57o) of the portion of the judgment (self'-entployed), X should be taxed only on P5,000.00,
award, representing the taxable backwages, allowances and benefits ltnnided that the free board and lodging is giuen in the
(RMC 39-2012, August 3,2072). business premises of the lawyer and for his conuenience,
u,n.tl that the free lodging was giuen to X as a corudition
Items Not lncluded as Compensation lncome lbr his employment.
Compensation shall not include remuneration paid: (a) for (2) lf the employer is an obstetrician who is self-employed,
agricultural labor paid entirely in products of the farm where the the basis of his income will only be P5,000.00, if it is
labor is performed; or (b) for domestic service in a private home; prouen thq.t the free board and lodging is giuen within
or (c) for casual labor not in the course of the employer's trade or the business premises of said employer for his conuenience
business; or (d) for services by a citizen or resident ofthe Philippines and that the free lodging is required to be accepted by
for a foreign government or an international organization (Sec. 78[N, X as condition for employrnent. Otherwise, X would be
NIRC). taxed on F6,500.00.
As a general rule, the income recipient is the person liable to
pay the income tax. In order to improve the collection of income Bar Question (1999)
on the compensation income of employees, the State requires the A Oo., a Philippine corporation, has an executive (P) who is a
employer to withhold the tax upon payment of the compensation l,'ilipino citizen. A Co. has a subsidiary in Hong Kong IHK Co.] and
income, such that at the end of the calendar year, the employee will irssign P for an indefinite period to work full time for HK Co. P
needs only to file a tax return and no tax is paid, because his total
w ill lrring his family to reside in HK and will lease out his residence
withholding tax during the year is equal to his income tax liability. rrr l,lrc Philippines. The salary of P will be shouldered 50Vo by A Co.
lBeginning 2002, qualified employees need not file their income tax wlrilrr lhe other SOVo plus housing, cost of living and educational
returns and the employer may file a substituted return for its
rrllow:rnces of P's dependents will be shouldered by HK Co. A Co.
employees.l
will r:rrdit L}l'e 507o of P's salary to P's Philippine bank account. P
will sign the contract of employment in the Philippines. P will also
Bar Question (1996) lrc rct:civing rental income for the lease of his Philippine residence.
X is employed as a driver of a corporate lawyer and he receives Arc these salaries, allowances and rentals subject to the
a monthly salary of F5,000.00 with free board and lodging with an I'lrilippine income tax?
equivalent value of Fl,500.00.
(1) What will be the basis of X's income tax? Why? Srrggested answer:
(2) Will your answer in question (1) be the same ifXs employer
' 'I'he salqries and, allowances receiued. by P q,re not subject to
is an obstetrician? Why? l'h il.ippine income tax. P qualifi.es us ct non-resident citizen because he
l,'uoes the Philippines for employment requiring him to be physically
150 Itl,:vt t,twt,tt ot',t'l'nxA't'tot'l
ltrrntt,; lrtttr,Wt'uLttot,trtttr;'l'nxt:s 151

present abroad most of the time during the taxable year (Sec' 22lEl' words, the l'B'I'on the f'"inge benefits of the employees. assumed by
NIRC). A ruon-resident citizen is taxable only on income deriued from the employer, loses its character as an income tax in the hands ofthe
Philippine sources (Sec. 23, NIRC). The salaries and allowances employer. However, the fringe benefits ofrank-and-fiIe employees are
receiued.frombeing employed abroad are incomes from without because treated as part of his compensation income subject to income tax and
these are cornpensation for seruices rendered outside ofthe Philippines withholding tax on compensation income, which must be withheld
(Sec.42, NIRC). and deducted by his employer from the compensation income of the
employee.
Howeuer, P is taxct'ble on rental income for the lease of his
Philippine resid,ence because this is an income deriued from within, Fringe benefits received by employees, except rank-and-file
the leased. property being located in the Philippines (Sec. 42, NIRC)' employees, including those in special economic zones and freeport
zones, are subject to the 32Vo normal fringe benefits tax (effective
January l-, 2000), or 257o on the fringe benefits received by non-
Bar Question (2004) resident aliens not engaged in trade or business in the Philippines,
Citing Section 10, Article VIII of the 1987 Constitution, which or l57o imposed on the fringe benefits received by an alien individual
provides that salaries ofjudges shall be fixed by law and that during employed by a regional or area headquarters, regional operating
iheir continuance in office their salary shall not be decreased, a judge headquarters, offshore banking units, or foreign petroleum service
of MM Regional Trial court questioned the deduction of withholding contractors or sub-contractors, or any of their Filipino individual
taxes from his salary since it results into a net deduction ofhis pay. employees who are employed and occupying same positions as those
held by the alien employees (BIR RuIinS No. 04-2000, January 5,
Is the contention ofthe judge correct? Reason briefly.
2000).
Suggested answer: As a general rule, the income recipient is the person liable to pay
the income tax.3 In order to improve the collection of income on the
No. The contention is incorrect. The salaries of judges are not
compensation ineome of employees, the State requires the employer
tax-exempt q.nd, their taxabitity is not contrary to the prouisions of
to withhold the tax upon payment of the compensation income, such
section 70, Article vIII of the constitution on the non-diminution of
that at the end of the calendar year, the employee needs only to file a
the salaries of the judiciary during their continuance in office. The clear
tax return and no tax is paid, because his total withholding tax during
intent of the constitutional commission that framed the constitution
the year is equal to his income tax liability.a It had been observed by
is to subject their salaries to tax as in the case of all taxpayers. Hence,
government, however, that many of the fringe benefits paid by the
the d.ed.uction of withholding taxes, being a n?anner of collecting the
employer to his employees are not being subjected to income tax and
income tuc on their salary, is not a diminution contemplated by the
withholding tax on compensation. To plug this loophole, R.4.8424,5
fundamental law (Nitafan, et al. u- Commissioner, 752 SCRA 284 which imposes a fringe benefits tax on the fringe benefits received by
t1e87l). supervisory and managerial employees, was enacted in 1997 to take
effect on the first day of the following year. The law mandates that
Fringe Benefits the employer shall assume the fringe benefits tax imposed on the
To ensure that fringe benefits are subjected to income tax, taxable foinge benefits of the managerial or supervisory employee, but
Section 33 of R.A. 8424, which imposes a fringe benefits tax on the allows the employer to deduct such fringe benefit tax as a business
fringe benefits received by supervisory and managerial employees, expense from its gross income.
was enacted. The law mandates that the employer shall assume
the fringe benefits tax imposed on the taxable fringe benefits of sWhile the FBT is mandated to be assumed by the employer, it is still a tax
the managerial or supervisory employee, but allows the employer irnposed on the income (fringe benefits) of the employee.
to deduct such fringe benefit tax as a business expense, when the aBeginning calendar year 20O2, qualified employees need not file their income
grossed-up monetary value (composed of the value of the fringe tax returns and the employer may file a substituted return for the employees.
benefits and FBT) is authorized as a business deduction. In other 5FBT imposed in R.A. 8424 was implemented by Rev. Regs. No. 3-98.
Ii
t52 ll.t,:vil,:wt,:lt oI'l',tx,t t'tot't
{
I r'rr r rMt,i ANI r Wt t't tt tot,r lnr r'l',txt,ls 153
( ltoss I trttrtttc

However, the fringe benefits of rank-and-file employees are ol'srri<l gxrrsonnel on the monthly rental has already been taxed as
treated as part of his compensation income subject to income tax and r'onr llcnsitl.ion inc<lme.e
withholding tax on compensation income, which must be withheld
Fringe benefits of F18,000, which Philippine Long Distance
and deducted by his employer from the compensation income of the 'l'cle phone Company granted per rank-and-file employee of the
employee. Due to the different tax treatment of fringe benefits received ('onr l):lny labor union in the form of education assistance in its recently
by supervisory and managerial employees, on one hand, and those ,'orrr:lrrdcd Collective BargainingAgreement, is exempt from the foinge
received by rank-and-fiIe employees, on the other hand, some say that
lrr,rrclit,s tax on the part of the recipients.l0
the law is anti-poor and contravenes the fundamental principle that
the income tax shall be imposed based on the taxpayer's ability to pay. ( )vrrrtime meal allowance furnished by a domestic corporation to its
This is also the reason why supervisory and managerial employees rrrnk-and-file and supervisory, professional and technical employees
want to treat the amounts paid to them by their employers as fringe prrrsrrant to its Collective Bargaining Agreement is not subject to
benefits, while the employer wants to consider the same payments li'ingc henefits tax.r1
as compensation income.
I)a nr.inimis benefits
Fringe benefits received by employees, except rank-and-fiIe
employees, in special economic zones and freeport zones are subject 'l'here are certain fringe benefits denominated as "d.e minirnis
to the 32Vo norrnal fringe benefits tax (effective January 1, 2000), llcnefits"12 that are exempt from income tax and withholding tax, even
or 25Vo on the fringe benefits received by non-resident aliens not il'rcurived by rank-and-file employees and supervisory or managerial
engaged in trade or business in the Philippines, or l57o imposed r,rrrployees. These include:
on the fringe benefits received by an alien individual employed by o Monetized unused vacation leave credits of private
a regional or area headquarters, regional operating headquarters,
employees not exceeding 10 days;
offshore banking units, or foreign petroleum service contractors or
sub-contractors, or any of their Filipino individual employees who o Monetized value of vacation and sick leave credits paid to
are employed and occupying same positions as those held by the government employees;
alien employees.6 Medical cash allowance to dependents of employees, not
Housing assistance granted by aPBZA-registered corporation to exceeding F750 per employee per semester or F125 per
its expatriate employees who are directors ormanagers are considered month;
as fringe benefits subject to the fringe benefits tax.7 The amount of
Rice subsidy of F1,500 or one sack of 50 kg rice per month
rent subsidized by the company in behalf of its expatriate employee amounting to not more than F1,500;
shall be treated as fringe benefit subject to the fringe benefits tax.
However, where the amount of the lease is higher than the fringe Uniform and clothing allowance not exceedingP{,O0D per
benefit allowable, the excess shall be treated as income subject to a,nnum;
income tax and withholding tax.8 Actual medicine assistance (e9., medical allowance to cover
The fringe benefits tax is imposed on 50Vo of the grossed-up medical and healthcare needs, annual medicaVexecutive
monetary value of the leased motor vehicle. Thus, only l07o (6OVo check-up, maternity assistance, and routine consultations,
less 40Vo) of the monthly car rental is subject to the fringe benefits not exceeding F10,000 per clnnum;
tax ofthe firm engaged in the lease ofcars and other vehicles for use Laundry allowance not exceeding F300 per month;
of its salesmen, executives and other employees, since Lhe 40Vo share

'$BIR Ruling No. 009-2000, January 4,2000.


6BIR Ruling No. 04-2000, January 5, 2000. r"BIR Ruling No. 057-98, May 21, 1998.
TBIR Ruling No. 208-99, December 28, 1999. rIBIR Ruling No. 061-99, May 5, 1999.
sBIR Ruling No. 025-2001, June 13, 2001. r2See Sec. 1, Rev. Regs. No. 10-2008, July 8,2008.
154 lit,:vt t,:wt,:tt ott'l'nxr'r't'tol I Nr r rMt,t At.tt t W I I I ll tol,l rlNr l'l'nxt'lll r55
(itotlr Ittlrrttr'

Employees achievement awards (e.g., fbr length of service or (gcncrally when employee is rrxluircd to be on duty during the meal
safety achievement, which must be in the form of tangible period).ra l,odging is excluded only if the employee must accept the
personal property other than cash or gift certificate, with lodging on the employer's business premises as a condition of his
an annual monetary value not exceeding F10,000 received omployment.r6
by employee under an established written plan which does
not discriminate in favor of highly paid employees; Stock Option Plans
Gifts given duringXmas and major anniversa4r celebrations A corporation grants options to its employees to buy its shares of
not exceeding F5,000 per employee per clnnuffL; stock at F150 per share. The employees exercised the options at the
. Daily meal allowance for overtime work and night/ lime the shares of stock were selling at the stock exchange at F200
graveyard shift not exceeding 257o ofbasic minimum wage pcr share. There is additional compensation income of F50 per share
on a per region basis (Beu. Regs. No. 5-2077, Mareh 16, .rt the exercise datelG (Commissioner a. Smith,324 U.5.177).
2O11). In BlE Ruling No. 119-2012, February 22, 2012, it was ruled
The amount of "de minimis" benefits conforming to the ceiling lhat any income derived by the employees from their exercise of stock
herein prescribed shall not be considered in determining the F30,000 options is considered as compensation income subject to income tax
ceiling of "other benefits" excluded from gross income under Section and withholding tax. In said ruling, stock options were granted by the
32(b)(7)(e) [Exclusions] of the Tax Code. However, ifthe employer pays domestic corporations as part of compensation plan, and under the
more than the ceiling prescribed by these regulations, the excess shall plan, the employees were given the right to buy a specified number of
be taxable to the employee receiving the benefits only if such excess shares of a foreign corporation up to a specified time/period from the
is beyond the F30,000 ceiling. Any amount given by the employer as grant date, at a fixed price, regardless of the stock's future market
benefits to its employees, whether classified as de minimis benefits price.
or fringe benefits, shall constitute as deductible expense upon such The folloqing rules shall now be followed for stock option plans:
employer. MWEs receiving'other benefits' exceeding the F30,000
limit shall be taxable on the excess benefits, as well as on his salaries, 1. Any income or gain derived from stock option plans granted
wages and allowances, just like an employee receiving compensation to managerial or supervisory employees, which qualifies
income beyond the SMW.13 as fringe benefits, is subject to FBT imposed under Section
33 ofthe Tax Code.
Where compensation is paid in property other than money, the
employer shall make necessary arrangements to ensure that the 2. The additional compensation of the taxable fringe benefit
amount of the tax required to be withheld is available for payment is the difference of the book value/fair market value of the
to the BIR. shares, whichever is higher, at the time of exercise of the
stock option and the price fixed on the grant date.
The prevailing judicial opinion is to the effect that generally,
the value to the employee of living quarters and meals furnished 3. The option has value only if, at the time of the exercise,
in addition to salary constitutes income subject to tax. However, the stock is worth more than the price fixed on the grant
where the quarters and meals are furnished for the convenience of date.
the employer, the ratable value of the same need not be added to the 4. The additional compensation or taxable fringe benefit
salary or cash compensation of the employee for income tax purposes arises whether the shares ofstocks involved are that ofa
(Hend,erson a. Collector, 7 SCRA 649, June 28, L957). The value domestic or foreign corporation.
of the meals is not taxable to the employee, if the meals are provided
by the employer for a substantial non-compensatory business purpose
laSec. 119-1(a), U.S. IRC.

'5Sec. 119, U.S. IRC.


13Sec. 1, Rev. Regs. No. 10-2008, July 8, 2008. I6BIR Ruling No. 135-97, December 11, 1997
I N('r )Mt,r ANt I Wt't ttt tot,t rtt'tr l'l)rxl'lr I lt7
156 Itt,:vt t,:wt,:tt t ttt'l'nxn't'tott ( lrrrxs lrrcorrrr.

nt n,tluinxl kt deduct llrc t:<trrcsptttul'in'g, tuithhctltling tax, unless it is


5. Ifthe shares to be used at the exercise ofthe stock options
trtttsilIcre<I u.s de minimis benclit cxentpt liom income tax.
come from the unissued shares of stock of the issuing
corporation, the original issuance ofsaid shares is subject
to DST. Bar Question (1995)
b. When the employee subsequently sells or dispose of the
(l) Mr. Adrian is an executive of a big business corporation.
shares of stocks, the tax treatment shall be as follows: Aside from his salary, his employer provides him with
the following benefits: free use of a residential house
If the shares involved are shares of stock in a domestic to an exclusive subdivision, free use of a limousine and
corporation not traded in the local stock exchange, the membership in a country club where he can entertain
gain, if any, is subject to capital gains tax. The sale customers of the corporation.
or transfer ofthe said shares is subject to DST, upon
execution of the deed transferring ownership or rights Which of these benefits, if any, must Mr. Adrian report
thereto, or upon delivery, assignment or endorsement as income? Explain.
ofsuch shares in favor ofanother. (2) Capt. Canuto is a member of the Armed Forces of the
b. If the shares involved are shares of stock listed Philippines. Aside from his pay as captain, the government
and traded through the local stock exchange, the gives him free uniforms, free living quarters in whatever
transaction is subject to the stock transaction tax. military camp he is assigned, and free meals inside the
camp.
Ifthe shares involved are shares ofstock in a foreign
corporation, the gain, ifany, is subject to the ordinary Are these benefits income to Capt. Canuto? Explain.
income tax or regular corporate income tax(RMC 88- (3) Mr. Infante was hit by a wayward bus while on his way
2072, December 28, 2012). toiwork. He survived but had to pay F400,000.00 for his
hospitalization. He was unable to work for six months
Bar Question (2003) which meant that he did not receive his usual salary of
F10,000.00 a month or a total of F60,000.00. He sued
A "ftinge benefit" is defined as being any good, service or other
the bus company and was able to obtain a final judgment
benefit furnished or granted in cash or in kind by an employer to an
awarding him F400,000.00 as reimbursement for his
individual employee. Would it be the employer or the employee who
hospitalization, F60,000.00 for the salaries he failed to
is legally required to pay an income tax on it? Explain.
receive while hospitalized, F200,000.00 as moral damages
for his pain and suffering, and F100,000.00 as exemplary
Suggested answer:
damages. He was able to collect in full from the judgment'
It is the employer who is legally required to pay an income ta^x How much income did he realize when he collected
on the fringe benefit paid to superuisory or managerial employee. The
on the judgment? Explain.
fringe benefit tax is imposed as a fr.nal withholding income ta.x on
the fringe benefi.ts of the emplolee, but the legal obligation to remit
Suggested answer:
the tax is placed on the ernployer, such that if the to.x is not paid, the
legal recourse of the BIR is to go after the employer. Any amount or (1) Mr. Adrian rnust report the imputed rental value of the
ualue receiued by the employee as a fringe benefi.t is considered tan- house and limousine q's income. If the rental ualue exceeds
paid, or net of the income tq,x due thereon. The person who is legally the personal needs of Mr. Adrian because he is expected to
required to pay is that person who, in case of non-payment, can be prouide accommodqtion in said house for company guests
legally demanded to pay the tax. Howeuer, fringe benefit paid to a or the car is used partly for business purpose' then Mr.
ranh-and-file employee is tucable to said employee, which the employer
158 Itt,:vt t,;wt,:tt oI'l',lxn't'tor.t lrrrrvt':'rt'.',Wt'i'l,iilll,il,"" ''^-'" 159

Adrian is entitled only to a rq,table rental ualue of the house rnrlo;xrndcnt occupation, representing the will of his employer only
and limousine as excclusion from gross income and only rrn to thc result of his work and not as to the means and methods
q reasoneble amount should be reported q.s income. This lr.y which the work is to be accomplished, he is a contractot (Luzon
is becq.use the free housing and use of the lirnousine are Steued.oring Co. u. Trinid'ad,43 Phil.8O3; Commissioner a.
giuen partly for the conuenience and benefit of the employer tlngineering Equipment and. Supply Co.,64 SCftA 597 [1975]),
(Hend.erson u. Collector, 7 SCRA 548).
A firm which leases its neon signs and billboards cannot be
(2) No, the free uniforms, free liuing quclrters and the free considered itself as a media company, like a newspaper or a radio
meals inside the camp are not income to Capt. Canuto lrroudcasting company. Neon sigts and billboards are primarily
because these are facilities or priuileges furnished by rltrsigned for advertising. It performs advertising services. It is,
the employer for the employer's conuenience which are l.lrcrcfore, an independent contractor (Ad.uertising Associates u.
necessqry incidents to proper performance of the military (tourt of Appeals,l33 SCRA t19841).
personnel's duties.
Gross incomn frorn business. - In the case ofmanufacturing,
(3) None. The F200,000.00 moral and exemplary damages are rrrrrrchandising, or mining business, "gross in'come'means the total
compensation for injuries sustained by Mr. Infante. The Hrrlcs, less the cost of goods sold, plus any income from investments
P400,000.00 reimbursement for hospitalization expenses rrnd I'rom incidental or outside operations or sources. In determining
and the F60,000.00 for salaries he failed to receiue are t,he gross income, subtractions should not be made for depreciation,
umounts of any damages receiued whether by suit or rlepletion, selling expenses or losses, or for items not ordinarily used
agreement on account of such injuries. Section 28(bX5) of in computing the cost of goods sold (Sec. 43, Reu. Regs. No- 2).Inthe
the Tax Code specifically excludes these amounts from the case of sellers of services, their gross income is computed by deducting
gross income of the injured indiuidual (Sec. 28[bJ, NIRC ull direct costs and expenses as prescribed in Revenue Memorandum
and Sec.63, Reu. Regs. No.2). Oircular Nos. 4,2003 and 30-2008 dated April 1, 2008.

Trade or Business lncome or Professional lncome Bar Question (1994)


There is no specific criterion as to what constitutes "doing" or The University of Bigaa, a non-stock, non-profit entity, operates
"engaging in" or "transacting" business. Each case must be judged a canteen for its students and a bookstore inside the campus' It
in the light of its peculiar environmental circumstances. The term also operates two dormitories for its students, one of which is in the
implies a continuity of commercial dealings and arrangements, campus.
and contemplates, to that extent, the performance of acts or works
Is the University liable to pay income taxes for the operation of
or the exercise of some of the functions normally incident to, and
the:
in progressive prosecution of, commercial gain or for the purpose
and object of the business organization (Commissioner a. British 1) canteen?
Oaerseas Ainoays Corporation, supra). 2) bookstore?
X Corporation rendered technical services through its "work 3) two dormitories?
engineers" to PNB, DBP and SSS in the construction of their buildings.
The "work engineers" acted as overseers ofX Corporation, rendering Suggested answer:
their professional services as employees of the corporation. In this 1) For the operation of the cq.nteen inside the campus,
case, X Corporation is a contractor and not an employee of the
the income thereon being incidental to the operations
contractees. The employer-employee relationship exists only where
' of the uniuersity as a school, is exempt (Art- XIV[4][3]'
the person rendering employment services is an individual and not a
Constitution; DECS Regulations No. 137'87, December 76,
corporation. Moreover, the true test in determining the relationship
1987).
between the parties is that ifhe renders service in the course ofan
160 Itr,:vrr,:wt,:rr on 'l'nxn t toN I N( r )Mt,i AN I r W t't't tt lot,t rtt',tr i'l'nx I'ls r6l
( lross lltctttntl

2) For the same reasons, the Uniuersity of'Bigaa is not liuble Bar Question (2012)
to pay income to.xes for the operation of the boohstore, since
Spouses Pablo Gonzales and Teresita Gonzales, both resident
this is an ancillary actiuity the conduct of which is carried citizens, acquired during their marriage a residential house and
out within the school premises. lot located in Makati city, which is being leased to a tenant for a
3) The Uniuersity of Bigaa shall not be liable to pay income monthly rental of F100,000. Mr. Pablo Gonzales is the President
taxes for the operation of the dormitory located in the of PG Corporation and he receives F50,000 salary per month' The
campus, for same reasons as the foregoing. spouses have only one minor child. In late June 2010, he was imme-
diately brought to the hospital because ofa heart attack and he was
Howeuer, the latter shq.ll be liable for income tctxes on incorn'e pronounced dead on June 30, 2010. with no liabilities, the estate of
from operations of the dormitory located outside the school premises. lh" lut" pablo Gonzales was settled extra-judicially in early 2011. (a)
*Gross ittcorne" means all income Is Mr. Gonzales required to file income tax return for 2010? If so, how
Lease of real property. -
derived from whatever source, including rents (Sec. 32[A][5], NIRC). much income must he declare for the year? How much personal and
Rental income is treated as business income to which the lessor may additional exemption is he entitled to? (b) Is Mrs. Gonzales required
claim allowable deductions under Section 34 of the 1997 Tax Code. to file income tax return for 2010? If so, how much income must she
declare for the year and how much personal exemption is she entitled
If the lessor is a citizen, resident alien, or non-resident alien to? (c) Is the Estate of the late Pablo Gonzales required to file income
engaged in trade orbusiness in the Philippines, his net taxable income
tax return for 2010? If so, how much income must it declare for the
shall be subject to the graduated income tax rates provided for in year and how much personal exemption is it entitled to?
Section 24 of the 1997 Tax Code, and if the lessors are husband and
wife, they shall compute separately their individual income tax based Suggested answers:
on their respective taxable income. However, if any income cannot be Yes, Mr. Pablo Gonzales is requiredto fi'le income tax return
definitely attributed to or identified as income exclusively earned or and pay incorne tax on the following incomes for 2010:
realized by either of the spouses, the same shall be divided equally F301Q9Q - rental income (F100,00012 x 6 months), and
between the spouses for the purpose of determining their respective F300,000 (F50,000 x 6 months) - salary, from January to
taxable income (Sec.24[A], NIRC). June 30. Onty 507o of the rental is to be reported by him
If the lessor is a non-resident alien not engaged in trade or becq.use the leq'sed property is a property of the conjugal
business in the Philippines, the rental income from real property partnership of gains belonging to the spouses. He will be
located in the Philippines shall be subject to 257o final withholding entitled. to personal exemption of ?50,000 and qdditional
tax(Sec. 25[B], NIRC), unless a lower rate is imposed pursuant to personal exemption of fl5,000 for one minor child. If the
an effective tax treaty, such tax to be withheld and remitted by the tarpayer dies during the tq'xable year, his estate may still
lessee in the Philippines to the BIR within the prescribed dates (Secs. claim the personal und additional exemptions for himself
57 and 58, NIRC). q,nd his dependent as if he died at the close of such year
(Sec. 35, NIRC).
If the lessor is a domestic corporation or a resident foreign
corporation, its net taxable income shall be subject to the 327o (now b. Yes, Mrs. Teresita Gonzq.les is required to file her income
SOVo) norrrral corporate income tax, or its gross income will be subject tax return and pay income tax on P600,000 (P50,000 x 12
to the two percent (2Vo) minimum corporate income tax, whichever is months), rental income for the year (January to December
higher (Sec.27[A] and Sec.28[A], NIRC). However, if the lessor is a 2010). If any income of the spouses cannot be definitely
non-resident foreign corporation, the gross rental income from real attributed to or identified q.s income exclusiuely earned or
property located in the Philippines shall be subject to the 32Vo (now req,lized by either of the spouses, the same shall be diuided
307o) corporate income tax(Sec. 28[B], NIRC), such tax to be withheld equally between them for the purpose of determinirtg their
and remitted by the lessee in the Philippines to the BIR within the respectiue tq.xable income (Sec. 24[A], NIRC). Since the
prescribed dates.
L62 ltr:vrr,:wr,;H or.r 'l'nxn'r'ror.r ln'tr'Mr': ANrr,wt'';,'1.1:il;l'.1"" '''^""' l6:l

deceased husband already claimed the additional personal a. The lessor may report as income the mq,rhet ualue of the
excernption for the minor child, Mrs. Gonzales could no building at the time when such building is completed; or
longer claim the same additional personal eremption (Sec.
35[B], NIRC).
b. The lessor may spread ouer the life of the lease the estimated
depreciated ualue of such building at the termination of
c. Yes, the Estq,te of the late Pablo Gonzales (through his the leqse and report q.s income for each year of the lease q.n
Adrninistrator or Executor) is also required to file its income aliquot part thereof (9ec.49, Reu. Regs. No.2).
to.x return and pay tar, if applicable. Income tos, imposed
by Title II upon indiuiduals shall apply to the incorne of Sales or erchanges ofreal property. - Exchanges ofreal
estates, including incom.e receiued by estates of deceased property classified as capital assets by individuals are subject to the
persons during the period of administration or settlement capital gains tax based on the fair market value of the real property
of the estq.te (Sec. 60, NIRC), and the estate of a decedent (BIR Ruling No. 037, February 10, 1988). So is a deed of reconveyance
(which shall haue its own TIN) shall be entitled to personal with assumption of mortgage (BIR Ruling No. 298, July 6, 1988).
exemption of P20,000 (Sec. 61, NIRC). It is believed, In mortgage foreclosure sales, the amount of loan secured by the
however, that since the personal exemption of indiuiduals mortgage is not considered as basis in computing the capital gains
has been increased to F50,000 under R.A. 9504 (social tax(BIR Ruling No.455, September 16, 1988); the basis, for income
legislation) in 2008, the same amount of ?50,000 shall q.lso tax purposes, is the highest bid price.
be extended to estates and trusts. The rental income to be
Section 24(DX1) ofthe 1997 Tax Code is comprehensive enough to
reported by the estate shall be P300,000 (F100,000 / 2 x 6
cover not only voluntary sales but also involuntary sales, like execution
rnonths (from July 7 to December 31,2010).
sale and expropriationsale(BIRRuling No.091, May 2, 1989).In case
Bar Question (1995) of expropriation by the government, the actual consideration may be
used as basis in determiningthe capital gains tax(BIR Ruling No. 175,
Mr. Domingo owns a vacant parcel of land. He leases the land September 30, tr 990).Thejust cornpensation paid by the government
to Mr. Enriquez for ten years at a rental of F12,000.00 per year. to the seller/owner of property is the equivalent for the value of the
The condition is that Mr. Enriquez will erect a building on the land property at the time of its taking (not at the time of payment). It is
which will become the property of Mr. Domingo at the end of the lease the fair and full equivalent for the loss sustained by the transferor
without compensation or reimbursement whatsoever for the value of that is the measure of indemnity. Such being the case' the amount
the building. approved by the Court as fair compensation must be used as the tax
Mr. Enriquez erects the building. Upon completion, the building base for computing the gains derived out of such transaction. The
had a fair market value of F1 million. At the end of the lease, the l'orced character ofthe disposition ofthe real property provides the
building is worth only F900,000.00 due to depreciation. .iustification for the above-stated treatment of gain arising from the
expropriation sale (BIR Ruling No. 061, April 11, 1991).
Will Mr. Domingo have income when the lease expires and
becomes the owner of the building with a fair market value of
Professional lncome
F900,000.00? How much income must he report on the building?
Explain. "Professional incorne" refers to the fees received by a
professional from the practice of his profession, provided that
Suggested answer: there is no employer-employee relationship between him and
his clients. The existence or absence of the employer-employee
When q. building is erected by a lessee in the leased premises in
relationship determines whether the income shall be treated as
pursuance of an agreement with the lessor tha.t the building becornes
compbnsation income or professional fee. This fact is material
the property of the lessor at the end of the lease, the lessor has the
{irr purposes of taxation because there is no deduction allowed
option to report incorne as follows: against compensation income, whereas allowable deductions may
ANt ) Wr'r'r tt tilI rrf'.tt ;'l'A\ I (il-r
164 Itr,;vr r,;wr,lrr or'l'nxn't'torrr I Nr 1 rr\4t,t r t :r

( llrrltt I ttt'ttttr'

be made from professional income. Thus, a lawyer may prnctico his b. ll'[lrc scllet'or tratrslirrrrr is not a dealer in securities,
profession as a legal officer of a private corporation, but for income [he shatres of sttlck arc rtrgttrtled as capital assets. There
tax purposes, the compensation income he receives is subject to is a need to determinc il'the shares of stock are listed and
the graduated income tax rates without deductions (except for his tr.rded in er local stock exchange.
personal and additional exemptions) because of the existence of
Investor in shares of stock in a mutual fund company, in
employer-employee relationship.
connection with the gains realized by said investor upon redemption
of said shares of stock in a mutual fund company (Sec. 32[B][6][h]'
CapitalAssets NIRC, Reu. Regs. No.6'2008, April22,2008).
For tax purposes, there are three (3) general types ofcapital 1) Ifthe shares ofstock arelisted andtradedin the local stock
assets. These are: (a) shares ofstock ofa domestic corporation; (b) exchange, the transaction is exempt from income tax, regardless
real property (of individuals) or land,ior building (of corporations); ofthe nature ofbusiness ofthe seller or transferor (indiYidual
and (c) other types ofassets, including shares ofstock ofa foreign or corporation), except when it is a dealer in securities. Income
corporation. The rules provided for in the 1997 Tax Code are taxes covered by the exemption are capital gains taxes from the
summarized below. sales of shares of stock by citizens, resident aliens, domestic
corporations, resident and non-resident foreign corporations,
1. Shares of stock of a domestic corporation and regular income tax on gains derived from sales of shares of
"Shares ofstoch" shall include shares ofstock ofa corporation, stock (Sec. 70, Reu. Regs. No.3-95). However, it is subject to the
warrants and,/or options to purchase shares of stock, as well as ll2 of l%o stock transaction tax imposed in Section I27(A)
units ofparticipation in a partnership (except general professional ofthe 1997 Tax Code, based on the gross selling price or gross
partnerships, joint stock companies, joint accounts, joint ventures value in money of the shares of stock sold or transferred. The
taxable as corporations, associations, and recreation or amusement selling price of the shares of stock shall be the fair market value
clubs (such as golf, polo or similar clubs), and mutual fund certificates ofthe shares ofstocks transferred or exchanged (based on the
(Sec.22[L], NIRC). listed priceon the date of sale or closest to it) and not the fair
market value of the property received in exchange (Sec. 6[a],
"Dealer in securities" means a merchant of stocks or securities, Reu. Regs. No. 2'82). The provisions of Revenue Regulations
whether an individual, partnership or corporation, with an established No. 2-82 were amended in 2008 as follows: "In determining the
place of business, regularly engaged in the purchase of securities selling price, the following rules shall apply: (a) in cash sale,
and the resale thereof to customers. It means any person who buys selling price shall be the total consideration per deed of sale;
and sells securities for his/her own account in the ordinary course of (b) if total consideration consists partly in money and partly in
business (Sec. 3.4, SRC). kind, the selling price shall be the sum of money and the FMV of
The rules on sale or exchange of shares of stock of a domestic the property received; (c) in case ofexchange, selling price shall
corporation are: be the FMV of the property received; and (d) in case FMV of the
shares sold or exchanged is greater than the amount of money
a. Ifthe seller or transferor is a dealer in securities, the and./or the FMV of the property received, the excess of the FMV
shares ofstock (whether listed and traded in the local stock of the shares sold or exchanged over the amount of money and
exchange, listed but not traded in the local stock exchange, the FMV of the property, if any, received as consideration shall
or not listed) shall be treated as ordinary assets and the be deemed a gift subiect to donor's tax under Section 100 of
ordinary gain, ifany, from the sale or transfer thereofshall the Tax Code" (Rea. Regs. No.6-2008, April 22,2008).
be subject to the graduated income tax rates (five percent
I57ol-32%o), in the case of individual seller or transferor, , The fair market value of the share of stock sold shall be:
(a) in the case of listed shares which were sold or exchanged
or to the 30Vo normal corporate income tax, in the case of
corporate seller or transferor. outside of the trading system and./or facilities of the local stock
166 lll:vt t,lwt,;tt r tr'l'nxn'r'tot'r
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exchange, the closing price on the day when the shares are sold prior to l)ecember 31, 201 2 may be allowed up to December 31,
or exchanged. When no sale is made on the day when the listed 2OI2 to comply with the MPO; otherwise, the non-compliant
shares are sold or exchanged, the closing price on the day nearest listed company shall be assessed as follows:
to the date of sale or exchange of the shares shall be the FMV; (b)
in case of shares of stock not listed in the local stock exchange,
A. Fortransactions up to December Slrz0lzunder
the Amended MPO Rule A stock transaction tax at the
the book value ofthe shares ofstock as shown in the financial rale of !/2 of one percent (77o)- of I}:re gross selling price or gross
statements duly certified by an independent CPA nearest to the value in money of the shares of stock under Section 127(A) of
date of sale (Reu. Regs. No.6-2008, April22,2008). the Tax Code;
The Fair Market Value (FMV) of shares of stock sold, B. For transactions afrter December 31.,2Ol2 A
in the case ofshares ofstock not listed and traded in the local final tax at eitherSVo/I\Vo on the net
-
capital gain imposed under
stock exchange, shall be the value of the shares of stock at Sections 24,25 and 28 of the Tax Code, as amended.
the time of sale. In determining the value of the shares, the
Adiusted Net Asset Method shall be used whereby all assets The above taxes shall not apply to the following:
and liabilities are adjusted to fair market values. The net of a. Dealers in securities, provided that they shall not be subject
adjusted asset minus the liability values is the indicated value to VAT on their gross receipts and income tax from their
ofthe equity. For purposes ofthis section, the appraised value sale or exchange of securities;
of real property at the time of sale shall be the higher of (1) the
FMV as determined by the CIR; or (2) the FMV as shown in the b. Investors in shares of stock in a mutual fund company
in connection with the gains realized by said investors
schedule of values fixed by the Provincial or City Assessor; or (3)
upon redemption of said shares of stock in a mutual fund
the FMV as determined by independent Appraiser (Reu. Regs.
company pursuant to Section 32(BX7Xh) of the Tax Code;
No.6-2073, April 11,2073 annend.ed. Rea. Regs. No.6-2008,
April 22,2008). c. Persons who are exempt under existing investment
incenlives and other special laws (Rea. Regs . No. 76'2072,
The stockbroker who effected the sale has the duty to December 7,2012).
collect the tax from the seller upon issuance of the confirmation
of sale, issue the corresponding official receipt thereof and remit 2) Ifthe shares ofstock are not listed, or they are listed but
the same to the Revenue District Office wherein the Philippine not traded, in the local stock exchange, the net capital
Stock Exchange is located within five (5) banking days from the gains realized during the year, if any, shall be subject to the
date of collection thereof. final capital gains tax equivalent to five percent (\Vo) of lhenet
capital gains not exceeding F100,000, and llVo, on any amount
Rules for publicly-listed shares whose public ownership in excess of F100,000, such tax to be paid within 30 days from
fall below the mandatory MPO level the date of sale (Sec.24[c] and Sec. 25tAlt3l; Sec' 27[D][2], Sec.
2StAlt7ltcl and Sec.28[B][5][c],NIRC). An annual capital gains
AII publicly-Iisted companies are required, at all times, to
tax return must be filed by the taxpayer, covering all his stock
maintain a minimum percentage of ownership (MPO) of listed transactions during the calendar year, not later than the 15th
securities held by the public (or "public float") of the higher rate
day of the fourth month following the close of the taxable year
of ll%o of the publicly-listed companies'issued and outstanding (Sec. 7, Reu. Regs. No. 2-82, March 29, 1982; see Sec. 52[D]'
shares, exclusive ofanytreasury shares, or at such percentage as i NIRC). The effect of this provision requiring the filing of annual
may be prescribed by the Securities and Exchange Commission
(SEC) or the Philippine Stock Exchange (PSE). Publicly-listed tax return is to allow the taxpayer to claim the lower rate offive
percent (57o) only on the first F100,000 gross sales. Take note
companies which are non-compliant with the MPO as of
December 31, 2011 and those whose public ownership levels
that it does not matter who is the seller or transferor (whether
he is an individual (citizen or alien) or a corporation (domestic
subsequently fall below the above-mentioned MPO at any time
or foreigp), provided he/it is not a dealer in securities.
168 ltr,:vrr,:wt,trt oN'l',rxn,r,roN lNrrrttll,r ,rrutr Wlttttt,t,utrurl'l',txt,;l; 169
( itrrgs ltttrttttt'

The capital gain from the sale of listed shares over a rl<tmestic tttrporuli<tn that qre listed qnd traded in the
the counter or outside of the local stock exchange shall Philippine Stock Exchange by ercpress prouision of law (Sec.
be subject to the 57o/I0Vo capital gains tax, since the law 24[c], NIRC, as amended by B.P. 221, May 25, 1982). He
requires that the listed shares must be traded in the local stock is, hou)euer, subject to the stoch transaction to'x equiualent
exchange. What is controlling is whether or not the shares of to one-half of one percent (1 / 2 of lVo) of the gross selling
stock are traded in the local stock exchange (Del Rosario a. price or gross ualue in money of the shares of stock sold or
Conmiasioner, CTA Case No.4796, December 1, 1994). exchanged (Sec. 127[A], NIRC), which tax shall be withheld
However, the capital loss from the sale of listed shares outside and remitted by the stochbroher who effected the sale to the
ofthe local stock exchange can be deducted from the capital gain BIR within fiue (5) banhing days from the date of collection
from another sale ofunlisted shares, or listed shares but traded thereof (Sec. 127[C][1], NIRC).
outside ofthe local stock exchange because the tax base is net
capital gain (capital gains less capital losses). b. Yes, John McDonald will be subject to Philippine income
tax on the Php200,000 gain arising from his direct sale
The transfer by Compagnie Finonciere Sucres et Denrees of the listed shares of stocks of a domestic corporation
of its eight percent (\Vo) eqrity interest in the Makati Shangri- to his friend residing in Mahati. An alien indiuidual,
La Hotel to Kerry Holdings Ltd. is subject to the capital gains whether or not a resident of the Philippines, is tct'xqble on
tax; hence, the claim for refund is denied. The capital gains income deriued from sources within the Philippines (Sec.
tax return, which petitioner filed with the BIR, showed that it 23[D], NIRC). Gain from the sale of shares of stock in a
had a net gain. A tax on the profit of sale on net capital gain is domestic corporation sholl be treated as deriued entirely
the very essence of the capital gains tax law. To hold otherwise from sources within the Philippines, regardless of where
will ineluctably deprive the government of its due and unduly the said shares are sold (Sec. 42[E], NIRC). A fi'nal tax at
set free from tax liability persons who profited from said the rates prescribed. below is hereby imposed upon the net
transactions (Compagnie Financiere Sucres et Denrees u. capital gains realized during the taxable year from the sale
Cotnmissioner, G.B. No. 133834, August 28,2006). of shares of stock in a domestic corporation, except shares
sold of disposed of through the stock excharuge:
Bar Question (2008) Not over F100,000 6Vo

John McDonald, a U.S. citizen residing in Makati City, On any amount in excess of F100,000 tOTo
(Sec.24[c], NIRC)
bought shares ofstocks ofa domestic corporation whose shares are
listed and traded in the Philippine Stock Exchange, at the price
of Php2 million. Yesterday, he sold the shares of stocks through 2. Real property
his favorite Makati stockbroker at a gain of Php200,000. Since the Tax Code does not define the term "real propertlr"
Is John McDonald subject to Philippine income tax on the sale the definitionof "immnuable property" inArticle 415, Civil Code of
ofhis shares through his stockbroker? Explain. the Philippines shall be applied. The rules on the sale or exchange
of real property located in the Philippines are summarized below:
If John McDonald directly sold the shares to his best friend, who
is another U.S. citizen residing in Makati, at a gain of Php200,000, Ifthe seller or transferor is a real estate dealer, the real
is he liable to Philippine income tax? If so, what is the tax base and property sold is an ordinary asset, and the ordinary gain,
rate? if any, is subject to the graduated income tax rates of five
percent (57o) to 327o (if an individual who is a citizen, or a
Suggested answers: resident or non-resident alien engaged in trade or business
in the Philippines, or 25Vo final tax if a non-resident alien
q. No, John McDonald is erempt from Philippine incorne not engaged in trade or business in the Philippines), or
tax on the gain arising from his sale of shares of stochs of to the SOVo norror'al corporate income tax (if a domestic
L70 lil:vrr,rwr,:rt oN'l'nxn'noN lrrrrMr,r ANrr Wlrtrrrot,ntttri'l'nxt,:s l7l
( ilosr Ittt'ontc

corporation or a resident foreign corporation) (Sec. 24[AJ, asset because there is no similar express provision as that
Sec.25[A][1] and [B], and Sec.27[A], Sec.28[A][1] and granted to domestic corporations. Therefore, regardless
[B][1], NIRC), unless the sale is exempt from income of classification, net taxable income from the sale of real
tax because it is a socialized housing (i.e., gross selling properby realized by a resident foreign corporation shall be
price is not more than F400,000) under R.4.7279 (Urban subject to the normal corporate income tax and expanded
Development and Housing Act) or an economic housing withholding tax. However, if the seller is a non-resident
under 8.O.223 (Investment Incentives Act), as validated foreign corporation, the gain from sale shall be taxedat70Vo
in a ruling issued by the BIR. The buyer must withhold the (Sec.4[e] and [fl, Reu. Regs. No. 7-2003). The real property
proper expanded withholding tax on the transaction and referred to here could be a condominium unit which
remit the same to the BIR within the period prescribed in foreigners are allowed to own subject to certain conditions
Revenue Regulations No.2-98, as amended. Non-resident under the Condominium Act (P.D. 9 5 7, as amended by R A-
foreign corporations are taxed on their gross income from 4726).
sources within the Philippines, including gain from sale
of real property at 30Vo, effective November 1, 2005. Deed ofExchange
A"real esta,te d,eal.er" includes any person engaged Deed of Exchange executed by the parties voluntarily and
in the business of buying, developing, selling, exchanging without any financial consideration, involving real properties, would
real properties as principal and holding himself out as a subject either party (a) to the capital gains tax, based on the fair
full or part-time dealer in real estate (Sec. 4.106-7, Reu. market value or consideration, whichever is higher, or (b) to the
Regs. No.7-95, as amended). ordinary income tax or regular corporate income tax, depending on
the nature ofthe assets exchanged. In this case, there are two (2)
b. If the seller or transferor is not a real estate dealer, taxable transactions.
determine whether the real property sold or transferred
is (a) used in the taxpayer's trade, business or profession,
Transfer ofirlterest on real property shall be governed by the
or (b) treated as fixed asset used in his trade, business or
following rules:
profession, subject to depreciation. If the answer in either of
the two cases above is in the affirmative, the real property 1. If upon completion of payment of the purchase price of
shall be treated as ordinary asset, and the gain, if any, real property but before the execution ofthe Deed ofSale,
from the sale or transfer thereof shall be subject to the the buyer assigns his right to another for a consideration,
graduated income tax rates (five percent [\Vo] to 32Vo), the assignment is a separate sale ofreal property; hence,
if an individual, or to the normal corporate income tax subject to the expanded withholding tax or final withhold-
rate of 307o based on net taxable income, and expanded ing tax, as the case may be, and to DST on the same basis.
withholding tax, as discussed in the preceding paragraph. 2. If the sale of interest on real property (property was
On the other hand, if the answer is in the negative, the real purchased under a Contract To Sell but sold by the original
property shall be treated as capital asset, and the gain,
buyer before it was fully paid) it is taxable on the part ofthe
ifany, by a citizen, alien (resident or non-resident), estate seller based on the realized gain(i.e., selling price less the
and trust, and domestic corporation and partnership shall cost or adjusted basis) (Reu. Regs. No. 17'2003, March
be subject to the final capital gains tax ofsix percent(67o)
31,2OO3),
based on the gtoss selling price or fair market value of
the property at the time of sale, whichever is higher (Sec. Rules on non-redemption of property sold during involuntary
24[D], Sec.25[N[3] and [B]; Sec.27[D][5], NIRC).It is to sales,
be noted that foreign corporations (whether resident or
non-resident) are not entitled to the preferential tax rates Revenue Regulations No. 9-2012 implements Sections 24(D)
on their gain from sale ofreal property classified as capital (1), 2?(D)(5), 57,106 and 196 of the Tax Code, and Revenue
r72 Itt,:vrr,:wr,:rr 0N'l'rrxn'r'rolr Ittr'rrut,: ,tr.ttr Wt't'ttttot,ntNti'l'Axt,:s I73
( lnrrg lrrr:tttttrt

Regulations No. 2-98, as amended, and Revenue Regulations No. Such income is exempt from income tax in the case of non-resident
16-2005, as amended on non-redemption of property sold during citizens, alien individuals, and foreign corporations because they are
involuntary sales; and revokes and amends all contrary issuances taxed only on income from sources within the Philippines (Sec. 23,
and rulings. NIRC).
If property is sold during involuntary sales, the SELLER shall
be subject to (a) income tax, which could either be: Bar Question (2013)
Capital gains tax, ifproperty is a capital asset; or In 2000, Mr. Belen bought a residential house and lot for
F1,000,000. He used the property as his and his family's principal
Ordinary income tax or regular corporate income tax, if
property is an ordinary asset, regardless of the type of residence. It is now year 2013 and he is thinking of selling the
property to buy a new one. He seeks your advice on how much
proceedings and personality of mortgagees/selling persons;
(b) VAT (if ordinary asset), and (c) DST. income tax he would pay if he sells the property. The total zonal
value of the property is F5,000,000 and the fair market value per tax
o Above taxes shall be due counted from the date the right declaration is F2,500,000. He intends to sell it for F6,000,000. What
to redeem the property ofthe buyer has expired. material considerations will you take into account in computing
the income tax? Please explain the legal relevance of each of these
Buyer who is deemed to have withheld the CGT or CWT
considerations.
due from the sale shall file CGT and remit the tax within
30 days, or file CWT return and remit the RCIT within 10 Suggested answer:
days from date of expiration of redemption period, except
for the month of December, which may be filed not later Since the planned sale inuolues a real property classified as
than January 15 of the following year. a capital asset, the material considerations to take into account to
compute the income tax are:
If property sold is subject to VAT, it shall be paid by the
owner/mortgagor within 2O or 25 days of the following 1. The'qument fair marhet ualue of the property to be sold- The
month when the right of redemption expires. currQnt fair marhet ualue is the higher between the zonal
ualue and the fair mq.rket ualue per tax declaration;
DST shall be paid within five (5) days after the close of the
month after the lapse of the redemption period. 2. The gross selling price ofthe property;

The CGT/CWT/VAT and DST shall be based on whichever is 3. Deterrnination of the to,x base, which is the higher annount
higher of the consideration (bid price of the highest bidder) or the between the gross selling price and the cunent fair market
fair market value or the zonal value as determined in accordance ualue of the property.
with Section 6(E) of the Tax Code. The income tax is computed at 67o of the tar base, which
All regulations, rulings or orders inconsistent with Revenue is in the nature of a final capital gains tax (Sec. 24[D][1]'
Regulations No. 9-2012 are hereby revoked, repealed or amended. NIRC).
Howeuer, since the property to be sold is a principal
Real property located outside the Philippines residence and the purpose is to buy a new one, I will aduise Mr.
Belen that the sq.le can be exempt from the 6Vo capital gains tax,
The gain from the sale or other disposition ofreal properby not
located in the Philippines, regardless of classification, by resident
if he is willing to comply with the following conditions:
citizens and domestic corporations shall be subject to the graduated mus.t utilize the entire proceeds of sale in acquiring a
income tax (if a resident citizen) or normal corporate income tax (if
,a. He new prr.ncipal residence within 18 months from date of
a domestic corporation), since they are taxed on worldwide income. disposition;
I
174 ltuvtt,rwt,:H ott'l'nxrt't'ton I Nr r rMt,; trtt t r Wt't t tt tot,t ttt"tt l'l'nx t,:s t75
{ lrorn ltrrrrtttt'

b. He should notify the Commissioner of his intention to auail Bar Question (2005)
of the exernption within 30 days from date of sale; Josel agped to sell his condominium unit to Jess for F2.5 million.
c. He should open an escrou) account with a bank and deposit At the time of the sale, the property had a zonal value of F2'0 million.
the 6Vo capital gains tq.x due on the sale. If he complies with Upon the advice of a tax consultant, the parties agreed to execute
the utilization requirement, he will be entitled to get back two deeds of sale, one indicating the zonal value of F2.0 million as
his deposit of the tax payment; otherwise, the deposit will the selling price and the other, showing the true selling price of F2'5
be applied against the capital gains tax due (Sec. 24[D][2], million. The tax consultant filed the capital gains tax return, using
NIRC). the deed of sale showing the zonal value of F2.0 million as the selling
price. Discuss the tax implications and consequences of the action
Bar Question (2009) taken by the parties.

Melissa inherited from her father a 300-sq.m. lot. At the time Suggested answer:
of her father's death on March 14, 1995, the property was valued at
The capital gains ta,x due on the sale shall be based on the actual
F720,000. On February 28, 1996, to defray the cost of the medical
expenses ofher sick son, she sold the lot for F600,000 on cash basis. selling price of fl.S million, which is higher than the zonal ualue of
The prevailing market value of the property at the time of sale was the property (Sec. 24[D][1], NIRC). The documentary stamp tax on
F3,000 per sq.m. (a) Is Melissa liable to pay capital gains tax on the the conueyance ofreal property shall lihewise be based on the higher
transaction? If so, how much and why? If not, why not? (b) Is Melissa ualue (Sec. 196, NIRC). Accordingly, a d.eficiency capital gains ta'xc and
liable to pay VAT on the sale of the property? If so, how much and documentary stamp tax are due from Josel plus the 507o surcharge
why? If not, why not? irnposable on a fraudulent return.
Both Josel and his ta^x, consultant are criminally liable for tan
Suggested answers: euasion. Here, it is clear that the three (3) requisite factors to constitute
a. Melissa is liable to pay the 6Vo capital gains tax based on tax euasion ai4 present, uiz.: (1) the end to be achieued, which is the
the gross selling price (P600,000) or fair market ualue at payment of lesslthan that known by them' to be legally due; (2) an
the time of sale (fl00,000 = ?3,000 r 300 sq.m.), whicheuer
accompanying state of mind, which is euil, in bad faith, willful or
d,eliberate and not merely accidenta,l; and (3) a course of action, which
is higher. The capital gains tar is F54,000 (fl00,000 x
6Vo). Although Melissa actually incurred a loss in the sale
is unlawful ( CIR a. Estate of Benigno P. Tod.a, Jr -, 438 SCRA 290
of the real property, this loss is disregarded for income to.x t20041).
purposes because Section 24(D) of the Tax Code presumes
that the seller realizes a gain from the sale of such req,l Bar Question (1993)
property classified as a capital asset and it imposes the to.x Juan Panalo won a damage suit for F500,000.00 against Juana
on the higher amount between the gross selling price and Talo. Panalo got a writ of execution and made a levy on the lot of
the fair marhet ualue. The real property is a capital asset, Talo. The lot was sold at public auction where Panalo was the highest
since it is not used in the trade or business of Melissq (Sec. bidder for F500,000.00. Panalo refused to pay any capital gains tax
39[A], NIRC). on his purchase of said lot. Your opinion.
b. No. Melissa is exempt from VAT on the sale of the req.l
property classified as a capital asset. To be subject to VAT, Suggested answer:
the real property must be classified as an ordinary asset, The capital gains tax from sales ofreal property is payable by the
the seller must be engaged in the real estate business, and seller( S ection 2 1 [e] in relation to S ection 49[q] [4] of the NIRC). Hence,
the amount of gross sales must haue exceeded ?1.5 million. Panalo cannot refuse to pay the capital gains ta,x on his purchase of
In this case, all the aboue requisites are not present. said lot, because he is treated q.s the statutory seller.
176 llt,:v t r,;wt,;t oN'l'Axn't'ror'r I N('oN,t l'r AN I I W t't t tt tot,t tt t',tt I'l'nxt,:s 177
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Bar Question (2008) h. 'I'he amou.tt.l. of' ?1,200,000 (67o times P15 m'illion),
representing capital gains tax erroneously paid by Pedro
Pedro Manalo, a Filipino citizen residing in Makati City, owns a Manalo, may be credited against the ordinary income tax
vacation house and lot in San Francisco, California, U.S.A., which he due on the taxable income for 2006, since capital gains
acquired in 2000 for F15,000,000. On January 10, 2006, he sold said tax is another form of income tar, under Title II of the
real property to Juan Mayaman, another Filipino citizen residing in Tax Cod.e. If the BIR official insists on not allowing such
Quezon City, for F20,000,000. On February 9,2006, Manalo filed the tax credit of capital gains tax erroneously paid against
capital gains tax return and paid F1,200,000 representing6Vo capital ord.inary income tax due for the year, I would aduise my
gains tax. Since Manalo did not derive any ordinary income, no income
client to fite a written claim for tax credit or refund for
tax return was filed by him for 2006. After the tax audit conducted the capital gains tax erroneously paid with the BIR within
in 2007, the BIR officer assessed Manalo for deficiency income tax two (2) years from the date of payment (Secs. 204[c] and
computed as follows: F5,000,000 (F20,000,000 less F15,000,000) x 229, NIRC).
35Vo = F1,750,000, without the capital gains tax paid being allowed
as tax credit. Manalo consulted a real estate broker who said that the
F1,200,000 capital gains tax should be credited from the Fl,750,000 Bar Question (2000)
deficiency income tax. Last July 72, 2000, Mr. & Mrs. Peter Camacho sold their
a. Is the BIR officer's tax assessment correct? Explain. principal residence situated in Tandang Sora, Quezon City for
T"tr *illiott pesos (F10,000,000.00) with the intention of using the
b. If you were hired by Manalo as his tax consultant, what proceeds to acquire or construct a new principal residence in Aurora
advice would you give him to protect his interest? Explain. Hills, Baguio City.

Suggested answers: What conditions must be met in order that the capital gains
presumed to have been realized from such sale may not be subject to
&. Aresident citizen like Pedro Manalo is talcable on all incorne capital gains tax?
deriued from sources within and without the Philippines
(Sec. 23[A], NIRC). Gains, profits and income from the Suggested answer:
sale of real property located without the Philippines a.re
The conditions are:
considered q.s incomes fron'L sources without the Philippines
(Sec.42[C][5]. NIRC). 1. The proceeds arefully utilized in acquiring or constructing
The uacation house and lot in California, USA is a a new prirucipal residence within eighteen (18) calendar
capital asset, since it is not used in the taepayer's trade or months from the sale or disposition of the principal
residence;
business (Sec. 39[A][1], NIRC). Howeuer, it is not subject to
the 6Vo capital gains tax under Section 24(DX1) of the Tatc 2. The historical cost or adjusted basis of the real property
Code, since the real property is not located in the Philippines. sold or d.isposed shall be carried ouer to the new principal
Said preferentiq.l rate of income tcuc applies only when the residence built or acquired;
seller is a resident citizen and the real property is classified
3. The Commissioner of Internal Reuen'ue must hq'ue been
as a capital asset locq.ted in the Philippirues. Accordingly,
informed by Mr. & Mrs. Peter Camacho within thirty (30)
the gain of F5 million (20 million less F15 million) shall
d.ays from the date of sale or disposition on July 12, 2000,
be included in the tatcable income of Pedro Manalo for 2006
through a prescribed statement I return of their intention to
subject to the graduatedincome tax rates of 57o to 327a (Sec.
24[A][1], NIRC). It is, therefore, erroneous for the BIR to auail of the tax exemption;
apply the corporate income tdx r(fie of 35Vo on the tonable 4. Thq.t the said exemption can only be auailed of once euery
income of Pedro Manalo, a resident citizen. ten (10) years; and
178 ltr,rvrr,:wr,;rr on 'l',rxn'r'ror.r lNr'.trtt,,,tnt,Wttttllol,ltlttri'l'Axt'lll I79
(itols Itttttttttr

5. If there is no full utilization of tlte proceeds of' salc or in the name of'his stltr. 'l'hc corresponding donor's tax thereon was
disposition, the unused portion of the gain presumed tut haue duly paid by the father. (a) How much is the cost basis of the old car
been realized from the sale or disposition shall be subject to Mr. Aguirre? (b) What is the nature of the old car capital asset
to capital gains tax (Sec.24[D][2], NIBC). or ordinary asset? (c) Is Mr. Aguirre liable to pay -
income tax on the
gain from the sale ofhis old car?
Other capital assets
Suggested answers:
All other capital assets, except shares of stocks of a domestic
corporation and real property located in the Philippines, shall be a. F700,000. The basis of the property in the hands of the
subject to income tax at the graduated income tax rates (if seller is d,onee-son is the carry-ouer basis, the same basis as if it
an individual) or at 30Vo regular corporate income tax (if seller is a would be in the hands of the donor-father (Sec. 40[8][3]'
corporation). Examples are motor vehicles and jewelries not used NIRC).
in the taxpayer's trade or business, shares of stocks of a foreign b. The otd car is a capital asset. It is a property held by
corporation, and investments in short-term commercial papers that the taxpayer (whether or not connected with his trade or
are not considered as deposit substitutes. business), but is not stoch in trade or other property ofa kind
"Hold.ing period.'of the property clnssified. as other capital which would properly be included in the inuentory of the
asset is mnterial for individ.ual taxpayers only. - Only 50Vo of taxpayer, ifon hand at the close ofthe year, or property held
Iong-term capital gains are recognized as subject to income tax, if primarily for sale to custonrers in the ordinary course of his
derived by an individual taxpayer, while L0O7o of l}:'e capital gains are trad,e or business, or property used in the trade or business
subject to tax ifderived by an individual taxpayer from short-term ofa character subject to depreciation, or real property used
capital asset transactions. A capital gain is treated as (a) long-term in trad.e or business of the taxpayer (Sec. 39[A], NIRC).
if the asset sold or exchanged is held for more than 12 months, or c, Yes, ke.is liable to income ta'r onhis capital gain of ?100,000
(b) short-term if the asset sold or exchanged is held for 12 months (F800,A00less F700,000), but only 507o of the toxable gain
or less (Sec. 39[BI, NIRC).In the case of corporate taxpayers, the shall be recognized and subject to income tax, considering
holding period is not material and the capital gain or capital loss is that the holding period of the old car is more than one year
recognized in full. (9ec.39, NIRC).
Capital lnsses can be offiet only against and. to the extent
ofcapital gains. - Capital losses cannot be deducted from ordinary Passive Investment Income
gains or income. This principle applies to all types of taxpayers
(corporate or otherwise). Capital losses are deductible only to the lnterest income
extent of capital gains. In general, interests received or credited to the account ofthe
depositor or investor are included in their gross income, unless they
Bar Question (2012) are (a) exempt from tax, or (b) subject to final tax at preferential rate
under the 1997 Tax Code or under the applicable tax treaty.
Mr. Pedro Aguirre, a resident citizen, is working for a large
real estate development company in the country and in 2010, he was Interest means the amount which a depository bank may pay on
promoted to Vice-President ofthe company. With more responsibilities savings and time deposits in accordance with the rates authorized by
comes higher pay. In 2011, he decided to buy a new car worth F2 theBangko Sentral ng Pilipinas (Reu. Regs. No' 12-80, as am'ended).
million and he traded-in his old car with a market value of P800,000,
Interest income has to be examined closely to determine whether
and paid the difference of PI.2 million to the car company. The old
it is taxable in the Philippines, and if so, what kind of income tax and
car, which was bought three (3) years ago by the father of Mr. Pedro
what rate of tax shall apply to it. The rules on interest income under
Aguirre at a price of F700,000, was donated by him and registered
the Philippine 1997 Tax Code are summarized as follows:
180 Itt,;vtt':wt,:tt oN 'l'nxn t'r, rN
It'tlotul,; ,tt.tl Wl'l llllrtl,lrlNl;'l'\\l'lli lftl
( itrrttt Ittt otttt'

a. Incotne interest from Philippine cun'ency deposits l. Intcnrsl, irttrtttttr is sub.icct L<t 20oI, Final Withholding
and. deposit substitutes. - Gross interest income from Tax (FW'l'), il'rcccived by citizens, resident aliens,
Philippine currency bank deposits and yield or any other non-resident alien engaged in trade or business in
monetary benefit from deposit substitutes and from trust the Philippines, domestic corporation, and resident
funds and similar arrangements are subject to the 2Dofti foreign corporation;
final withholding tax, of all depositors, except when the 2. Interest income is subject to257o FWT, if received by
depositor is a non-resident alien not engaged in trade or
a non-resident alien not engaged in trade orbusiness
business in the Philippines, where such interest income
in the Philippines;
shall be subject to the higher 257o tax rate pursuant to
Section 25(B) of the Tax Code. However, if the depositor is 3. Interest income is subject to 307o FWT, if received by
an employee trust fund or accredited retirement plan, such a non-resident foreign corporation, unless it is from
interest income, yield or other monetary benefit is exempt foreign loan, which is subject Lo 207o FWT;
from the final withholding Lax (Comtnissioner u. Court
of Appeals and. GCL Retiremcnt Plan,207 SCRA487). 4. Interest income derived from an instrument that does
not qualify as a deposit substitute is subject to the
The term "d.eposit substitutes" shall mean an 2O7o Creditable Withholding Tax (CWT).
alternative form of obtaining funds from the public (the
term"public" means borrowing from twenty [20] or more B. Interest derived from government debt
instrrrments and securities:
individual or corporate lenders at any one time), other than
deposits, through the issuance, endorsement, or acceptance 1. The debt instrument will be treated as a deposit sub-
of debt instruments for the borrower's own account, for stitute, regardless ofthe number ofinvestors, at the
the purpose ofrelending or purchasing ofreceivables and time of its issuance by the government (e.9., Bureau
other obligations, or financing their own needs or the irf Treasury, Bangho Sentral ng Pilipina.s, etc.);
needs of their agent or dealer. These instruments may
include, but need not be limited to, bankers' acceptances, 2. The interest income is subject to 207oFWT, unless the
promissory notes, repurchase agreements, including investor is (a) an alien individual not engaged in trade
reverse repurchase agreements entered into by and or business in the Philippines, which is taxed at25Vo
between the Banglao Sentra.l ng Pilipinas (BSP) and FWT, or (b) a non-resident foreign corporation, which
any authorized agent bank, certificate of assignment or is taxed al30Va FWT, payable upon the issuance of
participation and similar instruments with recourse. the deposit substitute.
However, debt instruments issued for inter-bank call C. Interest derived from long-term (maturity
loans with maturity of not more than five (5) days period of at least five [5] years) deposits or investment
to cover deficiency in reserves against deposit liabilities, certificates:
including those between or among banks and quasi-
banks shall not be considered as deposit substitute debt 1. Interest income in the form of savings, common or
instruments (Sec. 22[Y], NIRC). individual trust funds, deposit substitutes, invest-
ment management accounts and other investments/
Implementing Section 22(Y) of the Tax Code, the
certificates shall be exempt from income tax, if made
Secretary of Finance promulgated Revenue Regulations
a citizen, resident alien, or non-resident alien engaged
No. 14-2012 on November 7, 2012. The rules are in trade or business in the Philippines, under certain
summarized below:
conditions;
A. Interest derived from currencybank deposit and 2. Interest income derived by a corporation on long-term
yield or any other monetary benefit from deposit substitute,
deposits or investments is taxable at2o%o FWT' The
trust fund and other similar arrangements:
182 ltr,:vrr,rwr,lrr 'l'nlin lr'r.r I Nr r rMt,; ANl, Wt t ttt tot.trtt'tt l'l'nxt,:s lSli
'N ( lrorr ltrcotnc

exemption from income tax is grarnted only on interest he received upon nrul,urity of the deposit substitute/debt
income of individual deposits or investments. instruments which shall in no case be lower than the interest
rate prevailing at the time of the issuance or renewal of
D. Interest derived from a depository bank under said debt instruments. Yield shall be synonynous with the
the expanded foreign currency deposit system/OBU:
interest rate of return earned by a debt security held to
1. Apply 7.57oFWT, if interest income is received by a maturity (Reu. Regs. No. 12-80, a.mend.ed).
citizen, resident alien, non-resident alien engaged
"Other h'ust arra ngemcr?/s" means on yield/income,
in trade or business in the Philippines, domestic not previously subjected to a final tax, pertaining to all and
corporation, or resident foreign corporation;
other trust and similar arrangements, whether covered by
2. Interest income is exempt is received by non-residents a trust indenture/agreement or by an investmenVportfolio
(individuals or corporations); management agreement or any other similar document
involving the investmenVmanagement of funds (Reu. Regs.
3. Joint bank accounts of resident and non-resident No. 13-78, as arnended by Sec. 7, Reu. Regs. No. 16-81, July
citizen shall be 50Vo exempt (on the part of the non-
24, 198L; Reu. Regs. No.2-98).
resident citizen) and 50Vo taxable at 7.5Vo FWT (on
the part ofthe resident depositor). b. Interest income on foreign currency d.eposits. -
Gross interest income from foreign currency deposits with
Revenue Memorandum Circular (RMC) Nos. 77-2012 an Offshore Banking Unit (OBU) or Foreign Currency
(November 23, 2Ol2), 8l-2O12 (December ll, 2Ol2), and, 84-2OL2 Deposit Unit (FCDU) in the Philippines is subject to the
(December 26,2012) clarified Revenue Regulations No. 14-2012 final withholding tax of 7.\Vo (BIR Ruling No. 103-99,
(November 7,2Ot2) as follows: JuIy 13, 1999). However, interest income from foreign
cumency transactions ofa bank shall be subject to lo%ofinal
1. For zero-coupon instruments and securities issued by the
withhblding tax. If the foreign currency deposit is with a
government, t}re 2O7o FWT is payable upon the original
banklocated outside the Philippines, the interestincome is
issuance of the debt instrument.
subject to the graduated income tax rates (if the depositor
2. For interest-bearing instruments and securities issued by is a resident citizen) or the normal corporate income tax
the government, the 207o FWT is payable upon payment rate of 30Vo (ifthe depositor is a domestic corporation). Take
of the interest (RMC 77-2012, Nouember 23,2012). note that interest income on foreign currency deposits with
a bank located outside the Philippines by a non-resident
3. Interest income received by banks from payors belonging to
cltizen, alien individual, and foreign corporation is exempt
the Top 20,000 Corporations strictly arising from individual
from income tax, pursuant to the express provisions of
loans obtained from banks that are not securitized, Section 28(AX4) for OBU and Section 27(DX3) for FCDU,
assigned or participated out remains to be subject to both ofthe 1997 Tax Code.
creditable withholding tax at two percent (2Vo). Corollanly,
interest income paid by banks designated as Top 20,000 The tax base upon which the appropriate withholding
Corporations strictly arising from loans made to such tax rate shall be applied by the bank on interest income
banks that are not securitizedor participated out remains from foreign currency denominated loans extended to
to be subject to CWT at two percent (2Vo). The 207o FWT resident borrowers is the total amount of the interest
and CWT imposed under the 1997 Tax Code and existing income to be paid, without grossing up thereto the
regulations cover interest arising from or paid out of debt corresponding withholding tax due thereon, whether the
securities (RMC 84-2012, December 21,2012). borrower assumes to pay the tax or not (BIR Ruling No.
046-96, April2, 1996). The obvious purpose of the ruling
"Yield," shall mean the difference between the is to avoid endless "pyramiding."
amount the lender/investor loaned,/placed and the amount
INt t,Ml,; ,tlltr WIIIlll,l lrlNr:'l'A\l'ili I85
184 It.t,tvtt,twt,ttt | )N'l'AxA't'toN
( irorrrt Ittr'tttttt

c. Interestincon e f'romtrad.itional loans by lncal benhs wil,hhcld by thrr tlcposit,rtry bank lrom the proceeds of the
and, other cred.itors. - Interest income derived from krng-tcrm deprlsit or investment certificate based on the
loans and other transactions, other than those enumerated rcmaining maturity thereof:
above, is subject to the graduated income tax rates (if Four (4) years to less than five (5) years \Vo;
the creditor is an individual) or the normal corporate tax Three (3) years to less than four (4) years - l2Vo;
rate (if the creditor is a corporation) and no creditable Less than three (3) Years 207o
withholding tax is required to be made, except in the case ( Sec. 24tBlt1l and Sec. 25[A][2], NIRC).
of(a) non-resident alien not engaged in trade or business
in the Philippines where the rate applicable is 257o final This tax exemption is not extended to a non-resident
tax, and (b) non-resident foreign corporation where the alien not engaged in trade or business in the Philippines,
rate applicable is 20Vo final tax (Reu. Regs. No. 4-75) . and Revenue Regulations No. 2-98 used "holding period"
for purposes of determining the applicable withholding tax
d. Discounts &re treated. in the san,e n.anner as rate in case of Pre-termination.
interest incorne. - Discount revenues in financing
or factoring arrangements and in the issuance of long- f. Interest incomc frorn long-terrn d'eposits or inuesttnents
term instruments and bonds are treated for income tax of corporations is taxable. - The preferential tax
purposes in the same manner as interest income. Once one treatmlnt accorded to individuals is not extended to
recognizes the identity ofthe present value and the future corporations as no similar provision can be found in
value formulations, it becomes unnecessary to distinguish Sections 27 and 28 of the Tax Code.
between discount rates and interest rates. Indeed, in o Interest income on trad.itional lnans is not subiect
b.
most areas of financial practice, we dispense with the to final or creditabte withhold'ing tar' - Interest
distinction and simply refer to the two (2) collectively as payrqents for loans and other borrowings granted
the "yield." Although the term interest rate is often used Li-fittancial institutions, ordinary corporations, and
to decide the rate used to take monies forward in time, individuals are not subject to the final or expanded
there really is no difference between a discount rate and withholding tax, unless made by a Top 20,000 Corporation
an interest rate, and practitioners often use the term (BIR Ruting No.043'96, March 25, 1996)'
"yield" in lieu of either.
h.Interestonforeignloans.-Interestonforeignloans
The amount of discount at which Treasury Bills extended by non-resident foreign corporations is subject to
are originally sold by the Republic of the Philippines is t'he2}vofinalwithholdingtax'unlessalowerrateoftaxis
considered as interest (Sec. 7, Reu. Regs. No. 3-82, April imposed under an existing tax treaty' If the loan is granted
3, 1982). by a foreign goYernment or by a financial instrtution
e. Intere st inc ome from long -term d,eposits or inv e stment s owned, controlled or enjoying refinancing from the foreign
of ind.iuid,uals is exernpt. - Interest income from government, or an international or regional financing
long-term deposit or deposit substitutes, investment institution established by governments, the interest income
management accounts and other investments evidenced ofthelendersha]lnotbesubjecttothefinalwithholding
by certificates in such form prescribed by the Bangko tax ( Sec. 32[B] [7] [a], NIRC)'
Sentral ng Pilipina.s received by a ciLizen, resident alien,
and non-resident alien engaged in trade or business in the Bar Question (2008)
Philippines, shall be exempt from income tax. However, In 2007, Mr. & Mrs. Renato Garcia, an overseas Filipino
should the holder of the certificate pre-terminate the contract worker in Hong Kong, opened peso and dollar deposits at
deposit or investment before the fifth year, a final tax shall the Philippine branch of the Hong Kong Bank in Manila. During the
be imposed on the entire income and shall be deducted and year, the bank paid interest income of Php10,000 on the peso deposit
186 Itt,:vtt':wt,:tr oN 'l'nxn'r'r rN
'""'"u
nf,',l,Ll',','l,l,il,',1'.*" '''n'"" 187

and US$1,000 on the dollar deposit. The bank withheld final income /llg.s. No. 2). Ad.ioid.end is <lrrlirrc<l :ls tl corporate profit set aside,
tax equivalent to 20Vo of t}re entire interest income and remitted the rleclarcd, and ordered by the dircctors to be paid to the stockholders
same to BIR. on dcm:rnd or at a fixed time. Until the cash or property dividend is
declared, the corporate profits belong to the corporation and not to
a. Are the interest incomes on the bank deposits of Mr. &
the stockholders, and are liable for the payment of the debts of the
Mrs. Renato Garcia subject to income tax? Explain.
c<rrporation (Fisher a. Collector, 43 Phil.973).
b. Is the bank correct in withholding the 20Vo final tax on the
In general, dividends are included in the gross income of the
entire interest income? Explain.
stockholder, unless they are exempt from tax or subject to final
lax at preferential rate under the 1997 Tax Code. Cash dividend
Suggested answers:
and property dividend are subject to income tax, whereas stock
a,. The interest income onthe foreign currency d.eposit of Renato dividend is generally exempt from income tax. However, any type
Garcia, a non-resident citizen, with the FCDU of HK Bank of dividend must come from the unappropriated retained earnings
in Makq.ti is exempt from Philippine incom.e tax by ex,press of the corporation, unless it is a liquidating dividend which is not a
prouision of law (Sec. 24[B] in relation to Sec. 28tAlt7ltbl, true dividend in the true sense. "Property d'iuid.end"'is a dividend
NIRC). His interest income on peso deposit with HK Bank payable in property, which may be investments in shares of stocks of
in Makati will be subject to the 20Vo final withholding tax another corporation, or real property, or some other property owned
24[8][1], NIRC in relation to Secs. 23tBl and 57[AJ,
(Sec. by the corporation, paying the dividend. Property dividend is different
NIRC). from stock dividend in that the shares ofstock declared as property
dividend by a corporation are shares ofstock ofanother corporation
The interest income on the foreign currency deposit
to which the corporation paying the dividend has investments and
of Mrs. Garcia, a resident citizen, with the FCDU of HK
is shown as assets in its balance sheet. On the other hand, "stock
Bank in Mq,kq.ti is subject to the 7.5Vo fi.nal withholding
tox (Sec.24[8][1], NIRC), while her interest incorne on the
diuid.end.'i3 a dividend payable in the shares of stock of the
corporation declaring such stock dividend. The issuance ofthe stock
peso deposit with the bank will be subject to the 20Vo final
dividend will increase the number of shares issued and outstanding
withholding to;tc.
ofthe corporation that declared the stock dividend. A stock dividend,
b. No, a.s discussed aboue, the 20Vo final withholding tax when declared, is merely a certificate of stock which evidences the
applies only on the interest income on peso deposits. Since interest ofthe stockholder in the increased capital ofthe corporation. A
20Vo FWT is higher thq.n the 7.5Vo FWT on interest income stock dividend, being one payable in capital stock, cannot be declared
on foreign currency deposit of Mrs. Garcia, she can fiIe a out ofoutstanding corporate stock, but only from retained earnings.
written claim. for refund or tax credit for the excess tax However, a " liquid,ating diuid.e nd," although so-called dividend, is
paid, and Renato Garcia can also file a written clairn for not truly dividend as contemplated under the income tax law.
refund or krx credit for the 207o FWT erroneously deducted
and remitted to the BIR on his interest income on foreign Distinctions between Cash Dividend and Stock Dividend
currerucy deposit which is exempt from incorne ta.x,.
Divid.end. is a corporate profit set aside (from Retained
Earnings), declared and ordered by the directors to be paid to the
Dividend lncome stockholders on demand or at a fixed time. A stoch d'iaidend' is a
Dividends comprise any distribution whether in cash or other dividend payable in reserve or increase of additional stock of the
property in the ordinary course ofbusiness, even though extraordinary corporation. Acash d.iaid.end. is disbursement to the stockholder of
in amount made by a domestic corporation, joint stock company, the accumulated earnings, and the corporation parts irrevocably with
partnership, joint account, association, or insurance company to the all interest therein. A stock dividend involves no disbursement, and
shareholders or members out of its earnings or profits (Sec. 250, Reu. the corporation parts with nothing to the stockholders who receive,
not an actual dividend but a certificate of stock. When cash dividend
188 Itt.:v t t,;wr,lrr ou'l'A xn't'ror't
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is declared and paid to the stockholders and such cash becomes corporirtc properties. As capital, il is not yet subject to income.
the absolute property ofthe stockholders and cannot be reached by llowever, if a corporation cancels or redeems stock issued as a
creditors ofthe corporation in the absence offraud. A stock dividend, dividend at such time and in such manner as to make the distribution
however, still being the property of the corporation and not of the or cancellation, in whole or in part, essentially equivalent to the
stockholder, may be reached by an execution against the corporation distribution of a taxable dividend, the amount so distributed in
and may be sold as a part of the corporate property (Fisher u, rcdemption or cancellation of the stock shall be considered as
T?inid.ad' supra). Dividend is distinguished from "profi,ts," for profits taxable income to the extent it represents a distribution of earnings
in the hands of a corporation do not become dividends until they have or profits. This process of issuance-redemption amounts to a
been set apart, or at least declared, as dividends and transferred to distribution of taxable cash dividends, which was just delayed so
the separate property of the stockholders (Hyatt a. Alen, 56 N.Y, as to escape the tax (Commission'er a. Court of Appeals and' A.
553). Soriano Corporation, 307 SCRA 152).

Stock dividends Bar Question (2003)


Stoch d.iuid.end.s are generally exempt from tar. A stock
- On 3 January 1998, X, a Filipino citizen residing in the
dividend, which represents the transfer ofsurplus to capital account, Philippines, purchased one hundred (100) shares in the capital
is not subject to income tax. However, a dividend in stock may stock of Y Corporation, a domestic company. On 3 January 2000, Y
constitute taxable income to the recipients thereof, notwithstanding Corporation declared, out ofthe profits ofthe company earned afber
the fact that the officers or directors of the corporation choose to 1 January 1998, a hundred percent (!007o) stock dividends on all
call such distribution as a stock dividend. The distinction between a stockholders of record as of 31 December 1999 as a result of which X
stock dividend which does not, and one which does, constitute income holding in Y Corporation became two hundred (200) shares. Are the
taxable to the shareholder is the distinction between a stock dividend stock dividerqds received by X subject to income tax? Explain.
which works no change in the corporate entity, the same interest in
the same corporation being represented after the distribution by more Suggested answer:
shares of precisely the same character, and a stock dividend where No. Stoch diuidends are not realized in'come. Accordingly' the
there either has been a change ofcorporate identity or a change in different prouisions of the Tox Code, imposing a tax on diuid'end income
the interest ofthe shareholders after the distribution is essentially couers cash and property diuidends only, mahing stoch diuidends
different from his former interest. A stock dividend constitutes income exempt from income tq.tc. Howeuer, if the distribution of stock diuidends
if it gives the shareholder an interest different from that which his in the equiualent of cash or property diuidend, as when the distribution
former stockholdings represented. A stock dividend does not constitute results to a change in ownership interest ofthe shareholders, the stock
income if the new shares confer no different rights or interests than diuid.ends wilt be subject to income tq,x (Sec. Z4[B][2]; Sec. 25[A] and
did the old
- the new certificates plus the old representing the same
proportionate interest in the net assets ofthe corporation, paying the
[B] ; Sec. 28[B][5][b], NIRC).
stock dividend, as did the old (Sec. 252, Reu. Regs. No.2).However,
Rules on Taxation of Dividends
the receipt oftax-free stock dividends by the stockholder will reduce
his cost or adjusted basis of the stocks in determining the gain or loss The applicable rules with respect to dividend income under the
upon the subsequent sale or transfer thereof. Philippine 1997 Tax Code are as follows:
Subsequent cancellation or red.emption of stock d.ividend.s Diuid.end. is paid. by a d.omestic corporation
is essentially equiualent to the declaration of cash d.iuidend.. Recipient is a citizen or resident alien
- In a loose sense, stock dividends issued by the corporation, are
considered unrealized gain, and cannot be subjected to income ' Up to December 37, !997, cash dividend or property dividend
tax until that gain has been realized. Before the realization, stock paid by a domestic corporation was exempt from income tax pursuant
dividends are nothing but a representation of an interest in the to the provisions of the 1.977 Tax Code, as amended.
190 ll,r,:vr t,twt'ttr oN'l'nxn'r'roN
I
l lru, or,tt,: nnt,Wttttttttl,ttttttl'l',txt,:s f91

BeginningJanuary 1, l-998, cash dividend or property dividend .your answer in (a) be the same, if Caruso became a U.S. immigrant
paid by a domestic corporation or a joint stock company, insurance in 2008 and had become a non-resident Filipino citizen? Explain the
or mutual fund company, or on the share of an individual in the difl'erence in treatment for Philippine income tax purposes.
distributable net income after tax of a partnership (except a general
professional partnership) ofwhich he is a partner, or on the share Suggested answers:
of an individual in the net income afber tax of an association, joint
account, orjoint venture or consortium taxable as a corporation of
o.. In order to lessen the impact of double taxation on the sanne
inconle, I would aduise Caruso to credit the U.S. income
which he is a member or co-venturer, out of its earnings or profits in
tax on the diuidend paid to the U.S. Federal Gouernment
1998 or succeeding years, is generally subject to the following final
against the Philippine income tq'x to be paid to the
withholding tax rates:
Philippine Gouernment. This priuilege is, howeuer, subject
6Vo - beginningJanuary 1,1998; or to limitation as to amount and proof of ta,x payrnent made
8Vo - beginning January 1, 1999; or to the U.S. gouernrnent must be attached to the Philippine
1O7o beginning January 1, 2000. income tae return.
-
However, the tax on dividends shall apply only on income b. If Caruso became an immigrant in 2008 and thus became
earned on or after January 1, 1998. Income forming part of retained a non-resident Filipino citizen, such diuidend income
earnings as of December 31, 1997 shall not, even if declared or receiued from a U.S . corporation will be treated as a foreign-
distributed on or after January 1, 1998, be subject to this tax(Sec. source income, exernpt from the Philippine incorne to,r- A
24[B][2], NIRC). non-resident Filipino citizen is taxed only on income from
*
sources within the Philippines (Sec. 23[B], NIRC), q.nd
The appropriate tax rate to be deducted and withheld on the cash I
I diuidends receiued from a foreign corporatiort whose gross
dividend by the paying corporation shall be the rate prescribed in the
I irtcome for the three-year period wqs deriued from sources
year ofreceipt ofsuch dividend (not the rate in the year ofdeclaration
oitside the Philippines (Sec. 42[B], NIRC).
of such dividend) (BIR Ruling No. 134-99, August 25, 1999).

Recipient is a non-resident alien engaged in trade or business in the Bar Question (2001)
Philippines What do you think is the reason why cash dividends, when
Cash and./or property dividends shall be subject to 20Vo final received by a resident citizen or alien from a domestic corporation,
withholding tax ( Sec. 25[A] [2], NIRC). are taxed only at the final tax of LOTo and not at the progressive tax
rate schedule under Section 24(A) of the Tax Code? Explain your
Recipient is a non-resident alien not engaged in trade or business in answer.
the Philippines
Suggested answer:
Cash and/or property dividends shall be subject to the final
withholding tax rate of 25Vo (Sec. 25[B], NIRC). The reason for irnposing final withholding tapc (rather than the
progressiue tax schedule) on cash diuidends received by a resident
citizen or alien from a domestic corporation is to ensure the collection of
Bar Question (2010)
inconre ta.x on said income.If we subiect the diuidend to the progressiue
In 2009, Caruso, a resident Filipino citizen, received dividend to* rate, which can only be done through the fi.ling of income tax
income from a U.S.-based corporation which owns a chain of Filipino returns, there is no assurance thq.t the taxpayer will decla're the
restaurants in the West Coast, USA. The dividend remitted to Caruso income, especially when there are other items of gross incorne earned
is subject to U.S. withholding tax with respect to a non-resident alien duiing the year. It would be extremely difficult for the BIR to monitor
like Caruso. (a) What will be your advice to Caruso in order to lessen compliance considering the huge number of stockholders. By shifting
the impact of possible double taxation on the same income? (b) Would the responsibility to remit the tax to the corporation, it is uery easy to
t92 Itt,:vt t':wt':rr oru'l'nxn'r'roN
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check compliance becquse there are fewer withholding agents compored thc dill'erence between the regular income tax of 357o in 1997,34%
to the number of income recipients. in 1gg8, 330ft, in 1999, and 32/o in 2000 and thereafter andt]"JletSvo
Likewise, the imposition of a final withholding tax will make the tax on dividends as provided for in this paragraph (sec.28[B][5][b],
tax auailqble to the gouernment at an ectrlier time. Finally, the final NIRC; P.D. 69 ond Sec. 2, Reu. Regs. No. 4-76). With the increase
withholding tex will be q sure reuenue to the gouernment unlike when in the corporate income tax rate to 35Vo under R.A. 9337, effective
November '1,,2005,the tax due which is deemed paid to the Philippine
the diuidend is treated as a returnable income where the recipient
government shall be 20Vo of the dividend, and effective January 1,
thereof who is in a tax loss position is giuen the chance too offset such
2009, the tax due which is deemed paid shall be I|Vo.
loss against diuidend income thereby depriuing the gouernment of the
tax on said diuidend incorne. Atax sparing credit is a credit granted by the residence country
for foreign taxes that for some reasons were not actually paid to the
Recipient is a domestic corporation or a resident foreign corporation source country but that would have been paid under the country's
Dividends received by a domestic corporation or resident normal tax rules. The usual reason for the tax not being paid is that
foreign corporation from a domestic corporation (inter-corporate the source country has provided a tax holiday or other tax incentive to
dividend) shall not be subject to tax (Sec. 27[D]t4l and Sec. 28tAl foreign investors as an encouragement to invest or conduct business
in the country. In the absence of tax sparing, the actual beneficiary
[7][d], NrRC).
of a tax incentive provided by a source country to attract foreign
Dividend exclusion has always been a dominant feature of investment may be the residence country rather than the foreign
corporate income tax. It is a device for reducing extra or double investor. This result occurs whenever the reduction in source-country
taxation ofdistributed earnings. Since a corporation cannot deduct tax is replaced by an increase in residence-country tax.
from its gross income the amount of dividends distributed to its
In the leading case of Conxmissioner u. Procter & Gamble PMC
corporation-shareholders during the taxable year, any distributed
(160 SCRA 560), t]ne court ruled that the preferential 75vo tax on
earnings are necessarily taxed twice; initially at the corporate level
dividend paid to a non-resident foreign corporation is inapplicable
when they are included in the corporation's taxable income, and
because of the failure of the claimant to show the actual amount
again, at the corporation-shareholder level when they are received
credited by the U.S. government, to present the U.S. income
as dividend. Thus, without exclusion, the successive taxation of the
dividend as it passes from corporation to corporation would result in
tax returns of PGMC-USA, and to submit a duly authenticated
document evidencing the tax credit of the 20vo diffetential. upon
repeated taxation of the same income and would leave very little for
motion for reconsideration, the Supreme Court in an en' banc
the ultimate individual shareholder. At the same time, the decision
resolution reversed the earlier decision ofthe court. It pronounced
to tax a part of such dividends reflects the policy of discouraging that the l57o preferential tax rate was applicable to the case at
complicated corporate structures as well as corporate divisions in the
bar, because it was established that the Philippine Tax code only
form of parent-subsidiary arrangements adopted to achieve a lower requires that the U.S. shall "allow" Procter & Gamble USA "deemed
effective corporate income tax rate (Filipinas Life Assurance Co. paid" the tax credit equivalent lo 2OVo. Clearly, the "deemed paid"
a. Cornmissioner,2l SCRA 622). lax credit which must be allowed by U.S. law to P&G USA is the
same "deemed paid" tax credit that Philippine law allows to a
Recipient is a non-resident foreign corporation Philippine corporation with a wholly- or majority-owned subsidiary
Dividends received by a non-resident foreign corporation from in the U.S. The "deemed paid" tax credit allowed in Section 902,
a domestic corporation is subject to the ISVo final withholding tax, U.S. Tax Code, is no more a credit for "phantom taxes" than is the
subject to the condition that the country in which the non-resident "deemed paid" tax credit granted in Section 30(C)(8) (now Sec'
foreign corporation is domiciled, shall allow a credit against the tax 28tBlt5ltbl, NIRC). The legal question should be distinguished
due from the non-resident foreign corporation taxes deemed to have from questions of administrative implementation arising after the
been paid in the Philippines equivalent to 20Vo for 1997 , lgTo for Lgg8, legal question has been answered (comrnissioner u. Procter &
tSVo for 1999, and LTVo for 2000 and thereafter, which represents Gannble PMC,204 SCRA 377).
I94 ltr:vrr,;wr,;rr or.r'l'nxn,rrrr.r I Nr uMt,; lrult Wt l tlttot lrlNt l'l'Axt'll; t95
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The fact that Switzerland does not impose any tax on the Royalty paid by a f)omestic Corporation
dividends received from a domestic corporation should be consi-
dered as full satisfaction ofthe condition that the 20Vo differential
is deemed credited by the Swiss government (as against the Com-
utr*u*"d itt ttud" ot b,rtitt"tt itt th" Philippitt"t, ot u do-"tti"
missioner's contention that the tax-sparing credit should apply
only if the foreign country allows a foreign tax credit). The court Royalty income from sources within the Philippines is subject
observed that to deny private respondent the privilege to withhold to20Vo final withholding (income) tax, except royalty on books, other
only l57o provided for under P.D. 369 would run counter to the very literary works and musical compositions received by individuals cited
spirit and intent of said law and definitely will adversely affect above which is subject to IOVo final tax (Sec- 24[8][1] and Sec.25tN
foreign corporations'interest and discourage them from investing [2], NIRC).
capital in our country (Commissioner a. Wand.er Philippines,
160 SCRA 573). Recipient is a non-resident alien not engaged in trade or business in
the Philippines
Bar Question (1994) Royalty income from sources within the Philippines is subject to
257a finalwithholding (income) tax, unless a lower tax rate is allowed
What are disguised dividends in income taxation? Give an
example. under an existing tax treaty (Sec. 25[B], NIRC).

Recipient is a non-resident foreign corporation


Suggested answer:
Royalty income from sources within the Philippines is subject
Disguised diuidends are those income payments ntade by a
to the 307o final withholding tax, unless a lower tax rate is allowed
domestic corporation, which is a subsidiary of a non-resident foreign
under an e;isting tax treaty (Sec. 28[B][il, NIRC).
corporation, to the latter ostensibly for seruices rendered by the latter i
to the former, but which payments are disproportionately larger than
the actual ualue of the seruices rend,ered. In such case, the arnount Bar Question (2002)
ouer and aboue the true ualue ofthe seruice rendered shall be treated The MKB-PhiIs is a BOl-registered domestic corporation licensed
as a diuidend, and shall be subjected to the corresponding tax of357o by the MKB of the United Kingdom to distribute, support and use in
on Philippine sourced gross income, or such other preferential rate as the Philippines its computer software systems, including basic and
may be prouided under a comesponding Tax Treaty. related materials for banks. The MKB-Phils provides consultancy
Example: Royalty payments under a corresponding licensing and technical services, incidental thereto by entering into licensing
agreement. agreements with banks. Under such agreements, the MKB-Phils
will not acquire any proprietary rights in the licensed systems. The
MKB-Phils pays royalty to the MKB-UK, net of lSVo withholding tax
Royalty lncome prescribed by the RP-UK Tax Treaty.
Royalty is a valuable property that can be developed and sold on Is the income of the MKB-Phils under the licensing agreement
a regular basis for a consideration; in which case, any gain derived
with banks considered royalty subject to 207o final withholding
therefrom is considered as an active business income subject to the
tax? Why? If not, what kind of tax will its income be subject to?
normal corporate income tax(BIR Ruling No.57-2000; RMC 77-2003).
Explain.
Where a person pays royalty to another for the use of its intellectual
property, such royalty is a passrve income ofthe owner thereof subject
Suggested answer:
to final withholding tax.
' Yes. The income of MKB-Phils under the licensing agreement
The rules on royalty as a passive income under the Philippine
1997 Tax Code are summarized hereunder:
with banks shatl be corusidered as royalty subject to 20vo final
withhotding tax. The term royalty is broad enough to include
q
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technical aduice, &ssistance or seruices rendered in connection with I . l\t/r, ol't hc gross alnount of royalties arising from the use
technicq.l nxanagement or qdministration of any scientific, industriul oI, or thc right to use, any copyright of literary, arbistic or
or corlmercial undertahing, uenture, project or schen?e (Sec.42[4]1fl, scientific work, including cinematographic films or tapes
NIRC). Accordingly, the consultancy and technicq.l seruices rendered for television or broadcasting, or
by MKB Phils uthich are incidental to the distribution, support and
use of the computer systems of MKB-UK are taxable as royalty.
2. l07o of tlrle gross amount of royalties arising from the use
of, or the right to use, any patent, trade mark, design or
model, plan, secret formula or process' or from the use of,
Ta,ration of royalty und.er the Philippines-U.5. Ta.r Tleaty.
or the right to use, industrial, commercial, or scientific
The Philippines-U.S. Tax Treaty provides that royalty paid by a
-resident equipment, or for information concerning industrial,
of the Philippines to a corporation domiciled in the U.S. shall
commercial or scientific experience.
be as follows: (a) 257o, in all other cases; (b) l\Vo, if paid by a BOI-
registered enterprise engaged in preferred areas ofactivities, and (c) Considering that the treaty with China does not contain a
the lowest rate of Philippine tax that may be imposed on royalties of "matching credit" provision similar to that found in the treaty with
the same kind, paid under similar circumstances to a resident of a Germany, the tax on royalty payments to residents of China can be
third State. considered paid under similar circumstances to a resident of the
United States and the most-favored-nation clause in the RP-U.S.
The phrase "paid. und,er similar circum"stattces" under the
Tax Treaty shall apply (RMC No. 46'2002, September 2, 2002)'
most-favored nation clause in the Philippines-U.S. Tax Treaty has
Accordingly, the preferential 7O7o rate of tax may again be availed
been construed as referring to the manner of payment of taxes or
of by U.S. corporations under the most-favored nation clause in the
circumstances that are tax-related, and not to the subject matter of
Philippines-U.S. Tax T?eaty, in relation to the Philippines-China Tax
the tax (royalty). The entitlement of 107o rate by U.S. firms despite
Treaty, effective January l,2OO2'
the absence of a matching credit (2OVo on royalties under RP-Germany
Tax Treaty) would derogate from the design behind the most-favored
b.
I

Royalty paid by a Foreign Corporation


nation clause to grant equality of international treatment, since the
tax burden laid upon the income of the investor is not the same in Recipient is a resident citizen and a domestic corporation
the two countries. The similarity in the circumstances of payment
The royalty paid by a foreign corporation to a residenL citizen
of taxes is a condition for the enjoyment of the most-favored nation
and a domestic corporation is subject to tax at the graduated rates
treatment precisely to underscore the need for equality of treatment.
oftax ranging from five percent (57o) to 327o (in the case ofresident
The concessional rate of I0Vo provided for in the RP-Germany Tax
citizens) or at 32Vo (in the case of domestic corporations), because
Treaty should apply only if the taxes imposed upon royalties in the
they are liable to income tax on worldwide income.
RP-U.S. Tax Treaty and in the RP-Germany Tax Treaty are paid
under similar circumstances. The two (2) tax treaties do not contain
Recipient is a non-resident citizen. an alien, and a foreign corporation
similar provisions on tax crediting. The tax treaty with Germany
expressly allows crediting against German income and corporation Since they are liable to Philippine income tax only on income,
tax of 207o of the gross amount of royalties (deemed) paid under the the source of which is from the Philippines, they are exempt from
law of the Philippines. On the other hand, the tax treaty with the U.S. income on the royalties received from a foreign corporation whose
does not provide for similar crediting of 20Vo of the gross amount of property or interest is not located or used in the Philippines.
royalties paid (Commissioner u. S.C. Johnson & Sons, G.R. No.
727705, June 25, 7999; Wrigley Philippines a. Comtnissioner, Rental lncome
CTA Case No. 7738, July 26, 2007).
Rental income on the lease of personal property located in the
Treatrnent of royalty und.er the Philippines-China Tax Philippines and paid to a non-resident taxpayer shall be taxed as
Tleaty, - Under the Philippines-China Tax Tleaty effective January follows:
7,2002, the tax on royalties shall not exceed:
198 lil,rvrr,;wr,;rr oN'l'Axn'r'roN rN( ('|M'|'':^N'|r{w'|',;lli:ii,lll"" ''^-'* 199

Non-Resident Corp. Non-ResidentAlien 'l'hc principlc underl.ying the taxability of an increase in the net
Vessel 4.1Vo 2\Vo
worth ol'a taxpayer rests on the theory that such an increase in
Aircraft, machineries and net worth, if unreported and not explained by the taxpayer'
other equipment 7.SVo 257o
comes from income derived from a taxable source. In this
case, the increase in net worth was not the result of the receipt by
Other assets 3O.OVo 2\Vo
it of taxable income. It was merely the outcome of the correction of
an error in the entry in its books relating to its indebtedness to the
Bar Question (1993) insurance company. The income tax law imposes a tax on income; it
X is employed as security guard of Excel Supermarket, Inc. X does not tax any or every increase in networth whether or not derived
lives in a room within the compound of Excel but he is not charged from income (Fernand.ez Herma.nos, Inc. a. Commissioner, CTA
any rent. The rental value of the room is F300.00 a month. X wants Case 787, June 10, 1963).
your opinion on whether BIR can tax the value of the free use of his
room. Prizes and Awards
Suggested answer: Prizes (except prizes amounting to F1"0,000 or less) and other
winnings (except Philippine Charity Sweepstakes Office and lotto
The rental value of the room is not taxable. Section 2.2 of the winnings) from sources within the Philippines shall be subject to
Revenue Audit Mentorandum Order No. 1-87 prouides that if the 2OVo final withholding tax, if received by a citizen, resident alien or
lodging is furnished in the business premises of the employer and non-resident alien engaged in trade or business in the Philippines.
the employee is required to accept such lodging as a condition of his However, if the recipient is a non-resident alien not engaged in trade
employment, then the ualue of said lodging will be not taxable. It is or business in the Philippines, the prizes and other winnings shall
merely for the conuenience, comfort and pleasure of the employer. be subject to 257o final withholding tax. And if the recipient is a
corporation (domestic or foreign), the prizes and other winnings are
Other Income added to the cdrporation's operating income and the net income is
subject to 30Vo corporate income tax.
lncome from any source whatever
However, prizes and awards made primarily in recognition
The phrase nincotne from any source tohateuer" is broad of religious, charitable, scientific, educational, artistic, literary, or
enough to cover gains contemplated here. These words disclose civic achievement are excluded from gtoss income only if (a) the
a legislative policy to include all income not expressly exempted recipient was selected without any action on his part to enter the
within the class of taxable income under our laws, irrespective of contest or proceeding; and (b) the recipient is not required to render
the voluntary or involuntary action ofthe taxpayer in producing the substantial future services as a condition to receiving the prize or
gains (Blas Gutiet'rez a. Collector, supra). award (Sec. 32[B][7][c], NIRC). Moreover, all prizes and awards
Any economic benefit to the employee, whatever may granted to athletes in local and international sporbs competitions
have been the mode by which it is implemented, is income and tournaments whether held in the Philippines or abroad and
subject to tax. Thus, in stock options, the difference between the sanctioned by their national sports associations are also excluded
fair market value of the shares at the time the option is exercised from gross income (Sec.32[B][7][d], NIRC).
and the option price constitutes additional compensation income to The grand prize of the Philippine Centennial Commemorative
the employee (Commissioner u. Smith, supra). A stock option is 100,000 PISO National Raffle Draw of one Jaguar Daimler is subject
a right, but not an obligation, to purchase (caII option) or sell (put to the 2OVo final withholding tax, despite the fact that the raffie draw is
option) a specified number of shares at a fixed price before or at a a go,vernment-sponsored project (B IR Ruling No. 005-2001, February
certain date in the future. 15,2001).
200 llt,;vt t';wt,ltr oN'l'lxn'r'ror.r INl,Mt,r nNtr Wt t ttttot,trlt'tt l'l'lxt';s 201
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Bar Question (1996) i. ll'he recipicnt wus selected without any action on his part
to enter the rcntest or proceeding; and
Onyoc, an amateur boxer, won in a boxing competition sponsored
by the Gold Cup Boxing Council, a sports association duly accredited ii. The recipient is not required to render substantial future
by the Philippine Boxing Association. Onyoc received the amount of seruices as a condition to receiuing the prize or award.'
F500,000 as his prize which was donated byAyala Land Corporation.
The BIR tried to collect income tax on the amount received by Onyoc The first award granted to Euelyn was a Palanca award.
and donor's tax from Ayala Land Corporation, which taxes, Onyoc This hind of award requires submission of literary works. Hence,
and Ayala Land Corporation refuse to pay. Decide.
this is included in the gross income because it fails to meet the
legal requisites prouided for in the afore-quoted prouisions of law
Suggested answer: specifically item (i).

The prize
The second uward granted to Euelyn was the Most Valuable
wiII not constitute a taxable income to Onyoc; hence,
the BIR is not correct in imposing the income tax. R.A. No. 7549 Player Award. In this kind of award, Euelyn did not file any
explicitly prouides that "All prizes qnd awards granted to othletes in application to enter into any contest. The award was giuen to her in
Iocal and international sports tournaments and competitions held in recognition for her outstanding performance in the field of sports.
Howeuer, the recognition in the field of sports is not among those stated
the Philippines or abroqd and sanctioned by their respectiue national
sports associations shall be exempt from income tax.u in the afore-quoted prouision of law . Thus, the award granted to her
does not fall under the afore-quoted prouision of law.
Neither is the BIR correct in collecting the donot's tor from Ayala
The lq.st award granted to her was the Fellowship Award. This
Land Corporation. The law is cleor when it categorically stqted that
the donor of said prizes and q.wards shall be exempt from the payment
requires also submission of application to qualify for such award.
Hence, it fails to meet the necessary requisites of the afore-quoted
ofthe donofs tax.
prouision oflqut specifically item (1).
Bar Question (1993) Bar Questidn (1998)
Evelyn is a graduate student of U.P. In January 1991, she Is the prize of one million pesos awarded by the Reader's Digest
won the Palanca Award for an outstanding short story she wrote. subject to withholding of final tax? Who is responsible for withholding
The award was F25,000.00 in cash. In February, 1991, she was also the tax? What are the liabilities for failure to withhold such tax?
named Most Valuable Player of the Varsity volleyball team and she
was given a trophy plus F10,000.00. Finally, in March 1991, she Suggested answer:
received a Fellowship Award from the University of California to
pursue a master's degree inAmerican literature. The fellowship is for It depends. If
the prize is considered as winnings deriued from
sources within the Philippines, it is subject to withholding of final tax
$10,000.00 plus free board and lodging for two (2) semesters. Should
(Sec. 24[B] in relation to Sec. 57[A], NIRC). If deriued from sources
Evelyn include these awards and fellowship in her gross income?
Reasons.
without the Philippines, it is not subject to withholding of final tax
because the Philippine tax law and regulations could not reach out to
Suggested answer: for eign j uris dictions.
The toa shall be withheld by the Readet's Digest or local agent
Gross income includes prizes and winnings (Sec. 27, NIRC),
except those stated in Section 288(8), (E) of the NIRC, to wit:
who has control ouer the payrnent of the prize.

"(E) Prizes and awqrds made primarily in recognition of Any person required to withhold or who willfully fails to
religious, charitable, scientifi,c, educationol, artistic,literary, or ciuil withhold, shall, in addition to the other penalties prouided under the
Code, be liable upon conuiction to a penalty equal to the total amount
achieuement but only if:
of tax not withheld (Sec. 251, NIRC). In cqse of failure to withhold
202 Itr,rvtt,:wt:lt oN'l'nxlt'tott rrrrrMr.. nn',w';''i,T.irl;lli" ''^"''" 2oB

the tatc or in the case of under withholding, the deficiency tux shall similar to a loan, which is not income, because for every
from the payer I withholding agent ( lst par.,
be collected Sec. 2.S1Al, pcso borrowed he has a corresponding liability to pay one
Reu. Regs. No.2-98). pcso; and
Any person required under the Tax Code or by rules and (3) [f he has to paythe deficiency income tax assessment, there
regulations to uithhold toxes at the tim.e or times required by law or will be hardly anything left to return to the victims of the
rulcs and regulations shall, in addition to other penalties prouided swindling.
by law, upon conuiction be punished by a fi,ne of not less thq,n Ten
thousand pesos (Php10,000.00) and suffer imprisonment of not less l{ow will you rule on each ofthe three grounds for the protest?
than one (1) year but not more than ten (10) years (lst par., Sec. 255, l,)xplain.
NIRC).
Suggested answer:
Bar Question (2000) ( 1) The contention that the income tax applies to legal incorne
and not to illegal income is not correct. Section 28(a) of the
Jose Miranda, a young artist and designer, received a prize
Tax Code includes within the puruiew of gross income all
of P100,000.00 for winning in the on-the-spot peace poster contest
income from whateuer source deriued. Hence, the illegality
sponsored by a local Lions Club. Shall the reward be included in the
of the income will not preclude the imposition of the income
gross income of the recipient for tax purposes? Explain.
tqx thereon.
Suggested answer: e) The contention that the receipts from his swindling did not
constitute income because of his obligation to return the
No. It is not includable in the gross irrcome of the recipient because
amount swindled is lihewise not corect. When a taxpayer
the same is subject to a final tax of 207o, the arnount thereof being in
acquires earnings, lawfully or unlawfully, without the
excess of P10,000.00 (Sec. 24[8][1], NIRC). The prize constitutes a
consensual recognition, ex,press or implied, of an obligation
taxable income because it was made primarily in recognition of artistic
to repEy and without restriction as to their disposition, he
achieuement which he won due to an action on his part to enter the
has reieiued toxable income, euen though it may still be
contest (Sec. 32[B][7][c], NIRC). Since it is an on-the-spot contest, it is
claimed that he is not entitled to retoin the money, and euen
euident that he must haue joined the contest in order to earn the prize
though he may still be adjudged to restore its equiualent
or award. (James u. U.5.,366 US 213, 1961). To treat the embezzled
funds not as tarable income would perpetuate injustice
Bar Question (1995) by relieuing embezzlers of the duty of paying income
Mr. Lajojo is a big-time swindler. In one year he was able to earn ta"x,es on the money they enrich themselues with through
F1 Million from his swindling activities. When the Commissioner embezzlement, while honest people pay their taxes on euery
of Internal Revenue discovered his income from swindling, the conceiuable type of income.
Commissioner assessed him a deficiency income tax for such income. (3) The deficiency income tq$, assessment is a direct tax imposed
The lawyer of Mr. Lajojo protested the assessment on the on the ou)ner which is an excise on the priuilege to earn an
following grounds: income. It will not necessarily be paid out of the same income
that was subjectedto the ta,rc. Mr. Lajojo's liability to pay the
(1) The income tax applies only to legal income, not to illegal tq^rc is based on his hauing realized o taxable income from
income; his swindling actiuities q.nd will not affect his obligation
(2) Mr. Lajojo's receipts from his swindling did not constitute to mq,he restitution. Payment of the tax is q, ciuil obligation
income because he was under obligation to return amount imposed by law while restitution is a ciuil liability arising
he had swindled, hence, his receipt from swindling was from a crime.
204 Itt,:vt t,lwt,ltr oN'l'nxA'nor.r Ir.l'rrMu nNrr Wt'r'rrtor,rrtlrr'l'nxt,rs 205
( lrosg I rrcorrrl

Bar Question (1995) which had a market value ol'?30,000.00. In the dacion en pago
Mr. Osorio, a bank executive, while playing golf with Mr. document, the balance of the debt was condoned.
Perez, a manufacturing firm executive, mentioned to the latter that (a) What is the tax effect on the discharge ofthe unpaid balance
his (Osorio) bank had just opened a business relationship with a ofthe obligation on the debtor corporation?
big foreign Importer of goods which Perez'company manufactures.
Perez requested Osorio to introduce him to this foreign Importer and (b) Insofar as the creditor is concerned, how is he affected
put in a good word for him (Perez), which Osorio did. As a result, tax-wise as a consequence of the transaction?
Perez was able to make a profitable business deal with the foreign
Suggested answer:
importer.
(a) The condonation ofthe unpaid balance ofthe obligation has
In gratitude, Perez, in behalf of his manufacturing firm, sent the effect of a donation made on the part of the creditor. It is
Osorio an expensive car as a gift. Osorio called Perez and told him that obuious that the creditor merely desires to benefit the debtor
there was really no obligation on the part of Perez or his company to and without any consideration therefore cancels the debt,
give such an expensive $ft. But Perez insisted that Osorio keep the
the amount of the debt cancelled is a gift from the creditor
car. The company ofPerez deducted the cost ofthe car as a business to the debtor and need not be included in the lattet's gross
expense. income (Sec. 50, Reu. Regs. No.2).
The Commissioner of Internal Revenue included the fair market (b) For the dffirence of 770,000.00, the creditor shall be subject
value of the car as income of Osorio who protested that the car was to donot's tax at the applicable rates prouided for under the
a gift and therefore excluded from income. National Internal Reuenue Code.
Who is correct, the Commissioner or Osorio? Explain.
Bar Question (1995)
Suggested answer:
Mr. Francisco borrowed F10,000.00 from his friend, Mr. Gutierrez,
The Cornmissioner is correct. The car, hauing been giuen to Mn payable in one.year without interest. When the loan became due, Mr.
Osorio in consideration of hauing introduced Mn Perez to a foreign Francisco told Mr. Gutierrez that he (Mr. Francisco) was unable to pay
importer uthich resulted to a profitable business d.eal, is consid.ered because of business reverses. Mr. Gutierrez took pity on Mr. Francisco
to be a compensation for seruices rendered. The transfer is not a gift and condoned the loan. Mr. Francisco was solvent at the time he
because it is not made out of a detached or disinterested generosity but borrowed the F10,000.00 and at the time the loan was condoned.
for a benefit accruing to Mr. Perez. The fact that the company of Mr. Did Mr. Francisco derive any income from the cancellation or
Perez takes a business d.eduction for the payment indicates that it was
condonation of his indebtedness? Explain.
consi.d.ered as a pay rather than a gift. Hence, the fair marhet ualue of the
car is includible in the gross income pursuant to Section 28(a)(l) of the Suggested answer:
Ta,x Code (See 1974 Federal Ta$ Handbook, p. 145). Apayment though
uoluntary, if it is in return for seruices rendered, or proceeds from the No. Mr. Francisco did not deriue any income from the carrcellati'on
constraining force of any moral or legal duty or a benefit to the payor or condonation of his indebtedness. Since it is obuious that the
is anticipated, is a ta.x,able incorne to the payee euen if characterized as creditor merely desired to benefit the debtor in uiew of the absence of
q ngift" by the payor (Com.missioner u. Duberstein, 363 U.5.278). consideration for the cancellation, the annount ofthe debt is considered
as a gift from. the creditor to the debtor and need not be included in
the latter's gross income.
Bar Question (1997)
An insolvent company had an outstanding obligation of Bar Question (1997)
F100,000.00 from a creditor. Since it could not pay the debt, the During the year, a domestic corporation derived the following
creditor agreed to accept payment throughdacion en pa.go a property items of revenue: (a) gross receipts from a trading business; (b)
206 Itr,;vn,:wr,:rr or'l'nxA,t,tor'r Irurrrut,: Atttr Wt't'ttttot,trtrrr'l'nxl:s 207
( lroxx ltrrrrttrrr

interests from money placements in the banks; (c) dividends lrorn foregoing organizut,ionn lrom any of their properties, real
its stock investments in domestic corporations; (d) gains from stock or personal, or from any of their activities conducted for
transactions through the Philippine Stock Exchange; (e) proceeds profit, regardless of the disposition made of such income
under an insurance policy in the loss ofgoods. shall be subject to tax imposed under this Code."
In preparing the corporate income tax return, what should be b. Is the income derived by YYZ Foundation from the sale
the tax treatment on each of the above items? ofa portion ofits lot, rentals from its boarding house and
Suggested answer: the operation ofits canteen and gift shop subject to tax?
Explain.
The gross receipts from trading business is includible qs an item
ofincorne in the corporate incorne tax return and subject to corporate Suggested answer:
income tax rate based on net income. The other items of ret)enue
The exemption conternplated in the Constitution couers
will not be included in the corporate income tax return. The interest
real estate tax on real properties actually, directly and
from money rrtarhet placernents is subject to a final withhotding exclusively used for religious, charitable or social welfare
tax of 20Vo; diuidends from domestic corporations are exernpt from
purposes. It does not couer exemption from the imposition
incorne tax; and gains from stock transactions with the Phitippine
of income tax, which is within the context of Section 30 of
Stock Exchange are subject to transaction tax which is in lieu of the
the Tax Code. As a rule, non-stock, non-profi.t corporations
incorne tax. The proceeds under an insurance policy on the loss of
goods is not an item of income but merely a return of capital; hence, organized for religious, chd.ritable or social welfare
purposes are exempt from income tatc on their income
not taxable.
receiued by them as such. Howeuer, if these religious,
charitable or social welfare corporations deriue income
Bar Question (2002)
from their properties or any of their actiuities conducted
XYZ Foundation is a non-stock, non-profit association duly for profi,t, the income ta.x shall be imposed on said items
organized for religious, charitable and social welfare purposes. of income, ircespectiue of their disposition (Sec. 30, NIRC;
Last January 3, 2000, it sold a portion of its lot used for religious Comm.issioner a. YMCA, G.R. No. 724043, October
purposes and utilized the entire proceeds for the construction ofa 74, 7998; CIR a. St. Luke's Med.ical Center, G.B. No.
building to house its free Day and Night Care Center for children 795909, September 26, 20 72).
ofsingle parents. In order to subsidize the expenses ofthe Day and b. Yes. The income deriued from the sale of lot and rentals
Night Care Center and to support its religious, charitable and social
from its boarding house are considered, as income from
welfare projects, the Foundation leased the 30O-square meter area properties which are subject to ta,x. Likewise, the incomes
ofthe second and third floors ofthe building for use as a boarding
from the operation of the canteen and gift shop are income
house. The Foundation also operates a canteen and a gift shop
from its activities conducted for profit, which are subject to
within the premises, all the income from which is used actually, ta.x. The income ta.x attaches irrespectiue of the disposition
directly, and exclusively for the purposes for which the Foundation ofthese incornes.
was organized.
a. Considering the constitutional provision granting tax Bar Question (2005)
exemption to non-stock corporations, such as those formed
Explain briefly whether the following items are taxable or non-
exclusively for religious, charitable or social welfare
taxable: (a) income frornjueteng; (b) gain arising from expropriation
purposes, explain the meaning of the last paragraph
ofproperty; (c) taxes paid and subsequently refunded; (d) recovery
of said Section 30 of the 1997 Tax Code, which states
ofbad debts previously charged off; and (e) gain on the sale ofa car
that "ll]ncome of whatever kind and character of the used for personal purposes.
20u Itt,:vt t,lwr,:tt oN'l'rrx,r'r'loru I rur'r tMt,i ANt r Wt't ttt tr't I rtl,'tr r'l'A \r, lr 209
( lrorri Irrlorrrl

Suggested answer: Suggested answer:


a. It is taxable. The law imposes a tctx on,irucorrue from uny a. I'he proceeds of lifi: i,nsuranca receiued by a child as
source whateuer,' which rneans that it includes income irreuocable beneficiary are not to be reported in the
whether legal or illegal (Sec. J2[A], NIBO. annual income to.x return, because they are excluded from
b. Taxable. There is a material gain, not exclud,ed by law, gross income. This kind of receipt does not fall within
realized out of a closed, and, completed, trunsqction. Gqins the definition of income - oany wealth which flows into
from dealings in property are part of gross income (Sec. the taxpayer other than a mere return of capital." Since
32tAlt?l, NrRO. insurance is compensatory in nature, the receipt is merely
considered as a return of capital (Sec. 32[BJ[11, NIRC;
c. It depends. Taxes paid which are allowed, as a d,ed,uction Fisher u. T?inid.ad, 43 Phil.73 t19221).
from gross income are taxable when subsequently refunded
but only to the extent of the income tax benefit of said, b. 13th moruth pay is excluded from gross income for income
deduction (Sec. 34[C][1], NIRC). It follows that taxe:s paid, tax purposes to the extent of F30,000. Any excess will be
which are not allowed as deduction from gross income, i.e., included in the gross income as part of gross compensation
income tax, donor's tux and estate tax, q,re ruot taxable when income ( Sec. 32[B] [7] [e], NIRC).
refunded. De minimis benefits are non-taxable fringe benefits.
d. Recouery ofbad debts preuiously charged offis taxoble to They are not to be reported in the income tax return
the extent of income tax benefit of said deduction (Sec. S4[E] because they are tax exempt. They are also exempt frorn the
[1], NIRC). imposition of the fringe benefits tax (Sec. 33[C], NIRC).
e. Gain on the sale of a car used for personal purposes is c. Diuidends receiued by a domestic corporation from another
tq,xable. This is a gain deriued from dealings in property domestic corporation qre not subject to inconce tax; hence,
which is part of the taxpayer's gross income (Sic. J2tAl should not be declared in the income tax return (Sec. 27[D]
[3], NIRC). There is a material gain, not excluded by law, . [4], NIRC).
realized out of a closed and completed transaction. Diuidends receiued by a damestic corporation from a foreign
corporatioru are subject to income tax and shall form part
Bar Question (2005) of the gross income. There is no law exempting this type of
state with reasons the tax treatment of the following in the diuidend frorn income tax (Sec. 32[n, NIRC).
preparation of annual income tax returns: d, Interest on deposit with BPI Family Bank is a passiue
a. income subject to a final withholding tar rate of 20Vo;
Proceeds oflife insurance received by a child as irrevocable
beneficiary; the interest on deposit with a local offshore banking unit
of a foreign bank is a passiue income subject to a final
b. 13th month pay and de minimis benefits; withholdirug tax rate of 7.57o (Sec. 24[8][1], NIRC). Both
c. Dividends received by a domestic corporation from (i) interest incomes q.re not to be declared as part of gross
another domestic corporation; and (ii) a foreign corporation; income in the income to.x return.

d. Interest on deposits with (i) BpI Family Bank; and (ii) a e. (L) Generally, income realized from the sale of capital
assets qre not to be reportedin the income tax return,
local offshore banking unit of a foreign bank;
as they are already subject to final taxes (capital
e. Income realized from sale of (i) capital assets, and (ii) gains tax on real property located in the Philippines
ordinary assets. and shares of stocks of a domestic corporation). What
are to be reported in the annual income tax return
210 llt,tvtt,:wt,:tt ott'l'nxn t'totr

q,re the capital gains deriued lront the dispositiort


of capital assets other than real property located
in the Philippines or shares of stochs in domestic
corporations which dre not subject to final taxes.
CIIAPTER VI
(ii) Income realized from the sale of ordinary assets is
taxable ond the said incorne shall be declared in the EXCLUSIONS FROM GROSS INCOME
annual income tax return. The income constitutes
either income deriued from the conduct of trade or
business or a gain deriued from dealings in property As the items of gross income subject to tax are being determined,
(Sec.32[4][2] and [3J, NIRC). l.he exclusions from gross income under the 1997 Tax Code and the
cxempt income under general or special laws must at the same time
lrc ascertained. It is important to identify these exclusions and exempt
income so that they are not included in the taxable income reported
b.y the taxpayer in his/its regular income tax return (BIR Form 1701
lbr individuals and 1702, for corporations).
The term "gross income" does not include those items of income
cxempted by the statute, tax treaty, or fundamental law. Exemption
is an immunity or privilege; it is freedom from a charge or burden
to which otlrers are subjected (Greenfield. a. Meer, 77 PhiI. 394).
Such tax-free income should not be included in the income tax return
for individuals (BIR Form 1701) or corporate income tax return (BIR
Form 1702), unless information regarding it is specifically called
for. The exclusion of such income should not be confused with the
reduction of gross income by the application of allowable statutory
deductions (Sec. 61, Reu. Regs. No. 2). Exclusions are in the nature
of tax exemptions, and it behooves upon the taxpayer to establish
them convincingly ( C ommission er u. Mitsubis hi, 7 8 1" SC RA 2 L4).
An example of exclusion is the maternity benefits advanced by the
employer to his employees (BIR Ruling No. 012-99, January 28, 1999).
Under the 1997 Tax Code, the termnexclusiorr.s" refers to items
that are not included in the determination of gross income either
because: (a) they represent return ofcapital or are not income, gain
or profit; or (b) they are subject to another kind ofinternal revenue
tax; or (c) they are income, gain or profit that are expressly exempt
from income tax under the 1997 Tax Code.
Exemption may, however, be granted also under the 1987
Constitution, tax treaty or international agreement, or a general or a
special law. Sometimes, exemption is granted by law to the individual,
corporation or association that receives the income.

2rl
212 Itr,:vr r':wr,:rr ol'l'nxn't'tor'r Ilr r rMt,: ANt r WI t IiltilLt IN(i'l']\xt,:il 2l:l
l,lxclusronrr lirrrrr ( ilols I rrtotrrt'

Items of exclusion representing Return of Capital lrrolits irrtr irt,l,rihr.rttrble t,o a l)(rrlnlrIl(!nl, trstahlishment of the foreign
corporirtion crtrated or deemed creat,ed in the Philippines. Also, capital
The return of capital may take many forms. The amount ol' grrins f rom sale of shares ol'stock of ar domestic corporation, which
capital is generally recovered through deduction ofthe cost or adjusted is rrlwirys presumed by law to have its situs in the Philippines, are
basis ofthe property sold from the gross selling price or consideration. gerlerrt.l.l.y not subject to Philippine income tax, if there exist no real
It may also relate to indemnities, such as proceeds of life insurance ltntpert.v interest.
paid to the insured's beneficiaries and return of premiums paid
by the insurance company to the insured under a life insurance, UndcrSpeeral.laws
endowment or annuity contract. Moral damages are exempt because
they represent return or recovery ofcapital and are not income to the il. Under R.A. 6938 (Cooperatiue Code of the Philippines),
injured or damaged person. agricultural multi-purpose cooperative registered with the
Cooperative Development Authority is exempt from ordinary
Item of exclusion because it is subjectto another internal income tax on its transactions with members and non-
members for a period of 10 years from the date of registration.
revenue tax Thereafber, the income tax exemption shall be limited to business
The value ofproperty acquired by gift, bequest, devise, or descent transactions with members only.a R.A. 9520 (Philippine
is exempt from income tax on the part ofthe recipient thereof,l because Cooperative Code of 2008) exempts from any taxes and fees
the receipt ofsuch property is already subject to transfer taxes (i.e., on duly registered cooperatives which do not transact business
estate tax or donor's tax). The policy of Congress is to impose only with non-members or the general public, and cooperatives with
one kind of direct tax accumulated reserves and undivided net savings of not more
- either the income tax or transfer taxes - on than F10 million. However, If the cooperative has accumulated
these transactions.
reserves and net savings of more than F10 million, it is subject
Items of exclusion because they are expressly exempt to income tax on the amount allocated for interest on capitals,
provided that it is not consequently imposed on interest
from income tax
individually received by members (Arts. 60 and 61, R.A. 9520,
Under the Constitution February 17, 2009) .

All assets and revenues of a non-stock, non-profit private There is nothing in the BIR ruling to suggest that it
educational institution used directly, actually and exclusively for applies only when deposits are maintained in a bank. Rather,
private educational purposes shall be exempt from taxation.2 the ruling clearly states, without any qualification, that since
interest from any Philippine currency banks, cooperatives are
Under a Tax Tleaty not required to withhold the corresponding tax on the interest
from savings and time deposits of its members, members of the
Income of any kind, to the extent required by any treaty
cooperatives deserve preferential tax treatment pursuant to
obligation binding upon the Government of the Philippines, is
R.A. 6938, as amended by R.A. 9520 (Dumaguete Cathed'ral
exempt from income tax.3 Business profits of a foreign corporation
organized under the laws of a treaty country from sources within
Cred.it Cooperatiue a. CIR, G.R. .A/o. 782722, January 22,
2010).
the Philippines are not subject to Philippine income tax, unless such
b. Under R.A.7279 (Urban Deuelopment Housing Act of
1Sec.
7992), the National Housing Authority is exempt from all fees
32(BX2), NIRC.
Art. XIV, 1987 Constitution. and charges of any kind, whether local or national, such as
'zSec. 4(3),
3In general, business profits from sources
within the Philippines are exempt from
Philippine income tax, unless the foreigl corporation has a permanent establishment
in the Philippines and such business profits are attributable to said permanent aBIR Ruling No. 008-2001, March 5, 2001
establishment.
2t4 ll.r,;vr r';wr,:rr or'l',lxn'r'roN INr r rMt,: aNIr Wt t ttrtol.rrtttrri'l'nxt,:s 2ll-t
l,)xtlttxtotrn li'otrr ( lrosx ltrrrrttrc

income and realty taxes, while the private sector participating i. No more five percent (5%) gross income tax incentive to
in socialized housing shall be exempt from the following taxes:r' developers ofTEZs in Metro Manila, Cebu, Mactan Island,
and Boracay Island;
i. Project-related corporate or individual income taxes
on income directly realized from the development and/ ii. No more income tax holiday and five percent (57o) gross
or improvement of socialized housing sites, slum areas, income tax incentives to locator enterprises of TEZs in
resettlement areas, and/or construction and sale of the aforesaid four (4) areas, except for tax and duty-free
socialized housing units to qualified beneficiaries as importation and zero-VAT rating on local purchases of
approved by the HLURB or LGU concerned. The exemption capital equipment;
shall be issued by the BIR on a per project basis, and iii. No more new TEZs shall be established in the aforesaid
separate books of account shall be kept by the contractor, four (4) areas.
developer, owner or seller of socialized housing units.
The new policy shall not have retroactive effect. However,
ii. Capital gains tax on sale of raw lands for use in socialized TEZ developers and locator enterprises in said four (4) areas that
housing project. have not signed their Registration Agreement with PEZA shall
c. Under R.A. 7653 (New Central Bank Act), as amended by be covered by the new policy. Existing and future TEZ developers
R.A. 8791, the Bangko Sentral ng Pilipina.s is exempt from all and locator enterprises outside the four (4) areas shall continue
national, provincial, municipal and city taxes for a period of five to avail of the incentives, subject to existing guidelines: (a) For
years.6 It is exempt from documentary stamp tax under R.A. TEZ developer/operator-five percent (57o) gross income tax; and
9243 (2003). (b) for TEZ locator enterprises - ITH, five percent (57o) gross
income tax; tax and duty-free importation; and zero percent(OVo)
d. Under R.A. 791.6 (PEZA Law), as amended,PEZA-reg;stered VAT on local purchases of capital equipment (RMC 23-2013,
enterprises are given income tax holidays of six (6) or four (4) February 22,2013).
years from the date of commercial operation, depending on
whether their qctiuities are considered as pioneer or non-pioneer. Under R,A- 9L78 (Barangay Miero Business Entetprises
Act of 2002), Barangay Micro Business Enterprises shall be
Henceforth, registered ecozone and freeport zone exempt from income tax for income arising from the operation of
enterprises already availing ofthe incentives and benefits under the enterprise. BMBE refers to anybusiness entity or enterprise
R.A. 9400 in accordance with these rules, shall be expressly engaged in the production, processing or manufacturing of
disqualified from availing of the incentives and benefits defined products or commodities, including agro-processing, trading
and/or granted under other laws, rules and regulations. Qualified and services, whose total assets including those arising from
enterprises already enjoying incentives under other preferential Ioans but exclusive of the land on which the particularbusiness
regimes should have their registrations thereunder cancelled entity's office, plant and equipment are situated, shall not be
before they may subsequently avail of the benefits provided more than F3 million.
under R.A. 9400 (DOF Departmerut Order No. 18-2013, April
16, 2013; RMC 35-2013, April 25, 2013). Local Water Di.stricts are erempt ftnm incom"e ta,r.1 Local
water districts are now exempt from income under R.A.- 10026,
Pursuant to PEZA Board Resolution No. 12-610, as circularizedby Revenue Memorandum Circular No. 28-2010
dated November 13, 2013, which approves the guidelines dated March 23,2010. However, they were subject to income
on registration and administration of incentives to Tourism taxes and franchise taxes, in addition to the following taxes: (a)
Economic Zone (TEZ) developers and locator enterprises, the excise taxes; (b) value-added tax on sale ofgoods and services; (c)
following rules have been adopted: other percentage taxes; (d) capital gains tax; (e) income tax on
sBIR Ruling No. 064-96, June 7, 1996.
6BIR Ruling No. 138-96, December 12, 1996. ?RMC 63-03, October 10,2003.
216 Itt,:vtt,;wt,:tr oN'l'nxrt't,r rr'l INr r rN4t, ANt r Wr t trtt, r,trtNrr'l',lxl.:s 217
l,)llltrlronrr Itrrrrr ( itrrss Itttrttttc

income not arising from the water district's productive activity p.rrticipation ol'!'ilipinos in the ownership of real estate in the
such as interest, royalties, prizes, winnings and dividends; (fl Philippines (Sec. 2, REIT Law), and to give alien individuals
final tax of 20Vo on interest income from philippine currency and foreign corporations to own indirectly real properties in the
bank deposit, yield or any other monetary benefit from deposit Philippines, Congress enacted Republic Act No. 9856, otherwise
substitutes and from trust fund and similar arrangement; known as the "Real Estate Investment Trust (REIT)" Law. To
and (g) documentary stamp taxes on documents, instruments make investments in REIT corporations attractive, the law gives
and papers effective August 18, 1996 or five (b) years from the the following tax incentives to qualified investors:
effectivity of R.A. 7109.8
The exemption privilege (income and franchise taxes), Persons entitled. to enjoy incentiues
granted to local water districts, was limited to a period of five There are two (2) kinds of persons entitled to tax
(5) years from the effectivity of R.A. Z10g.e
incentives, namely: (1) REIT, which is a stock corporation
C. Incentiaes und.er RA,. 9SSG (The Reat Estate Investment organized principally to own income-generating real estate
Tlust Act of 2oog)ro assets; and (2) Investor in REIT shares ofstocks in accordance
with a REIT Plan approved by the Securities and Exchange
Under Section 10, Article XII of the 1982 Constitution, Commission (SEC).
only Filipino citizens and domestic corporations organized and
existing under the laws of the Philippines, at least 60Vo of the Requisites for Exemption
capital of which is owned by Filipinos, are entitled to acquire
and own land in the Philippines. A few exceptions to this rule To be entitled to the incentives provided by law, the
exist, such as (a) when property is acquired by purchase by an following requisites must be complied with:
alien individual or foreign corporation, and such property is
part of the 4O7o interest in a condominium project or townhouse
,, 7. REIT shares are registered with the SEC and the
Philippine Stock Exchange (PSE);
complex covered by a Condominium C ertifi c ate of Title I Re p ub tic
Act No.4726 (Condominium Act), as amended by Republic Act 2. REIT complies with the foreign ownership limitations
No. 7899J; and (b) when property is acquired by purchase by a provided for in the 1987 Constitution and special laws
former natural-born Filipino citizenwho has lost his philippine on real property ownership;
citizenship, subject to limitations provided by law (Sec. g, 3. 907o of the distributable income of the REIT shall
Article XII, 1987 Constitution), such as Batas pambansa Blg. be distributed to shareholders during the year.
185, law enacted to implement the above-cited provision of the Distributable income excludes proceeds from the sale
Constitution, and Republic Act No. 812g, wtrich amended the of REIT assets that are re-invested within one (1) year
"Foreign Investments Act." from date of sale;
While ownership of real property in the philippines is not 4. Minimum public ownership. There must be at
subject to limitation with respect to Filipino citizens, not so many least 1,000 public shareholders- in the REIT, each
citizens own such real properties because ofthe ever-increasing shareholder owning at least 50 shares ofany class of
cost to acquire the same. In order to provide opportunities shares, who in the aggregate own at least one-third
to these Filipino citizens who are not capable of owning real (1/3) of the outstanding capital of the REIT;
property as such or to democratize wealth by broadening the
5. Capitalization. The REIT must have a minimum
paid-up capital -of F300 million;
8Memo. No. 014-2002, October 24,2002 p
of Deputy Commissioner Edmundo
Guevara. 6. Allowable inuestments. The REIT may invest in
eBIR Ruling No. UN-439-95, November
10As implemented
17, 1995. - in the Philippines or if
the following: (a) real estate
by Rev. Regs. No. 18-2011, JuJy 25,21ll. the real estate is outside the Philippines, it does not
2t8 Itt,:vtt,:wt,rH or.r'l'AxA't'ror.r Irur opr,: lnrr Wt't ttttot,trtNr;'l'Axt,::r 2r9
l,lxclttsrorrrr lirrtrr ( itrrns ltttrtlttt'

exceed 4oo/o ofthe deposited property and upon special .)


'l'hc ltllI'l' slrrrII nol. lxr Ii.rble to the minimum corporate
authority from the SEC; (b) real-estate related assets; income tax (M(ll'l') computed at two percent (27o) of
(c) managed funds, debt-securities and listed shares; its gross incomc;
(d) government securities; and (e) other similar
outlets allowed by the SEC; 3. The distributable income excludes the proceeds from
sale of REIT assets that are re-invested by the REIT
7. Investrnent in synthetic inuestment products. The within one (1) year from the date of sale;
REIT may invest not more than five percent -(57o) of
its investible funds in synthetic investment products, 4. One percent (l%o) creditable withholding tax on
such as credit default swaps, credit-linked notes, etc., income payments to REIT;
upon approval by the appropriate regulatory body; 5. 1O7o final tax on dividends paid by REIT, unless
8. Income-generating real estate. The income- received by a non-resident person that is subject
-
generating real estate of the REIT must provide income to income tax rate of less than LO%o, pursuant to a
representing at least 757o ofthe deposited property; treaty. Overseas Filipino investor is exempt from the
dividend tax for seven (7) years;
9. Property deuelopmenf. The REIT must hold the
developed property until- its completion and the total 6. The sale of listed investor securities through the PSE,
contract value shall not exceed lOVo ofthe deposited including block sales or cross sales with prior PSE
property of the REIT; approval, is subject to stock transaction tax of r/2, of
one percent (77o) of the gross selling price;
10. Single entity limit. The REIT shall not invest
not more t};.an L1o/o -of its investible funds in any 7, The initial public offering and secondary offering of
one issuer's securities or managed fund, except investor securities is exempt from the IPO tax;
government securities where the limit is 25Vo; 8. The original issuance of investor securities shall be
l-1. JointVenture. REIT shall not make investment subject to documentary stamp tax;
-Theor interests in an unlisted special
by acquiring shares 9. The sale or transfer of real property and security
purpose vehicle constituted to hold./own real estate interest thereto shall be entitled to 5O7o discount of
and the REIT shall have freedom to dispose of such the applicable documentary stamp tax thereon, and
investment; and the unlisted REIT may avail ofthis privilege, provided
72. The valuation of the REIT assets shall be made by an it listed within two (2) years from the initial availment
independent appraisal company at least once a year. of the incentive;

10. However, a seller of real property to a REIT shall


Ta,r Incentiaes be subject to income tax, because the REIT law does
The tax incentives of a REIT corporation include the not provide for any exemption on such transaction.
following: Likewise, the sale and lease of real property by a
REIT shall be subject to value added tax (VAT), but a
1. The regular corporate income tax (RCIT) ofthe REIT REIT shall not be considered as a dealer of securities
shall be computed on its Net Taxable Income as and shall not be subject to VAT on sale or exchange
defined in the REIT law (i.e., dividend paid during of securities forming part of its real estate-related
the year and on or before the last day of the 5th assets.
month following the close ofthe taxable year which is
considered paid as ofthe end ofthe year is deductible h. nA. 9505 (Personal Equity and. Retirement Account
from its gross income); TPERAI Act of 2008). A qualified contributor shall be
-
220 ltr,rrrrr,:wr,rrr oru
,l'nxn'r.ror.i
I Nrr rMt'; Ar.rI r Wt t t tt I rt,ltt'tr l'l'nxt,ts 22t
l,)xlltrlrutrrt lirrttt ( iross ltrtrrlttt'

entitled to a tax credit in the amount of five percent (5oI,) of the l'lriIippinc Health lnsurunr:c ()orporation (PHIC), the Philippine
aggregate qualified PERA contributions made in one taxable ( llrurity Sweepstakes Oflice (['CSO), shall pay such rate of tax upon
year against his own income tax liability. However, if the l,lrcir taxable income as are imposed under Section 27 of the Tax
contributor is an overseas Filipino, he shall be entitled to claim ( )rde upon corporations or associations engaged in a similarbusiness,
the five percent (\Vo) tax credit against any national internal irr<lustry or activity (Sec.27[C], NIRC).
revenue tax liabilities, excluding the contributor's withholding
tax liabilities as withholding agent. The contribution of the UnderR.A. 9337, effective November 1,2005, PAGCORbecame
employer to the PERA of a qualified employee shall not form xubject to income tax on its income from casino operations, dollar pit
part of the employee's taxable gross income; hence, exempted operations, regular bingo operations, and income from mobile bingo
from the withholding tax on income, whether withholding tax operations operated by it, with agents on commission basis, provided
on compensation or fringe benefits. The pERA-TCC may be t,htrt agents'commission income shall be subject to the regular income
issued only to a qualified overseas Filipino and self-employed l,rrx and withholding tax, and on income from other related operations.
contributor. The TCC arising from the pERA contributions shall I'AGCOR's contractees and licensees (i.e., entities authorized and
not be refundable or transferable. On the part of the employer, licensed by PAGCOR to perform gambling casinos, gaming clubs and
he can claim the actual amount of his/its qualified employer,s olher amusement places, and gaming pools) are subject to income tax
contribution as a deduction from his/its gross income, but only under the Tax Code. In addition, P.D. 1869, PAGCOR is subject to
to the extent ofthe employer's contribution that would complete f'ranchise tax of five percent (57o) of its gross revenues or earnings
the maximum allowable PERA contribution of an employee. t'rom the above activities (RMC 33-2013, April 17, 2013).
The qualified employer's contribution allowable as deduction
shall likewise be exempt from withholding tax on compensation, Exclusions from Gross lncome
notwithstandingthe provisions of Section B4(K) ofthe Tax Code. Section 32 of the Tax Code enumerates the excluded items
Investment income of the contributor consisting of all froryr gross income. These are as follows:
income earned from the investments and reinvestments of his
PERAAssets in the maximum amount allowed shall be exempt 1. Proceeds of life insurance policies. - Proceeds of life
from the following taxes: (a) FWT on interest from any currency insurance policies, paid by reason of the death of an insured
bank deposit, yield or any other monetary benefit from deposit to his estate or to any beneficiary (individual, partnership, or
substitutes and from trust and similar arrangements, including corporation, but not a transferee for a valuable consideration),
a depository bank under the expanded FCDS; (b) capital gains directly or in trust, are excluded from the gross income of the
tax on the sale, exchange, retirement or maturity of bonds, beneficiary. It is immaterial whether the proceeds are received
debentures or other certificates ofindebtedness; (c) ITVo tax on in a single sum or in installments. If, however, such proceeds are
cash or property dividends actually received from a domestic held by the insurer under an agreement to pay interest thereon,
corporation or mutual fund company; (d) capital gains tax on sale the interest payments must be included in income. The interest
or other disposition ofshares ofstock in a domestic corporation; income shall be taxed at the graduated income tax rates.
and (e) regular income tax(Reu. Regs. No. 1Z-2011, October 22,
2011). Bar Question (2003)
On 30 June 2000, X took out a life insurance policy on his own
Under the 2005 Tax Code life in the amount of F2,000,000.00. He designated his wife, Y, as
Exempt corporations and associations irrevocable beneficiary to F1,000,000.00 and his son, Z,Lothe balance
of F1,000,000.00, but in a latter designation, reserving his right to
All corporations, agencies, or instrumentalities owned or substitute him for another. On 1 September 2003, X died and his wife
controlled by the government, except the Government Service and son went to the insurer to collect the proceeds of Xs life insurance
Insurance System (GSIS), the Social Security System (SSS), the policy.
t).).,
l(r':v t t,twt,:lt oN'l',nxn,rroru

lil;iH,:il ,Iil,:'ill:iiil,;:,1il: 223

Are the proceeds of'the insurance subject to income tax on the


of indemnity. Proceeds ol' lilir insurance, payable upon the death
part of Y andZ for their respective shares? Explain.
ol'the insured, are considered as indemnity rather than income to
l.he heirs or beneficiaries who could be corporations or individuals
Suggested answer: (El Oriente Fabrica d.e Tabacos u. Posad.o,s,56 Phil. 747).But
No. The law explicitly prouides that proceeds of tife insurance interest payments thereon shall be taxable, if such amounts are held
policies paid to the heirs or beneficiaries upon the death ofthe insured by the insurer under an agreement to pay interest.
are excluded from gross income qnd is exempt from toeation. The
proceeds oflife insurance receiued upon death ofthe insured constitutes :-t. Value of property acquired by giftrtt bequest, devise, or
a compensation for the loss of life; hence, a return of capital, which descent.ra - If the payment of a gift or bequest is to be made at
is beyond the scope of income taxation (Sec. J2[B][il, NIRC). TNOTE: intervals, it is taxable to the donee (or beneficiary) to the extent
The reseruation as to his right to designate or substitute the beneficiary that it is made out of income.15
for another is not important for income tax purposes, arthough it is Gifts, bequests and devises (which are subject to estate or
mctterial for estate tax purposes.l
gift taxes) are excluded, but not the income from such property.
2. Amounts received under life insurance, endowment or
If the amount received is on account of services rendered,
whether constituting a demandable debt or not, or the use or
annuity contracts. - Amounts received (other than amounts opportunity to use of capital, the receipt is income (Piroaano
paid by reason of the death of the insured and interest pa;rments
u. Cornmissioner, 14 SCRA 832).
on such amounts) under a life insurance, endowment, or annuity
contract are excluded from gross income, but if such amounts
(when added to amounts already received before the taxable
4. Amounts received through accident or health insurance.
year under such contract) exceed the aggregate premiums or - Amounts received through accident or health insurance
or under workmen's compensation acts, as compensation for
considerations paid (whether or not paid during the taxable personal injuries or sickness, plus the amounts of any dnma'ges
year), then the excess shall be included in gross income.
received, whether by suit or agreement, on account of such
However, in the case of a transfer for a valuable consideration,
injuries or sickness.
by assignment or otherwise, of a life insurance, endowment, or
annuity contract, or any interest therein, only the actual value Compensations for damages to personal or family rights,
of such consideration and the amount of the premiums and damages for slander and libel, award for loss of life, damages
other sums subsequently paid by the transferee are exempt from for injuries to the goodwill of a taxpa)'er's business are not
taxation.llNo loss is realized on surrender of a life insurance taxable, unless they exceeded its cost. Payments in settlement
policy for its surrender value.12 of an action for breach of promise to marry and compromise
payments in settlement of an action for damages against abank
Life insurance is a contract of indemnify. It is cerbain that
- beneficiaries
the proceeds of life insurance policies paid to individual
on account of conduct impairing the taxpayer's goodwill by
injuring its reputation are not taxable.l6Damages received for
upon the death of the insured are exempt. It is not so certain that the
proceeds oflife insurance policies paid to corporate beneficiaries upon
the death of the insured are likewise exempt. But at least, it may r3Girt is a gratuitous transfer. The essential elements of a gift are: (a) a donor
be said that the law is indefinite in phraseology and does not permit competent to make the gift; (b) a clear and unmistakable intention on his part to make
the courb unequivocably to hold that the proceeds oflife insurance it; (c) a donee able to take the gift; and (d) a conveyance, assignment or transfer vesting
legal title in the donee, without power ofrevocation at the will ofthe donor, and a
policies received by corporations constitute income, which is taxable.
relinquishment of dominion and control of the subject matter of the gilt by delivery to
Life insurance is like that of fire and marine insurance a contract
- the donee (Sec . 821 1; 82 19[5], U.S. IRC) .
laSec. 64, Rev. Regs. No.2
lrSec. 62, Rev. Regs. No. 2. 16Sec. 102; 1.102-1, U.S. IRC
t'zSec. 14.029(10), (15), 16lyde McDonald, 9 BTA 1340; Farmers and Merchants Bank of Carlettsburg
U.S. IRC.
v. Commissioner, 59 Fed. Qd) 9I2.
224 ltr,:vrr,;wr,rrr ou 'l'nxn,r,ron INt r rMt,: ANtr Wt l tttt, rt,trtNrl'l'nxt,:s 225
l,ixclrrrlorrH liotrr ( iross Itttrxttt'

patent infringement, breach oI'contract,r {iduciary duty und rrr:klcss driver. As a rosult,, ltc hud [o pay F200,000.00 to his doctor
recoveries (except punitive damages) for anti_trust vir.rlations rrrrd P100,000.00 t<l the hospit.r[ where he was confined for treatment.
are excluded from gross income to the extent that the l,sses llc lilcd a suit against the bus driver and the bus company and was
to which the damages relate did not give rise to a tax benefit rrwurded and paid actual damages of F300,000.00 (for his doctor and
either in the recovery year or earlier tax years. However, lrospitalization bills), F100,000.00 by way of moral damages, and
"insider profits" recovered by a corporation from the insider ?50,000.00 for what he had to pay his attorney for bringing his case
(major stockholder or director) are taxed to the corporation.lr l,o court. Which, if any, of the following awards are taxable income
The theory of these cases is that recoupment on account of l,o X and which are not? Explain.
such losses is not income, since it is not "derived from capital,
from labor or both combined." And the fact that the payment Suggested answer:
of compensation for such loss was voluntary does trot .hurrg"
its exempt status. It was in fact compensation for a loss, which Nothing is taxable. Under the Tqlc Code, any amount receiued
impaired petitioner's capital. (rs u)mpensation for personal injuries or sichness, plus the amounts
litr u,ny damages receiued whether by suit or agreerlent, on account of
In order that moral damages may be awarded, there xu:h injuries or sickness shall be excluded from gross inconte. Since the
must be pleading and proof of moral suffering, mental anguish, tntire amount of P450,000.00 receiued represents award of damages
fright and the like. The award of moral damages fulfills two ort. uccount of the injuries sustained, all shall be excluded from his
(2) purposes: (a) to compensate the morally injured; and (b) to gross income. Obuiously, these damages are considered by law as mere
alleviate his suffering (B-F. Metal u. Spouses Lomotan, GR, n:turn of capital (Sec.32[8][4], NIRC),
No. 770873, April IG, 2008; Sutpicio Lines u. Curso,G..R. lVo.
757009, March 72,2010). Moral damages are in the category
Bar Question (2005)
of an award designed to compensate the claimant for actual
injury suffered and not to impose a penalty on the wrongdoer JR was a passenger of an airline that crashed. He survived
(Kierulf a. CA, G.R. No.99BOI, March IS, 7992; Frq,ncisco the accident but sustained serious physical injuries which required
a, Ferrer, G.R. No. 142029, February 2gr 2OOI). hospitalization for 3 months. Following negotiations with the
trirline and its insurer, an agreement was reached under the terms
Moral damages are in the category of an award designed to
of which JR was paid the following amounts: F500,000.00 for his
compensate the claimant for the actual injury suffered and not
hospitalization; F250,000.00 as moral damages; F300,000.00 for loss
to impose a penalty on the wrongdoer. The award is not meant
of income during the period of his treatment and recuperation. In
to enrich the complainant at the expense of the defendant, addition, JR received from his employer the amount of F200,000.00,
but to enable the injured party to obtain means, diversion or
representing the cash equivalent of his earned vacation and sick
amusement that will serve to obviate the moral suffering he has
leaves. Which, if any, ofthe amounts he received are subject to income
undergone (ABS-CBN Broad,casting Corporation a. Court
tax? Explain.
of Appeals, 3OI SCRA 575).
Damages awarded to compensate for rost profits are taxable Suggested answer:
to the recipient thereof.
The amount of fl00,000.00 that JR receiued from his employer
is subject to income tax, except the money equiualent of ten (10) days
Bar Question (2003) unutilized uacqtion leaue credits which is not taxable. Amounts of
X, while driving home from his office, was seriously injured uacation q.llowq.nces or sich leq.ue credits which are paid to an employee
when his automobile was bumped from behind by a bus drinen by a corustitutes com.pensation (Sec. 2.78[A][7], Reu. Regs. No. 2-98, as
amended by Reu. Regs No. 10-2000).
lTPrentice-Hall Federal Tax
Handbook, 19g8, p. 141.
226 lit,lvtt,lwt,:tt oru'l'lxnt'tott I Nr',,Mt,,twt r Wl t t tt tol,t tttt, t'l'n\1,;rl 227
l,lxt'lugrorrrr lirrtrr ( itoss Ittt tttttt'

The amounts that JR received from the airline are excluded ti. Retirement beneflts, pensions, glatuities' etc.
from gross income and not subject to income tax because they are
compensation for personal injuries suffered from an accident as well
a. Retirernent benefi.ts receiaed' und.er RA. 7647r1s RA'.
4977, and Section 60(8) of the 7997 Tax Cod.e.
as damages received as a result of an agreement on account of such
Retirement benefits received under R.A. 7641 and those
injuries (Sec. 32[8][4], NIRC). received by officials and employees of private firms, whether
individual or corporate, in accordance with a reasonable
5. Income exempt under treaty. - Income of any kind, to private benefit plan maintained by the employer under
the extent required by any treaty obligation binding upon the R.A. 4917, provided that the retiring official or employee
Government of the Philippines, is exempt from income tax.
has been in the service of the same employer for at least
Interest income from foreign currency loan extended by Asian 10 years and is not less than 50 years of age at the time
Finance and Investment Corporation of Singapore is exempt
of his retirement, and the benefit shall be availed of by an
from the 20Vo final withholding tax under the tax treaty.ls
official or employee only once.2o
Interest onprornissory notes issued. to foreign eompanies. Retirement benefits of Sl-year old employee who has rendered
The National Development Company (NDC) entered into contracts 23 years of continuous service to the iompany isstill subject to income
-
in Tokyo with several Japanese shipbuilding companies for the tax and withholding tax, because the retirement plan of said employee
construction of 12 ocean-going vessels. Initial payments were requires minimum of 55 years of age and 25 years of continuous
made in cash and through irrevocable letters of credit. Promissory service.2lRetirementbenefits of a lady employee of a private company
notes were issued by NDC. The remaining payments and interests who has completed 10 years of employment with the firm but who
were remitted in due time. The BIR assessed NDC for deficiency was only 49 years old and 10 months at the time of her retirement
withholding tax on interest income paid to the foreign corporations. shall not be exempt from income. R.A. 4917 requires the presence of
NDC claimed exemption under the old Section 29(b)(4) of the 19ZZ two (2) conditions.22
Tax Code. The court ruled that C.A. 182, as amended by C.A. 311,
The tax exemption privilege of employees' trusts springs from
does not provide such authorization exempting interest under
Section 53(B) of the Tax Code (now Sec. 60[8]), which specifically
Section 29(b)(4) of the old Tax Code, but like R.A. 1407, it does not
exempts them from income tax. The law (R.A. 1983) has singled out
exempt from taxes the interest on such securities. Tax exemptions
employees' trusts for tax exemption. Employees' trusts or benefit
cannot be merely implied but must be categorically and unmistakably
plans normally provide economic assistance to employees upon the
expressed. Any doubt concerning this question must be resolved
occurrence of certain contingencies, particularly old age retirement,
in fauor of the taxing power. Moreouer, there was nothing in the death, sickness or disability. It provides security against certain
undertaking signed by the Secretary ofFinance that the court found,
hazards to which members of the PIan may be exposed. It is an
any inhibition against the collection ofthe disputed taxes. In fact, the
independent and additional source of protection for the working
gouernment made such undertaking in consonance with and certainly
group. R.A. 1983 was conceived in order to encourage the formation
not against the prouisions of the Tax Code. It must be noted that NDC
and establishment of such private plans for the benefit of laborers and
is not the entity being taxed here. The tqx was due on the interest employees outside of the social security system. It is evident that tax
earned by the Japanese shipbuilders, which NDC is mandated to
exemption is likewise to be enjoyed by the income of the pension trust.
withhold and deduct from the payment (National Deaelopment
Company a. Cotnrnissioner, G..R. No. L-53967, June 30, 7987).
l'gR.A. 7641 only requires the employee to render ser-vices to his employer for at
INOTE: Exemption of interest on gouernment securities is no longer
prouided for in R.A. 8424J Ieast five (5) years and that he be not less than 60 but not more than 65 years of age
at the time of his retirement.
'z0R.A. 4917, as implemented by Rev. Regs. No.
1-68, as amended by Rev. Regs.
No. 1-83 and Rev. Regs. No. 11-2001.
tsBIR Ruling No. 118-96, November 4, 1996. 'zrBIR Ruling No. 052-2000, October 30, 2000.
"BIR Ruling No. 128-96, November 26, 1996.
228 li.r,:vr r,:wr,:r oru'l'nxn'r'rol
li;:il;,:lll illl,l'li;:,iilil"::llll 22e

Otherwise, taxation of those earnings would result in a diminul"ion 9l'its exisLilg lrr()videtrI l"utrrl lor [he employees, and the officials
of accumulated income and reduce whatever the trust beneficiaries ancl emplo.yees of'PNll ccasirrg [0 be Provident Fund members even
would receive out of the trust fund. This would run afoul of the very il'still employed with PNB as a private bank, any amount received
intendment of the law. Besides, P.D. 1959 which deleted the prouisos by them f'rom PNB as a result of its privatization, including those
regarding tax exemption and preferential tax rates under the old law, lrom the Provident Fund and the money value of the accumulated
cannot be deemed to extend to employees'trust. Said decree, being a unused vacation and sick leave credits, are exempt from income tax
general law, cannot repeal by implication a specific provision, Section and withholding tax.25
56(b) (now Section 53[b], in relation to R.A. 4917 , granting exemption
from income to employees' trust (Commissioner u. GCL Retiremcnt
b. Separation pay for cau'les beyond' the control of the
employee. - Amount received by an official or employee
Plan, 207 SCRA 487). or by his heirs from the employer as a consequence of
Interest income derived by Private Educational Retirement separation of such official or employee from the service of
Annuity Association Retirement Plan from its depository bank under the employer because of death, sickness or other physical
the expanded foreign currency deposit system is exempt from the disability or for any cause beyond the control ofthe said
7.SVo frnal income tax.23 official or employee.
Any and all amounts representing return of the personal Income from sale of lot that ca,rne ftom trust fund' is
contributions to the funds ofthe employees, who are still in the active exempt frorn incorne tax. The documents issued and certified by
service of the SVD, shall not be subject to income tax, since the same
-
Citybrust showing that money from the Employees'Trust Fund was
are considered as mere return of capital. However, the income or invested in the MBP lot cannot simply be brushed aside by the BIR
earnings derived from the personal contributions by the employee as self-serving, in the light of previous cases holding that citytrust
members (that are distributed currently) are subject to income tax was indeed handling the money of the Employees'Trust Fund. These
since in a retirement plan under R.A. 4917, the employer or officials documents, together with the notarized Memorandum of Agreement,
and employees or both, contribute to a trust fund for the purpose clearly es,tablish that petitioner, on behalf of the Employees' Trust
of distributing to such officials and employees or beneficiaries, the Fund, indeed invested in the purchase of the MBP lot. Thus, the
corpus or income accumulated by the trust in accordance with the Employees'Trust Fund owns 49.59Vo of the MBP lot.
plan. In the instant case, it is only upon their retirement that the
since petitioner has proven that the income from the sale of the
total benefits which the employees of SVD shall receive consisting of
MBP lot came from an investment by the Employees'Trust Fund,
their personal contribution, counterpart contributions of the employer,
petitioner, as trustee of the Employees' Trust Fund, is entitled to
and the income of the fund to which the employees are entitled and
are distributed to them shall be exempt from income.za
.lui- th" tax refund of F3'037,500 which was erroneously paid in
the sale of the MBP lot.26
Proaid.ent fund. is an employees' trust. - The Philippine
National Bank (PNB) Provident Fund is an employees'trust. Any For any cause beyond the control of the said official or
amount received by an employee or by his heirs from his employer as employee
a consequence ofseparation ofsuch employee from the service ofhis The phrase "for any cause beyond' the control of the said'
employer due to death, sickness or other physical disability or for any
official or ernplo5tee" means that the separation of the employee
cause beyond the control ofsaid employee is exempt, regardless ofage
must be involuntary and not initiated by him. Retrenchment of the
or length of services. Since the contemplated separation of officials
employee due to unfavorable business conditions or financial reverses
and employees from the service of PNB as a result of the bank's
is considered as involuntary. No withholding of tax is, therefore,
privatization is not of their own making, the possible termination

'5BIR Ruling No. 088-96, August 6, 1996.


Ruling No. 042-2000, September 15, 2000. 26Miguel Osorio Pension Foundation, Inc. v' Commissioner, G'R' No' 162175,
'z3BIR
'zaBIR Ruling No. 051-2000, October 30, 2000. June 28, 2010.
2:10 Itt,:vlt,:wt,:tr oN'l'nxtlroru Wt't'tttt0l,l)lN(I'l'AXl,)s
Irur r rMt,t ANtr 237
l,)rclrrgr,rrrH lirrtrr ( iross ltrtrtttttl

necessary to be deducted by the employer f'rom the separation pay.


Bar Question (2005)
Thus, if the employee is separated under a Voluntary Separation
Program of his employer, any separation pay received by the employee Company A decides to close its operations due to continuing
thereat shall be taxable. The early retirement package under the krsses and to terminate the services of its employees. Under the
Business Process Re-engineering Program, intended to rationalize l,ubor Code, employees who are separated from service for such cause
and streamline the operations of the company to cut on unnecessary are entitled to a minimum of one-half month pay for every year of
cost and abolish positions that have become redundant is non-taxable scrvice. Company A paid the equivalent of one month pay for every
to the recipients.2T .ycar of service and the cash equivalent of unused vacation and sick
leaves as separation benefits. Are such benefits taxable and subject
Tertnina,l leaue pay. Any amount received by an official
-
or employee or by his heirs from the employer as a consequence of
to withholding tax under the Tax Code? Decide with reasons.
separation of such official or employee from the service of the employer
Suggested answer:
due to death, sickness or other physical disability or for any cause
beyond the control of the said official or employee is excluded. The The separation benefits paid by Company Ato its employees are
tax exemption applies to the salary or cash equivalent of accumulated excluded from gross incorne, being iru the nature of benefits giuen to
vacation and sick leaves such as the "terminal leave pays" of retiring employees whose seruices were terminated due to causes beyond their
government employees, which are considered not part of the gross control (Sec. 32[B][6][b], NIRC). The entire benefits, thus, are not
salary (Commissioner u. Castaned.a, ZOg SCRA Z2). tuxable and not subject to withholding tan under the Tax Code.
c. Retiremcnt benefits from forei.gn gouer.nmcnt agencies. 7. Miscellaneous items
- The provisions of any existing law to the contrary
notwithstanding, social security benefits, retirement a. Incotne of foreign goaernrnents. - Income derived
gratuities, pensions and other similar benefits received from investments in the Philippines in loans, stocks,
by resident or non-resident citizens of the Philippines or bonds or other domestic securities, or from interest
aliens who come to reside permanently in the philippines on deposits in banks in the Philippines by (i) foreign
from foreign government agencies and other institutions, governments, (ii) financing institutions owned, controlled,
private or public; or enjoying refinancing from foreign governments, and (iii)
international or regional financial institutions established
d. Payments und.er U.S. Veterans Ad.ministration. by foreign goyernments (Philippine Long Distance
-
Payments of benefits due or to become due to any person
Telephone Co. u. Commissioner, CTA Case No.4375,
residing in the Philippines under the laws of the U.S. January 7,1992).
administered by the U.S. Veterans Administration;
Loan agreemcnt without stipulation that foreign cred'itors
e. SSS benefifs. Benefits received from or enjoyed under
the SSS;28
- act for Eximbanh. - If the loan agreements state nothing about the
loan being obtained from Eximbank of Japan nor can it be inferred or
GS/S benefits. - Benefits received from the GSIS,2e deduced from the loan agreements that foreign creditors acted for and
including retirement gratuity received by government in behalf of Eximbank of Japan, or Eximbank of Japan had to finance
officials and employees. or guarantee the loans extended by foreign creditors, interest income
is not exempt from the Philippine income tax (Asia Tlansrnission
Corporation a. Comm.issioner, CTA Case No.3380' July 27,
27BIR
1988).
Ruling No. 105-96, October 1b, 1996.
28R.A.8282.
Loan and. sales contract without reference to Erimbank.
"R.A. 8291, which amended P.D.1146, exempts GSIS from all internal revenue The loan and sales contract between Mitsubishi and Atlas does not
-contain any direct or inferential reference to Eximbank whatsoever.

f
I
T
232 Itt,rvtt,:wt,:tr oN'l',lxir't'roN IN( IrMl,r ANII WIt ttttrrt,trlttri'l'nxt,ls 233
l,lxclrrltotrrr lirrttr ( itrrtrtr Irtt otttt,

The agreement is strictly between Mitsubishi as creditor in the lhe (iovernntctti, ol Llrc l'hilippines or to any political
contract of loan and Atlas as the seller of the copper concentrates. subdivision thcreol;
From the categorical language used in the document, one prestation
was in consideration ofthe other. The specific terms and the reciprocal c. Prizes and. sward,s in recognition of religious and
nature of their obligations make it implausible, if not vacuous, to give charitable aceomplishmcnts. - Prizes and awards made
credit to the cavalier assertion that Mitsubishi was a mere agent in primarily in recognition of religious, charitable, scientific,
said transaction. Surely, Eximbank had nothing to do with the sale educational, artistic, literary, or civic achievement but only
of the copper concentrates since all that Mitsubishi stated in its loan
if:
application with the former was that the amount being procured i. the recipient was selected without any action on his
would be used as a loan to and in consideration for importing copper part to enter the contest or proceeding; and
concentrates from Atlas. Such an innocuous statement of purpose
could not have been intended for, nor could it legally constitute, ii. the recipient is not required to render substantial
a contract of agency. The taxability of a party cannot be blandly future services as a condition to receiving the prize
glossed over on the basis of a supposed "broad, pragmatic analysis" or award.
along without substantial supportive evidence, lest governmental The Government of Singapore Investment Corporation is a
operations suffer due to diminution of much needed funds. Nor can financing institution wholly-owned and controlled by the government
we close this discussion without taking cognizance of petitioner's of singapore entitled to the issuance of a Tax credit certificate for
warning, of pervasive relevance at this time, that while international the erroneously paid final tax of 20Va on its interest income from
comity is invoked in this case on the nebulous representation that Philippine T-bonds ( Gou' t of Singapore Inuestment Corp. a. CIR,
the funds involved in the loans are those of a foreign government, CTA Case Nos. 6745, June 6, 2008, and' 7726, April 29' 2070).
scrupulous care must be taken to avoid opening the floodgates to the
violation of our tax laws. Otherwise, the mere expedience of having a d. Prizes and. ausards for sports cornpetitions. - All prizes
Philippine corporation enter into a contract for loans or other domestic and awards granted to athletes in local and international
securities with private foreign entities, which in turn will negotiate competitions and tournaments whether held in the
"sports
independently with their governments, could be availed of to take Philippines or abroad and sanctioned by their national
advantage ofthe tax exemption law under discussion (Commissioner sports associations
a. Mitsubishi Metal Corporation, G.R. No.54908, January 22, The F1 million prize money won by the Filipino
1990). International Chess Grand Master from the First
Loan guaranteed. by a gouernrnent financial institution. Parnbansa (National) Millennium Chess Grand Prix
Interest income arising in the Philippines and paid in respect of sanctioned by the National Chess Federation is subject to
-
a loan made, guaranteed or insured by the Korea Exchange Bank, the 20Vo final withholding tax. To be eligible for exemption,
a financial institution which is 1007o owned by the Government of the national sports association referred to in the law
South Korea, shall not be subject to income tax and withholding that should sanction said sport activity is the Philippine
tax.soSimilarly, interest income on loans paid to the Commonwealth Olympic Committee.32 The prize received by Luisito
Development Corporation that is owned by the government of United
I

I
Espinosa from WBC Featherweight Championship Fight in
j
Kingdom is exempt from tax.31 t
Cotabato in 1997 is exempt from income tax, but the prize
of Challenger Carlos Rios of Argentina is subject to 307o
b. Income d.eriaed. from any public utility.
- Income
li
(now 25Vo) final withholding tax.33 However, cash prizes
derived from any public utility or from the exercise won by local players/participants in golf tournaments are
of any essential governmental function accruing to not passive incomes inasmuch as participating in golf
S0BIR Ruling No. 139-96, December 12,1996. 3'zBIR Ruling No. 026-2000, June 13, 2000.
3rBIR Ruling No. 013-96, February 7, 1996. 33BIR Ruling No. 126-97, December 3, 1997.
235
234 Itl,:vt t,:wt,:H on'l'lxlt'tott
ii;:iH,lil illl,l'l'lli,:'Ji',,iill:
tournaments is their profession and/or occupation. Such abuse on its part because ol'its recognized expertise, that if Congress
being the case, the cash prizes are subject to the rates had intended to exempt interest from bonds, debentures and other
under Section 24(A) and not to 20Vo final withholding tax certificates of indebtedness, it would ha.ue done so in cleqr and specifi'c
imposed by Section 24(B).34 terms (Malayan Zurich Insurance a. Comrnissioner, CA-GR SP
No. 7707O, March 28, 2OO5).
e. 73th month pay and. other gross benefi.ts. - 13th
month pay and other gross benefits received by officials Interest income from long-term deposits in the form of a common
and employees of public and private entities, to the extent trust fund established by RCBC through its Trust and Investment
of F30,000; Division is exempt from the 207o frnal withholding tax. However,
should the holder of the certificate pre-terminate the deposit or
GSIS, SSS, Med.ieare and Pag-Ibig contributiot.s.
-
GSIS, SSS, Medicare and Pag-Ibig contributions, and union
investment before the fifth year, a final tax shall be imposed on the
entire income and shall be deducted and withheld by the depository
dues of individuals;
bank from the proceeds of the long-term deposit or investment
o Gains realized, finrn the sale or erchange or retiremcnt certificate on the remaining maturity thereof.3s
of bonds. - Gains realized from the sale or exchange or
retirement of bonds, debentures or other certificate of Exempt Gorporations
indebtedness with a maturity of more than five (5) years. Government-owned or controlled corporations. - All
Gains cannot includ.e interest. - Gains cannot include corporations, agencies, or instrumentalities owned or controlled by
interest, since it clearly refers to gains from the sale of bonds, the Government, except:
debentures and other certificates of indebtedness. Whereas,theterm 1. Government Service Insurance System;
ointerest"
"gainsu includes in its general sense, this rule cannot be
applied to Section 32(BX7)(d of the Tax Code in the specific sense. 2. Social Security System;
Section 32(A) of the Ta^x Code define.s "gross income' and it is clear that 3. Philippine Health Insurance Corporation; and
there is a distinction between "gains deriued from dcalings in property"
and "interests.' oGains realized from the sale or exchange or retirement 4. Philippine Charity Sweepstakes Office
of bonds, debentures and other certifi.cate of indebtedness" would fall
shall pay such rate of tax upon their taxable income as are imposed
under the category of "gains deriued from dealings in property." On the upon corporations or associations engaged in a similar business,
other hand, "interests" would include interest from bonds, debentures industry, or activity, the provisions of existing special or general laws
and other certificate of indebtedness. OnIy citizens, resident aliens to the contrary notwithstanding.36
and non-resident aliens engaged in trade or business are exernpt from
income tax on interest from long-terrn deposit or inuestment. On the Exempt corporations and associations. - Section 30 of the
other hand, domestic and resident foreign corporations are subject to a 199? Tax Code expressly exempts from tax the income received by
20Vo fi.nal tax on such interest. If Congress intended to exempt interest the following organizations as such:
from bonds, debentures and other certificates ofindebtedness under (A) Labor, agricultural or horticultural organization not
Section 32(BX7Xil of the Tan Code, it would haue done so in clear and organized principally for profit;
specific terms (Nippon Life Insurance Company u. Commissioner,
CTA Case No.6742, Febntan7t 4,20O2).The Supreme Court will not (B) Mutual savings bank not having a capital stock represented
set asid.e lightly the conclusion reached by the CTA which, by the uery by shares, and cooperative bank without capital stock
nature of its function, is dedicq.ted exclusiuely to the considerq.tion of
tax problems. The court agreed with the CTA, uhose findings of facts 35BIR Ruling No. 063-2000, November 20,2000. The BIR treats the common
will not ordinarily be reuiewed, absent any showing of gross error or trust like an individual that is exempt from interest income on long-term deposits or
investments.
seSec. 2Z(c), NIRC.
saBIR Ruling No. 052, February 19, 1988.
237
236 Itt,lvt t,:w l,;tr t tn 'l'nxl'ltt ttt
lii:ill,lll,Yil,l'l'ili::il';:1il:
organized and operated for mutual purposes and without Notwithstanding the provisions in the preceding paragraphs, the
profiu income of whatever kind and character of the foregoing organizations
f'rom any of their properties, real or personal, or from any of their
(c) A beneficiary society, order or association, operating for
activities conducted for profit regardless of the disposition made of
the exclusive benefit of the members such as a fraternal such income shall be subject to tax imposed under this Code.
organization operating under the lodge system, or a mutual
aid association or a non-stock corporation organized by While the 1997 Tax Code enumerates certain non-stock, non-
employees providing for the payment of life, sickness, profit associations that are exempt from income tax, their income from
accident, or other benefits exclusively to the members of property, real or personal, or from an activity conducted for profit,
such society, order, or association, or non-stock corporation regardless of the disposition of the proceeds of the sale or income,
or their dependents; shall be taxable to them.
(D) Cemetery company owned and operated exclusively for the
benefit of its members;
Charitable Organizations
The phrase "any of their actiaities cond.ucted' for profit'
(E) Non-stock corporation or association organized and
does not qualify the word "properties." This makes income from
operated exclusively for religious, charitable, scientific,
athletic, or cultural pu{poses, or for the rehabilitation of the property of the organization taxable, regardless of how that
income is used - whether for profit or for lofty non-profit purposes.
veterans, no part of its net income or asset shall belong to
or inure to the benefit of any member, organizer, officer or
Thus, the income derived from rentals of real property owned by
any specific person;
the Young Men's Christian Association of the Philippines, Inc.
(YMCA), established as a welfare, education and charitable non-profit
(F) Business league, chamber of commerce, or board of trade, corporation, is subject to income tax' The rental income cannot be
not organized for profit and no part of the net income of exempted on the solitary but unconvincing ground that said income
which inures to the benefit of any private stockholder or is not coll0cted for profitbut is merely incidental to its operation. The
indiyidual; law does not make a distinction. Where the law does not distinguish,
(G) Civic league or organizalion not organized for profit but neither should we distinguish. Inasmuch as taxes are the lifeblood
operated exclusively for the promotion of social welfare; of the nation, the Court has always applied the doctrine of strict
interpretation in construing tax exemptions. YMCA is exempt from
(H) A non-stock and non-profit educational institution; the payment of property taxes only but not income taxes because
(D Government educational institution; it is not an educational institution devoting its income solely for
educational purposes. The term "ed'ucational institutioz' has
(J) Farmers or other mutual typhoon or fire insurance acquired a well-known technical meaning. Under the Education Act
company, mutual ditch or irrigation company, mutual or of 1982, such term refers to schools. The school system is s;monymous
cooperative telephone company, or like organization of a with formal education which "refers to the hierarchically structured
purely local character, the income of which consists solely and chronologically graded learning organized and provided by the
of assessments, dues, and fees collected from members for formal school system and for which certification is required in order
the sole purpose of meeting its expenses; and for the learner to progress through the grades or move to higher levels
(K) Farmers, fruit growers, or like association organized and (Commiseioner a. YMCA of the Philippines, G.R. No. 724(M3,
operated as a sales agent for the purpose of marketing October 14,1998).
the products of its members and turning back to them the
proceeds of sales, less the necessary selling expenses on Clubs for Pleasure' Recreation and OtherNon'Frofit Purlroses
the basis of the quantity of produce finished by them. Clubs for pleasure, recreation and other non-profit purposes are
not in the current list of tax-exempt corporations in section 30 of the
I nr r rl,il,t nxt r Wt t t tttot,ltt'tr i'l'nxt,:s 239
238 Itr,:vr r,:wr,:rr oru'l'Axn'r'r rr.r
],)xclttxtutrH li'ont ( itrrss I ttrrrtltr:

1997 Tax Code. Aperson, object or thing omitted from the enumeration necessarily mean "choritable" (Collector a. Club Filipino, Inc.
must be held to have been omitted intentionally; hence, their income d.e Cebu). The sports club in CIub Filipino de Cebu may be non-
from whatever source, including membership fees, assessment dues, profit, but it was not charitable. To be charitable, an organization
rental income, and service fees are subject to income tax. For VAT must meet the substantive test of charity in Lung Center of the
purposes, even non-stock, non-profit organizations are liable to pay Philippines a. Quezon City. Any profit by a charitable institution
VAT on their sale of goods or services (COMASERCO a . CIR, ibid) . must not only be plowed back "whenever necessary or proper," but
Thus, the gross receipts of recreational clubs, including membership must be "devoted or used altogether to the charitable object which it
fees, assessment dues, rental income, and service fees are subject to is intended to achieve." Charity is essentially a grft to an indefinite
VAT (RMC 35-2012, August 3,2012). number of persons which lessens the burden of government. In other
words, charitable institutions provide for free goods and services to
Non-Stock, Non-Profit Hospital the public which would otherwise fall on the shoulders of government.
As a matter of efficiency, the government forgoes taxes which should
St. Luke's Medical Center is a hospital organized as a non-stock have been spent to address public needs, because certain private
and non-profit corporation. The BIR assessed it for deficiency income entities already assume a part of the burden. The loss of taxes by
tax for 1998 at l07o preferential tax rate, because it was operating for the government is compensated by its relief from doing public works
profit and only LSVa ofits revenues were used for charitable purposes. which would have been funded by appropriations from the Treasury.
The hospital's board, officers and employees directly benefit from Moreover, to be exempt from income tax, Section 30(E) of the Tax
its profits. St. Luke's maintained that it was exempt as a charitable Code requires that a charitable institution must be "organized and
and social institution under Section 30(E) and (G) of the Tax Code. operated exclusively" for charitable purposes. Under Section 30(G)
Making of profit per se does not destroy its tax exemption. Besides, of the Tax Code, the institution must be "operated exclusively" for
it secured a BIR ruling confirming its tax exemption. social welfare. However, the last paragraph of Section 30 of the Tax
The Supreme Court ruled that Section 27(B) of the 1997 Tax Code qualifies the words "organized and operated exclusively."
Code does not remove the income tax exemption of proprietary non- The last paragraph provides that if a tax exempt charitable
profit hospitals under Section 30(E) and (G) of the Tax Code. They institution conducts "any" activity for profit, such activity is not tax
can be construed together without the removal of such tax exemption. exempt, even as its not-for-profit activities remain tax exempt. Thus,
The effect ofthe introduction ofSection 27(B) is to subject the taxable even if the charitable institution must be "organized and operated
income of two (2) specific institutions, namely: proprietary non-profit exclusively" for charitable purposes, it is nevertheless allowed to
educational institutions and proprietary non-profit hospitals, among engage in "activities conducted for profit" without losing its tax
the institutions covered by Section 30, to the I07o preferential rate exempt status for its non-for-profit activities. The only consequence is
under Section 27(B), instead ofthe ordinary 30Vo corporate rate under that the "the income of whatever kind and character" of a charitable
the last paragraph of Section 30 in relation to Section 27(A)(1). As a institution "from any ofits activities conducted for profit, regardless
general principle, a charitable institution does not lose its character of the disposition made of such income, shall be subject to tax."
as such and its exemption from taxes simply because it derives Insofar as the revenues from paying patients are concerned (i.e.. Fll
income from paying patients, whether out-patient or confined in the billion revenues from paying patients in 1998 as compared to free
hospital, or receives subsidies from the government, as long as the services expenditures of F218 million), St. Luke's is a corporation
money received is devoted or used altogether in the charitable object "not operated exclusively" for charitable or social welfare purposes'
which it is intended to achieve, and no money inures to the private With the introduction of Section 27(B) of the Tax Code, the rate for
benefit of the persons managing or operating the institution. non-prof.t proprietary hospital is now \07o.
"Proprietary" means private; "non-profi.f," means no net InJesus Sacred Heart College, the Court declared that there is no
income or asset accrues to or benefits any member or specific person, official legislative record explaining the phrase "any activity conducted
with all the net income or asset devoted to the institution's purposes for profit." However, it quoted a deposition of Senator Cuenco, who
and all its activities conducted not for profit. "Non-profill" does not
?
240 llr,:v r r,rwt,:tt ott'l',lxA't'toN
iil.;l:,lli, ,lll,l'li;:,ii'ii,;:llli 24t

introduced the phrase "or from any activity conducted fbr profit." The Educational institutions. - The income of a private
question was whether having a hospital is essential to an educational cducational institution may be exempt from or subject to income tax,
institution like UST College of Medicine. Senator Cuenco answered depending on what law it is claiming exemption. If it is a non-stock,
that if the hospital has paid rooms generally occupied by people of non-profit private educational institution, whose assets and income
good economic standing, then it should be subject to income tax. are used exclusively, directly and actually for its educational purposes,
Activities for profit should not escape the reach of taxation. Being a it is exempt from tax under the 1987 Constitution. However, if it does
non-stock and non-profit corporation does not, by this reason alone, not qualify under said provision of the Constitution, it may claim
completely exempt an institution from tax. An institution cannot use partial exemption from the normal corporate income tax under Section
its corporate form to prevent its profitable activities from being taxes 27(B) of the 1997 Tax Code. It wiII be entitled to the 107o preferential
(CIR u. St. Luhds Medical Center,Inc., G.R. Nos. 195909 and. tax rate on its net taxable income, provided that the gross income from
L95960, September 26, 2012). unrelated trade, business or other activity the private educational
institution and hospital, which is non-profit, does not exceed 507o of
Bar Question (2013) the total gross income derived from all sources. The decisions of the
court in the cases below have been modified by the amendment to
A group of philanthropists organized a non-stock, non-profit the income tax law.
hospital for charitable purposes to provide medical services to the
poor. The hospital also accepted paying patients although none of Income of non-stoch, non-priaate ed,ucational institution
its income accrued to any private individual; all income were plowed exempt from taration und.er the 1987 Constitutiot '. - Interests
back for the hospital's use and not more than 30Vo of its funds were from savings and time deposits are exempt from the 2OVo final
used for administrative purposes. Is the hospital subject to tax on its withholding tax, if earned by non-stock, non-profit educational
income? If it is, at what rate? institutions as all revenues and assets of these institutions, which
are actually, directly and exclusively used for educational purposes
Suggested ansvyer: are exempt from taxation under the Constitution. The relief given
to such schools is expected to be passed on to students in the form
Yes, a non-stoch, non-profit hospital organized for charitable
of lower tuiticin fees. The specification that these institutions must
purposes, although generally exempt from income tanc, becomes
be non-stock has been added as a safeguard because the moment
tanable on incorne deriued from actiuities conducted for profit. Seruices
a stock corporation is formed, there is expectation of dividends or
rendered to paying patients are considered ectiuities conducted for profits (Southeast Asian Regional Center for Grad.uate Stud'y
profit which are subject to income tax, regardless of the disposition and. Researc h in Agriculture I SEARCA] u. C ommissioner, CTA
of the said income. The rate is 10Vo of net income, considering that Case No.4982, October 6, 1995).
the income earned appears to be deriued solely from hospital-relqted
cr.ctiuities (CIR a. St. Luke's Med.ical Center, ibid). Isolated. sa,le of property by non-stock, non-profit
Priuqte educational institution that engages in profitable found.ation. - GAUF is a non-stock, non-profit organization.
On April 25, L998, a Deed of Absolute Sale was executed between
undertah,ing is subject to tax. - A priuate educational institution GAUF, as seller, and Spouses Callangan, as buyers, involving a real
which deuiates from its purely educational purposes and actiuities property together with improvements thereon, in the total sum ofF1.3
shall be treated like any priuate domestic corporation engaged in million. All the proceeds of sale will be used for the construction and
business for profit with respect to income deriued therefrom. The improvement of the Golden Pavilion Building, which is an expansion
protectiue mantle of income tax benefit or exemption cannot be extended
program of GAUF where the service offices of the Registrar, Business
to a priuate educationq,l institution which chooses to descend from its
and Finance, Accounting, Cashier and Treasurer are now presently
high pedestal of tae preference or immunity to the leuel of an ordinary located. It also houses a multi-purpose recreational center for the
priuate corporation engaged in profi,table undertaking or business students and personnel of the University. The sale of the land with
(Xaaier Schoolr lnc. a. Commissioner, CTA Case 7682, October
improvements is exempt from the capital gains tax, considering that
8,7969). the income derived therefrom did not result from the productive
242 Itt,:vt l,:wt'ttr or.l'l'Axrt'r'tolt I Nr r rNil,t At.ilr Wt t ttttilt,iltrur i'l'l\t':lt 24:l
l,lxr'lttltotlr lrolrr ( ilorrrr lrrcotrtr,

use of real properties but from a single transaction which is mcrcly clirirn lirr [ax credit lirr ovtrrllrrirl llrrrrrr:lt ;lrolil rcrnittance tax &t l5('/r,,
incidental to the purpose for which GAUI' was organized; hence, whtrre the tax treaty merc,ly rertluires payment of such tax aLLOo/,. BIll,
said income is not within the contemplation o{'the last paragraph ol' rclying r-rn the late filing of the application under RMO 1-2000 and on
Section 30 of the 1997 Tax Code.3TThis opinion has been sustained the Supreme Court's minute resolution on Mirant (Phil) Operations
and adopted by the CTA in Congregacion de la Mission de San Vicente Corporation u. CIR (CTA EB No. 40, June 7,2005), affirmed by the
dePaul u. Collector, CTA Cqse No. 1468, October 74, 1968.1t8 SC in G.R. No. 168531 in Minute Resolutions dated November 12,
Failure to obserae requirem"ent d.oes not constitute utaiuer 2007 and February 18, 2008, denied the claim, which claim was also
ofright to eremption. - V.G. Sinco established Foundation College denied by the CTA.
of Dumaguete. The Department of Education required that colleges The Supreme Court said its minute resolution on Mirant is
should be incorporated. Hence, in 1951, he organized V.G. Sinco not a binding precedent, as clarified by it in Philippine Health Care
Educational Institution, a non-stock corporation. It never distributed Prouiders u. CIR. Our Constitution provides for adherence to the
any dividend or profit to its stockholders. Only part of its income general principles ofinternational law as part ofthe law ofthe land.
went to the payment of its teachers and to the other expenses of the The time-honored international principle of pacta sunt seruandq.
college incident to an educational institution, but none of the income demands the performance in good faith of treaty obligations on the
had been channeled to the benefit of any individual stockholders. part of the states that enter into the agreement. Every treaty in filrce
While the acquisition of additional facilities may redound to the is binding upon the parties, and obligations under the treaty must be
benefit of the institution itself, it cannot be positively asserted performed by them in good faith. A state that has contracted valid
that the same will redound to the benefit of its stockholder, for no International obligations is bound to make in its legislations those
one can predict the financial condition of the institution upon its modifications that may be necessary to ensure the fulfillment of the
dissolution. Moreover, intended to relieve the taxpayer of the duty obligations undertaken. Thus, laws and issuances must ensure that
of fiIing returns and paying the tax, it cannot be said that the failure the reliefs sranted under tax treaties are accorded to the narties
to observe the requirement called for therein constitutes a waiver entitled thereto. The BIR must not impose additional requirements
of the right to enjoy the exemption. To hold otherwise would be
tantamount to incorporate into our tax laws some legislative matter international abreements. Moreso, when the RP-Germany Tax Tleaty
by administrative regulation. The fact that appellant charges tuition does not provide for any pre-requisite for the availment of the benefits
fees and other fees for the different services it renders to the students, under said agreement.
which is its only source of income, does not in itself make the school
a profit-making enterprise that would place it beyond the puruiew of Likewise, it must be stressed that there is nothing in RMO
the law U.G. Sinco Ed.ucational Cotporation a. Collector, 700 1-2000, which would indicate a deprivation of entitlement to a tax
Phit.127). treaty relief for failure to comply with the 15-day period. The Supreme
Court recognized the clear intention of the BIR in implementing RMO
Failure to strictly comply with Reaenue Mernorand.um 1-2000, but the CTA's outright denial of a tax treaty relief for failure
Ord.er No. 7-2000, which requires the ta.rpayer to secure prior to strictly comply with the prescribed period is not in harmony with
to,r treaty relief from the BIR, will not d.epriae taxpayers of the the objectives of the contracting states to ensure that the benefits
benefit of a tax treatSt. - BIR issued Revenue Memorandum Order granted under tax treaties are enjoyed by duiy entitled persons
No. 1-2000, which requires that any availment of the tax treaty relief or corporations. Bearing in mind the rationale of tax treaties, the
must be preceded by an application with ITAD at least 15 days before period of application for the availment of tax treaty relief should not
the transaction so as to streamline the processing of the application operate to divest entitlement to the relief as it would constitute a
for tax treaty reliefand to prevent the consequences ofan erroneous violation of the duty required by good faith in complying with a tax
interpretation and./or application of treaty provisions. Petitioner filed treaty. At most, the application for a tax treaty relief from the BIR
should merely operate to confirm the entitlement of the taxpayer
37BIR
38BIR
Ruling No. 115-92, Apnl 2, 1992. to the relief. The obligation to comply with a tax treat)' must take
Ruling DA-172-03-19-99. precedence over the objective of RMO 1-2000. Non-compliance with
244 llt,rvl,rwt,:rr or'l'AXn'r'ror.r Wt rilrot.rrtnrt'l'nxl,:s
INr r rMr,: AttD 24lt
l,lxclttgtorrr liottt ( itrrxs Itt<rrttc

tax treaties has negative implications on international relnl,ions, and Bar Question (1994)
unduly discourages foreign investors. While the consequences sought Maribel Santos, a retired public school teacher, relies on her
to be prevented by RMO 1-2000 involve an administrative procedure,
pension from the GSIS and the interest income from a time deposit
these maybe remedied through other system management processes;
ol'F500,000.00 with ABC Bank. Is Miss Santos liable to pay any tax
e.9., imposition of a fine or penalty.
on her income?
More importantly, treaties have the force and effect of law in the
Philippines. Tax treaties are entered into "to reconcile the national Suggested answer:
fiscal legislations of the contracting parties and, in turn, help the Maribel Santos is exempt from tax on the pension from the GSIS
taxpayer avoid simultaneous taxations in two different jurisdictions (Sec. 28[b][7][F], NIRC). Howeuer, as regards her time deposit, the
(CIR a. S.C. Johnson and Son). Simply put, tax treaties are entered
interest she receiues thereon is subject to 207o final withholding tan
into to minimize, if not eliminate the harshness of international (Sec.21[a][c], NIRC).
juridical double taxation (Deutsche Bank AG Manila Branch a.
CIR, G.n. No. 78855O, August 79,2073).
Bar Question (1991)
Bar Question (1996) X owns a half-hectare property in Bacoor, Cavite which in
1980 was expropriated by the national government, through the
(1) X, an employee ofABC Corporation died. ABC Corporation
Department of Public Works and Highways. After ten years, X was
gave Xs widow an amount equivalent to Xs salary for one
paid F2,000,000.00 as just compensation plus 6Va annaalinterest by
year.
the DPWH but minus the withholding tax. Is the action of DPWH
Is the amount considered taxable income to the widow? Why? proper? Reasons.

Suggested answer: Suggested ans\tr'er:


No. The amount receiued by the widow from the decedent's No, the action of DP,:WH is not proper. In the case of Prouince of
employer may either be a gift or a separation benefit on account of Tayabas u. Perez (66 Phil. 467), just compensation was defined as "the
death. Both are exclusions from gross income pursuant to prouisions just and complete equiualent of the loss which the owner of a thing
of Section 28(b) of the Tax Code. expropriated has to suffer by reason ofthe expropriation."
Further, in BIR Ruling No. 61-91, "just compensation" wq.s
(2) A, an employee of the Court of Appeals, retired upon defined as that which is paid by the Gouernment equiualent to the
reachingthe compulsory age of 65 years. Upon compulsory ualue of the property at the time of its taking. It is the fair and full
retirement, A received the money value of his accumulated equiualent for the indemnity.
leave credits in the amount of F500,000.00.
Is said amount subject to tax? Explain. Based on the foregoing it is clear therefore that the amount
receiued after 10 years as just compensation is not in &ny way a profi,t,
Suggested answer: gain or income on the part of X, in the same uein, the 67a annual interest
paid by DPWH is not income. The same partakes of the nature of a
No. The commutation of leaue credits, more commonly known as penalty or irudemnity due and accruing to X for hauing been depriued
terminal leaue pay, i.e., the cash equiualent of accumulated uq.cation of the use and benefit by not being paid of the fair market ualue of the
and sich leaue credits giuen to an officer or employee who retires, or property since its tahing 70 years ago. Hence, the DPWH should not
separated from the seruice through no fault of his own, is exempt from
haue withheld taxes.
income tqe (B IR Ruling N o. 23 8 I 1, N ou e mber 8, 1 9 9 1 ; C ommis sioner
-

a. Castafi.eda, GR. No.96076, October 77, 7997).


246 Itr,:vrr,:wr,rrr ou'l'AxA't'tor.t
ii;lili;,lll; illl,i'l:ilii'J;';:,:li: 247

Bar Question (1993) r:onsitlere<l es u $epuruliott ptr.y lhu.t would haue exempted benefi'ts
lntm income tq^x, since it wus Mario who had decided to retire instead
The employees of Travelers, Inc. staged a strike. X, a non- of being required to do so (Sec. 28, NIRC).
union member joined the strike and volunteered to picket the
company premises from 8:00 A.M. to 12:00 P.M. Monday to Friday. 2) Is his F50,000.00 insurance proceeds exempt from income
Six months into the strike. X ran out of money and asked financial taxation?
aid from the union since he has no other source of income and
needed financial assistance in order to live. The union gave him Suggested answer:
F1,000.00 a month to take care of his food requirements plus
F500.00 to take care of his monthly rent. When X filed his return, The F50,000.00 insurq,nce proceeds is not totally exempt
he excluded these benefits from his gross income. The exclusion from income tax. The ercluded amount is only that portion which
was denied by the BIR. Decide. corresponds to the premiums that he had paid since 1965. At the
rate of F1,520.00 per year multiplied by twenty (20) years which was
Suggested ansv/er: the period of the policy, he must haue paid a total of F30,400.00.
Accordingly, he will be subject to report as toxable income the amount
The Fl,500.00 is not compensation income because compensation of F19,600.00 (9ec.28, NIRC).
income arises out of employer-employee relationship as payment
for seruices without compensation. The F1,500.00 is a gift from. the Bar Question (1991)
Iabor union. According to Section 28(bX3) of the NIRC, gifts are to be
excluded from gross income. Thus, the BIR's denial is not ualid. Delstar Emmanuel Perez, a government employee, retires from
the service upon reaching the compulsory retirement age of 65. Would
Bar Question (1991) the amount he is entitled to receive by way of commutation of his
accumulated Ieave credits, of his terminal leave pay, be subject to
Born of a poor family on 14 February 1944, Mario worked income tax?
his way through college. After working for more than 2 years in X
Manufacturing Corporation, Mario decided to retire and avail of the Suggested answer:
benefits under the very reasonable retirement plan maintained by
his employer. He planned to invest whatever retirement benefits The a,mount tha,t Emrna.nuel Perez is to receiue should not be
he would receive in a business that will provide his employer with subjected to incorne tax, and such was the ruling by the Suprerne
the needed raw materials. On the day of his retirement on 30 April Court in the In Re: Zialcita Administratiue Case (Adm.. Matter No.
1985, he received F400,000.00 as retirement benefit. In addition, 90-6015-SC, October 18, 1990). The ruling apparently repudiated, or
his endowment insurance policy, for which he was paylng an annual at least is inconsistent with, its earlier decision in Commissioner u.
premium of F1,520.00 since 1965, also matured. He was then paid Victoriano, G.R. No.83176, August 10, 1989.
the face value of his insurance policy in the amount of F50,000.00.
Bar Question (1994)
1) Is Mario's F400,000.00 retirement benefit subject to income Pedro Reyes, an official of Corporation X, asked for an "earlier
tax? retirement" because he was emigrating to Australia. He was paid
F2,000,000.00 as separation pay in recognition of his valuable services
Suggested answer: to the corporation. Juan Cruz, another official of the same company,
Mario's P400,000.00 retirement benefit is subject to income was separated for occupying a redundant position. He was given
tax. To be exempt, the retirement pay must haue been extended to an F1,000,000.00 as separation pay.
employee who is at least 50 years of age and who would haue worked Jose Bautista was separated due to his falling eyesight. He
for at lea.st ten (10) years with the employer. The amount cannot be was given F500,000.00 as separation pay. All the three (3) were
248 Itr,:vr r,rwr,rrr oru'l'nxn't'ror'r IN|oMt,,trutr Wl ililtor,lrlN( i'l'nxl,is 249
l,lxcltrrilrrrrr lirrtn ( ltrrgs I tttrrttttr

not qualified to retire under the BlR-approved pension plan of the I,-or categorv (A) entploy{,(,.s - the benefits under the BIR
corporation. approved plan plus an ex gntliu peryment of one month of every year
(1) of service.
Is the separation pay given to Reyes subject to income tax?
(2) For category (B) ernployees - one month for every year of service.
How about the separation pay received by Cruz?
(3) For both categories, the cash equivalent ofunused vacation and
How about the separation pay received by Bautista?
sick leave credits.
Suggested answer: A Co. seeks your advice as to whether or not it will subject any
(1) of these payments to withholding tax. Explain your advice.
The separation pay giuen to Reyes is subject to income tax
ds corLpensation income because it arises from a seruice
Suggested answer:
rendered pursuant to an employer-employee relationship.
*A"
It is not cortsidered an exclusion from gross income because For category employees, all the benefits receiued on account of
the rule in taxation is talc construed in strictissimi juris or their separation are not subject to income tax; hence, no withholding
the rule on strict interpretation of ta.x exemptions. tq.x shall be imposed, The benefits receiued under the BlR-approued
(2) plan upon meeting the seruice requirement and age requirement are
The separation pay receiued by Cruz is not subject to
explicitly excluded from gross income. The ex gratia payment also
incorne tox because his separation from the company was
qualifi.es ds an exclusion from gross income, being in the nature of
inuoluntary ( Sec. 28[b] [7], NIRC).
beneft.t receiued, on account of separation due to causes beyond he
(3) The separation pay receiued by Bautista is likewise employees' control (Sec. 32[B], NIRC). The cash equiualent of unused
not subject to his separation is due to disability, hence uacation and sick leave credits qualifies as part ofseparatioru benefits
inuoluntary. excluded from gross income (CIR u. Court of Appeals' G,R. No.
96076, October 17, 7997).
Under the law, separation pay receiued through inuoluntary
from taxation,
co.uses is exempt For category "B" employees, all the benefi.ts receiued by them will
also be exempt from income tax; henee" not subject to withholding to'x.
Bar Question (1999) These are benefi.ts receiued on accourl,t of separation due to causes
beyond the employees' control, which'are specifi.cally excluded from
A Co., a Philippine corporation, has two divisions - gross income (Sec.32[B], NIRC).
manufacturing and construction. Due to the economic situation, it
had to close its construction division and lay-offthe employees in that
division. A Co. has a retirement plan approved by the BIR, which
Bar Question (1995)
requires a minimum of 50 years of age and 10 years of service in the Mr. Jacobo worked for a manufacturing firm. Due to business
same employer at the time of retirement. reverses the firm offered voluntary redundancy program in order
to reduce overhead expenses. Under the program an employee who
There are 2 groups of employees to be laid off:
offered to resign would be given separation pay equivalent to his three
(a) Employees who are at least 50 years of age and has at month's basic salary for every year of service. Mr. Jacobo accepted the
least l-0 years of service at the time of termination of offer and received F400,000.00 as separation pay under the program.
employment; and
After all the employees who accepted the offer were paid, the
(b) Employees who do not meet either the age or length of firm found its overhead still excessive. Hence it adopted another
service. redundancy program. Various unprofitable departments were closed.
As a result, Mr. Kintanar was separated from the service. He also
A Co. plans to give the following:
received F400,000.00 as separation pay:
250 lir,;vrr,:wr,rn or.r 'l'nxe'nor.r f nrrrMt,: ANt, Wtttttt.t,trtxt:'l'Axl,i:; 251
l,ixcltrrtuttH li orrr ( ltrrgg I ncorrrrt

(1) Did Mr. Jacobo derive income when he received his h,c i,s en.l,i,l,l,erl. ltt nt't,it,t' tr ttt!cr Lh.a BIR-approued retirement
separation pay? Explain. plon woukl nttl tlurr.Li.fv us un exclusion from gross income.

Suggested answer: (D No. The amount receiued was in consideration of his loyalty
and inualuable seruices to the company which is clearly a
(1) Yes, Mr. Jacobo deriued ataxq.ble income when he receiued compensation income receiued on account of employment.
his separation pa,y because his separation from employment Under the employet's'motiuation test,' emphasis should be
was uoluntary on his part in uiew of his offer to resign. What placed on the ualue of Mr. Quiroz seruices to the company
is excluded fronx gross income is any amount receiued by an as the compelling reason for giuing him the gratuity; hence,
official or employee as d consequence of separation of such it should constitute a tutable income. The payment would
offi.cial or employee from the seruice of the employer for any only qualify as a gift if there is nothing but 'good will,
cause beyond the control of the said official or employee (Sec. esteem and kindness' which motiuated the employer to giue
28, NIRC). the gratuity (Stanton u. U.S., 186 F. Supp.393). Such is
not the case in the herein problem.
Bar Question (1995)
Mr. Quiroz worked as chief accountant of a hospital for forty-five Bar Question (2002)
years. When he retired at 65 he received retirement pay equivalent XYZ Foundation is a non-stock, non-profit association duly
to two months' salary for every year of service as provided in the organized for religious, charitable and social welfare purposes. Last
hospital BIR approved retirement plan. The Board of Directors of the January 3, 2000 it sold a portion ofits lot used for religious purposes
hospital felt that the hospital should give Quiroz more than what was and utilized the entire proceeds for the construction of a building
provided for in the hospital's retirement plan. In view of his loyalty to house its free Day and Night Care Center for children of single
and Invaluable services for forty-five years; hence, it resolved to pay parents. In order to subsidize the expenses of the Day and Night
him a gratuity of F1 Million over and above his retirement pay. Care Center and to support its religious, charitable and social welfare
The Commissioner of Internal Revenue taxed the F1 Million as projects, the Foundation leased the 30O-square meter area of the
part of the gross compensation income of Quiroz who protested that second and third floors of the building for use ars a boarding house.
it was excluded from income because (a) it was a retirement pay, and The Foundation also operates a canteen and a gift shop within the
(b) it was a grft. premises, all the income from which is used actually, directly, and
exclusively for the purposes for which the Foundation was organized.
(1) Is Mr. Quiroz correct in claiming that the additional Fl-
Million was retirement pay and therefore excluded from a. Considering the constitutional provision granting tax
income? Explain. exemption to non-stock corporations such as those formed
exclusively for religious, charitable or social welfare
(2) Is Mr. Quiroz correct in claiming that the additional F1 purposes, explain the meaning of the last paragraph of
Million was gift and therefore excluded from income? said Section 30 of the 1997 Tax Code which states that
Explain. "income of whatever kind and character of the foregoing
organizations from any oftheir properties, real or personal,
Suggested answer:
or from any oftheir activities conducted for profit regardless
(1) No. The additional Fl million is not a retirerruent pay but a of the disposition made of such income shall be subject to
part of the gross corlpensation income of Mr. Quiroz. This tax imposed under this Code."
is not a retirement benefit receiued in accordance with a
reasonabl,e priuate benefit plan maintained by the employer
b. Is the income derived by YYZ Foundation from the sale
ofa portion ofits lot, rentals from its boarding house and
as it was not paid out of the retirem.ent plan. Accordingly,
the operation ofits canteen and gift shop subject to tax?
the amount receiued in excess of the retirem.ent benefits that
Explain.
2ft2 Itr,:vt t,:wt,;tr ot't'l'lxn't'ror.r Ittr oMt'; nn t r W t't't t tll,Dtttr i'l',lxt,:s
t 2Sil
l,)xcltrrtotrrt lirrttt ( itrrss Itttrrtttt'

Suggested answer: orul intpnttttrrtlctt.ls, thx's rtttt apply becattse the obligation
a. The exemption contemplated in the Constitution couers to pay the co1titul, guins tax herein is imposed on X, the
real estate tax on real properties actually, directly, and seller, and rutt on the Church. Since payment of the capital
exclusiuely used for religious, charitable or social welfare
gains tax is a condition precedent for the registration ofthe
purposes. It does not couer exemption from the imposition of transfer certifi.cate of title to real property, the non-payment
the income tax which is within the context of Section 30 of herein by the seller is a ualid reason for the Registry of Deeds
the Tafi Code. As a rule, non-stoch non-profit corporations to deny the transfer of title to the subject land'
organizedfor religious, charitable or social welfare purposes (b) No. The tar exemption granted to churches in the
are exempt from inconxe tuc ontheir income receiued by them Constitution refers to property tax and not to capital gains
as such. Howeuer, if these religious, charitable or social tax which is an income tan. Besides, the capital gains tax
welfare corporations deriue income from their properties is the liability of the seller X and not the purchaser-
or any of their actiuities for profit, the incorne tax shall
be imposed on said items of income irrespectiue of their
Bar Question (2000)
disposition (Sec. 30, NIRC; CIR u. CA and. YMC{ 298
SCRA 83). Under Article XIV, Section 4(3) of the 1987 Philippine
Constitution, all revenues and assets of non-stock, non-profit
b, Yes. The income deriued from the sale oflot and rentals educational institutions, used actually, directly and exclusively
from its boarding house are considered as incorne from for educational purposes, are exempt from taxes and duties. Are
properties which are subject to tax. Likewise, the incomes income derived from dormitories, canteens and bookstores as well as
from the operation of the canteen and gift shop are income interest income on bank deposits and yields from deposit substitutes
from its actiuities conducted for profit which are subject to automatically exempt from taxation? Explain.
tuc. The income tax attaches irrespectiue of the disposition
of these incomes (Sec. 30, NIRC; CA and. CIR u.YMCA, Suggested answer:
ibid.).
No. The interest income on banh deposits aBd yields from deposit
Non-stock, non-profit private educational institution substitutes are not automatically exempt fronl taxation. There must
be a showing that the incomes are included in the school's annual
Bar Question (1993) information return and duly audited fi'nancial statements together
X sold a piece of land to the United Church of Christ of Quezon with:
City, Inc. The land is to be devoted strictly for religious purposes by 1. Certifications from depository banks as to the amount of
the Church. When the Church tried to register the title of the land, interest income earned from passiue inuestments not subject
the Register of Deeds refused, claiming that the capital gains tax to the 20Vo final withholding tax;
was not paid. Is the transaction exempt from the capital gains tax?
Reasons. 2. Certification of actual, direct and exclusiue utilization of
said income for educational purposes;
Suggested answer: 3.Board resolution on proposed proiect to be funded out of
(q.) No. Under Section 21(e) in relation to Section 49(a)(4) of the
the money deposited in banks or placed in money marhet
National Internal Reuenue Code, the seller is the one liable placements (Finance Department Order No. 749-95,
November 24, 1995), uhich must be used actually, directly
for the payment of the capital gains tatc from the sale of real
property by an indiuidual ta"tcpayer. Meanwhile, the Church and exclusiuely for educationq'l purposes.
in this instq.nt case is the buyer. Hence, Section 28(4) of the The income deriued frorn dormitories, canteens and bookstores
1987 Constitution, which exempts church lands, buildings, are not also automatically exempt from taxation. There is still the
254 llt,:vt t,twt,:rr or.,r'l'nxn'rrow

requiretnent for euidence to show actual, direct and erclusiue use


for educational purposes. It is to be noted that the 1g87 philippine
constitution does not distinguish with respect to the source or origin
of the income. The distinction is with respect to the use which should
be actual, direct and exclusiue for educational purposes. CHAPTER VII
Consequently, the prouisions of Section 30 of the NIRC of 1gg7, RETURN OF CAPITAL AND DEDUGTIONS
that o non-stock and non-profit educational institution is exempt from
tarotion only "in respect to income receiued by them as such" could not
affect the constitutional tar exemption. where the constitution does Return of Capital
not distinguish with respect to source or origin, the Tax Code should
not make distinctions. Income tax is levied by law only on income, which may be gross
income or net income; hence, the amount representing return of
Requirement for revalidation of tax exemption for non-stock, capital should be deducted from the proceeds from sales of assets
non-profit corporations and associations and should not be subject to income tax. Cost ofgoods purchased for
resale, with proper adjustment for opening and closing inventories,
In the light of the ruling of the Supreme Court in the case of are deducted from gross sales in computing gross income (Sec. 65,
St. Luke's Medicol Center u. CIR, the BIR requires all hospitals and Reu. Regs. No.2). Payment of principal by a debtor to a creditor is
non-stock, non-profit organizations operating hospitals which were deducted from the total amount received by the latter in order to
issued tax-exempt rulings before to submit a request for revalidation determine his interest income.
of their tax-exempt status by submitting cerbain documents. cIR also
declares that all rulings issued prior to November l,2\IL,which grant 1. Sale of inventory of goods by manufacturers and
tax exemption to proprietary non-profit hospitals or to non-stock, dealers ofproperties. - In sale ofgoods or properties
non-profit entities operating hospitals shall no longer be valid (RMC representing inventory, the amount received by the seller
No. 4-2013, January 1 1, 2013). consists ofreturn ofcapital and gain from sale ofgoods or
properties. That portion ofthe receipt f'Presenting return
Corporations and associations under Section B0 of the Tax of capital is not subject to income tax. Accordingly, cost of
Code, including those that have been issued tax exemption rulings/ goods manufactured and sold (in the case of manufacturers)
certificates prior to June 30, 20L2 as well educational institutions, or cost of sales (in the case of dealers) is deducted from
shall file their applications for tax exemptions with the RDO where gross sales and is reflected above the gross income line in
they are registered, by submitting cerbain documentary requirements a profit and loss statement.
(RMC No.20-2013, July 22,2013).
2. Sale of stockin trade by a real estate dealer and
dealer in securities. - While real estate dealers and
dealers in securities also maintain stocks in trade primarily
for sale to customers in the course oftheir trade or business,
they are ordinarily not allowed to compute the amount
representing return ofcapital through cost ofsales. Rather,
they are required to deduct the total cost specifically
identifiable to the real property or shares of stock sold or
exchanged. However, computation of the cost of building
projects on pre-sale stage can be based on the estimated

255
256 llr.:vrr,:wr,:rr on'l'nxntror.r INr r rMr': nNtr Wt t ttttot,tttt'ttl'l'nxt,)s 2lt7
lil,lrrlrr ol ( lrtpil.trl rrtr<l I)r'tlttcl,iotts

construction cost of the project on the theory that income il Prizes and wirtrt,itt.gs;
tax is a tax on gross or net income.
j) Pensions; and
3. Sale of services. - Sellers of services do not buy and
h) Partner's distributiue share of the gross income of general
carry nor sell any stock in trade or inventory ofproperty;
p rofe s s io nal p artner s hiP.
hence, they do not take or assume any risk of loss similar
to sellers ofinventory ofgoods. Their entire gross receipts Further, under Section 36 of Revenue Regulations No.2, "toxable
are treated as part of income. Some sellers of services, incon1.e"in a broad sense n'Leans all wealth which flows into the
however, have cost of services that must be deducted from taxpayer other than as a rnere return of capital.
their gross receipts in order to arrive at their gross income,
It includes the forms of the income specifically describedas gains
which amount is used in computing their two percent (2Vo)
and profits, including gains deriued from the sale or other disposition
MCIT for the year.
of assets. Gross income, n'Lectns income (in the broad sense) less income
which is by statutory prouision or otherwise exempt from. the tax
Bar Question (1993) imposed by law.
In 1990, X started constructing a commercial building with Applying the aboue prouision of law to the case at bar, the amount
spaces for lease to the public. X required Y, a prospective lessee to sign
of ?100,000.00, being a loan or an indebtedruess, is an outlay, not a
a pre-lease agreement, which principally provided: (a) that the lessee
taxable incorne or gain.
shall extend to the lessor a non-interest bearing loan of F100,000.00
payable within twelve (12) months; and (b) that in consideration of
the loan, the lessee shall be given preference in the lease and his Bar Question (2001)
rentals shall not be increased while the loan remains unpaid. Upon Distinguish "Exclusion from Gross Income" from "Deductions
completion of the building, Y extended the loan of F100,000.00 to X From Gross Income." Give an example of each'
and he was given a space in its ground floor. May the BIR consider
the F100,000.00 as taxable income of X? Reasons. Suggested answer:
Exclusions from gross income refer to a flow of wealth to the
Suggested answer:
taxpayer which are not treated as part ofgross income, fpr purposes of
Section 28 of the NIRC defines "gross income' as all income from computing the tarpayet's taxable income, due to the folloving reasons:
whateuer source deriued including but not limited to the following (1) It is exempted by the fundamental law; (2) It is exempted by statute;
items: (3) It does not come withinthe definitionof income (9ec.61, Reu. Regs.

a) Compensation for seruices, including fees, cornmissions,


No.2).
ond similar items; Deductions from gross income, on the other hand, are the
a,mounts, which the lq.w allows to be deducted from. gross income in
b) Gross income deriued from business; order to q.rriue at net income.
c) Gains deriued from dealings in property;
Exclusions pertain to the com'putation of gross income, while
d) Interest; deductions pertain to the computation of net income.
e) Rents; Exclusions are something receiued or earned by the taxpayer,
which do not form part of gross income while deductions are something
fl Royalties;
spent or paid in earning gross income.
g) Diuidends;
Example of an exclusion from gross income is proceeds of life
h) Annuities; insurance receiued by the beneficiary upon the death of the insured
258 llt,:vtt':wt,:tt oN'l'nxn'r'roN It|oMt,: ANtr Wt't t Ittilt,trtwr;'l',txt,:ri
ll,r,l.rrrrr ol ( irrItlrrI rtttrl I )rrlttt:l,iotts

q.n income or 13th month pay of an employee not exceeding


which is not purchase oflaw books, enlertainrnent expenses, car insurance and
P30,000.00, which is an income not recognized for tax purposes. car depreciation. The BIR disallowed the deductions. Was the BIR
Example of a deduction is business rental. correct?

Ded.uctions are construed. strictly against the taxpoyer Suggested answer:


claiming it. - He who claims a deduction must point to the specific No, the BIR is wrong in disallowing the deductions claimed by
provision of the statute authorizing it, and he must be able to prove
Atty. Gambino. It appears that the general professional partnership
that he is entitled to it. As a general rule, deductions are strictly
cloimed itemized deductions from its gross reuenues in arriuing at its
construed against the taxpayer claiming them and it is incumbent
distributq.ble net income. The share of a partner in the net income of the
upon the taxpayer to establish a clear right to tax exemption. Tax
partnership must be reported by him as part of his gross income from
exemptions are looked upon with disfavor (Western Minolco
practice of profession qnd he is allowed to claim further deductions
Corporation o. Cornrnissioner, 124 SCRA 272).If the exemption
which are reasonable, ordinary and necessa'ry in the practice of
is not expressly stated in the law, the taxpayer must at least be profession and were not claimed by the partnership in cornputing its
within the purview of the exemption by clear legislative intent net income (5ec.26, NIRC; Reu. Regs. No. 16'2008, February,2010).
(Comrnissionerof Customs u.Philippine Acetglene Co., Bg SCRA
INOTE: The examinee may want to qualify his answer further by
7O). However, if there is an express mention in the law or if the
citing the rules on (a) purchases of law boohs, which can be a capital
taxpayer falls within the purview of the exemption by clear legislative
expenditure; (b) entertainment ex,penses, which must conform to the
intent, the rule on strict construction will not apply (Commissioner
ceiling for sellers of seruices; (c) car insurance and depreciation, which
a. Arnold.us Canpenhy Shop, 159 SCRA 199).
are deductible only to the extent that it was used for business or practice
of IawJ.
Deductions from Gross lncome
There are three (3) types ofdeductions from gross income. These Business Expenses
are:
Conditions for deductibility of business expenses:
a. The itemized deductions in Section 3 (A) to (J) and (M)
1. It must be ordinary and necessary;
available to all kinds of taxpayers engaged in trade or
business or practice of profession in the Philippines; 2, It must be paid or incurred during the taxable year;
b. The optional standard deduction in Section 34(L) available 3. It must be paid or incurred in carrying on or which are
to individual and corporate taxpayers deriving business, directly attributable to the development, management,
professional, capital gains, passive income, or other income operation and/or conduct ofthe trade, business or exercise
not subject to final tax; and of profession;
c. The special deductions in Sections 37 and 38, both ofthe 4. It must be supported by adequate invoices or receipts;
Tax Code, and in special laws like the BOI Law (E.O. 226).
5. It is not contrary to law, public policy or morals; and
Bar Question (2013) 6. The tax required to be withheld on the expense paid or
payable is shown to have been remitted to the BIR (Sec.
Atty. Gambino is a partner in a general professional partnership. 2.58.5, Reu. Regs. No. 2'98, April 77, 1998).
The partnership computes its gross revenues, claims deductions
allowed under the Tax Code, and distributes the net income to the An expense is "ordinary" when it connotes a payment, which is
partners, including Atty. Gambino, in accordance with its articles normal in relation to the business ofthe taxpayer and the surrounding
of partnership. In filing his own income tax return, Atty. Gambino circumstances. An expense is "necessary" where the expenditure is
claimed deductions that the partnership did not claim, such as appropriate or helpful in the development of the taxpayer's business
260 llt,:vt t,rwr,:rr oN'l'Axn,rroru 26t
,,j,ir;:Tr,ii:r,Y,::i'lj;li'i;:l,,ll;l;,,,
or that the same is proper for the purpose of realizing a profit or or liability bc known ubsolul,trl.y; it only requires that a taxpayer has
minimizing aloss (General Electric IPJJ, Inc. u. Collector, CTA at its disposal the inlirrrrration necessary to compute the amount with
Case 7717, July 74, 1963). reasonable accuracy, which implies something less than an exact
or completely accurate amount. Moreover, deduction partakes the
Bar Question (2009) nature of tax exemption; it must be construed strictly against the
taxpayer ( Commis sioner u. Isabela Cultural C orporation, G.R.
Masarap Food Corporation (MFC) incurred substantial
No. L72231, Februany 12,2007).
advertising expenses in order to protect its brand franchise for one
of its line products. In its income tax return, MFC included the
advertising expense as deduction from gross income, claiming it as
Additional requirements for deductibility of certain pay-
an ordinary business expense. Is MFC correct? ments
Any amount paid or payable which is otherwise deductible
Suggested answer: from, or taken into account in computing gross income or for which
In 1995, respondent paid P9.4 million for aduertising a product. depreciation or amortization may be allowed under this Section, shall
This was disallowed by the BIR as ordinary and necessqry erpense be allowed as a deduction only if it is shown that the tax required
and considered the sante as capital expenditure, since the amount to be deducted and withheld therefrom has been paid to the BIR in
was staggering, which was incurced to creqte or maintq,in some form accordance with this Section, Sections 57 and 58 of this Code (Sec.
of goodwill for the taxpayer's trade or business or for the industry or 34[K], NIRC).
profession of which the taxpayer is a member. The court held thot
Implementing the above provision of law, Revenue Regulations
"goodwill" generally denotes the benefit arising from connection and No. 12-2013 dated July 12,20L3 provides that: "No deduction will also
reputation, and efforts to establish reputation qre akin to acquisition
be allowed, notwithstanding payments of withholding tax at the time
ofcapital assets. Therefore, eJcpenses related thereto are not (ordinary of the audit investigation or reinvestigation/reconsideration in cases
and necessary) business ucpenses but are capital expenditures (that where no withholding of tax was made in accordance with Sections
are not deductible pursuant to the prouisions of Section 36 ofthe Tax
57 and 58 of the Code."
Code) (Commissioner a. General Foods Phjl., G.R. No. 14g6Z2,
April 24,2OOg).
Bar Question (1994)
Professional erpensea are d.eductible in the year the In December 1993, the So ngguniang Bayan auLhored a Christmas
professional seraices are rend.ered., not in the year they are bonus of F3,000.00, a cash gift of F5,000.00, and transportation and
billed.. - In 1984 and 1985, legal services were rendered by the representation allowance of P6,000.00 for each of the municipal
lawyer, but they were billed by the lawyer and paid by the respondent employees.
in 1986. In 1985, auditing services were rendered by the accountant
but billed and paid in 1986. In the audit of the books for 1986, the
(1) Is the Christmas bonus subject to any tax?
BIR disallowed the expenses for 1986 pursuant to the "all events (2) How about the cash gift?
test." The CTA and CA ruled in favor of the respondent. However,
the Supreme Court reversed their decisions since taxpayer uses the
(3) How about the transportation and representation
allowances?
accrual method of accounting.
The Court ruled that accrual of income and expense is permitted Suggested answer:
when the "aII euents test' h:as been met. This test requires: (1)
fixing a right to income or liability to pay; and (2) the availability
(1) The Christmus bonus giuen by the Sangguniang Bayan
of reasonably accurate determination of such income or liability. It
to the municipal employees is taxable as additional
compensation (Sec. 21[a], NIRC).
added that it does not, however, demand that the amount of income
262 lillvrr,:wr,:rr oN'l'Axn'r'ror I Nr r rMt,i ANI I W l't't ttrot,Dtttr I'l',lxt,:s 26:t
ll.r,l.rtrn ol ( lttlrtlrtl rttttl I )r'tlttcl.iotts

(2) The cash gift per employee of ?5,000.00 being substantial nol u lttr,vtrtut.l irt. gtxtd laith and is not normal to
operatinSl los.stts is
may be considered taxable qlso. It is in the nature of the business; hence, unreasonttltle und would not qualify as ordinary
additional cornpensation income as it is highly doubtful and necessary ex,peruse.
if municipal gouernments are authorized to make gifts in
substantial sums such as this. It is not furthermore Sift of Bar Question (1993)
"srnall ualue" which employers might giue to their employees
on special occasions like Christmas - items which could X just hurdled the bar examinations and immediately engaged
be exempt under BIR Reuenue Audit Memorandum Order in the practice of law. In preparing his income tax return he listed the
No. 1-87. INOTE: It is considered q,s de minimis benefits following as deductible items: (a) fees paid to the Supreme Court to
under Reu. Regs. No.3-98, as amend.ed; hence, exempt from be able to take the bar examinations; (b) fees paid to a law school to
income tuc q.nd fringe benefits tax.l enroll in its pre-bar review classes; (c) malpractice insurance; and (d)
amount spent to entertain a judge who decided his first case. Which
(3) The transportation and representation allowances qre deductions are allowable? Reasons.
actually reirnbursements for excpenses incurred by the
employee for the ernployer. Said q.Ilowonces spent by the
Suggested answer:
employee for the ernployer are designed to enhance the
quality of the seruice that the employer is supposed to Section 29 of the Nation'al Internal Reuenue Code on deductions,
perform for its clientele like the people of the municipality. among other things, prouides:
"(a) Expenses
Bar Question (2006)
(1) Business Expenses (q) In General - All the ordinary and
Gold and Silver Corporation gave extra 14th month bonus to necessary qcpenses paid or incurred during the taxq.ble
all its officials and employees in the total amount of F75 million. year in carrying on any trade or business. Including a
When it filed its corporate income tax return the following year, the reasonqble allowance for salaries or other compensation
corporation declared a net operating loss. When the income tax return for personal seruices actually rendered; traueling ucpenses
of the corporation was reviewed by the BIR the following year, it while away from' home in' the pursuit of a trade, profession
disallowed as item of deduction the F75 million bonus the corporation or business: rentals or other payments required' to be mq'de
gave its officials and employees on the ground of unreasonableness. as a condition to the corutinued use or possession, for the
The corporation claimed that the bonus is an ordinary and necessary purpose of the trade, profession or business of property to
expense that should be allowed. which the taapayer has not taken ruor is not tahing title or
in which he has no equity."
Suggested answer:
Further, Section 69 of Reuenue Regulations No. 2, as
I will rule against the deductibility of the bonus. The extra bonus amended, otherwise known as "Income Tax Regulations,"
is both not normal to the business and unreasonq.ble. Admittedly, reads:
there is no fixed test for deterrnining the reasonableness of a bonus
as dn additional compensation. This depends upon nxany factors, "Sec. 69. Professional Expenses - A
such as the payment must be made in good faith; the character of the professional may claim as deductions the cost
taxpayet's business; the uolunte a.nd amount of its net earnings; the of supplies used by him or in the practice of his
locality; the type and extent of the seruices rendered; the salary policy profession, etcpenses paid in the operation and repair of
of the corporation; the size of the particular business; the employees' transportation equipment used in making professionq,l
qualification and contributions to the business uenture; and general calls, dues to professional societies and subscriptions
economic conditions (CJ],1. Hoskins & Co, Ine. u. CIR, 30 SCRA to professiorual jourruals; the rent paid for office roon'Ls'
434 t19691). Giuing an extra bonus at a time that the company suffers the expenses of the fuel, Iight, u)ater, telephone, etc.
264 ltuvrr.:wr,:rt oN'l'Axn'r'ror.r I Nr', rNtt, rtt'tl r Wl l lll lol,l llN( l'l'Axl'il'i
ll.r,lttrtr ol ('ttptlttl ttttrl I)rrlttt't,iotls

used on such offices, qnd me hire of office assistants. cun be claimed by Murrg l)otrglrrs I lamburger, Inc. as an ordinary and
Amounts currently expended for books, furniture and necessary expense.
professional instruments and equipment, the useful
life of which is short, may be deducted. But amounts Suggested answer:
expended for books, furniture and professional
No. As the expenditure hq.d not been incurred in carcying on his
instruments and equiprnent of a permanent charqcter
trad.e or business, the same cannot be cortsidered an ordinary and
are not allowable deductions."
necesscrry expense for which deduction may be claimed- Such expense
From the foregoing prouisions oflaw that ordinary and is a personal expense which is not deductible from the gross income
necessary expenses incurred during a tascable year pertaining pursuant to Section 36 ofthe 1997 Tax Code-
directly to the practice of a profession may be allowed as
d.eductions, it may be inferred from a keen reading of Section Bar Question (1998)
69 of Reuenue Regulations No. 2 thot aside frorn personal
exemptions, only direct costs or ouerhead expenses incurred MC Garcia, a contractor who won the bid for the construction of
in the actual practice of a profession may be claimed; i.e., a public highway, claims as expenses, facilitation fees which according
supplies, fuel, Iight, electricity, salaries, etc. Applying the to him are standard operating procedure in transactions with the
aboue considerations in the case at bar, it appears that
government. Are these expenses allowable as deduction from gross
arnong the expenses incurred by X, only the premiums he income?
paid for malpractice insurance qualifies as a deductible
expense, the same being an ordinary q.nd necessctry expense Suggested answer:
in the pursuit of a profession as defined by Section 29 of No. The alleged facilitation fees which he claims as standard
the NIRC and further qualift.ed by Reuenue Regulations operating procedure in transactions with the gouernment comes in
No. 2. The tuition fees for pre-bar classes and the bar the form of bribes or "kich,bach" which are not allowed as deductions
examination fees paid to the Supreme Court by X do not frorn gross income (Sec. 34[A]fl1[c], NIRC)-
qualify as deductible expenses under Reuenue Regulations
No. 2. As for the amount spent by X to entertoin the Judge Bar Question (2001)
who decided his first case, the same may not be claimed as
an expense. A business elcpense to be deductible must be In order to facilitate the processing of its application for a
sustained by adequate proof and that the same must not Iicense from a government offrce, corporation A found it necessary
be against the law or public policy (Consolid.ated Mines to pay the amount of Php100,000 deductible from the gross income of
a. Court of Tar Appeals and, Commissioner, 58 SCRA Corporation A? On the other hand, is the Php100,000 taxable income
618,. of the approving official? Explain your answers.

Bar Question (1993) Suggested answer:

X is the Advertising Manager of Mang Douglas Ham, Inc. X had Since the amount of Php100,000 constitutes a bribe, it is not
dinner with Y, owner of a chain of burger restaurants, to convince allowed a.s a deduction from gross income of Corporation "A" (Sec'
the latter to carry Mang Douglas'hamburger. AJter Y agreed, both 34tAltlltcl, NIRC). Howeuer, to the recipient gouernment official, the
X and Y went their separate ways. X celebrated by going to a single's same constitutes a ta.xable income. All income from legal or illegal
bar. He picked up a partner and consumed a bottle of beer. He drove sources is taxable absent any clear prouision of law exempting the
home at 3:00 a.m. On his way, he sideswiped a pedestrian who died as same. This is the reason why gross income had been defined to include
a result ofthe accident. X settled the case extra-judicially by payrng inconre d,eriued. from whateuer source (Sec. 32[A], NIRC). Illegally
the heirs of the pedestrian F50,000.00. The money, however, came acquired. income constitutes rectlized income under the claim of right
from Mang Douglas Hamburger, Inc. Discuss whether the F50,000.00 doctrine (Ruthin u. U.S., 343 U.5.130).
266 lil :vrr,:wr,:rr oru'l'irxlTror.r I Nr r rn,tt,t tttt r Wr'ttIr rot,t)tNr i'l'Axl')s 267
Itr,l,ttrn ol ( 'ltItl ttl tttttl I )rrltttll,iotts

Bar Question (1993) In general, the amotttrt, ol'interest expense paid or incurred
within a taxable year on indebtedness in connection with the
X is the proprietor ofVanguard, which is a security and detective
taxpayer's trade, business or exercise ofprofession shall be allowed
agency. X was able to get the contract to provide the security services as a deduction from the taxpayer's gross income. The provisions of
of a government agency. He signed the Security Agreement with the
Section 4(b) of Revenue Regulations No. 13-2000 to the contrary
director of the government agency calling for the deployment of 100 notwithstanding, interest incurred or paid by the taxpayer on all
security guards on a 24-hour basis. The contract was revocable at unpaid business-related taxes shall be fully deductible from gross
the will of the director. To please the director, X gives him at the end income and shall not be subject to the limitation on deduction
of the month F100,000.00 per guard hired. May X deduct from his heretofore mentioned. Thus, such interest expense incurred or paid
income the money he paid to the director? Reasons. shall not be diminished by the percentage of interest income earned
which had been subjected to final withholding tax.
Suggested answer:
Optional treatrnent of interest expense on capital
The money paid to please the director is not deductible. This is
erpend,iture. - At the option of the taxpayer, interest expense on
a form of bribery. Deductions shall not be qllowed if the expense is a capital expenditure incurred to acquire property used in trade,
contrary to law, public policy or for immorq.I purposes (Za,mora v. business or exercise of a profession may be allowed as a deduction in
Commissioner, I SCEA 763; Roras a. CTA and. Cornmisaioner, full in the year when incurred, the provisions of Section 36(AX2) and
23 SCRA 276). (3) of the 1997 Tax Code to the contrary notwithstanding, or may be
treated as a capital expenditure for which the taxpayer may claim
Bar Question (1998) only as a deduction the periodic amortization of such expenditure
(Sec. 34[B]t31, NIRC). However, should the taxpayer elect to deduct
Are contributions to a candidate in an election subject to donor's
tax? On the parb of the contributor, is it allowable as a deduction from the interest payments against its gross income, the taxpayer cannot
gross income? at the same time capitalize the interest payments because that would
constitute double tax benefits which is not authorized by law (Paper
Suggested answer: Ind.ustries Corporation of the Philippines u. Com'missioner, 250
scRA434).
q,) No, prouided the recipient candidate had complied with the
requirement for fi.ling of returns of contributions with the Conditions for deductibility of interest. - In general,
requisites for the
subject to certain limitations, the following are the
Comrnission on Elections as required under the Omnibus
Election Code. deductibility of interest expense from gross income, uiz.:

b) The contributor is not allowed to deduct the contributions 1. There must be a valid and existing indebtedness;
because the sa.id ex,perlse is not directly attributable to, the 2. The indebtedness must be that of the taxpayer;
deuelopment, management, operation andlor conduct of
3. The interest must be legally due and stipulated in writing;
a trade, business or profession (Sec. 34[A]il1[a], NIRC).
Furthermore, if the candidq,te is an incumbent government 4. The interest expense must be paid or incurred during the
official or employee, it rnay even be considered as a bribe or taxable year;
a kichback (Sec. 34[A]fl1[c], NIRC).
i). The indebtedness must be connected with the taxpayer's
trade, business or exercise ofprofession;
lnterests
olnterest'is the amount paid by a debtor to his creditor for 6. The interest payment arrangement must not be between
related taxpayers as mandated in Section 34(BX2)(b), in
the use or forbearance of money (Art. 1956, Ciuil Code of the relation to Section 36(8), both of the Tax Code of 1997;
Philippines).
INr r rMt,:,rNlr Wl l llllr tl.lrlN(i'l'Axl';s 269
268 Rrvtt,:wl:rr oN'l'nxrrt'tot't
Itr,l.ttrtt ol ( ittPtl.trl rtttrl l)r'rltlt:t,iotts

7. The interest is not expressly disallowed by law to be Suggested anawer:


deducted from the taxpayer's gross income(e.9., interest The commissioner's argument is misplaced because the interest
on indebtedness to finance petroleum operations); and on the d.onorls tuc is not one that can be considered as hauing been
8. The amount of interest deducted from gross income does incurred. in connection with the to.xpayer's trade, business or exercise
not exceed the limit set forth in the law. In other words, of profession. Tq,x obligations constitute indebtedness for purposes
the taxpayer's otherwise allowable deduction for interest of d.ed.uction from gross income of the amount of interest paid on
expense shall be reduced by 33Vo (Sec. 34[B][1], NIRC). indebtedness (CIR u. Palanea, 78 SCRA 496). Although interest
payment
-is for delinquent taxes is not deductible as ta'x, the taxpayer
Bar Question (1992)
not preclud.ed. from claiming said interest q,s deduction a's such
(Collector u. Magalona, L-75802, Septem.ber 30,7960).
Sometime in December 1"980, a taxpayer donated to his son 3,000
shares of stock of San Miguel Corporation. For failure to file a donor's Bar Question (1999)
return on the donation within the statutory period, the taxpayer was Explain if the following items are deductible from gross income
assessed the sum of F102,000.00, as donor's tax plus 25Vo stncharge for income tax purposes. Disregard who is the person claiming the
or F25,500.00 and 2OVo interest or F20,400.00 which he paid on June expense.
24,L985.
1) Interest on loans used to acquire capital equipment or
April 10, 1986, he filed his income tax return for 1985 claiming
On machinery;
among others, a deduction for interest amounting to F9,500.00 and
reported a taxable income of F96,000.00. 2) Depreciation of goodwill.

On November 10, 1986, the taxpayer filed an amended income Suggested answer:
tax return for the same calendar year 1985, claiming therein an 1) This is a deductible item from gross income. The law giues
additional deduction in the amount of F20,400.00 representing the toxpayer the option to clairn as a deduction or treat a'6
interest paid on the donor's gift tax.
capital expen'diture interest incurred to acquire property
A claim for refund of alleged overpaid income tax for 1985 was used in trade, business or exercise ofa profession (Sec.34[B]
fiIed with the Commissioner which was subsequently denied. [3], NIRC).
Upon appeal with the Court of Tax Appeals, the Commissioner 2) Depreciation for goodwill is not allowed as deduction
took issue with the Court of Tax Appeals' determination that the from gross income. While intangibles may be allowed to
amount paid by the taxpayer for interest on his delinquent taxes be depreciated or amortized, it is only allowed to those
is deductible from the gross income for the same year pursuant to intangibles whose use in the business or trade is defi'nitely
Section 29(bX1) of the National Internal Revenue Code. lirnited in d'uration (Basilan Estates u. CIR,21 SCRA
17). Such is not the case with goodwill-
The Commissioner of Internal Revenue pointed out that a tax is
not indebtedness. He argued that there is a fundamental distinction
Bar Question (1999)
between a "tax' and a "debt." According to the Commissioner, the
deductibility of interest on indebtedness from a person's income tax A Co., a Philippine corporation, issued preferred shares ofstock
cannot extend to interest on taxes. with the following features:
1) What is your opinion on the argument of the Commissioner 1. Non-voting;
that a tax is not indebtedness so that deducibility on the 2. Preferred and cumulative dividends at the rate of tOTo pet
interest on taxes should not be allowed?
annum, whether or not in any period the amount is covered
by earnings or Projects;
27 t
270 lit,lvt t,lwt,:tr oN'l'nxA't'toN
,,:,il;ill,ii::,Y,:li';j:l:i'ill;,I;l;*
3. In the event of dissolution of the issuer, holders of pref'erred 4. 'l'axes are nttt Hpccilicull.y excluded by law from being
stock shall be paid in full or ratably as the assets ofthe deducted from lhe taxpayer's gross income'
issuer may permit before any distribution shall be made unutilized creditable input taxes attributable to zero-rated
to common stockholders; and sales can only be recovered through the application for refund or tax
4. The issuer has the option to redeem the preferred stock. credit. unapplied input taxes after the expiration of the two (2)-year
prescriptive period may not be expensed outright. Tax exemptions
A Co. declared dividends on the preferred stock and claimed the are strictly construed against the taxpayer, and deductions are in
dividends as interest deductible from its gross income for income tax the nature of tax exemptions (BIR Ruling No. 123-2013, March 25,
purposes. The BIR disallowed the deduction. A Co. maintains that 2013; RMC No. 57'2013, August 23,2013).
the preferred shares with their features are really debt and therefore
the dividends are really interests. Decide.
Losses
Suggested answer: Losses are generally classified into: (a) those incurred in a trade
or business for profit; (b) those incurred in any transaction entered
The diuidends are not deductible from gross income. Preferred
into for profit, although not connected with the trade or business;
shares shall be considered capital, regardless ofthe conditions under
and (c) casualty losses that arise from fire, storm, shipwreck, or other
which such shares are issued and, therefore, d,iuidends paid thereon
casualty, or from theft or robbery, even though not connected with
are not considered ointerest" which are allowed to be deducted from
the trade or business ofthe taxpayer.
the gross income of the corporation (RMC No. 17-71, July 12, 1971).
Conditions for deductibility of losses (Reu. Regs' No' 12'77

Taxes and Reu. Regs. No. 10-79)

All taxes, national or local, paid or accrued during the taxable 1. The loss must be that of the taxpayer;
year in connection with the trade or business or profession of the 2. The loss is actually sustained and charged offwithin the
taxpayer are deductible from gross income, except: taxable year;
1. Philippine income tax(9ec.87, Reu. Regs. No.2); 3. The loss is evidenced by a closed and completed transaction;
2. Foreign income tax(9ec.82, Reu. Regs. No.2); 4. The loss is not claimed as a deduction for estate tax
3. Estate and donor's taxes (Sec. 83, Reu. Regs. No.2); purposes;

4. Special assessments on real property (Sec. 84, Reu. Regs. 5. The loss is not compensated for by insurance or otherwise;
No.2); and 6. In the case of an individual, the loss must be connected
5. Electric energJ consumption tax under B.P. 36. with his trade, business or profession, or incurred in any
transaction entered into for profit though not connected
Conditions for deductibility of taxes: with his trade, business or profession; and
1. Pa5rments must be for taxes; 7. Inthe case ofcasualtyloss, ithasbeenreportedtothe BIR
within 45 days from date ofoccurrence ofthe loss'
2. Taxes are imposed by law upon the taxpayer;
3. Taxes must be paid or accrued during the taxable year Bad Debt Theory
in connection with the taxpayer's trade, business or Under the bad' d'ebt theory, loss from theft or embezzlement
profession; and occurring in the year and discovered in another year is ordinarily
deductible for the year in which sustained. In a case, however, where
I l, ottil, Atil, Wt t t ltt, rt,trtttr l'l'nxt'ls 27:l
272 Itr,rvl,lwr,;r oN'l'nxA't'toN
('rtptlttl tttttl I )r'rlttt'l.iotts
ll.r,l.rrrrr ol

the taxpayer had no means of determining the actual date o{'thc Bar Question (2010)
embezzlement, a loss was sustained in the year of discovery. The "A" is a travelling salesman working full time for Nu Skin
rule is now modified by the bad debt theory which holds that since Products. He receives a monthly salary plas 37o commission on his
ltreembezzlement of funds creates a debtor-creditor relationship, the sales in a southern province where he is based. He regularly uses
loss is deductible as bad debt in the year when the right of recovery his own car to maximize his visits even to far-flung areas. one fine
becomes worthless (Talisay-Silay Milling Co. u. Comrnissioner, day, a group of militants seized his car. He was notified the following
CTA Case 1-399, Decetnber 29, 1965). aav lv tt that the marines and the militants had a bloody
"-police
and his car was completely destroyed after a grenade hit
encounter
Losses must be Evidenced by Closed and Completed it. "A" wants to file a claim for casualty loss. Explain the legal basis
Transaction ofyour tax advice.
The rule is that loss deduction will be denied if there is a
measurable right to compensation for the loss, with ultimate Suggested answer:
collection reasonably clear. So where there is reasonable ground for I would, aduise oA" not to file a claim for casualty loss deduction
reimbursement, the taxpayer must seek his redress and may not
frorn gross income, because he deriues purely compensation income,
'whici
secure a loss deduction until he establishes that no recovery may be includ.es the SVo commission on his sales, from his employer.
had. In other words, the taxpayer must first exhaust his remedies An ind.iuid,uul who receiues compensation income under an employer'
to recover or reduce his loss (Plaridel Surety & Insurance Co. v. employee relationship is not entitled to any kind of deduction (whether
Collector, 21 SCRA 1187). itemiied. or the stand.ard ded.uction) frorL gross income (Sec. 34, NIRC}
Losses must usually be evidenced by closed and completed Ind,eed1 he is allowed to deduct from his gross compensation income
transactions. Proper adjustment must be made in each case for only the personal and ad.ditional exemptions authorized in section 35
expenditures or items of loss properly chargeable to capital account, olihe fax Cod.e. Besid,es, to be deductible fronx gross income, casualty
and for depreciation, obsolescence, amortization, or depletion. loss rnust relate to a property connected with the trade, business or
Moreover, the amount of the loss must be reduced by the amount of profession of the taxpayer (Sec. 34[D][2] ' NIRC).
any insurance or other compensation received, and by the salvage
value, ifany, ofthe property. A loss on the sale ofresidential property Bar Question (1998)
is not deductible unless the property was purchased or constructed by
Give the requisites for deductibility of a loss.
the taxpayer with a view to its subsequent sale for pecuniary profit.
No loss is sustained by the transfer of property by gift or death. Losses
Suggested answer:
sustained in illegal transaction are not deductible.l
The requisites for deductibility of a loss are: (a) loss belongs to
The law contemplates the deduction from gross income of losses
the taxpayerj &) q.ctuqlty sustained and charged offduring the ta"x,able
only which are fixed by identifiable events. The income tax law is (c) euid'enced, by a closed and com'pleted transaction; (d) not
yeq.r;
concerned only with realized losses and it was only in 1949 that -compensated.
by insurance or other forms of ind.emnity; (e) not claimed
petitioner reasonably ascertained the fact of and the amount of the q,s i d,eduction for estate tax purposes in case of indiuidual taxpayers;
loss was not yet evidenced by a closed and completed transaction
and. (f) if it is a casualty loss it is euidenced by a declaration of loss
as the possibility of reimbursement was still real and substantial
(Alhambra Cigar & Cigarette Mfg. Co. o. Collector, CTA Case filed within 45 days with the BIR.
743, July 37, 7956).
Bar Question (1993)
X is a traveling salesman in Jolo, Sulu. In the course of his
LSec. 96, Rev. Regs. No. 2.
travel, a band of MNLF seized his car by force and used it to kidnap
274 Itr,:v r r':wr,;rt oru'l'nxn'r'ror.r INr oMtri ANt r Wt t'ttttot,trtHrl'l'nxl';li 27{t
ll,r,l,ttt tt ol ( irtptl.rrl ttrrrl I )lrltlt:l,irttts

a foreign missionary. The next day, X learned that the military and Bar Question (1999)
the MNLF band had a chance encounter. Using heavy weapons, the
military fired at the MNLF band that tried to escape with the use Explain if the following items are deductible from gross income
of Xs car. All the members of the band died and X's car was a total
for income tax purposes. Disregard who is the person claiming the
wreck. Can X deduct the value of his car from his income as casualty deduction.
loss? Reasons. 1) Reserves forbad debts;

Suggested answer: 2) Worthlesssecurities.

Section 29(1Xc) of the National Internal Reuenue Code prouides Suggested answer:
that in cases of indiuiduq.l taxpayers, losses to be deductible must:
1) Reserues for bad debts are not allowed as deduction from
a) actually be sustained and charged off within the taxable gross income. Bad debts must be charged off during the
ye&r; taxable year to be allowed as deduction from gross income'
b) haue been incurred in trade, profession or business or in
The mere setting up of reserues will not giue rise to any
deduction ( Sec. 34[E], NIRC).
any transaction entered into for profi.t, though not connected
with trade, profession, or business; 2) Worthless securities, which are ordinary assets, are not
allowed, as d.eduction from gross income beca,use the loss
c) be euidenced by a closed and completed trctnsaction.
is not realized. Howeuer, if these worthless securities are
Moreouer, Section 1 of Reuenue Regulations No. 12-77 defined capital assets, the owner is considered to haue incuted
ocasualty
loss' as a complete or partial destruction. of property resulting a capital loss as of the last day of the ta*able year and,
from an identifiable euent of sudden, unexpected, or unusual nature. therefore, ded,uctible to the extent of capital gains (Sec'
It denotes accidents, some sudden inuasion by hostile agency, and 34tDlt4l, NIRC). This deduction, howeuer, is not q'llowed
excludes progre s siue deterioration. to a bank or trust company (Sec. 34[E][2], NIRC).
Bosed on the aboue-mentioned laws and the circumstances of
the case at bar, the ualue of the wrecked car is deductible as casualty Bar Question (2004)
lo ss, prou ided the regulation s gou erning sub stq.n tiation requirements PQR Corporation claimed as a deduction in its tax return the
for losses are complied with. amount of F1,000,000.00 as bad debts. The corporation was assessed
by the commissioner of Internal Revenue for deficiency taxes on the
Bad Debts ground that the debts cannot be considered as "worthless," hence,
The term "bad debt" refers to debt resulting from the lhey do not qualif] as bad debts. The company asks for your advice
worthlessness or uncollectibility, in whole or in part, of amount due o' i,Whut factors will hold in determining whether or not the debts
the taxpayer by others, arising from money lent or from uncollectible are bad debts?" Answer and explain briefly.
amounts of income from goods sold or services rendered. A bad debt
arises when a loan or debt for services or sale or rental ofproperby Suggested answer:
becomes worthless or uncollectible. The debt must have had a value In ord.er that d,ebts shall be considered as bad debts because they
when acquired or created. If a worthless debt arises from unpaid haue become worthless, the taxpayer should establish that during
wages, rents, etc., there is no deduction, unless the unpaid amount the year for which the deduction is sought, a situation deueloped as
has been included in income. A genuine creditor-debtor relationship a result of which it became euident in the exercise of sound, objectiue
must exist. (Sec.2, Reu. Regs, No. 5-99, March 70, 1999, as amended business jud.gment that there remained no practical, but only uaguely
by Reu. Regs. No.25-2002, Nouember 19,2002). theoretical, prospect that the debt would euer be paid (collector of
Internal Reuenue o. Good'rich International Rubber Co'r 21
276 l},:vr r,:wr,lrr or.r'l'nxn'r'ror,,r I Nr r rMt,;,tt'ttr W I t t tt tot,ttlNr I'l'Axl'lll 277
ll.r'lttrtt ol ('rtItl.ttl ttttrl I )r'rlttcl,iotts

SCRzf /J,36 [1967]). "Worthless" is not determined bv an in/h:xihl.e hrr rcirlized a rcductitltt ol't,Jtrr ittt:otttel lax due from him on account of
formula or slide rule calculation, but upon the exercise of' stturut, the srrid deduction, his subscquent recovery thereoffrom his debtor
business judgment. The factors to be consid,ered include, but aret rutl shall be treated as a receipt of realized taxable income. conversely,
limited to, the following: (a) the debtor has no property nor uisible if'the said taxpayer did not benefit from the deduction of the said
income; (b) the debtor has been adjudged banhrupt or insoluent; (c.) bad debt written-off because it did not result to any reduction of his
collateral shares haue become worthless; and (d) there ere numerous income tax in the year of such deduction (i.e., where the result of
debtors with small amounts of debts and further qction on the accou.nts his business operation was a net loss even without deduction of the
would entail etc.penses exceeding the amounts sought to be collected. bad debts written-off), then his subsequent recovery thereofshall be
treated as a mere recovery or a return ofcapital, hence, not treated
Bar Question (2003) as receipt of realized taxable income.
A. What is meant by the "tax benefit rule"? Under the "tax benefit rule or equitable doctrine of tax benefit,"
the recovery of amounts deducted in previous years from gross income
B. Give an illustration of the application of the tax benefit rule.
become taxable income unless to the extent thereof, the deduction did
Suggested answer: not result in any tax benefit to the taxpayer. Revenue Regulations No.
2 provides that any amount subsequently received on account ofa bad
A. Tax benefit rule states that the taxpayer is obliged to declare debt previously charged offand allowed as deduction for prior years
as tucable incorne subsequent recouery of bad debts in the year must be included in the gross income for the taxable year in which
they were collected to the extent ofthe tax benefit enjoyed by the received. But construing a similar provision in the Federal Income
taxpayer when the bad debts were written-off and claimed as Tax Regulations, it was ruled that recoveries of bad debts previously
deduction from gross income. It also applies to taxes preuiously deducted do not constitute taxable income, unless the deductions of
deducted from gross income but which were subsequently bad debts in prior years resulted in a reduction of income tax liability.
refunded or credited. The ta;xpayer is also required to report as This doctrine can only be availed ofby a creditor but never by a debtor
tq.Jcable income the subsequent tax refund or tax credit granted (Philippine Fiber Processing Co. a. Commissioner, 7966).
to the extent ofthe tax benefit ofthe taxpayer enjoyed when such
taxes were preuiously claimed as deduction from income.
Depreciation
B. X Company has a business connected receiuable amounting to Depreciation is the gradual diminution in the useful value
F100,000.00 fromY who was declared bankrupt by a competent
of tangible property resulting from wear and tear and normal
court. Despite eq,rnest efforts to collect the same, Y was not able
obsolescence. The term is also applied Lo amortization of the value of
to pay, prompting X Cornpany to write-off the entire liability. intangible assets, the use ofwhich in the trade orbusiness is definitely
During the year of write-off, the entire amount was claimed as limited in duration.
a deduction for income tax purposes reducing the taxable net
income of X Cornpany to only P1,000,000.00. Three (3) years A reasonable allowance for the exhaustion' wear and tear,
later, Y uoluntarily paid his obligation preuiously written-off to and obsolescence of property used in the trade or business may be
X Company.In the year of recouery, the entire amount constitutes deducted from gross income. For convenience, such an allowance
part of gross income of X Company because it was able to get full will usually be referred to as depreciation, excluding from the term
tax benefit three (3) years earlier. any idea of a mere reduction in market value not resulting from
exhaustion, wear and tear, or obsolescence. The proper allowance for
Tax Benefit Rule. The recovery of bad debts previously such depreciation ofany property used in the trade or business is that
-
allowed as deduction in the preceding year or years shall be included amount which should be set aside for the taxable year in accordance
as part of the taxpayer's gross income in the year of such recovery with a reasonable consistent useful life of the property in business,
to the extent of the income tax benefit of said deduction. Example: If equal the basis of the property. Due regard must also be given to
in the year the taxpayer claimed deduction of bad debts written-off, expenditures for current upkeep (Sec. 105, Reu. Regs. No.2).
27tl l(r,:vt t,:wr,:rr on'l'rxA't'toN Irur'oMt', ANI Wr't lrtot,trtnri'l'nxl:s 279
Itr,l,urtr ol ( lrrptl.rtl rttttl l)ctlttt:tiotts

Who may tahe Depreciation.


- The person who sustains an 4. All mainlcnlur(:c (lxponsos on account of non-depreciable
economic loss from the decrease in property value due to depreciation vehicles fbr taxation purposes are disallowed in its entirety.
gets the deduction. Ordinarily, this is the person who owns and has Loss incurred in the sale of such non-depreciable vehicles
a capital investment in the property. shall not be allowed as deduction from gross income.
Depreciation cannot go beyond. acquisition cost of prcperty 5. The input taxes on the purchase ofnon-depreciable vehicles
and.cannot be based. on appraisal aalue. - Depreciation is the and all input taxes on maintenance expenses incurred
gradual diminution in the useful value of tangible property resulting thereon are likewise disallowed for taxation purposes.
from wear and tear and normal obsolescence. The term is also applied
to amortization of the value of intangible assets, the use of which in 6. The regulation shall be effective on October L7,2OI2(Rev.
Regs. No. 12-2012, October 12, 2012).
the trade or business is definitely limited in duration. Depreciation
commences with the acquisition of the property and its owner is not The income tax law does not authorize the depreciation of an
bound to see his property gradually wasted without making provision asset bevond its acouisition cost. The reason is that deductions from
out of earnings for its replacement. He is entitled to see that from gross income are privileges, not matters of right. They are not created
earnings, the value ofthe property invested is kept unimpaired so that by implication but upon clear expression in the law. Moreover, the
at the end of any given term of years, the original investment remains recovery, free of income tax, of an amount more than the invested
as it was in the beginning. It is not only the right of a company to capital in an asset will transgress the underlying purpose of a
make such a provision, but it is its duty to its bond and stockholders, depreciation allowance. For then what the taxpayer would recover
and in the case ofa public service corporation, at least, its plain duty will be, not only the acquisition cost, but also some profit. Recovery in
to the public. due time through depreciation of investment made is the philosophy
behind depreciation allowance; the idea ofprofit has never been the
Rules on Depreciation ofVehicles underlying reason for the allowance. Hence, depreciation on appraisal
1. value is not allowed (Basilnn Esta.tes a. Collector,2T SCRA 77).
No deduction from gross income for depreciation shall be
allowed, unless the taxpayer substantiates the purchase
with sufficient evidence, such as official receipts or other Conditions for Deductibility of Depreciation
adequate records which contain, among others, the specific 1. The allowance for depreciation must be reasonable;
motor vehicle identification number, chassis number, or
other registration identification numbers of the vehicle, the 2. It must be for property arising out of its use in the trade
total price of the specific vehicle subject to depreciation, or business, or out of its not being used temporarily during
and the direct connection or relation ofthe vehicle to the the year; and
development, operation, and,/or conduct oftrade or business 3. It must be charged off during the taxable year from the
or exercise of profession. taxpayer's books of accounts.
2. Only one vehicle for a land transport is allowed for the use
of an official or employee, the value of which should not Bar Question (1998)
exceed F2,400,000.
1. What is the proper allowance for depreciation of any
3. No depreciation shall be allowed for yachts, helicopters, property used in trade or business?
airplanes, and/or aircrafts, and land vehicles which 2. What is the annual depreciation of a depreciable fixed asset
exceed the above threshold amount, unless the taxpayer's
with a cost of P100,000.00 and an estimated useful life of
main line of business is transport operations or lease of 20 years and salvage value of F10,000.00 after its useful
transport equipment and the vehicles are used in said Iife?
operations.
2'I
280 It.t,;v t t,:wt,:tr ot'l',lxit't'lor.r
,,lir,:,Tl,li::,Y,i:; llil:i'iil;,;i}:;;,,.
Suggested answer: donation was perlirt:l,c<|. 'l'lttr tltrtluc[ibility of donation is not governed
h.y the urdinary rules on dcductibility of the expense. Donation must
1. The proper allowance ofdepreciation ofany property used in
be both perfected and consummated before it can be allowed as a
trade or business refers to the reasonable allowance for the
deduction (Philippine Stoeh Exchange a. Commiesioner, CTA
etchaustion, wear and, tear (including reasonable allowance
Case No.5995, October 75,2002).
for obsolescence) ofsaid property. The reasonable allowance
shall include, but not limited to, an allouance computed t
under any of the following methods: (a) straight-line Bar Question (1993)
method; (b) dcclining-balarrce method; (c) sum-of-years-digit The Filipinas Hospital for Crippled Children is a charitable
method; and (d) any other method which may be prescribed organization. X visited the hospital, on his birthday, as was his
by the Secretary of Finance upon recommendation of the ! custom. He gave F1,000,000.00 to the hospital and F5,000.00 to a
Cornmissioner of Internal Reuenue (Sec. 34[FJ, NIRC). !
crippled girl whom he particularly pitied. A crippled son of X is in the
2. The annual depreciation of the depreciable fixed asset may hospital as one of its patients. X wants to exclude both the F100,000.00
be computed on the straight-line method which will allow and the F5,000.00 from his gross income. Discuss.
the tax,payer to deduct an annual d,epreciation of F4,500,
Suggested answer:
arriued at by diuiding the depreciable ualue of ?100,000
by the estirnated useful life (20 years). (Jnder Section 29(hX1) of the National Internq'l Reuenue Code
charitable contributions to be deductible must be:
Charitable contributions a. actually paid or made to domestic corporations or
Conditions for Deductibility associcr.tions organized and operated exclusiuely for religious,
charitable, scientific, youth and sports deuelopment,
1. The charitable contribution must actually be paid or made cultural or educational purposes or for rehq'bilitation of
to the Philippine government or any political subdivision ueterans or to social welfare institutions no part of which
thereof exclusively for public purposes, or any of the inures to the benefi,t of any priuate indiuidual;
accredited domestic corporation or association specified in
the Tax Code; b. mq,de within. the taxable year;

2. It must be made within the taxable year; c. not more than 6Vo (for indiuiduals) or 37o (for corporations)
of the taxpayer's tuxable income to be computed without
3. It must not exceed 107o (individual) or five percent (5Vo) i nc I uding the c ontrib ution.
(corporation) of the taxpayer's taxable income before
charitable contributions (whether deductible in full or Applying the aboue-prouisions oflaw to the case at bar, it is clear
subject to limitation); therefore that only the F100,000.00 contribution of X to Filipinas
Hospital for Crippled Children qualifi.ed as a deductible contribution.
4. It must be evidenced by adequate receipts or records; and
Section 29(h)(1) of the NIRC expressly prouides that the same
5. The amount of charitable contribution of property other must be actually paid to a charitoble organization to be deductible.
than money shall be based on the acquisition cost of said Note that the law accorded no priuilege to similar contributions
property (Sec.34[H], NIRC). The limitation is imposed to extended to priuate indiuiduals. Hence, the ?5,000.00 contribution
prevent abuse of donating paintings and other valuable to the crippled girl cannot be claimed as a deduction.
properties and claiming excessive deductions therefrom.
Irrespective of the accounting method used by the donor, Bar Question (1993)
donation is recognized as a deduction from his gross income in the year X's favorite charity organization is the Philippine National Red
such donation was actually paid or made, not in the year the deed of Cross (PNRC). To raise money, PNRC sponsored a concert featuring
282 llt,:vt t,;wt,:tr oN'l'AxA't'toN
,,lil,::ll lil:,Y,:i;';l:li l;::,:iill;," 2tt3

the Austria Boys Choir. X advanced P100,000.00 to the l'Nlt(l Optional Standard Deduction (OSD)
for which he was issued a promissory note. Before its maturity, X The optional standard deduction, which is in lieu of the
cancelled and returned the note to PNRC. An advertising man, X
itemized deductions, is merely a privilege that may be enjoyed by
also undertook the promotions of the Austria Boys Choir. Part of the
certain individual taxpayers. The requisites for its exercise are as
promotions campaign was to ask prominent personalities to publicly
follows:
donate blood to the PNRC a day before the concert. X himself donated
100 cc. of blood. X intends to claim as deductions the value of the note, a. OSD is available only to citizens or resident aliens and to
the cash value of the promotions campaign and the cash value of the domestic corporations and resident foreign corporations;
blood he donated. Give your legal advice. thus, non-resident aliens and non-resident foreign
corporations are not entitled to claim the optional standard
Suggested answer: deduction;
The ualue of the note can be claimed as deduction as chq.ritable b. The standard deduction is optional; i.e., unless taxpayer
contribution. While the u.mount was originally a loan, it can be signifies in his return his intention to elect this deduction,
consid.ered to haue become a gift or contribution when X cancelled he is considered as having availed of the itemized
and returned the note to PNRC, ct charitable organization. deductions;
On the other hand, the cash ualue of the promotions campaign c. Such election, when made by the qualified taxpayer, is
cannot be claimed as a deduction. Aduertising expenses can only be irrevocable for the year in which made; however, he can
deducted from the reuenues where the expenses were incurred. In the change to or select the itemized deductions in succeeding
case at hand, PNRC is the reuenue-producing entity not X, X did not year(s);
deriue any reuenue. Thus, the cash ualue of his promotions campaign
cq.rlnot be claimed as deduction.
d. The amount of standard deduction is limited to AOVo of
taxpayer's gross sales or gross receipts (in the case of
Finally, the cash ualue of the blood donated by X cannot be individuals selling goods or services, as the case may be)
clq.imed as deduction. Blood has no monetary ualue in this cq.se q.s it and on gross income (in the case of a corporation); and
is not disbursed in the form ofexpense.
e. Proofofactual deductions is not required.
Bar Question (2001) Exemptions are fixed at arbitrary amounts intended to
substitute for personal and living expenses. They are roughly the
Taxpayers, whose only income consist of salaries and wages from equivalent of the taxpayer's minimum subsistence and those of his
their employers, have long been complaining that they are not allowed dependents (Mad.rigal u. Raffirty, supra).
to deduct any item from their gross income for purposes of computing
their net taxable income. With the passage ofthe Comprehensive Tax
Bar Question (2009)
Reform Act of 1997 , is this complaint still valid? Explain your answer.
Ernesto, a Filipino citizen and a practicing lawyer, filed his
Suggested answer: income tax return for 20O7, claiming optional standard deductions.
Realizing that he has enough documents to substantiate his
No more. Gross compensation income earners ore nou) allowed
profession-connected expenses, he now plans to fiIe an amended
at least qn item of deduction in the form of premium payments on
income tax return for 2007, in order to claim itemized deductions,
health and / or hospitalization insurance in an annount not exceeding
since no audit has been commenced by the BIR on the return he
F2,400.00 per annum (Sec. 34[M], NIRC). This deduction is allowed
previously filed. Will Ernesto be allowed to amend his return? Why
if the aggregate farnily income do not exceed fl50,000.00 and by the
or why not?
spouse, in case of married indiuiduq,l, who claims additional personal
exernption for dependents.
I ttr r rtrtt,l rtttt r W t tt tI tot.t ttttt t'l'nxl:s 2Ult
284 Rl:vtt,:wt:tr r lru'l'rrxr\,lrr lr.r
ltr,l,ttrtt ol'l lttptl,ttl tttrrl l)rrrluctions

Suggested answer: one taxable year. Only ontt I'otlltlr parent, who must be of legal age,
at least 16 years older than the fbster child, unless the applicant is a
Ernesto will not be allowed to fi,le an amended return for 2007, relative of the foster child, among others, can treat the foster child as
not because of Section 6(A) of the L997 Tox Code which allows the fi.ling dependent for a particular year. An agency may also enjoy exemption
of amended tax return prouided thq.t no audit notice hqs been serued from income tax, as implemented by Revenue Regulations No. 13-98
upon him by the BIR in the meantime, but because of Section 34(L) and it can apply for qualification as a donee institution entitled to
of the Tatc Code, which prouides that "Such election (of the itemized deduction from gross income and exemption from donor's tax(RMC
or standard deduction) when made in the return shall be irreuocable No. 41-201"3, April 17, 2013).
for the to*able year for which the return is made."
Bar Question (2001)
Basic Personal Exemptions
Distinguish allowable deductions from personal exemptions.
For each individual taxpayer taxed under Section 24(A) (i.e., Give an example of an allowable deduction and another example for
citizens and resident aliens), the personal exemption shall be F50,000 personal exemption.
(R.4. 9504, July 1, 2008).
A "senior citizen" is any resident citizen of the Philippines Suggested answer:
ofat least 60 years old, including those who have retired from both The distinction between allowable deductions und personal
government offices and private enterprises, and has an income of not exemptions are as follows:
more than F60,000per annum. subject to the review of the National
Economic Development Authority (NEDA) every three (3) years (R.4. 1. As to amount - Allowable deductions generally refer to
7432, implemented by Reu. Regs. No.2-94, August 23, 1993). actual expenses incurred in the pursuit of trade, business
or practice of profession while personal exemptions are
Ad.d.itional eremptions for ta.rTtoyer with d,epend.ents. A arbitrary amounts allowed bY law.
-
married individual or a head of family shall be allowed an additional
exemption of F25,000 for each qualified dependent child, provided 2. As to nature - Allowable deductions constitute business
that the total number of dependents for which additional exemptions expenses while personal exemptions pertain to personal
may be claimed shall not exceed four (4) dependents. The additional ex,penses.
exemptions for qualified dependent children shall be claimed by only 3. As to purpose Deductions are allowed to enuble the
-
one of the spouses in the case of married individuals. taxpayer to recoup his cost ofdoing business while personal
A "d.epend.ent' meants a legitimate, illegitimate or legally exemptions are allowedto couer personal, family and liuing
adopted child chiefly dependent upon and living with the taxpayer etcpenses.
if such dependent is not more than 21 years of age, unmarried and 4. As to claimants - Allowable deductions can be claimed
not gainfully employed or if such dependent, regardless of age, is by all taxpayers, corporate or otherwise, while personal
incapable of self-support because of mental or physical defect. exemptions can be clairned only by indiuidual taxpayers.
R.A. 9504, which was signed by the President on June 17,
2008, increased personal exemptions to F50,000, as irrespective of Bar Question (1997)
whether the individual is single, head of the family, or married. It Mar and Joy got married in 1990. A week before their
also increased additional exemptions for children not exceeding from
marriage, Joy received, by way of donation, a condominium
to F25,000 for each child not exceeding four (4).
unit worth F750,000.00 from her parents. After marriage, some
R.A. 10165 (Foster Care Act of 2Ol2') authorizes a foster renovations were made at a cost of F150,000.00. The spouses were
parent to claim an additional exemption of F25,000 for a foster both employed in 1991 by the same company. On 30 December
child, if the period of foster care is at least a continuous period of 1992, their first child was born, and a second child was born on
286 Itl:vrr,:wr,:rr oru'l'nxllrow I nt r rMl,l nt,tl r Wl ll ll lill,l rlNli'l'Axl'llj 2U7
lil'l.ttrtr ol ('rtltlttl rttrrl I )r'rlttt't,iolln

07 November 1993. In 1994, they sold the condominium unit and Bar Question (2004)
bought a new unit. RAM got married to LISA last January 2003. On November 30,
Under the foregoing facts, what were the events in the life of 2003, LISA gave birth to twins. Unfbrtunately, however, LISA died
the spouses that had income tax incidence? in the course of her delivery. Due to complications, one of the twins
also died on December 15, 2003.
Suggested answer: In preparing his income tax return for the year 2003, what
The euents in the life of Spouses Mar and Joy, which haue income should RAM indicate in the return as his civil status: (a) single; (b)
tq.r, incidences, are the follouting: married; (c) head of the family; (d) widower; (e) none of the above?
Why? Reason.
a. Their marriage in 1990 qualift.es them to claim personal
eremption for married indiuiduals ;
Suggested answer:
b. Their employmerut in 1991 by the same conxpq.ny will make
RAM should indicqte "(b) mq'ried" os his ciuil status in preparing
them liable to the income imposed on gross compensation
his income tax return for the year 2003. The death of his wife during
income;
the year will not change his status because should the spouse die during
c. Birth of the fi.rst child in December 1992 would giue rise to the ta.xq.ble year, the taxpayer may still claim the sq.me exemptions
an additional exemption of F5,000.00 (now fl5,000.00) for (that of being married) as if the spouse died q't the close of such year
the taxable year 1992; (Sec.35[c], NIRC).
d. Birthoftheir secondchildinNouember 1993 wouldlihewise
entitle them to claim udditional exemption of P5,000.00 Non-Deductible Expenses
(now ?25,000.00) raising their additional personal In general, in computing net income, no deduction shall in any
exemptions to P10,000.00 for to.tcable year 1993; case be allowed in respect to -
e. SaIe of their condominium unit in L994 shall make the 1. Personal, living or family expenses;
spouses liable to the SVo (now 67o) capital gains tar on the
gain presumed to haue been realized from the sale. 2. Any amount paid out for new buildings or for permanent
improvements, or betterments made to increase the value
ofany property or estate.
Status-at-the-end-of-the-year ru le
This Subsection shall not apply to intangible drilling
"Status-at-the-end.-of-the-year rule' which means that and development costs incurred in petroleum operations,
whatever is the status ofthe taxpayer at the end ofthe calendar year
which are deductible under Subsection (GX1) of Section 34
shall be used for purposes of determining his personal and additional
of this Code;
exemptions generally applies. A change of status of the taxpayer
during the taxable year generally benefits, but does not prejudice, 3. Any amount expended in restoring property or in making
him. Thus, if he marries at the end of the year (2012), he shall be good the exhaustion thereof for which an allowance is or
entitled to personal exemption of F50,000.00. If a child is born at any has been made; or
time during the calendar year, even on the last day of the year, the
taxpayer is entitled to claim his child as a dependent entitling him
4. Premiums paid on any life insurance policy covering the
life of any officer or employee, or of any person financially
to deduct additional exemption of F25,000.00 for that year. On the interested in any trade or business carried on by the
other hand, if one of his qualified dependent children dies during the
taxpayer, individual or corporate, when the taxpayer is
year, the law considers that the child died on the last day ofthe year;
directly or indirectly a beneficiary under such policy (Sec.
hence, he is entitled to claim the full amount of additional exemption
121, Reu. Regs. No.2);
of F25,000.00 for the deceased child for the year.
288 ll,r,:vrr,rwr,:tr oN'l'nxn'r'ror'r I ttr r rMt,r nn I r W t't't t t tot,nI t"lr i'l',txt':s 2t19
Itclttrtt ol ( irtptl,rrl rrtttl l)trlttt:t.iotls

5. Losses from sales or exchanges of property betueen to ?100,000.00. Is sttitl protttiurn deductible by ADD Computers?
relnted.parties. - In computing net income, no deduction Reason.
shall in any case be allowed in respect of losses from sales
or exchanges ofproperty directly or indirectly Suggested answer:
-
a. Between members of a family. For purposes of this No. The prernium is not deductible because it is n'ot an ordinary
paragraph, the family of an individual shall include business expense. The term "ordinary" is used in the income tax law
only his brothers and sisters (whether by the whole or in its common significance and it has the connotation of being normal,
half-blood), spouse, ancestors, and lineal descendants; usual or customary (Deputy a. Du Pont, 308 US 488 [ 1940]) . Paying
or prernium for the insurance of a person not connected to the co\npqny
is not normal, usual or custonxdry.
b. Except in the case of distributions in liquidation,
between an individual and a corporation more than Another reason for its non-deductibility is the fact that it ca.n be
50Vo in value of the outstanding stock of which is consid,ered as an illegal compensation made to a gouernm.ent ernplqtee.
owned, directly or indirectly, by or for such individual; This is so because if the insured, his estate or heirs were made as
or the beneficiary (because ofthe requirernent ofinsurable iruterest), the
payment of premium will constitute bribes which are not allowed as
c. Except in the case of distributions in liquidation,
d.eduction from gross income (Sec. 34[A][1][c]' NIRC).
between two corporations more lhan 507o in value
of the outstanding stock of each of which is owned, On the other hand, if the comp&ny was ma,de the ben'efi'ciary,
directly or indirectly, by or for the same individual, whether d,irectly or indirectly, the premiurn is not allowed as a
ifeither one ofsuch corporations, with respect to the deduction from gross income (Sec. 36[A][4], NIRC).
taxable year ofthe corporation preceding the date of
the sale or exchange was, under the law applicable
to such taxable year, a personal holding company or
a foreign or a foreign personal holding company;

d. Between the grantor and a fiduciary of any trust; or


e. Between the fiduciary of a trust and the fiduciary of
another trust if the same person is a grantor with
respect to each trust; or
Between a fiduciary of a trust and a beneficiary of
such trust.

Bar Question (2004)


OXY is the president and chief executive officer of ADD
Computers, Inc. When OXY was asked to join the government
service as director of a bureau under the Department of Trade and
Industry, he took a leave of absence from ADD. Believing that its
business outlook, goodwill and opportunities improved with OXY in
the government, ADD proposed to obtain a policy of insurance on his
life. On ethical grounds, OXY objected to the insurance purchase but
ADD purchased the policy anyway. Its annual premium amounted
2et
'-"'i'li;,1-,';,I],i',1','j,'; iiil;,]^-'"'
of an individual.ln this connrrclion, it can be stated that capital gains
and passive investment incomes not subject to capital gains taxlfinal
withholding income tax shall be subject to the regular income tax or
global tax system.
CIIAPTER VIII
TAX BASES AND RATES lndividuals
The graduated income tax rates applicable to individuals on
their taxable income beginning January 1, 2000 are:
The Philippines has adopted the semi-schedular or semi-global
Tax Brs,chet Tqlc Rete
income tax system. For this reason, each type or group of income
is subject to one set of graduated income tax rates, or normal or Not over F10,000 \Vo
minimum corporate income tax rates, or preferential tax rates. These over F10,000 but not over F30,000 F500 + 1070 0f the excess
tax rates are, however, applied to different tax bases depending on the
t;pe or group of income. oTs.x base" is the amount of taxable income over F80,000 but not over F70,000 orthe excess
upon which the applicable tax rate is applied to arrive at the income filF]|i1|,
tax due. over F70,000 but not over F140,000 F8,500 + 20vo of the excess
The tax bases can be grouped into the following general
categories: over p140,000 but not over F2b0,000
fltfJli;Thortheexcess
1. Compensation income, business and professional income, Over F250,000 but not over F500,000 F50,000 + 307o ofthe excess
capital gains, passive income, and otherincome not subject over F250,000
to final tax; Over F500,000 F125,000 + 32Vo of the
2. Capital gains subject to final withholding income tax at excess over F500,000
preferential tax rates; and
Certain ind'ivid.uals are subiect to 1"5Vo preferential ta*' -
3. Passive investment income subject to final withholding However, there are certain alien individuals employed by regional or
income tax at preferential tax rates. area headquarters (RHQ), regional operating headquarters
(ROHQ),
offshore banking units, and foreign petroleum service contractors and
Glnbal tax system. - We follow the global tax system insofar
as compensation income, business and professional income, capital sub-contractors, whose taxable base is their gross compensation income
gains, passive incomes, and other income not subject to final tax. without any deduction oftheir personal and additional exemptions. The
This means that allowable deductions under Sections 34, 37, and same tax treatment is accorded to Filipinos employed and occupying the
38 of the Tax Code as well as personal and additional exemptions same positions as those of aliens employed by the RQHs and RoHQs
under Section 35 of the Tax Code, with respect to individuals, are (Sec. iSFl, [D] and' tUl, NIRC). The citizens cannot be treated Iess
deducted from the taxable gross income (except capital gains from advantageously than their alien counterparts in the Philippines.
sale or exchange ofshares ofstock ofa domestic corporation and real
property, and passive incomes that are subject to final withholding Bar Question (2001)
taxes). The resulting figure is the net utarable incomc'(i.e., gross
of the law in imposing what is known as
what is the rationale
income less allowable deductions) (Sec. 31, NIRC).It must be noted
the Minimum Corporate Income Tax on Domestic Corporations?
that no deductions (whether itemized or optional standard) are
allowed by law to be deducted from the gross compensation income Is a corporation which is exempted from the minimum corporate
income tax automatically exempted from the regular corporate income
290 tax? Explain your answer.
292 Itt'rvt r,:wt,:rt oN'l'n xA'r'ror.r I N( oMt': ANtI Wt trlttot,trtt'ltt'l'nxl';li 29:l
'l'rrx llrul,rr rrtrrl ltttt,cg

Suggested answer: of its gross incomc during t,hc.ycur..'l'herelbre, there will be two (2)
yearly computations of'corpor.ate income taxes for every corporation
The imposition of the Minimum Corporate Income Tax (MCIT)
subject to either the RCIT or MCIT, whichever is higher.
is designed to forestall the preuailing practice of corporations of ouer
claimirtg deductions in order to reduce their income tax payments. The MCIT is one of the changes introduced by the 1997 Tax
The filing of income tax returns showing a tctx loss euery year goes code, which primarily aims to forestall tax evasion by corporations
against the business motiue which impelled the stochholders to that declare losses despite their business operations. Thus, even ifa
form the corporation. This is the reason why domestic corporations corporation incurs net loss in its business operations, it is still subject
(and resident foreign corporations), after the recouery period offour to an MCIT of two percent (27o) of its gross income. while it is true
years frorn the time they comn'Lence business operations, become that MBC did not conduct business operations for almost 12 years
lioble to the MCIT wheneuer this tax imposed at 2Vo of gross as it was placed under receivership proceedings, it is still subject to
income exceeds the normal corporate income tax imposed on net the two percent (2%o)MCIT for the year 1999. Hence, BIR Ruling No'
income (Sponsorship Speech, Chairman of Senate Ways and Means 007-2001, which stated that the law allowing the suspension of the
Committee). imposition of the MCIT applied to both newly created and existing
corporations, is void. The four (4!year grace period provided in section
No. The minimum corporate income tax is q proJcy for the
27(E)(7) of the Tax code is given only to newly formed corporations
normal corporate income tax, not the regular income tax paid by a
and not to existing corporations (Manila Banking Corporation v'
corporation. For instance, a proprietary educationol institution rnay
be subject to a regular corporate income tax of 10Vo (depending on
Comrnissioner, CA-GR SP.l/o. 77777, Mary 77,2005).
its dominq.rlt income), but it is exempt from the imposition of MCIT A domestic corporation that is registered with the Camp John
because the lq.tter is not intended to substitute special tax rates. So Hay Development Authority is not entitled to the five percent (57o)
is with PEZA enterprises, CDA enterprises, etc. preferential income tax rate on its gross income earned and thus
subject to the normal corporate income tax rate on its net taxable
[NOTE: If what is meqnt by regular income tox is the 32Vo tax income from worldwide sources. Proclamation No' 420, which was
rate imposed on net tueable income of corporations, the onswer would issued by the President of the Philippines and which extended the
be in the affirmatiue, because domestic corporations and resident same privileges enjoyed by enterprises registered with the Subic
foreign corporations q.re either liable for the two percent (2Vo) of gross Bay Metropolitan Authority (SBMA) under R'A' 7227 (otherwise
income (MCIT) or 32Vo of net incorne (the normq,I corporate income known as the Bases Development and conversion Law) to enterprises
tax), whicheuer is higher.l registered with the other Freeport zones like the Camp John Hay,
violated the 1987 constitution, which provides that now law granting
Domestic corporations tax exemption shall be passed without the concurrence of a majority
of all the members of congress (John Hay Peoples Alternatiae
A domestic corporation is subject to Philippine income tax at
30Vo (effective January 1, 2009) of its net taxable income from sources
Coalition a. Lirn, G.R. No. 719775, October 24,2003). This legal
problem was solved when clark and the other freeport zones (Poro
within and without the Philippines (Sec. 27[A], NIRC), except in the
Point and camp John Hay) were declared as special economic zones
case of a proprietary educational institution and hospital which is
under the amendatory laws.
non-profit, which shall be subject to income tax at IOVa of its taxable
income, unless its gross income from unrelated trade, business or However, proprietary educational institutions and hospitals
other activity exceeds SOVo of t}re total gross income derived from all which are non-profit shall pay a tax of l07o on their taxable income,
sources (Sec. 27[B], NIRC). except those covered by Subsection (D) hereof, provided that if
A domestic corporation is subject to the corporate income tax for
the gross income from unrelated trade, business or other activity
exceeds 507o of the total gross income derived from all sources, the
the year, equal to the higher amount between the regular corporate
tax prescribed in subsection (A) hereof shall be imposed on the entire
income tax (RCIT), computed atSOVo on its net taxable income, and the
taxable income (Sec.27[B], NIRC).
minimum corporate income tax (MCIT) computed at two percent(2Vo)
294 It,t,:vtt,twl,:tt oN'l'nxn'r'ror.r lNr r rMl, ANlr Wt t ttttot htnrl'l'nxt'::; 29lt
'litx llttrrt'rr rrrrtl ltrtl,r'g

Resident Foreign Gorporations 2, Ileu. lil'g.s. No. I 5'2U)2, May 30, 2002).An international
carrier doing brrsincss in the Philippines shall pay a tax
As a general rule, a resident foreign corporation is subject to
Philippine income tax on its sources within the Philippines at B\%t of 2-I/2ok on its "Gross Philippine Billings" (GPB). An
(30Vo etrective January 1, 2009) of its net taxable income. Its income off-line airline having a branch office or a sales agent
from foreign sources shall be exempt from Philippine income tax. in the Philippines which sells passage documents for
compensation or commission to cover off-Iine flights of its
There are, however, certain exceptions to the general rule. These principal or head office, or for other airlines covering flights
are discussed hereunder: originating from Philippine ports or off-Iine flights, is not
Resident foreign corporations that are exempt from Philippine considered engaged in business as an international air
income tax: carrier in the Philippines, and is, therefore, not subject to
GPB tax nor to the three percent (37o) common carrier's tax.
a. Regional or area headquarters (RHQ) shall mean a An international air carrier having flights originating from
branch established in the Philippines by multinational any port or point in the Philippines, irrespective ofthe place
companies and which headquarters do not earn or derive where passage documents are sold or issued, is subject to
income from the Philippines and which act as supervisory, the GPB tax of 2.57o, unless subject to a different tax rate
communications and coordinating center for their affiliates, under the applicable tax treaty to which the Philippines is
subsidiaries, or branches in the Asia-Pacific Region and a signatory (Sec.28[A][3], NIRC). Philippine tax treaties
other foreign markets (Sec. 22[DD], NIRC and Art. 50, generally reduce the rate to 1.57o.
8.O.226).
Under R.A 10378, July 23,2OL3, international air
b. Representative office is a branch in the Philippines of a carriers may be entitled to preferential income tax rate of
foreign multinational corporation whose activities are I.57o on GPB under the tax treaty, or even exempt from
limited to information dissemination, product promotion, Philippine income tax, subject to rules on reciprocity,
and the performance of quality control of goods for export on revenues from the transport of passengers from the
to its head office or affiliates. Philippines to a foreign port.
Regional area headquarters and representative offices of The2.57o tax on GPB under the 1997 Tax Code is an
multinational corporations in the Philippines are exempt from income income tax levied on the presumed gain ofthe international
tax since they are not engaged in business in the Philippines nor airline companies (and not a percentage tax).T}re prouiso
derive any active business income from sources within the Philippines. in P.D. 69 and the definition of GPB provided in P.D. 1355,
However, income from passive investments like interest income on now incorporated in Section 28(B) ofthe 1997 Tax Code,
bank deposits or deposit substitutes in the Philippines is subject to ensured that international airlines are taxed on the income
the final withholding tax. they derived from Philippine sources (Commissiorr'er u,
Arnerican Airlines, L80 SCRA 274).
Resident Foreign Gorporations that are Subject to Pref- In the case ofthe passenger's passage documents or
erential Tax Rates flights from any port or point in the Philippines and back,
a. International carrier. - ulnternq,tional air canrier,' that portion ofrevenue pertaining to the return trip to the
refers to a foreign airline corporation doing business in Philippines shall not be included as part of GPB.
the Philippines having been granted landing rights in any In the case of flights that originates from the
Philippine port to perform international air transportation Philippines but transshipment of passenger' excess
services/activities or flight operations anywhere in the baggage, cargo and./or mail takes place somewhere in
world. Offline carrier refers to an international air carrier another aircraft belonging to a different airline company,
having no flight operations to and from the Philippines (Sec. the GPB shall be that portion of the revenue corresponding
296 Itt,:vtt,twt,;tr oI'l'rrxn'l,ror,r
'"'"|i:;,1''iil,l:,li:','li il:i;;,l'^"" 2'(t7

to the leg flown from any point in the Philippines to thc Branch Profit Remittance Tax on Philippine branch of
point of transshipment.
Foreign Gorporations
b. Offihore banhing units. - The provisions of any law to To equalize the tax burden on foreign corporations maintaining,
the contrary notwithstanding, income derived by offshore
on one hand, local branch offices, and organizing, on the other hand,
banking units authorized by the Bangho Sentral ng
a subsidiary domestic corporation where at least a majority of all the
Pilipinas (BSP) from foreign currency transactions with
latter's shares of stock are owned by such foreign corporations, the
local commercial banks, including branches of foreign banks
ls%obranc};. profit remittance tax is imposed on the profit actually
that may be authorized by the BSP to transact business
remitted by the Philippine branch to its head office (Banh of Amcrica
with offshore banking units, including any interest income
NT and. SA v. Court of Appeals and' Cornrnissioner,2S4 SCRA
derived from foreign currency loans granted to residents,
302), lt does not matter whether the head office of the foreign
shall be subject to a final income tax at the rate of I}Vo of
corporation is located in a tax treaty country, in a tax haven or other
such income.
non-treaty country.
Income derived by an FCDU or an OBU from foreign
Tax base. - Effective January 1, 1998, the tax base of the
currency transactions with residents of the philippines,
ISTobranct, profit remittance tax imposed on profit remitted by the
including local commercial banks, local branches of Philippine branch to its foreign head office is the total profit applied
foreign banks, and other depository banks under the
or earmarked for remittance without any deduction for the tax
foreign currency deposit system, shall be subject to a final
component thereof (except those activities which are registered with
withholding tax of lOVo.Income from foreign currency
the Philippine EconomicZone Authority). Revenue Regulations No.
transactions shall include interest from lending operations,
2-98 also exempts from the branch profit remittance tax enterprises
includingbank charges, commissions, service fees, and net
registered with the Subic Bay Metropolitan Authority (SBMA) and
foreign exchange transactions gains. Income from foreign
the Clark Development Authority (CDA) which are covered under
currency transactions with non-residents of the Philippines
R.A.7227. Prior to R.A.8424 (January 1, 1998), only the amount of
shall not be subject to income tax by express provision of
profit actually remitted abroad was ruled by the courts subject to
the law. The person making the income payment shall
lhe I57o branch profit remittance tax. The tax was imposed on the
withhold and remit the tax pursuant to the provisions of
amount sent abroad and the law called for nothing further (Banh
Sections 57 and 58 of the Tax Code (]ec.2.22, Reu. Regs.
of Arnerica NT & SA u. Court of Appeals an'd' Commissianer,
No. 10-98, August 25, 1998).
ibid.).
Income derived by an FCDU or an OBU llom activities
other than foreign currency transactions shall be subject lncome of Non-resident Foreign Corporation Subiect to
to the pertinent income taxes prescribed under Section 22 Preferential Tax Rates
or 28 ofthe Tax Code.
The following incomes of a non-resident foreign corporation are
All items of income other than income from subject to the preferential tax rates:
international air transport services shall be subject to tax
under the pertinent provisions ofthe Tax Code. 1. Non-resident cinematographic film owner, lessor, or
distributor shall pay ataxof 25Vo of its gross income from
c. Regional operating head.quarters. sources within the Philippines (Sec. 28[8][2)], NIRC).
- Shall pay a tax
of IOVo of their net taxable income from sources within the
Philippines ( Sec. 28[A] [6] [b], NIRC). Accordingly, income 2. Non-resident owner or lessor of vessels chartered by
from sources outside the Philippines is exempt from income Philippine nationals shall be subject to a tax of 4-U2Va of
tax. gross rentals, lease or charter fees from leases or charters
to Filipino citizens or corporations, as approved by the
Maritime Industry Authority (Sec. 28[8][3], NIRC).
298 llt,:vt t,lwr';rr ou'llrxrt'ttor.r I Nr'( tMlj: ANI I Wt t t lt tot't rtt"lri'l'nxl';s 299
'l'ttx llrxlr trtrtl ltltl,crc

3. Non-resident owner or lessor of aircraft, machineries and The basis ofproperty shall be:
other equipment shall pay a tax of 7-L/2Vo of their gross
rentals or fees (Sec.28[8][4], NIRC). a. The cost thereof, ifsuch property was acquired by purchase;
or
4. Interest income on foreign loans contracted on or after
August 1, 1986 shall be subject to a final withholding tax b. The fair market price or value as of the date of acquisition,
of 207o (Sec.28[B][5][a], NIRO. if the same was acquired by inheritance; or
5. Cash and,/or property dividends received from a domestic c. If the property was acquired by grft, the basis shall be the
corporation shall be subject to a final withholding tax at same as if it would be in the hands of the donor or the last
the rate oflSVo, subject to the condition that the country preceding owner by whom it was not acquired by gift, except
in which the non-resident foreign corporation is domiciled that if such basis is greater than the fair market value of
shall allow a credit against the tax due from the non- the property at the time of the gift then, for the purpose of
resident foreign corporation taxes deemed to have been determining loss, the basis shall be such fair market value;
paid in the Philippines equivalent to ls%o,whichrepresents or
the difference between the regular income tax of BOVo on d. If the property was acquired for less than an adequate
corporations and the ISVo tax on dividends as provided consideration in money or money's worth, the basis of
in this subparagraph (Sec. 29tBltsltbl, NIRC). When the such property is the amount paid by the transferee for the
country of residence of the non-resident foreign corporation property; or
does not impose income tax on dividends paid by a domestic
corporation, there is substantial compliance with the e. The basis as defined in paragraph (CX5) ofSection 40 of
above condition on "deemed paid" tax credit, andonly \EVo the Tax Code, if the property was acquired in a transaction
shall be withheld by the domestic corporation paying the where gain or loss is not recognized under paragraph (C)
dividend to the foreign corporation (Wand.er (2) also of this section.
Phitippines
u. Cornmis sioner, supra.) The term "aQiusted' basil" means the original cost to acquire
6. Net capital gains realized by a non-resident foreign the property plus amounts spent for new buildings, improvements,
corporation during the taxable year from the sale, exchange betterments, and other capital expenditures made to increase the
or other disposition of shares of stock in a domestic value of any properby or materially prolong the life of the property
corporation, except shares sold or disposed of through less accumulated depreciation up to the date of sale.
the stock exchange, shall be subject to the final tax at the Transfer for inad.equate consid'eration. - As a rule,
following rates: (a) five percent(\Vo) on net capital gains not transfers for less than an adequate and full consideration in money
over F100,000; and (b) L|Vo on net capital gains in excess or money's worth is deemed a gift under Section 100 of the 1997 Tax
of P100,000 (Sec. 28[B][5][cJ, NIRC). Code. However, this is not absolute. In the case of Commissioruer u.
B.F. Goodrich Philippines (G.R. No. 104171, February 24, 1999),l}re
Gain from Sale of Property Supreme Court ruled that "It is possible that real property may be
sold for less than adequate consideration for a bona fde business
In general, the gain from the sale or other disposition ofproperty
purpose; in such event, the sale remains as'arm's length'transaction.
shall be the excess of the amount realized therefrom over the basis
or adjusted basis, and the loss shall be the excess of the basis or In the present case, the private respondent was compelled to sell
adjusted basis for determining loss over the amount realized. The
the property even at a price less than its market value, because
amount realized from the sale or other disposition of property shall be
it would have lost all ownership rights over it upon the expiration
of the parity amendment. In other words, private respondent was
the sum of money received plus the fair market value of the property
(other than money) received (Sec.40tAl, NIRO. attempting to minimize its losses. At the same time, it was able to
lease the property for 25 years, renewable for another 25. This can
;J00 Itt,:vtt,:wt,ttr or.r'l'nxn'r'ror.r :ror
'"'''li::,llli,ll;:l:"liii:i;;,1'^""'
be regarded as another consideration on the price."'fhus, since there laut imposes the fin.u,l. kw ol'6'ilt ott. the gain presumed to h'aue been
is no showing of donative intent on the parb of the seller, there is no
realized on the sale of' Lands und / or buildings of corporations treated
donation here. Although it is true that dealings done in the ordinary
as capital assets. The applicable corporate income tax rate beginning
course ofbusiness are not sufficient to rule out existence ofdonative
January 1,2000 under R.A. 8424 is 327o an'd starting Nouember 7,
intent, it is equally true that donative intent is not s5rnonymous with
2005 und,er R.A. 9337 is 357o, but starting January 7' 2009, the rate
disparity in consideratio n (B I R Ruling N o. 0 3 3 2 002, August 1 6, 2002 ) .
-
is 30%ol.

Bar Question (1992) Nature of Asset or Property


ABC, a domestic corporation, sold in 1989 two (2) condominium The kind of income tax applicable on the property transaction
units of Legaspi Towers in Roxas Boulevard for F8,1b8,142.00. The depends on the nature ofthe property sold or exchanged. The nature
corporation declared in its income tax return for taxable year 1989 of ihe asset is, however, not material with respect to certain passive
its gains derived from the sale of the two (2) condominium units as investment incomes subject to final taxes at preferential tax rates.
follows:
a. Ord'inary asset. - If the property sold is classified as
UNITA UNIT B an ordinary asset, income tax due is the normal corporate
income tax computed at307a of its net taxable income (in
(316.5 sq.ft.) (322 sq.f1u.)
the case ofcorporations), or the graduated income tax rates
Proceeds from sale F3,933,679 ?4,224,463 ranging from 5Vo to 32Vo applied on his net taxable income
(in the case of individuals other than a non-resident alien
Less:
not engaged in trade or business in the Philippines)'
(a) Acquisition costs (Deed of Sale I,50I,295 L,529,755
9/9/83) Actualincomc or gain. - The actual gain from the
sale ofreal property classified as an ordinary asset by an
(b) Payments of Realty Tax 49,248 55,413
individual or corporation is subject to income tax at the
Total of (a)ft) r,550,543 1,585,168 graduated income tax rates (in the case of individuals) (^Sec'
Gains 24[AJ and' Sec. 25[A], NIRC), ot at 30Vo of its net taxable
2,383,136 2,639,295
income (in the case of a corporation) (Sec. 27[A] and Sec'
28[AJ, NIRC). The gain is arrived at by deducting the cost
Without going into computations, answer the following question: or adjusted basis of the property sold from the amount
Since ABC derived gains from the sale ofthe condominium units, realized (i.e., amount of cash and./or fair market value of
should it pay the \Va capital gains tax, 35Vo corporate income tax or property received). As a general rule, the income tax law
none ofthe above because the corporation is not a real estate dealer? imposes the tax only when there is actual income, gain or
Discuss. profit.
b. Capital asset. - In general, if the real property sold
Suggested answer: is classified as a capital asset, the income tax due is the
ABC Corporation must pay the 357o corporate inconte tax. capital gains tax computed at six percent (61o) of L}:re actual
consideration or fair market value of the real property sold
The National Internal Reuenue Code does not prouide for the as determined by the Commissioner, whichever is higher'
payment by corporations of SVo (now 67o) capital gains tqx on the sale If the shares of stock of a domestic corporation sold are
of real property, whether considered capital assets or not. Such income unlisted, or if the shares of stock of a domestic corporation
is included in. the computation of net income (gross taxoble incorne sold are listed but not traded in the local stock exchange,
less deductions) and is subject to the tax rate of 357o. INOTE: Existing
and they are classified as capital assets' the income tax due
302 ll,t,:v r t,:wt,:tr oN'l'rxn'r'ror.r

is the capital gains tax computed at five percent (\Vo) on


the first F100,000 net capital gain and l|Vo onthe amount
in excess of F100,000.
CHAPTER IX
Presumed, incorne or gain. - Where an individual or a
corporation sold real property or land and./or building, respectively, ORDINARY ASSETS AND CAPITAL ASSETS
classified as a capital asset, the law presunoes that there was a capital
gain realized, and the capital gains tax is computed at six percent
(6Vo) of the actual consideration or the fair market value at the time of
sale of the real property, whichever is higher (Sec. 24[D][1], Sec.25[B]
lmportance of Knowing Nature of Asset
[3], and Sec.27[D][5J, NIRC).In other words, regardless of whether Knowledge ofthe nature ofthe asset sold or exchange is very
or not the seller makes a profit or incurs a loss from the transaction, important to determine the kind of income tax applicable on the
the capital gains tax must be paid thereon by the seller. However, no transaction as well as the tax rate(s) on the proper tax base (i'e',
donor's tax is due on the transfer ofsaid real property for less than gross selling price, fair market value, or net taxable income)' The
its full and adequate consideration pursuant to Section 100 ofthe character of the asset is crucial also in determining the tax liability
Tax Code. This is an exception to the general rule that there must of the taxpayer upon its sale or disposition. It is worthwhile to know
be actual income, gain or profit realized by the taxpayer in order that that where the gain from sale of property is small or when the sale
income tax may be imposed thereon. results in a loss, it is best that the character ofthe property sold is
an ordinary asset, because the cost or adjusted basis ofthe asset is
Passive lnvestment lncomes deducted from the gross selling price and only the gain, if any, shall
be subject to income tax at the graduated tax rates offive percent('vo)
Passive investment incomes subject to final withholding taxes
to 327o (if an individual) or atSovo (if a corporation). when there is a
are taxed on the gross amount, without any deduction of cost and
loss from sale of ordinary asset, such loss is carried forward and may
expenses of sale.
be deducted from the gross ordinary income of the taxpayer for the
next three succeeding taxable years. On the other hand, ifa gain is
Bar Question (2010) realized from the sale ofordinary asset, such gain is added to ordinary
What is the "immediacy test"? Explain briefly. income and taxed at the graduated tax rates (if an individual) or at
357o (if a corporation).
Suggested answer:
Sale or Exchange
To deterrnine the reasonable needs of the business in order to
justify an accumulation of earnings (and not impose the 107o tax on In order to have tax consequences, the sale or exchange of
improperly a.ccumulated earnings of corporations), the "immediacy property must be consummated and not just perfected. There is a
test" under American jurisprudence has been adopted in the sale o" exchange ofproperty when there is an effective and actual
Philippines. Thus, the term "reasonq.ble needs of the business" is transfer of ownership of the property to another as would divest the
construed to nxean the immediate needs of the business to accumulate transferor ofthe benefits accruing from the ownership ofthe property,
earnings and profits (instead ofdeclaring diuidends to shareholders), for a valuable consideration.
including reasonably anticipated needs. nsale' or oerchange" are to be considered in the light
The terms
of their ordinary meaning from a consideration of the substance of
the transaction. courts often rely on the significance of the words in
common usage, assuming thereby that the legislature intended that

303
304 llt,tvll,twt,ltr oN 'l'AxA n(
305
)N
,,,j,]:;::lJil::I"',ll:il':lllJ,:,,i'IJ;1,,"
meaning to prevail (Helaering a. Hannmel, 377 U.S. 504). Thus, of'the capitol shartis u,se by x, b th<: transfer of the capitol share's
forced sales, such as foreclosure sales and tax sales, have been held use to Y. Oriental remainetl the legal ou)ner thereof all throughout,
embraced within the meaning of the law. A distribution in complete while X and Y are only the benefi.cial owners'
liquidation has been held to be an "exchange" for the purposes of
determining gain or loss (Helaering u. Chester N.Weauer Co.r 305 Bar Question (1994)
u.s.293).
X-land Condominium Corporation was organized by the owners
A sale or exchange will ordinarily be held to occur on the date of units in X-land Building corporation in accordance with the
the transfer of title over the asset is effected, or when ownership is Master Deed with Declaration of Restrictions. The X-land Building
terminated in the hands of the transferor. What is generally taken corporation, the developer ofthe building, conveyed the common areas
into account is not the perfection of the contract but the consummation in favor of the X-land condominium corporation. Is the conveyance
thereof (U.5. Industrial Alcohol Co. u. Heluering, 137 F. tzdl subject to any tax?
577).However, in condemnation proceedings, the sale occurs at the
time of taking of the property rather than when the proceeds of the Suggested answer:
judgment are received (Kieselbach a. Comrnissioner, SlT U.5.399, any tax. The same is without
87 L. ed.358,63 S. Ct.3Og). -and. is not subject to
The conueyance
consid.eration, not in connection with a sale rnade to X-Iand
Dacion en pago is the transmission of the ownership of a thing by Cond.om.inium Corporation, and the purpose of the conueyance to the
the debtor to the creditor at an accepted equivalent ofthe performance Iatter is for the nTanagement of the conl,mon areas for the cornmon
of an obligation (8 Manresa 324).Indacion en pqgo, the debtor offers benefit of the unit owners.
another thing to the creditor who accepts it as equivalent of payment
The same is not subject to income tax since no income was
ofoutstanding debt. The undertaking really partakes in one sense of
realized, a.s a result of the conueyance, which was made pursuant to the
the nature of sale, that is, the creditor is really buying the thing or
cond.om.inium Act (R.A. 4626), and the purpose of which was merely
property of the debtor, payment for which is to be charged against
to uest title to the common areas in fauor of theX-land Condorninium
the debtor's debt (Filinuest Cred.it Corporation u. Philippine
Corporation.
Acetylene Co., 777 SCRA 421).
There being no monetary consideration, rueither is the conueyarrce
Bar Question (1993) subject to the creditable withholding tax imposed under Reuenue
Regulations No. 7-90, as amended.
Oriental, Inc. holds a proprietary share of Capital Gold Club,
The second. conueycrnce was actually no conueyance at all because
Inc. It assigned without any consideration this share to X, one of its
foreign consultants, to enable him to use its facilities for the duration when the units were sold to the uarious buyers, the common areas
of his stay in the Philippines. X signed a Declaration of Trust where were alread,y part and parcel of the sale of said units pursuant to the
he acknowledged that the share is owned by Oriental, Inc. and where Cond.ominium Act. Howeuer, the Deed of Conueyance is subiect to
he promised to transfer the same to whoever will succeed him as documentary stamP tax.
consultant. When X's contract with Oriental, Inc. expired, he left the
Philippines and assigned for free the share to Y, his successor in office. GapitalAssets
What tax, if any, can be imposed by the BIR on the transaction? "capital assets" means property held by the taxpayer
The term
Suggested answer: (whether or not connected with his trade or business), but does not
include:
The BIR cannot impose any tax because there was no real transfer
of the ownership of the subject Capitol Golf Club, Inc. ("Capitol") 1. Stock in trade ofthe taxpayer or other property ofa kind
proprietary share from X to Y. Oriental, Inc. is the true owner of the which would properly be included in the inventory of the
Capitol proprietary share. It remained the true owner from the time taxpayer ifon hand at the close ofthe taxable year; or
306 ltr:vrr,:wr,rrt ol,r 'l'nxn'r'ror.r I lr r rMt,t itNIr W t t l tt t, rl,lrtttr t'l'nxt':ll :lo7
( )r{llllttrv Ansllx tttttl ( ilrpil,rrl Ar'rst:LH

2. Property held by the taxpayer primarily fbr sale to Suggested answer:


customers in the ordinary course of his trade or business;
(I ) 'fhe loncl is a capital usset because it is neither for sale in
or
the ordinary course of business nor a property used in the
3. Property used in trade or business, ofa character which trade or business of the taxpayer (Sec. 33, NIRC)'
is subject to the allowance for depreciation provided in (2) Yes, Mr. Nqlal is tiable to the 5o/o (now 67o) capital gains
Subsection (F) ofSection 34; or
tax imposed under Section 21(e) of the Tax Code based on
4. Real property used in trade or business of the taxpayer the gross selling price of F800,000.00, which is an amount
(Sec.39[A], NIRC). higher than the zonal ualue'
Since the enumeration of capital assets is made in the negative
manner, the four (4) general types of assets listed are "ord.inanyt Bar Question (2008)
a"ssets." The exclusion from the term "capital assets" of property In January, 1970, Juan Gonzales bought one hectare of agricultural
used in the trade or business of a taxpayer of a character which is land in Laguna for F100,000. This property has a current fair market
subject to the allowance for depreciation is limited to property used value of F10 million in view of the construction of a concrete road
by the taxpayer in the trade or business at the time of the sale or traversing the property. Juan Gonzales agrees to exchange his
exchange. It has no application to gains or losses arising from the sale agricultural lot in Laguna for a one-halfhectare residential property
ofreal property used in the trade or business to the extent that such located in Batangas, with a fair market value of F10 million, owned
gain or loss is allocable to the land, as distinguished from depreciable by Alpha Corporation, a domestic corporation engaged in the buy
improvements upon the land (Sec. 132, Reu. Regs. No.2). and sale ofreal property. Alpha Corporation acquired the property
Where the real property is located outside the Philippines, the in2007 for F9 million.
norrrral corporate income tax of 307o (in case of a domestic corporation) a. What is the nature ofthe real properties exchanged for tax
or the graduated income tax rates offive percent (SVo) to 32Vo (in case of capital asset or ordinary asset? Explain.
a resident citizen) shall apply, even though such property is classified
purposes -
as a capital asset. The preferential rate ofsix percent (67o) applies b. Is Juan Gonzales subject to income tax on the exchange of
only when such real property is situated within the Philippines. This property? Ifso, what is the taxbase and rate? Explain'
rule is clearly set forth in Section 24(D) of the Tax Code, with respect c. Is Alpha Corporation subject to income tax on the exchange
to sales of real property by individuals, and it is believed that when of property? If so, what is the tax base and rate? Explain'
the preferential rate was extended to corporations, it was made under
the same conditions granted to individuals (RMC No. 41-86). Suggested answers:

Bar Question (1995) a. The term "capital Q'ssets" means property held by the
taxpayer (whether or not connected with his trade or
In 1990, Mr. Naval bought a lot for F1,000,000.00 in a sub- business), but does not include stoch in trade ofthe toscpayer
division with the intention of building his residence on it. In 1994, or other property of a kind which would properly be includcd
he abandoned his plan to build his residence on it because the iru the inuentory ofthe toxpayer, ifon hand at the close of
surrounding area became a depressed area and land values in the the taxable year, or property held by the taxpayer primarily
subdivision went down; instead, he sold it for P800,000.00. At the for sale to customers in the ordinary course of his trade or
time of the sale, the zonal value was F500,000.00. business, or property used in the trade or business, of a
(1) character which is subject to the allowance for depreciation,
Is the land a capital asset or an ordinary asset? Explain.
or real property used in trade or business ofthe toxpayer
(2) Is there any income tax due on the sale? Explain. lgss. lB[A][1], NIRC)- Based on foregoing definition, the
agricultural tand of Juan Gonzales is a capital asset, while
308 Itr,:vtt,:wt,:tr oN'l'AxA'l'toN INr lMl': ,lNl, Wt ttttt, rt.tttNrl 'l'nxt';sl :t09
( )r'rlrrurr y Arrrr,lrr rtttl ('rrlrilrrl Assr:l,s

the residential property of Alpha Corporation is un onlinur\ litr r!t1tru'irr'l,i'ttrt, ttr real property used in trade
u.LLrtutu,rtttc
asset. or business of'th'e ltlxltuyer (Sec. 22lZl in relation to Sec'
39[A]111, NIRC).
b. Yes, Juan Gonzales is subject to the capital gains tax
equal to 6Va of the gross selling price or fair marhet ualue
at the time of the exchange, whicheuer is higher, on the Bar Question (1998)
agricultural land in Laguna he exchanged to Alpha An individual, who owns a ten (10)-door apartment with a
Corporation. In this case, the law presumes that Juan monthly rental of F10,000.00 each residential unit, sold this property
Gonzales mq.hes a profit from sale or transfer of property to anotler individual taxpayer. Is the seller liable to pay the capital
(Sec.24[D][1], NIRC). gains tax?

c. Yes, Alpha Corporation is liable to pay corporate income Suggested answer:


tax on the net taxable income (gross sales less cost of sales
and deductions) realized by it from the sctle or excharuge of No. The seller is not liable to pay the capital gains tq'x because
its Batangas property for the agricultural land in Laguna the property sold, is an ordinary asset, i.e., real property used in trade
owned by Juan Gonzales. The net profit of Fl million ( F10 o, butin""". It is apparent that the taxpayer is engaged in the real
million selling price less fl rnillion cost) will be added to estate business, regularly renting out the l}-door apartment'
the other ordinary incomes and from such gross income,
business excpenses and other a.llowable deductions will be Bar Question (1997)
deducted to arriue at net ta,xable income for the year to
A corporation, engaged in real estate development, executed
which we will apply the regular corporate income tax rate
deeds of sale on various subdivided lots. One buyer, after going
of 357o.
around the subdivision, bought a corner lot with a good view of
the surrounding terrain. He paid F1.2 million, and the title to the
Bar Question (2003, 1998) property was issued. A year later, the value ofthe lot appreciated to
1. What is the difference between capital gains and ordinary a market value of F1.6 million, and the buyer decided to build his
gains? house thereon.

2. What does the term "ordinary income" include? Upon inspection, however, he discovered that a huge tower
antenna had been erected on the lot frontage totally blocking his
Suggested answer: view. When he complained, the realty company exchanged his lot
with another corner lot with an equal area but affording a better
1. Capital gains are gains realized from the sale or exchange view. Is the buyer liable for capital gains tax on the exchange of the
of capital assets, while ordinary gains refer to gains realized lots?
from the sale or disposition ofordinary u.ssets.

2. The term ordinary income includes any gain from the sale Suggested answer:
or exchange of property which is not a capital asset. These Yes, the buyer is subject to capital gains tax on. the exchange
are the gains deriued from the sale or exchange ofproperty of lots on the basis of preuailing fair market ualue of the property
such q.s stock in trade ofthe taxpayer or other property ofa transferred, at the tirne of the exchange or the fair rnarket ualue of the
hind which would properly be included in the inuentory of property receiued, whicheuer is higher (Sec.21[e], NIRC)- Real property
the taxpayer if on hand at the close of the taxable year, or -transactions
subject to capital gains tax are not limited to sales but
property held by the taspayer primarily for sale to custorners also exchanges ofproperty unless exempted by a specific prouision of
in the course of his trade or business, or property used in law.
trade or business of a character which is subject to the
310 lil,rvr r,:wr,:rr on'l'nx,r'r'ror.r

Bar Question (2001)


t
A, a doctor by profession, sold in the year 2000 a parcel ofland
which he bought as a form of investment in 1990 for Phpl million.
The land was sold to B, his colleague, at a time when the real estate CIIAPIER X
prices had gone down and so the land was sold only for Php800,000
which was then the fair market value ofthe land. He used the proceeds TAX.FREE EXCHANGES
to finance his trip to the United States. He claims that he should not
be made to pay t}:,e 67o final tax because he did not have any actual
gain on the sale. Is his contention correct? Why? Tax-free Exchanges
The entire amount of the gain or loss shall be recognized upon
Suggested answer: the sale or exchange ofproperty, except as herein provided:
No. The 67o capital gains tatc on sale of real property held as
capital asset is imposed on the income presumed to haue been realized
1.. No gain or loss shall be recognized if in pursuance of a plan
of merger or consolidation -
from the sale which is the fair market ualue or selling price thereof,
whicheuer is higher (Sec. 24[DJ, NIRC). Actual gain is not required a. A corporation, which is a party to a merger or
for the imposition of the tax, but it is the gain by fiction of law which consolidation, exchanges property solely for stock
is taxable. in a corporation, which is a party to the merger or
consolidation; or
Bar Question (2003) b. A shareholder exchanges stock in a corporation, which
What is the rationale for the rule prohibiting the deduction of is a party to the merger or consolidation, solely for
capital losses from ordinary gains? Explain. the stock ofanother corporation, also a party to the
merger or consolidation; or
Suggested answer: c. Asecurityholderofacorporation, which is a partyto
Losses from sales or exchanges ofcapital assets shall be allowed the merger or consolidation, exchanges his securities
only to the extent ofthe gains from such sales or erchanges (Sec. 39[c], in such corporation, solely for stock or securities
NIRC). Thus, capital losses are not deductible from ordinary gains. in another corporation, a party to the merger or
The rationale for this rule is that a capital asset refers to property consolidation.
held which is not considered as an ordinary asset. Generally, capital 2. No gain or loss shall be recognized if property is transferred
assets are properties of the taxpayer that are not used in his trade to a corporation by a person in exchange for stock or unit
or business, as distinguished from ordinary assets which are used of participation in such a corporation of which as a result
in the trq.de or business of the taxpayer. To qllow the deductiort of of such exchange, said person, alone or together with
non-business (capital) losses from business (ordiruary) income or gain others, not exceeding four (4) persons' gains control ofsaid
could mean the reduction or euen elimination of taxable income of the corporation, provided that stocks issued for services shall
taxpayer through personal, non-business related etcpenses, resulting not be considered as issued in return for property (Sec.
in substantiq.I losses of reuenue to the gouernment. 40tcl[2], NIRC; See Reu. Memo. Ruling No. 1-2002, April
25,2002, inuoluing de facto rnerger).
While the law refers to the merger or consolidation and the
exchange of property ( e.g., r eal property, shares of stocks, receivables,

311
312 Itr.;v r r,:wr':rr or'l'nxn'r'ror.r I Nr oMl,, ANII Wt t ttttot,lrtt'trl'l'nxt';s :JI:J
'l'rrx li r,,' l'lxr'lr:rttgls

etc.) for shares of stock of a corporation as a result of which the letstSl(/a of the totll votirtg powor ot'all classes of stocks entitled to
transferor gains control or further control ofthe corporation, the law vote. ln determining Lba 5l(I, stock ownership, only those persons
merely defers the recognition of the gain or the loss insofar as the who transf'erred property fbr stock in the same transaction may be
transferor and transferee is concerned. Thus, upon the subsequent counted up to a maximum of five (5). FDC and FA together gained
sale or disposition ofthe property covered by the tax-free exchange by control of the corporation. The fact that FDC's stockholding was
the transferor or the transferee, the historical cost or basis shall be eroded and that FA acquired only 9.967o is of no moment. BIR even
used for purposes of determining the gain or loss from the subsequent gave a ruling that the exchange was tax-free.
sale or transfer. So that the historical cost or basis may be monitored
The assessment of income tax on the alleged gain on "dilution" is
upon the subsequent sale of transfer of the property, the same is
premature as said gain has yet to be realized by FDC. The prospective
required to be annotated at the back ofthe title ofthe land or the
gain did not result from any alienation ofproperty, but represents
certificate of stock of the corporation and special books or records
are also mandated to be maintained by the parties to the tax-free
terely an alleged increase in the value of the shareholdings of FDC
in FAC resulting from the assignment of a percentage of its rights
exchange.
in the project to FAC. Such gain becomes taxable only if and when
In d.etermining control, collnctiae control ofpersorr.s up to a FDC a;tu;lly realizes the incremental value of its investment should
marimum of fiue (5) uho transferred. property for stock shall be it finally disposes of its shares in FAC (Commissioner u. Filinaest
counted.. - FDC is an investment holding company with substantial Deuelopm.ent Corporation, CA'GR SP No. 74570, January 26,
investments in real estate companies, principally FL and FA. In 1996, 2006).
FDC, FA and FL entered into a Deed of Exchange, whereby FDC and
FA agreed to transfer to FL properties worth F4.81M in exchange for Exchange of proPertY
463,094,30L shares of stock of FL. Prior to the exchange, FDC owned
67.427a of FL, but after the exchange, FDC owned only 61.037o of Gain or loss arising from the acquisition and subsequent
FL and FA owned 9.96Vo. FDC owns 8O7a of FA, the remaining2OVo disposition of property is realized only when as the result of a
being held by FL. Hence, FDC indirectly owned 69Vo of FL after the transaction between the owner and another person, the property is
exchange. converted into another property that has a market value. The term
"tna.rhet ualu.e" means the fair value of the property in money as
In 1997, FL requested for a ruling from the BIR that no gain or between the one who wishes to purchase and one who wishes to sell.
loss would be recognized in the transfer ofthe properties in accordance It is not, however, what can be obtained from the property when the
with Revenue Memorandum Order No. 26-92. The BIR granted the owner is under peculiar compulsion to sell or the purchaser to buy; nor
ruling and held that FDC and FA clearly gained control of FL. is it a purely speculative value which an owner could not reasonably
On various dates during 1996 and 1997, FDC extended to its to ottain for the property although he might possibly be
"*p""t
fortunate enough to do so. "Market ua,lu.e" is the price at which a
affiliates various advances. On November 15, 1996, FDC formed ajoint
venture company named FAC based in Singapore with a Singaporean seller willing to sell at a fair price and a buyer willing to buy at a
firm. FAC was tasked to manage FDC's 507o ownership interest in its fair price, bolh having reasonable knowledge of the facts, will trade.
PBCom Office Tower Project. Pursuant to the joint venture, FDC's EvidLnce as to the assets and liabilities of a corporation and as to its
equity participation in FAC was 60Vo.In payment of its subscription earnings may furnish definite indications of the market value of its
in FAC, FDC transferred a portion of its rights in the Project to FAC. stock (Sec. 740, Reu. Regs. No. 2).
FDC reported a net loss of F190.7M in its 1996 income tax return.
Bar Question (1999)
Under BIR Ruling No. 210-91, Section 3ak)Q) of the Tax Code
shall be understood to mean that any number of persons may exchange HK Co. is a Hong Kong corporation not doing business in the
property for stocks, provided that as a result of the transaction, Philippines. It holds 40vo of the shares of A co., a Philippine company,
not more than five (5) transferors would control the corporation. while fhe 6OVo is owned by P Co', a Filipino-owned Philippine
oControl" means ownership of stocks in a corporation possessing at corporation. HK Co. also owns 1007o of the shares of B Co', an
314 Itt,lvtt,rwt,rtt on'l'nxn'r'ror.r I Nr (,Mt,r ANrI Wt t ttttot.tttNr l'l'nxl':r; 315
'l'rrx licr' l'lxt'ltrttrgt'tl

Indonesian company which has a duly licensed Philippine branch. <lnriutrl taxable goi,tt. litr h is tt'ort.orn.it: grti.n which was realized by uirtue
Due to worldwide restructuring of the HK Co. group, HK Co. decided ol'the exchange of'the land lbr the liability for the subscription'
to sell all its shares in A and B Companies. The negotiations for the
buy-out and the signing of the Agreement of Sale were all done in the 2) Is the CDI liable for any taxable gain?
Philippines. The agreement provides that the purchase price shall be
subject to withholding tax. Explain your advice. Suggested answer:
cDI itsetf is not liable for any taxable gain since subscription
Suggested answer: payments dre not considered as taxable income being merely
P Co. should not subject the payments of the purchase price to inuestments in the corporation. Howeuer, a tq,xable incidence may
withholding tan. While the seller is a non-resident foreign corporation occur as and. when the corporation sells the parcel of land for a price
which is not normally required to frle returns in the Philippines and, ouer and. aboue the ualue ofthe shares of stoch or in this case ouer and
q,boue fl50,000.00. Until such time, howeuer, there is no realizable
therefore, ordinarily all its income earned from Philippine sources is
tqxed uict the withholding ta,x system, this is not the procedure auailing income on the part of the corporation.
with respect to sq,les of shares of stock. The capital gains tax on the
sale of shares of stock of a domestic corporation is always required to Bar Question (1994)
be paid through capital gains tax return fi.l.ed. The sale of the shares of
(1) In a qualified tax-free exchange of property for shares
stock of the Indonesian Corporation is not subject to income tux under
under Section 3a(c)(2) of the Tax Code, what is the tax
our jurisdiction becquse the income deriued therefrom is considered
basis for computing the capital gains on: (a) the sale of
as a foreign-source income.
the assets received by the corporation; and (b) the sale
ofthe shares received by the stockholders in exchange of
Bar Question (1991) the assets?
Cebu Development Inc. (CDI) has an authorized capital stock (2) In a qualified merger under Section 3 ak)Q) of the Tax Code,
of F5,000,000.00 divided into 50,000 shares with a par value of One
what is the tax basis for computing the capital gains on: (a)
Hundred Pesos (F100.00) per share. Of the authorized capital stock,
the sale ofthe assets received by the surviving corporation
twenty-five thousand (25,000) shares have been subscribed. Mr. Juan from the absorbed corporation; and (b) the sale ofthe shares
Legaspi is a stockholder of CDI where he has subscription amounting
of stock received by the stockholders from the surviving
to 13,000 shares. To fully pay his unpaid subscription in the amount
corporation?
of F950,000.00, Mr. Legaspi transferred to the corporation a parcel
of land that he owns by virtue of a Deed of Assignment.
Suggested answer:
Upon investigation, the BIR discovered that Mr. Legaspi (1) In a qualified tax-free exchange of property for shares of
acquired said property for only F500,000.00. T @Q) of the Toa Code, the tax basis
stock under Section'
1) Is Mr. Legaspi liable for any taxable gain? for computing the gain on the:
(a) sale ofthe assets receiued by the corporation shall be
Suggested answer: the original /historical cost (i-e., purchase price plus
The transfer by Mr. Legaspi to the corporation of the parcel ercpenses of acquisition) of the property / assets giuen
of land in payment of his unpaid subscription did not increase his in exchange of the shares of stock.
stockholdings in the corporation. It cqnnot be said that he acquired (b) sale ofthe shares of stock receiued by the stockholders
control of the corporation by uirtue of the transfer of the land. His
percentage of stockholdings in the capital stock of the corporation
in exchange of the assets shall be the original I
historical cost ofthe property giuen in exchange ofthe
remains the same after the transfer as before. Therefore, Mr. Legaspi
shares of stock.
I Nr r rMt, Attt, W t t't tttr rt.t rtt'tr i'l'nxt'ls ;l l7
316 Itt,:vtt,:wt,lr or.r'l'nx,rlror'r
'lirr li,,r, l,)xcltrurlSrs

(2) In a qualified merger under Section J4(cX2) of the Tax Cod.e,


Suggested answor:
the tax basis for computing the capital gains on: Yes. The exchange in 1995 is a tax-free exchange so thot the
(a) the sale of the assets receiued by the suruiuing subsequent sale of one of'the brothers of his sh(tres to the other two
corporation from the absorbed corporation shall be (2) brothers in 1997 will be subject to income tax. This is so because
the original / historical cost of the assets when still in the to"x-free exchange merely deferred the recognition of income on
the hands ofthe absorbed corporation. the exchange transaction. The gain subject to income tax in the sale
is measured by the dffirence between the selling price of the shares
(b) the sale of the shares of stock receiued by the (fl Miltion) and the basis of the real property in the hands of the
stochholders from the suruiuing corporation shall be transferor q.t the time of exchange which is the fair mq,rhet value of
the acquisition / historical cost ofassets transferred to his share in the real property at the tint'e of inheritance (Sec. 34[b][2],
the suruiuing corporation. NIRC). The net gain frorn the sale of shares of stoch is subject to the
schedulq.r capital gains tax of 107o for the ftrst F1'00,000.00 and 20Vo
Section 40(C)(2) rnerely defers recognition of gain or loss for the excess thereof (Sec. 21[d], NIRC). INOTE: The current capital
from exchange of propertSt. - Section g4(C)(2) (now Section 40lCl gains tax rates are 57o on the first F100,000.00 net capital gain and
l2l of the 1997 Tax Code) merely defers recognition of the gain or 707o on the arnount ouer F700,000.001.
loss from the exchange of properties, for in determining the gain or
Ioss from a subsequent transaction ofthe real properties or ofthe
stocks involved in the exchange, the original or historical cost ofthe
Original basis of property to be transferred
properties or the stocks is considered (BIR Ruling No. 050-2000, The original basis ofthe property to be transferred shall be the
August 10,2000). following, as may be approPriate:
The amount of income derived or loss sustained from a tax-free (a) The cost ofthe property, ifacquired by purchase;
exchange of property is the difference between the market value at The fair market price or value as of the moment of death
the time ofthe exchange ofthe property received in exchange and the
ft)
ofthe decedent, ifacquired by inheritance;
original cost, or the adjusted cost basis, ofthe property exchanged
to the transferor. The cost basis to the transferee of the property (c) The basis in the hands of the donor or the last preceding
exchanged for stocks shall be the same as it would be in the hands of owner by whom the property was not acquired by gift, if the
the transferor (Sec. 147, Reu. Regs. No. 2). property was acquired by donation. If the basis, however,
is greater than the fair market value of the property at the
Bar Question (1997) time of donation, then, for purposes of determining loss,
the basis shall be such fair market value; or
Three brothers inherited in 1992 a parcel ofland valued for real
estate tax purposes at F3.0 million which they held in co-ownership. (d) The amount paid by the transferee for the property, if
In 1995, they transferred the property to a newly organized the property was acquired for less than an adequate
corporation as their equity which was placed at the zonal value consideration in money or money's worth;
of F6.0 million. In exchange for the property, the three brothers (e) The adjusted basis of(a) to (d) above, ifthe acquisition cost
thus each received shares of stock of the corporation with a total of the property is increased by the amount of improvements
par value of F2.0 million or, altogether, a total of F6.0 million. No that materially add to the value of the property or
business was done by the Corporation, and the property remained appreciably prolong its life less accumulated depreciation;
idle. In the early part of 1997, one of the brothers, who was in dire
need of funds, sold his shares to the two brothers for F2.0 million. (fl The substituted basis, if the property was acquired in a
Is the transaction subject to any internal revenue tax (other than previous tax-free exchange under Section 40(CX2) ofthe
the documentary stamp tax)? Tax Code of 1997.
318 Itt,:vtt,:wr,;rr (,N'l'AxA'r'roN I N( | rMt,i ANt, Wt t t tt tol,t rtt"tr i'l'nxt':ll :t l9
'lirx lilr' l'lxclttrtlgcs

Sale of Principal Residence principle of estoppel (r'.g., il't,lrc property was sold on May 1' 2000'
The term "Principal Resid.ence" shall refer to the dwelling ihe vendor's annual income tax return for the year 1999, which he
house, including the land on which it is situated, where the husband filed on or before April 15, 2000, showing his residential address,
and wife or an unmarried individual, whether or not qualified as head shall be treated as a conclusive presumption that his true residential
of family, and members of his family reside. Actual occupancy of such address is that which is shown in his aforesaid income tax return).
principal residence shall not be considered interrupted or abandoned If the vendor is exempt from filing any tax return' in which case' he
has no tax record immediately prior to the sale of his property,
then
by reason of the individual's temporary absence therefrom due to chairman or
travel or studies or work abroad or such other similar circumstances. the aforementioned certification from the Barangay
The character of permanency must be present in the principal Building Administrator, as the case may be, shall suffice'
residence, in that said individual intends to return to the dwelling
house, whenever he is absent. RequisitesforExemptionfromTaxofSaleofPrincipal
Residence
Where ownership of the land and the dwelling house thereon
belongs to different persons, e.g., where the land is leased to the Bar Question (2000)
dwelling house owner, only the dwelling house shall be treated as LastJuly]r2,2ooo,Mr.&Mrs.PeterCamachosoldtheir
principal residence ofthe dwellinghouse owner. Thus, ifthe said land principal residence situated in Tandang Sora, Quezon City' for
and the dwelling house thereon be jointly sold or disposed by the said h"r, *iltlot, pesos (F10,000,000.00) with the intention of using the
owners, only the sale or disposition of the dwelling house shall be proceeds to acquire or construct a new principal residence in Aurora
entitled to the benefit of exemption from the capital gains tax herein Hills, Baguio CitY'
prescribed: Prouided, howeuer, That where both the owner of the land
and owner of the dwelling house actually reside in the said dwelling what conditions must be met in order that the capital gains
house, then both the said land and dwelling house shall be treated as presumed to have been realized from such sale may not be subject to
their principal residence (e.g., owner of the land is the parent while capital gains tax?
owner of the house is his child, or uice uersa).
Suggested answer:
Where the land and the dwelling house thereon be owned
by several co-owners, e.g., inherited by two or more heirs through When the real property sotd or disposed by a natural person
hereditary succession, and where the said property is actually used (e.g., citizen orcesid.eoi atiiru) is a capital asset and his principal
'r"iid"n"n,
as principal residence by one or more of the said co-owners, including the capital gains presumed to haue been realized from the
the members of their family, the said property shall be treated as ,i," o, d.isposition thireof shall be exempt from the 67o capital gains
the principal residence of the co-owner/s actually occupying and tox, provided that:
using the same as his/their principal residence but to the extent of 1. The proceed's of sale is fully utilized in acquiring or
his/their proportionate share in the value ofthe principal residence. consiructing a new principal residence uithin 18 calendar
Conversely, the capital gains tax exemption benefit herein prescribed months from the date of sale or disposition;
shall not apply in respect of the other co-owners who do not actually
use and occupy the same as their principal residence. 2. The Commissioner is duty notified by the taxpayer within
30 d.ays from the d'ate of sale or disposition through
The residential address shown in the latest income tax return o prei"ribed' return of his intention to auail of the tax
filed by the vendor/transferor immediately preceding the date of sale of eremption; and
the said real property shall be treated, for purposes ofthe regulations,
as a conclusive presumption about his true residential address, the .t. The tuc exernption is auq'iled only once euery 70 years' The
certification of the Barangay Chairman, or Building Administrator historical o, ad.justed' basis ofthe real property sold or
"oit
d.isposed. shall be carried ouer to the new principal residence
(in case of a condominium unit), to the contrary notwithstanding,
in accordance with the doctrine of admission against interest or the built or acquired.
:120 Itl:vtt,:wt,:tr or.r'l'nxn'r'ror.t

If there is no full utilization of the proceeds of'sare or dispositirn,


the portion of the gain presumed realized from the sale or disposition
shall be subject to the capital gains tax. For this purpose, the gross
selling price or fair market value at the time of sale, whichever is
higher, shall be multiplied by a fraction which the unutilized amount CHAPTER XI
bears to the gross selling price in order to determine the taxable
portion and the tax prescribed under paragraph (1) ofthis subsection
ACCOUNTING METHODS AND PERIODS
shall be imposed thereon (Sec.24[D], NIRC).
In order to ensure payment of the six percent (6Vo) capital gains The method. of accounting regularly employed' by the
tax on sale or exchange of real property classified as capital asset, tarpayer must clearly reflect his income. - The method of
and to prevent tax leakages arising from non-compliance with the accounting regularly employed by the taxpayer in keeping his books, if
conditions for tax exemption discovered by the tax authority at a later such method clearly reflects his income is to be followed with respect
time, payment of the capital gains tax under escrow is then required. to the time as of which items of gross income and deductions are to
Thus, the six percent (6Vo) cspil^l gains tax otherwise due on the be accounted for. If the taxpayer does not regularly employ a method
presumed capital gains derived from the sale, exchange or disposition of accounting that clearly reflects his income, the computation shall
of his principal residence shall be deposited in cash or manager's be made in such manner as in the opinion of the commissioner of
check in interest-bearing account with an Authorized Agent Bank Internal Revenue clearly reflects it(Sec' 43,NIRC; Sec. 166, Reu. Regs'
(AAB) under an Escrow Agreement between the concerned Revenue No.2).In view of this express mandate in the law that the method
District officer, the seller/Transferor and the AAB to the effect that regularly employed by the taxpayer in keeping his books must clearly
the amount so deposited, including its interest yield, shall only be reflect his income for the year, the Tax code provision and regulation
released to such seller/rransferor upon certification by the said RDo used in preparing the taxpayer's income tax return and in computing
that the proceeds of sale or disposition thereof has, in fact, been his tax liability will prevail over the generally accepted accounting
utilized in the acquisition or construction ofthe seller/Transferor's principles used by taxpayers in keeping their books ofaccounts and by
new Principal Residence within 18 calendar months from date of the external auditors in conducting the statutory audit and in preparing
said sale or disposition. The date ofsale or disposition ofa property the audited financial statements, which are required to be attached
refers to the date of notarization of the document eviaencing the to the income tax return of the taxpayer.
transfer of said property. In general, the term "EscrotD, means ,,a
scroll, writing or deed, delivered by the grantor, promisor or obligor
No unifonn mnthod. of accounting is prescribed' for all
ta,xpayters. - It is recognized that no uniform method of accounting
into the hands of a third person, to be held by the ratter until the
c"tr b" p""rcribed for all taxpayers, and the law contemplates that each
happening of a contingency or performance of a condition, and then
taxpayer shall adopt such forms and systems of accounting as are in
by him delivered to the grantee, promisee or obligee" (Reu. Regs. No.
his judgment best suited to his purpose. Each taxpayer is required by
14-2000, Nouember 20, 2000).
Iaw to make a return ofhis true income. He must, therefore, maintain
such accounting records as will enable him to do so. Any approved
standard method of accounting that reflects taxpayer's income may
be adopted.

Methods of Accounting
There are several methods ofaccounting revenues and expenses
that may be used by taxpayers under the 1997 Tax Code' These are:

321
I l']r oltt l,.,tt-t t, W t t t I I lot,l rt t'tr i'l'nxt'll;
:12:l
322 ltr,:vu,:wr,:rr oN'l'Axirtror
Acrrrttttl.tttil Mlllrrxls ltrrrl Itr:rirxls

1. Cash receipts and disbursements method; Incorne is recognized when earning process is complete
and erchonge hae tihen ploce. - Under the realization principle,
2. Accrual method;
revenue is generally recognized when both ofthe following conditions
3. Installment method; are met: (a) ttre earning pio""t" is complete orvirbually complete; and
(b) an exchange has taken place. This principle requires that revenues
4. Percentage of completion method; or
must be b"fore they are received. Amounts received in advance
5. Crop year basis. are not "urn"d
treated as revenue ofthe period in which they are received but
as revenue ofthe future period or periods in which they are earned.
In case of conflict, tar rule preaails ouer accounting These amounts are carried as unearned revenue, that is, liabilities
principle. - In general, tax accounting requires that payments to transfer goods or render services in the future - until the earning
received for services to be performed in the future must be included in process is complete (Manila Mand.arin Hotels u. Cornrnissioner,
gross income in the taxable year of receipt. However, this treatment CTA Case No.5046, March 24, 7997).
varies from the generally accepted accounting principles consistently 6All Eaents TestD is followed' for erpenses' the
used by many accrual method taxpayers in the treatment of payments
- Under
taxable year in
accrual method, an expense was deductible for the
received in one taxable year for services to be performed by them in which determined the fact of the
which all the events had occurred
the next succeeding taxable year. In this case where there is conflict
liability and the amount thereof could be determined with reasonable
between a tax rule and an accounting principle, the tax rule shall
prevail, because the method of accounting used by the taxpayer must
.a"orr-"y (the so-called "all euents test"). If the "all eoents test"
was satisfied, an accrual basis taxpayer generally could deduct the
clearly reflect his income for the year.
full face amount of the liability (ignoring any discounting of the
Cash method.. Cash method is a method of accounting amount to reflect the time value of money). Thus, the courts held
-
whereby all items of gross income received during the year shall be that expenditures are deductible only when the activities that the
accounted for in such taxable year and that only expenses actually taxpayer is obligated to perform are in fact performed, not wJren the
paid shall be claimed as deductions during the year. Under this "fa&" of the obligation to perform is determined (SpencerrWhite &
method, income is realized upon actual or constructive receipt of Prentis u. Cornmissioner, 744 Fzd 45,2d Cir' 1944)'
cash or its equivalent, and expenses are deductible only upon actual
payment thereof, regardless of the taxable year when the service is Bar Question (2010, 2009)
performed or the expense is incurred.
What is the "all events test"? Explain briefly'
Accrualm,ethod..
- Accrual method is a method of accounting
for income in the period it is earned, regardless of whether it has Suggested answer:
been received or not. In the same manner, expenses are accounted
for in the period they are incurred and not in the period they are Accrual of income and expense is permitted when the "all
paid. Under this method, net income is being measured by the excess euents test' has been ntet. This test requires (1) fixing a right to the
of the income earned during the period over the expenses incurred income or liabitity to pay, and (2) auailability of reasonably accurate
during the same period. The income that has been earned and the d.etermination of iu"i ircome or liability. It does not, howeuer, de'mand
expenses that have been incurred are to be reporbed duringthe year, that the amount of income or liability be hnown absolutely; it only
although they have not been collected or paid. In the succeeding year requires that a taxpayer has at its disposal the information necessary
of receipt or paJrment, the taxpayer shall report no additional income to compute the omount with reasonable accuracy, which implies
or expenses. something less than an exact or cornpletely accurate amount'

Taxpayers that have inventories ofgoods for sale and have trade Installment m.ethod.. - It is a method considered appropriate
receivables and payables must use the accrual method of accounting when collections of the proceeds of sales and incomes extend over
their income and expenses. relatively long periods oflime and there is strong possibility that full
324 Itt,:vtt,:wr,;rr oru'l'nxn't'tor.r I rur r rMt,: nNtr Wt'lt tt tot ttttlt t'l'rrxl'llt il?lt
Accutttrl tttg Mr,l lxxlH tttttl I'r'rittrls

collection will not be made. As customers make installment payments, inconrg drlrivcd lrom srrt:lr trrttl,rttt:t rna.y be reported upon the basis of
the seller recognizes the gross profit on sale in proportion to the cash pcrcen[age of completiOn. ln de[cr.mining the percentage of completion
collected during the year. of'a contract, one of the lbllowing methods is generally used:
Generally, income from a sale of property on the installment a. The costs incurred under the contract as of the end of
basis may be reporbed as the pa5rments are received. Ifthe installment the tax year are compared with the estimated total to be
method is elected for qualifying sales, the gain reported for any taxable performed; or
year is the proportion of the installment payment received in that
year which the gross profit, realized or to be realized when payment is b. The work performed on the contract as of the end of
completed, bears to the total contract price. Expressed in accounting
the tax year is compared with the estimated work to be
performed.
formula, the income to be reported for the year is the product of the
total collections during the year multiplied by the gross profit rate. Long'term contracts, which are usually contracts taking
In general, the contract price is the amount, which will be paid to the more than a year to complete, and frequently involving large scale
seller. The function of the installment method of reporting income projects for the construction of industrial plants or buildings, are
is to permit the spreading of the income tax over the period during regulated due to the timing issues on the reporting of income and
which paSrments of the sales price are received. Thus, the installment In long-term contracts, the return should be accompanied
method alleviates possible liquidity problems, which might arise from ""p"rrru..
by a certificate ofthe architect or engineer showing the percentage
the bunching of gain in the year of sale when a portion of the selling oi completion during the taxable year of the entire work performed
price has not been actually received. under the contract. There should be deducted from such gross income
SaIn ofrealproperty inuolaing d.efetedpaymcnts. Under all expenditures made during the taxable year on account of the
-
Section 49(B) of the Tax Code, deferred payment sales of property contract, account being taken of the materials and supplies on hand
include (a) agreements of purchase and sale which contemplate that at the beginning and end ofthe taxable year for use in connection
a conveyance is not to be made at the outset, but only after all or a with the work under the contract but not yet so applied.
substantial portion ofthe selling price has been paid, and (b) sales Taxable income of a taxpayer is figured on the basis of his annual
in which there is an immediate transfer of title, the vendor being accounting period. An accounting period or taxable year normally
protected by a mortgage or other lien as to deferred payments. Such consists of tZ months, which could be the calendar year or the fiscal
sales under (a) or (b) fall into two (2) classes when considered with year. Income tax returns, whether for individuals or for corporations,
respect to the terms of sale, as follows: associations, or partnerships, are required to be made and their
1. income computed for each calendar year ending on December 31st
Sales of property on the installment plan, that is, sales
in which the cash or property, other than evidence of ofevery year. However, corporations, associations, or partnerships
may with the approval of the commissioner of Internal Revenue first
indebtedness ofthe purchaser, received in payment during
secure, file their returns and compute their income on the basis of a
the taxable year in which the sale is made do not exceed
fiscal year which means an accounting period of l-2 months ending on
25Vo of t}re selling price; or
the last day of any month other than December. But in no instance
2. Deferred-payment sales not on the installment plan, that shall individual taxpayers be authorized to establish a fiscal year as
is, sales in which the pa5rments received in cash or property basis for filing their returns and computing their income (sec. 169,
other than evidences of indebtedness of the purchaser Reu. Regs. No.2).
during the taxable year in which the sale is made exceed
257o of the selling price.
An accounting period of a taxpayer may be for less than 12
months, as when the annual accounting period of a subsidiary is
Percentage of completion method,. changed to conform to the annual accounting period adopted by
- This method is
applicable in the case of a building, installation or construction its foreign parent company, for easy consolidation of their audited
contract covering a period in excess of one (1) year, whereby gross worldwide financial statements.
:t26 Itr,:vrr,:wr,;rr oN'l'AxA'r'ror.'r INr oMt,l ANtI Wt't tlttot,trttlll'l'nxt';s :127
Arrrrrrrrltrrll Mr,l.lrrxls rrrrrl l,t'rirxln

When included in Gross lncome the yclr thc scrvicg wrrs ltgrlirrrlgd, where the requirements of the
The amount of all items of income shall be included in the gross "all events test" have betln met.
income for the taxable year in which received by the taxpayer, unless,
under methods of accounting permitted under Section 43 of the 1997 lncome ConstructivelY Received
Tax Code, any such amounts are to be properly accounted for as of a Income which is credited to the account of or set apart for a
different period. In case ofdeath ofa taxpayer, there shall be included taxpayer and which may be drawn upon by him at any time is subject
in computing net income for the taxable period in which he died to tax for the year during which so credited or set apart, although
amounts accrued up to the date ofhis death, ifnot otherwise properly not then actually reduced to possession. To constitute receipt in
includible in respect ofsuch period or a prior period, regardless ofthe such a case, the income must be credited to the taxpayer without
fact that the decedent may have kept his books and made his returns any substantial limitation or restriction as to the time or manner
on the basis of cash receipts and disbursements (Sec. 44, NIRC; Sec. of payment or condition upon which payment is to be made' A book
170, Reu. Regs. No.2). entry, if made, should indicate an absolute transfer from one account
Gains, profits, and income are to be included in the gross income to another. If the income is not credited, but is set apart, such income
for the year in which the taxpayer received them, unless they are must be unqualifiedly subject to the demand of the taxpayer. where a
included when they accrue to him in accordance with the approved corporation contingently credits its employees with bonus stock, but
method of accounting followed by him. If a person sues in one (1) the stock is not available to such employees until some future date
year on a pecuniary claim or for property, and money or property is the mere crediting on the books of the corporation does not constitute
recovered on a judgment therefore in a later year, income is realized receipt (Sec. 52, Reu. Regs. No.2)-
in that year, assuming that the money or property would have been
income in the earliest year if then received. This is true of a recovery When expense is to be claimed as Deduction from Gross
for patent infringement. Bad debts or accounts charged offbecause [ncome
of the fact that they were determined to be worthless, which are
subsequently recovered, whether or not by suit, constitute income Ata,xpayer has the right to claim all authorized' d'ed'uctions
for the year in which recovered, regardless of the date when amounts d,uring thi cuffent year, and' he cannot ad,aance or d'elay such
were charged off(Sec. 51, Reu. Regs. No. 2). claim in a prior or succeed'ing year. - Each year's return, so far
as practicable, both as to gross income and deductions therefrom,
The fundamental support for the sale basis is found in legal should be complete in itself, and taxpayers are expected to make every
considerations. In giving the vendee title to valuable goods, the reasonable effort to ascertain the facts necessary to make a correct
vendor acquires a claim that is in itselfrecognized property and that return. The expenses, liabilities, or deficit ofone year cannot be used
is quite distinct from any asset possessed prior to sale. Accordingly, to reduce the income of a subsequent year. A taxpayer has the right
the shipment of merchandise to the customer is generally regarded to deduct all authorized allowances and it follows that if he does not
as the time for recognizing the sale. Generally, revenue is recognized within any year deduct certain ofhis expenses, Iosses, interests, taxes,
at the point of sale. However, revenue may also be recognized or other charges, he cannot deduct them from the income ofthe next
subsequent to the time of sale. This is common practice in connection or any succeeding year. Ifit is recognized, however, that particularly
with installment sales where the customer receives the goods in a going business of any magnitude there are certain overlapping
and agrees to pay for them in a series of periodic payments or items that do not materially distort the income, and so long as these
installments and the vendor usually retains protective title to the overlapping items do not materially distort the income, they may be
goods. When a company is primarily a service enterprise, the act included in the year in which the taxpayer, pursuant to a consistent
or process of furnishing the service to the customer constitutes the policy, takes them into his accounts.
"sale" and marks the time for revenue recognition. Corollarily, the
absence of billing statement by the seller of service does not justify Judgments or other binding judicial adjudication, on account of
the delay in the recognition ofthe expense by the buyer thereofin damages for patent infringement, personal injuries, or other cause,
are deductible from gross income when the claim is so adjudicated or
I N|olt'll,; a Nl r W t l t t l!t,l rt t'tr i'l'Ax l':lt
:l2t)
328 l},:vrr,:wt,:tt oru'l'nx,t't'toN
t

Accottttltttg Mlllrrxlrr rrtlrl I1'rirxls

paid, unless taken under other methods of accounting which clearly ln order to pr<tvitk: grrirlrrlincs on cross-border transactions
reflect the correct deduction, less any amount of such damages as may between associated entcrprises and domestic transactions between
have been compensated for by insurance or insurance. Ifsubsequent associated enterprises, Revenue Regulations No' 2'2013 dated
to its occurrence, however, a taxpayer fi.rst ascertained the amount January 2g, i}lr}, which was largely based on arm's length
ofa loss sustained during a prior taxable year which has not been methodologies set outin OECD Transfer Guidelines, was promulgated.
deducted from gross income, he may render an amended return for These arm;s length methodologies include comparable uncontrolled
such preceding taxable year, including such amount of loss in the p"i"e r""tttod, r"esale price method, cost plus method, profit split
deduction from gross income and may in proper cases file a claim for method, residual ptoht split approach, contribution profit split
net margin method. The regulation also
refund ofthe excess tax paid by reason ofthe failure to deduct such ,pp"ou"'h, and transactional
provide for securing advance pricing arrangement, which is a facility
Ioss in the original return. A loss from theft or embezzlement occurring
in one year and discovered in another is ordinarily deductible for the available to taxpayers who are engaged in cross-border transactions
year in which sustained (9ec.76, Reu. Regs. No.2). to determine in advance an appropriate set of criteria to ascertain
transfer prices of controlled transactions over a fixed period of time,
Ded.uctions and. cred.its must be tahen for the year in so as to reduce the risk of transfer pricing examination
and double
whieh thqt are paid, or incurred. - The terms "paid. or incurredn taxation. This could be unilateral, bilateral, or multilateral advance
and "paid, or accrued" will be construed according to the method pricing arrangement.
of accounting upon the basis of which the net income is computed
by the taxpayer. The deductions and credits must be taken for the
taxable year in which "paid or accrued" or "paid or incurred," unless Filing of Tax Returns
person
in order clearly to reflect the income, such deductions or credits The frequency of filing income tax returns depends on the
should be taken as of a different period. If a taxpayer desires to and the nature oi itt"o-u received' The rules are summarized as
claim a deduction or a credit as of a period other than the period in follows:
which it was "paid or accrued" or "paid or incurred," he shall attach
to his return a statement setting forth his request for consideration a. Ind.iuid.uolls d.eriving pure$t cornpensation income'
Individual deriving purely compensation income must
-
of the case by the Commissioner of Internal Revenue, together with
a complete statement of the facts upon which he relies. However,
filehisincometaxreturn(BIRForm1701)notlaterthan
in his income tax return he shall take the deduction or credit only Aprillsofthefollowingyear.Thisrequirementoffiling
for the taxable period in which it was actually "paid or incurred" or taxreturnsisnolongerrequiredbeginningforthecalendar
year2o}2,iftheemployeequalifiesunderthesubstituted
"paid or accrued," as the case may be. Upon the audit of the return,
the Commissioner of Internal Revenue will decide whether the case
filing sYstem.
is within the exception provided by the law, and the taxpayer will be
advised as to the period for which the deduction or credit is properly
substituted filing of tax returns is required where (i) an
or one
allowable. employee receives purely compensation- income from a single
(ii) correct amount
emptoyet *tto deducted and remitted to the BIR the
or*itrrrrotaing tax from the employee's compensation income during
Transactions between Related Parties and Transfer the year, and said employee has (iii) no taxable other income subject
Pricing to incorne tax under the global tax system. In lieu of the regular
tax
returns to be filed by the employees, the employer shall file BIR Form
The Commissioner of Internal Revenue is authorized to
distribute, distribute or allocate gross income or deductions between 2316 (certificate of Income Tax Withheld on compensation) with
(sec. 2.83.1,
or among two or more organizations owned or controlled directly the BIR on or before January 31 of the following year
No' 3-2002' March
or indirectly by the same interests, if he determines that such is Reu. Regs. No. 2-98' q.s amend'ed' by Reu' Regs'
27,200r). BIR Form 2316 shall contain a certification to the effect
necessary to clearly reflect the income of any such organization(Sec. considered
50, NIRC). that the employer's filing of BIR Form 1604-CF shall be
as a substitutea nnng o1 th" employee's income tax return
to the
330 1il,:vr t,:wr,:rr oru'l',rx^, rroN :r:r I

^lil;,',T,l,l;'#liilllil'lllli 'llll;;i"
extent that the amount of compensation and tax withheld in BIR the to.res correctly withheld only by one employer. In this cqse, euen
Form 1604-CF as filed with BIR is consistent with the corresponding if his aggregate compensation income from both his employers does
amounts indicated in BIR Form 2316 (5ec.2.83.1, Reu, Regs. No. 19- not exciid ft0,000.00 ond that total withholding ta,xes were correctly
2002, October 11,2002). However, non-resident citizens who receive withheld by his employers, the fact that he deriues compensation
purely income from foreign sources are no longer required to file their income concuffently from two employers at anytime during the toxable
Philippine income tax returns, although they must still file an income year, d.oes not exempt him from filing his income ta'x return (RA- 7497 '
tax return covering income from sources within the Philippines. as implemented by Reu. Regs. No. 4-93)-

Filipino employees of foreign embassies and interna- Bar Question (2000)


tional organizations in the Philippines, including ADB a monthly
Mr. Javier is a non-resident senior citizen. He receives
Foreign embassies and international organizations shall pension from the GSIS, which he deposits with the PNB-Makati
submit to the Office of the CIR a Summary List of Employees as of branch. Is he exempt from income tax and therefore not required to
December 3t, 2Ol2 who want to avail of abatement of penalties not file an income tax return?
later than May 10, 2013 and the tax must be paid not later than May
15, 2013 with Declaration of Availment of Abatement plus required Suggested answer:
attachments and that no pending criminal case for 2}l2isfiled with Mr. Jauier is exempt from income tax on his monthly GSIS
the Department of Justice or the court. International organizations pension (Sec. 32tBlt6ltfl, NIRC), but not on the interest income that
whose non-Filipino employees enjoy immunity from taxation need -might
accru,e on the pensions deposited with PNB which are subject
not submit information on their non-Filipino employees (Reu. Regs. to final withholding tax.
No. 7-2013, May 9, 2013).
Consequently, since Mr. Jauiey's sole ta.rable income would have
In lieu of the Summary List of Employees, the employee may been subjected to a fi.nal withholding tar, he is not required anymore
obtain a Certificate of Employment from his/her employer disclosing to file an income tax return (Sec. 51[N[2][c], NIRC)'
the information on his/her position or rank, period of employment for
2012, and the monthly salaries, emoluments and monetary benefits
(Reu. Regs. No.8-2013, May 9,2013). Bar Question (2001)
In the year 2000, X worked part time as a waitress in a restaurant
Bar Question (1997) in Mega Mall from 8am to 4pm and then as a cashier in a 24-hour
convenience store in her neighborhood. The total income of X for the
A bachelor was employed by Corporation A on the first working year from the two employees does not exceed her total personal and
day of January 1996 on a part-time basis with a salary of F3,500.00 additional exemptions for the year 2000. was she required to file an
a month. He then received the 13th month pay. In September 1996, income tax return last April? Explain your answer.
he accepted another part-time job from Corporation B from which he
received a total compensation of F14,500.00 for the year 1996. The Suggested answer:
correct total taxes were withheld from both earnings.
Yes. An indiuidual deriuing compensa'tion concurrently from two
With the withholding taxes already paid, would he still be or m,ore employers at any time during the taxable year shall file an
required to file an income tax return for his 1996 income? income tax return (Sec. 51[A][2][b], NIRC)'

Suggested answer: b. Ind'iaid.uq,t d'eriuing purelg trad.e, business or


Yes, because what is exempt from professional incorne, or rnixed' income. - Individual
ftIing are those indiuiduals
who haue total comperusation income not exceeding P60,000.00 with deriving mixed income, or purely business/professional
332 Itt,:vt r,;wr,:rt oN'l'nxn,rror.r
I nr r rMt,r,ttt t r W t t t t t tot,t rtt'tr I'l'nx t':;; :J: I:J
Alcotttrltttg Mll.lrrxlH trttrl Itt'riods

income, or other income must file his quarterly income


necessarily mean an ext:ntptiltn. likewise from the filing of'an income
tax returns (BIR Form 1700 Q), and an annual income tax
tax return (Garrison u. Court of Appeals, 187 SCRA 525)'
return (BIR Form 1700) as follows:
Period Due Date for Filins Return Domestie corporation and. resid.ent foreign
corporatiot '. - Domestic corporation and resident
Ql Return April 15 of same year
foreign corporation shall file quarterly corporate income tax
Q2 Return August 15 of same year
return (BIR Form 1702 Q) within 60 days after the end of
Q3 Return November 15 of same year
the calendar or fiscal quarter used, and annual corporate
Annual Return April 15 of the following year income tax return (BIR Form 1702) on or before the 15th
(9ec.74, NIRC)
day of the fourth month following the close of the calendar
To determine the taxable income to be reported in the year or fiscal year, as the case may be (Sec. 75,N/fiC)' The
quarterly tax returns, the gross income and deductions shall be deadlines for the filing ofthe tax returns by a corporation
computed on a cumulative basis. The gross income that shall using the calendar year are as follows:
be reported are those subject to tax at the graduated tax rates,
excluding capital gains and passive income subject to final taxes at Ql Return May 31 of same year
preferential tax rates. The income tax due every quarter shall be Q2 Return August 31 of same year
computed based on the cumulative taxable income for the quarter Q3 Return November 30 of same year
and any preceding quarters. The amount of income tax to be paid Annual Return April 15 of the following Year
shall be the balance of the income tax after deducting therefrom
the total quarterly income taxes previously paid and any taxes Cumulatiae cornputation of quarterly and' annual tax
withheld under the expanded withholding tax system from the liabitities. - computation of the quarterly and annual tax returns
items of gross income reported for the period (Sec. 5, Reu. Regs. of individuals (except those receiving purely compensation income)
No.7-93, January 4, 1993). and corporations shall be made on the cumulative basis; 1.e., gross
income and deductions are consolidated and the income tax liability
Bar Question (1991) is computed on the consolidated net income, and the income taxes
paid for the preceding quarter(s), including the creditable withholding
Robert Patterson is an American who first arrived in the iaxes withheld by the withholding agent(s) duly supported by
Philippines in L944 as a member of the U.S. Armed Forces that certificates of Taxes withheld, and excess tax paid in prior year(s)
liberated the Philippines. After the war he returned to the United carried over to the current taxable period, are credited against the
States but came back to the Philippines in 1958 and stayed here up consolidated income tax due.
to the present. He is presently employed in the United States Naval
Base, Olongapo City. For the year 1985, he earned US$10,856.00. The filing of corporate income tax returns and the payment of
Sometime in 1986, the District Revenue Office of the Bureau of tax could be done manually or electronically. The following taxpayers
Internal Revenue served him a notice, informing him that he did not have been required to e-file and e-pay: (a) large taxpayers notified
file his income tax return for the year 1985 and directing him to file by BIR; (b) Top 20,000 Corporations notified by BIR; (c) Top 5,000
said return in 10 days. He refused to file any return claiming that he Individuals notified by BIR; (d) taxpayers who wish to enter contract
is not a resident alien and is therefore not required to file any income with government; (e) corporations with paid-up capital of F10 million
tax return. Is Patterson's claim correct? o" *oi"; (f) pEZA-registered entities and those located within special
economic zones; and (g) government offices, insofar as remittance of
Suggested answer: withheld VAT and business tax is concerned(Reu. Regs. No. 1-2013,
January 23, 2013). Also, corporations with complete computetized
Pqtterson's claim is not correct. While Paterson is exempt accounting system, taxpayers joining public bidding pursuant to
from income tax, an exemption from income tax does not, howeuer, E.O. 398, a" imple*ented by Revenue Regulations No' 3-2005, and
INr r rMt,: Atttr Wt ttttot.ttltttr:'l'nxl':s ili|{-r
334 Ilt,:vt l:wr,:tr oN'l'nxn't'ror',r
t

Acrotttrl,itrg Mll.ltrxln rrrlrl lllri<xls

enterprises enjoying fi.scal incentives shall use the EFPS (electronic the date of sale with the llevcnuc District office where the principal
filing and paJrment system). Any manual filing of tax returns and./or place ofbusiness ofthe seller is located. Also, an annual capital gains
payment of taxes, other than those authorized by the BIR, such as iax return covering all transactions involving shares of stock (not
during system unavailability upon written notification by DCIR-ISG, subject to stock transaction tax) shalt be filed not later than the 15th
shall be considered as a violation under Section 275 of the Tax Code, day of the fourth month following the close of the taxable year.
subject to penalties (RMC 30-2013, April 8,2013).
b. Real property located in the Philippines
Bar Question (2001) The capital gains tax return shall be filed by the seller within
a) How ofben does a domestic corporation file income tax 30 days from the date of sale with the Revenue District office having
transferred is
return for income earned during a single taxable year? lurisdiction over the place where the property being
Explain the process. iocated (Sec .3,Reu. Rbgs. No.8-98, August 25, 1998)' This regulation
clarifies that the seller is the one responsible for the filing ofthe capital
b) What is the reason for such procedure? gains tax return, but there shall be no expanded withholding tax to be
ieducted from the gross selling price by the buyer-withholding agent.
Suggested answer: The certificate Authorizing Registration (cAR) shall be issued by the
a) A domestic corporation is required to file income tox returns RDO where the real property is located. Accordingly, even if the real
property is an ordinary asset (i.e., subject to the global tax system
four (4) times for income earned during a single taxable
year. Quarterly returns are required to be filed for the urra withholding tax), the proper tax return, together with
""putraed
the application for the issuance of cAR, shall be filed with the RDO
fi.rst three quarters uhere the corporation shall declare its
quarterly sunxnxary of gross income q,nd deductions on a where the real property is located.
cumulqtiue basis (Sec. 75, NIRC). Then, a final adjustment
return is required to be filed couering the totol taxable Passive lnvestment lncome
income for the entire year, cqlendar or fi.scal (Sec. 76, NIRC).
since the passive investment income is already subject to the
b) The reason for this procedure is to ensure the timeliness of final withholding tax, which tax is already withheld and deducted
collection to meet the budgetary needs of the gouernment. from the income payment and remitted to the BIR by the withholding
Likewise, it is designed to ease the burden on the tatcpayer agent-payor, by filing his/its withholding tax return, no other income
by prouiding it with an installment payment scheme, rather ti ""t ."tr is rlquired to be filed by the recipient of income covering
than requiring the payment of the tar on a lurnp-sum basis such income to the BIR.
after the end ofthe year. These passive investment incomes subject to the final tax at
preferentialiax rates will be shown as adjustments to net income of
Capital Gains Tax Returns ih" t""pry"r as shown in the audited financial statements prepared
a. Shares ofstock ofa dornestic corporation by the external auditors'

Listed. and. trad,ed in a local stock erchange - The


transaction is exempt from income tax, but subject to the L/2 of one
percent (I7o) stock transaction tax based on the gross selling price
which is required to be withheld and deducted by the stockbroker
handling the transaction and remitted to the BIR within five (5)
working days from the date of sale (Sec. 127[a], NIRC).
Unlisted., or listed but trad.ed outsid.e a local stock
excha.nge - The capital gains tax must be filed within 30 days from
lNr ilNilr ANlr Wt I tttlr tl,DlNrl'l'Axt';l :l:17
Wrl lrlrulrlrrrll'lirxls

Rcgulations N0. 2-9t1, clcrrrl.y provido that proof of remittance is the


responsibility ofthe withh0lding agent and not of the taxpayer-refund
claimant. It should be borne in mind by that payors of withholding
taxes are by themselves constituted as withholding agents of the
CIIAPTER XII BIR. The taxes they withhold are held in trust for the government.
WITHHOLDING TAXES In the event that the withholding agents commit fraud against the
government by not remitting the taxes so withheld, such act should not
prejudice respondent. Respondent has no control over the remittance
Lf ifru taxes withheld from its income by the withholding agent or
lmportance of Withholding Taxes payor who is the agent ofthe petitioner. The certificate of creditable
Withholding tax is a method of collecting income tax in advance bax Withheld issued by the withholding agents of the government
from the taxable income ofthe recipient of income. Thus, ifthe income are prima facie proof of actual payment by respondent-payee to the
of the recipient is exempt from income tax, no withholding of tax is gorr""rr-"rrt itself through said agents. We stress that the perbinent
required to be made by the payor of such income, which is constituted frovisions of law and the established jurisprudence evidently
as a withholding agent. demonstrate that there is no need for the claimant-respondent to
prove actual remittance by the withholding agent to the 1IR (C/R
The withholding of income tax on compensation income, on
certain income payments made to resident taxpayers, and on income
i. Ario,l'n Transmission Corpora,tion, GJ-. No' 779677, January
79,2077).
payments made to non-resident taxpayers is very important for all
taxpayers, because the obligation to withhold and remit the tax is
mandatory and prescribed by law. Also, expenses that are subject to Final Withholding Tax
withholding tax are disallowed by revenue officers as deductions from under the final withholding tax system, the amount of income
gross income of the taxpayer. tax withheld by the withholding agent is constituted as a full and
In the operation of the withholding tax system, the payee is the final payment of the income tax due from payee on the said income.
taxpayer, the person on whom the tax is imposed, while the payor, Instancls when the income is subject to final withholding taxes
a separate entity, acts no more than an agent of the government for are listed in Section 57(A) of the 1997 Tax Code' The liability for
the collection of the tax in order to ensure its payment. Obviously, payment of the tax rests primarily on the payor as a withholding
the amount thereby used to settle the tax liability is deemed sourced aglnt. Thus, in case of the withholding agent's failure to withhold
from the proceeds constitutive ofthe tax base. In an ad ualorem tax, tte tax or in case of under-withholding, the deficiency tax shall be
the tax paid or withheld is not deducted from the tax base, except collected from him. The payee is not required to file an income tax
when the law clearly spells out in defining the tax base (Bank of return for the particular income' nor is he liable for the payment of
America u. Commissioner, 234 SCRA 302). the tax (sec . 2.s7, Reu. Regs. No. 2-98). The income subjected to final
withholding tax is no longer reported in the income tax return of the
The duty to withhold is different from the duty to pay income individual tr"pry"t (BIR Form 1701) or corporate taxpayer (BIR
tax. Indeed, the revenue officers generally disallow the expenses Form 1702), but the final withholding tax deducted is not deductible
claimed as deductions from gross income, if no withholding of tax as from the ordinary income tax or regular corporate income tax of the
required by law or the regulations was withheld and remitted to the taxpayer.
BIR within the prescribed dates.
The finality of the withholding tax is limited only to the payee's
Rernittance of withheld tq.res is the responsibility of the income tax liability on the particular income. It does not extend to
withhold.ing agent-payor of income. Sections 57 and 58 of the the payee,s other tax liability on said income, such as when the said
-
1997 Tax Code, as implemented by Section 2.58.3(8) of Revenue income is further subject to a percentage tax, such as gross receipts
tax in the case of a bank.
336
338 Itt,:vtt,twr,;rr oN'l'AXn'r'roru I lrr lMt,; ANIr Wt't t tt tot,trtttr l'l'nxt'l:; ;t;tf)
W tl.ltlr,,kl rrr11'l'lrxcs

Since the withholding agents (who have control, custody, or Creditable Withholding Tax
receipt of the funds) deduct the withholding taxes when the income
payments are paid or payable, they are described as,,withholding 'lhe Secretary of'I"inance may, upon recommendation of the
taxes-at-source." ln other words, the tax is withheld and deducted commissioner, require the withholding of a tax on the items of income
at the source and time of payment. This is particularly significant payable to natural or juridical persons, residing in the Philippines,
where the payee is a non-resident individual or a non-resident foreign Ly puyot-"orporation/persons, at the rate ofnot less than one percent
corporation. dbLr*not more thanB2Vo thereof, which shall be credited against
the income tax liability of the taxpayer for the taxable yeat (sec.
Bar Question (2001) 57[B], NIRC).

What is meant by income subject to "final tax"? Give at least under the creditable withholding tax system, taxes withheld on
two examples of income of resident individuals that is subject to the certain income payments are intended to equal or at least approximate
final tax. the tax due of the payee on said income. The income recipient is still
required to file an irr"o*" tax return, as prescribed in Sections 51 and
Suggested answer: SZL1 the Tax Code, to report the income and./or pay the difference
between the tax withheld and the tax due on the income. Taxes
Income subject to final tax refers to an income wherein the tox withheld on income payments covered by the expanded withholding
due is fully collected through the withholding tar system. und,er this tax and compensation income are creditable from the ordinary income
procedure, the payor of the income withholds the tatc and remits it to tax of an individual or a corporation.
the gouernm.ent ds a final settlement of the income tax d.ue on said,
incorne. The recipient is no longer required to include the item of income There are three (3) types of creditable withholding taxes,
subjected to "final taJc" es part of his gross income in his income tuc namely: (1) expanded withholding tax on certain income payments
returns. Exarnples of income subject to finat tax are diuidend income, made ty private persons to resident taxpayers; (2) withholding tax
or, income for services done in the Philippines; and (3)
interest frorn bank deposits, royalties, etc. "o-p"tt.ation
withholding tax on money payments of the government'
Bar Question (2001)
Expanded Withholding Tax
Is a non-resident alien who is not engaged in trade or business or
in the exercise of profession in the Philippines but who derived rental An income payment is subject to the expanded withholding tax
income from the Philippines required to file an income tax return on if the following conditions concur:
April of the year following his receipt of said income? If not, why not? a. An expense is paid or payable by the taxpayer, which is
Explain your answer. income to the recipient thereof subject to income tax;

Suggested answer: b. The income is fixed or determinable at the time of


payment;
No. The income ta,x on all income deriued frorn philippine sources
by a non-resident alien who is not engaged in trad,e or business in the c. The income is one of the income payments listed in the
Philippines is withheld by the lessee as q, Fincll withhordirg Tax (sec. regulations that is subject to withholding tax, unless
57[A], NIRC). The gouernment cunnot require persons outsid.e of its the payor of the income is a Top 20,000 Corporation or
territorial jurisdiction to file a return; for this reason, the income tarc on Top 5,000 Individual, where the regulations require the
income deriued from within must be collected through the uithhotding wiihholdlng of the creditable income tax on purchases
to"tc system and thus relieue the recipient of the income the duty to
ofgoods or services from regular suppliers, regardless of
fite arnount, or from irregular suppliers, where the amount is
income tan returns (Sec. 51, NIRC).
F10,000 or more;
340 Itt,tv t t,:wt,:tr or.r'l'AxA'r'roN "''''"i;ii,',i,l,lilll; lli:'l';'''^-' ' :r4 I

d. The income recipient is a resident of the Philippines liable llred or duterminuble at the time of paymcnt
,I'he income fu

to income tax; and lncome is fixed when it is to be paid in amounts definitely


basis for
The payor-withholding agent is also a resident of the pre-determined. It is determinable, whenever there is a
An
Philippines. ialculation by which the amount to be paid may be ascertained'
it is paid from time
income is described as annual or periodical, when
Persons exempt from withhold.ing ta.x. The withholding of not at regular intervals' The income need not be
- to time, whether or
No' 2)'
creditable withholding tax shall not apply to income payments made puiJ unnoully if it is paid periodically (Sec' 799' Reu' Regs'
to the following:
The ineorne payrnent is listed' in the regulations as subject to
1. National government and its instrumentalities, including
provincial, city or municipal governments and barangays, uithhold'ing
the
except government-owned or controlled corporations ; Revenue Regulations No' 2-98, as amended' enumerates
withholding tax'
2. Persons enjoying exemption from payment of income taxes different income payments subject to the expanded

pursuant to the provisions ofany law, general or special, If the income payrnent is not one of those listed in the regulations'
payor is
such as but not limited to the following: then it is not subject to withholding tax, unless the income
a Top ZO,0O0 Coiporation or a Top 5,000 Individual' in which case'
a. Sales of real property by a corporation which is percent(lqo),for local purchase
It uppfl"uUle nWt rate shall be one
registered with and certified by HLURB or HUDCC of "goods or two percent (27o) for purchase of services'
as engaged in socialized housing project where the
selling price of the house and lot or only the lot does The recipient of incomp is a resid'ent of the Philippines
not exceed F400,000.00;
Theprovisionsoftheexpandedwithholdingtaxregulationsapply
b. Corporations registered with the BOI, PEZA, and only where the recipient of income is a resident of the
Philippines' The
to pay incornc ta'x"
SBMA, enjoying exemption from income tax under term,?esid.en f,,, seems to refer to a person "liabl'e
8,O.226, R.A. 7916, and R.A. 7227 , respectively; made by the withholding agent' The tax
on the income payment to be
status of the withholding agent-payor of income is
immaterial' Thus'
c. Corporations, which are exempt from income tax
whether or not the payor of itt--" is a corporation or
association
under Section 30 ofthe Tax Code, such as GSIS, SSS, or registered with the
orguttir"a under tft" Uws of the Philippines
and PHIC; or not the payor
se"curities and Exchange commission, or whether
d. General professional partnerships; of income is taxable or"exempt from tax, it has
the responsibility of
e. Joint ventures or consortium formed for the purpose withholding and remitting the proper tax'
of undertaking construction projects or engaging If the recipient of the income is a non-resident taxpayer, the
tax, not to
in petroleum, coal, geothermal and other energy income puy-"rri shall be subject to the final withholding
operations pursuant to an operating or consortium the creditable withholding tax discussed above'
agreement under a service contract with the
government; and The payor-withhotd,ing agent is resid'ent of the
Philippines
of tax
Revenues derived from carriage of persons, cargo The power of the government to require the withholding
or mail originating from the Philippines up to final extendsonlytotaxpaye-rswhoareresiding(j.e.,doingbusinesswithin
destination, paid to international shipping line or the territorial jurisdiction of the Philippines). Thus, non-resident
through its shipping agent in the Philippines, subject foreign and foreign embassies in the Philippines may not
"o"portiions agents of the
to the 2.57o final on Gross Philippines Billings (81fi be constituted nor be compelled to act as withholding
Ruling No. DA-204-2006 and 321-2008, December 12, go\ru"n-unt, because in case of non-compliance with their obligations
2008).
342 Itt,lv t t,;wt,;tt or.r'l'nx,r,uoN
INr oMt' ANtt Wt tttttot,trttttl 'l'nxt';s :t4:t
Wrl lrltoklrrrg'l'rrxls

to withhold, the Philippines may not enforce its tax laws beyond its
territorial jurisdictions.
2. IJnder It.A. 7641 (th'ose receiue'd from employers
w ithou.t. u,rt.y ntli,re atent plan) :

Bar Question (2000) a. I'hose receiued under existing collectiue


bargaining agreement and other agreements
To start a business of his own, Mr. Mario de Guzman opted for are exemPt; and
an early retirement from a private company after ten (10) years of
service. Pursuant to the company's qualified and approved private b. In the absence of retirement plan or agreement
retirement benefit plan, he was paid his retirement benefit which providing for retirement benefits, the benefits are
was subjected to withholding tax. excluded from gross income and exempt frorn
income tax if: (i) retiring employee must haue
Is the employer correct in withholding the tax? Explain. serued at least fiue (5) years; and (ii) that he is
under what conditions are retirement benefits received by not less than 60 years of age but not more than
officials and employees of private firms excluded from gross income 65.
and exempt from taxation?
Withholding Agent
Suggested answer:
The following persons are constituted as withholding agents:
(a) It depends. An employee retiring under a cornpany's 1. In general, anyjuridical person, whether or not engaged
qualified and priuate retirement plan can only be exempt in trade or business;
from incorne tax on his retirement benefits if the followiig
requisites are met: (1) that the retiring employee must 2. An individual, with respect to payments made in connection
haue been in seruice of the same employer for at least 10 with his trade or business. However, insofar as taxable
years; (2) that he is not less than S0 years of age at the sale, exchange or transfer of real property is concerned,
time of retirement; q.nd (S) the benefit is auailed of onty individual buyers who are not engaged in trade or business
once. In the instant case, there is no mention whether the are also constituted as withholding agents; and
employee has lihewise compiled tuith requisites number
(2) and (3).
3. All government offices, including government-owned or
-controlled corporations, as well as provincial, city, and
(b) The conditions to be met in order that retirement benefits municipal governments and barangays.
receiued by officials and employees of priuate firms are
excluded from gross income and exempt from taaation are Time to Withhold and Remit Tax
as follows:
Withholding tax shall be deducted and withheld by the
1. Under RA.4977 (those receiued under a redsonable withholding agent when the income payment is paid or payable or
priuate benefit plan): accrued (Reu. Regs. No. 2-98, as q,mended by Sec. 4, Reu. Regs' No'
12-2001, September 7, 2001), or the income payment is accrued or
a. the retiring official or employee must haue been
recorded as an expense or asset, whichever is applicable, in the
in seruice of the same employer for at least l0
payor's books, whichever comes first. The term "payable" refers
years;
lo the date the obligation becomes due, demandable or legally
b. that he is not less than S0 years of age at the time enforceable.
of retirement; and
Where the income is not yet paid or payable but the same has
c. that the benefit is auailed ofonly once. been recorded as an expense or asset, whichever is applicable, in the
payor,s books, the obligation to withhold shall arise in the last month
344 li,t,:vt r,rwt,rrr oN'l',rxA,t,ror.,t IN( r'Nil,,\Ntr Wl I llllol,l!lNr l'l'AIl'lil il4lt
Wtl lrlroLltrrli'l'rrxcs

of the return period in which the same is claimed as an expense or Consequences of Non-Remittance of Tax Withheld by the
amortized for tax purposes. Withholding Agent With Respect to the Payee of lncome
Time to Credit Expanded Withholding Tax From lncome should the duly constituted withholding agent of the government
fail to remit the amount of tax withheld to the BIR, the payee of
Tax the income from whom the withholding tax was deducted may still
The amount of the expanded withholding tax as shown in BIR credit the amount withheld from his income tax liability for the year.
Form 2307 (certificate of creditable Tax withheld) shall be claimed The act of the agent (withholding agent) is the act of the principal
by the taxpayer-seller ofgoods or services as tax credit against hiV (government).
its income tax liability for the quarter or year, which should be in Proof of actual remittance by the respondent is not needed in
the same taxable year when the corresponding sales or revenues order to prove withholding and remittance of taxes to petitioner.
were reported in the annual income tax return. Where no BIR Form
Section 2.5S.3(B) of Revenue Regulations No. 2-98 clearly provides
2307 was issued by the buyer thereofin the year ofsale despite the
that proof of remittance is the responsibility of the withholding agent
withholding of the creditable income tax as shown in the journal
and not of the taxpayer-refund claimant. It should be borne in mind
voucher, secondary documentary evidence such thejournal voucher
by the petitioner that payors of withholding taxes are by themselves
and the check, evidencing payment and deduction of withholding tax,
constituted as withholding agents of the BIR. The taxes they withhold
in lieu of BIR Form 2307, may be submitted by the seller of goods
are held in trust for the government. In the event that the withholding
or services in support of the tax credit. However, where the buyer
agents commit fraud against the government by not remitting the
issued the BIR Form 2307 upon payment of the selling price in the
tixes so withheld, such act should not prejudice herein respondent
succeeding year for credit sales, such act does not conform with the
who has been duly withhetd taxes by the withholding agents acting
regulation, and the late withholding and remittance of the tax has
under government authority. Moreover, pursuant to Sections 57 and
the effect of disallowance of the business expense or deduction from
5g of the NIRC of 1997, as amended, the withholding of Income tax
the gross income for the year, and the BIR may still pursue the and the remittance thereof to the BIR is the responsibility of the payor
assessment and collection of the deficiency creditable withholding tax
and not the payee. Therefore, respondent, x x x has no control over the
that should have been withheld and remitted to the BIR(Reu. Regs.
remittance ortn" taxes withheld from its income by the withholding
No. 12-2013, July 12,2013).
agent or payor who is the agent of the petitioner. The certificates of
creditable Tax withheld at source issued by the withholding agents
Consequences of Non-Withholding of Tax By the payor of the government are prima facie proof of actual payment by herein
of lncome responlent-payee to the government itself through said agents.
Any income pa5rment which is otherwise deductible under the
we stress that the pertinent provisions of law and the established
jurisprudence evidently demonstrate that there is no need for the
Tax Code shall be allowed as a deduction from the payor,s gross income
claimant, respondent in this case, to prove actual remittance by the
only if it is shown that the income tax required to be withheld has withholding agent (payor) to the BIR (CIE a. Asian Tlansmission
been paid to the Bureau in accordance with sections bz and b8 ofthe
Tax Code.
Corporation, G.R. No. 779677, January 19, 20L7)'

No deduction will also be allowed, notwithstanding payments Bases of Withholding Tax


of withholding tax at the time of the audit investigation or As a general
reinvestigation/reconsideration in cases where no withholding of
Withhotd.ing tax based. on gross income' -
rule, the gross amount of income payment shall be used as basis in
tax was made in accordance with Sections b7 and b8 of the Tax Code
( Sec. 2.58.5 of Rea. Reg s. No. 2 -98, as am.end.ed. by Rea. Reg
computing the expanded withholding tax. However, the following are
s. No. the exceptlons to the general rule where the basis of the withholding
12-2013). Revenue Regulations No. 12-2018 will apply on tax audit
tax is nol just the income but may include return of capital, which is
for the year 20LB (nMC No.63-2013, September 26,201J).
not subject to income tax:
st
346 rtt'tt r Wt t t tt tot,t rtNt i'l'nxt':l;
Ittr otUt, :147
Itr,:vrr,:wt,ttr oru'l'nxA'tror.r
Wtl lrlroLlrrtli'l'rrxcH

1. Gross payments to resident individuals c. Where thtl strlkrry't,rtrttslilrrlr is exempt from


and corporate cinematographic film creditable withholding tax in accordance with
owners, lessors or distributors \Vo Section 2.57.5 ol'[tcv. Regs. No. 2-98 - Exempt
-
2. Gross payments to contractors 27o Imposing the graduated withholding tax rates on the gross
- selling ptice or fair market value, whichever is higher, on the
3. Gross selling price paid to sellers of
sale o1. real property classified as ordinary asset by real estate
real property classified as ordinary
dealers, tpp"ut. to be beyond the authority granted by law-to the
asset
- 1.57o - 67o commissioner of Internal Revenue. while the tax rates are within the
4. Gross amounts paid by any credit card range prescribed in section 57 of the 1997 Tax code, the mandated
company to any business entity ta" bas" upon which the tax rates are applied is the "gloss income,"
representing sale ofgoods or services Il2Vo ofLVo which rn"un. the amount after deducting the cost or adjusted basis
- ofthe real property sold or exchanged. Review by the BIR ofthe tax
5. Income payments made any of the Top
rates or evln the tax base is in order, so as to remove the inequity
10,000 corporations to their regular
against real estate dealers.
local suppliers of
a. goods _ IVo Withholding Tax Rates
b. services - 2Vo The withholding tax rates applied on income payments liable
6. fncome payments by the government to income tax are as follows:
on their purchases ofgoods from 1. Professional fees for services rendered by
local suppliers - 2Vo individuals, including professional real
estate practitioners (brokers, appraisers,
Withholding ta* based. on grtss selling price or fair market and consultants)l as well as professional
aalue, whicheaer is higher. A creditable withholding tax based entertainers and athletes, and directors:
-
on the gross selling pnce/total amount of consideration or the fair
market value, whichever is higher, paid to the seiler/owner for the If gross income for current yearexceeds
sale, transfer or exchange ofreal property, other than capital asset, F720,000.00, or professional does not file l57o
shall be imposed upon the withholding agenvbuyer, in accordance
-
Sworn Declaration for first semester of the
with the following schedule: year with BIR, regardless of gross income.
a. Upon the following values of real property, where the If gross income for current year does not
IOTo
seller/transferor is habitually engaged in the real estate F720,000.00 -
business as per proof of registration with the HLURB or 2. Rental income
HUDCC: Real properties - 57o
Personal properties i%o
With a selling price of F500,000.00 or less I.|Vo -
- Poles, satellites and transmission facilities - 57o
With a selling price of more than Billboards - \Vo
F500,000.00 but not more than F2,000,000.00
- B.OVo
3. Gross payments to resident individuals
With a selling price of more than p2,000,000.00 and corporate cinematographic film owners,
- 5.OVo
b. Where the seller/transferor is not lessors or distributors - 1Vo

habitually engaged in the real estate business - 6.0Vo


lSee Revenue Regulations No. 10-2013, June 6, 2015
348 Itt,:v t t,:wt,:lt or.r'l'AxA,rror.r
'"'''"fili,',1,1,:;;ll; llil):;'' ^-'" :t4e

4. Gross payments to certain contractors


- 20r, venue for filing wlthholding tax returns and time for
5. Income distribution to beneficiaries l5o/o payment of tax
-
6. Income payments to certain brokers, includ- creditable withholding taxes deducted and withheld by the
ing real estate brokers who did not pass the withholding agenvbuyer shall generally be filed with the Authorized
Board examination, and agents IOTo Agent Ban[ located within the principal place of business of the
- *itt t otaitrg agent. However, expanded withholding taxes on the
ry
,. fncome payments to partners of general
professional partnerships: sale, transfer or exchange of real property classified as, ordinary
r"r"t, shall be paid by thJwithholding agenVbuyer upon filing of the
Ifgross income for current year exceeds return with the authorized agent bank located within the Revenue
F720,000.00
- ISVo District office having jurisdiction over the place where the property
If gross income for current year does not being transferred is located within 1-0 days following the end of the
However, taxes withheld
exceed P720,000.00 LIVo -ort-h in which the transaction occurred. 15 of the following
- in December shall be filed on or before January
8. Gross additional payments to government year (Reu. Regs. No. 8-98, August 25, 1998)'
personnel from importers, shipping and
airline companies, or their agents
- L57o

9. Commissions of independent and exclusive


distributors, medicaVtechnical and sales
representative, and marketing agents of
multi-level marketing companies LIVo
-
10. Tolling fees paid to refineries i%o
-
11. Income payments made by pre-need
companies to funeral parlor LVo
-
t2. Payments made to embalmers l7o
-
13. One-half of gross payments made by any
credit card company in the Philippines * 2Vo

14. Income payments made by any Top 20,000


Corporation
Supplier ofgoods LVo
-
Supplier of services 27o
-
15. Income payments made to suppliers of
agricultural products LVo
-
16. Income pa5rments on purchases of minerals,
mineral products and quarry resources t0Vo
-
t7. Political contributions to candidates |Vo
-
' 'i,:;lii,i ,1,11
;'; ,r-r I

2. A transl'(]r is (tttsu, being testamentary in nature'


tttttrl
should be cnrbodied in a last will and testament (Art'
728, Ciuil Cocle).It is not a contract; it is a legacy' If not
embodied in a valid will, the donation is void
(Puig a'
PART III Pefi.aflorid'a, 76 SCRA 736)'

IRANSFER TAIGS S.Thetransferconveysnotitleorownershiptothetransferee


before the death ofthe transferor, or the transferor retains
the ownership, full or naked, of the property conveyed; it
CIIAPIER XIII
is the donor's death that determines the acquisition of, or
ESTATE TAX the right to the property. In donation inter uiuos, its effect
is produced while the donor is still alive'
4. The transfer is revocable before the transferor's death
Transfer Taxes and revocability may be provided indirectly by means of
*Transfer t@xes" are
taxes imposed upon the gratuitous the reserved power in the donor to dispose of the property
disposition of private property. Under the Tax code, transfer taxes conveyed.
refer to: 5. The transfer would be void if the transferor survived the
1. Estate tax (donation transferee, in the case of donation mortis causa'
mortis cq.usq) _ Tax levied on
the transmission of properties from a d.ecedent to his 6. Donations, being in the form of a will, are never accepted
heirs. Estate tax is the tax on the privilege to transmit bythedoneesduringthedonor's]ifetime.Acceptanceisa
property at death and on certain transfers which are requirementfordonationsinterujuos.Wherethedonation
made the equivalent of testamentary dispositions by tookeffectimmediatelyuponthedonee'sacceptance
the statute. thereof and it was subject to a resolutory condition that
2. Donor's tax (donation inter uiuos) Tax levied on the the donation would be revoked if the donee did not fulfill
- person (donor)
transmission of properties from a living certain conditions, the donationisinter uiuos (Bonsato rt'
to Court of APPeals, gS Phil' 48L)'
another living person (donee).

Distinctions between Donatio n inter vivosand Donation Bar Question (1994)


mortis causa (1) What is the principle of mobilia sequuntur personam?
1. A donation mortis causq is made in consideration of (2) Are donations inter uiuos and donations mortis cdusa
death, without the donor's intention to lose the thing subject to estate taxes?
conveyed or its free disposal in case of survival, while a
donation inter uiuos is made without such consideration Suggested answer:
but out of the donor's generosity (Balaqui u. Dongso, 58 (1) Principle of m.obitia sequuntur personam refgrs to the
Phil.673), although the subject matter is not delivered of intangible personal property
at once, or the delivery is to be madepos/ mortern,which 'g"n"riuy that taxation
principle
follows the residence or domicile of the
ou)ner
is a simple matter of form and does not change the nature
thereof-
ofthe act.

350
352 'l'rxn,r,r,lr I'ttlNrrt' t,ttt'l',rxt':li ill-ril
ltr,:vrr,rwr,rrr oru
l,lrl.r rl.r" l'tr x

(2) Donations inter uiuos are subject to donot's gift tax (St:c. Il'the Net EstuLc ts
91[a], Tax Code) while donations mortis causo are sub.ject
to estate tar (Sec. 77, Tax Code). Howeuer, donations inter not The tax
But Of the excess
uiuos constituted lifetime lihe transfers in contemplation of Over over shall be Plus over
deqth or reuocqble transfers (Sec. ZStbl and [c], Tax Code) P 200,000 ExemPt
may be taxed for estate tax purposes, the theory being that F 200,000 500,000 O |Vo F 200'000
the transferor's control thereon ertends up to the time of his 5oo;ooo 2,ooo,ooo F 15,ooo 87o 5oo,ooo
death. 2,000;000 5,000,000 135,000 llTo 2,000,000
S,OOO,OOO 10,000,000 465,000 lSVo 5'000'000
Estate Tax fO,OOO,OOO and over 1,215,000 20Vo 10,000'000

Nature and Object of Estate Tax


Justification of Estate Tax
Estate tax is laid neither on the property nor on the transferor
or the transferee. It is an excise tax or privilege tax and its object is
l.Benefit.receivedtheory.-(Seediscussionson..benefit-
received theory" in income taxation);
to tax the shifting of economic benefits and enjoyment of property
from the dead to the living (Gregg a. Cornmissioner, 3IS Mass. 2.PrivilegetheoryorStatepartnershiptheory._Succession
704). to the property of a deceased person is not a fundamental
right and consLquently, the legislature can constitutionally
Taxation of the transmission of the decedent's estate and
donations made by,persons, natural or juridical, whether citizens
burdensuchsuccessionwithatax(Stebbinsu'Rilly,268
or aliens, residents or non-residents shall be governed by these us 137);
regulationsl promulgated to implement the provisions of R.A. g424. 3. Ability to pay theory. - Those who have more properties
For purposes of these regulations, the provisions of the Family to transfei to their heirs upon death shall pay more estate
Code of the Philippines (E.O. 209) which took effect on August 3, taxes.Anothernameorconceptsimilartotheabilitytopay
1988 shall govern the property relations between husband and wife theory is the redistribution of wealth theory' The taxes
whose marriage was celebrated on or after such date. For marriages paid by rich people are programmed for disbursement by
celebrated prior to the effectivity of the Family code of the philippines, borrgr"r. more for the benefit of the poor in terms of social
the civil code of the Philippines shall govern the property relations services, education, health, etc'
between husband and wife in relation to the pertinent provisions of
the Family Code. The term "d.eced.ent" refers to a deceased person who is the
source ofthe hereditary property or estate which is to be distributed.
He is called "testq,tor" oi;tesiatrin," 7f he/she left a will' antd"intestate,"
Rates of Estate Tax
if he/she left no will. i

The transfer ofthe net estate ofevery decedent, whether resident


or non-resident of the Philippines, as determined in accordance
"Inheritance" refers to the mass of proirerty, rights' and
with the code, shall be subject to the estate tax. The entire value obligations of a person existing at the time of his death and which
of the net estate is divided into brackets and each rate is imposed are iot extinguished by his death (Art. 776, NCC), including those
on the corresponding bracket. Below is a table showing the tax on which have a-ccrued from that time (Art.781, NCC). Rights which
each bracket and the cumulative total tax for the entire net estate, are extinguished by death because they are intransmissible by
pursuant to the rates provided in the Code. their natrire and porpotu (e.g., right of usufruct, right of personal
easement, or right to tife annuity), not by contractual stipulation,
are also called purely personal rights because are inseparable from
rRev. Regs. No. 02-03, December
16,2002 amended Rev. Regs. No. 17-93. their holder or owner. They are not included in the inheritance.
354 Itr.:vr r,:wr,:rt ou'l'Axn,r'roN 'l'ttnrurtl, t,:tt'l'nxt'lr i I l-r l-r

l,lrrl.rrlr.'lir x

For purposes of computing the estate tax, only property and rights
Residence
existing at the time of death shall be included in the grLss estate of
the decedent. "Reeid,ence" refers to the permanent home, the place to which
whenever absent, for business oi pleasure, one intends to return' and
Reasons for Taxability of Transfers of property depends on facts and circumstances, in the sense that disclose intent
(ioro u.Tan cort e, 100 phil,32L).kis, therefore, not necessarily
The dominant purpose of the law is to reach such transfers the actual place of residence. Thus, a citizen who went abroad for
which are really substitutes for testamentary dispositions and thus operation in a prestigious hospital and stayed there for orre month
prevent the evasion of the estate tax (U.5. u. Wells, 2gJ U.S. 102). but unfortunately died therein is still a resident of the Philippines
In most of these transfers, the property remains substantially that for estate tax PurPoses.
of the transferor during his lifetime notwithstanding the transfer as
he still retains either the beneficial ownership or naked title to the
property. Hence, the transfer is essentially similar in respect to a
Gross Estate
transmission by testacy or intestacy upon the death ofthe decedent.
The transfer by inter uluos must be absorute and outright with no time oilis ieath shall be included in his gross estate. Where the
strings attached whatsoever by the donor. A transfer ofproperty by a"""a"rrt h.d, before his death, relinquished his interest in property,
trust or donation is not consummate until put beyond recall TBurnet he could not be deemed to have transmitted any interest in such
u. Guggehein, 288 U.S. 2BO). property at his death (Crooks a. Hasselson,282 U'S' 55)'
The value ofthe gross estate ofthe decedent shall be determined
Death is the Generating Source of power by including the value at the time of death of all property, real or
(Sec' 85' NIRC) '
Estate tax laws rest in their essence upon the principle that fl"rotul, tangiUte or intangible, wherever situated
death of an individual is the generating source from which the taxing The properbies includible in the gross estate of the decedent
power takes its being, and that it is the power to transmit or the and
would d"plrrd on whether or not the decedent is a citizen or alien
transmission from the dead to the living on which the tax is more whether or not the alien decedent is a resident of the Philippines at
immediatelybased (Lorenzo u. posad.c,s,64 phil.Bd8). No manual the time of his death. Thus,
transfer ofthe property to the heirs is required, but the source and
direction ofthe property are under the control ofthe probate court 1. Citizen and resident alien decedent:
and the transfer is not effected until its recipients are determined (a) Real property wherever situated;
and title is lodged in them (BS CJS 990).
(b) Tangible personal property wherever situated;
Law and Market Value at the Time of Death is Applied (c) Intangible personal property wherever situated'
The law in force at the time of death of the decedent governs. 2. Non'resident alien decedent: (
The taxpayer cannot foresee and ought not to be reqiired to (a) ,
ReaI property situated in the Philippines
guess the outcome of pending measures. The tax may be made
retroactive in its operation, but legislative intent that a tax statute (b) Tangible personal property situated in the Philippines;
should operate retroactively should be perfectly clear (Lorenzo u. (c) Intangible personal property with a sllus in the
Posad.as, ibid).
Philippines, unless exempted on the basis of
The fair market value at the time of death of properties left by reciProcitY ( Sec. 104, NIRC)'
the decedent to his/her heirs shall be used in determining the amount
The estate of a d'eceased person is a juridical entity that has
of his gross estate (Sec. BS, NIRO.
a personality of its own. Judgment in a case binds only the parties
356 Itt,;vtt,rwt,llr oru'l'nx,t'r'row 'l'ttnrultt, t,;tt 'l'nxt':s illl7
l,irrlrrlr,'l\rx

therein and not the estate of a deceased person which might have t. Judicial wh('n it is mude by the court in an ordinary
been represented at one time by one of the parties (Nazareno a. action fbr- partition or in the course of administration
Court of Appeals,343 SCRA 63Z t2OOOl). proceedings (Rules 69-90, Rules of Court); or
2. Extrajudicial when it is made by the decedent himself
Settlement of Estate by an act inter -uiuos or by will (Art. 1080, NCC), or by a
The estate left by a decedent may be settled and distributed: third person entrusted by the decedent (Art. 1081, NCC),
or by the heirs themselves who are all of age and there are
By extra-judicial settlement among the heirs where there
no debts (Sec. 7, Rule 74, Rules of Court).
are no debts or claims against the estate (RuIe 74, Sec. 7,
Rules of Court). Where there are two (2) or more heirs, the whole estate of the
decedent is, before its partition, owned in common by such heirs'
b. By ordinary judicial action for partition, when the heirs
subject to the payment of debts of the deceased (Art. 1078, NCC).
cannot come to an extra-judicial settlenent (ibid.); and
From the moment of death of the decedent, the heir, If there is only
c. By judicial settlemerrt, which may be summary, in which one, becomes the sole owner of the estate (Art. 777, NCC). There is
case no administrator is appointed to represent the estate, no need for judicial declaration of his heirship. An affidavit of extra-
or regular, in which case an administrator is appointed judicial declaration suffices to settle the entire ofthe decedent(Sec.7,
(Sec. 2, Rules of Court; Villocino u. Doyon, 65 SCRA 460 Rule 74, Rules of Court; Cabuyao u. Caagbay, 95 Phil. 61.4 t 19541) .
t1e75l). Pending actual partition, the co-heirs succeeding to the estate are
co-owners lhereof (Art. 484, NCC), with respect to the part or portion
The "executor" is the person appointed by the testator in his
which might be adjudicated to each of them, subject to the payment of
will to carry out its provisions. Upon the probate of the will (Art.
debts of the deceased. Until a partition is made, the respective share
838, NCC), the probate court appoints him, unless he is unfit to
ofeach heir cannot be determined and every heir exercises, together
discharge the trust as such (Sec.4, Rule 80, Rules of Court). The
"administrator" is the person appointed by the probate court to with the others, joint ownership over t}ne pro indiuiso property, in
addition to his use and enjoyment thereof with no other limitation
administer the estate of a person who dies intestate, or testate
than that he shall not injure the interests of his co-heirs or co-owners.
without having appointed an executor; or where the person is unfit
or refuses to act as such; or where the will was void and not allowed
to probate (Art.881, NCC). Bar Question (2008)
Jose Cerna, Filipino citizen, married to Maria Cerna, died in
Partition and Distribution of Estate a vehicular accident in NLEX on JuIy 10,2007 . The spouses owned,
among others a 10O-hectare agricultural land in Sta. Rosa, Laguna
Partition is the separation, division and assignment of a thing
held in common among those to whom it may belong. The thing itself
with current fair market value of ?20 million, which was subject
matter of a Joint Venture Agreement about to be implemented with
may be divided, or its value (Art. 102g, NCC). The idea of partition
Star Land Corporation (SLC), a well-known real estate development
involves not only the setting apart and division of a thing owned in
company. He bought the said real property for P2 million fifty [50]
common but also the assignment or allotment of the respective shares
years ago. On January 5, 2008, the administrator of the estate
or parts of the heirs, so that they may enjoy and possess the same
and SLC jointly announced their big plans to start conversion and
separately and exclusively. It is the purpose ofpartition to put an
development of the agricultural lands in Sta. Rosa, Laguna into first-
end to co-ownership. It seeks a severance ofthe individual interest
class residential and commercial centers. As a result, the prices of
of each heir, vesting in each a full ownership in specific property and
giving to each one the right to enjoy his estate without supervision real properties in the locality have doubled. The administrator of the
Estate ofJose Cernan filed the estate tax return on January 9, 2008,
or interference from the others (Confessor v. Pelayo, 1 SCRA gl7
by including in the gross estate the real property at F2 million' After
tL9611). Partition of the estate may be:
9 months, the BIR issued deficiency estate tax assessment; by valuing
358 Itr:vrt:wr.:rr r x'I'exattor.r 'l'rrnrulr.t,rtr' l'nx t,ilt ill-r9
l,lrl rrlr"l'rr x

the real property at ?40 million. (a) Is the BIR correct in valuing the a proportiottttl,c sJrttrc in property, only the value of such
real property at P40 million? (b) If you disagree, what is the correct share has to lrc includcd in the gross estate. Ifhe is entitled
value to be used for estate tax purposes? only to the use ol'the property, it is the value of that use
that has to be included.
Suggested answers:
Examples:
a. No, the BIR is wrongin ualuing the req.l property at ?40
million. The ?40 million represents the ualue of the real a. Dividends declared by a corporation before death of
property in 2008, after the announcentent by the joint the stockholder although paid after death;
uenture partners thot deuelopment plans would be pursued b. Partnership profits even if paid after death of the
in the area. The ualue of the gross estate of the decedent partner;
shall be determined by including the ualue qt the tim.e of
death in 2007 ofall property, real or personal, tangible or c. Proceeds of a life insurance policy payable to a
intangible, whereuer situated (Sec. 85, NIRC). designated revocable beneficiary;

b. Since the fair rnarket ualue of the real property at the d. Right of usufruct.
time of death of Mr. Jose Cerna in 2007 was fl,O million, 3. Property or interest transferred.
this rnorhet ualue should be the one used for purposes of
determining the gross estate. Whateuer is the uq,lue of the Bar Question (2005)
property after his death-whether it increases or decreases
-is of no moment for estate tax purposes. Ralph Donald, an American citizen, was a top executive of a
U.S. company in the Philippines until he retired in 1999. He came
Decedent's Gross Estate to like the Philippines so much that following his retirement, he
decided to spend the rest of his life in the country. He applied for
Decedent's interest;
1.
and was granted a permanent resident status the following year' In
2. Transfers in contemplation of death; the spring of 2004, while vacationing in Orlando, Florida, USA, he
suffered a heart attack and died. At the time of his death, he left the
3. Revocable transfers; following properties: (a) bank deposits with Citibank Makati and
4. Property passing under general power of appointment; Citibank Orlando, Florida; (b) a resthouse in Orlando, Florida; (c)
a condominium unit in Makati; (d) shares of stock in the Philippine
5. Proceeds of life insurance; subsidiary of the U.S. Company where he worked; (e) shares of stock
6. Prior interests; in San Miguel Corp. and PLDT; (0 shares of stock in Disney World in
Florida; (g) U.S. treasury bonds; and (h) proceeds from a life insurance
7. Tlansfers for insufficient consideration; policy issued by a U.S. corporation.
8. Capital of the surviving spouse (9ec.85, NIRC). Which of the foregoing assets shall be included in the taxable
gross estate in the Philippines? Explain.
Kinds of Property Embraced Under Decedent's Interest:
1. Property owned. - The decedent possesses all the Suggested answer:
attributes of ownership. Being resident of the Philippines at the time of his death, the
q.
gross estate of Ratph Donald shall include q'll his property, real or
2. Interest in property possessed.
- The law contemplates any
personal, tangible or intangible, whereuer situq.ted at the time of his
interest or right in the nature ofproperby, but less than
d.eath (Sec. 85, NIRC). Thus, the following shall be included in his
title having value or capable ofbeing valued, transferred
by the decedent at his death. If the decedent owns only taxable gross estate in the Philippines:
360 oN'l'nxlr,ron ,(i
ltr,:vrr,rwr,rH
"'i]lii:';i',i ,l,ii'r I

a. bank deposits with Citibank Mah,otiand Citibanh Orlqndo, l3uilding at Pasig, Mc[ro Mrttrilrr rrrrd a house and lot in Los Angeles,
Florida California.
b. a resthouse in Orlando, Florida What assets shall be included in the Estate Tax Return to be
c. q condominium unit in Mahati filed with the BIR?
d. shares of stoch in the Philippine subsidiary of the U.S.
Suggested answer:
com.pany
e. sha.res in San Miguel Corp. and
Att of Mr. Robertson's assets, consisting of 10,000 shares in the
PLDT
Meralco, q, condominium unit in' Pasig, and his house and lot in Los
f. shares of stoch in Disney world in Florida Angeles. California, are taxable. The properties of a resident alien
g. decedent like Mr. Robertson are taxable whereuer situated (Secs. 77,
U.S. treasury bonds
78 and 98, NIRC).
The proceeds from a life insurance policy issued by a U.S.
corporation is included as part of the gross estate of Ralph Donald, lntangible personal property
ifthe designation ofthe beneficiary is revocable or irrespective ofthe
nature of the designation, if the designated beneficiary is either the As a general rule, the situs of an intangible personal property is
estate ofthe deceased, his executor or administrator. Ifthe designated at the domicile or residence of the owner (51 Am. Jur. 494-495). This
beneficiary is other than the estate, executor or administrator and is the known as the principle of "rnobilia sequuntur personarn."
the designation is irrevocable, the proceeds shall not form part ofhis The principle, however, is not controlling (a) when it is inconsistent
gross estate (Sec.85[E], NIRC). with express provisions of statute, or (b) when justice does not demand
that it should be, as when the property has in fact a situs elsewhere
( Collector a. Fisher, 1 SCRA 9il. Bonds, mortgages and certifi cates
Bar Question (1994)
of stock are taxable at the place where they are physically located
Jose Ortiz owns 100 hectares of agricultural land planted (Burnet u. Broohs,288 U.5.378).
to coconut trees. He died on May 30, 1994. Prior to his death, the
government, by operation of law, acquired under the Comprehensive Under the Tax Code, the following intangible personal properties
Agrarian Reform Law all his agricultural lands except five (b) have situs in the Philippines:
hectares. Upon the death of Orliz, his widow asked you how she will 1. Franchise which must be exercised in the Philippines;
consider the 100 hectares ofagricultural land in the preparation of
the estate tax return. What advice will you give her? 2. Shares, obligations, or bonds issued by any corporation
or sociedu.d anonirna organized or constituted in the
Suggested answer: Philippines in accordance with its laws;

The 100 hectares of land, which Jose Ortiz owned but which 3. Shares, obligations, or bonds issued by any foreign
prior to his death on May 30, 1994 were acquired by the gouernment corporation 857o of the business of which is located in the
under CARP, ctre no longer part of his taxable gross estate, with the Philippines;
exception of the remaining fiue (5) hectqres which under Section TS(a) 4. Shares, obligations, or bonds issued by any foreign
of the Tar Code stiil forms part of "decedenf,s interest." corporation if such shares, obligations or bonds have
acquired a business situs (i.e., they are used in furtherance
Bar Question (1994) of its business in the Philippines by the foreign corporation)
Cliff Robertson, an American citizen, was a permanent in the Philippines;
resident of the Philippines. He died in Miami, Florida. He left 5. Shares or rights in partnership, business or industry
10,000 shares of Meralco, a condominium unit at the Twin Towers established in the Philippines (Sec' 104, NIRC).
362 ll,r':vr r,:wr':rt oN'l'AxA'f toN 'l'tr,tl.tr tt, t,:tt'l'nx t,ut :J6{J
l,lHl rr l,r"li r x

Reciprocal Exemption as to lntangible Personal Property contemplation of immincnl clouth to which the statute refers (U.S.
A decedent's intangible personal property may be subject to u.Welle,283 U.5.102).
transfer taxes both in his place of domicile or residence and in the This provision is not confined to disposition of property or
place where such property has a situs or is located. In order to prevent
property rights made by last will and testament or to gifts mortis
multiplicity of taxation, the Tax Code provides that the tax imposed cq,usa, which are made in anticipation of impending death, are
by this Title shall be credited with the amounts of any estate tax
revocable and are defeated if the donor survives the apprehended
imposed by the authority of a foreign country, subject to limitation perll (Basket u. Hassel, 707 U.S. 602).
(Sec.86[E], NIRC). No tax shall be imposed in respect of intangible
personal property of a citizen and resident of a foreign country (a)
Gircumstances taken into account include:
when the foreign country does not impose transfer tax of any character
in respect ofintangible personal property ofcitizens ofthe Philippines 1. Age and state of health of the decedent at the time of gift,
not residing in that foreign country, or (b) when the foreign country especially where he was aware of a serious illness;
imposes transfer taxes but grants similar exemption from transfer
taxes in respect ofintangible personal property owned by citizens of
2. Length of time between the gift and the date of death
(Dison u. Posad,as, 57 PhiI. 465). A short interval
the Philippines not residing in that foreign country (Se c. 104, NIRC) .
suggests the conclusion that the thought of death was in the
The term "foreign counhlt may refer to the Federal Government or
decedent's mind, and a long interval suggests the opposite
to the individual states of the United States (Collector u. Norton, (Estate of Mary Aushm,an,4O BTA 948);
103 Phit.1558).
Reciprocity in exemption does not require the foreign country
3. Concurrent making of a will or making a will within a short
time after the transfer (Roces v. Posad'as,58 Phil. 708).
to possess international personality in the traditional sense. Thus,
Tangier, Morocco (Collector v. Cannpos Rued.a,42 SCRA 28) and, Motives associated with life that precludes the category of
California, a state in the American Union (Collector u. Lara, LO2 transfer in contemplation of death are:
Phil. 813) were held tobe "foreign countries'within the meaning of 1. To relieve the donor from the burden of management;
Section 108 ofthe Tax Code.
2. To save income or property taxes;
Transfer in Contemplation of Death 3. To settle family litigated and unlitigated disputes;
The term 'in contemplation of death" does not refer to the 4. To provide independent income for dependents;
general expectation of death which all entertain. The words mean
that it is the thought of death, as a controlling motive, which induces 5. To see the children enjoy the property while the donor is
the disposition ofthe property for the purpose ofavoiding the tax. alive;
The decedent either has retained for his life or for any period which 6. To protect family from hazards of business operations; and
does not in fact end before his death (a) the possession or e4joyment,
or the right to the income from the property, or (b) the right, either 7. To reward services rendered.
alone or in conjunction with any person, to designate the person who
shall possess or enjoy the property or the income therefrom, except Bar Question (2013)
in case of a bona fide sale for an adequate and full consideration Mr. Agustin, 75 years old and suffering from an incurable
in money or money's worth (See Sec.85[B], NIRC). The decedent's disease, decided to sell for valuable and sufficient consideration, a
motive or intention is a question of fact. Thus, the imminence of house and lot to his son. He died one year later. In the settlement
death may afford convincing evidence of the impelling cause of the of Mr. Agustin's estate, the BIR argued that the house and lot were
transfer. However, it is contemplation of death and not necessarily transferred in contemplation ofdeath and should therefore form part
ofthe gross estate for estate tax purposes. Is the BIR correct?
{Fl
'l'trnNrt' t' tt'l'lxt';ll iI (ilr
364 Itt,:vrr,:wr,;rt ou'l',txnt'totrt
l,lrrl.rt l.r .'l'rr x

Suggested answer: ln a case wherO tlr(! tkr(rrrstr<l cxpressly and consistently declared
her conveyance t() be <lne 0l'dr-rnation mortis causa and further
No. The house and lot were not transferced in contemplation of' forbade the registration of the deed until after her death, the court
death; therefore, these properties should not form part ofthe decedent's said all these features concordantly indicated that the conveyance
gross estate. To qualify as a transfer in contemplation of death, the was not intended to produce any definitive effects nor to finally pass
transfer must be either without considerotion or for insufficient any interest to the grantee, except from and after the death ofthe
consideration. Since the house and lot were sold for ualuable and grantor. The power, as reserved in the deed, was a power to destroy
sufficient consideration, there is no transfer in contemplation of death ihe donation at any time, and that it meant that the transfer was not
for estate tax purposes (Sec. 85[BJ, NIRC). binding on the grantor until his death made it impossible to channel
the properby elsewhere (Puig u. Penaflorida, supra)-
Bar Question (2001)
A, aged 90 years and suffering from incurable cancer, on August Transfer of Property Under General Power of Appoint-
1, 2001 wrote a will and, on the same day, made several inter viuos ment
gifts to his children. Ten days later, he died. In your opinion, are the
Any property passing under a general power of appointment
inter uiuos gifts considered transfers in contemplation of death for
exercised by the decedent: (a) by will, or (b) by deed executed in
purposes ofdetermining properties to be included in his gross estate?
contemplation of, or intended to take effect in possession or enjoyment
Explain your answer.
at, or after his death, or (c) by deed under which he has retained
for his life or any period not ascertainable without reference to his
Suggested answer:
death or for any period which does not in fact end before his death
Yes. When the donor mqkes his will within a, short time of, or (i) the possession or enjoyment of, or the right to the income from,
simultaneously with, the mahing of gifts, the gifts are considered as the property, or (ii) the right, either alone or in conjunction with
hauing been made in contemplation of death (Roces a. Posadasr SS .rry p""tott, to designate the persons who shall possess or enjoy the
Phils. 708). Obuiously, the intention of the donor in mahing the inter proplrty or the income therefrom, except in case of a bona ficle sale
uiuos gifts is to auoid the imposition of the estote tax and since the io" Ln adequate and full consideration in money or money's worth
donees ure lihewise his forced heirs who are cqlled upon to inherit, it (sec. 85[D], NIRC).
will create a presumptionjuris tantum thq.t said donations were made
A"power of appointment" refers to a right to designate the
mortis causa; hence, the properties donoted shall be included as part
p"rrotr oi p"rsons who shall enjoy or possess certain property from the
of A's estate.
estate of a prior decedent. Itis"general" when it gives to the donee the
power to appoint any person he pleases, including himself, his spouse,
Revocable Transfers (Transfer With Retention or Lis estate, executor or administrator, and his creditor, thus having as
*special"
Reservation of Gertain Rights) full dominion over the property as though he owned it. It is
Revocable transfers cover transfers (except in case of bona fide
when the donee can appoint only among a restricted or designated
class of persons other than himself (Morgana, commissioner, S09
sale for an adequate and full consideration in money or money's
worth) by trust or otherwise, where the enjoyment thereof was u.s.78).
subject at the date ofhis death to any change through the exercise The property passing under a general power of appointment
of a power (in whatever capacity exercisable) by the decedent alone comes from the donor and the donee (decedent). The power to dispose
or by the decedent in conjunction with any other person (without of property at death by the exercise of a power of appointment is
regard to when or from what source the decedent acquired such the equivalent of ownership. It is a potential source of wealth to
power) to alter, amend, revoke or terminate or where any such power the appointee and the disposition ofwealth effected by its exercise
is relinquished in contemplation of the decedent's death (Sec. 85[C], or refinquishment at death is one form of the enjoyment of wealth
NIRC). (Graaes a. Schmid.lapp, 36 U -5. 657).
wg

366 1il,:vrr,:wr,;rt ()N'l'AxA'n{ )N 'l'tralttt, t,:tt'l'nxt,:rt 367


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Bar Question (2009) this case, the dailh. of'Zundro occurred in 2007, and rnore
In 1999, Xavier purchased from his friend, Yuri, a painting than fiue (5) years haue, therefore, elapsed from the date of
for F500,000. The fair market value of the painting at the time of death ofXauier in 2001.
purchase was F1 million. Yuri paid all the corresponding taxes on
the transaction. In 2001, Xavier died. In his last will and testament, Proceeds of Life lnsurance
Xavier bequeathed the painting, already worbh F1.5 million, to his
Taxation of the proceeds of life insurance will depend on the
only son, Zandro. The will also granted Zandro the power to appoint
designated beneficiary, the manner of designation of such beneficiary
his wife, Wilma, as successor to the painting in the event of Zandro's (whether irrevocable or revocable), and the period and source ofthe
death. Zandro died in 2OO7, and Wilma succeeded to the property.
funds used in paying the premiums on the insurance contract. Thus,
(a) Should the painting be included in the gross estate of Xavier in
2001 and thus, be subject to estate tax? (b) Should the painting be 1. The proceeds of life insurance are taxable in the following
included in the gross estate ofZandro in2007 and thus, be subject cases:
to estate tax? (c) May a vanishing deduction be allowed in either or (a) Beneficiaryis the estate ofthe deceased,his executor
both ofthe estates? or administrator, irrespective of whether or not the
Suggested answers: insured retained the power ofrevocation;

a. The ualue of the gross estate of the decedent shall be


(b) Beneficiary is other than the decedent's estate,
determined by including the ualue q.t the time of his deq.th executor or administrator, when designation of
of all property, real or personal, tangible or intangible, beneficiary is not expressly made irrevocable or the
whereuer situated (Sec. 85, NIRC). Accordingly, the fair designation of the beneficiary is revocable (Sec. 85[E],
market ualue of the painting in 2001, which was owned by NIRC). Under P.D. 1460 (Insurance Code of 1978),
Xauier at the tirne of his death, should be included in the insurance proceeds are presumed to be revocable;
gross estate of Xavier and be subject to estate tax.
hence, includible in the decedent's gross estate.

b. The ualue of the painting in 2007, which was bequeathed 2. The proceeds of life insurance are not taxable in the
by Xavier to Zandro by will in 2001 with power to appoint
following cases:
his wife, Wilma, as successor to the painting, should not (a) Accident insurance proceeds. Tax Code specifically
be included in the gross estate of Zandro. Only property mentions only life insurance policies;
passing under a general power of appointment is included
in the gross estate of the decedent. In this case, the painting
(b) Proceeds ofa group insurance policy taken out by a
company for its employees. The law speaks of policies
has to be transferred by Zandro to his wife, Wilma, based
"taken out by the decedent upon his own life";
on the will of his father, Xauier, and since the power of
appointment granted by Xauier to Zandro is specific (i.e., (c) Amount receivable by any beneficiary irrevocably
only to his wife), such property should not be included in designated in the policy of insurance by the insured.
his gross estdte in 2007. The transfer is absolute and the insured did not retain
any legal interest in the insurance (S ec. 85[E], NIRC);
c. No, uanishing deduction is not auailable to both Estates
of Xauier and Zandro because in the case of Xauier, he (d) Proceeds of insurance policies issued by the GSIS to
acquired the painting by purchase, and in the case of government officials and employees (P.D. 1146) arc
Zandro, the painting shall not be included in his gross exempt from all taxes;
estate; hence, there would be no double taxation of the
same property, for estate tax purposes. Moreouer, the two
(e) Benefits accruing under the SSS law (R.A. 7767, as
(2) deaths ntust occur within a period offiue (5) years. In amended);
368 llt,rvtt,rwt,:tt oN'l'AXA'r'r.l 'l'tt.lr.trt t,:tt'l'nxl':ri :169
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(0 Proceeds of life insurance payable to heirs ol'dcccascd 2. That whiclr ttttt:lt ittrlttiros duringthe marriagebylucrative
members of military personnel (R.4. 360). title;
3. To determine the conjugal or separate character of 3. That which is acquired by right of redemption or by
proceeds, the following factors are considered: exchange with other property belonging to only one of the
spouses; and
(a) Policy taken before marriage - source of funds
determines ownership ofthe proceeds of life insurance; 4. That which is purchased with exclusive money of the wife
or of the husband (Sec. 148, Ciuil Code).
(b) Policy taken during marriage
The sums collected by installments during the marriage from
i. Beneficiary is estate ofthe insured - proceeds
credit payable in a certain number ofyears are considered property
are presumed conjugal; hence, one-half share of
of the spouse to whom the credit belongs (Art- 156, NIEC)' The
surviving spouse is not taxable;
right to an annuity, whether perpetual or for life, and the right of
ii. Beneficiary is third person - proceeds are usufruct, belonging to one of the spouses, form part of his or her
payable to the beneficiary even if premiums separate property, but the fruits, pensions and interests, due during
were paid out of the conjugal partnership (DeI the marriage belong to the partnership (Art. 157, NIRC).
Val u. DelVal,29 Phil. 534). AII other property belongs to the conjugal partnership.
Bar Question (2003) The fair market values of exclusive properties of the decedent
are included in full to his gross estate and no deduction for share of
In June 2000, X took out a life insurance policy on his own the surviving spouse shall be considered therefrom. Indeed, share of
life in the amount of F2,000,000.00. He designated his son, Z, as the surviving spouse shall be computed and taken only against the
his beneficiary with respect to F1,000,000.00, reserving his right fair market values of conjugal properties or absolute community of
to substitute him for another. X died in September 2003. Are the properties.
proceeds oflife insurance to form part ofthe gross estate ofX? Explain.
Exemptions under special laws
Suggested answer:
1. Benefits receivedbymembers from the Government Service
Only the proceed of F1,000,000.00 giuen to the son, Z, shall Insurance System (P.D. 1146) and the Social Security
form part of the gross estate of X. Under the Tatc Code, proceeds of System (R.A. 1161, as amended) by reason of death;
life insurance shull form part of the gross estate of the decedent to
the extent of the amount receiuable by the beneficiary designated in 2. Amounts received from the Philippine and United States
the policy ofinsurance except when it is expressly stipulated that the governments for damages suffered during the Iast war
designation of the beneficiary is irreuocable. As stated in the problem., (R.A.227);
only the designation ofY is irreuocable, and the decedent reserued the 3. Benefits received by beneficiaries residing in the
right to substitute Z as beneft.ciary for another person. Accordingly, the Philippines under laws administered by the U.S' Veterans
proceeds receiued by Y shall be excluded, while the proceeds receiued Administration ( R.A. 360) ;
by Z shall be included in the gross estate of X (Sec. 85[E], NIRC).
4. Bequests, legacies or donations rnortis causa to social
welfare, cultural, or charitable organizalions (P'D' 307);
Exclusive Property but bequests to religious and educational institutions are
The following are the exclusive property of each spouse: not exempt (BIR Ruling 75-001, January 15, 1975);
1. That which is brought to the marriage as his or her own; 5. Grants and donations to the Intrq'rnuros Administration
(P.D. 1616).
crl
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Bar Question (1999) Suggested answer:


A died, survived by his wife and three children. The estate tax No. This expen$e utill not faII under any of the allowable
was properly paid and the estate settled and divided and distributed deductions from gross estate. Whether uieuted in the context of either
among the four heirs. Later, the BIR found out that the estate failed funeral expenses or medical expenses, the same will not qualify as a
to report the income received by the estate during administration. deduction. Funeral expenses may include medical expenses of the last
The BIR issued a deficiency income tax assessment plus interest, illness but not expenses incurred after burial nor expenses incurred to
surcharges and penalties. Since the 3 children are residing abroad, conlmemorate the death anniuersary (De Guzman u. De Guzmon,
the BIR sought to collect the full tax deficiency only against the widow. 83 SCRA 256). Medical expenses, on the other hand, are allowed only
Is the BIR correct? if incurred by the decedent within one year prior to his death (Sec.
86[A][6], NIRC).
Suggested answer:
Yes. The BIR is correct. In q, case where the estate has been
Glaims against the Estate
distributed to the heirs, the collection remedies auailable to the BIR Claims against the estate shall be deductible from gross estate,
in collecting tut liabilities of an estate may either ( 1) sue all the heirs provided that at the time the indebtedness was incurred, the debt
and collect frorn each of them the amount of tar, proportionate to the, instrument was duly notarized and, if the loan was contracted within
iruheritance receiued or (2) by uirtue ofthe lien created under Section three (3) years before the death ofthe decedent, the administrator
279, sue only one heir and subject the property he receiued from the or executor shall submit a statement showing the disposition of the
estate to the payment of the estate tax. The BIR, therefore, is corcect proceeds of the loan (Sec. 86[c], NIRC).
in pursuing the second remedy although this will giue rise to the
The requirements for the deductibility of claims against the
right of the heir who pays to seek reimbursement from the other heirs
(Collector u. Pined.a,2l SCRA 105).In no case, howeuer, can the estate are:
BIR enforce the tax liability in excess of the share of the widow in the 1. They were contracted in good faith and for an adequate
inheritance. and full consideration in money or money's worth;

Funeral expenses
2. They must be existing against the estate;
Amounts for actual funeral expenses or in an amount equal to
3. They must be enforced by the claimants;
five percent (57o) of the gross estate, whichever is lower, but in no 4. They must be reasonably certain in amount; and
case to exceed F200,000 shall be deducted from gross estate (Sec. 5. At the time the indebtedness was incurred, the debt
86[A][1], NIRC). instrument was duly notarized and, if the loan was
contracted within three (3) years before the death ofthe
Bar Question (2001) decedent, the administrator or executor shall submit a
On the first anniversary of the death of Y, his heirs hosted a statement showing the disposition of the proceeds of the
sumptuous dinner for his doctors, nurses, and others who attended loan(P.D.1994).
to Y during his last illness. The cost of the dinner amounted to
Php50,000. Compared to his gross estate, the Php50,000 did not An indebtedness that has been condoned or has prescribed
exceed five percent of the estate. Is the said cost of the dinner to may not be claimed as a deduction (Bocanegro u. Collector, CTA
commemorate his one year death anniversary deductible from his Case No.420, October 72, 1959). Unpaid taxes such as income and
gross estate? Explain your answer. real estate taxes that accrued after the death ofthe decedent are
not deductible from gross estate as they are properly chargeable to
the income of the estate (Dela' Vina v. Colleetor, 65 Phtl. 620).
372 lU,:vrr,:wt,ltr oN'l'AXA'l'tt tt',t
:t7:t

In the testate or intestate proceedings to settle the estate of er Losses


deceased person, the properties ofthe estate are under thejurisdiction
of the court until they have been distributed among the heirs entitled l:ossos incurred during thc settlement of the estate arising
thereto (Domingo a, Garlitos, S SCRA443). {'rom fires, storms, shipwreck, or other casualties, or from robbery,
t,he [t or ernbezzlement, when such losses are not compensated for by

Glaims against lnsolvent Persons insurance or otherwise, and if at the time of the filing of the [estate]
return, such losses have not been claimed as a deduction for income
For claims against insolvent persons to be deductible from the tax purposes in an income tax return, and provided that such losses
gross estate (Sec. 86[d], NIRC),it is important to show that: were incurred not later than the last day for the payment of the estate
1. The amount of said claims has been initially included as tax(i.e., six [6] months from date of death) are deductible from gross
part ofhis gross estate; and estate (Sec. 86[e], NIRC).

2. The incapacity of the debtors to pay their obligations is Family home


proven, not merely alleged (Monserrat a. Collector, CTA
Case No. 77, December 28, 1955), Family home means the dwelling house, including the land
on which it is situated, where the husband and wife, or a head of
the family, and members of their family reside, as certified to by
Unpaid Mortgages and Taxes the Barangay Captain of the locality. The family home is deemed
Unpaid mortgages upon, or any indebtedness in respect to, constituted on the house and lot from the time it is actually occupied
property shall be deductible from gross estate, where the value as a family residence and is considered as such for as long as any of
of decedent's interest therein, undiminished by such mortgage or its beneficiaries actually resides therein'z
indebtedness, is included in the value of the gross estate. However,
unpaid income tax upon income received after the death of the Cond.itions for the allowq.nce of family homc as d'ed'uction from
decedent, or property taxes not accrued before his death, or any the gross estate -
estate tax shall not be deductible from gross estate. The unpaid 1. The family home must be the actual residential home ol'
mortgages and taxes must be contracted bona fide and for an the decedent and his family at the time of his death, as
ad.equate and full consideration in money or money's worth (Sec. certified by the Barangay Captain of the locality where the
86[e], NIRC), family home is situated;
Where the decedent owned only one-half of the property 2. The total value of the family home must be included as
mortgaged so that only one-half of its value was included in his estate, part ofthe gross estate ofthe decedent; and
only one-half of the mortgage debt was deductible, even though the
executor paid the entire debt, the liability of the decedent being 3. Allowable deduction must be in an amount equivalent
solidary, inasmuch as the executor would be subrogated to the rights to the current fair market value of the family home as
of the mortgagee as against the co-owner and co-mortgagot (Pa'rrot declared or included in the gross estate, or the extent of
u. Comrnissioner, 279 U.S. 870). the decedent's interest (whether conjugal or community, or
exclusive property), whichever is lower, but not exceeding
Indebtedness secured by mortgage of real property situated F1,000,000.00.
outside the Philippines may not be deducted where such property is
not includible in the gross estate for the reason that the decedent at Standard Deduction
the time of his death was a non-resident alien (Intestad'o d.e Don
Valentin Descals u. Collector,9S Phil.694). A deduction in the amount of One million pesos (F1,000'000)
shall be allowed as an additional deduction without need of
2Arts. 152 and 153, Family Code
374 Ilt,tvt t,:wr,:rt oN'l'nxa'r'roru
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substantiation. The full amount of F1,000,000 shall be allowed as of the prior tloctr<l(ttll., or huve been included in the total
deduction for the benefit ofthe decedent. The presentation ofsuch amount oI'the gilts ol'the donor within five (5) years prior
deduction in the computation ofthe net taxable estate ofthe decedent to the present decedent's death.
is properly illustrated in these regulations. 4. Previous taxation of the property - The estate tax on
the prior succession, or the donor's tax on the gift, must
Medical Expenses have beenfinally determined and paidbythe priordecedent
All medical expenses (cost of medicines, hospital bills, doctors' or by the donor, as the case maY be.
fees, etc.) incurred (whether paid or unpaid) within one (1) year 5. No previous vanishing deduction on the property -
before the death of the decedent shall be allowed as a deduction, No such deduction on the property, or the property given in
provided that the same are duly substantiated with official receipts exchange therefore, was allowed in determining the value
for services rendered by the decedent's attending physicians, of the net estate of the prior decedent. This limitation is
invoices, statements of account duly certified by the hospital, and intended to preclude the application ofvanishing deduction
such other documents in support thereofand provided, further, that on the same property more than once (Sec.86[N[2], NIRC)-
the total amount thereof, whether paid or unpaid, does not exceed
F500,000. Limitations as to Amount of Deduction Allowable:
Any amount of medical expenses incurred within one (1) year 1. Value of property - The deduction is limited by the value
from death in excess of F500,000 shall no longer be allowed as a ofthe property previously taxed or the aggregate value of
deduction under this subsection. Neither can any unpaid amount such property if more than one item, as finally determined
thereof in excess of the F500,000 threshold nor any unpaid amount for the purpose ofthe prior estate tax (or gift tax) or the
for medical expenses incurred prior to the one (l)-year period from value ofsuch property in present decedent's gross estate,
date ofdeath be allowed to be deducted from the gross estate as claim whichever is lower.
against the estate.
2. Deduction for mortgage or other lien - The initial
value in #1" above shall be reduced by the total amount
Property Previously Taxed (or Vanishing Deduction) paid, ifany, by the present decedent, on any mortgage or
The vanishing deduction operates to ease the harshness of other lien on the property where a deduction was allowed,
successive taxation of the same property within a relatively short by reason of the payment of such mortgage or other lien
period of time (up to five [5] years) occasioned by the untimely death from the gross estate ofthe prior decedent, or gift ofthe
ofthe transferee after the death ofthe prior decedent or donor. donor, in determining the estate tax of the prior decedent
or the donor's tax.
Requisites: 3. Deduction for expense' lossesr indebtedness' taxes'
1. Death etc. - The value as reduced in #2 above shall be further
- The present decedent died within five (5) years
from date ofdeath ofthe prior decedent or date ofgift. reduced by an amount which bears the same ratio to
the amounts allowed as deductions for expenses, losses,
2. Identity of the property - The property with respect indebtedness, taxes, and transfers for public use as the
to which deduction is sought can be identified as the one amount otherwise deductible for property previously taxed
received from prior decedent or from the donor, or as the bears to the value ofthe decedent's gross estate.
property acquired in exchange for the original properly so
received. 4. Percentage of deductions - The vanishing deduction
shall be the value in #3 multiplied by the following
3. Inclusion of the property - The property must have percentage of deduction:
formed part of the gross estate situated in the Philippines
376 lU,:vrr,;wr,rrr oN'l'Axnlrou 'l'l,lrrrt,t'tt'l',trt,:li :177
l,lrlrrlr"lirx

(a) 700Vo of the value, if the prior decedent died within l,htrt c:ruscd [hc inst,irrrl,lltt(!()tts tlt:aLJr tlf',Jaime. The following day,
one (1) year prior to the death ofthe present decedent, Assunta also died in a hospi[ttl. 'lhe spouses and their son had the
or if the property was transferred to him (present lbllowing assets and liabilities at the time of death:
decedent) by gft within the same period prior to his
death; Assunta
(b) 80Vo, if the period is more than one (1) year but not Exclusive Conjugal Jaime
more than two (2) years; Cash F10,000,000 F1,200,000
(c) 6OVo,7f the period is more than two (2) years but not Cars 2,000,000 500,000
more than three (3) years; Land 5,ooo,0oo 2,ooo,00o
Residential house 4,000,000
(d) 407o,if t}r'e period is more than three (3) years but not Mortgage payable 2,5oo,o0o
more than four (4) years; or Funeral expenses 300,000
(e) 207o,if the period is more than four (4) years but not
more than five (5) years. a. Is the Estate of Jaime Asuncion liable to estate tax?
Explain.
In outline form, the computation of vanishing deduction shall b. Is vanishing deduction applicable to the Estate of Assunta
be as follows: Asuncion? Explain.
Value taken of property previously taxed (pdg1 decedent's gross
estate) Suggested answers:
Zess: Mortgage debt paid, if any (1st deduction) a. The Estate of Jaime Asuncion is not liable to estate tos. At
the time of death, his gross estate amountedto P7,200,000.
Initial basis Since his estate is entitled to stq,ndard deduction of
Divided by the value ofgross estate ofprcsent decedent Fl million and funeral expenses equiualent to 5o/r, of his
gross estate not exceeding 7200,000, plus the fact that the
Multiplied by expenses, indebtedness, etc. and transfers for
public purposes first F200,000 of his net estate is exempt from estate tax,
there would be no estate ta'r due on his net estate'
Equals 2nd deduction
b. No, there would be no ua.nishing deduction allowed to the
Initial basis less 2nd deduction Estate of Assunta Asuncion, since she did not in'herit or
Equals final basis receiue any property frorn her deceased son' Jaime, that was
preuiously subjected to estate tax or donot's tq'tc. While her
Multiplied by applicable rate of vanishing deduction estate could be entitled to receiue one-half of F1.2 million
Equals amount of vanishing deduction (or F600,000) cush deposit from her deceased son, this is
eJcenxpt from estate tan, as explained aboue. To be en'titled
[NOTE: The amount of uanishing deduction is not subtracted to the uanishing deduction, it is important that the property
from the ualue of the conjugal property to determine the share of the (cash of F600,000 in the instant case) must haue been' taxed
suruiuing spouse.l in the estate of a prior decedent.

Bar Question (2008) Bar Question (1994)


While driving his car to Baguio City last month, Pedro Asuncion, What is vanishing deductions in estate taxation?
together with his wife, Assunta, and only son, Jaime, met an accident
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Suggested ansryer:
llrrrvincial and cit.y :rssossor$, wltichcver is higher. For purposes of
Vanishing deductions or property preuiously taxed in estate prescribing real property values, the Commissioner is authorized to
taxation refers to the diminishing deductibility / exemption, at the divide the Philippines into different zones or areas and shall, upon
rate of 207o ouer a period of fiue (5) years until it is lost after the fifth consultation with competent appraisers, both from the private and
year, of any property (situated in the Philippines) forming part of the public sectors, determine the fair market value of real properties
gross estate, acquired, by the decedent from a prior decedent who died located in each zone or area.
within a period of fi.ue (5) years from the decedent's d,eath.
In the case of shares of stocks, the fair market value shall depend
on whether the shares are listed or unlisted in the stock exchanges.
Valuation of Property Unlisted common shares are valued based on their book value while
1. "Fair market uahte" is the price which a property will unlisted preferred shares are valued at par value. In determining
bring when it is offered for sale by one who desires, but is the book value of common shares, appraisal surplus shall not be
not obliged to sell, and is bought by one who is under no considered as well as the value assigned to preferred shares, ifthere
(Manila Railroad Co. u. Vel.a.squez,
necessity ofbtryrng it are any.
32 Phil. 286).It is the price at which a property would
For shares which are listed in the stock exchanges, the fair
change hands between a willing buyer and a willing seller
market value shall be the arithmetic mean between the highest
with neither being under any compulsion to buy or sell and
and lowest quotation at a date nearest the date ofdeath, ifnone is
both having reasonable knowledge ofthe facts and acting
available on the date ofdeath itself.
for their own best interests Morcester Countryt T?ust
Co. a. Commissioner, IS4 F.2nd. 5ZB). To determine the value ofthe right to usufruct, use or habitation,
as well as that of annuity, there shall be taken into account the
2. The estate shall be appraised at its fair value as of the time
probable life of the beneficiary in accordance with the latest basic
of death since by fiction of law, property is deemed to be
standard mortality table, to be approved by the Secretary of Finance,
transferred at such time (Art. 777, Ciuil Code).
upon recommendation of the Insurance Commissioner.
3. For real property, the current and fair market value as
shown in the schedule of values fixed by provincial and city Bar Question (2006)
assessors or the fair market value as determined by the
Commissioner (commonly referred to by revenue officers as Varnishing deduction is availed of by taxpayers to:
"zottalvalue"), whichever is higher, shall be used. The use a. correct his accounting records to reflect the actual
of the schedule of values is prescribed in order to minimize deductions made;
the discretion of examiners in making valuation of real
property. b. reduce his gross income;

4. For unlisted shares of stocks of domestic corporations, c. reduce his output value-added tax liability;
fair market value shall be determined in accordance with d. reduce his gross estate.
the provisions of Revenue Regulations No. 6-2018 dated
April 11, 2013. For the listed shares of stocks of domestic Choose the correct answer. Explain'
corporations, the fair market value of the shares of stocks
on the date ofdeath or closest to the date ofdeath ofthe Suggested answer:
decedent shall be used. I choose (d), reduce his gross estute. Vanishing deduction or
If the property is a real property, the fair market value shall property preuiously tuced is one of the items of deductions alloued
be thefair market value as determined by the commissioner or the in computing the net estate of a decedent (Sec. 86tAlt2l and 86[8][2]'
fair market value as shown in the schedule of values fixed by the NIRC).
:*tI
380 ltr,rvrr,:wr,;rr ,r.r 'l'Axl,r,rrr,r ''i,li:,i.:,,1,11"'
With. resltt:<:l ttt I ttt' lili' ittsruttttt't' Ttrtx:eeds, the amount includible
Bar Question (2000) tux purposes would be to the extent
irr th( gross estate. lbr lrtt.i.l.i1t1tin.e
a) Discuss the rule on situs of taxation with respect to the 0f' th.e um\unt receiuable by the estate of the deceased, his executor,
imposition of the estate tax on property left behind by a or orlministrator, under policies taken out by decedent upon his own
non-resident decedent. lif'e, irrespectiue of whether or not the insured retained the power of
reuocation or to the extent ofthe amount receiuable by any beneficiary
Suggested answer: d.esignated. in the policy of insurance, except when it is expressly
(Sec.
The ualue of the gross estate of a non-resident decedent who stipitated that the designation ofthe beneficiary is irreuocable
is a Filipino citizen at the time of his death shall be determined by 85[E], NIRC).
including the uq,Iue qt the time of his death of all property, real or The deductions that may be clq'imed by the estate are:
personal, tangible or intangible, whereuer situated to the extent of
the interest therein of the decedent at the time of his death (Sec. 85 1) The actual funeral etcpenses or in an amount equal to fiue
percent (SVo) ofthe gross estate, whicheuer is lower, but in
[A], NIHO. These properties shall haue a situs of taxation in the (fl00,000'00)
no case to exceed two hun'dredthousartdpesos
Philippines; hence, subject to Philippine estate taxes.
(Sec. 86[A][1] [a], NIRC);
On the other hand, in the case of a non-resident decedent who
at the time of his death was not a citizen of the Philippines, only that 2) Thejudicialexpenses inthe testate or intestate proceedings
(Sec.86[A][1], NIRC);
part of the entire gross estate which is situated in the Phitippines
to the extent of the interest therein of the decedent at the time of 3) The ualue of the decedent's family home located in
his death shall be included in his taxable estate, prouided. that Valle Verd'e, Pasig City in an amount not exceedin'g one
with respect to intangible personal property, we apply the rule of million pesos (?1,000,000'00) and upon presentation of a
reciprocity. certificalion ofthe barangay captain ofthe locality that the
same has been the decedent's family home (Sec' 86[Al[4]'
b) Mr. Felix de la Cruz, a bachelor resident citizen, suffered NIRC)
from a hearb attack while on a business trip to the USA. He
4) The stand.ard d'eduction of P1,000,000.00 (Sec' 86[A][5]'
died intestate on June 15, 2000 in New York City, leaving
NIRC);
behind real properties situated in New York; his family
home in Valle Verde, Pasig City; an office condominium in 5) Med.ical expenses incurred within one year from death
Makati City; shares of stocks in San Miguel Corporation; in an amount not exceeding F500,000'00 (Sec. 86[A][6]'
cash in bank; and personal belongings. The decedent is NIRC),
heavily insured with Insular Life. He had no known debts
The estate tax return shatl be filed within six (6) months from the
at the time of his death. As the sole heir and appointed
deced.ent's d.eath (Sec. 90[B], NIRC), prouided that the Commissioner
Administrator, how would you determine the gross estate
of Internal Reuenu.e shall haue authority to grant in meritorious cq.ses'
of the decedent? What deductions may be claimed by the
u, reasonq.ble extension not exceeding thirty (30) days for filing the
estate and when and where shall the return be filed and
return (sec. gqfc], NIRC),
estate tax paid?
Except in cases where the cornmissioner of Internal Reuenue
Suggested answer: otherwise permits, the estate tax return shq.Il be filed with an
authorized. agent banh, or Reuenue District officer, collection offi'cer,
The gross estate shall be determined by including the ualue at
the time of his death all of the properties mentioned, to the extent of
or d.uly autiorized. Treqsurer of Pasig City, the City in which the
decedint, Mr. d.e Ia Cruz, was domiciled ctt the time of his death (sec.
the interest he had at the time of his death becquse he is a Filipino qo[D], NIRC).
citizen (Sec. 85[A], NIRC).
382 Itr,:vil.:wt,:tt oN'l'Axn,r,toN

Bar Question (2002)


Mr. Castro inherited from his father, who died on June 10,
1994, several pieces of real property in Metro Manila. The estate tax
return was filed and the estate tax due in the amount of p2b0,000.00
CIIAPTER XIV
was paid on December 6, 7994. The Tax Fraud Division of the BIR
investigated the case on the basis of confidential information given DONOR'S TAX
by Mr. Santos on January 6, 1gg8 that the return filed by Mr. Castro
was fraudulent and that he failed to declare all properties left by his
father with intent to evade payment of the correct tax. As a result, a "Donation" is an act of liberality whereby a person (donor)
deficiency estate tax assessment for F1,2b0,000.00, inclusive of sTvo (donee)
disposes gratuitously of a thing or right in favor of another
surcharge for fraud, interest and penalty, was issued against him
on January 10, 2001. Mr. Castro protested the assessment, on the
*ho accepts il (Art. 725, Ciuil code). There is also donation when
a person gives to another a thing or right on account ofthe latter's
ground of prescription.
merits o" of th" services rendered by him to the donor provided they
A. Decide Mr. Castro's protest. do not constitute a demandable debt or when the gift imposes upon
the donee a burden which is less than the value of the thing given
B. What legal requirement must Mr. Santos comply with so (Art. 726, Ciuil Code).
that he can claim his reward? Explain.
under the Tax Code, donation has a broader meaning. It extends
Suggested answer: to sales or exchanges ofproperty, other than real property classified
as capital asset located in the Philippines, for less than adequate and
A. The protest should be resolued against Mr. Castro. Whqt
fuII consideration in money or money's worth (Sec' 700, NIRC)'
was filed is a fraudulent return making the prescriptiue
period for assessment 70 years from discouery ofthe fraud
(Sec. 222, NIRC). Accordingly, the assessment wcts issued Nature of gift tax
within the prescriptiue period to mahe an ussessrnent based Gift tax is not a property tax but an excise tax imposed on
on a fraudulent return. the privilege of the owner to give. It is not a tax on property as
B. The legal requirements that must be satisfied. by Mr. Santos ,o"h bu"uo*e the imposition does not rest upon general ownership
to entitle him to reward are as follows: (Bromley a. McCaughn, 280 U.S. 124). Thus, the levy on the
transfer by way of donati oninter uiuos of property used exclusively for
1. He should uoluntarily file confi,dential information religious po"por"r does not infringe the provisions of the constitution
under oq.th with the Law Diuision of the Bureau exelpting from taxation churches and parsonages a1d a{ lands,
of Internal Reuenue alleging therein the specific buildings and improvements used actually, directly and exclusively
u iolatio ns c o n s tit ut ing fraud ;
for religious purposes (Ltad,oc u. cornrnissioner, 14 SCRA 29D.
2. The information must not yet be in the possession of the HowevJr, gifts in favor of religious institutions are now exempt from
Bureq.u of Internal Reuenue, or refer to a cctse already donor's tax.
pending or preuiously inuestigated by the Bureau of
Donor's tax is imposed upon the transfer by any person, resident
Internq.l Reuenue;
or non-resident, of the property by stft. The tax shall apply whether
3. Mr. Sq,ntos should not be a, gouernment employee or the transfer is in trust or otherwise, whether the gift is direct or
a relatiue of a gouernment employee within the sixth indirect, and whether the property is real or personal, tangible or
degree of corusanguinity; and intangible (Sec. 98, NIRC).
4. The information must result to collections of reuenues
and/or fines and penq,lties (Sec.282, NIRC). 383
jf
384 Itt':vtt':wt:tr oN'l'AXn'r'toN 'l'lrnnrrt, t,rlt'l',tx t,:s ilfll-r
I )otror'rt'l'ttx

Purposes of Donor's Tax and therelirrc, dorrttliotr Lo him shall not be considered as
1. To supplement estate tax; donation made to stranger.

2. To prevent avoidance of income tax through the device of Donation made between business organizations
splitting income among numerous donees, who are usually and those made between an individual and a business
members of a family or into many trusts, with the donor organization shall be considered as donation made to a
thereby escaping the effect of the progressive rates of stranger.
income tax.
c. contribution for election campaign - Any contribution in cash
Rates of Donorts Tax or in kind to any candidate, political party or coalition ofparties
for campaign purposes, shall be governed by the Election Code,
A' schedular rates of donof s tax imposabre on donation rnad.e to as amended.
a donee who is not a stranger. The transfer ofthe total net
gifts made during the calendar -year shall be subject to tax in The application of the rates as provided above is imposed
accordance with the schedule provided in section gg (rates of on donations made beginning January 1, 1998, which is the
tax payable by donor) ofthe Tax code. The entire value ofthe effectivity date of R.A.8424.
net gifts for each calendaryear is divided into brackets and each
rate is imposed on the corresponding brackets as shown below: Bar Question (2011)
If net gift is:
Celia donated F110,000 to her friend Victoria, who was getting
married. celia gave no other gift during the calendar year. what is
But not The tax Of the excess the donor's tax implication on Celia's donation?
Over Over shall be Plus over
F100,000 Exempt Suggested answer:
F100,000 200,000 0 2Vo F100,000 Cetia shall pay a 307o donor's tax on the F100,000 cash
200,000 500,000 2,000 4Vo 200,000 d,onation, sinceVictoria, the donee, is a stranger to her. A"stranger"
500,000 1,000,000 14,000 6% 500,000 is a person who is not a brother, sister (whether by whole or half-
1,000,000 3,000,000 44,000 8Vo 1,000,000 blood.), spouse, ancestor and lineq'l descendant; or a relatiue by
3,000,000 5,000,000 204,000 L0Vo 3,000,000 consanguinity in the colloteral line within the fourth ciuil degree of
5,o0o,0oo 10,000,000 404,000 t2% 5,000,000 relationship (sec. 99[B], NIRC). Celia. is not entitled to deduct the
10,000,000 1,004,000 lSVo 10,000,000 amount of P10,000 as dowry or gift on account of marriage because
that priuilege is giuen only to parents of the donee who is getting
B. Tax payable by the donor if donee is a stranger. When the
d9n9e or beneficiary is a stranger, the tax puyublu -by the donor
married (Sec. 101[4], NIRC).
shall be 307o of the net gifts. For purposes of the donor,s tax, a
nstranger" is person
a who is not a:
Taxable Transfers
1. Brother, sister (whether by whole or half-blood), spouse, The term "transfer of property in trust or othenoise,
ancestor, and lineal descendant; or d.irect or ind'irecf," is used by the law in the most comprehensive
sense. It includes not only the transfer of ownership in the fullest
, Relative by consanguinity in the collateral line within the sense but also the transfer of any right or interest in property, but
fourth degree of relationship. less than title. A transfer becomes complete and taxable only when
A legally adopted child is entiiled to all the rights the donor has divested himself of all beneficial interest in himself
and obligations provided by law to legitimate children, or his estate. The law contemplates the passage of control over
'l'trrrur tt.t,:tt'l'nx t'::t ;tu-/
386 Itr,;vrr,:wr,:rr ( )N'l'AxA1't{ }N
| )orrot'tt'l'ttx

the economic benefits of the property, rather than mere technical Suggested anslver:
changes in the title (Sanford. a. Cornrnjssioner, g0B U.S. Sg). Yes. While the gift has been made on account of rnarriage' to
ualue
qualify for exemptioi'to the extent of the first F10'000'00 of the
Bar Question (1996) giuen to a legitimate' recognized
ii"r"if,' ,u"h gi-ft shoutd' haue been

X, a multinational corporation doingbusiness in the Philippines, natural or adopted child ofthe donor'
donated 100 shares of stock of said corporation to Mr. Y, its resident (Filipino
2) What is the tax consequence, if any, to the donee
manager in the Philippines. daughter-in-law of Mr' Morgan)?
(1) What is the tax liability, if any, of X corporation?
Suggested answer:
(2) Assuming the shares of stocks were given to Mr. Y in
consideration of his services to the corporation, what are The gift, with respect to the don'ee, is excluded from gross income
and. is iicome taxation' There is no donee's gift tax'
the tax implications? Explain. "*Jipt from
Suggested answer: 3) Can you name one kind of gift that is exempt from donor's
taxwhichisextendibletobothresidentsandnon-residents
(1) Foreign corporations effecting a donation are subject to ornon-citizensofthePhilippines?Includequalifications,
donor's tax only if the property donated is located in the if anY.
Philippines. Accordingly, don ation of a foreign corporation
of its own shares of stochs in fauor of resident emplqtees is Suggested answer:
any
not subject to donot's tax (BIR Ruling No. 018-87, January Gifts rnad.e to or for the use of the National Gouernment or
26, 1987). Howeuer, if 85Vo of the business of the foreign of agertcies which. is not conducted for profit'
entity creq,ted' by any its
corporation is located in the Philippines or the shares i, ti ony potitical tubdiuition of the said q'nd Gouernment' are exernpt
donoted haue acquired business situs in the Philippines, to both residents non-residents'
the donation rnay be taxed in the Philippines subject to the
iti tn iuc with respect
rule of reciprocity. Essentials of a Taxable Donation
(2) If the shares of stocks were giuen to Mr. Y in consideration 1. CaPacitY of the donor;
of his seruices to the corporation, the same shall constitute
talcable compensation incorne to the recipient because it is 2. Donative intent;
a corlpensation for seruices rendered an employer-employee 3. Delivery, whether actual or constructive' of the subject
relatiortship; hence, subject to income tax. matter;
The par ualue or stated ualue of the shares issues also constitutes 4.AcceptanceoftheSrftbythedonee(Art'746'CiuilCode)'
deductible ercpense to the corporation, prouided it is subjected to
withholding tar on wages. Donative lntent
Donatiae intent must be present in a direct gift of property in
Bar Question (1992) such intent
order that the donor's tax can be assessed and collected.
Mr. Bill Morgan, a Canadian citizen and a resident of followedbyadonativeactisessentialtoconstituteagift,andno
should
Scarborough. Ontario, sends a gift check of $20,000.00 to his future strained urrd u"tifi"i.l construction of a supplementary statute
Filipino daughter-in-law who is to be married to his only son in the beincludedtotaxasgiftatransferactuallylackingdonativeintent.
Philippines. ihor, it was held thafthe transfer of properties from o-ne corporation
to' and a
to another corporation which is connected with' subordinate
1) Is the donation by Mr. Morgan subject to tax? Explain.
district or local organization or branch ofthe transferor corporation
388 Itt,;vtt,rwr,rtr oru'l'nxl,r.ror.l 'l'rrnrrrlt,.tr'l'Axt,;tt :t89
I )lrrot 'rt 'l'n x

is not subject to donor's tax because wanting in donative intent. such Accretion is .r right l)lrs0rl ()n the presumed will of the decedent.
transfer, being in name only, a transfer from the right hand to thc whcn [hc testator givcs il d()l() rminate, undivided thing or the same
left hand, and merely to enable the transferee corporation to better inheritance to two (2) or more persons, without designating their
perform its obligation to administer, apply and use the said properties specific shares, he thereby manifests his desire to give to said persons
for the same purposes (religious, charitable and educational) for preference to the right over the thing or inheritance assigned. Hence,
which the transferor was created and still exists (The christian iffo, urry reason one ofthem does not or cannot receive his share, the
& Missionary Alliance Churches of the phil. a. Collector, CTA law, foilLwing the testator's implied desires, gives the vacant share to
Case No.668, August 21, 1964). the others. Accretion is a right and not an obligation; hence, it maybe
Donative intent is not, however, required in transfers of property renounced or waived by anyone who stands to benefit from it (Ynza
for less than adequate and full consideration. In such a case, donative u. Rod.riguez,95 PhiL 347 t19541).
intent is superfluots (Perez a. Commissioner, CTA Case IZOZ, Accretion, whether in testamentary or intestate succession,
February 10,19Og). refers only to the free portion. It never operates in compulsory
succession. However, an heir who repudiates his inheritance cannot
Consideration be represen ted (Art. g77 , NCC) . Hence, in intestate succession, the
"Consideration" mearrs money or equal value or some goods or share of a co-heir who renounces his share in the inheritance accrues
service capable of being evaluated in money. "Grqtitude" is not a con- to his co-heirs. The effect is the same as where there is accretion.
sideration the value ofwhich can be deducted from that ofthe properby
transferred as a gift. Like "love and affection," it has no economic value Bar Question (2013)
and is not "consideration" in the sense of the word is used in section In the settlement of the estate of Mr. Barbera who died Intestate,
103. Thus, donation given out ofgratitude for services rendered con- his wife renounced her inheritance and her share of the conjugal
stitutes taxable donation. It is not deductible from gross income of the property in favor of their children. The BIR determined that there
donor for the value ofsaid serwices does not constitute recoverable debt *u. u taxable gift and thus assessed Mrs. Barbera as a donor. was
(Piroaano u. Commissioner, L-L9BG1, July JI, 1965). the BIR correct?

Donation of Gonjugal Property Suggested answer:


The BIR is correct that there was gift but only insofar
q. tatcable
The spouses are co-owners ofconjugal property (Art. 124, Ciuit
as the renunciation of the share of the wife in the conjugal property
Code). Thus, a gift made by the spouses of conjugal property shall be
is concerned.. This is a transfer of property without consideration,
deemed separate donations by the husband and the wife in proportion q'nd it thus
which talzes effect during the lifetime of the transfer lwife,
to their respective interests. In other words, there will be lwo (2)
donations made and two (2) separate computations of donor's taxes. qualifi.es as q texable gift (Reu- Regs. No. 2-2003)'
However, unless the wife expressly joins in making the donation But the renunciation of the wife's share in the inheritance from her
of conjugal property, it shall be deemed to have been made by the d.eceesed, husba,nd is not q. taxable gift, considerirtg that the
property
husband alone (Tang Ho u. Board. of Tax Appeals, gZ phit. ggg). is automatically transferred to the other heirs by operation of law due
to her repudiat;ion of her inheritance (BIR Ruling No' DA'333-07)'
Right of Accretion
Bar Question (2008)
Accretion is a right by virtue of which, when two (2) or more
persons are called to the same inheritance, devise or legacy, the part Spouses Jose San Pedro and Clara San Pedro, both Filipino
assigned to the one who renounces, or cannot receive his share, or citizens, are the owners of a residential house and lot in Quezon city.
who died before the testator is added or incorporate to that ofhis co- After the recent wedding of their son, Mario, to Maria, the spouses
heirs, co-devisees, or co-legatees (Art. 1015, Ciuit Cod.d. donated said real property to them. At the time of donation, the real
property has a fair market value of F2 million'
390 llt.:vt t,:wr,;tr oN'l'nxnlror.r
'l'rrnrrrr, t,rtr 'l',lxt,:rr :19 I
I hrrrorrg'llrx
Are Mario and Maria subject to income tax for the value of the
real property donated to them? Explain. the lcss lirrtunate cuns[ilutrnts of'said municipality. In accordance
thercwith, the Municipal (iovernment of Pateros issued to the
b. Are Jose and Clara subject to donor's tax? If so, how much occupants/beneficiaries Certificates of Award giving to them the
is the taxable gift of each spouse and what rate shall be respective areas where their houses are erected. Through Ordinance
applied to the gift? Explain. No. 2, Series of 1998, the said municipal government ordained that
the lots awarded to the awardees be finally transferred and donated
Suggested answers: to them. Determine the tax consequence of the foregoing dispositions
with respect to Ace Tobacco Corporation, the Municipal Government
a. Mario and Maria, donees, are exempt from income tq,x on of Pateros, and the occupants/beneficiaries.
the ualue of the real property receiued by them through
donotion of their parents. The ualue of property acquired Suggested answer:
by gift, bequest, deuise, or descent, sholl not be included in
the gross income of the donees. Howeuer, incorne from such The donq.tion by Ace Tobacco Corporation is exempt frorn the
property shall be included in their gross incomes during the donot's tax because it qualifi,es as a gift to or for the use of any political
yeur (Sec. 32tBlt3l, NIRO. subdiuision of the Nq.tional Gouernment (Sec. 101[2J, NIRC). The
conueyance is lihewise exempt from documentary stamp tax because it
b. Spouses Jose and Clara are subject to donofs ton on the
fair is a transfer without considerq,tion. Since the donation is to be used as
marhet uolue (72 million) of the real property d,onated. to
a relocation site for the less fortunate constituents of the municipality,
their son, Mario, and on the donation made to Mario's wife,
it may be considered as q.rl undertahing for human settlernents; hence,
Maria. There are four (4) tq.xable donations of F500,000
the ualue of the land may be deductible in full from the gross income of
made by the spouses. Donor Jose mode p500,000 d,onation
Ace Tobacco Corporation if it is in qccordance with q. National Priority
to his son, Mario, and another donq.tion of F500,000
to his daughter-in-law, Maria. Donor Claro also mad,e Plan determined by the National Economic Deuelopment Authority
(Sec. 34[H][2][q.], NIRC). If the utilization is not in accordance with
?500,000 donationto her son, Mario, and another d,onotion
of ?500,000 to her daughter-in-law, Mario. Since the a Nq.tional Priority Plan determined by the Nationq,l Economic
Deueloprnent Authority, then Ace Tobacco Corporation may deduct the
donations to their son, Mario, were mqde by the Spouses
Jose and Clara on account of his maniage, Jose and Clora
ualue ofthe land donated only to the extent offiue percent (5Vo) ofits
can each deduct P10,000 front his or her gross gift. Their taxq.ble income deriued fVom trade or business as computed without
net gifts of P490,000 (P500,000 less F10,000) will be subject the beruefit of the donation (Sec. S4Hlt2lta] in relation to Sec. 34tHl
to the graduoted donofs tax rates ranging from 2Vo to TSVo [1], NIRC).
( Sec. 99[A], NIRC). With respect to their donations to The Municipality of Pateros is not subject to any donoy's tax on
their
daughter-in-law, Maria, their gross gifts of F500,000 shail the ualue of land it subsequently donated, it being exempt from taxes
be subject to the 30Vo d,onof s tax rate, considering that the as a political subdiuision of the Nq.tional Gouernment.
donee is a stranger in relation to the donors. A,,stranger" is
a person who is not a: (i) brother, sister (whether by whole The occupants/beneficiaries are subject to real property taxes
or half-blood), spouse, ancestor and lineol d.escend,ant; or because they now own the land.
(ii) relotiue by consanguinity to the collateral line within
the fourth degree of relationship (Sec. gg[B], NIRC). Transfer for Insufficient Consideration
Bar Question (1998) Bar Question (1999)
Ace Tobacco Corporation bought a parcel of land situated at
A, an individual, sold to B, his brother-in-law, his lot with a
market value of F1,000,000.00 for F600,000.00. As cost in the lot is
Pateros and donated it to the Municipal Government of pateros for
F100,000.00. B is financially capable of buying the lot. A also owns
the sole purpose of devoting the said land as a relocation site for
X Co., which has a fast growing business.
392 llt,:vtt:wltrr oru'l'nx,rtror'r I'tr,rrur rt, t'rrt'l'nxl,;:; 393
I )orror"rt'l'rtx

A sold some of his shares of stock in X Co. to his key executives 7. I]onati0ns kr t,lrc lnt,rirmuKrs Administration (P.D. 1616).
in X Co. These executives are not related to A. The selling price is
F3,000,000.00 which is the book value of the shares sold but with Bar Question (2011)
a market value of F5,000,000.00. A's cost in the shares sold is Levox corporation wanted to donate F}5 million as prize money
F1,000,000.00. The purpose of A in selling the shares is to enable
for the world piofessional billiard championship to be held in the
his key executives to acquire proprietary interest in the business and
Philippines. since the Billiard sports Federation of the Philippines
have a personal stake in its business.
ao". ,rot recognize the event, it was held under the auspices of the
Explain ifthe above transactions are subject to donor's tax. International Professional Billiards Association, Inc. Is Levox subject
to donor's tax on its donation?
Suggested answer:
Suggested answer:
The first trqnsq,ction where a lot was sold by A to his brother- Yes, since the national sports association for billiards does not
in-lq,w for a price below its fair ntarket ualue will not be subject to
donot's ta"tc if the lot qualifies as a capital asset. The transfer for less sanction the euent, and the donation is not included among the exempt
than adequate and full consideration which giues rise to a deemed donations under the law'
gift, d.oes not apply to q. sq.le of property subject to capital gains tax
(Sec. 100, NIRC). Howeuer, if the lot sold is an ordinary asset, the Bar Question (2002)
ercess of the fair market ualue ouer the consideration receiued shall on December 6, 2001, LVN Corporation donated a piece ofvacant
be considered q.s a gift subject to the donor's tox. lot situated in Mandaluyong city to an accredited and duly registered
non-stock, non-profit educational institution to be used by the latter
The sale of shares of stoch below the fair market ualue thereof
is subject to the donor's tax pursuant to the prouisions of Section 100
in building a sports complex for students.
of the Tax Code. The erccess of the fair mq,rhet ualue ouer the selling a. May the donor claim in full as deduction from its gross
price is a deemed gift. incomeforthetaxableyear200ltheamountofthedonated
lot equivalent to its fair market value/zonal value at the
Exemptions under Special Laws time of the donation? Explain your answer'
1. Donations to Philippine government for scientific, b. In order that donations to non-stock, non-profit educational
engineering and technological research, invention and institution may be exempt from the donor's gift tax, what
development (R.A. 1606); conditions must be met bY the donee?
2. Donations to social welfare, cultural, and charitable Suggested answer:
organizations (P.D. 507; R.A. 1916);
a. No. Doncttions and. I or contributions tnad,e to qualified donee
3. Donations to the International Rice Research Institute institutions consisting of property other than money shall
(R.4.2707); be based' on the acquisition cost of the property' The donor

4. Donations to Ramon Magsaysay Award Foundation (R.A.


isnotentitled.toclaimasfulldeductionthefairmarhet
ualue I zonal ualue of the tot don ated ( Sec ' 34[H] , NIRC) '
3076);
5. Donations to the National Museum, the National Library,
b. In ord.erthat donations to noru-stoch, non-profit educational
and the archives of the National Historical Institute (P.D.
institution may be exempt from the donor's gift tax, it is
required' that not more thl.n 307o of the said gifts shall be
973);
used, by the donee-institution for administration purposes
6. Donations to the Southern Philippines Development ( Sec. 101[A] [3], NIRC) -
Administration (P.D. 690);
'l'trlrurtl.t':tt'l'nxt':rl :t95
394 Ilt.:vrr.:wr.;H oN TAxA'lroN
Ilrtrot't 'litx

Bar Question (1994) prolbssion(sec.34lAllI llu.l, NI It()). b'urthermore,if the candidate is an


-incu.mbent
gouernmeril offi<:ial or employee, it may euen be corusidered
In 1991, Imelda gave her parents a Christmas gift ofP100,000.00 as bribe or a kichback (Sec. 34[A][1][c], NIRC)'
and a donation of F80,000.00 to her parish church. She also donated
a parcel of land for the construction of a building to the PUP Alumni
Association, a non-stock, non-profit organization. Portions of the Bar Question (2009)
building shall be leased to generate income for the association. Miguel, a citizen and resident of Mexico, donated US$1,000
(1) Is the Christmas gift of F100,000.00 to Imelda's parents worth of stocks in Barack Motors corporation, a Mexican company, to
his legitimate son, Miguelito, who is residing in the Philippines and
subject to tax?
abouito be married to a Filipino girlfriend. Mexico does not impose
(2) How about the donation to the parish church? any transfer tax of whatever nature on all gratuitous tra-ns-fers of
(3) property. (a) Is Miguel entitled to claim a dowry exclusion? why or
How about the donation to the P.U.P. Alumni Association?
*frv (b) Is Miiuel entitled to the rule of reciprocity in order to
Suggested answer: "oiZ
be exempt from the Philippine donor's tax? Why or why not?
(1) The Christm,as gift of ?100,000.00 (now fl00,000.00) giuen Suggested answers:
by Imelda to her parents is taxoble up to ?50,000.00 (now
?100,000.00) because under the law (Sec. 92[a] now Sec. a.Dowriesorgiftsmadeonaccountofmarriageandbeforeits
99[A],NIRC), net gifts rntexceeding ?50,000.00 qre exernpt. celebratioior within orue ye&r thereafter by parents to each
oftheirlegitimate,recognizednaturqloradoptedchildren
(2) The donation of ?80,000.00 to the parish church euen to the extent of the first Ten thousand pesos (F10'000) is
assuming that it is erclusiuely for religious purposes is not exempt from d'onot's tax (Sec' 101[A], NIRC)' To be entitled
tae-exempt becquse the exernption granted under ArticleVl, tothed'owryexemptionunderthedonor'staxluw,thedonor
Section 2B(3) of the Constitution applies only to reql estate mustbearesid'entofthePhilippines.SiruceMiguelisanon-
ta.xes (Lladoc u. Cornmissioner, 14 SCRA292). resid,entalien',hed.oesnotqualifytoclaimsuchexernption.
(3) The danation to the P.U.P. AlurnniAssociation d.oes not also b. Miguel is not entitled to the rule of reciprocity in order to be
qualify for exemption both under the Constitution and the eximpt from the Philippine donot's tq'x' In the first place'
afore-cited law because it is not an educational or research thed'onationbyMiguel,anon-residentMexicancitizen,
organization, corporation, institution, foundation or trust. of the shares of stochs of Barach Motors Corporation' a
Mexican compcrny' which has not acquired business situs
Bar Question (2003, 1998) in the Philippines, to his son, Miguelito, is exem'pt from
d.onot's taxind'er Section 104 of the 1997 Tct'r Code, which
Are contributions to a candidate in an election subject to donor's prouid,esthq,t"...wherethedonorwas&non-residentalien
tax? On the part of the contributor, is it allowable as a deduction from
atthetimeofhisdonation,hisrealandpersonalpropertyso
gross income?
transferred.butwhichq.resituatedoutsidethePhilippines
Suggested answer: shall not be iruclud,ed as part of his'gross gift''" In other
q'nd
word.s, there is nothing to be subject to donoy's tq'x'
No, prouided the recipient candidote had complied with the there is no reciprocity rule necessary to claim exemption'
requirement for fiIing of returns of contributions with the Commission
on Elections as required under the Omnibus Election Code. Procedure for comPuting net gifts
The contributor is not allowedto deductthe contributions because The tax for each calendar year shall be computed on the basis
the said expense is not directly attributable to, the deueloprnent, of the total net gifts made during the calendar year in accordance
rlanagement, operation and/or conduct of a trade, business or with the schedule of tax rates prescribed in the law (i.e., The first
396 Itt,;vt uwt,:H ot't'l'nxnt'ror
'lil;ll;ll,ll,l
' :re7

P100,000.00 net gift is exempt; two percent (2Vo) is applied on the in the schedule of ualues fixed by the
marhet uaLut, us shtnDrt.
amount of net gift over F100,000.00 and 157o, on the amount of net ()ity Assessors' The fact that the property is
Prouincial anct
gift over F10,000,000.00) (Sec. 99[A], NIRC).
worthflTmitlionasofthetimeofdonationisimmaterial,
The tax is imposed on the cumulative basis during the calendar unlessitcanbeshownthatthisualueisoneofthetwoualues
year; i.e., the rates are applied on the aggregate net gifts during the mentioned' as prouided' urud'er Section 81 of the Tq"x' Code'
calendar year, but donor's taxes paid during the calendar year are
(2) The Reuenue District Officer is not correct because the
credited against the donor's tax due on the latest donation during
computation of the gift tax is cumulatiue but ortly insofar as
the same calendaryear. Thus, all donations made in one (1) calendar calendar year' Therefore' there
gifti rnad.e wlihtn ihn
year by a donor are taxed at the same graduated tax rates as ifthey "o*n
is no legal justification for treating two (2) gifts effected in'
had been made at one (1) time. A new computation of donor's tax is
two (2) separute calendar years as one gift'
made for gifts made by the donor in another calendar year(s).
(3) Dino gained' an income of F19 rnillion frorn the sale' Dino
Bar Question (1995) acquires a carry-ouer basis which is the basis of the property
inihe hand.s of the d.onor or Fl rnillion. The gain from the
Kenneth Yusoph owns a commercial lot which he bought many sale or other d.isposition ofproperty shall be the excess-ofthe
years ago for F1 Million. It is now worth F20 Million although the zonal amount reulized, therefrom ouer the basis or adjusted basis
value is only F15 Million. He donates one-halfpro indiuiso interest in gain (Sec' 34[a] , NIRC) ' Since the property
'wasd'etermining
for
the land to his son Dino on 31 December 1994, and the other one-half acquired' bi Sift, the basis for determining gain shall
pro indiuiso interest to the same son on 2 January 1995. be the same as if it would be in the hands of the donor
or
by whorn the property was not
(1) How much is the value of the gifts in 1994 and 1995 for the last preced'ing owner
purposes of computing the gift tax? Explain. acquired by gift. Hence, the gain is computed by deducting
(2) thi basis il rl *ittton from the amount realized which is
The Revenue District Officer questions the splitting of the flO million.
donations into 1994 and 1995. He says that since there
were only two (2) days separating the two (2) donations (4) If the commercial lot was receiued by inheritance the gain
the
they should be treated as one, having been made within from the sale for F20 mittiott' is F5 rnillion because
one year. Is he correct? Explain. basis is the fai,r marhet ualue as of the date of acquisition'
The steppei"up basis of FL'5 miltion which is the ualue for
(3) Dino subsequently sold the land to a buyer for F20 Million. estq'te tax puiposes is the basis for determining the
gain
How much did Dino gain on the sale? Explain. (sec. 34[b][2], NIRC).
(4) Suppose, instead of receiving the lot by way of donation,
Dino received it by inheritance. What would be his gain Bar Question (2001)
on the sale of the lot for F20 Million? Explain. to
Your bachelor client, a Filipino residing in Quezon city, wants
purposes
give his sister a gift of Php200,000. He seeks your advice-' for
Suggested answer:
if reducing if nolt ehminating the donor,s tax on the gift, on whether
(1) The ualue of the gifts for purposes of computing the gift tax it is better for him to give ai of the Php200,000 on Christmas 2001
shall be P7.5 million in 1994 and ?7.5 million in 1995. In or to give Php100,000 on Christmas 2001 and the other Php100'000
ualuing a real property for gift tax purposes the property on January 1,2002. Please explain your advice'
should be appraised q.t the higher of two ualues as of the
time of donation which are (a) the fair mq,rket uqlue as Suggested answer:
d.etermined by the Comrnissioner (which is the zonal ualue
I would' ad.uise him' to split the don'ation' Giuing the Php200'000
fixed pursuant to Sec. 16[e] of the Tax Code), or (b) the fair to a higher
as a one-tin'te d.onation *ould. mean that it will be subject
398 Itr,:vrt,;wt,ltr ou'l'nxn't ror'r

tax bracket under the graduated tuc structure, thereby necessilu,tirLg


the payment of donor's tax. On the other hand, splitting the donatiltn
into two equal am.ounts of Php100,000 giuen on two (2) dillbrenl yeurs
will totally relieue the donor from the donor's tox because the first PART IV
Php100,000 donation in the graduated brackets is exempt (Sec. 99,
NIRC). While the donor's tatc is computed on the cumulatiue donations , VATUE ADDED TA}{ ffAT)
the aggregation of all donations made by a donor is allowed only ouer
one calendar year.
CIIAPTER Xry

Bar Question (2000) INTRODUCTION


a) When the donee or beneficiary is a stranger, the tax payable
by the donor shall be 30Vo ofLhe net gifts. For purposes of
this tax, who is a stranger? Characteristics of Value Added Tax
(Bar Question [19961)
Suggested answer:
1. It is a tax on the value added ofa taxpayer'
A "stranger" is a person who is not a:
(1) 2. It is collected through the "tax credit method" or "invoice
Brother or sister (whether by whole or half-blood), spouse, method."
ancestor and lineal descendant; or
(2) 3. It is a transparent form ofsales tax.
Relatiue by consanguinity in the collateral line within the
fourth degree of relationship (Sec.98[BJ, NIRC). 4. It is a broad-based tax on consumption of goods, properties
or services in the Philippines as it applies to all stages of
b) What conditions must occur in order that all grants, manufacture, production, and distribution of goods and
donations and contributions to non-stock, non-profit private services.
educational institutions may be exempt from the donor's 5. It is an indirect tax.
tax under Section 101(a) ofthe Tax Code?
6. The Philippines adopted the "separate indication of tax
Suggested answer: method."

The following are the conditions: 7. There is no cascading in the value added tax system'

1) Not more than 30Vo of said gifts shall be used by such donee Tax on value added
for administr ation p urp o s e s ;
vAT is a tax on the value added of a taxpayer arising from taxable
2) The educational institution is incorporated as a non-stock sales of goods, properties or services during the quarter at the rate of
entity, paying no diuidends, gouerned by trustees who p"rc"ttt (O7o) or lo7o. "Value add.ed"'is the difference between
receiue no conxpensation, and deuoting all its income, """o
total sales ofthe taxpayer for the taxable quarter subject to value
whether students' fees or gifts, donations, subsidies or added tax and his total purchases for the same period subject also
other forms of philanthropy, to the accomplishment and to value added tax. In this sense, the value added of a businessman
promotion of the purposes enumerated in its Articles of is the same as his gross profit, provided that he is not engaged in
Incorporation ( Sec. 10 1[A] [3], NIRC). transactions exempt from value added tax. If there is no value added

399
400 VAr.lrt,: At rtrl,:lr'l',rx t VA'l't 401
llt,;vr r,;wr,:rr or.r'l'nx,rlroN
I ttl trxlttcl tott

on taxable sales (because the gross sales or receipts is equal to the "Cost d.ed.uctittrt melhod" re I'ers to the manner of computing
gross purchases) or where there is a loss from sale (because the gross thetaxpayer'svalueaddtrdtaxliabilitybydeductinghiscostsand
purchases is more than gross sales or receipts), there is still output subject to value added tax from his taxable sales ofgoods,
tax due on the transaction. There will be no value added tax due or properties or-seruices, and multiplying the resulting value added by
"*p"rrru.
there will be an excess input tax which may be carried over to the I2Vo. (See illustration above).
next quarter(s), respectively. The presence or absence ofmark-up or
profit by itself is not material for purposes of determining taxability
"Tar cred'it method." (sometimes called "inaoice mcthod'")
is
refers to the manner by which the value added tax of a taxpayer
of a transaction subject to tax.
computed. The input taxes shifted by the sellers to the buyer
are
The term "output tax" mearrs the value added tax due on the creditud against the buyer's output taxes when he in turn sells the
sale or lease oftaxable goods, properties or services by any person taxable goodr, properties or services (Secs' 105 and 110[N' NIRC)'
registered or required to register under Section 236 ofthe Tax Code The tax i shifted when the buyer ofgoods, properties or services used
(Sec. 110[A], NIRC). in trr" production or distribution process passes the input tax forward
to t is iluyer, or backward to his iupplier. There is generally forward
The term "input tatr" mearrs the value added tax due from or
paid by a VAT-registered person in the course of his trade or business
shifting of t." when there is a seller's market (i.e., there are more
is
buyers"than sellers or demand is greater than supply), and there
on importation of goods or local purchase of goods, properties or
balkward shifting of tax when there is a buyer's market like in real
services, including lease or use ofproperty, from a VAT-registered person
estate and coconut oil industries. Although the seller is the
person (Sec. 110[A], NIRC). The buyer becomes entitled to the input
legally liable to pay the tax, the seller shifts the burden of the tax
tax upon consummation of sale and issuance of a VAT invoice, in the
case of sale of goods or properties, and upon payment of service fee or
tJtn" irrt"rmediate buyers who successively pass on the tax to their
buyers until the goods, property or service reaches the final consumer.
compensation, in the case of sale of services. It is not necessary that the
the inventory ofgoods or properties be sold before the buyer thereof
It;ill be noted that whether it is the cost deduction method orinput
tax credit method is used, the value added tax due or the excess
becomes entitled to claim the input tax.
tax is the same. (See illustration above)'
The value added of a taxpayer and his value added tax due
or excess input tax on his transactions during the quarter can be Sales Tax
computed by using the formula shown below:
VAT is a tax on the taxable sale, barter or exchange ofgoods'
properties or services. A barter or exchange has the same tax
CASE "A" CASE "8" ion*"qo".r"e as a sale. A sale may be an actual sale or a deemed sale'
Amount VAT Amount VAT or an export sale or a local sale.
Sales 100 100
Generally, there must be an actual sale of goods, properties
Output tax (100 x I2Vo) t2.o t2.o
Purchases 80 130 or services in ihe philippines in order that value added tax may be
Input tax (80 or 130 x L2Vo) 9.6 15.6 imposed. Exceptions are as follows:
Value added 20 (30) 1. Importationofgoods. - Imporbationofgoodsbyanyperson'
VAT payable (20 xt2Va) 2.4 who may or may not be engaged in trade or business
Excess input tax [(30) x t2%o)l (3.6) in the Philippines' in which case, the tax is imposed on
the import"t-Uoyut (Sec' 105, NIRC)' Take note that
Tax Gredit Method importation of service is not subject to value- a-dded tax'
unlesssuchserviceisperformedwithinthePhilippines;
There are two (2) popular ways of computing the value added
tax of a taxpayer. These are the (a) cost deduction method, and (b) 2.
tax credit method. Sales of
4O2 ltr:vrr,:wr,:rr {,N 'l'AX^.r,rrN u^''
'i,1,:lll;il,l"'t,tVA'r') 403

goods, properties or services exempt from value added tax (<rrzerO-rated), while itnporl,s ol'grxds are subjectto!2Vovalue added
border
are not covered by the value added tax system and should tax. some mlings referre.d to the destination principle as "cross
be evidenced by non-VAT invoices or receipts. However, the doctrine." Exports are zero-rated because the consumption such of
erroneous issuance by a seller of a VAT invoice or receipt g"oJ, *ilbe made outside the philippines, while imports of goods
for an exempt sale of goods, properties or services makes ire subject to l27ovalue added tax because they are for consumption
him liable to the value added Lax(Sec. 113[D], NIRC); and, within ine fnmppines. In the case of services, the consumptiorr takes
3. Deemed sales of goods or properties (Sec. 106[8], NIRC). place where the service is performed, following the "situs-of-seruice
principle."
Taxable Transactions When the goods, properties or services are consumed or are
no output
destined for consumption abroad, they are zero'rated;hence'
The main object of the value added tax is the transaction. A but the input taxes passed on upon
transaction could either be: (a) a sale, barter or exchange ofgoods or ta* is imposed on the sale thereof,
por"trut" of taxable goods, properties or services may be claimed by
properties in the course oftrade or business; (b) a sale ofservice in credit from the BIR'
the course of trade or business; or (c) an importation of goods, whether
ih" tu*puy"r as refund or tax
or not made in the course of trade or business (Sec. 105, NIRC).
lndirect Tax
Broad-based tax on consumption in the Philippines An indirect tax is a tax demanded in the first instance from one
person in the expectation and intention that he can shift the burden
VAT is broad-based because every sale ofgoods, properties or
services at the levels ofmanufacturers or producers and distributors
io *o*"orr" else (Commissioner u. Tours Speciolists,In-c" G3,'
is not
(whether at wholesale and retail) is subject to value added tax. While No.66476, March 27, 7gg0).It is one paid by a person who
directly liable therefore, and who may thereafter shift or pass on
every taxable sale ofgoods, properties or services is subject to value which ultimately assumes the
added tax, the tax burden rests with the final consumer who consumes
the tax to another person or entity,
tax burden (Maced'a v. Macaraig, 797 SCBA 777) ' The impact
of
the goods, properties or services. Consumption takes place when the the tax has been imposed, while
taxpayer does not sell further the goods, properties or services either taxationis on the seller upon whom
tlre incid.ence of tan is onihe final consumer, the place at
which the
because he is the final consumer or he is not engaged in business
subject to value added tax like sale ofagricultural food products in tax comes to rest.
their original state. A person who is engaged in trade or business subject to value
Sale of goods located and consumed outside the Philippines is addedtaxdoesnotbeartheburdenoftaxation,sincehegenerally
passes on the tax to his customers (whether VAT-registered or
not),
exempt from value added tax, even if the contracting parties are both passing"
domestic corporations. in which case, there is "forward passing" of tax. "Backward
of tax happens when the seller aJsumes the payment ofthe
tax' which
The VAT system encourages savings because the tax is imposed happens when there is a buyer's market or supply is greater
than
only upon consumption. Moreover, investments in capital goods such demand. This is illustrated below:
as machinery and equipment are effectively not subject to value added
tax due to the provision in the Tax Code allowing taxpayers to recover
FORWARD BACI{WARI)
input taxes paid on acquisition ofcapital goods through refund or tax PASSING
credit. 107.14
Selling Price 1_20.0
Output tax L4.4 L2.86
Destination Principle Cost 100.0 100.00
Input tax t2.0 12.00
The destination of the goods determines taxation or exemption
from tax. Export sales ofgoods are subject to zero percent (OVo)rate Gain 20.0 7.r4
VAT Payable 2.4 0.86
I
VAr,r rt,. Arlrl,;1,'l',lx t VA'l't 4Oft
404 llt,:vr t,rwr,;rr oN'l'Axrvlror.r
Ittl rrrlttll.tott

In the example above, the total invoice amount (gross selling such provisitln, Revcnttc ltogtrlrtl,ions N<l' 18-2011 was promulgated
price plus l27o YAT) is F134.40 (F120 + PI4,40), in forward on November 21,2071.
shifting of tax, and F120.00 (F107.14 + F12.86), in backward
shifting of tax. Value added tax does not cascade
..tax on tax,, (Sec, 106[A]'
A tax is said to cascade when there is
Gumulative through the chain of distribution of goods is
108[A], and. 110[N, NIRC). Another name given to'ocascading"
and performance of services "py"u-iait g" - the tax should not be imposed upon another tax
3 2' Au gu st 7 6'
Every taxable sale or transfer ofgoods, properties or scrvices is ii.opt" a. Eolr'ld'iganb ay an and' T an, G'R' N o' 7 52"gtoss receipts,"
subject to value added tax. This means that on the taxable transaction, iOOil.In defining the terms "gross selling price" and
addedlax law expressly excludes the value added taxes
the seller is subject to output tax, while the buyer is entitled to the value
the input taxes due
input tax. When there is a new sale of the same goods, properties ;;;; on by the sellers to the buyers'toMoreover,
or services, the new seller is subject to the output tax and the new iloro o" p.ld by the buyer are allowed be credited against his output
taxes. There was cascading in the old sales tax system as the
sales
buyer is entitled to input tax. This procedure is repeated until the last
sale to the final consumer. In such a case, the input tax passed on to iL o" original sales of goods paid by imporbers and manufacturers
and the turnover taxes paid by wholesalers and retailers of
goods
the final consumer becomes part of his acquisition cost or operating
expense. becamepartofthegrosssellingpricesubjecttotheturnovertax.

Tax-inclusive method/separate indication of VAT Principle of RecouPment of Tax


Sale of goods by the supplier must be subject to value added tax Interposing an exempt transaction along the chain of distribution
in order to entitle the buyer who is also subject to VAT to credit the diminishes the-ability of th" VAT system to collect the tax on the
input tax from the output tax on his taxable sale. The VAT-registered 'llralo", added by each seller; in fact, it aggravates cascading of taxes'
As a result, the value added tax that was foregone in the
prior.exempt
seller need not show the output tax as a separate item in his sales
transaction is recouped from the succeeding customer who is liable
invoice or receipt to be liable to the value added tax, nor is the VAT-
registered buyer required to prove to the BIR that it has been shown to value added tax.
as a separate item in the sales invoice or receipt to be entitled to
input tax. The law presumes that in every VAT invoice or receipt,
there is always a VAT component shilted by the seller, which can
easily be determined by dividing the total invoice amount by 11 or by
multiplying the total invoice amount by l/ll, when the regular VAT
rate is ll%o, or by dividing the total invoice amount by 9.33333 or
multiplying the total invoice amount by 1/9.33333, when the regular
VAT rate is 72Vo (Sec. 106[D][1] and Sec. 108[C], NIRC). The value
added tax was mandated not to be shown as a separate item in the
invoice or receipt, except in the case of banks which are required
to indicate the value added tax as a separate item in the invoice or
receipt in order that the same may be credited by a VAT-registered
buyer of the bank's services from his output tax (Secs. 106 and 108,
NIRC, as implemented by Reu. Regs. Nos. 12-2003 and 20-2003).
Effective November 1,, 2005, R.A. 9337, however, made a
complete turn-around by requiring that the VAT component shall
be separately indicated in the VAT invoice or receipt. To implement
VAt.rrr, Atrtrt',1 'l',lx tVA'l't 407
ll't.rrttttt l,ttrlrlc lo'l'trx

l,hrrt the taxable sulcs 9l'gorxls, lrropcrties and services by each spouse
shall be added togethor Lo dctcrmine whether he/she has exceeded
thc general threshold prescribed by law (F1,919,500). If he/she does,
then he/she must register as a vAT person and comply with hisftrer
CHAPIER XVI obligations under the vAT law; otherwise, he/she would be subject to
the three percent (\Vo) percentage tax under section 116 of the Tax
PERSONS LIABLE TO TAX Code.
Joint aenture. - An unincorporated joint venture is created
Taxable persons when two (2) corporations, while registered and operating separately,
A person may be characterized as a taxable person, if (a) he were placed under one sole management, which operated the business
undertakes taxable transactions in goods, properties or services affairs of said companies as though constituted as a single entity,
consumed or destined for consumption within the Philippines, (b) such
thereby obtaining substantial economy and profits in the operation.
transactions are entered into in the course ofhis trade or business, An unincorporated joint venture is a variant form of temporary
and (c) the amount of his gross sales or receipts is over the threshold
organization erected for the purpose of carrying out some particular
transaction or project. Dissolution is effected upon accomplishment or
fixed by law or regulations. As provided in Revenue Regulations No.
abandonment of the purpose for which the organization was formed.
16-2011 dated October 28,201.I, the general threshold under Section
An unincorporated joint venture engaged in construction activity or
109(V) of the 1997 Tax Code was increased to P1,919,500 effective
in enerry-related projects, although exempt from income tax, is liable
January I, 2012. As clarified in Revenue Regulations No. 3-2012,
to value added tax. Hence, it must register as a vAT person, secure
February 20, 2012, for instruments executed and notarized on or
its own Taxpayer Identification Number, keep its books of accounts,
after November 1, 2005 but prior to January L,2012, the threshold
issue sales invoices or official receipts, and file vAT declarations or
amounts for sale of resident lot is F1,500,000 and sale of residential
returns and pay value added taxes.
house and lot and other dwelling, F2,500,000. An importer of taxable
goods, whether made in the course of trade or business, is also a However, the BIR has allowed certain arrangements through
taxable person. which the unincorporated joint venture is treated merely as a "flow-
through entity" that does not pay value added tax. In such a case'
A taxable person must register for value added tax purposes the members of the joint venture are responsible for their respective
(Sec. 237[A], NIRC). However, his failure to register as a VAT person
obligations under the joint venture agreement and can claim input
does not exculpate him from his liability to pay the value added tax
taxes on their taxable purchases (See BIR Ruling No. 2-97, January
on his taxable sales ofgoods, properties or services. In other words,
14,1997).
registration as a VAT person is not a requirement to make a person
liable to value added tax (Secs. 106, 107 and 108, NIRC). Gouernmcnt. - The government, consisting of the three (3)
branches, namely the executive, legislative, and judiciary, and its
A taxable person may conduct business as an individual political subdivision, performing an essential governmental function,
(single proprietorship), estate or trust, partnership, joint venture,
is exempt from value added tax. However, government entities
corporation, cooperative or association. Special attention must be and instrumentalities, including government-owned or -controlled
given to the following situations:
corporations, are subject to value added tax if they sell goods,
Husband and. wife. - For VAT purposes, husband and wife properties or services in the course oftrade or business or when they
shall be treated as separate taxpayers. Each spouse engaged in p"tlor- proprietary functions. Thus, local water districts and similar
taxable sale of goods, properties or services must comply with the public utilities are not exempt from value added tax. Beginning
administrative requirements prescribed for VAT taxpayers. However, November 1, 2005, the government is required to withhold a final
the "aggregation rule" for each spouse shall apply, which means vAT of five percent(1Ta) based on the gross payment for its purchases
oftaxable goods, properties or services pursuant to the provisions of
406 R.A.9337.
40rl Itt,:v t r,;wt,:rr or.r'l'nxA'r'ror.,r V^t tit /\rt't r,'l',rr rVA'l't 40!)
I'r't rrrttr l,tttlrlc lo'l':tx

Non-stoch, non-profit association or organization. irs association trs, lilcs and rlther assessments/charges
tt' xr t'sl t i ll
- cl tt tr rr ll

Generally, a non-stock, non-profit association or organization whose by r1e mbers/tenanl.s 9l'ir trlrrr|rnrinium corporation form part of gross
receipts come purely from association dues or special assessments income of the latter sub.iect to income tax (and expanded withholding
from members is not subject to the value added tax. The reason for tax) as well as value added tax, because a condominium corporation
the exemption may either be (a) that it is not engaged in business furnishes its members/tenants with beneficial services (i.e., benefits,
or in taxable sale of goods, properties or services, or (b) that the
I advantages, and privileges in return for such payments)' The RMC
amount received by it from the members is not income but represents ,"u. urr"hored on the decision of the Supreme court in the case of cIR
additional capital contribution, or (c) that it is a liability of the u. CA and. Comrnonwealth Management and Seruices Corporation
association which must be spent by the association for the special (G.R. No. 125355, March 30,2000), whereby the said stated: "Even
purposes for which the fund was created, and the passing of Board a non-stock, non-profit organization or government entity is liable to
Resolution by the Board of Tlustees should clearly spell this out. Thus, pay vAT on the sale of goods or services. vAT is a tax on transaction,
a business league, which is not organized for profit, relies solely on the Lv"n itt the absence ofprofit attributable thereto." In Section 105 of
mandatory contributions of its members for its operating expenses, the Tax code, the term "in the course oftrade or business" requires
and performs functions exclusively for the benefit of its members, is
I the regular conduct or pursuit of a commercial or economic activity,
not considered rendering service in the course oftrade or business; regardless of whether or not the entity is profit-oriented. The provision
hence, not subject to VAT.I of section 105 is clear. Hence, it is immaterial whether the primary
The Manila Bethel Temple, Inc., a religious organization, is purpose of a corporation indicates that it receives payments for
exempt from all taxes to which it is directly liable on activities not ,"rrri""" rendered to its affiliates on a reimbursement-of-cost basis
conducted for profit. Such activities include gross receipts from the only, without realizing profit, for purposes of determining liability
following sources: (a) sale of bibles and other religious articles (all for VAT' on services rendered. As long as the entity provides service
reading materials) on a non-profit basis to church members; (b) for a fee, remuneration or consideration, then the service rendered
receipts from the Music College in the form of offerings on a voluntary is subject to VAT.
basis; and (c) receipts from the Bible College in the form of offerings on subd,iuisions or villages Homeowners Associations.
a voluntary basis.2Along the same vein, the receipt of small sums of Section 18 of R.A. 9904 (Magna Cartq, for Homeowners and
-Homeowners,
money by priests or their congregation from the relatives and friends Associations) provides that the association dues
ofthe deceased for praying for the soul ofdead persons is also exempt and income derived from rentals of property of the homeowners'
from value added tax, since such religious activity is not considered association may be exempted from income tax, vAT and percentage
as a taxable trade or business. tax, provided that the homeowners'association complement, support
arrd the local government unit in providing vital services
Condnminium cotporation. - A condominium corporation that "t"engthen
to their members, and the grant of tax incentives shall be subject to
will not sell, barter, exchange, or lease any good or property and will
not render service for a fee, but merely implements the administration the following conditions:
ofthe required services to collect the association dues and assessments 1. The homeowners' association must be a duly constitute
from the unit owners, pursuant to its corporate purposes as "trustee" "association" as defined under Section 3(b) of R'A. 9904;
of the fund, is not subject to VAT on such activity. The above ruling
was recently revoked by Revenue Memorandum Circular No.65-2012 2. The local government unit having jurisdiction over
dated October 31,2012,3 where the CIR ruled that amounts paid in thehomeowners'associationmustissueacertification
identifying the basic services being rendered by the
rVAT Ruling No. 801-90, October 11, 1990. homeowners' association and therein stating its lack
ZVAT Ruling No. 266-89, October 26, 1989. of resources to render such services, notwithstanding
3A petition for declaratory relief against
the RMC was filed by the First e-Bank
Tower Condominium Corporation on December 26, 2}l2before a Makati RTC. The court Alr"Jt tl*t the BIR failed to give due notice and opportunity to be heard, before
ruled that the RMC did not only clarify an existing law, but changes its import and issuing "dd"d
said circular. Thus, in imposing additional tax burden on petitioner, respondent
interpretation that in so doing it prejudices the right ofthe petitioner as a taxpayer. violated the constitutional right to due process and hearing'
410 It,r,rvr r':wt,;rr or.r'l'nxn'r,ror.r VAt,trt, Atrtrt,,tr'l',rx tVA'l't 4ll
l'r,t tt,,ttrt Lrrllrlr' l.o 'litx

its clear mandate under the applicable laws, rules restaurant or canttttttl, lxrul,itltttl or shop selling sporting goods' or
and regulations, provided that such services must fall
leases its facilities or spaces t() others, it is liable to the value added
within the purview of the "basic community services and tax where the amount of its gross sales and./or gross receipts exceeds
?1.5 million (now F1,g1g,50b), or subject to the 3Eo percentage tax, if
facilities" which is defined in Section B(d) of R.A. 9904 as
those referring to services and facilities that redound to
gross sales and receipts is F1.5 million or less. Non-stock, non-profit
the benefit of all homeowners and from which, by reason
issociation may include foundations and condominium corporations.
of practicality, no homeowner may be excluded such as
but not limited to security, street and vicinity lights, It should be noied, however, that a non-stock, non-profit association
cannot be exempt from VAT on its purchases of goods, properties or
maintenance, repairs and cleaning of streets, garbage
services inasmuch as its exemption from income tax is not a legal
collection and disposal, and other similar services and it exemPt from VAT.6
basis to make
facilities; and
Thecultural center of the Philippines is not subject to tax on
3. The homeowners' association must present proof (e.g.,
ticket sales ofcultural shows but is taxable on sales ofgoods by its
financial statements) that the income and dues are used
gift shops.T
for the cleanliness, safety, security and other basic services
needed by members, including the maintenance of the Irnporter. - Although the actual seller of goods is the head
facilities of their respective subdivisions or villages. office intapan, it cannot be made liable for value added tax as the
sale was consummated in Japan. Neither is the Philippine branch
unless the above conditions are met, the homeowners'association
ofthe foreign corporation liable for value added tax as it is not the
shall generally be subject to income tax and vAT because beneficial
actual sellei. The branch merely acted as an agent of the head office
services are rendered by the association to its members.a
in promoting its sales, delivering the samples and the quotation to
Recreational or sports club. - The euezon City Sports the possiblJuyers. The head office is the actual seller of the goods
Club is not subject to VAT on membership dues and fees and guest as indicated ilrthe commercial invoices. The head office in Japan
fees, tennis, pelota, squash, badminton, bowling, billiards and gym as a trading office buys the goods from manufacturers in Japan
fees as paSrments for the use of facilities.s However, this ruling was and then ,"llr th" same to local buyers in the Philippines. VAT is
superseded by Revenue Memorandum Order No. 85-2012 dated properly and legally due on the local buyers who are considered the
August 6, 2012, which declares that even a non-stock, non-profit i*pott"t.. Considering that such value added tax on importation
organization or government is liable to pay VAT on the sale of goods it should no longer be imposed
was already paid by the local buyers,
or services. Thus, the gross receipts ofrecreational clubs, including on the pnitippine branch (Kanematsu Corporation, Manila
but not limited to membership fees, assessment dues, rental income, Branch u. io**i"sioner, CTA Case No' 4875, February 72'
and seryice fees are subject to VAT. Also, PCCI, which is a non-stock, 1997).
non-profit corporation organized to maintain and protect the integrity
of its registry of purebred dogs and whose activities are principally Bar Question (2008)
sourced from registration and membership fees from its members, is
subject to VAT (RMC No. 64-2013, September 30,2015). Greenhills Condominium corporation is an existing non-
stock, non-profit association of unit owners in Greenhills Tower,
However, the moment the non-stock, non-profit association San Juan City since 2001. To be able to reduce the association
engages in any taxable sale of goods or services, like operating a dues being collected from the unit owners, the Board of Directors
of the corloration agreed to lease part of the ground floor of the
condominium building to DEF Savings Bank for F120,000 a month
aRMC No. 9-2013, January 31, 2018. The homeowners associations argue that
the LGUs involved would not generally issue the certification stating that they have
no resources to render such basic community seryices in order to get the tax-exempt starting JanuarY, 2007.
status. The said condition thus effectively removes the window when the homeowners
association may be exempted from tax. 6VAT Ruling No. 247-89, October 4, 1989.
6VAT Ruling No. 098-88, April 14, 1988.
?VAT Ruling No. 18-89, January 25, 1989.
*f
\./11 r1,\gr1r1:tr'l'lx t VA'l't
1
4 l:t
412 llt,tv rr,;wt,:tr ( )N 'l'AxA't1( )N l'r,t'rronri l,rrrlrlc Lo'l\rx

shirts and t.lrcsscs rrlrrOrrtl rrrrrl pcrlirrtning litrison work between its
a. Is the non-stock, non-profit association liable to value added
home officc and the l'ilipin<t l{arrncnt manufacturers and exporters'
tax in 2007? If your answer is in the negative, is it liable
Newtex does not generate any income. To finance its office expenses
to another kind ofbusiness tax?
here, its head office abroad regularly remits to it the needed amount.
b. Will the association be liable to value added tax in 200g, To oversee its operations and manage its office here, which had been
if it increases the rental to F150,000 a month beginning in operation for two years, the head offlce assigned three foreign
January,2008? Explain. personnel. Is Newtex subject to VAT?

Suggested answers: Suggested answer:


d. No, Greenhills Condominium Corporation will not be Newter is not subject to vAT. The vAT is imposed on sellers
subject to ualue added totc, since its gross rental income and. not on buyers. The bra.nch offi,ce did not deriue any income or
for the year 2007 will be Fl,440,000 (F120,000 times 12). compensation so as to possibly permit the imposition of a ualue added
The sale or lease of goods or properties or the perforntance tax'on compensation for seruices rendered. In addition, since the
of seruices other than the tra,nsactions mentioned in the transactiois are d.irect export sales, the VAT does not apply. Export
preceding paragraphs, where the gross annuel sales and, / sales are among those thit are either zero-rated or exempt from
ualue
or receipts do not exceed the amount of One million fi,ue ud.ded tax (Secs. 99-100, NIRC).
hundredthousandpesos (Pl,500,000), shall be erempt from
ualue added tax (Sec. 109NJ, NIRC). Howeuer, it would, be
subject to the SVo percentage ta^x, on its gross rental income
under Section 116 of the Tax Code.
b. Yes. If Greenhills Condominium Corporation increases the
monthly rental income to F150,000, it wilt be subject to the
12Vo ualue added tax beginning Nouember 7, 2008, unless
it registers as aVAT person effectiue January 1,2008. The
reason for this is that the gross annual rental income of
the association for 2008 would be Pl,800,000 (F150,000
times 12) (Sec. 109M, NIRC). Moreouer, the association
will be deemed to be engaged in the business of leasing,
despite its being a non-stock, non-profit organization. The
phrase "in the course oftrade or business" fiLeatLS the regular
conduct or pursuit of a commercial or en economic actiuity,
including transactions incidental thereto, by any person,
regardless of whether or not the person engaged therein is
a non-stock, non-profit priuate orgaruization (irrespectiue
of the disposition of its net income and whether or not it
sells exclusiuely to mernbers or their guests), or gouernment
entity (Sec. 105, NIRC).

Bar Question (1991)


Newtex International (Phils.), Inc. is an American firm duly
authorized to engage in business in the Philippines as a branch
office. In its activity ofacting as a buying agent for foreign buyers of
rf
Vnt,trl, At,trl'.n'l'nx (VA'l') 4l lt
( )ttl,prtl 'litx ,rrr l'irrll ol ( irxxls or l'rttlxrrt'ics

The valuc addtlcl Lttx ttccrutrs upon the consummation of sale of


goods or properties, regtrrdlcss ol'the terms of payment between
the
and 237 NIRC)
contracting parties ( Sic. I 06, in relation to Secs ' 1 13
' '

Thus, ,, ,Jo., as the seller issues a VAT invoice


(whether the sale is
CHAPTER XVII
for cash or on credit), he becomes liable to value added tax on such
OUTPUT TAX ON SALE sale.
OF GOODS OR PROPERTIES
Types of Sales
l.Actualsale._Inactualsale,aVAT.registeredpersonis
Elements of Taxable Sale of Goods or Properties thesellerandanotherVAT-registeredpersonisthebuyer.
To be subject to value added tax, the sale of goods (tangible Thesellersoutputtaxbecomesthebuyer'sinputtax'which
or intangible objects that have value) must be: (a) an actual or the latter can credit against his output tax on his taxable
deemed sale of goods or properties for a valuable consideration; sales ofgoods, properties or services during the quarter'
(b) undertaken in the course of trade or business; (c) for the use
or consumption in the Philippines; and (d) not exempt from value Bar Question (1997)
added tax under the Tax Code (Sec. 109, NIRC), special law, or
2. Deemcd. sale. - The following transactions are considered
international agreement.
as deemed sales:
With respect to sale or exchange of real property, all of the
following requirements must be met: (a) the seller executes a deed of a. Transfer' use or consumption not in the course of
sale, barter or exchange, assignment or conveyance, or contract to sell, business of goods or properties originally intended
of real property; (b) the real property is located within the Philippines; for sale or for use in the course ofbusiness;
(c) the seller or transferor is engaged in real estate business either as
a real estate dealer, developer, or lessor; (d) the real property is held b'Distributionortransfertoshareholdersorinvestors
primarily for sale or for lease in the ordinary course of his trade or as share in the profits of the VAT-registered persons
business, or at least an ordinary asset used in the trade or business or to creditors in PaYment of debt;
of the VAT taxpayer as an incident to his VAT-taxable activity; and c. Consignment of goods, if actual sale is not made
(e) the sale is not exempt from value added tax under Section 109 of within sixty days following the date such goods were
the Tax Code, special law, or international agreement binding upon consigned; and
the government of the Philippines.
d.Retirementfromorcessationofbusiness,withrespect
to inventories of taxable goods existing as of such
Sale of Goods or Properties retirement or cessation'
By the contract ofsale, one ofthe contracting parties obligates
himself to transfer the ownership of and to deliver a determinate In deemed sales, the seller is also the buyer and no valuable
thing, and the other to pay therefor a price certain in money or its consideration is thus paid. For example, if the owner withdraws
goods for personal (non-business) use from his inventory' he derives
equivalent (Art. 1458, New Ciuil Code). A sale is a transfer of goods
or properties to a buyer either for cash or on credit, or partly for cash
i tax advarrtage from the input tax, which he has already credited
and partly for credit. The term "sale" includes barter or exchange of at the time of furchase against his output tax. Since the withdrawal
or transfer of goods ,uroit, in the use or consumption of such
goods
goods or properties.
byaperson(thesellerhimself)whoiseffectivelythefinalconsumer'
such withdrawal or transfer is deemed a sale subject to value
added
tax. The rationale of the transaction deemed sale provisions is to
414
{f
4r6 Itt,:vr t':wr,rrt oN'l'nxn'r'ror.: Vlr,r 1,, Altrt,:l 'l'rrx tVA'l't 4t7
( )rrl lrrtl 'l'rrx ,,tt littll ol ( irxxls or l'rlr1x'rl'it's

recapture the value added tax that was claimed as input tax at thc (2) Sule ol'rtrw ttttttcrittls <lr packagingmaterials to a non-
time of purchase. residcnt buycr firr delivery to a resident local export-
Sal.eof aessels by NDC is a d.eerned. sale. While the subject oriented enterprise to be used in manufacturing'
-
sales transaction involving the five (5) vessels may not be considered
processing, packing or repacking in the Philippines
a "sale" envisaged in Section 99 (now Sec. 106) ofthe Tax Code, which
ofthe said buyer's goods and paid for in acceptable
is a general provision, it is, and it should be, considered a,,sale', within
foreign currency and accounted for in accordance with
the purview ofSection 100(b) (now Sec. 106tbl) ofthe Tax Code, as the rules and regulations of lhe Bangho Sentral ng
implemented by Section 4 of Revenue Regulations No. 5-g7, which Pilipinas IBSP);
enumerates the transactions "deemed sale" subject to the l\vo value (3) Sale of raw materials or packaging materials to
added tax. Undeniably, when NDC offered for sale, as one lot and by export-oriented enterprise whose export sales exceed
public bidding, all of its shares of stock in NMC, and the subject five 7O7o oftolal annual Production;
(5) NDC-owned "Klockner" vessels operated by NMC, to the private
respondents group of private companies, a corresponding change
(4) Sale ofgold to t]ne Bangh'o Sentral ng Pilipinas IBSP);
in ownership of NMC resulted. As to whether or not this change of (5) Those considered export sales under E'O' 226'
ownership in NMC may have been brought about by the privatization otherwise known as the Omnibus Investment Code
policy of the government, the law or Section 4(E)(1) of Revenue of 1987, and other sPecial laws; and
Regulations No. 5-87, does not distinguish. Where the law does not
distinguish, courts should not distingujsh (Comrnissjoner a. CTA
(6) The sale of goods, supplies, equipment and fuel
and Magsaysay Lines, et al., CA-G.R. SPl/o. 2ggg4, March 7I, to persons engaged in international shipping or
1997).
international air transport operations'

However, in Mind.anao II Geothermq.l Partnership u. CIR


(b) Foreign Currenc5r Denom'inated' Sale' - The phrase
uforeign currency d.enom.inated' sale" means sale to a
(G.R. Nos. 19330I and 794687, March 1I,20Ig), the Supreme
court ruled that the sale by the petitioner of its Nissan patrol to ,ron-r"rid"r,t of goods, except those mentioned in Sections
its executive may be said to be an isolated transaction. However, it l4gandlsO,assembledormanufacturedinthePhilippines
does not follow that an isolated transaction cannot be an incidental fordeliverytoaresidentinthePhilippines,paidforin
transaction for vAT purposes. A reading ofsection 105 ofthe 1997 acceptable foreign currency and accounted for in accordance
Tax code would show that a transaction "in the course of trade or with the rules and regulations of the Bangho Sentral ng
business" includes "transactions incidental thereto." The court also Pilipinas (BSP).
explained its ruling in CIR u. Magsaysay Lines, which involved the (c) Sales to persons or entities whose exemption under special
sale of vessels by NDC to Magsaysay Lines; the sale was involuntary lawsorinternationalagreementstowhichthePhilippines
and made pursuant to government's policy of privatization. is a signatory effectively subjects such sales to zero tate'

3. Expor.t sale.
- (a) The
tetm"export sales" means: Goods or ProPerties
(1) The sale and actual shipment of goods from the The term "good's" means any movable, tangible object' which is
Philippines to a foreign country, irrespective of any appropriable or transferable, and having intrinsic value. It connotes
shipping amangement that may be agreed upon which ;; produced and subsequently purchased to satisfy the
may influence or determine the transfer of ownership ";-"dity
culent wants and perceived needs of the buyer (Reu' Regs' No' 5-87'
of the goods so exported and paid for in acceptable September 1,1987).
foreign currency or its equivalent in goods or services,
and accounted for in accordance with the rules and Theterm"goodsorproperties"meansalltangibleand
regulations of theBangko Sentral ng Pilipinas (BSp); intangible objects, whether real or personal, which are capable of
41u Vat.t rl' Alt't':t r'l'nx t VA'l't 4t9
ll,lrvt l':wr,:tr. oN'l' xn,rroru
()rrl.lrrrl 'l\tx ott i'irtlc r,l ( irttttlx ot l'rttltcrl'ics

pecuniary estimation. It includes: (a) real properties, such as Goods are consumed or for consumption in the Philip-
lands and buildings, held primarily for sale to customers or held for pines
lease in the ordinary course of trade or business, and (b) intangible
properties (i.e., the right or privilege to use patents, Domestic sales in the Philippines and importation of goods
"opy"ight.,
trademarks, etc.; the right or privilege to use in the philippi.r& from abroad that are indubitably intended to be used or consumed
oirtry in the Philippines are taxable at l2va. Export sales of qoods which
industrial, commercial or scientific equipment; the right or privilege to
use motion picture fi.lms, films, tapes and discs; and radio, television, are destined-to b" used or consumed outside the Philippines are
satellite transmission and cable television time), which are capable subject to value added tax at zero percent (07o). sale of goods by a
of pecuniary estimation (Sec. 106, NIRC). VAT-registered person located in the Customs Territory will also be
deemedls u"poit sale and thus zero-rated, if made to a corporation
*ith trr" Philippine ExportZoneAuthoriw (PEZA) or Subic
For valuable consideration ""girt"r"a
BJy Metropolitan Authority (SBMA), since the special economic zone
A transaction is outside the scope ofvalue added tax, unless it or ireeporLzone is consideied by fiction of law as a foreign territory.l
is made for a valuable consideration. consideration may consist of This rule is in conformity with the principle that the vAT is a tax on
money, or something of value other than money (e.g., barter of pen consumption of goods in the Philippines'
for wristwatch), or partly money and partly in kind (e.g., exchange
VATonimported.goods.-Thereshallbelevied,assessedand
or trade-in of motor vehicle). Transfer of property without valuable imporiation of goods a value-added tax equivalent
collected or,
to 1,2Vo based on thelotal value used by the Bureau of Customs in
consideration (e.g., gift) is exempt from value added tax. "rr"ry
determining tariff and customs duties plus customs duties, excise
ln the course of trade or business taxes, if any, and other charges, such tax to be paid by the importer
The phrase "in the course of trad,e or business" prior to the release of such goods from customs custody: Prouided'
means the
regrrlar conduct or pursuit of a commercial or an economic activity, Th"t *h""" the customs duties are determined on the basis of the
including transactions incidental thereto, by any person, regardless quantity or volume of the goods, the value-added tax shall be based
of whether or not the person engaged therein is a non-stock, non- on tft" landed cost plus excise taxes, if any (Sec' 707, NIRC) '
profit private organization (irrespective ofthe disposition ofits net
income and whether or not it sells exclusively to members or their Bar Question (2005)
guests), or government entity. The rule of regularity to the contrary
AnalienemployeeoftheAsianDevelopmentBank(ADB)who
notwithstanding, services rendered in the philippines by non-resident
is retiring soon has offered to sell his car to you, which he imported
foreign persons shall be considered as being."tta""ea in the course
tax-free for his personal use. The privilege of exemption from tax is
of trade or business (Sec. 105, NIRC).
granted to qualified personal use under the ADB Charter' which is
"Incid.entol" means depending upon or appertaining to iecognized by the tax authorities. Ifyou decide to purchase the car,
something else as primary; something necessary appertaining to, is the sale subject to tax? ExPlain'
or depending upon another which is termed the principal (Word.s &
Phrases, 1940,Vol- 20, p.41g). Suggested answer:
A transaction will be characterized as having been entered Yes.Thesqleissubjecttota'x.Section107(8)oftheTaxCode
into by a person in the course oftrade or business, i?it is regularly prouid.es that "[I]n the case of tax-free irnportation of goods into
conducted and undertaken in pursuit of a commercial or economic
activity. Transactions that are undertaken incidental to the pursuit 'S""J.1065, Rev. R,egs' No. 4-2007 (February 7,2007) considers current sales
of a commercial or economic activity are considered" as enterled into to ecozone or freeport ron" automatically zero-rated sales, see Sec. 106-5(e), Rev'
i,
in the course oftrade or business. il;r.N". 16_0b; itMc T4-99 dated october 1b, 1999; see commissioner v. Seagate
TeJhnology (philippines), G.R. No. 153866, February 11, 2005 and
commissioner v.
9' 2005'
Toshiba Ilnfor-ation Equipment (Phils'), G'R' No' I5OI54' August
420 Itr,:vt t,:wr,; tr r lr,l'l'rtxnt,rotr

the Philippines by persons, entities or agencies erempt


from tax,
where such goods are subsequently sold, transferred. or exchanged
in the Philippines to non-exempt persons or entities, the purchasirs,
transferees or recipients sholl be considered, the importer ihereof, who
shall be liable for any internal reuenue ta* on such importation., CI{APIER XVIII
OUTPUT TAX ON SALE OF SERVICES
Absence of profit or margin does not make the perfor-
mance of taxable services for a fee exempt from VAT
commonwealth Management and services corporation The phrase "sale or exchange of seruiees" broadly embraces
(comaserco) is a corporation duly organized and existing the performance of all kinds of services in the Philippines for others
under the
laws of the Philippines. It is an affiliate of philippine Anierican Life for i fee, remuneration or consideration, by a person, regardless of
Insrrrance company (Philamlife), organized by the latter to perform whether the performance thereof calls for the exercise or use of the
collection, consultative and other technical services, including physical or mental faculties. It means any transaction undertaken in
functioning as an internal auditor of philamlife and its other affiliates. ih" .oo"ru oftrade or business which does not constitute sale ofgoods
These services were performed on a "no-profi.t, reimbursement-of-cost and which is not expressly exempt from value added tax under the
only" basis by comaserco, which averred that it was not engaged in Tax code or special law. services of the following persons are subject
the business of providing services to philamlife and its ahhates. to value added tax:
comaserco was established to ensure operational orderliness and 1. Construction and service contractors;
administrative efficiency of philamlife and its affiliates, and not in
the sale ofservices. 2. Stock, real estate, commercial, customs and immigration
brokers;
The Supreme Court ruled that contrary to Comaserco,s
contention, section r05 (persons liabte) of the Tax code clarifies 3. Lessors ofproperty, whether personal or real;
that even a non-stock, non-profit organization or government entity 4. Warehousing services;
is liable to pay vAT on the sale of goods or services. vAT is a tax on
transactions, imposed at every stage ofthe distribution process on the 5. Lessors or distributors of cinematographic fiIms;
sale, barter, exchange ofgoods or property, and on the performance of 6. Persons engaged in milling' processing, manufacturing or
services, even in the absence ofprofit attributable thereto. The term repacking goods for others;
"in the course oftrade or business" requires the regular conduct or
7. Proprietors, operators or keepers of hotels, motels,
pursuit of a commercial or an economic activity, regardless of whether
or not the entity is profit-oriented. It is immaterial whether the resthouses, pension houses, inns, resorts;
nrimary purpose of a corporation indicates that it receives payments 8. Proprietors or operators of restaurants, refreshment
for ser-vices rendered to its affiliates on a reimbursement-of-cost basis purlor., cafes and other eating places, including clubs and
only, without realizing profit, for purposes of determining liability caterers;
for vAT on services rendered. As long as the entity provides serrrice
for a fee, remuneration or consideration, then the service rendered 9. Dealers in securities;
is subject to vAT. At any rate, because taxes are the lifeblood of the 10. Lending investors;
nation, statutes that allow exemptions are construed strictly against
the grantee and liberally in favor of the government.2 11. Transportation contractors on their transport of goods
or cargoes, including persons who transport goods or
..rgo"t for hire and other domestic common carriers by
2commissioner v. cA and commonwealth Management and services
Corporation, G.R. No. I2SZEE,March 80,2000.
421
422 ltr,:vrr,:wr,:rr oru 'l'rrxn.r,lor.r
Vlt t,t, Atrtrt,:tr'l',rx IVA'l't 42:t
( tttl Ittl 'l'rrx rrtr i'iltlc ol Scrvitts
land, air and water relative to their transport of goods the sila.s ol'l,ltc lrrt,l,cr is Lhe place where the right to use
or cargoes; the propert.y is excrcised.
12. Services of franchise grantees of telephone and telegraph,
3. Leq.se or use of intangible property. - Intangible
radio and television broadcasting and all other franchise properties may be grouped into (a) patents,
copyrights,
grantees except those under Section 119 ofthe Tax Code;
designs or models, plans, secret formula or processes,
13. Services of banks, non-bank financial intermediaries and goodwill, trademark, trade brand or other like property
finance companies; or right, and (b) right to use radio, television, satellite
transmission and cable television time'
14. Non-life insurance companies (except their crop insu-
rances), including surety, fidelity, indemnity and bonding 4. Lease oruse oftangible property. - Tangibleproperties
companies; and may be grouped into (a) industrial, commercial or scientific
equipment, including the supply of any assistance that is
15. Similar services regardless of whether or not the ancillary and subsidiary to and is furnished as a means of
performance thereof calls for the exercise or use of the
enabling the application or enjoyment of such properties,
physical or mental faculties (Sec. 108[A], NIRC).
and (b) motion picture films, films, tapes and discs.

Categories of services Requisites for taxability of services


1. Professionalltechnical consult&ncy. - The supply 1. The service must be performed or is to be performed in the
of technical advice, assistance, or services rendered in course of trade or business in the Philippines, except in the
connection with technical management or administration
case of service done in the Philippines by a non-resident
of any scientific, industrial or commercial undertaking, person under Section 105 ofthe 1997 Tax Code;
venture, project or scheme.
2. For a valuable consideration actually or constructively
2. Transfer of technology. - Transfer of technology received; and
consisting of the supply of scientific, technical, industrial
or commercial knowledge or information, including 3. The service is not exempt under the Tax Code, special law,
ancillary and subsidiary assistance to and furnished as a or international agreement.
means of enabling the application and enjoyment of the
technology transfer. In this connection, it is important Sale of services
to differentiate between the service rendered and the
product arising from the performance of the service. The As an insurance broker, Winternitz income comes from
efforts or activities undertaken (for which the supplier commissions, and not from premium payments; hence, the basis
receives a remuneration or compensation) to produce for vAT should be the commission it receives and not the premium
scientific, technical, industrial or commercial knowledge payments it receives and remits to the insurance company. Such sales
or information should be distinguished from the product constitute part of the taxable income of the insurance companies,
which may emerge from or be created as a result of such and not Winternitz, as a broker. Section 301 of P.D. 612 defines an
efforts. The first is a performance of service, which may be "insttrance broher"asany person who, for compensation, commission
carried on within or outside the Philippines; the second is or another thing of value, acts or aids in any manner in soliciting,
an intellectual or other intangible property and the right negotiating or procuring the making of any insurance contract or in
to use such property may be exercised either within or placing risk or taking out insurance, on behalfofan insured other than
outside the Philippines for a consideration called royalty. himself. InAnscor Insurance Brohers u. CIR and CTA, the Supreme
The situs of the former is where the service is performed; court held that an insurance broker is different from an insurance
agent, since the broker acts as a middle between the insured and the
424 ll,t.:vt t,:wr,:tr oru'l'Axn'r'lolr VAr.r n, Arlrt';tr'l',rx (VA'l') 42ft
( )rrlprtl 'l'rrr ,,tt li:tlc rtl'Scrvirts

Insurance company and solicits insurance under no employment f'r<lm principte). The plucc (tl' prr.yrncnt is immaterial since t]ne situs
any special company and places orders ofinsurance with the company ot'tt" service is dctt:rminod b.y the place where such service is
selected by the insured, or in the absence ofsuch a selection, by the performed.
broker Minternitz Associates Insurance Brohers Corp. u. CIR,
The word "incid.ental" means depending upon or appertaining
CTA Case No. 7977, June 9, 2077).
to something else as primary; something necessary, appertaining to,
Since National Development Company (NDC) is a VAT-registered or depend.ing upon another, that is termed the principal. The sale of
person on its sale of services, its transactions incident to the normal NDC's vessels was pursuant to the government privatization program
VAT-registered activity of leasing out personal property, including beyond the control of NDC. The sale of the vessels as such is not
sale of its own assets (vessels) that are movable, tangible objects, necessary to carry out NDC's primary function of leasing personal
which are appropriable or transferable are subject to the lOVovaIue properties. The act ofselling capital assets does not necessarily follow
added tax. This finds support in VAT Ruling No. 395-88 dated August lhe-act ofleasing these assets. The sales transaction was in isolated
18, 1988 which stated that NDC operates like a holding company case. An isolated transaction does not warrant the imposition thereof
with various interests/investments in other companies operating for of business taxes (Magsaysay Lines, et al. u. Comrnissioner, CTA
profit; its functions are purely proprietary. It is registered as a VAT Case No.4353, April 27, 1992).
person engaging in leasing personal property and it does not pay the
three percent (3Vo) common carrier's tax. The terms of the bidding Lease of Properties Owned by Non-residents
provide that a value added tax of lOVo (now !27o) onthe value ofthe
vessels shall be paid by the winning bidder (Magsaysay Lines, et A non-resident person who derives rental income from the
al. a. Commissioner, CTA Case No.4353, April27, 1gg2). Iease of tangible property physically situated in the Philippines or
receives royalties for granting the right to use in the Philippines the
Service in the course of trade or business intangible property (eg., copyright or patent) belonging to him is a
taxable person. The amount of rentals and royalties remitted to the
It is not absolutely necessary that the person who entered non-resident lessor or licensor is subject to value added tax (except
into a contract to perform service for another in the course oftrade when the payor is an enterprise registered with the Philippine Export
or business should personally render the service. The service may Zone Authority tPEZAl, Subic Bay Metropolitan Authority [SBMA]'
be performed by another as a subcontractor. Thus, in the case of clark Development Authority tcDAl and other related authorities
Philippine Healthcq,re Prouiders Corporation u. Commissioner ( supra), under R.A. 7916 and 7227, as amended), irrespective of the place
the Court ruled that petitioner merely acted as a sub-contractor and where the contract of lease or licensing agreement is executed, if the
did not perform medical services to its members. property is leased or used in the Philippines.
AII kinds of services performed in the Philippines by a VAT- The Tax Code prescribes an ancillary criterion for determining
registered person for a resident or non-resident person are subject to the destination of the service rendered in the form of lease of tangible
value added tax at the rate of l27o or OVo. Certain services performed properties, which is the place where the property is leased or used'
in the customs territory of the Philippines are subject to zero percent
(0Vo), andserwices performed outside the Philippines, including special
Actual or Constructive ReceiPt
economic zones and freeport zones which are considered as foreign
territories by fiction of law (Saura Import & Export Co. a. Meer, Tax accounting rules for gross receipts within a taxable period
G.B. No. L-2927, Februany 25, 7957), even if undertaken in the for value added tax is different from the accrual method of accounting
course oftrade or business, are beyond the scope ofthe value added for income tax purposes. Issuing and,/or sending statement of account
tax and thus exempt from value added tax. to the customer for whom the service was rendered or still to be
performed does not create output tax liability to the seller nor does it
The place where the service is performed determines the give rise to input tax (creditable by the vAT-registered buyer) until
jurisdiction to impose the value added tax (situs-of-seraice the consideration is received by the seller.
426 lU,:v r r,rwtLtt r lr.r'l'nxat'rol Vnt.lt,t At,t,t, l,'l'nx tVA'l't 427
()rrl.prrl 'l'rrx ott Sttlt'ol ( irxxln ttr I'rolx'rlics

Actual or constructive receipt of the contract price, compensation, Code (such as grantees ol'gus, tnd water utility firms and radio and,/
remuneration or fee makes the seller of service liable to value added or television broadcasting companies whose annual gross receipts
tax, even if no service has yet been performed by him. Thus, if a for the preceding year do not exceed F10 million), became subject
contractor receives upon the execution ofthe contract a down pa5rment to value added tax.
of 20Vo of the total contract price, such amount received is already However, under P.D. 1869, PAGCOR is subject to franchise tax
subject to value added tax although he does not start the construction
offive percent (57o) ofils gToss revenues or earnings from its casino
ofthe project until after the next taxable quarter.
operations, dollar pit operations, regular bingo operations, and
"Constructiue receipt" occurs when the money consideration or income from mobile bingo operations operated by it, with agents on
its equivalent is placed under the control ofthe person who rendered commission basis (EMC 33-2013, April 17,2013).
the service without restrictions by the payor. Examples are: deposit Tollway operators are couered by the VAT because they render
in banks which are made available to the seller of services without
seruices for a fee. They arejust lihe lessors, warehouse operators and
restrictions; issuance by the debtor ofa notice to offset any debt or
other groups expressly mentioned in the law' - Under P.D. 1112
obligation and acceptance thereofby the seller as paJrment for services (Toll Operation Decree), tollway operators construct, maintain,
rendered; and transfer ofthe amounts retained by the contractee to
and operate expressways, also called tollways, at the operators'
the account of contractor.
expense. Tollways serve as alternatives to regular public highways
that meander through populated areas and branch out to local
Dealer in Securities roads. In consideration for constructing tollways at their expense,
A"d,ealer in securities" is a merchant of stocks or securities, the operators are allowed to collect government-approved fees from
whether an individual, partnership or corporation, with an established motorists using the tollways until such operators could fully recover
place of business, regularly engaged in the purchase of securities their expenses and earn reasonable returns from their investments.
and their resale to customers. He buys securities and sells them to When a tollway operator takes a toll fee from a motorist' the fee
customers with a view to the gains and profits that may be derived is in effect for the latter's use of the tollway facilities over which
therefrom. the operator enjoys private proprietary rights that its contract and
the law recognize. Toll operators are franchisees because franchise
A pre-need. cotnpany is considered as a dealer in securities broadly covers government grants ofa special right to do an act or
subject to tOVo value added tax on gross income. Its gross receipts series of acts of public concerns. Also, the VAT law does not define
consist of actual receipts of premium on contract price minus franchisees as only those who have legislative franchise. Petitioners
contributions to the trust funds to be set up independently as contend that toll fees are of public nature and are therefore not
mandated by the Securities and Exchange Commission. sale of services. This is not correct. The law in the same manner
includes electric utilities, telephone, telegraph and broadcasting
Franchise Grantees companies in its list of vAT-covered businesses. Their services are
also of public nature. Moreover, statements made by individual
A franchise is the privilege of doing that which does not belong
members of congress in the consideration of a bill do not necessarily
to the citizens of the country generally by common right; it is a right
reflect the sense ofthat body and are' consequently, not controlling
and privilege acquired by special grants from the public through the
in the interpretation of law. The Congressional will is ultimately
legislature which imposes on the grantee as a consideration therefore,
determined by the language of the law that the lawmakers voted
a duty to the public to see that they are properly used.
on. The toll fee is not a tax. It is not collected by BIR or by the
Before the effectivity of R.A. 7716 (otherwise known as the government. It does not go to the government coffers. It is not
Expanded VAT Law), sale of services by legislative franchise collected for a public purpose. The operation by the government
grantees were subject to tax prescribed by their respective of a tollway does not change the character of the road as one for
franchises. BeginningJanuary 1, 1996, all franchise grantees, except public use. The charging of fees to the public does not determine
those subject to franchise tax under Section 119 of the 1992 Tax the character of the property whether it is for public dominion or
428 Itt,rvt t,:wr,:H or.r'l'Axn'r'roN
Vnt.t rl'l Atrt rt':tr'l'nx (VA'l') 429
( )rrl,prrl,'l\tx ott Srrlc ol ( ltxrtls or Itrolltrrl.itrs
not. The seller remains directly and legally liable for payment ol'
the VAT, but the buyer bears its burden since the amount of VAT Suggested answer:
paid by the former is added to the selling price. Once shifted, the 1. VAT exernpt. Sale of agricultural products such as fresh
VAT ceases to be a tax and simply becomes part of the cost that the uegetables in their origin'al state, of a kind generally used
buyer must pay in order to purchase the goods, property or service. as, or producing foods for human consumption, is exempt
VAT on tollway operations is not really a tax on the tollway user,
fromVAT (Sec. 109[c], NIRC).
but on the tollway operator (Renato Diaz, et al. a, Seeretary of
Finance and CIR, G.R. No. 793007, July 7g,2OI1). 2. VAT at 10Vo. Since Juke's Construction Company has
rendered seruices to theWorld Health Organization, which
R.A. 9337, effective November L,2005, subjects to zero percent is an entity exempted from ta,xation under iruternational
(OVo) rate all sales of power or sales of fuel, as long as said power/ agreements to which the Philippines is a signatory, the
electricity and fuel are generated or produced from renewable sources supply of seruices is subject to zero percent (07o) rate (Sec.
of enerry, which means that the seller of power/electricity or fuel 108[B][3J, NIRC).
must not only be limited to generation companies, unlike in R.A. 9136
(EPIRA Law), which requires that the sale of generated power must be 3. VAT at 707o. Tractors and other agricultural implemen'ts
made by a generation company (Energy Deoelnpmcnt Corporation fall under the definition of goods which include all tangible
a. CIR, CTA Case No. 7792, Noaernber 19, 2012). objects which are capable of pecuniary estimcttion (Sec.
106tAlt1l, NIRC), the sales of which are subject to VAT at
10Vo.
Lending investor
A "lend.ing inuestor" is a person, other than a bank, non- 4. This is subject to VAT at 707o. This transaction also falls
bank financial intermediary, finance company and other financial under the definition of goods, the sales of which are subject
intermediary not performing quasi-banking functions, who makes a to VAT at 707o.
practice of lending money for himself or others at interest. 5. VAT exempt. The monthly fee paid by each student falls
under the lease of residential units with a monthly rental
Bar Question (1998) per unit not exceeding F8,000 (now F10,000), which is
exempt from VAT, regardless of the amount of aggregate
State whether the following transactions are (a) VAT Exempt;
rentals receiued by the lessor during the year (Sec- 109[x],
(b) subject to VAT at lOVo (now l2Vo); or (c) subject to VAT at OVo:
NIRC). The term "unit" shall mean per person in the case of
1. Sale of fresh vegetables by Aling Ining atthe Pamilihang dorntitories, boarding houses and bed spaces (5ec.4.103-1'
Bayan ng Trece Martirez; Reu. Regs. No.7-95).

2. Services rendered by Jake's Construction Company,


a contractor to the World Health Organization in the Bar Question (1992)
renovation of its offices in Manila; Your client, United Market Cooperative, is requesting the
3. Sale of tractors and other agricultural implements by Commissioner of Internal Revenue to exempt it from the payment
Bunghal Incorporated to local farmers; of VAT on its purchases of prime commodities from food suppliers/
manufacturers on the ground that it is exempt from all taxes'
4. Sale of RTW by Cely's Boutique, a Filipino dress designer, including VAT, under R.A. No. 6938, the Cooperative Code of the
in her dress shop and other outlets; Philippines.
5. Fees for lodging paid by students to Bahay-Bahayan Do you think your client can obtain the necessary exemption
Dormitory, a private entity operating a student dormitory from the BIR? If your answer is in the affirmative, explain the basis
(monthly fee F1,500). for the grant. If your answer is in the negative, state the basis for the
rejection of the request.
Vlt,ttt,: Alt,t,:t,'l'nx (VA'l') 4;l I
430 llt,:vr r,:wr,:tt oN'l'nxrvlror.r
( )rrl,1rrrl. 'l'ttr ott Sltk' ol ( |xxls or I'r<tp<lrtitrs

Suggested answer: registered seller, the purchust: lransaction is not exempt from value
added tax.
1. An exemption is not necessary. The ualue added tax is
not imposed on the purchaser but on the seller, except in VAT is an indirect tax, which is shifted by the seller to the
importation of goods. buyer by adding the same to the cash cost and/or selling price' The
tax exemption granted to a rural bank by virtue of section 15 of
2. No. The exemption to which the toxpayers are entitled to Republic Act No. 7353 extends only to those taxes which a rural bank
refers to those that are leuied on the exempt taxpayer or is directly liable to pay and not to the taxes which are merely passed
directly imposed on. the exempted goods. The ualue added on to it as a consequence of the sale (The Region Bank [Los Bafi'os
tax is imposed on the sellers of goods and seruices, rlot on Rural Bankl v. Commissioner, CTA Case No.5378, September
the purchasers. 1,7997).

Gategories of exemptions Scope of exemption


1. Exempt persons
- the seller or the buyer is not liable to 1. Partia'l erernption The seller has no output tax liability
-input
value added tax; or on his sales, but the taxes passed on to him by his
2. Exempt transactions transactions in certain goods, suppliers ofgoods, properties or services form part ofhis
-
properties or services, which are not subject to value added assets or operating expenses.
tax, even ifsuch goods, properties or services are sold by a 2. Total eremption - Total relief from value added tax
VAT-registered person, and regardless ofthe annual gross is accomplished by subjecting the sales to zero rate, but
sales or receipts derived therefrom. the input taxes passed on to him by his suppliers may be
A seller who is a VAT-registered person may be exempt from recovered from the BIR through claims for tax credits or
legal liability to pay the value added tax. Such exemption may be refunds.
express or implied. An express exemption may be granted under Eremption from ta.r means that the seller is relieved from the
a specific provision of the Tax Code or a special law, which confers payment of the value added tax on his taxable transactions for which
upon such person the exemption from the payment of the value added he is directly and legally liable.
tax. The exemption from value added tax may be implied; 1.e., it is
intrinsic from the very nature of the entity itself as a non-taxable The Philippine value added tax system is replete with exemptions
person (e.g., government performing essential governmental functions that not only complicates to a certain degree the implementation of
and non-stock, non-profit associations not undertaking any taxable the value added tax but also limits the tax base.
transaction). nln lieu of prouision exent'pts PLDT from VAT on
importation of mnchineryt and' equipmcnt- phrase "in
A person, who is engaged in business of undertaking exempt - The for (Black
transactions, is not liable to value added tax. However, if at the same lieu of'means instead of; in place of; or on substitution
time, he also undertakes taxable transactions, the value of which a. Barneq46 p.2d' 6251 626, 742 Kan.381).h does not mean "in
does not exceed the prescribed threshold, he is not liable to pay value addition to" (Glossrnon Const. Co, ts. Baltimare Briek Co., 246
added tax, unless he opts to register as a VAT person. Md.478, 228 Azd 472,474, Black's Law Dictionary, 6th ed-, 7990,
p. 787). The "in Iieu of implies the existence of something for which
Transactions with exempt persons L substitution is being made. Thus, the "in lieu of all other taxes"
means that none other than the tax specified however described,
If the law merely exempts an entity as a seller from direct can be demanded. It limits the liability to the specific tax (State
liability for payment of the value added tax on his sales and it of Tennessee a. Bank of Commerce, 53 F- 735, 736, Words and
does not relieve the same person as a purchaser from the direct Phrases, Vol. 27, p. 474). Thus, the phrase "in lieu of all taxes" has
burden of the value added tax that may be shifted to it by a VAT-
432 llt,:vtt,:wt,:ti ot't'l'nx,r'r'roN V^r,r r' Arr'r.tr'l'nx tVA'l't 4:t:l
( )rtllrttl 'l'rrr ,,tt ljrtlr' ,rl ( ioorls or l'rol)('rl,i('s

the effect of exempting from taxation the VAT (which is covered crrrrgct in subjeclirtg [lttrstr rcv(]llLlos to the value added tax
(Manila
under the general term "taxes" under Section 12 of R.A. 7082) on the Mand.arin Hotels u. Comrnittsioner, CTA Case No' 5046, March
purchases of imporbed equipment, machineries and spare parts made 24,1997).
by petitioner by virtue ofits paying the three percent (37o) franchise
tax pursuant to Section 117 of the NIRC and Section 12 of R.A. 7082. Sec.1O9(l) - Hospital seraices
The rationale for the exemption from all other taxes except the income .,Medical services" include various items of services like general
tax and the real property tax granted on petitioner upon the payment
treatment, physical examination, consultation, medication, dressing,
of the three percent (3Vo)franchise tax is "that such exemption is part
suturing sutgicat operation, and all that pertain to or deal with
of the inducement for the acceptance of the franchise and the rendition
the healing art of the science of medicine (BIR Ruling No. 107-99'
of public service by the grantee" (Proaince of Misamis Oriental
Nouemberl2, 1ggg, quoting Cortes a- Pan Orienta'l Match Co',7
a. Cagayan Electric Power and. Light Companyr Inc., GR. No.
CAR [2s] 1014).
45355, January 72, 1990).It is an elementary rule in statutory
construction that the exceptions in the law will not be enlarged beyond The sale of drugs and other pharmaceutical items to in-patients
the actual signification ofthe words used or extended beyond the limits of the hospital is a vAT-exempt transaction within the meaning of
the words themselves actually set (De Jesus v. City of Manila, 2g Section 103(l) [now Section 109(l)] of the Tax Code' The maintenance
Phil.73). The exemption from VAT was declared by the BIR in BIR and operation ofa pharmacy or drugstore by a hospital is a necessary
Ruling No. UN-140-94 dated April 19, 1994 and confirmed by the and essential (hospital) service or facility rendered by any hospital for
Department of Finance ruling dated January 5, 1995 (Philippine its patients ( st . Lukd s Med.ical center u . cTA and. com.missioner,
Long Distance Telephone Company u. Commis sioner, CTA Case CA-GR. SP No. 45892, March 73, 1'998). Before a taxpayer may
No.5706, Decetnber 18, 7995). claim that its sale of drugs or pharmaceutical items is classified
as "hospital services" exempt from VAT, the following must be
Generally, the exemption is fundamentally intended to benefit
established: (i) that the taxpayer operates a hospital; (ii) that said
the purchaser, not the VAT-registered seller. There is no reason to
hospital has a pharmacy or drugstore; and (iii) that the sale of drugs
exempt the seller because he can charge the value added tax against
was -ade uy sala hospital drugstore or pharmacy to in-patients of the
his customer, thereby enabling him to recoup what he pays to the
hospital being operated by the taxpayer. Under R.A.4226,"hospital"
government. A seller may enjoy exemption from value added tax, not
,rr"*rr. a place devoted primarily to the maintenance and operation of
necessarily under a special law but because ofits intrinsic nature as an
facilities for the diagnosis, treatment and care of individuals suffering
entity that is not subject to value added tax. However, an international
from illness, disease, injury or deformity, or in need of obstetrical
agreement or special law must include indirect taxes, such as value
or other medical and nursing care. A perusal of petitioner's Articles
added tax, among the transactions with a purchaser to make them
of Incorporation reveals that petitioner is essentially a non-stock,
eligible either for exemption (partial reliefl or zero-rating (complete
,rorr-profit educational corporation. They also failed to provide proof
reliefl.
that the discrepancy is due to sales of medicine, equipment and
supplies to in-patienis (Herm'no Miguel Febres Cord'ero Med'ical
Illustrative Cases:
Found.ation a. CIR, suPra).
Sec.7o9(il - Comman carriers
Sec.1O9(q) - Special law or international agreement
The petitioner is not a common carrier subject to the three
percent (\Vo) comrr'on carrier's tax under Section 115 of the Tax Code. Though Japanese nationals may be considered exempted from
Petitioner is engaged in the hotel business and not in the business of value added tax pursuant to section 103(u) [now section 109(q)] ofthe
transporting passengers as defined in Article 1732 of lhe New Civil NIRC, the exemption refers to its own direct tax liability by reason of
Code. On the occasion when the petitioner extends transport services its own supply of products and services, meaning the output tax due.
like providing limousine service and the like, it does so only for its This cannoi refer to input taxes passed on to it by its suppliers as
hotel guests and not to the public in general. Respondent is thus forming part of the invoice price. AVAT-exempt person is exempted
434 llt,:vt t,;wr,;tr or'r'l'nx,t't tor.r

for value added tax (output tax) but is not entitlcd to clainr inprrt t,ax
credit. In view thereof, petitioner is not entitled to the refund of input
taxes because it failed to qualify as an effectively zero-ratcd VA'l'
person and even as an exempt taxpayer by virtue ofthe Exchange o1'
Notes between the Philippine and Japanese governmenLs (Kurnagai- CIIAPTER XIX
Gumi Co., Ltd.. tPhil. Branch] u. Cornrnissioner, CTA Case Nos.
4670, July 29, 7997 and.4777, May 4, 1998).
TAX BASES

Effective y zer o -r ated tra n sacti o n


I
Actual sale of goods or ProPerties
Effectively zero-rated sale of goods or properties shall refer
to the sale by a VAT-registered seller to a person who was granted 'Tax base" is the amount or value on which the value added
indirect tax exemption under a special law or international agreement. tax rate will be applied in computing the output tax. For a taxable
However, the exemption of the entity does not extend to its personnel person who sells goods or properties, the tax base is the "gross
and guests with respect to the value added tax that may be passed selling price," the total amount of money or its equivalent which
on to them by their suppliers. the purchaser pays or is obligated to pay to the seller in consideration
ofthe sale, barter or exchange ofthe goods or properties, excluding
In CIR o. Acesite Hotel Corporation, the Supreme Court the value added tax(Sec. L06tAl, NIRC). Thus, in the case of sale of
already settled the issue as to PAGCOR's exemption under P.D. 1869. appliances and other personal properties on installment basis,
It ruled that under PAGCOR's Charter, it is granted exemption from the entire gtoss selling price is subject to l27o VAT in the quarter of
payrnent of taxes, except franchise tax, which shall be in lieu of all sale (whether the consideration is received in fulI or not in the quarter
kinds of taxes, levies and fees or assessments of any kind, nature of sale). However, in the case of sale, barter or exchange on or after
or description, levied, established or collected by any government January 1, 1996 of real property subject to VAT, "gross selling
authority. Such exemption is extended to entities or individuals price,' shall mean the consideration stated in the sales document
dealing with PAGCOR in casino operations. Since Grand Plaza's iwhich may include cash, property, and evidence of indebtedness
transaction with PAGCOR pertains to the latter's casino operations, issued by the buyer). However, the commissioner shall determine
PAGCOR's exemption from taxes, specifically from VAT, extends to the appropriate tax base in cases where a transaction is deemed a
its transaction with Grand Plaza. Section 108(BXg) of the Tax Code sale, barter or exchange ofgoods or properties, where the gross selling
effectively zero rates services rendered to persons or entities whose price is unreasonably lower than the actual market value (Se c. 106[E] '
exemption under special laws or international agreements to which NIRC).If the VAT is not billed separately in the document of sale,
the Philippines is a signatory effectively subjects the supply of such the selling price or the consideration stated therein shall be deemed
services to zero percent (0Vo) rate (Grand. Plaza Hotel Corporation tobe inclusiue of VAT.
v. CIR, CTA Case No.7794, Februany 18,2017).
Sale of goods
Exemption based on location
As a general rule, the value added tax (output tax) accrues on
The exemption or extent of exemption of a person may depend sale ofgoods or properties (other than a real property) at the time of
upon the location of its business. A Board of Investments (BOI)- sale, when the sales invoice is issued, although none or only a part
registered firm is granted exemption even if it is located and doing of the gross selling price is paid by the buyer at the time of sale'
business within the customs territory. On the other hand, a special
economic zone or freeport zone is granted exemption because it has
to locate and conduct business within a geographically demarcated
area.
435
l},:vr r,:wr,rrr oN'l'nxn'r'ror'r Vlt,t tr Atrtrt,:l'l'nx t VA'l't 4:17
'lirx lhtHls

Sale of real property t,hc scparately-billed ou[put VA'l'in the sales document issued by
the scller. Therefore, the output vAT which is based on the market
Sale of real property may be for cash or on installment sale. A value must be billed separately by the seller in the sales document
cash sale is subject to value added tax at the time of execution of the with specific mention that the vAT billed separately is based on the
document of sale. The amount subject to value added on installment market value of the property (Sec. 4.106-4, Reu. Regs. No. 4-2007,
sales will depend on the initial pa5rments received during the taxable February 7,2007).
year.
An installment sale is a sale of real property whereby the Sales discounts, returns, and allowances
payment of the consideration therefor is not made in full at the time Sales discounts determined and granted at the time of sale,
of sale but is deferred or staggered at a later date or dates. "Initial which are expressly indicated in the sales invoice relating to sales of
paymcnts" means paym.ents, which the seller receiues before or upon goods or properties do not form part ofthe tax base; hence, deducted
execution of the instrurnent of sale, plus the payments which he expects irom the gross selling price. The sales discounts must be recorded in
or is scheduled to receiue in cash or property (other than euidence of the books of accounts of the seller. The grant of sales discounts must
indebtedness ofthe purchaser) during the calendar year when the real not depend upon the happening of a future event. Thus, discount
property is sold. granted after the buyer has achieved a certain sales volume quota
In the case of sale of real property on the installment plan, for the period is not allowable deduction from gross sales.
where the initial payments do not exceed 25Vo of the total contract Senior citizens are entitled to 20Vo discount under R.A' 9257,
price or gross selling price, the tax base shall be the amount actually otherwise known as the Expanded senior citizens Act of 2003. The tax
or constructively received during the taxable quarter. The seller shall base shall be the net sales after deducting the 20vo discoant granted
recognize output tax and input tax shall accrue to the buyer at the to the senior citizen and the dealer may deduct such discount from
time of the execution of the instrument of sale. its gross selling price without requiring the indication of the buyer-
On the other hand, in the case of a deferred payment sale not senior citizen's TIN.I
on the installment plan, where the initial pa5rments exceed 257o
ofthe total contract price or gross selling price, the tax base shall Transactions deemed sale
be the entire gross selling price, in which case, even if only a part The tax base for transactions deemed sale, such as (a)
ofthe total consideration is received by the seller, his output tax is withdrawal of goods from business for non-business use; (b) business
computed on the entire gross selling price. His subsequent receipt of assets distributed to shareholders or investors as their share in the
the unpaid balance in succeeding years will no longer be subject to profits or to creditors in payment of debt; and (c) goods consigned
value added tax that must be evidenced by non-VAT invoice or receipt lor a period exceeding 60 days, is the market value of such goods
(Sec. 4.106-7, Reu. Regs. No. 7-95). as of the occurrence of the transaction deemed sale' However, in
If the sale of real property is on installment plan where the the case of retirement from or cessation of business which is also a
zonal value/fair market value is higher than the consideration/selling transaction deemed sale, the tax base shall be the acquisition cost
price, exclusive of the VAT, the VAT shall be based on the ratio of or the current market price of the goods, whichever is lower (sec.
actual collection of the consideration, exclusive of VAT, against the 106[8], NIRC).
agreed consideration, exclusive of VAT, appearing in the Contract To
SeIVSale of SaIe applied to the zonal value/fair market value of the Commissioner's power to determine tax base
property at the time of the execution of the Contract To SelVContract If the gross selling price in the invoice is unreasonably lower
of Sale at the inception of the contract. Thus, since the output VAT than the actual market value, the commissioner is authorized to
is based on the market value of the property which is higher than
the consideration/selling price in the sales document, exclusive of rRev. Regs. No. 1-2007. R.A. 925? was amended by R.A. 9994 (Expanded Service
the VAT, the input VAT that can be claimed by the buyer shall be Citizens Act of 2010) which grants 207o discount and exempts sales from VAT'
438 ll,r,:vrr,rwr,:rr oru'l'AxA't'lr rN VAr,rr': Arrrrr,rrr'l'nx (VA'l') 4:J9
'lir x lhrn,s

determine and prescribe the actual market value to be used as the tax r:ornpanies), relativtrs b.y r:orrsrrttgtrinity or affinity within the fourth
base. The gross selling price is considered unreasonably lower than civil degree, even if'trlvcrotl ll.y an agreement to the contrary.2
the actual market value, if it is lower by more than 307o of the actual
To be subject to value added tax, the sale or exchange ofservice
market value of the same goods of the same quantity and quality sold
in the immediate locality on or nearest the date of sale (Sec. 106[D] must meet all of the following essential requisites:
[3], NIRC). 1. There is a sale or exchange ofservice or lease ofproperty
enumerated in the law or other similar services;
Sale of services 2. The service is performed or to be performed in the
The fundamental principle for the imposition of value added tax Philippines;
on sale of services is the performance of services in the Philippines. 3. The service is performed or to be performed in the course
The value added tax accrues upon actual or constructive receipt of ofthe taxpayer's trade or business or profession;
payment by the seller of service. Thus, when the seller received no
payrnent, no ualue added tax (output tax) liability arises. Corollarily, 4. The service is performed or to be performed for a valuable
if an amount of the contrqct price, fee or conxpensation is receiued consideration actually or constructively received; and
by the seller, he is liable to ualue added tqx euen though he has not 5. The service is not exempt under the Tax Code, special law,
performed any seruice to the buyer during the quarter.
or international agreement.
For sale of services, the tax base is gross receipts. The term Ifany ofthe above essential requisites is not met, the transaction
"gross receipts" means the total amount of money or its equivalent, is exempt from value added tax, but it may be subject to other
representing the contract price, compensation, seruice fee, rental or percentage tax under Title V ofthe Tax Code.
royalty, including the antount charged for materials supplied utith the
seruices and deposits and aduaruce payments actually or constructiuely The services of the following persons listed in Section 108 of the
receiued during the taxable quarter for the seruices performed or Tax Code are subject to value added tax:
to be performed for another person, excluding the ualue added tan 1. Construction and service contractors;
(Sec. 108[A], NIRC), except those arnounts earrnarhed for payment
to unrelated third party or receiued as reimbursement for aduance 2. Stock, real estate, commercial, customs, and immigration
payment on behalf of another, which do not redound to the benefit of brokers;
the payor. 3. Lessors ofproperty, whether personal or real;
A payment is a "paSrment to a third party," if the same is made 4. Warehousingservices;
to settle an obligation of another person, e.g., customer or client, to
the said third party, which obligation is evidenced by the sales invoice 5. Lessors or distributors of cinematographic films;
or official receipt issued by said third party to the obligor or debtor 6. Persons engaged in milling, processing, manufacturing or
(e.g., customer or client of the payor of the obligation).
repacking goods for others;
An advance payment is an "advance payment on behalf of 7. Proprietors, operators or keepers of hotels, motels,
another," if the same is paid to a third party for a present or future resthouses, pension houses, inns, and resorts;
obligation of said another party, which obligation is evidenced by a
sales invoice or official receipt issued by the obligee or creditor to the 8. Proprietors or operators of restaurants, refreshment
obligor or debtor (i.e., the aforementioned "another part") for the sale parlors, cafes and other eating places, including clubs and
of goods or services by the former to the latter. caterers;

For this purpose, "unrelated party" shall not include taxpayer's


':Sec. 4.108-4, Rev. Regs. No. 4-2007, February 7,2O07; Manila Jockey Club v.
employees, partners, affiliates (parent, subsidiary and other related Collector and Philippine Tourist Trade Corp. v. Commissioner, supra.
440 It.r,tvt r,:wr,:rr or'l'nxn'r'roN Vrr.r,r, Alnr't,'l',ir rVA'l't 441
'l'rt r l lrttrltr

9. Dealers in securities' irr l,lrc t:hirrl,cr ltinr lilr, l,lrc lrrw, ltowcvcr, is cxplicit that the l0o/oYAT
10. Lending investors; slroulrl not be lrasccl orr lhc itrcomc that must have been received
lrul, orr thc income that was actually received. Although the taxable
11. Transportation contractors on their transport ofgoods or transaction is the past, present or future performance of service, the
cargoes, including persons who transport goods or cargoeg t,ux accrues only upon actual or constructive receipt ofconsideration
for hire and other domestic common carriers by land ( P hilippine Fast Feny Corporation u . Cornrnissioner, CTA Caee

relative to their transport ofgoods or cargoes; No. 6302, August 75, 2002).
I
12. Common carriers by air and sea relative to their transport VAT is not based. on gross billings. - In BIR Ruling No.
of passengers, goods or cargoes from one place in the 085-99 dated June 29, 1999, then Commissioner Beethoven Rualo
Philippines to another place in the Philippines; ruled that reporting of output VAT based on accrual method of
13. Sales of electricity by generation, transmission, and accounting is not correct and output tax liability should be recorded
on cash basis. Indeed, petitioner erred in using its "gross billings" as
distribution companies, and electric cooperatives;
basis in the computation and recording of its output VAT (PLDT a.
L4. Services of franchise grantees of electric utilities, telephone Commissioner, CTA Case No. 5892, June 27,2002).
and telegraph, radio and television broadcasting, and all
other franchise grantees, except those under Section 119 Gross receipts of HMO includ.es atnounts paid. to
(franchise tax) of the Tax Code; hospitals and. clinics. - The membership fees in connection
with prepaid group practice health care program are subject to
15. Non-life insurance companies (except their crop insur- value added tax. The revenues ofhealth care providers are actually
ances), including surety, fidelity, indemnity and bonding derived from the application and membership fees being paid by
companies; and their members. Thus, the basis for computing the tax shall be the
gross receipts, which in this case shall be the payments for medical
16. Similar services, regardless of whether or not the
performance thereof calls for the exercise or use of the plans and application fees actually received from the members,
physical or mental faculties.3 undiminished by any amount paid or payable to owners/operators of
hospitals, clinics and medical and dental practitioners (Philippine
The GPP shall be treated. as a separate and. d,istinct Health Care Prouid.ers a. Commissioner, G.R. No. 768729,
taxable person from the ind.iaid.ual partners composing the April 24,2OOZ).
partnership. - For VAT purposes, all gross receipts from the
sales of services rendered by the partners for and in the name of Advance rental payments
the partnership shall be entirely taxable against the partnership.
However, the sales of services made by any of the partners thereof, Advance payment by the lessee which actually in the nature of:
in his personal and individual capacity, shall not be attributed to the (a) a loan to the lessor from the lessee; or (b) an option money for the
partnership, but shall be taxable against such partner as an individual property; or (c) a security deposit to insure the faithful performance
professional. The GPP is treated as a separate and distinct taxable ofcertain conditions ofthe lessee to the lessor is not subject to value
person from the individual partners composing the partnership. As added tax.
such, in determining whether or not a professional's gross receipts The receipt of a deposit as a requirement of the seller from his
exceed the prescribed VAT threshold, receipt of his share in the net tenants in the form ofsecurity or collateral does not constitute a sale
income of the GPP, of which he is partner, should not be considered. and the amount thereof does not form part of the lessor's gross selling
VAT is based, on income actually receiued.. price. It is only upon forfeiture of such deposit due to the customer's
be true
- While it may
that there was an overpayment because there was a decrease failure to fulfill certain conditions creating a taxable event that will
justify inclusion of the deposit in the tax base (VAT Ruling No. 276-
3Sec. 108(A), 88).
NIRC, as amended by R.A. 9337; Sec. 4.108-2, Rev. Regs. No. 16-05.
*I
442 lil :vr r,rwr,lrr or'l'.,rxn'r'ror.r Vlr,t rr, Atrtrt,;t,'l',rx t VA'l't 44:l
'l'rt x llttncs

Reimbursement of expenses tlrcsc cxpcns()H lnir.y trot llc claimed as deductions from the
gross incottrc ol'thc clicnt.
Generally, reimbursements do not form part of thc lax llrso
of the seller of service, provided they conform to the requiremonl,n 3. All payments made by the client to the GPP shall be
prescribed in the law or its implementing regulations. allowed as deduction from its gross income as professional
feels provided that they are duly substantiated by official
To be exernpt from VAT, receipts couering reimbureed
receipts issued by the GPP pursuant to Section 34(AX1) of
expenses must be in na,mn of customcr.
- Petitioner not only acted
as the exclusive mining service contractor of DMC in the production/
the Tax Code.
extraction of dolomite ore from the mining claims owned by the latter 4. The GPP and client are not precluded from availing of the
in Cebu but also became the exclusive buyer of the raw dolomite ore it Optional Standard Deduction provided under existing tax
produced./mined for DMC. Thus, petitioner incurred two types of costs laws, rules and regulations.
and expenses in its operations, namely: (a) those costs and expenses
incurred by petitioner as a service contractor of DMC in mining and Tax implications and recording of deposits/advances for
producing the dolomite ore which under the Service Contract were
expenses received by taxpayers not Govered by RMG
to be reimbursed by DMC; and (b) those incurred by petitioner in
connection with the processing of the raw dolomite ore after buying 89-2012
them from DMC and before the same were sold to third parties. Only Depositslad.aances part of gross receipts:
the costs and expenses under the first t5rye were covered by the Service
Contract and reimbursed by DMC to petitioner. The second type of When cash deposits or advances are received by taxpayers,
costs and expenses pertained to petitioner's independent operations
other than a general professional partnership (GPP) covered by
Revenue Memorandum Order No . 89-2012, from the clienUcustomer,
and were borne solely by petitioner. To be exempt from value added
a corresponding Official Receipt shall be issued. The amount received
tax, the receipts covering the reimbursed expenses must not be in
the name of petitioner but that of the customer (Philippine Mining shall be booked as income and shall form part of the Gross Receipts
Ser-aice Corporation a. Commissioner, CTA Case No. 5725, July subject to VAT or OPT, and shall in turn be deductible as expense
25,2002). by the clienVcustomer, provided it is duly substantiated by Official
Receipts pursuant to Section 34 ofthe Tax Code.
Tax implications and recording of deposits/advances Claim for d.ed.uction of expenses:
made by clients to GPP for expenses
Receipts incurred, paid for and issued in the name of the
1. Upon receipt ofthe cash deposits/advances from the client, taxpayer shall be recorded as its own expenses for income tax
the general professional partnership (GPP) shall issue an purposes. These expenses shall be claimed as deductions from gross
official receipt. The amount received shall be booked as income, provided these are substantiated by ORs/invoices issued by
income ofthe GPP and form part of the GPP's gross receipts third-party establishments.
and subject to VAT, if applicable.
2. The GPP shall record the expenses it incurred and paid Incom,e payments are subject to appropriate WT:
on behalf of the client as its own expenses, for income tax All clients/customers shall, upon payment of deposits/advances,
purposes, ifthe official receipVinvoice issued by the third- withhold tax at the rate prescribed in Revenue Regulations No. 2-98,
party is in the name of the GPP. Said expenses, supported as amended, which shall be remitted/paid on or before 10th day of
by official receipt/invoices issued by the third-party following month, except for taxes for December, which shall be filed
establishments in the name of the GPP, may be claimed by on or before January 15 ofthe following year. For taxpayers using
the latter as deductions from its gross income. Conversely, eFPS, regulations pertaining thereto shall apply.
444 VAr rir' Arrlt,:tr'l'nx (VA'l') 44lt
ll.t,:v t t,:wt,ttr oN'l'nxrvlror'r
'lirr llirsr,s

Issuing ORs for d.eposits and. ed.aances: Media advertising


An OR shall be issued for every deposit and advance pursururl, 'l'hc tax basc on mcdia transactions is (a) the amount of gross
to section 113 of the Tax code. The oR shall cover the entire amourrl, rcccipts representing agency commissions received by an advertising
which the clienVcustomer pays. irgency for the services it performed as a broker for the media and the
rrdvertiser; and (b) the amount representing gross receipts derived
For VAT taxpayers, the VAT OR will constitute the output ttrx by the media from its advertising service.
for taxpayers other than GPP and in turn, the input tax of its cliernU
customer (RMC 76-2073, February 75,2073).4
Travel agency
Reimbursemnnts from mall tenants for utilities are exempt
The value added tax on a travel agent is based on his gross
fromVAT. - Petitioner paid charges for electricity, air-conditioning, receipts which will not include the (a) cost of airline or ship tickets,
water, common facilities and janitorial services based on the floor area
and (b) the reimbursement of expenses for services rendered by third
occupied by each tenant and the lessees were made to reimburse these
advances made in accordance with the lease agreements. It is not the
party other than the travel agent and paid to such party. Typical
petitioner who directly supplies electricity, water and similar other of these reimbursements are passport and visa fees for all types of
goods to the lessees, neither does it render security and janitorial passengers and hotel room charges, bus and./or car tour charges, guide
fees, resort fees and meal charges for tourists. Iftour packages are
services. What petitioner does is to pay PLDT, Meralco, MWSS, and
packaged and sold to domestic tourists, the value added tax will be
other similar establishments for the services that they render and
based on the total receipts of the tour operator, excluding the fees
the goods that they supply for the whole Harrison Plaza Complex.
paid to bus operators, resort and guide fees and meal expenses. To
Therefore, reimbursements sought from the tenants for advances
be excluded from gross receipts, said expenses must be supported by
made by petitioner are not subject to value added tax(Tourist Tladz
receipts issued by the supplying company or establishment.
and. Tlauel Corporation a. Commissioner, CTA Case No.4806,
Januany 19,1996),
Hotel, restaurant, and caterer
Gustoms broker The tax base includes charges for rooms, laundry and valet
services, food and beverage consumption, corkage, handling charges
Gross receipts of a customs broker do not include advances for
for providing telephone, telex, cable, or fax services, cake shop
port fees, such as arrastre, wharfage, stamps, etc., provided that in
sales, lease to concessionaires, compensation and other service fees.
issuing receipts for the brokerage bill, the reimbursement for advances
However, it does not include (a) service charges billed separately and
are segregated. The BIR has ruled that advances for expenses payable
actually distributed to waiters and employees; (b) actual cost of long
to the government entities and./or government controlled corporations
distance and overseas telephone calls, fax, cable, telex and charges
and trucking, transportation, petty, representations and other
of the telecommunication companies collected by the establishment
miscellaneous expenses related to shipping, are excludible from the
from the customers for the concerned telecommunication companies,
taxable gross receipts of a customs broker if: (a) the advances are billed
which are earmarked for payment to the latter; and (c) local taxes
separately and a non-vAT receipt is issued to the client for the total
charged.
amount advanced; and (b) each person or entity who directly renders
service to the broker's client for whom he advanced the payment, Hotel guests, regard,Iess of nationality, are subiect to ualue
issues a receipUinvoice in the name of the client. ad.d.ed.tar. - The saleof servicebyhotels, motels andinnsis subject
to value added tax, regardless of the tax status of their customers,
aMany tax practitioners and taxpayers
do not agree with the above administrative who could be citizens or foreigners. In the case of foreign guests of
issuance. They believe that a deposit/advance (which is a liability account) does not
a hotel, the hotel and other charges paid by them are subject to the
automatically become the income of the professional or the contractor upon receipt
thereof (for income tax and vAT purposes), provided that they can show that such regular VAT rate, considering that zero-rating of services applies
advance/deposit is paid in the name oftheir clienucontractee as shown by the vAT/ only to "seryices other than processing, manufacturing or repacking
NV invoice or receipt issued by the supplier ofgoods or seryices.
446 llt,:vtt,:wt,ltt oN'l'Axn.rror.t Vnr,r rr, Ar,r,r',rr'l'nx t VA'l't 447
'l'rrx llrgr.s

rendered to a person engaged in business conducted outside thc [o this rule is whctt tltcrc is tr lttw or regulation, which would exempt
Philippines or to a non-resident person not engaged in businoss wh, such gross receipl,s liutrt t,hc lax. 'lhe Supreme Court ruled that
is outside the Philippines when the services are performed."r' the term "grols reeeipts" subject to tax do not include monies or
Proaiding limausine sertsice by a hotel to customers. .Iho receipts entrusted to the taxpayer which do not belong to them and
-
hotel is not a common carrier subject to the three percent(Bo/o) common do not redound to the taxpayer's benefit; and it is not necessary
carrier's tax under section 115 of the 19gz rax code. petitioner is that there must be a law or regulation which would exempt such
engaged in the hotel business and not in the business oftransporting monies and receipts within the meaning of gross receipts under the
passengers as defined in Article l7B2 of the New civil code. on Tax Code. Parenthetically, the room charges entrusted by the foreign
the occasion when the petitioner extends transport services like trauel agencies to the priuate respondent do not form part ofits gross
providing limousine service and the like, it does so only for its hotel receipts within the defi.nition of the Tax Code. The said receipts neuer
guests and not to the public in general. Respondent (commissioner) belonged to the priuate respondent. The priuate respondent neuer
is thus correct in subjecting these revenues to the varue added tax.6 benefited from their payment to the locol hotels. This arrangement
whether or not the common carrier's tax can be credited against the was only to q.ccommodate the foreign trauel agencies. If the hotel room
value added tax liability of the hotel operator, the authoi believes charges entrusted to petitioner will be subject to the three percent (SVo)
that it is not possible because only input taxes are creditable against contractor's tax qs what respondent would want to do in this case, that
output taxes. common carrier's tax is a percentage tax under Title v would in effect do indirectly whqt P.D. 37 tttould not like hotel room
of the Tax code. The remedy of the hotel is to file a written claim for charges of foreign tourists to be subjected to hotel room to'tc. Although
tax credit or refund within two (2) years from the date of erroneous respondent may claim that the three percent (3E') contractor's tax
payment of the tax. (replaced by ualue added tax in 1988) is imposed upon a different
incidence; i.e., the gross receipts of petitioner tourist agency which he
Gross receipts do not includ.e m.onies or receipts entn'sted. asserts includes the hotel room charges entrusted to it, the effect would
to the ta.xpayer which do not belong to thern and da nat rednund be to impose a tax, and though dffirent, it nonetheless imposes a tax
to the taxpayet's benefit.
- It is not necessary that there must be
a law or regulation which would exempt such monies and receipts
actually on roon'L charges. One way or the other, it would not haue the
effect of promoting tourisrn in the Philippines as that would increase
within the meaning of gross receipts under the Tax code. The hotel the costs or expenses by the addition of a hotel room tqx in the ouerall
room charges held in trust by a local travel agency for foreign tourists etcpenses of said tourists.e
and travelers and./or correspondent foreign travel agencies and paid to
local host hotels do not form part ofthe taxable gross receipts.z rhis Tolling fees receiaed' by a hotel for PLDT is not part of
decision is in accord with the earlier ruling of the supreme court in its gross receipts. - The definition ofgross receipts refers to the
another case.sThus, the amounts are delivered to the Board on Races, amount of money actually or constructively received by the taxpayer
the horse owners and the jockeys. These amounts are merely held as service fees. There is no reason why the hotel should include tolling
in trust for distribution as prizes to the owners of winning horses. charges for the overseas calls made by its guests as part of its gross
They are destined for no other object than the payment of prizes and receipts, because these are charges of PLDT. This ruling is consistent
the club cannot otherwise appropriate this portion without incurring with the decision of the Supreme Court in the cases of the Collector
liability to the owners of winning horses. u. Manila Jochey CIub, 108 Phil. 821, and Commissioner u- Tours
Specialists and CTA, 183 SCRA402. Moreover, the demolition of civil
BIR contends that gross receipts include the entire gross receipts works in the building of petitioner paving the way for a renovation
of a taxpayer undiminished by any amount, and the only exception thereofper se cannot be considered subject to value added tax. The
same is true with the retirement of the operating equipment' (e.g.,
sSec. 108(BX2), as amended silverwares) because the reason for their retirement was due to loss or
by R.A. 9887.
.Manila Mandarin Hotels v. Commissioner,
CTA Case No . E046,March24,lgg7
?Commissioner v. Tours Specialist eCommissioner v. Tours Specialists, Inc. and CTA, G.R. No. 66416, March 21,
and CTA, G.R. No. 66416, March 21, 1990.
sCollector v. Manila Jockey
Club, 108 Phil. 821 (1960). 1990.
ql
448 ll.t,:vrr,:wr,:rr oN'l'nxl't.rolr u^"'' (vn'r') 44e
f;]l';';,,1^x

obsolescence but not the sale thereof'subject to value added tax. 'l.hc Non-life insurance company
selling of unserviceable equipment and other assets, including reul
property improvement are not subject to value added tax. The selling Tax base consists of the total premiums collected whether
of these assets are merely incidental to its renovation. Petitioner is such premiums are paid in money' notes, credits or any substitute
in the hotel business. Where the law taxes a business, it is presumed for money. It does not include (a) premiums refunded within six (6)
to be the legislative intent not to separately tax every activity which months after payment on account of rejection of risk or returned for
is merely incidental or necessary to the conduct of said business other reason to the person insured (return premiums); (b) premiums
(Manila Mandarin Hotels u. Commissioner, CTA Case No.5046, on reinsurance of a company that has already paid the tax; (c)
March 24,7997). premiums on account of any reinsurance, if the risk insured against
covers property located outside the Philippines; and (d) documentary
VAT on operator of tollways. Tollway fees are not taxes.
- stamp tax and local tax passed on by the insurance company to the
They are not assessed and collected by the BIR and do not go to the insured. Premiums collected from crop insurance,life and disability
general coffers of government. A tax is imposed under the taxing insurance, and health and accident insurance policies are excluded
power of the government principally for the purpose of raising from the tax base.
revenues to fund public expenditures. Toll fees, on the other hand,
are collected by private tollway operators as reimbursement for the Dealer in securities
costs and expenses incurred in the construction, maintenance and
operation of the tollways, as well as to assure them a reasonable For sales of securities listed and traded in the local stock
margin of income. Taxes may be imposed by the government under exchange, the tax base is gross income derived from their sale or
its sovereign authority, while toll fees may be demanded by either exchange of such securities. "Gross in'come" means the excess of
the government or private persons as an attribute of ownership. total gross selling price over the total acquisition cost ofsecurities sold
Accordingly, VAT on toII fees is not a tax on tax. for the month or quarter plus other or incidental income. The value
added tax on "over-the-counter" transactions is the gross income as
The CIR did not usurp legislative prerogative or expand the VAT indicated in the VAT invoice; otherwise, the tax shall be computed
law's coverage when she sought to impose VAT on tollway operations. by multiplying 1/11 of the total invoice amount.
Section 108(4) of the Code clearly states that services of all other
franchise grantees are subject to VAT, except as may be provided A pre-need company is considered as a dealer in securities
*Gross irtcorne"
under Section 119 of the Code. Tollway operators are not among the subject to value added tax on gross income received.
franchise grantees subject to franchise tax under the latter provision. means actual receipts on contract price minus contributions to the
Neither are their services among the VAT-exempt transactions under trust funds to be set up independently as mandated by the Securities
Section 109 ofthe Code. and Exchange Commission. The amount of such contribution is
required to be indicated in the official receipt; otherwise, the entire
If the legislative intent was to exempt tollway operations from amount will be subject to tax.
VAT, as petitioners so strongly allege, then it would have been well
for the law to clearly say to. Tax exemptions must be justified by
clear statutory grant and based on language in the law too plain to
Security agencies
be mistaken. But as the law is written, no such exemption obtains Security agencies, whether in the form of a sole proprietorship
for tollway operators. The Court is thus duty-bound to simply apply or in corporate form, are subject to value added tax based on their
the law as it is found. gross receipts representing their agency fees, exclusive of the
amount intended or earmarked for salaries of the security guards,
PAGCOR is exempt from VAT pursuant to its charter, P.D. 1369.
provided that the contract must show the breakdown between the
Being a special law, P.D. 1869 prevails over R.A. 7216, a subsequent
agency fee and the security guards' salaries. The client shall be
general law. To be valid, repeal of a special law by a general law
entitled to input tax only on the agency fee covered by VAT receipts.
should be express (CIR a. Acesite Hotel Corp, G.R. No. I4Z2\S,
The legal basis for the new position is that under R'A- 6727 (Wage
Februany 16,2007).
450 Ilt,:vtt,twt,:tr ott'l'lxn'troru u^"'l;l'J';'i,lirx (VA'r') 4t't

Rationalization Act), the liability of securitics lbr increases in wage prcuision should be deenu,d. cnu,cted pursuant to the Legislatiue policy
rates of workers are explicitly required to be borne by their principuln embod.ied in the prior st<r,tn,tes. 'l'his is the reason why Section 125 of
or clients of construction/service contractors and the contracts aro the present Toec Code imposes amusement tq^Jc on proprietor, lessee or
deemed accordingly. Also, under R.A. 5487, the amount of salary or operator of cockpits, cabarets, night or day clubs, boxing exhibitions,
compensation of security guard ofprivate detective shall be earmarked professional bashetball games, jai-alai and racetrachs. It excludes
and set aside. The same shall be segregated from the monies proprietors /operators of theaters or cinemas. Moreouer, gross receipts
received by the agency from its clients as an amount reserved for the from the admission tickets are not rnentiorued expressly in the aboue
remuneration of the guard of detective. After all, the security agency prouision of the Tuc Code. Our tox laws, past and present, did not adopt
has no control or dominion over the portion of payment earmarked more specific terms in defining "sqle or exchange of seruices" to include
as salaries of guards (RMC No.39-2007, January 22,2007). the showing of fiIms in public by the owners, operators or proprietors
of mouie / cinema houses or theu'ters as subject to ualue added ta'Jc.rr
Movie and Cinema Houseslo
SEC. 109. Erempt Tlansactions.-(1) Subject to the provisions
Theatres and movie houses are not included in the enumeration of subsection (2) hereof, the following shall be exempt from the value-
of taxable services in the VAT law. However, they were added among added tax:
the taxable sellers of services in the regulation on account of the
phrase "other similar services" in the definition of the term "sale or
(A) Sale or importation of agricultural and marine food products
exchange ofservices" in Section 108 ofthe Tax Code.
in their original state, livestock and poultry of or king generally
used as, or yielding or producing foods for human consumption; and
In the recent decision ofthe CTA involving movie houses, the Tax breeding stock and genetic materials thereof.
Court ruled that they are exempt from value added tax. The history
Products classified under this paragraph shall be considered in
of the value added system reveals the legislative intent to subject
certain sales ofservices to value added tax and others to percentage their original state even if they have undergone the simple processes
of preparation or preservation for the market, such as freezing, dryrng,
tax or amusement tax. The activity of showing cinematographic
films, by tradition, is considered not as service covered by value salting, broiling, roasting, smoking or stripping. Polished and./or
husked rice, corn grits, raw cane sugar and molasses, ordinary salt,
added tax, but as an amusement subject to amusement tax. Although
Commonwealth Act No. 466 provided that the amusement taxes and copra shall be considered in their original state;
from gross receipts received by the proprietor, lessee, or operator of (B) Sale or importation of fertilizers; seeds, seedlings and
theaters, cinematographs, concerb halls, circuses, and other places of fingerlings; fish, prawn, livestock and poultry feeds, including
amusement shall be collected, the collection of amusement taxes on ingredients, whether locally produced or imported, used in the
such places of amusement paid on admissions was transferred to the manufacture of finished feeds (except specialty feeds for race horses,
Iocal government units under P.D. 231 (Local Tax Code), which took fighting cocks, aquarium fish, zoo animals and other animals generally
effect on July 1, 1975. While the phrase "to the exclusion of both the considered as pets);
national or municipal government" is no longer found in R.A. 7160
(Local Government Code of 2001), it does not mean that the national
(C) Importation of personal and household effects belonging
to the residents of the Philippines returning from abroad and non-
government is now empowered or authorized to levy and collect tax
resident citizens coming to resettle in the Philippines: Prouided,That
on the gross receipts from admission fees collected by the operatorV
such goods are exempt from customs duties under the Tariff and
proprietors of theaters, cinemas and other amusement places without
Customs Code of the Philippines;
the Congress enacting a statute enabling the national government to
do so. When the legislature enacts a provision, it is understood that it (D) Importation of professional instruments and implements,
is aware of preuious statutes relating to the same subject matter and wearing apparel, domestic animals, and personal household effects
that in the absence of any ex,press repeal or amendment therein, the new
trSM Prime Holdings and First Asia Realty Dev. Corp. v. Commissioner, CTA
Case No. 7079, December L4,2O06.
'oRMC 28-01, JuJy 2,2001; VAT Ruling No. 31-2000, September 8, 2000.
I
452 It,t,lvtt,:wr,ttt oN'l'nxn'r'ror.r Vnr,r r,, Arrtrt,:r'l'nx ( VA'l') 453
'l'rrx llrtst,s

(except any vehicle, vessel, aircraft, machinery other goods lirr usc irr (N) Sales b.y nott-ttgricttltural, non-electric and non-credit
the manufacture and merchandise of any kind in commercial quantil,.y) c<-roperatives duly rcgistered with the Cooperative Development
belonging to persons coming to settle in the Philippines, for their own Auihority: prouided., That the share capital contribution of each
use and not for sale, barter or exchange, accompanying such persons, member does not exceed Fifteen thousand pesos (P15,000) and
or arriving within ninety (90) days before or after their arrival, upon regardless ofthe aggregate capital and net surplus ratably distributed
the production of evidence satisfactory to the Commissioner, that such among the members;
persons are actually coming to settle in the Philippines and that the
(O) Export sales by persons who are not VAT-registered;
change ofresidence is bona fide;
(E) (P) Sale of real properties not primarily held for sale to
Services subject to percentage tax under Title V;
customers or held for lease in the ordinary course oftrade or business
(F) Services by agricultural contract growers and milling for or real property utilized for low-cost and socialized housing as defined
others of palay into rice, corn into grits and sugar cane into raw Uv nepuUtic Act No. 7279, otherwise known as the Urban Development
sugar; and Housirrg Act of 1992, and other related laws, residential lot
(G) valued at one million five hundred thousand pesos (F1,500,000)1'z
Medical, dental, hospital and veterinary services except
and below, house and lot and other residential dwellings valued at
those rendered by professionals;
Two million five hundred thousand pesos (F2,500,000)13 and below:
(H) Educational services rendered by private educational (3)
Prouid.ed.,That not later than January 31, 2009 and every three
institutions, duly accredited by the Department of Education years thereafter, the amount herein stated shall be adjusted to their
(DepEd), the Commission on Higher Education (CHED), the Technical present values using the consumer Price Index, as published by the
Education and Skills Development Authority (TESDA) and those national Statistics Office INSO);
rendered by government educational institutions; (Q)Leaseofaresidentialunitwithamonthlyrentalnot
(I) Services rendered by individuals pursuant to an employer- exceeding Ten thousand pesos (F10,000);1a Prouided, That not later
employee relationship; than January 31, 2009 and every three (3) years thereafter, the
(J) amount herein stated shall be adjusted to their present values using
Services rendered by regional or area headquarters
the consumer Price Index, as published by the national Statistics
established in the Philippines by multinational corporations which
Office (NSO);
act as supervisory, communications and coordinating centers for their
affiliates, subsidiaries or branches in the Asia-Pacific Region and do (R) Sale, importation,printing or publication of books and any
not earn or derive income from the Philippines; newspaper, ,,'agurlttu review or bulletin which appears at regular
intervals with fixed prices for subscription and sale and which is not
(K) Transactions which are exempt under international
devoted principally to the publication of paid adverbisements;
agreements to which the Philippines is a signatory or under special
laws, except those under Presidential Decree No. 529; (S)Sale, importation or lease of passenger or cargo vessels
(L) Sales by agricultural cooperatives duly registered with the and aircraft, including engine, equipment and spare parts thereof
for domestic or international transport operations;
Cooperative Development Authority to their members as well as sale
of their produce, whether in its original state or processed form, to (T) Importation of fuel, goods and supplies by persons engaged
non-members; their importation of direct farm inputs, machineries in international shipping or air transport operations;
and equipment, including spare parts thereof, to be used directly and (U) Services of banks, non-bank financial intermediaries
exclusively in the production and/or processing oftheir produce;
(M) Gross receipts from lending activities by credit or tT*re..""d t" F1,919,500 beginning Jan:uary L,20:12 under Rev. Regs' No. 16-
multi-purpose cooperatives duly registered with the Cooperative 2011, october 27,2}ll and clarified in Rev. Regs. No. 3-2OL2, February 2O,2O12.
l3lncreased to F3,199,200 beginning January 1, 20L2, ibid'
Development Authority; lalncreased to F12,800 beginningJanuary 1, 2Ol2'ibid'
454 l},:vr r;wr:rr oN'l'nxl,t,ror.r

performing quasi-banking functions, and other non-bank linancial


intermediaries;
(V) Sale or lease of goods or properties or the performance
of services other than the transactions mentioned in the preceding CI{APTER IC(
paragraphs, the gross annual sales and,/or receipts do not exceed the
amount of One million five hundred thousand pesos (F1,b00,000):t6 RATES OF VAT
Prouid.ed., That not later than January 31, 2009 and every three (B)
years thereafber, the amount herein stated shall be adjusted to their
present values using the Consumer Price Index, as published by the Output Tax
national Statistics Office (NSO).
1. l2%o standard rate;
2. \Vo (zerotale).

lnput Tax
1. I2Vo slandard rate;
2. \Vo (zetotate);
3. 27o Lransitional or I2Vo actual input tax rate;
4. 4Eo pteslTmptive input tax rate; and
5. 1Vo finalwithholding tax rate.
The L27o standard rate and o7o (zero rate) are applied directly
on the tax base. Transitional input tax rates are applied to the
value
of goods existing at the date a person commences business and,/or
beimes liable to the value added tax. A presumptive input tax rate
is applied to purchases of VAT-exempt goods used as inputs by a
VAT-regist"rud p"I'.o,, in manufacturing or processing certain food
products.
In general, sale ofgoods, properties and services subject to value
added ta'x are subject to the !2vo standard rate beginning February
1,2006.

Sale of goods
The following transactions involving sales of goods ate zeto'
rated:
1.

(aetual-cxpad-sald' The
rblncreased to F1,919,500 startingJanuary
1,2012 underRev. Regs. No. 16-2011
dated October 27 ,2011. 455
456 lil,lvil,;wl,:rr oN 'l'nxA,nr rr,r VAt.rrr: At,ttt,tr'l',lr t VA'l't 4lt7
llrrllrr ol VA'l'

paid in acceptable fbreign currency or its equi..,el,(,ttt in "Oonridered erport sales undrcr E'O'
goods or seruices and accounted for in accordancc with the 226" shall rncan the Philippine port F.O'B' value
rules of the Bangko Sentral ng Pilipina.s (BSp). payment determined from invoices, bills of lading, inward
of the export proceeds in equivalent goods or services is letters of credit, landing certificates, and other
allowed in order to promote exchange deals between or commercial documents, of export products exported
among corporations belonging to the same group(s) or directly by a registered export producer' or the net
even between unrelated parties doing business in the sellingprice ofexport products sold by a registered
region or in the world. After all, the inward remittance export producer to another export producer, or to
of foreign currency (for export sales) will be compensated an export trader that subsequently exports the
by an equal amount of another foreign currency to be same: Prouided, That sales of export products to
remitted outwardly (for import of goods). To avoid future another producer or to an export trader shall only
assessment or issue on this matter with the BIR, the BSp be deemed export sales when actually exported by
and the BIR may be requested to issue a Certification or the latter, as evidenced by landing certificates or
Ruling, respectively, confirming that the exchange deal similar commercial documents. Prouided, further,
complies with the accounting requirements or liquidation That pursuant to E.O. 226 and other special laws,
of the foreign currency under the BSp Circulars and Tax even without actual exportation, the following shall
Code. be considered constructively exported for purposes of
2. Sale ofgoods, which are considered as "deemed', export sale these provisions: (1) sales to bonded manufacturing
by a VAT-registered person to certain entities who are also warehouses of export-oriented manufacturers; (2)
residents of the Philippines, such as: sales to export processing zones, pursuant to R'A'
7916. as amended. 7903, 7922, and other similar
a. Internal or constructive export sales. The term export processing zones; (3) sales to enterprises
"internal or constructive export sales" -covers sales
of raw materials or packaging materials to export- Meiropolitan Authority pursuant to R.A. 7227;1 (4)
oriented enterprises, which the Tax Code considers sales io registered export traders operating bonded
as export sales at the level of the supplier of raw trading warehouses supplying raw materials in the
materials in the Customs Territory. The sale by manufacture of export products under guidelines to
VAT-registered person of raw materials or packaging be set by the Board of Investments in consultation
materials to a non-resident buyer is eligible for zero- with the Bureau of Internal Revenue and the Bureau
rating, if the (a) raw materials or packaging materials of Customs; and (5) sales to diplomatic missions and
are delivered, (b) to a resident (local) export-oriented other agencies and./or instrumentalities granted tax
enterprise, (c) to be used in manufacturing, processing immunities, of locally manufactured, assembled
or repacking in the Philippines of the said buyer,s or repacked products whether paid for in foreign
goods, and (d) such sale is paid for in acceptable currency or not.z
foreign currency and accounted for in accordance
with BSP rules. Moreover, sale by a VAT-registered
enterprises operating within the special economic zones and fieeports
enterprise of raw materials or packaging materials (Clark, Poro Point, Camp JohLHay, uttd Motottg, Bataan) pursuant to Sec' 15 of R'A'
to an export-oriented enterprise whose export sales 7227 , asamended, were granted tax amnesty by paying F25,000 within
six(6) months
exceed 7IVo ofhis total production is eligible for zero- -.R"gi"t"red
from the effectivity ofR.A. 9399, approved March 20, 200?, and the applicable tax and
the
rating. Any enterprise whose export sales exceed duty liabilities (i.e., difference between all national and local tax impositions and
five percent (\Vo) flnal tax on gross income).
70Vo ofthe total annual production ofthe preceding 2The underlined provisions have been added by sec. 4.106-5 0fRev. Regs. No.
taxable year shall be considered an export-oriented 4-2007 ,February 7 , 2007 . The definition of "considered export sales under
E.o. 226"
enterprise. vAT-registered in the customs territory to ecozone and
is expanded to make sales by a
458 Itt,;vt t,:wt,:tt oN'l'Axn,r'ron V,rr,r rr,: Arrtrr';rr'l'A\ ( VA'l') 4lt9
ll.rrt.r.rr ol VA'l'

For purposes of zero-rating, the export sales ol' which l,ho l'hilippines is signatory, such as Asian
registered export traders shall include commission Development Bank (ADB), International Rice
income. The exportation of goods on consignmen[ Research Institute (IRRI), etc', shall be effectiuely
shall not be deemed export sales until the export subject toVAT at zero percent'a (Jnder their respectiue
products consigned are in fact sold by the consignee. law s - R.A. 7 9 1' 6 for PE ZA-registered enterprises and
Sales of goods, properties or services made by a VAT- R.A. 7227 for SBMA-registered enterprises - their
registered supplier of a BOl-registered manufacturer/ geographical tenitories are regarded as foreign soil by
producer whose products are lo07o exported are fiction of law, pursuant to the Supreme Court d'ecisions'
considered export sales. A certification to this effect Thus, in the case of Commissioner of Internal Reuenue
must be issued by the Board of Investments, which u. Seagate Technology (Philippin'es), (G'R' No' 153866'
shall be good for one (1) year, unless subsequently February 11, 2005), and Commissioner of Internal
re-issued by the BOI. Reuenue u. Toshiba Information' Equipmen't (Phils')'
b. Effectively zero-rated sales. The term "effectively Inc. (G.R. No. 150154, August 9,2005), the Supreme
-
zero-rated sale of goods and properties" shall refer Court ruled that as a special economic zone (ecozone
to the local sale of goods and properties by a VAT- or freeport zone), indubitably a geographical territory
registered person to a person or entity who was of the Philippin'es, is regarded in law as a foreign
granted direct and indirect tax exemption under s;oil. Accord'ingly, all articles may be imported by an
ecozone or freeport zone enterprise free ofcustoms and
special laws or international agreement.
import duties and natiortq'l internal reuenue tcuces'
It is not the person enjoying tax exemption except those articles prohibited under the PEZA or
privilege under special law or international agreement SBMA law ond' those absolutely prohibited by other
which is given the privilege of enjoying zero-rating general or special law. Articles which are admitted to
under the VAT law, but the sales (by suppliers) to the ecozone or fteeport zone frorn the Customs Territory
such persons or entities which may be subject to zero und'er proper permit shall be considered as exported'
rate.3
Likewise, in the case of Coconut Oil Refi'ners
Sales to entities, the exemption of which under a Association, Inc., et al. u' Hon' Executiue Secretary
special law or an international agreement binding to Ruben Torres, et al- (G-R. No' 132527, July 29, 2005),
the government ofthe Philippines effectivelyzero rate the Supreme Court explained that "the provision of
such sales, are effectively zero-rated. Sales ofgoods or incentives, such as tax and duty-free importations
property to persons or entities who are exempt from of raw materials, capital and equipment, should be
direct and indirect taxes under special laws; eg., sales interpreted within the context and in a manner that
to enterprises dulyregistered and accredited with the would promote in the fullest manner and objects of
Subic Bay Metropolitan Authority (SBMA) pursuant the legislature. Hence, all goods needed in the ecozone
to R.A. 7227, sales to enterprises duly registered or freeport zone and which are used and consumed
and accredited with the Philippine Economic Zone within the ecozone or freeport zone should enjoy tax
Authority (PEZA) or international agreements to and dutY exemPtion."
In said decision, the Court explained the clear
legislative intent, uiz.: "For as long as the goods
freeport enterprises automatically zero-rated. corollarily, the definition of"effectively
zero-rated sales" in sec. 4.106-6 is restricted to transactions that grant direct and
remain within the zone, whether we call it an
indirect tax exemption under special laws and international agreements.
sBIR Ruling No. 077, March 4, 1988; Lepanto Consolidated tS"" 41064(c), Rev. Regs. No. 16-05 was amended by Rev' Regs' No' 4-2007
Mining Co. v. '
Commissioner, CTA Case No. 4629, December 21, 1998. February 7,2007.
460 li,r':vrt,:wt,:tr or.r'l'Axn,l,toN V,tt,ttt,r Anlt,:tr'l',rx (VA'l') 461
ll.rrlcs ol'VA'l'

economic zone or a freeport zone, fbr a$ long us w(l pursuunt, [o VA'l' Ruling No. 378-88' which declared
say in this lawthat all goods entering this particular ihat sale of gold to the Central Bank of the Philippines
territory will be duty-free and tar-free, for as Long os (now BSP) was considered as export sale' BIR also
they remain there, consumed there or re-exported or issued. RMC 59-88 and no less than fiue subsequent
destroyed in thq.t place, then they are not subject to rulings were issued', confi'rming the same position' On
the duties and teres in accordance with the laws of J aniary 2 3, 7 g g 2, the BIR is su'e d VAT RulinS No' 00 8
-
the Philippines.' 92, d,eciaring that sale of gold to BSP is subject to 70Vo
Except for export sale under Section 4.106-5(a) VAT. Subsequently,VAT Ruting No.59-92 was issued,
and foreign currency denominated sale under Section reiterating ihat the sale of gold to BSP is treated as
4.106-5(b), other cases ofzero-rated sales shall require a d.omestic sale. The Supreme Court ruled that the
prior applicatioru with the appropriate BIR office for prejudice to petitioner by the retroactiue application
'of
effectiue zero-rating. Without an approved application VAT Ruliig No. 008-92 is patentlv euident' By the
for effective zero-rating, the transaction otherwise d,enial of its claim for refund or tq'x credit, petitioner
entitled to zero-rating shall be considered exempt. The has been precluded from recouering its input tax costs
foregoing rule notwithstanding, the Commissioner attributibte to its sales of gold during said period,
may prescribe such rules to effectively implement the becauseit could not pass on to the BSP the 10Vo
processing of applications for effective zero-rating.5 VAT, which would. be retroactiuely imposed on said
transactions, not hauing passed the same q't the time
Should the tox,payer still apply for VAT zero- the sales were noade on the assumption that said sales
rating on sales it made prior to the effectiuity of RA. are subject to zero percent (07o) and rnay be refunded
9337? - The contract ofsales ofindustrial gases to or credited later.T So as to encourdge the sale ofgold to
PEZA-registered enterprises entered into priorto the the BSP, the d'oubt as to zero-rating of this transaction
effectivity of R.A. 9337 are subject to zero percent w&s remoued.by R.A.7716 beginning January 1, L996'
(OVo) YAT and require no prior approval for zero-
rating by the BIR based on RMC 74-99.It must be d.
noted that Revenue Regulations No. 16-05 amended goods; except (a) automobiles under Section 149 of
RMC 74-99. Thus, under the new regulations, sales to th" Tu" Code and (b) non-essential goods, such as
PEZA-registered enterprises require prior application jewelry, perfumes, toilet waters, yachts and other
for effective zero-rating and approval by the BIR vessels intended for pleasure or sports under Section
appropriate office. Without an approved application, 150 of the Tax Code, assembled or manufactured
the transaction is otherwise considered as exempt. in the Philippines for delivery to a resident of the
However, since the taxpayer's contracts of sales were Philippines, paid for in acceptable foreign currency
entered into prior to the effectivity of R.A. 9337 and and accounted for under BSP rules are zero-rated'
Revenue Regulations No. 16-05, their provisions e. The sale of good.s, supplies, equipment and fuel
requiring prior application for VAT zero-rating do to persons engaged in international shipping or
not apply.6 international air transport operations' The same
c. Sale of goldto L}re Bangho Sentrq,l ng Pilipiruqs (BSP). is limited to goods, supplies, equipment and fuel
pertaining to or attributable to the transport ofgoods
- Before the amendment
7716 (1996), gold
of the VAT law by R.A.
and passengers from a port in the Philippines directly
sale of to the BSP was zero-rated
to a foreign port, or uice uersa, without docking or
6Sec. 4.106-6, Rev. Regs. No. 16-05,
September 1,2005. This provision in Rev.
Regs. No. 16-05 was amendedbyRev. Regs. No. 4-2007 datedFebruary 7,2007.
6BIR Ruling No. DA-735-06, December 19, 2006.
TCommissioner v. Benguet Corporation, G'R' No' 145559, July 14' 2006'
462 Itt,:vr r,lwr,:rr or'l'nxA't'tor,r u^'"'i,li::,i''ll,''rli,l,un'''' 46:l

stopping at any other port in the l)hilippincs, ltnloHH of its sales, then 100%' of'il's rrct input taxes
paid may be refunded
the docking or stopping at any other Philippinc Commis.sioner' CTA
Ui"t" bonsolida.ted Mining Cirnpany u'2L'
I
port is for the purpose of unloading passcngorn bie Nos.445,4629 ond' 4874, December 7998)'
and/or cargoes that originated from abroad, or kt
load passengers and/or cdrgoes bound for abroad:tr Zero Percent (0%) VAT on sale of services
Prouided, further, That if a portion of such fuel, by VAT-
goods or supplies is used for purposes other than that The following services performed in the Philippines
(O7o) rat'e"
mentioned in this paragraph, such portion of fuel, registered persons-shall be subject' to zero percent
Processing, manufacturing or repacking goods for
other
goods and supplies shall be subject to 107o or 72o/o 1.
VAT. The phrase *without doching or stopping at any persons aling business oottid" the Philippines which
other port in the Philippines' has been interpreted goods u"" ,ob-r"qoently exported' where the services
are
under Reuenue Regulations No. 4-2007 to meqn ioreign currency and accounted for
[aid for in accepiable t'heBangko
an international airline that ma.kes a stopouer in a in accordan." *ith th" rules and regulations of
Philippine port to unload passengers and / or cargoes Sentral ng PiliPinas (BSP)'
from foreign destination or to pick up passengers and / or repacking
or cargoes for foreign destination is deemed not to haue 2. Services other than processing, manufacturing
docked or stopped at any other port in the Philippines. renderedtoup",ro"""g"gedinbusinessconductedoutside
the Philippinls or to a non-resident person not engaged
in
business *tto it outside the Philippines when the services
Seruice charges to foreign aessels engaged. in intenrational paid for in
shipping is zero-rated. are performed, the consideration for which is
- The docking charges computed based on
U.S. dollars and converted in its equivalent Philippine pesos received u"""ptubl" forelgn currency and accounted for in accordance

by petitioner for docking (luggage entrance) and undocking services with the rules ind regulations of the Bangho sentral ng
(luggage departure) rendered to foreign vessels (foreign principals) PiliPinas (BSP).
is zero-rated, even if the company did not bill directly the foreign 3. Services rendered to persons or entities whose exemption
which
principal but billed only its local husbanding agent, and that the under special laws oi international agreements-to
payments were not received in foreign currency but in pesos pursuant the philippines is a signatory effectively subjects the supply
to Section lo2(a)(2) of the Tax Code and BIR Ruling No. 054-92 dated of such ,""oi"". to zeto percent (07o) tate' Transactions
April 28, 1992 (Philippine Sinter Corporation a. Cornntissioner, fallingwithinthisprovisionarecalledeffectivelyzero-rated
CTA Case No.4447, January 26, 1995). sales. The po"po," ofthe effective zero-rating
provision is
to recogniJe and maintain such complete relief from the
Effeetiuely zero-rated. sales to PEZA and. BOl-registered tax intended to be enjoyed by certain
burden ofindirect as
firms. -E.O. 226 falls within the meaning of "special law" as entities under special laws or international agreements by
contemplated by Section 100(aX2) of the Tax Code, as amended by entities to be zero-rated'
permitting sales to such
8.O.273. Notwithstanding the absence of actual exportation, sales to
PASAR and PHILPHOS, being BOI and PEZA-registered and export- Services rendered to persons engaged in international
oriented enterprises, are effectively zero-rated pursuant to Articles shipping or international air transport operations'
23 and 77 of the Omnibus Investments Code uis-d.-uis Section 100(a) i""f"ai"E leases ofproperty for use thereof' The services
(2) of the NIRC (Atlas Consolid.ated Mining & Deueloptnent referredto herein shall not pertain to those made to
Corporation u. CTA and Commissioner, CA-G&. SPNo. 34752, carriers by air and sea relative to their transport
February 6, 7998). The law does not require that IOOVo ofits sales "o--o"
;i;;;.;"g""r, good* or cargoes from- one place in the
be actually exported. For as long as an enterprise exports over 70Vo Philippine-s to another place in the Philippines' the same
i"id t"U:"ct to the regular VAT rate under Section 108
ofthe Tax Code.
V,tr,lt', Atrt,t, tr't',rx t VA'l't 465
464 1il,:v r r,rwt,:rr on'l'Ax,r'r'ror.l
l{rrllrr ol VA'l'

5. Services perfbrmed by subcontractors and./or contntctonr declarecl that il'rcspotttlt'ltl' rcgisters as a VAT person and
the
in processing, converting, or manufacturing goods fbr an consideftrtion fbr its sr:rvic()s is paid fbr in acceptable foreign currency
enterprise whose export sales exceed and accounted for in accordance with the rules and regulations
ofthe
70a/o of toLal annual
production. Borgho sentrql ng Pilipina.s, the serwices shall be subject to vAT at
zero rate. Hence, respondent registered as a VAT taxpayer'
6. Transport of passengers and cargo by domestic air or sea
carriers from the Philippines to a foreign country. Gross In Decembe r, !997 , respondent availed of the BIR's Voluntary
receipts ofinternational air carriers doing business in the Assessment Program for the year 1996, interpreting Revenue
Philippines and international sea carriers doing business in Regulations No. S--90 to mean that its sales of services to the consortium
the Philippines are still liable to a percentage tax of three wa"s subject to the lovaYAT.It filed an amended 1996
VAT return
percent (3%) based on their gross receipts as provided for arrd paia 56.9M as its output tax Iiability for the year. Thereafter,
in Section 118 of the Tax Code, but shall not be liable to secured vAT Ruling No. 003-99, which reconfirmed BIR
VAT. """porra"rrt
Ruliing No. 028-95 which held that respondent's services are subject

7. toVATat,zetopercent(oVo).onthisbasis,respondentfiled'aclaim
Sale ofpowerorfuel generatedthroughrenewable sources
for the issuances of a tax credit certificate with the BIR on the
1996
of energy, such as, but not limited to, biomass, solar,
outpot vAT it had erroneously paid when it availed of the VAT.
wind, hydropower, geothermal and steam, ocean energy,
and other emerging sources suing technologies such as The BIR argued that respondent's services are not destined
fuel cells and hydrogen fuels. Zero-rating shall not apply for consumption abroad, and they are not of the same nature as
strictly to the sale of power or fuel generated through project studies, information services, engineering and architectural
renewable sources ofenergy, and shall not extend to the d""igor, and other similar services mentioned in Section 4.L02-2(b)
(07o)
sale of services related to the maintenance or operation of (2) oT Revenue Regulations No. 5-96 as subject to zero percent
plants generating said power. VAT. Therefore, respondent's services cannot legally quali$r for zero
percent (07o) VAT but are subject to the regular LDToYAT'
All other taxable sales of services not entitled to zero-rating
shall be subject to the regular VAT rate of I}Vo or l2%o. The CTA ruled in favor ofthe respondent, stating that the latter
(a) payment of
complied with the requirements for zero-rating, to wit"
The purpose of applying zero percent (OVo) rate on a taxable
fees in acceptable foreign currency; (b) foreign currency was
transaction is to exempt the transaction completely from value added "".rri"" remitted into th" Philippines; and (c) inward remittance is
inwardly
tax previously collected on purchases. This arises because the sales The CA
accountLd for in accordance with BSP rules and regUlations.
of the VAT-registered seller are subject to zero percent (07o) raIe,
affirmed the decision of the CTA.
while the input taxes on his purchases passed on to him by the VAT-
registered suppliers may be recovered back from the BIR in the form The Supreme Court reversed the decision of the CTA and CA'
oftax refunds or credits. TheTaxCodenotonlyrequiresthattheservicesbeotherthan
processing, manufacturing or repacking of goods and that payment
Seruices other than processing, manufacturing, or
repacking of good.s must liheuise be perfonned. for persons io, soch se-rvices be in acceptable foreign currency accounted for in
accordance with BSP rules. Another essential condition for vAT
zero-
d.oing business outsid.e the Philippines.
- A foreign consortium
entered into a contract with NAPOCOR for the operation and
rating is that the recipient of such services is doing business outside
tfre ff,iUppines. While this requirement is not expressly stated
in the
maintenance of the latter's power barges. Respondent subcontracted this is clearly provided in the first
second purugxuph ofsection 102(b),
the actual operation and maintenance of the barges and other acts the listed services must be "for
paragraph Jf Section 102(b) where
which have to be done in the Philippines, which was paid by the outside the Philippines." When Section
ith"r"p"rrons doing business
consortium in foreign currency inwardly remitted to the Philippines under
102(b)i2) stipulatei payment in,,acceptable foreign currency''
through the balking system. To ascertain the tax implications of the payer-recipient of-services
BSP rules, the law clearly envisions
the transaclion6, respondent secured BIR Ruling No. 023-95, which
tobedoingbusinessoutsidethePhilippines,sinceonlythosenot
466 Itt,lvt t,:wt,:tt or'l'nxn'r'ror.l Virr,r rr,; Atrt rt,:t r'l'lx ( VA'l') 467
ll,rrlnx ol VA'l'

doing business in the Philippines can be required undcr lJSl, rulos Is Royal Mining's t:lrtitn ntcritorious? Explain.
to pay in acceptable foreign currency fbr their purchase of'goods or
services from the Philippines. Significantly, the amended Section Suggested answer:
108(b) [previously Section 102(b)] of the present Tax Code clarifies
No, Royal Miningls claim is not meritorious because it is the sale
this legislative intent. Expressly included among the transactionn
subject to 0VoYNl are "[s]ervices other than those mentioned in the of gotd. (and.not siluer) to the BSP that is considered as export sale
subject to zero-rated VAT'
[first] paragraph [of Section 108(b)] rendered to a person engaged
in business conducted outside the Philippines or to a non-resident
person not engaged in business who is outside the Philippines when zero-rating dnes not require that the seroices be d.estined'
for consumptioi abroad. or be erported,. - Note that while
Section
the services are performed, the consideration for which is paid for in pa5rment of the services in
iOStgltZl of th" Tax Code only requires
acceptable foreign currency and accounted for in accordance with the
rules and regulations of the BSP." acceptable foreign currency, accounted for in accordance with existing
BsPregulations, vAT Ruling No. 040-98 requires that the s€rvices
However, the Supreme Court still favored the respondent. The be,,destined for consumption abroad" and'not rendered within the
implied revocation of BIR Ruling No. 023-95 and VAT Ruling No. 003- Philippines." In fact, said VAT ruling appears to digress eve-n from
99 cannot apply retroactively as the rulings were what respondent the very revenue regulations which it purports to interpret. section
invoked in applying for refund of the output tax (Commissioner a. 4.102-2(b)(2) of Revenue Regulations No. 5-96 does not require that
Burmeister and Wain Scand.inaaian Contraetor Mjndanao, the services to be rendered by a vAT registered person be destined,
Inc., G.R. No. 753205, Januany 22, 2OO7). consumed or rendered abroad.
As explained by the Supreme Court in the Burmeister case, In sum, it is very that VAT Ruling No. 040-98 not only expands
"Ifthe provider and recipient ofthe'other services'are both doing the language of section 108(BX2) but also of Revenue Regulations No.
business in the Philippines, the payment of foreign currency is s-90 which interprets said statute. The same cannot be countenanced.
irrelevant. Otherwise, those subject to the regular VAT under It is a settled rule of legal hermeneutics that the implementing
Section 102(a) of the 1977 Tax Code can avoid paying the VAT by rules and regulations cannot amend the act of Congress (National
simply stipulating payment in foreign currency inwardly remitted Tobacco Cirporation a. COA, 511 SCRA 755) for administrative
by the recipient ofservices. To interpret Section 102(bX2) to apply rules and ."gllatiottr are intended to carry out, not supplant or
to a payer-recipient of services doing business in the Philippines modifr, the law (Grego u. COMELEC,274 SCRA 48L; Amcrican
is to make the payment of the regular VAT under Section 102(a) ExprLss International - Phitippine Branch a. Cotnrnissioner,
dependent on the generosity ofthe taxpayer. The provider ofservices CTA Case No.6099, APril L9,2002).
can choose to pay the regular VAT or avoid it by stipulating payment
in foreign currency inwardly remitted by the payer-recipient. Such Source offoreign cutnency is not required by laut to be
interpretation removes Section 102(a) as a tax measure in the zero-rated.. - In urr.llittg of the zero-rating incentive provided by
Tax Code, an interpretation this Court cannot sanction. A tax is a law for foreign currency remittance in our country, it is sufficient
mandatory exaction, not a voluntary contribution." (Accenture u. that foreign currency inwardly remitted in our economy. we do not
CIR, G.R. No.790702, July 77,20L2). give much ado as to where the money is sourced for as long as the
foreign currency remittance in our country is tluly acco,unted for in
.".ofoun"" with the rules and regulations of the BSP (Placer Dome
Bar Question (2006) Technical sertsiees [Philippines] a. commissioner, cTA Case
Royal Mining is a VAT-registered domestic mining entity. One No. 5685, March 79, 2002).
of its products is silver being sold to the Bangko Sentral ng Pilipinas.
Sale of serttiee to NPC is effectiaely zero'rated' - NPC is an
It filed a claim with the BIR for tax refund on the ground that under entity with a special charter (R.A. 6395), which categorically makes it
Section 106 of the Tax Code, sales of precious metals to the Bangko
exempt from payment of all taxes, whether direct or indirect, including
Sentral are considered export sales subject to zero-rated VAT.
VAT. Hence, tyvirtue of the said charter, services rendered by a VAT-
Vlt.rrr, At rt,t,.t,'l'nx t VA'l't 4(;1)
46ft lU,rvr r,;wt,;rr ( )N'l'AxA'r'roN
ll.rrl.r'rr ,rl VA'l'

registered entity to NPC are effectively sub.jcct to zcro porcont, VA'l' <:gurrlr.y.'I'hc cfl'ect,ivo zgt.6 ritl,ilg wJrich is trll<-rwed on [he basis of
(Mirant Nauotas Corporation a. Commissioner, CT'A Cate No. rgt:ipr<lcity is limitetl tlade to the embassies in their official
Lo sttlgs
6(M4, October 76,2002 citedin Kepco Philippines Corporation o. capacities. It does not applv to the individual purchases made by the
Commissioner, CTA Case Nos. 5675 and. 5704, March 18,2008). members of their diplomatic staffs (VA? Rulin'g No. 382'88, Aug' 24,
However, under R.A. 9337 (November 1, 2005), sale to government 1988, citing Art. 49[l]tal, Vienna Conuentioru on Consular Relations).
shall be subject Io 1Vo final VAT, such amount to be withheld by thc
government agency, instrumentality or GOCC and remitted to thc
BIR.

Distinctions between automatically zero-rated and


effectively zero-rated transactions
Automatic zero rating:
1. There is no need to file an application form and to secure
BIR approval thereof; and
2. The word "ZERO-RATED" is not required to be stamped
on the face of the VAT invoice or receipt to be issued by the
seller ofgoods or services. The reason for this requirement
is that the buyer, as shown by his address in the sales
invoice and shipping documents, is located outside the
Philippines.

Effectiuely zero-rated. transactions:


1. An application for zero-rating must be filed and the
BIR approval necessary before the transaction may be
considered as effectively zero-rated;
2. The word "ZERO-RATED" must be stamped on the face
of the VAT invoice or receipt to be issued by the seller of
goods or services. The reason for this requirement is that
the buyer of the goods or services is located within the
Philippines, or he is located outside the Philippines merely
by fiction of law.

Foreign embassies in the Philippines


Transactions of a VAT-registered person with the embassy of
a foreign state and its personnel will be zero-rated, provided that
they can submit to the Commissioner a copy of the special legislation
or international agreement showing that said foreign government
allows similar tax exemption privilege to the Philippine embassy and
its personnel on their purchases ofgoods or services in that foreign
Vlt,trl', Alll';l"l'nx (VA'l') 47 I
l'lxorrtlrl'l'tttttstlt'l.tottg

rcsident citizcrrs trrtttirtg t.o rtrsettlc in the Philippines: Prouided'


'l'hat such goods arc exe nrpt I'rom customs duties under the Tariff
and Customs Code of the Philippines;
CHAPTER IfrI (D) Importation of professional instruments and implements,
wearing apparel, domestic animals, and personal household
EXEMPT TRANSAGTIONS effects (except any vehicle, vessel, aircraft, machinery other
goods for use in the manufacture and merchandise of any kind
in commercial quantity) belonging to persons coming to settle
The following transactions are exempt from the value-added trrx in the Philippines, for their own use and not for sale, barter
under Section 109 of the 2005 Tax Code, as amended by R.A. 1037u or exchange, accompanylng such persons, or arriving within
dated March 27,2013: 90 days before or after their arrival, upon the production of
(A) Sale or importation of agricultural and marine food products in evidence satisfactory to the Commissioner, that such persons
their original state, livestock and poultry ofor king generally are actually coming to settle in the Philippines and that the
used as, or yielding or producing foods for human consumption change of residence is bona fide;
and breeding stock and genetic materials therefor; (E) Services subject to percentage tax under fitle V of the Tax Code;
Products classified under this paragraph shall be considered (F) Services by agricultural contract growers and milling for others
in their original state even if they have undergone the simple ofpalay into rice, corn into grits and sugar cane into raw sugar;
processes ofpreparation or preservation for the market, such as
freezing, dryrng, salting, broiling, roasting, smoking or stripping. "Contract growing" includes poultry, livestock and
Polished and./or husked rice, corn grits, raw cane sugar and agricultural and marine food products.
molasses, and ordinary salt shall be considered in their original (G) Medical, dental, hospital and veterinary services except those
state; rendered by professionals;
"Original state" means simple processes ofpreparation or Sale of medicines by the hospital pharmacy to in'patients
preservation for the market. The process is no longer simple, if is exempt from VAT, but sale to out-patients is subject to I27o
it involves physical or chemical process that alters the exterior VAT (St. Lukds Med'ical Center u. CTA and. CIR, 1998).
texture or form or inner substance ofthe product as to prepare
it for a special use. (H) Educational services rendered by private educational
institutions, duly accredited by the Deparbment of Education
Rice, corn grits, raw sugar, molasses, ordinary salt and (DepEd), the Commission on Higher Education (CHED), the
copra are products in their original state (by express provision Technical Education and Skills Development Authority (TESDA)
of law). and those rendered by government educational institutions;
(B) Sale or importation of fertilizers; seeds, seedlings and fingerlings; Educational services rendered by private educational
fish, prawn, livestock and poultry feeds, including ingredients, institutions accredited by DepEd, CHED, TESDA (Informatics
whether locally produced or imported, used in the manufacture Atabang Center u. CIR, CTA EB 593, FebruanA 28,2071),
offinished feeds (except specialty feeds for race horses, fighting and those rendered by government educational institutions.
cocks, aquarium fish, zoo animals and other animals generally
considered as pets); (r) Services rendered by individuals pursuant to an employer-
employee relationship;
(C) Importation of personal and household effects belonging to the
(J) Services rendered by regional or area headquarters established
residents of the Philippines returning from abroad and non-
in the Philippines by multinational corporations which act as
470 supervisory, communications and coordinating centers for their
472 llt,:vt t,twt,tti oN'l'Axn'r'rlr'r V^t,rr ADtrt,,l|'l'irx tVA'l't 47:l
l,lrcrrrlrl 'l't rttttrttt l itttts

affiliates, subsidiaries or branches in the Asia-Pacific Rcgion propert.y lirr krw-cost, lnd srlcialized housing, residential lot
and do not earn or derive income from the Philippines; valued at ?1.5 M ( increased to F1,919,500 beginning 2Ol2) or
below, house and lot and other residential dwellings valued at
(K) Tlansactions which are €xempt under international agreements
P2.5 M (increased to F3,199,200 beginninS2012) or below (fteu.
to which the Philippines is a signatory or under special Regs. No. 16-2011, October 27, 2011; Reu. Regs. No. 3-2012'
laws, except those under P.D. 529
- Petroleum Exploration
Concessionaires under the Petroleum Act of 1949;
February 20,2012).

(L) This threshold is on a per transaction basis. This


Sales by agricultural cooperatives duly registered with the means that provided the selling price per sale document does
Cooperative Development Authority to their members, as well as
not the threshold provided for in the law or regulation (i.e',
sale oftheir produce, whether in its original state or processed
F1,919,500 for residential lot, and F3,199'200 for residential
form, to non-members; their importation of direct farm inputs,
house and lot), the transaction remains exempt from VAT'
machineries and equipment, including spare parts thereof, to be
used directly and exclusively in the production and,/or processing
Sate of ad.iacent lots or units within a L2'm.onth period' and
oftheir produce; parking slots to the same buyer for purposes of utilizing
(M) Gross receipts from lending activities by credit or multi-purpose aa one residential area
cooperatives duly registered with the Cooperative Development
Ssle of ad'iacent lots. - Sale within a 12-month period
Authority;
of two (2) or more adjacent residential lots, house and lots or
(N) Sales by non-agricultural, non-electric and non-credit other residential dwellings (like condominium unit) in favor
cooperatives duly registered with the Cooperative Development of one buyer from the same seller for the purpose of utilizing
Authority: Prouided, That the share capital contribution of each the lots, house and lots or other residential dwellings as one
member does not exceed Fifteen thousand pesos (P15,000) and residential area wherein the aggregate value of the adjacent
regardless of the aggregate capital and net surplus ratably properties exceed Fl,919,500, for residential lots and F3,199,200
distributed among the members; lor residential house and lots or other residential dwellings,
(O) although covered by separate titles and/or separate Tax
Export sales by persons who are not VAT-registered;
Declarations, shall be presumed as a sale of one residential lot,
(P) Sale of real properties not primarily held for sale to customers or house and lot or residential dwelling. The sale shall be exempt
held for lease in the ordinary course oftrade or business or real from VAT only if sale did not exceed the threshold amounts
property utilized for low-cost and socialized housing as defined stated in the regulations.
by R.A. 7279, otherwise known as the Urban Development and
Sale of pqrkirlg slots. - Sale of parking slot which may
Housing Act of 1992, and other related laws, residential lot
or may not be included in the sale of condominium units is a
valued at One million five hundred thousand pesos (F1,500,000)
separate and distinct transaction not covered by the rules on
and below, house and lot and other residential dwellings valued
threshold amount, not being a residential lot, house and lot or a
at Two million five hundred thousand pesos (F2,500,000) and
residential dwelling; thus, should be subject to VAT, regardless
below: Prouided, That not later than January 31, 2009 and
of amount of selling price (Reu. Regs. No. 13'2012, October 12,
every three (3) years thereafter, the amount herein stated shall
2012).
be adjusted to their present values using the Consumer Price
Index, as published by the National Statistics Office (NSO). (Q) Lease of a residential unit with a monthly rental not exceeding
Ten thousand pesos (P10,000); Prouided, That not later than
Increased. threshold. effictiue January 7, 2072 January 31, 2009 and every three (3) years thereafter, the
amount herein stated shall be adjusted to their present values
Sale of real property not primarily held for sale to customers
using the Consumer Price Index, as published by the National
or for lease in the ordinary course oftrade or business, or real
Statistics Office INSO);
V,rt.tt. Atrtrt tr'l'rr tVA'l't 47lt
474 Itt,:vr t';wr,;rr oN'l'rrxn'r'ror.r
l'lxr,nrIl 'l't ttttttttt l.totts

This threshold is on a per residential unit pr:r monllr salcs or roctlipl,s tLr ttrtt, oxt:trtttl P l.l-r M (increased to F1,919,500
basis. This means that the lease of a residential unit wil,h l beginning ZOID (lltu' /&rgs. Mr. 16-2011, October 27,2011)'
monthly rental not exceeding ?10,000 (increased to ?l2,ll(Xl Ifsale of goods pertains to agricultural or marine food
beginning 2012) is exempt from VAT (Reu. Regs. No. 16-201l, products in their original state or sale ofbooks, or sale ofservice
October 27,2011). relates to rental of residential unit not exceeding F10,000,
Lease of commercial buildings are subject to VA'l', transaction is exempt even if gross sales or receipts exceed
regardless of rental per month or unit, provided threshold ol' ?1.5M (F1,919,500).
F1.5 M (F1,919,500 beginning 2012) is exceeded, or the lessor
Tax d.ue on trantsaction - VAT or OPT?
registered as a VAT person.
(R) 1. Professional, classified as self-employed, refers to an
Sale, importation, printing or publication of books (in hard
individual or a group practicing his or their profession or
copies per RMC No. 75-2012 dated Nouember 23, 2012) and
calling, with or without license under a regulatory board
any newspapet, rnagazine review or bulletin which appears
or body.
at regular intervals with fixed prices for subscription and sale
and which is not devoted principally to the publication of paid Apart from applicable income taxes and withholding
advertisements; taxes, Le/she or they are subject to VAT' A professional
(S) Transport of passengers by international carriers;
is liable to VAT at the rate of l27o 1f his gross receipts/
professional fees for the past 12 months is more than
(T) Sale, importation or lease of passenger or cargo vessels and F1,919,500 (RMC 64'2012, October 31,2012)'
aircraft, including engine, equipment and spare parts thereof
for domestic or international transport operations; sale of 2. The sale or lease of goods or property or the performance
of services other than transactions mentioned in section
international air carriers with respect to revenues from
109 of the Tax Code, where the gross sales or receipts for
transport of passengers originating from the Philippines to
the preceding 12 months do not exceed F1'5 M (F1,919,500
foreign ports (R.A. 10378, as implernented by Reu. Regs. No.
15-20 13, September 20, 20 13) ;
beginning 2012) prescribed in Section 109(V) of the Tax
Code is exempt from VAT. It is required that the seller
ru) Importation of fuel, goods and supplies by persons engaged in registered as a non-VAT person and the reason for his
international shipping or air transport operations; exemption from VAT is that his gross sales or receipts
(v) Seryices of banks, non-bank financial intermediaries performing for the preceding 12 months do not exceed F1'5 million
(F1,919,500 beginning 2072)' However, he will be subject
quasi-banking functions, and other non-bank financial
to the three percenl(37o) percentage tax under Section 116
intermediaries;
ofthe Tax Code.
(w) Sale or lease of goods or properties or the performance of
If sale of goods pertains to agricultural or marine food
services other than the transactions mentioned in the preceding
products in their original state or sale ofbooks, or sale of
paragraphs, the gross annual sales and./or receipts do not
service relates to rental of residential unit not exceeding
exceed the amount of One million five hundred thousand pesos
(F1,500,000): Prouided, That not later than January 31, 2009 F12,800, the transaction is exempt from VAT, even if
and every three (3) years thereafter, the amount herein stated
his gross sales or receipts exceed F1,919,500, and he is
also exempt from the payment of the three percent $7o)
shall be adjusted to their present values using the Consumer
percentage tax under Section 116 ofthe Tax Code'
Price Index, as published by the national Statistics Office
(NSO). If the lessor has commercial stalls for lease and the
Sale or lease of goods or property or the performance of
amount of gross rental for the year is F1'5M (P1,919,500
services other than transactions mentioned above, the gross
beginning 2072) or less, he is (a) exempt from VAT if he
476 Itt,:vl,lwt,:tt oN'l'Axrr't'ror'r Vrtt,t tt,r At rt rt':t r'l'rrx t VA'l'l 477
lrixr,trrIl'l't ttttgttt'l,iotts

did not register as a VA'l'person, or (b) sub.iect to VA'l' il' not included in thO e nurn(}ruli0n ol'taxable services in the vAT law.
he registered as a VAT person, or he issued a VAT receipt Our tax laws, past and present, did not adopt more specific terms for
.,sale or exchange of services" to include showing of films in public
for the rent income.
(CIR u. SM Prime Hold'ings, G R. No. 783505, February 26, 2070).
The transactions that are subject to VAT are those, which involve
sale or exchange of goods, properties, or services that are used or
consumed mainlyby the medium to high-income groups. Exemptions Services subject to percentage taxes
(partial relief) from VAT are granted to certain transactions for vary- The services subject to percentage tax under Title V ofthe Tax
ing reasons of public policy. Thus, exemptions are granted, in some Code include the following:
cases, to encourage agricultural production, and in other cases, for
Kind of Tax Tax Base Section
the personal benefit ofthe end-user rather than for profit motive. The
law likewise declares that "exempt from the tax are sales of farm and tax on
37o percentage Gross receipts 116
marine products, so that the costs of basic food and other necessities, persons exempt from VAT
spared as they are from the incidence ofthe VAT, are expected to be
relatively lower and within the reach of the general public."l 37o common carrier's tax
on domestic carriers by land Gross receipts tr7
Bar Question (2009) 37o common carrier's tax
on international carriers Grossreceipts 118
Emiliano Paupahan is engaged in the business of leasing out
several residential apartment units he owns. The monthly rental for Franchise tax Gross receipts 119
each unit ranges from F8,000 to F10,000. His gross rental income for 27o gas and water
one year is F1,650,000. He consults you on whether it is necessary for 37o
- radio and TV
him to register as a VAT taxpayer. What legal advice will you give
-
107o overseas communica- Gross receipts 120
him, and why?
tions tax
Suggested answer: Gross receipts tax on banks Gross receipts tzl
Since the rental income per unit per month of his apartment Gross receipts tax on Gross receipts
units (which ranges from F8,000 to ?10,000) does not exceed the finance companies 722
threshold prouided for in the VAT law in the amount of ?10,000, his
rental incorne is exempt from VAT under Section. 109(q of the 1997 zEo premiu:m tax on Premiums collected
To,x Code. In uiew thereof, it does not matter whether or not he hos life insurance companies t23
exceeded the general threshold for the preceding twelue months of Tax on agents ofinsu- Premiums collected
F1,500,000 prescribed in Section 109(V) of the Tax Code. Thus, my rance companies 124
aduice is for him not to register as a VAT person. He will be exempt
fromVAT under Section 109(q and from the 37o percentage ta"tc under Amusement taxes Gross receipts I25
Section 116 of the Tax Code. Tax on winnings Winnings or dividends 126

Theater operators are exempt from VAT Stock transaction tax Gross selling price or
and IPO tax gross value in money I27
Gross receipts oftheatre owner or operator from sales oftickets
to moviegoers are exempt from VAT. Theatres and movie houses are Section 118 of the 2005 Tax Code was amended by R.A.
10378 (which grants income tax exemptions to international air
lTolentino, et al. v. Secretary of Finance and Commissioner, G.R No. 115455, carriers based on reciprocity) to read as follows:
October 30, 1995.
478 Itt,:vil,;wr':rr r )N'l'nxn,r,roru

A. International air carriers doing business in the philippines


on their gross receipts derived from the transport ofcargo from the
Philippines to another country shall pay ataxof Bvo of their quarberly
gross receipts;
CHAPTER MII
B. International shipping carriers doing business in the INPUT TAXES
Philippines on their gross receipts derived from the transport ofcargo
from the Philippines to another country shall pay ataxof Jvoof their
quarterly gross receipts (RMC No. 40-2013, May 2, 201J).
There are five (5) categories of input taxes that may be credited
against output tax, namelY:
1. Input tax credit on importation of goods and current local
purchases of goods' properties and services (Sec' 710,
NIRC);
2. Tlansitional input tax credit (Sec- 111[A], NIRC);
3. Presumptive input tax credit (Sec' 111[8], NIRC);
4. Final withholding tax credit (Sec- 114[C], NIRC); and
5. Excess inPut tax credit.
Input tax credit arises from purchases ofgoods, properbies and
services-. Tlansitional input tax credit may be claimed by persons
who
become liable to value added tax for the first time; they represent
input tax on inventories goods, materials and supplies existing on
the date of commencement of a person's status as a taxable person.
Presumptive input tax may be claimed by: (a) persons engaged in
business of processing sardines, mackerel and milk, manufacturing
refined ,ogu, and cooking oil, and noodle-based instant meals, which
are substalntially produced from primary agricultural and marine food
products, the supply of which is exempt from value added tax' Final
*itrrrrotaitrg tax credit is based on the amount paid to the supplier of
goods or by the government and is required to be withheld
""irri"",
by the government and remitted to the BIR'

Sources of inPut tax credits


Input taxes passed on by the sellers of goods, properties or
services may arise from any of the following:
1. Any input tax evidenced by a VAT invoice or official
,""Lipt1r*oed in accordance with section 113 hereof on

479
480 lt,r.tvrr,:wr,;rt or,,r 'l',rxn,r,roN u^'
"'',llllli ll,,1''u.t
VA',r't 4tl I

the following transactions shall be credit*bl. rrgiri'sl, l,lrr, (a) 'lirlrtl inptrl, l,rrx which can be directlyattributed to
output tax: trattsuctiotts sulrjcct to value-added tax; and
(a) Purchase or importation of goods: (b) A ratable portion of any input tax, which cannot be
(i) For sale; directly attributed to either activity.
(ii) For conversion into or intended to form part ol' Credits of input taxes from output taxes must be supported by
a finished product for sale including packaging VAT invoices or receipts which must be issued in the name of the
materials; buyer ofgoods, properties or serwices (Sec. 113[N in relationto Sec.
(iii) For use as supplies in the course of business; 237, NIRC). Input tax on purchase of goods or properbies is creditable
upon consummation of sale (or issue of the sales invoice by the VAT-
(iv) For use as materials supplied in the sale ol' registered seller, although no payment thereof was made by the
service; or buyer) and on importation of goods or properties, upon payment of
(v) For use in trade or business for which deduction the value added tax prior to the release of the goods from customs
for depreciation or amortization is allowed under custody. Input tax on purchase of services is creditable only when
this Code. paid by the buyer to the seller thereofand evidenced by the seller's
(b) Purchase of services on which a value-added tax has official receipt (Sec. 110[2], NIRC).
been actually paid.
Refund or Tax Credit of Excess lnput Tax
2. The input tax on domestic purchase of goods or properties
shall be creditable: In proper cases, the Commissioner of Internal Revenue shall
grant a tax credit certificate or refund for creditable input taxes
(a) To the purchaser upon consummation of sale and on within 120 days from the date of submission of complete documents
importation of goods or properties; and in support ofthe application fiIed in accordance with subparagraph
(b) To the importer upon payment of the value-added tax (a) above.
prior to the release ofthe goods from the custody of In case of full or partial denial of the claim for tax credit
the Bureau of Customs. certificate or refund as decided by the Commissioner of Internal
Prouided, That the input tax on goods purchased or Revenue, the taxpayer m.ay appeal to the Court of TaxAppeals (CTA)
imported in a calendar month for use in trade or business within 30 days from the receipt of said denial otherwise, the decision
for which deduction for depreciation is allowed under this shall become final. However, if no action on the claim for tax credit
Code, shall be spread evenly over the month of acquisition certificate or refund has been taken by the Commissioner of Internal
and the 59 succeeding months if the aggregate acquisition Revenue after the 120-day period from the date of submission of the
cost for such goods, excluding the VAT component thereof, application with complete documents, the taxpayer may appeal to
exceeds F1,000,000: Prouided, howeuer, if the estimated the CTA within 30 days from the lapse of the 720-day period.l
useful life of the capital good is less than five (b) years, as Being a derogation ofthe sovereign authority, a statute granting
used for depreciation purposes: Prouided, finally, That in tax exemption is strictly construed against the person claiming
the case ofpurchase ofservices, lease or use ofproperties, the exemption. When based on such statute, a claim for tax refund
the input tax shall be creditable to the purchaser, lessee or partakes of the nature of an exemption; hence, the same rule of strict
licensee upon pa)'rnent ofthe compensation, rental, royalty interpretation against the taxpayer-claimant applies to the claim
or fee. (WMPC u. CIR, tbid).
3. A VAT-registered person who is also engaged in transac-
tions not subject to the value-added tax shall be allowed
tax credit as follows: rSec. 112(c), NIRC.
482 llt,rvt t,:wt,:tr oN'l'nxn'r'ror,l Vnt.rr,r Anlt':l'l'nr (VA'l') 4tt:l
I ttpttl 'l'rtxt's

Categories of Refund.s or Tax Credits d. Claimant rrtust' tlctluct from its VAT quarterly return the
Refund or tax credit of excess input taxes is allowed by the input tax being claimed as refund or tax credit;
Original VAT Law (8.O. 273), as amended by R.A. 7716,8241, and e. The claimed input VAT payments are directly attributable
8424, only on three (3) instances, namely: (1) zero-rated or effectively to zero-rated or effectively zero-rated sales;
zero-rated sales ofgoods; (2) local purchase or importation ofcapital
goods; and (3) cessation ofbusiness or dissolution ofthe corporation. f. For zero-rated sales under Section 106(AX2XaX1)' (2)
However, the regulation also allows the refund or tax credit on unused and (b) and Section 108(BX1) and (2), the acceptable
input tax on purchase of real property. Under R.A. gggT (200b), item foreign currency exchange proceeds thereofhad been duly
(2) above was removed. accounted for in accordance with the rules and reg:rlations
of the Bangko Sentrq'l ng Pilipinas (BSP);
Zero-rated. or effectiuely zero-rated. sales g. The claimed input VAT payments are duly supported by
It should be clear that claims for refund or tax credit under VAT invoices oiofficial receipts in accordance with Section
the zero-rated or effectively zero-rated sales ofgoods, properties or 4.I04-SofRevenueRegulationsNo'7-gS,inrelationto
services, the seller ofthe goods is the one entitled to the refund or Sections I73 (inuoicing requiremertts) and 237 (issuu'nce
credit; in the purchase of capital goods, it is the purchaser that is of receipts or inuoices) of the Tax Code;5 and
entitled to the refund or tax credit.2ln order to be entitled to refund h.TheVATreturnforthesucceedingquarterscoveredbythe
or tax credit of unutilized input tax payments directly attributable to claim for tax refund or credit must be submitted with the
zero-rated or effectively zero-ratedsales,spetitioner must prove that: CTA.
a. The claimant must be a VAT-registered person. However, ApersonisentitledtoVATrefundortaxcreditwhen:(a)the
it is not application for effective zero-rating that is claimed input tax payments are duly supported by VAT invoices
or
indispensable to VAT refund or credit.a receipts iriaccordancl with Section 4.104-5 of Revenue Regulations
b. The application for the issuance ofa tax credit certificate No.7.-g5inrelationtoSectionsll3and2STofLheTaxCode;(b)the
or refund is filed with the BIR or the DOF Center within claimed input tax payments are directly attributable to zero-rated
sales; (c) the claimldinput tax payments were not applied
against
two (2) years afber the close of the taxable quarter when
the sales were made, and with the CTA within 30 days any output tax nor carried over to the succeeding month(s)/quarter(s);
from the date ofreceipt ofdenial from the CIR or in case arri (a)totfr the administrative and judicial claims for refund or tax
of inaction by the CIR, from the lapse of the 120 days from credit were filed within the two'year prescriptive period'6
Excess input ta,x on purchase of real property ' - Pelitioner
date of filing of the complete documents in support of the s
administrative claim; of the 1997 Tax code is
reliance on the provisions of section 112(A)
c. The claimed input tax payments were not applied against misplaced sinceihe transaction involved in this case is not zero-rated
or ifectively zero-rated sale. However, petitioner's claim for
refund
any output tax during the period (quarter or year) covered
by the claim and in the succeeding periods, unless a onthebasisofSection4.106.lofRevenueRegulationsNo.T-95is
separate claim covering succeeding such period is filed proper. In order that petitioner's claim for refund may prosper' said
therefor; iection provides the following requisites:
a. The applicant must be a VAT-registered person;
'?Commissioner v. Toshiba Information Equipment (phils.), G.R. No. 1b01b4, _ffiGinesManufacturingv.Commissioner,CTACaseNos.5460and
August 9,2005.
3Sec. 112(At, NIRC.
aCommissioner v. Seagate Technolory (Phil.),
Sg02,Februarys,zoozcitedinDynoNobelPhilippinesv.Commissioner,CTACase
G.R. No. 158866, February 11, No. 6291, March 10, 2003.
2005. iLaziBay Resources v. Commissioner, CTA Case No' 6031' June 27
'2OO2'
r't'nx ( VA'l') 4 ltl-r
484 Itt,:vt t.:wt,:tt oN'l'nxn.r.ror.r V,rt,t rt,: AtrDt';l
I trprtl. 'l\txtls

b. There be a purchase ofland; tw<l (2).ycttrs rtltcr Lhc close of the taxable quarter when
the sales wcre made, and with the CTA within 30 days
c. The purchase of land is substantiated by sufficient
from the date ofreceipt ofdenial from the CIR or in case
evidence; from the lapse of the 120 days from
of inaction by the CIR,
d. The input taxes have not been applied against the output date of filing of the complete documents in support of the
taxes; administrative claim;
e. The application for the refund of unutilized or excess c. The claimed input tax payments were not applied against
creditable input tax arising from the purchase ofland has any output taxhuring ihe period (quarter or year) covered
been made within two years after the close of the taxable by the and in the succeeding periods' unless a
quarter when the purchase was made; "tti*
siparate claim covering succeeding such period is fiIed
f. therefor;
The land subject ofthe purchase was used by the applicant
in his VAT taxable business (Concepcion CarcierBealty d. Claimant must deduct from its VAT quarterly return the
Hold.ings a. Commissioner, CTA Case No. 6lBZ, input tax being claimed as refund or tax credit;
Febnr.any 17,2003).
e. TheclaimedinputVATpaymentsaredirectlyattributable
to zero-rated or effectively zero-rated sales;
Requirements for claims for refund or tax credit arising
from zero-rated or effectively zero-rated sales For zero-rated sales under Section 106(AX2XaX1)' (2)
and (b) and Section 108(BX1) and (2), the acceptable
It should be clear that claims for refund or tax credit under foreign currency exchange proceeds thereofhad been duly
the zero-rated or effectively zero-rated sales ofgoods, properties or accounted for in accordance with the rules and regulations
services, the seller ofthe goods is the one entitled to the refund or of the Bangko Sentral ng Pitipinas (BSP); the recipient of
credit; in the purchase of capital goods, it is the purchaser that is ..doing business outside the Philippines',
services should be
entitled to the refund or tax credit.T In order to be entitled to refund for the transaction to be zero-rated under Section 108(B)
or tax credit of unutilized input tax payments directly attributable to (2) of the 1997 Tax Code (Accenture a' CIR, G"R' No'
zero-rated or effectively zero-rated sales,8petitioner must prove that: 7gO L02, July 7 L, 20 7 2, citing CIR a' BW SC Mind'anao'

a. The claimant must be a VAT-registered person. It is not the 2007);


application for effective zero-rating that is indispensable C
b. The claimed input VAT payments are duly supported by
to VAT refund or credit.elt is the suppliers of the SBMA- vAT invoices oiofficial receipts in accordance with section
registered enterprise who are the proper parties to claim 4.104-5 of Reuenue Regulations No' 7-95, in relation to
(issuance
the tax credit from the BIR. Accordingly, said suppliers Sections 113 (iruuoicing requirements) and 237
shall refund to the SBMA-registered enterprise the VAT of receipts or inuoices) of the Tax Code;ro and
erroneously passed on to it (Contex Corporation a.
Commissioner, GR, No.757735, July 2,2004); h. The VAT return for the succeeding quarters covered by the
claim for tax refund or credit must be submitted with the
b. The application for the issuance ofa tax credit certificate CTA.
or refund is filed with the BIR or the DOF Center within
ApersonisentitledtoVATrefundortaxcreditwhen:(a)the
or
claimed input tax payments are duly supported by VAT invotces
TCommissioner v. Toshiba Information Equipment (phils.), receipts in accordancl with Section 4.104-5 of Revenue Regulations
G.R. No. 150154,
August 9, 2005.
8Sec. 112(A), NIRC. phtlrppines Manufacturing v. commissioner, cTA Case Nos. 5_460 and
eCommissioner v. Seagate Technology (Phil.), G.R. No.
1b8866, February 11, 5902, February s,-iooz cited in Dyno Nobel Philippines v. commissioner, cTA Case
2005. -i;"l
No. 6291 , March 10. 2003'
Vnt.ttt, Atrnt:lr'l',rx tVA'l't
487
486 lll,tvt t,twt,ltt oN'l'Axn'r'ror.r
I ttpttl 'l'ttxlr

No. 7-95 in relation to Sections 113 and 28? of the Tax Code; (b) the 2012; Siticon Phit. u. CIH,6J'I.' No' 772378' January 77' 2O77;
37'
claimed input tax payments are directly attributable to zero-rated Kepio Phil. Corporation u' CIR, G'R' No' 779967' Januan1
sales; (c) the claimed input tax payments were not applied against ioit; Microsoft Phil. u. CIR, G'R' No' L80773, April6' 2077)'
any output tax nor carried over to the succeeding month(s)/quarter(s);
and (d) both the administrative and judicial claims for refund or tax Transitional inPut tax
credit were filed within the two-year prescriptive period.l1
There are three (3) situations where a person may claim
goods' materials'
In a claim for tax refund or tax credit, the applicant must prove transitional input tax on his beginning inventories of
not only entitlement to the grant of the claim under substantive law. and supplies:
It must also show satisfaction of all the documentary and evidentiary first time
requirements for an administrative claim for a refund or tax credit. 1. When he becomes liable to value added tax for the transactions
under a new legislation or when his taxable
Hence, the mere fact that WMPC's application for zero-rating has been (secs.236[G] and
approved by the CIR does not, by itseldjustify the grant ofa refund or exceed the vAf_registration threshold
tax credit. The person claim the refund must further comply with the [H] and 111, NIRC);
person'
invoicing and accounting requirements mandated by the Tax Code as 2. When he elects to register as a VAT-registered
well by revenue regulations implementing them. Under the Tax Code, provided he is eligible (Sec' 236[I], NIEC); and
a creditable input tax should be evidenced by a vAT invoice or officiar
3. If he is already a VAT-registered person and also deals
receipt. Section 4.108-1 of Revenue Regulations No. 7-9b requires, which is exempt' but it
among others, that "if the sale is subject to zero percent (OVo)yy'jl, in goods or properties, the sale of
becomes a ta*aite transaction under a new or amendatory
the term 'zero-rated. sale' shall be written or printed prominently on
the invoice or receipt" (Western Mind.q.nao Power Corporation a. Iaw.
CIR, G.R. No. 787736, June 73,2072). on
Transitional input tax is entitled' to claim input VAT based
but on the ualue of
Imprinting of the u)ord "zero-rated" on the inuoices or receipts the ualue not only in tand. inr,prouements also
is required. - Section 244 of the Tax Code explicitly grants the land. itself, regard.less of aciual ta'x
-S;p*;"
the payment of input tor'.- The
Secretary of Finance the authority to promulgate the necessary Court tt ut on its face, there is nothing in Section 105
",]t"d together
rules and regulations for the effective enforcement of the provisions orine old NIRC that prohibits inclusion of real properties, goods,
of the Tax Code. Such rules and regulations "deserve to be given with the improvement-s', thereon, in the beginning inventory of
weight and respect by the courts in view of the rule-making authority materials and supplies, based on which inventory the transitional
given to those who formulate them and their specific expertise in input tax credit is-computed' It can be conceded that when
it was
their respective fields." In this regard, the Court has consistently drafted,sectiont05couldnothavepossiblycontemplatedconcerns
were not
held that the absence of the word "zero-rated" on the invoices and specific to real properties, as- real estate transactions
when transactions on
receipts of a taxpayer will result in the denial of the claim for refund. originally subjecl to VAt. At the same time,
ln Panasonic Imaging Corporation u. CIR, the Court affirmed the beginning with R'A'
rea"l properties were finally made subject to VAT
Section
decision of the CTA, ratiocinating that "... the appearance of the 77!6, nocorresponding amendment was adopted as regards
word 'zero-rated' on the face of Invoices covering zero-rated sales 105 to provide io, a diff"rentiated tax treatment
in the application
properties or
prevents buyers from falsely claiming input vAT from their purchases ofthe transitional input tax credit with respect to real
when no VAT was actually paid... Further, the printing of the word real estate dealers'13
'zero-rahed'on the invoice helps segregate sales that are subject to
l0Vo (now l2%o)YAT from those sales that are zero-rated.', (Eastern
4.10t1 of Rev. Regs. No. ?-95 limited transitional input taxes on
Telecomtnunications Phil. a. CIR, GR. No.768856, August 2g, on lands Jv, *tt"it" pavment of sales-tq lu19 po::*]I;1td"'
i-p.orru-"tt, 158885 and 170680,
Bonifacio l"uuiop-""t corporation v. cIR, G.R. Nos.
13Fort

l1Lazi Bay Resources v. Commissioner,


-""
aprit z, zoos. sc en banc fi.ied to grani the refund or tax credit in favor of taxpayer
CTA Case No. 6031, June 27 ,2002.
ln C.n. No. 173425, September 4,2012'
488 Itt,:vil,rwr,:rr oN'l'nxn't,ror.r u^' VA'r't 4tt9
' ',1;,ili ',i,1'nxr

The amendments to the VAT law do not show any intention to lnput taxes that may be refunded or credited
make those in the real estate business subject to a different treatment
from those engaged in the sale ofother goods or properties or in any Input tar attributahle to good's exported" - There is nothing
to
other commercial trade or business. on the scope of the basis for in the Ntnc hmiting or.defining the phrase "input tax attributable
gourl" to oily those input to.cces on purchases which forrn part
determining the available transitional input VAT, the CIR has no
power to limit the meaning and coverage of the term ,,goods,' in Section Z/ ri" "*ported" The input tq'xes which were ignored by CTA
fiinished. product.
105 of the Tax code without statutory or legal basis. The transitional ion"i"tnd of input taxes on localty purchased capital goods' ucp3nses
repairi aid' maintenunce' security seruices, supplies'
janitorial
input tax credit operates to benefit newly VAT-registered persons, for
which were clearly incurred in the course of
'and.
whether or not they previously paid taxes in the acquisition of their ieliuery seruices,
100vo of
beginning inventory of goods, materials or supplies. business of pefitionei. considering that petitioner exports
its prod.ucts, the input taxes incurred. cannot but be attributed
to the
Prior payment of input taxes is not required for a tua,payer to gooa, exported., since no other goods are produced other than those
"erportei.
auail of the 8Vo transitional input tarc (TIT) credit.
- Section 105 The apportionment prouided for in Section 12 of Reuenue
ofthe old rax code provides that for a taxpayer to avail of the 8vo Rigutations No.8_AZ, as amend.ed, in cases of avAT,registeredperson
TIT, all that is required is to file a beginning inventory with the iio it engaged' in both VAT-taxoble and VAT-exemptexports.7007o operations
BIR. It was never mentioned in Section 10b that prior payment of ilo,el:s not i" the case at bench because petitioner (Babcock
taxes is a requirement. To require it now would be tantamount to ofits
"Vfiy
producis; henc", engaged' in purely zero-rated sales
judicial legislation. Moreover, transitional input tax credit is not nitoini Phits.l u.Coi*is"ioner & CTA,CA-GJ.SPNo' 40703'
a tax refund per se but a tax credit. Tax credit is not synonymous Noaem.ber 27' 7996),
to tax refund. Tax refund is defined as the money that a taxpayer
overpaid and is thus returned by the taxing authority. Tax credit is Sale of rano materials to BOl-registered' enterprises uhose
an amount subtracted directly from one's total tax liability. It is any sot"r exceed'70Voof totalannualprod'uction' - To avail of
"*poi is for it
amount given to a taxpayer as a subsidy, a refund, or an incentive ze-ro-rating of input taxes, tle only requirement to be complied
to sell its raw materials to export-oriented Bol-registered enterprises
to encourage investment. Also, in CIR u. Central Luzon Corporation The law
(G.R. No. 159647, April 15, 2005), the Court declared that while tax whose export sales exceed 707o oflotal annual production.
Hence, local sales in excess of
liability is essential to the availment or use of any tax credit, prior does not require a!\OVo export sales'
theT}Torequirement may be allowed, contrary to the contention ofthe
tax payments are not. On the other hand, for the existence or grant sold its
solely of such credit, neither a tax liability nor a prior tax payment is respondent^. Likewise, p"titio''"., a Bol-registered enterprise,
BOl-registered export producer'
needed (Fort Bonifacio Deaelopment Corporation u. CIR, GR. .opp", concentrate to FASAR, also a
These copper concentrates have been used as raw materials
in the
No. 773425, September 4,2012). pASAR,
p""a""ti6" of goods for export by which actually exported
Unutilized creditable input taxes ottributable to zero-rated, i s.gsqoof its manufacturedgood s (Mq'rcopper Mining Cotporation
sq,les cqn only be recouered through the applicatiort for refund or o. Cornrnissioner, CTA Case No' 4950, July 23, 1996)'
tax credit. The unapplied input taxes after the expiration of the goods'
two-year prescriptive period to file a claim for refund or tax credit Ercess input tax arising from purchase of capital
(a) they have
Goods or properties are classified capital goods if:
may not be expensed outright and claimed as a deduction from gross -estimated useful life greater than one year; (b) treated as depreciable
income. Section 110(B) of the 2005 Tax Code merely allows three (3) or sale of
options to taxpayers, namely: (a) carry-over of excess input tax; (b) assets; and (c) used dlirectly or indirectly in the production
refund; and (c) tax credit ofunused input taxes directly attributable taxable goods or services. On the other hand, property is considered
to zero-rated sales. Tax exemptions are strictly construed against aepre"iite only if it is: (a) used in a trade or business or held for
the taxpayer, and deductions are in the nature of tax exemptions It proao"tion of income; and (b) subject to exhaustion within a
(BIR Ruling No. 123-2073, Mqrch 26,2013, RMC SZ-2075, August
"
determinableperiodoftime;thatis,ithasalimitedusefullife
23,2013). (Chapter 23A.01 _ p. 2, Merten's Lqw on Federol Income Tq.xation).
Records show that pltitioner is primarily engaged in the construction
490 Itt.:vt t,:wr,:rr oN'l'rrxn,r.ror.l u^' ,,',llllll,,i,l',rrr VA'r't 41) I

and repair of infrastructure/development projects covered in Ir.A. (ovo). Input


are subject to valuo uddtxl tux at l2oh or zero percent
7718, also known as the Expanded BOT Law and projects which are transactions
foreign-funded or assisted and required to undergo international
i"*", or purchases directly and entirely attributable to
to value added tax at l27o or zero percent QTo) are creditable
competitive bidding and in the manufacture and production of "rrtl"ct
ugui".t tfr" taxpayer's output taxes. Input taxes on purchases directly
concrete products and to sell the same on wholesale. Based on the
description of the various equipment appearing in the invoices issued
aid entirely aitributable to transactions exempt from value added
of the
tax become part of the cost of the asset or operating expens-e
by MCRP Construction Corporation, the court is convinced that However' if the asset
ta"paye, deductible only from his gross income'
the same were to be used by petitioner in its business operations. subject to or
b" directly and entirely attributed to transactions
They are assets subject to depreciation; hence, they are considered "rrrrroi
exemptfromvalueaddedtax,thetaxpayerhastoallocatetheinput
as capital goods (Italian-Thai Deaelopment public Cotnpany gross- receipts
taxes on these assets based on the gross selling price or
Ltd..-Philippine Branch a. Cotnrnissiiner, CTA Case No.6IZ2, (Sec' 110[3], NIRC, as implemented
for the preceding taxable quart er
Noaember 12,2002). INOTE: Effectiue Nouember j,2005, R.A. 7JSZ
by Reu. Regs. No.7-95, as amended)'
remoued excess input taxes arising from importation or purchase of
capital goods from beirug claimed as refund or tarc creditJ
Glaim for refund or tax Gredit
"Capital good.s or propetties' refer to goods or properties with
estimated useful life greater than one year and which are treated Thefilingoftheapplicationsfortaxcreditorrefundiswithin
for
as depreciable assets under section 29(f), used directly or indirectly the two-year ieriod cot sidetittg that the administrative claim
refund is reckoned, in case ofinput tax attributable to export sales
in the production or sale oftaxable goods or services. Based on the
foregoing definition, lthe court] findls] no reason to deviate from the (Section106[a]),afterthecloseofthetaxablequarterwhensuchsales
findings of the CTA that training materials, office supplies, posters, weremade,andincaseofcapitalgoods(Section106[b])'withintwo
banners, T-shirts, books, and other similar items are not capital goods yearsafter.thecloseofthetaxablequarterwhentheimportationor
"por.hu.* refund
(Silieon Phil. v. CIR, G.R. No.7Z2BZ8, January IZ,2OII). was made. The prescriptiveperiod in claiming for the
date of filing
if input tax in the judicial level is reckoned from the Philippine
However, purchases made by petitioner for the improvement of ortrrf quarterly VAT return (Nichimen corporation
the land do not qualifr as capital goods. contrary to the definition of Branch a. Cornmissioner, CTA Case No' 5384, August 78' 7998;
capital goods, land and the improvements introduced therein are not nii"i "U p ow er tPhitiwinesl Corporation a. Cornrnis sioner,
subject to depreciation. This view finds support in the Law ofFederal CTA Case No. 5389, JanuarY 4, L999)'
Income Taxation upon which the Philippines based its laws on income
taxation. Thus, "because land does not have a limited and determinable
life, it is not subject to depreciation apart from the improvements or
Deadline for submission of claim
physical development added to it" (La Ftwtera u. Cotntnissioner, oneofthecontroversialissuesrelatingtoclaimsforrefundortax
must
CTACase Nos.5898 and.5937, September IZ, Z0OI). credit for excess input taxes relates to the dates when the claims
be fiIed with the BIR and the cTA. In earlier cases,la the
Tax court
Excess input tar of d.issoluing unincorporated, joint the filing ofthe applications for tax credit or refund is
that
aenture. - The excess input tax not used by MTOB Consortium, an ""pi.i""a
unincorporated consortium, may be refunded pursuant to RMC No. *ithin thu two-year period considering that the administratiue claim sales
for refund is reckoned, in case ofinput tax attributable to export
42-99 and VAT Review Committee Ruling No. 024-00 dated July 27,
(Sec.106ta]),afterthec]oseofthetaxablequarterwhensuchsales
2OO2 (Mitsubishi Corporation, et al.a. Comrnissioner, CTACase two years
were made, and in case of capital goods (Sec' 106[b]), within
No. 6037, Nouernber 1 7, 2002).
plrr"h.* ** *"d". Th" p."""riptive period in claiming for the refund
Allocation of input tax
laNichimenCorporationPhilippineBranchv.Commissioner,CTACaseNo.
A VAT-registered person may enter into (a) transactions 5384,August13,1998;HopewellPower(Philippines)Corporationv'Commissioner'
which are exempt from value added tax, or (b) transactions which CTA Case No. 5389, January 4, 1999'
492 llt,:vtt,lwt,trt oN'l'Axn'r'toN Vnt,t tt,: Alut':t,'l'Ax (VA'l') 49:]
I ttlrrll. 'litxtrs

of input tax in the judicial leuel is reckoned from the date of filing ol' Illirant Pagbilao Curc (SC -2OO8)
the quarterly VAT return. This is based on the strict interpretation
of the law. ln 2008, the Atlas consolidated Mining decision of the_supreme
Court was reversed by another Supreme Court decision in the case of
In another case,ls the CTA ruled that the two-year period at the cIR u. Mirant Pagbilao corporation (G.R. No. 172129, September 72,
administrative level must be counted from the filing of the quarterly 200g,565 SCRA7l4,*h.'-it ruled that "the reckoning point of the
return. The CTA rationalizes its decision as follows: "In the cases of
Comrnissioner of Internal Reuenue u. TIvD( Sales, Inc. and the Court
of Appeals, G.,R. No. 83736, dated January 13, 1gg2 and ACCRA
Inuestmeits Corporation u. Commissioner of Internal Reuenue (204
SCRA 957),the Supreme Court held that the two-year period should
be counted from the filing of the final income tax return, because it is ,"t"d ,u1"., .otr*id"ritr* thut it ir trot u "u." of nut*"ttt o"
only during that date that the exact tax liability or refundability of
"t"ott"oot
the tax can be determined. In the same manner, it is only after the
filing of the quarterly VAT return that we can determine the VAT Aichi Forging ComPanY 6C -2010)
liability or refundability of VAT. It should be noted that the basic
requirement is that VAT refund can only be granted to the extent Unutilized' input VAT must be claimed within two (2) years after the
that the input taxes have not been applied against output tax. All close of the tax,ibte quarter when the sa.les were made; the Ueno'trWe
jhog il ntpond'entis claim for refund' I credit of input VAT before the
these matters can only be determined if a return is filed. It is logical, 'CT.f
therefore, that the two (2)-year period should not immediately be *iorrints a d.ismissal inasmuch as no jurisdiction was acquired
by the cTA. - In computing the two (2)-year prescriptive
period for
counted from the close ofthe quarter but from the prescribed date of CTA Division
filing of the VAT return." ciaiming a refund./cr"dit of unutilized input tax, the
applied"section 112(A) of the NIRC, while the cTA en bonc took into
consideration sections 114 and 229 of ltre NIRC; hence, the cTA eru
Atlns Consolid.ated Mining Case (SC -2002) (2)-year period should start
banc ntled.that the reckoning of the two
The prior interpretation was, however, changed by the Supreme from the date ofpayment oftax and not from the close ofthe taxable
Court in 2007 . On the basis of the 1997 Tax Code provisions and as quarter when the ,.1"" *u"" made. The pivotal question has already
now interpreted by the Courts, there are two (2) levels within which ileen resolve dinCornmissioner u. Mirant Pagbilao Corporation,where
the claim for tax credit or refund of value added tax must be filed. the Court ruled that Section 112(A) of the NIRC is the applicable
At the administrative (BIR) level, the two-year period for the provision in determining the start of the two (2)-year period, and
filing of a written claim with the BIR is counted from the "close of ihat Sections 204(C) 2zg of the NIRC are inapplicable as "both
the taxable quarter when the sales or imporbation or purchase were ptorritiottt apply only to instances -of erroneous payment or illegal
^1,d,

made" pursuant to Section 112(A) of the Tax Code. collection ofir,tlr.tui"evenue taxes." To be clear, Section 112 ofthe
NIRC is the pertinent provision for the refund/credit of input vAT.
At the judicial (CTA) level, the two-year period for the filing of Thus, the two (2)-year period should be reckoned from the close of
a petition for review with the CTA shall be counted from the "date of the taxable quarter when the sales were made'
filing of the VAT return and pa5rment of the tax" in accordance with
the provisions of Sections 204(C) and229 of the 1997 Tax Code.16 In CIR u. Primetown Property Group, Inc', tlne Supreme Courb
said that as between the civil code, which provides that a year is
T5JIDECO Manufacturing Philippines
v. Commissioner, CTA Case No. 6b52, equivalent to 365 days, and the Administrative code of 1987, which
september 16,2004. since this legal issue is far from settled, the author suggests that states that a year is iomposed of 12 calendar months, it is the latter
the two (2) periods (administrative and judicial) be strictly followed by the taxpayer
that must prevail following the legal maxim, Lex posteriori derogat
and his lawyer. It is safer to be conservative.
r8Atlas Consolidnted Mining and Deuelopment
Corporation u. CIR, G.R. Nos.
priori. Thus, [the court] holdtsl that respondent's petition (filed
I4llO4 and 148763, June 8, 2007 (6.24 SCRA 73). on April 14, 20OO) was filed on the last day of the 24th calendar
494 Itl,rvt t,:wt,ltr oN'l'Axn't'rorrr Vrr,rrr,, Atrtrt,;t,'l'AX ( VA'l') 49lt
Ittprtl'lltxrls

month from the date respondent filed its final adjusted return. thattheadministrativeclrrirrrwasfiledonf)ecember30,2003,while
The respondent's administrative claim was timely filed. However, The premature
the judicial claim was filed on February 19, 2004'18
notwithstanding the timely filing of the administrative claim, Ithe i-rG oir"*pondent's claim for refund/credit of input vAT before the
Courtl [is] constrained to deny respondent's claim for tax refund./ cTA warrants a dismissal inasmuch as no jurisdiction was acquired
credit, for having been filed in violation of Section 112(D) of the NIRC. by the CTA.
Section 112(D) clearly provides that the CIR has "120 days from the
date of the submission of the complete documents in support of the Whilethegeneralruleisthat..ajudicialinterpretationbecomes
passed'
application [for tax refund./credit]" within which to grant or deny a part of the fu* t, of the date that law was originally
that when a doctrine of this court is
the claim. In case of full or partial denial by the CIR, the taxpayer,s s,ibiect only to the qualification
is adopted, and more so when there is
recourse is to file an appeal before the CTA within 30 days from receipt ouurrof"a and a different view
doctrine should be applied prospectively
of the decision of the CIR. However, if after the 120-day period, the u r"t""rul thereof, the new
CIR fails to act on the application for tax refund./credit, the remedy arra not apply to parties who relied on the old doctrine and
of the taxpayer is to appeal the inaction of the CIR to CTA within B0 ."t"J r" good faitlh,"it th" Sopt"me Court decisions in the Aichi and
"ftorrta
the
days. In this case, the administrative and the judicial claims were Mirq.ntcases discussed above have been applied retroaciive]yby
simultaneously filed on September 30, 2004. Obviously, respondent cTAen banc inseveral refund or tax credit cases pending before it'
pointed-ou! that the said
did not wait for the decision of the CIR or the lapse of the 120-day Tax practitioners and taxpayer-claimants
period. For this reason, [the Court] findlsl the filing of the judicial o,",t'ul\,"longfiledonthebasisofapplicablejurisdictionatthetime
claim with the CTA premature. The phrase "within two (2) years ... offilingtheclaimsandweredecidedbytheCTADivisionsinfavorof
irr"luJpuv"rs on that legal basis befolg the decisions ofthe sc
in the
apply for the issuance ofa tax credit certificate or refund" in Section
h"tt"e, should not be covered by the recent
1I2 of lhe Tax Code refers to applications for refund./credit filed with Aichi and' Mirant
"ur"rf e CTAen banc
the CIR and not to appeals made to the CTA. This is apparent in decision of the Supreme iourt. At any rate, some of thes
the first paragraph of Subsection (D) of the same provision, which now on appeal by the taxpayers before the Supreme Court'
cases are
states that the CIR has "120 days from the submission of complete
(SC -2013)
documents in support of the application filed in accordance with San Roque, Ta'ganito and Phiter Cases
Subsections (A) and (B)" within which to decide on the claim. In Antonio T'
fact, applying the two-year period to judicial claims would render The Suprem e Cot:u:t en banc, speaking through Justice
relating to claims
nugatory Section 112(D) of the NIRC, which already provides for a cr"fio, finally clarified and settled the legal issues
for refunds or tax credit ofexcess input taxes as follows:
specific period within which a taxpayer should appeal the decision or
inaction of the CIR. The second paragraph of Section 112(D) of the L. Premature or late filing of the claim for refund or
NIRC envisions two scenarios: (1) when a decision is issued by the credit
CIR before the lapse of the 120-day period; and (2) when no decision
is made after the 120-day period. In both instances, the taxpayer has &. CIR a. San Roque Power Corporation, GJB' No'
30 days within which to file an appeal with the CTA. As we see it 187485, Februa'ry 12, 2073
then, the 120-day period is crucial in filing an appeal with the CTA.
In fine, the premature filing of respondent's claim for refund,/credit
of input VAT before the CTA warrants a dismissal inasmuch as no lsCommissioner v. Taganito Mining Corporation, CTA EB No' 559, April 18'
jurisdiction was acquired by the CTA.17 giiOir' f" this case, five (5) justices v-o!-ed to denv the
2011; Resolution, eugust
refund; three (3) justir", uoLd to grant it,on-the ground that the failure to exhaust
of action which is waivable
Taganito Mining Case (CTA EB -2011) administrative remedy ."*"rt, o"& from lack of cause
,"J1, *frii" o"" iU:ustice maintained that the two (2)-year period
Following the Aichi case, the CTAen bonc dismissed the refund ""t:".lsdictional,
.ppfi", U"ift to administralive and iuiicialclaims, and the Mirant should be applied
case for having been prematurelV filed by the petitioner, considering prospectivelY.
leColumbia Pictures Corporation v' CA and Sunshine Home Video' Inc'' G'R'
No. 110318, August ZA, fSS6; ftanters Products' Inc'
v' Fertiphil Corporation' G'R'
l7Commissioner v. Aichi Forging Company of Asia, lnc.,
ibid. No. 156278, March 29,2004.
496 li.r,:vrr,twr,:rr oN'l'nxA'l'ron VAl,t rt': At,lt';tt'l',lr t VA'l') 497
I ttlrttl 'l'lrxt's

On April altcr it filed


10, 2003, a mere llJ days dcnirrl" l,ltrrt, thc t,axpayer can take to the CTA for
its amended administrative claim with the OIll on review. Without a decision or an "inaction deemed
March 28,2003, San Roque filed a Petition for Review a denial" of the Commissioner, the CTA has no
with the CTA. From this, we gather two crucial facts: jurisdiction over a petition for review'
first, San Roque did not wait for the 120-day period
San Roque's failure to comply with the 120-
to lapse before filing its judicial claim; second, San
Roque filed its judicial claim more than four years
day mandatory period renders its petition for
before the Atlas doctrine, which was promulgated by
,".ri"* with the CTA void. Article 5 of the Civil
Code provides, "Acts executed against provisions
the Court on June 8, 2007.
of mandatory or prohibitory laws shall be void,
Clearly, San Roque failed to comply with the except when ih" lu* itself authorizes their validity'"
120-day waiting period, the time expressly given by San Roque's void petition for review cannot be
law to the CIR to decide whether to grant or deny legitimized by the CTA or this Court because
San Roque's application for tax refund or credit. It Riticte 5 of the Civil Code states that such void
is indisputable that compliance with the l2}-d,ay petition cannot be legitimized "except when the
waiting period is mandatory and jurisdictional. iaw itself authorizes [its] validity'" There is no law
The waiting period has been in our statute books authorizing the petition's validity'
for more than 15 years before San Roque filed its It is hornbook doctrine that a person committing
judicial claim.
a void act contrary to a mandatory provision of law
Failure to comply with the 120-day waiting cannot claim or acquire any right from his void act' A
period violates a mandatory provision of law. It right cannot spring in favor of a person from his own
violates the doctrine of exhaustion of administrative vo"id or illegal act. This doctrine is repeated in Article
remedies and renders the petition premature and 2254 of tft" Ciuit Code, which states, "No vested or
thus without a cause of action, with the effect that the acquired right can arise from acts or omissions which
CTA does not acquire jurisdiction over the taxoayer's against the law or which infringe upon the rights of
petition. Philippine jurisprudence is replete with olhers." For violating a mandatory provision of law
cases upholding and reiterating these doctrinal in filing its petition with the CTA, San Roque cannot
principles. claim any rigtrt arising from such void petition' Thus'
San Roque's petition with the CTA is a mere scrap of
The charter ofthe CTA expressly provides that
paper.
itsjurisdiction is to review on appeal "decisions ofthe
Commissioner in cases involving refunds of internal San Roque cannot also claim being misled'
revenue taxes." When a taxpayer prematurely files misguided or confused by the Atlas doctrine because
a judicial claim for tax refund or credit with the CTA San"Roque fiIed its petition for review with the CTA
without waiting for the decision of the Commissioner, more than four yeais before Atlas was promulgated'
there is no "decision" of the Commissioner to review Tihe Atlas doctrine did not exist at the time San Roque
and thus the CTA as a court of special jurisdiction failed to comply with the 120-day period' Thus, San
has nojurisdiction over the appeal. The charter ofthe Roque cannot invoke Llne Atlas doctrine as an excuse
CTA also expressly provides that ifthe Commissioner for its failure to wait for the 120-day period to lapse'
fails to decide within "a specific period" required In any event ,theAtlas doctrine merely stated that the
by law, such "inaction shall be deemed a denial" two-year prescriptive period should be counted from
of the application for tax refund or credit. It is the the date of payment of the output VAT, not from the
Commissioner's decision, or inaction "deemed a close of the taxable quarter when the sales involving
V,lr,r'r, Atrt rt,rt''l'A\ ( Vn'l') 4t)9
49rl llt,:vtt,twt,ttt oN'l'Ax,rL'ror.r
Itrpttl 'l'ttxcr

the input VAT were made. The Atlus doctrirrc tlxrs h. 'l'ugtrnilo Mining Corporation v. CIR, G'R' No'
not interpret, expressly or impliedly, thc 120+ll0 tlrr.y 1961l$
periods.
Like San Roque, Taganito also filed its petition
In fact, Section 106ft) and (e) of the Tax Oodc for review with the CTA without waiting for the 120-
of 1977, as amended, which was the law cited by day period to lapse and it filed its judicial claim before
the Court in Atlas as the applicable provision of the the promulgation of the Atlcts docttine. However,
law, did not yet provide for the 30-day period for the Taganito can invoke BIR Ruling No. DA-489-03 dated
taxpayer to appeal to the CTA from the decision or December 10, 2003, which expressly ruled that the
inaction ofthe Commissioner. Thus, theAtle,s doctrine "taxpayer-claimant need not wait for the lapse of
cannot be invoked to disregard compliance with the the tZO-day period before it could seek judicial relief
30-day mandatory and jurisdictional period. Also, with the CTA by way of petition for review'" Since
the difference between the Atlas doctrine, on one the petition was filed before the adoption of the Aichi
hand, and the Mirant doctrine, on the other hand, is doctrine, Taganito is deemed to have filed its judicial
a mere 20 days. The Atlas doctrine counts the two- claim with the CTA on time.
year prescriptive period from the date of payment of
the output VAT, which means 20 days afber the close c. Phitex Mining Corporation. a. CIR, G.R' No'
of the taxable quarter. The output VAT at that time L97L56
must be paid at the time of filing of the quarterly Philex (1) filed on October 2I,2005 its original
tax returns, which were to be filed "within 20 days
VAT return for the third quarter of taxable year 2005;
following the end of each quarter." (2) filed on March 20,2006 its administrative claim
Whether the Atlas doctrine or the Mirq,nt for refund or credit; (3) filed on October 17,2007 lts
doctrine is applied to San Roque is immaterial because petition for review with the CTA. The close of the
what is at issue in the present case is San Roque's ihird taxable quarter in 2005 is September 30, 2005,
non-compliance with the 120-day mandatory and which is the reckoning date in computing the two-year
jurisdictional period, which is counted from the date it prescriptive period under Section 112(A).
filed its administrative claim with the Commissioner.
Philex timely filed its administrative claim on
The 120-day period may extend beyond the two-year
March 20, 2006, within the two-year prescriptive
prescriptive period, as long as the administrative
period. Even if the two (2)-year prescriptive period is
claim is filed within the two-year prescriptive period.
computed from the date of payment ofthe outputVAT
However, San Roque's fatal mistake is that it did not
under Section 229, Philex still filed its administrative
wait for the Commissioner to decide within the 120-
claim on time. Thus, theAtlas doctrine is immaterial
day period, a mandatory period whether t}reAtlas or
t}:re Mirant doctrine is applied.
in this case. The Commissioner had until July 17,
2006, the last day of the l2}-day period, to decide
At the time San Roque filed its petition for review Philex's claim. Since the Commissioner did not act
with the CTA, the 120+30 day mandatory periods on Philex's claim on or before July 17, 2006, Philex
were already in the law. Section 112(C) expressly had until August 17,2006, the last day of the 30-day
grants the Commissioner 120 days within which to period, to file its judicial claim. The CTA EB held that
decide the taxpayer's claim. The law is clear, plain, August l7 ,2006 was indeed the last day for Philex to
and unequivocal. Following l}ne uerba legis docftrne, fileltsludicial claim. However, it filed its petition for
this law must be applied exactly as worded since it review with the CTA only on October 17 ,2007 , ot 426
is clear, plain, and unequivocal. days after the last day of fiIing. In short, Philex was
V,lt,trt', Anlrt';l'l"rr tVt\'l't 5Ol
500 lit,lvtt,:wt,:tr or.r'l'Axrr't'loN
Ittlrttl'l'rrxllr

late by 1 year and 61 days in filing its.iudicial clairn. ln pcriotl''l'h us' i l' t,hc taxpa.yer fi les his adminis-
prt-.scri pt,ivc
any event, whether governed b.y jurisprudcncc bc{ilro, irative claim on thc 61 lth dav, the Commissioner, with his
during, or afber theAtlas case, Philex's judicial cluim fZO-aay period, will have until the 731st day to decidethe
will have to be rejected because of late filing. claim. if th" Co-*issioner decides only on the 731st day'
or does not decide at all, the taxpayer can no longer file
2. Prescriptive periods under Section 112(A) and (C) his judicial claim with the CTA because the two
(2)-year
(equivalent to 730 days) has lapsed'
There are three (3) compelling reasons why the 30-day period frescriptive period file an
bh" So-a.y period granted by law to the taxpayer to
need not necessarily fall within the two (2)-year prescriptive period, utterly useless, even if the
appeal Uuiot" tne CTAbecomes
as long as the administrative claim is filed within the two (2)-year law filing his administrative
tu"puyut complied with the
prescriptive period.
claim within the two (:2)-yeat prescriptive period'
Section 112(A) clearly, plainly, and unequivocally provides
a.
The theory that the 30-day period must fall within
that the taxpayer "-.y, within two (2) years after the close
the two-year prescriptive period adds a condition that is
of the taxable quarter when the sales were made, apply
not found in the law. It results in truncating 120 days from
for the issuance ofa tax credit certificate or refund ofthe
the 730 days that the law grants the taxpayer for filing his
creditable input tax due or paid to such sales." This means
administrative claim with the Commissioner' This Court
that the claim may be filed at anytime within two (2) years.
cannot interpret a law to defeat, wholly or even partly' a
It can even be filed on the last day of the two (2)-year period
r"-uav thafthe law expressly grants in clear, plain' and
and it will strictly comply with the law. The two (2)-year
unequivocal language.
prescriptive period is a grace period in favor ofthe taxpayer
and he can avail ofthe full period before his right to apply
for a tax refund or credit is barred by prescription.
b. Section 1,12(C) provides that the Commissioner shall decide
the application for refund or credit "within 120 days from
the date of submission of complete documents in support
of the application filed in accordance with Subsection
(A)." This means that the application in Section 112(.4')
is the administrative claim that the Commissioner must
decide the 120-day period. In short, the two (2)-year period
file his judicial claim with the CTA'
in Section 112(4) refers to the period within which the
taxpayer can file an administrative claim for tax refund
3. Excess input VAT and excessively collected tax
or credit. Stated otherwise, the two (2)-year prescriptive
period does not refer to the filing of the judicial claim with
TheinputVATisnot..excessively''collectedasunderstoodunder
the CTA but to the fiIing of the administrative claim with amount
section 229 because at the time the input vAT is collected, the
the Commissioner. is a tax liability of, and
p"iJ i, correct and proper. The input v^AT
Ifthe 30-day period, or any part ofit, is required to fall goods, properties or services
c. iegally paidby, aVAT-registered seller of
within the two (2)-year prescriptive period (equivalent to u, inpui by another vAT-registered person in the sale of his
730 days), then the taxpayer must file his administrative "ia
own goods, propirties or services. This tax liability is true
even if the
claim for refund or credit within the first 610 days of the settei pu.r"" on tn" input VAT to the buyer as part ofthe purchase
two (2)-year prescriptive period. Otherwise, the filing of the pti.* ift" second VAT-registered person' who is not legally liable for
VAT creditfor his
administrative claim beyond the first 610 days will result [he input vAT, is the orru *ho applies the input as
oltp"t vAT. If the input vAT is in fact "excessively" collected
in the appeal to the CTA being filed beyond the two (2)-year o*"
Vlt t,r, Anttt,l'l',rx tVA'l't 50:l
502 llt,:vtt.:wt,:tr oN 'l'A\A uoN
Ittpttl'l'ttxln

as understood under Section 229, thcn it is thc lirst VA'l'-rcgisl.orlrl is rnorc lhan whaL is krgrrll.y rlrrc. llc is not, the taxpayer who legally
person - the taxpayer who is legally liable and who is decmtrtl t,o ltttvl paid the input VA'l'.
legally paid for the input VAT - who can ask for a tax rclu n<l or crcrl i l,
under Section 229 as an ordinary refund or credit outside ol'thc VA'l' 4. Effectivity and scope of Atlas, Mirant and' Aichi
system. In such event, the second VAT-registered taxpayer will huvrr doctrines
no input VAT to offset against his own output VAT.
The Atlas doctrine, which held that claims for refund or credits
In a claim for refund or credit of "excess" input VAT under of input vAT must comply with the two (2)-year prescriptive period
Section 110(B) and Section 112(A), the input VAT is not "excessively" under Section 229, should be effective only from its promulgation on
collected as understood under Section 229. Al the time of paymenl, June 8,2007 until its abandonment on september 12,20o8inMirant.
of the input VAT, the amount paid is the correct and proper amount.
The Atlas doctrine was limited to the reckoning of the two-year
Under the VAT system, there is no claim or issue that the input VAT prescriptive period from the date of payment of the output vAT. Prior
is "excessively" collected, that is, that the input VAT paid is morc iothe Attas doctrine, the two (2)-year prescriptive period for claiming
than what is legally due. The person legally liable for the input VAT
refund or credit of input vAT should be governed by section 112(A)
cannot claim that he overpaid the input VAT by the mere existence
following t}Ie uerbal legis rule. The Mirq.nt ruling, which abandoned
of an "excess" input VAT. The term "excess" input VAT simply means
tJoe Atlai doctrine, adopted the uerbal legis ruIe, thus applying Section
that the input VAT available as credit exceeds the output VAT, not
112(A) in computing the two (2)-year prescriptive period in claiming
that the input VAT is excessively collected because it is more than
refund or credit of inPut VAT.
what is legally due.
The Atlas doctrine has no relevance to the 120+30 day periods
Under Section 229, the prescriptive period for filing a judicial
under section 112(C) because the application of the 120+30 day
claim for refund is two (2) years from the date of payment of the
periods was not in issue inAtlq,s. The application of the 120+30 day
tax "erroneously, x x x illegally, x x x excessively or in any manner
periods was first rai sedinAichi, which adopted the uerbal legas rule in
wrongfully collected." The prescriptive period is reckoned from the
date the person liable for the tax pays the tax. Thus, if the input irolding that the 120+30 day periods are mandatory and jurisdictional.
VAT is in fact "excessively" collected, that is, the person liable for the When Section 112(C) states that "the taxpayer affected may,
tax actually pays more than what is legally due, the taxpayer must within 30 days from receipt of the decision denying the claim or after
file a judicial claim for refund within two (2) years from his date of the expiration ofthe 120-day period, appeal the decision or the unacted
payment. Only the person legally liable to pay the tax can file the claim with the cTA," the law does not make the 120+30 day periods
judicial claim for refund. The person to whom the tax is passed on as optional just because the law uses the word "may." The word "may"
part of the purchase price has no personality to file the judicial claim simply means that the taxpayer may or may not appeal the decision
under Section 229. of the commissioner within 30 days from receipt of the decision, or
Under Section 110(B) and Section 112(A), the prescriptive period within 30 days from the expiration of the 1.2}-day period'
for filing a judicial claim for "excess" input VAT is two (2) years The old rule thatthe taxpayermayfile the judicial claim, without
from the close of the taxable quarter when the sale was made by the waiting for the commissioner's decision if the two (Z)-year period is
person legally liable to pay the output VAT. This prescriptive period about to expire, cannot apply because that rule was adopted before
has no relation to the date of payment of the excess input VAT. The the enactmlnt of the 30-day period. The 30-day period was adopted
excess input VAT may have been paid for more than two (2) years but precisely to do away with the old rule, so that under the vAT system,
this does not bar the filing of a judicial claim for excess VAT under lh" t.*pry"r will always have 30 days to file the judicial claim even
Section 112(A), which has a different reckoning period from Section if the commissioner acts only on the 120th day, or does not act at all
229. Moreover, the person claiming the refund or credit of the input during the 120-day period.
VAT is not the person who legally paid the input VAT. Such person
seeking the VAT refund or credit does not claim that the input VAT A claim for tax refund or credit, like a claim for tax exemption,
was excessively collected from him, or that he paid an input VAT that is construed strictlv against the taxpayer.
*,r. I
V,lt.t rt, l\t,lt' t"l',rr t VA'l't l-r( ) l-r
('orrrpltrrtrrl lllrlttttltttcttl.s

..Head office" (I l( )) rrrlirrs t,0 t,[re dcclared specilic or identifiable


principal place/heacl 0llictr 0l'business as stated in the Articles of
irr.o.poruiion/Articles r-rf' Partnership/Articles of Cooperation /DTI
Certificate of Registration, as the case may be, or, in the absence
CHAPTER )0(III thereof, the place where the complete books of accounts are kept. It is
COMPLIANCE REQUIREMENTS the fixed place of business, whether rented or owned, and whether or
not the products/services being sold are located or displayed thereat.
For persons who conduct business in a nomadic or roving manner,
A person who is subject to pay internal revenue tax must comply suclras peddlers, "tiangges," mobile storeS Operators, COmmOn CarrierJ
with certain administrative requirements prescribed by the Tax Code. school bus operators without designated garages/terminals, etc., their
These are: I place of residence shall be considered as the HO.2

1. Registration as a VAT taxpayer; "Branch" means a separate or distinct establishment or place


of business where sales transactions are conducted independently
2. Keeping and stamping of books of accounts, sales invoices from the Ho. For purposes of these Regulations, branch shall include
and official receipts and other accounting records; the following: (i) Sales outlet or establishment situated in another
3. Issuance ofinvoices and receipts; Iocation/address other than at the Ho; (ii) Facility with sales activity;
(iii) Real properties for lease including car parks, with Administrative
4. Filing of tax returns and payment of taxes; and office stratt ue considered as a branch. If CRM/POS are used thereat,
5. Withholding of tax on certain payments made to other the same shall be registered under existing CRMIPOS policies and
persons. procedures prescribed under the regulations on secondary registration
process, etc.
Registration Requ irements "Facility" may include but not limited to place of production,
showroom, warehouse, storage place, gatage' bus terminal, or real
Any person who, in the course oftrade or business, sells, barters,
property for lease with no sales activity. A facility shall be registered
or exchanges goods or properties, or engages in the sale of services
subject to VAT imposed in Sections LOG (sq,le of goods or properties) a" a bratr"h whenever sales transactions/activities are conducted
and 108 (sale of seruices) of the Tax Code, shall register with the thereat. Registration of the "facility" with no sales activity is not
subject to payment of annual registration fee'
appropriate revenue office,1 using the proper BIR forms, and pay an
annual registration fee in the amount of Five hundred pesos (F500), "Principal place of business" refers to the place where the
using BIR Form No. 0605 (payment form), for every separate or head or main offi"" ir lo"uted as appearing in the corporation's Articles
distinct establishment or place ofbusiness (save a warehouse without oflncorporation. In the case ofan individual, the principal place of
sale transactions) before the start of such business and every year business shall be the place where the head or main office is located
thereafter on or before the 31st day ofJanuary. and where the books ofaccounts are kept.
"Separate or distinct establishment" shall mean anybranch "Warehouse" means the place or premises where the inventory
or facility where sale transactions occur. of goods for sale are kept and from which such goods are withdrawn
for delivery to customers, dealers, or persons acting in behalf of the
business.
l"Appropriate revenue office" refers to the divisions under the Large Taxpayers
Any person who maintains a head or main office and branches
Service (for large taxpayers) or to the Revenue District Offrce (for non-large taxpayers)
which has jurisdiction over the principal place of business of the taxpayer.
in different places shall register with the Large Taxpayers service

504
zSee Rev. Regs. No. 7-2012, April2'2OI2.
506 Itt,:vrt,:wr,:rr { )N'l'AXA't't( )N V,tt trt, Atrt,t.tr'l',rr tVA'l't ltl7
('orrrlrltrrnl. ltlrlttttttttcltls

(if officially designated and notified as a Large Taxpayer) or with tlro A person comrrr0rrt:irrl{ il tr(,w lrrrsincss becomes a taxable person,
Revenue District Office (RDO) [if not designated as a Large Taxpayer l, if he expects to realizc irn irnnual gross sales or gross receipts in
which has jurisdiction over the place wherein the main or head office excess oi pl,g1g,b00 {'r'nr Ltrxable transactions for the next twelve
orbranch is located. However, the registration fee shall be paid to any months. Ifhe expects to realize a gross sales or gross receipts for the
accredited bank in the BIR national office or revenue district where next twelve -on1hr that is F1,919,500 or less, he should register as
the head office or branch is registered, provided that in areas where a non-VAT or exempt person' unless he opts to register as a VAT
there are no accredited banks, the same shall be paid to the RDO, person because his cuslomers are aII VAT-registered persons who
collection agent, or duly authorized treasurer of the municipality might want to deal only with another vAT-registered persons so
where each place ofbusiness or branch is situated. thJt tney can enjoy the benefits ofinput tax credits' A person who in
2O12 wis already engaged in trade or business (like sale ofrattan or
Each VAT-registered person shall be assigned only one Taxpayer
abaca) or exercise of profession (like a doctor of medicine or lawyer)
Identification Number (TIN). The branch shall use the 9-digit TIN of
the head offi.ce plus a 3-digit branch code. will be subject to value added tax, ifhe realizes or expects to realize
a gross salLs or gross receipts for the next twelve months exceeding
'VAT-registered person" refers to any person registered in F1,919,500.4
accordance with this section.
Registration has recently been categorized into two (2) types -
'VAT-registrable person" refers to any person who is required (1) primary registration; and (2) secondary registration' "P-rimary
to register under the provisions ofthis section, but failed to register. rejistration" is the process by which a person, whether an individual,
Registration is an indispensable requirement under our VAT including estates and trusts, or a corporation and other juridical
law. However, registration does not determine taxability under entities, upon application and full compliance with the registration
the VAT law.3 Ordinarily, a person who is subject to any internal requirements, is registered with and consequently included in the
revenue tax must register with the BIR. If he is liable to value registration database of the BIR. Primary registration may involve
added tax (e.g., dealer of ready-to-wear clothes with gross sales t*'o .."ntrios depending on the purpose of the taxpayer applying
(b)
over F1,919,500), he registers as a VAT person. If he is exempt for registration as follows: (a) TIN issuance and registration; or
from value added tax (e.g., sale of books or dealer of raw eggs, Purely TIN issuance.
regardless ofhis gross sales), he registers as a non-VAT person. If "secondary registration" shall pertain to subsequent
he is engaged in transactions subject to value added tax and in other registration activities after the issuance of BIR certificate of
transactions exempt from value added tax, he must both register Relgistration relative to the printing and issuance of official receipts/
as VAT and non-VAT person (e.g., dealer of books, magazines and sal-es invoices; keeping/registering of books of accounts and other
school supplies; real estate developer who sells residential lots not accounting records; applying for certain accreditation requirements
exceeding F1,919,500 and/or residential houses and lots and other and securing other applicable registration-related permits's
dwellings at prices not exceeding F3,199,200, real estate lessors of
real properties at F12,800 or less per unit per month and at more
Mandatory Registration
than F12,800 per unit per month). However, a real estate dealer who
sells real property on the installment plan at gross selling prices over Any person (natural or juridical) who, in the course of trade or
the threshold need not register as a VAT person and as a non-VAT business or profession, sells, barters or exchanges goods or properties'
person, since he is engaged in one business subject to value added or engages in ttre sale or exchange ofservices shall be liable to register
tax. However, he must issue non-VAT receipts or acknowledgment if:
receipts whenever he receives installment payments from sales on
a.Hisgrosssalesorreceiptsfromon-goingbusinessforthe
a deferred payment basis not on the installment plan. past twelve (12) months, other than those that are exempt

aSee Rev. Regs. No. 16-2011, October 27 '2017


3Sec. 236, 2005 NIRC. See Commissioner vs. Seagate Technology (Plrril.), ibid. sSee Rev. Regs. No. 7 -2012, Aprll 2' 2012.
Vnt,r rt,; Atttrt,:lt'l'nx t VA'l't 509
508 Itt,:vt r,:wr,:rr ot'l'lxa,t'toN ( iotrtpl ttt ttcl l(r'rlttitttlrlttl.s

under Section 109(1XA) to (U) of the Tax Code, havo [,'9r doctors 9f urcdici[o u1d lawyers, the fbllowing are their
exceeded One million nine hundred nineteen thousand five registration requircments:
hundred pesos (F1,919,500); or 1. Professionals nttw covered by VAT pursuant to R'A' 9337
b. There are reasonable grounds to believe that his gross are required to update their registration using BIR Form
1905.
sales or receipts in a new business for the next twelve (12)
months, other than those that are exempt under Section l.llftheirgrosssalesorreceiptsforthepasttwelve(12)
109(1XA) to (U) of the Tax Code, will exceed One million months have exceeded the F1,919,500 threshold'
nine hundred nineteen thousand five hundred pesos they are required to register as VAT taxpayers
(F1,919,500). by iegistering VAT as additional tax type of said
Registration as a VAT taxpayer may be mandatory taxpayers' They have to accomplish BIR Form No'
1905.
or directory. A person whose transactions exceed the pre-
scribed registration threshold is a taxable person, regard- t.2 If their gross sales or receipts for the past twelve
less of whether or not he registers as a VAT person. In other months have not exceeded the Fl,919,500 threshold'
words, non-registration as a VAT person does not exempt they are still required to update their registration by
the seller from value added tax (output tax) liability. Based registering Percentage Tax as tax type because they
on existing law and regulations, the seller who did not reg- are now subject to percentage tax under Section 116
ister as a VAT person cannot claim any input tax passed on ofthe Tax Code.
to him as a penalty for non-registration. To be creditable to
a VAT-registered buyer, the input tax must be evidenced 2. Apply for Authority to Print Receipts (ATP) using BIR
by a VAT invoice for purchase of goods or property or VAT Form 1906 to be able to have printed VAT receipts'
official receipt for purchase of service, which is issued by a Every person who becomes liable to be registered shall register
VAT-registered seller ofgoods, properties or services. with the Lipropriate revenue office (LTS or RDO), which has
Taxpayers previously registered as VAT taxpayers
jurisdiction^*". th" head office or branch of that person, and shall
under R.A. 8424 or other VAT law are not required to pay the annual registration fee prescribed in subsection 9.236-1(a)
register anew under R.A. 9337, while taxpayers who are irereof. Ifhe fails to register, he shall be liable to pay the output tax
previously registered as non-VAT taxpayers but are now under sections 106 and/or 108 of the Tax code, as if he were a vAT-
covered by the VAT Law shall update their registration registered person, but without the benefit ofinput tax credits for the
by filing BIR Form L9O5 (Application for Registration p"riod in which he was not properly registered'
Information Update) at the RDO having jurisdiction over Moreover,franchisegranteesofradioandtelevisionbroad-
the taxpayer's Head Office.G casting, whose gross annual receipts for the preceding calendar
year
*".""JFt0,000,000, shall register within thirty (30) days from the
The domestic shipping agent shall epply for a TIN
end of the calendar Year.8
for each principal it represents. - Each principal is by
itself a taxpayer separate and distinct from the agent
and the other principals of the same agent. For purposes When to Register as Non'VAT Taxpayer
of registration and securing the TIN of the principal(s), Every person, other than those required to be registered
the shipping agent must submit the Agency Agreement as VAT p"r*t r, engaged in any business, shall, on or before the
between him and his principal(s) which will suffice as the of his business, or whenever he transfers to another
documentation requirement.T "o--"rriu-ent
revenue district, (a) register with the appropriate revenue office
6RMC 62-05, October 18,2005.
sSec. 9.236-1(b), Rev. Regs. No. 16-05, September 1, 2005'
?Q39, RMC 31-08, April 11, 2008
510 Itt'tvlt, wt,:tt oN 'l'Axn't'toN
Vnt,t tt, At,t,t,rn'l',rx ( VA'l') l-rl I
('orrrpltrrttn' llcr;ttitrrttttrttl.s

within ten (10) days from the commencement of business or transf'er (2) Any pcrsort wlro is VA'l'-rcgistered but enters into trans-
in the manner prescribed under this section and (b) pay the applicable actions which arc cxcmpt from VAT (mixed transactions)
registration fee ofFive hundred pesos (Fb00.00) for every s-parate may opt that thc VAT apply to his transactions which would
or distinct establishment or place of business, if he has not paid the have been exempt under Section 109(1) ofthe Tax Code,
registration fee in the beginning ofthe taxable year. as amended.
The head or main office and each of its branches located in (3) Franchise grantees of radio and./or television broadcasting,
different places must be registered with the Revenue District office whose annual gross receipts ofthe preceding year do not
where the head or main office or branch is located.e exceed Ten million pesos (F10,000,000) derived from the
business covered by the law granting the franchise, may
Optional VAT Registration opt for VAT registration. This option, once exercised, shall
A VAT-registered person may, in relation to Section 9.286_1(c) be irrevocable.
of these Regulations, elect that the exemption in section 4.10g- (4) Radio and TV broadcasting whose gross annual receipts
1(B) hereof shall not apply to his sales of goods or properties or do not exceed F10 million and which do not opt to be VAT
services.l. once the election is made, it shall be irrevocable for registered;
a period of three (3) years counted from the quarter when the
election was made, except for franchise grantees of radio and rv (5) PEZA and other ecozone registered enterprises enjoying
the preferential tax rate of 5Vo, in lieu ofall taxes;
do .tot t"tr -illio.r p"ror (P-10,000,000), *h"r" th" optioo (6) SBMA and other Freeport zone-registered enterprises
becomes"""""d
perpetually irrevocable. rl enjoying the preferential tax rate of 57o, in lieu of all
There are some taxpayers who are engaged in businesses that taxes.
are exempt from value added under existing law (RA.9SSZ), but are Any person who elects to register under subsections (1) and
given the option to register as VAT taxpayers. These include: (2) above shall not be allowed to cancel his registration for the next
(1) Any person who is VAT-exempt under Section 4.10g-1(B) three (3) years, counted from the quarter when the election was
(1XV) not required to register for VAT may, in relation to made, except for franchise grantees of radio and TV broadcasting
Section 4.109-2, elect to be VAT-registered by registering whose annual gross receipts for the preceding year do not exceed F10
with the RDO that has jurisdiction over the head offi.ce of million, where the option becomes perpetually irrevocable.lz
that person, and pay the annual registration fee ofF500 The above-stated taxpayers may apply for VAT registration not
for every separate and distinct establishment. later than ten (10) days before the beginning ofthe taxablels quarter
and shall pay the registration fee prescribed under sub-paragraph
(a) of this section, unless they have already paid at the beginning of
eSec. 9.236-1, Rev.
Regs. No. 7-95, December 9, 199b. the year. In any case, the Commissioner of Internal Revenue may,
10The business
ofan international sea carrier is exempt from VAT because this for administrative reason, deny any application for registration. once
is a serwice subject to percentage tax. Ifthe main business (international shipping)
is exempt from vAT, the vAT-exempt person cannot elect that its exempt business/ registered as a vAT person, the taxpayer shall be liable to output tax
es be placed under the vAT system. The option to be subject to vAT on its exempt ut d b" entitled to input tax credit beginning on the first day of the
transactions is available only to a vAT-registered person (Az, RMc gl-200g, January month following registration.
30r 2008). It cannot elect that said principal exempt business be subject to vAT even
if its secondary businesses are subject to VAT (AgZ, RMC g1-200g u"a ae, RMC 46_
2008' February 1' 2008). In determining main or principar business ofa taxpayer,
we apply the predominance test (Elva or more of its gross receipts). If his main
business is not within the vAT system, he can be considered as a vAT person eligible 12Sec. 15, Rev. Regs. No.4-2007, February 7,2007.
for election under Section 109(2) of the Tax Code. 13The word "calendar" was replaced by "taxable" so as to cover corporations that
llSec.15, Rev. Regs. No.4-2002, February
7,2007. adopted fiscal year in computing their income and expenses'
rf
512 llt,lvt l,;wr,:rt oN'l'nxn'noN Vlt,t rt,; Alrtrt,:t t VA'l't S lil
( "l'nx
lolrlltttttt l lttrlttit'r'ttttrttls

VAT Books of Accounts 7. lnPut'l'ttxcs.


Notwithstanding the provisions of Section 233 (subsidiary 8. InPut tax dccmed Paid'
boohs) and in addition to the regular accounting records required
(c) Subsid,iary recorcl of purchase or importation of capital
under Section 232 (keeping of booh,s of accounts) of the Tax Code for
good's.
- In addition, a subsidiary record in ledger form
income tax purposes, all VAT-registered persons are required to keep
a control subsidiary sales and purchase journals in the head office and
tttult b" maintained for the acquisition, purchase or
importation of depreciable assets or capital goods which
additional subsidiary sales and purchasejournals for every branch
shallcontain,amongothers'informationonthetotalinput
or outlet where sales and,/or purchases are made.la
tax thereon as well as the monthly input tax claimed in
(a) Subsid.iary sales journai.
- The daily sales are recorded in VAT declaration or return.ls
this journal. Depending on the nature of the business, the
correctness of business transactions are not rendered inualid
subsidiary sales journal should at least contain separate
simply because they are record.ed in unregistered accounting records.
columns for the following:
- Purrorls liable to value added taxes are required to keep subsidiary
1. Sales - Export ,ule, joo"rrul and subsidiary purchase journal, where taxable sales
2. Sales - Zero-rated
and purchases are to be iecorded. Books of accounts and other
accounting records mustbe registered with the appropriate Revenue
3. Sales - Exempt District office. However, the correctness of financial and business
transactions are not rendered incorrect or invalid merely because
4. Sales - Taxable
they are recorded in unregistered accounting records'16
5. Deemed Sales
6. Output Taxes. lnvoicing Requirements
(b) Subsidiary purchase journal. All persons subject to an internal revenue tax shall, for each sale
- The daily purchases,
both local and imported, and other transactions affecting or transflr of merchandise or for services rendered valued at
twenty-
five pesos (F25.00) or more, issue duly registered receipts or sales or
purchases and input taxes are recorded in this journal. All
commercial invoices, prepared at least in duplicate, showing the date
purchases from VAT-registered persons shall be entitled
of transaction, quan[ity, unit cost and description of merchandise
to input tax credits. All local purchases from other persons in the
who are not VAT-registered shall not be entitled to input or nature ofserwice. In the case ofsales, receipts or transfers
amount of one hundred pesos (F100.00) or more, or regardless of
tax credits. Depending on the nature ofthe business, the person liable to value
amount, where the sale or transfer is made by a
subsidiary purchase journal should at least provide the where
following: added tax to another person also liable to value added tax, or
the receipt is issued to cover payment made as rentals, commissions'
1. Purchases ofgoods for sale. .o*purrr'utions or fees, receipts or invoices shall be issued which shall
2. Purchases of supplies. sho* the name' business style, if any, and address of the purchaser'
person,
customer or client. where the purchaser is a vAT-registered
3. Purchases of raw materials. in addition to the information herein required, the invoice or receipt
Identification Number (TIN) of the
4. Purchases ofservices. shall further show the Taxpayer
purchaser.lT
5. Purchases of capital goods.
6. Purchases from non-VAT persons.
I6RMC 62-05.
l{lhompsonShirtFactoryv.Collector,CTACaseNo'377,August27'L963'
taRev. Regs. No. 5-87, September r?Sec. 237, NIRC.
1, 1987
ql
VAt,r tt' Anrrt, t,'l'nx t VA'l't 5ll-r
5t4 Itt,:v t r':wr,:tr oN'l'nxn't'ror.r
( lotrr pltttttct' llrrlttltttltt'ttl,t+

A "sales or commercial invoice" is a written account of goods component its saltls, provi<lctl lhut il'the sale is exempt f]om value-
<lf
or printed
sold or services rendered indicating the prices charged therefore or aaaea tax, the term "vA'l'-ltxlcMP"T SALE" shall be written
a list by whatever name it is known which is used in the ordinary prominentlyontheinvoiceorreceiptandifthesaleissubjectlozeto
SALE" shall be written
course of business evidencing sale and transfer or agreement to sell iercent (o%)vLT,the term "ZERO-RATED
or transfer goods and services.ls or printed prominently on the invoice or receipt'
A "receipt" is a written acknowledgment of the fact of payment TheamountofthetaxshallbeshownaSaSeparateiteminthe
in money or other settlement between seller and buyer of goods, debtor invoice or receiPt'
and creditor, or person rendering services and client or customer.re
Cash register machineslPOs machines. VAT-registered Sales invoice v. Official receipt
persons who have permits to use cash registers shall - be allowed Petitioner offered in evidence vAT invoices to substantiate its
to
continue using the same. The provisions of Revenue Regulations zero-rated sales. cTA en banc denied petitioner's claim, stating that
No. 4-80, as amended, shall continue to be in force insofar as they sinceitisengagedinsaleofservices,VATreceiptsshouldhavebeen
do not conflict with the provisions of this section. In addition to the presented.
data required to be reflected on the cash register receipts, the VAT
registration number of the seller should also be shown. If a buyer Sectionllsofthelgg7TaxCodedoesnotcreateadistinction
desires that a regular sales invoice be issued in lieu ofthe cash register between a sales invoice and an official receipt. sales invoices are
tape, the seller should issue such invoice. Exempt sales should be recognized commercial documents to facilitate transactions. They
properly identified in the cash register tape.2' A manufacturer/dealer/ .re iroof" that business transactions have been concluded. Thus, an
invoice would suffice, provided substantiation requirements are
met
vendor/distributor must register - on behalf of the buyer/user the
CRM/POS to be sold or distributed not later than five (5) days from
- (AT&TComrnunicationsSerwicesPhil'a'CIR,G'R'No'782364'
the date of sale of the machine, and before it is actually used by the iugust 3r 2070). However, the Court in a more recent case noted
buyer/user. such registration shall be done manually with the RDo/ thal there is a fine distinction between a VAT invoice and a VAT
LTADI and II/LTDO, or electronically through the BIR's electronic official receipt. "vAT invoice and vAT receipt should not be confused
does the
mail (e-mail) or website (e-AccReg System).2l as referring to one and the same thing' Certainly, neither
law intendlhe two principal documents - Phil' Corp' u' CIR'official
(Kepco
sales invoice and
GR'
A VAT-registered person shall issue: (1) a VAT invoice for every receipts - to be used alterttatively
sale, barter or exchange ofgoods or properties; and (2) a VAT official No. 781858, November 24,2070)'
receipt for every lease ofgoods or properties and for every sale, barber
or exchange of services. Principal v. Supplementary invoices and receipts
A VAT-registered person may issue a single invoice or receipt The principal and supplementary receipts and invoices of the
for VAT-taxable and VAT-exempt transactions, provided that the head office and each of the branches shall have its own independent
invoice or receipt shall clearly indicate the break-down of the sales series of serial number. The application for authority to
print (BIR
price between its taxable, exempt and zero-rated components and Form 1906), together with the necessary documentary requirements'
the calculation of the vAT on each portion of the sale shall be shown shall be submilted to the RDOILT Office having
jurisdiction over the
on the invoice or receipt. A VAT-registered person may also issue head offrce of the taxpayer-applicant' However, the old BIR Form
separate invoices or receipts for the taxable, exempt, and zero-rated 1906 shall still be usld-untiiihe revised form becomes available'
The official receipvsales invoice/commercial invoice shall be printed
18Sec. 2(c), showing, among others, the following:
Rev. Regs. No. 2-73.
lsSec.2(B), Rev. Regs. No. 7-78.
20Rev. Regs.
a.ForNon-VATofficialreceipts/salesinvoicesandother
21See Rev.
No. 5-87, September 1, 198?.
Regs. No. 4-2OI3, December E, 20lZ which further amended Rev.
commercial invoices (VAT or NV) such as delivery
Regs. No. 1L-2004 and 5-2005. receipts, order slips, purchase orders, provisional receipts'
516 llt,rv I t,twt,:tt olt'l'nxn't,toru Vrr.lt,r Atrlt,:tr'l'nx t VA'l't ltlT
( lotrrpltrr nrr, l(r't1tt irt'ttttrttLs

acknowledgment receipts, collection receipts, crcdiVdclril, A. licccipts \vith ATI' prior to January-t-20!L - All receipts/
memo, job orders and other similar documents, in ircldit,ion invoices with A'l'P prior to January l,2OII shall no longer
to applicable information, the phrase "THIS DOCUMIIN'I' be valid as of'August 31, 2013. The issuance of said receipts/
IS NOT VALID FOR CLAIM OF INPUT TAX" in lxrld invoices starting August 31, 2013 constitutes a violation of
letters, which shall be conspicuously printed at the I'ace ol' the Tax Code, and considered as if no receipVinvoice was
the document. issued.
b. At the bottom of the official, sales invoice or commercial B. Receipts with ATP dated January 1, 2011 up to January 17.
invoice, the phrase: "THIS IIMICE/RECEIPT STIALL 20Lg - They can be used until October 31, 2013, provided
BE VALID FOR FTVE (5) YEARS FROM THE DATE that the new ATP issued on or before August 30, 2013.
OF THE ATP." However, the application for new ATP filed after April
Buyers ofgoods on account or credit evidenced by Charge 30, 2013 is deemed filed out of time subject to penalty of
c.
Sales Invoice shall be entitled to input tax. Upon collection
F1,000. The term "valid until October 31, 2013 only"
by the seller, a Collection Receipt shall be issued to the shall be stamped prominently on the face of the receipts/
buyer to evidence receipt ofpayment thereof. invoices (original and duplicate copies); otherwise, no
deduction and input tax may be claimed using these
d. For taxpayers transacting with senior citizens and persons invoices/rec eipts ( RMC 52 -20 7 3, Augu st 1 3, 20 7 3 ) .
with disabilities, the following additional information shall
be required: senior citizen TIN; OSCA ID/PWD ID No.; SC/ Only VAT-registered persons may print their TIN followed by
PWD discount;and signature of SC/PWD (RMO 72-2073, the word'1/AT." - A VAT-registered person shall issue (a) a VAT
May 3,2013). invoice for every sale, barter or exchange ofgoods or properties, and
(b) a VAT official receipt for every lease of goods or properties, and
The validity of all unused./unissued principal and supplementary
invoices/receipts printed prior to January 18, 2013, the effectivity for every sale, barter or exchange of services. Only VAT-registered
persons are required to print their TIN followed by the word "VAT" in
date of Rev Regs No. 18-2012, from June 30, 2013 to August 30, 2013.
However, the deadline for the filing an application for printing of new their invoices or official receipts. Said documents shall be considered
as a'VAT invoice" or "VAT official receipt." All purchases covered by
receipts to replace all unused./unissued principal and supplementary
invoices/receipts shall be maintained as of April 30, 2013. Thus, invoices other than VAT invoice or official receipt will not entitle a
all applications received after said date shall be considered late VAT-registered purchaser to input tax. VAT invoice or official receipt
application and penalties for late filing shall be imposed. All unused./ shall be prepared at least in duplicate, the original to be given to the
unissued receipts/invoices shall be surrendered to the RDO where buyer and the duplicate to be retained by the seller as part ofhis
the taxpayer is registered on or before the 10th day after the date accounting records.22
of printing. The date of new principal and supplementary receipts/ Official receipts and. inaoices ca.nnot be used. inter'
invoices is the date of expiration of the validity period of the unused./
unissued receipts/invoices referred to herein. After August 30,
changeably. - The input VAT on domestic purchases of goods or
properties shall be allowed as tax credit to the purchaser only upon
2013, all principal and supplementary receipts/invoices printed consummation of sale, which means upon issuance by the seller of
prior to January 18, 2013 shall no longer be valid. Issuance ofsaid the VAT sales invoice evidencing the sale. On the other hand, the
receipts/invoices shall be deemed an issuance of invalid receipt or input VAT on purchases of services shall be available as tax credit
as if no receipts were issued, in violation of Section 264 of the Tax to the purchaser only upon issuance by the seller of the VAT official
Code. Transactions with such receipts are deemed not properly receipt. Considering that for the same transaction, the output
substantiated and may not be allowed as a deducti on (RMC 44-2073, VAT of the seller becomes the input VAT of the purchaser, the law
June 17,2073). requires that the input VAT be substantiated by the very same
The use of receipts/invoices is further extended as follows:
"Sec.4.113-1(4), Rev. Regs. No. 16-05, September 1,2005.
5tu lit,:vil,;wt,:tr oN'l'rtxn'l'tott Vnr,r nr Atrtrr,;tr'l'nx ( VA'l') 519
( iorrrplurrrcr, ll.rrlrr irctrrcttt,s

document on which the output VAT was based. Hence, thc in;rul, taxabler oxcmpt lrnd zero-rated components, and the
VAT on purchases of goods must be supported by VAT sales invoiccs, calculation ol' lhc VAT on each portion of the sale shall
while the input VAT on purchases of services must be supportcd b.y be shown on thc invoice or receipt. The seller has the
VAT official receipts.23 option to issue separate invoices or receipts for the
The electronic statement of account and non-VAT receipl issutr<l taxable, exempt, and zero-rated components of the
by a purchaser of receivables of credit cardholders to retail deakrrs sale.26
cannot be considered sufficient evidence for input tax, as they are 3. In the case of sales in the amount of One thousand pesos
not in accordance with RMC 62-05, which requires the issuance of' (F1,000) or more, where the sale or transfer is made to a
invoice for sale of goods and receipts, for sale of services. Likewise, the VAT-registered person, the name, business style, if any,
purchaser ofreceivables is not a direct seller ofthe goods to the credit address and TIN of the purchaser, customer or client, shall
cardholders but the retail dealers to whom the credit cardholders be indicated in addition to the information required in (1)
purchased goods by using their credit cards.24
and (2) of this Section.2T

lnformation in VAT invoice or official receipt Additional information in VAT invoice or receipt
The following information shall be indicated in VAT invoice or To establish the audit trail of sales and purchases needed in
offlcial receipt: monitoring collections specifically from the value-added tax, the
1. A statement that the seller is a VAT-registered person, receipts, sales or commercial invoices must reflect the "name" ofboth
followed by his TIN; the seller and the buyer as it appears in the Certificate ofRegistration
for tax purposes. As such, all manufacturers, wholesalers and other
2. The total amount which the purchaser pays or is obligated sellers, in issuing receipts or invoices are required to accurately reflect
to pay to the seller with the indication that such amount their registered name as well as their clients.
includes the VAT, provided that (a) the amount of tax
shall be shown as a separate item in the invoice or Taxpayers who changed status from non-VAT to VAT or from
receipt, (b) if the sale is exempt from VAT, the term'"VAT- VAT to non-VAT as a result of the implementation of R.A. 9337 should
exempt sale" shall be written or printed prominently on submit within thirty (30) days from effectivity of the law an inventory
the invoice or receipt, or (c) ifthe sale is subject to zero of unused invoices or receipts as of the day immediately preceding
percent (IVo)YAT, the term "zero-rated sale" shall be the effectivity of R.A. 9337, indicating the number of booklets and the
written or printed prominently on the invoice or receipt;25 corresponding serial numbers. Unused non-VAT invoices or receipts
(d) if the sale involves goods, properties or services, some shall be allowed for use in transactions subject to VAT, provided the
of which are subject to and some of which are VAT-zero- phrase "VAT-registered as of November I, 2005, effectivity date of
rated or VAT-exempt, the invoice or receipt shall clearly R.A. 9337" is stamped on all copies thereof. Likewise, unused VAT
indicate the breakdown of the sale price between its invoices or receipts shall be allowed in VAT-exempt transactions,
provided the phrase "Non-VAT-registered as ofNovember 1, 2005" is

'3BASF Philippines v. Commissioner, CTA EB No. 47, January 5,2006.


26When
'zaBIR Ruling No. DA-646-2006, October 31, 2006. the VAT-registered seller chooses to issue mixed VAT invoices or
25The invoicing requirement set forth
in Sec. 4.108-1 ofRev. Regs. No. ?-9b, receipts, it is easy to reflect the breakdown of the sales into taxable at l27o or O7o or
particularly the printing of the word "zero-rated" on invoices or receipts, though not exempt from VAT, including the separate indication of thel2ToYAT in the invoice or
expressly provided in the law, was recognized as a reasonable and in accord with receipt, because that is clearly shown therein. However, if the VAT taxpayer selects
the efficient collection of VAT. When R.A. 933? took effect on November 1,2005, it to issue separate VAT and non-VAT invoices or receipts, the RDO may not deny the
included the invoicing requirement under Rev. Regs. No. 14-05. The conversion from request of the taxpayer if he chooses to issue non-VAT receipts to cover VAT-exempt
regulation to law did not diminish the binding force ofsuch regulation with respect to transactions like collection of sales on credit from customers. See RMC 29-2005 and
acts committed prior to the enactment of that law (Panasonic communication Imaging RMC 62-2005.
Corp. of the PhiI. u. CIR, G.R. No. 178090, February 8,2010).
'z?Sec. 4.113-1(8), Rev. Regs. No. 16-05, September 1, 2005.
520 Itt,rvt r,:wt,lt oN'l'Ax,r't'toN Vrr,r rr, Ar rlr,:rr'l'nx t VA'l't lt2l
('orrrlrlrrrrrrl ltr,rlrrirctttr,ttls

stamped on all copies thereof. These unused invoices or receipts with Penalties
the proper stamp shall be allowed for use in transactions subject to The following penalties shall be imposed for violations of certain
VATA.Ion-VAT up to December 31, 2005.28
Tax Code provisions:

lssuance of VAT lnvoice or Receipt for Non-VAT or 1. Issuance ofVAT-inuoice or receipt for exempt trq.nsactions.
- Pursuant to Section 109 of the 1997 Tax Code, a VAT-
Exempt Sales
registered person whose sale of goods or properties or
As provided under Section lI3 (inuoicing and accounting services which are otherwise not subject to VAT but who
requirernenfs) of the Tax Code, a VAT-registered person shall, for issues a VAT invoice or receipt for such transactions shall
every sale, issue an invoice or receipt. In addition to the information have the following consequences:
required under Section 237 (issuance of inuoices or receipts), the
following information shall be indicated in the invoice or receipt:
a. Shall be liable to the payment of output tax due on
such sale of exempt goods or properties or services
(1) A statement that the seller is a VAT-registered person, computed at tf-l (for lj%o) or 1/9.33333 (for l2%o)
followed by his taxpayer's identification number (TIN); and of the total amount appearing on such issued VAT
(2) invoice/receipt;
The total amount which the purchaser pays or is obligated
to pay to the seller with the indication that such amount b. No input tax credits shall be allowed to be claimed
includes the value-added tax. against the output tax due on such transactions; and
Corollary thereto, Section 4.108-1 of Revenue Regulations No. c. Shallbeliabletothe applicablepercentagetax,ifany,
7-95, as amended, in part, likewise provides that if a VAT-registered imposed under Title V of the Code;
person is also engaged in non-VAT (exempt) transactions, the rule is
that he is not allowed to issue VAT invoice or receipt on said non-VAT
2. Issuance of VAT inuoice or receipt without the required
phrase - Non-inclusion of the required phrase shown
transactions. AVAT invoice or receipt shall be issued only for sales of
above on the VAT invoice or receipt to be issued by a VAT-
goods, properties or services subject to VAT imposed in Sections 106
registered taxpayer shall be subject to the administrative
and 108 ofthe Code. Thus, he should use separate invoices receipts
penal sanctions provided for in the Tax Code and
for taxable and exempt transactions.
implementing regulations.2e
The ultimate paragraph of Section I09 (exempt transq,ctions)
of the 1997 Tax Code cites the consequence of issuing a VAT invoice Consequences of issuing erroneous VAT invoice or
or receipt by a VAT-registered person for his exempt transactions, official receipt
uiz.:
If a person who is not VAT-registered issues an invoice or
"The foregoing exemptions to the contrary notwithstanding, receipt showing his TIN, followed by the word "VAT," the erroneous
any person whose sale of goods or properties or services which issuance shall result to the following consequences imposed under
are otherwise not subject to VAT, but who issues a VAT invoice or
R.A.9337:
receipt therefor shall, in addition to his liability to other applicable
percentage tax, if any, be liable to the tax imposed in Section 106 1. The non-VAT person shall be liable to (a) the percentage
or 108 without the benefit of input tax credit, and such tax shall be taxes applicable to his transactions; (b) VAT due on the
recognized as input tax credit to the purchaser under Section 110, transactions under Section 106 or 108 ofthe 2005 Tax Code,
all of this Code." without the benefit of any input tax credit; and (c) a 5O7o
surcharge under Section 248(8) ofthe Tax Code.

2sTransitory provisions (unused invoices or receipts), Rev. Regs. No. 16-05. "RMC 61-03, October 8, 2003. This rule applies to transactions prior to the
effectivity of R.A. 9337 (November 1,2005).
522 l},:vrr,:wt,:tr oN'l'nx,,t't'tor.t Vnr,rrr, Arrrrr,:rr'l'nx ( VA'l') lt23
( lrrrrplrrrrrr'r. ltrl;rr irr.nrcnl.s

2. VAT shall be recognized as an input tax credit to thc Filing of Return and Payment of Tax
purchaser under Section Ll} (input tax credits) ofthe 2005 VAT returns and declarations
Tax Code, provided the requisite information required
under Subsection 4.113(8) of these regulations is shown A taxable person is required to account for and pay value added
on the invoice or receiPt.so tax by reference to each accounting period consisting of three (3)
months, referred to as a taxable quarter. A VAT declaration for the
If a VAT-registered person issues a VAT invoice or official receipt month must be filed within twenty (20) days after the end of the month
for a VAT-exempt transaction, but fails to display prominently on the concerned, and a VAT return covering the amount of his gross sales
invoice or receipt the words'VAT-exempt sale," the transaction shall or receipts and purchases for the prescribed taxable quarter must be
become taxable and the issuer shall be liable to pay VAT thereon. filed by the taxable person within twenty-five (25) days following the
The purchaser shall be entitled to claim an input tax credit on his close of the quarter to which it relates (Sec. 114, NIRC).
purchase.sl
Only one consolidated return shall be filed for the principal place
VAT inuoice or receipt must include TIN of taxpayer plus word ofbusiness or head office and all branches of the taxpayer's business.
'VAf'. - The words "Taxpayer Identification Number-VAT" must
be printed on the invoices and receipts to be considered as a'VAT A person whose registration has been cancelled must file a return
invoice." In view thereof, all purchases covered by invoices other than and pay the tax due thereon within twenty-five (25) days from the
'VAT invoice" shall not give rise to any input tax. Where the suppliers date of cancellation of registration.
still have unexpended or unissued invoices or receipts bearing the
old Taxpayer Account Number (TAN)+VAT, the new Taxpayer Paym.ent of ta,x
Identification Number (TIN) shall be reflected or superimposed on VAT must be paid every month. The taxable person must submit
all unexpended or unissued VAT or Non-VAT receipts or invoices to a monthlyVAT declaration form (BIR Form 2550M) for the monthly
be valid as a VAT invoice. The supplier is allowed to use the same sales and./or receipts as basis for paying the value added tax thereon
until they are used up or expended as long as the TINs are reflected within twenty (20) days following the end of the month to which it
thereon.32 relates. The declaration must be accomplished only for each of the
A taxable person who is also engaged in exempt transactions first two (2) months of each taxable quarter. The VAT return (BIR
must provide himself with and issue separate invoices or receipts Form 2550Q) for the quarter must be filed not later than twenty-five
for his taxable and exempt transactions. VAT invoices or receipts (25) days after the close ofthe taxable quarter.
shall be issued for taxable transactions, while non-VAT invoices or The VAT payable for each calendar quarter shall be reduced by
receipts shall be issued for exempt transactions. If he uses a VAT the total amount of tax(es) previously paid for the preceding two (2)
invoice or receipt for an exempt transaction, such transaction will months and/or the sum of the allowable excess input tax carried over
be subject to value added tax without the benefit ofinput tax credit. and the value added tax withheld by the government.
However, his customer who is VAT-registered is entitled to credit the
input tax included in the VAT invoice or receipt covering the exempt The monthly declaration and quarter return shall be filed
transaction.3s with, and the tax due thereon paid to, a bank duly accredited by the
Commissioner located in the revenue district where such person is
registered or required to be registered.
The VAT must be paid every month. The taxable person must
s0Sec.4.113-4(4), Rev. Regs. No. 16-05, September 1' 2005. submit a monthly VAT declaration form (BIR Form 2550M) for the
31Sec.4.113-4(8), Rev. Regs. No. 1-6-05, September 1,2005. monthly sales and./or receipts as basis for paying the value added tax
32Central Azucarera Don Pedro v. Commissioner, CTA Case No. 5821, August
thereon within twenty (20) days following the end of the month to
5,zo\2,citing Seagate Technology (Phil.) v. Commissioner, CTA Case No- 5999, July
26,200L. which it relates. The declaration must be accomplished only for each
33Sec. 109, last paragraph, 1997 NIRC. of the first two (2) months of each taxable quarter. The VAT return
524 ldl:vrr,rwt,lt oN'l'Ax,t't'tor.t
Vlt.r n Altrt,;tr'l',rx tVA'l't 52lt
('orrrlrl rrr rrr'r, l{.rr1rr irctttcttl"s

(BIR Form 2550Q) fbr the quartcr must bo liled not lrtt,er lhnn 26 da.yn Final Withholding Tax
after the close of the taxable quarter. 1'he right of'thtr gov(lrtttncnt,
to assess deficiency value added tax generally sttrrts to run I'rrtttr lhtr As a general rulc, with holding tax does not apply on transactions
filing of the VAT quarterly return. subject to value added lax. 'fhe exceptions to this rule are:

The VAT payable for each calendar quarter shall be reduced by 1. Gross payments by the government shall be subject to the
the total amount of tax(es) previously paid for the preceding two (2) five percent (57o) final withholding tax;
months and/or the sum of the allowable excess input tax carried over 2. Gross payments by resident VAT-taxpayers to non-
and the value added tax withheld by the government.3a resident foreign persons of rentals, royalties, reinsurance
premiums, and services done in the Philippines
Illustration - l27o
(Sec. 114[C], NIRC). However, if the payor of royalty is
Month I Month 2 Month 3 Quarter a PEZA-registered enterprise, the I07o value added tax
Sale 100 100 100 300 may not be passed on to it. Since the enterprise is exempt
Output tax 12.o 12.0 72.O 36.0 from all direct and indirect taxes under a special law (R.A.
Purchases 80 90 85 255 7916, as amended) and considering that the service (i.e.,
Inout tax 9.6 10.8 to.2 30.6 use of patent, trademark, trade name, etc.) is done in a
Value added 20 10 15 45 foreign territory, it is not required to withhold and remit
VAT Pavable 2.4 r.2 1.8 5.4 the value added tax(BIR Ruling No.009-98;VAT Ruling
No. 005-2003). An ecozone is considered as a special
BIR Form 2550-M 2550-M None 2550-Q customs area which is considered as a foreign territory
Deadline 20th day of 20th day 25th day of by fiction of law.
following month following rnonth
Withholding of tax applies only to taxable transactions. Thus,
payment for the sale of Iive dairy cows to a government agency, which
The value added tax on the sale ofrefined sugar is payable in
is an exempt transaction, is not subject to withholding tax UAT
advance by the owner/seller to the BIR, through the sugar refinery.
Ruling No.24-98, September 1, 1998).
The advance payment must be made prior to or upon issuance of
the refi.ned sugdr release order or similar instruments. Howeuer, the Beginning November 7,2005, when R.A. 9337 became effective,
owner-seller n1.&y withdraw his refined sugar from the sugor rnill or all sales of goods, properties or services to the government shall be
refinery warehouse without aduance payment of the tax, if it will not subject to the five percent (\Vo) finalwithholding tax. The government
be locally sold but rqther for use erclusiuely as rq.w material in the shall, before making payment on account of each purchase of goods
manufacture of sugar-based food products intended for zero-rated and./or services taxed at lU%o (up to January 31, 2006) or L2Va YNI
export UAT Ruling No. 198-90, September 14, 1990). (starting February 1, 2006) pursuant to Sections 106 and 108 ofthe
Tax Code, deduct and withhold a final VAT due at the rate of five
Requirernent to pay in adaance VAT on sale of fl'our and'
percent (\Vo) of the gross payment thereof.
time of paytnent of ad.uance VAT. - The value added tax on the
sale of flour milled from imported wheat shall be paid in advance The fiver percent (5Vo) final VAT withholding rate shall represent
prior to the withdrawal of the imported wheat from customs custody the net VAT payable of the seller. The remaining fiue percent (SVo)
based on the formula prescribed in the regulation.35 Purchases by or seuen percent (77o) effectiuely accounts for the standard input VAT
flour millers of imported wheat from traders shall also be subjected to for sales of goods or seruices to gouernment, in lieu of the actual input
advance VAT and shall be paid by the flour miller prior to delivery.36 VAT directly attributable or ratably apportioned to such soles. Should
actual input VAT attributable to sale to government exceed five
3aSec. 4.114-1, Rev. Regs.
No. 7-95. percent (\Vo) or seven percent (77o) of gr.oss payments, the excess may
35Rev. Regs. No. 29-2003,October 30, 2003. form part ofthe sellers'expense or cost. On the other hand, ifactual
36Sec.4.114-1(BX2), Rev. Regs. No. 16-05.
526 Rltvtuwun oru'l'axa'uott

input VAT attributable to sale to government is less than five percent


(57o) of gross payment, the difference must be closed to expense or
cost.37

The term "government" refers to the national government or any PART V


of its political subdivisions, instrumentalities or agencies, including
government-owned or controlled corporations. TAX REMEDIES
CHAPTER }frIV
INTRODUCTION

BIR Organizational Structure


The Bureau of Internal Revenue (BIR) is headed by a
Commissioner of Internal Revenue and four (4) Deputy Commissioners
(Sec. 3, NIRC), each of whom heads the Operations Group, Legal
and Inspection Group, Resource and Management Group, and
Information Systems Group. The Commissioner and four (4) Deputy
Commissioners, together with 13 Assistant Commissioners for
the different services, comprise the senior level of administrative
authority. Supporting them are the nineteen (19) Regional Directors
(Sec. 10, NIRC), more than one hundred fifteen (115) Revenue
District Officers (Sec.9, NIRC), two (2) Large Taxpayers Audit and
Investigation Divisions and two (2) Large Taxpayers District Offices,
and thousands ofrevenue officers conducting the audit oftaxpayers'
books of accounts and accounting records. The revenue officers
tasked to audit, develop and file criminal tax cases are assigned at
the National Investigation Division, in the National Office, and at
the Special Investigation Division, in the regional offices.

Agents in the Collection of National lnternal Revenue


Taxes
The BIR officials are charged with the assessment and collection
of all national internal revenue taxes, fees and charges, including
the VAT and excise taxes on imported goods as well as penalties and
fines forviolations of certain provisions ofthe 2005 National Internal
Revenue Code ("Tas Codc" for brevity) and special laws administered
by the BIR. However, the following officials are constituted as agents

375ec.22, Rev. Regs. No.4-2007, February 7,2007 527


52tl Itt,tvtt,:wt,;tr oN 'l'A\n lror.r 'l',\ \ l(r,:N4l';t )tt':rl 529
I rrl lorltrcl tort

of the Commissioner of Internal Revenue in tho collcction ol'nrrtionrrl 3. 'fo exocutc.jrrrlgrrrrrrrt in all cases decided in its favor by the
internal revenue taxes (Sec. 12, NIRC): (a) the Comnrissiorrcr ol' CTA and thc ordintrry courts; and
Customs and his subordinates, with respect to the collection ol'valuc
added tax and excise tax on imported goods;l (b) the head of thc
4. To effect and administer the supervisory and police powers

appropriate government office and his subordinates, with respect to


conferred upon it by the Tax Code or other special laws
(Sec.2, NIRC).
the collection ofenergy tax; and (c) the authorized agent banks, with
respect to the receipt ofpa5rments ofinternal revenue taxes authorizcd The Commissioner of Internal Revenue has been given broad
to be made through banks. Any bank officer or employee involved in powers under the Tax Code in order to effectively enforce tax laws
this task shall be subject to the same sanctions and penalties under and collect the needed revenues. These powers include:
Sections 269 (uiola.tions committed by gouernment enforcement officers)
and.270 (unlawful diuulgence of trade secrets) of the Tax Code.
1. Power to interpret tax laws and to decide tax
cases. - The power to interpret the provisions of the
Aside from the above-mentioned persons, withholding agents Tax Code and other tax laws shall be under the exclusive
constituted as such under the Tax Code and its implementing and original jurisdiction of the Commissioner, subject to
regulations are required to deduct and remit taxes within the review by the Secretary of Finance (Sec. 4, NIRC). Th.e
prescribed dates to the BIR on payments of compensation income provision was inserted in R.A. 8424,whichbecame effective
subject to creditable withholding tax on wages, certain income on January 1, 1998, in order to avoid situations where
payments subject to expanded withholding tax, passive investment different government agencies like the BIR, Department
incomes and capital gains subject to final tax, and gross incomes of Finance (DOF), Department of Justice (DOJ), Board of
paid to non-resident foreign persons subject to final taxes as well Investments (BOI), and even the Office of the Executive
as payments by the government for goods and services subject Secretary sometimes issue conflicting opinions on the
to value added tax or other percentage tax. It will be noted that proper interpretation ofcertain provisions ofthe Tax Code
these withholding agents are required to strictly comply with their and other tax laws.
responsibilities under the law to deduct and remit to the BIR the
A legislative rule is in the nature of subordinate legislation,
taxes on certain transactions - without any compensation from
- for any failure to comply with designed to implement a primary legislation by providing the details
government, yet they are penalized
thereof. Interpretative rules are designed to provide guidelines to
such tax obligations as a withholding agent.
the law which the administrative agency is in charge of enforcing.
Accordingly, in considering a legislative rule, a court is free to
Powers and Duties of BIR make three inquiries: (i) whether the rule is within the delegated
The Tax Code enumerates the powers and duties of the BIR as authority of the administrative agency; (ii) whether it is reasonable;
follows: and (iii) whether it was issued pursuant to proper procedure
( Mi s amis Orie nt al As s o c i ation o f C oc o Tlad.er s a . D ep artnent
1. To assess and collect national internal taxes, fees, and of Finance Secretary cited in Commissioner of Customs a.
charges; Hypermix Feed.s Corporation, G.R. No. 779579, February 7,
2. To enforce all forfeitures, penalties and fines connected 2012).
therewith; In a leading case, the Supreme Court ruled that the jurisdiction
to review rulings of the Commissioner, in particular RMO 15-91 and
rMany tax practitioners believe that the BOC has no power to assess deficiency RMC 43-91, implementing the five percent (|Vo) lending investor's
value added tax and excise taxes on imported goods, which were earlier released by the tax on pawnshops, belongs to the CTA, not to the Regional Trial
Bureau of Customs after payment of the VAT and excise taxes. The assessment and Courts (RTC). The petition should have been fiIed with the CTA, not
collection of deficiency national internal revenue taxes properly belongs to the BIR,
and the BOC, as the agent ofthe CIR, has no such power ofassessment and collection the RTC. Such revenue orders were issued pursuant to petitioner's
of deficiency taxes. powers under Section 245 (authority of the Secretary of Finance
530 Itt,:vt t,:wt':tr oN'l'Ax,t't'tor'r
iil,:lflii:It r-';,I

to promulgate rules and regulations) of the 'I'ax Codc. 'l'hus, l.lrc vests the power ol'.j ud it:i ir l rtrviow or lhe power to declare a law, treaty,
court stated that "the authority of the Secretary of !'inanco ... international <lr executive agreement, presidential decree, order,
shall be without prejudice to the power of the Commissioncr ol' instruction, ordinance, or regulation in the courts, including the
Internal Revenue to make rulings or opinions in connection with thc regional trial courts. This is within the scope ofjudicial power, which
implementation of the provisions of internal revenue laws, including includes the authority of the courts to determine in an appropriate
ruling on the classification of articles of sales and similar purposes."2 action the validity of the acts of the political departments (Smart
Cornrnunications u. NTC cited. in Commissioner of Customs
Bar Question (2006) a. Hypermix Feed.s Corporation, G.R. No. L79579, Februany 1,
2012).
Mr. Abraham Eugenio, a pawnshop operator, after having
been requested by the Revenue District Officer to pay value added
tax pursuant to a Revenue Memorandum Order (RMO) of the 2. Power to decide disputed assessments, refunds of
taxes, fees or other charges, penalties. - The power
Commissioner of Internal Revenue, filed with the Regional Trial
to decide disputed assessments, refund I tax credit of toxes ,
Court an action questioning the validity of the RMO. If you were the
judge, will you dismiss the case? and other matters arising under the Tax Code is vested
with the Commissioner, subject to the exclusive appellate
jurisdiction of the Court of Tax Appeals (CTA) (n.A.
Suggested answer:
1125, as amended). The jurisdiction of the CTA has been
Yes. An RMO is in reality a ruling or an opinion issued by the enlarged under R.A. 9282 (April, 2004) to include collection
Commissioner in implementing the prouisions of the Tax Code dealing of assessed deficiency taxes and criminal tax cases, where
with the to.xability of pawnshops. The power to reuiew rulings issued the basic tax assessed is F1 million or more.
by the Commissioner is lodged with the CTA ond not with the RTC.
The assessments issued by the Regional Directors, Assistant
A ruling falls within the puruiew of 'other matters arising under the
Commissioners, and Deputy Commissioners may be appealed
Tax Code," appealable only to the CTA (CIR u. Leal, 392 SCRA I
administratively to the Commissioner.s This is necessary to give the
t20021).
Commissioner an opportunity to correct whatever mistake has been
committed by his subordinates, pursuant to the doctrine of exhaustion
Petitions inuoluing oalid.ity or constitutionality of law or of administrative appeal. This is also in conformity with the provisions
regulations
of the Tax Code, which provides that the power to decide disputed
In British American Tobacco Corporation a. Camacho assessments arising under the Tax Code or other laws or portions
(ibid.),the Supreme Court ruled that petitions involvingthe validity thereof administered by the BIR is vested in the Commissioner,
of a regulation or other administrative issuance must be filed with subject to the exclusive appellate jurisdiction of the Court of Tax
the regular courts and not with the CTA. In United. Cad.iz Suga,r Appeals.a
Sugar Farmers Association Multi-Purpose Cooperative u.
While the Secretary of Finance has supervisory powers over the
Commissioner, CTA Case No.7995, August 761 2077, where the
BIR, an appeal by the taxpayer of the Commissioner's decision on the
petitioner assailed the validity of Revenue Regulations No. 13-2008,
disputed assessment to the Secretary of Finance or filing a motion for
which provides for instances where withdrawal of sugar is exempt
reconsideration with the Commissioner shall not stop the running of
from VAT, the CTA chose not to rule on the legal issue, for lack of
jurisdiction, being a court of special jurisdiction. the 30-day period to make an appeal to the CTA. The power of review,
which implies the power to reverse or modify, granted to the Secretary
The determination ofwhether a specific rule or set of rules issued of Finance is limited only on rulings issued by the Commissioner which
by an administrative agency contravene the law or the constitution is
within the jurisdiction of the ordinary courts. Indeed, the Constitution
3Sec. 3.1.6, Rev. Regs. No. 12-99.
aSec. 4, NIRC; R.A. 1125, as amended by R.A. 9282, April 25,2004
2Commissioner v. Josefina Leal, G.R. No. 113459, November 18,2002.
532 llt,:vt t,twl,:tr oN'l'nxlt'toru l',rx lil:ur,:rrrr,ls l-riill
I rrl.rotlrtcl,iotr

are adverse to the taxpayer pursuant to his powcr to interprct'lhx Bar Question (2013)
Code provisions. The power to interpret the law is difl'erent f'nlnr thc In 2010, pursuant to a Letter of Authority (LA) issued by the
power to decide on disputed assessments. Regional Director, Mr. Abcede was assessed deficiency income taxes
by the BIR for the year 2009. He paid the deficiency. In 2011, Mr.
3. Power to examine books and other accounting Abcede received another I"A for the same year 2009, this time from the
records and obtain information. - In ascertaining National Investigation Division, on the ground that Mr. Abcede's 2009
the correctness of any return, or in making a return when return was fraudulent. Mr. Abcede contested the LA on the ground
none has been made, or in determining the liability of any that he can only be investigated once in a taxable year. Decide.
person, or in collecting any such liability, or in evaluating
tax compliance, the Commissioner is authorized: Suggested answer:
a. To examine any book, paper, record, or other data The contention of Mr. Abced.e is not tenable. While the general rule
which may be relevant or material to such inquiry; is to the effect that for income tax purposes, a taxpayer must be subject
b. To obtain on a regular basis from any person other to examination ond inspection by internal reuenue officers only once
than the person whose internal revenue tax liability in a taxable year, this will not apply if there is fraud, irregularity or
is subject to audit or investigation, or from any office mista.kes as d.etermined by the Commissioner. In the instant case, what
or officer of the national and local governments, triggered the second exam.ination is the findings by the BIR that Mr.
government agencies and instrumentalities, including Abcede's 2009 return was fraudulent. Accordingly, the examination
the Bangh,o Sentral ng Pilipinas and government- is legally justified (Sec. 235, NIRC).
owned or controlled corporations, any information;
c. To summon the person liable for tax or required Bar Question (1999)
to file a return, or any officer or employee of such "A" Co., a Philippine corporation, is a big manufacturer of
person, to appear before the Commissioner or his consumer goods and has several suppliers of raw materials. The BIR
duly authorized representative at a time and place suspects that some of the suppliers are not properly reporting their
specified in the summons and to produce such books, income on the sales to "A" Co. The CIR therefore:
papers, records, or other data, and to give testimony;
a. Issued an access letter to "A" Co. to furnish the BIR
d. To take such testimony ofthe person concerned, under information on sales and payments to its suppliers.
oath, as may be relevant or material to such inquiry;
and . b. Issued an access letter to a bank ("X" Bank) to furnish the
BIR on deposits of some suppliers of "A" Co. on the alleged
e. To cause revenue officers and employees to canvass ground that the suppliers are committing tax evasion.
from time to time of any revenue district or region and
inquire after and concerning all persons therein who "A" Co., 'X" Bank and the suppliers have not been issued by
maybe liable to pay any internal revenue tax, and all the BIR letter of authority to examine. '.A" Co. and'1C'Bank believe
persons owning or having the care, management or that the BIR is on a "fishing expedition" and come to you for counsel.
possession of any object with respect to which a tax What is your advice?
is imposed (Sec.5, NIRC).
Suggested answer:
While the Supreme Court recognized the power of taxation of
government, it however cautioned the government to exercise such I wiII q.duise nA" Co.
and "Y Bank that the BIR is justifi.ed
power to minimize injury to the proprietary rights of a taxpayer only in getting information from the former but not from the latter.
(Roxas a. CTA,23 SCRA 276). The BIR is authorized to obtain information from other persons
than those whose internal reuenue tax liability is subject to audit or
5:t4 Itt';vtt,:wl':ti oN'l'nxA'r'ror.r
ill,":llililli,i 535

inuestigation. Howeuer, th,is power slut,ll rutl he conslrtuttl es grenting a lbrcign tax authority of a contracting state to which the
the Commissioner the authority to inquire into banh deposits (Scc. 5, Philippines has an effective tax treaty, subject to certain
NIRC). conditions.

4. Power to inquire into banks deposits of taxpayers. Garnishment of bank deposits


- The provisions of the foregoing paragraphs
notwithstanding, nothing shall be construed as granting
Garnishment is an administrative remedy allowed by
law to enforce a tax liability. Bank accounts shall be garnished
the Commissioner the authority to inquire into bank by serving a warrant of garnishment upon the taxpayer and
deposits other than as provided for in Section 6(F) of the
upon the president, manager, treasurer or other responsible
Tax Code (Sec. 5, NIRC). Notwithstanding any contrary
officer of the bank. Upon receipt of the warrant of garnishment,
provisions of R.A. 1405 (Bank Secrecy Law) and other
the bank shall turn over to the Commissioner so much of the
general or special laws, the Commissioner is authorized
bank accounts as may be sufficient to satisfr the claim of the
to inquire into the bank deposits of: (1) a decedent to Government (Sec. 208, NIRC).
determine his gross estate; and (2) any taxpayer who has
filed an application for compromise of his tax liability
under Section 204(A)(2) ofthis Code by reason offinancial Bar Question (2012, 1998)
incapacity to pay his tax liability. The application to Can the Commissioner of Internal Revenue inquire into the bank
compromise shall not be considered, unless and until deposits of a taxpayer? If so, does this power of the Commissioner
the taxpayer waives in writing his privilege under R.A. conflict with R.A. 1405, Secrecy of Bank Deposits Law?
1405, and such waiver shall constitute the authority of
the Commissioner to inquire into the bank deposits of the Suggested answer:
taxpayer (Sec. 6[F], NIRC).
The Commissioner of Internal Reuenue is authorized to inquire
Ifa bank has knowledge ofthe death ofa person, who into the bank deposits of:
maintained a bank deposit account alone or jointly with
another, it shall not allow any withdrawal from the said (1) A d.ecedent to determine his gross estate;
deposit account, unless the Commissioner has certified (2) Any taxpayer who has filed an applicationfor compromise
that the transfer taxes imposed thereon have been paid. of his tax liability by means of financial incapacity to pay
However, the administrator of the estate or any one of his tax liability (Sec.6[F], NIRC).
the heirs of the decedent may, upon authorization by
the Commissioner, withdraw an amount not exceeding The limited power of the Commissioner does not conflict with R.A.
F20,000 without the said certification. For this purpose, No. 1405 because the prouisions of the Tax Code granting this power
all withdrawal slips shall contain a statement to the effect is an exception to the Secrecy of Bank Deposits Law as embodied in a
that all of the joint depositors are still living at the time later legislation.
of withdrawal by any one of the joint depositors and such Furthermore, in case a taxpayer applies for an application to
statement shall be under oath by the said depositors (Sec. comprornise the payment of his tan liabilities on his claim that his
97, NIRC). financial position dernonstrates a clear inability to pay the ta.x assessed,
Under RA. 70021, as impl.etnented. by Reaenue his application shall not be considered unless and until he waiues in
Regulations No. 70-2010 d.ated. October 6, 2070, writing his priuilege under RA. 7405, and such waiuer shall constitute
Congress allows the CIR to obtain information relating the authority of the Commissioner to inquire into the bank deposits of
to bank deposits and other related information held by the tatcpayer.
financial institutions, as may be requested in writing by
536 llt,lvtt,:wt,:il ott'l',txrt't'tott 'l'nx ldr,rrrr,:r rrr':s 537
Irrl.rrxlrrt'{.iorr

Bar Question (2003) T'he Commissioner or his duty authorized representatiue may be
allowed to inquire or looh into the bank deposits of a to,xpayer in the
X dies in year 2000 leaving a bank deposit of F2,000,000.00
lbllowing cases:
under joint account with his associates in a law firm. Learning of
X's death from the newspapers, the Commissioner wrote to every a) For the purpose ofdetermining the gross estate ofa decedent;
bank in the country asking them to disclose to him the amount b) Where the taxpayer has fiIed an application for compromise
of deposits that might be outstanding in his name or jointly with of his tax liability by reason of financial incapacity to pay
others at the date of his death. May the bank holding the deposit such tax liability (Sec. 6[F], NIRC);
refuse to comply on the ground of the Secrecy of Bank Deposit
Law? Explain. c) Where the taxpayer has signed a waiuer authorizing the
Commissioner or his duly authorized representatiues to
Suggested answer: inquire into the banh deposits.
No. The Commissioner has the authority to inquire into 5. Powerto assess and collect the comect amount oftax.
bank deposit accounts of a decedent to determine his gross estate
notwithstanding the prouisions of the Bank Secrecy Law. Hence, the - After the return is filed, the Commissioner or his duly
authorized representative may authorize the examination
banks holding the deposits in question rnay not refuse to disclose of any taxpayer and the assessment of the correct amount
the amount of deposits on the ground of secretary of bank deposits oftax. The tax or deficiency tax so assessed shall be paid
(Sec. 6[F], NIRC). The fact that the deposit is a joint account will not
upon notice and demand from the Commissioner or his
preclude the Commissioner from inquiring thereon because the law duly authorized representative (Sec. 6[A], NIRC).
mandates that if a banh has knowledge of the death of a person, who
maintained q b(rnk deposit account alone or jointly with another, it After the return is filed, the Commissioner or his duly
shall not allow any withdrawal frorn the said deposit account, uruless authorized representative may authorize the examination
the Commissioner has certified that the ta.xes imposed thereon haue of any taxpayer and the assessment of the correct amount
been paid (Sec. 97, NIRC). Hence, to be able to giue the required oftax. The tax or deficiency tax so assessed shall be paid
certification, the inclusion of the deposit is imperatiue. upon notice and demand from the Commissioner or his duly
authorized representative. However, failure to file a return
Bar Question (2000) shall not prevent the Commissioner from authorizing the
examination of any taxpayer. The tax or any deficiency
A taxpayer is suspected not to have declared his correct gross tax so assessed shall be paid within the period fixed
income in his return filed for 1997. The examiner requested the in the assessment notice and demand letter from the
Commissioner to authorize him to inquire into the bank deposits of Commissioner or from his duly authorized representative.s
the taxpayer so that he could proceed with the net worth method of
When a report required by law as a basis for
investigation to establish fraud.
assessment of any national internal revenue tax shall not
May the examiner be allowed to look into the taxpayer's bank be forthcoming within the time fixed by laws or rules and
deposits? In what cases may the Commissioner or his duly authorized regulations or when there is reason to believe that any such
representative be allowed to inquire or look into the bank deposits of report is false, incomplete or erroneous, the Commissioner
a taxpayer? shall assess the proper tax on the best evidence obtainable.
In case a person fails to file a required return or other
Suggested answer: document at the time prescribed by law, or willfully
or otherwise files a false or fraudulent return or other
No, os this would be uiolatiue of R.A. 1405, the Bank Deposits
Secrecy Law. 6Sec.6(A), NIRC.
538 ltr,:vrr,rwr,:rt oN'l'Axl'r'ror l',rx lt.r,;lrr,rt rrt,l l-rlll)
I rr I rr x lr r cl io t t

document, the Commissioner shall make or amend the 'lhe sourt rulcd that dcspitc the broad paritttrct,crrs provided in
return from his own knowledge and from such information Section 50 of the'lax Code, the CIR's power oI'distribution or allocation
as he can obtain through testimony or otherwise, which of gross income and deductions under the 'lax Code and Revenue
shall be prima facie correct and sufficient for all legal Regulations No. 2 do not include the power to impute "theoretical
purposes.6 interests" to the taxpayer's transactions. Pursuant to Section 28 (now
32) of the Tax Code, the term "gross income" is understood to mean
Assessm"ent of correct or proper taxes. - It will all income from whatever source derived. While it has been held that
be noted from the above provisions that the Commissioner
the phrase "from whatever source derived" indicates a legislative
is generally required to assess the correct amount of
policy to include all income not expressly exempted within the class
deficiency tax. However, when any of the circumstances
of taxable income under Philippine laws, the term "income" has been
mentioned in Section 6(8) of the Tax Code is present,
interpreted to mean "cash received or its equivalent," "the amount
the Commissioner may assess the proper deficiency tax
of money coming to a person within a specific time," or "something
based on the best evidence obtainable. The reason for
distinct from principal or capital." Otherwise stated, there must be
the difference in the statutory provisions and the kind of
proofofthe actual or, at the ver)' least, probable receipt or realization
assessment that may be made lies, among others, in the
by the controlled taxpayer of the item of gross income sought to be
circumstances of the taxpayer (whether cooperative or
distributed, apportioned or allocated by the CIR. In this case, there is
uncooperative) as well as the availability of adequate books
no evidence ofactual or possible showing that the advances taxpayer
and records oftaxpayers for purposes ofascertaining the
extended to its affiliates had resulted to interests subsequently
correctness of his declarations made in the tax returns.
assessed by the CIR. Even if the Court were to accord credulity to
For reasons ofpublic policy and based on the lifeblood the CIR's assertion that taxpayer had deducted substantial interest
theory, the assessment made by the Commissioner isprimo expense from its gross income, there would still be no factual basis for
facie presumed correct. The burden ofproofto show the the imputation of theoretical interests on the subject advances and
incorrectness or inaccuracy ofsuch assessment or its details assess deficiency income taxes thereon. Further, pursuant to Article
Iies on the taxpayer, contrary to the usual presumptions 1959 of the Civil Code of the Philippines, no interest shall be due,
ofgood faith and innocence. The revenue officers are also unless it has been expressly stipulated in writinS rcIR a. Filinaest
presumed to have taken into consideration all the facts to Deueloprnent Corporation, G.R. Nos. 763653 and. 767689, July
which their attention was called.T Howeuer, the presumption 19,2017).
of correctness of an assessment, being a mere presumption,
cannot be made to rest on another presumption.s 6. Power not to allow withdrawal of any return,
statement or declaration, although the same may be
Power to impute "theoretical interest' to taxpayefs amended. - Any return, statement or declaration fiIed
tra,nsa,ctiorr.a. - BIR issued deficiency income tax assessment for in any office authorized to receive the same shall not be
1997 against Filinvest Development Corporation, by imputing interest withdrawn. However, the same maybe modified, changed,
on advances made to its affiIiates, based on Section 50 of the Tax Code, or amended within three (3) years from the date of such
authorizing the CIR distribute, allocate or apportion gross income or filing, provided that no notice for audit or investigation of
deductions between or among related taxpayers in order to determine such return, statement or declaration has, in the meantime,
their true income. In its protest, FDC contended that interests cannot been actually served upon the taxpayer. For purposes of
be demanded in the absence of a stipulation to that effect. this section, the term "aud.it notice" may refer to a letter
of authority (LA), a tax verification notice (T'rtrN), or a letter
6Sec. 6(8), NIRC.
notice (LN).
?Collector v. Bohol Land Transportation Co., 107 PhiI. 965; Commissioner v.
There is no provision in the 1997 Tax Code prohibiting the
Avelino, 3 SCRA 570.
sCollector v. Benipayo, 3 SCRA 182. amendment of a return once a claim for refund has been filed. It is
ol
'l'rrx ll.t,;rr.tt,ltrtt,ls ll4l
l-r40 lil,rvr,:wr,:rr 'l'nxn trotr
I nl,rrxlttt't.iott

prohibited only if a notice fbr audit or investigation ol'stlch r(!t,tlrn, 2. Substantive *- remediesprovidedfbrbylaworregulation;
statement or declaration has, in the meantime, been actuallv servtxl an essential part or constituent or relating to what is
upon the taxpayer (CIR a. Citicorp Capital Phils., CA-GR SP No. essential;
6855, April 72,2002). 3. Procedural - remedies involving law of pleading,
jurisdiction, etc.;
evidence,
7. Power to delegate powers to subordinate officials. -
The Commissioner may delegate the powers vested in him 4. Administrative - remediesavailableattheadministrative
underthe Tax Code to anyor such subordinate officials with (BIR) level;
the rank equivalent to a division chief or higher, subject 5. Judicial - remedies that are enforced through judicial
to such limitations and restrictions as may be imposed by which may be civil or criminal.
action,
rules and regulations to be promulgated by the Secretary
of Finance, upon recommendation of the CIR. However,
the following powers of the CIR shall not be delegated:
Substantive Remedies
a. The power to recommend the promulgation of rules
1. Imposition of withholding tax on certain income
and regulations by the Secretary ofFinance; Pa5rments
The Secretary of Finance may, upon the recommen-
b. The power to issue rulings of first impression or to
dation of the Commissioner, require the withholding of a
reverse, revoke or modify any existing ruling of the
tax on the items of income payable to natural or juridical
BIR; persons, residing in the Philippines, by payor-corporation/
c. The power to compromise or abate any tax liability, persons as provided for by law, at the rate ofnot less than
but this power may be delegated to regional offices one percent (l7o) b:ut not more t}rran 327oro thereof, which
where the basic deficiency tax is F500,000 or less or shall be credited against the income tax liability of the
if it involves minor criminal violations; taxpayer for the taxable year (Sec. 57[BJ, NIRC).
d. The power to assign or reassign revenue officials to 2. Issuance of revenue regulations by administrative
establishments where articles subject to excise tax agency
are stored or kept (Sec. 7, NIRC). The power to issue regulations is expressly conferred
in the Tax Code. Thus, the Secretary ofFinance, upon the
Definition of remedies recommendation of the Commissioner, shall promulgate all
needful rules and regulations for the effective enforcement
"Rerned.y" is a method by which a cause of action can be enforced
of the provisions of the Tax Code (Sec. 244, NIRC). The
by law or equity. It is the procedure or type of action which may be
rules and regulations ofthe Bureau oflnternal Revenue
availed of by the plaintiff as the means to obtain the relief desired
(Florenz D. Regalado, Remedial Law Compendium, Vol. I, p. 20). shall contain, among others, provisions specifying,
prescribing or defining the time and manner of canvassing
revenue regions, forms of labels, conditions to be observed
Types of remedies under the 1997 Tax Code by revenue officers respecting the institutions and conduct
1. Summary - remedies at the administrative level that of legal actions (9ec.245, NIRC).
are executed without ceremony or delay; short or concise;
towhere the debt instrument does not qualify as a "deposit substitute" under
section 22(Y) ofthe 1997 Tax Code, the income therefrom shall be subject to t]ae 207o
eA Revenue District Officer, who has an Item of Chief Revenue Officer [V, has creditable withholding (income) tax pursuant to Rev. Regs. No. !4-2012, November
the same rank or level as a Division Chief. 23,20t2.
542 Itt,;t tt,:wr.:rr oN'l'Ar,r'r'roru 'l'nx lit,;v r,:t rtt,ts 543
I rr l,rr xl ttr:l.iotr

The rationale for the grant of power to issue regulations was primary legisl.rtion by providing the details thereof. An
explained by the court. Thus, administrative agencies are interpretative rule, on the other hand, is designed to
clothed with rule-making powers because the lawmaking provide guidelines to the law which the administrative
body finds it impracticable, if not impossible, to anticipate agency is in charge of enforcing. When an administrative
and provide for the multifarious and complex situations rule goes beyond merely providing for the means that can
that may be encountered in enforcing the law. All that is facilitate or render less cumbersome the implementation
required is that the regulation should be germane to the ofthe law and substantially increases the burden ofthose
objects and purposes ofthe law and that it should conform governed, it behooves the agency to accord at least to those
to the standards that the law prescribes (Director of directly affected a chance to be heard and, thereafber, to
Forestry a. Munoz,23 SCRA 1183). be duly informed, before the issuance is given the force
and effect of law (BPI Leasing Corporation a- Court
The grant of the rule-making power to administrative
agencies is a relaxation of the principle of separation of Appeals and. Commissioner, G..R. No. 727624,
Noaernber 78,2OOg).
of powers and is an exception to the non-delegation
of legislative powers. Administrative regulations or 3. Failure to obey summons' including subpoenas
"subordinate legislation" calculated to promote the public
Any person who, being duly summoned to appear to testifr,
interest are necessary because of "the growing complexity
of modern life, the multiplication of the subjects of or to appear and produce books of accounts, records,
memoranda or other papers, or to furnish information as
governmental regulations, and the increased difficulty of
required under the pertinent provisions ofthe Tax Code,
administering the law" (Calalang u.Williams,70 Phil.
neglects to appear or to produce such books of accounts,
726).
records, memoranda or other papers' or to furnish such
The rule-making power must be confined to details for information, shall, upon conviction, be punished (Sec.266,
regulating the mode or proceeding to carry into effect the NIRC).
law as it has been enacted. The power cannot be extended
to amending or expanding the statutory requirements or
4. Declaration under penalties of perjury
to embrace matters not covered by the statute. Rules that Any declaration, return and other statements required
subvert the statute cannot be sanctioned (Del March u. under the Tax Code, shall, in lieu of an oath, contain a
Philippine Veterans Ad.ministrqtion, 57 SCRA 349). written statement that they are made under the penalties
of perjury. Any person who willfully files a declaration,
It is a settled law that regulations promulgated return or statement containing information which is not
by authority of law and not in conflict with the statute
are binding upon everyone falling under any of their
true and correct as every material matter shall, upon
conviction, be subject to the penalties prescribed for perjury
provisions (Commissioner a. Bishop ofthe Missionary
under the Revised Penal Code (Sec. 267, NIRC).
Dis trict of the P hil. I s land.s, 1 4 S C RA 99-l). Reeulations
have the force and effect of law, whenever they are found
to be in consonance and in harmony with the general Ad,rninistratiae interpretations should. be respected.
purposes and objects of the law, as if the regulations had The interpretation given by the administrative officer charged
been written in the original law itself (Interprovincial by reason of his office to carry out the provisions of a statute
Autobus Co. a. Collector, gS Phil.29O). should be respected whenever such interpretation is assailed by
someone who alleges no reasons of weight to contradict or weaken it
Administrative issuances may be distinguished (Commissioner u. Ledesma, Sl SCRA 95),
according to their nature and substance: legislative
and interpretative. A legislative rule is in the matter The law concedes to administrative bodies the authority to
of subordinate legislation designed to implement a in accordance with their
act on and decide claims and applications
544 Itt,:vt t,twt,ttr oru'l'nxn'r'roru

judgment, in the exercise of their adjudicatory capacity. llecausc ol'


their acquired expertise in specific matters within the purview of'thcir
respective jurisdictions, the findings of these administrative bodies
merit not only great weight but also respect and finality. There is
a limit, however, to such a deference paid to the actuations of such
CIIAPIER IOO
bodies. Clearly, where there has been a failure to interpret and apply ADMINISTRATIVE REMEDIES OF GOVERNMENT
the statutory provisions in question, judicial power should assert
itself. Under the theory of separation of powers, it is the judiciary,
and to the judiciary alone, that the final say on questions of law in The power to tax is considered as the strongest of all the powers
appropriate cases coming before it is vested (Begosa a. Philippine of government. It is described as unlimited, plenary, comprehensive
Veterans Ad,ministration, GR. No. L-25976, April30, 1970). and supreme, in the absence of constitutional restrictions, the
principal check on its abuse resting in the responsibility of Congress
Principl.e of legislatiae a.pproaa.l by re-enactrtent to their constituents. In enacting R.A.8424, Congress placed upon the
The principle of legislative approval of administrative Bureau oflnternal Revenue the duty to generate adequate national
interpretation of a statute is to the effect that the re-enactment of internal revenue taxes to defray the expenses ofgovernment.
a statute substantially unchanged is persuasive indication of the Because taxes are the lifeblood of the nation and their prompt
adoption by Congress ofa prior executive construction. The principle collection is an imperious need, the BIR has been given ample powers
applies with more cogency in a case where what is involved is not to assess and collect national internal revenue taxes. The assessment
a mere opinion of the Commissioner of Internal Revenue or ruling of taxes must, however, be exercised within the ambit of the law and
rendered on a mere query, but a Revenue Memorandum Circular its implementing regulations.
issued to "all internal revenue officials" by the Commissioner (ABS-
CBN Broad.casting Corporation u, Court of Tax Appeals and, A- Power to Assess
Cornmissioner, 708 SCRA 142).
The power to assess and collect the correct amount of tax
is vested with the Commissioner of Internal Revenue under the
Tax Code. After the return is filed, the Commissioner or his duly
authorized representative may authorize the examination of any
taxpayer and the assessment of the correct amount of tax (Sec- 6[A],
NIRC).
"Assess" means to impose a tax; to charge with a tax; to declare
a tax to be payable; to apportion a tax to be paid or contributed, to
fix a rate; to fix or settle a sum to be paid by way of tax; to set, fi'x or
charge a certain sum to each taxpayer; to settle determine or fix the
amount of tax to be paid (84 C.J.S., pp.749-750).

Presumption of correctness
The assessments made by the Commissioner and his authorized
agents are presumed correct. The burden of proof to show the
incorrectness or inaccuracy ofsuch assessments or the details thereof

545
546 llt.:vtt,lwt,llt oru'l'nx,r'r'roN
'l'nx ltt,:ut,lt rtt,:s lt47
Arlrrrnrtslrrtlivc lh'tttt'tlics ol (iovcrtttttt'tll

Iies on the taxpayer (Republic u. Marsman Deaeloprnent Co., 44 Examples:


SCRA 478).The burden of proof is on the taxpayer contesting the
validity or correctness of an assessment to prove not only that the
a. Gross income for purposes of computing the minimum
corporate income tax does not include miscellaneous or
Commissioner of Internal Revenue is wrong but that the taxpayer
incidental income;
is right (Tan Guan u. CTA and. Comrnissioner, 79 SCRA 9Og).
The agents of the BIR will also be presumed to have taken into b. Additional income tax paid per amended tax return
consideration all the facts to which their attention was called subsequently fiIed by taxpayer before receipt ofaudit notice
(Collector u. Aaelino, 3 SCRA 570). is not subject to257a surcharge;
Unless rebutted, all presumptions generally are indulged in favor c. Excess of fair market value over exercise price of a stock
of the correctness of the assessment by the Commissioner against the option is considered as additional compensation income
taxpayer (Cyanamid Philippines v. Cour-t ofAppeals,322 SCRA and not as fringe benefit.
639).
Assessment Process
Basis of Assessment The assessment process starts with the self-assessment by
An assessment is issued by the BIR based on findings of fact the taxpayer of his tax liability, the filing of the tax return, and the
and./or law. In fact, the factual and./or legal bases of the assessment payment of the entire tax due shown in his tax return in accordance
must be stated; otherwise, the assessment is null and void. with the methods and within the dates prescribed in the law and
regulations (Secs. 51, 52, 56 [income tax], 90, 91 [estate tq'lc], 103
Question of Fact [donoy's tq.x], 114 [ualue q.dded tcm], and 128 [percentage taxes], NIRC) .

There is a question offact when the doubt or difference arises The role of the government in the assessment process includes
as to the truth or falsehood of the alleged facts (Commissioner a. the following:
Court of Appeals and.YMCA" 298 SCRA 83). Factual findings of 1. Examination of books of accounts and other
administrative agencies which have acquired expertise in their field accounting records of taxpayers by revenue officers
are binding and conclusive on the Supreme Cowt (Fortich u. Corna, to determine correct tax liability. - In ascerbaining
G.8. IVo. 737457, April24, L998). the correctness of any return' or in making a return when
none has been made, or in determining the liability of any
Examples: person, or in collecting any such liability, or in evaluating
a. Income from the sale of banana saplings was not included tax compliance, the Commissioner or his authorized
in the income tax return of the taxpayer; representative is authorized to examine any book, paper,
record, or other data which may be relevant or material to
b. Representation expenses are not substantiated by invoices such inquiry and to assess the correct tax liability (Secs.
or receipts; E[B] q,nd 6[A], NIRC).
c. Tax was paid after the deadline prescribed by law for the The books of accounts, accounting records or information (such
filing of return and payment of tax. as costs and volume of production, receipts or sales and gross incomes
of taxpayers, and the names, addresses, and financial statements
Question of Law of corporations) that may be examined by revenue officers may be
in the possession of the taxpayer under examination or with third
There is a question of law when the doubt or difference arises parties, including the national and local governments, government
as to what the law is on a certain state of facts (Commissioner a.
agencies and instrumentalities (e.g., Bangho Sentral ng Pilipinas),
Court of Appeals and.YMCA, supra). and government-owned or -controlled corporations (Sec. 5[B], NIRC).
5Atl Itt,;v l t,;wr,:rt or'l'irxA't'rorrt 'l'nx ltt,tmt,lt rtt,ts l-r49
Arlrrrrrrrrrl.nrl,tvc li,t'tttt'tliclc ol' (iovcrntncttl

If said taxpayer or third parties do not submit the documents or reasonable allowance lbr living expenses for the period and plus or
information requested by the BIR, the person may be required minus adjustments for other items, such as taxes paid, insurance
to testify or the document may be summoned and required to be premiums, depreciation and others, represents the income of the
presented to the BIR (Sec. SICJ and [D], NIRC), taxpayer."
The use of the net worth method is supported by Section 43 of
Best evidence obtainable the 1997 Tax Code which allows the Commissioner to use any method
When a report required by law as a basis for the assessment of computation or accounting which would more clearly reflect the
of any tax shall not be forthcoming within the time fixed by laws or income of the taxpayer (Collector o. Aaelino, S SCRA 57).
rules and regulations, or when there is reason to believe that any
such report is false, incomplete or erroneous, the Commissioner shall 2. Preparation of tentative findings and holding of
assess the proper tax on the best evidence obtainable. In case a person informal conference. - Soon after the completion of
fails to file a required return or other document at the time prescribed the revenue officer will render a written
the tax audit,
by law, or willfully or otherwise files a false or fraudulent return or report, stating therein whether or not the factual and
other document, the Commissioner shall make or amend the return legal basis ofhis findings and whether or not the taxpayer
from his own knowledge and from such information as he can obtain agrees with his findings. If the taxpayer is not amenable,
through testimony or otherwise, which shall be prima facie correct the taxpayer shall be informed in writing by the Revenue
and sufficient for all legal purposes (Sec. 6[8], NIRC). District Officer or by the Chief of Division (e.g., Special
Investigation Division) concerned of the discrepancies
However, it is believed that the revenue officer's report should be
in the taxpayer's payment of his taxes, for the purpose
complete and must indicate clearly the method(s) used in estimating of informal conference, in order to afford the taxpayer
the tax liability, the particular method adopted in preference to with an opportunity to present his side of the case. If
some other methods, and additional circumstances supporting the the taxpayer fails to respond within 15 days from date of
correctness of his estimate of the tax liability, in order that it will receipt of the notice for informal conference, he shall be
carry great weight. considered in default, in which case, the Revenue District
In one case, the court sustained the use ofthe doctrine ofbest Officer or the Chief of the Division shall endorse the case
evidence obtainable, where the conductor's daily reports were allowed with the least possible delay to the Assessment Division of
to be used instead of the freight tickets issued by a common carrier, the Revenue Regional Offrce or to the Commissioner or his
for purposes of computing the documentary stamp tax thereon duly authorized representative, for appropriate review and
(Interproaincial Autobus Co. a. Commissioner, 98 Phil.2g0). issuance of deficiency tax assessment, if warranted (Sec.
3.7.1, Reu. Regs. No. 72'99, September 6, 1999). INOTE:
Networth method of investigation Rev. Regs. No. 18-2013, November 28,2013, removed the
informal conference stagel.
In the leading U.S. case of Hollond u. U.S. (348 U.S. 121),
the net worth method was described succinctly as follows: "If the Administrative due process
government can prove with reasonable certainty the taxpayer's net
worth, that is, the excess of assets and liabilities at a given date or Due process demands that the person be duly informed of the
starting point, generally December 31 of a given year if the taxpayer charges against him. He cannot be convicted of an offense with which
he was not charged. Administrative proceedings are not exempt from
is on the calendar year basis, and if the government is then able to
prove by independent evidence such as bank deposits or purchases basic and fundamental procedural principles, such as the right to due
process in investigations and hearings. The right to substantive and
of assets, that the taxpayer's net worth has increased at the end
procedural due process is applicable in administrative proceedings
of the taxable year in question, then the inference is reasonable
and therefore permissible that the increase in the net worth plus a
(Ciuil Seraice Cornmission u. Lucas, GR. No. 727838' January
21, 7999). The essence of due process is that a party be afforded
550 l},:vr r,:wr,lH oN'l'AxA,t.lor.r iis I
Art.rirrrsr,r'r,ivl il.'H'Jil:l:t (k vcrnnre rrr
reasonable opportunity to be heard and to submit any evidence hc taxpayer, by determining the true net income from the property and
may have in support of his defense. In administrative proceedings, business ofsuch controlled taxpayer, using the uncontrolled taxpayers
due process simply means the opportunity to explain one's sido or as the standard.
the opportunity to seek a reconsideration of the action or ruling
complained of. A formal or trial-type hearing is not, at all timcs, 3. Issuance of Preliminary Assessment Notice (PAN).
necessary (Padilla a. Sto. Tomas, 245 SCRA rcil.
- If after review and evaluation by the Assessment
Division or by the Commissioner or his duly authorized
Principle of estoppel representative, it is determined that there exists sufficient
The error made by a tax official in the assessment of his tax basis to assess the taxpayer for any deficiencytax(es), said
liabilities does not have the effect ofrelieving the taxpayer from the office shall issue to the taxpayer, at least by registered mail,
obligation to pay the full amount of his tax liability, for taxes are fixed a PAN for the proposed assessment, showing in detail, the
by law and the government is never estopped to collect the legitimate facts and the law, rules and regulations, or jurisprudence
taxes because of errors committed by its agents (Commissioner u, on which the proposed assessment is based, and it shall the
Atlas Consolid.ated. Mining Co., 702 SCRA 24G). However, like taxpayer to reply to the findings within 15 days from the
other principles, the principle of estoppel also admits of exceptions in date of receipt of the PAN. If the taxpayer fails to respond
the interest ofjustice and fair play. The Commissioner is precluded within 15 days from date of receipt of the PAN, he shall
from adopting a position inconsistent with one previously taken be considered in default, in which case, a formal letter
where injustice would result therefrom or where there has been a of demand and assessment notice shall be caused to be
misrepresentation to the taxpayer (Balmaced,a a. Corominas & issued by said office, calling for payment of the taxpayer's
Co.,66 SCRA 553). deficiency tax liability, inclusive of the applicable penalties
(5ec.3.1.2, Reu. Regs. No. 12-99).
The principle is rooted in the notion of sovereignty formerly
nutshelled in the ancient maxim that "The king can do no wrong." In 4. Reply. - Forpurposesofcontestinginwritingthefindings
this view of infallibility of the State, any mistakes committed by the of the revenue officers contained in a PAN, the regulations
agents of the sovereign, namely: government officials and employees, use the term"reply" to distinguish the written objection(s)
are their own and cannot bind the government, which cannot be placed against a FAN issued by the BIR, where the generic term
in estoppel on account of the mistakes of its agents (Tax Practice end "protest," or the specific term "request for reconsideration"
Procedure in the Philippines, T.P. Matic, Jr., p. 321). or "request for reinvestigation" is utilized.
Hereunder are the distinctions between "reply" antd
Pou:er to allocate incorne and d.ed.uctions among affiIiated
ta.rpayers "protest!'

In the case of two or more organizations, trades or businesses


1. A taxpayer is generally given under the regulations
(whether or not incorporated and whether or not organized in fifteen days from the date of receipt of the PAN
within which to make his written "reply" thereto,
the Philippines owned or controlled directly or indirectly by the
while he is given under the law 30 days from the date
same interests, the Commissioner is authorized to distribute,
of receipt within which to file his "protest" against
apportion or allocate gross income or deductions between or among
the FAN.
such organization, trade or business, if he determines that such
distribution, apportionment or allocation is necessary in order to 2. Due to the shorter time given to the taxpayer to make
prevent evasion oftaxes or clearly to reflect the income ofany such the "reply," a taxpayer generally does not respond
organization, trade or business (Sec. 50, NIRC). in an adequate manner to the specific findings of
the revenue officer. On the other hand, the "protest"
The purpose of such authority given to the Commissioner is
is usually sufficient and comprehensive to explain
to place a controlled taxpayer on tax parity with an uncontrolled
the legal and factual bases why the assessment is
552 llr:vtt,:wt,;tt rrN'l'Axn't't,tt 'l'nx ltr,;rrrt,lDtt,:s 55:l
Arlrnr rrrHl.r'rrl.ivc lh'ntt'tlit's rtl ( lttvt'rtttttcttl

incorrect, and certain documentary ovidence nol AIA is not liubl.e litr u,nv deficiency VAT and excise taxes because
presented during the preliminary assessment phasc of' its auailment of tax amnesty. - AIA is a domestic corporation
and legal authorities andjurisprudence relcvant to operating within the Subic special economic zone, engaged in the
the findings of the revenue officers are submitted or importation of used motor vehicles and heavy equipment which it
presented. sells to the public through auction. On August 25,2004,AIA received
3. Most often than not, the taxpayer himself normally from the CIR a formal demand letter containing an assessment for
deficiency VAT and excise tax, for auction sales conducted on February
handles the aspect of the preliminary assessment
process, hoping that he could still convince the 5-8,2004. AIA protested, contending that it availed of tax amnesty
revenue officer ofthe correctness or reasonableness under R.A. 9480 (Tax Amnesty Act of 2007) for the years 2005 and
prior years. The CIR contends that AIA is disqualified under Section
of the taxpayer's position. However, they generally
8(a) of R.A. 9480 (withholding agents with respect to their withholding
do sloppyjobs as taxation is a highly technical and
complicated matter. It is best to leave tax matters
tax liabilities) because it is "deemed" a withholding agent for the
in the hands of the professionals. During the formal deficiency taxes. This argument is untenable.
assessment stage, a taxpayer is almost always The court ruled that tax amnesty program under R.A. 9480 may
represented by his tax agent or consultant. be availed ofby any person, except those who are disqualified under
Section 8 thereof. The CIR did not assess AIA as a withholding agent
4. Failure to reply to a PAN makes the taxpayer in
that failed to withhold or remit the deficiency VAT and excise tax
default and authorizes the revenue official to issue
the FAN. However, no liability for additional or to BIR. Indirect taxes, Iike VAT and excise tax, are different from
deficiency tax arises from such failure to file a withholding taxes. In withholding tax, the Incidence and burden of
reply. In view ofthis principle, it can be said that taxation fall on the same entity, the statutory taxpayer. The burden
of taxation is not shifted to the withholding agent who merely collects,
the filing of a "reply" to PAN is directory on the
part ofthe taxpayer. On the other hand, failure to by withholding, the tax due from income payments to entities arising
file a timely "protest" to a FAN makes the formal from certain transactions and remits the same to the government.
assessment notice final and executory, and the In indirect taxes, the incidence of taxation falls on one person but
the burden thereofcan be shifted or passed to another person (Asia
taxpayer loses his right to contest the assessment,
at the administrative and judicial levels, even if such
International Auctioneers u. CIR, G.R. No. 779775, September
assessment is weak or has no legal basis. Because of
26,2072).
this tax consequence, it behooves upon the taxpayer
to file such "protest" within 30 days from date of 5. Issuance of Formal Assessment Notice (FAN) and
receipt of the assessment. In other words, the filing letter of demand. - The formal letter of demand and
assessment notice shall be issued by the Commissioner or
of a protest against an assessment is mandatory and
had to be made on a timely manner.
his duly authorized representative. The letter of demand
calling for payment of the taxpayer's deficiency tax(es)
shall state the facts, the law, rules and regulations, or
Tax amnesty as a defense jurisprudence on which assessment is based; otherwise,
Tax amnesty partakes of an absolute waiver by the government the formal letter of demand and assessment notice shall
of its right to collect what is due it and to give tax evaders who be void. The same shall be sent to the taxpayer only by
wish to relent a chance to start with a clean slate. A tax amnesty, registered mail or by personal delivery. If sent by personal
much like a tax exemption, is never favored or presumed in law. delivery, the taxpayer or his authorized representative
The grant of a tax amnesty, similar to a tax exemption, must be shall acknowledge receipt thereofin the duplicate copy of
construed strictly against the taxpayer and liberally in favor ofthe the letter of demand, showing the following: (a) his name;
taxing authority. (b) signature; (c) desigpation and authority to act for and
554 lit,lvr t,:wt,:tt oN'l'nxl't'tor.r l-r5l-r
A,r,,,,,,i"r,.,,tiu1'ii#ili:l'':r,i,ver.nrnenr
inbehalfofthe taxpayer, ifreceived by a person other thtn the taxpayer may be able to dispute the imposition
the taxpayer himself; and (d) date of receipt thereofll or agree with it.3
FAN (BIR Form 17.08) contains the following 2. Although petitioner did not receive the notice of
information: name, address, and TIN of the taxpayer; assessment sent by respondent Commissioner, it
kind oftax; period covered; basic tax assessed, surcharge, may not complain of lack of due process. In one case,
interest, and compromise penalty, if any; and the date when petitioner was given the opportunity to be heard and
such deficiency tax must be paid. Generally, the date of to present, as it did, its side of the controversy by
payment is about thirty days from the date of mailing or respondent Court acting on petitioner's motion for
release of the formal assessment, although in some cases, reconsideration and modifying the decision to reduce
there is a delay in the signing and release of such formal petitioner's tax liability. Absence of previous notice is
assessment notice. not itself a substantial defect; what the law abhors is
The FAN and letter of demand should always go the lack of opportunity to be heard.a
together. The reason for this is that the information given
in the FAN is inadequate for the taxpayer to make a good Absence of onshore income and of loarts in tax returns is
tantarnount to omission to file return.
evaluation of the correctness of the formal assessment. - Since there was an absence of
FCDU onshore income declaration in petitioner's quarterly percentage
Since the law requires that the factual and./or legal bases
of the assessment must be stated, and this requirement tax returns and considering that the loans made to residents and
is not satisfied by the issuance ofFAN alone, a letter of the certificate of time deposits made by resident depositors were not
demand thus fills up the void and explains to the taxpayer reflected on its DST declarations for 1998, then these are tantamount
how the deficiency assessment was arrived at, including to omission to file the said returns. The said omissions warrant the
the reasons and legal bases for the assessment. application of the 10-year assessment period under the Tax Code,
within which respondent can assess petitioner for deficiency GRT
The taxpayer shall be informed in writing of the law and DST.
and the facts on which the assessment is made; otherwise,
the assessment shall be void.'?Applying the provisions of Assessments are prima facie presumed correct and made in good
Section 228 of the Tax Code, the Tax Court was rather faith. The taxpayer has the duty of proving otherwise. In the absence
lenient in favor of the government in its earlier decisions. of proof of any irregularities in the performance of official duties, an
Thus: assessment will not be disturbed. All presumptions are in favor of the
correctness oftax assessments.s Failure to present proofoferror in
1. If the assessment notice is deemed insufficient the assessment will justify judicial affirmation of said assessment.6
insofar as compliance with Section 228 (protesting
of assessrnent) of the Tax Code is concerned, such
insufficiency can be cured, if the demand Ietter can
show the legal and factual bases relied upon in the
3PNZ Marketing v. Commissioner, CTA Case No. 5726, December 14,200I.
issuance of the assessment which the assessment aArtex Development Co. v. NLRC, 187 SCRA 611; Manuel v. Villalena,
37 SCRA
notice failed to detail. The rule requiring the BIR to 745. See the latest decisions of the Supreme Court on the matter discussed in the
inform the taxpayer in writing of the laws and the succeeding Chapters.
facts on which the assessment is made runs parallel sStandard Chartered Bank v. Commissioner, CTA Case No. 7253, June 2b,
to the due process clause for it is believed that it is 2010, citing Interprovincial Autobus Co., Inc. v. Collector, 98 Phil. 290; Sy Po v. CTA,
et al., G.R. No. 81446, August 18, 1988; Dayrit v. Cruz, G.R. No. L-39910, September
only through a detailed appraisal of its basis that 26, 1988; Cagayan Robina Sugar Milling Co. v. CA, et al., G.R.No. 122451, October
t2,2000.
rSec. 3.1.4, Rev. Regs. No. 12-99, September 6, 1999. 6Delta Motors Co. v. Commissioner, CTA Case No. 3782, May 2L, lg86;
NIRC. Commissioner v.CL et al., G.R. Nos. 104151 and 105563, March 10, 1995.
'zSec. 228,
556 Itt,lvt t,:wr,:rt oN'l'nxA't'toN 'l',r x tt,rrr.t t,rt rt t,;s
I l>lt7
Arl rrrr rrrrl,rrrl,rvl lilllrrcrlicg o[ ( lovrlrrrrnorrt.

The assessment notice must be personally delivered or mailed ttr c. The taxpayer does not have to pay the deficiency tax
the address shown in the income tax return covered by the assessment, assessment in filing the protest letter, but the 207o defrciency interest
unless a written notice ofthe change ofaddress duly received by the per annunT shall start to run from the date the tax is due up to the
appropriate revenue omce was previously made by the taxpayer or date of payment of the deficiency tax.
his authorized representative. It is always important to indicate and
stamp on the assessment notice, demand letter, and the envelope
d. The business of the taxpayer does not become illegal by
non-reason of the non-payment of the assessed national internal
containing the assessment notice and demand letter the exact date
revenue tax, unlike local business tax, which must be paid upon the
of receipt by the person who received the same, and such receiving
person must immediately forward the same to the official in charge
filing ofthe protest.
of tax matters. This will ensure the filing of a written protest against
the assessment within thirty days from the date of receipt thereof by
6. Filing of administrative protest by the taxpayer
the office and not by the officer in charge of tax matters.
against the assessment. - The taxpayer or his duly
authorized representative may protest administratively
It must also be noted that the final assessment notice must against the aforesaid formal letter of demand and
be protested by the taxpayer within the 30-day period, despite assessment notice within 30 days from date of receipt
the fact that exactly the same issues were raised by the revenue thereof. This period is known as the "30-d.ay period;'
officers in the preliminary assessment notice, which were in this book. Ifthere are several issues involved in the
objected to, adequately explained, and supported by factual and formal letter of demand and assessment notice but the
legal arguments submitted by the taxpayer or his authorized taxpayer only disputes or protests against the validity of
representative at the preliminary assessment stage. The protest some of the issues raised, the taxpayer shall be required
against the final assessment notice is not the same as the reply to pay the deficiency tax or taxes attributable to the
to the preliminary assessment notice, in the same manner that undisputed issues, in which case, a collection letter shall
the preliminary assessment notice does not ripen into a final be issued to the taxpayer calling for payment of the said
assessment notice if not duly issued or deemed issued within the deficiency tax, inclusive of the applicable surcharge and./
three-year period the BIR may make an assessment. or interest. No action shall be taken on the taxpayer's
disputed issues until the taxpayer has paid the deficiency
Where the taxpayer is appealing on the ground that the
assessment is erroneous, it is incumbent upon him to prove what the
tax or taxes attributable to the said undisputed issues.
The prescriptive period for assessment or collection of the
correct and just liability is by a full and fair disclosure of all pertinent
data.7
tax or taxes attributable to the disputed issues shall be
suspended.
Legal efficts of issuance of FANIDL
The taxpayer shall state the facts, the applicable law, rules and
a. The issuance of the FAN/DL legally creates tax liability of regulations, or jurisprudence on which his protest is based; otherwise,
the taxpayer which is being demanded in the accompanying letter of his protest shall be considered void and without force and effect. If
demand. there are several issues involved in the disputed assessment and
b. If the taxpayer files a timely protest against the FANIDL, the taxpayer fails to state the facts, the applicable law, rules and
regulations, or jurisprudence in support of his protest against some
the assessment does not become final and executor. The taxpayer
may file a supplemental protest, containing the additional or new ofthe several issues on which the assessment is based, the same shall
be considered undisputed issue or issues, in which case, the taxpayer
evidence and arguments in support of its protest, within the next 60
days from the date offiling ofthe protest letter.
shall be required to pay the corresponding deficiency tax or taxes
attributable thereto (Sec. 3.7.5, Reu. Regs. No. 12-99).

?Bonifacio Sy Po v. CTA, G.R. No. 81446, August 18, 1998.


If the taxpayer fails to file a valid protest against the formal
Ietter of demand and assessment notice within 30 days from date
55rl 1il,:vrr,:wr,:tr r rN'l'AxA'r'ror'r !-rl-r9
A,r,,,r'rrr.,,l,ru,l,il ,ilffi::ll'|, ,l,v.rrrr.urrr,
of receipt thereof, the assessment shall become final, executor.y irn<l and demandable. flowever, if the taxpayer elevates his
demandable. protest to the Commissioner within 30 days from date of
7. Submissionofdocumentaryevidenceandarguments. receipt of the final decision of the Commissioner's duly
authorized representative, the latter's decision shall not
- The taxpayer shall submit the required documents in
support of his protest (1.e., request for reinvestigation) be considered fi,nal, executory and demandable, in which
case, the protest shall be decided by the Commissioner.
within 60 days from date of filing of his letter of protest;
otherwise, the assessment shall become final, executory 9. Appeal by the taxpayer of the final decision of the
and demandable. This period is referred to as the "60-d.ay Commissioner or his authorized representative
period.." The phrase "submit the required documents" on the disputed assessment to the Court of Tax
includes submission or presentation of the pertinent Appeals. - If the Commissioner or his duly authorized
documents for scrutiny and evaluation by the Revenue representative fails to act on the taxpayer's protest within
Officer conducting the audit. The said Revenue Officer 180 days from date of submission, by the taxpayer, of the
shall state this fact in his report ofinvestigation. required documents in support ofhis protest, the taxpayer
If the protest is denied, in whole or in part, by the may appeal to the Court of Tax Appeals within 30 days
Commissioner, the taxpayer may appeal to the Court of from the Iapse ofthe said 180-day period, otherwise, the
Tax Appeals within 30 days from date of receipt of the said assessment shall become final, executory and demandable
(5ec.228, NIRC).
decision, otherwise, the assessment shall become final,
executory and demandable (Sec. 228, NIRC; Sec. 3.1.5,
Reu. Regs. No. 12-99). B. Power to Collect Taxes
However, the counting of the 180-day period will start Delinquency tax v. deficiency tax
to run from the filing ofthe protest letter (1.e., request for
reconsideration), and if the respondent failed to render A taxpayer is considered.d.elinquent inthe payment of his tax
his decision within 180 days from the filing of his protest when (a) the self-assessed tax per return filed by the taxpayer on the
letter, petitioner has 30 days therefrom to file an appeal prescribed date was not paid at all or was only partially paid; or (b)
with the CTA.8 the deficiency tax assessed by the BIR became final and executory.

8. Denial of protest by the Commissioner or his The term "d,efi.ciency" means: (1) The amount by which the
authorized representative. - The decision of the tax imposed by law lTitle II (Income Tax)] as determined by the
Commissioner or his duly authorized representative shall Commissioner or his authorized representative exceeds the amount
(a) state the facts, the applicable law, rules and regulations, shown as the tax by the taxpayer upon his return; or (2) If no amount
orjurisprudence on which such decision is based; otherwise, is shown as the tax by the taxpayer upon his return, or ifno return
the decision shall be void; and (b) that the same is his final is made by the taxpayer, then the amount by which the tax as
decision (Sec. 3.1.6, Reu. Regs. No. 12-99). determined by the Commissioner or his authorized representative
exceeds the amounts previously assessed (or collected without
In general, if the protest is denied, in whole or in part, assessment) as a deficieney (See Sec.56[8], NIRC).
by the Commissioner or his duly authorized representative,
the taxpayer may appeal to the Court of Tax Appeals Distinction between remedies in the collection of
within 30 days from date of receipt of the said decision;
otherwise, the assessment shall become final, executory
deficiency tax and delinquency tax
a. A delinquent tax can immediately be collected
sOceanic Wireless Network v. Commissioner, CTA Case No. 6111, November 3, administratively through the issuance of the warrant
2004. of distraint and levy, and./or by judicial action, while a
560 Itr';vrr,:wr,:ri oN'l'nxA'uoN 561
Arrrrrr'sr r:rr,iv:'il.lil.I;:i':r c.v.rnme nr
deficiency tax can be collected also through rrdministrul,ivc Tax lien
and,/or judicial remedies but has to go through the proccss
offilingthe protest against the assessment by the taxpayer "Tax lien" is understood to denote a legal claim or charge on
and denial of such protest by the BIR. property, either real or personal, as security for the payment of some
debt or obligation (Hongh,ong & Shanghai Banking Cotporotion
b. The filing of a civil action for the collection ofthe delinquent u. Commissioner, 39 Phil. 145).
tax in the ordinary court is a proper remedy, while the filing
ofa civil action at the ordinary court for the collection ofa When a taxpayer neglects or refuses to pay his internal revenue
deficiency tax during the pendency of the protest may be tax liability after demand, the amount so demanded shall be a lien in
the subject of a motion to dismiss. In addition to the motion favor of the government from the time assessment was made by the
to dismiss at the ordinary court, a petition for review must Commissioner until paid with interest, penalties and costs that may
be filed by the taxpayer with the CTA within the 30-day accrue in addition thereto upon all property and rights to property
period prescribed in R.A. 1125, as amended to toll the belonging to the taxpayer.
running of the prescriptive period. The lien shall not be valid against any mortgagee, purchaser
c. A delinquent tax is subject to administrative penalties, such or judgment creditor until notice of such lien shall be filed by the
as 25Vo surcharge, interest, and compromise penalty. A Commissioner in the office of the Register of Deeds of the province
deficiency tax is generally not subject to the 2570 snrcharge, or city where the property ofthe taxpayer is situated or located (Sec.
although subject to interest and compromise penalty. 219, NIRC).
Afber a Final Assessment Notice and Demand Letter have been The claim of the government predicated on a tax lien is superior
issued by the BIR, next stage is the collection thereof. to the claim of a private litigant predicated on a judgment. The
tax claim must be given preference over any other claim of any
Administrative remedies of the government to collect other creditor, in respect ofany and all properties ofthe insolvent.
There is no merit in the contention of the National Labor Relations
assessed taxes Commission that taxes are absolutely preferred claims only with
The remedies of the government for the collection of national respect to movable or immovable properties on which they are due
internal revenue taxes can be classified into administrative remedies (Republic u. Peralta, 150 SCRA 37).
and judicial remedies. The administrative remedies are: The tax lien attaches not only from the service of the warrant of
1. Tax lien; distraint of personal property but from the time the tax became due
and payable.
2. Distraint ofpersonal property, or levy ofreal property, or
garnishment of bank deposits; The power of the court in execution of judgments extends only
to properties unquestionably belonging to the judgment debtor.
3. Sale ofproperty; Execution sales affect the rights of the judgment debtor only, and the
4. Forfeiture; purchaser in an auction sale acquires only such right as the judgment
debtor had at the time of sale.
5. Compromise and abatement;
The sheriffis not authorized to attach or levy on property not
6. Penalties and fines; and belonging to the judgment debtor.
7. Suspensionofbusinessoperations. The term "tar" is used in a broad sense encompassing all
The judicial remedies of the government are civil action and government revenues collectible by the Commissioner under the Tax
criminal action. Code, whether or not involving taxes in the strict technical sense
thereof (e.g., forest charges) (Commissioner u. National Labor
562 Itt,lvtt,:wt':tr oN'l'nxA'r'ror': 56:l
Arrrrri,,rsr,rrrr,iv:,il lll;Iu:ll';], .,v.rrrr'.rrr.
Relations Comrnission ond. Maritim.e Company of the Phil., Suggested answer:
238 SCRA 42).
The motion filed by the Commissioner should be granted because
BIR may collect the deficiency tax due from one heir only or the claim of the gouernment for unpaid taxes is generally preferced
from all the heirs in proportion to their inheritance receiued. - After ouer the claims of laborers for unpaid wages. The prouision of Article
the closure ofthe estate proceedings ofAtanacio Pineda and the 110 of the Labor Code, which giues laborers' claims for preference,
distribution ofthe estate to his heirs, the CIR tried to collect from applies only in case of bankruptcy or liquidation of the employey's
one of the heirs deficiency income tax due from the estate. The business. In the instant cq.se, OCEANIC is not und.er bankruptcy or
respondent appealed to the CTA alleging that he was appealing liquidation at the time the warrants of distraint and leuy were issued;
"only that proportionate part or portion pertaining to him as one hence, the lien of the ernployees is unwarranted (CIR a. NLRC, Gn.
of the heirs." The CTA found respondent Pineda liable only for the No.74965, Notsember 9, 1994).
payment corresponding to his share of the tax assessed. The CIR
appealed to the Supreme Court and proposed to hold respondent Distraint, levy, or garnishment
liable not only for his share in the tax but for the payment of all
the taxes found by the CTA to be due from the estate. The Supreme Distraint of personal property
Court granted the petition and ruled that Pineda was liable for Distraint is a remedy whereby the collection of delinquent
the assessment as an heir and as a holder-transferee of property taxes is enforced on the goods, chattels or effects and other personal
belonging to the estate/taxpayer. As an heir, he was individually property ofwhatever character ofthe taxpayer, including stocks and
answerable for the part of the tax proportionate to the share he other securities, debts, credits, bank accounts and interests in and
received from the inheritance. His liability, however, cannot exceed rights to personal property (5ec.205[a], NIRC).
the amount of his share. As a holder of property belonging to the
estate, he was liable for the tax up to the amount of the property a. Actual d.istraint is resorted to when at the time required
in his possession. The reason was that the government has a lien for payment, a person fails to pay his delinquent tax
on the property received by him from the estate for unpaid income obligation (Sec. 207[A], NIRC). Distraint consists in the
taxes for which said estate was liable (CIR v. Pined.a, G.R. No. actual seizure and taking possession ofpersonal property
L-22734, September 75, 1967). ofthe taxpayer.
b. Constructiae d,istrainf is issued where no actual tax
Bar Question (1995) delinquency of the taxpayer is necessary before the same
is resorted to by government. It may be availed of when the
For failure of Oceanic Company, Inc. (OCEANIC) to pay
deficiency taxes of F20 Million, the Commissioner of Internal Revenue
taxpayer is retiring from any business subject to tax; he
issued warrants of distraint on OCEANIC's personal properties and
intends to leave the Philippines; he removes his property
levy on its real properties. Meanwhile, the Department of Labor therefrom; or he performs any act tending to obstruct the
proceedings for collecting the tax due or which may be
through the Labor Arbiter rendered a decision ordering OCEANIC
due from him. Constructive distraint shall be effected by
to pay unpaid wages and other benefits to its employees. Four barges
belonging to OCEANIC were levied upon by the sheriffand later sold
requiring the taxpayer or any person having possession or
at public auction. control ofthe personal property to sign a receipt covering
the property distrained and obligate himselfto preserve the
The Commissioner of Internal Revenue filed a motion with the same intact and unaltered and not to dispose of the same
Labor Arbiter to annul the sale and enjoin the sherifffrom disposing in any manner whatever, without the express authority
the proceeds thereof. The employees of OCEANIC opposed the motion of the Commissioner (Sec. 206, NIRC). It is a preventive
contending that Article 110 ofthe Labor Code gives first preference remedy to forestall hiding or possible dissipation of the
to claims for unpaid wages. Resolve the motion. Explain. taxpayer's assets when tax delinquency takes place.
lt64 l-rfis
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"Garnishment" refers to a warning t<l a person in whose hands Bar Question (2004, 1998)
the effects ofanother are attached, not to pay the money or delivcr the
property or allow withdrawal of deposits of the defendant in his hands Is the BIR authorized to collect estate tax deficiencies by the
(seeReliance Procorna, Inc. a. Phil-Asia Tobacco Corporation, summary remedy of levy upon and sale of real properties of the
57 SCRA 370). decedent without first securing the authority of the court sitting in
probate court over the supposed will ofthe decedent?
Levy of real property
Suggested answer:
Levy is a remedy whereby the collection of delinquent taxes is
Yes. The BIR is authorizedto collect estate tan deficiency through
enforced on the real property belonging to the delinquent taxpayer.
the summary remedy of leuying upon and sale of real properties of a
Levy shall be effected by writing upon an authenticated certificate
decedent, without the cognition. q.nd authority of the court sitting in
showing the name of the taxpayer and the amounts of the tax and
probate ouer the supposed will ofthe deceased, because the collection of
penalty due, a description of the property upon which levy is made. At
estate tax is executiue in character. As such, the estate tox is exempted
the same time, written notice of the levy shall be mailed to or served
upon the Register of Deeds of the province or city where the property frorn the application of the statute of non-claims, and this is justified
by the necessity of gouernment funding, immortalized in the mosim
is located and upon the delinquent taxpayer, or ifhe be absent from
that taxes are the lifeblood of the gouernment (Marcos II a. CA and.
the Philippines, to his agent or the manager of the business in respect
to which the liability arose, or if there be none, to the occupant of the
crR,273 SCRA 47).
property in question (Sec. 207, NIRC).
Bar Question (1998)
The remedy by distraint ofpersonal property and levy on realty
may be repeated if necessary, until the full amount due, including all Is the BIR authorized to issue a warrant of garnishment against
expenses, is collected (Sec. 217, NIRC). The reason for this provision the bank account ofa taxpayer despite the pendency ofhis protest
was succinctly explained by the court as follows: If a full discharge of against the assessment with the BIR or appeal with the Court of Tax
the tax liability is to be the result of the distraint and levy, this would Appeals?
permit a clever taxpayer who is able to conceal most of the valuable
part ofhis property from the revenue officers to escape payment of Suggested answer:
his tax liability, by sacrificing an insignificant portion of his holdings The BIR is authorized to issue a warrant of garnishment against
(Castro u. Collector,6 SCRA 886).
the banh account ofa taxpayer despite the pendency ofprotest (Yabes
Distraint and leay proceedings are aalid,Iy begun or u. Flnjo, 15 SCRA 278). Nowhere in the Tox Code is the Commissioner
con.menced, by the issuance of the toanrant and seruiee thereof required to rule first ort the protest before he can institute collection
on the taxpayer. - Under Section 223(c) of the Tax Code, it is not proceedings on the tax assessed. The legislatiue policy is to giue the
essential that the warrant be fully executed so that it can suspend Commissioner much latitude in the speedy and prompt collection of
the running of the statute of limitations on the collection of the taxes because it is in tq.xation that the Gouernment depends to obtain
tax. It is enough that the proceedings have validly begun and that the means to carry on its operations (Republic u. Lim Tian Teng
their execution has not been suspended by reason ofthe voluntary Sons, 16 SCRA 584).
desistance of the CIR. Jurisprudence establishes that distraint and The Commissioner is not authorized to issue the warrant of
levy proceedings are validly begun or commenced by the issuance of the garnishment during the pendency of appeal with the Court of Tax
warrant and seryice thereof on the taxpayer (BPI u. Commissioner, Appeals because the assessment is not yet fi.nal and unappealable.
G.R. No. 739736, October 77,2OO5).
56f; It.l:vtt,twl,:tr ot t'l',lx,t l t,,l 'l',rx ll,t,:mt,:Dtt,:s 5() /
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Sale of property and penalties so duo rrnd the time and place of sale, the name of the
taxpayer against whom taxes are levied, and a short description of
The Revenue District Officer or his duly authorized representativc the property to be sold. At any time before the day fixed for the sale,
shall, upon recommendation of the Commissioner, forthwith cause a the taxpayer may discontinue all proceedings by payrng the taxes,
notification to be exhibited in not less than two public places in the penalties and interest. Ifhe does not do so, the sale shall proceed and
municipality or city where the distraint is made, specifying the time shall be held either at the main entrance of the municipal building or
and place of sale and the articles distrained. The time of sale shall city hall, or on the premises to be sold, as the officer conducting the
not be less than twenty days after notice to the owner or possessor of proceedings shall determine and as the notice of sale shall specify
the property and the publication or posting of such notice. One place (Sec.213, NIRC).
for the posting of such notice shall be at the Office of the Mayor of
the city or municipality in which the property is distrained. Forfeiture
At the time and place fixed in such notice, the said revenue officer Forfeiture of property for want of bid.d.er. - In case there is
shall sell the goods, chattels, or effects, or other personal property, no bidder for the real property in the public sale or if the amount of
including stocks and other securities so distrained, at public auction to the highest bid is insufficient to pay the taxes, penalties and costs, the
the highest bidder for cash, or with the approval of the Commissioner, property shall be declared forfeited to the Government. The Register
through duly licensed commodity or stock exchanges. of Deeds concerned shall, upon registration of the declaration for
In the case of stocks and other securities, the officer making the forfeiture, transfer the title ofthe property to the Government without
sale shall execute a bill of sale which he shall deliver to the buyer, the necessity of an order from a competent court.
and a copy thereoffurnished the corporation, company or association Within one year from the date of such forfeiture, the taxpayer or
which issued the stocks or other securities. Upon receipt of the copy anyone for him, may redeem said property by paying the full amount
of the bill of sale, the corporation, company or association shall make oftaxes, penalties, interests and costs ofsale, but ifthe property is
the corresponding entry in its books, transfer the stocks or other not thus redeemed, the forfeiture shall become absolute (Sec. 215,
securities sold in the name of the buyer, and issue, if required to do NIRC).
so, the corresponding certificates of stock or other securities.
Any residue over and above what is required to pay the entire Gompromise and abatement
claim, including expenses, shall be returned to the owner of the Cornprornise
property sold. The expenses chargeable upon each seizure and sale
shall embrace only the actual expenses ofseizure and preservation The Commissioner may compromise any national internal
of the property pending the sale, and no charge shall be imposed for revenue tax when (a) a reasonable doubt as to the validity of the
the services ofthe local internal revenue officer or his deputy (Sec. claim against the taxpayer exists, or (b) the financial position ofthe
209, NIRC). taxpayer demonstrates a clear inability to pay the assessed tax.
Within twenty days after levy, the officer conducting the The compromise settlement of any tax liability shall be subject
proceedings shall proceed to advertise the property or a usable to the following minimum amounts:
portion thereof as may be necessary to satisfy the claim and cost of 1. For cases of ftnancial ineapacity , a minimum
sale; and such advertisement shall cover a period of at least thirty compromise rate equivalent to l07o of the basic tax
days. It shall be effectuated by posting a notice at the main entrance assessed; and
of the municipal building or city hall and in a public and conspicuous
place in the barrio or district in which the real estate lies and by 2. For other cases, a minimum compromise rate equivalent
publication once a week for three (3) weeks in a newspaper of general to 407o ofthe basic tax assessed.
circulation in the municipality or city where the property is located. Where the basic tax involved exceeds F1,000,000 or where the
The advertisement shall contain a statement of the amount of taxes settlement offered is less than the prescribed minimum rates, the
568 lil,rvrt,:wt,ttr on 'l',txn't tott 'l-rfi9
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compromise shall be subject to the approval of the National Evaluation e. Cascs whcrc linal rcports of reinvestigation or reconsi-
Board which shall be composed of the Commissioner and the Deputy deration have been issued resulting in the reduction of
Commissioners. the original assessment agreed to by the taxpayer when
he signed the required agreement form.
All criminal violations may be compromised, except (a) those
already filed in court, or (b) those involving fraud (Sec. 204[A],
Suggested answer:
NIRC).
The taxpayer's offer to compromise shall not be considered,
a. Delinquent q.ccounts may be compromised, if either of the
two conditions is present: (1) the assessment is of doubtful
unless and until he waives in writing his privilege under R.A. 1405 or
ualidity, or (2) the financial position of the taxpayer
under other general or special laws, and such waiver shall constitute
demonstrates a clear inability to pay the tox (Sec,204[A],
the authority of the Commissioner to inquire into his bank deposits
NIRC; Sec.2, Reu. Regs. No.30-2002);
(Sec.6[F], NIRC).
Should the BIR formally accept the offer of compromise based
b. These may be compromised, prouided that it is premised
upon doubtful ualidity of the q.ssessment or financial
on doubtful validity of the assessment made by the taxpayer, the
incapacity to pay;
remainingbasic tax (i.e.,607o ofthe basic tax) plus aII the surcharges
and deficiency interests shall be deemed waived and cancelled. In the c. These may not be compromised, so that the totcpayer may not
case of offer to compromise based on financial incapacity, if accepted profit from his fraud, thereby discouraging its commission;
by the CIR, the remaining 9OVo of thebasic tax plus all penalties shall
be waived.
d. These may not be comprornised in order that the taxpayer
will not profit from his criminal acts;
Effective after 15 days from publication in a newspaper of
general circulation ofRevenue Regulations No.9-2013 dated May e. Cases where final reports ofreinuestigation or reconsideration
haue been issued resulting in the reduction of the original
10, 2013, all decisions of the National Evaluation Board, gxanting
assessment agreed to by the taxpayer when he signed the
request of taxpayer to compromise, shall have the concurrence of the
required agreement form, cannot be compromised. By giuing
Commissioner of Internal Revenue. The compromise offer shall be
his conformity to the reuised assessment, the taxpayer
paid first by the taxpayer upon filing ofthe application for compromise
admits the ualidity of the assessment and his capacity to
settlement. No application for compromise shall be processed without
pay the same (Sec.2, Reu. Regs. No.30-2002).
the full settlement of the offered amount. In case of disapproval, the
amount paid upon filing shall be deducted from the total outstanding
tax liabilities. Bar Question (2004)
After the tax assessment had become final and unappealable,
Bar Question (2006) the Commissioner of Internal Revenue initiated the filing of a civil
State and discuss briefly whether the following cases may be action to collect the tax due from NX. After several years, a decision
compromised or may not be compromised: was tendered by the court ordering NX to pay the tax due plus
penalties and surcharges. The judgment became final and executory,
a. Delinquentaccounts; but attempts to execute the judgment award were futile.
b. Cases under administrative protest, afber issuance of the Subsequently, NX offered the Commissioner a compromise
final assessment notice to the taxpayer, which are still settlement of 50Vo of the judgment award, representing that this
pending; amount is all he could really afford. Does the Commissioner have the
power to accept the compromise offer? Is it legal and ethical? Explain
c. Criminal tax fraud cases;
briefly.
d. Criminal violations already filed in court;
570 57
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Suggested answer: 1) 'I'he tax or &ny portion thereof appears to be unjustly or


excessiuely assessed; or
Yes. The Commissioner has the power to accept the offer
of compromise, if the financial position of the taxpayer clearly 2) The administration and collection costs inuolued do not
dernonstrates a clear inability to pay the tox (Sec. 204, NIBC). justify the collection of the amount due (Sec. 204[8], NIRC).
As represented by NX in his offer, only 507o of the judgment Bar Question (1998)
award is all he could really afford. This is an offer for cornpromise
based on financial incapacity which the Commissiorrcr shall not accept, An Information was filed in court for willful non-payment of
unless accompanied by a waiuer of the secrecy of bank deposits (Sec. income tax, the assessment of which has become final. The accused,
6[F], NIRC). The waiuer will enable the Cornmissioner to ascertain through counsel, presented a motion that he be allowed to compromise
the financial position of the ta.xpayer, although the inquiry need not his tax liability subject of the information. The prosecutor indicated
be limited only to the bank deposits of the taspayer but also as to his his conformity to the motion. Is this procedure correct?
financial position as reflected in his financial statements or other
records upon which his property holdings ca.n be ascertained. Suggested answer:
If
indeed the financial position of NX as determined by the No. Crirninal uiolations, if already filed in court, may not be
Commissioner demonstrates a clear inability to pay the tax, the compromised (Sec. 204[8], NIRC). Furthermore, the payment of the
acceptance of the offer is legal and ethical because the ground upon tq.x due after apprehension shall not constitute a ualid defense in
which the compromise utas anchored is within the context of the law any prosecution for uiolation ofany prouisions ofthe Tax Code (Sec.
andthe rate of com.promise is wellwithin andfar exceeds the minimum 247[a], NIRC). Finally, there is no showing that the prosecutor in the
prescribed by law, which is only 107o of the bq.sic ta.x, assessed. problem is a legal officer of the Bureau of Internal Reuenue to whom
the conduct of crimirual actions is lodged by the Tose Code.
Bar Question (2000) Bar Question (1998)
Under what conditions may the Commissioner of Internal May the Commissioner of the Internal Revenue compromise the
Revenue be authorized to:
payment of withholding tax (tax deducted and withheld at source)
a) Compromise the payment of any internal revenue tax? where the financial position of the taxpayer demonstrates a clear
inability to pay the assessed tax?
Suggested answer:
Suggested answer:
The Commissioner of Internal Reuenue maybe authorized to
No. Ataxpayer who is constituted as withholding agent who hqs
compromise the payment of any internal reuenue ta,x, where:
deducted and withheld at source the tax on the income payment made
1) A reasonable doubt as to the ualidity of the clairn against by him holds the taxes as trust funds for the gouernment (Sec. 58[D],
the taxpayer exists; or NIRC) and is obligated to remit them to the BIR. The subsequent in-
2) The fi,nancial position of the ta.xpayer demonstrates a clear ability of the withholding agent to pay I remit the tax withheld is not a
ground for compromise; becq.use the withholding tax is not a to.x upon
inability to pay the assessed ta.tc.
the withholding agent but it is only a procedure for the collection of a
b) Abate or cancel a tax liability? tax.

Power of Commissioner to comprotnise is nat absolute, - In


Suggested answer: one case, a fine was imposed on the original appraisement of certain
The Commissioner of Internal Reuenue may abate or cancel a jewelry. This was questioned by the taxpayer in the CTA, but the
ta"x liability when: governmentwon. The decisionbecame final for failure ofthe taxpayer
r;72 Itt,rvt t,:wt,:tr oN'l'Axn'r'ror.r 'l'nx ltt,:trlt,;t rtt,:s fr73
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to appeal the same. However, the Commissioner of Customs, with As utunsel of Mirutl'ta, I will introduce euidence that the
the approval of the Department of Finance, subsequently ordered a income payment was reported by the payee and the income
reappraisal of the article in question and entered into a compromise. tax wq.s paid thereon in 1997 so that my client may be
The Supreme Court ruled that the compromise was improper because allowed to pay only the ciuil penalties for non-withholding
the Commissioner acted as a mere agent of the Government, the pursuant to Reuenue Memorandum. Order No. 38-83.
Commissioner of Customs, is not authorized to accept anything less
than what is adjudicated in favor of the Government. By virtue of B . AII criminal uiolations of the Tux Code may be compromised
except those already fi.Ied in court or those inuoluing fraud
such final judgmenl the Government had already acquired a vested
(9ec.204, NIRC)
righL (Roaero u. Arnparo,9T Phil.228).
Compromise agreement entered into without authority is not Accordingly, if Minolta makes a uoluntary offer to
void, but unenforceable and may be ratified (Lim Pin u. Liao Tan, cornpromise the criminal uiolations for non-fi'Iing and non-
L15 SCRA 290). But a compromise agreement entered into by payment of taxes for the year 1998, the Commissioner tlay
government lawyer without authority of the Board of Directors is accept the offer which is allowed by law. Howeuer, if it can
be established that a tax has not been paid as a consequence
null and void (Republic u. Plan, 116 SCRA 7O).
of non-fi.Iing of the return, the ciuil liability for taxes may
be dealt with independently of the criminal uiolations- The
Bar Question (2002) compromise settlement of the criminal uiolations will n'ot
Minolta Philippines, Inc. (Minolta) is an EPZA-registered relieue the taxpayer from its ciuil liability. But the ciuil
enterprise enjoying preferential tax treatment under a special law. Iiabitity for taxes may also be compromised if the financial
After investigation of its withholding tax returns for the taxable position of the taxpayer demonstrates a clect'r inability to
year L997 , the BIR issued a deficiency withholding tax assessment pay the tax.
in the amount of F150,000.00. On May 15, 1999, because of financial
difficulty, the deficiency tax remained unpaid, as a result of which Abatement
the assessmentbecame final and executory. The BIR also found that,
When the tax or any portion thereof appears to be unjustly or
in violation of the provisions of the NIRC, Minolta did not file its excessively assessed, or when the administration and collection costs
final corporate income tax return for the taxable year 1998, because involved do not justify the collection of the amount due, the tax may
it allegedly incurred net loss from its operations. On May 17,2002, be abated ; i.e., l]ne entire tax liability of the taxpayer is cancelled (Sec.
the BIR filed with the RTC an action for collection of the deficiency
204[B], 1997 Tax Code).
withholding tax for 1997.
The power to compromise or abate shall not be delegated by the
A. Will the BIR's action for collection prosper? As counsel of Commissioner, except in the following cases: (a) assessments issued
Minolta, what action will you take? Explain. by regional offices involving basic taxes of F500,000 or less; and (b)
B. May criminal violations of the Tax Code be compromised? minor criminal violations. These cases may be compromised by a
If Minolta makes a voluntary offer to compromise the regional evaluation board (Sec. 7, NIRC).
criminal violations for non-filing and non-payment oftaxes
for the year L998, may the Commissioner accept the offer? Penalties and fines
Explain.
Compromise and compromise penalty compared:
Suggested answer:
Similarities:
A. Yes. BIR's action for collection will prosper because the
1. They both imply mutual agreement. A compromise penalty
assessment is already fi.nal and executory. It can already
be enforced through judicial action.
cannot be imposed in the absence of a showing that the
574 Itr,;vr r,:wr,:rr oN'l'nxn'r'roru 'l'nx llt,:rur;trtt,;s 575
Arl rrr i rr rnl.rrrl.ivc llcnredies ol' Government

taxpayer consented thereto. If the Commissioner's offer of corporation. In addition to the civil penalties provided for under
compromise is rejected by the taxpayer, the Commissioner the Tax Code, a compromise penalty was imposed for violation of
cannot enforce it but he may file a criminal action against the withholding tax provisions. May the Commissioner of Internal
the taxpayer for the tax violation (Commissioner a. Revenue legally enforce the collection of compromise penalty?
Fireman's Fund.Insurance Co., 748 SCRA 315).
Suggested answer:
2. The Commissioner has no power to impose and collect
the compromise penalties in the absence of a compromise No. There is no showing that the comprornise penalty was
agreement validly entered into between the taxpayer imposed by the Commissioner of Internal Reuenue withthe agreement
and the Commissioner (Mithi ng B@yan Cooperatiue and conformity of the taxpayer (Wond'er Mechanical Engineering
Marheting Association u. Araneta, 2 SCRA 879). Corpora,tion a. Court of Ta* Appeals, et al., 64 SCRA 555).
However, where in an appeal to the CTA, the taxpayer has
expressed his willingness to pay compromise penalties,
said amounts may be collected as part of the judgment
(Commissioner u. Guerrero, 19 SCRA 205).
3. The right to enter into an agreement, including the amount
to be paid in settlement of a tax violation, is discretionary
to the Commissioner or the taxpayer.

Distinctionsz
1. Definition and nature of uiolation being comprontised:
A compromise penalty is an amount of money paid
by a taxpayer to compromise a tax violation that he
has committed, which may be the subject of criminal
prosecution, while a compromise is an amount of money
paid by the taxpayer to settle his civil liability for tax
assessed by the government.
2. Basis of amount paid: In compromise, the basis of the
amount paid is the basic tax assessed; in compromise
penalty, the basis is the gross sales or receipts during the
year or the tax due.
3. Minimum amount prescribed: In compromise, the law
sets a limit as to the amount that may be accepted by the
government, depending on the legal grounds used by the
taxpayer; in compromise penalty, the amount set depends
on the nature of the tax violation and the minimum amount
is generally not less than F1,000.

Bar Question (2000)


A domestic corporation failed to withhold and remit the tax on
income received from Philippine sources by a non-resident foreign
'l',rx llt,:mt,:t rl t,:s 577
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'Iax Appeals, the rcspondent is the Commissioner of Internal Revenue'


not the Republic of the Philippines.

CIIAPTER }CffI Jurisdiction over civil actions


Civil action is available to and initiated by the government only
JUDICIAL REMEDIES OF GOVERNMENT when a tax liability becomes delinquent and collectible. Effective
April, 2004, jurisdiction over civil actions for the collection of
delinquent taxes with basic tax amounting to Fl million or more
The main function of the BIR is to raise revenues for the
shall be filed with the CTA. The RTC retains jurisdiction over basic
operations of government. To effect collection of delinquent taxes,
tax in the amounts up to less than Fl million.
the BIR may resort to judicial actions under the Tax Code. Civil
and criminal actions and proceedings instituted in behalf of the
Government under the authority of this Code or other laws enforced When collectibility of tax liability arises
by the BIR shall be brought in the name of the Government of the 1. Self-assessed. tax shoun in the return was not paid. within
Philippines and shall be conducted by legal officers of the BIR, but the d.ate prescribed. by law
no civil or criminal actions for recovery of taxes or the enforcement
of any fine, penalty or forfeiture under this Code shall be filed in Internal revenue taxes are self-assessing and no further
court without the approval of the Commissioner (Sec. 220, NIRC). assessment by the government is required to create the tax liability,
where the taxpayer merely filed his tax return showing an amount
No court shall have the authority to grant an injunction to of tax due, without paying the same or payrng only a portion thereof.
restrain the collection of any national internal revenue tax, fee or In such a case, the taxpayer is immediately considered as delinquent
charge imposed by the Tax Code (Sec. 218, NIRC). However, the with respect to the unpaid amount of tax.
Court of Tax Appeals is given the power to restrain the collection of
national internal revenue taxes, subject to certain conditions (Sec. 7, Bar Question (1998)
R.A. 1125).
When is an internal revenue tax considered delinquent?
Givil action
Suggested answer:
There are two (2) ways by which the civil tax liability of a
taxpayer is enforced by the government through civil actions. These An internal reuenue tax is considered delinquen't when it
are: (1) by filing a civil case for the collection of a sum of money with is unpaid after the lapse of the last day prescribed by law for its
the proper regular cotrt (i.e., Municipal Court or Regional Trial payment. Lihewise, it could also be considered as delinquent where
Court), if basic tax assessed is less than Fl million, or with the CTA, an assesstrlent for defi.ciency tax has become final and the taxpayer
where the basic tax assessed amounts to F1 million or more; and (2) has not paid it within the period giuen in the notice of assessment.
by filing an answer to the petition for review filed by the taxpayer A"d.elinquent accouttt" refers to the amount of tax due from
with the Court of Tax Appeals. a taxpayer who failed to pay the same within the time prescribed for
When the Commissioner of Internal Revenue files a civil action its payment arising from (a) a self-assessed tax, whether or not a tax
for the collection of taxes, it is the Republic of the Philippines that is return was filed, or (b) a deficiency assessment issued by the BIR,
the party plaintiff, not the Commissioner of Internal Revenue. But which has become final and executory. Where no return was filed,
when it is the taxpayer that files a petition for review in the Court of the taxpayer shall be considered delinquent as of the time the tax on
such return was due, and in availing of the compromise, a tax return
shall be fiIed as a basis for computing the amount of compromise to
576
578 It l:vtt,:wt,:tr r lN'l'rrxrvlror.r 'l',rr l(t,:ltt,:t rtl,rs 579
I rrrll'url llr,ttrrrlrcs rtl' ( lovt'rtttttcttl

be paid (Reu. Regs. No. 17-86; PNOC u. CA, et al., and. PNB a. CA, ruled that the request tirr reconsideration cannot be considered as a
et al., G..R. Nos. 109976 and. 772800, April26,2OO5). protest against the assessment. The failure of the heirs to substantiate
their claim against the assessment due to the non-submission of their
2. Final @ssessnlent is not protested. administratiaely within position paper justified the Commissioner's action in collecting the
3O d.ays from d.ate of receipt tax in the court settlement proceedings (Dayrit a. Cruz, 165 SCRA
The assessment may be protested administratively by filing 571).
a request for reconsideration or reinvestigation within 30 days
from receipt of the assessment in such form and manner as may be Bar Question (1991)
prescribed by implementing rules and regulations. Otherwise, the Antonio Cruz was appointed by the Regional Trial Court as
assessment shall become final (Sec. 229, NIRC). The filing of the administrator in the testate proceedings for the settlement of the
protest within the 30-day period is mandatory and is not extendible, estate of his deceased father. On12 February 1987 the Commissioner
and if the BIR imposes certain conditions for the approval of such of Internal Revenue issued a deficiency estate tax assessment for
protest, said conditions must be satisfied with by the taxpayer. the estate. The notice of deficiency assessment was received by the
Failure to question o;ssesan crlt served. upon the d.eced.enf,s Administrator on 19 February 1987. In his letter to the Commissioner,
heirs. - Apart from failing to file the required estate tax return, dated 21 February 1987, which was received by the latter's office two
petitioner and the other Marcos heirs failed to question the (2) days later, the Administrator requested for a reconsideration of
assessments served on them as heirs of the late President Ferdinand the assessment on the ground that the same is contrary to law and is
Marcos, thereby allowing said assessments to lapse into finality. not supported by sufficient evidence. He also requested for a period of
Said assessments having become final and executory, the same may fifteen (15) days within which to submit the estate's position paper.
be collected by summary remedy of distraint or levy (Marcos II v. On 4 August 1988, not having received the promised position
Court ofAppeals,273 SCRA 47). paper, the Commissioner filed with the Court a motion for allowance
ofclaim and for an order ofpayment ofestate taxes, praying therein
3. Non-compliance with the cond.ition laid. in the approual that the administrator be required to pay the BIR the aforementioned
ofprotest deficiency tax. The Administrator opposed the motion alleging that
The protest letter filed by the taxpayer or his authorized agent, by reasons of the pendency of his request for reconsideration the
provided it is not considered as pro forma, is generally approved by the deficiency assessment has not become final and executory and,
Commissioner. In some instances, the Commissioner imposes certain therefore, the absence of a decision on the disputed assessment is a
conditions or requires the filing of position papers in granting the bar against collection of taxes. He further argued that it is the Court
request for reinvestigation or reconsideration, in order to adequately of Tax Appeals, and not the Regional Trial Court, which has exclusive
evaluate the validity of the arguments and documents mentioned in jurisdiction over the claim.
the protest letter. Thus, failure of the taxpayer to comply with such Resolve the motion and issues raised.
condition within the time granted him is construed as if no protest
was filed by him. Suggested answer:
Estate and inheritance taxes were assessed against the estate Euidently, the request for reconsideration referred to did not
of spouses Marba Teodoro and Don Toribio Teodoro. The heirs then express or specify the grounds therefor. Arequest for reconsideration
filed a request for reconsideration ofthe assessments and asked that in the tenor stated in the problem is insufficient, not being
they be given 30 days within which to submit their position paper in substantiated, to stop the running of the 30-day period utithin
support of their claim. The position paper was not submitted. When which the assessment may be disputed (Dayrit a. Cruz, G.,R. No.
the Government sought to collect the tax liabilities in the settlement 39979, September 26, 1988). The failure of the taxpayer to submit
proceedings on the estate, the heirs interposed the defense that the the promised position pqper within the said 30-day period had the
assessments have not become final and executory. The Supreme Court effect of rendering the assessment final and executory. In addition,
580 Itt';vt t,:wt,:tr oN'l'nxn'rroru 5rl I
rrrrrrr.rrrr ,;l;l,l,,'illll,ri';l,v.r.r'.rrr.
the pendency of a decision oru a disputed qssessment does not bar Collection of tur through the filing of the BIR'I a.nswer
the collection of the taxes, and no injunction mcry be issued. by any in the petition fbr reuiew fiIed. by the taxpayer with the CTA.
court (except by the court of rax Appeals as an incident to a timely
petition for reuiew). In the absence of a petition for reuiew with the - The fact that no civil action to collect the taxpayer's tax liability
was filed by the Government (in the RTC) is no ground for claiming
court of rax Appeals which may be brought by a taxpayer within J0 that the right of the Government to collect said liability had already
days from the receipt of the final decision of the commissioner, the prescribed. The Supreme Court ruled that prescription had not
court of rax Appeals has no jurisdiction to take cognizance thereof set in inasmuch as the Government's answer in the CTA was filed
(See Sec. 11, R.A. 1125). Premises considered, the action taken by
well within the prescriptive period prescribed by law (Fernand'ez
the commissioner with the Regional rriol court was appropriate Hermanoq Inc. u. Commissionerr 2g SCRA 552).In other words,
and in accordance with law. the answer filed by the government in the Court of Tax Appeals was
The taxpayefs failure to dispute the ussessment effectiuely by tantamount to the filing of a civil action for collection in the regular
complying with the conditions loid downby the BIR, such as specr.fyins court. Incidentally, when action for collection is filed in the regular
under oath the grounds of his protest, paying one-half of the crmount courts, prescription is tolled.
sssessed and putting up a bond for the balonce, prouid,ed. a legal basis
for the Gouernment to collect the taxpayer's tiability by ord,iiary ciuit When to go to court?
action (Republic u. Led.esnta., G.R. No. L-IBZ1|, FebruanTt 2g, As a general rule, the BIR can file a civil action for the collection
1967). of a tax that has become delinquent or collectible within five (5) years
from the date of assessment. Thus, in the leading case of Republic u.
4. Failure to file a timely appeal to the CTA on the Lim Tiq.n Teng Sons (16 SCRA 584), Lhe Supreme Court held that
final d.ecision of the Commissioner or his o.uthorized nowhere in the Tax Code is the Commissioner required to rule first
representative on the disputed assessntent. Taxpayer filed on the taxpayer's request for reinvestigation before he can go to
with the BIR a request for reinvestigation after -he was assessed court for the purpose ofcollecting the tax assessed. The legislative
deficiency income tax. subsequently, a letter-decision demanding policy is to give the Commissioner much latitude in the speedy
payment was issued by BIR. Since the taxpayer did not appeal, and prompt collection of taxes because it is on taxation that the
a civil action for collection was filed by the Government. The Government depends to obtain the means to carry on its operations.
court ruled that the taxpayer's failure to appeal the decision to The Court further said that when the Commissioner did not reply to
the Court of Tax Appeals deprived him of the right to question the taxpayer's request for reconsideration and instead referred the
the Commissioner's authority to collect the tax within the case to the Solicitor General forjudicial collection, this was indicative
prescriptive period provided by law (Basa a. Republic, IBg of his decision against reinvestigation. Failure on the part of the
scRA34). taxpayer to fiIe the appeal to the CTA makes the final decision of the
Where the taxpayer failed to comply with a condition laid down Commissioner on the disputed assessment final and executory.
by the commissioner for the reinvestigation of the case and its failure Distraint and levy proceedings are ualidly begun or comrnenced
to appeal to the crA made the assessment final and executory, so that by the issuance of the warrant and seruice thereof on' the tonpayer.
if an action to collect the tax assessment is filed by the government in
the ordinary court, this is akin to an action to enforce a judgment such - Under Section 223(c) of the Tax Code, it is not essential that the
warrant be fully executed so that it can suspend the running of the
that no inquiry can be made thereon as to the merits of the original statute of limitations on the collection of the tax. It is enough that
case or the justness of the judgment relied apon
(Mambulao Lumber the proceedings have validly begun and that their execution has not
Co. a. Republic, 132 SCRA 1). TNOTE: A ciuil action to collect an been suspended by reason of the voluntary desistance of the CIR.
qssessment that hqs become
final and executory is now required, to be Jurisprudence establishes that distraint and levy proceedings are
filed with the crA under R.A. 9282, where the basic tar assessed, is validly begun or commenced by the issuance of the warrant and
Fl million or more.l service thereof on the taxpayer (BPI u. Cotnrnissioner, G.R. No.
739736, October 17, 2005).
582 Itltvtt,twt,:tt r lN'l'nxn'r'ror.r 583
,rrrrrit.r'r ,,:::I,ii:Ilii'iirvcr..r.'r
However, the filing of a civil action in the regular court (RTC) rendered against such parties because any such judgment would be
to collect a tax which was the subject of apending protest in the BIR an encroachment on the prerogative of the Commissioner to make
was a justifiable basis for the taxpayer to appeal to the CTA and to an assessment and would further violate the rule on due process and
move for a dismissal in the trial [regular] court of the Government,s the exhaustion of administrative remedies. Moreover, under Section
action to collect the tax liability under dispute (Yabes u. Ftojo, 175 7 of R.A. 1125, only the Commissioner of Internal Revenue and
SCRA278). the Commissioner of Customs may be sued before the Court of Tax
Another exception relates to an action to collect on the bonds, Appeals in appropriate cases (Gotannco & Sons a. Commissioner,
which is an action separate and distinct from an action to collect CTA Case No. 765, August 72, 7965).
taxes. Article 1144 of the civil code which provides that actions upon The stockholders of a corporation that has tax delinquency
a written contract must be brought within ten (10) years from the cannot be made liable for the obligations of the corporation. The
time the right of action accrues, finds a fitting application (Repubhc obligations ofthe corporation are not those ofthe stockholders, for it
a. Dorego, GR. No. L-76594, April 26, 1962).It appearing that is a basic rule that a corporation is vested by law with a personality
said bonds were executed on June 12 and2g,1946, the right of the separate and distinct from those of the persons composing it as well as
government to collect the amounts covered thereby, prescribed on from that of any other legal entity to which it may be related (Sunio
June 12 and29,1956. The complaint was filed on February 18, 1959. a. National Labor Relations Commission, 727 SCRA 390).Itis,
however, possible for stockholders to be held personally liable for the
Who approves the filing of civil action? unpaid tax liabilities of a defunct corporation as when the assets of
the corporation have passed into the hands ofits stockholders (Tan
No civil or criminal action for the recovery of taxes or the
Tiong Bio u. Cornmissioner, 100 Phil.86). Also, a stockholder who
enforcement of any fine, penalty or forfeiture under this Code shall
has unpaid subscriptions is liable for the debts of the corporation
be filed in court without the approval of the Commissioner (5ec.220, (Lumanlan u. Cura,59 Phil.746).
NIRC). However, a Regional Director may also approve the filing of
civil actions for collection of delinquent tax, if this power is expressly
delegated to him by the Commissioner under an appropriate revenue
Criminal actions
memorandum lor administrative] order on the matter (Republic a. A- Under the 1997 Tax Code
Hizon,320 SCRA 574).
Two common crimes punishable under the Tax Code which
Complaints in civil actions for the collection of delinquent taxes are filed by the BIR are as follows:
are required to be approved by the Solicitor General before they are
filed. However, BIR legal officers deputized as Special Attorneys and
1. Attempt to eaad.e or defeat tax. - Any person who
stationed outside Metro Manila may file verified complaints without
willfully attempts in any manner to evade or defeat
the approval of the Solicitor General, provided that the Solicitor any tax imposed under the Tax Code or the payment
thereof, in addition to other penalties provided by law,
General is furnished a copy of the complaint, and thereafter, the
upon conviction thereof, be punished. The conviction or
solicitor General files a notice of appearance in the court where the
action is filed. If the complaint is found to be improperly filed, a motion
acquittal obtained under this Section shall not be a bar
to the filing of a civil suit for the collection of taxes (Sec.
to dismiss is filed with the coarl(Repuhlic a.Domecillo, CA..-GR.
254, NIRC).
SPNo. 77676, Februany 9,7990).
To establish the existence of fraud, the following
Respondents in a civil action for the collection of tax requisites must be present and established by competent
evidence:
Parties who are not included in an assessment made by the
Commissioner of Internal Revenue cannot be made respondents in a. The end. to be achieued' - the objective is to pay
an appeal from a particular assessment, and no judgment can be an amount of tax that is less than that known by the
taxpayer to be legally due;
584 1il,:vt t,:wt,;tr or'r'l'nxn lror.r 'l'^\ ltr':Nr'r)1,;ri l-rUl-r
,lrrrlrlrrrl ltr,rrrcrlir,s ol'( lovt'rttntt'ttl

b. The accompanying state of mind,


- the state of ln Criminal Casc No. O-Ol5 (for failure to supply correct
mind is variously described as being evil, in bad faith, information), the elcments that must be established are: (a) the
deliberate and not accident, or willful; and accused is a person required under the Tax Code or by rules and
c. The oaert act d.one or schetne used. by the regulation to pay any tax, make a return, keep any record or supply
taxpayer, which must be tinged with some element of correct and accurate information; (b) the accused failed to supply
deceit, misrepresentation, trick, device, concealment
correct and accurate information at the time or times required by law
or dishonesty ("Fraud under Tax," Balter). or rules and regulations; and (c) such failure to supply information
is willful. The prosecution has already the first element. Regarding
2. Failure to file return, supply corcect and, accurate the second element, the accused filed his ITR for 2003 with RDO
informntiont pa! tar, withhold. and. rernit tax and. Calasiao, Pangasinan for his "Mendez Weight Less Center" located
refund. eficess taxes withheld on contpensation. at Dagupan City. However, it was discovered that there are several
-
Any person required under the Tax Code or by rules and other branches registered with the BIR under the name of the
regulations promulgated there under to pay any tax, make accused as the sole owner. Taking into consideration the bulk of
a return, keep any record, or supply correct and accurate circumstantial evidence proving the accused's ability to spend on the
information, who willfully fails to pay such tax, make previously mentioned expenditures and purchases during 2003, the
such return, keep such record, or supply such correct and accused earned substantial income during said year. These findings
accurate information, or withhold or remit taxes withheld, contradict the declaration made by the accused in the ITR he fiIed
or refund excess taxes withheld on compensation, at the that he suffered a net loss during the year. The accused also failed
time or times required by law or rules and regulations to file his ITRs for his income earned from the operation of the other
shall, in addition to other penalties provided by law, upon branches of his business for 2003. As to the third element, the accused
conviction thereof, be punished. is considered to have knowledge that he has the obligation to declare
and file ITR for taxes from all sources, and despite his knowledge, he
In Criminal Case No. 0-013 (for non-filing of tax return failed to file his ITR on his income from other businesses, making it
under Section 255 of the Tax Code), the elements that must be appear that his only source of income was from the operation of his
established are: (a) the accused was a person required to make or file branch in Dagupan City (People a. Mend.ez, Crim Case No.0-073'
a return; (b) the accused failed to make or file the return at the time January 5, 2077; People u. Wong Yan Tak, et al. [Pin Itl Pac
required by law; and (c) the failure to make or file the return was Martl, CTA Crim. Case No. O-090, October 17,2072).
willfirl. As to the first element, It has been established that the accused
is a resident Filipino citizen and that he is the sole proprietor of For failure of the State Prosecutor to submit the records of
"Mendez Body and Face Salon and Spa" in Quezon City. The accused preliminary investigation, the CTA dismissed the case without
prejudice (People a. Tambunting, Crim. Case No.0-200, May 77,
was earning income for 2001 to 2003 through the ad placements, the
vehicles registered in his name, and the numerous travels he took 2011).
in said years. As to the second element, he did not file his ITR with The accused, as President of Jadewell Parking Systems
RDO 39, South Quezon and there were no records of returns filed for Corporation, should at the very least have been aware of who is
said years as certified by the RDO. As to the third element, although authorized to sign Jadewell's income tax returns and other tax filings.
the accused did not earn any income in 2002, his purchases and Accused, as president and general manager ofJadewell, could not even
expenditures prove that he has knowledge that he has substantial explain how a certain Via Aguas was able to sign some tax returns
income, which was used on such, and his denial of income connotes and payment forms, despite the allegation of the defense that said
his attempt to conceal said Income by not filing his tax return. Also, Via Aguas is not an employee of Jadewell. Accused also submitted
the habitual failure to file his ITR for 2001 and 2002, despite findings into evidence Income tax returns which were unsigned. Knowing all
that he was earning income, then shows the willfulness of his non- these, accused did not even inquire as to whether Jadewell's income
filing for 2002. tax returns were being properly filed and whether the information
contained therein is true and accurate. This "deliberate avoidance"
586 lir,:vtt,:wr':rr or'l'nxn't'ror'r 'l'nr llt,:ll,lrrrr,:s 587

or "omission" on the part of the accused leads this court to concludo the court .,
""-,0,"1.;t,.ll.-.
;;"
;;,","1u""" totuuy isorated
that the supply of false and incorrect information was willful and from the rest of the world. They were not afforded means of
done with the knowledge of the accused (People a. Rogelio A. Tan, communication and transportation for the accused to have complied
CTA Crim. Case No. O-O64, June 27,2012). with the requirement of filing of return and payment of tax. From the
Any person who attempts to make it appear for any reason that foregoing facts, the forcible expulsion ofthe accused from the country
return or statement, or actually files a
he or another has in fact filed a was a form of disability similar to the exculpatory cause enumerated
return or statement and subsequently withdraws the same return or in the Tax Code. Accordingly, the court found the accused's failure
statement after securing the official receiving seal or stamp of receipt to file the return and to pay the estate tax due was not willful, and
of an internal revenue office where the same was actually filed shall, the prosecution's scanty evidence failed to establish the element of
upon conviction therefor, be punished (Sec. 255, NIRC). criminal intent (People u. Imeld.a R. Marcos, Crim. Case No.
q-9L24-38283, April 20, 20OZ ).
Although the accused may have failed to file the estate tax
return, the accused should be exempted from criminal liability as Important principles on criminal actions
she was prevented to do so due to an insuperable cause made by no
less than the government. From February 1986, the accused and her Some important principles in the collection of taxes through
family were forcibly placed on exile in Hawaii until November 1994, criminal action are:
when they returned to the country. The properties of President Marcos 1. No criminal action for the recovery of taxes or the
were sequestered and placed under the control and possession ofthe enforcement of any fine, penalty or forfeiture shall be
government after which forfeiture proceedings were filed before the filed in court without the approval of the Commissioner.l
Sandiganbayan Cuurl Why would the government require accused The Commissioner, through administrative issuances,
to comply with her obligation when it had taken away the means by has delegated this power to file criminal actions against
which she could comply with the requirements of the law. Logically, delinquent taxpayers to his subordinate officials in the
a legal heir who does not possess knowledge or information regarding legal service.
the total value ofthe estate ofthe decedent would not dare execute
a return under oath under pain of criminal liability. In the same For failure ofthe State Prosecutor to comply with the
manner, the accused cannot be expected or pay the tax due on the order to submit to the CTA the written approval issued by
estate of her deceased husband during the time she had no record in the CIR to file the case and the records of the preliminary
her possession and control with which she could assess the value of investigation, the case was dismissed, without prejudice
the gross estate and the deductions allowed thereto to determine the
(People a. Renne Samala, Crim. Case No. 0-274,
estate tax liability. September 1,20LL).

Under Section 83 of the Tax Code, the law presumes that 2. Criminal actions instituted on behalf of the Government
the person filing the return has personal knowledge regarding the under the authority of the Tax Code or other laws, enforced
extent and value ofthe properties ofthe decedent. Otherwise, the by the BIR, shall be brought in the name of the Government
requirement that the return must contain the itemized list of his of the Philippines and shall be conducted by the legal
assets under oath serves no purpose. In order to establish a willful officers of the BIR.2 However, it does not preclude the
violation of said provision, it is incumbent upon the prosecution to BIR from seeking the assistance ofexperienced litigators
prove that on 28 September 1998 and within 90 days thereafter, from the Department of Justice in the prosecution of the
the accused while in Hawaii personally knew the extent and total criminal action. Criminal cases are fiIed in the name of
value of the estate of the late president. At the time of the filing "People of the Philippines versus the accused taxpayer" in
of the criminal complaint against the accused, the latter was not order to differentiate it from civil cases for the collection of
yet in any way the executor or administrator of the estate and only
rSec. 220, NIRC.
after the filing of the complaint that the accused was designated by
'9Sec. 220, NIRC.
588 Itt,:vtt,:wt,:tt oN'l'Axn't'tttr"t
'l',rx ltr,;ut,rtrn:s l-ltl9
'l ttrltctttl ll,rrrr,rlits ol' ( iovtlrtttrtcnl,

delinquent taxes which are filed in the name of "Republic various laws defining the Office of the Solicitor General,
of the Philippines versus the delinquent taxpayer." beginning with Act No. 135, which took effect on 16 June
1901,, up to the present Administrative Code of 1987.
The Solicitor General is the principal law
officer and.legal d.efend.er ofthe governmcnt. - In its Aware that the dismissal of the petition could have
resolution dated 15 November 2000, the Supreme Court lasting effect on government revenues, the lifeblood of the
denied the Petition for Review onCertiorarl submitted by state, the Court heeds the plea ofpetitioner for a chance
the Commissioner of Internal Revenue for non-compliance to prosecute the case. Relative to the lack ofverification
with the procedural requirement of verification explicit required of petitions, the Supreme Court has held in a
in Section 4, Rule 7, of the 1997 Rules of Civil Procedure number of instances that such a deficiency can be excused
and, furthermore, because the appeal was not pursued by or dispensed with in meritorious cases, the defect being
the Solicitor General. When the motion for reconsideration neither jurisdictional nor always fatal. Verification is
fi.Ied by petitioner was likewise denied, petitioner filed the
mainly intended to ensure that the allegations in the
instant motion seehing an elucidation on the supposed pleadings are true and correct and not mere speculations
discrepancy between the pronouncement of this Court, on (Commissioner u. La Suerte Cigar and. Cigarette
one hand, that would require the participation of the Office Fa,ctory, G.E. No. 744942, July 4,2002).
of the Solicitor General and pertinent prouisions of the 3. The grant of a motion to dismiss a criminal case must be
Tax Code, on the other hand, that a.Ilow the legal officers based upon the judge's own personal conviction that there
of the BIR to institute and conduct uction in behalf of the was no case against the accused. The trial judge must
Gouernment under Section 220 of the Tax Reform Act of himself be convinced that there was indeed no sufficient
1997 (R.A.8424 effectiue I January 1998). evidence against the accused, and this conclusion can be
arrived at only after an assessment of the evidence in the
Ordered to comment, the Office of the Solicitor possession ofthe prosecution. What is imperatively required
General expressed the view that under Section 220 of is the trial judge's own assessment of such evidence, it not
the Tax Reform Act, amending Section 227 of the 1993 being sufficient for the valid and proper exercise ofjudicial
Tax Code, the primary responsibility to conduct civil and discretion merely to accept the prosecution's word for its
criminal actions lies with the legal officers of the BIR, supposed insufficiency of evidence.s
such that it is no longer necessary for BIR legal officers to
be deputized by the Office of the Solicitor General or the 4. The acquittal of the taxpayer in a criminal action under
Secretary of Justice before they can commence any action the Tax Code does not necessarily result in exoneration
under the 1997 Tax Code. of said taxpayer from his civil liability to pay taxes. In
ordinary criminal cases, the civil liability in incurred by
The institution or commencement before a proper reason of the offender's criminal act. Article 100 of the
court of civil and criminal actions and proceedings arising Revised Penal Code provides that every person criminally
under the Tax Reform Act which "shall be conducted by tegal liable for a felony is also civilly liable. In tax cases, the civil
officers of the Bureau of Internal Revenue" is not in dispute. liability to pay taxes arises not because ofany felony but
An appeal from such court, however, is not a matter of right. upon the taxpayer's failure to pay taxes. Criminal liability
Section 220 of lhe Tax Reform Act must not be understood in taxation arises as a result ofone's failure to pay his tax
as overturning the long established procedure before this liabilities. Moreover, while Section 73 of the old Tax Code
Court in requiring the Solicitor General to represent the has provided the imposition ofthe penalty ofimprisonment
interest of the Republic. This Court continues to maintain or fine, or both, for refusal or neglect to pay income tax or
that it is the Solicitor General who has the primary
responsibility to appear for the government in appellate 3Martinez v. Court of Appeals, cited in People v. Lucio Tan, et al., ibid.
proceedings. This pronouncement finds justification in the
590 1il,;vrr,:wr,;rr or.r'l'AxA'r,ror.t 'l'nx ltr,:vr,lrur,:s I'lg I

to make a return thereof, it failed to provide the collection 6undernol,"-ii)),,",';'::;,';:,',;;^)"',)),'),,,","aseimpriesatso


of said tax in criminal proceedings. The only civil remedies the fi.Iing ofthe ciuil cese. In fact, no reseruation for the filing
provided for the collection oftaxes are distraint or goods, of the ciuil cu.se may be made under this new law, unlike
chattels, etc., or by judicial action, which remedies are that of a felony under the Reuised Penal Cod,e. Accordingly,
generally exclusive in the absence ofa contrary intent from not only are the indiuiduals but also the corporations who
the legislator.a participated in the comm.ission of the offense are included
The acquitta.l of the taxpayer in a criminal in the inforrnation, although the corporations can only be
held ciuilly liable.
actionund.er the Ta.x Cod.e dnes not necessari$t result
in exoneration of said. ta,rpayer from his ciail liability filing of the criminal aetion implies the
The
to pay tares. - With regard to the tax proper, the filing also of the ciuil action, and' no reseraation
acquittal in the criminal case could not operate to discharge thereto may be mad.e. - As to the civil aspect, the same
the petitioner from the duty to pay the tax, which the law is deemed instituted with the criminal case, and shall be
requires to be paid, since that duty is imposed by statute jointly determined in the same proceedings by the CTA
prior to and independent of any attempt on the part of the pursuant to Section 7(bX1) of R.A. 9282. Corollarily, there
taxpayer to evade payrnent. The obligation to pay the tax is the rule that an accused acquitted of a criminal charge
is not a mere consequence of the felonious acts charged in may, nevertheless, be held in the same case civilly liable,
the information, nor is it a mere civil liability derived from where the facts established by the evidence so warrants.T
a crime that would be wiped out by the judicial declaration
that the criminal acts charged did not exist.5 Deficieney and. dclinquent ta'xes may be collzcted.
through ciuil or criminal actions. - Under existing
5. Under existing provision of law, the judgment in the provision of law, the remedies for the collection of national
criminal [tax] case shall not only impose the penalty but internal revenue taxes resulting from delinquency shall be
shall also order payment of the taxes subject ofthe criminal by civil or criminal action, and the judgment in the criminal
case as finally decided by the Commissioner.c [tax] case shall not only impose the penalty but shall also
order pa5rment of the taxes subject of the criminal case as
However, the Court said: "While the accused is guilty
beyond reasonable doubt for violation of Section 255 finally decided by the Commissioner.s Also, under R.A.
(Failure to fiIe return or to supply corcect information) , this 9282,the filing of the criminal case implies also the filing
of the civil case. In fact, no reservation for the filing of the
court will not impose the alleged tax liabilities, considering
that there was no assessment issued against the accused. civil case may be made under this new law, unlike that of
a felony under the Revised Penal Code. Accordingly, not
The computations presented by the prosecution to prove
civil liabilities may not be used because the BIR did not only are the individuals but also the corporations who
participated in the commission of the offense are included
follow the assessment procedures provided for in the Tax
Code, and the civil liabilities for the non-payment of tax
in the information, although the corporations can only be
may not be determined and imposed" (People u. Jose held civilly liable.
Mend.ez, CTA Crim. Case No.073 and 075, January T
5,2011). {iWful" n eans not merely aoluntary, but with a bod'
putpose; corntptly; a aoluntany act is a free, intelligent, and'
intentional act. - The assessment notices were issued by the
BIR to the taxpayer. The accused admitted during the hearing on
aRepublic v. Patanao, 20 SCRA 712.
sCastro v. Collector, G.R. No. L-L2174, Apil20,1962, cited in People v. Patanao, TPeople v. Estelita Delos Angeles, CTA Crim. Case No. 0-027, November 25,
20 scRA 712. 2009.
6Sec. 205, NIRC. 8Sec. 205, NIRC.
592 1il,:vtt,:wt,rtr oN'l'nrn'r'ror 'l'A\ ltr,:Mt,it)t t,ts 593
.l rrrl icrrr I ltr,rrrcrlics ol' ( bvcrnnrctrt.

December 7, 2000 the existence of the assessment notices, which former Second l)ivision, is tantamount to "deliberate ignorance" or
were proven to have been sent by registered mail. He also admitted "conscious avoidance."l2
that he received the Warrant of Distraint and Levy and Demand
Letter, demanding the payment of the deficiency taxes stated in the The Marcoses u)ere totally isolated. f-rom the rest of the
assessment notices. He admitted too that he ignored the demand
world.; they utere not afford.ed. the tneans of comrnunication
for the payment of the deficiency taxes. There is no other conclusion
and, transportation and, were not alloused. to receiue aiaitora
that can be drawn, except that the accused willfully did not pay his in Hawa.ii; thus, it was impossible for the accused. to haue
deficiency tax liabilities. The word"willful," ir: a statute, means "not
complied. uith the requirement of filing and. paying any of her
ta.x obligations.
merely voluntary, but with a bad purpose; in other words, corruptly." - The BIRfiled criminal complaints against Imelda
Marcos for failure to pay income tax; failure to give a written notice
A voluntary act is a free, intelligent, and intentional act. Furbhermore,
of death; failure to pay estate taxes; and failure to file income and
the accused admitted that he paid F50,000 to two BIR regional office
estate tax returns. Mrs. Marcos, in her counter-affidavit, stated that
employees to settle his tax liabilities without asking for any receipt.
This reveals a conscious effort to evade his 1993 tax liabilities. The the Marcoses were forcibly evicted from the country and brought to
act of bribing the BIR employees constitutes an overt act on the part
Hawaii in 1986, leaving most of their personal and real properties
under the possession and control ofthe government. Finding probable
of the accused that showed his deliberate and willful refusal to pay
cause, the DOJ filed information against Imelda Marcos.
his deficiency tax liabilities to the government.e
The accused)s mere reliance on the representations rnade
The court took iudicial notice of the forcible eviction of the
by his accountant, with deliberate refasal or aaoid.ance to Marcoses out of the country. The Marcoses were totally isolated
from the rest of the world. They were not afforded the means of
uerifu the contents of his income tax return and to inquire on
communication and transportation and were not allowed to receive
its authenticity constitutes'Toillful blind.ness."t0 "Wilfulness"
-
was characterized as a state of mind that may be inferred from
visitors in Hawaii. Thus, it was impossible for the accused to have
complied with the requirement of filing and paying any of her tax
the circumstances of the case. Thus, proof of willfulness may be,
and usually is, shown by circumstantial evidence alone. Another obligations. Likewise, even though she wanted to do so, their sudden
circumstance which convinced this Court to infer the presence of departure from the country prevented the accused from bringing
"willfulness" on the part of the accused not to file his income tax her personal record and documents with which she could assess
returns is his admission that he signed the income tax returns but or determine her income for the year 1985 to prepare her income
failed to read all the contents, and that he did not personally file his
tax return. Consequently, failing on the part of the prosecution to
substantiate through competent evidence that the accused willfully,
income tax returns, and did not verify from the BIR if his income tax
returns were actually filed.l1
unlawfully and feloniously neglected to file and pay her income tax
return for the year 1985, she could not be held criminally liable.
Petitioner's sole reliance on her husband to file their income tax
The court finds merit in the argument that the failure on the
returns is not a valid reason to justify her non-filing, considering that
part ofthe accused to file the estate tax return and to pay the estate
she knew from the start that she and her husband are mandated by
law to file their income tax returns. The petitioner testified that she
tax is not willful. Although the accused may have failed to comply
does not even know how much was her tax obligation, nor did she
with what is required by law, the accused should be exempted from
bother to inquire or determine the facts surrounding the filing of her
criminal liability as she was prevented to do due to an insuperable
cause made by no less than the government;i.e., as early as February,
income tax returns. Such neglect or omission, as aptly found by the
1986, accused and her family were forcibly placed on exile in Honolulu,
ePeople v. Mallari, CTA Crim. Case Nos. A-1 and A-2, September 4,20O6. Hawaii until November, 1991, when they returned to the country;
roPeople v. Benjamin Kintanar, CTA Crim. Case No. 0-030,
August 11, 2010. the properties of President Ferdinand Marcos were sequestered and
Appeal to CTA en banc was dismissed for having been filed out of time (Kintanar v.
People, CTAEB CrimNo.011, Resolutions dated February 16,20ll andJuly 27,2011).
lrPeople v. Benjamin Kintanar, CTA Crim. Case No. 0-031 and 0-032, September l2People v. Gloria Kintanar, CTA EB Crim No. 006; CTA Crim. Case Nos. P-033
27,2010. and 0-034, December 3, 2010.
594 llt,:vtt,:wr,:tr or.r'l'lxrvlroru 'l'nx ll.r,:nar,:rrrr,:s l-r9l-r
,l rrrl tctrrl l(.r,trrr,rlics o1 ( |rvcrttlrrtttl,

placed underthe control and possession of the govcrnnlclrt all,r:r wlrit:lr law, und il'Llro same be not known at the time, from the
forfeiture proceedings were filed before the Sundiganheyutt ( jourl. discovery thereof and the institution ofjudicial proceedings
As pointed out by the defense, why would the government requirc for its investigation and punishment. The prescription
accused to comply with her obligations when it had taken away the shall be interrupted when proceedings are instituted
very means by which she could comply with the requirements of against the guilty persons and shall begin to run again if
the law? Logically, a legal heir who does not possess a knowledge or the proceedings are dismissed for reasons not constituting
information regarding the total value of the estate of the decedent jeopardy. The term of prescription shall not run when
would not dare execute a return "under oath" under pain of criminal the offender is absent from the Philippines.ls However, a
liability. In the same manner, it is error to expect that the accused petition for reconsideration of an assessment may affect
would pay the tax due on the estate of her late husband during the the suspension ofthe prescriptive period for the collection
alleged time under which she was made to pay when she had no of taxes, but not the prescriptive period of a criminal action
records in her possession and control with which she could assess for violation of law.16
the gross value of the late president's estate at the time of his death
and the deductions allowed from the gross estate to determine the When the civil action arising out of a tax delinquency
estate tax liability. is extinguished by prescription, considering that under
the law, the Government has only five years from date
On the whole, underscoring the flnding of the Court that of assessment of tax within which to collect the tax, it is
accused's failure to comply with her tax obligation was due to causes still possible for such tue to be collected by criminal action
beyond her control, there is no doubt that the element of "wilfullness" inasmuch us actions of this kind prescribe only after the
for crimes involving the violation of the NIRC, as alleged in the lapse of fiue years counted from the discouery of the crime
information in these fi.ve criminal complaints, is lacking. In short, and,the institution of proceedings for its inuestigation and
the prosecutor's evidence did not pass the test of moral certainty that punishment.rT
there was "willful disobedience" on the part of the accused with the
intention to evade and defeat the payment of the tax.13 8. In a criminal action that was instituted against the
taxpayer for having filed a false and fraudulent return and
6. With regard to the tax proper, the acquittal in the criminal for failure to pay taxes, the subsequent satisfaction ofthe
case could not operate to discharge the petitioner from the tax liability by payment or prescription will not operate to
duty to pay the tax, which the law requires to be paid, since extinguish the taxpayer's criminal liability. Whether under
that duty is imposed by statute prior to and independent of the Tax Code or Revised Penal Code, the satisfaction of civil
any attempt on the part of the taxpayer to evade payment. liability is not one of the grounds for extinction of criminal
The obligation to pay the tax is not a mere consequence action.18
of the felonious acts charged in the information, nor is it
a mere civil liability derived from a crime that would be 9. Ifa person convicted for violation ofany ofthe provisions of
wiped out by the judicial declaration that the criminal acts the Tax Code has no property with which to meet the fine
charged did not exist.la imposed upon him by the court, or is unable to pay such
fine, he shall be subject to a subsidiary personal liability.te
7. All violations of any [penall provision of the Tax Code shall This provision corrected the lack ofauthority for the courts
prescribe after five (5) years. Prescription shall begin to
run from the day of the commission of the violation of the
15Sec.281, NIRC.
l3People v. Imelda Marcos, CTA Crim. Case Nos. l6People v. Ching Lak, G.R. No. L-10609, May 23, 1958.
Q-91-24382-89, 91-24388-89, 17Sec. 281, NIRC.
and.9I-24392, April 20, 2007.
laCastro v. Collector, G.R. No. L-12174, April 20, 1962, cited in rsPeople v. Tierra, 12 SCRA 666.
Republic v. rsSec. 280, NIRC; see People v. Balagtas, 105 Phil. 1362.
Patanao, 20 SCRA 712.
596 ll,r,;vr t,:wr,:tr or.r'l'nxn lror.r 'l'nx ltt,rr'rt,rtrtt,u.r 597
.lrrrlrcrrrl l{,rtrrrrrrlrcs ol' ( lovrlrnrrrcnt,

to impose subsidiary penalty in case of insolvcnc.y on thc 1997 'l'ax Oode, under lnfbrmation filed by the Assistant
part of the taxpayer, which he is sentenced to pa.y. City Prosecutor on March 3, 2009.
On September 6, 200I, a letter of authority for 2000
10. Any person convicted of a crime penalized by the Tax Codc
was issued by the BIR. The investigation led to the issuance
shall, in addition to being liable for the payment of the tax,
of PAN for deficiency income tax, EWT, and VAT. FAN and
shall be subject to the penalties imposed herein. Payment of'
demand letters were issued on June 28,2004. Fiestapack
the tax due after apprehension shall not constitute a valid
purportedly failed to pay despite the demand and until the
defense in any prosecution for violation ofany provision
above assessments became final; hence, this case.
ofthis Code or in any action for the forfeiture ofuntaxed
articles.20 Apparently, to be liable for the alleged crime, the
following elements have to be proven by the prosecution
11. If the Commissioner is convinced that the taxpayer is beyond reasonable doubt: (a) the corporation taxpayer
criminally liable, he should institute criminal proceedings is required to pay tax and it failed to pay such tax at
and not arbitrarily impose a penalty.2l However, if the BIR the time required by law; (b) TVpingco is the president,
official accepts the payment of compromise penalty offered general manager, branch manager, treasurer, officer-in-
by the taxpayer for violation ofa specific provision oflaw charge or employee responsible for the violation of the
imposing criminal liability, the criminal liability of the corporate taxpayer; and (c) Tlrpingco willfully fails to pay
taxpayer for such violation shall be obliterated. the corporate taxes.

t2. Taxes are the lifeblood of government and every citizen For 2000, Fiestapack filed its ITR reflecting a net
loss. The BIR conducted an investigation and disallowed
is duty bound to pay taxes and to pay taxes in the right
q.mount. Therefore, technicalities will haue to yield the loans payable and interest expense for failure to
present documentation, resulting in the deficiency tax
to the gouernntent interest of the nation to enforce its
assessments. Typingco disputed the purported receipt or
laws against tax euasion, especially where the amounts
knowledge of the assessment notices or, at least, receipt
inuolued are huge. Procedurctl rules should not be
applied with rigidity especially when to do so would thereofby Fiestapack and the propriety ofthere issuance
by invoking the ground of prescription. In the case of CIR
result in manifest failure ar miscarriage ofjustice. Ru.les
u. Metro Star Superama, the SC ruled on the importance
of procedure should not be applied in a uery technical
of issuing a PAN uis-d.-uis the validity of the assessments,
sense, for they are adopted to help secure, not ouercide,
which are the requirements of due process that must be
sub stantial j ustice.22
satisfied by the BIR. Section22S of the Tax Code requires
13. The guilt of the accused must be estqblished beyond
that the taxpayer must be informed in writing about the
factual and legal bases of the assessments; otherwise, the
reasonable doubt.
- Joseph Typingco is the alleged
President and authorized officer of Fiesta Pack, Inc. He was
assessments are void. The law imposes a substantive,
not merely a formal, requirement. To proceed heedlessly
charged for violation ofSection 255 (Failure to file return
and to supply correct information), in relation to Sections
with tax collection without first establishing a valid
assessment is evidently violative of the cardinal principle in
253(d) [Officers of corporation on whorn penalties may be
administrative investigations - that taxpayers should be
imposedl and 256 (Penalty liability of corporations) of the
able to present their case and adduce supporting evidence.

zoSec. 2b3(a), After a scrutiny of the parties allegations and pieces


NIRC.
zlCollector v. University of Sto. Tomas, 104 Phil. 1062. ofevidence, this Court finds the prosecution cannot prove
22See People v. Lucio C. Tan,
et al., G.R. No. 144?07, July 13, 2004; Piglas-Kamao the actual sending of the PAN through ordinary mail.
v. NLRC, 357 SCRA 640. The ITR of Fiestapack shows that the name of Joseph
598 Itr:vn:wt,;tr oN'l'AxA'noN 'l'rx ll,r,;l.rr,:orr,:s 599
I rrr I rcrrr I ll,r'rrrr,rl ilrq ol' ( lovcrrr nrrtnl,

Tlpingco appears above the caption "President/VP/Auth substant,irrl,o l,ho accused to have perpetrated the crime.
Representative." However, the same is not conclusive Notably, the tax liabilities are corporate tax liabilities
evidence that Typingco is actually the President, in the of Vicente Singson-Encarnacion Corporation, but it is
absence of other conoborating proofs for 2000. The word misleadingly stated therein that "the above-named accused
"fort preceded the actual signature and the name "Joseph did then and there willfully, unlawfully and feloniously
Tlpingco" was only typewritten. This means that someone fail and refused to fail tax liabilities" without stating
signed on behalfor in representation ofJoseph Tlpingco. that these are corporate tax liabilities. The supporting
Ttre prosecution failed to authenticate the said signature documents do not substantiate or prove that the accused
and to show that the person who signed the ITR was is indeed the Treasurer and,/or responsible officer of the
really authorized by Tlpingco. With respect to the General corporation. The offense fails to relate its commission with
Information Sheet (GIS), said GIS was sworn, certified Sections 253(d) and 256 of the Tax Code, which will provide
and signed by Joseph Tlpingco on April 20,200L.It bears the legal basis to charge the accused for non-payment of
stressing that the taxable year under scrutiny is 2000. On corporate tax liabilities. Finally, the basis of the deficiency
the other hand, Tlpingco offered in evidence various notices tax assessments was not attached to the records of the
of conference, decisions and orders of NLRC and memo case ( Peopl.e a. Paz Abad. Sa,ntos, CTA Crim. C ase No.
from Fiestapack's employees union, showing Alvin T! as 0 - 2 7 0, April 7 3, 2 O 7 2 ; P eop l.e u. Beqj amin Hian Tek C o
the President of Fiestapack. Moreover, an act or omission Cua, CTA Crim. Case No. 0-262, May 78,2012; People
is "willfully' done, if done voluntarily and intentionally a. Eliseo Co, CTA Crim. Case No. 0-708, October 3,
and with specific intent to do something the law forbids, 2012).
or with specific intent to fail to do something the law
requires to be done. A willful act may be described as one B. Under the Tariffand Customs Code
done intentionally, knowingly, and purposely, without The Information filed by the DOJ with the CTA failed to specifr
justifiable excuse. It connotes the existence of"knowledge"
the amount of taxes and fees claimed.
and "voluntariness." Undoubtedly, it becomes necessary
for the prosecution to prove beyond reasonable doubt The CTA has no jurisdiction. The jurisdiction is with the regular
that Tlpingco, in representation of Fiestapack, received courts and the case should be dismissed by the CTA. Pursuant to
the assessment notices or was aware of its tax liabilities Section 7 of R.A. 9282, t}i'e CTA has exclusive jurisdiction over all
in order to impute upon him the required elements of criminal offenses arising from violations of the Tariff and Customs
"willfulness" in this case. The BIR witness testified that Code, where the principal amount of taxes and fees, exclusive of
PAN was mailed by ordinary mail and the FAN, by charges and penalties claimed is Fl million or more. If it is less than
registered mail. Finally, considering that the prosecution Fl million or no specific amount is claimed, the case should be tried by
failed to prove that the PAN was sent and actually received the regular courts and the jurisdiction of the CTA shall be appellate
by Fiestapack, the assessment made by the CIR is void. (Peopln o. Med.ina, Crim. Case No.0-209, May 4, 2011).
A void assessment bears no fruit; hence, no civil liability The accused are charged in an Information for violation of
arises in this case (People a. Typingeo, CTA Crim. Caee
Section 3602 of the Tariffand Customs Code in relation to Article]-T2
No. 0-I 74, Moy 76, 20L2). of the Revised Penal Code. On April 18, 2011 and on May 25,2011,
t4. Based on the allegations in the Information, accused Paz the CTA promulgated resolutions ordering the State Prosecutors to
Abad Santos is charged for violation of Section 49(b) now submit clear and legible copies; otherwise, the case shall be dismissed
Section 106(A), Sections 57(B), 175 and 24(8)(2) ofthe 1997 for failure to comply with a lawful order of the Court. Records show
Tax Code, allegedly due to her failure to pay tax liabilities, that despite notice and receipt ofthe resolution, the prosecutors failed
for the period 2005. The CTA ruled that a determination of to comply with the resolution; hence, case was dismissed (Peopl.e a.
probable cause cannot be made when the evidence do not Parungo, CTA Crirn. Case No. O-798, June 28,2077).
600 llt,;v t t':wt,ltt otrt'l'nxn't tol 'l'Ar ll.l,:Nu,rrn,ll 601
'lrrrlrcrrl ltlnrcrltcs ol ( ittvt'tttttttttl,

The conuiction of the accused rnust rest, not on the weakness ol' saplings. Wha[ is involved in the criminal action is legally not the
the defense, but on the strength of the prosecution.
- Valic, et al. were collection oI'ttrxes where the assessment of the Commissioner may
charged for conspiring with other respondents in violation of Section be reviewed by the Court of Tax Appeals but a criminal prosecution
3602 of the Tariff and Customs Code in relation to Article L72 of the for violations of the Tax Code which is within the cognizance of the
Revised Penal Code by declaring with the use of fraudulent documents. Court of First Instance (now Regional Trial Court). While there
- Valid is acquitted for failure ofthe prosecution to establish the
guilt ofthe accused beyond reasonable doubt. The prosecution has
can be no civil action to enforce collection before the assessment
procedures in the Code have been followed, there is no requirement
the onus probandi to show beyond reasonable doubt that (1) There for the precise computation and assessment of the tax before there
was an imported article, which, according to the Information, is the can be a criminal prosecution. The protest of the petitioner against
9,667 prilled urea in bulk with the equivalent duty of ?t,829,496, the assessment cannot stop his prosecution for violation of the Tax
represented by Import Entry No. C-95-2001; (2) The accused, in Code.
conspiracy with the other accused, made or attempted to make an
entry of the alleged imported article through the filing of said import
In another case, the Supreme Court stated that, "We share
entry at BOC La Union on June 25,2001; (3) The same was done by
the view of both the trial court and Court of Appeals that before
means of any false or fraudulent declaration or by means of any fake
the tax liabilities of Fortune are first determined, it cannot
statement, which is the Certificate of Eligibility purportedly issued
be correctly assessed that private respondents have willfully
attempted to evade or defeat the taxes sought to be collected from
by the Philippine Carabao Center in favor of Norsk Hydro, making it
appear that the subject shipment is exempt from paSrment of duties
Fortune. In piain words, before anyone is prosecuted for willful
attempt to evade or defeat any tax under Sections 253 and 255 (now
and taxes; (4) The Certificate of Eligibility was falsified in violation
Secs,254 and 256, NIRC), the fact that a tax is due must first be
of Article 172 of the Revised Penal Code; and (5) The Certificate of
proved. Suppose the Commissioner eventually resolves Fortune's
Eligibility was filed by accused Valic to defraud the government by
avoiding the payment of rightful duties and taxes. In this case, the
motion for reconsideration of the assessments, pronouncing that
prosecution failed to prove conspiracy as well as the existence ofthe
the taxpayer is not li(rble for any deficiency assessment, then the
import entry. Necessarily, the prosecution failed to prove that there criminal complaints filed against priuate respondents will haue no
leg to stand on."
was an item imported in the amount stated in the Information. The
original of the Certificate of Eligibility was not presented before the "In view of the foregoing reasons, we cannot subscribe to the
Court (People a. Valic, et al., CTA Crim. Case No. 0-758, July petitioner's thesis citing Ungab u. Cusi, that the lack of a final
23,2072). determination of Fortune's exact or correct tax liability is not a bar
to criminal prosecution, and that while a precise computation and
Filing of criminal action under the Tax Gode during the assessment is required for a civil action to collect tax deficiencies,
pendency of protest the Tax Code does not require such computation and assessment
prior to criminal prosecution. Reading Ungab carefully, the
The filing of a criminal action during the pendency of a protested pronouncement therein that deficiency assessment is not necessary
assessment will depend on whether or not a crime is complete when prior to prosecution is pointedly and deliberately qualified by the
the violator has knowingly and willfully filed a fraudulent return with Court with the following statement quoted from Guzik u. U.S..' 'The
intent to evade and defeat a part or all ofthe tax. In other words, for crime is complete when the violator has knowingly and willfully filed
criminal prosecution to proceed before or during the pendency of an a fraudulent return with intent to evade and defeat a part or all of
assessment, there must be aprima facle showing of a willful attempt the tax.' In plain words, for criminal prosecution to proceed before
to evade taxes. assessment, there must be aprima facie showing of a willful attempt
In the case of Ungab u. Cusi, 97 SCRA 877, lhe Supreme Court to evade taxes. There was a willful attempt to evade tax in Ungab
ruled that the criminal action is legally proper where the taxpayer because of the taxpayer's failure to declare in his income tax return
deliberately did not declare his income from sales of banana 'his income derived from banana saplings.' In the mind of the trial
court and the Court of Appeals, Fortune's situation is quite apart
602 llt,:vtt,:wt,;rr oN 'l'nxn ltor.r 'l',rx llr:uutrtr:s 603
Jrrdk:inl lhrmodios of Govornmont

factually since the registered wholesale price of'the goods, approved Suggested anawor:
by the BIR, is presumed to be the actual wholesale price, therefore, not
fraudulent. Unless and until the BIR has made a final determination No, prior assessment of deficiency ta,x by the BIR is not required
ofwhat is supposed to be the correct taxes, the taxpayer should not before a criminal action may be filed against a ta.rpayer. The case fi.led
be placed in the crucible of criminal prosecution. Herein lies a whale by tlrc DOJ with the nrc against )Q( is a criminnl actinn for rnn-filitW
of difference between Ungab and the case at bar (Commissjoner a. of irrcomc ta* return undcr Section 255 of the 1997 Tu Codc, using
Court of Appeals and. Fortune Tobacco Corporation, gT SCRA the ffidnuit of the CIR as basis for the fi.ling of said erirninal actinn,
799; Resolution on Motion for Reconsid.eration, February 6, and, thc case daes twt inuolue assessmpnt of a dcftcicncy ta'x li,ability for
1997). such uialation of a Tax Code prouision. In CIR u. Pascor Rcalty and,
Deuelnpmnnt Corporation, the SC ruled that thz criminal charge nced
In Corn mis sioner u. Pascor Realty and Deu elopment Corporation, only be proued ly a prim,a facie shouting of failure to file a requircd'
G.R. No. 128315, June 29, 1999, tllre Supreme Court reiterated the tax return and such fact need rwt be proued by an assessm'ent.
general rule that an assessment is not necessary before a criminal
charge can be filed. The criminal charge need only be proved by a Bar Question (2005)
prima facie showing of failure to file a required tax return and such
fact need not be proved by an assessment. In 1995, the BIR filed before the Department of Justice (DOJ) a
criminal complaint against a corporation and its officers for alleged
The issuance of an assessment must be distinguished from the evasion of taxes. The complaint was supported by a swonn statement
filing of a complaint. Before an assessment is issued, there is, by of the BIR showing the computation of the tax liabilities of the erring
practice, a pre-assessment notice sent to the taxpayer. The taxpayer is
taxpayer. The corporation filed a motion to dismiss the criminal
then given a chance to submit position papers and documents to prove complaint on the ground that there has been, as yet, no assessment
that the assessment is unwarranted. If the Commissioner is satisfied, of its tax liability; hence, the criminal complaint was premature. The
an assessment signed by him or her is then sent to the taxpayer, DOJ denied the motion on the ground that an assessment of the tax
informing the latter specifically and clearly that an assessment has deficiency of the corporation is not a precondition to the filing of a
been made against him or her. In contrast, the criminal charge need
criminal complaint and thatin anyevent, thejointaffidavitofthe BIR
not go through all these. The criminal charge is filed directly with examiners may be considered as an assessment of the tax liability of
the Department ofJustice. Thereafter, the taxpayer is notified that a the corporation.
criminal case had been fiIed against him, not that the Commissioner
has issued an assessment. It must be stressed that a criminal Is the ruling of the DOJ correct? Explain.
complaint is instituted not to demand payment, but to penalize the
taxpayer for violation ofthe Tax Code. Suggested answer:
Yes. The ruling of the DOJ in denying the motinn to di'smiss
Bar Question (2010) is correct, The issuante of the defi,ciency assessrnent notiae prinr to
Based on the affidavit of the Commissioner of Internal Revenue prosecution is nnt necessary because the facts ofthe case show that
(CIR), an Information for failure to file income tax return under the crim.e of euasion is cornpl.ete, since the uiolator has knowingly and
Section 255 of the National Internal Revenue Code was filed by the willfully fi,l.ed a fraudulent return with intent to eua.d.e or d'efeat a part
Department of Justice with the Manila Regional Trial Court (RTC) or all of the tas (Ungob o . Cuei, 97 SCRA 877) . What is inuolued here
against )O(, a Manila resident. )O( moved to quash the Information is not the colLection of tases but a criminal prosecution for uinlation
on the ground that the RTC has no jurisdiction in view of the absence of the Tax Code.
of a formal deficiency tax assessment issued by the CIR. Is the prior Howeuer, the contention that the joint affidauit of the BIR
assessment necessary before an Information for violation of Section uannirrcrs showing tlw computatinn of ta^r linbiliti.es may be considzred
255 of the Tax Code could be filed in court? Explain. an assessment is erroneous, It is not an assessment which may entitle
tlw to.rpayer to protest (CIR a . Paneor Rcol$ & Developnent Corp ,
604 llt,tvtt,:wtctt r rtt'l'Axlrt'tor.r 605
.rrrrrrr.,rr
'.jlll.li:illl;'il,vt'r..rrr..(.
3Og SCRA 402). An assessment is a formal notice to the ta^tepayer taxpuyer kt euude payment. The obligation to pay the ta'x
stating that the a,nxount thereon is due as a tuc and containing a is ruil u mere consequence of the felonious acts charged in
demand for the paynxent thereof (Alhambra Cigar & Cigorette the Information, nor is it a mere ciuil liability deriued from
Mfg. Co. a. Collector, 705 Phil. 1.337 t1959D. crime that would be wiped out by the judicial declara'tion
that the criminal acts charged did not exist (Castro a.
Bar Question (1998) Colkctor of Internal Reaen'tte, G.8. No. L'1"2774, April
26,7962).
Is assessment necessary before a taxpayer may be prosecuted
for willfully attempting in any manner to evade or defeat any tax b. No. White the accused is guilty beyond reasonable doubt for
imposed by the Internal Revenue Code? uiolation of Section 255, the CTA will not irnpose the alleged
tax liabilities, considering that there was no assessrnent
Suggested answer issued against the accused. The cornputations presented
by the prosecution to proue ciuil liabilities may not be used
No. Assessment is not necessary before a taxpayer may be becq.use the BIR did not follow the assessment procedures
prosecuted if there is a prima facie showing of a willful atternpt to euade prouided for in the Tax Code and in the implementing
taxes as in the ta.xpayefs failure to declare a specifi.c item of tanable regulations ( P eople a. Mendcz, CTA C rim - C aee No. O 7 3
income in his income ta,x returns (Ungab a. Cusi, 97 SCRA 877) . On and, 0L5, Januan! 5, 207L).
the contrary, if the ta^x alleged to haue been euaded is cornputed based
on reports approued by the BIR, there is a presumption of regularity
of the preuious payment of tanes, so that unl,ess and until the BIR
Persons liable for criminal prosecution
has made a final deterntination of what is supposed to be the correct Penalty shall be imposed on partner, president, general manager,
ta,xes, the to,xpa,yer should not be placed in the crucible of crirninal treasurer, or officer responsible for violation, in case of violations
prosecution (CIR u. Fortune Toboeco Corp., G.R. No, 7L9322, committed by associations, partnerships or corporations (Sec. 253[d],
June 4,7996). NIRC). A corporation can act only through its officers and agents and
where the business itself involves a violation of the law, the correct
Bar Question (2012) rule is that all who participate in it are liable. Here, as the filing of
the false return constitutes a violation of the law, defendant as the
a. The acquittal of the taxpayer in a criminal action under the author ofthe illegal act, must necessarily answer for its consequences
Tax Code does not necessarily result in exoneration ofsaid taxpayer provided that the allegations are proven (People a. Tan Boon Kong,
from his civil liability to pay taxes. Explain your answer. 54 Phil.607).
b. Should the accused be found guilty beyond reasonable
doubt for violation of Section 255 of the Tax Code (for failure to file Bar Question (2013)
tax return or to supply correct information), the imposition of the civil
You are the retained tax counsel ofABC Corporation. Your client
liability by the CTA should be automatic and no assessment notice
informed you that they have been directly approached with a proposal
from the BIR is necessary. Explain your answer.
by a BIR insider (i.e., a middle rank BIR official) on the tax matter
they have referred to you for handling. The BIR insider's proposal
Suggested answer:
is to settle the matter by significantly reducing the assessment, but
a. In ta.xation, the taxpayer becornes criminally liable because he will get SOVo of the savings arising from the reduced assessment.
of a ciuil liability. While he may be acquitted on the criminal What tax, criminal and ethical considerations will you take into
case, his acquittal could not operate to discharge him from account in giving your advice? Explain the relevance ofeach ofthese
the duty to pay ton, since that duty is imposed by statute considerations.
prior to and independent of any attempt on the part of the
606 Rt:vluwr,:n oN TAxA'n(|N

Suggeeted answer:
I will aduise my client not to accept the settlernent proposal
but instead pay the entire annount of ta* that is legally due to the
gouerntnent. CIIAPTER ICryII
On the tox aspeet,I will tell my cli.ent that a proposed assessntent CIVIL PENALTIES
couering deftciency ta.res which are legally due must be fully paid to
ernnerote the ta.spayer frorn further tax liabilities. The unwananted
rcduction of thn prcposed assessm,ent into lnlf and the payment thercof
The term "ciuil penalties" is a generic term used to refer to
will not close the case, but can be re-opened anytirne within ten years surcharges, deficiency and delinquency interests, and compromise
from discouery so as to collect the correct annount of taxes from ABC penalties for violation ofcertain provisions ofthe Tax Code.
Corporation.
The act of deliberately paying an amount of to^x, that is less than Surcharges
what is known by my client to be legally due through a cause of action
that is unlawful is consid.ered as ta.r euasion. I will aduise my cli.ent There shall be imposed, in addition to the tax required to be
thut conniuing with a BIR insider to reduce the proposed assessment paid, a penalty equivalent to25Vo of the amount due, in the following
cases:
for afee is unlawfal whirh can expose the officers of the corporatianto
crirninnl liability. Likewise,the paymentto be mad,e tothe BIRofftrinl l-. Failure to file any return and pay the tax due thereon as
of50% ofthe sauings constitutes direct bribery punishabk under the required under the provisions of this Code or rules and
Revised. Penal Code. regulations on the date prescribed;
On ethical grounds, agreeing to the settlement schzrne being 2. Unless otherwise authorized by the Commissioner, filing
prcposed by the BIR insider is agreeing to the perpetration of a a return with an internal revenue officer other than those
dishonest act. Since ta,rotion is symbiotic relationship, fair d,ealing with whom the return is required to be filed;
on both si.dcs is of paramount irnportance. I will remind rny clicnt
that ta.xpoyenE oue honcsty to gouernmcnt just e.s gouernment owes 3. Failure to pay the deficiency tax within the time prescribed
for its payment in the notice of assessment; or
fairness to ta*payer (CIR v. Tohyo Shipping Co., Ltd., G..8. No.
ffi262,Moy 261 1996). 4. Failure to pay the full or part of the amount of tax shown
on any return required to be filed under the provisions of
this Code or rules and regulations, or the full amount of
tax due for which no return is required to be filed, on or
before the date prescribed for its payment.
In case of willful neglect to fiIe 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 50Vo of the tax or of the deficiency tax, in case
any payment has been made on the basis of such return before the
discovery ofthe falsity or fraud. A substantial under-declaration of
taxable sales, receipts or income, or a substantial overstatement
of deductions, as determined by the Commissioner pursuant to the

607
608 Itt,:vt t,lwt,rtr oru'l'A xA't,tor't 'l'nx ltr,rrur,:rrtt,rs 609
( livil I'r'rrrrlt.it's

rules and regulations to be promulgatod by thc SccreLary ol'1.'inarrcc, Is Danilo liable fbr the deliciency tax and the penalties thereon? What
shall constihfte prima facie evidence of a false or fraudulent return. is the liability, if any, of the accountant? Discuss.
Failure to report sales, receipts or income in an amount exceeding
307o of that declared per return, and a claim of deductions in Suggested ansu/er:
an amount exceeding 30Vo of actual deductions, shall render the
taxpayer liable for substantial under-declaration of sales, receipts Yes, Danilo is liable for the deficiency tax as well as for the
or income or for overstatement of deductions, as mentioned herein deficiency interest. Howeuer, he is not liable for the fraud penalty
(9ec.248, NIHC). because the accountant acted beyond the limits of his authority- Atax
return which does not correctly reflect tq.xable income may only be false
It is patently unfair for the government to require the payment but not necessarily fraudulent, where it appears that the return was ruot
of 25Vo surcharge inasmuch as the taxpayer acted in good faith in prepared by the taxpayer hirnself but by his accountant. Accordingly,
payrng the franchise tax at the lower rates fixed by its franchises the 50Vo surcharge for fraud could not be imposed (Aznar u. CTA,
(Guagua Electric Light Plant Co. a. Commissioner, Ig SCRA 58 SCRA 719 t1s74l).
790).
On the other hand, the accountant may be held criminally liable
Construing the provisions of the old Section 51(d) and (e) of the for uiolation of the Tax Code, whert he falsified the tox return by under-
Tax Code, as amended by R.A. 2343,the interest and2\Vo surcharge declaring the sa.Ie and ouerstating the ercpense deductions (Sec. 257,
on deficiency taxes are imposable upon failure of the taxpayer to NIRC). If Danilo's accountant is a Certified Public Accoun'tant, his
pay the tax on the date fixed in the law for the payment thereof certificate as CPA sholl automatically be reuoked or cancelled upon
(Commissioner u. Connel Bros. Co. tPhil.l, 40 SCRA 416). conuiction.
The time prescribed for the payment of tax was fixed, whether or
not a notice of the assessment was given to the taxpayer (Central Bar Question (1995)
Azucarera Don Ped.ro a. CTA, G.R. No. L-2329G, May JI", 196Z).
The rule has to be so because a deficiency tax indicates non-payment Businessman Stephen Yang filed an income tax return for 1993
of the correct tax, and such deficiency exists not only from the showing business net income of F350,000.00 on which he paid an
assessment thereof to pay the correct amount of tax when it should income tax of F61,000.00. After filing the return, he realized that he
have been paid; and the imposition thereof is mandatory even in the forgot to include an item of business income in 1993 for F50,000.00.
absence of fraud or willful failure to pay the tax in full (Abad. u. CTA Being an honest taxpayer, he included this income in his return for
and. Cornmissioner, L-20834, October 79, 7g6G). 1994 and paid the corresponding income tax thereon'

In another case, the taxpayer understated his income by 227Vo for In the examination of his 1993 return, the BIR examiner found
7946,564Vofor L947 ,957ofor 1948,4867o for lg4g,2,g4GVo for 19b0, and that Stephen Yang failed to report this item of F50,000.00 and
49ovo for 1951. The court said these substantial under-declarations of assessed him a deficiency income tax on this item, plus a 50Vo ftatd
income for six consecutive years eloquently demonstrate the falsity surcharge.
or fraudulence of the income tax returns with intent to evade the (1) Is the examiner correct? Explain.
payment of tax. Hence, the imposition of the fraud penalty is proper
(Perez u. Court of Tax Appeals, G.R. No. L-7OSOZ, May 50, L958, (2) If you were the lawyer of Stephen Yang, what would you
cited in Aznar a. Collector, supra). have advised your client before he included in his 1994
return the amount of F50,000.00 as 1993 income to avoid
Bar Question (2006) the fraud surcharge? ExPlain.

Danilo, who is engaged in the trading business, entrusted to his


(3) Considering that Stephen Yang had already been assessed
accountant the preparation of his income tax return and the payment a deficiency income tax for 1993 for his failure to report
ofthe tax due. The accountant fiIed a falsified tax return by under- the F50,000.00 income, what would you advise him to do
declaring the sales and overstating the expense deductions ofDanilo. to avoid the penalties for tax delinquency? Explain.
610 linvrr,:wr,:rr ()N 'l'AxA,r.r()N 'l',rx ltt,ltrtt,:trt l:t 611
(.livil l'onultion

(4) What would you advise Stephen Yang to do with regard collected from the date prescribed for its payment until the full
to the income tax he paid for the F50,000.00 in his 1994 payment thereof.
return? In case your remedy falls, what is your other
recourse? Explain.
C. Delinquency interest. -In case of failure to pay: (1) the amount
of the tax due on any return required to be filed; or (2) the
amount of the tax due for which no return is required; or (3) a
Suggested answer:
deficiency tax, or any surcharge or interest thereon on the due
(1) The examiner is correct in assessing a deficiency income ta^tc date appearing in the notice and demand of the Commissioner,
for taxable year 1993 but not in irnposing the E}Vo fraud there shall be assessed and collected on the unpaid amount'
surcharge. The amount of aII items of gross income must be interest at the rate prescribed in Subsection "A" hereof until
included in gross income during the year in which receiued the amount is fully paid, which interest shall form part of the
or realized (Sec. 38, NIRC). The 50Vo fraud surcharge tax(9ec.249, NIRC).
ottaches only if a false or fraudulent return is willfully
The surcharge and./or interest shall apply to all taxes, fees and
made by MnYang (Sec. 248, NIRC). The fact that Mr.Yang
charges imposed under the code which shall be collected at the same
included the income in his 1994 return belies any claim of
time, in the same manner, and as part of the tax. In case the tax
willfulness but is rather indicatiue of an honest mistake
due from the taxpayer is paid on a partial or installment basis, the
which was sought to be rectified by a subsequent act, that
interest on the deficiency tax or on the delinquency tax liability shall
is the filing of the 1994 return.
be imposed from due date of the tax until full payment thereof. The
(2) Mr.Yang should haue amended his lgg7 income tax return interest shall be computed based on the diminishing balance of the
to allow for the inclusion of the F50,000.00 income during tax, inclusive of interests (Sec. 2, Reu. Regs. No. 12-99, September 6,
the taaable period it was realized. 1999).
(3) Mr. Yang should file a protest questioning the S|Vo
surcharge and ask for the abatement thereof. Bar Question (1995)
(4) Mr. Yang should file a written clqim for refund with the (1) What is a "deficiency interest" for purposes of the income
Commissioner of Internal Reuenue of the toees paid on the tax? Illustrate.
F50,000.00 income included in 1994 within two years from (2) What is a "delinquency interest" for purposes of the income
payment pursuant to Section 204(3) of the Ta"tc Code. Should tax? Illustrate.
this remedy fail in the adrninistratiue leuel, a judicial claim
for refund can be instituted before the expiration of the two- Suggested answer:
year period.
(1) Deficiency interest for purposes of the incotne tux is the
interest due on any arnount of tax due or installment
Deficiency and delinquency interests thereofwhich is not paid on or before the date prescribed
A. In general. - There shall be assessed and collected on any for its payment cornputed at the rate of 20Vo per annurn
unpaid amount of tax, interest at the rate of twenty percent or the Monila Reference Rate, whicheuer is higher, from
(2O7o) per annu.nl, or such higher rate as may be prescribed by the date prescribed for its payrnent until it is fully paid. If
rules and regulations, from the date prescribed for payment for example after the audit of the books of XYZ Corp. for
until the amount is fully paid. taxable year 7993 there was found to be due a deft'ciency
incorne tax of P125,000.00 inclusiue of the 25Vo surcharge
B. Deficiency interest. - Any deficiency in the tax due, as the term
imposed under Section 248 of the Ta.x Code, the interest
is defined in this Code, shall be subject to the interest prescribed
will be cornputed on the ?125,000.00 frotn April 15' 1994
in Subsection'4" hereof, which interest shall be assessed and
up to its date of PaYment.
612 llr,:vrr.:wr,:rr oN'l'Axn,rror.r 'l'nx l},lwr,:nrr,:s (; l:t
( iivil ll'rrnlticg

(2) Delinquency interest is the interest of20o/o or the Manila penalties in the absence ol'a compromise agreement validly entered
Reference Rate, whicheuer is higher, required to be paid in into between the taxpayer and the Commissioner (Mithi ng Bq'ya'n
case offailure to pay: Cooperatiae Marheting Association a. Araneta, supra). However,
(a) the amount of the tuc due on ony return required to where in an appeal to CTA, the taxpayer has expressed his willingness
to pay compromise penalty, said amounts may be collected as part of
be filed; or
the judgment (Commissioner a. Guerrero, supra).
(b) the amount of the tax due for which return is required;
or
(c) the deficiency ta^r or any surcharge or interest thereon,
on the due date appearing in the notice and demand
of the Commissioner of Internal Reuenue.
If in the aboue illustration the assessrnent notice was
released on December 3 7 , 1994 and the amount of deficiency
tax, inclusiue of surcharge and deficiency interest, was
computed up to January 30, 1995 which is the due date
for payment per assessment notice, failure to pay on this
lotter date will render the tax delinquent and will require
the payrnent of delinquency interest.

The imposition of lVo monthly [now 207o annuq.I]


interest is but a just compensation to the State for the delay
in paying the tax, andfor the concomitant use by the taxpayer
of funds that rightfully should be in the gouernment's
hands (U.5. u. Goldstein, 189 Ft2dl 752). The fact thq,t the
interest charged is made proportionate to the period of delay
constitutes the best euidence thq.t such interest is not penal
but compensatory (Aguinaldo Ind.ustries Corporation a.
Commissioner and CT{ L-29790, Februany 25, 7982).

Gompromise penalties
Nature of cornpromise penalty. - A compromise penalty is
a certain amount of money which the taxpayer pays to compromise
a tax violation that may be the subject of criminal prosecution. A
compromise implies mutual agreement. Hence, a compromise penalty
cannot be imposed in the absence of a showing that the taxpayer
consented thereto. If the Commissioner's offer of compromise is
rejected by the taxpayer, the Commissioner cannot enforce it but he
may file a criminal action against the taxpayer for the tax violation.
A penalty can be imposed only on a finding of criminal liability
(Commissioner a. Firernan's Fund. Insurance Co., supra).The
Commissioner has no power to impose and collect the compromise
'l',rx ltt,ltrtt,:t rtt,ls 615
lft ,rnr,(l i(,H ol''l\txprtycrs

toxpuyer, he arn rtolily tlrc ColLcctor within 15 days from receipt of said
decision of his desire to haue his case reuiewed by the Commissioner.
The decision ofthe Collector on the tarpayet's protest, ifaduerse to the
Gouernment, is automatically eleuated to the Cornmissioner for reuiew;
CIIAPIER }ONIN
and if such decision is affirmed by the Commissioner, the same shqll
REMEDIES OF TAXPAYERS be automatically eleuated to and fi'nally reuiewed by the Secretary of
Finance.
Resort to judicial relief can be had by the taxpayer by appealing
Bar Question (1996) the decision of the Commissioner or of the Secretary of Finance
(1) Compare the taxpayer's remedies under the National (for cases subject to automatic reuiew) within 30 days from the
Internal Revenue Code and the Tariffand Customs Code. promulgation of the aduerse decision to the CTA.

Suggested answer: Administrative remedies


The taspayey's rernedies under the National Internal Reuenue The legal remedies available to taxpayers at the administrative
Cod.e may be categorized into remedies before payment and remedies level will depend on whether or not payment of the deficiency tax
after payment. The remedy before payment consists of adm.inistratiue assessment was made.
remedy which is the filing of protest within 30 days from receipt of Before payment of the deficiency tax assessment, the taxpayer's
assessment, and judicial remedy which is the appeal of the aduerse remedy is to file a written protest within 30 days from date of receipt
d.ecision of the Commissioner on the protest with the Court of Tax of the formal assessment notice. The timely fiIing of the written protest
Appeals, thereafter to the Court of Appeals and finally with the against the assessment is mandatory; otherwise, the assessment will
Supreme Court. become final (Sec. 228, NIRC).
The remedy after payment is auailed of by paying the assessed After payment of the deficiency tax assessment was made, his
tas within 30 days from reeeipt of assessment and the filing of a clairn remedy is to file a written claim for refund or tax credit with the
for refund or tas credit of these toxes on the ground that they are appropriate government agency - the Bureau oflnternal Revenue
enoneously paid within two years from date of payment. If there is a or the Department of Finance One Stop Shop Center. The taxpayer
dznial of the claim, appeal to the CTA shall be mad.e within 30 days need not pay the deficiency tax assessment under protest nor is he
ftnm receipt of denial but within two years from date of payment. If required to write a letter to the BIR protesting said assessment at
the Commissioner fails to act on the claim for refund or ta.r credit and the time of payment (Secs.204[C] and 229, NIRC).
the two-year period is about to erpire, the ta,xpayer should consider
the continuous inaction of the Comntissioner as a denial and eleuate
the case to the CTA before the expiration of the two-year period.
Judicial remedies
If the protest is denied in whole or in part, or is not acted upon
under the Tariff and. Customs Cod.e, tanpayefs rerned.ies arise
within 180 days from submission of documents, the taxpayer adversely
only after payment of duties. The adrninistratiue rernedies consist of
affected by the decision or inaction may appeal to the Court of Tax
filing a clairn for refund which may take the form of abatement or Appeals within 30 days from receipt of the said decision, or from the
drowback. The ta.xpayer can also file a protest within 15 days from
lapse of the 180-day period; otherwise, the decision shall become final,
payment if he disagrees with the ruling or decision of the Collector
executory and demandable (Sec. 228, NIRC).
of Customs regarding the Legality or correctness of the assessment
of customs duties. If the decision of the Collector is aduerse to the When one speaks of due process, a distinction must be made
between matters of procedure and matters of substance' In essence,
procedural due process refers to the method or manner by which the
6L4
616 It,t,rv t t,:wt,:tr oru'l',txn t'tot't
'l',r r llt,:ut,;t rt t,:s (; l7
l{r,rrrr,rlir,r ol'l\txpityt'rs

Iaw is enforced, while substantive due process requires the law itscl l, that busincs$(!!r nrir.y incur, the Secretary of Finance is authorized
not merely the procedures by which the law would be enforced, is lir i r, to suspend the imposition of MCIT, if a corporation suffers loss
reasonable, and just (Corona a. United. Harbor Pilots Association due to prolonged labor dispute, force majeure and legitimate
of the Philippines,2TS SCRA 540). business reverses . ". MCIT is a tax on income as it is imposed
on gross income (sales less cost of sales)'1
Mand.amus dnesnot he againstthe d.iscretionary powers of
the Commis sioner. In one case, the court ruled that the Commissioner
2. Non-retroactiaity of rulings. - BIR rulings may be modified'
of Internal Revenue may not be compelled to issue an assessment by a
reversed or revoked by the Commissioner at anytime, but
tax informer who filed confidential information against the taxpayer such modification, reversal, or revocation shall not be given
(Meralco Securities Corporation u. Saaellano, 777 SCRA 804).
retroactive application to the prejudice of taxpayers who
relied on the previous ruling, except: (a) where the taxpayer
Substantive remedies deliberately misstates or omits material facts from his return or
Examples of substantive remedies are: in any document required of him by the BIR; (b) where the facts
subsequently gathered by the BIR are materially different from
1. Questioning the constitutionality oraalidity oftax statutes the facts on which the ruling is based; or (c) where the taxpayer
or regulations. - The provisions of the Constitution on the acted in bad faith (Sec. 246, NIRC).
exercise ofthe taxing power are not construed as grants ofsuch
power but are merely limitations on a power otherwise absolute. On July 25,1987, President Corazon Aquino signed E.O.
Tax statutes, like other legislation, enjoy the presumption of 2?3, imposingVAT effective January 1, 1988' On December 10,
validity and constitutionality. To doubt is to sustain (Yu Cong 1987, respondent wrote CIR, asking if it is exempt from VAT.
u. Trinidad,4T Phil. 385). Atax statute may be attacked in the On June 8, 1988, CIR issued VAT Ruling No. 231-88 exempting
courts not only by reason ofnon-observance or violation ofthe respondent from VAT. On April 22,1994, BIR Director Umali
constitutional limitations on the exercise ofthe taxing power, but confirmed ruling. On January 1-, 1996, R.A. 7716 (EVAT
also on account ofviolation or non-observance ofthe procedure Law) became effective. On October l-, 1996, BIR sent PAN for
laid down by the fundamental law on the enactment of legislation deficiency VAT and DST to respondent. On October 20,1999,
(Maniln Electric Co. u. Public Seraice Com.tnission, 73 Phil. respondent filed its protest. On September 2I,2000, it filed the
128). appeal to the CTA.

Imposition of the minirnum corporate income tar is The Court ruled that it is not necessary that the person
constitutional; it is a tar on incorne (not on capital). - who entered into a contract to perform service for another in the
MCIT is a new concept devise as a relatively simple and effective course oftrade or business should personally render the service.
revenue raising instrument and as a corrective measure to put The service may be performed by another as a sub-contractor.
a stop to the practice of corporation, which while having large Health Maintenance Organizations (HMO) are not actually
turnovers, report minimal or negative net income resulting to rendering medical serwices. They merely act as conduits between
minimal or zero income taxes year-in and year-out through the members and their accredited recognized hospitals and
under-declaration of income or over-declaration of expenses clinics. Those exempt from VAT are taxpayers engaged in the
otherwise called "tq^r shelters." performance of medical, dental, hospital and veterinary services.
Safeguards were incorporated into the law, to wit: 6) For providing and arranging for provision ofhealth care
imposition of MCIT only on the fourth year after commencement services to its members, HMOs are liable to VAT. The basis for
of operations; (b) carrying forward of any excess of MCIT paid computing the VAT shall be payments for medical plans and
over the normal income tax which shall be credited against
the normal corporate income tax for three (3) immediately lChamber of Real Estate and Builders'Association (CREBA) v. Exec. Secretary,
succeeding years; and (c) to address the genuine repeated losses G.R. No. 160756, March 9, 2010.
618 Itr,rvrt,;wt,:tt or.r'l'AxA't'tow ' l'nx llt,:rrl t,:nt t,:s 619
lhrnrrxl iox ol''lltxPrtYcrs

application fees, undiminished by amount paid for payuble to d. Verification of capital gains tax liabilities; and
owners/operators of hospitals, clinics and medical and dcntul
practitioners. e. In the exercise of the Commissioner's power to obtain
information from other persons in which case, another or
Respondent's failure to describe itself as HMO is not separate examination and inspection may be made (Sec.
tantamount to bad faith. HMO was first recorded in Philippine 235, NIRC).
statute books upon the passage of R.A. 7875 (National Health
Insurance Act of 1995). In 1988, when VAT Ruling No. 231-88 b. Publication of RMC and RMO. - In the absence of publication,
was issued, HMO was yet unknown or had no significance for tax Revenue Memorandum Order (RMO) No. 15-91 and Revenue
purposes. "Good. faith" is that state of mind denoting honesty of Memorandum Circular (RMC) No. 43-91, imposing the five
intention and freedom from knowledge of circumstances which percent (57o) lending investors tax on pawnshops, are not valid.
ought to put the holder upon inquiry. The CIR is precluded from While the rule-making authority of the Commissioner of Internal
adopting a position contrary to one previously taken, where Revenue is not doubted, Iike any other government agency'
iqiustice would result to the taxpayer (ABS-CBN Brcad.ca,sting the Commissioner may not disregard legal requirements or
Corp. a. CTA, G.R. No. 52306, October 72, 1987). Applying applicable principles in the exercise of quasi-legislative powers.
the ruling retroactively would be prejudicial to the taxpayer The due observance ofthe requirements ofnotice' hearing, and
(Commissioner u. Benguet Cotporation, G.F,. No. 734587, publication should not have been ignored (Commissioner u.
July 8, 2005, cited. in Phil. Healthcare Proaiders v. Miehel Lhuillier Pawnshop, G.R. No. 750947, July 75,
Commissioner, GR. No. 768729, April 24, 2OO7). 2003).

3. Failure to inform the taxpayer in usriting of the legal and, 6. Power of CIR to d'istribute or allocate I'ross incotne
factual bases of a,s s es s mcnt mahes it a oid. - The taxpayer ond d.ed.uetions d'oes not includ.e the power to impute
shall be informed in writing of the law and the facts on which ntheoretical interesta' to the controlled' taxpayefs
the assessment is made; otherwise, the assessment shall be void transoctiont. - Sec.43 ofthe Tax Code authorizes the CIR
(Sec.228, NIRC). to distribute, allocate or apportion gross income or deductions
between or among controlled corporations in order to prevent
4. Preseruation of boohs of accounts and, once-a-year evasion of taxes. Despite the broad parameters, however,
examinatiorr. - All books of accounts, includingthe subsidiary the power of the CIR does not include the power to impute
books and other accounting records ofcorporations, partnerships, "theoretical interests" to the controlled taxpayer's transactions.
or persons, shall be preserved by them for a period beginning There must be proofofthe actual or at least, probable receipt or
from the last entry in each book until the last day prescribed realization by the controlled taxpayer of the item of gross income
by Section 203 within which the Commissioner is authorized to sought to be distributed or allocated by the CIR. However, the
make an assessment. The said books and records shall be subject CIR had adduced no concrete proofthat said funds were, indeed,
to examination and inspection by internal revenue officers. For the source of the advances the former provided its affiliates.
income tax purposes, such examination and inspection shall be While admitting FDC obtained interest-bearing loans from
made only once in a taxable year, except in the following cases: commercial banks, FDC clarified that the subject advances
were sourced from the corporation's rights offering in 1995 as
a. Fraud, irregularity or mistakes, as determined by the
well as the sale of investment in Bonifacio Land in 1997. Article
Commissioner;
1956 of the Civil Code provides that no interest shall be due,
b. The taxpayer requests reinvestigation; unless it has been expressly stipulated in writing. Considering
that taxes, being burdens, are not to be presumed beyond what
c. Verification of compliance with withholding tax laws and
the applicable statute expressly and clearly declares, the rule
regulations;
is likewise settled that tax statutes must be construed strictly
620 llt':vtt,;wt,;tr oN'l'nxn'r'ror.r 621
,,,,,,,,lllJlliTjl],'ll;,".,,.,'
against the government and liberally in favor of the tux;ru.ycr Enhanced VAP. When a [ax provision speaks unequivocably, it
(CIR u. Filinuest Deaelopment Corporation, G.ll. No. is not the province of a Court to scan its wisdom or its policy.
763653, July 79, 201"L). The more correct course of dealing with a question of construc-
tion is to take the words exactly what they say. Moreover, the
7. Availment of tax amnesty findings of facts of the CTA are final and binding upon the SC,
The recording in the Official Registry Booh of the BIR of especially if these are similar findings of the CA, which is the
the information fi,led by an informer is a mandatory requirernent final arbiter of questions of fact.2
before the taxpayer may be excluded from the couerage of theVAP. The law presumes that the BIR had sufficiently passed
- An interesting issue regarding the availment by a taxpayer of
the Voluntary Assessment Program (VAP) was clarified by the
upon the taxpayer's compliance before acceptance oftax amnesty

Supreme Court. In this case, an informer filed an Affidavit with


payment.
- The law presumes that the BIR had sufficiently
passed upon the taxpayer's compliance, much more the details
the Special Investigation Division (SID), Davao City, statingthat of the Statement of Assets, Liabilities and Networth (SALN),
no income tax returns were filed by the taxpayer for the years before the acceptance of the applicable amnesty tax payment.
1994-1996. Pursuant to a Mission Order, the revenue officers In the instant case, the CIR even failed to file a timely motion
reporbed and confirmed the non-filingofthe returns to the Chief for reconsideration when the Court in Division resolved PMC's
SID. When the CIR offered VAP under Revenue Memoranduni availment of the tax amnesty. Thus, he cannot raise at this
Circular No. 59-97, taxpayer availed of the benefits under said point in time that the CTA can inquire into the correctness of
VAP for the years 1993-1996. Thereafber, the BIR issued letter PMC's SALN, when the CIR itself could have easily denied the
of authority for 1993-1996 and after tax audit, issued FAN. The acceptance of PMC's availment of the tax amnesty.s
FAN was timely protested, but was denied, so taxpayer filed
an appeal to the CTA, which rendered a decision cancelling the The original law, R.A. 6426 (Foreign Currency Deposit
assessment. Upon appeal, the CA affirmed the CTA decision. Act of the Philippines), as amended by P.D. 1035 and 1246,
The SC ruled that the recording in the Official Registry Book exempts from all taxes all foreign currency deposits made
of the BIR of the information filed by an informer is a manda- under the foreign currency deposit system, including interest
tory requirement before the taxpayer may be excluded from and all other income of such deposits, irrespective of whether
the coverage of the VAP. The court explained that where the or not these deposits were made by residents or non-residents.
language of the law is clear and unequivocal, it must be given its Thereafter, the Tax Code of 1977 was enacted, which also
literal application and applied without interpretation. Revenue granted tax exemption to FCDU's foreign currency transactions,
Memorandum Order Nos. 59-97, 60-97, and 63-97 consistently but with certain exceptions (i.e., income from foreign currency
provided that "persons under investigation ... as a result ofveri- transactions with non-residents, OBUs in the Philippines,
fied information filed by an informer under Section 281 of the local commercial banks, including branches of foreign banks).
NIRC, and duly recorded in the Official Registry Book (ORB) of Subsequently, R.A. 8424 (Tax Reform Act of 1997) was enacted
the Bureaubefore the date ofavailment underVAP" are excluded on January L, 1998 deleting the phrase "exempt from all taxes"
from the coverage of the VAP." This denotes that in addition to from Section 27(DX3) of the law. The court treats such deletion
the filing of verified information, the same should also be duly of the phrase as withdrawal of the exemption previously granted
recorded in the ORB of the BIR. The conjunctive word "and" is by the prior law. However, the availment of the petitioner of
not without legal significance. It means "in addition to." The the tax amnesty under R.A. 9480 entitled it to the immunities
word "and," whether it is used to connect words, phrases or full and privileges provided in Section 6 thereof. It is evident
sentences, must be accepted as binding together and as relating from Revenue Memorandum Circular No. 69-2007 that DST
to one another. It implies conjunction or union. The interpre- is included in the coverage of the tax amnesty law, and it has
tation is bolstered by the fact that the BIR issued RR 18-2005
2Commissioner v. Ariete, G.R. No. G.R. No. 164152, January 2l,2OlO.
and reiterated the same provision in the implementation of the 3Commissioner v. Philex Mining Corporation, CTA EB 578, June 29,20LO.
622 ltuvil:wr,:rr 0r.r'l',rxrTlor.r 'l'nx ll,t,;r'.'lt,;trtt,ln (:23
llr,rrrlrlirrH ol'l\rxlxrycrs

been established that petitioner sufficiently complied with thc b. Chiet, Assessment l)ivision prepares assessment notice
requirements of R.A. 9480, DOF Order No. 29-07, and Revenuc and demand letter for approval by the Regional Director.
a
Memorandum Circular No. 69-07.a
As a general rule, a pre-assessment notice is required
Furthermore, the taxpayer may also question the amount to be issued by the BIR. However, a pre-assessment notice
oftax and/or penalty being collected as too high, confiscatory shall not be required in the following cases:
or excessive in violation of the provision of the Constitution. To
prove this point, documentary evidence, data and statistics must
1. When the finding for any deficiency tax is the result
of mathematical error in the computation of the tax
be submitted.s
as appearing on the face ofthe return; or

Procedural remedies 2. When a discrepancy has been determined between


the tax withheld and the amount actually remitted
To give meaning to the due process clause of the Constitution by the withholding agent; or
involving tax cases and to implement the provisions of the Tax Code,
Revenue Regulations No. 12-99 prescribes the following procedural 3. When a taxpayer who opted to claim a refund or
requirements in the issuance of deficiency tax assessments: tax credit ofexcess creditable withholding tax for a
taxable period was determined to have carried over
1. Notice of informal conference and automatically applied the same amount claimed
Revenue Officer against the estimated tax liabilities for the taxable
quarter or quarters ofthe succeeding taxable year; or
a. Revenue officer informs the taxpayer of his findings as well
as factual and legal bases after the completion of his tax 4. When the excise tax due on excisable articles has not
audit in an informal meeting; been paid; or

b. He then prepares report ofexamination based on the results 5. When an article locally purchased or imported by an
of meeting with taxpayer, afber considering factual and exempt person, such as, but not limited to, vehicles,
legal explanations of taxpayer; capital equipment, machineries and spare parts,
has been sold, traded or transferred to non-exempt
c. He submits written report to Revenue District Officer. persons (Sec. 228, NIRC).
2. Post-reportingnotice Section 228 oflhe 1997 Tax Code requires that
Revenue District Officer 15 days the taxpayer be informed of the law and facts on
- which assessment is made. The objective is to give
a. Taxpayer submits written explanations on findings; the taxpayer the opporbunity to refute the findings of
b. Revenue District Officer forwards report to Assessment the examiner and give a more accurate and detailed
Division. explanation regarding the proposed assessment. It
is sufficient that computations are attached to the
3. Preliminary Assessment Notice (PAN) pre-assessment notice clearly showing the specific
Chief, Assessment Division - 15 days provisions of the law from which the assessments
were based and the facts on how the amounts of the
a. Taxpayer submits written explanations on findings; deficiency taxes were arrived at. The requirement
shall be deemed to have been complied with if, during
alnternational Exchange Bank (now Union Bank of the Phil.) v. Commissioner, the informal conferences, the taxpayer is able to
CTA Case No. 7848, May 6, 2010. submit a written comment on the issues raised in the
5PLDT v. Public Service Commission, 34 SCRA 609; MERALCO v. PSC, 34
SCRA 609.
report of investigation which he could not have done
624 lt.r.rvrr,;wr,;rr
'ru'l'AXA,r'r,n
'l',\\ l{.r,:Nl,:rrtt,:ri 625
llr,rrrr,rltlrr ol'l'rrxlrrylrs

if he had not been informed ol'the law und thc lirr:l,s in the issuanco'ol'a dc(icicncy tax assessment, the absence of which
upon which the assessments were based (Philippiru: renders nugatory any assessment made by the tax authorities." The
Stock Exchange u. Commissioner, CTA Carc No. use of the word "shall" in Subsection 3.1.2 describes the mandatory
5995, Oetober 75, 2002). nature of the service of a PAN. The persuasiveness ofthe right to due
process reaches both substantial and procedural rights and the failure
Bar Question (2010) of the CIR to strictl)' comply with the requirements laid down by law
and its own rules is a denial ofMetro Star Superama's right to due
On March 10, 2010, Continental, Inc. received a preliminary
process. Thus, for its failure to send the PAN stating the facts and
assessment notice (PAN) dated March 1, 2010 issued by the
Commissioner of Internal Revenue (CIR) for deficiency income tax for
the law on which the assessment was made as required by Section
228 of R.A. 8424. the assessment made by CIR is void.
2008. It failed to protest the PAN. The CIR thereupon issued a final
assessment notice (FAN) with letter of demand on April 30, 2010. The CIR tried to justify his position by citing
Clft u. Menguito, where
FAN was received by the corporation on May 10, 2010, following which the court stated that "the stringent requirement that an assessment
or on May 25,20L0, it filed its protest against it. The CIR denied the notice be satisfactorily proven to have been issued and released or,
protest on the ground that the assessment had already become final if receipt thereof is denied, that said assessment notice have been
and executory, the corporation having failed to protest the PAN. Is served on the taxpayer, applies only to formal assessments prescribed
the CIR correct? Explain. under Section 228 of the Tax Code, but not to post-reporbing notices or
pre-assessment notices... A post reporting notice and pre-assessment
Suggested answer: notice do not bear the gravity of a formal assessment notice. The post-
No. Failure to file a Reply to PAN mahes the taxpayer in default reporting notice and pre-assessment notice merely hint at the initial
and authorizes the reuenue official to issue the FAN. Howeuer, no findings ofthe BIR against the taxpayer and invites the latter to an
Iiability for additional or deficiency tax qrises from such failure. informal conference or clarificatory meeting."
Indeed, Reuenue Regulq.tions No. 12-99 mahes the filing of such Reply However, the Supreme Court said that the case of CIR u.
to PAN merely directory, i.e., the taxpayer may or may not reply to the Menguito (G.R. No. 167560, September 17,2008), cited by the CIR in
PAN. The only legal consequence of such failure to fiIe the Reply to the support of its argument that only the non-service of the FAN is fatal
PAN is for the CIR to issue a FAN. Since the corporation timely filed to the validity of an assessment, cannot apply to this case, because
the protest against the FAN, it cannot be said that the final assessment the issue herein was the non-compliance with the provisions of RR
notice had already become fi.nal and executory. 12-85, which sought to interpret Section 229 of lhe old tax law. R.A.
8424has already amended the provision of Section 229 on protesting
The issuance of PAN is mandatory an assessment. The old requirement of merely notifying the taxpayer
ofthe CIR's findings was changed in 1998 to informingthe taxpayer of
The importance of the due process guaranteed under the
not only the law, but also of the facts on which an assessment would
Constitution was emphasized by the Supreme Court in a very recent
be made.6
case, where the taxpayer was assessed based on the best evidence
rule. The BIR allegedly sent the PAN for deficiency taxes which the Assessrnent is null and. uoid. for haaing been issued. on the
taxpayer denied. The taxpayer, however, acknowledged receipt of d.ay the PAN was receiaed. by the petitioner. - Records show that
the FAN. The SC ruled that "Section 228 of the Tax Code clearly the PAN dated January 9, 2003 was received by petitioner on January
requires that the taxpayer must first be informed that he is liable 24,2003. On the other hand, the FAN was issued on January 24,2003.
for deficiency taxes through the sending of a Preliminary Assessment Given that the FAN was issued on the same day petitioner received
Notice. He must be informed of the facts and the law upon which the the PAN, it is evident that respondent violated the provisions of
assessment is made. The law imposes a substantive, not merely a
formal requirement. The sending of a PAN to the taxpayer to inform GCommissioner v. Metro Star Superama, Inc., G.R. No. 185371, December 8,
him of the assessment made is but part ofthe'due process requirement 2010.
626 llt,:vtt,:wt,:tr oN'l'Axn'r'ror*r 'l'irx Rl:uurtl:s 627
Ittrmodies of Taxpayere

Section 228 af bhe 1997 NIRC, as well as of'the provir.tions ol'lttrvenuc a. Taxpayer files request for reinvestigation or motion for
Regulations No. 12-85 and 12-99 and Revenue Memorandum Order reconsideration;
No. 37-94, which give the taxpayer a period of 15 days within which
to reply to the PAN. Even assuming that there was an informal b. He submits additional documentary evidence and"/or
conference that took place between petitioner and respondent, and arguments as well as legal authorities.
that during the conference and even thereafter, petitioner, through
its counsel, requested a copy of the FAN, the fact remains that as 6. Reinvestigation
indicated in the FAN, it was issued on the same day the PAN was a. BIR evaluates the legal and factual arguments, including
received by petitioner. Clearly, petitioner was denied of its right to documentary evidence submitted by taxpayers;
due process.T
b. Reiterates original findings or revise report of examination
4. Formal (or Final) Assessment Notice (FAN) and Letter of and submits it to RDO until it reaches the Regional
Demand - Regional Director - three (3) years ftom date Director.
of filing of return or 10 years foom date of filing false or
foaudulent return 7. Denial of protest by Regional Dircctor - 180 days from
date of filing of protest or submieeion of documentary
a. Regional Director signs assessment notice and demand evidence by taxpayer
letter;
b. He causes to be released and mailed assessment notice and 8. Administrative appeal to Comnrissioner of decieion of
demand letter, or personal service thereofto taxpayer. Regional Director

If the assessment notice was deemed insufficient insofar as 9. Denial of protest or inaction by Commissioner within 180
compliance with Section 228 of the Tax Code is concerned, such days frrom date of proteet or supplemental proteat
insufficiency can be cured if the demand letter can show the legal
and factual basis relied upon in the issuance of the assessment which 10. Appeal to CTAby taxpayer - 30 days from date ofrecelpt
the assessment notice failed to detail. The rule requiring the BIR to
inform the taxpayer in writing of the laws and the facts on which the Bar Question (2000, 1992)
assessment is made runs parallel to the due process clause for it is
Describe separately the procedures on the legal remedieg
believed that it is only through a detailed appraisal of its basis that
under the Tax Code available to an aggrieved taxpayer both at the
the taxpayer may be able to dispute the imposition or agree with it
(PNZ Marketing u. Commissioner, CTA Co,se No. 5726, December
administrative and judicial levels.
74,200L).
Suggested answer:
5. Protest letter must be filed by taxpayer within 30 days The legal remedies of an aggrieued taxpayer under the Tas Cod.e,
foom date of receipt of assessment notice and demand both at the adrninistratiue and judi.cial Leuels, may be clnssifi.ed into
letter; submits documentary evidence within 60 days those for assessment, collection and refund,,
from submission of protest letter The procedures for the administratiue remedies for assessrnent
TPuratos Philippines, Inc. v. Commissioner, CTA Case No. are as follows:
6g80, October 4,2OI0,
citing Estate of the Late Juliana Diez Vda. De Gabriel, G.R. No. 155541, Jan:uary 27,
2004; BPI Data Systems Corporation v. Commissioner, CTA Case No. 4580, January
a. After receipt of the Pre-Assessm.ent Notice (PAN), he rnust
12, 1994; Tupas v. CA, 193 SCRA 597; Banco Espanol v. Palanca, 37 Phil. 921; Morales within 15 days from. receipt explain why no additional tases
v. Collector, 17 SCRA 1018; Commissioner v. Reyes, G.R. Nos. 1b9694 and 168b81, should be assessed against him.
January 27,2006.
628 lU,:vrt:wr,:tt oN'l'AxA'r'tr lr'r
l',rx
' lt,r,;r.1,;r rr r,:l 629
lklrrrrxlit:g ol''l'uxpaycls

b. If the Commissioner of Internal Reuenue issue-s o.rt


Tax Appeals under other matter arising under the prouisions of the
assessment notice, the taxpayer rnust administroti.uel,y National Internol Reuenue Code. The judicial appeal starts with the
protest or dispute the assessment by fi.ling a motion fbr
Court of Tax Appeals, and continues in the sanle manner as shown
reconsideration or reinuestigation within 30 days frorn aboue.
receipt of the notice of assessment (4th par., Sec. 228,
NIRC). Should the Bureau of Internal Reuenue decide to utilize its
judicial tax remedies for collecting the taxes by ntectns of an ordinary
Within 60 days from filing of the protest, the toxpayer shall submit suit fi.led with the regular courts for the collection of a sum of money,
q.ll releuant supporting documents.
the taxpayer could oppose the same going up the ladder of' jud.i<:ial
The judicial remedies of an aggrieued taxpayer relatiue to an processes from the Municipal Trial Court (as the case n'Lay be) to th,e
assessment notice &re as follows: Regional Tri.al Court, to the Court of Appeals, thence to the Suprerne.
Court. [NOTE: Ciuil actions for the collection of delinquent taxe,s
&. Where the Commissioner of Internal Reuenue has not acted
amounting to Pl milliorl or n'Lore shqll now be filed with the CT'A
on the taxpayet's protest within a period of 180 days from under R.A.92821.
subrnission of all reLeuant documents, then the taxpayer has
a period of30 days from the lapse ofsaid 180 days within The remedy of an aggrieued taxpayer on u claim for refund is
which to interpose a petition for reuiew with the Court of to appeal the aduerse decision of the Commissioner to the CTA in the
Tax Appeals. sd,nte nxanner outlined aboue.

b. Shoutd. the Commissioner deny the ta,xpayey's protest, then


he has a period of 30 days from receipt of said denial within
Types of taxes
which to interpose a petition for reuiew with the Court of Self-assessing ta*es which da not require issua.nce of arssessn cnt
Tox Appeals.
Internal revenue taxes are self-assessing and no further
In both cases, the taxpayer must apply with the Court of Tox assessment by the government is required to create the tax liability
Appeals for the issuance of an injunctiue writ to enjoin the Bureau of (Tfu.paz u. Ulep, 316 SCRA 118).T}rre taxpayer himself assesses his
Internal Reuenue fTom collecting the disputed tax during the pendency tax liability, files the tax return and pays the tax within the prcscribed
of the proceedings. dates. The collection of such unpaid tax (like income tax) shown in the
The aduerse decision of the Court of Tatc Appeals is appealable tax return filed may proceed without any further assessment, and the
to the Cou.rt of Appeals by means of a petition for reuiew on certiorari
five (5)-year prescriptive period to collect the unpaid delinquent tax
within a period of 15 days from receipt of the aduerse decision, applies. This is so because the date of the assessment in the cast: of
extendible for another period of 15 days for compelling reasons, but self-assessed taxes would be the date of the actual filing of the rclturn
the extension is not to exceed a total of 30 days in all. INOTE: Under as it is on such date when the tax is said to have been assessed. ln
R.4.9282, decisions of the CTAdiuision shall be appealed to the CTA other words, the assessment made by the taxpayer of his tax liabilil,.y
en banc, and decisions of the latter, to the Supreme Courtl.
is adopted by the government (See Sec. 222[c], NIRC).

The aduerse decision ofthe Court ofAppeals is appealable to the Tares which require o,ssessn cnt to establish hability
Supreme Court by means of a petition for reuiew on certiorari within
a period of 15 days from receipt ofthe aduerse decision ofthe Court
The general rule is that taxes are self-assessing and thus do not
of Appeals.
require the issuance of an assessment notice in order to establish thc
tax liability ofa taxpayer. The exceptions are:
The employment by the Bureau of Internal Reuenue of any of
the administratiue remedies for the collection of the tax, such as 1. Tax period of a taxpayer is terminated
distraint and leuy, m.ay be administratiuely appealed by the ta.xpayer When it shall come to the knowledge of the Commissioner
to the Commissioner, whose decision is appealable to the Court of that a taxpayer is retiring from business subject to tax, or is
630 llt,:vtt,:wt,:tt r tN 'l'nxn't tott 'l'nx llr,:l,rr,rr rrr,:s 631
lilrtrrr,rlics ol"l\rxprrycls

intending to leave the Philippines or to remove his property :]. Tax lien
therefrom or to hide or conceal his property, or is performing Ifany person liable to pay an internal revenue tax, neglects
any act tending to obstruct the proceedings for the collection of or refuses to pay the same after demand, the amount shall be a
the tax for the past or current quarter or year, or to render the lien in favor of the Government of the Philippines from the time
same totally or partly ineffective unless such proceedings are when the assessment was made by the Commissioner until paid,
begun immediately, the Commissioner shall declare the tax with interests, penalties, and costs that may accrue in addition
period of such taxpayer terminated at any time and shall send thereto upon all property and rights to property belonging to
the taxpayer a notice ofsuch decision, together with a request the taxpayer. However, the tax lien shall not be valid against
for the immediate payment of the tax for the period so declared any mortgagee, purchaser or judgment creditor until notice of
terminated and the tax for the preceding year or quarter, or such lien shall be filed by the Commissioner in the office of the
such portion thereof as may be unpaid, and said taxes shall Register of Deeds of the province or city where the property of
be due and payable immediately and shall be subject to all the the taxpayer is situated or located (Sec. 219, NIRC).
penalties hereafter prescribed, unless paid within the time
fixed in the demand made by the Commissioner (Sec. 6[D], 4. Dissolving corporation
NIRC).
Every corporation shall, within 30 days after the adoption
2. Deficiency tax liability arisingfrom a tax audit conducted by the corporation ofa resolution or plan for its dissolution, or
by the BIR for the liquidation of the whole or any part of its capital stock,
including a corporation which has been notified of possible
The tax return filed and the tax paid by the taxpayer is involuntary dissolution by the Securities and Exchange
presumed to be correct and is not false or fraudulent. In order Commission, or for its reorganization, render a correct return
to determine the correctness of the computation of the tax to the Commissioner, verified under oath, setting forth the
liability made by the taxpayer, the BIR is granted the right to terms of such resolution or plan and such other information
conduct a tax audit within the prescriptive period. The tax audit as the Secretary of Finance, upon recommendation of the
generally requires examination of the books of accounts and Commissioner, shall, by rules and regulations, prescribe.
accounting records ofthe taxpayer under audit, or the records
of third parties who are suppliers or customers of the taxpayer The dissolving or reorganizing corporation shall, prior
under audit, or the government. The tax audit may also refer to the issuance by the SEC of the Certificate of Dissolution or
to a "no contact" audit whereby the tax liability of a taxpayer is Reorganization, as may be defined by rules and regulations
determined by comparing the tax returns filed by the taxpayer prescribed by the Secretary of Finance, upon recommendation
with the other documents or information obtained by the BIR of the Commissioner, secure a certificate of tax clearance from
from third parties. the BIR which certificate shall be submitted to the Securities
and Exchange Commission (Sec. 52[cJ, NIRC).
Theterm"d,eficiency" means: (1) The amount by which the
tax imposed by law as determined by the Commissioner or his
authorized representative exceeds the amount shown as the tax
by the taxpayer upon his return; or (2) If no amount is shown as
the tax by the taxpayer upon his return, or ifno return is made by
the taxpayer, then the amount by which the tax as determined by
the Commissioner or his authorized representative exceeds the
amounts previously assessed (or collected without assessment)
as a deficiency (See Sec.56[8], NIRC).
'l'lr ltr,n'rr,rr rrr,;r; 6:J3
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:J. 'I'hc l'AN/I)I, nrust s[ate the factual and legal bases of
the asscssment and jurisprudencel on which it is based;
otherwise, the assessment shall be void;z
CHAPTER }OflX 4. The FAN/DL must be signed by the Commissioner or his
duly authorized representative;
ASSESSMENT AND PROTEST
5. The FANIDL mustbe issued withinthe original prescriptive
period prescribed by law or within the extended prescriptive
periodas validly agreedbetween the BIR and the taxpayer;
What is an assessment? and served by personal delivery or by registered mail; and
An assessment is the notice to the effect that the amount therein
stated is due from a taxpayer as a tax with a demand for payment of
6. The FANIDL must be addressed and served to the correct
person in his/its registered or duly notified new address.
the same within a stated period of time (Comrnissioner u. CTA,27
SCRA 1159).It also refers to the official action of an administrative
officer in determining the amount of tax due from a taxpayer (Bisaya Bar Question (2008)
Land. Tlansportation Co. a. Collector, 705 Phil. 1338). After examining the books and records of EDS Corporation,
An assessment contains not only a computation of tax t}:'e 20O4 final assessment notice, showing basic tax of F1,000,000,
liabilities, but also a demand for payment within a prescribed deficiency interest of F400,000, and due date for payment of April
period. The ultimate purpose of assessment is to ascertain the 30,2007, but without the demand letter, was mailed and released by
amount that each taxpayer is to pay. An assessment is a notice the BIR on April 15, 2007, The registered letter, containing the tax
to the effect that the amount therein stated is due as tax and assessment, was received by the EDS Corporation on April 25,2007.
a demand for payment thereof. Assessments made beyond the a. What is an assessment notice? What are the requisites of
prescribed period would not be binding on the taxpayer (Tupaz a valid assessment? Explain.
u. Ulep,316 SCRA 118).
b. As tax lawyer of EDS Corporation, what legal defense(s)
Essential requirements for valid assessment would you raise against the assessment? Explain.

To be valid, an assessment must comply with the following Suggested answers:


essential requisites:
a. The assessment notice, without the demand letter, is uoid.
1. The FAN (BIR Form 17.08) contains the name, address, Section 228 of the Tqx Code expressly prouides that "the
and TIN ofthe taxpayer; the kind oftax, period covered, taxpayer shall be informed in writing of the law and the
basic tax and penalties; signed by the authorized BIR facts on which the assessment is made; otherwise, the
official, and the date of payment of the tax. The demand ussessment shall be uoid." Since the assessment notice
letter (DL) contains the computation of the deficiency tax, merely contains the bctsic tox, interest q.nd due date for
including penalties, if any, the factual and legal bases of payment, it does not comply with the requirernents of the
the assessment, and the demand for payment of the tax. law that it must state the factual and legal bases; hertce, it
Thus, the FAN and DL must always go together; is uoid.
2. The FAN/DL must be issued on account of or covered by a b. The demand letter is important not only because in such
validly issued letter of authority; Ietter does the BIR mahes a demand for the payment of the
rRev. Regs. No. 12-99
632 'Sec. 228, NIRC.
634 Itr,:vrr,rwr';r { )N 'l'AxA lr( )N 6:15
n,,,,,,,,111.11;':ll;li"i';,,,,,.",
defi,ciency to;r but more inxportantly, because the lindinlqs of' Notilication by OIR ol'his asscssment to taxpayer is not enough;
facts and computations of the d.efi.ciency tcr^r.es by the reuenu.e t:rxpayer must be infbrmed of factual and legal basis.
officers as well as the legal basis for such assessmcnts ure
Tancinco died leaving a house and lot. The BIR received a sworn
ade q uately exp lained t her ein.
statement for reward filed by an informer, prompting it to conduct
an investigation on the estate. Without the required preliminary
Assessment based on Presumption findings, BIR issued a letter of authority, which was received by one
Per taxpayer's books and records, its purchases for the fourth of the heirs, Reyes. On February 72,1998, the BIR issued a PAN
quarter of 2002 was only P5,682. Based on the quarterly report against the estate for F14.58 M. On May 19, 1998, the heirs received a
submitted to the BIR by taxpayer's suppliers, it is F3,121,769. Due final estate tax assessment and a demand letter, both dated April22,
to the discrepancy, the BIR assessed deficiency taxes based on the 1998, for F14.91 M, inclusive of penalties. On June 1, 1998, Sumbillo
higher amount. protested the assessment on behalfofthe heirs on the ground that
the property had already been sold by the decedent in 1990. The CIR
The CTA cancelled the deficiency assessments and ruled that issued a preliminary collection letter to Reyes, followed by a Final
the summary list of purchases received by the BIR were not verified Notice Before Seizure dated December 4, 1998. WDL was served
with other externally sourced data to check the integrity of the upon the estate, followed by notices of levy and tax lien against it.
information gathered. Indeed, the Integrated Tax System of the Reyes protested the notice of levy. The heirs proposed a compromise
BIR can only check or validate the format and possible viruses in settlement of F1 M. In a letter to CIR dated January 27 ,2OO0, Reyes
the computer program, but certainly not the content or substance of proposed to pay 507o of the basic tax due, citing the heirs'inability
encoded summary lists of purchases, according to the witness of the to pay the assessment. The CIR rejected the offer, since the estate
BIR. The court concluded that while it is true tax assessments have tax is a charge on the estate and not on the heirs; hence, the latter's
the presumption of correctness and regularity in its favor, it is equally financial incapacity is immaterial, as in fact the gross value of the
true that assessments should not be based on mere presumptions, estate (P32.42 M) is more than sufficient to settle the tax liability.
no matter how reasonable or logical the presumption might be (CIR
CIR demanded payment of F18.03 M; otherwise, notice of sale of
u. Hanex T?ad.ing; Far N Parcel u. CIR, CTA Case No.7475, property would be published. On April 11, 2000, Reyes proposed to
Noaernber 22,2011). pay L$OVo of the basic tax due. As the estate failed to pay the liability
The whole income tax assessment and part of the VAT within April 15, 2000 deadline, BIR notified Reyes on June 6, 2000
assessment rest on the finding that there is under-declared input tax that the property would be sold at public auction on August 8, 2000.
in the amount of ?L2,71.5,371.17. Simply put, the theory of CIR is that On June 13, 2000, Reyes filed a protest with the BIR Appellate
since there is an under-declaration ofinput tax and correspondingly, Division and offered to file the estate tax return and pay the correct
of purchases, the same should translate to taxable income for income
amount of tax without surcharge or interest. Without acting on the
tax purposes, and taxable gross receipts, for VAT purposes. In the protest and offer, CIR instructed the Collection Enforcement Division
imposition of VAT, what is critical to be shown is that the taxpayer to proceed with the auction sale; hence, Reyes filed a petition for
received an amount of money or its equivalent, and not when there review with the CTA. The CIR filed a motion to dismiss on the grounds
are under-declared input taxes on purchases. Since it was erroneous
that the CTA no longer had jurisdiction because the assessment is
for respondent to impose a deficiency income tax on the basis of an already final, and the petition was filed out of time. The CTA denied
under-declared input tax, the income tax return cannot be treated as the motion.
false. Such being the case, the prescriptive period to be applied is the
three-year period. In this case, the CIR failed to offer proofthat the During the pendency of the case with the CTA, BIR issued RR
first, second, and third waivers were executed in three copies; hence, 6-2000 and Revenue Memorandum Order No.42-2000, offering cerbain
the assessments are cancelled and set aside (Phil. Daily Inquirer taxpayers with delinquent accounts and disputed assessments an
a. CIR, CTA Case No. 7853, February 76,2072). opportunity to compromise their tax liability. On November 25,2000,
Reyes filed an application for compromise settlement and paid the
'l',rx ILt,:tur':t rt t,::i 6;i7
636 ll.r,:vr r,:wr,lrt oN'l'AXA't'rulr Anrr,rrrrrrr,trl. rtttrl I trol.r'sl,

mere internal memorundum issued tr-r the BIR's regional director,


amount of F1.06 M. While waiting for the approval of'thc Naliunul and not to the petitioner, UPS. ln the present case, it is the Regional
Evaluation Board, Reyes filed a motion to declare application as I)irector's decision, which is being appealed before the CIR. The
a perfected compromise with the CTA, which denied such motion, regulation implementing Section 228 of the Tax Code, specifically
since such application needs NEB approval. Reyes filed a motion for states that if the taxpayer appeals the Regional Director's decision
judgment on the pleadings, which was granted. The CTA denied the
with the CIR, the former's decision does not constitute a final decision
petition. Upon appeal, the CA granted the petition, saying that the appealable to the CTA. UPS correctly appealed the decision of the
assessment notice and demand letter should have stated the facts and
CIR, and not that of the Regional Director before the court, and it
the law on which they were based; otherwise, they were deemed void. timely filed its petition on August 23,2007 , after receipt of the WDL
Since the assessment and demand letter were void, the proceedings
on July 25, which act can be considered as a denial of its protest (UPS
emanating from them were likewise void, and any order emanating International u. CIR, CTA Case No. 7675, August 4, 2077).
from them could never attain finality.
The la.w requires that the factual and legal bases be stated in
The Supreme Court ruled that Section 228,paragraph2, of the
the Demand Letter q.nd Finctl Assessment Notice; the requirement for
Tax Code is clear and mandatory
- the taxpayer shall be informed
in writing of the law and the facts on which the assessment is based;
issuing a preliminary or final assessrnent, informing a taxpayer of the
ercistence of defi.ciency tax assessment is marhedly different from the
otherwise, the assessment shall be void. Reyes was not informed in requirement of what such notice must contain. Enron is a domestic
writing of the law and the facts on which the assessment of the estate -
corporation registered with the Subic Bay Metropolitan Authority
tax had been made. Reyes was merely notified of the findings by the (SBMA); hence, subject to the five percent (57o) final tax on its gross
CIR, who had simply relied upon the provisions offormer Section 229 income earned. Enron filed its income tax return for 1996, showing a
prior to its amendment by R.4.8424. net loss. BIR conducted an audit ofits books and records for 1996, and
The general rule is that statutes apply prospectively. However, the revenue officers disallowed certain deductions and costs without
statutes that are remedial, or that do not create new or take away indicating the factual and the legal bases. During the PAN stage,
vested rights, do not fall under the general rule. Clearly, Section 228 the BIR informed the taxpayer thru preliminary 5-day letter and
of the Tax Code provides for the procedure in case an assessment furnished Enron with a copy of the audit working paper. Then, CIR
is protested and does not create new or take away vested rights. assessed the deficiency five percent (57o) final tax on its gross income
In both instances, it can surely be applied retroactively. Moreover, earned. Enron disputed the protested the deficiency tax assessment.
R.A. 8424 does not state that pending actions are excepted from the Due to the non-resolution of the protest within the 180-day period,
operation ofSection 228, or that applying it to pending proceedings Enron filed a petition for review with the CTA and it argued that
would impair vested rights (Commissioner a. Reyes, and. Reyes u. the deficiency tax assessment disregarded Section 228 of the 1997
C ommis sioner, G.R. No s. I 59 6 94 and. 7 63 5 8 7, J anu ary 2 7, 2006) . Tax Code and Section 3.1.4 of Revenue Regulations No. 12-99, by
not providing the legal and factual bases of the assessment. It also
The assessment notice and letter of demand calling for questioned the substantive validity of the assessment. CTA granted
payment of the taxpayer's deficiency tax(es) shall state the Enron's petition and ordered the cancellation ofthe void assessment.
facts, the law, rules and regulations, or jurisprudence on Motion for reconsideration was filed but was denied by the CTA' CIR
which the assessment is based; otherwise, the forrnal letter of appealed to the CA, but the CA affirmed the decision of the CTA.
demand and assessment notice shall be void (Sec. 228, NIRC, It held that the audit working paper did not substantially comply
as implemented by Sec. 3, Reu. Regs. No. 12-99, September 6, 1999). with Section 228 of the Tax Code and RR 12-99 because they failed
formal letter of demand failed to state the legal and factual
The to show applicability of the cited law to the facts of the assessment.
bases for the assessment. - By reproducing the document verbatim, CIR appealed to the Supreme Court (SC).
the demand letter only stated the computations and discrepancies, The SC decided in favor of Enron. The use of the word "shall" in
but there was really no statement regarding the legal bases. The Section 228 of the Tax Code indicates the mandatory nature of the
evidence that the CIR tried to show to prove that he apprised the requirements laid down therein. In the issuance of FAN, the revenue
taxpayer of such legal bases was a memorandum that was actually a
ti38 llt :r'tt,lwt,ttr oru'l',rrA't rorrr 'l',\x ltl,:Mr':r)il,rs (;It1)
Arlr,rlttrcrrl, rrtttl l'rot,t'st,

officers did not provide Enron with written bases of the law and thc already sold in lf)90.'l'lrc llllt tricd to collect thc ttssossed tax thru
facts on which the assessment is based. CIR did not bother to explain administrative remedies, and the taxpayer ofl'ered to settle the same
how it arrived at such assessment. He failed to mention the specific thru compromise by paying SOVo of thebasic tax assessed, but the CIR
provision of the Tax Code or rules and regulations not complied with denied the offer and increased the total tax to F18.03 M, inclusive of
by Enron. penalties. The offer oftaxpayer was later on increased to 1007o ofthe
The SC ruled that the preliminary 5-day letter and audit basic tax assessed. As the tax was not paid, BIR then set the property
working paper were not valid substitutes for the mandatory for public auction sale; hence, petitioner filed petition for review with
notice in writing of the legal and factual bases of the assessment. the CTA. BIR filed a motion to dismiss because the assessment was
These steps were mere perfunctory discharge of the CIR's duties already final and execution and that the petition for review was filed
in correctly assessing a taxpayer. The requirement for issuing out of time. CTA denied the motion to dismiss.
a preliminary or final assessment, informing a taxpayer of the In the meantime, BIR issued Revenue Regulations No. 6-2000
existence of deficiency tax assessment is markedly different from and Revenue Memorandum Order No. 42-2000, offering taxpayers
the requirement of what such notice must contain. Just because with disputed assessments to compromise cases. On Novembet 25,
the CIR issued an advice, preliminary letter and final notice does 2000, Reyes filed the application for compromise and paid F1.06
not mean that taxpayer was informed of the law and facts on which M. While waiting for the approval by the BIR National Evaluation
the assessment was made. Board, Reyes filed a motion to declare the application as a perfected
The law requires that the factual and legal bases be stated in compromise, which the CTA denied since the NEB approval is needed.
the Demand Letter and Final Assessment Notice. Otherwise, the Reyes filed a judgment on the pleading, which the CTA granted.
express provision ofSection 228 ofthe 1997 Tax Code and Revenue However, the CTA eventually denied the motion. Reyes then filed
Regulations No. 12-99 would be rendered nugatory. The alleged an appeal to the Court of Appeals (CA). The CA granted the appeal,
"factual bases" in the advice, preliminary letter and audit working saying that the FAN/DL should have stated the facts and the law
paper did not suffice. on which the assessment was based, and since the FANIDL did not
state the facts and the law, the assessment was void and could not
Moreover, due to the absence of a fair opportunity to be informed attain finality and the proceeding emanating from them were also
of the legal and factual bases of the assessment, the assessment void. Thus, the BIR appealed to the SC.
is void. The old law merely required the taxpayer to be notified of
the assessment. This was changed in 1998 and the taxpayer must The Supreme Courb ruled that Section 228 of the 1997 Tax Code
now be informed not only of the law but also of the facts on which is clear and mandatory - the taxpayer shall be informed in writing of
the assessment is made. Such amendment is in keeping with the the law and the facts on which the assessment is based; otherwise, it
constitutional principle that no person shall be deprived ofproperty is void. Reyes was only notified of the findings by the CIR, who merely
without due process.3 relied on the provisions of the former Section 270 of the l-977 Tax
Code prior to its amendment by R.A. 8424. The SC added that the
Section 228 of the 1997 Tax Code, as amended by R.A. 8424, general rule is that laws apply prospectively. However, statutes that
does not state that pending actions are excepted from the operation are remedial, or that do not create new or take away vested rights,
thereof.
- On May 19, 1998, the heirs of Tancinco received a FAN
and DL for deficiency estate tax in the amount of F14.91 M, inclusive
do not fall under the general rule. Since Section 228 of lhe 1997 Tax
Code, as amended by R.A. 8424, does not state that pending actions
of penalties. The assessment was duly protested within the 30-day are excepted from the operation of Section 228, or that applying it
period from date of receipt, on the ground that the property was to pending proceedings would impair vested rights, said law may be
applied retroactively.a
3Commissioner v. Enron Subic Power Corporation, G.R. No. 166387, January
19, 2009; see United Salvage and Towage (Phils.), Inc. v. Commissioner, CTA Case No.
6606, March 12,2010; UPS International, Inc. v. CIR, CTA Case No. 7675, August 4, aCommissioner v. Reyes, and Reyes v. Commissioner, G.R. Nos. 159694 and
2011. 163581. January 27, 2006.
640 1il,:vr r,rwr,rrr or.r'l'lxll'roru 'l'Ax li,t,:Mt,tt )tt,:s ri41
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The inserted. sentence waa not an q.fft.rmation of uhat the laut the 199? Tax Codc (lt.A. U424).'l'he inserted sentence was not an
required.; the amend.ment by R.A.8424 was an innouation and. aflirmation of what the luw required; the amendment by R.A. 8424
could. not be reasonably inferced. from the old.law.
- On October was an innovation and could not be reasonably inferred from the old
28, 1988, CIR assessed petitioner (BPI) for deficiency percentage tax law.
and documentary stamp tax for 1986. On December 10, 1988, BPI
The October 28, 1998 notices were valid assessments, which BPI
replied stating "[Y]our deficiency assessments are no assessments
should have protested within 30 days from receipt. The December
at all ... As soon as this is explained and clarified in a proper letter
10, 1998 reply BPI sent to BIR did not qualify as a protest, since the
of assessment, we shall inform you of the taxpayer's decision on
letter itself stated "we shall inform you of the taxpayer's decision
whether to pay or protest the assessment." On June 27,1991, BPI
on whether to pay or protest the assessment." Thus, BPI's failure to
received a letter from BIR, stating "... Your letter failed to qualify as
protest the assessment made it final and executory. The assessment
a protest under Revenue Regulations No. 12-85 ... still we obliged to
is presumed to be correct (Commissioner u. BPI, G.R- No. 734062,
explain the basis of the assessment." On July 6, 1991, BPI requested
a reconsideration of the assessments and on December 12, 1991, April 77,2007).
BIR denied the protest, which was received on January 2I,Igg2.On In a long line of cases, the Supreme Court has ruled that the
February L8, 1992, BPI filed a petition for review at the CTA. On requirement of the law to inform the taxpayer of the basis of the
November 16, 1995, CTA dismissed the petition for lack ofjurisdiction; assessment does not necessarily mean that it be a full narration of
the assessments had become final and unappealable. the facts and laws on which the assessment is based. The purpose
of the assessment is to enable the taxpayer to know the law and the
On May 27,1.996, CTA denied reconsideration. On appeal, the
facts on which the assessment is made, and to afford him his right
CA reversed the CTA decision. It ruled that the October 28, 1988
notices were not valid assessments because they did not inform the
to due process once it is served and received. Thus, so long as the
parties are notified and given the opportunity to explain their side,
taxpayer ofthe legal and factual bases therefor. It declared the proper
the requirements of due process are satisfactorily complied with. In
assessments were those in May 8, 1991 letter, which provided the
reasons for claimed deficiencies. CIR elevated the case to the Supreme
this case, the petitioner has intelligently made its protest by stating
Court.
that its sales of pharmaceutical items in favor of its in-patients are
exempt from VAT. This circumstance proYes that petitioner was
The Supreme Court ruled that CIR did not inform BPI in writing sufficiently informed of the facts and the law as to why assessment has
of the law and facts on which the assessments were made. He merely been issued against it(Hermano MiguelFebres Cord'ero Med'ical
notified BPI of his findings, consisting of the computation of the tax Found.ation a. CIR, CTA Case No. 8194, January 9,2012).
liabilities and a demand for payment within 30 days from receipt
thereof. He relied on former Section 270 of the Tax Code, prior to its lssuance of LA for discrepancy noted in LN
amendment by R.A. 8424.InCIR u. Reyes, G.R. No. 159694, January
27,2006, the only requirement was for the CIR to "notify" or inform The issuance of an issue-based letter of authority to cover
the taxpayer of his findings. Nothing in the old law required a written specifically "income tax, VAT, percentage tax, and withholding taxes
statement to the taxpayer of the law and the facts. The Court cannot due to discrepancy reflected in the letter notice" must be issued by
read into the law what obviously was not intended by Congress; that the BIR. A Notice for Informal Conference, together with the letter
would be judicial legislation. of authority, shall be served to the taxpayer (Big AA Corporation o.
CIR, CTA Case No.7O93, February 22,2006; RMC No. 55'2070,
Jurisprudence simply required that the assessments contain a June 77,2070).
computation of tax liabilities, the amount to be paid plus a demand
for payment within a prescribed period. The sentence "the taxpayer
lssuance of valid LA
shall be informed in writing of the law and the facts on which the
assessment is made; otherwise, the assessment shall be void" was The examiners were authorized to examine petitioner's books of
not in the old Section 27o,btl was only inserted in Section 228 in accounts and accounting records for the period "1997 and unverified
642 'l'^\ llt,rMt,tt rtt,tli (;4il
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Arrrr.rtrrrrctrl. tt tttl l'ro(,t'gl

prior years." The CIR's basis for the deficiency VAT fbr the year lggz of thetaxpayer.'l'ltus, whe n thc deliciency assessments were sent to
was the year 1998. In this case, the court ruled that the deficiency the old address (b.y the tlllt by mail) despite proper notification of
assessment issued without a valid authority is a nullity. Also, the new address, the running ofthe three-year prescriptive period to
the issuance of a letter of authority for "one taxable year and all assess was not suspended. The law on prescription, being a remedial
unverified prior years" or similar statement is prohibited (CIR u. measure, should be interpreted in a way conducive to bring about the
Sony Philippines, GR. No. 778697, Noaember IZ,2OIO). beneficient purpose of affording protection to the taxpayer.T
Since no assessment was serued on the trustee of the Estate, it can
As there are no notices sent to the petitioner-BASF, the
be said that there was no assessment of the tax, and no proceed,ings
assessments are void. InCIR u. Reyes, the SC ruled that if there is no
could be initiated in court for the collection of said tax. Due process
requires at the very least that such notice actually be - received. In valid notice sent, the assessment is void. The reason for this is that
"the law imposes a substantive, not merely a formal, requirement.
Commissioner of Internal Reuenue u. Pqscor Realty and Deuelopment
To proceed heedlessly with tax collection without first establishing
Corporation, the Court had occasion to say:
a valid assessment is evidently violative of the cardinal principle in
An assessment contains not only a computation oftax liabilities, administrative investigations that taxpayers should be able to present
but also a demand for pa5rment within a prescribed period. It also their case and adduce supporting evidence' x x x." A void assessment
signals the time when penalties and interests begin to accrue against cannot give rise to an obligation to pay deficiency taxes, and it divests
the taxpayer. To enable the taxpayer to determine his remedies the taxing authority of the right to collect them.8
thereon, due process requires that it must be served on and received
b)' the taxpayer.5 Forms of assessment
The final assessment notice for the alleged underpayment of 1. Forrnal Assesstnent Notice (FAN). - Generally, an
the estate tax, which was issued by the CIR, was established to assessment refers to the formal assessment notice (BIR Form
have been served on the trustee of the Estate of the late Juliana No. 1708), which is a serially numbered, accountable form of
DiezVda. de Gabriel, whose relationship with the trustor had been the government. Thus, a pre-assessment notice issued by a
severed when the latter died. Since no assessment was served on revenue official preparatory to the issuance of a formal or final
the Estate, it can be said that there was no assessment of the tax, assessment notice as part ofprocedural due process is not, legally
and no proceedings could be initiated in court for the collection of speaking, an assessment, even if it contains a computation of
said tax. The claim for collection filed with the probate court was the tax liabilities of a taxpayer and a demand for payment of
barred for having been made beyond the five-year prescriptive period the computed tax liabilities.
to collect set by law.6
The failure of the BIR to note where to send the PAN and FAN 2. Informal written notice. - An assessment may also be in
should not be taken against BASF where there is proper notice of the form of a letter or other less formal communications to the
taxpayer. In order to constitute an assessment, the notification
new address.
- It has been established that Notices of Dissolution
were published in the Malaya newspaper on three (3) successive must contain an outright demand for payment of the amount
weeks - August 22, 29, and September 5, 2001, wherein the new alleged to be due. Thus, it was ruled that a letter containing
address in Laguna was included. Also, the tax audit for another year a computation of supposed tax liabilities, giving the taxpayer
(1999) was done by another revenue officer in the Laguna address an opportunity to show the incorrectness ofthe findings ofthe
examiner, or urging the taxpayer to produce his books or records
for verification or to present his side is not an assessment
sEstate of the Late Juliana Diez vda. de Gabriel
v. commissioner, 41g scRA 266,
cited in BASF Coatings + Inks Phil v. Commissioner, CTA Case No. 712b, February
t7,20ro. TBPI v. Commissioner, G.R. No. L-174942, March 7, 2008.
cEstate of the late Juliana Diez vda de sBASF Coatings + Inks Philippines v. Commissioner, CTA Case No. 7125,
Gabriel v. Commissioner, G.R. No. 1bb541,
January 27,2OO4 (419 SCRA 266). February 17,20IO.
644 llt,:vil,:wt,:rr oN'l'Axn'r'ror'r 'l',t x lt.t,:rrll,lt rt l,:s 64lt
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(Lantin a. Commissioner, CTA Case No. 7957, April lO, ln thc cirsc of'ir lirlsc or fiaudulent return with intent to
1969). cvade tax or ol'ltrilure to file a return, the tax may be assessed'
or a proceeding in court for the collection of such tax may be filed
A demand for payment of franchise tax, representing the
difference between the tax computed at five percent (57o) pursuant
without assessment , at any time within 10 years after the discovery
of the falsity, fraud or omission. In a fraud assessment which has
to Section 259 of the Tax Code and the tax at one percent (l7o) or
become final and executory, the fact of fraud shall be judicially taken
two percent (2Vo) under its franchises covering the period, which
cognizance of in the civil or criminal action for the collection thereof
was previously refunded erroneously by BIR is an assessment for
(9ec.222[a], NIRC).
deficiency tax (Guagua Electric Light Plant Co. u . Cornmissioner,
supra). If the date on which the assessment is due to prescribe falls on a
Saturday, the following day being a Sunday, it is understood that the
A letter of the Commissioner demanding the amount of a
Government has until the next succeeding business day or Monday
rubber-check previously paid by a taxpayer, should be deemed to be
an assessment, ifit declares and fixes the tax to be payable against
within which to assess the tax (Com'm'issioner a.Western Pacific
the party liable thereto and demands the settlement thereof. Corporation, T4 SCRA 105).ThLe computation of the prescriptivo
period is that the first day shall be excluded but the last day ofthe
However, an affidavit which was executed by revenue officers, period so computed is to be included, unless it is a Saturday, a Sunda.y,
stating the tax liabilities of a taxpayer and attached to a criminal or a legal holiday, in which event the time shall run until the end ol'
complaint for tax evasion, cannot be deemed an assessment that can the next day which is neither a Sunday nor a holiday.
be questioned before the CTA (Commissioner a. Pascor Realty
and Deaeloprnent Corporation, supra). In counting the three (3)-year period where there is a leap
year (which has 366 days), the Supreme Court ruled that thtr
Administrative code explicitly ordains that the term "year" shall bc
Significance of assessment
understood to have 365 days (National Marketing Corporation u '
An assessment is a preliminary and essential step towards the Tecsonr 29 SCRA 70). Applying the ruling to tax assessment cases,
initiation of administrative proceedings or judicial action to collect the BIR may, therefore, assess the deficiency tax only within 1,091r
taxes. It is not altogether inconsequential; it establishes the basic (365 times 3) days. A "year" shall be understood to be twelve calendar
tax liability ofa taxpayer. It is relevant (a) in the proper pursuit of months; "month" of thirty days, unless it refers to a separate calendar
judicial and extrajudicial remedies to enforce taxpayer liabilities and month, in which case, it shall be computed according to the number
certain matters that relate to it, such as the imposition of surcharges of days the specific month contains; "duy," to a day of twenty-four
and interest, (b) in the application of statutes of limitations, (c) in the hours (Administratiue Code of 1987).
establishment of tax liens, and (d) in estimating the revenues that
However, in 1987, Executive OrderNo. 292 (Administrative Code
may be collected by government in the coming year.
of 1987) was enacted. Section 31 of said law provides that a"vear"
shall be understood to be 12 calendar months; "month" of 30 days,
When must an assessment be made?
unless it refers to a specific calendar month. Applytttg EO 292, the
Except as provided in Section 222 of the 1997 Tax Code, taxes Supreme Court in the case of Cotnmissioner of Internal Reuenue u'
shall be assessed within three (3) years after the last day prescribed Primetown Property Group, G.R. No. 162155, August 22, 2007, ruled
by law for the filing of the return, and no proceeding in court without that the Administrative code of 1987, being the more recent law than
assessment for the collection of such taxes shall be begun after the the Civil Code, governs the computation of legal periods.
expiration ofsuch period. In a case where a return is filed beyond the
period prescribed by law, the three-year period shall be counted from Basis of assessrnent
the day the return was filed. For purposes ofthis section, a return
The deficiency tax assessments issued against Luang originated
filed before the last day prescribed by law for the filing thereof shall
be considered as filed on such last day (Sec. 203, NIRC).
from the computerized matching conducted by the BIR on
information or data provided by Luang's suppliers against Luang's
646 Itt,;vr r,twt,ttt oN'l'nx,\'r'rlru 'l',lx llt,:tut,ltrrt,:s 647
Axrrr.nnrrrt,ttl. rtntl Itrot,ctct

declarations per vAT returns filed coverin g2oo5. said cornputeriztxl considering thrrt it, tlttcs tr<lL affect or pertain to income or expense
matching supposedly disclosed that Luang did not declure his which could all'ect the company's income tax due for 2006, and
purchases in the total amount of F40,048 ,304.72, and as such, l,uang
Waterfront's F8 million overpayment in 2006 is significantly higher
had under-declared his purchases by gg.6%o. As a result, the llilt than the company's tax assessment (Waterfront Cebu City Hotel
issued Letter Notice dated April 30, 2OO7 against Luang. RMO 42- a, CIR, CTA Co,se No.8005, December 72' 2072).
2003 provides the guidelines governing assessment oftrxes covered by
LNs, while RR 12-99 provides that "If after review and evaluation . . ., it The presumption of correctness of assessment, being a rlere
is determined that there exists sufficient basis to assess the taxpayer, presumption, cannot be made to rest on another presumption. -
the said Office shall issue to the taxpayer, at least by registered mail, Assessment Notice and demand letter and details of discrepancy show
a PAN for the proposed assessment, showing in detail, the facts and that united Distribution Management was assessed for deficiency final
the law, rules and regulations, orjurisprudence on which the proposed taxof 107o on payments to stockholders and interest payments made
assessment is based." to them. There is nothing in the records which would show that United
Distribution Management filed a return for the final withholding tax
BIR witness testified that the post reporting notice was sent on payments to stockholders treated as dividends subject to final
by registered mail, but during the cross examination, the witness tax. As testified to by the external auditor, petitioner made some
confirmed that he has no document or evidence to prove that the pAN paSrments to stockholders for their advances to the corporation but
was actually received by Luang. Jurisprudence is replete with cases did not declare and pay dividends to its shareholders in 2004. The
holding that if the taxpayer denied receiving an assessment from the minutes of the board meetings were examined and they did not come
BIR, it is incumbent upon the BIR to prove by competent evidence across any document authorizing declaration of dividends, and the
that such notice was indeed received by the addressee. The onus Retained Earnings in the audited financial statement for 2004 showed
probandi is therefore shifted to CIR. InCIR u. Metro Star Superama, Fl,895,568 and a deficit of F89,360 for 2003. In this case, CIR failed
the High rribunal declared that failure to strictly comply with notice to prove in court that the payment to the stockholder and the interest
requirements prescribed under Section 228 of lt,e Tax Code and RR paid were indeed dividends. Clearly, the CIR merely assumed that
12-99 is tantamount to a denial of due process. Thus, Luang was not
said payments were dividends, which has neither legal nor factual
accorded due process, and the undated PAN and FAN dated October
basis. well-settled is the rule that "the presumption of correctness
30, 2008 are void (Luang u. CIR, CTA Case No. Zg6Z, January E, of assessment, being a mere presumption, cannot be made to rest on
2072; see Next Mobile, Inc. a. CIR, CTA Case No. 2g65, December another presumption" (ffinited Distribution Management u- CIR,
77,2072; Phil. AerospcLce Deuelopment Corp. a. CIR, CTA Case CTA Case No. 7885, September 24, 2072; CIR a. Reyes, G.,R. No.
No. 7830, December 1 7, 2072). 759694, January 27,2006; Benipayo u. CIR, ibid.).
Effect of excess tqx credit claim on subsequent tctxable periods.
- BIR issued a deficiency income tax assessment for 2006, which When is a tax assessment made or deemed made?
is attributed to prior year's excess tax credits claimed and based on
There are three (3) important dates to be considered in cases of
disallowed creditable tax withheld. The assessment was protested
assessments. These are: (a) date of issue or preparation; (b) date of
on the ground that it had no effect because the assessed amount was
has already been deducted in its 2008 annual ITR, by reducing the service or mailing; and (c) date of receipt.
excess credit in its 2008 ITR, and it was not paid. When the taxpayer 1. Issue date
received the FDDA from the BIR, it filed a petition for review with the
The "issue date" is necessarily anterior to the date ofthe actual
CTA. The CIR contends that the adjustment made by the taxpayer
should be disregarded, given the adjustment affected the succeeding release or mailing of the demand letter. It is not the issue date of
taxable year 2007, which is still under investigation. the demand letter and/or notice of assessment that is the reckoning
point in prescription, but rather, the date when said demand letter or
The CTA ruled that the assessed income tax of P1.5 million notice of assessment is released, mailed or sent to the taxpayer that
due to excess tax credits would not give rise to deficiency income tax constitutes actual assessment (Repubhc a. Limaco & De Guzman
Commercial Co., 5 SCRA 990).
648 llt.:vt t,:wt,:l or'l',,rxn lror'r 'l'nr l{t';vt'tt rtt,trl (i49
Alrr.rrrnrlttl ttttrl l )trrlt'sl

2. Date of service or mailing though that thc corrct:t, irdrlrcss 0l'thc tuxpayer is indicated in the
demand letter or not,ice. Records, however, show that petitioner
Assessment is d,eemed made when notice is released or
wrote private respondent a follow-up letter dated September 19,
ma.iled. to correct ta.xTtayer.
- An assessment is deemcd madc whcrr
the notice to that effect is released, mailed or sent to the taxpaycr firr
1g55, reiterating its demand for the payment of taxes as originally
demanded in petitioner's letter dated July 16, 1955. This follow-up
the purpose of giving effect to the assessment (Bautistq qnd Tsn
letter is considered a notice of assessment in itself which was duly
a. Collector, G.R. No. L-72259, May 27, 1959). However, when an
received by private respondent in accordance with its own admission
estate is under administration, the notice of assessment must be sent
(Republic a. Court of Appeals and' Nielson & Co., 149 SCRA
to the administrator. Since the administrator had not received the
351).
notice of assessment, he could not appeal the assessment to the CTA
within 30 days from date of mailing of notice (Republic u. Leonor Requiremcnts to mahe presumption of receipt in the course
d.eln Rama' GR. No. L-2L708, Nouember 29, 7956). of mail applicable. Deficiency income tax assessments cannot be
- collector
tax cannot prove that said assessments
enforced where the
Mere notations of mailing cannot suffice.
- While we have
held that an assessment is made when sent within the prescribed
were served on the taxpayer within the period ofprescription provided
by law. The presumption that a letter duly directed and mailed was
period, even if received by the taxpayer aft,er its expiration (Bautista
received in the regular course of mail cannot apply where none of
and. Tan u. Collector, G R. No. L- 7 2 2 59, May 2 7, 7 I 59 ), this ruling
the required facts to raise this presumption, i.e., that the letter was
makes it the more imperative that the release, mailing, or sending of
properly addressed with postage prepaid and that it was mailed, have
the notice be clearly and satisfactorily proved. Mere notations on the
Leen shown. Once these facts are proved, the presumption is that the
records of the tax collector of the mailing of a notice of deficiency tax
Ietter was received by the addressee as soon as it could have been
assessment to a taxpayer, made without the taxpayer's intervention,
transmitted to him in the ordinary course of the mails. But if one of
notice or control, and without adequate supporting evidence, cannot
the said facts fails to appear, the presumption does not lie (Enriquez
suffice to prove that such notice was sent and received; otherwise,
u. Sun Life Assurance of Canad.ar 4T Phil.269).
the taxpayer would be at the mercy of the revenue of!ficers, without
adequate protection and defense. The fact that Nava acknowledged
receipt ofthe second final notice personally delivered to him is no
3. Date of receiPt
proof that he received the first notice by mail. There is a difference An assessment is deemed made on time when notice to this
between receiving a second final notice and receiving a final notice effect is released, mailed or sent by the Collector to the taxpayer,
for the second time (Naua a. Commissioner, 13 SCRA 104). even though the same is actually received by the taxpayer upon
the expiration of the prescriptive period (Basilan Estatesr lnc' u'
Presurnption of receipt in the course of mail; burd.en of
proof in case of d,enial of receipt. - When an assessment notice Collector,2l SCRA l7).Ihelaw does not require that the demand
or notice be received within the prescriptive period (Republic u.Tqn
is sent by mail, the rule is that it is prima facie presumed that the
taxpayer received the mailed notice within the period of time when
Kim En, CA-G,R. SP No. 28743, Februany 29, 1964).
mail of such kind are ordinarily received so that if such presumed Receipt of the tax notice by the taxpayer's attorney-in-fact is
receipt is still within the prescriptive period, the taxpayer's contention binding upon the taxpayer (Gibbs a. Cornrnissioner, 15 SCRA 318).
that the Government's right to assess the tax has already prescribed
cannot be given credit (Republic u. Tan Kim En, CA G.R, SP No. Who may sign an assessment notice?
28743, Febrwary 29, 7964). However, where the taxpayer-addressee
makes a direct denial of receipt of a mailed demand letter, such denial Since it is the Commissioner that is specified in the law as
shifts the burden to the Government to prove that such letter was the one empowered to make assessments, the question of whether
indeed received by the taxpayer. Significantly, it should be noted the power may be delegated by him or exercised by lesser officials
that the party favored by the presumption of receipt under Rule 131, in the BIR has arisen. It has been held that the signing of a notice
Section 3(v) of the Rules of Court is the Government. It is important of assessment may be delegated to subordinate officers (villamin
u. Court of Tax Appeals, G.R. No. L-77536, October 31,7960)'
650 Itt,lvt t,:wt,:lt oN'l'nx,r'r'ror.,r
(i5 I

^"",."l'11.:l;lll,li"ii.,,,,,-,
An assessment signed by the Chief of the Income Tax l)ivision or making asscssments, and even while the appeal of the taxpayer
by a Provincial Revenue Officer with delegated powers is a vulid from the original assessment is still pending in the Court of Tax
assessment (Collector u. Bohol Land. Tlansportation Co, 707 Appeals so as to avoid multiplicity of suits (Collector u. Batangas
Phit.965). Tlansportation Co., 102 Phil. 822).
Section l-5 [now Sec. 6(8)] of the NIRC provides "[W]hen a report
Revised assessment required by law as a basis for the assessment of any national internal
The change of assessment from EWT to FWT in the FDDA is revenue tax shall not be forthcoming within the time fixed by laws
considered as a neu) assessment. The concept of "Iicense generating or rules and regulations or when there is reason to believe that any
royalty income'in RMC 44-05 is nowhere to be found in RMC 77-03; such report is false, incomplete or erroneous' the Commissioner shall
hence, the retroactiue application by the CIR of RMC 44-05 has no leg assess the proper tax on the best evidence obtainable." Clearly, Section
15 does not provide an exception to the Statute of Limitations on the
to stand on.
- The CIR rendered a Final Decision on the Disputed
Assessment (FDDA), wherein he treated the software maintenance issuance of an assessment, by allowing the initial assessment to be
seryice fees as "license generating royalty income" under Section 5 made on the basis of the best evidence obtainable. Having made its
of RMC 44-05 that should be subjected to a final withholding tax and initial assessment in the manner prescribed, the Commissioner could
not expanded withholding tax. Accordingly, the tax rate that shall be not have been authorized to issue, beyond the five (5!year prescriptive
applied is72%o on the income pa5rment remitted to the foreign affiliate. period, the second and the third assessments under consideration
But taking into consideration the tax treaty between the U.S. and (Commissioner a. B.F. Goodrich Phils., 303 SCRA 546).
the Philippines, the tax rate to be applied is reduced to l\Vo. The period between the request for reinvestigation or
In the case at bench, Fluor argues that the change in the reconsideration and the revised assessment must be subtracted from
classification of the assessed deficiency tax from EWT in the demand the total prescriptive period prescribed in Section 318 (now Sec.223,
letter to FWT in the final decision on disputed assessment should be NIRC) (Ta.n Guan o. Nable,24 SCRA 93).
considered as a new assessment. When an assessment is reconsidered, it is the date the
The CTA agreed with Fluor. The change of assessment from reconsidered assessment is notified to the taxpayer that tolls the
EWT to FWT in the FDDA is considered as a new assessment on five-year period of limitation, on the theory that an assessment that
the following grounds: (1) CIR's FDDA is primarily anchored on has been set aside or cancelled is no assessment at all (Querol a.
Section 5 of RMC 44-05. However, after reviewing the provisions of Collector,6 SCRA 304).
said Circular, this Court finds that the same is not applicable in this
case in view ofthe non-retroactive application ofthe Circular. It is Forms of protest
very clear under Sec. 9 of RMC 44-05 that such Circular only covers
There are basically two (2) types of protest against an
software pa5rments paid or payable from date of effectivity of the same,
assessment. These are (a) the request for reconsideration, where the
which is September 6,2005. This assessment involves the year 2004.
protest is anchored on documents, arguments, and legal authorities
Regulations and circulars would have no retroactive application, ifto
already submitted or presented to the BIR, or (b) the request for
so apply them would be prejudicial to the taxpayers. (2) The concept
reinvestigation, where the protest is grounded on new or additional
of "license generating royalty income" in RMC 44-05 is nowhere to be
documents, arguments, and legal authorities not yet submitted or
found in RMC 77-03; hence, the retroactive application by the CIR of
presented to the BIR(Reu. Regs. No. 12-85).
RMC 44-05 has no leg to stand on (Fluor Daniel Phil a. CIR, CTA
Case No.7793, April 17,2072). The period to file the protest is described as the "30'day period."
The written protest, which may be a request for reconsideration or
The Commissioner has the authority to make subsequent request for reinvestigation, shall be accompanied by a waiver of the
assessments or modify or revise the original assessment to collect
Statute of Limitations in favor of the government. "Request for
additional sums covered by the original assessment as long as the reconsid.eration" tefers to a plea of re-evaluation of the assessment
modification or revision is done within the prescriptive period for
652 llr,:vr t,:wt,:tr ott'l'nxn't'tor't
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ltt,;tr.lt,lt rtt,ts
Asscsr+tttr:nl, tt trtl I trot,tlsl

on the basis ofexisting records without need ofadditional evidoncc.


Assessment Division and Regional Director; hence, the original higher
It may involve a question of fact or of law, or both. "Request for
reinaestigatiort" refers to a plea ofre-evaluation ofan assessment on assessment for deficiency EWT for F1-,617,910.13 remains valid,
the basis ofnewly discovered or additional evidence that a taxpayer and the motion lacks basis. The cTA ruled that the revised audit
intends to present in the reinvestigation. It may also involve a report is valid and the payment of the revised assessment settled in
question of fact or law, or both.e full the deficiency EWT. The revised report, being the work product
of the revenue officers in the performance of their official duties,
The filing of the protest against the FAN/DL within the 30- enjoys the presumption of regularity. The revenue officers have the
day period from date of receipt is MANDATORY; otherwise, the competence and authority to determine the amount of deficiency tax
assessment would become final and executory. and issue an audit report stating the same. Here, the cIR failed to
adduce evidence that the report was invalid and not yet final (UPSI
The date ofreceipt by the taxpayer ofthe assessment notice and
letter of demand is crucial to his present and future tax remedies. In
Property Hold'ings a. CIR, CTA Case No. 7702, June 2L,201L)'
some cases, the mailed envelope containing the assessment notice Request for reinoestigation may toll prescriptiae period"
and letter of demand is received by a clerk or a security guard of The issue of prescription raised by petitioner is baseless. The
-assessments
the taxpayer, and is delivered to the President or other responsible were predicated on the fact that his income tax returns,
person ofthe corporation at a later date. This leaves such President or if not fraudulent, were false because he under-declared his income. In
other responsible officer to file his protest within a few days to comply such a case, the deficiency assessments may be made within ten (10)
with the 30-day period. If there is truly no more time to consult a tax years after the discovery of the falsity or omission. The courb action
counsel or agent regarding the assessment, the taxpayer must file should be instituted within five (5) years after the assessment, but
his written protest against the formal assessment on best efforts and this period is suspended during the time that the commissioner is
based on the best evidence obtainable within the remaining few days prohibited from instituting a court action. As explained in the solicitor
ofthe 30-day period, citing the factual and legal bases for objecting to General's memorandum, Basa's request for reinvestigation tolled the
the deficiency assessment. He can then subsequently hire the serwices prescriptive period of five (5) years within which court action may be
of a tax counsel or agent who can assist him in defending his case Lrought.lo Moreover, the issue of prescription should have been raised
before the BIR and later on, with the CTA. In this connection, it is best in the Tax Court.11
that the company has a written memorandum regarding the receipt
and handling of BIR communications, especially FAN/DL, in order
Ad.ministratiue appeal must be fil.ed. with the Commissioncr'
Afinal decision of the commissioner's subordinate official shallbe
to prevent or avoid assessment notices becoming final and executory -
not be considered as final, when an administrative appeal on the final
and resulting in the possible bankruptcy of the company.
decision of the subordinate official is filed before the commissioner
The BIR issued. a Final Assessment Notice for d.eficiencat under Section 3.1.5 of Revenue Regulations No. 12-99. Thus, when the
expand.ed. withhold.ing to.r against the tarpayer, u:hich was taxpayer filed the request for reconsideration ofthe final decision on
tim.ely protested. by the tarpayer. - Taxpayer filed petition for the disputed assessment (FDDA) with the Assistant commissioner -
review with the CTA, and later on filed an Omnibus Motion for the Large Taxpayers service (and not to the commissioner), it did not toll
cancellation of the assessment, alleging that the CIR during the the iunning of the 30-day period to appeal the FDDA to the CTA'12
pendency of the proceedings, issued a Revised Audit Reporb which
reduced and recomputed the EWT in the amount of F78,076.03,based
The taxpayer's failure to appeal in due time makes the
on the revised report signed by Revenue Officer Quevedo and Group
assessment in question final, executory and demandable. Thus,
Supervisor Rimando, and RDO Salita. On this basis, taxpayer paid
the lower deficiency EWT. CIR filed a Comment stating the Report loCommissioner v. Capitol Subdivision, Inc., 119 Phil' 1051; Collector v' Suyoc
was not final as the same was not approved and signed by the Chief, Consolidated Mining Co., 104 Phil. 819.
rrBasa v. Commissioner, G.R. No. L-45277, August 5, 1985.
lzCollege Assurance Plan Phils, Inc' v. Commissioner, CTA EB No' 475, June 1,
eRev. Regs. No. 5-87 was amended by Rev. Regs. No. 12-99. 2010; see Fishwealth canning corporation v. commissioner, G.R. No. 179343, January
21,2010.

i
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654 Ilt,tvt t,:wr,:n oN'l'nxn'r'ror.r
655

^,,,,-lll,:lllll,li"il.,,,.,",
respondent is now barred from disputing the correctness ol'l,hc letter may not be interpreted to authorize or justify the continuance
assessment or from invoking any defense that would reopcn th() of the suspension of the period of limitations" (Republic a. Ablaza,
question of its liability on the merits.l3 108 Phil.1105).
However, a motion for reconsideration filed by the taxpayer at Letter which states that it is not a request for reinuestiga'
the Commissioner's level, afber he denied the protest filed by said tion. - A letter which reads:
taxpayer on August 4,2005, does not toll the 30-day period to appeal "On behalf of our client, ACMDC for short, we file this
to the CTA. And since the petition for review was filed before the CTA protest under the provisions of law requiring taxpayers
only after the 30-day period of appeal has lapsed (i.e., on October 20, to protest deficiency assessments within 30 days from
2005), it was filed out of time (Fishu:ealth Canning Corporation receipt else they become final and executory. This is not
v. CIR, G.R. No. 179343, January 21,2010).In other words, what a request for reconsideration or reinvestigation or a plea
is appealable to the CTA is the decision of the CIR on the disputed
for accommodation in any sense. It should not therefore be
assessment (not the decision of a subordinate official on the protest of interpreted to estop our client from invoking the defense
the taxpayer), pursuant to the express provisions ofSections 4 and228
of prescription whenever this becomes available."
ofthe 1997 Tax Code. It is this disputed assessment that is appealable
to the CTA for review (CIR a.Isabela Cultural Corporation, GR. is not a request for reinvestigation. otherwise, there would be no need
No. L35270, July 77,2OO1). for the legal requirement that an extension of the original period can
be agreed upon by the parties in writing (Commissioner u. Atlas
It is important to know whether the protest filed is valid or Consolid.ated. Mining & Deuelopmnnt Corporation, CA-G-R. SP
pro forma. If it is a valid protest, coupled with the written waiver No.47979, Septem.ber 30, L999),
of the statute of limitations duly signed by the taxpayer and the
Commissioner or his authorized representative, the protest suspends
the running of the statute of limitations. Bar Question (2012)
The BIR issued in 2010 a final assessment notice and demand
Bar Question (1992) Ietter againstx corporation covering deficiency income tax for the year
2008 in the amount of F10 million. X corporation earlier requested
What are the requisites before a taxpayer's request for the advice of a lawyer on whether or not it should file a request for
reinvestigation may be granted by the BIR? Discuss briefly. reconsideration or a request for reinvestigation. The lawyer said it
does not matter whether the protest filed against the assessment
Suggested answer: is a request for reconsideration or a request for reinvestigation,
A request for reinuestigation refers to a plea for re-eualuation of because it has the same consequences or implications. (a) What are
an assesament on the basis of ruewly discouered euidence or additional the differences between a request for reconsideration and a request
euidence the taxpayer intends to present in the re-inuestigation. for reinvestigation? (b) Do you agree with the advice of the lawyer?

Request for copy of the cornputation is not a request for Suggested answers:
reinaestigation. - Ifthe letter does not ask for a reinvestigation a. Request for reconsid'eration is a plea for eualuatiort
or reconsideration, it does not suspend the prescriptive period. In of the assessment on the basis of existing records withrtut
one case, the court ruled that "All that the letter asks is that the the need of presentation of additional euidence (Reu. Regs'
taxpayer be furnished a copy of the computation. Nowhere does the No. 12-99). It does not suspend the period to collect the
letter imply a demand or request for a different or new and distinct defi.ciency tq.x (Sec. 223, NIRC). The 180-day period within
reinvestigation from that already requested and, therefore, the said which the BIR shall act on the protest starts frorn the fi'ling
of the request for reconsideration ( Sec. 228 , NIRC) - On the
LsRepublic v. CA & Nielson & Co., G.R. No. L-37061, September 5, 1984. other hand, a request for reinvestigation is a plea for
'l',nr llt,:tlrt,rt rtl';ri 6lt7
656 Itt.rvrr':wr,;rr , rN 'l'AxA l'r, rN
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re-eualuation of the assessment on the basis of'ud.ditilnu.l submission 0r presenlation oI'the pertinent documents for scrutiny
or newly discouered euidence which ore to be introduced lbr and evaluation by the Revenue officer conducting the audit. The said
ucanlination for the first time. It suspends the running of' Revenue officer shall state this fact in his report of investigation'
the prescriptiue period to collect. The 180-day period within If the taxpayer fails to filea valid protest against the formal
which the BIR shall act on the protest starts only from the letter of demand and assessment notice within 30 days from date
date of submission of the additional or newly discouered of receipt thereof, the assessment shall become final, executory and
euidence (Sec. 228, NIRC; RCBC u. CIR, cited' in Royal demandable.
Banh of Scotland. IPhil.l a. CIR, CTA EB Case No.446,
October 23,2OOg). If the protest is denied, in whole or in part, by the commissioner,
the taxpayer may appeal to the court of Tax Appeals within 30 days
b. No, in uiew of the aforesaid dffirences between the request from date of receipt of the said decision, otherwise, the assessment
for reconsideration and the request for reinuestigation. shall become final, executory and demandable'
When to file administrative protest? In general, if the protest is denied, in whole or in part, by the
commissioner or his duly authorized representative, the taxpayer
The taxpayer or his duly authorized representative may protest
may appeal to the Court of Tax Appeals within 30 days from date
administratively against the aforesaid formal letter of demand and
of t"""ipt of the said decision, otherwise' the assessment shall
assessment notice within 30 days from date of receipt thereof. If
become hnal, executory and demandable. However, if the taxpayer
there are several issues involved in the formal letter of demand and
elevates his protest to the commissioner within 30 days from date
assessment notice but the taxpayer only disputes or protests against
of receipt of tie final decision of the Commissioner's duly authorized
the validity of some of the issues raised, the taxpayer shall be required
representative, the latter's decision shall not be considered final,
to pay the deficiency tax or taxes attributable to the undisputed issues,
e>recutory and demandable, in which case, the protest shall be decided
in which case, a collection letter shall be issued to the taxpayer calling
by the Commissioner.
for payment of the said deficiency tax, inclusive of the applicable
surcharge and./or interest. No action shall be taken on the taxpayer's If the commissioner or his duly authorized representative fails ttr
disputed issues until the taxpayer has paid the deficiency tax or taxes act on the taxpayer's protest within 180 days from date of submission,
attributable to the said undisputed issues. The prescriptive period by the taxpayer, ofthe required documents in support ofhis protest,
for assessment or collection of the tax or taxes attributable to the the taxpayer may appeal to the court of Tax Appeals within 30 days
disputed issues shall be suspended. from the lapse of the said 180-day period, otherwise, the assessment
shall become final, executory and demandable (Sec' 228, NIRC)'
The taxpayer shall state the facts, the applicable law, rules and
regulations, or jurisprudence on which his protest is based; otherwise, Interpreting the above provision, the CTA ruled that the
his protest shall be considered void and without force and effect. If taxpayer has the option to either (a) fite an appeal with the cTA
there are several issues involved in the disputed assessment and witirln the 30-day period after the lapse of the 180-day period, or
the taxpayer fails to state the facts, the applicable law, rules and (b) wait for the final decision of the commissioner on the disputed
regulations, or jurisprudence in support of his protest against some assessment and file an appeal with the cTA within thirty days after
ofthe several issues on which the assessment is based, the same shall receipt of such decision (Lascona Land. co. v. commissioner,
be considered undisputed issue or issues, in which case, the taxpayer CTA Case No. 5777, January 4,2000). On appeal, the decision of
shall be required to pay the corresponding deficiency tax or taxes the cTA was reversed by the court of Appeals. The cA decision was
attributable thereto. appealed to the Supreme Court, where it is still pending'
The taxpayer shall submit the required documents in support On April 2,2004, the President of the Philippines signed R'A'
of his protest within 60 days from date of filing of his letter of 9282, whereby the inaction of the commissioner of Internal Revenue
protest; otherwise, the assessment shall become final, executory and during the 180-day period is construed as a denial of the protest.
demandable. The phrase "submit the required documents" includes 1
Hence-, the taxpayer must file his appeal with the cTA within 30 days
I

rl

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658 llt,:vtt,:wr,;tt or.r'l'nxn'r'roru 'l',tx ll,t':vl,ltrtt,:s 6lt9
Aggrtsstrttrttl, ittttl l'rol,csl,

from the lapse of the 180-day period in order to protcct his irrtcrcsl,. and executory. The court ruled that the 30-day period to appeal is
jurisdictional and failure of the petitioner to comply thereon would
Bar Question (2009) bar the appeal and deprive the cTA of its jurisdiction. such period
A final assessment notice was issued by the BIR on June is mandatory and it is beyond the power of the courts to extend the
13, (Chan Kian u. CTA, 705 Phil.906 t19591),
same
2000, and received by the taxpayer on June 15, 2000. The taxpayer
protested the assessment on July 31, 2000. The protest was initially The option granted to the taxpayer in case of inaction by the
given due course, but was eventually denied by the CIR in a decision cIR is mutually exclusive and resort one option bars the application
dated June 15, 2005. The taxpayer then filed a petition for review with of the other. After availing of the first option (filing the petition for
the CTA, but the CTA dismissed the same. (a) Is the CTA correct in review with the cTA), petitioner cannot successfully resort to the
dismissing the petition for review? (b) Assume that the CTA's decision second option (awaiting final decision of the cIR) on the pretext that
dismissing the petition for review has become final. May the CIR there is yet no final decision on the disputed assessment because of
legally enforce collection ofthe delinquent tax? the cIR's inaction. Moreover, assessments are presumed to be correct,
unless otherwise p roven (Rizal Cornmnrcial Banking Corporation
Suggested answers: a. Cornrnissioner, G.R. No. 768498, April24,2007).
a. Yes. The CTAis corcect in dismissing the petition for reuiew
because the q,ssessment had already become final and Administrative appeal to the Commissioner
executory by the time the protest was filed on July S 1 , 2000. Pursuant to Section 3.1.5 of Revenue Regulations No. 12-99, a
The fact that the petition for reuiew was filed by the to.tcpayer taxpayer may still elevate his protest to the comrnissioner within ll0
before the CTA within 30 days from the date of receipt of dayi from date of receipt of the final decision of the Commissioner's
the CIR's final decision on the disputed assessnlent, this is duly authorized representative, and the latter's decision shall not be
not, howeuer, releuant in this case becq,use the toxpayer filed considered final, executory and demandable. Applying the foregoing,
its protest against the assessment after the S}-day period considering that the Final Decision on the Disputed Assessment
mandated by law. (FDDA) dated May 8, 2009 was issued by Zenaida Garcia, OIC-Asst
b. Since the assessment had already become final and Commissioner, LTS, this Court finds that Belle Corporation's appeal
executory for failure of the taxpayer to file a timely protest to the then commissioner is with legal basis. Therefore, the Regional
against the assessment, particularly where the decision of FDDA dated September 2, 20!0, issued by Nestor Valeroso, Asst
the CTA also became finq,l and excecutory, the CIR can legaUy Commissioner, LTS, is a final decision which is appealable to the
enforce the collection of the delinquent tax by administratiue CTA within 30 days from receip tthereof (Belle Corporation a. CIR,
remedies through the issuance of warrants of distraints / CTA Case No.8775, September 18,2072).
garnishments and leuy and /or by judicial remedies through
the fiIing of ciuil octions or criminal actions within the time Motion for reconsid.eration on the Final Decision on Disputed
prescribed by law. Assessmnnt
The petitioner was assessed by BIR, which deficiency tax
The option granted. to the taxpayer in case of inaction of assessment was timeiy protested by the petitioner. The protest was,
the CIR is m.utual\t erclusiue and. resort to one option bars the however, denied by the CIR and received by the taxpayer on August
application of the other. - Petitioner maintains that its counsel's 4,2OO5.The taxpayer filed a motion for reconsideration with the cIR
neglect in not filing the petition for review within the reglementary onAugust 31, 2005. subsequently, the taxpayer received a collection
period due to the fault of the counsel's secretary was excusable. letter from the BIR; hence, it filed a petition for review on october 20,
Since the petition for review was filed out of time (more than B0 days 2005. The cTA denied the petition for review, for being filed out of
after the lapse of 180 days), and petitioner did not file the motion time. The petitioner filed a motion for reconsideration but was denied
for reconsideration or appeal, the disputed assessment became final by the CTA in division, so it filed an appeal with the CTA en banc,
660 Itt,rv[,lwr,:rt oN'l'nx,r'r'roru
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which appeal was also denied; hence, this appeal 1,, lhtr Sulrr.rrr. remedies belirrc the Cllt (Allied. Banhing Corporation a. CIR,
Court. G.R. No. 775097, February 5,2O7O).
The High Court ruled that since the petition was filcd bclirrc
the CTA only on October 20,2005, it was filed out of'timc bcca's. Bar Question (2012)
the denial of protest was received on August 4,2OOE. A motion fbr In the examination conducted by the revenue officials against
reconsideration filed by the taxpayer at the cIR level does not toll the corporate taxpayer in 2010, the BIR issued a final assessment
the 30-day period to fiIe appeal to the CTA (Fjshwealth Canning notice and demand letter which states: o'It is requested that the above
Corp a. CIR, G.R, No. L79343, January 2I,2OI0).In a case where deficiency tax be paid immediately upon receipt hereof, inclusive of
the protest was denied by the Regional Director who subsequently penalties incident to delinquency. This is our final decision based on
denied such protest, the reply letter/motion for reconsideration filed investigation. If you disagree, you may appeal this decision within
by the taxpayer with the Regional Director did not suspend the 30 days from receipt hereof, otherwise said deficiency tax assessment
running of the 30-day period to appeal to the CTA; hence, petition shall become final, executory and demandable." The assessment was
was dismissed because the assessment had already become final, immediately appealed by the taxpayer to the Court of Tax Appeals,
executory and demandable and the court has no jurisdiction to act without filing its protest against the assessment and without a denial
on the instant petition (Misnet, Inc. a. CIR, CTA Case No. gS7S, thereof by the BIR. If you were the judge, would you deny the petition
March 27,2012). for review filed by the taxpayer and consider the case as prematurely
filed?
Meaning of CIR (decisionsu appealable to CTA
After conducting the tax audit on the books and records ofthe Suggested answer:
bank, the CIR issued deficiency tax assessments. In the Demand No, the petition for reuiew should not be denied. The case is an
Letter accompanying the assessment notice, it states: ,,... This is exception to the rule on exhaustion of administrq,tiue remedies. The
our final decision based on investigation. If you disagree, you may BIR is estopped from claiming that the filing of the petition for reuieut
APPEAL the FINAL DECISION within B0 days from receipt hereof. is premature because the to.xpayer failed to exhaust all administratiue
Otherwise, the assessment shall become final and executory....,' remedies. The stq,tement of the BIR in its final assessment notice and
On the basis of this, the taxpayer filed an appeal with the CTA demand letter led the toxpayer to conclude that only a final judicial
within 30 days from the date of receipt. The petition was denied ruling in his fauor would be accepted by the BIR. The taxpayer cannol
by the CTA, and the taxpayer filed an appeal with the Supreme be blamed for not filing a protest against the assessment since tht:
Court. language used and the tenor of the dernand letter indicate that it is
the final decision of the BIR on the matter. The CIR should indicqte,
The court ruled that the word "d.ecisions" in R.A. 9282 means
decisions of the commissioner of Internal Revenue on the protest of
in a clear and unequiuocal language, whether his acti"onan a di.sputed
assessment constitutes his final determination thereon in order for the
the taxpayer against the assessment that is appealable to the CTA.
Strictly speaking, the dismissal of the petition by the CTA was proper. taxpayer concerned to deterrnine when his or her right to appeal tut
However, a careful reading of the demand letter and the assessment the tax court qccrues. Although there was no direct reference for th.e
notices leads the supreme court to agree with the petitioner. The taxpayer to bring the matter directly to the CTA, it cannot be denied
statement of the cIR led the petitioner to conclude that only a final that the word "appeal' under preuailing tax laws refers to the filing
judicial ruling in her favor would be accepted by the BIR. Thus, the of a petition for reuiew with the CTA (Allied. Bank Corporation u.
final assessment notice and demand letter may be considered as the CIR, G.R. No.775097, Februany 5,2010).
final decision appealable to the crA. Although there was no direct
reference to bring the matter directly to the CTA,"appeal,'refers to Denial of protest
petition for review with the CTA. The terms "protests" and,,request Denial of protest can take so many forms. The denial can be direct
for reconsid.eration or reinaestigation" refer to administrative or indirect, express or implied. Indirect or implied denial of protests
662 Itl,:vtt,:wt,ll oN 'l'nxn t'totrt 663
^--,.-lll.illl,li"ii.,,u*,
caused confusion not only to revenue oflicials who administer tax laws appeal the (]omnt.issiotrcr's denial to the Court of Tax Appeals (CTA)
but also to taxpayers who want to comply with their tax obligations within 30 days t'rom receipt, if the remedy of appeal is still auailable.
under the Tax Code and other special laws. I will further aduise the bank to file a motion for injunction with
the CTA to enjoin the Com.missioner from enforcing the assessment
A- Direct denial of protest I pending resolution of the appeal. While an appeal to the CTA will not
Ad.ministratiue d.ecisiorl lr suspend the payment, leuy, distraint and / or sale ofany property ofthe
- The
on. & d,isputed, asseastnerr.f.
or his duly authorized representative taxpayer for the satisfaction of its ta.x liability, the CTA is authorized
decision of the Commissioner
shall (a) state the facts, the applicable law, rules and regulations, or to giue injunctiue relief if the enforcement would jeopardize the interest
jurisprudence on which such decision is based; otherwise, the decision of the taxpayer, as in this cq,se where the assessm.ent has not become
shall be void, in which case, the same shall not be considered a decision li final.
on a disputed assessment, and (b) that the same is his final decision I

(9ec.3.1.5, Reu. Regs. No. 12-99). B. Indirect Denial of Protest


There is nothing in the Tax Code prouisions defining the powers While the existing regulation requires that the Commissioner
of the RDO, which would show thq.t an RDO can issue decisions that li or his authorized representative shall state in the letter of denial
are appealable to the CTA. - While it is undisputed that the CTA It that it is his final decision on the disputed assessment, jurisprudence
may review the decisions of the CIR, in this case, the questioned is replete with cases where this requirement is not followed by the
decision was merely issued by the Revenue District Officer (RDO), Commissioner or his authorized representative. Based on the old law
and not the CIR herself. And while it is undisputed that Section 7 and regulation, the court considered the following cases as indirect
of the Tax Code, as amended, allows the CIR to delegate her vested denial ofthe protest filed by the taxpayer.
powers, except those enumerated therein, to any subordinate official
Commissioner d.id. not rule on the ta,xpa,yefs mation for
with the rank equivalent to a division chief or higher, the petitioners {
rf reconsid.eration of the o,asessr,rterr,t. - There is no dispute that the
have failed to demonstrate that the RDO issued the same under the Commissioner did not rule on respondent's motion for reconsideration
authority of the Commissioner. There is nothing in the Tax Code and thus left respondent in the dark as to which action is the
provisions defining the powers of the RDO, which would show that decision appealable to the Court of Tax Appeals. Had he categorically
an RDO can issue decisions that are appealable to the CTA; hence, stated that he denies respondent's motion for reconsideration and
the subject petition must be dismissed for being premature (GiS-A that his action constitutes his final determination on the disputed
Snacksr lnc. a. CIR, CTA, October 21, 2011). assessment, respondent without needless difficulty would have been
able to determine when his right to appeal accrues and the resulting
Bar Question (2006) confusion would have been avoided. Under the circumstances, the
On June 1, 2003, Global Bank received a final notice of Commissioner, not having clearly signified his final action on the
assessment from the BIR for deficiency documentary stamp tax in the disputed assessment, the period to appeal has not legally commenced
amount of 55 million. On June 30, 2003, Global Bank filed a request to run. It was only when respondent received the summons on the
for reconsideration with the Commissioner of Internal Revenue. The civil action for the collection of deficiency income tax that the period
Commissioner denied the request for reconsideration only on May 30, to appeal commenced to run (Commissioner a. Union Shipping
2006, at the same time serving on Global Bank a warrant of distraint Corporation, L85 SCRA 547).
to collect the deficiency tax. If you were the counsel, what will be your Referral by the Commissioner of request for reinuestigation
advice to the bank? Explain. to the Solicitor General. - The Collector of Internal Revenue did
not reply to the request for reinvestigation. Instead, he referred the
Suggested answer: case to the Solicitor General for collection of the tax. The lower court
The denial of the request for reconsideration is a fi.nal decision of
interpreted this action of the Collector as a denial of defendant's
the Commissioner of Internal Reuenue. I would aduise Global Bank to
request for reinvestigation. According to the Supreme Court, the
664 1il,:vtt,lwt,ltt oN'l'rtxA't'totrt 'l'.tx ll.r,;tttt,:trtt,lri (i65
Asslssrrrcrtl :rtrrl I trol.r,sl,

lower court committed no error. For what is more indicative o1'thc of'servicc of'mail mrrltcrs in accordance with legal requirements,
Collector's decision against reinvestigation that his insistence to is very vital, as it carries legal consequences on the rights of the
collect the tax? This decision was communicated to defendant in a taxpayer to be informed of any tax burden imposed by the BIR,
Ietter dated September 20,1957 of the office of the Solicitor General and of the government to collect the correct taxes imposed upon a
which must have been received by defendant not later than October I taxpayer? The service of the FDDA is thus insufficient (Estate of
8, 1957 for on said date, it acknowledged receipt thereof. It had 30 Dr. Felisa Vd.a. d.e San Agustin a. CIR, CTA Case No. 8359,
days from October 8, 1957 within which to appeal to CTA (Republic October 70,2072).
a. Lim Tian Teng Sons, supra).

Reiterating the d.emand. for immed.iate payment of Bar Question (2006)


the d.efi.ciency tax d.ue to taxpayef s continued. refusa,l to A taxpayer received a tax deficiency assessment of 51.2 million
execute waiaer. - The letter was tantamount to a denial of the I
from the BIR demanding payment within 180 days; otherwise, it
reconsideration or protest of the respondent corporation on the would collect through summary remedies. The taxpayer requested for
assessment made by the petitioner, considering that the said letter a reconsideration stating the grounds therefor. Instead ofresolving
was in itself a reiteration of the demand by the BIR for the settlement I the request for reconsideration, the BIR sent a Final Notice Before
of the assessment already made, and for the immediate payment of I Seizure to the taxpayer.
the tax in spite ofthe vehement protest ofthe respondent corporation.
This was a clear indication of the disputed assessment, in view of I May this action of the Commissioner of Internal Revenue be
I deemed a denial ofthe request for reconsideration ofthe taxpayer to
the continued refusal ofthe respondent corporation to execute the
waiver of the period of limitation upon the assessment in question. entitle him to appeal to the CTA? Decide with reasons.
This being so, the letter amounted to a decision on a disputed or
protested assessment and, therefore, the respondent court did not err Suggested answer:
in taking cognizance of the case (Commissioner v..fiyala Securities
I
Yes. The action of the CIR is deem.ed a denial of the request for
Corporation and. CTA, 70 SCRA 204). reconsideration of the taxpayer, thus entitling him to appeal to the
Preliminary collection letter rnay serae as assessrnent CTA. The Notice was the only response receiued by the ta'xpayer and
notice. - A preliminary collection letter presupposes the existence its content and tenor supports the theory that it was the BIR final act
of a valid assessment notice. The preliminary collection letter shall regarding the request for reconsideration.. The uery title of the Notice
serve as the assessment notice if it was the initial notice received by indicated that it was o "Final Notice Before Seizure" which rneans
the taxpayer regarding his internal revenue tax liabilities, and if it that the taxpayet's properties will be subjected to seizure to enforce the
can be proven that the taxpayer did not receive any assessment notice deficiency assessment. Thus, in one decided case, the Supreme Court
and no follow-up letter was sent or no preliminary conference was ruled that the Final Notice Before Seizure is a final decision of the
arranged. The 30-day period provided for by Section 228 ofthe Tax Commissioner on the disputed assessment (CIR u.Isabela Cultural
Code, within which an assessment maybe protested, shall commence Corp.,361 SCRA 71 t2001l).
from the date of receipt of said preliminary collection Ietter (United'
International Pictures a. Conxrnissioner, CTA Case No. 5884, Bar Question (2004)
June 5,2002). RR disputed a deficiency tax assessment and upon receipt of an
nno return adverse decision by the Commissioner of Internal Revenue, filed an
Seruice of FDDA through registered mail on a
card" basis is insufficient. - Evidently, the Final Decision on the appeal with the Court of Tax Appeals. While the appeal is pending,
Disputed Assessment to the taxpayer sent through registered mail the BIR served a warrant of levy on the real properties of RR to
on a "No Return Card" basis. To the mind of the court, why would an enforce the collection of the disputed tax. Granting arguendo that
important document like the FDDA be sent by registered mail on a the BIR can legally levy on the properties, what could RR do to stop
"no return card" basis, when the receipt of the same, or completeness the process? Explain briefly.
666 Itr,:vrr,lwr,:rr oN'l'lx,r'r'roN 'l',\x lt.t,iMt.:t rtt,iii 667
Assr.rsrrrcrrl rrrrl l'trrl,r'sl

Suggested answer: R. Iutil.L utuit fbr t.h.e liLir4; ol'lhe L:iuil action fbr collection and
consider the same es an appealable decision'. I will not file
RR should file a motion for injunction with the CTA to stop the
an injunctiue suit because it is not an auailable remedy.
administratiue collection process. An appeal to the CTA shall not I would then appeal the case to the Court of Appeals and
suspend the enforcentent of the tax liability, unless a motion to that
moue for the dismissal of the collection case with the RTC.
effect shall haue been presented in court and granted by it on the basis
Once the appeal to the CTA is fi.led on time the CTA has
that such collection will jeopardize the interest of the taxpayer or the exclusiue jurisdiction ouer the case. Hence, the collection
Gouernment (Piroaano u. CIR, 14 SCRA 532 t19651).
case in the RTC should be dismissed (Yabes o. Flajo, 775
The CTA is ernpowered to suspend the collection of interna.I scRA 278 [1e82]).
reuenue tctxes and custorls duties in cases pending appeal only when:
(1) in the opinion of the court the collection by the BIR wiII jeopardize Bar Question (1998)
the interest of the gouernm.ent and / or the taxpayer; and (2) the tax,payer
is willing to deposit the amount being collected or to fi.le a surety bond CFB Corporation, a domestic corporation engaged in food
processing and other allied activities, received a letter from the BIR
for not more than double the amount of the tax to be fixed by the court
(Sec. 11, R.A. 1125). assessing it for delinquency income taxes. CFB filed a letter of protest.
One month after, a warrant of distraint and levy was served on CFB
Corporation.
Bar Question (2002)
If you were the lawyer engaged by CFB Corporation to contest
On March 15, 2000, the BIR issued a deficiency income tax the assessment made by the BIR, what steps will you take for your
assessment for the taxable year 7997 against the Valera Group of
client?
Companies (Valera) in the amount ofF10 million. Counsel forValera
protested the assessment and requested a reinvestigation of the
Suggested answer:
case. During the investigation, it was shown that Valera had been
transferring its properties to other persons. As no additional evidence Ishall immediately file a motion for reconsideration of the
to dispute the assessment had been presented, the BIR issued on issuance of the warrant of distraint and leuy and seek from the BIR
Comm.issioner a dertial of the protest
*in clear and unequiuocal
June 16,2000 warrants ofdistraint and levy on the properties and
ordered the filing of an action in the Regional Trial Court for the language." This is so because the issuance of a warrant of distraint
collection of the tax. Counsel forValera filed an injunctive suit in the and leuy is not considered as a denial by the BIR ofthe protest filed by
Regional Trial Court to compel the BIR to hold the collection of the CFB Corporation (CIR a. Union Shipping Corp., 185 SCRA 547).
tax in abeyance until the decision on the protest was rendered.
Within 30 days from receipt of such deniq.l "in clear and
A. Can the BIR file the civil action for collection, pending unequiuocal language," I shall then file a petition for reuiew with the
decision on the administrative protest? Explain. Court of Tax Appeals.
B. As counsel for Valera, what action would you take in order
to protect the interest ofyour client? Explain your answer. Inaction of the GIR on the protest against assessment
may be deemed a denial of protest or taxpayer may wait
Suggested answer: for CIR final decision on the disputed assessment
A. Yes, because there is no prohibition for this proced,ure On March 27,I998,the ClRissued an assessment notice against
considering thot the filing of q. ciuil action for collection respondent for deficiency income tax for 1993 in the amount of
during the pendency of an administratiue protest constitutes ?753,266.56. On April 20, 1998, Lascona filed a protest. Said protest
the final decision of the Commissioner on the protest (CIR was denied by the Regional Director on March 2, 1999 because the
a. Union Shipping Corp,85 SCRA 548 t1990l). case was not elevated to the CTA within the 180-day period provided
66rl Itt,:vt t,lwt,ltr oN'l'Axrvlror.r ' l'n x l l,t,:tr.t t,llt t,ll't (;(;1t
Arrrr,xHtttrltl. rttttl I trol,t'sl

for in the Tax Code; hence, the assessment had becomc final. On Agrril such {inal decisiOn 0n l,lrc rlisprrLOd assessment t() thO ()'l'A within 30
12,1999, Lascona appealed to the CTA. Lascona had until L)cccmbcr days af'ter receipt ol'such tlccision (Lascona Land' Co. a. CIR, G.R.
16, 1998 or January 1-6, 1999 to elevate its appeal to the CTA. Sincc No. 171251, March 5,2012).
Section 228 of the Tax Code provides that a delinquent taxpayer m{ry
nevertheless directly appeal a disputed assessment, ifits request for Bar Question (2011, 2009)
reconsideration remains unacted upon 180 days after submission
thereof, the taxpayer need not await the outcome of its protest with Spanflex Intl, Inc. received a notice of assessment from the
the CIR before it can question the propriety of the assessment before BIR. It seasonably filed a protest with all the necessary supporting
the CTA. documents, but the BIR failed to act on the protest. Thirty days from
the lapse of 180 days from the filing ofits protest, Spanflex still has
The CTA nullified the assessment and ruled that the taxpayer not elevated the matter to the CTA. What remedy, if any, can Spanflex
has the following options: (a) wait for the final decision of the take?
Commissioner on the disputed assessment and file the petition for
review with the CTA within 30 days from date of receipt of such Suggested answer:
denial; or (b) file a petition for review within 30 days after the lapse
of the 180 days provided for in the law. The CTA stressed that the Spanflex may wait for the final decision on the disputed
wordings of Section 228 of the Tax Code clearly provide that it is BIR and appeal it to the CTA within 30 days from
assessment of the
only the decision not appealed by the taxpayer that becomes final, receipt of such decision.
executory and demandable.
The government appealed to the Court of Appeals, which
reversed the CTA decision. The CA ruled that from Section 228 of the
Tax Code, it can be inferred that if the protest was not acted upon
within 180 days from the submission of documents, such inaction
allows the taxpayer to appeal to the CTA. If there is no appeal within
30 days after the lapse of the 180-day period, the matter/decision
under protest becomes final. Consequently, the word "decision" in
the last paragraph of Section 228 cannot be strictly construed as
referring 6nly to the decision per se of the Commissioner as found by
the CTA but should be considered as sSrnon)'rnous with the disputed
assessment. As held in the case of Commissioner of Internal Reuenue
u. S.C. Johnson and Sons,Inc.,'olaws are not just mere compositions,
but have ends to be achieved and that the general purpose is a more
important aid to the meaning of a law than any rule which gramMarch
may lay down. It is the duty of the courts to look to the objective to be
accomplished, the evils to be remedied, or the purpose to be subserved,
and should give the law a reasonable or liberal construction which will
best effectuate its purpose." However, the CA decision was reversed
by the Supreme Court. Citing its earlier decision in RCBC u. CIR,
the SC has held that in case of inaction of the CIR within the 180-day
period from the date of the filing of the protest and the submission
of documents, the taxpayer can either file an appeal with the CTA
within 30 days after the expiration of the 180-day period or wait for
the final decision of the CIR on the disputed assessment and appeal
l'nx ltr,:ltt,;t rtt,:s 677
l 'rr,rt'ri pl.iot t

thc contemplation ol'[hc 'l'ax Commission which recommended the


approval of'the ltrw. Just zrs the government is interested in the
stability of its collections, so also are the taxpayers entitled to an
assurance that they will not be subjected to further investigation
CHAPTER }Cfr fbr tax purposes after the expiration of a reasonable period of time
PRESCRIPTION (Republic u. Ablaza, 108 Phil. 1105).

Tax Gode provisions prevail over Civil Gode provisions


Prescription, sometimes referred to as the Statute of Limitations, on prescription
is the legal term used to describe time limitations or passage of time
The Tax Code, a special law, shall prevail over the Civil Code, a
that produces legal consequences. It may refer to (a) the acquisition
general law. Thus, in an interesting case, the court ruled that since
or accrual of certain substantive rights or the loss or deprivation
thereof, ifalready possessed, or (b) the loss or forfeiture ofthe right the demand on the taxpayer to pay the tax is in effect an assessment
to bring an action to demand or enforce such substantive rights, on for deficiency franchise tax, the right to assess or collect the same
account of failure to bring the action within the prescribed time. The is governed by Section 331 of the Tax Code, rather than by Article
public policy on prescription is founded on the ancient Latin maxim ll45(2),in relation to Articles 1154 and 1155, of the Civil Code, which
"Vigilantibus et non dormientibus jure subueniunt" (i.e.,thelaw serves allows six (6) years from date of refund within which to file an action
( Guagua Electric Light Plant Co. v. Collector and. Court of Tax
those who are vigilant, not those who sleep).
Appeals, supra).
Under the Civil Code, substantiue aspect is referred to as
acquisitive prescription, while procedural aspect is referred to as However, when the Government proceeds by court action to
extinctive prescription. The terrn "Statute of Limitatiotns" is forfeit a bond, the action is for the enforcement of a contractual
commonly used in our jurisdiction as the equivalent of all statutory obligation, the prescriptive period for which is ten years under Article
provisions on prescription. ll44(I) of the Civil Code (Republic a. Arcache, 70 SCRA 337).

Purpose of Statute of Limitations Gonstruction of law on prescription (Bar Question [20101)


The law prescribing a limitation of actions for the collection of The law on prescription, being a remedial measure, should be
the income tax is beneficial both to the Government and to its citizens; liberally construed in order to afford such protection. As a corollary,
to the Government because the tax officers would be obliged to act the exceptions to the law on prescription should perforce be strictly
promptly in the making of assessment, and to citizens because after construed. Moreover, negligence or oversight on the part of the BIR
the lapse of the period of prescription, citizens would have a feeling cannot prejudice taxpayers, considering that the prescriptive period
of security against unscrupulous tax agents who will always find was precisely intended to give them peace of mind. For the purpose of
an excuse to inspect the books of taxpayers, not to determine the safeguarding taxpayers from unreasonable examination, investigation
latter's real liability, but to take advantage ofevery opportunity to or assessment, our tax law provides a statute of limitations in the
molest peaceful, law-abiding citizens. Without such a legal defense, collection of taxes (Com'missioner a. B.F. Good.rich Phils, 303
taxpayers would furthermore be under obligation to always keep their SCRA546).
books and keep them open for inspection subject to harassment by
unscrupulous tax agents. The law on prescription being a remedial Bar Question (2011)
measure should be interpreted in a way conducive to bringing about Mia, a compensation income earner, filed her income tax return
the beneficent purpose ofaffording protection to the taxpayer within for the year 2007 on March 30, 2008. On May 20,20LL, Mia received
an assessment notice and letter of demand covering the year 2007,
670 but the postmark on the envelop shows April 10, 2011. Her return
672 Itt,tvt t,:wt,:tr oN'l'nxn'r'roru 'l',rx lit,:trtt,:t rtlls 67',.]
I 'tr,xcripl,iot t

is not a false and fraudulent return. Can she raise the defense of' proceeding shuLl be fiLed alter the expiration of two (2)
prescription? years I'ntm the date of'payment of the tax, regardless of any
superuening cause thut may arise after payment (9ec.229,
Suggested answer: NIRC).
No. The S-year prescriptiue period stq.rted to run only on April Based on the foregoing, the BIR lawyer can raise
15,2008 (and not on March 30,2008). Internal reuenue taxes shall the defense of prescription for the year 2004, but not for
be assessed within three (3) years after the last day prescribed by law the year 2005. Since the withholding tax return for 2004
for the filing of the return (Sec. 203, NIRC). Accordingly, the period was filed on January 70, 2005, and considering that the
to assess the deficiency tax for 2007 has not yet expired on April 10, clairn for refund or credit was fi'Ied only on April 70,
20L1. 2007, more than two years haue elapsed between the date
of payment and the date of filing the written claim for
Bar Question (2008) refund or credit.
DEF Corporation is a wholly owned subsidiary of DEF, Inc., b. The proper person to claim refund or tq'x credit is the person
California, USA. Every December 15 of the year, DEF Corporation on whorn the tox is imposed by the statute. In one case, the
paid annual royalties to DEF, Inc. for the use of the latter's software, Supreme Court ruled thq't the BIR should not be allowed
for which the former, as withholding agent of the government, to defeat q'n otherwise ualid cluim for refund by raising
withheld and remitted to the BIR the l57a final tax based on the the question of the withholding agent's alleged incapacity
gross royalty payments. The withholding tax return is filed and the to fite the claim for refund for the first time on appeaL The
tax remitted to the BIR on January 10 of the following year. On Gouernment must follow the same rules of procedure which
April 10, 2007, DEF Corporation filed a written claim for tax credit bind, priuate parties (Commissioneru.Procter & Gamble
with the BIR, arising from erroneously paid income taxes covering PMC,204 SCRA 377),
the years 2004 and 2005. The following day, DEF Corporation filed
a petition for review with the Court of Tax Appeals involving the tax Bar Question (1997)
credit claim for 2004 and 2005.
Taxes were generally imprescriptible; statutes, however, may
a. As a BIR lawyer handling the case, would you raise the provide otherwise. state the rules that have been adopted on this
defense of prescription in your Answer to the claim for tax score by:
credit? Explain.
(a) The National Internal Revenue Code;
b. Can the BIR lawyer raise the defense that DEF Corporation
(b) The Tariffand Customs Code; and
is not the proper party to file such claim for tax credit?
Explain. (c) The Local Government Code.

Suggested answers: Suggested answers:


cL. No credit or refund of taxes shall be allowed, unless the The rules that haue been adopted on prescription are as
taxpayer files in writing with the Commissioruer a claim follows:
for credit or refund within two (2) years after the payment (a) National Internal Revenue Code - The Statute of Limitation
of the tax. (Sec. 204, NIRC). No suit or proceeding shall be (3)
maintq,ined in aruy court for the recouery of any totc hereafter for assessment of tax if a return is filed is within three
years frorn the lost day prescribed by law for the fiIin'g of'
alleged to haue been emoneously or illegally assessed or
collected, until o claim for refund or credit has been duly the return, or if filed after the last day, within three years
filed with the Commissioner. In any case, no such suit or from date of actual fi.ling. If no return' is fi.led or the return
674 llt,:vrr,:wr,:n oru'l'nxl'r'roru 'l'nr lir,:vr,:r rrt,:lr 1i7 lt
Itrcst ripl,iott

fi,led is false or fraudulent, the period ro osses$. is within 1. Period to assess the tax
ten years from discouery of the omission, fraud or falsity.
The prescriptive period to make an assessment depends upon
The period to collect the tar is within three years from whether or not a tax return was filed and whether or not the tax
date of assessment. In the c&se, howeuer, of omission to file return filed was false or fraudulent'
or if the return filed is false or fraudulent, the period to
collect is within ten years from discouery without need of If there was a tax return filed that is not false or fraudulent, the
an assessment. BIR has three (3) years from the date of filing of return within which
to make an assessment, and if the return was filed before the last
(b) TariffandCustoms Code - It does not express any general day prescribed by law for the filing thereof, the three (3!year period
Statute of Limitation. It prouided, howeuer, that "when shall be considered as filed on such last day (Sec' 203, NIRC). On the
articles hque entered and passed free of duty or final other hand, if the return filed was false or fraudulent with intent to
adjustment of duties made, with subsequent deliuery, such evade tax, the BIR is given 10 years from the date ofdiscovery ofthe
entry and passage free of duty or settlement of duties will, falsity or fraud (Sec. 222[a], NIRC).
after the expiration ofone (7) year, from the dote ofthe finat
payment of duties, in the absence of fraud or protest, be ft.nal If no return was filed, the BIR has 10 years from the date of
and conclusiue upon all parties, unless the liquidation of discovery of the omission within which to make an assessmenL(Sec.
import entry was merely tentatiue" (Sec. 1603, TCC). 222[q], NIRC).
(c) Local Gouernment Code - Localtaxes,fees, or charges shall Bar Question (2006)
be assessed within fi,ue (5) years from the date they became
due. In case offraud or intent to euade the payment oftaxes, The Commissioner of Internal Revenue issued an assessment
fees or charges, the same maybe assessed within ten years for deficiency income tax for taxable year 2000 last July 31, 2006 in
frorn discouery of the fraud or intent to euade payment. They the amount of F10 million, inclusive of surcharge and interests. Ifthe
sholl also be collected either by administratiue or judicial delinquent taxpayer is your client, what steps will you take? What is
q.ction within fiue (5) years from date of assessment (Sec. your defense?
194, LGC).
Suggested answer:
Prescriptive periods under the Tax Gode Since rny client has already lost his right to protest (the assessment
As a general rule, the assessment of national internal revenue hauing been. issued on July 3 1 , 2006 , and that he is already categorized
taxes prescribes within three years or ten years, depending on as a delinquent taxpayer), I will q.duise him to wait for a collection
q.ctiorl to be instituted by the Commissioner. Once collection is pursued,
whether or not a tax return was filed or the tax return filed was false
or fraudulent with intent to evade the payrnent of the tax(Secs. 205 I will fiIe a petition for reuiew with the CTAto question the ualidity of
and 222, NIRC). However, where the law does not provide for any the Commissioruet's action. My defense would be prescription. Since
particular prescriptive period of assessment, such as the 257o st;.lltax the assessment was issued beyond the prescriptiue period to assess, the
q.ssessment is inualid and any action to collect an inualid q.ssessment
on improperly accumulated surplus of the corporation (before its
elimination in 1986 by E.O. 37), then the rule is that the tax sought is not warrant @hil. Journo,lists, Inc. u. CIR, 447 SCRA 274
to be assessed becomes imprescriptible (Commissioner u, Ayata t2004D.
Securities, supra).
Bar Question (2002)
There are three (3) important prescriptive periods relating
to assessment and collection of taxes, namely: (a) period to assess Mr. Sebastian is a Filipino seaman employed by a Norwegian
the tax; (b) period to collect the tax; and (c) period to file criminal company which is engaged exclusively in international shipping. He
action. and his wife, who manage their business, filed a joint income tax
676 Itt,:vt t,:wt,rtr oN'l'nxn'r'toru 'l'nx llt,:tut,;trtt,:rt 677
l'rcscripl.itttt

return for 1997 on March 15, 1998. After an audit of'the return, the Burden of proof
BIR issued on April 20,200I a deficiency income tax assessment for
the sum of F250,000, inclusive of interest and penalty. For failure of It is incumbent upon a taxpayer, who wants to avail of the
Mr. and Mrs. Sebastian to pay the tax within the period stated in the benefits ofsection 331 (now Sec. 203) ofthe Tax Code by setting up
prescription as an affirmative defense, to prove he submitted a return'
notice of assessment, the BIR issued on August 19, 2001 warrants of
distraint and levy to enforce collection ofthe tax. If he fails to do so, the conclusion should be that no such return was
filed, in which case, the government has 10 years within which to
Ifyou are the lawyer of Mr. and Mrs. Sebastian, what possible make the corresponding assessm ents (Tan Guan a. Nable, supra) .
defense or defenses will you raise in behalf of your clients against
the action of the BIR in enforcing collection of the tax by the For the 1O-year period of limitation of assessment of taxes
summary remedies of warrants of distraint and levy? Explain your under Section 332 lnow Sec.222(a)lof the Tax Code to aPPlY, it is not
answer. enough that fraud is alleged in the complaint; it must be established
and proved by clear, convincing proof (Republic u- Lirn d.e Yu, 7O
Suggested answer: SCRA 737).

I will raise the defense of prescription. The right of the BIR to 2. Period to collect the assessed tax
assess prescribes after three years counted from the last day prescribed Any internal revenue tax which has been assessed within the
by law for the filing of the income tax returns when the said return is period of limitation may be collected by distraint or levy or by a
filed ontime (Sec. 203, NIRC). The lost day for filing the 1997 income proceeding in court within five (5) years from date of assessment. The
tax return is April 15, 1998. Since the assessment was issued only on period of limitation to collect is counted from the assessment of the
Apri|20,2001, the BIR's right to assess has already prescribed. tax, NOT from the time the income tax return was filed (Gutierrez
a, Collector, G.R. No. L-79537, May 20, 1965).
Bar Question (2002)
Where a withholding agent fails to file a withholding tax return,
Mr. Castro inherited from his father, who died on June 10, "a proceeding in court for the collection of such tax may be begun
1994, several pieces of real property in Metro Manila. The estate tax without assessment, at any time within ten years after the discovery
return was filed and the estate tax due in the amount of P250,000.00 of the ... omission." In the case at bar, the failure to file a return was
was paid on December 6, 1994. The Tax Fraud Division of the BIR discovered in 1949. Judicial suit was initiated on January 16, 1953
investigated the case on the basis of confidential information given when the Jai-Alai Corporation was included as party defendant in
by Mr. Santos on January 6, 1998 that the return filed by Mr. Castro the amended complaint. As only four (4) years had elapsed from the
was fraudulent and that he failed to declare all properties left by his time of the discovery of the omission to file a return to the filing of a
father with intent to evade payment of the correct tax. As a result, a judicial action, the right to collect the withholding tax through the
deficiency estate tax assessment for F1,250,000.00, inclusive of b\Vo assets had not vet prescribed (Republic u. Razon and. Jai-Alai
surcharge for fraud, interest and penalty, was issued against him Corporation, 20 SCRA 234).
on January 10, 2001. Mr. Castro protested the assessment, on the
ground of prescription. Decide Mr. Castro's protest. The fact that court action for the collection of fixed tax was
instituted more than five (5) years after the period to which it refers,
does not afl'ect either the validity of any revised assessment made or
Suggested answer
the right to enforce it by court proceedings, where no return for said
The protest should be resolued against Mr. Castro. What was filed tax had been filed (Collector a. Pined.a, 2 SCRA 401).
is a fraudulent return mahing the prescriptiue period for assessment
70 years from discouery of the fraud (Sec. 222, NIRC). Accordingly, Bar Question (1993)
the qssessment wqs issued within the prescriptiue period to mq,ke an
assessment based ort a fraudulent return. On September 19, 1973, the BIR sent a notice of assessment to
X to pay P300,000.00 as forest charges for the years 1970-1973. X
678 Itt,:vrt,:wr,:rr or.r'l'nxn'r,ror.r
ili ,li:lill,ll:: 67e

made a partial payment of P100,000.00 on September 28, 1g?3. X the IltR t0 conrputc ancl to assess the tax Iiability ofthe taxpayer is
died in November 1977 . OnJaly 29,1979, the BIR filed in the Testate considered as a tax return. There was no omission to file a tax return
Estate Proceedings of X a claim for F200,000.00, the unpaid forest on the part of the taxpayer where it failed to include certain items
charges left by X. The administrator of the estate opposed the claim and the non-inclusion of these items is not due to anywillful omission
on the gtound of prescription. Decide. or fraud (Escud.ero Electric Seruice Co. a. Dotningo, CTA Case
No.7026, Decernber 26, 1963).
Suggested answer:
A tax return based on tentative financial statements prepared
Where assessment was made, the tax may be collected within fiue by an independent certified Public Accountant is a tax return that
(5) years (now three [3] years)
from the d.qte of assessment (Collector siarts the running of the period within which the BIR may make an
a. Pined.a, 2 SCRA 4OI). assessment.
In the case qt bar, X, on the basis of the notice of assessment, In the following instances, the court did not consider the return
uolurutarily made partial payment to the Bureau of Internal Reuenue in or document prescribed by the BIR for certain transactions as
the amount of One Hundred Thousqnd Pesos (F100,000.00). However, appropriate tax returns; hence, the l0-year prescriptive period shall
it took the BIR almost more than five (5) years to tq.he the necessary applv.
legal action to collect the remq,ining amount of taxes due.
1. Transcript sheets. Transcript sheets are not returns
-information
This is clearly beyond the fioe (5) (now three [3] yeqr) period for the because they do not contain the necessary and required
collection of toxes. Hence, the claim filed by the BIR against the Estate to permit the computation and assessment of taxes like the specific
of X for the payment of Two Hundred Thousand Pesos (fl00,000.00) tax (Alca u. Cornmissioner, 26 SCRA 137).
has prescribed.
2. Income tax return for percentage tax return'
(NOTE: Under RA.8424 [1998],the periodto collect an assessed - An income tax return cannot be considered as a return for
compensating tax (which was replaced by the value added tax). The
tax is five years from the date of the assessrnent.)
taxpayer must file a return for the particular tax law. If he does
not file such return, an assessment may be made within ten years
What is a tax return? from and after the discovery of the omission to file the return. Even
"Tar return" refers to the form prescribed by the BIR showing if an income tax return which happens to be the wrong return had
basic information about the taxpayer and the computation of his tax been filed and even considering that the income from said sales
liability, which is required to be filed within the period prescribed were all reflected therein, still this would not take the place of the
by law and used as the basis for payment of tax assessed by the correct return which for purposes of the tax in question should
taxpayer. The BIR prescribes a separate form for each kind of actually be the percentage tax return (Butuan Sawmill, Inc' u'
tax. For example, income tax return for salaried individuals is CTA,76 SCRA 755).
BIR Form 1700; for individuals engaged in trade or business, BIR When there is no provision in the law requiring the filing of
Form 1701; for corporations, BIR Form 1702; VAT return is BIR a return but the tax is such that its amount cannot be ascertained
Form 2550. without the data that is pertinent thereto, the commissioner may, by
There are two (2) types of tax returns, namely: (a) original appropriate regulations, require the filing ofthe necessary returns.
return; and (b) amended return. In filing an amended return properly In any event, with or without such regulations, it is to the interest
described as such, a copy ofthe original return is attached thereto. of thetaxpayer to file said return if he wishes to avail himself of the
benefits of the three-year prescriptive period. If this notwithstanding,
To be considered as a tax return, it is not always required he does not file a return at all, then an assessment may be made
that the prescribed BIR forms be used and filed by the taxpayer. A at any time within the ten-year prescriptive period (Bisaya Land.
document containing all the necessary information that would allow Transportq'tion Co. a. Collector, 705 Phil. 1338).
680 ll,t,;v t l,lwt,:tr on'l'nxn lror.r
ill i:l:lill,lll' (ir'r I

Effect of filing an amended return years after lh.e lnst tlu,\, prt'scribed by law lbr the filing of'the return
(Sec. 203, NIITC). Howeuer, if'the return originally filed is amended
The taxpayer is granted the right to file an amended return,
substantially, the counting of'the three-year period starts from the date
statement or declaration, subject to the following conditions: (a) the
the amended return was filed (CIR a, Phoenir Assurance Co-, 74
amendment shall be made within three years from the date of filing
SCRA 52). There is ct substantial amendment in this case because u
of the original return, statement or declaration, and (b) no notice of
new return was filed declaring more losses, which can only be done
audit or investigation of such return, statement or declaration has,
either (1) in reducing gross income, or (2) in increasing the items of
in the meantime, been actually served upon the taxpayer (Sec. 6[A],
deductions claimed.
NIRC).
The prescriptive period for assessment starts to run from the False or fraudulent tax return
filing of the original return, if the same is sufficiently complete
to enable the Commissioner to intelligently determine the proper In the case of a false or fraudulent return with intent to evade tax
amount of tax to be assessed. The fact that amended returns were or of failure to file a return, the tax may be assessed, or a proceeding
filed later neither starts anew the running of the statute of limitations in court for the collection of such tax may be filed without assessment
nor extends the prescriptive period (AL. Ammen Tlansportation at any time within 10 years aft'er the discovery of the falsity' fraud
Co.r Ine. v. Collector, CTA Case No. 540, Nouember 70, 1965). or omission (Sec. 222[a], NIRC).

However, where the amended return is substantially different The proper and reasonable interpretation ofSec. 332 (now Sec.
from the original return, the right of the BIR to assess the tax is 222tal) ofthe Tax Code should be that in the three different cases
counted from the filing of the amended return. As pointed out by of (a) false return, (b) fraudulent return with intent to evade tax, (c)
the court, if the assessment is counted from the filing of the original failure to file a return, tax may be assessed, or a proceeding in court
return, this would permit taxpayers to evade taxes by simply reporting for the collection of such tax may be begun without assessment, at
in their original return, heavy losses and amending the same after the any time within ten years after the discovery of the falsity, fraud, or
lapse of the prescriptive period when the Commissioner has already omission. The stand of the court that the law should be interpreted
lost his authority to assess the tax. In the original return, taxpayer to mean a separation of the three different situations of false return,
declared a net loss after deducting head office expenses allocable to fraudulent return with intent to evade tax, and failure to file a return
the Philippine business. The objective of the Tax Code is to impose is strengthened immeasurably by the last portion of the provision
taxes, not to enhance tax avoidance to the prejudice of the Government which aggregates the situations into three (3) different classes, namely
(Cornmissioner n. Phoeni"x Aasurance Co., 74 SCRA 52). "falsity," "fraud," and "omission." That there is a difference between
"false return" and "fraudulent return" cannot be denied. While false
Bar Question (1999) return merely implies deviation from the truth, whether intentional
or not, fraudulent return implies intentional or deceitful entry (in the
A Co., a Philippine Corporation, filed its 1995 Income Tax Return books) with intent to evade the taxes due. Whenever the government
(ITR) on April 15, 1996 showing a net loss. On November 10, 1996, it is placed at a disadvantage so as to prevent its lawful agents from
amended its 1995 ITR to show more losses. Afber a tax investigation, proper assessment of tax liabilities due to false returns, fraudulent
the BIR disallowed certain deductions claimed by A Co., putting A return intended to evade payment of tax, or failure to file returns,
Co. in a net income position. As a result, on August 5, 1999, the BIR the period of ten years from the time of discovery or omission even
issued a deficiency income assessment against A Co. A Co. protested seems to be inadequate and should be the one enforced (Aznar a.
the assessment on the ground that it has prescribed. Decide. Cornmissioner, 58 SCRA 519).
In the case of willful neglect to file the return within the period
Suggested answer:
prescribed by this Code or by rules and regulations, or in case a false or
The right of the BIR to ossess the tax has not prescribed. The fraudulent return is willfully made, the penalty to be imposed shall be
rule is thq.t internal reuenue taxes shull be assessed within three 50Vo of the tax or of the deficiency tax, in case any payment has been
682 'ill
llt,;vrt,rwr,:rt oN'l'Axn'r,roru

,::l:lii:,i;: 683

made on the basis of such return before the discovery of the f'algitv The Commissioner may also abate or cancel a tax liability when
or fraud. A substantial under-declaration oftaxable sales, receipts or (a) the tax or any portion thereof appears to have been unjustly or
income, or a substantial overstatement of deductions, as determined excessively assessed; or (b) the administrative and collection costs
by the Commissioner pursuant to the rules and regulations to be involved do not justify collection of the amount due (Sec. 204, NIRC).
promulgated by the Secretary of Finance, shall constitute prima
facie eidence of a false or fraudulent return. Failure to report sales, Bar Question (2002)
receipts or income in an amount exceeding SOVo of that declared per
return, and a claim of deductions in an amount exceeding B\Vo of What constitutes prima facie evidence of a false or fraudulent
actual deductions, shall render the taxpayer liable for substantial return to justify the imposition of a SOVo stncharge on the deficiency
under-declaration of sales, receipts or income or for overstatement tax due from a taxpayer? Explain.
of deductions (Sec. 248[8], NIRC).
Suggested answer:
Bar Question (1996) There is a prirna facie euidence of false or fraudulent return when
(1) Distinguish a false return from a fraudulent return. the taxpayer substantially under-declared his taxable sales, receipts
or income, or substantially ouerstated his deductions. The taxpayef s
Suggested answer: failure to report sales, receipts or income in an amount exceeding 307o
of that declared per return, and a claim of deduction in an amount
The distinction between a false return and a fraudulent return is exceeding 307o ofactual deduction shall render the taxpayer liable for
that the fi,rst merely implies a deuiation from the truth or fact whether substantial under- declara,tion and ouer-declaration, respectiuely, and
intentional or not, whereas the second is intentional and deceitfut with will justify the imposition of the 50Vo surchq.rge on the deficiency tctx
the sole aim of euading the payment of the correct tae due. due from the taxpayer (Sec. 248, NIRC).
(2) Explain the extent of the authority of the Commissioner
Bar Question (1998)
of Internal Revenue to compromise and abate taxes?
What constitutes prima facie evidence of a false or fraudulent
Suggested answer: return?
The authority of the Commissioner to compromise encompasses
Suggested answer:
both ciuil and criminol liabilities of the ta"xpayer. The ciuil comprornise
is allowed only in cq,ses (a) uhere the tax assessment is of doubtful There is prim.a facie euidence of a false or fraudulent return when
ualidity, or (b) when the financial position of the tox,payer demonstrq,tes the to,xpayer has willfully and hnowingly filed it with the intent to
a clear inability to pay the tax. The compromise of the tax liability is euade a part or all of the tax legally due from him (Ungab u. Cusi,
possible at any stage of litigation and the amount of compromise is 97 SCRA 877). There must appear a design to mislead or deceiue on
Ieft to the discretion of the Commissioner, except with respect to final the part of the taepayer, or at least culpable negligence. A mistake,
ossessrlents issued against large taxpayers wherein the Commissioner which is not culpable in respect of its ualue, would not constitute ct
cannot compromise for less thon 507o. Any compromise inuoluing false return (Words ond Phrases, VoL 16, page 173).
large taxpayers lower than 50Vo shall be subject to the approual of
the Secretary of Finance. INOTE: This requirement had been deleted Cases:
in R.A.8424.1
There is fraud in the following decided cases:
All criminq.l uiolations ercept those inuoluing fraud, can be 1. Fraud. must be the prod.uct of a d.eliberate intent to
compromised by the Commissioner but only prior to the filing of the
information with the Court.
eaad.e taxes.
- Fraud, in order to justify an assessment
based on the ten-year prescriptive period, must be the
684 Itr,:vr r,rwr,:rt or.,r'l'nxn'rror'r
'l',rx ll,t,:l'tt'ltrtt'lll 685
Ittt'lt'rl1tl trttl

product of a deliberate intent to evade taxes (Jalandoni belonged tu one of'the heirs; and that the three remaining
u. Republic, L5 SCRA 57). lots were already declared in the return submitted by the
husband as part ofthe conjugal property for purposes of
2. Simple statemcnt that return filed. was not fraud.ulnnt income tax. The omission, therefore, was not deliberate and
d.oes not d.isproue existence of fraud. - The income did not amount to fraud indicative of an intention to evade
which was reported by the taxpayer in his return was the payment of the proper tax due the government (Jalnndani
income from the rents. Substantial income derived from a. Republic, supra).
other sources was not included. The Court held that a
simple statement in the letter that the returns were not I Sate of real property for a price less than its fair
fraudulent is not sufficient to overthrow the findings ofthe market ualue is not necessarily a false return. - The
Commissioner as to the reason for the omission. Hence, the fact that private respondent's property was sold for a price
tax may be assessed within ten years from the discovery less than its declared fair market value alone did not by
of the fraad (Tayengco a. Collector, CTA Case No.57, itselfjustifu a finding of false return which contains wrong
July 37,1964). information due to mistake, carelessness or ignorance.
The Court reasoned out that "it is possible that real
3. Substantial und.er-d.eclarations of income for six property may be sold for less than adequate consideration
(6) consecutiae yea,rs d,ernonstrate fraud,ulence of for a bona fide brsiness purpose; in such event, the sale
return. - Substantial under-declarations of income for remains an'arm's length transaction'." Private respondent
six consecutive years eloquently demonstrate the falsity declared the sale in its 1974 return submitted to the BIR
or fraudulence of the income tax returns with an intent (Commissioner a. B.F. Good'rich Phils.' supra).
to evade the payment of tax. Hence, the imposition of the
fraud penalty is proper (Perez u. Court of Tax Appeals, 3. Fraud, is a question of fact and' the circumstonces
L-70507, May 30,1958). constituting fraud. must be alleged and' proued, in
the trial court. - The finding of the trial court as to
4. Presenee of fi.ctitious expenses, with no eaid.ence its non-existence is final and cannot be reviewed, unless
presented., proaea eristence of fraud.. - The clearly shown to be erroneous. Fraud is never lightly to be
Commissioner's determination based on the circumstances presumed because it is a serious charge (Commissioner
of the case that fraud is present stands if no evidence is a. Ayala Securities Co., 70 SCRA 204).
presented by the taxpayer to show that the return filed by
him was not fraudulent. The Supreme Court upheld the 4. Fraud. is neuer imputed. and' the courts neuer sustain
Commissioner's findings of fraud brought about by the find.ings of ftaud'upon circum"stances that only create
presence of fictitious expenses, which were claimed by the suspicion. - The Supreme Court held that it is persuaded
taxpayer as deductions from gross income (Tan Guan a. considerably by the private respondent's (Javier's)
Commissioner, supra). contention that there is no fraud in the filing of the return
and agree fully with the CTA s interpretation of Javier's
However, the courts did not consider the tax returns filed as notation in his income tax return filed on March 15, 1978,
false or fraudulent with intent to evade the payment of the tax in the thus: "The taxpayer was the recipient of some money from
following cases: abroad which he presumed to be a gift but turned out to
l-. Mere und.erstatetnent in the tar return will not be an'error and is now subject of litigation,'that it was an
necessarily imply fraud. - Mere understatement in the 'error or mistake of fact or law'not constituting fraud, that
tax returns ofseven property subject to estate tax will not such notation was practically an invitation for investigation
necessarily imply fraud. It appears that three of the seven and that Javier had literally'laid his cards on the table."'
lots alleged to have been excluded were actually included Fraud is never imputed and the courts never sustain
in the returns; that one lot was not included because it findings of fraud upon circumstances which, at most create
686 Itl,;vtt,:wr,:tr 0t,t'l',txn't'ror.r 'l'nx l(t,:r',lt,:trtt,rs 687
Itroxcripl,iorr

only suspicion and the mere understatement of a tux is in the proceedings, only in his memorandum fiIed with the Tax Court
not itselfproofoffraud for the purpose oftax evasion. A subsequent to resting his case. Said Court rejected the plea offraud
"fraudulent retu.rn" is always an attempt to evade a tax, for lack ofallegation and proof, and ruled that the return, although
but a merely "false return" may not be (Commissioner u. not accurate, was sufficient to start the period ofprescription. Fraud
Jauier, 199 SCRA 824). is a question of fact. The circumstances constituting it must be alleged
5. Mistakes of reaenue officers on three (3) d.ifferent and proved in the court below.
occasions rerru)ae elemcnt of fraud. - The presence of The CFI acting as a settlement court is not the proper tribunal to
fraud was held quite unlikely in an assessment where the pass upon the defense of prescription; therefore, it would be but futile
BIR itself appeared "not too sure" as to the real amount to raise it therein. Moreover, the Tax Code does not bar the right to
of the taxpayer's net income, as where the BIR had on contest the legality ofthe tax afber a taxpayer pays it. Under Section
three different occasions arrived at three highly different 306, he can pay the tax and claim a refund therefore. Afortiori,his
computations (Republic u. Lim d.e Yu, supra). willingness to pay the tax is no waiver to raise defenses against the
The lower court in three instances supported tax legaliW (Commissioner u. Gonzales, 18 SCRA 757).
petitioner's stand on the wrong inclusions in his lists of
assets made by the Commissioner, resulting in the very Gonsequence of failure to prove fraud
substantial reduction of petitioner's tax liability by the The Commissioner's failure to prove fraud can be fatal to the
lower court. The foregoing shows that it was not only Mr. assessment as when a tax liability is assessed beyond the usual
Aznar who committed mistakes in his report of income three-year prescriptive period. The fact that the Commissioner did
but also the respondent Commissioner who committed not include the fraud penalty in his deficiency assessment which was
mistakes inhis use ofthe inventorymethod. The mistakes issued after the fiIing of the taxpayer's return is an indication that the
of the Commissioner which also involve very substantial Commissioner himself does not believe that there was fraud. There
amounts were also repeated yearly, and yet we cannot was no fraud if the Commissioner merely relied upon an alleged
presume therefrom the existence of any taint of official substantial under-declaration of income tax resulting from his own
fraud. It necessarily follows that a mere mistake cannot computation of the cost basis of the lands and improvements sold
be considered as fraudulent intent, and ifboth petitioner by the taxpayer to the Government. It appeared that the taxpayer
and respondent committed mistakes in making entries in honestly believed in a different cost basis and had explained the
the returns and in the assessment, it would be unfair to nature of the improvements introduced on the lands. The mere
treat the mistakes of the petitioner as tainted with fraud understatement of income in itself does not prove fratd(Yutiuo Sons
and those of the respondent as made in good failh (Aznar Hard.ware Co. a. CTA, 7 SCRA 160).
a. CTA and. Collector, supra).
Bar Question (2008)
When must fraud be raised by government?
Maria Suerte, a Filipino citizen, purchased a lot in Makati City
The Commissioner claims that fraud attended the filing of the in1980 at a price of Phpl" million. Said property has been leased to
return; that this being so, Section 332(a) (now Sec. 222lal) of the MAS Corporation, a domestic corporation engaged in manufacturing
Tax Code would apply. It may be well to note that the assessment paper products, owned 997oby Maria Suerte. In October, 2007' EIP
letter itself did not impute fraud in the return with intent to evade Corporation, real estate developer, expressed its desire to buy the
payment of the tax. Precisely, no surcharge for fraud was imposed. In Makati properby at its fair market value of F300 million, payable
his answer to the petition for review fiIed by Yusay in the CTA, the as follows: (a) F60 million down payment; and (b) balance, payable
Commissioner alleged no fraud. Instead, he broached the insufficiency equally in 20 months. Upon the advice of a tax lawyer, Maria
of the return as barring the commencement of the running of the Suerte transferred her Makati property for shares of stocks of MAS
Statute of Limitations. He raised the point of fraud for the first time Corporation. A BIR ruling, confirming the tax-free exchange of
688 Itt':v l t,;wt,:tr oN'l',tx,l't'tott
ill jlixlil,l'i;i 6fre

property for shares of stocks, was secured from the BIR Nationul is unlawluL (Commissioner of Internal Reaenue u. Estate of
Office and a Certificate Authorizing Registration was issued by thc Benigno Tod'a, Jr., et al., G.R. No. 147788, September 74r 2004)'
Revenue District Officer (RDO), where the property was located.
Subsequently, she sold her entire stockholdings in MAS Corporation Prescription
to EIP Corporation for F300 million. In view of the tax advice, Maria
The three (S)-year period to assess cornn'Lences from the date of
Suerte paid only the capital gains tax of F29,895,000 (F100,000 x
actual filing of the return or from the last day prescribed by law for the
5Vo plus F298,900,000 x lOVo), instead of the corporate income tax of
F104,650,000 (35Vo on F299 million gain from sale of real property). fiIing of such return, whicheuer comes later. - According to Sections
After evaluating the capital gains tax payment, the RDO wrote a 203 and 114(A) of the Tax code, the three (3)-year period to assess
commences from the date of actual filing of the return or from the
letter to Maria Suerte, stating that she committed tax evasion.
Iast day prescribed by law for the fiIing of such return, whichever
Is the contention of the RDO tenable? Or was it tax avoidance comes later. In the case of vAT, the filing of quarterly VAT returns
that Maria Suerte had resorted to? must be made within 25 days after the close of each taxable quarter
prescribed by each taxPaYer.
Suggested answers:
Considering that the PAN and FAN and Final Decision
The contention of the RDO that Maria Suerte committed tax on Disputed Assessment for deficiency vAT covering the period
eucrsion by selling shares of stocks, rather than real property, is not September t,2}O4to August 31, 2005 were issued only on September
tenable. The facts of the case show that Mariq. transferred the real g, ZOO8, September 25,2008 and September 10' 2009, respectively,
property by uirtue of a tax-free exchange of property for shares of stochs the deficiency vAT for the 2nd, 3rd, and 4th quarter ofFY 2005 are
of MAS Corporation. Irudeed, the tatc-free nature of the transaction already barred by prescription. on the issue of whether or not the
was confirmed by the BIR when it issued a ruling and the RDO BIR may assess deficiency vAT, despite the fact that the taxpayer has
issued the corresponding Certifi,cate Authorizing Registration on the excess unutilized input taxes of ?23,125,L25.98, the cTA ruled that it
transaction. Inthe case of Dolpher Trad.es Corporation u.Intermediate cannot be assessed any deficiency output tax for the period (cargill
Appellate Court, 157 SCRA 349 (1988), the Supreme Court said Philippines a. CIR, CTA Case No. 7928, August 23,2017)'
"[T]he transfer of properties to a corporation in exchange for shares
of stock ofthe corporation pursuant to Section 35(c)(2) (now Sec. 40[c] When must issue on prescription be raised?
[2]) of the Tax Code, as amended, where the transferors gain control
of the said corporation, does not constitute q. sale of properties. The Issue of prescription rnust be raised' at the ad'ministrative
leael. The issue as to the right of the government to assess and
transaction merely inuolues a change in the nature of the ownership -
collect must be raised. at the administrative level, and evidence to
of properties from unincorporated to incorporated entity. Ownership
ouer the properties remains the same." prove prescription ofthe right to assess and collect mustbe introduced
by the taxpayer.
"Tax aaoid,ance" is the tax sauing deuice within the means
sanctioned by law. This method should be used by the taxpayer in Inualid.ity of uaiuer m'ay still be raised. d'uring the trial at
good faith and at arm's length. "Ta* euasion,," on the other hand, is cTA. - The contention of the respondent that failure ofthe petitioner
a scheme used outside of those lawful means und when auailed of, it to raise the issue ofprescription in its letter-protest, precluded it from
usually subjects the tanpayer to further or qdditional ciuil or criminal invoking the same for the first time before this court is untenable. In
liabilities. Tax eussion connotes the integration of three factors: (1) the firstplace, the petitioner cannot raise the issue ofprescription in
the end to be achieued; i.e., the payment of less than that hnown by its letterlprotest filed on July 15, 1993 because ofits prior execution
the taepayer to be legally due, or the non-payment of tax when it is of a supposedly valid "waiver of the defense of prescription" on August
shown that a tax is due; (2) an acconxparuying state of mind which is fi,Iggr.It was only after a careful perusal of the records of the BIR
described as being "euil," in "bq.d faith," "willful," or "deliberate and that the petitioner discovered the invalidity of the waiver signed by
not accidental;" and (3) a course of action or failure of action which its representative. such knowledge prompted the petitioner to file a
690 Itt.rvt t,:wr,;rr or.'r'l'rrxr!r'roru 'l',rx ltr,rrr.rr,:rrll;s 691
| 'rcsr:ript,iott

Motion to Allow Petitioner to Adduce Additional llebuttal llvidcrrcc cases where the perird lbr assessment extends indefinitely because
where it invoked the defense of prescription (Central Cement this deprives the taxpayer of the assurance that it will no longer be
Corporation a. Commissioner, CTA Case 5024, June 13, lgg7). subjected to further investigation for taxes after the expiration ofa
reasonable period of time.
When gouernmcnt ad.mitted. allegation of prescription in
its answer, ta*payer need. not introd.uce eaid.ence. Thus, in the execution of the waiver, the following procedures
- When thc
taxpayer assailed the right of the government to assess and collect, should be followed:
alleged the facts constituting prescription, supported by annexes (in
The waiver must be in the form identified in RMO 20-90.
its petition for review), and the government admitted the allegation
This form may be reproduced by the Office concerned but
in its answer, there was no need for the taxpayer to present further
there should be no deviation from such form. The phrase
evidence on this point... The demand on the taxpayer to pay the
"but not after should be filled up.
amount erroneously refunded is in effect an assessment for deficiency
franchise tax. And being so, the right to assess or collect the same is b. Soon after the waiver is signed by the taxpayer, the CIR
governed by Section 331 ofthe Tax Code, rather than by Article 1145 or the revenue official authorized by him shall sign the
of the Civil Code (Guagua Electric Light Plant Co. a. Collector waiver indicating that the BIR has accepted and agreed to
and. Court ofTax Appeals, supra). -,l9-"
the waiver. The date of such acceptance by the BIR should
be indicated.
Waiver of the defense of prescription c. The waiver must be executed in 3 copies; the second copy
Well-settled is the rule that prescription as a defense is waived if is for the taxpayer. The date of receipt by the taxpayer
not seasonably interpose d (Visayan Electric Co. a . Cornmissioner, must be indicated in the original copy. Without the date,
39 SCRA 43). The plea of prescription is also deemed waived by it cannot be determined whether the waiver was accepted
the failure to allege it in the answer (Mambulao Lurnber Co. v. by BIR before the expiration of the three-year period.
Republie, supra), by failing to raise the issue of prescription in the The waiver of the Statute of Limitations is a derogation of the
petition for review fiIed in the CTA (Sy Chiuco a. Collector, 7OZ taxpayer's right to security against prolonged and unscrupulous
Phil. 428), or by acknowledgment of the obligation (Sannbrano a. investigations and must therefore be carefully and strictly construed
CTA and. Collector, 101 Phil. f), or renunciation of the benefit of (against the government). The waiver of the Statute of Limitations is
prescription already obtained (Republic u. Lim d.e Yu, 10 SCRA not a waiver of the right to invoke the defense of prescription, but is
737). an agreement between the taxpayer and the BIR that the period to
A waiver of the Statute of Limitations signed by Comptroller issue an assessment and collect the taxes due is extended to a date
of a corporation is valid, even without a letter or certificate of certain. Being a remedial measure, the law on prescription should
authority to execute the waiver. Revenue Memorandum Order No. be liberally construed in order afford such protection to the taxpayer
20-90 clearly provides that, in case the taxpayer is a corporation, the (Phil. Journalists a. Cornrnissioner, G.R. No. 1"62852' Decetnber
waiver must be signed by any of its responsible officials. Without 7 6, 2 OO4 ; Pfizer, I nc. a. C omrnis sioner, CTA C ase N o. 6 7 3 5, April

doubt, the Comptroller is a responsible official of a corporation within 27,2OO3; FMF Dea. Corp. a. Commissioner, CTA Case No.6753,
the purview of the law. The law merely requires that the waiver be March 20,2003).
signed by any ofa corporation's responsible officials, not necessarily Due to infirmities in the execution of the waiuer, the assessment
an authorized representative or offi.cer. However, to be valid and is null and uoid. - Union Cement was involved in a two-step merger.
binding upon the taxpayer, the waiver must conform to RMO 20- Pursuant to law, Union Cement, as the surviving corporation,
90, which implements Sections 203 and 222 of the Tax Code. Said assumed all the rights and obligations of the merged corporations.
sections provide for the Statute of Limitations on the assessment and The assessment here pertains to the business operations of BMC. On
collection oftaxes to safeguard the interest ofthe taxpayer against March 28, 2003, Union Cement received from CIR a PAN dated March
unreasonable investigation. IJnreasonable investigation contemplates L2,2OOS,pertaining to the business operations of Bacnotan Marketing
692 l}':vr r,:wr,:rr or.,r'l'nx,r'r'rorr 'l',rx li.t,ll.,tt,;t rt t,ls 69:l
l 'rosr:t'ipt,iott

Corporation (BMC ), informing Union Cemen t ol' ll M O's ir l cgcrll i r rtr rr rr t, having bs:n duc mainly to his protest againstthe original assessment,
tax and VAT liabilities for 1999-2000 in the aggrcgutc amount, ol' thereby inducing petitioner to order several reinvestigations, the first
PI07,439,917.94. On April 14, 2003, Union Cement protesLcd thc of which was made by examiner Espinosa who submitted her report
PAN for lack of factual and legal bases. At the same time, it signud August 27, t953, upon which the income tax assessment notice of
a waiver form extending the period to assess up to June 30, 200:1. October 19, 1953, must have been based. Petitioner relies, in support
On the part of CIR, a certain Ms. Flor Mercado signed the waivcr fbr of his pretense, upon the case of Collector u. Suyoc Consolidated
Atty. Edwin Abella, ACIR (LTS). On June 30, 2003, Union Cenrent, Mining Co., L-71527, Nouember 25, 1958, in which we held that "...
received a Formal Letter of Demand with "Details of Discrepancies," there are cases however where a taxpayer may be prevented from
all dated June 16, 2003, for deficiency income tax signed by DCIR setting up the defense ofprescription even ifhe has not previously
Estelita Aguirre. The total assessment amounts to P97,698,105.26, waived it in writing as when by his repeated requests or positive acts,
inclusive of penalties. the Government has been, for good reasons, persuaded to postpone
RMO 20-90 provides the guidelines on the proper execution collection to make him feel that the demand was not unreasonable
of waivers and in relation thereto, RDAO No. 5-01 provides that or that no harassment or injustice is meant by the Government."
"Revenue officials authorized to sign the waiver: The following The Suyoc case is not in point, for respondent had not requested,
revenue officials are authorizedto sign the Waiver of the Defense of or induced the petitioner by positive acts to delay the making of
Prescription under the Statute of Limitations prescribed in Sections the revised assessment notice of October 19, 1953. Up to that time,
203, 222 and other related provisions of the Tax Code of 1997." respondent merely contended that the amounts sought to be collected
Considering the requisites provided in the BIR issuances, there are by petitioner were not due from the estate ofthe deceased and gave
infirmities in the execution of the subject waiver as follows: (1) The his reasons therefor. Petitioner had a perfectly legitimate right to
waiver was signed by Ms. Flor Mercado for then ACIR of LTS, Atty. do this and the same does not suffice to stop him from invoking the
E. Abella; (2) The original copy of the waiver does not indicate the Statute of Limitations. The rule applicable to the case at bar is that
fact ofreceipt by the taxpayer ofhislher file copy ofthe waiver; and laid down in Collector u. Solano, L-11"475, July 31, 1958 (Collector
(3) The subject waiver failed to indicate the specific kind of tax and a. Pined.a,2 SCRA 401).
the amount of tax due. In Scandinauian Motors Corporation u. CIR
andinDole Philippines u. CIR,this Court explained the reason for the Effect of fraud assessments which are final and execu-
requirement: "The purpose of stating the specific kind of tax and the tory
arnount of tax due is for the Union Cement to pinpoint which among
the proposed tax assessments may subsequently be issued without Section 222(a) of the Tax Code provides that "x x x in a fraud
the Union Cement invoking the defense of prescription (Pfizer, Inc. assessment which has become final and executory, the fact of fraud
u. CIR, CTACase No. 6L35, April21,2003),If the amount and kind shall be judicially taken cognizance of in the civil or criminal action
of tax were not indicated in the said waiver, logically, there was no for the collection thereof." The effect of this provision is to placc
agreement to speak of (Solid Cernent Corporation u. CIR, CTA Case within the scope ofjudicial notice under Section 1, Rule 129 of the
No. 5420, May 27, 1999).It should be emphasized that RMO 20-90 Rules of Court, and thus dispense with the need for proof therefor,
requires specific information; hence, to substitute the same with those fraud assessments which have become final and executory
general statements is a departure from RMO 20-90." Since the waiver under the law.
was improperly issued, the prescriptive period was not toll ed (Union However, in Republic u. Ker & Co., suprd, the Commissioner
Cemcnt a. CIR, CTA Case No.6842, January 18,2012). maintained that the taxpayer filed a false return and since the fraud
penalty of 50Vo surcharge was imposed in the deficiency income tax
Prescription in relation to acts or delays of taxpayer assessment, which has become final and executory, the finding of the
Commissioner as to the existence of fraud has also become final and
Petitioner contends that respondent may not avail himself of need not be proved. This contention suffers from a flaw in that it fails
the plea of prescription, the delay in making the revised assessment
to consider the well-settled principle that fraud is a question of fact,
694 Itr':vrr,:wr,rr on 'l'A)iA t'toN 'l'rrx lt,t,:rr.tt,:nrt,ts 695
I 'rr,xt.ri grl.iorr

which must be alleged and proved. Fraud is a serious chargo ittttl, of'thc prcscriptivc pcriod, the period during which any of
to be sustained, it must be supported by clear and convitrcing prtxrl. the enumerated condition exists is deducted from the total
Accordingly, fraud should have been alleged and prr-rved in the lowcr period. The period to assess or collect mentioned in the
court. On these premises, we sustain the ruling of the lower court on law is not extended. However, in the case of extension, the
the point ofprescription. Ker & Co. raised the defense ofprescription period stated in the law within which the Commissioner
in the proceedings below and the Republic, instead of questioning may assess or collect is extended by the agreement signed
the right ofthe defendant to raise such defense, litigated on it and by both parties.
submitted the issue for resolution of the court. By its actuation, the
Republic should be considered to have waived its right to object to Cases:
the setting up ofsuch defense. 1. A waiuer is ineffectiue if it is erecuted. beyond. the
prescriptive period.. - Section 222(b) and (d), 1997 Tax
Extension of the prescriptive period Code authorizes the taxpayer and the Government to
Differences between extension and interruption of prescriptive extend by mutual agreement in writing the prescriptive
periods period for the assessment and collection of taxes. It is
necessary that the waiver be executed by the parties
1. In extension ofthe prescriptive period, the taxpayer and before the lapse of the five-year prescriptive period. A
the Commissioner or his authorized representative sign a waiver is ineffective if it is executed beyond the original
written waiver extending the period within which the BIR three-year (now five-year) period of prescripti on (Republic
may assess or collect the tax. In suspension or interruption a. Acebed.o,22 SC&A 856). The rule is in accord with
of the prescriptive period, the contracting parties do not the general law on prescription that requires a written
sign any written agreement interrupting the period. Either acknowledgment of the debtorto renew the cause of action
the taxpayer requested for a reinvestigation which was or interrupt the running of the limitation period (Act 790,
granted by the Commissioner, or a warrant of distraint Sec.50; New Ciuil Code, Art. 1155; Collector a. Pined.a,
or levy was issued by the Commissioner or his authorized supra). There can be no extension ofthe prescriptive period
representative and no property of the taxpayer could be once prescription has set in. The law does not authorize
located. the extension ofthe prescriptive period once prescription
has set in. The waiver of the statute oflimitations executed
2. The grounds for extension of the prescriptive period are
by the taxpayer cannot be deemed to include taxes which
provided for in Section222(b) to (e), while the grounds for
the interruption of the prescriptive period are given in had already prescribed. The clear import of Section 223(b)
Section 223,both of the Tax Code. is that it does not authorize extension by agreement of
the Commissioner and the taxpayer once prescription
n- To validly extend the prescriptive period, the waiver must has attached; i.e., after expiration of the original period
be signed by the contracting parties before the expiration (Republic a. Lint. d.e Yu, supra).
of the time prescribed to assess or to collect (or before the
issuance, release and mailing of the assessment notice and 2. Waioer, uthere no period. BIR may trssess tar is
ind,icated., is inualid..
demand letter). In the case of suspension or interruption - A close scrutiny of the waiver
revealed that no period was agreed upon within which
ofprescriptive period, the actions ofthe taxpayer and the
BIR are taken after the issuance, release and mailing of the respondent may validly assess the petitioner after
assessment notice and letter of demand. the regular three-year period ofprescription provided by
law. This Court, therefore, holds that the said waiver is
4. In extension and suspension ofthe prescriptive period, the invalid and without any binding effect on the petitioner for
effect is to extend or prolong the period within which the the reason that there was no consent by the respondent
Commissioner may assess or collect the tax. In suspension (CIR) and no period was set or agreed upon for subsequent
696 llt,;vt t,;wt,:tr ot't'l'rxn t'tor'r 'l'^r lt.r,:Mr,:rrn,r:; 697
l'rtscripl.iorr

assessment (Pelican u. Commissioner, CTA Case No. l4lllol't,lro Oivil (lode) is clearly applicable to the case at
5997, May 76,2003). bench. RClIlC, through its partial payment of the revised
assessments issued within the extended period as provided
3. RDO who attested. in the u)aiaer d.id not sign it for for in the questioned waivers, impliedly admitted the
the Commissioner. - A close scrutiny of the waiver of validity of those waivers. Had petitioners believed that the
the statute of limitation shows that RDO Sixto Javier waivers were invalid and that the assessments were issued
had merely attested the aforesaid waiver; that aforesaid beyond the prescriptive period, then it should nothave paid
officer did not sign the waiver either for or by virtue of the reduced amount of taxes in the revised assessment.
the authority of the Commissioner. Clearly, for all legal RCBC's subsequent action effectively belies its insistence
intents and purposes of the above law, Section 332 of the that the waivers are invalid. To hold otherwise and allow
NIRC, there was no valid waiver executed by the CIR a party to gainsay its own act or deny rights which it had
and petitioner to stop the running of the period within previously recognized would run counter to the principle
which to validly assess the tax in question. Moreover, it of equity which this institution holds dear.l
is only the Commissioner, who is specially named by said
provision of Section 332(b) of the Tax Code, as the one
who can sign the waiver of the statute of limitation, and
Rules in cases of more than one (1) waiver signed
since the Commissioner has not signed the waiver, there 1. Waiaer must be in writing and signed. by both the
is, therefore, no consummated or valid waiver which may Commissioner and, the tarpayer. - The CTA held
suspend the running of the period within which to assess that the three waivers signed by Carnation have no
the tax in question (Collector a. Solano, G.R. No. binding effect for lack of consent on the part of the BIR
L-77475, July 37, 1958). Commissioner. Upon the other hand, BIR Commissioner
Filing of bond. is tantannount to a uritten toaiaer. maintains that the waivers are valid although not signed
4.
by the CIR because (a) when the BIR examiners extended
- Only written agreements can suspend the running of
the period of limitation (Republic u. Ret, 4 SCRA 783). the period to audit and investigate Carnation's tax returns,
The filing of the bond has been held to be tantamount to
the BIR gave its implied consent to such waivers; (b) the
a written waiver which interrupts the period of limitation
signature of the CIR is a mere formality and the lack of
(Republic a.Xauier Gun Tlad.ing Co.,4 SCRA 1133). it does not vitiate the binding effect of the waivers; and
(c) that a waiver is not a contract but a unilateral act of
The filing of a chattel mortgage to secure the tax obligation
renouncing one's right to avail ofthe defense ofprescription
is tantamount to a written waiver of the statute of
limitations (Sannbrano o. CTA,101 PhiI.l). and remains binding in accordance with the terms and
conditions set forth in the waiver. The court did not go along
5. Waiaers extend., not red.uce, prescriptiue period.s with CIR's theory. Section 319 is clear and explicit that the
proaided.by law. - Tax waivers are supposed to extend, waiver must be in writing and signed by both the CIR and
not reduce, the prescriptive periods provided by law. Hence, the taxpayer (Comrnissioner u. Carnation Phil. [nou
the Commissioner cannot validly agree to reduce the rnerged with Nestle Phils.l and. CTA" CA-G.R. SP No.
prescriptive period to less than that granted by law to the 30220, May 31,1994).
detriment of the State since it diminishes the Government's
opportunities to collect taxes due the Republic (Republie
2. Waiaer tnust be signed. by reuenue official who is d.uly
a. Lopez, 7 SCRA 566).
authorized.. - Petitioner filed its 1989 annual income tax
return on April 11, 1990 and so, the BIR has until April 15,
6. Had petitioners believed that the waivers were invalid and 1993 to assess. On March 16, 1993, Petitioner executed a
that the assessments were issued beyond the prescriptive
period, then it should not have paid the reduced amount
oftaxes in the revised assessment. - Estoppel (underArt. 'RCBC v. Commissioner, G.R. No. 170257 , September 7 , 20II
698 llt,rvtt,:wt,;tt oN 'l'nxn't toN
l'A\ lir,Nr:ll,:r 699
|
)rr.scrt
1rl,iotr

waiver consenting to the assessment andlrr c<lllccl.ion ol'l.lrr' to assess was not suspended
rrol, vrrlid. 'l'hus, Lhe period
taxes which may be found due after invcstigation rtl, tut.y by potitioner's execution of the first waiver, more so by
time before or after the lapse of the period of limitutiorrn the second waiver. As required by Section 223,the second
fixed by Sections 203 and 223 of the NIRC but not lutcr waiver must be executed before the expiration of the
than September 30, 1993. It would seem, therefore, l,hut period previously agreed upon. Inasmuch as there is no
the BIR's right to assess was extended by the said waiver. valid waiver previously agreed upon, no valid extension
An examination, however, of the waiver would reveal can be made. The law bars the respondent in issuing the
the absence of the signature of the Commissioner, whosu subject assessment (Luzon Packaging Prod,ucts a.
signature is required in waivers for tax cases involving Comrnissioner, CTA Case 5076, June 23, 1997).
more than one million pesos under RMO 20-90. The subject 4. Amount and. kind. of tax, and. date of acceptance of
waiver was instead signed by the Assistant Revenue waiaer by BIR and. d.ate of fact of receipt by taxpayer
Service Chief, Special Operations Service, ofthe BIR. Since must be ind.icated. in the waiaer. - If the amount and
the amount involved in the assessment is F16,259,617 .67 , kind of tax were not indicated in the first waiver, logicallv,
the waiver was invalid insofar as the said assessment there was no agreement to speak of. An agreement is "the
was concerned and consequently did not suspend the expression by two or more persons of a common intention
running of the three-year prescriptive period. Thus, when to affect their legal relations; it consists in their bcing of
Respondent issued the aforesaid assessment on July 27, the same mind and intention concerningthe mattcr agrccd
1993, his right to assess has prescribed(Philippine Bank upon" (Philippine Law Dictionary, Moreno, Srd. I'kt.., p.
of Communications u. Comrnissioner, CTA Case 5257, 46). Moreover, the date of the acceptance of said wirivrrr
Nouernber 7,1999). by the respondent and the fact of receipt by the pe[iliorrt:r
3. Unsigned. first utaiaer is not a aalid. agreetnentl of its copy of the accepted waiver were not indicated in
period to assess was not suspend.ed,by the erecution said waiver. Therefore, having ruled that the first waivcr
of first utaiuer. - The first waiver extended the period was invalid, the three (3)-year reglementary period wrrs
of assessment up to December 31, 1992 and the second not interrupted. In other words, the assessment issucd orr
waiver extended it up to June 30, 1993. However, these March L4,L996,for alleged liability incurred in 1990 alrcitrl.y
waivers have no binding effect. The first waiver was not prescribed. Considering that the first waiver is not vulitl,
valid because the Commissioner (or his duly authorized there can be no basis for the second waiver... In sum, ttvctt
representative) did not give his consent as evidenced by supposing that the two waivers were valid, the assessmcnl,
the fact that he did not sign the document. The fact that issued on March 14, 1996 is still void simply becattsc it,
it was left unsigned by the Commissioner signifies that does not correspond to the original assessments nor l,rt l.Jtc
there was no valid agreement to stop the running of the same assessments in a reduced amount. As evinced b.y l.lrc
period of limitations. Section 223(b) of the NIRC clearly records, the subject assessment is entirely separa{,c itntl
provides that both the Commissioner and the taxpayer distinct from the assessment issued on November 2lt, 1994.
must agree in writing on the period agreed upon. Since the The assessment issued on March 14,l996,which givcs risc
Commissioner did not affix her signature, the document to the instant petition, pertains to deficiency incomc tax
is ineffective... The fact that the waiver executed on for 1990 in the amount of P'85,282,456.L7,by reason of the
September 30, 1992 was signed by the representative of disallowance by respondent of certain interest expenses.
the petitioner and not by the Commissioner, the period However, the assessment notices above-mentioned relate
to assess was never extended. The waiver was not to different tax liabilities of herein petitioner. In fact, the
consummated and therefore was invalid and void. As memorandum issued by the Revenue Officer who conducted
regards the second waiver executed by the petitioner, the the reinvestigation recommendation for the cancellation of
same was of no consequence since the first waiver was the same assessments for lack of factual and legal basis
'l'nx ltr,rrur,rr rtt,:r 701
700 l},:vl r.;wr,:tr olt'l'Ax,t't'tor.t
l'r'r'sclilrl,iott

(Solid. Cement Corporation. u. Comrnissioner, CTA Insurance Corporutittn, et Ql. u. CA, et al., G.-R. No. 772675'
Case 5420, May 27,1999). January 25,1999).
The service of a warrant of distraint or levy to a taxpayer's
lnterruption of the prescriptive period authorized representative, who has always acted in behalf of the
taxpayer, is sufficient to toll the running of the prescriptive period
The running of the prescriptive periods for assessment (Palanca a. CIR, G.R. No. L'76667, Januany 31, 7962). Also, the
and collection of taxes is suspended under any of the following
circumstances:
court allowed the suspension of the prescriptive period since the
enforcement of the warrant was not implemented because of the
a. When the Commissioner is prohibited from making the pending protests ofthe taxpayer and its requests for withdrawal of
assessment or beginning distraint and levy or a proceeding the warrant (Ad.aertising Assoeiates a. CA, et al., G.,R. No. 79758,
in court and for 60 days thereafter; Deeernber 26, L984).
b. When the taxpayer requests for the reinvestigation which
is granted by the Commissioner; Prescriptive period is not suspended
c. When the taxpayer cannot be located in the address given 1. The prescriptive period to collect is not suspended during
by him in the return filed upon which a tax is being assessed the period that the property ofthe taxpayer is in custotlio
or collected; Prouided, That if the taxpayer informs the legis (under judicial custody) because it may still btr
Commissioner of any change in address, the running of distrained subject to the prior lien of the attachmcnt
the Statute of Limitations will not be suspended; creditor (Collector a. Codinera, 102 Phil. 1L65).

d. When the warrant of distraint and levy is duly served upon 2. When the taxpayer partially paid the deficiency tax, thtr
the taxpayer, his authorized representative or a member prescriptive period to collect is not suspended because lhtr
of his household with sufficient discretion and no property
government is not prevented from collecting the tax tror
could be located; and does it constitute as a waiver "in writing" of the defensc ol'
prescription (Cord'ero a. Gond.a,8 SCRA 331 [L966]).
e. When the taxpayer is out of the Philippines (Sec. 223,
NIRC). 3. The pendency of a criminal case does not suspend thc
running ofthe prescriptive period to collect the tax assesstxl
In order that the pendency ofother proceedings shall have the in the absence of any court order prohibiting its collection.
effect of tolling the Statute of Limitations on a cause of action, the A criminal action for a tax violation is distinct from thtr
proceedings must be of such nature as to prevent enforcement of civil action (Republic u. Ret, GR. No. L-73754, March
remedy by action. Where one has a choice of remedies, the fact that 3L,1962).
he selects one remedy does not toll limitations as against an action
based on another. Since the Commissioner is empowered to pursue 4. The CIR s decision orderingthe taxpayerto paythe assessed
administrative and judicial remedies simultaneously to collect taxes, tax was issued more than 13 years from the issuance ol'
it is necessary to show that he is barred from exercising all remedies the assessment. While the taxpayer specifically requested
available to him, and not only one which he chooses to avail of. for reinvestigation and submitted additional documents in
support thereof, BIR did not act thereon' In order effect
The prescriptive period will be suspended only "If the taxpayer suspension of the statute of limitations, the request for
informs the Commissioner of any change in the address." Since the reinvestigation must first be granted by the Commissioner.
"pool" (of insurance firms assessed as a taxable partnership) changed The court added that the burden ofproofthat the request
its address without notice to the BIR, and indeed, the pool could not for reinvestigation had been actually granted shall be
be located at the address given in the information return filed and for on the Commissioner. Such grant may be expressed in
which reason there was delay in sending the assessment, the right its communications with the taxpayer or implied from
of the government to assess and to collect had not prescribed (Afi.sco
702 llt, vl,:wt,;tr ol 'l'nrn'r'roru
'l'nx llt':tvtt,:t ttt,:s 70:i
| 'rcnr:ripl.iott

the action ofthe CIR or his authorized represcntative in Fitness, Inc. was not satisfied and on January 18, 1980, it filed a
response to the request for reinvestigation (BPI u. CIR, petition for review of the decision in the CTA to enjoin the enforcement
G.R. No. 174942, March 7,2OO8). of the assessment. On February 7, 1980, the BIR issued a warrant of
distraint against Fitness, Inc.
Bar Question (2002) The CTA enjoined the collection of the deficiency taxes by virtue
OnAugust 5,1997,Adamson Co.,Inc. (Adamson) filed a request of the warrant of distraint. It was argued by Fitness, Inc. that the
for reconsideration of the deficiency withholding tax assessment on right of the BIR to collect its alleged deficiency taxes had already
July 10, 1997, covering the taxable year 1994. After administrative prescribed. Rule on the argument.
hearings, the original assessment of F150,000.00 was reduced Suggested answer:
to F75,000.00 and a modified assessment was thereafter issued
on August 5, 1999. Despite repeated demands, Adamson failed The warrant of distraint wa's serued on the taxpayer within
and refused to pay the modified assessment. Consequently, the the prescriptiue period (then fi.ue [5] years, now three [3J years). In
BIR brought an action for collection in the RTC on September 15, Commissioner u. Wyeth Suaco (202 SCRA 125), the court ruled'
2000. Adamson moved to dismiss the action on the ground that the that the prescriptiue period prouided by law to mahe collection by
government's right to collect the tax by judicial action has prescribed. distraint andl or leuy or by a proceeding in court is interrupted once
Decide the case. a taxpayer protests the assessrnent and requests for its cancellation.
Thus, when the taxpayer protested the assessment on February 8,
Suggested answer: 7975, the prescriptiue period to collect was interrupted and resumed
The right of the Gouernment to collect by judicial action has not on December 10, 1979. When the Commissioner issued the warrant of'
prescribed. The filing of the request for reconsiderqtion suspended distraint on Februa.ry 7, 7980, it was well within the fi.ue-year (now ll
the running of the prescriptiue period and commenced to run again years) prescriptiue period to collect.
when a decision on the protest was made on August 5, 199g. It must be The right of the BIR to collect the defi'ciency taxes has not
noted that in qll cases couered by ant. assessment, the period to collect prescribed, as the prescriptiue period is rechoned from the date of the
shq.ll be fiue (5) years from the dqte of the assessment but this period reduced assessn'Lent, which is December 10, 1979. The BIR has three
is suspended the filing of a request for reconsideration which was (3) years from said date to collect.
acted upon by the Commissioner (Commissioner u. Wyeth Suaco
Laboratories, 202 SCR:I 125 [ 1991 ]). Alternative suggested answer:
The reduced assessment is in the nature of a cornpromise
Bar Question (1993) assessment, the first q.ssessment receiued by Fitness on December 79,
Fitness, Inc. is a domestic corporation engaged in the 1974, and protested only on February 8, 1975, hauing already become
manufacture and sale of nutritional products. It pays royalties to its final and binding on Fitness.
foreign licensor. After investigation, the BIR on December 17,1g74, Applying the present prouisions of the NIRC, Fitness should
sent a notice of assessment to Fitness, Inc. for allegedly failing to haue protested the q.ssessment within thirty (30) days frorn receipt
remit withholding tax at source for the fourth quarter of 19ZB on its of the sanrle. Failing to do so, the assessment became final and was
royalties. It demanded payment of F3,000,000.00. The notice was presumably merely compromised. The date of such compromise
received by Fitness, Inc. on December 19,I974. assessment should then be the basis for computing the prescriptiue
On February 8,1975, Fitness, Inc., through its counsel, protested period of three (3) years.
the assessment and requested its cancellation or withdrawal on
(NOTE: Beginning 7984, the prescriptiae period' of the right
the ground that it lacked factual and legal bases. On December 10,
1979, the Commissioner of the BIR rendered a decision reducing the
of the goaernrnent to assess and. collect internalreuen'ue ta'res
assessment to P1,500,000.00.
was red,uced. from fiae to three years.)
704 Itt,:vtt,:wt,;tt ot.t'l'nxn'r'l rN
'l'nx llr,;rrlr,;r rtt,:lr 705
| 'rcstri1rl.iot t

Period. the Commissioner is prohibitecl fronr. mahing a warrant ol'distraint and levy, which was the first clear and
a.sseaatnent,beginning d.istraint and leay, or proeeed.ing in unequivocal act on the part of the Government which showed that
court and for 6O d.ays. - The running of the prescriptive period t<r as far as it was concerned, the old assessment of the deficiency taxes
collect deficiency taxes shall be suspended for the period during which was final, and hence collection of the amount assessed would proceed.
the Commissioner is prohibited from beginning a distraint and levy The interruption began on September 2, 1954, when the appellant's
or instituting a proceeding in coult, and for sixty days thereafter. In request for reinvestigation was granted, since the grant in effect tied
this case, the pendency ofthe taxpayer's appeal in the CTA and in the the hands of the appellee from filing the action (Republic a. Aquias,
Supreme Court had the effect of temporarily staying the hands of the 33 SCRA 607).
Commissioner. If the taxpayer's stand that the pendency of the appeal
On June 6, 1985, BPI sold $500,000 to the Central Bank for $1M.
did not stop the running ofthe period because the CTA did not have
On October 10, 1989, BIR assessed BPI for deficiency documentary
jurisdiction over the case is upheld, taxpayers would be encouraged
stamp tax (DST) on the sales. The assessment contained a
to delay the payment of taxes in the hope of ultimately avoiding the
computation, which stated that the foreign bills of exchange amounted
same. Under the circumstances, the running of the prescriptive period
to F18.48M, and the tax due based on Section 182 of the Tax Code
was suspended. The reason for such prohibition is that when a case
was computed at ?27 ,720. BPI received the assessment on October
is on appeal to the CTA, the Commissioner is prevented from filing
20, 1989. On November 17, 1989, BPI protested the assessment, but
an ordinary action to collect the tax in the regular courts (Repubtjc
there was no immediate reply. On October 15, t992, BIR issued a
u. Ker & Co., Ltd., 78 SCRA 207).
warrant of distraint and./or levy, but it was served only on October
23,1992. On September 11, 1997, BPI received a letter from the CIR
Request for Reinvestigation is granted by BIR dated August 13, 1997, denying its request for reconsideration and
The only agreement that can suspend the running of the addressing the points raised in the protest letter. BPI filed a petition
prescriptive period for the collection of taxes is a written agreement for review with the CTA on October 10, 1997, raising the ground of
between the taxpayer and the Collector, entered into before the prescription. CTA held that the period to collect has not yet prescribed,
expiration of the five (5)-year period, extending the period of but it cancelled the assessment as the sales were tax exempt. CIR
limitation prescribed by law. The rule is in accord with the general appealed to CA, which sustained sustained that the period to collect
law on prescription that requires a written acknowledgment of the has not yet prescribed, but held that the sales were subject to DST.
debtor to renew the cause ofaction or interrupt the running ofthe
The Supreme Court ruled that under Section 223(c) of the Tax
limitation period (New Ciuil Code, Art. 1155; Collector u. Solano,
Code, it is not essential that the warrant be fully executed so that it
G.R. No. L-11475, July 31, 1958). A mere request for reinvestigation
can suspend the running ofthe Statute of Limitations on the collection
or reconsideration of an assessment does not have the effect of
ofthe tax. It is enough that the proceedings have validly begun and
suspension. The ruling is logical; otherwise, there would be no point
that their execution has not been suspended by reason ofthe voluntary
to the legal requirement that the extension of the original period be
desistance of the CIR. Jurisprudence establishes that distraint and
agreed upon in writing." The "legal requirement" above adverted
levy proceedings are validly begun or commenced by the issuance of
to obviously refers to Section 319(c) of the Tax Code, whereunder
the warrant and service thereof on the taxpayer.
the 5-year period therein fixed to enforce collection of a tax, either
by distraint or levy or by a proceeding in court, may be extended if, Moreover, BPI's protest did not constitute a request for
prior to the expiration thereof, another period is "agreed upon in reinvestigation which could have suspended the running of the
writing by the Commissioner of Internal Revenue and the taxpayer" period to collect. Revenue Regulations No. 12-85 provides for the
(Commissioner u. Atlas Consolid.ated Mining & Deaeloprnent procedure for protesting and assessment and distinguishes between
Corporation, CA-GR. SPNo. 47979, September SO,Iggg). (a) request for reconsideration, which refers to a plea for a re-
evaluation of an assessment on the basis of existing records without
Where the reinvestigation requested by appellant was not
need of additional evidence; and (b) request for reinvestigation, which
conducted because neither the appellant nor his counsel appeared,
refers to a plea for re-evaluation of an assessment on the basis of
the prescriptive period remains suspended until the BIR issued
706 Itr,:vrr,:wr,:rr on'l'ax,r'r'roN 'l'll,i:i:ill,ili 707

newly-discovered or additional evidence that a taxpayer intends kr The phrase "institution of judicial proceedings for its
present in the reinvestigation. Section224 of the Tax Code provides investigation and punishment" may be either disregarded as
that only a request for reinvestigation may suspend the running of surplusage or should be deemed preceded by the word "until" (People
the prescriptive period. Taxpayer's protest letter did not specifically a. Duque, G.R. No. 700285, August 13, 1992).
request for either reconsideration or reinvestigation, but its contents
would show that it did not present any new evidence. The BIR itself There must be a judicial proceeding for the investigation and
referred to it as a request for reconsideration. Even ifit was considered punishment of the crime in addition to the fact of discovery before
as a request for reinvestigation, it may only validly suspend the the five-year period begins to run. The referral ofthe case to a public
running of the period, when it has been granted by the CIR. Such prosecutor for preliminary investigation constitutes the "institution
grant need not be express, but may be implied from the acts of the ofjudicial proceedings" contemplated by law (see Lim, et al. u. CA,
Commissioner or his authorized representative in response to the G.R. Nos. 48734-37, October 18, 7990).
request for reinvestigation (BPI u. Comrnissioner, Gf,. No. 739736, If the nature of the crime is such that it could only be
October 17,2005). committed after service of notice and demand for payment of the
deficiency taxes upon the taxpayer, like those violations committed
Bar Question (2000) under Section 255 of the Tax Code for failure to file return and
Mr. Reyes, a Filipino citizen engaged in the real estate business, to supply accurate information), the prescriptive period shall
filed his 1994 income tax return on March 20, 1995. On December be counted from the date when the final notice and demand is
15, 1995, he left the Philippines as an immigrant to join his family served on the taxpayer. This is so because prior to the receipt of
in Canada. Aiter the investigation of said return, the BIR issued a the letter-assessment, no violation has yet been committed by the
notice of deficiency income tax assessment on April 15, 1998. Mr. taxpayer. The crime is committed only after its receipt coupled with
Reyes returned to the Philippines as a balihbayan on December 8, the willful refusal to pay the taxes due within the allotted time
1998. Finding his name to be in the list of delinquent taxpayers, (Aguina.ld.o Industries Corporation u. CIR, G.R. No. L-29790,
he filed a protest against the assessment on the ground that he did February 25, 1982).
not receive the notice of assessment and that the assessment had
prescribed. Will the protest prosper? Explain. Bar Question (2006)
Suggested answer: Gerry was being prosecuted by the BIR for failure to pay his
income tax liability for Calendar Year 1999 despite several demands
No. Prescription has nnt set in because the period of lirnitations for by the BIR in 2002. The Information was filed with the RTC only
the Bureau of Internal Reuenue to issue an assessment was suspended last June 2006. Gerry filed a motion to quash the Information on the
during the tirne that Mr. Reyes was out of the Philippines or from the ground of prescription, the Information having been filed beyond the
period December 15, 1995 up to December 8, 1998 (Sec. 223 in relqtion 5-year reglementary period. If you were the judge, will you dismiss
to Sec.203, NIRC). the Information? Why?
3. Period to file criminal action
Suggested answer:
Prescription shall begin to run from the day of the commission of
the violation ofthe law, and ifthe same be not known at the time, from
No. The trial court cqn exercise jurisdiction. Prescription of a
criminal action begins to run from the day of the comm.ission of the
the discovery thereofand the institution ofjudicial proceedings for its
uiolation of law. The criminal uiolation was committed when Gerry
investigation and punishment. The prescription shall be interrupted
when proceedings are instituted against the guilty persons and shall
willfully refused to pay despite repeated demands in 2002. Since the
Information. was filed in June 2006, the crimirtctl case u)as in'stituted
begin to run again if the proceedings are dismissed for reasons not
constituting jeopardy. The term prescription shall not run when the within the fiue-year period required by law (Tfupaz a. UIep,316 SCRA
offender is absent from the Philippines (Sec.2B1, NIRC). 719991; Sec. 281, NIRC).
708 Itt,rvt t,lwt,:tt on'l'nxn'r'ror,,r

Bar Question (2002)


TY Corporation filed its final adjusted income tax return for
1993 on April 1-2, 1994 showing a net loss from operations. After
investigation, the BIR issued a pre-assessment notice on March 30, CIIAPTER NOfl
1996. A final notice and demand letter dated April 15, 1997 was
issued, personally delivered to and received by the company's chief TAX CREDIT OR REFUND
accountant. For willful refusal and failure of TY Corporation to pay
the tax, warrants of distraint and levy on its properties were issued
and severed upon it. On January 10, 2002, a criminal charge for All national internal revenue taxes, except VAT
violation of the Tax Code was instituted in the Regional Trial Court
Every corporation liable to income tax shall file a final adjustment
with the approval of the Commissioner.
return covering the total taxable income for the preceding calendar
The company moved to dismiss the criminal complaint on the or fiscal year. If the sum of the quarterly tax payments' including
ground that an act for violation of any provision of the Tax Code the creditable withholding taxes, made during the said taxable year
prescribes after five (5) years and, in this case, the period commenced is not equal to the total tax due on the entire taxable income of that
to run on March 30, 1996 when the pre-assessment was issued. year, the corporation shall either (a) pay the balance oftax still due;
or (b) carry over the excess credit; or (c) be credited or refunded with
How will you resolve the motion? Explain your answer.
the excess amount paid, as the case may be.
Suggested answer: In case the corporation is entitled to a tax credit or refund of
the excess estimated quarterly income taxes paid, the excess amount
The motion to dismiss should not be granted. It is only when
shown on its final adjustment return maybe carried over and credited
the assessment has become final and unappealable that the S-year
against the estimated quarterly income tax liabilities for the taxable
period to file o criminal action commences to run (T\tpaz a. Ulep,
quarters ofthe succeeding taxable years. Once the option to carry-
316 SCRA 118 [1999]). The pre-assessment notice issued on March
over and apply the excess quarterly income tax against income tax
30, 1996 is not a final assessment which is enforceable by the BIR. It
due for the taxable quarters ofthe succeeding taxable years has been
is the issuance of the final notice and demq,nd letter dated April 15,
made, such option shall be considered irrevocable for that taxable
1997 and the failure of the taxpayer to protest within 30 days from
period and no application for cash refund or issuance ofa tax credit
receipt thereof that made the q.ssessment final and unappealable. The
certificate shall be allowed therefor (Sec. 76, NIRC).
earliest dq.te th&t the assessment has become final is May 16, 1997
and since the criminal charge was instituted on January 10,2002, A "tax cred.it" is a claim for the issuance of a tax credit
the same was timely fi.led. certificate, showing an amount owing from the goYernment to the
taxpayer which the latter is legally authorized to credit or offset
against national internal taxes payable by him, except withholding
taxes. On the other hand , a "refu,n'd'" is claim for the payment of
cash for taxes erroneously or illegally paid by the taxpayer to the
government. A "Tax Credit Certificate" means a certification, duly
issued to the taxpayer named therein, by the Commissioner or his
duly authorized representative, reduced in a BIR accountable form
in accordance with the prescribed formalities, acknowledging that
the grantee-taxpayer is legally entitled a tax credit, the money value
of which may be used in payment of any of his internal revenue

709
770 Itt,:vil,twr,:rr oN'l'nxn'r,roru
,,,,,-'l'11,,111,T,l:'l'i i,,,,,, 717

tax liability (except those excluded), or may be converted as rr The rechoning ol'the two (2)-year prescriptiue period would be
cash refund, or may otherwise be disposed of in the manner and the d.ate of'monthly remittqnce of the clairned creditable withholding
in accordance with the limitations, if any, as may be prescribed by to*es. - Since the claim pertains to creditable income tax erroneously
the provisions of these Regulations (Sec. 7, Reu. Regs. No. 5-2000, withheld, Sections 204(c) and 229 of the Tax Code must be read
August 15,2000). together with Section 2.58 of Revenue Regulations No. 2-98, as
The Commissioner may credit or refund taxes erroneously or amended by Revenue Regulations No. 17-2003' Based on these
illegally received or penalties imposed without authority, refund the regulations, the reckoning of the two-year prescriptive period would be
value of internal revenue stamps when they are returned in good the date ofmonthly remittance of the claimed creditable withholding
condition by the purchaser, and, in his discretion, redeem or change taxes for January to December 2006. The last month covered by the
unused stamps that have been rendered unfit for use and refund claim is December 2006, which under Revenue Regulations No' 2-98,
their value upon proofofdestruction. No credit or refund oftaxes or must be paid on or before January L5,2007 , or not later than January
penalties shall be allowed unless the taxpayer files in writing with 20,2007,in case of availment of EFPS. Therefore, counting the two-
the Commissioner a claim for credit or refund within two (2) years year period from these dates, LISP had only until January 1'5, 2009 or
aft,er the payment of the tax or penalty. A return filed showing an January 2O,20Og at the most, to file its claim for refund for December
overpayment shall be considered as a written claim for credit or 2006, both with the CIR and the CTA. Since the claim was filed only on
refund. March 4,2OOg and the subsequent appeal was filed with the CTA on
April 13,2009, LISP's claims forthe months of Januaryto December
A Tax Credit Certificate validly issued under the provisions 2006 had already prescribed (LISP'il I'acatord Association a. CIR,
of the Tax Code may be applied against any internal revenue tax, CTA Case No.7906, September 22,2077).
excluding withholding taxes, for which the taxpayer is directly liable.
Any request for conversion into refund of unutilized tax credits may Value Added Tax (VAT)
be allowed, subject to the provisions of Section 280 of this Code. The
original copy of the Tax credit certificate showing a creditable barance Any VAT-registered person, whose sales are zero-rated or
is surrendered to the appropriate revenue offrcer for verification and effectively zero-rated, may, within two (2) years after the close of the
cancellation. In no case shall a tax refund be given resulting from taxable quarter when the sales were made, apply for the issuance of
availment of incentives granted pursuant to special laws for which a tax credit certificate or refund ofcreditable input tax due or paid
no actual payment was made (Sec,204[C], NIRO. attributable to such sales, except transitional input tax, to the extent
that such input tax has not been applied against output tax. In the
No suit or proceeding shall be maintained in any court for the case of zero-rated sales under Section 106(A)(2XaX1)' (2) and (B) and
recovery ofany national internal revenue tax alleged to have been Section 108(BX1) and (2), the acceptable foreign currency exchange
erroneously or illegally assessed or collected, or ofany penalty to have proceeds thereofhad been duly accounted for in accordance with the
been excessively or in any manner wrongfully collected, until a claim
rules and regulations of the Bangko Sentral ng Pilipinas @SP) ' Where
for refund or credit has been duly filed with the Commissioner; but the taxpayer is engaged in zero-rated or effectively zero-rated sale and
such suit or proceeding may be maintained, whether or not such tax,
also in taxable or exempt sale of goods or properties or serrrices, and
penalty or sum has been paid under protest or duress.
the amount of creditable input tax due or paid cannotbe directly and
In any case, no such suit or proceeding shall be filed after the entirely attributed to any one ofthe transactions, it shall be allocated
expiration of two (2) years from the date of payment of the tax or proportionately on the basis of the volume of sales.
penalty, regardless of any supervening cause that may arise after A VAT-registered person may apply for the issuance of a tax
payment. The Commissioner may, even without a written claim
credit certificate or refund of input taxes paid on capital goods
therefor, refund or credit any tax, where on the face of the return imported or locally purchased, to the extent that such input taxes
upon which payment was made, such pa;rment appears clearly to have not been applied against output taxes. The application may be
have been erroneously paid (Sec. 229, NIRC).
made only within two (2) years after the close of the taxable quarter
712 Itt:vrr.:wr,:rt oN 'l'nxA noN 'l'n x ll.t,:n t,rt rtt,:ri 7l::l
'l'rrx ( irrrlil or ltr,lirrrrl
when the importation or purchase was made (Sec. I l2lAl urut lRl,
Thus, thr.l SC aflirms the CTA en banc's ruling that Petron was an
NIRC).
innocent transferee for value (CIR u. Petron Corporation, G.R.
In proper cases, the Commissioner shall grant a refund or No. 785568, March 21, 2012).
issue the tax credit certificate for creditable input taxes within
Petitioner-manufacturer who sold its oxygen and acetylene
120 days from the date of submission of complete documents in
gases to National Power Corporation, a tax-exempt entity, cannot
support of the application filed in accordance with subsections (A)
claim exemption from the payment of sales tax simply because
and (B) hereof.
its buyer (NPC) is exempt from taxation. Pursuant to our ruling
In case offull or partial denial ofthe claim for tax refund or tax in Philippine Acetylene u. CIR, a tax exemption being enjoyed
credit, or the failure on the part of the commissioner to act on the by the buyer cannot be the basis of a claim for tax exemption
application within the period prescribed above, the taxpayer affected by the manufacturer-seller of the goods for any tax due to it as
may, within 30 days from the receipt of the decision denying the claim manufacturer-seller. The excise tax imposed on petroleum products
or after the expiration ofthe 120-period, appeal the decision or the is the direct liability of the manufacturer who cannot invoke the
unacted claim with the Court of Tax Appeals (Sec. 112[D], NIRC). excise tax exemption granted to its buyers who are international
carriers. In the case ofinternational air carriers, the tax exemption
The proper party to question or seek a refund, of the tax is the
granted under Section 135(a) ofthe Tax Code is based on "a long
statutory toxpayer, the person on whom the tax is imposed by law and
standing international consensus that fuel used in international
who paid the same, euen when he shifts the burden thereof to another.
Thus, in Contex Corporation a. CIR, the Supreme Court held
air services should be tax exempt." The provisions of lhe 1944
-that while it is true that Convention of International Civil Aviation, which form binding
petitioner corporation should not have been
international agreement, requires the contracting parties not to
liable for the vAT inadvertently passed on to it by its supplier since
charge duty on aviation fuel already on board any aircraft that has
their transaction is a zero-rated sale on the part ofthe supplier, the
petitioner is not the proper party to claim such vAT refund. Rather, it arrived in their territory from another contracting state. Between
Individual countries, the exemption of airlines from national taxes
is the petitioner's suppliers who are the proper parties to claim the tax
and duties is a standard element of the network of bilateral "Air
credit and accordingly refund the petitioner of the VAT erroneously
Service Agreements." Later, a resolution of the International Civil
passed on to the latter (Silhair fSingapore] pTE Ltd, a. CIR, Gi.
Aviation Organization expanded the provision as to similarly exempt
No. 166482, Januany 25, 2OI2).
from taxes of all kinds of fuel taken on board for consumption by an
The Commissioner may not grant the refund when there is a aircraft from a contracting state in the territory of another State
deficiency tax assessment against the claimant-taxpayer. To award departing for the territory of any other State. The tax exemption
such refund despite the existence of the deficiency assessment is now generally applies to fuel used in international travel by both
an absurdity and a polarity in conceptual effects (comrnissioner domestic and foreign carriers (CIR v. Pilipinas Shell Petroleum
u. Court of Appeals and. Citytrust Banking Corporation,2B4 Corporation, G.R. No. 788497, April25,2072).
scRA848).
Tax Credit v. Tax Deduction
Tax credit certificates are valid and effective from there issuance
and are not subject to a post-audit as a suspensive condition for their A"tar cred.it" refers to an amount that is subtracted directly
validity. The implication of the instant case of the earlier rulings in from one's total tax liability. It reduces the tax due, including the
Petron u. CIR (2010) and, Shell u. CIR is that petron has the riglt to income tax that is determined after applying the corresponding tax
rely on the validity and effectivity ofthe tax credit certificates that rates to taxable income. Examples of tax credits are withheld taxes,
were assigned to it. The validity ofthose certificates should not depend payments of estimated tax, and investment tax credits. On the other
on the results of the DoF's post-audit findings. As found earlier, the hand, a "tafi d,ed.uction" is an amount allowed by law to reduce
parties entered into a joint stipulation offacts statingthat petron did income prior to the application of the tax rate to arrive at taxable
not participate in the procurement or issuance of those certificates. income. A tax credit is used only after the tax has been computed; a
tax deduction, before.
7t4 li,r,:vrr,:wt,trr on'l'AxA,t'ror.r 'l'nx ltr':tltt,:t rt,rs 715
'llrx ( lrt,rlit, or llt'funrl

Since a tax credit is used to reduce directly the tax that is due,
there ought to be a tax liability before the tax credit can be applied.
1. Ifin a taxable year a bookstore has no tax due on which to
enjoy the tax credit, can the bookstore claim from the BIR
However, the existence of a tax credit or its grant by law is not the
a tax refund in lieu of tax credit? Explain.
same as the availment or use of such credit. While the grant is
mandatory, the availment or use is not. If a net loss is reported by, 2. Can the BIR require the bookstores to deduct the amount
and no other taxes are currently due from, a business establishment, of the discount from their gross income? Explain.
there will be no tax liability against which any tax credit can be
applied. Nevertheless, under R.A. 7482, Congress has granted
3. If a bookstore closes its business due to losses without being
able to recoup the discount, can it claim reimbursement
without conditions a tax credit benefit to all covered establishments.
of the discount from the government on the ground that
While a tax liability is essential to the use of any tax credit, prior
without such reimbursement, the law constitutes taking of
tax payments are not essential on estate taxes, donor's taxes, and private property for public use without just compensation?
value added taxes.
Explain.
The provisions of the implementing regulations that withdrew
or modified the unconditional gtant of a tax credit to all covered Suggested answer:
entities are void. Revenue Regulations No. 2-94 defined "tax credit"
as discount to be deducted from gross income. The regulation is still
1. No, The lqw is clear that bookstores can only cluim the
discount as a tax credit. The term "tqx credit" connotes
subordinate to R.A. 7432, and in case of conflict, the implementing
that the amount, when claimed, shq'll only be treq'ted as a
rule will not prevail over the law it seeks to implement. Accordingly,
reduction from any tax liability, plain and simple. There is
despite incurring a net loss, taxpayer may still claim the 2OVo
nothing in the law that grants a refund when the bookstore
discount as a tax credit pursuant to R.A. 7482 (Cornmissioner v.
has no tax liability against uthich the tqx credit can be used
Central Luzon Drug Corporation, GR. No. 15g64Z, April 75, (CIR u. Central Luzon Drug Corpu 456 SCRA 414
2OO5; Commissioner a. Bicoland.ia Drug Corporation, GR. No.
t20051).
748083, July 27,2006). TNOTE: RA. 9257 amend,ed R,A. 24J2. The
term *tqrc credit' is no longer used. The cost ofthe discount shail be 2. No, Tax credit, which reduces the tqrc liability, is dffirent
allowed as d'eduction fronx gross income for the sanne ta*able year that from a tax deduction, which merely reduces the income to
the discount is granted.l arriue at the tax base. Since the law q'llowed boohstores to
claim in full the discount as a tax credit, the BIR is not
Tax credit certificates (TCC) are valid and effective from their
allowedto expand or contract the legislatiue mandate (CIR
issuance and are not subject to a post-audit as a suspensive condition
u. Central Luzon Drug Corp, ibid).
for their validity. The implication of this statement is that the
taxpayer has the right to rely on the validity and effectivity of the 3. No, the bookstore cannot cleim reim'bursement. The tax
TCCs that were assigned to it. However, the transferee/assignee of credit priuilege giuen to it is the compensation for the
a TCC may be held liable if proven to have been a party to the fraud subsidy taken by the gouernment for the benefit of a class
or to have had knowledge ofthe fraudulent issuance ofthe subject of taxpayers to which the students belong. Howeuer, the
TCC (CIR a. Petron Corporation, GR. No. 785568, Mareh 2I, priuilege granted is limited only to the reduction of a
20L2). present or future tax liability, because by its nature, it is the
existence of a lach of a tax liability that determines whether
Bar Question (2006) the discount can be used as a tax credit. Accordingly, if the
business continues to operate at a loss and no other ta.xes
Congress enacts a law granting grade school and high school are due, compelling the business to close shop, the credit
students alUvo discount on all school-prescribed textbooks purchased cctn neuer be applied and will be lost altogether (CIR a.
from any bookstore. The law allows bookstores to claim in full the Central Luzon Drug Corp., ibid.).
discount as a tax credit.
716 Itlrvt t,:wt,:tt or.,r'l'nxn'r'ror.r 'l',nx ltt,lrr,tt,ltrtt,:s 717
'l\rx ( inrtlil, or lhrlirrrrl

Options of Taxpayers fbr Excess Quarterly Tax Paymenls and is to guide tax authorities, at the earliest stage, irr the proper
Creditable Withholding Taxes treatment of tax credits. In making that option irrevocable, the
The phrase *succeed.ing tarable yearu in the TSZZ I'ax law aims towards a more efficient system of tax administration
Code is a limitation that applies only to a tax cred.it, not to tax (Commissioner a. Cebu Holdings,Inc., CA-GR SP No. 75424,
refund.. February 78,2005).
- Under Section 69 of the L977 Tax Code, as amended, it
provides that a taxable corporation is entitled to a tax refund when Election to file claim' for refund is not final a'nd' prior
the sum of the quarterly income taxes it paid during a taxable year aerification and. approual by CIR is required'. - While a taxpayer
exceeds its total income tax due also for that year. Consequently, is given the choice whether to claim for refund or have its excess taxes
the refundable amount that is shown on its final adjustment return applied as tax credit for the succeeding taxable year' such election
may be credited, at its option, against its quarterly income tax is not final Prior verification and approval by the Commissioner of
liabilities for the next taxable year. Since the taxpayer was unable Internal Revenue is required. The availment of the remedy of tax
to use the excess income taxes paid in 1995 against its tax liabilities credit is not absolute and mandatory. It does not confer an absolute
in 1996, it may claim the refund in 1997. A tax refund may be right on the taxpayer to avail of the tax credit scheme, if it so chooses.
claimed even beyond the taxable year following that in which the Neither does it impose a duty on the part of the government to sit
tax credit arises. There is no law limiting such entitlement, other back and allow an important facet of tax collection to be at the sole
than the requirement that the filing of the administrative claim for control and discretion ofthe taxpayer.
it be made by the taxpayer within a two-year prescriptive period
under Section 204(3) ofthe 1977 TaxCode. The phrase "succeeding Ilnd,er Section 76, the exercise of an option is irreuocable
taxable year" in the L977 Tax Code is a limitation that applies only and, a d.ecision to earry'oaer and' appl! tor oaerpayrnent
to a tax credit (Calamba Steel Center a. Comrnissioner, G.R. eontinues until the oaerpoyn 'ent has been fally applied' to ta.r
No. 157857, April 28,2005). tiabilities. - Section 76 of the 1997 NIRC wrought two (2) changes
to its predecessor, Section 69 of t]ne1977 NIRC: first, it mandates that
Option to camy oaer erceas quarterly ineome tar is the taxpayer,s exercise ofits option to either seek refund or crediting
irreuocable for that tqrable year, once the tarpayer has is irrevocable; and second, the taxpayer's decision to carry-over
exercised. such option under 7997 Tax Cod.e.
- Under Section
76 of R.A. 8424, otherwise known as the 1997 Tax Code, which
and apply its current overpayment to future tax liability continues
until the overpayment has been fully applied, no matter how many
became effective on January 1, 1998, the taxpayer is allowed any of tax cycles it takes. [The Court] explained in Asiaworld Properties
the following options, if the sum of its quarterly tax payments made Philippine Corporation u. Cont'missioner of Internal Reuenue:
during the taxable year is not equal to the total tax due for that
year: (a) pay the balance ofthe tax still due; (b) carry-over the excess Under this old provision, the option to carry-over the excess
credit; or (c) be credited or refunded the amount paid. Ifthe taxpayer or overpaid income tax for a given taxable year is limited to the
has paid excess quarterly income taxes, it may be entitled to a tax immediately succeedingtaxable year only. In contrast, under Section
credit or refund as shown in its final adjustment return which may 76 of the NIRC of 1997,the application ofthe option to carry-over the
be carried over and applied against the estimated quarterly income excess creditable tax is not limited only to the immediately following
tax liabilities for the taxable quarbers ofthe succeeding taxable years. taxable year but extends to the next succeeding taxable years. The
However, once the taxpayer has exercised the option to carr;r-over and clear intent in the amendment under section 76 is to make the option,
to apply the excess quarterly income tax against income tax due for once exercised, irrevocable for the "succeeding taxable years."
the taxable quarters ofthe succeeding taxable years, such option is Thus, once the taxpayer opts to carry-ouer the excess income
irrevocable for that taxable period and no application for cash refund tax against the taxes due for the succeeding taxable years, such
or issuance of a tax credit certificate shall be allowed. option is irreuocable for the whole amount of the excess income tax,
The purpose ofthe law in requiring taxpayers to elect whether thus, prohibiting the taxpuyer from applying for a refund for that
to carry over their excess tax credits or claim for refund thereof saul.e uccess income tax in the next succeeding taxable years. T}re
unutilized excess tax credits will remain in the taxpayer's account
T lfr It.t,;vtt.;wt,;rt ott'l'Axrt't totr 'l'nx ltt,ltrlt,:trtt,:s 7t9
'lirx ( ircrltl. or lttrlirrrd

and will be carried over and applied against the taxpayer's inconrtr as regards said taxpayer's excess tax credit. The interpretation of
tax liabilities in the succeeding taxable years until fully utilized.l the court of Appeals only delays the flip-flopping to the end of each
In our (earlier) Decision, we denied petitioner's claim for refund succeeding taxable period.
because it has earlier opted to carry over its 19gz excess income tax The supreme court similarly disagrees in the declaration of the
payments by marking the tax credit option box in its lgg7 income
court of Appeals (in the cIR a.BPl case) that to deny the claim for
tax return. We must clari$', however, that while petitioner may no refund of BPI, because of the irrevocability rule, would be tantamount
longer file a claim for refund, it properly carried over its 1992 excess to unjust enrichment on the part ofgovernment. The court addressed
income tax pa5rments by applying portions thereof to its 19gg and the very same argument in Philam, where it elucidated that there
1999 Minimum Corporate Income Tax in the amounts of p2b,596,210
would be no unjust enrichment in the event of denial of the claim
and F14,185,874, respectively. Pursuant to our ruling, petitioner for refund under such circumstances, because there would be no
may apply the unutilized excess income tax payments as a tax credit forfeiture of any amount in favour of the government. The amount
to the succeeding taxable years until fully utilized. Thus, as of the being claimed as a refund would remain in the account of the taxpayer
taxable year 1999, petitioner still has an unutilized excess income tax until utilized in succeeding taxable years, as provided in section 76
pa;rments of P92,261,444 which may be carried over to the succeeding
of the NIRC of 1997. It is worthy to note that unlike the option for
taxable years until fully utilized.2 refund of excess income tax, which prescribes after two years from the
To avoid confusion, this Court has properly explained the phrase filing of the FAR, there is no prescriptive period for the carrying over
"for that taxable period" InCIR u. BPI, where the Court held that of th-e same. Therefore, the excess income tax credit of BPI, which it
the phrase merely identifies the excess income tax, subject of the acquired in 1998 and opted to carry over, may be repeatedly c,arried
option, by referring to the "taxable period when it was acquired by the ovJr to succeeding taxable years, i.e., to 1999, 2000, 2001, and so on
taxpayer." Section 76 remains clear and unequivocal. Once the carry- and so forth, until actually applied or credited to a tax liability of
over option is taken, actually or constructively, it becomes irrevocable. BPI. Prescription did not bar the taxpayer from applying the amount
It mentioned no exception or qualification to the irrevocability rule. as tax credii, considering that there was no prescriptive period for
Hence, the controlling factor for the operation of the irrevocability the carrying over of the amount as tax credit in subsequent taxable
rule is that the taxpayer chose an option, and once it had already years.3
done so, it could no longer make another one (Ilnited International Submission of ta'xtrtoyet' s ta'r return is required' and' grant
Pictures a. CIR, G.R. No. 76833I, October II, ZOI2). of refund, is found.ed. on the assumption tha,t ta,r return is ualid4
The Court ofAppeals mistakenly understood the phrase ,,for that since the taxpayer opted to apply its aggregate excess credits as tax
-credit
taxable period" as a prescriptive period for the irrevocability rule. or refund for 1990, it was incumbent upon it to present its 1990
This would mean that since the tax credit in this case was acquired income tax return to show that the claimed tax credit or refund had not
in 1998, and BPI opted to carry it over to 1g99, then the irrevocability been automatically credited and applied to its 1990 taxliabilities. The
ofthe option to carry over expired by the end of1999, leaving BpI free grant of a refund is founded on the assumption that the tax return is
to again take another option as regards its 1g98 excess income tax valid; i.e., that the facts stated therein are true and correct. without
credit. This construal effectively renders nugatory the irrevocability the tax return, it is error to grant a refund since it would be virtually
rule. The evident intent of the legislature, in adding the last sentence impossible to determine whether the proper taxes have been assessed
to Section 76 of the 1997 Tax Code, is to keep the taxpayer from and paid. Failure of the taxpayer to present sufficient evidence to
flip-flopping on its options, and avoid confusion and complication p"orr" itr claim for refund is fatal to its cause. The claimant has the
Lurden ofproofto establish the factual basis ofhis or her claim for
rCommissioner v. McGeorge Food
Industries, G.R. No. 17 4187, Octaber 2O, 2OL0;
tax credit or refund (Paseo Realty & Deaelopmcnt corporation
Belle Corporationv. Commissioner, G.R. No. 181298, January2O,Z}ll;Commissioner o. Court of Appeals, GR. No. 779286, October 73' zO(M)'
v. Phil-American Life and General Insurance co., G.R. No. 175124, september 29,
2010.
2Belle Corporation v. Commissioner,
to"-*tt"t""er v. PL Management International Phil, Inc', G'R' No' 160949'
G.R. No. 181298, January 10, 2010. April 4, 2011.
720 Itt,:vtt,:wr,:tt oN'l'nxn'r'roru 'l',rr ll.t,:ttt,tntt,ll 72t
'lirx ( ilr,rlil, or ltclittttl

The government cannot illicitty withhold. from tarpayere statute. 'Ihe claim fbr refund should be filed with the Commissioner
what is justly d'uethem. - when it is undisputed that a taxpa.ycr is as a pre-requisite before court action on tax refund cases can be
entitled to a refund, the state should not invoke technicalities, keep
commenced and that the suit for refund must be filed within two (2)
the money not belonging to it. once a taxpayer elects to carry over years from date of payment oftax. When the two (2)-year period is about
and apply its excess tax to the following year's tax liability, it could
to prescribe and the claim for refund with the Commissioner had not
not have this excess refunded until the entire duration ofthat taxable
been acted upon, the taxpayer should file a petition for review with the
year has lapsed or expired. In any case, the law was not couched in
CTA within the two (2)-year period; otherwise, if the Commissioner's
such a way as to authorize the state to forfeit the unutilized excess
decision is adverse, the taxpayer could no longer appeal to the CTA
tax credits (Raytheon Ebasco Ouerseas Ltd.-phitippjne Branch (Commissioner o. United' International Pictures, CA G.ft. SP No.
a. Cornmissioner, CA-G.R. SPNo. 80296, Aprit 11,2005).
652L 7, Januany 31, 2005).
Refunds are in the nature of tax exemptions and are con- He who claims a refund or exemption from taxes has the burden
ofjustifuing the exemption by words too plain to be mistaken and too
strued strictly against the tax payer claiming the same categorical to be misinterpreted (Compagnie Financiere Sucres
The petition for review for erroneously paid taxes for 1998 was et Denrees u. Cornmissioner, G.R. No. 733834' August 28,2006).
filed by petitioner, as trustee of various retirement plans, on october
9, 1995. At this time, petitioner had a pending petition before the Bar Question (2013, 20121
crA involving the same legal issue but covering a previous taxable
period. Hoping to comply with the two-year period within which to file On April 6, 2012, the corporation filed its annual corporate
an action for refund, petitioner filed a motion to admit supplemental income tax return for 2011, showing an overpayment of income tax of
petition in the crA case to include the tax refund claimed for 1998. FL million, which is to be carried over to the succeeding year(s). On
The CTA denied the motion, saying that the case had already been May 15, 2012,the corporate sought advice from you and said that it
pending for more 2-l/2years and the admission of the suppremental contemplates to file an amended return for 2OL1, which shows that
petition would further delay the proceedings. Thus, separate petition instead of carryover ofthe excess income tax pa5rment, the same shall
for review for refund was filed. be considered as a claim for tax refund and the small box shown as
"refund" in the return will be filled up. Within the year, the corporation
While income from employees trust funds were exempt from will file the formal request for refund for the excess payment. (a) Will
income taxes, the claims for refund had already prescribed insofar as you recommend to the corporation such a course of action and justifu
they covered the first, second and third quarters of1993 as well as for that the amended return is the latest official act of the corporation as
october 1 to 8, 1993. The claim for refund for october 9 to December to how it may treat such overpayment of tax or should you consider the
31, 1993 was also denied, the evidence being insufficient to establish option granted to taxpayers as irrevocable, once previously exercised
the fact that the money or assets of the trust funds were used or placed by it? (b) Should the petition for review filed with the CTA on the
in money market placements, bank deposits, other deposit substitute basis of the amended tax return be denied by the BIR and the CTA,
instruments and government securities. The burden of proving the could the corporation still carry over such excess payment of income
claim for refund necessarily falls on the taxpayer and petitioner failed tax in the succeeding years, considering that there is no prescriptive
to discharge the necessary burden of proof (Far East Banh and, period provided for in the income tax law with respect to carry over
Tlust Co. u. Commissioner, G.R. No, IB8g1g, May 21 2006). of excess income tax payments?
Denial by the Cornmissioner of the claim for refund. is
not required. Suggested answers:
- rt is unnecessary for the commissioner of Internal
Revenue to act unfavorably on the claim for refund before the crA may a. No. Once the option to carry ouer and apply the excess
acquire jurisdiction, because of the positive requirement of section 280 quarterly income tox, against the income taa due for the
of the Tax code and the doctrine that delay of the commissioner in tq.xable quarters of the succeeding tarable years has been
rendering decision does not extend the peremptory period fixed by the nrade, such option shall be considered irreuocable for the
722 lil';vrr,;wr,:rr oN'l'nxrllror.r 'l',\x 1il,:Mr.:r )r,::r '12:l
'lirx ( lrrrrlrl or ltclittttl

taxable year &nd no applic(rtion lbr tax rcf'untl or issuutx,e i rtlt:rt.ls o.tul lt u, r ptxt:s.'I'hus, by any reaso nuble s tandarcl,
of tax credit certifr,cate shall be allowed therelnr (Sec. 76, such person shouLd be regarded as a party-in-interest to
NIRC). bring suit for refund of taxes (Commission'er u. Procter
& Gamble PMC and' CTA,2O4 SCRA 377 t19911).
b. Yes. The carry-ouer of excess income tanc payments is no
longer limited to the succeeding taxable year. Unutilized
eJccess income tan payments may now be carried ouer to the Bar Question (2004)
succeeding taxable years until fully utilized. In addition, On March 12,2OOl, REN paid his taxes. Ten months later, he
the option to carry ouer ex,cess income tax payments is realized that he had overpaid and so he immediately filed a claim for
now irreuocable. Hence, unutilized etccess Income tax refund with the Commissioner of Internal Revenue.
payments rlay no longer be refunded (Belle Corporation
o. CIB, G*R. No. 787298, January 70,201,7; CIR a. PL, On February 27, 2003, he received the decision of the
Management Inf,l. Phils.,Inc., G-R. No. 760949, April Commissioner, denying REN's claim for refund. On March 24,2003,
4,2077). REN filed an appeal with the CTA. Was his appeal filed on time or
not? Reason.
Bar Question (2006) Suggested answer:
a. State the conditions required by the Tax Code before the
The appeal was not filed on time. The two-year period of limitation
Commissioner of Internal Revenue could authorize the only a limitation pursuing the
for fiting a claim for refund is not for
refund or credit oftaxes erroneously or illegally received. but also a limitation appealing
clairn at the administratiue leuel for
b. Does a withholding agent have the right to file an the case to the CTA. The law prouides that "no suit or proceeding shall
application for tax refund? Explain. be fi.led after the expiration of two years from the date of the payment
of the tanc. or penalty, regardless of any superuening cause that may
Suggested ansryer: arise after paynrent" (Sec. 229, NIRC). Since the appeal was only macle
on March 24,2003, more than two (2) years had already elapsed lrom
The conditions are: (1) a written claim for refund is
the time taxes were paid on March 12,2003' Accordingly, REN had
filed by the taxpayer with the Commissioner of Internal lost his judicial remedy because of prescription.
Reuenue (Sec. 204, NIRC); (2) the claim for refund must
be a categorical d,emq,nd for reimbursement (Bennejo u.
Coll.ector of Internal Beaenue, ST Phil96 t1950l); (3) Bar Question (1991)
the claim for refund or tax credit m.ust be filed with the Apple Computer Corp. (ACC) is a foreign corporation doing
Commissioner, or the suit or proceeding therefor rnust be business in the Philippines through a local branch located at Makati,
commenced in court within two years from date of payment Metro Manila. In 1985, the local branch applied with the Central Ban k
ofthe tax or penalty, regardless ofany superuening cause for authority to remit to ACC branch profits amounting to F8,000.00.
(Sec.229, NIRC). After payingthe L57o branch remittance tax of F1,200,000.00, tlrc
b. Yes. A withholding agent should be allowed to claim for tax branch office remitted to ACC the balance of P6,800,000.00. In
refund, because under the law, said agent is the one who January 1986, the branch office was advised by its, legal counsel that il,
is held liable for any uiolation of the withholding tax law overpaid the branch remittance tax since the basis of the computation
should such uiolation occur (Commjssioner a. Wand.er thereof should be the amount actually remitted and not the amount,
Philippines, 760 SCRA 57O [1988]). Furthermore, since applied for. Accordingly, the branch office applied for a refund in thtr
the withholding agent is made personally liable to deduct amount of F180,000.00.
and withhold any ta&, under Section 53(c) of the Tax Cod.e, it If you were the Commissioner of Internal Revenue, would ytlu
is imperatiue that he be considered the taxpayer for all legal grant the claim for refund?
724 'l'nx ltr,rtvt r,u rt r,;s 725
llt,tvn,lwr,:rr oru'l'lx,r'r'roru
'lirx (ircdil, or ltclirnd

Suggested ansvrer: illegally collecled from him, nowhere and in no wise does the law
imply that the Commissioner must act upon the claim. Inaction of
If I were the Commissioner of Internul Reuenue,I woukl alktut th.a the Commissioner on the claim for refund must be construed as a
claim for refund. The remittance tax should be computed on the amourtt reaffirmation of the original action taken by him and an implied
actually remitted (Marubeni Cotporation u. Commissioner, G.R. denial of the claim for refund or credit (Muller & Phipps [Manila]
No. 76573, September 74, 7989). In the refund of taxes, the claim a. Callector, 703 Phil. L45). Therefore, if no decision is received
therefor can be fi.led within two (2) years from the time of payment from the Commissioner on the claim for refund or credit and the
so long as the tax paynxent was made before an assessment by the two-year period for instituting court action is about to expire, the
Commissioner has become final (Sec. 230, NIRC). taxpayer must file the court action without waiting for the action of
the Commissioner on the administrative claim, if he is not to lose
Principle of Exhaustion of Administrative Remedies the right to judicial remedy, since the written claim for refund does
It is a well-settled rule in tax law, as in other fields of law, that not toll the statutory limitation of two years (Gibbs u. Collector,
the taxpayer who feels aggrieved by actions taken by tax authorities L-73453, 107 PhiI. 230).
may not seek redress in the courts ofjustice without first exhausting The time for an action for a refund of income tax is fixed by
available administrative remedies, except for certain well-recognized statute and is not extended by the delay of the Commissioner in giving
exceptions. It is the policy ofthe law and good practice to discourage notice of the rejection of such claim (Koppel tPhil.] a. Collector, 3
court litigations and encourage resort to administrative action SCRA 17).
whenever the latter is feasible, adequate and speedy. For another
thing, the respect and consideration due to each branch of the Starting date for counting the two-year period
government demand that the judicial department abstain, whenever
possible, from interfering in the acts of the other departments, As a general rule, the two-year period will be counted from the
except when the latter transcend their respective spheres ofaction date ofpayment ofthe tax or penalty, regardless ofany supervening
and suitable remedies cannot be obtained from them (Bagatsing u. cause that may arise after payment.
Ramirez, T4 SCRA 306). Exceptions to the rule are as follows:
However, the principle of exhaustion of administrative remedies
is not applicable "where the question in dispute is purely a legal lncome Tax
one" (Tapales a. Presid.ent and the Board. of Regents of II.p.,
7 SCRA 553), or where the controverted act is patently illegal 1. Corporate income tax. - Where a corporation paid
quarterly corporate income taxes in any of the first three
or was performed without justification or in excess of jurisdiction
(Mangubat u. Osmefia, G.R. No. L-12832, April 80, IgSg), or quarters during the taxable year but incurs a net loss
during the taxable year, the two (2)-year period for the
where the respondent is a Department Secretary, whose acts as
filing of claim for refund or credit shall be counted from
an alter ego of the President bear the implied or assumed approval
the date of the filing of the annual corporate income tax
of the latter (Marind.uque lron Mines Agents a. Secretary of
return (Commjssioner a. TITIX Sales,205 SCRA 184).
Public Works, GR. No. L-75982, May 37, 796g), or where there
are circumstances indicating the urgency of judicial intervention 2. Income tax paid. in installments. - Where the tax
(Gonzales a. Hechanoua, I SCRA 230). had been paid in installments, the taxes are deemed paid,
for purposes of determining the commencement of the
lnaction of the Commissioner on a claim for refund or two-year period for filing a written claim for the refund or
tax credit must be construed as a denial of the claim credit therefor on the date the last installment was paid
(Commissioner a. Palanca, 18 SCRA 496).
While the Tax Code authorizes a taxpayer to claim for the
refund or credit of any taxes alleged to have been erroneously or
'l',rx llt,:rur,:rrtt,r.t 72'.t
726 Ilt,tvtt,:wt,;lr oN'l'nxA't'loN 'lirx ( )rlrlil. or ltolirrrrl

l)i<l l,lr<r r:lirirn lirr rclirrrrl grrcsr:ribe?


Bar Question (1994)
Suggested anawer:
XCEL Corporation filed its quarterly income tax return firr
the first quarter of 1985 and paid an income tax of F500,000.00 on The claim for refund has prescribed. The counting of the two-year
May l-5, 1985. In the subsequent quarters, XCEL suffered losses so prescriptiue period for fiIing a claim for refund is counted not from
that on April 15, 1986 it declared a net loss of ?1,000,000.00 in its the dote when the quarterly income ta.xes were paid but on the date
annual income tax return. After failing to get a refund, XCEL filed when the fi.nal adjustment return or annual income tax return was
on March 1, 1988 a case with the Court of Tax Appeal store cover the fi.led (CIR a. TMX Sales, G.B. No. 83736, January 15, 1992; CIR
F500,000.00 in taxes paid on May 15, 1985. Is the action to recover a. Philam Life Insurance Co., Ine., Gf,. No. 105208, May 29,
the taxes filed timely? 1995).It is obuious that the annual income ta,x return was fi.led before
January 10, 1994 because the written clairn for refund was filed with
Suggested answer: the BIR on January 10, 1994. Since the two-year prescriptiue period
The action for refund was fiIed in the Court of Tu.x Appeals on is not only a limitation of action in the administratiue stage but also
tim.e-In the case of Comrnissioner u. TIvI)( Sales, Inc., 205 SCRA 184, a limitation of action for bringing the ca,se to the judicial stage, the
which is sirnilar to this case, the Supreme Court ruled that in the cq'se petition for reuiew filed with the CTA on March 02, 1996 is beyoncl
of ouerpaid quarterly corporate income tox, the two (2)-year period for the reglementary period.
filing claims for refund in the BIR as well as in the institution of an Withholding Tax
action for refund in the CTA, the two (2)'year prescriptiue period for
ta^tc refunds (Sec, 230, NIBO is counted from the fr'lin{ of the final, In the case of creditable withholding taxes, the three (3)-year
adjustment return under Section 67 of the Tax Code, and not from the period within which to assess shall be counted from the last day
filing of the quarterly return and payment of the quarterly to.x. The required by law for filing a monthly remittance return. Each monthly
CTA action on March 1, 1988 was clearly within the reglementary return on creditable taxes withheld is already a complete return. The
two (2)-year period from the fi.ling of the fi.nal adjustm.ent return of Annual Information Return submitted to the BIR is just an annual
the corporation on April 15, 1986. report of income payments and taxes withheld and it is not in the
nature of a Final Adjustment Return (HPCO Agrid.eo Corporation
Bar Question (1997) a. Cornmissioner, CTA Case No.6355, July 78,2002; Continental
Micronesia, Inc. - Phil. Branch a. Cornmissioner, CTA Case
A corporation files its income tax return on a calendar year basis. No.6797, March 22,2006). The counting of the three-year period
For the first quarter of 1993, it paid on 30 May 1993 its quarterly to assess expanded withholding tax should not start from the filing
income tax in the amount of F3.0 million. On 20 August 1993, it paid of petitioner's annual income tax return. Foremost because the
the second quarterly income tax of F0.5 million. The third quarter deficiency expanded withholding tax is not an income tax on the part
resulted in a net loss, and no tax was paid. For the fourth and final of petitioner. It is a penalty imposed by law for failure to perform an
return for 1993, the company reporbed a net loss for the year, and the obligation as a withholding agent ofthe government(Comrnissioner
taxpayer indicated in the income tax return that it opted to claim a u. CA, CTA and. A. Soriano Corpu G.R. No. 708576, January 20,
refund of the quarterly income tax payments. 1999).

On 10 January 1994, the corporation filed with the Bureau of Some expressed the view that in the case of creditable
Internal Revenue a written claim for the refund of F3.5 million. withholding tax, the two (2)-year period to file a claim for tax refund
or credit shall be counted from the date of fiIing of the annual income
BIR failed to act on the claim for refund; hence, on 2 March tax return to which the creditable income tax relates. However, in
1996, the corporation filed a petition for review with the Court of the case of final withholding tax, the two (2)-year period shall start to
Tax Appeals on its claim for refund of the overpayment of its 1993 run from the filing of the final withholding tax return and paSrment
quarterly income tax. BIR, in its answer to the petition, alleged that of the final income tax.
the claim for refund was filed beyond the reglementary period.
7ztl llr,:vtt,:wt,:tr oN 'l'Ax,\ r toN 'l'rr l{r,:wr,:lrr.;; 729
I'rrr ('rr'rltl ot ll.r.lirtrrl

Value Added Tax the invoices or rcr:tri;lts rct;uired by ltegulaLions No.3-88 and CTA
Circular No. l-95, as amended by CTA Circular No. 10-97, and such
Claims for tax credit or refund of erroneously or illegally collected
omission is fatal to its cause. Cases filed in the CTA arelitigated. de
value added tax arising from zero-rated or effectively zero-rated sales
nouo (Atlas Consolid.ated. Mining & Deuelapmcnt Corporation
shall be filed within two (2) years after the close of the taxable quarter
u. Cotnmissioner of Internal Reuenue, G.R. No. 745526, March
when the sales or importation or purchase were made (Sec. 112[Al,
76,2007).
NIRC).
On the basis of the codal provisions, there seems to be two (2) Bar Question (2002)
levels within which the claim for tax credit or refund of value added
tax must be filed. At the administrative level, the two (2)-year period A. What must a taxpayer do in order to claim a refund of,
for the filing of a written claim with the BIR is counted from the close or tax credit of, taxes and penalties which he alleges t<l
of the taxable quarter when the sales or importation or purchase have been erroneously, illegally or excessively assessed or
were made. At the judicial level, the two-year period for the filing of collected?
a petition for review with the CTA shall be counted from the date of B. Can the Commissioner grant a refund or tax credit even
filing of the VAT return and payment of the tax. The CTA, however, without a written claim for it?
ruled that the two-year period at the administrative level shall be
counted from the filing of the quarterly return. The rationale for Suggested answer:
this was explained in the case of Atlas Consolidated Mining and
Deuelopntent Corporation u. Commissioner, CTA Case No. 5296, JuIy A. The taxpayer must comply with the following procedures in
20, 1998 as follows: claiming a refund of, or tax credit for, taxes and penalties
which he alleges to haue been erroneously, illegally or
"x x x. This will harmonize Section 106 with Section excessiuely assessed or collected:
230 of the Tax Code which was interpreted by the Supreme
Court in the cases of Comrnissioner u. TMX Sales and the 1. He should file a written claim for refund with the
Court of Tox Appeals, G.R. No. 83736, January 75, 1992; Commissioruer within two years after the date ol'
and, ACCRA Inuestntents Corporation u. Commissioner, 204 payment of the tax or penalty (Sec. 204, NIRC);
SCRA 957 that the two (2) year period should be counted 2. The claim fi.led must state a categorical demand for
from the fiIing of the final income tax return, because reimbursement (Bermejo a. Coll.ector, 87 Phil. 96
it is only during that date that the exact tax liability or t1e50l);
refundability can be determined. In the same manner, it
is only after the filing of the quarterly VAT return that we 3. The suit or proceeding for recouery must be commenced
can determine the VAT liability or refundability of VAT. in court within two years from date of payment of the
It should be noted that the basic requirement is that VAT tasc or penalty regardless ofany superuening euent that

refund can only be granted to the extent that the input will arise after payment (Sec. 229, NIRC).
taxes have not been applied against output tax. All these
things can only be determined if a return is filed. It is INOTE: If the answer giuen is only number 7, it
logical, therefore, to conclude that the two (2!year period is suggested that the sq.me shall be giuen full credit,
should not immediately be counted from the close of the considering that this is the only requirement for the
quarter but from the date of filing of the VAT return." Commissioner to acquire jurisdiction ouer the claim.l

The well-entrenched rule is that those seeking tax refunds or B . Yes. When the taxpayer files a return uthich on its face shows
credits bear the burden of proving the factual books of their claims an ouerpayment of the tq.x and the option to refund /claim
and that the legislative intended to entitle them to such claims. The a tax credit was chosen by the tarpayer, the Commissioner
CTA and CA correctly obserwed that Atlas never submitted any of
7:lo llt,:vtt,lwt,ttr oN 'l'nxA loN
7:tt
,,,,,, l':ll,,l1illl'i'J,',,,,,,,,
shall grant the relund or lurc cre.dit withou.t the ruted fitr o
written claim. This is so, because a return ftled showittg llowtrver, thc spet:iitl cin:trtnsl,irn<:c in t,he instant case demands
dn ouerpaynxent shall be considered as a written claim for that it be given a diff'erent treatment. While MERALCO diligently
credit or refund (Secs. 76 and 204, NIRC). Moreouer, the filed its final adjustment return and paid the income tax thereon,
law prouides that the Commissioner may, euen without a it is beyond cavil that neither the right to claim for refund can be
written claim therefore, refund or credit any tax where on determined nor there was basis for MERALCO to know that the
the face of the return upon which payment was made, such income tax pa5rments for the taxable years 1994-1998 and 2000 were
payment appears clearly to haue been erconeously paid (Sec. erroneous and excessive. Such fact arose only when the Supreme
229, NIRC). Court's Decision in G.R. Nos. 141314 and 141369 became final and
executor on May 5,2003.
lnterpretation of phrase "regardless of any supervening MERALCO aptly relied in the case of CIR u. Philippine American
cause that may have arisen after payment" Life Insurance Co. (244 SCRA 447) , where the Supreme Court ruled
that "The prescriptive period of two (2) years should commence to
The claim must be in writing and must be instituted within two run only from the time that the refund is ascertained, which can
(2) years from the date ofpayment ofthe tax or penalty, regardless
only be determined after a final adjustment return is accomplished,
of any supervening cause that may have arisen after payment. The regardless of any supervening cause that may arise thereafter." This
phrase "regardless ofany supervening cause that may have arisen
is so because at that point, it can already be determined whether there
after payment" inserted into the section by P.D. 69, on its face, has been an overpayment by the taxpayer.s We are aware that equity
appears to cast doubt on several cases wherein it had been ruled is available only in the absence of law and not as its replacement.6
that the period of two (2) years should commence not from the date Indisputably, at the time MERALCO filed its final adjustment return
the tax was paid but from the happening of the supervening cause and paid the income tax thereon, the amount being claimed for refund
which entitled the taxpayer to a refund (Commissioner a. National
cannot be said to be "excessively and wrongfully collected." It was only
Power Corporation, ST SCRA 772). on May 5,2003, that the income tax payments for the taxable years
prescriptiae period. of two (2) years should. corwnence
The 1994-1998 and 2000 being claimed for refund were determined as
to run only from the time that the refund, is ascertained., "excessively and wrongfully collected." Equity as the complement of
uhich can only be detennined after a fi.nal adjushnent return legal jurisdiction seeks to reach and do complete justice where courts
is accomplished., regardless of any superuening cause that of law, through the inflexibility of their rules and want of power to
may arise thereafter. - The Tax Code provides that all suits adopt their judgments to the special circumstances of cases, are
or proceedings shall be filed before the expiration of two (2) years incompetent to do.7 To reckon the running of the prescriptive period
from the date of payrnent of the tax or penalty, regardless of any from the filing of the final adjustment return and payment of the tax
supervening event that may arise after pa;rment. This means that the thereon for the taxable years 1994-1998 and 2000 when the excess
two-year prescriptive period is reckoned from the filing of the final payments and the right to recover the same came about only on May
adjusted return.a At first glance, it would appear that prescription 5, 2003 would be iniquitous. The law on prescription being remedial
has set in as the claim for refund for the taxable years 1994 to 1998 measure should be interpreted in a way conductive to bringing about
and 2000, both in the administrative level (Novernber 27,2003) and the beneficent purpose ofbalancing the taxpayer and the government's
judicial level (May 4, 2005) were both filed beyond the two (2)-year interest. That is, if the circumstances warrant, the interpretation on
reglementary period from the filing of the final adjusted return. the law on prescription may be relaxed for equitable reason.

aCommissionerv. Primetown Property Group, Inc., G.R. No. 16215b, August 28, sCommissioner v. CA, et al.,G.R. No. 117254, January 21,1999.
2007; Philippine Bank of Communications v. Commissioner, G.R. No. II2024, January GAguila v. CFI ofBatangas, 160 SCRA 352.
28, 1999. TTamio v. Ticson, G.R. No. 154895, November 18, 2004, citing Air Manila v.
Commissioner, 83 SCRA 579.
7:t2 Itr,;vr r,:wt,;tr oN'l'AxA't'tol
' I'nx ll,t,;tr,t t,:t rt t,;s 733
'l\rx ( lrcrlit or llctirnd
In the case of CIR u. Mirq,rut Pagbilao Corporation, thc S(l hcld
Suggested answer:
that: "... The return of what was erroneously paid is foundcd on thc
principle of solutio indebiti, a basic postulate that no one should Yes. There was no claim for refund or credit tha.t has been duly
unjustly enrich himself at the expense of another. The caveat against filed with the Cornmissioner of Internal Reuenue which is required
unjust enrichment covers the government. And as decisional law before a suit or proceeding can be filed' in any court (Sec. 229, NIRC).
teaches, a claim for tax refund proper, as here, necessitates only the The denial of the claimby the Commissioner is the one whichwilluest
preponderance ofevidence threshold, like any ordinary civil case."8 the Court of Tox Appeals jurisdiction ouer the refund case should the
taxpayer decide to appeal on tirne.
Filing of written claim is mandatory
The taxpayer must first file a claim for refund or tax credit before
b) Why is the filing of an administrative claim with the BIR
necessary?
maintaining a suit or proceeding in any court for the recovery of any
internal revenue tax alleged to have been erroneously or illegally Suggested answer:
assessed or collected. This provision in Section 306 ofthe Tax Code
is mandatory and a condition precedent to the prosecution of a suit The filinq of an administratiue claim for refund with the BIR is
for the recovery of said taxes, non-compliance with which bars the necessary in order:
action and subjects the claim to dismissal for lack of cause of action 1) To afford the Commissioner an opportunity to consider
(Repubhc a. Lima.co & De Guzman Cornmcrcial Co. a,nd. Visayan
the clq,im and to haue a chance to correct the errors of
Surety & Insurance Corporation, supra). subordinate officers (Gonzales u. CTA' et al., 14 SCRA
79); and
Bar Question (2000)
2) To notify the Gouernment that such taxes haue been
On June 76,t997, the Bureau of Internal Revenue (BIR) issued questioned and the notice should be borne in mind in
against the Estate ofJose de la Cruz a notice of deficiency estate estimating the reuenue auailable for expenditures (Bertneio
tax assessment, inclusive of surcharge, interest and compromise a. Collector, GJ-. No. L-3028, July 29, 1950).
penalty. The Executor ofthe Estate ofJose de Ia Cruz (Executor) filed
a timely protest against the assessment and requested for waiver of Bar Question (1996)
the surcharge, interest and penalty. The protest was denied by the
Commissioner of Internal Revenue (Commissioner) with finality on Is a protest at the time of payment oftaxes/duties a requirement
September 13, 1997. Consequently, the Executor was made to pay to preserve the taxpayers'right to claim a refund? Explain.
the deficiency assessment on October 10, 1997. The following day, the
Executor filed a Petition with the Court of TaxAppeals (CTA) prayrng Suggested answer:
for the refund of the surcharge, interest and compromise penalty. The For tuces imposed under the NIRC, protest at the time of payment
CTA took cognizance of the case and ordered the Commissioner to is not required to preserue the taxpayers' right to claim refund. This
make a refund. The Commissioner filed a Petition for Review with is clear under Section 230 of the NIRC which prouides thq't a suit or
the Court of Appeals assailing the jurisdiction of the CTA and the proceeding may be maintq,ined for the recouery of national internal
Order to make refund to the Estate on the ground that no claim for reuenue ta,lc or penalty alleged to haue been erconeously assessed or
refund was filed with the BIR. collected, whether such tax or penalty has been paid under protest or
a) Is the stand of the Commissioner correct? Reason. not.
For duties imposed under the Tariff and Customs Code, a protest
qt the time of payment is required to preserue the taxpayers' claim for
SMERALCO v. Commissioner, CTA Case No. 7242,December 7,2010.
refund. The procedure under the TCC is to the effect that when a ruling
or decision of the Collector of Customs is made whereby liability for
734 Itt,tvt t,:wt,:tt oN'l'nxn'r'roru
'l'nx ll.t,:ltt'tutt,;s 735
'lirx ( )rt'rlil. or ll,clutrtl
duties is determined, the party &duersely affected may protest sucll
ruling or decision by presenting to the Collector, at the time when. of his right to appeal to the'fax Court would in effect require of him
payment is made, or within fi.fteen days thereafter, a written protest to go through a useless and needless ceremony that would surely
setting forth his objections to the ruling or decision in question (Sec. disallow the protest against the assessment. The law should not be
2308, TCC). interpreted as to result in absurdities (Roma.nCatholic Archbishop
of Cebu u. Collector,4 SCRA 279).
Had. petitioners belieaed. that the waiuers were inao.lid
and. that the assessmcnts were issued. beyond. the prescriptiue Appeal of final d'ecision of Commissioner to Secretary of
period., then it should. not haae paid. the red.uced amnunt of Finance d.id. not interru.pt running of period. to mnke an appeal
taxes inthe reuised. assessm.ent. Estoppel (underArt. 1431 of the to CTA. - An appeal of the final decision of the Commissioner to the
-
Civil Code) is clearly applicable to the case at bench. RCBC, through Secretary of Finance will not interrupt the running of the period for
its partial payment of the revised assessments issued within the appeal to the Court ofTax Appeals, since the Secretary ofFinance is
extended period as provided for in the questioned waivers, impliedly not the officer designated by law to pass upon the merits of motions
admitted the validity of those waivers. Had petitioners believed that for reconsideration or protests of disputed assessments (Tang Ho a.
the waivers were invalid and that the assessments were issued beyond Collector, CTA Case No.279, May 78, 1957).
the prescriptive period, then it should not have paid the reduced Proper person to claim refund' or cred'it. The proper
amount of taxes in the revised assessment. RCBC's subsequent
-
person to claim refund or tax credit is the person on whom the tax is
action effectively belies its insistence that the waivers are invalid. imposed by the statute Mestern Minolco Mining Corporation a.
To hold otherwise and allow a party to gainsay its own act or deny Plana, CTA Case No. 3077, May 27, 1982).
rights which it had previously recognized would run counter to the
principle of equity which this institution holds dear.e
Bar Question (2009)
Letter tend.ering payment of tax is not a clairn. - The ABCD Corporation is a domestic corporation with individual
letter dated March 14,1955 cannot be considered as claim for refund, and corporate shareholders who are residents of the U.S. For the
because it merely informed the Collector that it was tendering
2nd quarter of 1983, these U.S.-based individual and corporate
payment of the sum of F3,000 so that defendant-surety might be
shareholders received cash dividends from the corporation. The
removed from the black list. The law governing an action for the
corresponding withholding tax on dividend income - SOVo for
recovery oftaxes is Section 306 ofthe Tax Code, whether or not the
individual, and357o for corporate nonresident stockholders - was
recovery is by counterclaim or a separate action (Republic u. Limaco
deducted at source and remitted to the BIR. On May 15, 1984, ABCD
& De Guzman Cornmcrcial Co. and,Visayan Surety & Insurance
filed with the CIR a formal claim for refund, alleging that under the
Corporation, supra). RP-US Tax T?eaty, the deduction ofwithholding tax on dividends was
Where the assesstnent by BIR was paid by taxpayer to fixed at 25Vo of said,income. Thus, ABCD asserted that it overpaid the
forestall WDL, latter need not file a separate claim for refund. withholding tax due on the cash dividends given to its non-resident
or cred.it. - Where a taxpayer, from the time that he received the stockholders in the U.S. The Commissioner denied the claim.
tax assessments, had protested the same and paid the disputed On January 17, 1985, ABCD filed a petition with the CTA,
assessment under protest only to forestall the sale ofhis properties
reiterating its demand for refund. (a) Does ABCD Corporation have
that had been placed under distraint by the Commissioner of Internal
the legal personality to fiIe the refund on behalfofits non-resident
Revenue, to hold that he has lost the right to appeal from the ruling
stockholders? (b) Is the contention of ABCD Corporation correct?
of the Commissioner on the disputed assessment but must prosecute
his appeal under now Section 292 of ttre Tax Code which requires a
Suggested answers:
taxpayer to file a claim for refund ofthe taxes as a condition precedent
a. In Procter & Gomble PMC, supra,, inuoluing the refund of
alleged ouer-withheld final withholding tuc on diuidends
'gRCBC v. Commissioner, G.R. No. 170257, September 7,2011
paid out to a non-resident foreign corporation, the defense
736 ltr,:vrr,rwr,rrt oN 'l',txn'r'r,r,,r 'l'nx ll.t,:r.,tt,rt rt t,:s 737
'lirx ( lrcrlit, or ltclittt<l

of the Gouernment against the claim to the elfect that u rnere it. Only taxpayers are q,Ilowed to file a clairn
ot''a tax merely shilled to
withholding agent is not the proper party thut should cLaim for refund (Phil. Acetylene Co. a. CIR, 20 SCRA 1056 t19871).
such refund, was not interposed by the Gouernment in the
Iower court but was raised only for the first time on appeal. Bar Question (1999, 1992)
The Supreme Court sustained the Gouernment's position
and ruled that estoppel does not preclude the Gouernment A Co. is the wholly owned subsidiary of B Co., a non-resident
from its right to bring up such defense euen for the first time German company. A Co. has a trademark licensing agreement
on appeal. Howeuer, the Supreme Court, in a subsequent with B Co. On February 10, 1995, A Co. remitted to B Co. royalties
resolution, ruled that the BIR should not be allowed to of F10,000,000.00, which A Co. subjected to a WT of 257o or
defeat an otherwise ualid claim for refund by raising the F2,500,000.00. Upon advice of counsel, A Co. realized that the proper
question of the withholding agent's alleged irucapacity to WT rate is !}Vo. On March 20,1996, A Co. filed a claim for refund of
file the claim for refurud for the first time on appeal. The F2,500,000.00 with the BIR. The BIR denied the claim on November
Gouernment must follow the same rules of procedure which 15, 1996. On November 28, 1996, A Co. filed a petition for review with
bind priuate parties (Commissioner a. Procter & Gamble the CTA. The BIR attacked the capacity of A Co., as agent, to bring
PMC,2O4 SCRA 377). the refund case. Decide the issue.
b. Yes, ABCD Corporation is cotect. The applicable final Suggested answer:
withholding income tax rqte on the cash diuidends paid
it to non-resident shqreholders is only 25%, of the gross A Co., the withholding agent of the non-resident foreign
diuidend, pursuant to the RP-US Tax Treaty. Considering corporation, is entitled to claim the refund of excess withholding tax
that the final withholding tutes deducted and remitted to paid on the income of said corporation in the Philippines. Being a
BIR are 307o (for indiuiduals) and 35Vo (for corporations), withholding agent, it is the one held liable for any ui'olatiort of the
there was ouerpoyment of income tax. withholding tox law should such a uiolation occur. In the same uein,
it should be allowed to claim a refund in case of ouer-withholding
(CIR u. Wand.er Phils., Inc., GR No. 68378, April 75, 7988, 760
Bar Question (2006)
SCRA 573; CIR u. Procter & Gamble PMC,204 SCRA 377).
Lily's Fashion, Inc. is a garment manufacturer located and
registered as a Subic Bay Freeport Enterprise under Republic Act No. Proced.urq.l laws can be applied retrospectiuely. - Laws
7227and a non-VAT taxpayer. As such, it is exempt from payment of prescribing the method of obtaining a tax refund or credit and the
all local and national internal revenue taxes. During its operations, requirements for entitlement to said remedy are procedural laws
it purchased various supplies and materials necessary in the conduct and, therefore, can be applied retrospectively to actions still pending
of its manufacturingbusiness. The suppliers of these goods shifted to and undetermined at the time of their passage. Hence, the provisions
Lily's Fashion, Inc. the lOVo VAT on the purchased items amounting under the 1997 Tax Code that the filing of an amended individual
to F500,000.00. Lily's Fashion, Inc. filed with the BIR a claim for income tax return with the BIR, indicating an income tax overpa;rment
refund for the input tax shifted to it by the suppliers. If you were the was sufficient compliance with the requirement of a written claim
Commissioner of Internal Revenue, will you allow the refund? for refund or credit for an overpayment filed on October 8, 1997, if
the petition for review was instituted at the time when the 1997 Tax
Suggested answer: Code is already in effect (Acostaa. Commissioner, CA'G.R. SPNo.
55572, February 73, 2002).
No. The exemption of Lily's Fashion, Inc. is only for taxes for
which it is directly liq.ble; hence, it cannot claim exemption for a tax Failure to filn tim.ely appeal to CTA; answer of Cornrnission er
shifted to it, which is not at all considered ct. tq,x to the buyer but a part to taxpayet's petition for reuiew is equiaalent to iud'icial
of the purchase price. Lily's Fashion,Inc. is not the taxpayer irusofar as action for collection of tar. - The assessment becomes final and
the passed-on tax is concerned and therefore, it cannot claim a refurud executory for failure of the taxpayer to protest such assessment
738 Rl;vil:wt.;tr r lr'l',rxn'r'roru

within 30 days from receipt thereof, or if protested, the final ruling


of the Commissioner on such protest is not appealed to the Court of
Tax Appeals within 30 days from receipt of such final ruling. Where
such assessment is appealed by the taxpayer to the Courb of Tax PART VI
Appeals, the answer of the Commissioner to the taxpayer's petition
for review is equivalent to a judicial action for collection (Alhannbra LOCAT GOVERNMENT CODE
Cigar & Cigarette Manufacturing Co. a. Collector, .Ay'os. 12026
and. 72 737, May 29, 7959). CHAPTER IOOilI
Threat to enforce one's legal claim thru competent LOCAL BUSINESS TAXES
authority does not uitiate consent. - Defendant-surety claimed
that the sum of F3,000 was illegally or erroneously collected and
payment thereof was involuntary, having been allegedly made under
duress. A threat to enforce one's claim through competent authority, Gonstitutional basis
if the claim is just or legal, does not vitiate consent (Art. IJJS, Ciuil Each local government unit shall have the power to create its
Code). Having been made by the defendant-surety to preserve its own sources ofrevenue and to levy taxes, fees and charges subject
credit and enable it to carry on its business with the BIR, the said to such guidelines and limitations as the Congress may provide,
payment cannot be considered involuntary (Republic a. Limaco & consistent with the basic policy of local autonomy. Such taxes, fees
De Guzman, supra). and charges shall accrue exclusively to the local goveraments (Sec.
5, Art. X, 1987 Constitution).
However, local governments have no power to tax instrumentalities
of the National Government. PAGCOR, being an instrumentality of
the Government, is exempt from local taxes. This doctrine emanates
from the "supremacy of the National Government over local
governments." The U.S. Supreme Court said: "No state or political
subdivision can regulate a federal instrumentality in such a way as to
prevent it from consummating its federal responsibilities, or even to
seriously burden it in the accomplishment of them." Otherwise, mere
creatures ofthe State can defeat national policies thru extermination
of what local authorities may perceive to be undesirable activities or
enterprises using the power to tax as a "tool for regulation" (U.S. u.
Sanchez,340 US 42).The power to tax which was called by Justice
Marshall as the "power to destroy" cannot be allowed to defeat an
instrumentality or creation of the very entity which has the inherent
power to wield it (Basco u, PAGCOR' supra).

Bar Question (2001)


Congress, after much public hearing and consultations with
various sectors of society, came to the conclusion that it will be good
for the country to have only one system oftaxation by centralizing
739
r
740 1il,:vrr,:wt:tt oN'l'nxn'r'roN
''i:l,iilI:lilll);1;l;:ll' 741

the imposition and collection of all taxes in the national government. Scope of Taxing Power of LGUs
Accordingly, it is thinking of passing a law that would abolish the
Each local government unit shall exercise its power to create its
taxing power of all local government units. In your opinion, would
own sources ofrevenue and to levy taxes, fees, and charges, consistent
such a law be valid under the present Constitution? Explain your
answer. with the basic policy of local autonomy. Such taxes, fees, and charges
shall exclusively accrue to it (Sec. 129, LGC).
Suggested answer: All local government units are granted general powers to levy
taxes, fees or charges on anybase or subject not otherwise specifically
No. The law centralizing the imposition and collection of all taxes
in the national gouernment would contravene the Constitution which enumerated herein or taxed under the provisions of the National
rnandates that: "Each local gouernment unit shall houe the power to Internal Revenue code, as amended, or other applicable laws. The levy
must not be unjust, excessive, oppressive, confiscatory or contrary to
creqte their own sources ofreuenue and to leuy toxes, fees, and charges
a declared national economic policy (Sec. 786, LGC). No such taxes,
subject to such guidelines and limitu.tions as Congress may prouide
fees or charges shall be imposed without a public hearing having
consistent with the basic policy of local autonomy." It is clear that
been held prior to the enactment of the ordinance (Sec. 187, LGC)'
Congress can only giue the guidelines and limitations on the exercise
copies of the provincial, city, and municipal tax ordinances or revenue
by the local gouernments of the power to tax but what was granted by
the fundamental law cannot be withdrawn by Congress.
measures shali be published in full for three consecutive days in a
newspaper of local circulation or posted in at least two conspicuous
and publicly accessible places (Sec. 788, LGC).
Local Government Code (R.A. 7160)
Section 186 ofRA 7160 provides that an ordinance levying taxes,
To implement the above constitutional provision, Republic Act fees or charges shall not be enacted without any prior public hearing
No. 7160, otherwise known as the "Local Government Code (LGC) of conducted for the purpose. The lack ofa public hearing is a negative
1991," was signed into law and became effective on January l, Lggz.
allegation essential to petitioner's cause ofaction in the present case.
The plenary nature of the taxing power thus constitutionally Hence, as petitioner is the party asserting it, she has the burden of
delegated is not in itselfconfiscatory and oppressive. In delegating proof. since petitioner failed to rebut the presumption of validity
the authority, the State is not limited to the exact measure of the in favor of the subject ordinances and to discharge the burden of
power which is exercised by municipalities and the like; it is meant proving that no public hearings were conducted prior to the enactment
that there may be delegated such measure of power to impose and thereof, we are constrained to uphold their constitutionality or
collect taxes as may be deemed expedient. Thus, municipalities may legality (Figueras a. Court of Appeals and. City Assessor of
be permitted to tax subjects, which for reasons of public policy, the IWandaluyong, supra).
State has not deemed it wise to itself tax for more general purposes The rule is that taxes may not be imposed by implication; and
( P ep si- C ola Bottling C omp any of t he Phil. a. Mun. of T anau an, a tax statute is to be construed strictly against subjection to a tax
69 SCRA460). Iiability specifically where it carries penal provision (Marind.uque
Local government has been described as a political subdivision Iron Mines Agents u. Mun. Council of Hinabangan, Sanno,r, 77
of a nation or state which is constituted by law and has substantial SCRA416).
control oflocal affairs. In a unitary system ofgovernment, such as A tax, fee, or charge or to generate revenue under the Local
the government under the Philippine Constitution, local governments Government code shall be exercised by the sanggunian of the local
can only be an intra sovereign subdivision ofone sovereign nation, it government unit concerned through an appropriate ordinance (sec.
cannot be animperium in imperio (it does not rnake local gouernments 132, LGC). Local taxation, like national taxation, is legislative in
souereign within the stq,te). Local government in such a system can nature (Vittegas a.Hiu Chiong Tsai,86 SCRA270).The legislative
only mean a measure of decentralization ofthe function of government nature of taxation was held not violated when a tax ordinance created
(Basco u. PAGCOR, 197 SCRA 52 t19911).
a market committee whose function is purely recommendatory. Its
742 It,t,:vt r,;wr,:rr oN'l'n xn't.roI'r
I r x nt, ( l rvt,:ltt'tv t,lt'l't' (loI rt': 743
l,ocul []usiness'l'uxes
prior acquiescence to an intended or proposed city ordinance is not a
condition sine qua nonbefore the Municipal Board could enact such d. not be contrary to law, public policy and national
ordinance. The native power of the Municipal Board to legislate economic policy, nor in restraint of trade;
remains undisturbed even in the slightest degree. It can move its own
initiative and the Market committee cannot demur (Bagatsing a.
3. The collection of local taxes, fees, charges and other
impositions shall in no case shall be let to any private
Ramirez, T4 SCRA 306). person;
A municipal ordinance is not the same as a resolution of the 4. The revenue collected under the Code shall inure solely
municipal council. Legislative acts passed by the municipal council in to the benefit of, and subject to disposition by, the local
the exercise of its lawmaking authority are denominated ordinances. A government unit levying the tax, fee, charge, or other
resolution is less solemn and formal than an ordinance (Maccunana imposition, unless otherwise specifically provided for in
a. Verdeflor, 79 SCRA 399).
the Code; and

Bar Question (2003) 5. It shall be the responsibility of each local political


subdivision to evolve a progressive system oftaxation (Sec'
In order to raise revenue for the repair and maintenance of the 130, LGC).
newly constructed city Hall of Makati, the city Mayor ordered the
collection of F1.00, called "elevator tax," every time a person rides
Common Limitations
any of the high-tech elevators in the city hall during the hours of g:00
a.m. to 10:00 a.m. and 4:00 p.m. to 6:00 p.m. Is the ,,elevator Lax,, a Unless otherwise provided herein, the exercise of the taxing
valid imposition? Explain. powers of provinces, cities, municipalities, and barangays shall not
extend to the levy of the following:
Suggested answer: 1. Income tax, except when levied on banks and other financial
No. The imposition of a tax, fee or charge or the generation institutions;
of reuenue under the Local Gouernment cod,e shail be eiercised by
the sanggunian ofthe local gouernment unit concerned, through an
2. Documentary stamP tax;
appropriate ordinance (sec. 732, LGC). The city mayor alone could. not 3. Taxes on estates, inheritance, grfbs, legacies and other
order the collection of the tax. As such, the "eleuqtor tax" is an inualid acquisitions m.ortis cQllsa, except as otherwise provided
imposition. in ihe Code (1.e., tax may be levied on the transfer of real
property owned by provincesfsec. 135, LGCI and by cities
Fundamental Principles fSec. 151, fGC]);
The following fundamental principles shall govern the exercise 4. Customs duties, registration fees of vessel (except the
of the taxing and other revenue-raising powers of local government fee that may be imposed on the issuance of licenses for
units: the operation offishing vessels ofthree tons gross or less
by municipalities under Section 149, and by cities under
1. Taxation shall be uniform in each local government unit; Section 151 ofthe Code), and wharfage on wharves, tonnage
2. Taxes, fees, and charges shall: dues, and all otherkinds ofcustoms fees, charges and dues,
except wharfage on wharves constructed and maintained
a. be equitable; by the local government unit concerned;
b. be levied and collected for public purposes; 5. Taxes, fees, charges and other impositions upon goods
c. not be unjust, excessive, oppressive or confiscatory; carried into or out of, or passing through, the territorial
jurisdictions of local government units in the guise of
charges for wharfage, tolls for bridges or otherwise, or
744 llt,:vn,;wt,: rr oN'l'n xn'r,ror.r I / tr'^1, ( i(,vl,lltNMt,lt't't' ( lotrt, 745
l,rx':rl llrrsinr,ss'l'ltxt's

other taxes, fees or charges in any form whatsoever upon Tar on good.s or rnerchand,ise passing thru territorial
such goods or merchandise; jurisd.ictions
6. Taxes, fees and charges on agricultural and aquatic Sec. 133(e), R.A. 7160 prohibits the imposition, in the guise of
products when sold by the marginal farmers or fisher- wharfage, of fees - as well as all other taxes or charges in any form
men; whatsoeuer - on goods or merchandise. It is irrelevant if the fees
imposed are actually for police surveillance on the goods, because
7. Taxes on business enterprises certified to by the Board of
any other form of imposition on goods passing thru the territorial
Investments as pioneer or non-pioneer for a period of six
(6) and four (4) years, respectively, from the date ofsuch
jurisdiction of the municipality is clearly prohibited by section 133(e).
registration; Under Section 131(y), wharfage is defined as a fee assessed against
the cargo ofvessel based on quantity or weight. It is apparent that
8. Excise taxes on articles enumerated under the National a wharfage does not lose its basic character by being labeled as a
Internal Revenue Code and taxes, fees or charges on service fee "for police surveillance on all goods" (Palma Dea. Corp'
petroleum products. However, the LGU may not impose o.Mun. of Malangas, Zambo d'el Sur,473 SCRA 572 t2OO9l).
a tax on the business of importing, manufacturing or
producing said products (Petron a. Pililla, 198 SCRA Ercise tar on petroleurn prod'ucts
82),
Section 133 prescribes the limitations on capacity of LGUs to
9. Percentage tax or value added tax on sales or exchanges exercise their taxing powers. Paragraph (h) of section 133 mentions
ofgoods or services or similar transactions thereon except two (2) kinds of taxes which cannot be imposed by LGUs, namely: (a)
as otherwise provided herein; excise tax on articles under NIRC, and (b) taxes, fees or charges on
petroleum products.
10. Taxes on the gross receipts oftransportation contractors
and persons engaged in the transportation ofpassengers or Article 232 of IRR enumerates list of businesses subject to
freight by hire and common carriers by air, land or water, business taxes and paragr:aph (h) thereof does not allow imposition
except as provided in this Code; of local business taxes "on any business not otherwise specified in
11. Taxes on premiums paid for reinsurance or retrocession;
the preceding paragraphs which the sanggunian concerned may
deem proper to tax," but subject to this qualification "any business
12. Taxes, fees or charges for the registration of motor vehicles engaged in the production, distribution or sale of oil, gasoline and
and for the issuance of all kinds of licenses or permits for other petroleum products shall not be subject to any local tax imposed
the driving thereof, except tricycles; on this article."
13. Taxes, fees or charges on Philippine products actually Petron argues that business taxes on its sale of diesel fuels
exported, except as provided by the Code; partakes of an excise tax, which is a tax upon the performance'
14. Taxes, fees or charges on Countryside and Barangay carrying on, or the exercise of an activity. Malabon Mayor argues
Business Enterprises and on cooperatives duly organized that what the provision prohibits is the imposition of excise taxes
on petroleum products, but not the imposition of business taxes on
and registered under R.A. 6810 and R.A. 6938; and
the same, relying on the Court statement that "a tax on business is
15. Taxes, fees or charges of any kind on the National distinct from a tax on the article itself."
Government, its agencies and instrumentalities, and local
governments (Sec. 133, LGC). The meaning of "ercise tax" has undergone a transformation,
morphing fr omb]ne AmJur definition to its current signification which
The phrase "legacies and other acquisitions mortis ce.usa" refers is a tax on certain specified goods or articles. As Nolledo pointed out,
to acquisition ofproperty by reason ofdeath or after the death ofthe excise taxes are imposed directly on certain specified goods; they are
donor or person (Blach's Lq,w Dictionary, Sth ed.). taxes on property. An excise tax is not excise where it does not subject
I r x rnr, ( lovr,:rrr.rrrtt,:N't' ( l rt rt,: 747
746 Ilt:vtt,:wt,:tt or't'l'nxrt't'tol I rx'rrl llrrsi trcss'l':txr.s

upward spiral in its price shakes our economic foundation. There


directly the produce or goods to tax but indirectly as an incident to,
or in connection with, the business to be taxed.
is an inevitable link between the fluctuation of oil prices and the
prices of every other commodity.
It
is this concept of excise tax which we can reasonably assume
Subjecting petroleum products to business taxes apart from
that Congress had in mind and actually adopted when it crafted the
Code.
the taxes already imposed by Congress in this age of deregulation
would lead to the same result had they been taxed during the era of
On second issue, the Court said there is no doubt that following oil deregulation.
the 1987 Constitution and the LGC, the fiscal autonomy of LGUs has
While Section 133(h), LGC does not generally bar the imposition
received greater affirmation than ever. Thus, respondent cites that in
of business taxes on articles burdened by excise taxes under the
City Gouernment of San Pablo u. Reyes , the SC stated "in interpreting
statutory provisions on municipal fiscal powers, doubts will have to NIRC - tobacco, alcohol, mineral and miscellaneous products, it
specifically prohibits LGUs from extending the levy of any kind of
be resolved in favor of municipal corporations." Such policy is also
taxes, fees or charges on petroleum products (Petron u. Malabon
echoed in Section 5(a) of the LGC, which states that "any provision on
a power of LGU shall be liberally interpreted in its favor, and in case
City,2009).
ofdoubt, any question thereon shall be resolved in favor ofdevolution
of powers and of the lower LGIJ." Bar Question (2008)
However, Section 5(b) proceeds that "in case of doubt, any The City of Manila enacted an ordinance, imposing a 57o tax on
tax ordinance or revenue measure shall be construed strictly gross receipts on rentals of space in privately-owned public markets.
against the LGU enacting it, and liberally in favor of the taxpayer." BAT Corporation questioned the validity of the ordinance, stating
Evidently, local fiscal autonomy should not necessarily translate that the tax is an income tax, which cannot be imposed by the city
into abject deference to the power of local government units to government. Do you agree with the position of BAT Corporation?
impose taxes. ExpIain.

Congress has the constitutional authority to impose limitations Suggested answer:


on the power to tax of LGUs, and Section 133 of LGC is one such
limitation. The provision is the explicit statutory impediment to the No, Ido not agree with the position of BAT Corporation' The
enjoyment of absolute taxing power by LGU, not to mention the reality SVo tax on gross receipts on rentals of space in priuately-owned public

that such power is a delegated power. Another example is Section marhets irnposed under the ordinance of the City of Manila is not an
t33(g), where LGUs are disallowed from levying business taxes on income tax, which may not be imposed by the city gouernment, but
enterprises certified by BOI. a ualid license tax or fee for the regulation ofbusiness (Progressiae
Deuelopment Corporation u, Quezon City, G.R.No.36081' April
The phrase "taxes, fees or charges on petroleum products" 24,1989).
does not qualify the kind oftaxes, fees or charges. The absence of
such qualification leads to the conclusion that all sorts oftaxes on Ordinances which would prohibit the free flow of goods into, or
petroleum products, including business taxes, are prohibited by out of, the territorial jurisdictions of local governments are invalid
Section 133(h), LGC. Where the law does not distinguish, we should (Panaligan a. City of Tacloban, G.,R. No. L-9379, September 27,
not distinguish. 1957).

The earlier reference in paragraph (h) to excise taxes The six (6)-year tax holiday provided in Section 133(g) of the
comprehends a wider range of subjects of taxation (all excisable Code should commence on the date of its registration with the Board
products), while the later reference to "taxes, fees or charges" of Investments, not from the commencement of its actual operations
pertains only to one class ofarticles, specifically petroleum products. as certified to by the Board of Investments (Batangas Power
Oil is a commodity whose supply and price affect the ebb and flow Corporation a. Batangas City,428 SCRA 250 t20041).
of the lifeblood of the nation. Its shortage of supply or a slight,
L(tr At. ( ir)vt,it(NMt,lt',]'t'( lrtrt'l 7 4!t
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Bar Question (2010) 4. 'I'ax on sand, gravel and other quarry resources (Sec. 138);

XYZ Shipping Corporation is a branch of an international 5. Professionaltax(Sec. 139);


shipping line with voyages between Manila and the West Coast of 6. Amusement tax(Sec. 140); and'
the U.S. The company's vessels load and unload cargoes at the port
of Manila, albeit it does not have a branch or sales office in Manila.
7. Annual fixed tax for every delivery truck or van of
manufacturers or producers' wholesalers of, dealers, or
All the bills of lading and invoices are issued by the branch in Makati
retailers in, certain products (Sec. 141).
which is also the company's principal office. The City of Manila
enacted an ordinance levying a2Volaxon gross receipts ofshipping
lines using the Port of Manila. Can the city government of Manila Press
legally impose said levy on the corporation? As a general proposition, the press is not exempt from the taxing
power of the state and that what the constitutional guarantee of free
Suggested answer: press prohibits are laws which single out or target a group belonging
The situs is the place or incident of an euent or the location of to the press for a special treatment or which in any way discriminate
property, qnd the situs of a tax is, therefore, the place where the tax against the press on the basis of tlre content of the publication
hes to be paid. Section 150 of the LGC prouides for the situs of the tax
(Tolentino o. Secretary of Finance,249 SCRA 628).
imposed on taxpayers enumerated therein. The recording of sales of
goods and seruices subject to the local business tares shall be made Franchise tax
in the branch or sales outlet making the sale or transaction, and the Under Sections 137 and 193 of the Code, franchise taxes may
tax thereon shall accrue and shall be paid to the rnunicipality or city
be imposed by provinces despite any exemption enjoyed under
where such branch or sales outlet is located. In cases where there is no
special laws. section 193 ofthe code prescribes the general rule: Tax
such brq,nch or sales outlet in the city or municipality where the sale
exemptions or incentives granted to or presently enjoyed by natural
or transaction is rnade, the sale shall be duly recorded in the principal
or juridical persons are withdrawn upon the effectivity of the code,
except with respect to those entities expressly enumerated (cify
office and the tqxes due shall accrue and shall be paid to such city or
municipality (Sec. 150[oJ, LGC). In this case, the principal offi.ce in
Goat of San Pablo u. Re3/es, 305 SCRA 353 t19991). However,
Mq.kati City which issued the bills of landing and the inuoices to the
section 137 does not state that it covers future exemptions. Indeed,
customers has no brq,nch in the City of Manila, where the business
the grant of taxing powers to local government units under the
trqnsactions take place. In uiew thereof, the sales allocation shall be
constitution and the Local Government code does not affect the power
made as follows: 30Vo to the sales recorded in the principal office in
of congress to grant exemptions to certain persons, pursuant to a
Makati City shall be taxoble by the city where the principat office is
declared national policy. The legal effect ofthe constitutional grant
located, and 707o of the total sales record,ed in Mu,kati City shall be
to local governments simply means that in interpreting statutory
taxable by the City of Manila, where transaction is had (Sec. 150[b],
provisions on municipal taxing powers, doubts must be resolved in
LGC).
iavor of municipal corporations (PLDT a- City of Daaao,363 SCRII
522 t20011).
Taxes that may be imposed by provinces
Transco is not liable for franchise taxes. The two requirements
The province may levy only the following taxes, fees, and charges before a taxpayer may be held liable to a franchise tax are: (a) it has
(Sec. 134):
a franchise in the sense ofa secondary or special franchise; and (b)
1. Tax on transfer ofreal property ownership (Sec. 155); it is exercising its rights or privileges under this franchise within
the territory of the local government unit concerned. In this case, it
2. Tax on business of printing and publication (Sec. 156); is clear that Transco exercises its franchise within the Province and
3. Franchise tax(Sec. 137); the city. It is uncontroverted that it has erected poles and strung
750 Itr':vr r,;wr,:tr oN'l'AX,r't,toN ' l:,lliill:;lll:);r,i;:ll 7r-r I

quorty resources extracted from ptiPgtc


hus no powt:r kt im1xxt: krx rtn
wires to distribute electricity in both the province and thc cit.y. l,ir.
lq.nd (Lee a. Pres Jud.ge, 145 SCRA 408) in uiew of the limitations
this, it is liable to franchise taxes. However, the remaini'g qucstirn
imposed by Sections 133 and 151 of the NIRC (Za'mboanga Electric
is whether it is liable to pay to the province or to the city. Under
section 226 (franchise tax), the province may impose a tax on business Coop. u. Buat,243 SCRA 47).
enjoying a franchise at Sova of lva of the gross annual receipts, which
shall include both cash sales and sales on account realized during the Tax on amusement Places
preceding calendar year within Its territorial jurisdiction, excluding The term "arrur'sen 'ent places" includes theaters, cinemas,
the territorial limits of any city located in the province. The province concert halls, circuses, and other places of amusement where one
shall not impose the tax on business enjoying franchise operating seeks admission to entertain oneself by seeing or viewing the show
within the territorial jurisdiction of any city located within the or performance (Sec. 13L[c], LGC). This means that the amusement
province. Thus, the Province of Bataan is not authorized to impose place, to be subject to the amusement tax of 30Vo, needs only to be a
franchise tax on Transco's gross receipts from pENELCO. The place where one seeks admission to entertain himself by seeing or
one authorized, to impose such franchise tax is the City of Balanga viewing the show or performance.
(National Transmission Corporation a. proa. of Bataan, CTA
Case No. . December 76,2011). Section 13 of Local Tax Code mentions "other places of
a,nruserrnrr.lfr" professional basketball games are definitely not within
The low dnes not mahe q.n exemption from the payment of franchise its scope. The principle of ejusdem generis means that general words
tax merely because Transco's customer, ANECO, has its principal are to be held as applying only to persons or things of the same kind
office located in Butuan City, which is a separate local gouernment or class as those specifically mentioned. one must refer to the prior
unit. - Transco does not dispute the fact that ANECo's satellite enumeration of theaters, cinematographs, concert halls and circuses
offices are located and operating within the territorial jurisdiction with artistic expression as their common characteristics. Basketball
of the Province, and the sources of revenues from such locations caters to sports and gaming. Even up to the present, category of
are incoming receipt and,/or realized within the LGU's territorial amusement taxes on professional basketball games as a national
jurisdiction, which is what the law requires. The situs of taxation tax(Sec. 125, NIRC) remains the same. Section 140 of LGC retains
clearly does not depend on where the head office of rransco's customer the same areas where provinces may levy amusement tax without
is located. There is nothing on record which shows that Transco's including professional basketball games (Philippine Basketball
high voltage transmission facilities, including grid inter-connections Association o. Court of Appeals, 337 SCRA 358 tzOOOl)-
and ancillary services in operating the business to its customer is
not within the territory of the Province of Agusan del Norte. Thus,
Taxes that may be imposed by municipalities and cities
Transco's allegation that the gross annual receipts are realized within
the City of Butuan where ANECO's head office is located, although Municipalities may levy taxes, fees, and charges not otherwise
the remittances come from the different municipalities of Agusan levied by provinces (Sec. L42):
del Norte because the principal office is where the gross receipts are
realized, lacks legal and factual bases (Nofional rransmission
1. Tax on business:
C orporation u. Proa. of Agu san, CTA Case No. Z S, June S, 20 7 2 ). a. Manufacturers, assemblers, repackers' processors'
etc. of any article of commerce of whatever kind or
Tax on quarry resources nature (Sec. 143[a]);
Before any tax, fee or charge may be collected from a taxpayer, b. Wholesalers, distributors, or dealers in any article of
the same must first be levied under a duly enacted tax ordinance of the commerce (Sec. 143[b]);
local government concerned. Hence, in the absence of a tax ordinance
levying a fee on quarry resources extracted from private lands, there
c. Exporters, and manufacturers, millers, producers,
wholesalers, etc. of essential commodities (Sec.
will be no basis for the collection of said fee (prou. of Bulacan a. t43[c]);
Court of Appeals, G,R. No. 726232, Nouember ZZ, IggS). prouince
7lt2 Itr,:vrt,:wt,:tr I rr'r 'l';\rA t toN | ,r rrlt ( iol t:ttt'tlll,lN't ( lotrt 7 ltll
I rrrrl llttntttlss 'litxlri

d. Retailers ( Sec. I 4iildl ); Appl.ying t,ltrr rtrlirrg itt Llto itlrovt:<luotod jurisprudence willreveal
e. Contractors ( Sec. that there is a direct duplicate taxation. Petitioner is taxed twice, for
1431 e I);
the same subject matter, which is the business of operating abank, by
f. Banks and other financial institutions (Sec. l4\tfl; the same taxing authority, which is the City of Manila, by the same
jurisdiction, which is also the City of Manila, for the same' which is
C Peddlers of any merchandise or article of commerce
to generate revenue for the City of Manila, and for the same taxing
b.
(Sec. 143[sD;
periods, which are the first and second quarters of 2006. Moreover,
h. Any business, not otherwise specified in the preceding a perusal of section 143 of LGC will show that when a municipality
paragraphs. On any business subject to excise, value imposes local business tax on a bank or financial institution under
added tax, or percentage tax under the National Section 143(0, the same municipality may no longer subject the same
Internal Revenue Code, the rate shall be 2Vo ofgross bank or financial institution under section 143(h) of the same code.
sales or receipts (Sec. 143[h]). In the same manner, banks already made liable to local business tax
2. Fees and charges.- The municipality may impose and under section 19 of the MRC, which is based on section 143(0 of the
collect such reasonable fees and charges on business and LGC, may no longer be subjected to local business tax pursuant to
occupation and, except as reserved to the province in Section 21 of the MRC, which is based on Section 143(h) of the LGC
( City Tleasurer of Manila a. China Banhing Corporation, CTA
Section 139 ofthis Code, on the practice ofany profession
or calling, commensurate with the cost of regulation, Case No. 87, December 78,20L2).
inspection and licensing before any person may engage in In City of Manila u. Cocq'-Cola Bottlers, the Court declared
such business or occupation, or practice such profession or Ordinance Nos. 7988 and 8011 as null and void, for failure to
calling (Sec. 147, LGC). satisfy the requirement that the ordinance must be published for
three consecutive days; hence, the tax imposed under Section 21
The municipalities within the Metropolitan Manila Area may
of Ordinance No. 7794 upon the taxpayer who is already burdened
Ievy taxes at rates which shall not exceed by fifty percent (SOVd ftre
under Section 14 becomes illegal, as mandated before the passage
maximum rates prescribed for municipalities (Sec. 144, LGC).
of the invalidated ordinance No. 7988. In said case, the court stated
that it is ordinance No. 7988 that allowed petitioner to impose
Double Taxation taxes under section 21 simultaneously with section 14. There is no
The nullity of the questioned ordinances (City Ordinance No. escaping the reality that the declaration of nullity of the amendatory
7988) has already been established in the case of CCBp u. City of ordinances revived or once again breathed life into the exempting
Manila, for non-compliance with the posting requirements. More proviso of Section 2l of Ordinance No. 7794, proscribing its
importantly, registered businesses in the City of Manila already imposition ofbusiness tax on top of that under section 14. Moreover,
taxed under section 19 may no longer be taxed under section 21, the court also ruled there was double taxation (Treasurer of City
as the same constitutes double taxation. section 19 provides for a of Manila u. (Jnileaer Philippines, CTA Case No. 74, Decernber
tax on banks and other financial institutions of 0.75vo of the gross 6,2012).
receipts for the preceding calendar year. on the other hand, Section 21 While R.A. 7160 covers almost all governmental functions
provides: "on any of the following businesses and articles of commerce delegated to local government units all over the country, P.D' 921
subject to the excise, value added or percentage taxes under NIRC, as embraces only the Metropolitan Manila Area and is limited to the
amended, ataxof 50vo of rvo per annum onthe gross sales or receipts administration of financial services therein (Ty a. Tlannpe' 250
of the preceding calendar year is imposed: (a) On persons who sell SCRA 5OO).
goods and services In the course oftrade or business, and those who
import goods, whether for business or otherwise, as provided for It is true that Section 534 of the LGC has a repealing clause
in sections 100 to 103 of the NIRC, administered and determined which repeals "[a]11 general and special laws, acts, city charters,
by the BIR pursuant to the pertinent provisions of the said Code.,' decrees, executive orders, proclamations and administrative
7lt4 llt,lvt t,:wt,:tr oN'l'Axn'l'rorrr
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regulations, or part or parts thereof'which arc inconsist,cnt wit,h
any of the provisions of [the] code." However, a repcaring crause of' the Sangguniitttg l)anlerlawigan [tesolution "prohibiting
such nature cannot be considered as having the effect ofan express the catching, gathering, possessing, buying, selling and
repeal for it does not only fail to identify or designate the act or shipment of live marine coral dwelling of aquatic organisms
acts that are intended to be repealed but it predicates the intended for a period of five years, coming from Palawan waters,"
repeal upon the condition that a substantial conflict must be found were upheld as legitimate exercise of police power (Tano
on existing prior acts, and such being the case, the presumption a. Socrates, G.R. No. 779249, August 21, 1997).
against implied repeal applies ex proprio uigore (Iloilo palay and. d. The ordinance prohibiting the issuance of a business permit
Corn Planters Association a. Feliciano, IS SCRA SZD,In the to, and cancelling anybusiness permit of any establishment
absence ofan express repeal, the rule is that the general law and
allowing its premises to be used as a casino' and the
special on the same subject matter are deemed statutes in pari ordinance prohibiting the operation of a casino, were
materia and should accordingly, be read together and harmonized, declared invalid for being contrary to P.D. 1869 (Charter of
if possible, with a view to giving effect to every provision thereof PAGCOR), which has the character and force of a statute
(City of Naga a. Agna, 71 SCRA IZ6). (Magtojas o. Pryce Properties, supra).
Cases: e. The Manila Ordinance No. 7065, which grants Associated
Development Corporation a franchise to conduct jai-
a. A local government unit may, in the exercise of police power alai operations, is void and ultra-uires. What Congress
under the general welfare clause, order the closure of a delegated to the City of Manila in R.A. 409 (Revised
bank for failure to secure the appropriate mayor's permit Charter of Manila) with respect to wagers and betting
-ninn
and business licenses (Rurat of Makati r. Mun. was the power "to license, permit or regulate," not the
of Makati, G.R. lVo. 750ZGB, July 2,2004). power "to franchise." This means that the license or permit
b. However, a local government unit may not regulate the issued by the City of Manila to operate wager or betting
subscriber rates charged by CATV operators within activity, such asjoi-alai,wortld not amount to something
its territorial jurisdiction. More than two decades meaningful, unless the holder of the license or permit was
ago, the national government, through the National also franchised by the National Government to so operate
Telecommunications Commission (NTC) assumed (Lirna. Paquing,240 SCRA 649).
regulatory powers over the CATV industry. This was f. The power of municipal corporations is broad and has been
reinforced by P.D. I572,8.O.546, andE.O. 205. This is also
said to be commensurate with but not to exceed the duty
clear from President Fidel V. Ramos'E.O. 486, mandating to provide for the real needs ofthe people in their health,
that the regulation and supervision of the CATV industry safety, comfort and convenience, and consistently as may
shall remain vested "solely" in the NTC. Considering that be with private rights. Ordinance is not unconstitutional
the CATV industry is so technical a field, NTC, a specialized merely because it incidentally benefits a limited number of
agency, is in a better position than the local government persons. The support for the poor has long been an accepted
units to regulate it. This does not mean, however, that the exercise of the police power in the promotion of the common
LGU cannot prescribe regulations over CATV operators good (Binay a. Dom.ingo,2O7 SCRA 508).
in the exercise of the general welfare clause (Batangas
CATV a. Court ofAppeals, GR. No. I\88IO, September o
b. A Dagupan City ordinance, requiring all proposed
29,2004). subdivision plans to be passed upon by the City Engineer,
and imposing a service fee of F0.30 per square meter on
The Puerto Princesa Ordinance "banning the shipment every resultant lot, was declared invalid, as it effectively
of all live fish and lobster outside Puerto princesa City amends a general law (Villacorta a. Bernard'o, 743
from January 1, 1993 to January 1, 1998,,' as well as SCRA4sO).
7 f)(i 1il,;vrr,:wr,;rr ,n 'l',,rxn.t,r,ru I r tr /\r, ( ;( rvl,Ii N N'lt,rtt t' ( l rt rt.: 7 ft'l
I rx'rrl llrrsirrcHrr 'l'rrxr,s

h. The ordinance of Bayambang, pangasin:u), appoitr[ing l.lrc linrc of'soLes, salt:s raturn, excise tax, and ualue q.dded tax (Sec.
Lacuesta manager of fisheries for 2b years, ronewabltr 131[n], LGC).
for another 25 years, was held invalid. The municipality
cannot grant exclusive fishing privileges without prir_rr
public bidding and for a period of more than five years, Bar Question (2013)
because it violates the fisherieslaw (Terrad.o u. Court ABC Corporation is registered as a holding company and has an
ofAppeals, 137 SCRA g7g). office in the City of Makati. It has no actual business operations. It
invested in another company and its earnings are limited to dividends
i. An ordinance imposing F0.90 police inspection fee per
from this investment, interests on its bank deposits, and foreign
sack of cassava flour produced and shipped out of the
exchange gains from its foreign currency account. The City of Makati
municipality was held invalid. It is not a license fee but
assessed ABC Corporation as a contractor or one that sells services
a tax, which is unjust and unreasonable, since the only
service of the municipality is for the policeman to verify
for a fee. Is the City of Makati correct?
from the drivers of trucks ofpetitioner the number of sacks
actually loaded (Matalin Coconut a. Mun. Council of Suggested answer:
Malabang, Lanao d.el Sur, l4S SCRA 404). No. The corporation cannot be considered as a contractor'
j. because it does not render seruices for a fee. A contractor is one
Where the police power is used to discourage non-useful
whose actiuity consists essentially in the sale of all kinds of seruict:s
occupations or enterprises, an annual permit/license fee
of F100, although a bit exorbitant, is valid, (physical for a fee, regardless of whether or not the performance of the seruicc
Therapy Organization of the phit. calls for the exercise or use of the physical or mental faculties of'
a. Mun. Board, of such contrctctor or its employees. To be considered q.s a contractor,
Manila, ibid.).
the corporation must deriue income from doing actiue business of'
k. The power to issue permits to operate cockpits is vested selling seruices and not from deriuing purely passiue income. Only
in the Mayor, in line with the policy of local autonomy income arising from the performance of seruices to its custorners is
(Philippine Gamefoutl Commission a.IAC, 746 SCRA subject to local business tq.x. Accordingly, a mere holding conxpany
294; Deang u.IAC, supra). cannot be assessed by the City of Makati as a contractor (Sec. 131[h],
L LGC; Orlyete Company tPhil. Branchl u. City of Makati, CTA,
The Bocaue, Bulacan ordinance, prohibiting the operation
Noaember 74,2012).
of night clubs, was declared invalid, because of its
prohibitory, not merely regulatory, character (Dela Cruz
a. Paras, 123 SCRA SG9). Bar Question (2009, 2005)
Mr. Fermin, a resident of Quezon City, is a Certified Public
Bar Question (2010) Accountant-Lawyer engaged in the practice ofhis two professions. He
has his main office in Makati City and maintains a branch office in
What is the basis for the computation of business tax on
Pasig City. Mr. Fermin pays his professional tax as a CPA in Makati
contractors under the Local Government Code?
City and his professional tax as a lawyer in Pasig City.
Suggested answer: a. May Makati City, where he has his main office, require
"Gross sales or receipts" ln clude the total qmount of money or him to pay his professional tax as a lawyer? Explain.
its equiualent representing the contract price, cornpensation or seruice b. May Quezon City, where he has his residence and where
fee, including the q,mount charged, or rnaterials supplied with the he also practices his two professions, go afber him for the
seruices and deposits or aduance payments actually or constructiuely payment of his professional tax as a CPA and a lawyer?
receiued during the taxable quarter for the seruices performed or to be
Explain.
performed for another person, excluding discounts if determiruable at
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Suggested answer: but does nol, t:orrsl,it,rrt,e a contract so as to bar the city government
a, No. Mr. Fermin is giuen the option to pay either in the city {'rom suing the tzrxpayer for suing the taxpayer for collection of the
where he practices his profession or where he mq.intains his tax liability (Pqjaro u. Sand.iganbayan, 160 SCRA 763).
principal office in case he practices his profession in seueral The City of Pasig is authorized to levy business taxes under
places. The professional ton paid as a lawyer in Pasig City, Section 143 in relation to Section 151 ofLGC on contractor based on
a place where he practices his profession, will entitle him "g?oss receipts," which includes money or its equivalent actually or
to practice his profession in any part of the Philippines constructively received in consideration ofservices. Thus, when the
without being subjected to any other national or local tax, city assessed deficiency business tax based on taxpayey's gross reuenue
license, or fee for the practice of such profession (Sec. 739, as reported in its financial statements, it committed a palpable error.
in relation to Sec. 151, LGC). It would result on double taxation (Ericson Tel,ecornmunications
b. No. The professional to.x shall be paid only once for euery a. City of Pasig, GR. No. 776667, Noaember 22,2007).
ta,tcable year and the payment shall be made either in the
city where he practices his profession or where he maintains Bar Question (2008)
his principal office. The city of residence cannot require him
MNO Corporation was organized on July 1, 2006 to engage in
to pay his professional ta.xes (Sec. 139, in relation to Sec.
trading of school supplies, with principal place of business in Cubao,
151, LGC).
Quezon City. Its books of accounts and income statement show the
following data:
Accrual and payment of tax
JuIy 1, 2006 to December 31, 2006 F 5,000,000
Local taxes, fees and charges accrue on the first day of the January I,2007 to June 30,2007 10,000,000
calendar year; however, in case the effectivity of any new tax JuIy 1,2007 to December 31,2007 15,000,000
ordinance falls on any date other than the beginning ofthe quarter,
the same shall be considered as falling at the beginning of the next Since MNO Corporation adopted fiscal year ending June 30 as its
ensuing quarter and the new tax levy or revised rate due shall begin taxable year for income tax purposes, it paid its 27o business tax for
to accrue therefrom (Sec. 166, LGC). fiscal year ended June 30, 2007 based on gross sales ofF15,000,000.
However, the Quezon City Treasurer assesses the corporation for
The tax period of local taxes, fees and charges shall be the deficiency business tax for 2007 based on gross sales ofP25,000,000,
calendar year, except when otherwise provided in the Code (Sec. 165, alleging that local business taxes shall be computed based on calendar
LGC), and such levies may be paid on quarterly installments within year.
twenty days of each subsequent quarter. The time for pa5rment may
be extended by the Sanggunian concerned, without surcharges or a. Is the position of the city treasurer tenable? Explain.
penalties, but only for a period not exceeding six months (Sec. 167, b. May the deficiency business tax be paid on installments
LGC) . For any delinquency , the Sanggunian may impose surcharges without surcharge and interest? Explain.
of not exceeding twenty-five percent of the amount due and interest
at a rate not exceeding two percent per month until the delinquent Suggested answers:
amount is fully paid but not to exceed a total interest corresponding
to thirty-six months (Sec. 168, LGC). cL. Yes, the City Treasurer is correct in using the gross sales
for the calendar year of F25 million for purposes of
The non-payment of the tax liability on its due date subjects the computing the 27o local business tax for the year 2007. The
taxpayer to corresponding surcharges and interest. The execution tax period of local taxes, fees and charges is the calendar
of a promissory note by a taxpayer and its acceptance by the City year, elccept when otherwise prouided in the Code (Sec.
Treasurer did not relieve the taxpayer from its liability to pay 165, LGC). The use of the fiscal year by corporations for
surcharges and interest. The promissory note binds the taxpayer purposes of computing tqxes is allowed only under the
760 lir,rvrr,:wr,:rt
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National Internal Reuenue Code, but rutt under the ltrcal d. ln cirscs wlrcre a nrtrnul'acturer, assembler, producer,
Gouernment Code. exporter or contractor has two or more factories, project
offices, plants, or plantation located in different localities,
b. The local leuies may be paid on quarterly installments (Sec.
the 707o sales allocation above shall be pro-rated among
165, LGC) within the first twenty (20) days of each quarter.
the localities where the factories, project omces, plants and
The time for payment rnay be extended by the Sanggunian
plantations are located in proportion to their respective
concerned, without surcharges or penalties, but only for a
volumes of production during the period for which the tax
period not exceeding six (6) months (Sec. 167, LGC).
is due.
Situs of Taxes e. The foregoing sales allocation shall be applied irrespective
of whether or not sales are made in the locality where the
For purposes of collection of the taxes under Section
factory, project office, plant or plantation is located.
143 of this Code, manufacturers, assemblers, repackers,
brewers, distillers, rectifiers and compounders of liquor,
distilled spirits and wines, millers, producers, exporters, Principal office v. branch
wholesalers, distributors, dealers, contractors, banks "Principal office" refers to the head or main office of the
and other financial institutions, and other businesses business appearing in the pertinent documents submitted to the SEC
maintaining or operatingbranch or sales outlet elsewhere or DTL The city or municipality specifically mentioned in the articles
shall record the sale in the branch or sales outlet making ofincorporation shall be considered as the situs thereof.
the sale or transaction, and the tax thereon shall accrue
and shall be paid to the municipality where such branch "Branch office" means a fixed place in a locality which conducts
or sales outlet is located. In cases where there is no such operations of the business as an extension of the principal office.
branch or sales outlet in the city or municipality where the Offices used only as display areas of the products where no stocks
sale or transaction is made, the sale shall be duly recorded or items are stored for sale, although orders for the products may be
in the principal office and the taxes due shall accrue and received thereat, are not branch or sales offices. A warehouse which
shall be paid to such city or municipality. accepts orders and./or issues sales invoices independent ofa branch
with sales office shall be considered as a sales office (Art.243,IRR of
b. The following sales allocation shall apply to manufacturers, LGC),
assemblers, contractors, producers, and exporters with
factories, project offices, plants, plantation in the pursuit MNTC is a contractor subject to local business tax on its branches
oftheir business: locq.tedin Guiguinto, Bulacan. - Manila North Tollways Corporation
(MNTC) is a domestic corporation. It received from the Treasurer of
1. 307o of all sales recorded in the principal office shall be Guiguinto, Bulacan an assessment for Mayor's permit for the years
taxable by the city or municipality where the principal 20O4to 2008, and a month later, another assessment for local business
office is located; and tax for 2005 to 2007. The Treasurer stresses that the toll plazas
2. 70Vo of all sales recorded in the principal office shall be and customer service centers situated within Guiguinto, Bulacan
taxable by the city or municipality where the factory, are actually performing the functions of a branch or sales outlet.
project office, plant or plantation is located. Imposition of fees and the requirement to secure a permit are part
of the police power of an LGU. Separate protests were fiIe, but were
c. In case of a plantation located at a place other than the denied. Separate complaints with the Malolos RTC were failed, but
place where the factory is located, said 70Vo mentioned the RTC ruled against MNTC regarding its petition for preliminary
above shall be divided as follows: (i) 607o to the city or Injunction.
municipality where the factory is located; and (ii) 40Vo to
the city or municipality where the plantation is located. The Court ruled that the business activities and operations
conducted by MNTC in its Tabang and Sta. Rita toll plazas and
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customer service centers partake the nature of branches, "which is Oourt of'Appeals case or th.rt the elements of litis pendentia are
a fixed place in a locality which conducts operations of the business extant in the RTC case. "Litis pend.entia" is predicated on the
as an extension of the principal office." However, the computation principle that a party should not be allowed to vex another more
of petitioner's local business tax liability for the years 2005 to 2007, than once regarding the same subject matter and for the same cause
which was made on the basis of gross revenues, is erroneous. MNTC is of action. This principle is founded on public policy. RTC did not
engaged in the sale of services for a fee. It is classified as a contractor. err in the ruling that the RTC case was premature and that the
The CTA is bound to follow the doctrine laid down by the Supreme Mindanao Shopping should have first awaited the outcome of the
Court in Ericsson Telecom.munications u. City of Pasig, where the Court of Appeals case. The claim for refund Iodged with the RTC is
courb cancelled the local business tax assessment for lack of basis hinged on the alleged unconstitutionality of the new Tax Ordinance,
due to the fact that the assessment, Iike in this case, was based which is the very same issue pending for determination by the Court
on gross revenue as appearing in its audited financial statements, of Appeals (Mind.anao Shopping u. Daaao City, CTA Case No.
rather than on gross receipts. Also, mayor's permit or license fees , January 27,2011).
are charges imposed under the LGU's exercise of police power which
are intended to cover the cost of regulating business activities and The tests of a valid ordinance are:
privileges (MNTC a. Mun. of Guiguinto, Bulacan, CTA Case No. 1. It must not contravene the Constitution or any statute;
82, Decetnber 3r 2012).
2. It must not be unfair or oppressive;
Bar Question (2010) 3. It must not be partial or discriminatory;
Ferremaro, Inc., a manufacturer ofhandcrafted shoes, maintains 4. It must not prohibit but may regulate trade;
its principal office in Cubao, Quezon City. It has branches/sales 5. It must be general and consistent with public policy; and
offices in Cebu and Davao. Its factory is located in Marikina City,
where most of its workers live. Its principal office in Quezon City is 6. It must not be unreasonable (Magtajas u. Pryce
also a sales office. Sales of finished products for 2009 in the amount Properties Corporation, 234 SCRA 225).
of F10 million were made at the following locations: (i) Cebu
(ii) Davao l57o; and (iii) Quezon City 60%. Where should - 25Vo;
- - the Effectivity of ordinances (Sec, 59, LGC)
applicable local taxes on the shoes be paid?
Unless otherwise stated in the ordinance, the same shall take
Suggested answer: effect after 10 days from date a copy thereofis posted in all bullctin
board at the entrance of the provincial capitol or city, municipal, or
The sales made in the Cebu Branch (25Eo) and Dauao Bronch barangay hall, and in at least two (2) other conspicuous places in
(15Eo) shall be reported by the respectiue branches in their books and the LGU concerned. The secretary to the sanggunian shall cause
the local taxes due thereon wiII be paid to the city of Cebu and Dauao, the posting not later than five (5) days after approval thereo{l The
respectiuely. Howeuer, the sales recorded in the books in Quezon City text of the ordinance shall be disseminated and posted in Filipino or
to the extent of 60Vo shall be ollocated as follows: 307o of 607o shall be English and in the language or dialect understood by the majority of
paid to the Quezon City gouernment, while the 70Vo of 60Vo, shall be the people in the LGU, and the secretary shall record such fact in a
allocated a.nd paid to the Marikina City gouernment, where the factory book kept for the purpose.
is located.
Gist of all ordinances with penal sanctions shall be published in
a newspaper of general circulation within the province where the local
Tax Ordinances
legislative body belongs, and in its absence, posting shall be made in
An ordinance is presumed ualid, unless declared otherwise by all municipalities and cities of the province where the sanggunian of
a Court in an appropriate proceeding. - The Regional Trial Court origin is situated.
(RTC) did not err in ruling that the RTC case is a repetition of the
764 Itt,rvtt,:wt,:tr ( )N'l'AXA'ilr )N
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In the case of highly urbanized and independent component If, within the afbresaid thirty days, the provincial, municipal or
cities, the main features of the ordinance duly enacted shall, in
ciLySanggunian, as the case may be, takes no action, the tax ordinance
addition to being posted, be published once in a local newspaper of
shall be deemed approved (Sec.57, LGC).
general circulation within the city: Prouided, That in the absence
thereof, the ordinance shall be published in any newspaper ofgeneral Section 187, R.A. 7160, which authorizes the Secretary of Justice
circulation. to review the constitutionality or legality ofa tax ordinance - and,
if warranted, to revoke it on either or both grounds - is valid, and
Appeal to Secretary of Justice it does not confer the power of control over local government units
in the Secretary ofJustice, as even ifthe latter can set aside a tax
Any question on the constitutionality or legality oftax ordinances ordinance, he cannot substitute his own judgment for that of the local
or revenue measures may be raised on appeal within thirty days from government :unit (Drilon a. Lim, GR. No. 172497, August 4, 7994).
the effectivity thereofto the Secretary ofJustice who shall render
a decision within sixty days from the date of receipt of the appeal.
The appeal shall not have the effect of suspending the effectivity of
Bar Question (1991)
the ordinance and the accrual and pa5,'rnent of the tax, fee or charge The Municipality of Argao, Province of Cebu passed a tax
levied therein. Within thirty days after receipt of the decision or the ordinance requiring all professionals practicing in the municipality
lapse of the sixty-day period without the Secretary of Justice acting to pay a tax equivalent to two percent (2Vo) of their gross income.
upon the appeal, the aggrieved party may file appropriate proceedings A certified true copy of the ordinance was sent to the Secretary of
with a court of competent jurisdiction (Sec. 187, LGC). Finance for review on 1 March 1989 and was received by him on the
same day. On 15 August 1989 even as the tax ordinance remained
Review of tax ordinances unacted upon by the Secretary of Finance, the municipality started
collecting the tax to question. The members of the Philippine Bar in
Within three days after its approval, copies of the approved tax the municipality questioned the legality of the ordinance and sought
ordinance of the municipality or a component city shall be furnished the suspension of the collection of the tax, but the municipality argued
to the provin cial S anggunian; and, in the case of barangay ordinances, that since the Secretary has not taken any action on the ordinance
within ten days from enactment, copies thereof shall be forwarded to for more than one hundred twenty days after his receipt thereof, the
the municipal Sanggunian, or the city Sanggunian as the case may legality ofthe ordinance can no longer be questioned and insisted on
be, for the review of the ordinance (Secs. 56-57, LGC). the collection ofthe tax. Is the tax ordinance in question legal?
The provincial or the city or municipal Sanggunioz shall
review the tax ordinance within thirty days after receipt of a copy Suggested answer:
thereof. The provincial Sanggunloz shall examine the ordinance or No, the tux ordinance is not legal as the Local Tax Code allows
require the provincial attorney or prosecutor to provide it with his prouinces and cities, to the exclusion of municipalities, to impose an
written comments or recommendation which may be considered by annual occupation tq"x, on all persons engaged in the exercise or practice
t}ne Sanggunian in making its decision. It may declare the ordinance of their profession or calling in specified amounts which in the case
invalid, in whole or in part, if it finds such ordinance to be beyond of lawyers is P75.00 per annurl (Secs. 17 and 12 in relation to Sec.
the power conferred upon the city or municipal Sanggunian (Sec. 56, 23, Local Tax Code). A person ctuthorized to practice his profession
LGC). or calling shall pay the tax to the prouince where he practices his
In the case of barangay ordinances, the city or municipal profession or calling or maintains his office. No local gouernment unit
Sanggunian, if its finds the ordinance inconsistent with law, shall can impose q tar on income (Sec. 5, Local Tax Code).
return the same for adjustment, amendment or notification that
would thereby render the ordinance suspended until such time or 2) Is the Municipality correct in insisting on collecting the
the revision called for is effected(5ec.57, LGC). tax?
l,r r',rr, ( iovt,ttrtttrtt,;tt't ( l rtrt.; 767
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Suggested answer: Within 30 days ultcr rtlceipt ol'the decision or the lapse of 60-day
period without the Secretary ofJustice acting upon the appeal, the
No, the Municipality was incorrect in insisting on the collection aggrieved party may file the appropriate proceedings with a court of
ofthe tax. Once the tax on occupation is paid as stated in paragraph competent jurisdiction (Sec. 187, LGC).
(a), aboue, the lawyer is entitled to practice his profession or calling in
all parts of the Philippines without being subject to any other national In a case decide before the effectivity ofthis Code, it was held that
or local tax,, license or fee for the practice of such profession or calling. the 120-day period for review ofordinances in Section 44 ofthe Local
Tax Code is merely directory and the Secretary of Justice may still
3) Will the inaction of the Secretary of Finance bar the review the ordinance and act accordingly even after the lapse ofsaid
professionals in the Municipality from questioning the period, provided that he acts within a reasonable time (Estanislao
legality of that ordinance? u. Costales, 196 SCRA 853 t19911).

Suggested answer: The Secretary ofJustice can only review the constitutionality or
legality of the tax ordinance. If warranted, he can revoke it on either
The inaction of the Secretary of Finance does not bor the or both grounds, but he cannot substitute his own judgment for the
professionals in the Municipality from questioning the legatity of the local government (Drilon u. Litn,235 SCRA 135).
ordinance. While it is true that the Secretary of Finance may himself
suspend the tax ordinance within a 120-day period from receipt thereof, The three (3) periods in Section 187, LGC are mandatory
(Hagonoy Marhet Vend.ors Asso. u. Mun of Hagonoy, G.R. No.
his failure to do so, howeuer, has no preclusiue effect on taxpayers who
may be aduersely affected by the ordinance. 73702L, Februany 6,2002). The power to tax is the most effective
instrument to raise needed revenue. Any delay in implementing tax
4) What remedies are available to the taxpayer to enable him measures would be to the detriment of the public; hence, protests
to question the legality ofthat ordinance? over tax ordinances are required to be done with certain time frames
(Mactan Cebu Intl Airport a. Marcos,267 SCRA 667). The three
Suggested answer: (3) separate periods are prerequisites before seeking redress in court
(Reyes a. CL G.R. No. 1,78233, December 70' L999) and are set to
The taxpayer mqy pursue his remedies either administratiuely
judiciall,y. prevent delays as well as enhance the orderly and speedy discharge
or He may, as the cclse u)arrants, file a formal protest with
ofjudicial functions.
the Secretary of Finance or query with the Prouinciol Fiscal whose
opinion is appealable to the Secretary of Justice whose decision may Remedies of Taxpayers Against Tax Ordinance
be contested in the proper court. The other remedy would be to file a
special ciuil action for declaratory relief (if circumstances still warront) 1. In general, where the law provides for remedies against
or to pay the tax and thereafter to file an action for refund within six the action of an administrative body, relief to the courts
(6) fnow two (2)] years after such payment. can be sought only after exhausting all remedies provided
therein. The reason rests upon the presumption that the
Appeal of ordinances to Secretary of Justice administrative body, if given the chance to correct its
mistake or error, may amend its decision on a given matter
Any question on the constitutionality or legality oftax ordinances and decide it properly.
or revenue measures may be raised on appeal within 30 days from
the effectivity thereof to the Secretary of Justice, who shall render a 2. With regard to questions on the legality of a tax ordinance,
decision within 60 days from the date of receipt of the appeal. the remedies available to a taxpayer are provided in the
following provisions:
The appeal shall not have the effect of suspending the effectivity
ofthe ordinance and the accrual and payment ofthe tax, fee or charge a. Section 187 provides that the taxpayer may question
levied therein. the constitutionality or legality oftax ordinance on
appeal within 30 days from the effectivity thereof,
768 Itt,lvt t,:wt,rtr orrr'l'nxn'r'ron Lrx'nt, ( iovt,tttttvt,:tt't' ( lrtl,: 769
I rx'rrl llusirrcss 'l\rxcs

to the Secretary of Justice. The petitioner, altur Remedies for the collection of tax
finding that his assessment is unjust, confiscatory
or excessive, must have brought the case before Bar Question (1997)
the Secretary of Justice for questions of legality or 1. Tax lien. - Local taxes, fees, charges and other
constitutionality of the tax ordinance. revenues constitute a lien, superior to all liens, charges
b. Under Section 226, an owner of real property who is or encumbrances in favor of any person, enforceable by
not satisfied with the assessment of his property may, appropriate administrative or judicial action, not only upon
within 60 days from notice of assessment, appeal to any property or rights therein which may be subject to the
the Board of Assessment Appeals. lien but also upon property used in business, occupation,
practice of profession or calling, or exercise of privilege
c. Should the taxpayer question the excessiveness ofthe with respect to which the lien is imposed. The lien may
amount of tax, he must first pay the amount due, in be extinguished upon full payment of the delinquent local
accordance with Section252. Then, he must request tax fee or charge, including related surcharges or interest
the annotation of the phrase "paid under protest" (Sec. L73, LGC).
and accordingly appeal to the Board of Assessment
Appeals by filing a petition under oath, together with 2. Distraint and levy. - The civil remedies for the collection
his appeal (Lopez a. City of Manila, 303 SCRA 448 of local taxes, fees or charges, including the applicable
tleeel). surcharges and interest, fees or charges, may either be
(a) by the administrative remedies of distraint of personal
Section 195 of the Local Gouernment Code does not enumerate property of whatever kind, including securities and bank
nor restrict a protest of assessment to specific grounds; thus, accounts, and levy ofreal property and interest therein,
respondent has the right to raise qs an issue the constitutionality or (b) by judicial action. Either of these remedies, or both,
of the tax ordinance, which becqme the sole basis of the disputed may be pursued concurrently or simultaneously at the
assessment - Section 195 of the LGC merely provides that the discretion of the local government unit concerned (Sec.
taxpayer shall have 30 days within which to appeal with the court 174, LGC).
of competent jurisdiction, without specifying the court which has 3. Judicial action. - The local government may institute
exclusive jurisdiction over appeals from the denial or inaction of an ordinary civil action with the regular courts of proper
the local treasurer on local tax cases. In such a case, the RTC has jurisdiction for the collection of delinquent taxes, fees,
the exclusive originaljurisdiction as duly conferred by Section 19 of charges or revenues (Sec. 183, LGC). The term "ciail
Batas Pambansa BIg. 129; hence, the RTC properly had jurisdiction aetion" would preclude a criminal case as a proper
over the case. remedy for collection of delinquent local taxes (Republic
As to the propriety of canceling the assessment, it is a. Patanao,20 SCRA 712).
undisputed that a previous case before the Supreme Court has
invalidated Section 7C.06 of the RMRC insofar as it withdrew the The taxing authority and the taxpayer should stand on
privileges granted by law to Regional Operating Headquarters. reasonably equal terms and that the power of the State and the
This has not been denied by the parties. Further, the City failed remedies of the citizens are and should be reciprocal (Vd.a. y Hijas
to seasonably appeal the decision of the Secretary of Justice, d.e Ped.ro P. Roxas u. Rafferty, 37 Phil.957).
nullifying the subject provision. Hence, there is no legal basis for The prescribed procedure in auction sales of property for
the City to impose such taxes on Chevron, and the questioned tax delinquency should be followed punctiliously as they are in
assessment, having no basis in law, is null and void (Sangguniang derogation of property rights. Strict adherence to the statutes
Panglungsod. ng Mahq.ti v. Cheuron Hold,ings, CTA Case No. governing tax sales is imperative not only for the protection of
, October 27,2011). the taxpayer, but also to allay any possible suspicion of collusion
770 Itt,;vrr':wr,:rr oru'l'nxn'r'ron
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between the buyer and the public officials called upon to enfbrce In summary, to assess local taxes, the LGU has, withoutfraud,
such laws. Notice of sale to the delinquent land owners and to the five (5) years from the date they became due. In case of fraud, the LGU
public in general is an essential and indispensable requirement of has 10 years from discovery offraud or intent to evade payment. This
law, the non-fulfillment of which vitiates the sale (Serfi.no v. Court period may be suspended when (a) the Treasurer is legally prevented
of Appeals, 754 SCRA 19 t19871). Also, lack of proper notice from making the assessment or collection; (b) taxpayer requests for
invalidates an auction sale (Estate of the late Merced.es Jacob reinvestigation and executes a waiver in writing before expiration of
u. Court ofAppeals,283 SCRA 474 t19971). period; and (c) taxpayer is out ofthe country or otherwise cannot be
located (Sec. 194[d], LGC).
Bar Question (2010)
The right of Cagayan to assess local taxes for 1998 fourth quarter
How are retiring businesses taxed under the Local Government had already prescribed at the tirne assessrnent was issued in 2004.
Code?
- Section 166, LGC provides that all local taxes, fees and charges
shall accrue on the first day of January each year, and Section
Suggested answer: 167, LGC provides for the payment of local taxes, fees and charges
Upon terminq.tion of business subject to tax under Section 143 of within the first 20 days ofJanuary or ofeach subsequent quarter, as
the Local Gouernrnent Code, it is required to submit a sworn stq.ternent the case may be, and for local taxes for the fourbh quarter of 1998,
of its gross sq.les or receipts for the curcent year. If the tax paid during which includes franchise tax, they accrued on January 1, 1999 and
the year be less than the tar due on said gross sales or receipts of became payable within the first 20 days of January, the same year.
the current year, the difference shq.ll be paid before the business is In this case, the assessment was issued only in 2004. Thus, PLDT
considered officially retired (Sec. 145, LGC). is entitled to a refund or issuance of TCC. Furthermore, the BLGF's
interpretation oflocal tax law is not authoritative, since its function
is merely to provide consultative services and technical assistance
Prescriptive Periods to local governments and the general public on taxation and real
a. Period to assess local taxes and fees property assessment (Prov. of Cagagan u. PLDT, CTA Case No.
, Januar! 27r 2017).
Local taxes, fees, or charges shall be assessed within five (5)
)rears from the date they became due. No action for the collection of b. Period to Collect the Assessed Tax
such taxes, fees, or charges whether administrative or judicial, shall be
instituted afterthe expiration of such period without said assessment To collect the assessed tax, the rule is that no action for collection
having been made. In case of fraud or intent to evade the payment ofthe tax shall be instituted after the expiration ofsuch period (five
of taxes, fees, or charges, the same ma)' be assessed within ten (10) [5] years) without such assessment having been made.
)zears from discovery of the fraud or intent to evade payment. Local
taxes, fees, or charges may be collected within five (5) years from Bar Question (2010)
the date of assessment by administrative or judicial action. No such
action shall be instituted after the expiration ofsaid period (Sec. 194, On May t5, 2009, La Manga Trading Corporation received a
LGC). deficiency business tax assessment of F1,500,000 from the Pasay
City Treasurer. One June 30, 2009, the corporation contested the
The running ofthe periods ofprescription shall be suspended assessment by filing a written protest with the City Treasurer. On
for the time during which (a) the treasurer is legally prevented from October 10, 2009, the corporation received a collection letter from
making the assessment or collection; (b) the taxpayer requests for a the City Treasurer, drawing it to file on October 25,2009 an appeal
reinvestigation and executes a waiver in writing before expiration against the assessment before the Pasay Regional Trial Court. (a)
of the period within which to assess or collect; and (c) the taxpayer Was the protest of the corporation filed on time? (b) Was the appeal
is out of the country or otherwise cannot be located (Sec. 794, LGC). with the Pasay RTC filed on time?
772 Rtrvlnwr.:n r x'l'lxnrroru Lr r'nt, ( l rvl,:ttt',1Mt,:ru'l' ( l rt tl,: I 1,1
l,rx'rrl llttsitrlss'lltxtrn

Suggested answers: 'lhe trezrsur.er shall dccide the protest within 60 days from the
q,. date of its filing.
Yes. Since the business tax assessment wqs receiued on May
15, 2009 qnd the protest thereto was filed on June 30, 2009, If the treasurer finds the assessment to be wholly or partly
or a total period of 46 days, the taxpayer thus timely filed correct, he shall deny the protest with notice to taxpayer.
such protest. The law allows the taxpayer to fiIe its protest
The taxpayer shall have 30 days from date of receipt of the
within 60 days from tlte date of receipt of'the qssessment.
denial of the protest or from the lapse of the 60-day period within
b. The toxpayer shall, within 30 days from receipt of the deniol which to appeal with the court of competent jurisdiction; otherwise,
of the protest or from the lapse of the 60-day period pre- the assessment becomes conclusive and unappealable (sec. 195, LGC) .
scribed within which to appeal with the court of competent
Note that this provision does not require payment under protest
jurisdiction; otherwise, the q.ssessment beconxes conclusiue
to contest the assessment for local business, unlike section 252 of
and unappealq.ble. The fifth sentence of Section 195 of the
the LGC which requires the payment under protest of real property
LGC of 1991 does not prouide for any administrq,tiue appeal.
taxes. However, should the local government officer not issue the
Hence, the totcpayer can only appeal to q. court of competent
mayor's permit due to the non-payment of the local business tax, the
jurisdiction. In this case, the local treasurer is acting as a
business of the taxpayer becomes illegal and may be closed by the
quasi-judicial agency. Under Section 49 of the 1997 Rules of
local government officer.
Ciuil Procedure, appeals from quasi-judicial agencies, in the
exercise ofjudicial functions, shall be brought to the Court of
Appeals. In this case, the appeal was brought by the corpora- lnjunction available against collection of taxes
tion to the Pasay RTC, which is not the court of competent Unless such a suit is forbidden by statute, a court of equity
jurisdiction. Thus, the appeal was not fi.led on time. generally will interfere, where some ground of equitable jurisdiction
is presented, to prevent, by injunction, the collection of wrongful
Remedies of Taxpayers taxes by a municipality, provided that there is no adequate remedy
to redress the iniury to property which would be inflicted by enforcing
Prior to assessment payment of the tax (Valley T?ad'ing Co. a. CFI, et al., 77L SCRA
501 t19891).
1. Administrative appeal to the Secretary of Justice; and
The City of Makati cannot impose local business tq'x' for sales
2. Action for declaratory relief.
of branches or sales outlets located in other local gouernrnent units.
After an assessment Nippon Express (NEPC) is in the business of freight forwarding
-conducted through three branches in Paraflaque, Makati and cebu.
1. Protest of the assessment; or For 2000 and 2001, it paid Makati business taxes in the amounts
2. Action for refund. of P2,349,468.80 and F3,051,529.84, respectively. On September
I!,2002, Makati issued a Notice of Assessment to Nippon Express,
Protest of assessment assessing it for deficiency local business tax and penalties in the
amounts of F3,I70,296.07 and F1,020,856 for the years 2000 and
When the correct tax, fee or charge is not paid, the local treasurer 2001, respectively. Respondent City Treasurer assessed NEPC by
shall issue a notice of assessment within the applicable prescriptive taking into account its gross revenue for the years 1-998 to 2000 as tax
period (Sec. 194, LGC), stating the nature of the levy, amount of base. Nippon Express filed its protest on the ground that there was
deficiency, surcharge, interest and penalty. no factual and legal bases, since the imputed gross revenue used by
Taxpayer may file a written protest against the assessment with the petitioner exceed the actual gToss revenue ofrespondent for its
the local treasurer; otherwise, the assessment shall become final and ocean cargo Branch located in Makati city, and Makati has no right
executory. to assess for any deficiency local business tax due to the territorial
774 li,t,lvt t,twt,ltt orrr'l'nxllron l,rr Ar. ( lovl,;laNMt,;t't'l'( )ottt,; 77lt
I rrcrrl llrrsittr,ss'l'rtxt:s

character of taxation. since there was no action on the part of the ()ity Suggested answer:
within 60 days from date of filing, Nippon Express filed the case with The appeal should be made with the Secretary of Justice. Any
the Makati RTC, pursuant to Section lgb of the LGC. On September question on the constitutionality or legality of a tax ordinance rnay
22,2010, the Makati RTC found for Nippon Express. petition firr
be raised on appeal with the Secretary of Justice within 30 days from
review was filed by the City of Makati with the CTA.
the effectiuity thereof (Sec. 187, LGC; Hagonoy Market Vend,or
The CTA ruled in favor of Nippon Express. The Makati Revenue Association a. Mun. of Hagonoy, G.E. No. 737627, February 6'
Code provides the situs of tax and the sales allocation. Thus, ,,All 2002).
sales made by a branch or sales office or warehouse located in the
municipality shall be taxable herein. In case the principal office Protest
and the factory are located in this municipality, all sales recorded
in the principal office and those in other localities where there is no When the correct tax, fee or charge is not paid, the local
branch or sales office or warehouse shall be recorded in the principal treasurer shall issue a notice of assessment within the applicable
office and taxable by the municipality." The court is mindful of the prescriptive period (Sec. 194, LGC), stating the nature of the levy,
doctrine in statutory construction stating that where the language the amount of deficiency, the surcharges, interests and penalties.
of the law is clear and unequivocal, it must be given its literal The taxpayer may file a written protest the assessment with the
application and applied without interpretation. Here, all of the afore- local treasurer contesting the assessment within 60 days from the
quoted provisions are clear in stating that establishments stating receipt of the notice of assessment; otherwise, the assessment
or operating branch or sales outlet elsewhere shall record the sale shall become final and executor)'. The local treasurer shall decide
in the branch or sales making the sale or transaction, and the tax the protest within 60 days from the time of its filing. If the local
thereon' shall accrue and shall be paid to the municipality where treasurer finds the assessment to be wholly or partly correct, he shall
such branch or sales outlet is located. Similarly, the Court a quo deny the protest wholly or partly with notice to the taxpayer. The
aptly observed that even assuming that there was under-declaration taxpa)'er shall have 30 days from the receipt ofthe denial ofthe
or mis-declaration of the total taxable earnings of respondent in protest or from the lapse ofthe sixty-day period prescribed herein
its Paranaque City branch, thereby depriving the government of within which to appeal with the court of competent jurisdiction;
its lawful dues, the City Treasurer of Makati, through the revenue otherwise, the assessment becomes conclusive and unappealable
(Sec. 195, LGC).
examiner, attempted to collect what under the Revenue code and the
Local Government Code properly belongs to the City of parafraque.
The action of the City of Makati is impermissible, because to do Claim for refund
so would be sanctioning or encroaching upon the prerogatives of The filing of a written claim for refund with the local treasurer
another co-equal and autonomous local government (City of Mahati is a condition precedent for maintaining a court action. If the local
u. Nippon Express Philippines Corporation, CTA, February treasurer does not act on the written claim for refund and the two-
17,2072). year period is about to expire, the taxpayer should forthwith initiate
the court action for refund and consider the treasurer's inaction
Bar Question (2003) as a denial of his claim for refund. The Code failed to specifically
X, a taxpayer who believes that an ordinance passed by the City provide for a period of appeal in the event a decision is made by
council of Pasay is unconstitutional for being discriminatory against the treasurer on the claim for refund, similar to that obtaining in
him, wants to know from you, his tax lawyer, whether or not he can file the case of a denial on a written protest of an assessment. It would
an appeal. In the affirmative, he asks you where such appeal should seem, therefore, that the Court may entertain the appeal so long as
be made: the Secretary ofFinance, or the Secretary ofJustice, or the the case for refund is filed with it within the two-year period and a
Court of Tax Appeals, or the regular courts. What would your advice written claim for refund or credit had earlier been submitted to the
be to your client, X? local treasurer. The applicable statute of Limitations for claims for
refunds, not having been specifically provided for by that law, could
776 llt:vtr,:wl:tt oN'l'nxn'r,ror.r

be filed within six (6) years from the payment thereof as a case of
solutio indebiti (Art. 7745, Ciuil Cod.e of the philippinee; puyot
& Sone v, City of Monilo, 7 SCRA 9ZO).
CIIAPTER }CfrIII
REAL PROPERTY TAX

Nature of Real Property Tax


The real property tax is a tax on property. It has been considered
as a national, not a local, tax. The realty tax is enforced throughout
the Philippines and not merely in a particular municipality or city,
but the proceeds of the tax accrue to the province, city, municipality
and barrio where the realty taxed is situated (Sec. 86, P.D. 464).ln
contrast, a local tax is imposed by municipal or city council by virtue
of the Local Tax Code, P.D. 231 which took effect on JuIy 1' 1973
rcg O.G. 6197) (Meralco Securities Ind'ustrial Corporation a.
Central Board. of Assessment Appeals, G.R. No. L'46245, May
31, 7982).It has always been imposed by the national lawmaking
body. It is enforced through the Philippines and not in a particular
political subdivision, although the bulk of the tax proceeds accrue
to the various local government units where the property is located
(Secs.233 and 271, LGC).

Accrual and Payment of Tax


The real property tax for any year shall attach and become dutr
and payable on the first day ofJanuary and the said basic and any
other tax levied under the title on real property taxation shall, fronr
the date of accrual, constitute a lien upon the property subject trr
such tax. Said lien shall be superior to all other liens, mortgages' or
encumbrances of any kind whatsoever, shall be enforceable against thtr
properby, by administrative or judicial action, whether in the possession
ofthe delinquent or any subsequent owner or possessor, and shall btr
removable only by the pa5rment of the delinquent taxes and the related
interest and expenses (Sec. 246, relation to Sec. 257, LGC).
Real property taxes may, in the discretion of the taxpayer, btr
paid without penalty in four equal installments, the first installment
to be due and payable on or before March 31; the second installment,
on or before June 30; the third installment, on or before September

777
778 Itt,:vrr.:wr,:rt oN'l'nxn,r'ror.r
I rx At, ( iovr,;RNMI,tMt' ( lotrt,; 779
Itr,rrl l'roptrt'tv'l'ttx
30, and the fourth installment, on or before December 31, except thc
special levies which shall be governed by the local ordinance imposing b. Additional five percent (57o) tax on idle lands (i.e.,
the levy. Payments of real property taxes shall first be applied t' agricultural lands at least one-half of which remain
prior year delinquencies, interests, and penalties, if any, and only uncultivated or unimproved by the owner or owners
after said delinquencies are settled may tax payments be credited t<r thereof and non-agricultural lands, including
the current period (9ec.250, LGC). residential lots in subdivisions, of more than 1,000
square meters at least one-half of which remain
unutilized or unimproved by the owner or owners
Bar Question (20121 thereo0. Regardless of land area, this section shall
Mr. Jose Castillo is a citizen, who purchased a parcel of land in likewise apply to residential lots in subdivisions
Makati city in L970 ata consideration of Fl million. In 2011, the land, duly approved by proper authorities, the ownership
which remained undeveloped and idle, had a fair market value of ?20 of which has been transferred to individual owners,
million. The Assessor of Makati re-assessed in 2011 the property at who shall be liable for the additional tax; and
F10 million- when is Mr. castillo liable for real property tax on the
land based on the re-assessed fair market value, beginning 2011 or
c. Special levy or assessment that may be imposed by
provinces, cities or municipalities, including those
2012?
outside the Metropoiitan Manila Area, on property
especially benefited by certain infrastructure
Suggested answer:
developments or improvements undertaken by
Mr. Castillo shall be liable to the real property tax based. on the said governments to defray a part, not exceeding
re-assessed fair marhet ualue of P10 million beginning 2012. Att re- 6OVo, of t}rre actual cost thereof, including the cost of
assessments made after the first day of any year shall tahe effect on acquiring land and other real property in connection
the first of January of the succeeding year (Sec. 21, LGC). The fair thereof. However, the special levy shall not apply to
market ualue of flO million as determined by the comrnissioner shall lands exempt from basic real property tax and the
be used only for purposes of national internal reuenue tanes. remainder of the land portions of which have been
donated to the local government unit concerned for
Types of Real Property Tax the construction of such projects or improvements
( Secs. 232, 233, 235-237, LGC),
1. Annual ad ualorem tax that is levied by a province, city
or municipality within the Metropolitan Manila Area on
Bar Question (2005)
real property not hereinafter specifically exempted, at the
following uniform rates: A city outside of Metro Manila plans to enact an ordinance
that will impose a special levy on idle lands located in residential
a. Provinces
- not exceeding one percent (LVo) of the subdivisions within its territorial jurisdiction in addition to the basic
assessed value;
real property tax. Ifthe lot owners ofa subdivision located in the said
b. Cities and municipalities in the Metropolitan Manila city seeks your legal advice on the matter, what would your advice
Area - not more than two percent (2Vo) of the be? Discuss.
assessed value (Sec. 2SS, LGC).
Suggested answer:
2. In addition to the basic real propertytax, special levies
may be imposed by the same local government units on My aduice would be that the city's plan to enact a'n ordinance
said real property, such as: that will irnpose such special leuy on idle lands is not legally allowed,
unless these lands are specially benefited by a public worhs projects
a. Additional one percent (LEo) tax for the Special or improuements funded by the city gouernment (Sec. 240, LGC). I
Education Fund;
will lihewise aduise them that before the city coun'cil could enact an
Lr rnt, ( lovt,;lNvt,:N't' ( l rt rt, 7nI
780 Itt,;vn,;wr,:rr or'l'Axn't'tor.r Itt,rrl l'ro1x,rl,v'l\rx

ordinance imposing a speciel leuy, it shall conduct a public lrcuring Suggested answer:
thereon; notify in writing the owners of the real property to be affet:ted Not all local gouernment units may do so. Only prouinces, cities,
or the persons hauing legal interest therein as to the date and place and municipolities within the Metro Manila area (Sec. 232, LGC)
thereof and afford the latter the opportunity to ercpress their positions may irnpose an ad. valorem tu.x not exceeding fiue percent (57o) of the
or objections relatiue to the proposed ordinance (Sec. 242, LGC). assessed ualue (Sec. 236, LGC) of idle or uacant residential lots in a
subdiuision, duty approued by proper authorities regardless of area
Bar Question (1991) (5ec.237, LGC).

In view of the street widening and cementing of roads and the


improvement of drainage and sewers in the district of Ermita, the
Real Property Subject to Tax
City Council of the City of Manila passed an ordinance imposing The real property tax is imposed on real property such as
and collecting a special levy on lands in the district. Jose Reyes, a land, buildings, machinery and other improvements not otherwise
landowner and resident of Ermita, submitted a protest against the specifically exempted under the Code (Sec.232, LGC).
special levy fifteen (15) days after the last publication ofthe ordinance
alleging that the special levy was exorbitant since the rate thereof
The term "machinery" embraces machines, equipment,
was more than the maximum rate of two percent (2Vo) of ttre assessed
mechanical contrivances, instruments, appliances or apparatus
which may or may not be attached, permanently or temporarily to
value of the real properties allowed by Section 39 of Presidential
Decree No. 464, as amended.
the real property. It includes the physical facilities, for production,
the installations and appurtenant service facilities; those which are
Assuming that Jose Reyes is able to prove that the rate of the mobile, self-powered or self-propelled and not permanently attached
special levy is more than the aforesaid percentage limitation of 2Vo, to the real property but are actually, directly and essentially used to
will his protest prosper? meet the needs of the particular industry, business or activity, and
which by their very nature and purpose are designed for, or necessary
Suggested answer: to its manufacturing, mining, commercial, industrial or agricultural
purposes (Sec. 199[o], LGC).
The special leuy under the Real Property Tax Code on lands,
specially benefited by the proposed infrastru.cture, may not exceed 60Vo The term "improvements" refers to valuable addition made to a
of the cost of said improuement. AII lands comprised within the district property or an amelioration in its condition, amounting to more than
benefited are subject to the special leuy except lands exempt from the a mere repair or replacement of parts involving capital expenditures
real property tax (Sec. 47, Real Property Tax). The protest shall be and labor which is intended to enhance the value, beauty or utility
fiIed not later than 30 days after the publication of the ordinq.nce and or to adopt it for new or further purpose (Sec. 199[m], LGC).
may be submitted to the City Sanggunian signed by a majority of the
landowners affected by the proposed work. If no such protest is fiIed Bar Question (2009)
in the manner q.boue specified, the city ordinqnce shall become final
and effectiue. The leuy imposed under the ordinance should be within Republic Power Corporation (RPC) is a GOCC engaged in the
the limit of 607o of the total cost of the proposed improuement. supply, generation and transmission of electric power. In 2005, In
order to provide electricity to Southern Tagalog provinces, RPC
The rate oftwo percent (2Vo) ofthe assessed ualue under Section entered into an agreement with Jethro Energy Corporation (JEC), for
39 of P.D. 464 refers to the real property tq.x q.nd not to special leuies. the lease of JEC's power barges which shall be berthed at the port of
Batangas City. The contract provides that JEC shall own the power
Bar Question (1991) barges and the fixtures, fittings, machinery, and equipment therein,
May local governments impose an annual realty tax in addition to
all of which JEC shall supply at its own cost, and that JEC shall
the basic real property tax on idle or vacant lots located in residential
operate, manage and maintain the power barges for the purpose of
subdivisions within their respective territorial jurisdictions? converting the fuel of RPC into electricity. The contract also stipulates
782 llt,;vtt':wr,;rr { )N'l'AX^'t'tr

ill.l;,lll'i;i,ll""'
)N
783
"",ii;,f
that all real estate taxes and asscssmenLs, r:ltes and othcr (:hilrg()s,
in respect of the power barges, shall be for the account of'RI)O. equiprnent, consisting of underground tanks, eleuated tanks, water
tanks, gasoline punnps, computing pumps, water pumps, cd.r utasher,
In20O7, JEC received an assessment ofreal property taxes on car and truck hoists, air compressors and sirnilar articles, installed
the power barges from the Assessor of Batangas City. JEC sought by Caltex, in its gasoline stations, located on leased land, haue been
reconsideration ofthe assessment on the ground that the powerbarges held to be real property subject to the to'x (Calter Phils. o. Central
are exempt from real estate taxes under Section 284(c) of R.A. 7160, Boa,rd. of Assessmcnt Appeals, L14 SCRA 296).
as they are actually, directly and exclusively used by RpC, a GOCC.
Furthermore, even assuming that the power barges are subiect to real BOT Agreement is not merely a Financing Scheme
property tax, RPC should be held liable therefor, in accordance with
the terms of the lease agreement. Is the contention of JEC correct? Under the BOT Agreement, can the GOCC NPC) be deemed
the actual, direct and exclusive user of machinery and equipment
Suggested answer: for tax exemption? If not, can it pass on its tax-exempt status to its
BOT partner, a private corporation, thru the BOT agreement?
Power barges, which are floating and mouable, are real property
subject to real property tax. Article 415(a) or the New Ciuil Cod.e GOCC is exempt from RPT when it owns and/or actually uses the
prouides that "docks and structures which though floating, are machinery and equipment for generation and transmission of electric
intended by their nature and object to remain at a fixed place on a power. In this case, it is BPPC, a non-government entity, which owns'
riuer, lake, or coast' are considered immouable property ... The mere maintains and operates the machinery and equipment. Using these,
understanding of petitioner NPC under the Agreement that it shart itgenerates electricity, which it then sells to NPC. NPC is not the
be resporusible for the payment of real estate taxes and assessments registered owner of machinery and equipment' This is confirmed by
does not justify its exception. The priuilege granted to NpC cannot be BOT Agreement. Thus, Section 234(c) does not apply.
extended to FELS. The couenant does not bind third persons not priuy
thereto (FELS Energy,Inc. u. The Proa. of Batangas, G.R. No.
Liability for pa5rment of RPT is determined by law and not by
agreement of the parties. It must be expressly granted by law. Tax
168557, February 16, 2007).
exemption is also not transferable. And it is strictly construed.
Bar Question (2003) SC cited FELS Erwrgy u . Prou of Batangas, where it was provided

that NPC shall pay all of FELS' real estate taxes and assessments.
Under Article 415 of the Civil Code, in order for machinery and Exemption of NPC was not recognized since it was not the actual,
equipment to be considered real property, the pieces must be placed by direct and exclusive user ofthe barge.
the owner of the land and, in addition, must tend to directly meet the
needs of the industry or works carried on by the owner. Oil companies ThatBOTfureementis merely afinancing scheme, where BPPC
install underground tanks in the gasoline stations located on land is the financier and NPC is the actual user of properties is belied by
leased by the oil companies from the owners of the land where the the BOT Agreement itself. The proponent wiII construct the project
gasoline stations are located. Are those underground tanks, which at its own cost and subsequently operates and manages it. At the end
were not placed there by the owner of the land but which were instead of 1"5 years, the proponent transfers the ownership of the facility to
placed there by the lessee ofthe land, considered real property for NPC. Thus, BPPC has complete ownership-bothlegal andbeneficial
purposes ofreal property taxation under the Local Government Code? - of the project (NPC v. CBAA, LBAA'La Union, G.R. No. 777470,
Explain. Januan1 30,2009).
For purposes of taxation, the term "real property" may include
Suggested answer: things which generally should be regarded as personal property (84
It is a familiar phenomenon to see things classed as real C.J.S. 171, Note). It is a familiar phenomenon to see things classed
property for purposes of ta"tcation which on general principles might as real property for purposes oftaxation which on general principle
be considered personal property. For similar ree,sons, machinery and might be considered personal property (Standard Oil Co. of New
York u. Jararnillo, 44 PhiI.630). Thus, while the two tanks are not
784 Itl,tv t t,;wt,ttt oN'l'n xA,r'ror.r Lr x ',r r, ( iovl:rrt l,l t,:N't' ( k rt tt,: 786
lhrul Itropcrt,v 'l'ux

embedded in the land, they may, nevertheless, be considered as owner of the land and, in addition, must tend to directly neet the
taxable improvements on the land, enhancing its utility and rendering needs of the industry or works carried on by the owner. Oil companies,
it useful to the oil industry as defined under section B(k) of the Real such as Caltex and Shell, install undergtound tanks in the gasoline
Property Tax code. It is undeniable that the two tanks have been stations located on land leased by the oil companies from others. Are
installed with some degree of permanence at receptacles for the those underground tanks which were not placed there by the owner
considerable quantities of oil needed by Meralco for its operations. The of the land but which were instead placed there by the lessee of the
case of Board of Assessment Appeals u. Manilq Electric company ( 1 1g Iand, considered real property for purposes ofreal property taxation
Phil. 328), wherein Meralco's steel towers were held not to be subject under the Local Government Code? Explain your answer.
to realty tax, is not in point because in that case the steel towers
were regarded as poles and under its franchise, Meralco's poles are Suggested answer:
exempt from taxation. Moreover, the steel towers were not attached
to any land or building. They were removable from their metal frames Yes, the underground tanks although installed by the lessee,
(Manila Electric Co. u. Central Board. of Assessment Appeals, Shetl and Caltex, are considered as real property for purposes ofthe
G.1?. IVo. L-47943, May 37, 1982). imposition of real property taaes. It is only for purposes of executing
a final judgrnent that these machinery and equipment, installed by
The pipeline of Meralco Securities does not fall within any the lessee on a leased land, would not be considered as real property.
of the classes of exempt real property enumerated in section 3 of But in the irnposition of the real property tax, the underground tanks
the Assessment Law and section 40 of the Real property Tax code are ta.xable us necessary fix,tures of the gasoline station without which
(Meralco Securities Ind.ustrial Corporation u. CBAA, supra). the gasoline station would not be operational (Coltex Phils.r lnc- a-
The appellee constructed a road on a public land under lease CBAA,114 SCRA296).
contract. Appellant assessed real property tax thereon, which was
protested by the appellee, claiming that the road is exempt from tax Fundamental Principles
because (a) the road belongs to the national government by right of
accession; (b) the road cannot be removed or separated from the land Bar Question (2000, 1997)
on which it is constructed and so it is part and parcel of the public The appraisal, assessment, levy and collection ofreal property
land; and (c) according to the evidence, the road was built not only for for taxation purposes shall be guided by the following fundamental
the use and benefit ofthe appellee but also ofthe public in general. principles:
The court ruled that the government has practically reserved the
rights to use the road to promote its varied activities. since the road 1. Real property shall be appraised at its current and fair
in question cannot be considered as an improvement which belongs to market value;
the appellee, although in part is for its benefit, it is clear that the same 2. Real property shall be classified for assessment purposes
cannot be the subject of assessment within the meaning of section 2 of on the basis ofits actual use;
commonwealth Act No. 470. It is well settled that a realty tax, being
a burden upon the capital, should be paid by the owner ofthe land 3. ReaI properby shall be assessed on the basis ofa uniform
and not by a usufructuary (Mercado u. Rizal, 6T phit. 608; Art. Sg7, classification within each local political subdivision;
New ciuil code). Appellee is but a partial usufructuary of the road in 4. The appraisal, assessment and levy of real property for
question (Board of Assessmcnt Appeals of Zannboanga del Sur taxation purposes and the collection ofthe real property
a. Samar Mining Co., GR. No. L-28084, February 22, I|ZI). tax shall not be let to any private persons; and

Bar Question (2001)


5. The appraisal and assessment of real property shall be
equitable (Sec. 198, LGC).
Under Article 415 of the Civil Code, in order for machinery and willing
is the amount which a purchaser
"Fair market value"
equipment to be considered real property, they must be placed by the
but not compelled to buy would pay an owner of the property, and
786 Itt':vt t,:wt,:tr or.r'l',rx,r'r'rr lru
'"iil;1,'i;:;il1:l,1,",," 7tt7

the latter willing but not compelled to sell w'ulcl ircccpt :rs the R.A. 7160 and is therefore still the applicable statute, or because the
consideration or price therefor (Sec. 19g, LGC; Army and No;ay Club Supreme Court, in three related cases promulgated on 16 December
u. T?inid.ad,44 Phil.383). The schedule of fair market values shall 1993, after the Local Government Code of 1991 already took effect,
be published in a newspaper of general circulation in the province, ruled that a schedule ofvalues and the corresponding assessments
city or municipality concerned or the posting in the provincial capital based thereon "prepared solely by the city assessor ... failed to comply
or other places as required by law (Lopez a. City of Manila, 803 with the explicit requirement (of collegial and joint action by all
scRA 448 t19e9l). the assessors in the Metropolitan Manila Area under P.D. 921) '..
and are on that account illegal and void." R.A. 7160 has a repealing
Basis of real property tax.
- The basis of real property
taxation under the Assessment Law was ownership or interest
provision (Section 534) and, if the intention of the legislature was
to abrogate P.D. 921, it would have included it in such repealing
tantamount to ownership. The ReaI Property Tax Code changed clause, as it did in expressly rendering ofno force and effect several
the basis ofreal property taxation and adopted the policy oftaxing other presidential decrees. The repeal in R.A. 7160 partakes of the
real property on the basis ofactual use, even ifthe user is not the nature ofa general repealing provision. It is basic rule ofstatutory
owner (Prov. of Nueua Ecija o. Imperial Mining Co., II8 SCRA
construction that repeals by implication are not favored (Ty and'
632 t19821). This policy is still followed in the Local Government MVR Picture Tube u.Tlampe and.Mun.Assessor of Pasig, G.R.
Code.
No.177577, December 7,7995; Figuenes u. Court of Appeals,
For assessment purposes, the term "actu.al u se" refers to the 305 SCRA 206 tLgeel).
principal and predominant utilization of the property by the person The decision ofthe CBAA shall become final and executory after
in possession thereofpursuant to section lgg(b) ofthe code (Testate
the lapse of fifteen days from the date of receipt of the decision'.. To
Esta,te of Lim a. City of Manila, lBZ SCRA 488).Inlg74, anew
continue collecting real property taxes based on valuations arrived
Real Property Tax Code came into being when P.D. 464 was issued.
at several years ago, in disregard ofthe increases in the value ofreal
It changed the basis ofreal property taxation. It adopted the policy properties that have occurred since then, is not in consonance with a
oftaxing real property on the basis ofactual use, even ifthe user is sound tax system. Fiscal adequacy, which is one of the characteristics
not the owner. Thus, even ifthe user is not the owner ofthe property,
of a sound tax system, requires that sources of revenues must be
government property covered by mining leases is subject to real
adequate to meet government expenditures and their variations
property tax(Nueva Eeija u.Imperial Mining Corporation, GR. (Chavez a. Ongpin, supra).
No. L-59463, Noaember 79, 1982).
In appraising the current and fair market value of the property, Bar Question (2002)
the criterion is that which is prevailing in the locality where the
property is situated (Sec.207, LGC). However, in preparing a general The real property of Mr. and Mrs. Angeles, situated in a
schedule of value for a province or city and in determining the classes commercial area in front of the public market, was declared in their
of property for assessment levels, real property shall be classified, Tax Declaration as residential because it had been used by them
valued and assessed on the basis ofits actual use, regardless ofwhere as their family residence from the time of its construction in 1990.
located, whoever owns it, and whoever uses it (Secs. 217 and, 212, However, since January 1997, when the spouses left for the Unitcd
LGC). States to stay there permanently with their children, the properby has
been rented to a single proprietor engaged in the sale ofappliances
The Municipality of Pasig increased the real estate taxes and agricultural products. The Provincial Assessor reclassified thrt
effective for the year 1994, which assessment was protested by the property as commercial for tax purposes starting January 1998' Mr.
taxpayer. The court ruled that whether the assessment is made and Mrs. Angeles appealed to the Local Board ofAssessment Appeals
before or after the effectivity of R.A. 7160, the observance of, and contending that the Tax Declaration previously classifying thtrir
compliance with, the explicit requirement of P.D. 921 is strict and property as residential is binding.
mandatory, either because P.D. 921 was not impliedly repealed by
How should the appeal be decided?
7rJ8 Itt,:vt t,;wt';rr oN'l'Ax,\'tror't '/I,t9
lr r,u, ( iovt':trtttr.tt'tn'r' ( iotrt,:
Itr.rrl l'nrgx'rl..y'l'rrx

Suggested answer: accomplishlnenI ol'said purposes.'I'hus, CHHMAC should be under


The appeal should be decided against Mr. and Mrs. Angek:s. the same speciaL assessment level as that of CHH (City Assessor of
The law focuses on the actual use of the property for classification,, Cebu a. Assoc. of Beneuola d.e Cebu, G..R. No. 752904, June 8,
ualuation and assessment purposes regardless of ownership. section 2007).
217 of the Local Gouernment Code prouides that *real property shalt be
classified, ualued and assessed on the basis ofits actual use regardless Exemptions foom real property tax
of where located, whoeuer owns it, and whoeuer uses it."
Bar Question (2006, 20021
The prouincial, city or municipal qssessor shall undertahe o
general reuision of real property assessrruents within two (2) years after What properties are exempt from real property tax?
the effectiuity of this Code and euery three (3) years thereafter (Sec. 21g,
LGC). The assessment of real property shall not be increased, oftener Suggested answer:
than once euery three (3) years, except in case of new improuements The following are exernpted from payment of the real property
substarutially increasing the us,lue of said property or of any change tax:
in its actual use (Sec. 220, LGC).
1. Real property owned by the Republic of the Philippines or
Classes of real property any of its political subdiuisions, except when the beneficial
use thereof has been granted, for consideration or otherwise,
For purposes ofassessment, real property shall be classified as to a taxable person;
residential, agricultural, commercial, industrial, mineral, timberland,
or special. The city or municipality within the Metropolitan Manila 2. Chq.ritable institutions, churches, parsondges or conuents
Area, through their respective sanggunian, shall have the power to appurtenant thereto, n'Losques, non-profit or religious
classify lands as residential, agricultural, commercial, industrial, cemeteries, and all lands, buildings and irnprouements
mineral, timberland, or special in accordance with their zoning actually, directly q.nd exclusiuely used for religious,
ordinances (Sec. 215, LGC). charitable, or educational purposes ;

All lands, buildings, and other improvements thereon actually, 3. All machineries and equipment that are actually, directly
directly and exclusively used for hospitals, cultural, or scientific and exclusiuely used by local water districts and gouernment
purposes, and those owned and used by local water districts, and owned- or controlled corporations engaged in the supply and
government-owned or -controlled corporations rendering essential distributioru of water and / or generation and transmission
public services in the supply and distribution of water and/or of electric power;
generation and transmission of electric power shall be classified as 4. All real property owned by duly registered cooperatiues as
special (Sec. 216, LGC). prouided for under R.A. 6938; and
Chong Hua Hospital Medical Arts Center (CHHMAC) is an 5. Machinery and equipment used for pollution control and
integral part of CHH. The doctors and medical specialists holding eruu iro nment al p r ote ctio n.
clinics are those duly accredited by CHH, i.e., they are consultants
of the hospital who can treat CHH's patients confined in it. The fact Except as prouided herein, any exemption from payment of real
that the doctors are holding office in a separate building, like at property tctx preuiously granted to, or presently enjoyed by, all persons,
CHHMAC, does not take away the essence and nature oftheir serwices whether nstural or juridical, including all gouernment-owned or
uis-d,-uis the overall operation, of the hospital and the benefits to the controlled corporations, are hereby withdrawn upon the effectiuity of
hospital's patients. The exemption from this is not limited to property this Code (5ec.234, LGC).
indispensable for charitable or educational purposes, but extends to The exemption of government-owned or controlled corporations
facilities which are incidental to and reasonably necessary for the from national and local taxes was withdrawn by P.D. Nos. lI77 and
790 Itr,:vr r,rwt,;tr ott'l'Axn't'tott Lr r',1r. (l rvr,IrnMt,tt,t't' ( )ot rt,; 79t
lil'rrl l'roprrrl,y'l'lx

193I (Nationa.l Pou)er Corporation u. Court of Appealr, G.R. Suggested answcr:


No. L-73477, October 76, 7990). Commonwealth Act No. 1f12, which
No. The ossessor made an error in assessing the deficiency real
created the National Development Company, contains no provisirtn property tax on the land owned by "4" but being leased and used by
exempting it from the payment of real estate tax on properties it
the Tibetian monks for their religious rituals q.nd ceremonies. Section
may acquire. Besides, these properties are not devoted to public 198 of the Local Gouernrnent Code prouid.es that real property shall be
use but were acquired for resale to qualified persons. Also, National
classifi.ed for assessment purposes on the basis of actual use. Moreouer,
Development Company does not come under the classification of
charitable institutions, churc hes, parsonages or conuents appurtenant
municipal or public corporations in the sense that it may sue and be
thereto, mosques, non-profit or religious cemeteries, and all lands,
sued in the same manner as may other private corporations. Unlike
buildings and improuements actually, directly a.nd ercclusiuely used
the government, National Development Companymaybe sued without
its consent, and is subject to taxation (National Deaeloprnent Co. for religious, charitable, or educational purposes, are eJcempt from the
payment of real property tax (Sec. 234, LGC).
u. Proa. of Nueaa Ecija, G.R. No. L-47223, Noaernber 25, 1983).
A national government instrumentality is exempt from real property
tax (Phil. Fisheries Deaelnpment Authority u. CA, et al., G.R. Supreme Gourt decisions on real property taxes
No. 769836, July 3 7, 2007). 1. Manila International Airport Authority (MIAA)
a. Paraft.aque City (2006). - The Manila International Airport
Bar Question (2013) Authority (MIAA) owns airport lands and buildings located in
Paranaque City. MIAA is not a GOCC under Section 2(13) of the
Mr. Arnaldo leased a piece of land owned by the Municipality of
Introductory Provisions of the Administrative Code because it is not
Pinagsabitan and built a warehouse on the property for his business
organized as a stock or non-stock corporation. Neither is MIAA a
operations. The Municipal Assessor assessed Mr. Arnaldo for real GOCC under Section 16, Article XII of the 1987 Constitution because
property taxes on the land and the warehouse. Mr. Arnaldo objected to
MIAA is not required to meet the text of economic viability. MIAA
the assessment, contending that he should not be asked to pay realty
is a government instrumentality vested with corporate powers and
taxes on the land since it is municipal property. Was the assessment performing essential public services pursuant to Section 2(10) of the
proper?
Administrative Code.
Suggested answer: As a government instrumentality, MIAA is not subject to any
kind of tax by local governments under Section 133(o) of LGC. The
Yes, the assessment is proper. The land, although owned by
exception to the exemption in Section 234(a) does not apply to MIAA
the Municipality, is not exempt from real property tax because the because MIAA is not a taxable entity under the LGC. Such exception
beneficial use has been granted to a taxable person (Sec. 234[a], applies only if the beneficial use of real property owned by the Republic
LGC). is given to a taxable entity. The airport lands and buildings of MIAA
are properties devoted to public use and thus are properties ofpublic
Bar Question (2010) opinion, owned by the State or the Republic (MIAAv. CA and. Pasoy
"A" inherited a two-storey building in Makati from his father, a City,2OOG).
real estate broker in the'60s. A group of Tibetian monks approached
"A" and offered to lease the building in order to use it as a venue for 2. MIAAv. Pasay City (2009). - MIAA owns airport lands
their Buddhist rituals and ceremonies. "A" accepted the rental of Pl and buildings located in Pasay City.
million for the whole year. The following year, the City Assessor issued
an assessment against "a'for non-pa)rment of real property taxes. Is "Ittstrurnentality" refers to any agency of the national
the assessorjustified in assessing A's deficiency real property taxes? government, not integrated within the department framework,
Explain. vested with special functions or jurisdiction by law, endowed with
792 llt,:vt t,:wt'ttt ott'l'nxrt't'toN l,r r'Ar, ( ;oVl,;rtNMt,ltt't'( l rtrt'l 79:l
l{r,rrl l'rrrplll,y'l'irx

some if not all corporate powers, administering special funds, and For an entit,.y to be considered as GOCC, it must either be
enjoying operational autonomy, usually through a charter. This organized as a stock or non-stock corporation. Two (2) requirements
term includes regulatory agencies, chartered institutions and GOCC. are need to create a stock corporation: (1) it has capital stock
"Instrumentality" includes ... GOCC (Sec. 2[10], Administrative divided into shares; and (2) it is authorized to distribute dividends
Code). This means that a government instrumentality may or may and allotments of surplus and profits to its stockholders. If only
not be a GOCC. Obviously, the term government instrumentality is one requisite is present, it cannot be properly classified as a stock
broader than the term GOCC. corporation. As for nonstock corporations, they must have members
" Gotsernrt .ent-Owned. or Controlled, Corporation" (GOCC)
and must not distribute any part of their income to said members.
refers to any agency organized as a stock or non-stock corporation, PFDA is not a GOCC. It has capital stock but it is not divided
vested with functions relating to public needs whether governmental into shares ofstocks. It has no stockholders or voting shares; hence,
or proprietary in nature, and owned by the Government directly or it is not a stock corporation. Neither is it a non-stock corporation
through its instrumentalities either wholly, or, where applicable as because it has no members (PFDA a. CA & Iloiln City, G.R. No.
in the case of stock corporations to the extent of at least 577o of rts 769836, July 37,2007).
capital stock.
Since MIAA is a government instrumentality vested with 4. Light Rail Transportation Authority (LRTA)
corporate powers to perform efficiently its governmental functions, a, Central Board. of Assessment Appeals (CBAA). - Real
property is classified for assessment purposes on the basis ofactual
MIAA is like any other government instrumentality, the only
difference is that MIAA is vested with corporate powers. When use, which is defined as "the purpose for which the property is
the law vests in a government instrumentality corporate powers, principally or predominantly utilized by the person in possession
of the property."
the instrumentality does not become a corporation. Unless the
government instrumentality is organized as a stock or non-stock Unlike public roads which are open for use by everyone, the
corporation, it remains a government instrumentality exercising not LRT is accessible only to those who pay the required fare. It is thus
only governmental but also corporate powers. Thus, MIAA exercises apparent that petitioner does not exist solely for public service,
the governmental powers of eminent domain, police authority and and that the LRT carriageways and terminal stations are not
the levying of fees and charges. At the same time, MIAA exercises exclusively for public use. Although petitioner is a public utility, it
"all the powers of a corporation under the Corporation Law, insofar is nonetheless profit-earning. It actually uses those carriageways
as these powers are not inconsistent with the provisions of this E.O. and terminal stations in its public utility business and earns money
Hence, MIAA is not liable to pay RPT (G.R. No. 763072, April2, therefrom.
2009).
Real property owned by the government or any of its political
3. Philippine Fisheries Deaelopm.ent Authority (PFDA) subdivisions and any GOCC so exempt by its charter is exempt from
RPT, but this exemption shall not apply where the beneficial use has
a. CA & Ilniln City.
- PFDA is not a GOCC but an instrumentality
of the national government which is generally exempt from RPT. been granted, for consideration or otherwise to a taxable person.
However, said exemption does not apply to the portions of the IFPC, Records of the Constitutional Commission reveal that what is
consisting of breakwater, a landing quay, a refrigeration building, exempted is not the institution itself;those exempted from real estate
market hall, municipal shed, an administration building, water taxes are lands, buildings and improuements actually, directly and
and fuel oil supply system and other port-related facilities and exclusively used for religious, charitable or educational purposes.
machineries; title to the land and buildings of the IFPC remained with
the Republic, which PFDA leased to private entities. Nonetheless, What is meant by actual, direct and exclusive use of the
propertlz for charitable institutions is the direct and immediate and
the IFPC, being property of public dominion, cannot be sold at public
actual application ofthe property itselfto the purposes for which the
auction to satisfy the tax delinquency.
charitable institution is organized. It is not the use of the income
794 Itt,:vr t,;wr,;rr oN'l'nxn'r'ror,r
"',il;,f iili,ill:i;i,ll"'' ,lttt

from the real property that is determinative of whether the property pntpertv toxolinrt is lxt.sctl on use ancl rutt on outncrship; hence, the
is used for tax-exempt purposes. same rule must also be applied for real property tax exemptions.
In sum, SC ruled the portions of the land leased to private
entities as well as those parts of the hospital leased to private Bar Question (2011)
indi'niduals are not exempt from taxes (Lung Center of the Phil u. The head priest of the religious sect Tres Personas Solo Dios,
QC Asseasor, GR. No. 7447O4, June 29,2004).
-
as the corporation sole, rented out a 5,000 sq.m. lot registered in its
name for use as school site of a school organized for profit. The sect
5. Goaernment Seruice Insurance System (GS/S) u. used the rentals for the support and upkeep ofits priests. Is the rented
Assessor of Manila (2OOg).
- The GSIS was created under P.D.
1146, which granted tax exemption to it. In19g2,R.A. ?160 removed
lot subject to real property tax?
all tax exemptions from real property, except those specifically Suggested answer:
mentioned in the law. In June, 1997, R.A. 8291 was enacted and it
restated the exemption of GSIS, among other provisions. In this case, No, the lot is exempt from real property taxes, since it is actually,
GSIS leased some of its properties to private persons. Consideringthat directly and exclusiuely used by the school for educational purposes.
GSIS leased some of its real properties, the property must be subject The corporation sole is also exempt from real property tax und.er Section
to the real property tax, such tax to be paid by the lessee thereof. 234(b) of the LGC.

Bar Question (2000) Civil remedies for the collection of tax


Article VI, Section 28(3) of the 1987 Philippine Constitution Bar Question (1997)
provides that charitable institutions, churches and parsonages or
Give the remedies available to local government units to enforce
convents appurtenant thereto, mosques, non-profit cemeteries and all
the collection oftaxes, fees, and charges?
lands, buildings and improvements actually, directly and exclusively
used for religious, charitable or educational purposes shall be exempt
Suggested answer:
from taxation.
The remedies for collection may be categorized into (a) the
a) To what kind of tax does this exemption apply? extrajudicial remedy of leuy, and (b) judicial action (Sec. 256, LGC).
Leuy may be repeated if necessary until the full amount due, including
Suggested answer: aII expenses, is collected (5ec.265, LGC). The local gouernment unit
This exemption applies only to property ta^tc,es. What is exempted concerned may enforce the collection of the basic real property tot
is not the Institution itself but the lands, buildings and improuements or any other tq.x leuied under this Title by ciuil action in any court
actually, directly and exclusiuely used for religious, charitable and of competent jurisdiction. The ciuil qction shall be filed by the locul
educational purposes (Commissioncr of Internal Reuenue o. Court treasurer within the period prescribed in Section 270 of this Code (Sec.
of Appeals and.YMCA, GR. No 724043, October 14, L998). 266, LGC).
Moreouer, the basic real property tax and any other tax leuied
b) Is proofofactual use necessary for tax exemption purposes under this Title constitute a lien on the property subject to tax,
under the Constitution? superior to all liens, charges or encuntbrances in fauor of any
person, irrespectiue of the owner or possessor thereof, enforceable
Suggested answer:
by administratiue or judicial action, and may only be extinguished
Yes, because tax exemptions are strictly construed against the upon payment of the tax and the relqted interests and expenses (Sec.
taxpayer. There must be euidence to show that the taxpayer has 257, LGC).
complied with the requirements for exemption. Furthermore, real
796 llt,;vrr,:wr,:rr oru 'l'Axn lrrr'r
'"";i,:;1,'ill';lll,:i;i:""" 7e7

Bar Question (1999) Ilegion.ol,'l'rio,l. (kru.rl,s hote.iurisdicti,on ouer cl'ses inuoluing the
ent'brceme.nt and t:<tllection of'real property taxes. The conflict in the
A Co., a Philippine corporation, is the owner of machinery, prouisions on jurisdiction between P.D.242 (Prescribing the procedure
equipment and fixtures located at its plant in Muntinlupa City. The
City Assessor characterized all these properties as real properties for administratiue settlement or adjudication of disputes, claims
and controuersies between or among gouernm.ent offices, agencies
subject to the real property tax. A Co. appealed the matter to the and instrumentalities, including gouernment-owrued or controlled
Muntinlupa Board of Assessment Appeals. The Board ruled in corporations) and P.D. 464 (Real Property Tax Code) should be
favor of the City, in accordance with R.A. 1125 (An Act creating the resolued in fauor of the latter law, since it is a special law and of later
Court of Tax Appeals). A Co. brought a petition for review before enq,ctment (National Pouser Corporation a. Court of Appeals,
the CTA to appeal the decision of the City Board of Assessment supra).
Appeals.
Is the Petition for Review proper? Explain. Bar Question (1992)
Ms. Edna Dinoso is the registered owner of a residential lot with
Suggested answer:
a two-storey house situated in Naga City. The lot with an area of 328
No. The CTA is deuoid ofjurisdiction to entertain appeals from sq. meters is described and covered by TCT No. 4739 of the Registry
the decision of the City Board of Assessment Appeals. Said decision of Deeds of Naga City.
is insteq.d appealable to the Central Board of Assessment Appeals,
which under the Local Gouernment Code, has appellate jurisdiction On September \2, 1977, a 115 sq. meter portion of Edna's
ouer decisions of Local Board of Assessment Appeals (Caltex Phils.
property was expropriated by the Republic of the Philippines for the
a. Central Board. of Assessment Appeals, GR. No. L-50466, May
sum of F6,?00.00 representing the assessed value of the aforesaid
37,7982). portion. This amount was deposited by the Government in Edna's
account.
The collection of the tax may be enforced through either or both
For almost ten (10) years, Edna failed to pay her real estate taxes
the aboue administratiue and judicial remedies, alternatiuely or
on the same property. Thus, on November 5, 1977 her property was
simultu.neously, and the use or non-use of one remedy shull not be
a bar against an auailment of the other (Sec. 258, LGC). A formal sold at public auction by the City Treasurer of Naga City to satisfy
her real estate tax delinquencies amounting to F5,800.00. The highest
demand for the payment of the delinquent tctx is not required for the
initiation of either remedy. It is enough that a notice of delinquency bidder for the property was Angel Chua.
is caused to be posted and published as required under Section 254 Edna was not present at the public auction although she later
of the Code. admitted having received the notice of hearing for the petition for
The remedy of leuy can be pursued by putting up for sale only entry of a new certificate of title by Angel Chua (Both the auction
sale and the final bill of sale were annotated at the back of TCT No.
the req,l property subject to tax (i.e., the delinquent property upon
4739by the Register of Deeds.)
which the tox lien uttaches), regardless of the ou)ner or possessor
thereof. The personal liability for the tux delinquency, upon the other On March 15,1979, Edna filed a complaint to annul the auction
hand, is generally on whoeuer is the owner of the real property at the sale which was denied by the CFI Judge of Naga City. In fact, the
time the tax accrues. Where, howeuer, the tax liability is imposed on CFI Judge ordered the TCT #4739 ofEdna be cancelled and that a
the benefi.cial use of the real property, such as those owned by leased new title be issued to Angel Chua.
to priuate persons by the gouernment (Sec. 234, LGC), or when the
assessment is made on the basis of the actucr.I use thereof (Sec. 199
On appeal, the Court of Appeals affrrmed the CFI decision in
toto.
and 217, LGC), the personal liability is on any person who has such
benefi.cial or actual use at the time of the accrual of the tax (Nueaa Edna then elevated the case to the Supreme Court citing several
Ecija u.Imperial Mining Co., 778 SCRA 632). grave errors of law, among which are:
,se
798 Itr';vr r,:wt,:rr oN'l'Axn'r'toN
''",1i;1,'iill;,lllli;1."""
1) That her tax delinquencies (involving F5,800.00) for non- huue irrtpu,i,n'<l llu: substantiul rights of'the taxpayer. Inthe
payment of real estate taxes were offset by the sum of cq.se at bar, the plaintiff receiued q' notice of hearing for the
F6,700.00 which the government of the Philippines owed petition lbr entry of a new certifi,cate of title during which
her. She claims that her tax delinquencies have been she could haue questioned any irregularity in the conduct
extinguished by legal compensation; ofthe sale.
2) That the price of F5,800.00 paid by Angel Chua was grossly
inadequate and that because of its inadequacy, the same is Power to subpoena does not include contempt power
tantamount to deprivation of property without due process Since the existence of the contempt power in conjunction with the
of law; subpoena power in any government body inevitably poses a potential
3) That the public auction made on her property is void. derogation ofindividual rights, the law cannot be liberally construed
to have impliedly granted such powers (Negros Oriental II Electric
Discuss the merits of the appeal. Cooperatiue a. Sang guniang Panglungsod' ng Dumaguete, 7 5 5
scaA 421 [1987]).
Suggested answer:
1) The decision of the Court of Appeals affirming the CFI Prescriptive periods
decision must be affirmed. The basic real property tax and any other tax levied shall be
On the procedural aspect, it has not been shown as collected within five (5) years from the date they become due. No
required under the Reol Property Tax Code that plaintiff action for the collection of the tax, whether administrative or judicial,
has paid the amount for which the real property has been shall be instituted after the expiration ofsuch period. In case offraud
sold plus interest. or intent to evade payment of the tax, such action may be instituted
for the collection thereofwithin 10 years from the discovery ofsuch
On the claim of extinction of tax liability by legal fraud or intent to evade payment.
compensation, there is jurisprudence to the effect that the
doctrine of equitable recoupnxent does not apply in this The period of prescription within which to collect shall be
jurisdiction. Assuming it does, the facts of the case bear suspended for the time during which:
out that the Gouernment does not owe the plaintiff any 1. The local treasurer is legally prevented from collecting the
q,mount. tax;
2) On the claim that the price for the property was grossly 2. The owner of the property or the person having legal
inadequate, the ReaI Property Tax Code specifically interest therein requests for reinvestigation and executes a
mentions that the sale of real property at public auctions is waiver in writing before the expiration of the period within
"to satisfy all the taxes and penq.lties due and cost of sale" which to collect; and
(Sec. 73, LGC). Thus, the selling price is ba.sed not on the
fair marhet ualue of the property sold at public auction but 3. The owner of the property or the person having legal
the amount ofreal property taxes due thereon. In any case, interest therein is out of the country or otherwise cannot,
the delinquent taxpayer is giuen one year from the date of be located (9ec.270, LGC).
registration of the sale within which to redeem the property
by paying the tqx due plus costs q,nd interest. Bar Question (2011)
3) On the claim that the public ouction mude on the property is Ka Tato owns a parcel of land in Batangas declared {irr real
uoid, the Req,l Property Tax Code prouides (Sec. 83,2nd par., property taxation as agricultural. In 1990, he used the land fbr a
LGC) that q. court shall not declared a sale inuqlid due to poultry feed processing plant but continued to declare the property
irregularities in the proceedings unless, such irregularities as agticultural. In March 2011, the local tax assessor discovered Ka
rioI
800 llr,:vrr'rwr,rrr r rN'l',rrn't'toN
"";ll;1,'i:ll;l).Lli;1."""
Tato's change of use of his land and inlbrmed the local treasurer who adjustment depending upon thc final outcome of the appeal (Sec.231,
demanded payment of deficiency real property taxes from 1990 to LGC).
2011. Has the action prescribed?
Exhaustion of Administrative Remedies
Suggested answer:
Before seeking the intention of the courts, it is a pre-condition
No. The deficiency real property taxes for the period 1990 up to that petitioner must first avail of all the means afforded by the
2011 may still be collected within 10 years from March 2077 counting administrative processes. Thus, the denial of request for exemption
bachward. from real property tax by assessor may be appealed to the LBAA
as it concerns classification of property. Parties cannot bypass the
Taxpayer's Remedies authority of the concerned administrative agencies and directly seek
redress from the courts even on the pretext ofraising a supposedly
Where an assessment is illegal or void, the remedy of the
pure question of law without violating the doctrine of administrative
taxpayer who has already paid the tax under protest is to sue for
remedies.
refund in the competent CFI. Where the assessment is merely
erroneous, his recourse is to file an appeal in the Provincial Board of However, judicial review may be resorted to via an action for
Assessment Appeals within 60 days from receipt of the assessment. refund or reimbursement without exhausting administrative remedies
An assessment is illegal and void, when the assessor has no power to before the LBAA, where the plaintiffalleges that he is not the owner
act at all. It is erroneous when the assessor has the power but errs in or user ofthe property assessed. This is because the issue is not as
the exercise of that power (Victorias Milling Co. u. Court of Tar to the amount of tax assessed, but the imposition of the tax assessed
Appeals, ibid.). and who should shoulder the burden of the tax (Estate of Concord'ia
Any owner or person having legal interest in the property, who T.Limu.City of Manila,l82 SCRA483 t199ol). As this provision
is not satisfied with the action of the provincial, city or municipal was adopted from Section 30 of the RPTC, the case is still good law.
assessor may, within sixty days from the date of receipt by him of the
written notice of assessment, appeal to the local Board ofAssessment No Motion for Reconsideration is Allowed Before the
Appeals ofthe province or city concerned by a petition under oath, Assessor's Office
together with copies of the tax declarations and such affidavits
Under Section 22 of t}re Real Property Tax Code (RPTC), there
or documents in support of the appeal (Sec. 226, LGC; Chaaez a.
are only three (3) occasions when assessments of real properties may
Ongpin, 186 SCRA 337).The failure to appeal within the statutory
be made by the local assessor: (1) upon discovery ofthe real property;
period renders the assessment final and unappealable (Victorias
(2) during the general revision ofproperty assessments as provided
Milling Co. a. Court of Tax Appeals, 22 SCEA 1OO8). in Section 21 of the RPTC; and (3) at anytime when requested by the
The Board ofAssessment Appeals shall decide the appeal within person in whose name the property is declared. After an assessment
120 days from receipt of the appeal. The decision of the Board of has been conducted, the assessor shall within 30 days issue a written
Assessment Appeals, which must be based on substantial evidence notice of such new or revised assessment to the person in whose name
presented at the hearing or at least contained in the records may be the property is declared. If the owner is not satisfied with the action
appealed within 30 days from receipt thereofby the taxpayer to the of the assessor in the assessment of his property, he may appeal with
Central Board of Assessment Appeals, whose decision shall be final 60 days from receipt of the notice of assessment to the Local Board
and executory (5ec.229, LGC). of Assessment Appeals.
Appeal on assessments of real property made under the Under Section 226 of R.A. 7160, the last action of the local
provisions of this Code shall, in no case, suspend the collection of assessor on a particular assessment shall be the notice of assessment;
the corresponding realty taxes on the property involved as assessed action which gives the owner of the property the right
it is this last
by the provincial or city assessor, without prejudice to subsequent to appeal to the LBAA. The procedure does not permit the property
802 li,t,lvt t,:wr,;rr oru'l',rx,,t'r'row I r x:nt, ( lovt,:ttNrrtt,:N't ( )otrt,; 8():I
lhrrrl l'rotxrrl,y'lirx

owner the remedy of filing a motion for reconsideration befbre the Caltex cases. When the issue, however, is one that centers on who
local assessor. To allow this procedure would invite corruption in the should bear the burden of the tax between two private parties, the
system ofappraisal and assessment. It conveniently courts a graft- regular courts, not the assessment boards, have jurisdiction over
prone situation where values of real property may be initially set the case (Testate Estate of Concord.ia T. Lim u. City of Manila,
unreasonably high, and then subsequently reduced upon the request 182 SCRA482).
of the property owner ( Callanta a. Office of Ombudsman, JanuanSr
30, 7998, cited. in FELS Energy u. Prov, ofBatangas,2007). Bar Question (2006)
The special civil action of certiorari would be proper to question
Quezon City published on January 30, 2006 a list of delinquent
the decision of the Central Board of Assessment Appeals. The real property taxpayers in 2 newspapers ofgeneral circulation and
recognized rule is that the underlying power in courts to scrutinize posted this in the main lobby of the City Hall. The notice requires all
the acts of administrative agencies exercising quasi-judicial power owners ofreal properties in the list to pay the real property tax due
on questions of law and jurisdiction, even where no review is given within 30 days from the date of publication; otherwise, the properties
by statute, exists. When R.A. 1125 created the Tax Court in 1954, listed shall be sold at public auction.
there was as yet no Central Board of Assessment Appeals. Section
7(3) of R.A. 1125, in providing that the Tax Court had jurisdiction to Joachin is one of those named in the list. He purchased a real
review by appeal decisions ofprovincial or city boards ofassessment property in 1996 but failed to register the document of sale with the
appeals had in mind the local boards of assessment appeals, but no the Register ofDeeds and secure a new real property tax declaration in
Central Board ofAssessmentAppeals, which under the Real Property his name. He alleged that the auction sale of his property is void for
Tax Code has appellatejurisdiction over decisions ofsaid local boards lack of due process considering that the City Treasurer did not send
of assessment appeals and is, therefore, in the same category as the him personal notice. For his part, the City Treasurer maintains that
Tax Court (Caltex u. Central Board of Assessmcnt Appeals, LL4 the publication and posting of notice are sufficient compliance with
SCRA296). the requirements of the law.

Certiorari was properly availed of in this case. The rule is that 1. If you were the judge, how will you resolve this issue?
as to administrative agencies exercising quasi-judicial power there 2. Assuming Joachin is a registered owner, will your answer
is an underlying power in the courts to scrutinize the acts of such be the same?
agencies on questions oflaw andjurisdiction even though no right of
review is given by the statute (73 CJS 506).The purpose ofiudicial Suggested answer:
review is to keep the administrative agency within its jurisdiction
and protect substantial rights ofparties affected by its decisions (73 1. I will resolue the issue in fauor of the City Treasurer. For
CJS 507, Sec. 165). The review is a part ofthe system ofchecks and purposes of the real property tq.tc, the registered outner of the
balances which is a limitation on the separation of powers and which property is deemed the taxpayer. Hence, only the registered
forestalls arbitrary and unjust adjudications (Meralco Securities ou)ner is entitled to a notice of tax delinquency q.nd other
Ind.ustrial Corporation a. CBAA, supra). proceedings relatiue to a tq.x sq.le (Talusan' u. Tayag
and. Hernand.ez,356 SCRA 263 t20011). Not being the
The legislative intent on the Local Government Code appears to registered owner of the property, Joachin cannot claim to
be that any issue relating to real property taxation that a taxpayer haue been depriued of such notice. In fact, he was not entitled
is minded to raise against the government, whether it be a question to it. He brought the misfortune upon himself, becq.use he
on the validity of the assessment or of the imposition and collection did not register the Deed of Sale with the Register of Deeds
of the tax, should be resolved via the administrative route until upon its execution or secure a tax declaration in his name.
it may ultimately reach by way of appeal, the Central Board of He did not tahe the necessary steps to protect ond legitimize
Assessment Appeals. From the latter's decision, judicial recourse his interest. The auction sale of his property is, therefore,
should still be appropriate following the ruling in the Meralco and ualid.
804 llnvrr,:wr,rrr oru 'l'nxn'r'ror.r I r x 'n r, ( iov t,:ttl l,t t,:Nt' ( lt tt tt,l ti0l-r
Itcrtl Itroptrrt.y'lltx

2. No, my answer will not be the same. The law requires a notice B. <tf merit. No public hearing is required
The ltnttest is tleuoirl
of the a.uction s&le must be properly sent to the registered befbre the enactment of'a local tq,x ordinance leuying the
owner. A mere publication of the notice of delinquency bq.sic reul property tax (Art. 234, LGC Regulations).
would not suffice, considering that the procedure in tax in the protest prouided that sufficient
Yes, there is merit
sales is in personam. An auction sale, although preceded by
proof could be introduced for the non-obseruance of public
aduertisement and publication but without q.n qctual notice
hearing. By implication, the Supreme Court recognized that
to the delinquent taxpayer, is uoid (Tan a. Bantegui,473
public hearings are required to be conducted prior to the
SCRA 663 [2005]; Estate of Merced.es Jacob a. CA,283
enactment of an ordinance imposing real property toxes. Although
scRA 474 t19971). by the highest tribunal that presumption of
it was concluded
ualidity of a tq,lc ordinance c&n not be ouercome by bare assertions
Bar Question (2002) if procedural defects on its enactment, it would seern that if the
A. Aside from the basic real estate tax, give three (3) other taxpayer had presented euidence to support the allegation that no
taxes which may be imposed by provincial and city pubtic hearing was conducted, the Court should haue ruled that
governments as well as by municipalities in the Metro the tax ordinance is inualid (Figuenes u. Court of Appeals,
Manila Area. G.R. No. L-779772, March 25, 1999).

B. An Ordinance was passed by the Provincial Board of a


Bar Question (1991)
Province in the North, increasing the rate of basic real
property tax fromO.006Vo to IVo of t}ne assessed value of the The Municipality of Malolos passed an ordinance imposing a tax
real property effective January 1, 2000. Residents ofthe on any sale or transfer of real property located within the municipality
municipalities of the said province protested the Ordinance at a rate of one-fourth(Il4) of one percent (IVo) of the total consider-
on the ground that no public hearing was conducted and, ation of such transaction. X sold a parcel of land in Malolos, which he
therefore, any increase in the rate ofreal property tax is inherited from his deceased parents and refused to pay the aforesaid
void. tax. He instead filed appropriate case asking that the ordinance be
declared null and void since such a tax can only be collected by the
Is there merit in the protest? Explain your answer.
national government, as in fact he has paid BIR the required capital
gains tax. The Municipality countered that under the Constitution,
Suggested answer:
each local government is vested with the power to create its own
A. The following real property tq.xes aside from the basic sources ofrevenue and to ievy taxes, and it imposed the subject tax in
real property ton may be imposed by prouincial and city the exercise ofsaid constitutional authority. Resolve the controversy.
gouernments as well as by municipalities in the Metro
Manila area: Suggested ansvver:
1. Additional leuy on. real property for the Special The ordinance passed by the Municipality of Malolos imposing
Education Furud (9ec.235, LGC): a tax on the sale or transfer of real property is uoid. The Local TQx
Code only allows prouinces and cities to impose a tax oru the transfer
2. Additional ad ualorem tux on idle lands (Sec. 236, of ownersltip of real property (Secs. 7 and 23, LGC). Municipalities
LGC); and are prohibited from imposing suid tax that prouinces are specifically
3. Special leuy (Sec. 240, LGC). authorized to leuy (Sec. 22, LGC).
While it is true thqt the Constitution has giuen broad powers of
fNote: Other taxes may comprise the enumeration
because many other laws haue cr.uthorized them to be tqxatioru to local gouernment units, this delegation, howeuer, is subject
imposed by LGUs.J to such limitations &s nxay be prouided by law (Sec. 5. Art. X, 1987
Constitution)
806 Itt,;vt t,;wr,:rr oN'l'AXA't'toN
''";il;J,',il::il:.ll');1,"",,' u07

Payment of tax under protest After asscssrncn[ lly the City Assessor, the City Treasurer of
No protest shall be entertained unless the tax is first paid. Manila required X to pay the real estate taxes due on the lot for the
When a taxpayer desires for any reason to pay his tax under years 1977 and 1978. X paid under protest. On September 5, 1979, X
protest, he shall indicate the amount or portion thereof which he is sent a demand letter to the City Treasurer for refund. The demand
contesting and such protest shall be annotated on the tax receipts was refused.
by writing thereon the word "paid under protest." The protest shall X then filed with the Regional Trial Court a complaint against
be confirmed in writing, with a statement of the ground therefor, the City of Manila for a "sum of money and./or recovery of real estate
within 30 days. The written protest shall be filed with the provincial, taxes paid under protest." The City questioned the jurisdiction of the
city or municipal treasurers within the Metropolitan Manila Area, Court. Decide.
who shall decide the protest within sixty (60) days from the receipt
ofthe protest. Suggested answer:
In case of payments under protest, the amount or portion of the Section 62 of the Real Property Tax Code prouides thq.t:
tax contested shall be held in trust by the treasurer and the difference *$ec.62. Payment under protest.
shall be treated as revenue. -
*a) When q. taxpayer desires for any reo.son to pay his tq.xc under
In the event that the protest is finally decided in favor ofthe
protestant, the amount or portion of the tax protested against may protest, he shall indicate the amount or portion thereof
either be refunded to the protestant or applied as tax credit to any he is contestirug and such protest shall be q.nnotated on
other existing or future tax liability of the said protestant. If the the tax receipts by writing thereon the words'paid under
protest is denied or upon the lapse of 60 days without the protest protest.'Verbal protests shall be confirmed in writing, with
being finally decided, the taxpayer may avail of the remedies (i.e., a statement of the ground therefor within thirty days. The
appeal may be taken to the Board of Assessment Appeals) (Sec, 252, tar may be paid under protest, and in such case it shall be
LGC). the duty of the Prouincial, City or Municipal Treasurers to
q.nnotate the ground or grounds therefor on the receipt.
Protest is not a requirement in order that a taxpayer, who
paid under a mistaken belief that it is required by law, may claim "b) In payments under protest, the amount or portion
cctse of
for refund. Section 54 of C.A. 470 does not apply to petitioner which of the tax contested shall be held in trust by the treasurer
could conceivably not have been expected to protest a payment it und the dffirence shall be treated, as reuenue.
honestly believed to be due. The same refers only to the case where the "c) In the euent that the protest is finally decided in fauor ofthe
taxpayer, despite his knowledge of the erroneous or illegal assessment, gouernment the arnount or portion of the tax held in trust
still pays and fails to make the proper protest, for in such case, he by the treasurer shall accrue to the ret)enue account, but if
should manifest an unwillingness to pay, and failing so, the taxpayer the protest shall be decided finally in fauor ofthe protestant,
is deemed to have waived his right to claim a refund (Ramie Textiles the amount or portion of the tax protested or applied as tax
u. Mathay,89 SCRA 586). credit to any other existing or future tox liability ofthe said
protestant."
Bar Question (1993)
If
the owner is not satisfied with the action of the
On February 13, 1969, X, obtained a loan of F800,000.00 from prouincial or city assessors in the assessment of his property,
the GSIS secured by the mortgage of a parcel of land including its he may fi.le an. appeal to the Board of Assessrnent Appeals of
improvements. X failed to pay the loan. The lot was foreclosed and the prouince on city, within sixty (60) days from the receipt
sold at public auction to the GSIS as the highest bidder. X failed to of the decision (Sec. 30, RPTC).
redeem the lot and the GSIS consolidated its title to the lot in 1972.
In 1979, however, the GSIS allowed X to repurchase the lot. If the owner is not satisft.ed with the decision of the
Board of Assessment Appeals, he may appeal the said
808 ltr,:vrr,rwr,rrr rN 'l'nxtlror.r

decision to the Central Board of Assessment Appeals within


thirty (30) days after the receipt of the decision (Secs. 34
and 36, RPTC).
As enunciq,ted in the case of Victorias Milling Co. u. PART VII
Court ofTax Appeals,22 SCRA 1008 (1968):
"It is settled in our jurisdiction that where an TARIFF AND CUSTOMS CODE
assessrnent is illegal and uoid, the remedy of a taxpayer,
who has already paid the realty tctx under protest, is to CIIAPTER }OO{N
sue or refund in the competent court of first instonce. On
FU NDAM ENTAL PRI NCIPLES
the other hand, where the assessment is rnerely erroneeuE,
his recourse is to fi.Ie an appeal in the Prouincial Board
of Assessment Appeals within 60 days from receipt of the
d,ssessm,ent," Customs Duties
In X is to
uiew of the foregoing, the legal recourse of "Customs d.uties" is the name given to taxes on the importati<ln
appeal the decision of the City Tleasurer to the Board of and exportation of commodities, the tariff or tax assessed uporr
Assessrnent appeal, and not to file an actionfor sum of monny merchandise imported from, or exported to, a foreign country (Nestld
and / or recouery of real estq.te taees. Herrce, the Regional Tlial Phils. o. Court ofAppeals, supra).
Court has jurisdiction ouer the complaint filed by X. Customs duty attaches when goods are imported, or when
they are brought within customs jurisdiction with intention t<r
Bar Question (2004) unlade, the general principle of law being that duty attaches trr
RC is a law-abiding citizen who pays his real estate taxes imports immediately on their arrival within the limits of our ports,
promptly. Due to a series of typhoons and adverse economic conditions, regardless of any destruction that may occur after arrival (Unimex
an ordinance is passed by MM City, granting a 50Vo discount for MicroElectronics a. Republic of the Phils., CTA, Noaember 74,
payment of unpaid real estate taxes for the preceding year and the 20L2).
condonation of all penalties or fines resulting from the late payment.
Arguing that the ordinance rewards delinquent taxpayers and
lmported Articles Subject to DutY
discriminates against prompt ones, RC demands that he be refunded All articles, when imported from any foreign country into the
an amount equivalent to one-half of the real estate taxes he paid. The Philippines, shall be subject to duty upon each importation, even
municipal attorney rendered an opinion that RC cannot be reimbursed though previously exported from the Philippines, except as otherwise
because the ordinance did not provide for such reimbursement. RC specifically provided for in this Code or in other laws(Sec. 101, TCC).
files suit to declare the ordinance void on the gtound that it is class
legislation. Will his suit prosper? Explain your answer briefly. Prohibited lmportations
Suggested answer: The importation into the Philippines of the following articles is
The suit will not prosper. The remission or condonation of taxes
prohibited:
due and payable to the exclusion oftares already collected does not a. Dynamite, gunpowder, ammunitions and otherexplosives,
constitute unfair discrimination. Each set of taees is a class by itself firearm and weapons ofwar, and detached parts thereof,
and the lq.w would be open to attack as clqss legislation only if all except when authorized by law.
taxpayers belonging to one class were not treated alike (Juna Luna
Subd.iaision, Inc. a. Sarmiento,9T Phil.371 t19521).
809
810 It t.:vt t,:wt,;tr oru 'l'nxn'r'ror'r r| I
l,ilii:il,llil,l;ll.';t,:ll,i;,1,'l I

b. Written orprinted arbicle in any form containing any matter j. Opium pipes and parts thereof, of whatever material.
advocating or inciting treason, rebellion, insurrection
or sedition against the Government of the Philippines, k. All other articles the importation of which is prohibited by
of forcible resistance to any law of the Philippines, or law (Sec. 102, TCC).
containing any threat to take the life of or inflict bodily
harm upon any person in the Philippines. Conditional$t Free Importations
Written or printed articles, photographs, engravings, The following articles shall be exempt from the payment of
lithographs, objects, paintings, drawings or other imporb duties upon compliance with the formalities prescribed in, or
representation of an obscene or immoral character. with the regulations which shall be promulgated by the Commissioner
of Customs with the approval of the department head:
d. Articles, instruments, drugs and substances designed,
intended or adapted for preventing human conception a. Animals andplantsforscientific, experimental, propagation,
or producing unlawful abortion, or any printed matter botanical, breeding, zoological and national def'cnse
which advertises or describes or gives directly or indirectly purposes: Prouided, That no live trees, shoots, plants
information where, how or by whom human conception is and moss, and bulbs, tubers and seeds for propagation
prevented or unlawful abortion produced. purposes may be imported under this section, except b.y
order of the Government of the Philippines or other dul.y
Roulette wheels, gambling outfits, loaded dice, marked authorized institutions: Prouided, further, That the lrec
cards, machines, apparatus or mechanical devices used in entry of animals for breeding purposes shall be restricted
gambling, or in the distribution of money, cigars, cigarettes to animals of a recognized breed, duly registered in the btxrk
or other articles when such distribution is dependent upon of record established for that breed: andProuided, finally,
chance, including jackpot and pinball machines or similar That certificate of such record, and pedigree of such animal
contrivances. duly authenticated by the proper custodian ofsuch book of
Lottery and sweepstakes tickets except those authorized record, shall be produced and submitted to the Collector of
bythe Philippine Government, advertisements thereof and Customs, together with affidavit of the owner or importer,
lists of drawings therein. that such animal is the identical animal described in said
certifi.cate of record and pedigree.
o
b. Any article manufactured in whole or in part of gold silver
or other precious metal, or alloys thereof, the stamps b. Aquatic products (e9., fish, crustaceans, mollusks, marine
brands or marks ofwhich do not indicate the actual fineness animals, seaweed, fish oil, roe), including preparations or
or quality of said metals or alloys. manufactures thereof, caught or gathered by vessels of
Philippine registry: Prouided, That they are imported in
h. Any adulterated or misbranded article of food or any such vessels or in crafts attached thereto: and Prouided,
adulterated or misbranded drug in violation of the further, That they have not been landed in any foreign
provisions of the "Food and Drugs Act." territory or, ifso landed, they have been landed solely for
1. Marihuana, opium poppies, coca leaves, or any other transshipment without having been advanced in condition.
narcotics or synthetic drugs which are or may hereafter c. Samples of the kind, in such quantity and of such
be declared habit forming by the President of the dimensions or construction as to render them unsaleable
Philippines, any compound, manufactured salt, derivative, or of no appreciable commercial value, models not adapted
or preparation thereof, except when imported by the for practical use and samples of medicine properly marked
Government of the Philippines or any person duly "physicians' samples not for sale."
authorized by the Collector of Internal Revenue, for
medicinal purposes only. Commercial samples, except those that are not readily
and easily identifiable (e.g., precious and semi-precious
812 Itr,:vr r,:wt,:H ol'l'nxn'r,l l.r 'l'n ttr t,'t. nn t r ( lt tilr rvs ( lt lt rt,: ri l3
llrrrrtlrrrrrcrrt,rrl l'ri ttcipkrs

stones, cut or uncut, and jewelry set with precious or semi- the saf'ety seaworthiness or airworthiness of the vessel or
precious stones), the value of any single importation of aircraft to enable her to reach her port ofdestination.
which does not exceed ten thousand pesos, upon the giving
of a bond in an amount equal to one and one-half times
C
b' Articles brought into the Philippines for repair, processing
the ascertained duties, taxes and other charges thereon, or reconditioning to be re-exported upon completion of
conditioned for the exportation of said samples within six the repair, processing or reconditioning: Prouided, That
months from the date of the acceptance of the import entry, the Collector of Customs may, in his discretion, require
or in default thereof, the payment of the corresponding the giving of a bond in an amount equal to 1 1/2 times
duties, taxes and other charges. Ifthe value ofany single the ascertained duties, taxes and other charges thereon,
consignment of such commercial samples exceeds ten conditioned for the exportation thereof or payment of the
thousand pesos, the importer thereof may select any corresponding duties, taxes and other charges within six
(6) months from the date of acceptance ofthe import entry.
portion of same not exceeding in value ten thousand pesos
for entry under the provisions ofthis subsection, and the h. Medals, badges, cups and other small articles bestowed as
excess of the consignment may be entered in bond, or for trophies or prizes, or those received or accepted as honorary
consumption, as the importer may elect. distinctions.
d. Articles, including binnacles, propellers, and the like, the l. Wearing apparel and household effects, including those
character of which, as imported, prevents their use for articles provided for under subsections "j" and "k," and
other purposes than the construction, equipment, or repair belonging to residents of the Philippines returning from
of vessels and aircraft, and life-preser-\rers and life buoys, abroad, which were exported from the Philippines by
related equipment and parts and accessories thereof, which such returning residents upon their departure therefrom
are necessary for the take-offand landing and for the safe or during their absence abroad, upon the identity of
navigation of vessels and aircraft. such articles being established to the satisfaction of the
e. Equipment for use in the salvage of vessels or aircraft, Collector of Customs; personal and household effects
upon identification and the giving of a bond in an amount brought into the Philippines by returning residents, the
equal to one and one-half times the ascertained duties, export value ofwhich does not exceed five hundred pesos,
taxes and other charges thereon, conditioned for the solely for personal or household use but not imported for
exportation thereof or payment of the corresponding the account of any other person nor intended for barter,
duties, taxes and other charges within six months from sale or hire: Prouided, That such returning residents
the date of acceptance of the import entry: Provided, have not received the benefit ofany exemption hereunder
That the Collector of Customs may extend the time for within one hundred and eighty days from and after the
exportation or payment ofduties, taxes and other charges date of the last exemption granted: andProuided, further,
for a term not exceeding six months from the expiration That in the event the total export value of the imported
ofthe original period. article or articles exceeds the amount of five hundred
pesos, such article or articles shall be subject to duty only
f. Cost of repairs made in foreign countries upon vessels on the amount in excess of five hundred pesos; articles of
or aircraft documented, registered or licensed in the the same kind and class purchased in foreign countries
Philippines, upon proof satisfactory to the Collector of by residents of the Philippines during their absence
Customs (1) that adequate facilities for such repairs are abroad and accompanying them upon their return to the
not afforded in the Philippines, or (2) that such vessels or Philippines, or arriving within a reasonable time which
aircraft, while in the regular course of her voyage or flight in no case shall exceed ninety (90) days before or after the
was compelled by stress of weather or other casualty to put owner's return, upon proof satisfactory to the Collector of
into a foreign port to make such repairs in order to secure Customs that same have been in their use abroad for more
814 Itt,:vt t,:wt,:tr on'l'rtxA't'toN 'l'ntril,t, Atrtr ( itts'trrMs ( loDt,t 815
l,'rrrxlrrrrrctrl,rr I I'rittr:ipkrc

than one year; articles in any single shipmenl, cxrnsigrrcrl I. Professional instruments and implements, tools of trade,
to any single person when the total export value of'such occupation or employment, wearing apparel, domestic
shipment does not exceed one hundred pesos: Pnnithrl, animals, and personal and household effects, including
finally, That when the export value exceeds the amount those ofthe kind and class provided for under subsections
of one hundred pesos, only the amount in excess of one 'f " and "k" and belonging to persons coming to settle in the
hundred pesos shall be subject to duty. Philippines, in quantities and of the class suitable to the
profession, rank or position of the person importing them,
J. Wearing apparel, articles of personal adornment, toilet
articles, portable tolls and instruments, theatrical for their own use and not for barter or sale, accompanying
costumes, and similar personal effects, accompanying such persons, or arriving within a reasonable time, in the
travelers or tourists in their baggage or arriving within discretion of the Collector of Customs, before or after the
a reasonable time, in the discretion of the Collector of arrival oftheir owners, upon the production ofevidence
Customs, before or after the owners, in use of and necessary
satisfactory to the Collector of Customs that such persons
and appropriate for the wear or use of such persons are actually coming to settle in the Philippines, that the
according to their profession or position for the immediate articles are brought from their former place of abode, that
purposes of their journey and their present comfort and change of residence is bona fide, and that the privilege of
free entry under this subsection has never been previously
convenience: Prouided, That this exemption shall not be
held to apply to articles intended for other persons or for granted to them: Prouided, That neither merchandise
barter, sale or hire: Prouided, further, That the Collector of any kind, nor machinery or other articles for use in
of Customs may, in his discretion, require a bond in an manufacture, shall be classified under this subsection.
amount equal to one and one-half times the ascertained m, Animals, vehicles, portable theaters, circus and theatrical
duties, taxes and other charges upon articles classified equipment, including musical instruments, sceneries,
under this subsection, conditioned for the exportation panoramas, properties, saddlery, wax figures and similar
thereof or payment of the corresponding duties, taxes objects for public entertainment, and other articles
and other charges, within six months from the date of for display in public expositions, or for exhibition or
acceptance of the import entry: and Prouided, finally, competition for prizes, and devices for projecting pictures
That the Collector of Customs may extend the time for and parts and appurtenances therefor, upon identification
exportation or payment ofduties, taxes and other charges and the giving of a bond in an amount equal to one and
for a term not exceeding six months from the expiration of one-half times the ascertained duties, taxes and other
the original period. charges thereon, conditioned for exportation thereof or
payment of the corresponding duties, taxes and other
k. Vehicles, horses, harness, bed and table linen, table serwice,
charges within six months from the date of acceptance
furniture, musical instruments and personal effects oflike
character, owned and imported by travelers or tourists of the import entry: Prouided, That the Collector of
Customs may extend the time for exportation or payment
for their convenience and comfort, upon identification
and the giving of a bond in an amount equal to one and
ofduties, taxes and other charges for a term not exceeding
one-half times the ascertained duties, taxes and other six months from the expiration of the original period;
charges thereon, conditioned for the exportation thereof
and technical and scientific films when imported by
or payment ofthe corresponding duties, taxes and other technical, cultural and scientific institutions, and not
charges within six months from the date of acceptance of
to be exhibited for profit: Prouided, That if any of the
said films is exhibited for profit, the proceeds therefrom
the import entry: Prouided, That the Collector of Customs
may extend the time for exportation or payment of duties,
shall be subject to confiscation, in addition to the penalty
provided under section three thousand six hundred and
taxes and other charges for a term not exceeding six months
from the expiration ofthe original period. ten of this Code.
816 ll,r,:vr r,rwr,rrr oru'l'nxn't'ror.r
'l'ntttt,'t. nntr ( ittrt'trrlts ( iotrt,t nl7
llrrrrrlrrrrrltrl,rrl l'ri ttciplcs

n. Articles (e.9., photographic, sound rccording, olectricul and q. Regalia, gems, statuary, specimens or casts of sculptures
other equipment, vehicles, animals, costumes, appilr(!1, imported for the bona fi.de use and by the order of any
properties, supplies, unexposed motion picture films) society incorporated or established solely for religious,
brought byforeign producers for making or recording motion philosophical, educational, scientific or literary purposes,
pictures on location in the Philippines, upon identification or for the encouragement of the fine arts, or for the use
and the giving of a bond in an amount equal to one and one- and by the order of any institution of learning, public
half times the ascertained duties, taxes and other charges library, museum, orphan asylum or hospital, and not for
thereon, conditioned for exportation thereof or payment barter, sale or hire: Prouided, That the term"regalio" shall
of the corresponding duties, taxes and charges within six be held to embrace only such insignia of rank or office or
months from the date of acceptance of the import entry. emblems as may be worn upon the person or borne in the
Unexposed motion picture films allowed free entry under hand during public exercises or ceremonies of the society
bond for exportation falling within this subsection and or institution, and shall not include articles of furniture
subsequently exposed, whether or not developed, may be or fixtures, or ordinary wearing apparel, nor personal
re-exported free ofimport duties, taxes and other charges. property of individuals.
Negative films, undeveloped, exposed outside the r. Musical organs imported for the bona fide use and by
Philippines by resident Filipino citizens or by producing the owner of any society incorporated or established
companies of Philippine registry where the principal actors for religious or educational purposes, or, expressly f<rr
and artists employed for the production are Filipinos, upon presentation thereto.
affidavit by the importer that such exposed films are the Scientific apparatus, instruments and utensils speciall.y
same films previously exported from the Philippines. As
imported for the bona fide use and by the order of any
used in this paragraph, the terms oa.ctors' and "artists" society or institution incorporated or established solely
include the persons working the photographic camera for educational, scientific, or charitable purposes, or for
or other photographic and sound recording apparatus by the encouragement of the fine arts, or for Lhe bona fide
means of which the film is made.
use and by the order of any institution of learning in the
o. Costumes, regalia and other articles, including office Philippines, and not for barter, sale or hire.
supplies and equipment, imported for the official use of Philosophical, historical, economic, scientific, technical and
members and attaches of foreign embassies, legations, vocational books specially imported for the bona fide use and
consular officers and other representatives of foreign by the order ofany society or institution, incorporated or
government: Prouided, That the country which any such
established solely for philosophical, educational, scientific,
person represents accords like privileges to corresponding
charitable or literary purposes, or for the encouragement
officials of the Philippines. of the fine arts, or for the bona fi.de use of and by the order
p. Articles imported for the personal or family use of the of any institution of learning in the Philippines: Prouided,
members and attaches of foreign embassies, legations, That the provisions of this subsection shall apply to books
consular officers and other representatives of foreign not exceeding two copies of any one work when imported
governments: Prouided, That such privilege shall be by any individual for his own use, and not for barter, sale
accorded under special agreements between the Philippines or hire.
and the countries which they represent: and Prouided, Bibles, missals, prayer books, koran, ahadith and
further, That the privilege may be granted only upon other religious books of similar nature and extracts
specific instructions of the Department of Finance in each
therefrom, hymnal and hymns for religious uses, specially
instance which will be issued only upon request of the prepared books, music and other instrumental aids for thtr
Department of Foreign Affairs.
818 Itt.;vt t,:wt,;tt oru'l'nxn't'tol 'l'Atrtr,t.' ,tNtr ( itts'trrn,ts ( lttrt,; r',t I 1)
l,'rrrrlrrtttcnl,ttl I rri trciltlcs

deaf, mute or blind, and textbooks prcscribcd filr uso irr any thereof, be subject to a duty under this subsection equal
school in the Philippines; Prouided, That complcte books to the amount of such drawback or bounty.
published in parts in periodical form shall not be classified
v. Large containers (e.g., demijohns, cylinders, drums, casks
herein.
and other similar receptacles of metal, glass or other mate-
u. Newsprint, whenever imported by or for publishers for the rial) which are, in the opinion of the Collector of Customs,
exclusive use in the publication of newspapers. of such a character as to be readily identifiable may be
delivered to the importer thereof upon identification and
v. Articles donated to public or private institutions established
the giving of a bond in an amount equal to one and one-
solely for educational, scientific, cultural, charitable,
half times the ascertained duties, taxes and other charges
health, relief, philanthropic or religious purposes, for free
thereon, conditioned for the exportation thereofon payment
distribution among, or exclusive use of, the needy.
ofthe corresponding duties, taxes and other charges within
w. Food, clothing, house-building and sanitary-construction one year from the date ofacceptance ofthe import entry.
materials, and medical, surgical and other supplies for use
Supplies or ship stores listed as such for the use of the
in emergency relief work, when imported by or directly for
vessel; supplies which are intended for the reasonable
the account of any victim, sufferer, refugee, survivor or
requirements of the vessel in her voyage outside the
any other person affected thereby, or by or for the account
Phitippines, including such articles transferred from a
of any relief organization, not operated for profit, for
bonded warehouse in any collection district to any vesscl
distribution among the distressed individuals, whenever
engaged in foreign trade, for use or consumption of Lhc
the President shall, by proclamation, declare an emergency
passengers or its crew on board such vessel as sea storcs;
to exist by reason of a state of war, pestilence, cholera,
plague, famine, drought, typhoon, earbhquake, fire, flood or articles purchased abroad for sale on board a vesscl
as saloon stores or supplies: Prouided, That any surplrts
and similar conditions: Prouided,That the importation free
ofduty ofarticles described in this herein subsection shall
or excess of such ship, sea or saloon stores arriving
continue only during the existence of such emergency, or
from foreign ports shall be dutiable according to thtr
corresponding heading or subheading.
within such limits and subject to such conditions as the
President may, by his proclamation, deem necessary to aa. Arbicles and salvage from vessels recovered after the period
meet the emergency. of two years from the date of filing the marine protest or
Philippine articles previously exported from the the time when the vessel was wrecked or abandoned as
Philippines and returned without having been advanced determined by the Collector of Customs, or such part ol'
Philippine vessel or her equipment, wrecked or abandoned
in value or improved in condition by any process of
in Philippine waters or elsewhere: Prouided, That articles
manufacture or other means, and upon which no drawback
and salvage recovered within the said period of two years
or bounty has been allowed, and foreign articles when
returned after having been loaned and exported for use shall be dutiable according to the corresponding heading
or subheading.
temporarily abroad solely for exhibition, examination or
experimentation, for scientific or educational purposes, bb. Articles of easy identification exported from the Philip-
and foreign containers packed with exported Philippine pines for repairs abroad and subsequently reimported:
articles and returned empty if imported by or for the Prouided, That the cost of the repairs made to any such
account of the person or institution who exported article shall pay a rate of duty of twenty-five percent od
them from the Philippines and not for sale, subject to ualorem.
identification: Prouided, That any Philippine article
Coffins or urns containing human remains, bones or ashes,
falling under this subsection upon which drawback or
bounty has been allowed shall, upon re-importation and all articles for ornamenting said coffins or urns and
u20 Itr,:vrt,:wr,:rr on 'l'AxA lror,t 'l'arut.t, rtr.rn ( ir rlrtr rvs ( iolt,: u2t
l,'rr rrrlrrrrrcnl.rrl Prirrr:iplrrs

accompanying same; used personal and houscholrl cllirr:1,$, Suggested answer:


not merchandise, of deceased persons, upon idcnt,ilit:irl,iolr
as such, satisfactory to the Collector of'Customs.
No. Jqcob will be exempted, prouided he complies with the
requirements under Section 105 of the Tariffand Customs Code. These
requirements are:
Bar Question (2008)
JKL Corporation is a domestic corporation engaged in lhc
a. The car must haue been ordered or purchased prior to the
receipt by the Philippine rnission or consulate in Jakarta
importation and sale of motor vehicles in the Philippines and is
of Jacob's recall order;
duly registered with Subic Bay Metropolitan Authority (SBMA). ln
December, 2007, it imported several second-hand motor vehiclos b. The car is registered in Jacob's n&rLe;
from Japan and Korea, which it stores in a warehouse in Subic Bay.
It sold these motor vehicles in April, 2008 to persons residing in the
c. The exemption shall epply to the ualue of the car;
customs territory. d. The exemption shall apply to the d,ggregate ualue of his
personal q.nd household effects (including the personal
a. Are the importations of motor vehicles from abroad subject
computer) not exceeding 30Vo of the total amount receiued
to customs duties and value added taxes? Explain.
by Jacob as salary and allowances during his assignment
b. If they are taxable, when must the duties and taxes be paid? in Jakarta, but not to exceed four (4) years;
What are the bases for purposes of computing customs e. Jacob must not haue auailed of the exemption more often
duties and VAT? To whom must the duties and VAT be than once euery four years (last paragraph, Sec. 105 , TCC) .
paid? Explain.
Suggested answers: Bar Question (2003)
o.. The bringing in of motor uehicles from Japan end Korect X and his wife, Y, Filipino living in the Philippines, went on
to the Subic Freeport zone does not cottstitute importation. a three-month pleasure trip around the world during the months
By fiction of law , areas declared by lq.w as special economic of June, July and August 2002. In the course of their trip, they
zones or Freeport zones haue been treated for to,x purposes accumulated some personal effects which were necessary, appropriate
as foreign tercitories. Therefore, no customs duties, ualue and normally used in leisure trips, as well as souvenirs in non-
added tax ond excise tax shall be due thereon while they commercial quantities. Are they "returning residents" for purposes
remain within the special economic zone or Freeport zone of Section 105 of the Tariffand Customs Code? Explain.
(See R.A. 7916 - PEZA Law and R.A. 7227 - BCDA Law).
Suggested answer:
b. Yes, the sale and deliuery of the imported motor uehicles
nreturning resid,ents" refers to nationals
from the Freeport zone to the customs tercitory is subject No. The term utho
to customs duties and ualue added tox, which must be paid haue stayed in a foreign country for a period of at least six (6) month
to the Bureau of Custorns, as agent of the Commissioner (Sec. 105[fl, TCC). Due to their limited duration of stay abroad, X
of Internal Reuenue in the collection of national internal q,ndY are not considered as "returning residents" but they are merely
reuenue taxes on imported goods. considered as trauelers or tourists who likewise enjoy the benefit of
conditionally -free importation ( Sec. 1 05[g], TCC).
Bar Question (2005)
Jacob, after serving a five-year tour of duty as
military o ttach| in T[hen importation begins and ends
Jakarta, returned to the Philippines bringing with him his personal Bar Question (1995)
effects, including a personal computer and a car. Would Jacob be
liable for taxes on these items? Discuss fully. When does importation begin and when does it end?
'l'i\tll't, ANrr ( ll|ltr rrr,fii ( ioDt,: 82:l
822 RgvtrwnH <ln'l'nx,tttott
l,'rrrrlrrrrr,rrl,rrl I'rirrcipk,s

Suggested answer: irrr:irlrrnl,irl l.o l,hc <krlivor.y lrorrr l,lrrr lxrrt ol'importation to the principal
rnirrkct in the I)hilippines (Se<:. 20 I, 7'(:(:).
"Importation" begins from the time the carrying uessel or aircraft
enters Phitippine territorialjurisdiction with the intention to unload 'fhc term "transaction value" means the price actually paid
therein and ends at the time the goods are rel,eased or utithdrawn ftom or payable for the goods when sold for export to the Philippines,
the customhouse upon payrnent of the custonxs duties or with legal adjusted by adding: (a) commissions and brokerage fees; (b) cost
permit to withdraw (Vid'uya a. Berd.iago, 73 SCRA 553). of containers; (c) cost of packing, whether for labor or materials;
(d) value of materials, components, parts and similar items
As long as the irnportation has not been terrninated, the imported incorporated in the imported goods; (e) amount of royalties and
goods rerncr.in under the jurisdiction of the Bureau of Customs. license fees related to the goods; (0 cost oftransport ofthe imported
Importation is d.eerned terminated only upon the payment of the duties, goods from the port of exportation to the port of entry in the
taxes and other charges upon the articles, or secured to be paid, at Philippines; (g) loading, unloading and handling charges associated
the port of entry and the legal permit for withdrawal shall haue been with the transport of the imported goods from the country of
granted. The payment of the duties, taxes, fees and other charges must exportation to the port of entry in the Philippines; and (h) cost of
be in full. insurance (R.4. 9135, as irnplemented by Customs Adrninistratiue
Merchandise, the importation of which is effected contrary to Order No. 004-04, Nouember 8,2004).
Iaw, is subject to forfeiture, and that goods released contrary to law
are subject to seizure and forfeiture. Bar Question (2004)
State and explain the basis of dutiable value of an imported
Bases of Assessment of DutY article subject to an ad valorem tax under the Tariff and Customs
Code.
Whenever an imported article is subject to an ad ualorem rate
of duty, the duty shall be assessed upon the market value or price at Suggested answer:
which, at the time of exportation, the same, like or similar article is
freely offered for sale in the principal markets ofthe exporting country The basis of dutiable ualue of an imported a,rticle subject to an
for exportation to the Philippines, in the usual wholesale quantities ad ualorem tq"x, under the Tariff and Customs Code is its transaction
u alue ( Sec. 2 0 1 [N, TC C, as amended by R.A. I 1 3 5). If s uch u alue could
and in the ordinary course oftrade (excluding internal excise taxes to
be remitted or rebated), plus ordinary expenses prior and incidental not be determined, then the following ualues are to be utilized in their
to the lading ofsuch article on board the vessel or aircraft at the port sequence: (a) transaction ualue of identical goods (Secs. 201[8] , ibid.;
of export (including taxes or duties, if any) and freight paid as well as Sec. II, C.1, CAO 4-2004); (b) transaction ualue of similar goods (Sec.
insurance premium paid covering the transportation of such article 201[C], ibid.; Sec. II, D.7, CAO 4-2004); (c) deductiue ualue (Sec. II,
to the port of entry in the Philippines. 8.1, CAO 4-2004); (d) computed ualue (Sec. II, F.l, CAO 1-2004); and
(e) fallback uqlue (Sec. 201[F], ibid.).
When the value ofthe article cannot be ascertained in accordance
with the preceding paragraph, the value shall be the domestic Entry Withdrawal from Warehouse, for Gonsumption
wholesale market value or selling price of the same, like or similar
imported article in the principal market of the Philippines on the Imported articles shall be deemed "entered" in the Philippines
date of exportation of the article under appraisement, in the usual for consumption when the specified entry form is properly filed and
wholesale quantities and in the ordinary course of trade, minus the accepted, together with any related documents required by the
import duty and other taxes as well as a commission not exceeding provisions of this Code and/or regulations to be filed with such form
sixper centum if any has been paid or contracted to be paid on goods at the time of entry, at the port or station by the customs official
secured otherwise than by purchase, and profits not to exceed eight designated to receive such entry papers and any duties, taxes, fees
per centum and a reasonable allowance for general expenses not to and./or other lawful charges required to be paid at the time ofmaking
exceed eight per centum on purchased goods, and aII other expenses such entry have been paid or secured to be paid with the customs
u24 Itr,:vrr,:wr,:rr oN 'l'nxn lror.r
i,.)llili,,llli,i,li
'ir,tll;;
i,',u,"' n2r-,

official designated to receive such monies, provided that the article (b) "Counteruuiling dutier" u.re speciu.l duties imposed by the
has previously arrived within the limits of the port of entry. Secrelary of' I"inurrce upon prior inuestigation and report
Imported articles shall be deemed "withdrawn" from warehouse of'the I'ariff'Commission to ollbet (i) an excise or internal
reuenue tar upon articles of the same class manufactured at
in the Philippines for consumption when the specified form is properly
home, or (ii) subsidies to foreign producers or manufacturers
filed and accepted, together with any related documents required by
by their respectiue gouernments.
any provisions of this Code and/or regulations to be filed with such
form at the time of withdrawal, by the customs official designated to (c) "Marhing d.uties" are special duties equiualent to SVo ad
receive the withdrawal entry and any duties, taxes, fees and./or other ualorem imposed on articles not properly marhed. These
lawful charges required to be paid at the time of withdrawal have are, collected by the Commissioner of Customs except when
been deposited with the customs official designated to receive such the irnproperly marhed articles are exported or destroyed
payment (Sec. 206, TCC). under customs superuision and prior to final liquidation
T of the corresponding entry. These duties are designed to
Bar Question (2001) I preuent possible deception of the customers.

What do you understand by the term "flexible tariffclause" as I (d) "Discriminatory d.uties" are special duties collected in
used in theTariffand Customs Code? an amount not exceeding 1007o ad ualorem, imposed by
the President of the Philippines against goods of a foreign
Suggested answer country which discriminates against Philippine commerce
I or agairust goods coming from the Philippines and shipped
The term "flexible tariff cla,use" refers the authority giuen to to a foreign country.
the Presiderut to adjust the tariffrates under Section 401 of the Tariff I
u.nd Customs Code, which is the enabling law that made effectiue the Due Process
h
d.elegation of the taxing power to the Presid.ent under the Constitution.
I Due notice and hearing, besides being an inherent element of due
I'
process, which requires the Collector to give the owner or importer
Bar Question (2005, 1997) i
I of the property written notice of the seizure and an opportunity
Under the Tariffand Customs Code, what are: ! to be heard in relation to the delinquency which was the occasion
(a) for such seizure, as well as Section 2601, which directs that seized
dumping duties
I property, other than contraband, shall be subject to sale after liability
(b) countervailingduties ll to sale shall have been established by proper administrative or
judicial proceedings in conformity with the provisions of said Code
(c) marking duties (Commissioner of Customs u. Alihpala, supra).
(d) discriminatoryduties
Automatic Review
Suggested answer:
Taxes being the lifeblood of the Government, Section 12, which
(a) "Dumping d.uties" are special duties irnposed by the the Commissioner of Customs in his Customs Memorandum Order
Secretary of Finance upon recommertdation of the Tariff No. 20-87, enjoined all collectors to follow strictly, intended to protect
Commission when it is found that the price of the imported the interest of the government in the collection of taxes and customs
articles is deliberately or continually fixed at less thun the duties in those seizure and protest cases which, without the automatic
fair marhet ualue or cost of production, and the importation review provided therein, neither the Commissioner of Customs nor the
would ccluse or likely cause an injury to local industries Secretary of Finance would probably ever know about. Without the
engaged in the manufacture or production of the sarrc or automatic review by the Commissioner of Customs and the Secretary
similar q,rticles or preuent their establishment. of Finance, a collector in any of our country's far-flung ports, would
826 Itt,:vtt,:wt,:tr 0t t'l',txn'l't0N I'nrilt.r. Arurr ( ltritrrMs ( iolrt,r t127
l,'rrnrlrrrrrclr{.rrl I'r'irrr:i Jrlcs

have absolute and unbridled discretion to detcrmine whether g<xds shall also be published in the Oflicial OazetLe, "except such as have no
seized by him are locally produced, hence, not dutiable, or oflbreign general applicability." CMO No. 20-87 requiring collectors of customs
origin, and therefore subject to payment of customs duties and taxes. to comply strictly with Section 12 of the Plan, is an issuance which is
His decision, unless appealed by the aggrieved party (the owner of the addressed only to particular persons or a class of persons (the customs
goods), would become final with no one the wiser except himself and collectors). It need not be published, on the assumption that it has
the owner ofthe goods. The owner ofthe goods cannot be expected to been circularized to all concerned (Tafi.ad.a a. T\tuera, 136 SCRA
appeal the collector's decision when it is favorable to him. A decision 27; Yaokasin u. Cornrnissioner of Customs, ibid,.).
that is favorable to the taxpayer would correspondingly be unfavorable
to the government, but who will appeal the collector's decision in Bar Question (1991)
that? Certainly, it is not the collector (Yaokasin u. Cornmissioner
of Customs, 180 SCRA 59L). In view of the unfavorable balance of payment condition and
the increasing budget deficit, the President of the Philippines,
Bar Question (2002) upon recommendation of the National Economic and Development
Authority, issues during a recess of Congress an Executive Order
What is the basis of the automatic review procedure in the imposing an additional duty on all imports at the rate of ten (t0%o)
Bureau of Customs? Explain your answer. percentadualorem. The Executive Order also provides that the same
shall take effect immediately. Ricardo San Miguel, an importer,
Suggested Answer: questions the legality of the Executive Order on the grounds that only
Automatic reuiew is intended to protect the interest of the Congress has the authority to fix the rates of import duties and, in
Gouernment in the collection of taxes and customs duties in seizure any event, such an Executive Order can take effect only thirty (30)
and protest cases. Without such automatic reuiew, neither the days after promulgation and the President has no authority to shorten
Commissioner of Customs nor the Secretary of Finance would know said period.
about the decision laid down by the Collector of Customs fauoring the Are the objections of Mr. San Miguel tenable?
ta.xpayer. The power to decide seizure and protest cases may be abused
if no chechs are instituted. Automatic reuiew is necessary because Suggested answer:
nobody is expected to appeal the decision of the Collector of Customs
No, the objections are not tenable as the Executiue Order cannot
which is fauorable to the tatcpayer q.nd aduerse to the Gouernment. This
take effect'immediately." Being o.n "external" law and hauing the
is the reason why wheneuer the decision of the Collector of Customs
effect of law, the Executiue Order cq.nrlot become effectiue without
is aduerse to the Gouernment, the said decision is affirmed by the publication, a requirement of due process (Tafi,ad.a u. Tlttsera, L36
Commissioner of Customs. The same shall be autornatically eleuated
SCRA 27;8.O.202).
to ctnd be finally reuiewed by the Secretary of Finance (Yaokasin v.
Commissioner of Customs,lSO SCRA 591 t19891).
Claim for Refund
Publication In all claims for refund of customs duties, the Collector of
Customs to whom such customs duties are paid and upon receipt
Article 2 of the Civil Code, which requires laws to be published of such claim is mandated to verify the same by the records of his
in the Official Gazette, does not apply to CMO No. 20-87 which is only office. If such claim is found correct and in accordance with law, the
an administrative order of the Commissioner of Customs addressed to Collector shall certify the same to the Commissioner of Customs
his subordinates, the customs collectors. C.A. 638 (an Act to provide with his recommendation together with all the necessary papers
for the uniform publication and distribution ofthe official gazelte) and documents. This is precisely one of the reasons why the Court of
enumerates what shall be published in the Official Gazette besides Appeals upheld the dismissal of the case on the ground that the CTA s
legislative acts and resolutions ofa public nature ofthe Congress ofthe jurisdiction under the Tariffand Customs Code is not concurrent with
Philippines. Executive and Administrative orders and proclamations, that of the respondent Commissioner of Customs due to the absence
82rl llt,;vtt,rwt,;rr or.,r'l'Axn'l'ror'.r 'l'nrrrrtr,' nlrrr ( lus'trrvs ( iotrt,t r'r29
l,'rrrrrlrrrur,rrl.rrl l'ri rrt'iIlr,s

of any certification from the Collector of Customs of'Manila (Nestl6 bargc, catogorizcd as a Contruct of'Allreightmont, the owner of
Phils. u. Court of Appeals, supra). the tugboat mans the vessel with its own people and retains the
possession, command and navigation of the said ship. The barge,
Seizure and forfeiture proceedings being a non-motorized vessel that contains used oil from Palau and
only towed by the tugboat, makes the tugboat the principal and the
Property subject to forfeiture und,er Tariff and. Custom.s barge, a mere accessory, necessarily has no means of controlling its
Laws. - Atry vehicle, vessel or aircraft, cargo, arbicles and other route or destination. The Court finds the element of intent on the
objects shall, under the following conditions, be subject to forfeiture: part of the barge wanting (Barge a. Comtnissioner of Custom's,
a. Any vehicle, vessel or aircraft, including cargo, which shall CTA, Februanlt 77, 201 1).
be used unlawfully in the importation or exportation of No sufficient euidence was submitted to substantiate allegation
articles or in conveying and./or transporting contraband that the uessel entered the country only for repairs. - On Sept 4,2007 ,
or smuggled articles in commercial quantities into or the vessel owned by C&C Marine A/S and flying a Panamanianflag,
from any Philippine port or place. The mere carrying or arrived at the Porb ofBatangas. After 20 days, the vessel and Esteban
holding on board of contraband or smuggled articles in Tajanlangit, as representative ofthe buyer, 7107 ISC, a corporation
commercial quantities shall subject such vessel, vehicle, still to be formed, entered into a Memorandum of Agreement for
aircraft, or any other craft to forfeiture: Prouided, That the sale of the vessel. On November 15, 2007, a Bill of Sale was
the vessel, or aircrafb or any other craft is not used as duly executed where C&C Marine conveyed its l00%o shares in the vessel
authorized common carrier and as such carrier, it is not to ISC. After 12 days, the vessel secured a "Clearance of Vessel to a
chartered or leased (Sec. 2530, Tariff and Custorns Code Foreign Port" from Batangas to sail to Bataan, for repairs. Then, it
of the Philippines [TCCP]). was brought to the Port of Manila allegedly for further repairs and
b. Any article the importation or exportation of which is upgrading.
effected or attempted contrary to law, or any article of On January 27,2008, a subpoena was issued by the Chief, RATS
prohibited importation or exportation, and all other articles Group ofthe BOC. On March 4,2008,the District Collector of Manila
which, in the opinion of the Collector, have been used, are or issued a Warrant of Seizure and Detention (WSD) for the vessel. After
were entered to be used as instruments in the importation seizure and forfeiture proceedings, the District Collector resolved to
or exportation of the former; Iift the WSD and ordered the release of the vessel, which decision was
later upheld by the Commissioner of Customs on August 21,2008.
c. Any article sought to be imported or exported without
going through a customs house, whether the act was The authority to acquire was approved by MARINA on May
consummated, frustrated, or attempted. 6, 2008. While the papers and registration were being processed
by MARINA, it registered itself with the Subic Bay Metropolitan
There is no illegal importation when u non-motorized uessel, Authority and was issued the Certificate of Registration and Tax
being towed by a tugboat, that entered the jurisdiction of the Exemption on January 22,2009. On February 4,2009, petitioner
Philippines only for emergency bunkering needs of the tugboat, which finally executed an Import Entry and Internal Revenue Declaration,
principally nauigates and controls the route. - As duly approved by declaring itself as the importer of the vessel but with a notation "tax
Commissioner of Customs, the documentary exhibits clearly point to and duty free importation under R.A.7227, as amended."
the conclusion that the tugboat was bound for Malaysia and would On automatic review, the Secretary of Finance reversed and set
have arrived thereat, were it not for the damage sustained by it aside the lifting of the WSD and ordered the forfeiture of the vessel
while in transit from Palau to Malaysia, necessitating emergency based on the records of the Philippine Ports Authority. ISC filed a
repairs in the Port of Surigao, the nearest port. Evident from the motion for reconsideration to the Secretary of Finance, who denied
Tow Hire Agreement entered into by and between OSM Shipping the motion.
Phil., the owner of the tugboat, and petitioner, as owner of the
830 Itr,:vrr,:wt,:lr or.r'l'lxn'rror.r
i,l;ill;;,llil,i;li";r,:I; lJ;il ':r
I

The CTA ruled that the Secretary of Finance has sullicicntly thc .j u risd iction ol' thc ( )o l lcclor ol' ( j usturns bccausc thc j urisdiction
established that an illegal fraudulent importation, or at least an of thc latter is providcd lbr in R.A. 1937 which took effect on July 1,
attempt thereof, has been committed. Forfeiture proceedings under 1957, much later than the Judiciary Act of 1948. It is axiomatic that
the Tariffand Customs laws is not penal in nature, since it does not a later law prevails over a prior statute. Moreover, it is reasonable
result In the conviction of the wrongdoer nor in the imposition upon to conclude that the legislators intended to divest the Court ofFirst
him ofa penalty; proofbeyond reasonable doubt is not required in Instance ofthe prerogative Lo repleuin a property which is a subject
order tojustify the forfeiture ofthe goods. The degree ofproofrequired of a seizure and forfeiture proceedings for violation of the Tariff
is merely substantial evidence, which means such relevant evidence as and Customs Code. Otherwise, actions for forfeiture of property for
a reasonable mind might accept as adequate to support a conclusion. violation of customs laws could easily be undermined by the simple
Importation consists of bringing an article into the country device of repleuin. Furthermore, Section 2303 of the TCC, which
from the outside. Importation is complete when the taxable, dutiable requires the Collector of Customs to give to the owner of the property
sought to be forfeited written notice of the seizure and to give him the
commodity is brought within the limits of the port of entry. Entry
through a customs house is not the essence of the act. Simply stated, opportunity to be heard in his defenses, clearly indicates the intention
to imporb is to bring goods into a domestic port from a foreign country.
of the law to confine in the Bureau of Customs the determination of
The pieces ofevidence presented by ISC indicate that the vessel was all questions affecting the disposal ofproperty proceeded against in
really intended to be delivered for purchase. The repairs done were a seizure and forfeiture case. The judicial recourse of the property
to prepare the vessel for its Intended use in the Philippines (7707 owner is not in the Court of First Instance but in the Court of Tax
Iel.and. Shipping Corporation a. Secretary of Finance, CTA, Appeals, and only afber exhausting administrative remedies in the
March 6,2072). Bureau of Customs (Pacis a. Aueria, supra).
The preuailing doctrine is that the exclusiue jurisdiction in seizure
Subject uessels made an illegal entry that warcants forfeiture
thereof. - Sometime in 2007, Cornelio Q. Casido, President of and forfeiture coses uested in the Collector of Customs precludes a
Heritage Resources and Mining Corporation (HRMC), a domestic court of first instance from assuming cognizance ouer such a matter.
corporation engaged in mine exploration, hired and contracted the - It is a settled rule that the Bureau of Customs acquires exclusive
jurisdiction over imported goods, for the purposes of enforcement
services of Kanny I Tugboat and Kanny II Dumb Lighter owned by
Kanny Industrial Company, a corporation organized under the laws of the customs laws, from the moment the goods are actually in its
possession or control, even ifno warrant ofseizure or detention had
of Hong Kong. When the two vessels arrived at Homonhon Island,
previously been issued by the Collector of Customs in connection with
Eastern Samar, its captain and officials as well as Casido failed to
go to the nearest customs house upon entry as required by Section seizure and forfeiture proceedings (Republic a. CFI and. Mayer
250 of TCCP. BOC initiated forfeiture of the vessel. Steel Pipe Corporation,2TS SCRA 222).

The CTA found that the Republic and BOC Commissioner Bar Question (2008)
have presented substantial evidence to establish that an illegal
William Antonio imported into the Philippines a luxury car worth
importation has been committed by Casido, with the illegal entry of
US$100,000. This car was, however, declared only for US$20,000
the subject vessels, warranting the forfeiture thereof. The court cannot
countenance the position of Casido that the vessels were merely for
and corresponding customs duties and taxes were paid thereon.
administrative find under Sections 2519 and 252I of the TCCP, since
Subsequently, the Collector of Customs discovered the under-
declaration and he initiated forfeiture proceedings of the imported
they did not carry any contraband or smuggled items (Cosid.o u.
car.
Repubhc, CTA Case No.8087, Februany 8,2012).
The judicial in the Court
recourse of the property owner is not
a. May the Collector of Customs declare the imported car
forfeited in favor of the government? Explain.
of First Instance but in the Court of Tax Appeals, and only after
exhausting administratiue remedies inthe Bureau of Custom,s.
- The b. Are forfeiture proceedings of goods illegally imported
Court of First Instance (now Regional Trial Court) should yield to criminal in nature? Explain.
832 Rt;vtnwt,:H oN'l'nxn't'toN 'l'ntrtt,'t" nNtr ( itrs'trrus ( )otrt,: tt3;]
l,'rrrrrLrrrrcrrl.rrl I'rint:iplrrs

Suggested answers: from the customs zonc without proper appraisal to the damage of
the Government and requested for the issuance of the necessary
a. No, the Commissioner of Customs ualidly cannot accept
warrant of seizure. Seizure proceedings (S.I. No. 796) were then
the fi.ne in case of forfeiture. Section. 2307 of the Tariff
q,nd Customs Code prouides that subject to approual of instituted and the Collector of Customs issued a warrant of seizure
and detention.
the Comrnissioner, the district collector may, while the
case is still pending, except when there is fraud, accept During the progress of the search and seizure, and while the
the settlement of any seizure case prouided that the owner, goods were being removed by the Customs agents from the bodegas
intporter, exporter, or consignee or his agent shall offer to where they were stored, the consignee filed a Petition (Civil Case No.
pay to the collector a fine imposed by him upon the property, 234) with the Regional Tlial Courb of Manila asking that the Collector
or in case of forfeiture, the owner, exporter, importer or of Customs and all his agents be restrained from further enforcing
consignee or his agent shall offer to pay for the dornestic the aforesaid warrant and from proceeding with the trial of S.I. 796,
marlzet ualue of the seized orticle. The Commissioner may and that said warrant be declared null and void since the Collector
accept the settlement of any seizure case on appeal in the no longer had jurisdiction to issue the same considering that the
saale manner. customs duties and taxes had already been paid and the goods had
left the control and Jurisdiction of the Bureau of Customs.
b. Upon payment of the fine as determined by the district
collector, which shq.ll be in q.mount not less thun 207o nor
more than B07o of the landed cost of the seized imported
1) Did the Collector of Customs have jurisdiction to issue the
warrant ofseizure and detention?
article or the FOB uqlue of the seized article for export, or
payment of the domestic market ualue, the property shall
Suggested answer:
be forthwith released and all liabilities which may or
might attq.ch to the property by uirtue of the offense which On the assumption that the goods were releqsed from custorns
was the occasion of the seizure and all liability might haue custody without proper appraisal q's contended by EIIB, the Collector
been incurred under any cash deposit or bond giuen by the of Customs had jurisdiction to issue the warcant of seizure and
owner or agent in respect to such property shall thereupon detention. This remedy is generally auailable in importations tainted
be deemed to be discharged. Settlement of any seizure case with irregularity ($ec.2537, TCC;Viduya a. Berd'iago, 73 SCRA
by payment of the fine or redemption of forfeited property 553).
shall not be allowed in any case, where the importation is
absolutely prohibited or where the release of the property 2) Did the payment of the customs duties, taxes, etc. render
would be contrary to law. itlegal and improper the issuance of said warrant?

Bar Question (1991) Suggested answer:


Sometime in 15 September 1990, a shipment of 150 packages In seizure and forfeiture, the payment of customs duties, tanes,
of imported goods and personal effects arrived and was unloaded etc., does not necessa.rily render as ircegular and improper the issuance
at the Port of Manila. After the amount of F15,887.00 was paid by of a warrant of seizure und deterltion.
the consignee as customs duties, internal revenue taxes, fees and What is legally consequential is whether there utas, irt fact, an
other charges, the packages were released from the Customs house. irregularity committed in the importation of the articles and their
As the packages were being transported from the Customs area to release from. customs.
their destination, the truck carrying them was intercepted at T.M.
Kalaw St., Ermita, Manila by agents of the Economic Intelligence 3) Has the Regional T?ial Court jurisdiction to hear and decide
& Investigation Bureau (EIIB). In a formal communication, EIIB Civil Case No. 234?
informed the Collector of Customs that the packages were released
834 ll,t,:vr t,:wr,rrr or'l'nx,l'r'rot,r I'nrrtt,t.nnl ( lls'trrt'ls Oont,t Itill-r
lrrrrrtlrrrrrtnLtl l'rirtciples

Suggested answer: has no jurisdiction ouer the petition for reuiew and writ of'
prohibition (Cornmiasioner of Custorns v. Alikpala, 36
No, the Regional Trial Court has no jurisdiction. In the case of
scRA 208lle70l).
seizures and forfeitures, an ordinary court nxqy not tahe cognizance of
the case and. therefore, said courts would be bereft ofjurisdiction to b. No, because the Commissioner of Customs has not yet
hear q,nd decide the same. The jurisdiction of the Collector of Customs rend.ered a decision onthe claim for refund. The jurisdiction
in seizure and forfeiture proceedings is exclusiue of all other courts. of the Commissioner and the CTA are not concurren't in so
The proper remedy would be to go through with the hearing of the far as claims for refund are concerned. The only exception
case with the Collector of Customs from whose decision an appeal is when the Collector of Customs has not acted on the
may be made to the Commissioner of Customs and, thereafter, if the protested payment for a long time, the continued inaction
taxpayer still feels aggrieued, to the Court of Tax Appeals. of the Collector or Cornmissioner should not be allowed to
prejudice the taxpayer (Nestl6 Phils.a.Court ofAppeals,
Bar Question (2002) G.R. No. 734774, July 6,2OOI).
The Collector of Customs of the Port of Cebu issued warrants
Bar Question (1992)
of seizure and detention against the importation of machineries
and equipment by LLD Import and Expert Co. (LLD) for alleged Under Section 2523 of the Tariffand Customs Code the duty of
non-payment of tax and customs duties in violation of customs verifying the correct weight of a cargo shipment is imposed upon the
laws. LLD was notifi.ed of the seizure but, before it could be heard, vessel's master, owner or employee if a discrepancy between the actual
the Collector of Customs issued a notice of sale of the articles. In gross weight and declared gross weight of manifested cargo exceeds
order to restrain the Collector from carrying out the order to sell, 20Vo and "the Collector shall be of the opinion that such discrepancy
LLD fiIed with the CTA a petition for review with application for was due to the carelessness or incompetency of the master or pilot in
the issuance of a writ of prohibition. It also filed with the CTA an command, owner or employee of the vessel, a fine of not more than
appeal for refund of overpaid taxes on its other importations of raw LSVo of lhe value of the article may be imposed upon the importing
materials which has been pending with the Collector of Customs. The vessel."
Bureau of Customs moved to dismiss the case for lack ofjurisdiction
ABC Corporation's vessel was found, after appropriate
of the CTA.
administrative proceedings, to have violated the said provision far
A. Does the CTA have jurisdiction over the petition for review exceeding t}ire 20Vo statutory limitation. The Collector of Customs
and writ of prohibition? Explain. imposed a fine of ?22,600.00 (representing 157o of the value of the
discrepancy) which was amrmed by the Commissioner of Customs.
B. Will an appeal to the CTA for tax refund be possible?
Explain. On appeal by ABC Corporation, the Court of Tax Appeals found
the fine of ?22,600.00 harsh and unreasonable for a first offense
Suggested answer: and reduced the same to F5,000.00. The Commissioner of Customs
questions the scope of authority of the Court of Tax Appeals in the
a. No, because there is no decision as yet by the Commissioner
determination of the fine imposable under Section 2523 of the Tariff
of Customs, which can be appealed to the CTA. Neither and Customs Code.
the remedy of prohibition would lie because the CTA has
not acquired any appellate jurisdiction ouer the seizure Whose judgment should prevail under the circumstances of the
case. The writ of prohibition being merely ancillary to case? Explain fully.
the appellate jurisdiction, the CTA has no jurisdiction
ouer it until it has acquired jurisdiction on the petition Suggested answer:
for reuiew. Since there is no appealable decision, the CTA The judgment of the Court of Tax Appeals should preuail.
836 llt,;vtt,:wt,:tt ott'l'nx,ttt<ltt ittntrntg ( itltlt,:
'l'nrrrr,'r,' rrHu ( tt:17
l,'undrrnrorrtul l)rinciplon

The CTA has exclusive appellate jurisdiction over decisions of Suggested anawer:
the Commissioner of Customs in cases involving the imposition of I witt fi.le a protest with the Collector of Custom's (Sec. 2308,
fines, forfeitures or other penalties.
TCC). Shoutd the Collector prornulgate a decision aduerse to my
client, I witl giue a written notice to the Collector, copy furnished the
Remedies under the Tariff and Customs Code Commissioner of Customs, of my clienfs desire to haue the rnq,tter
reuiewed by the Commissioner (Sec. 2313, TCC). If the Cornmissioner
Bar Question (2013)
affirms the decision of the Collector, I will fiIe an appeal with the Court
On October 15, 2005, ABC Corporation imported 1,000 kilos of Tan Appeals within 30 days from receipt of the decision ( 1997 Rules
of steel ingots and paid customs duties and VAT to the Bureau of of Ciuit Procedure, R.A. 9252). If the CTA
issues a decision aduerse
Customs on the importation. On February 17,2009, the Bureau of to my client, I witl fiIe with the Suprerne Court a uerified petition for
Customs, citing provisions of the Tariffand Customs Code on post- reuiew on certiorari pursuant to Rule 45 (R.4. 9282).
audit, investigated and assessed ABC Corporation for deficiency
customs duties and VAT. Is the Bureau of Customs correct? Bar Question (1997)
Suggested answer: The Tariffand Customs Code allows the Bureau of Customs to
resort to the administrative remedy of seizure, such as by enforcing
No. The Bureau of Custorns has lost its right to assess deficiency the tax lien on the imported lien, and to the judicial remedy of filing
customs duties and VAT. The imported steel ingots in 2005 haue an action in courb. when does the Bureau of customs normally avail
been entered and the customs duties andVAT had been paid, thereby itself -
making the liquidation of the importation fi.nal and conclusiue upon
the parties after the erpiration ofthree (3) years from the date offinal a. of the administrative, instead of the judicial remedy, or
payment of duties and ta,xes (Sec. 1603, TCC, as amended by R.A. b. of the latter, instead of the former, remedy?
9135).
Suggested answer:
Bar Question (2006) The Burea'u of Custorns nortnally auails itself of the
a.
The Collector of Customs issued an assessment for unpaid administratiue rernedy of seizure, such as by enforcing the
customs duties and taxes on the importation of your client in the tax lien on the imported articles, instead of the judicial
amount of F980,000.00. Where will you file your case to protect your remed,y when the goods to which the tax lien attaches,
client's right? Choose the correct courts/agencies, observing their regard.Iess of ownership, is still in the custody or control of
proper hierarchy. the gouernment. In the case, howeuer, of importations which
are prohibited or undeclared, the remedy of seizure and
1. Court of Tax Appeals
forfeiture rnay still be exercised by the Bureau of Customs
2. Collector of Customs euen if the goods are no longer in its custody.
3. Commissioner of Customs b. When the goods are properly released and thus beyond
the reach of tax lien, the gouerntnent can seeh payment
4. Regional Trial Court
of the tax liability through iudicial action since the tax
5. Metropolitan Trial Court Iiability of the im,porter constitutes a personal debt to
the gouernment; therefore, enforceable by action. In this
6. Court ofAppeals
case, judicial remedy is normally availed of instead of the
7. Supreme Court adrninis t r atiu e re rnedY.
838 Rt:vu';wt:tt oN'l'nxaL'lor.r 'l'Atrtt,t, nNtt ( itts'tr rlls (.iotrt,; u39
l,'rr n<lrrnrcnht I l)rin<:iplcs

Bar Question (1992) Suggested answer:


A disgruntled employee of Apache Corporation reported to the No. The choice of remedy assu.rnes want of authority and
Commissioner of Customs that the company is illegally importing jurisdiction. Warrantless searches and seizures are, hou)euer,
electronic equipment by way of unlawful "shipside" activities thereby
authorized under Tariff and Custorns Code. Such searches and
evading payment of customs duties and taxes on the goods. within the meaning of the
seizures are ruot considered unreasonable
Accordingly, the Commissioner of Customs, upon the request of c ons titutional guar antee.
the Economic Intelligence and Investigation Bureau (EIIB), issued
warrants ofseizure and detention and directed EIIB to seize the goods Bar Question (1991)
listed in the warrants.
Dagat-dagatan Shipping Corporation (DSC) brought into the
After the seizure of the goods and considering the magnitude ofthe country two (2) non-propelled foreign barges which DSC charbered for
value of the goods, counsel for Apache corporation filed a petition with use in the Philippine coastwise trade under a Temporary Certificate
the supreme court for c ertiorari,prohibition and. mandomus tnenjoin of Philippine Registration, to be returned to the foreign owner upon
the commissioner of customs and his agents from continuing further termination of the charter period but not beyond 1999, pursuant
with the forfeiture proceedings and praying that the commissioner to P.D. No. 760, as amended. Upon their arrival, the barges were
return the confiscated articles on the ground that the warrants were subjected to duty by the Bureau of Customs. DSC refused to pay any
in violation of the Rules of Court and the Bill of Rights. customs duty contending that the charter or lease ofthe barges, which
1) If you are a newly-appointed Solicitor in the office of wiII be returned to the foreign owner when the charter expires, is not
the Solicitor General representing the Commissioner of an importation and. therefore cannot be subjected to any customs
Customs, how would you defend the latter? Give the specific duty.
defenses. 1) Is DSC's refusal with or without legal basis?
Suggested answer: Suggested answer:
Appurtenant to its power und,er the Tariff and Custorns Code nirnportation"
DSC's refusal is without legal basis. The term
to enforce the prouisions of such la.w, the Bureau of Customs may
includes the entry into the country of any article from a foreign country.
conduct searches and seizures euen without the benefit of a warcant
The fact that imported goods are to be re-exported does not mean that
issued by ajudge upon probable cause. This is historically considered
the customs duties rnay not be imposed, although in certain cases and
an exemption from the constitutional guarantee against unreasonable
subject to limitations prescribed by the Tariff and Customs Code, a
searches and seizures. There is probable cause whenthe correct amount
drawbach may be auailable to the tarpayer so as to be able to obtain
of customs duties was not paid by the importer.
their refund. An example of which are articles which are used in the
2) Assuming that the enforcement of the warrant had been manufacture of products for export within three (3) years after the
extended to the residence of the president of Apache importation.
Corporation, is such enforcement valid? Explain.
2) On what is the dutiable value of any imported article based?
Suggested answer:
No. The Tariff and Customs Code authorizes custom officials
Suggested answer:
and agents to seqrch any building, except dwelting houses. dutiable ualue of imported articles is the home consumption
'l'h.e
ualu,e, i..e., the cost or fair marhet ualue or price of the imported articles
3) Do you think the petition for certiorarl, prohibition, and i,n wlutlesale quantities in the prin'cipal market of the exporting country
mandamus filed by Apache Corporation will prosper in the or <nunlry of origin, including expenses collected from importation such
Supreme Court? Discuss. tts ilrcrrrance, freight, packaging, loading and unloading charges but
840 Ruvrr.:wr.:rt or.r'l'nxl,noN 'i:llli;;,lllJ;li";r;iljJilil '4
r

ex,cluding internal excise toxes. In case such ualue is unascertainable, jurisdiction


of Customs. 'I'his is u liel<I wh'ere the <J<tctrine of'primary
the commissioner rnay also determine the horne consurnption uarue controls. The Collector of'Custorns, when sitting in forfeiture
front any reliq,ble and available data (Sec. 201, TCC, as arnended; proceed,ings, constitutes a tribunal upon which the law confers
Commissioner a. Court of Tar Appeals. G.R. No. 22069, May 21, jurisdiction to heq.r and determine all questions touching the forfeiture
1988). and further disposition ofthe subject rnatter. The exclusiuejurisdiction
Wheneuer the decision of the Collector of Customs is aduerse to in seizure and forfeiture cases uested in the Collector of Customs
preclud,es the RTC from assuming cognizance ouer such matter. The
the gouernment, it is automatically eleuated to the Commissioner for -RTC
reuiew and, if it is affirmed by him, it is autornatically eleuated to the is thus deuoid of competence to act on the matter (Republic a.
Secretary of Finance for reuiew. CFI of Manila, 2L3 SCRA 222).

INOTE: Under RA. 9135, the basis for computing custorns duties Bar Question (1996)
is the transaction ualue.l On January 1, 1996, armed with warrants of seizure and
detention issued by the Bureau of customs, members of the customs
Bar Question (1993) enforcement and security services coordinated with the Quezon
IWV Floria, a vessel ofPhilippine registry, was hired to transport City police to search the premises owned by a certain Mr. Ho along
beans from Singapore to India. The vessel was allegedly hijacked at Kalayaan Avenue, Quezon City, which allegedly contained untaxed
sea and found its way to Bataan. It is also alleged that said beans vehicles and parts. while inside the premises, the members of the
are now with the List Co. and fake documents were used to show customs enforcement and security services noted articles which were
that the beans were imported from Japan. The collector of customs not included in the list contained in the warrant' Hence, on January
seized the IWV Floria and its cargo. The owner of IWV Floria filed 15, 1996, an amended warrant and seizure was issued.
a complaint in the Regional rrial court to obtain possession of the On January 25,Igg6,the customs personnel started hauling the
vessel and the beans. Does the RTC havejurisdiction over the case? articles pursuant to the amended warrant. This prompted Mr' Ho to
file a case for injunction and damages with a prayer for a restraining
Suggested answer: order before the Regional Trial court of Quezon city against the
The RTC has no jurisdiction. The Collector of Customs sitting in Bureau of Customs on January 27,1996. On the same date, the trial
seizure and forfeiture proceedings has exclusiue jurisdiction to hear court issued a temporary restraining order'
and determine all questions touching on the seizure and forfeiture of A motion to dismiss was filed by the Bureau of Customs on the
dutiable goods. The RTC has no jurisdiction to pass upon the ualidity ground that the Regional Trial court has no jurisdiction over the
or regularity ofthe seizure and forfeiture proceedings conducted by subject matter of the complaint and that it was the Bureau of customs
the Bureau of Custorns (Commissioner of Custorns o. Mokasio4 that has exclusive jurisdiction over it. Decide.
L77 SCRA 27, 33-34 t19891 eiting Po,cis a. Averia, 1g SC&A g|z
t1e661). Suggested answer:
Neither has RTC reuiew powers ouer actions concerning seizure The rnotion to dismiss should be granted. Seizure and forfeiture
and forfeiture proceedings conducted by the Collector of Customs proceed.ings q.re within the exclusiue jurisdiction of the collector of
which is reuiewable by the comrnissioner of custorns whose decision, Customs to the erclusion of regular courts. Regional Trial Courts ure
in turn, is reuiewable by the Court of Tar Appeals (Ibid.). deuoid of cornpetence to pass upon the ualidity or regularity of seizure
and. forfeiture proceedings conducted by the Bureau of Customs and
Alternative suggested answer: to enjoin or otherwise interfere with these proceedings (Republic a'
No. The question of seizure and forfeiture is for the Collector of CFI of Manila, G.P.. No,43747, September 2, 7992; Jao u. CA,
customs to determine in the fi,rst instance and then the commissioner G..R. No. 704604, October 6,7995).
842 lltivtt,;wt,:tt ott'l'lxa,tLott 'l'nrrr,r, rrNn ( ltrs'trrvs ( iont,: ft4:i
l,'rr rrtlrurrctrl,rrl l'rittci;lles

Bar Question (1994) of the Philippines with intention to unload and is deemed terminated
In smuggling a shipment of garlic, the smugglers used an upon payment ofthe duties, taxes and other charges due upon the
eight-wheeler truck which they hired for the purpose of taking out articles and the legal permit for withdrawal has been issued, or where
the shipment from the customs zone. Danny, the truck owner, did the articles are duty-free, once the articles have left thejurisdiction
not have a certificate ofpublic convenience to operate his trucking of the customs.
business. Danny did not know that the shipment of garlic was illegally The second type of smuggling refers to any degree ofparbicipation
imporbed. in the commission of unlawful importation.
Can the Collector of Customs of the port seize and forfeit the The third type of smuggling is committed when the accused is
truck as an instrument in the smuggling? found to have possession of dutiable arbicles while inside the premises
of the airport (Tomas Saloador a. Peopl.e of the Philippines).
Suggested answer:
Yes, the Collector of Custorns of the port can seize and forfeit the Bar Question (2013)
truck as an instrument in the smuggling actiuity, since the sanle was There is smuggling when new motor uehicles were declared as
used unlawfully in the importation of smuggled articles. The mere used truck replacement parts. - There is no doubt that smuggling of'
carrying of such articles on board the truck (in commercial quantities) the first type was committed when the shipments of 3 x 40 container
shall subject the truck to forfeiture, since it was not being used as q vans arrived at the Port of Cebu from Korea on board a vessel with
duty authorized comrnon carrier, which was chartered or lea,sed. q,s declared cargo: Used truck replacement parts, when in truth and in
such (Sec. 2530[a], TCC). fact, it contained units of Sportage and Gallope.
Moreouer, although forfeiture of the uehicle will not be effected Under Section 1203, TCCP, the owner of the imported articles
if it is established that the ou)ner thereof had no knowledge of is the consignee. In the instant case, all of the bills of lading provide
or participation in the unlawful act, there arises a prima facie that the consignee is Trex Eve Auto Sales and Services, the owner of
presumption or knowledge or participation if the owner is not In the the imported articles. Nevertheless, a further review of the records
business for which the conueyance is generally used. Thus, not hauing reveals that Trex Eve Auto Sales and Services is a sole proprietorship,
a certificate of public conuenience to operate a trucking business, he which is neither a natural person, nor a juridical person. The sole
is legally deetned not to houe been engaged in the trucking business proprietorship lacks juridical personality; thus, it Is the owner/
(Sec. 2531, TCC).
proprietor who is personally liable for all the debts and obligations of
the business. Section 1203, TCCP provides that "all imported articles
Smuggling shall be the property of the person to whom it is consigned."
Smuggling is committed by any person who (1) fraudulently From the foregoing, the law created a presumption of ownership.
imports orbrings into the Philippines any article contrary to law; (2) That ownership is vested with the consignee. Whether or not the
assists in so doing any article contrary to law; or (3) receives, conceals, accused parbicipated in the preparation ofthe bill ofland is immaterial
buys, sells or in any manner facilitate the transportation, concealment to disprove ownership, for the law created a presumption of ownership.
or sale of such goods after importation, knowing the same to have Therefore, it was imperative for Sayson to disprove ownership of
been imported contrary to law (Sec. 3601, TCCP). said articles by showing proof to the contrary, which he failed to do
(People u. Soyson, CTA Critninal Case, December 72r 2012).
The first t5rye of smuggling pertains to fraudulent importation.
To constitute fraud, there must be intentional fraud, consisting of
deception, willfully and deliberately dared or resorted to In order Bar Question (2013, 1994)
to give up some right. While importation is defined as "consisting of The Collector of Customs instituted seizure proceedings against
bringing an article into the country from the outside," importation a shipment of motor vehicles for having been misdeclared as second-
commences when the carrying vessel or aircraft enters the jurisdiction
844 Itt,:vtt,rwt,ltt oN'l'nxllroru nltr ( lrs'trnts ( iotrt,r
'l'nttrt,'r,' n45
l,'undamcntal l'rinciplcs

hand vehicles. state the procedure for the review ofthe decision up Suggested answer:
to the supreme court of the collector of customs adverse to the
importer. Motion granted. The Court of Tax Appeals has jurisdiction only
ouer decisions of the Commissioner of Custorns in cases inuoluing
Suggested answer: seizures, detention or release of property affected. (Sec. 7. R.A. No.
1125). There is no decision yet of the Commissioner which is subject
The procedure in seizure coses may be summarized. as follows: to reuiew by the Court of Tax Appeals.
The collector issues a warrant for the detention or forfeiture
of the imported articles (Sec. 2J01, TCC); b) Under the same facts, could the Importer fiIe an action in
the Regional Trial Court for repleuin onl}r'e ground that the
The Collector giues the irnporter a written notice of the articles are being wrongfully detained by the Collector of
seizure and fires a hearing date to giue the importer an Customs since the importation was not illegal and therefore
opportunity to be heard (Sec. 2J05, TCC); exempt from seizure? Explain.
Aformal hearing is conducted (5ec.2512, TCC);
Suggested answer:
The Collector renders a declaration offorfeiture (9ec.2J12,
rCC); No. The legislators intended to diuest the Regional Trial Courts
ofthejurisdiction to repleuin a property which is a subject of seizure
The importer aggrieued by the action of the Collector in and forfeiture proceedings for Ltiolation of the Tariffand Customs Code
any case of seizure rnay appeal to the Commissioner for his otherwise, actions for forlbiture of property for uiolation of the Custom,s
reuiew within fifteen (15) days from written notice of the Iaws could easily be underminul by the simple deuise of repleuin. (De
Collectoy's decision (Sec. 2515, TCC); la Fuente a. De Veyra, et al., 120 SCRA 455).
The irnporter aggrieued by the action or ruling of the There should be no u.nne(.st;ery hindrance on the gouernmenl.'s
Comrnissioner in any case of seizure may appeal to the driue to preuent smuggling an,d, olh,er frauds upon the Customs.
Court of Tax Appeals (Sec. 2402, fCe; Furthermore, the Regional 'I'riu.l (lourt do not haue jurisdiction in
The importer aduersely affected by the decision of the Court order to render effectiue and effick:n.l llrc utllection of import and export
of Tox Appeals may appeal to the Court of Appeals within duties due the State, which enu.blt:s lhe gouernment to carry out the
fifteen (15) days which may be extended for another fifteen functions it has been instituted h y'rfitrm. (Jao, et al. u. Court of
(15) days or such period as the Court of Tax Appeals may Appeals, et a1.,249 SCRA 35, 4:l).
decide. I'he Collector of Customs has.juris<li,ction to heq.r and determine
whe.ther or not a uessel was seized uti.t.lt.i.tt. th.<: territorial waters of the
Bar Question (2000) Philippines. Claim that seizure of'uesscl. lry th.e Customs Collector was
made outsirle the territorial jurisdit:liort. ol'l,h,e Philippines should be
a) On the basis ofa warrant ofseizure and detention issued
raised us o defense before the Collecl.or of'(irt.sktms, not by a separate
by the collector of customs for the purpose of enforcing the Tariff
action hefitre the CFI (Deln Fuente o. De Veyra, supra).
and customs Laws, assorted brands of cigarettes said to have been
illegally imported into the Philippines were seized from a store where
they were openly offered for sale. Dissatisfied with the decision Refund of customs duties
rendered after hearing by the collector of customs on the confiscation ( i rrr rr<ll,cq Industrial Steel Produr:t,s is rr <lotrtcstic corporation that
of the articles, the importer filed a petition for review with the court appliod lirr ir lctter of credit and paid thc prc-rcrltt isite advance deposit
of rax Appeals. The collector moved to dismiss the petition for lack amounl.irrg t,o ?156,101withMetrobank on l.lrc shipment of tool steel
ofjurisdiction. Rule on the motion. from (iorlnrur.y. However, the imporl,rrl.iorr rlirl rrot, materialize, the
846 llt,rv rr,:wr,:rr oru 'l'AxA,r'l rr.r

letter of credit remains unutilized; hence, subsequcntl.y cancclltrcl h.y


Metrobank.
Grandteq filed a claim for refund on February 16, 2002. tsOC
recommended and approved the claim, but when elevated to the
Secretary ofFinance, the latter denied the claim for failure to pay
the required processing fee within the statutory limit.
The CTA held that the records submitted by Grandteq have
shown that the period required under CAO 2-gb and Section 1Z0g
of the TccP was followed by Grandteq. The provisions of law cited
by the Secretary of Finance (Secs. 3301 and SB0S, TCC?) does not
mention that the refund processing fee should be paid within the
one year period under CAO 5-92, in order to be entitled to a claim
for refund of customs duties.

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