4 2020 UP BOC Taxation Law Reviewer PDF

U.P.
LAW BOC TAXATION

U.P. LAW BOC TAXATION
TABLE OF CONTENTS
TAXATION 1........................................................... 1 I. KINDS OF TAXES ......................................... 24
I. GENERAL PRINCIPLES OF TAXATION......... 2 1. AS TO OBJECT ..................................................24
2. AS TO BURDEN OR INCIDENCE .............................24
A. CONCEPT AND PURPOSE OF TAXATION .... 2
3. AS TO TAX RATES .............................................24
1. DEFINITION AND CONCEPT ................................... 2 4. AS TO PURPOSE ...............................................25
2. PURPOSE ......................................................... 2 5. AS TO SCOPE (OR AUTHORITY IMPOSING THE TAX) .....
3. TAX AS DISTINGUISHED FROM OTHER FORMS OF .................................................................25
EXACTIONS ....................................................... 4 6. AS TO GRADUATION ..........................................25
B. POWER OF TAXATION AS DISTINGUISHED J. GENERAL CONCEPTS IN TAXATION .......... 25
FROM POLICE POWER AND EMINENT DOMAIN .. 7
1. PROSPECTIVITY OF TAX LAWS ............................25
C. THEORY AND BASIS OF TAXATION ............. 9 2. IMPRESCRIPTIBILITY OF TAXES ............................26
3. SITUS OF TAXATION ..........................................27
1. LIFEBLOOD THEORY ............................................ 9
4. DOUBLE TAXATION ...........................................29
2. NECESSITY THEORY ........................................... 9
a. Strict sense (Direct Duplicate Taxation) ..29
3. BENEFITS-PROTECTION THEORY (SYMBIOTIC
b. Broad sense (Indirect Duplicate Taxation)
RELATIONSHIP) .................................................. 9
29
D. JURISDICTION OVER SUBJECT AND 5. ESCAPE FROM TAXATION ...................................30
OBJECTS............................................................... 9 a. Shifting of Tax Burden............................30
b. Tax Avoidance (Tax Minimization) ..........32
E. PRINCIPLES OF A SOUND TAX SYSTEM ... 10
c. Tax Evasion (Tax Dodging) ....................32
1. FISCAL ADEQUACY ........................................... 10 d. Transformation.......................................33
2. ADMINISTRATIVE FEASIBILITY.............................. 10 6. EXEMPTION FROM TAXATION ..............................33
3. THEORETICAL JUSTICE OR EQUALITY ................... 10 7. DOCTRINE OF EQUITABLE RECOUPMENT ..............35
F. INHERENT AND CONSTITUTIONAL 8. PROHIBITION ON COMPENSATION AND SET-OFF ....35
9. COMPROMISE ..................................................35
LIMITATIONS ON TAXATION............................... 10
10. TAX AMNESTY ..............................................36
1. INHERENT LIMITATIONS ..................................... 10
K. CONSTRUCTION AND INTERPRETATION OF
a. Public Purpose ...................................... 10
TAX LAWS, RULES, AND REGULATIONS ........... 36
b. Inherently Legislative ............................. 11
c. Territorial............................................... 12 1. TAX LAWS .......................................................36
d. International Comity............................... 13 2. TAX EXEMPTION AND EXCLUSION ........................37
e. Exemption of Government Entities, 3. TAX RULES AND REGULATIONS ...........................37
Agencies, and Instrumentalities ................ 13 4. PENAL PROVISIONS OF TAX LAWS .......................39
2. CONSTITUTIONAL LIMITATIONS ........................... 14
II. NATIONAL INTERNAL REVENUE CODE
a. Provisions directly affecting Taxation...... 15
(NIRC) OF 1997, AS AMENDED............................ 39
b. Provisions Indirectly Affecting Taxation .. 21
A. TAXING AUTHORITY.................................... 39
G. STAGES OR ASPECTS OF TAXATION........ 22
1. JURISDICTION, POWER AND FUNCTIONS OF THE
1. LEGISLATIVE ACT: LEVY OR IMPOSITION ............... 22
COMMISSIONER OF INTERNAL REVENUE ...............39
2. EXECUTIVE ACT: ASSESSMENT AND COLLECTION ......
a. Powers and Duties of the Bureau of Internal
................................................................. 23
Revenue (Sec. 2, NIRC) ...........................39
3. TAXPAYER’S ACT: PAYMENT .............................. 23
b. Power of the Commissioner to Interpret Tax
4. TAXPAYER’S AND EXECUTIVE ACT: REFUND ......... 23
Laws and to Decide Tax Cases.................39
H. REQUISITES OF A VALID TAX .................... 23 c. Non-retroactivity of rulings (Sec. 246, NIRC)
39
2. RULE-MAKING AUTHORITY OF THE SECRETARY OF a. Domestic Corporations and Resident

FINANCE ......................................................... 40 Foreign Corporations................................97
a. Authority of the Secretary of Finance to b. Non-resident Foreign Corporations (NRFC)
Promulgate Rules and Regulations (Sec. [Sec. 28(B)]............................................ 108
244, NIRC) .............................................. 40 c. Corporations Exempt from Income Tax . 108
b. Specific Provisions to be Contained in Rules 7. FILING OF RETURNS AND PAYMENT ................... 111
and Regulations (Sec. 245, NIRC)............ 40 a. Individual Return .................................. 111
b. Corporate Returns ............................... 113
B. INCOME TAX ............................................... 41
c. Return on Capital Gains Realized from Sale
1. DEFINITION, NATURE AND GENERAL PRINCIPLES ... 41 of Shares of Stock and Real Estate......... 114
a. Income Tax Systems ............................. 42 8. WITHHOLDING OF TAXES ................................. 114
b. Features of the Philippine Income Tax Law a. Concept ............................................... 114
............................................................. 43 b. Final Withholding Tax........................... 114
c. Criteria in Imposing Philippine Income Tax . c. Creditable Withholding Tax................... 114
............................................................. 43 d. Fringe Benefits Tax .............................. 115
d. Types of Philippine Income Tax ............. 43
TAXATION 2 ....................................................... 116
e. Kinds of Taxpayers................................ 44
f. Estates and Trusts ................................ 46 A. ESTATE TAX .............................................. 117
2. CONCEPT OF INCOME ....................................... 47
1. BASIC PRINCIPLES, CONCEPT, AND DEFINITION ... 117
a. When Income is Taxable ....................... 48
2. CLASSIFICATION OF DECEDENT ......................... 118
b. Tests in Determining Whether Income is
3. COMPOSITION OF GROSS ESTATE ..................... 119
Earned for Tax Purposes ......................... 49
c. Methods of Accounting .......................... 50 B. DONOR’S TAX............................................ 132
d. Situs of Income ..................................... 51
1. BASIC PRINCIPLES, CONCEPT, AND DEFINITION ... 132
3. GROSS INCOME ............................................... 51
2. REQUISITES OF VALID DONATION ...................... 132
a. Definition ............................................... 51
3. TRANSFERS WHICH MAY BE CONSIDERED AS
b. Distinguish: gross income, net income, and
DONATION ..................................................... 133
taxable income ........................................ 52
a. Sale, Exchange, or Transfer of Property for
c. Sources of Income Subject to Tax.......... 52
Less Than Adequate and Full Consideration
d. Exclusions............................................. 63
........................................................... 133
4. DEDUCTIONS FROM GROSS INCOME .................... 68
b. Condonation or Remission of Debt ....... 134
a. General Rules ....................................... 68
c. Renunciation of inheritance .................. 134
b. Concept of Return of Capital .................. 68
4. CLASSIFICATION OF DONOR ............................. 134
c. Distinguish: Itemized Deductions and
5. DETERMINATION OF GROSS GIFT (INCLUDING
Optional Standard Deductions.................. 69
COMPOSITION AND EXEMPTIONS) ...................... 135
d. Items Not Deductible ............................. 81
6. TAX CREDIT FOR DONOR’S TAXES PAID IN A FOREIGN
5. INCOME TAX ON INDIVIDUALS ............................. 82
COUNTRY ...................................................... 137
a. Resident Citizens, Non-Resident Citizens
7. FILING OF RETURN AND PAYMENT ..................... 137
and Resident Aliens [Sec. 24(A)(1)] .......... 82
b. Non-Resident Aliens Engaged in Trade or C. VALUE-ADDED TAX (VAT) ......................... 148
Business ................................................. 88
1. NATURE & CHARACTERISTICS OF VAT ............... 148
c. Non-Resident Aliens Not Engaged in Trade
a. Tax on value added.............................. 148
or Business [Sec. 25 (B)] ......................... 88
b. Sales Tax ............................................ 148
d. Aliens Employed by Regional Headquarters,
c. Tax on Consumption ............................ 148
Regional Operating Headquarters, Offshore
d. Indirect tax: Impact and Incidence of Tax ...
Banking Units, and Petroleum Service
........................................................... 148
Contractors.............................................. 89
e. Tax Credit Method ............................... 148
e. Individual Taxpayers exempt from income
f. Destination Principle and Cross-Border
tax........................................................... 89
Doctrine ................................................. 148
6. INCOME TAX ON CORPORATIONS ........................ 97
2. PERSONS LIABLE TO VALUE-ADDED TAX ............ 150
3. COMPOSITION OF VALUE-ADDED TAX ................ 150 2. NATURE AND SOURCE OF TAXING POWER .......... 217
a. On sale of goods or properties ............. 150 a. Grant of Local Taxing Power under the Local
b. On importation of goods....................... 155 Government Code (LGC)........................ 217
c. On sale of services and use or lease of b. Authority to Prescribe Penalties for Tax
properties .............................................. 155 Violations ............................................... 217
4. ZERO-RATED AND EFFECTIVELY ZERO-RATED SALES c. Authority to Grant Local Tax Exemptions ...
OF GOODS OR PROPERTIES, AND SERVICES......... 159 ........................................................... 217
5. VALUE-ADDED TAX-EXEMPT TRANSACTIONS ....... 162 d. Withdrawal of Exemptions .................... 217
6. INPUT AND OUTPUT TAX .................................. 170 e. Authority to Adjust Local Tax Rates ...... 218
7. REFUND OR TAX CREDIT OF EXCESS INPUT TAX; f. Residual Taxing Power of Local
PROCEDURE ................................................. 174 Governments ......................................... 218
8. COMPLIANCE REQUIREMENTS .......................... 179 3. SCOPE OF TAXING POWER ............................... 218
a. Registration......................................... 179 4. SPECIFIC TAXING POWER OF LGUS .................. 219
b. Invoicing Requirements ....................... 179 a. Taxing Powers of Provinces ................. 219
c. Filing of Returns and Payment ............. 180 b. Taxing Powers of Municipalities............ 222
d. Withholding of Final Value-added Tax on c. Taxing Powers of Cities........................ 226
Sales to Government ............................. 181 d. Taxing Powers of Barangays ................ 226
e. Administrative and Penal Sanctions ..... 181 5. COMMON REVENUE-RAISING POWERS ............... 227
6. COMMUNITY TAX ............................................ 227
D. PERCENTAGE TAXES: CONCEPT AND
7. COMMON LIMITATIONS ON THE TAXING POWERS OF
NATURE..................................................... 187
LGUS........................................................... 229
E. EXCISE TAX: CONCEPT AND NATURE .... 191 8. REQUIREMENTS FOR A VALID TAX ORDINANCE .... 231
9. COLLECTION OF TAXES.................................... 232
F. DOCUMENTARY STAMP TAX: CONCEPT AND
10. TAXPAYER’S REMEDIES ............................... 232
NATURE......................................................... 192
a. Protest of Assessment ......................... 233
1. TAX REMEDIES UNDER THE NIRC .................... 193 b. Claim for Refund or Tax Credit of
2. TAXPAYER’S REMEDIES................................... 198 Erroneously or Illegally Collected Tax, Fee or
a. Protesting the assessment ................... 199 Charge................................................... 233
b. Recovery of Tax Erroneously or Illegally c. Question the Legality of the Ordinance . 233
Collected ............................................... 201 11. ASSESSMENT AND COLLECTION OF LOCAL TAXES .
c. Power of Commissioner of Internal Revenue ............................................................... 234
to Compromise ...................................... 205
B. REAL PROPERTY TAXATION .................... 236
d. Non-retroactivity of Rulings .................. 206
3. GOVERNMENT REMEDIES FOR COLLECTION OF 1. FUNDAMENTAL PRINCIPLES .............................. 236
DELINQUENT TAXES ....................................... 206 2. NATURE OF REAL PROPERTY TAX (RPT) ........... 236
a. Requisites ........................................... 207 3. IMPOSITION.................................................... 236
b. Prescriptive Periods; Suspension of Running a. Power to Levy ...................................... 236
of Statute of Limitations.......................... 207 b. Exemptions from RPT .......................... 238
c. Administrative Remedies ..................... 207 4. APPRAISAL AND ASSESSMENT OF REAL PROPERTY ...
d. No Injunction Rule; Exceptions ............ 214 ............................................................... 238
4. CIVIL PENALTIES ............................................ 214 a. Classes of Real Property...................... 239
a. Delinquency Interest and Deficiency Interest b. Assessment of Real Property Based on
........................................................... 214 Actual Use ............................................. 240
b. Surcharge ........................................... 215 5. COLLECTION OF REAL PROPERTY TAX ............... 241
c. Compromise Penalty ........................... 215 6. TAXPAYER’S REMEDIES ................................... 244
d. Fraud Penalty...................................... 215 a. Contesting the Valuation of Real Property..
........................................................... 244
III. LOCAL TAXATION ........................................ 216
b. Contesting a Deficiency Tax Assessment...
A. LOCAL GOVERNMENT TAXATION ........... 216 ........................................................... 244
c. Compromising an RPT assessment ...... 246
1. FUNDAMENTAL PRINCIPLES (U-PUCE-PIP) ....... 216
IV. JUDICIAL REMEDIES ................................... 250
A. JURISDICTION OF THE COURT OF TAX

APPEALS ....................................................... 250
1. CIVIL CASES ................................................. 250

a. Exclusive Original Jurisdiction of the Court in
Divisions................................................ 250
b. Exclusive Appellate Jurisdiction in Civil
Cases.................................................... 250
2. CRIMINAL CASES ........................................... 251
a. Exclusive Original Jurisdiction of the Court in
Divisions................................................ 251
b. Exclusive Appellate Jurisdiction in Criminal
Cases.................................................... 251
3. CIVIL CASES ................................................. 253
a. Who May Appeal, Mode of Appeal, Effect of
Appeal................................................... 253
b. Suspension of Collection of Taxes ....... 253
c. Injunction not available to restrain collection
253
4. CRIMINAL CASES ........................................... 255
a. Institution and Prosecution of Criminal
Actions .................................................. 255
b. Institution of Civil Action in Criminal Action .
........................................................... 255
c. Period to Appeal.................................. 255
5. APPEAL TO THE CTA EN BANC ........................ 256
6. PETITION FOR REVIEW ON CERTIORARI TO SUPREME
COURT ......................................................... 256
U.P. LAW BOC TAXATION 1 TAXATION
TAXATION 1
TAXATION LAW
Page 1 of 256
[PAL v. Edu, G.R. No. L-41383 (1988)]

I. GENERAL PRINCIPLES
OF TAXATION b. Non-revenue/special or regulatory
Taxation is often employed as a device for
A. CONCEPT AND PURPOSE regulation by means of which certain
OF TAXATION effects or conditions envisioned by
governments may be achieved. Taxes may
be levied with a regulatory purpose to
1. Definition and Concept provide means for the rehabilitation and
stabilization of a threatened industry which
a. Revenue Raising Measure is affected with public interest as to be
The process or means by which the within the police power of the state. Thus,
sovereign, through its law-making body, taxation can:
raises income to defray the necessary 1. Promote general welfare of the
expenses of government; a method of people as an implement of police
apportioning the cost of government power
among those who in some measure are
privileged to enjoy its benefits and must, The so-called “sin taxes” on alcohol
therefore, bear its burdens [51 Am. Jur. 34; and tobacco manufacturers help
1 Cooley 72-93]. dissuade the consumers from
excessive intake of these potentially
b. As a Power harmful products. [Southern Cross
i. It refers to the inherent power of the state Cement Corporation v. Cement
to demand enforced contributions for public Manufacturers Association of the
purpose. Philippines, et al., G. R. No. 158540
ii. Is described as a destructive power (2005)]
which interferes with the personal and
property rights of the people and takes 2. Strengthen anemic enterprises or
from them a portion of their property for the provide incentives to greater
support of the government. [Paseo Realty production through grant of tax
& Development Corporation v. CA, G.R. exemptions or the creation of
No. 119286 (2004)] conditions conducive to their growth.
3. Protect local industries against
foreign competition by imposing
2. Purpose additional taxes on imported goods, or
encourage foreign trade by providing
a. Revenue-raising tax incentives on imported goods.
The primary purpose is to generate funds 4. Be a bargaining tool by setting tariff
for the State to finance the needs of the rates first at a relatively high level
citizenry and to advance the common weal. before trade negotiations are entered
[Napocor v. Province of Albay G.R. No. into with another country.
87479, 4 June 1990.] 5. Halt inflation in periods of prosperity
to curb spending power; ward off
Fees may be properly regarded as taxes depression in periods of slump to
even though they also serve as an expand business.
instrument of regulation. If the purpose is 6. Reduce inequalities in wealth and
primarily revenue, or if revenue is, at least, incomes, as for instance, the estate,
one of the real and substantial purposes, donor's and income taxes, their payers
then the exaction is properly called a tax.
Page 2 of 256
being the recipients of unearned wealth b. Grant tax exemptions or

or mostly in the higher income condonations; and
brackets. Progressivity is based on the c. Specify or provide for the
principle that those who are able to pay administrative as well as judicial
more should shoulder the bigger remedies that either the government
portion of the tax burden. or the taxpayers may avail themselves
[MAMALATEO] in the proper implementation of the tax
7. Encourage economic growth measure.
through the grant of incentives or
exemptions, which encourage 3. Subject to constitutional and inherent
investment and thereby stimulate limitations – The power to tax is said to be
economic activity the strongest of all the powers of
8. Taxes may be levied to promote government. It is unlimited, plenary,
science and invention [see RA. No. comprehensive and supreme. In the
5448] or to finance educational absence of constitutional restrictions, the
activities [see RA. No. 5447] or to principal checks on its abuse rest on the
improve the efficiency of local responsibility of members of Congress to
police forces in the maintenance of their constituents. However, the power of
peace and order through grant of taxation is subject to constitutional and
subsidy [see RA. No. 6141]. inherent limitations [MAMALATEO]. These
9. To push for the government’s health limitations are those provided in the
measure, just like what happened in fundamental law or implied therefrom,
the landmark legislation on sin taxes in while the rest spring from the nature of the
2012 [see R.A. No. 10351]. taxing power itself although they may or
may not be provided in the Constitution.
Nature
1. Inherent in sovereignty – The power to Elements of Taxation
tax is an attribute of sovereignty. It is a 1. Enforced proportional contribution from
power emanating from necessity because persons and properties - Its imposition is in
it imposes a necessary burden to preserve no way dependent upon the will or assent
the State's sovereignty xxx [Phil. Guaranty of the person taxed. It is not contractual,
Co., Inc. v. Commissioner, G.R. No. L- either express or implied, but positive acts
22074 (1965)]. of government;
2. Imposed by the State by virtue of its
2. Essentially a legislative function – The sovereignty; and
power to tax is peculiarly and exclusively 3. It is levied for the support of government
legislative and cannot be exercised by the [Republic v. COCOFED, G.R. Nos. 147062-64
executive or judicial branch of the (2001)]
government [1 Cooley 160-161]. Hence,
only Congress, our national legislative Characteristics of Taxing Power
body, can impose taxes. The levy of a tax, 1. It is comprehensive. Covers persons,
however, may also be made by a local businesses, activities, professions, rights,
legislative body subject to such limitations and privileges.
as may be provided by law. It includes the 2. It is unlimited. A tax does not cease to be
authority to: valid merely because it regulates,
a. Determine the nature, purpose, discourages, or even definitely deters the
extent, coverage, apportionment, activities taxed. The power to impose taxes
situs, and method of collection of the is one so unlimited in force and so
tax; searching in extent, that the courts scarcely
Page 3 of 256
TAXATION 1
TAXATION LAW
Page 1 of 256
[PAL v. Edu, G.R. No. L-41383 (1988)]

I. GENERAL PRINCIPLES
OF TAXATION b. Non-revenue/special or regulatory
Taxation is often employed as a device for
A. CONCEPT AND PURPOSE regulation by means of which certain
OF TAXATION effects or conditions envisioned by
governments may be achieved. Taxes may
be levied with a regulatory purpose to
1. Definition and Concept provide means for the rehabilitation and
stabilization of a threatened industry which
a. Revenue Raising Measure is affected with public interest as to be
The process or means by which the within the police power of the state. Thus,
sovereign, through its law-making body, taxation can:
raises income to defray the necessary 1. Promote general welfare of the
expenses of government; a method of people as an implement of police
apportioning the cost of government power
among those who in some measure are
privileged to enjoy its benefits and must, The so-called “sin taxes” on alcohol
therefore, bear its burdens [51 Am. Jur. 34; and tobacco manufacturers help
1 Cooley 72-93]. dissuade the consumers from
excessive intake of these potentially
b. As a Power harmful products. [Southern Cross
i. It refers to the inherent power of the state Cement Corporation v. Cement
to demand enforced contributions for public Manufacturers Association of the
purpose. Philippines, et al., G. R. No. 158540
ii. Is described as a destructive power (2005)]
which interferes with the personal and
property rights of the people and takes 2. Strengthen anemic enterprises or
from them a portion of their property for the provide incentives to greater
support of the government. [Paseo Realty production through grant of tax
& Development Corporation v. CA, G.R. exemptions or the creation of
No. 119286 (2004)] conditions conducive to their growth.
3. Protect local industries against
foreign competition by imposing
2. Purpose additional taxes on imported goods, or
encourage foreign trade by providing
a. Revenue-raising tax incentives on imported goods.
The primary purpose is to generate funds 4. Be a bargaining tool by setting tariff
for the State to finance the needs of the rates first at a relatively high level
citizenry and to advance the common weal. before trade negotiations are entered
[Napocor v. Province of Albay G.R. No. into with another country.
87479, 4 June 1990.] 5. Halt inflation in periods of prosperity
to curb spending power; ward off
Fees may be properly regarded as taxes depression in periods of slump to
even though they also serve as an expand business.
instrument of regulation. If the purpose is 6. Reduce inequalities in wealth and
primarily revenue, or if revenue is, at least, incomes, as for instance, the estate,
one of the real and substantial purposes, donor's and income taxes, their payers
then the exaction is properly called a tax.
Page 2 of 256
being the recipients of unearned wealth b. Grant tax exemptions or

or mostly in the higher income condonations; and
brackets. Progressivity is based on the c. Specify or provide for the
principle that those who are able to pay administrative as well as judicial
more should shoulder the bigger remedies that either the government
portion of the tax burden. or the taxpayers may avail themselves
[MAMALATEO] in the proper implementation of the tax
7. Encourage economic growth measure.
through the grant of incentives or
exemptions, which encourage 3. Subject to constitutional and inherent
investment and thereby stimulate limitations – The power to tax is said to be
economic activity the strongest of all the powers of
8. Taxes may be levied to promote government. It is unlimited, plenary,
science and invention [see RA. No. comprehensive and supreme. In the
5448] or to finance educational absence of constitutional restrictions, the
activities [see RA. No. 5447] or to principal checks on its abuse rest on the
improve the efficiency of local responsibility of members of Congress to
police forces in the maintenance of their constituents. However, the power of
peace and order through grant of taxation is subject to constitutional and
subsidy [see RA. No. 6141]. inherent limitations [MAMALATEO]. These
9. To push for the government’s health limitations are those provided in the
measure, just like what happened in fundamental law or implied therefrom,
the landmark legislation on sin taxes in while the rest spring from the nature of the
2012 [see R.A. No. 10351]. taxing power itself although they may or
may not be provided in the Constitution.
Nature
1. Inherent in sovereignty – The power to Elements of Taxation
tax is an attribute of sovereignty. It is a 1. Enforced proportional contribution from
power emanating from necessity because persons and properties - Its imposition is in
it imposes a necessary burden to preserve no way dependent upon the will or assent
the State's sovereignty xxx [Phil. Guaranty of the person taxed. It is not contractual,
Co., Inc. v. Commissioner, G.R. No. L- either express or implied, but positive acts
22074 (1965)]. of government;
2. Imposed by the State by virtue of its
2. Essentially a legislative function – The sovereignty; and
power to tax is peculiarly and exclusively 3. It is levied for the support of government
legislative and cannot be exercised by the [Republic v. COCOFED, G.R. Nos. 147062-64
executive or judicial branch of the (2001)]
government [1 Cooley 160-161]. Hence,
only Congress, our national legislative Characteristics of Taxing Power
body, can impose taxes. The levy of a tax, 1. It is comprehensive. Covers persons,
however, may also be made by a local businesses, activities, professions, rights,
legislative body subject to such limitations and privileges.
as may be provided by law. It includes the 2. It is unlimited. A tax does not cease to be
authority to: valid merely because it regulates,
a. Determine the nature, purpose, discourages, or even definitely deters the
extent, coverage, apportionment, activities taxed. The power to impose taxes
situs, and method of collection of the is one so unlimited in force and so
tax; searching in extent, that the courts scarcely
Page 3 of 256
venture to declare that it is subject to any State. The power to tax is a legislative
restrictions whatever, except such as rest power but is also granted to local
in the discretion of the authority which governments, subject to such guidelines
exercises it. [Tio v. Videogram Regulatory and limitations as law may be provided by
Board, G.R. No. 75697 (1987)] law.
3. It is plenary or complete. Under NIRC, the
BIR may avail of certain remedies to “Each local government unit shall have the
ensure the collection of taxes. Taxes, being power to create its own sources of
the lifeblood of the government, should be revenues and to levy taxes, fees, and
collected without unnecessary hindrance, charges subject to such guidelines and
every precaution must be taken not to limitations as the Congress may provide,
unduly suppress it. [Republic v. Caguioa consistent with the basic policy of local
G.R. No. 168584 (2007)] autonomy. Such taxes, fees, and charges
4. It is supreme. It is supreme insofar as the shall accrue exclusively to the local
selection of the subject of taxation is governments.” [Sec. 5, Art. X, 1987
concerned, but it does not mean that it is Constitution];
superior to the other inherent powers of the
State. 3. Tax as Distinguished from
Characteristics of Tax Other Forms of Exactions
1. Enforced contribution
2. Proportionate in character – Laid by Tariff
some rule of apportionment which is Taxes Tariff
usually based on ability to pay.
All embracing term to A kind of tax imposed
“The rule of taxation shall be uniform and include various kinds on articles which are
equitable. The Congress shall evolve a of enforced traded internationally
progressive system of taxation.” [Sec. 28 contributions upon
(1), Art. VI, 1987 Constitution]; persons for the
attainment of public
3. Levied for public purpose. Revenues purposes
derived from taxes cannot be used for
purely private purposes or for the exclusive Tariff may be used in one of three (3) senses:
benefit of private persons. [Gaston v. 1. A book of rates drawn usually in
Republic Planters Bank, G.R. No. 77194 alphabetical order containing the names of
(1988)]; and several kinds of merchandise with the
corresponding duties to be paid for the
4. Generally payable in the form of money same; or
– Although the law may provide payment in 2. The duties payable on goods imported or
kind (e.g. backpay certificates under Sec. exported; or
2, R.A. No. 304, as amended); 3. The system or principle of imposing duties
on the importation (or exportation of goods)
5. Personal to the taxpayer;
6. Levied on persons, property, rights,
acts, privileges, or transactions;
7. Levied by the State which has
jurisdiction or control over the subject
to be taxed;
8. Levied by the law-making body of the
Page 4 of 256
Toll
Imposed on persons, Imposed only on the
Taxes Toll property and the right right to exercise a
to exercise a privilege
Paid for the support Paid for the use of privilege.
of the government another’s property.
Failure to pay does Failure to pay makes
Demand of Demand of not necessarily make the act or business
sovereignty proprietorship the act or business illegal.
illegal.
Generally, no limit on Amount paid
the amount collected depends upon the Penalty for non-
as long as it is not cost of construction payment:
excessive, or maintenance of Surcharges; or
unreasonable or the public Imprisonment
confiscatory improvement used. (except poll tax).
Imposed only by the Imposed by the
government government or by License or permit fee is a charge imposed
private individuals or under the police power for purposes of
entities. regulation.
A toll is a sum of money for the use of
License is in the nature of a special privilege,
something, generally applied to the
of a permission or authority to do what is within
consideration which is paid for the use of a
its terms. It makes lawful an act which would
road, bridge or the like, of a public nature. [1
otherwise be unlawful. A license granted by the
Cooley 77]
State is always revocable. [Gonzalo Sy Trading
v. Central Bank of the Phil., G.R. No. L-41480
License fee
(1976)]
License and
Taxes
Regulatory Fee Importance of the distinctions
1. It is necessary to determine whether a
Imposed under the Levied under the particular imposition is a tax or a license fee
taxing power of the police power of the because some limitations apply only to one
state for purposes of state. and not to the other, and for the reason that
revenue. exemption from taxes may not include
exemption from license fee.
Forced contributions Exacted primarily to 2. The power to regulate as an exercise of
for the purpose of regulate certain police power does not include the power to
maintaining businesses or impose fees for revenue purposes.
government occupations. [Progressive Development Corp. v.
functions. Quezon City, G.R. No. L-36081 (1989)]
3. An exaction, however, may be considered
Generally unlimited Should not
as to amount unreasonably both a tax and a license fee. This is true in
the case of car registration fees which may
exceed the
expenses of issuing be regarded as taxes even as they also
serve as an instrument of regulation. If the
the license and of
supervision. purpose is primarily revenue, or if revenue
is, at least, one of the real and substantial
purposes, then the exaction is properly
Page 5 of 256
called a tax. [Phil. Airlines, Inc. v. Edu, G.R.

It has general Exceptional both as
No. L- 41383 (1988)]
application both as to to time and locality
4. But it is possible that a tax may only have
time and place
a regulatory purpose. The general rule,
however, is that the imposition is a tax if its
primary purpose is to generate revenue, A special assessment is not a personal liability
and regulation is merely incidental; but if of the person assessed, i.e., his liability is
regulation is the primary purpose, the fact limited only to the land involved. It is based
that incidentally revenue is also obtained wholly on benefits (not necessity).
does not make the imposition a tax.
[Progressive Development Corp. v. A charge imposed only on property owners
Quezon City, supra] benefited is a special assessment rather than
a tax notwithstanding that the statute calls it a
Primary purpose test (as seen in Progressive tax. The rule is that an exemption from taxation
Development Corp v. QC, supra): does not include exemption from special
1. Imposition must relate to an occupation or assessment. But the power to tax carries with
activity that so engages the public interest it the power to levy a special assessment.
in health, morals, safety and development
as to require regulation for the protection Note: The term "special levy" is the name used
and promotion of such public interest; in the present Local Government Code (RA.
2. Imposition must bear a reasonable relation No. 7160). A province, city, or municipality, or
to the probable expenses of regulation, the National Government, may impose a
taking into account not only the costs of special levy on lands especially benefited by
direct regulation but also its incidental public works or improvements financed by it.
consequences as well. [Sec. 240, RA 7160]
Note: Taxes may also be imposed for Debt

regulatory purposes. It is called regulatory tax. Taxes Debt
Special assessment Based on laws Generally based on

Taxes Special contract, express or
Assessment implied.
Levied not only on Levied only on land Generally cannot be Assignable

land assigned
Imposed regardless Imposed because of Generally paid in May be paid in kind

of public an increase in value money
improvements of land benefited by
Cannot be a subject Can be a subject of
public improvement
of set off or set off or
Contribution of a Contribution of a compensation compensation (see
taxpayer for the person for the Art. 1279, Civil Code)
support of the construction of a
Imprisonment is a A person cannot be
government public improvement
sanction for non- imprisoned for non-
payment of tax, payment of debt
except poll tax (except when it
arises from a crime)
Page 6 of 256
authority).
Governed by the Governed by the
special prescriptive ordinary periods of
Since Congress has the power to exercise the
periods provided for prescription
State inherent powers of Police Power,
in the NIRC
Eminent Domain and Taxation, the distinction
Does not draw Draws interest when between police power and the power to tax xxx
interest except only it is so stipulated or would not be of any moment when Congress
when delinquent where there is itself exercises the power. [NTC v. CA, G.R.
default No. 127937 (1999)
Imposed only by Can be imposed by

public authority private individual
A tax is not a debt in the ordinary sense of the

word.
Penalty
Taxes Penalty
Violation of tax laws Any sanction

may give rise to imposed as a
imposition of penalty punishment for
violation of law or
acts deemed
injurious
Primarily intended to Designed to regulate

raise revenue conduct
May be imposed only May be imposed by

by the government the government or
private individuals or
entities
Cannot be a subject Can be a subject of

of set off or set off or
compensation compensation (see
Art. 1279, Civil Code)
B. POWER OF TAXATION AS
DISTINGUISHED FROM POLICE
POWER AND EMINENT DOMAIN
When the distinction of exercise of

powers is relevant
The distinction is important when the one
exercising it is the LGU (mere delegated
Page 7 of 256
Taxation Eminent Domain Police Power
May be exercised
May be exercised by:
May be exercised only only by:
Authority (who the government;
by: the government; or
exercises the its political subdivisions;
the government; or its political
Power) or may be granted to public service
its political subdivisions. subdivisions.
companies or public utilities.
The use of the

property is
The property (generally in
“regulated” for the
the form of money) is To facilitate the taking of private property for
Purpose purpose of
taken for the support of public use.
promoting the
the government.
general welfare; it is
not compensable.
Operates upon:
Operates upon: Operates on:
a community;
Persons Affected a community; an individual as the owner of a particular
or a class of
or class of individuals. property.
individuals.
There is no transfer
The money contributed of title. At most, there
Effect becomes part of the There is a transfer of the right to property. is restraint on the
public funds. injurious use of
property.
Protection and benefits Indirect benefits

he receives.
The enjoyment of the Market value of the property The person affected
privileges of living in an receives indirect
Benefits
organized society, He receives the market value of the benefits as may
Received
established and property taken from him. arise from the
safeguarded by the maintenance of a
devotion of taxes to healthy economic
public purpose. standard of society.
Amount imposed
should just be
commensurate to
Generally, there is no
Amount of No amount imposed but rather the owner is cover the cost of
limit on the amount of tax
Imposition paid the market value of property taken. regulation,
that may be imposed.
issuance of a
license or
surveillance
Relatively free from

Subject to constitutional Inferior to the impairment prohibition;
constitutional
limitations, including the government cannot expropriate private
Relationship to limitations and is
prohibition against property, which under a contract had
Constitution superior to the
impairment of the previously bound itself to purchase from the
impairment of
obligation of contracts. other contracting party.
contract provision.
[MAMALATEO, Reviewer on Taxation 2nd Edition (2008), pp. 11-12]
Page 8 of 256
U.P. LAW BOC TAXATION 1 TAXATION LAW
can be pointed out. [Lorenzo v. Posadas,

C. THEORY AND BASIS OF G.R. No. L-43082 (1937)]
TAXATION
3. Benefits-protection Theory
1. Lifeblood theory (Symbiotic Relationship)
The underlying basis of taxation is This principle serves as the basis of taxation
governmental necessity, for without taxation, a and is founded on the reciprocal duties of
government can neither exist nor endure. protection and support between the State
and its inhabitants.
Taxes are the lifeblood of the government and
so should be collected without unnecessary Despite the natural reluctance to surrender part
hindrance. It is said that taxes are what we pay of one's hard earned income to the taxing
for civilized society. Without taxes, the authorities, every person who is able to, must
government would be paralyzed for lack of the contribute his share in the running of the
motive power to activate and operate it [CIR v. government. The government for its part is
Algue, G.R. No. L-28896 (1988); See also CIR expected to respond in the form of tangible and
v. Pineda, G.R. No. L-22734 (1967)]. intangible benefits intended to improve the
lives of the people and enhance their moral and
2. Necessity theory material values. This symbiotic relationship is
the rationale of taxation and should dispel the
erroneous notion that it is an arbitrary method
The power of taxation proceeds upon the
of exaction by those in the seat of power. [CIR
theory that the existence of the government is
v. Algue, supra]
a necessity; that it cannot continue without
means to pay its expenses; and that for those
means it has the right to compel all citizens and D. JURISDICTION OVER
property within its limits to contribute.
SUBJECT AND OBJECTS
The power to tax is an attribute of sovereignty.
It is a power emanating from necessity. It is a The limited powers of sovereignty are confined
necessary burden to preserve the State's to objects within the respective spheres of
sovereignty and a means to give the citizenry: governmental control. These objects are the
• an army to resist an aggression; proper subjects or objects of taxation and none
• a navy to defend its shores from invasion; else.
• a corps of civil servants to serve;
• public improvement designed for the 1. Tax laws cannot operate beyond a
enjoyment of the citizenry and those which State’s territorial limits
come within the State's territory; and 2. The gov’t cannot tax a particular object of
• facilities and protection which a taxation which is not within its territorial
government is supposed to provide. [Phil. jurisdiction
Guaranty v. CIR, G.R. No. L-22074 (1965)] 3. Property outside the State’s jurisdiction
does not receive any protection of the State
The obligation to pay taxes rests upon the 4. If a law is passed by Congress, it must see
necessity of money for the support of the to it that the object or subject of taxation
state. For this reason, no one is allowed to is within the territorial jurisdiction of the
object to or resist the payment of taxes taxing authority
solely because no personal benefit to him
Page 9 of 256
A tax law will retain its validity even if it is not in

E. PRINCIPLES OF A consonance with the principles of fiscal
SOUND TAX SYSTEM adequacy and administrative feasibility
because the Constitution does not expressly
require so. These principles are only designed
1. Fiscal adequacy to make our tax system sound. However, if a
tax law runs contrary to the principle of
The sources of tax revenue should coincide theoretical justice, such violation will
with, and approximate the needs of, render the law unconstitutional considering
government expenditures. The revenue should that under the Constitution, the rule of taxation
be elastic or capable of expanding or should be uniform and equitable. [Dimaampao,
contracting annually in response to variations Tax Principles and Remedies (2015)]
in public expenditures.
2. Administrative feasibility F. INHERENT AND

CONSTITUTIONAL LIMITATIONS
Tax laws should be capable of convenient, just ON TAXATION
and effective administration. Each tax should
be: 1. Inherent Limitations
• capable of uniform enforcement by
government officials, The following are the inherent limitations of
• convenient as to the time, place, and taxation:
manner of payment, a. Public Purpose
• enforced with the least inconvenience to the b. Inherently Legislative
taxpayer; and c. Territorial
• not unduly burdensome upon or d. International Comity
discouraging to business activity. e. Exemption of Government Entities,
Agencies, and Instrumentalities
3. Theoretical justice or equality
a. Public Purpose
The tax burden should be in proportion to the
taxpayer’s ability to pay. This is the so-called The proceeds of the tax must be used:
ability to pay principle. Taxation should be i. for the support of the State; or
uniform as well as equitable [Section 28(1), Art. ii. for some recognized objects of
VI, 1987 Constitution] The State must evolve a government or directly to promote the
progressive system of taxation. welfare of the community.
Taxation is said to be equitable when its burden Test: Whether the statute is designed to
falls on those better able to pay; taxation is promote the public interest, as opposed to the
progressive when its rate goes up depending furtherance of the advantage of individuals,
on the resources of the person affected. although each advantage to individuals might
incidentally serve the public. [Pascual v. Sec.
Note: The non-observance of the above of Public Works, G.R. No. L-10405 (1960)]
principles will not necessarily render the tax
imposed invalid except to the extent those The public purpose of a tax may legally exist
specific constitutional limitations are violated. even if the motive which impelled the
[DE LEON] legislature to impose the tax was to favor one
industry over another. [Tio v. Videogram, G.R.
Page 10 of 256
No. L-75697 (1987)] settled maxims in constitutional law is that the

power conferred upon the legislature to make
Public use is no longer confined to the laws cannot be delegated by that department
traditional notion of use by the public but held to any other body or authority.” [People v. Vera,
synonymous with public interest, public benefit, G.R. No. L-45685 (1937)]
public welfare, and public convenience.
(Commissioner of Internal Revenue v. Central Stated in another way, taxation may
Luzon Drug Corporation, G.R. No. 159647 exceptionally be delegated, subject to such
(2005)] well-settled limitations as:
a. The delegation shall not contravene any
It is the purpose which determines the public constitutional provision or the inherent
character of the tax law, not the number of limitations of taxation;
persons benefited. [Dimaampao, Tax b. The delegation is effected either by:
Principles and Remedies (2015)] · the Constitution; or
· by validly enacted legislative measures
Tests in Determining Public Purpose: or statute; and
a. Duty Test – Whether the thing to be c. The delegated levy power, except when
furthered by the appropriation of public the delegation is by an express provision of
revenue is something which is the duty the Constitution itself, should only be in
of the State as a government to favor of the local legislative body of the
provide. local or municipal government concerned.
b. Promotion of General Welfare Test – [VITUG and ACOSTA]
Whether the proceeds of the tax will
directly promote the welfare of the For a valid delegation of power, it is essential
community in equal measure. that the law delegating the power must be
c. Character of the Direct Object of the (1) complete in itself, that is, it must set forth
Expenditure – It is the essential the policy to be executed by the delegate
character of the direct object of the and,
expenditure which must determine its (2) it must fix a standard — limits of which are
validity as justifying a tax and not the sufficiently determinate or determinable —
magnitude of the interests to be to which the delegate must conform.
affected nor the degree to which the [Osmena v. Orbos, G.R. No. 99886 (1993)]
general advantage of the community,
and thus the public welfare, may be Legislature has the power to determine the:
ultimately benefited by their promotion. a. Nature (kind),
[Pascual v. Sec. of Public Works, b. Object (purpose),
supra] c. Extent (rate),
d. Coverage (subjects) and
b. Inherently Legislative e. Situs (place) of taxation.
General Rule: Delegata potestas non potest Exceptions

delegari. (No delegated powers can be further a. Delegation to local governments
delegated.) This exception is in line with the
general principle that the power to
The power to tax is exclusively vested in the create municipal corporations for
legislative body and it may not be re-delegated. purposes of local self-government
Judge Cooley enunciates the doctrine in the carries with it, by necessary
following oft-quoted language: "One of the implication, the power to confer the
Page 11 of 256
power to tax on such local c. Delegation to administrative

governments. (1 Cooley 190). This is agencies
logical for after all, municipal Limited to the administrative
corporations are merely implementation that calls for some
instrumentalities of the state for the degree of discretionary powers under
better administration of the government sufficient standards expressed by law
in respect to matters of local concern. or implied from the policy and purposes
[Pepsi-Cola Bottling Co. of the Phil. Inc. of the Act.
v. Mun. of Tanauan, G.R. No. L-31156
(1976)]. There are certain aspects of the taxing
process that are not legislative and they
Under the new Constitution, however, may, therefore, be vested in an
LGUs are now expressly given the administrative body. The powers which are
power to create its own sources of not legislative include:
revenue and to levy taxes, fees and 1. The power to value property for
charges, subject to such guidelines purposes of taxation pursuant to fixed
and limitations as the Congress may rules;
provide which must be consistent with 2. The power to assess and collect the
the basic policy of local autonomy. [Sec taxes; and
5, Art. X 1987 Constitution] 3. The power to perform any of the
innumerable details of computation,
b. Delegation to the President appraisement, and adjustment, and the
1. Tariff powers by Congress under delegation of such details.
the Flexible Tariff Clause
The exercise of the above powers is really not
The Congress may, by law, an exception to the rule as no delegation of the
authorize the President to fix within strictly legislative power to tax is involved.
specified limits, and subject to such
limitations and restrictions as it The powers which cannot be delegated
may impose, tariff rates, import and include:
export quotas, tonnage and ! The determination of the subjects to be
wharfage dues, and other duties or taxed;
imposts within the framework of the ! The purpose of the tax, the amount or rate
national development program of of the tax;
the Government. [Sec. 28(2), Art. ! The manner, means, and agencies of
VI, 1987 Constitution] collection; and
! The prescribing of the necessary rules with
2. Emergency Powers [Sec. 23(2), respect thereto.
Art. VI, 1987 Constitution.
3. To enter into Executive c. Territorial
agreements; and
4. To ratify treaties which grant tax Rule: A state may not tax property lying outside
exemption subject to Senate its borders or lay an excise or privilege tax upon
concurrence. the exercise or enjoyment of a right or privilege
derived from the laws of another state and
therein exercise and enjoyed. [51 Am.Jur. 87-
88].
Page 12 of 256
Reasons: b. In international law, a foreign government

a. Tax laws do not operate beyond a may not be sued without its consent.
country’s territorial limits. Therefore, it is useless to impose a tax
b. Property which is wholly and exclusively which could not be collected.
within the jurisdiction of another state c. Usage among states that when a foreign
receives none of the protection for which a sovereign enters the territorial jurisdiction
tax is supposed to be a compensation. of another, there is an implied
understanding that the former does not
Note: Where privity of relationship exists. It intend to degrade its dignity by placing
does not mean, however, that a person outside itself under the jurisdiction of the other.
of state is no longer subject to its taxing
powers. The fundamental basis of the right to e. Exemption of Government Entities,
tax is the capacity of the government to provide Agencies, and Instrumentalities
benefits and protection to the object of the tax.
A person may be taxed where there is between If the taxing authority is the National
him and the taxing state, a privity of the Government:
relationship justifying the levy. Thus, the
citizen’s income may be taxed even if he General Rule: Agencies and instrumentalities
resides abroad as the personal (as of the government are exempt from tax. Their
distinguished from territorial) jurisdiction of his exemption rests on the State's sovereign
government over him remains. In this case, the immunity from taxation. The State cannot be
basis of the power to tax is not dependent on taxed without its consent and such consent,
the source of the income nor upon the location being in derogation of its sovereignty, is to be
of the property nor upon the residence of the strictly construed. [Gomez v. Palomar, GR No.
taxpayer but upon his relation as a citizen to L-23645, 29 October 1968]
the state. As such a citizen, he is entitled,
wherever he may be, inside or outside of his Note: Unless otherwise provided by law, the
country, to the protection of his exemption applies only to government entities
government. through which the government immediately
and directly exercises its sovereign powers.
d. International Comity With respect to government-owned or
controlled corporations performing proprietary
Comity – respect accorded by nations to each (not governmental) functions, they are
other because they are sovereign equals. generally subject to tax unless exempted under
Thus, the property or income of a foreign state Section 27(C) of the Tax Code or, in certain
or government may not be the subject of cases, if there is a tax exemption provisions in
taxation by another state. their charters or the law creating them in line
Reasons: with the rule that a specific law overrides a
a. In par in parem non habet imperium. As general law.
between equals there is no sovereign
(Doctrine of Sovereign Equality among If the taxing authority is a local government
states under international law). One state unit: RA 7160 expressly prohibits LGUs from
cannot exercise its sovereign powers over levying tax on the National Government, its
another. All states, including the smallest agencies and instrumentalities and other
and least influential, are also entitled to LGUs. [Sec. 133 (o), LGC]
their dignity and the protection of their
honor and reputation. [Dimaampao, Tax
Principles and Remedies (2015)]
Page 13 of 256
Reasons for the exemption: 2. Constitutional Limitations

a. To levy a tax upon public property
would render necessary new taxes on The following are the constitutional limitations
other public property for the payment of of taxation:
the tax so laid and thus, the
government would be taxing itself to 1. Provisions directly affecting taxation:
raise money to pay over for itself. 1. Prohibition against imprisonment for
b. This immunity also rests upon non-payment of poll tax;
fundamental principles of government, 2. Uniformity and equality of taxation;
being necessary in order that the 3. Grant by Congress of authority to the
functions of government shall not be President to impose tariff rates;
unduly impeded. [1 Cooley 263.] 4. Prohibition against taxation of religious,
c. The practical effect of an exemption charitable entities, and educational
running to the benefit of the entities;
government is merely to reduce the 5. Prohibition against taxation of non-stock,
amount of money that has to be non-profit educational institutions;
handled by the government in the 6. Majority vote of Congress for grant of
course of its operations: For these tax exemption;
reasons, provisions granting 7. Prohibition on use of tax levied for
exemptions to government agencies special purpose;
may be construed liberally in favor 8. President’s veto power on appropriation,
of non-tax liability of such agencies. revenue, tariff bills;
[Maceda v. Macaraig, Jr., G.R. No. 9. Non-impairment of jurisdiction of the
88291 (1991)]. Supreme Court;
10. Grant of power to the local government
Exception: Government-owned or controlled units to create its own sources of
corporations (GOCCs) perform proprietary revenue;
functions hence, they are subject to taxation. 11. Flexible tariff clause;
[Dimaampao, Tax Principles and Remedies 12. Exemption from real property taxes;
(2015)] and
13. No appropriation or use of public
Exception to the Exception: The following money for religious purposes.
GOCCs are considered tax exempt:
1. Government Service Insurance 2. Provisions indirectly affecting taxation:
System (GSIS) 1. Due process
2. Social Security System (SSS) 2. Equal protection;
3. Philippine Health Insurance 3. Religious freedom;
Corporation (PHIC) 4. Non-impairment of obligations of
4. Philippine Charity Sweepstakes Office contracts;
(PCSO) [NIRC as amended, Sec 27(c)] 5. Freedom of speech and expression;
6. Presidential power to grant reprieves,
There is no constitutional prohibition against communications, and pardons, and
the government taxing itself. [Coll. v. Bisaya remit fines and forfeitures after
Land Transportation, 105 Phil. 338 (1959)]. conviction by final judgement; and
7. No taking of private property for public
use without just compensation
Page 14 of 256
a. Provisions directly affecting burden, not equality in amount

Taxation or equality in its strict and literal
meaning. The reason is simple
1. Prohibition against imprisonment for enough. If legislation imposes
non-payment of poll tax a single tax upon all persons,
properties, or transactions, an
No person shall be imprisoned for debt or inequality would obviously
non-payment of a poll tax. [Sec. 20, Art. III, result considering that not all
1987 Constitution] persons, properties, and
transactions are identical or
Capitation or poll taxes are taxes of a similarly situated. Neither does
fixed amount upon all persons, or upon all uniformity demand that taxes
the persons of a certain class, resident shall be proportional to the
within a specified territory, without regard relative value or amount of the
to their property or the occupations in subject thereof. Taxes may be
which they may be engaged. Taxes of a progressive.
specified amount upon each person b. Equity
performing a certain act or engaging in a i. Uniformity in taxation is
certain business or profession are not, effected through the
however, poll taxes. [51 Am. Jur. 66-67] apportionment of the tax
burden among the taxpayers
2. Uniformity and equality of taxation which under the Constitution
must be equitable. “Equitable”
The rule of taxation shall be uniform and means fair, just, reasonable
equitable. Congress shall evolve a and proportionate to the
progressive system of taxation. [Sec. taxpayer’s ability to pay.
28(1), Art. VI, 1987 Constitution] Taxation may be uniform but
a. Uniformity – All taxable articles or inequitable where the amount
properties of the same class shall be of the tax imposed is excessive
taxed at the same rate. [City of Baguio or unreasonable.
v. De Leon, G.R. No. L-24756 (1968)] ii. The constitutional requirement
i. Uniformity of operation of equity in taxation also
throughout tax unit – The rule implies an approach which
requires the uniform employs a reasonable
application and operation, classification of the entities or
without discrimination, of the individuals who are to be
tax in every place where the affected by a tax. Where the
subject of it is found. This “tax differentiation is not based
means, for example, that a tax on material or substantial
for a national purpose must be differences,” the guarantee of
uniform and equal throughout equal protection of the laws
the country and a tax for a and the uniformity rule will
province, city, municipality, or likewise be infringed.
barangay must be uniform and
equal throughout the province, Taxation does not require identity or
city, municipality or barangay. equality under all circumstances, or negate
ii. Equality in burden – the authority to classify the objects of
Uniformity implies equality in taxation.
Page 15 of 256
Equality and Uniformity distinguished: 3. Grant by Congress of authority to the

Equality in taxation is accomplished when the President to impose tariff rates
burden of the tax falls equally and impartially
upon all the persons and property subject to it. Delegation of Tariff powers to the President
under the flexible tariff clause [Sec. 28(2), Art.
Uniformity has been defined as that principle VI, 1987 Constitution], which authorizes the
by which all taxable articles or kinds of property President to modify import duties. [Sec. 1608,
of the same class shall be taxed at the same Customs Modernization and Tariff Act]
rate. A tax is uniform when it operates with the
same force and effect in every place where the 4. Prohibition against taxation of religious,
subject of it is found. It does not signify an charitable entities, and educational
intrinsic but simply a geographical uniformity entities
[Churchill v Concepcion, GR No. 11572, 22
September 1916] Sec. 28(3), Art. VI, 1987 Constitution:
a. Charitable institutions, churches and
Test of Valid Classification: Classification, to personages or convents appurtenant
be valid, must be reasonable and this thereto, mosques, non-profit cemeteries,
requirement is not deemed satisfied unless: and all lands, buildings, and improvements,
a. It is based upon substantial distinctions b. Actually, directly, and exclusively used for
which make real differences; religious, charitable, or educational
b. These are germane to the purpose of the purposes shall be exempt from taxation.
legislation or ordinance; c. The tax exemption under this constitutional
c. The classification applies not only to provision covers property taxes only and
present conditions but also to future not other taxes [Lladoc v. Commissioner,
conditions substantially identical to those of G.R. No. L-19201 (1965)].
the present; and d. In general, special assessments are not
d. The classification applies equally to all covered by the exemption because by
those who belong to the same class. nature they are not classified as taxes.
[Pepsi-Cola v. Butuan City, G.R. No. L- [Apostolic Prefect v. City Treasurer of
22814 (1968)] Baguio, G.R. No. L-47252 (1941)]
The progressive system of taxation would To be entitled to the exemption, the

place stress on direct rather than indirect taxes, petitioner must prove that:
on non-essentiality rather than essentiality to a. It is a charitable institution
the taxpayer of the object of taxation, or on the b. Its real properties are actually, directly
taxpayer’s ability to pay. Example is that and exclusively used for charitable
individual income tax system that imposes purposes.
rates progressing upwards as the tax base
(taxpayer’s taxable income) increases. A Revenue or income from trade, business or
progressive tax, however, must not be other activity, the conduct of which is not
confused with a progressive system of related to the exercise or performance of
taxation. religious, educational and charitable purposes
or functions shall be subject to internal revenue
While equal protection refers more to like taxes when the same is not actually, directly or
treatment of persons in like circumstances, exclusively used for the intended purposes.
uniformity and equity refer to the proper relative [BIR Ruling 046-2000]
treatment for tax purposes of persons in unlike
circumstances.
Page 16 of 256
others).
Test of Use of the property, and not
Exemption the ownership [Abra Valley
“Exclusive" – possessed and enjoyed to the
College v. Aquino, G.R. No.
exclusion of others; debarred from participation
L-39086 (1988)]
or enjoyment;
Nature of Actual, direct and exclusive
Use use for religious, charitable "Exclusively" - “in a manner to exclude; as
or educational purposes. enjoying a privilege exclusively.”
[Lladoc v. CIR, supra]
If real property is used for one or more
Scope of Real property taxes on commercial purposes, it is not exclusively used
Exemption facilities which are actual, for the exempted purposes but is subject to
incidental to, or reasonably taxation. The words "dominant use" or
necessary for the "principal use" cannot be substituted for the
accomplishment of said words "used exclusively" without doing
purposes such as in the case violence to the Constitution and the law. Solely
of hospitals, a school for is synonymous with exclusively. [Lung Center
training nurses, a nurses’ of the Philippines v. Quezon City, G.R. No.
home, property to provide 144104 (2004)]
housing facilities for interns, Note: Lung Center did not necessarily
resident doctors and other overturn the case of Abra Valley College v.
members of the hospital Aquino, G.R. No. L-39086 (1988). Lung Center
staff, and recreational just provided a stricter interpretation. In Abra
facilities for student nurses, Valley, the Court held: The primary use of the
interns and residents, such school lot and building is the basic and
as athletic fields. [Abra controlling guide, norm and standard to
Valley College v. Aquino, determine tax exemption, and not the mere
supra] incidental use thereof. Under the 1935
Constitution, the trial court correctly held that
the school building as well as the lot where it is
TEST: Whether an enterprise is charitable or built, should be taxed, not because the second
not: floor of the same is being used by the Director
· Whether it exists to carry out a purpose and his family for residential purposes
recognized in law as charitable; or (incidental to its educational purpose), but
· Whether it is maintained for gain, profit, or because the first floor thereof is being used for
private advantage. commercial purposes. However, since only a
portion is used for purposes of commerce, it is
A charitable insttution does not lose its only fair that half of the assessed tax be
character as such and its exemption from taxes returned to the school involved.
simply because it derives income from paying
patients, whether out-patient, or confined in the
hospital, or receives subsidies from the
government, so long as the money received is
devoted or used altogether to the charitable
object which it is intended to achieve; and no
money inures to the private benefit of the
persons managing or operating the institution
(including honoraria to members of the board
of trustees; BIR Ruling No. 558-18, among
Page 17 of 256
5. Prohibition against taxation of non-

stock, non-profit educational Similar tax exemptions may be extended to
institutions proprietary (for profit) educational
institutions by law subject to such
Sec. 4, Art. XIV, 1987 Constitution limitations as it may provide, including
All revenues and assets of non-stock, non- restrictions on dividends and provisions for
profit educational institutions used actually, reinvestment. The restrictions are designed to
directly, and exclusively for educational ensure that the tax-exemption benefits are
purposes shall be exempt from taxes and used for educational purposes.
duties.
Lands, buildings, and improvements
Proprietary educational institutions, actually, directly and exclusively used for
including those cooperatively owned, may educational purposes are exempt from
likewise be entitled to such exemptions property tax [Sec. 28(3), Art. VI, 1987
subject to the limitations provided by law, Constitution], whether the educational
including restrictions on dividends and institution is proprietary or non-profit.
provisions for reinvestment.
Sec. 28, par. 3, Sec. 4, par. 3,
Subject to conditions prescribed by law, all Art. VI Art. XIV
grants, endowments, donations, or
contributions used actually, directly, and
exclusively for educational purposes shall be
exempt from tax. Charitable Non-stock, non-profit
institutions, churches educational
This provision covers only non-stock, non- and parsonages or institutions.
profit educational institutions. convents
appurtenant thereto,
The exemption covers income, property, and mosques, non-profit
donor’s taxes, custom duties, and other taxes cemeteries, and all
imposed by either or both the national lands, buildings, and
government or political subdivisions on all improvements,
revenues, assets, property or donations, used actually, directly, and
actually, directly and exclusively for exclusively used for
educational purposes. (In the case of religious religious, charitable,
and charitable entities and non-profit or educational
cemeteries, the exemption is limited to property purposes.
tax.)
Property taxes Income, property,
The exemption does not cover revenues and donor’s taxes
derived from, or assets used in, unrelated and custom duties.
activities or enterprise.
Revenues derived from assets used in the

operation of cafeterias, canteens, and
bookstores are also exempt if they are owned
and operated by the educational institution as
ancillary activities and the same are located
within the school premises [RMC No. 76-2003]
Page 18 of 256
6. Majority vote of Congress for grant of municipality within the Metropolitan Manila
tax exemption Area. [Sec. 277, LGC]
7. Prohibition on use of tax levied for

Sec. 28, Art. VI, 1987 Constitution. special purpose
No law granting any tax exemption shall be
passed without the concurrence of a majority All money collected on any tax levied for a
of all the Members of the Congress. special purpose shall be treated as a special
fund and paid out for such purpose only.
Basis: The inherent power of the state to
impose taxes carries with it the power to grant If the purpose for which a special fund was
tax exemptions. created has been fulfilled or abandoned, the
balance, if any, shall be transferred to the
Exemptions may be created by: general funds of the Government. [Gaston v.
a. The Constitution, or Republic Planters Bank, G.R. No. L-77194
b. Statutes, subject to constitutional (1988)].
limitations
8. President’s veto power on
Vote required for the grant of exemption: appropriation, revenue, tariff bills
Absolute majority of the members of Congress
(at least ½ + 1 of ALL the members voting Sec. 27(2), Art. VI, 1987 Constitution.
SEPARATELY) The President shall have the power to veto
any particular item or items in an
Vote required for withdrawal of such grant appropriation, revenue, or tariff bill, but the
of exemption: Relative majority is sufficient veto shall not affect the item or times to which
(MAJORITY of the QUORUM). he does not object.
The provision guaranteeing equal protection of

the laws and that mandating the rule of taxation 9. Non-impairment of jurisdiction of the
shall be uniform and equitable likewise limit, Supreme Court
although not expressly, the legislative power to
grant tax exemption. Sec. 2, Art. VIII, 1987 Constitution.
The Congress shall have the power to
Grants in the nature of tax exemptions: define, prescribe, and apportion the
a. Tax amnesties jurisdiction of the various courts but may not
b. Tax condonations deprive the Supreme Court of its jurisdiction
c. Tax refunds over cases enumerated in Section 5 hereof.
Note:
a. Local government units may, through
ordinances duly approved, grant tax
exemptions, incentives or reliefs under
such terms and conditions as they may
deem necessary. [Sec. 192, LGC]
b. The President of the Philippines may, when
public interest so requires, condone or
reduce the real property tax and interest for
any year in any province or city or a
Page 19 of 256
11. Flexible tariff clause

Sec. 5(2(b)), Art. VIII, 1987 Constitution.
The Supreme Court shall have the following
Delegation of tariff powers to the President
powers: xxx
under the flexible tariff clause [Sec. 28(2), Art.
(2) Review, revise, modify or affirm on
VI, 1987 Constitution]
appeal or certiorari, as the laws or the Rules
of Court may provide, final judgments and
Flexible tariff clause: the authority given to the
orders of lower courts in xxx
President, upon the recommendation of NEDA,
to adjust the tariff rates under Sec. 1608 of the
(b) all cases involving the legality of any tax,
CMTA in the interest of national economy,
impost, assessment or toll or any penalty
general welfare and/or national security.
imposed in relation thereto.
12. Exemption from real property taxes
Even the legislative body cannot deprive the
SC of its appellate jurisdiction over all cases
Sec. 28(3), Art. VI, 1987 Constitution.
coming from inferior courts where the
Charitable institutions, churches and
constitutionality or validity of an ordinance or
personages or convents appurtenant
the legality of any tax, impost, assessment, or
thereto, mosques, non-profit cemeteries,
toll is in question. [San Miguel Corp v. Avelino,
and all lands, buildings, and improvements,
G.R. No. L-39699 (1979)]
actually, directly, and exclusively used for
religious, charitable, or educational purposes
Sec. 30, Art. VI, 1987 Constitution. shall be exempt from taxation.
No law shall be passed increasing the
appellate jurisdiction of the Supreme Court
13. No appropriation or use of public
without its advice and concurrence.
money for religious purposes
Scope of Judicial Review in taxation: limited

Sec. 29, Art. VI, 1987 Constitution
only to the interpretation and application of tax
No public money or property shall be
laws. Its power does not include inquiry into the
appropriated, applied, paid, or employed,
policy of legislation. Neither can it legitimately
directly or indirectly, for the use, benefit, or
question or refuse to sanction the provisions of
support of any sect, church, denomination,
any law consistent with the Constitution. [Coll.
sectarian institution, or system of religion, or
v. Bisaya Land Transportation, 105 Phil. 338
of any priest, preacher, minister, other
(1959)].
religious teacher, or dignitary as such,
except when such priest, preacher, minister,
10. Grant of power to the local government or dignitary is assigned to the armed forces,
units to create its own sources of or to any penal institution, or government
revenue orphanage or leprosarium.
LGUs have power to create its own sources of
revenue and to levy taxes, fees and charges,
subject to such guidelines and limitations as
the Congress may provide which must be
consistent with the basic policy of local
autonomy. [Sec. 5, Art. X, 1987 Constitution]
Page 20 of 256
b. Provisions Indirectly Affecting Due process does not require that the property
Taxation subject to the tax or the amount to be raised
should be determined by judicial inquiry, and a
1. Due process notice and hearing as to the amount of the tax
and the manner in which it shall be apportioned
are generally not necessary to due process of
Sec. 1, Art. III, 1987 Constitution. law. [Pepsi-Cola Bottling Co. of the Philippines,
No person shall be deprived of life, liberty, or Inc. v. Municipality of Tanauan, G.R. No. L-
property without due process of law, nor shall 31156 (1976)]
any person be denied the equal protection of
the laws. Instances of violations of the due process
clause:
Substantive Due Process – An act is done • If the tax amounts to confiscation of
under the authority of a valid law or the property;
Constitution itself. • If the subject of confiscation is outside the
jurisdiction of the taxing authority;
Procedural Due Process – An act is done • If the tax is imposed for a purpose other
after compliance with fair and reasonable than a public purpose;
methods or procedure prescribed by law. • If the law which is applied retroactively
imposes just and oppressive taxes.
Due Process in Taxation requirements: • If the law violates the inherent limitations
(a) Public purpose on taxation.
(b) Imposed within taxing authority’s territorial
jurisdiction 2. Equal protection
(c) Assessment or collection is not arbitrary or
oppressive Sec. 1, Art. III, 1987 Constitution.
No person shall be deprived of life, liberty, or
The due process clause may be invoked where
property without due process of law, nor shall
a taxing statute is so arbitrary that it finds no
any person be denied the equal protection of
support in the Constitution, as where it can be the laws.
shown to amount to the confiscation of
property. [Sison v. Ancheta, G.R. No. L-
59431(1984)] What the Constitution prohibits is class
legislation which discriminates against some
Due process is usually violated where: and favors others. As long as there are rational
! The tax imposed is for private, as or reasonable grounds for so doing, Congress
distinguished from, public purposes may, therefore, group the persons or properties
! A tax is imposed on property outside the to be taxed and it is sufficient “if all of the same
State, i.e., extra-territorial taxation; or class are subject to the same rate and the tax
! Arbitrary or oppressive methods are used is administered impartially upon them.” [1
in assessing and collecting taxes. Cooley 608].
But, a tax does not violate the due process The equal protection clause is subject to
clause, as applied to a particular taxpayer, reasonable classification [See requisites for
although the purpose of the tax will result in an valid classification, supra].
injury rather than a benefit to such taxpayer.
Page 21 of 256
3. Religious freedom 4. Non-impairment of obligations of

contracts
Sec. 5, Art. III, 1987 Constitution.
No law shall be made respecting an Sec. 10, Art. III, 1987 Constitution.
establishment of religion, or prohibiting the No law impairing the obligation of contracts
free exercise thereof. (Non-establishment shall be passed.
clause)
The Contract Clause has never been thought
The free exercise and enjoyment of religious
as a limitation on the exercise of the State's
profession and worship, without
power of taxation save only where a tax
discrimination or preference, shall forever be
exemption has been granted for a valid
allowed. (Free exercise clause)
consideration. [Tolentino v. Secretary of
Finance, supra]
No religious test shall be required for the
exercise of civil and political rights.
G. STAGES OR ASPECTS
The free exercise clause is the basis of tax
exemptions.
OF TAXATION
The imposition of license fees on the The exercise of taxation involves the following
distribution and sale of bibles and other stages:
religious literature by a non-stock, non-profit
missionary organization not for purposes of 1. Legislative Act: Levy or
profit amounts to a condition or permit for the imposition
exercise of their right, thus violating the
constitutional guarantee of the free exercise This process involves the passage of tax laws
and enjoyment of religious profession and or ordinances through the legislature. The tax
worship which carries with it the right to laws to be passed shall determine:
disseminate religious beliefs and information. i. Those to be taxed (person, property or
[American Bible Society v. City of Manila, G.R. rights);
No. L-9637 (1957)] ii. How much is to be collected (the rate
• It is actually in the nature of a condition or and the base of tax); and
permit for the exercise of the right. iii. How taxes are to be implemented (the
• This is different from a tax in the income of manner of imposing and collecting tax).
one who engages in religious activities or a
tax on property used or employed in It also involves the granting of tax exemptions,
connection with those activities. tax amnesties or tax condonation.
• It is one thing to impose a tax on the
income or property of a preacher. It is quite Scope of legislative power to tax:
another thing to exact a tax for the privilege
of delivering a sermon. a) Discretion as to purpose for which
taxes shall be levied.
The Constitution, however, does not prohibit
imposing a generally applicable tax on the sale The sole arbiter of the purposes for which taxes
of religious materials by a religious shall be levied is the legislature, provided the
organization. [Tolentino v. Secretary of purposes are public. The courts may review the
Finance, G.R. No. 115455 (1994)] levy of the tax to determine whether the
Page 22 of 256
purpose is a public one but once that is such as the Bureau of Internal Revenue or
determined, the courts can make no other Bureau of Customs.
inquiry as to the purpose of tax, as it affects the
power to impose it. [Cooley Taxation, 4th Ed., 3. Taxpayer’s Act: Payment
171.]
This process involves the act of compliance by
b) Discretion as to subjects of taxation. the taxpayer in contributing his share to pay the
expenses of the government. Payment of tax
It is inherent in the power to tax that a state be also includes the options, schemes or
free to select the subjects of taxation, and it has remedies as may be legally open or available
been repeatedly held that inequalities which to the taxpayer.
result from a singling out of one particular class
for taxation or exemption infringe no
constitutional limitation. [Lutz v. Araneta G.R. 4. Taxpayer’s and Executive
No. L-7859 (1955)] Act: Refund
c) Discretion as to amount or rate of tax. A claim for refund must first be filed with the
Commissioner of Internal Revenue. A suit or
In the absence of constitutional prohibitions, proceeding may be filed within two years from
the legislature has the right to finally determine the date of payment of the tax or penalty
the amount or rate of tax. Not only is the power regardless of any supervening cause that may
to tax unlimited in its reach as to subjects, but arise after payment. The Commissioner may,
in its very nature, it acknowledges no limits and even without a written claim therefor, refund or
may be carried even to the extent of exhaustion credit any tax, where on the face of the return,
and destruction, thus becoming in its exercise such payment appears clearly to have been
a power to destroy. erroneously paid. [Sec. 229, NIRC]
The power to tax includes the power to destroy

if it is used validly as an implement of the police H. REQUISITES OF A
power in discouraging and in effect, ultimately VALID TAX
prohibiting certain things or enterprises inimical
to the public welfare, x x x But where the power 1. It must be for a public purpose;
to tax is used solely for the purpose of raising 2. Rule of taxation should be uniform;
revenues, the modern view is that it cannot be 3. The person or property taxed is within the
allowed to confiscate or destroy. If this is jurisdiction of the taxing authority;
sought to be done, the tax may be successfully 4. Assessment and collection is in
attacked as an inordinate and unconstitutional consonance with the due process clause;
exercise of the discretion that is usually vested AND
exclusively in the legislature in ascertaining the 5. The tax must not infringe on the inherent
amount of the tax. (Cruz, Constitutional Law, and constitutional limitations of the
2000 Ed., p. 87) power of taxation.
2. Executive Act: Assessment

and collection
This process involves the act of administration
and implementation of tax laws by the
executive through its administrative agencies
Page 23 of 256
tax falls on the same person. (e.g., income

tax, estate tax, donor’s tax, community tax)
I. KINDS OF TAXES
b. Indirect Taxes – taxes which are
demanded from one person in the
1. As to object expectation and intention that he shall
indemnify himself at the expense of
a. Personal, Poll or Capitation Tax – tax of another, falling finally upon the ultimate
a fixed amount imposed on persons purchaser or consumer; taxes levied upon
residing within a specified territory, whether transactions or activities before the articles
citizens or not, without regard to their subject matter thereof, reach the
property or the occupation or business in consumers who ultimately pay for them not
which they may be engaged (e.g. as taxes but as part of the purchase price.
community (formerly residence) tax).
b. Property Tax – tax imposed on property, Thus, the person who absorbs or bears the
real or personal, in proportion to its value burden of the tax is other than the one on whom
or in accordance with some other it is imposed and required by law to pay the tax.
reasonable method of apportionment (e.g., Practically all business taxes are indirect (e.g.,
real estate tax). The obligation to pay the VAT, percentage tax, excise taxes on specified
tax is absolute and unavoidable and is not goods, customs duties).
based upon the voluntary action of the
person assessed.
c. Privilege/Excise Tax – it is said that an
3. As to tax rates
excise tax is a charge imposed upon:
a. Specific Tax – a tax of a fixed amount
i. the performance of an act,
imposed by the head or number or by some
ii. the enjoyment of a privilege, or
other standard of weight or measurement.
iii. the engagement in an
It requires no assessment (valuation) other
occupation, profession, or
than the listing or classification of the
business.
objects to be taxed (e.g., taxes on distilled
spirits, wines, and fermented liquors; cigars
The obligation to pay excise tax is based
and cigarettes)
on the voluntary action of the person taxed
in performing the act or engaging in the
b. Ad Valorem Tax – a tax of a fixed
activity which is subject to the excise. The
proportion of the value of the property with
term “excise tax” is synonymous with
respect to which the tax is assessed. It
“privilege tax” and the two are often used
requires the intervention of assessors or
interchangeably (e.g., income tax, value
appraisers to estimate the value of such
added tax, estate tax, donor’s tax).
property before the amount due from each
taxpayer can be determined. The phrase
2. As to burden or incidence “ad valorem” means literally, “according to
value.” (e.g., real estate tax, excise tax on
a. Direct Taxes – taxes which are automobiles, non-essential goods such as
demanded from persons who also jewelry and perfumes, customs duties.
shoulder them; taxes for which the
taxpayer is directly or primarily liable, or c. Mixed – a tax that has both the
which he cannot shift to another. The characteristics of specific tax and ad
liability for the payment of the tax valorem tax
(incidence) and the burden (impact) of the
Page 24 of 256
4. As to purpose on a fixed percentage of the amount of the

property, receipts or other basis to be
a. General or Fiscal Tax – levied for the taxed, e.g., real estate tax, VAT, and other
general or ordinary purposes of the percentage taxes.
Government, i.e., to raise revenue for d. Digressive – A fixed rate is imposed on a
governmental needs (e.g., income tax, certain amount and diminishes gradually
VAT, and almost all taxes). on sums below it. The tax rate in this case
b. Special/Regulatory/Sumptuary Tax – is arbitrary because the increase in tax rate
levied for special purposes, i.e., to achieve is not proportionate to the increase of tax
some social or economic ends irrespective base.
of whether revenue is actually raised or not
(e.g., protective tariffs or customs duties on Regressive/Progressive system of taxation
imported goods to enable similar products A regressive tax must not be confused with the
manufactured locally to compete with such regressive system of taxation.
imports in the domestic market).
In a society where the majority of the people
Tariff duties intended mainly as a source of have low incomes, a regressive taxation
revenue are relatively low so as not to system exists when there are more indirect
discourage imports. taxes imposed than direct taxes. Since the low-
income sector of the population as a whole
buys more consumption goods on which the
5. As to scope (or authority indirect taxes are collected, the burden of
imposing the tax) indirect taxes rests more on them than on the
more affluent groups.
a. National – taxes imposed by the national
government, through Congress and A progressive tax is, therefore, also different
administered by the Bureau of Internal from a progressive system of taxation.
Revenue (BIR) or the Bureau of Customs
(BOC) (e.g., national internal revenue Regressivity is not a negative standard for
taxes, customs duties, and national taxes courts to enforce. What Congress is required
imposed by laws). by the Constitution to do is to "evolve a
b. Municipal or Local – taxes imposed by progressive system of taxation." These
local governments, through their respective provisions are put in the Constitution as moral
Sanggunians, and administered by the incentives to legislation, not as judicially
local executive through the local treasurer enforceable rights. [Tolentino v. Secretary of
(e.g., business taxes that may be imposed Finance, GR No. 115455, 25 August 1994]
under the Local Government Code,
professional tax).
J. GENERAL CONCEPTS
6. As to graduation IN TAXATION
a. Progressive – The rate of tax increases as 1. Prospectivity of Tax Laws
the tax base or bracket increases, e.g.,
income tax, estate tax, donor’s tax. General rule:
b. Regressive – The rate of tax decreases as Tax laws are prospective in operation.
the tax base or bracket increases. There is
no regressive tax in the Philippines. Reason: Nature and amount of the tax under
c. Proportionate – The rate of tax is based tax laws enacted after the transaction could not
Page 25 of 256
have been foreseen and understood by the favor of the other taxpayers.
taxpayer at the time of the transaction.
2. Imprescriptibility of Taxes
Exception:
Tax laws may be applied retroactively provided Unless otherwise provided by law, taxes are
it is expressly declared or it is clearly the imprescriptible. [CIR v. Ayala Securities
legislative intent (e.g., increase taxes on Corporation G.R. No. L-29485 (1980)]
income already earned) except when
retroactive application would be so harsh The law on prescription, being a remedial
and oppressive. [Republic v. Fernandez, G.R. measure, should be liberally construed in order
No. L-9141 (1956)] to afford such protection. As a corollary, the
exceptions to the law on prescription should
Statutes are prospective and not retroactive in perforce be strictly construed. [Commissioner
their operation, laws being the formulation of v. Standard Chartered Bank, G.R. No. 192173
rules for the future, not the past. [Curata v. (2015)]
Philippine Ports Authority, G.R. Nos. 154211-
12 (2009)]
a. Prescriptions found in statutes
The language of the statute must clearly
(1) National Internal Revenue Code –
demand or press that it shall have a retroactive
statute of limitations in the assessment
effect. [Lorenzo v. Posadas, supra]
and collection of taxes therein
imposed.
Exception to the exception:
Collection of interest in tax cases is not penal
Summary of prescription on assessment
in nature; it is but a just compensation to the
and collection:
State. Thus, the constitutional prohibition
against ex post facto laws is not applicable to 3 YEARS Prescription of assessment AND
the collection of interest on back taxes. [Central collection from:
Azucarera v. CTA, G.R. No. L-23236 (1967)] (a) the prescribed last day of
filing of returns (even if the
Non-retroactivity of rulings [Sec. 246, NIRC] return was filed earlier than the
General rule: deadline); OR
Rulings do not have retroactive application if (b) the day when the return was
the revocation, modification, or reversal will be actually filed if filed later than the
prejudicial to the taxpayer. last day of filing [Sec. 203,
NIRC], whichever comes later.
Exceptions:
a. Taxpayer’s deliberate misstatement or 10 Prescription of assessment in
omission of facts YEARS cases of:
b. BIR’s gathered facts is materially (a) false or fraudulent return with
different from the facts from which the intent to evade tax; OR
ruling was based on (b) failure or omission to file a
c. Taxpayer acted in bad faith return [Sec. 222, NIRC]
Note: The rule on non-retroactivity of rulings Counted from the discovery of

may be applied only if the parties in the ruling the fraud, falsity, or omission.
involve the taxpayer himself/itself. The
taxpayer cannot invoke the rulings granted in
Page 26 of 256
of the Local Government Code [Sec.

5 YEARS Prescription of collection of tax
194 and 270, LGC].
if:
d. In case of fraud or intent to evade the
(1) assessed within the 3-year
payment of taxes, fees, or charges, the
and 10-year prescriptive
same may be assessed within ten (10)
periods;
years from the discovery of the fraud or
(2) assessed within the
intent to evade payment.
extended period agreed upon by
the Commissioner and taxpayer
The prescriptive period is tolled when:
(waiver of the prescriptive
a. The treasurer is legally prevented from
period); and
making the assessment or collection;
(3) Collected by distraint, levy,
b. The taxpayer requests for a
or by a proceeding in court.
[Sec. 222, NIRC] reinvestigation and executes a waiver
in writing before expiration of the period
within which to assess or collect; and
Note: The prescriptive period from final c. The taxpayer is out of the country or
liquidation is three (3) years, except in cases otherwise cannot be located.
of:
1. Tentative liquidation; 3. Situs of Taxation
2. Payment under protest;
3. Fraud; and
Meaning: Situs of taxation literally means the
4. Compliance audit.
place of taxation.
! The state where the subject to be taxed has
(2) Customs Modernization and Tariffs
a situs may rightfully levy and collect the
Act (CMTA)
tax; and
! The situs is necessarily in the state which
Under Sec. 430, it provides that “[i]n the
has jurisdiction or which exercises
absence of fraud and when the goods have
dominion over the subject in question.
been finally assessed and released, the
Within the territorial jurisdiction, the taxing
assessment shall be conclusive upon all
authority may determine the situs.
parties three (3) years from the date of final
payment or duties, or upon completion of the
Factors that Determine Situs:
post-clearance audit.”
a. Nature of the tax;
b. Subject matter of the tax (person,
(3) Local Government Code
property, act or activity)
c. Possible protection and benefit that
The LGC prescribes the following prescriptive
may accrue both to the government
periods for the assessment and collection of
and the taxpayer;
local taxes, fees, or charges [Sec. 194, LGC]:
d. Citizenship of the taxpayer;
a. Taxes, fees, and charges shall be
e. Residence of the taxpayer;
assessed five (5) years from the date
f. Source of income.
they become due;
b. Taxes, fees, and charges must be
collected five (5) years from the date of
assessment by administrative or
judicial action;
c. The prescriptive period for assessment
and collection shall be three (3) years
if the tax accrued before the effectivity
Page 27 of 256
Situs of Income Tax

Intangible General Rule: Domicile of
Taxpayer Source of Income personal the owner. Mobilia
property sequuntur personam
(e.g., credits, (movables follow the
Citizen- Residency Within PH. Outsi bills person)
ship de receivables,
PH. bank Exceptions: When property
deposits, has acquired a business
Filipino Resident Taxable Taxab bonds, situs in another jurisdiction;
le
promissory or
notes, When the law provides for
Filipino Non- Taxable Non-
mortgage the situs of the subject of
Resident Taxab
loans, tax (e.g., Sec 104, NIRC)
le
judgments ! Franchise, patents,
Alien Resident Taxable Non- and copyrights,
Taxab corporate trademarks – situs
le stocks) is the place of the
country where such
Alien Non- Taxable Non- intangibles are
Resident Taxab exercised
le ! Receivables –
Domicile or
residence of the
Situs of Property Tax
debtor
Kind of Situs ! Bank deposits –
Property Location of the
depository bank
Real property Where it is located (lex rei
sitae)
Situs of Excise Tax
Tangible Where property is Kind of Excise Tax Situs
Personal physically located although
property the owner resides in
another jurisdiction; or Income Tax Source of the
place of sale or transaction income, nationality or
residence of
taxpayer (Sec. 23,
NIRC)
! Occupation –
where the
occupation is
engaged in
! Transaction –
where the
transaction took
place
Page 28 of 256
6. Of the same kind or character of tax.

Donor’s Tax Location of property;
[Swedish Match Phils., Inc. v. Treasurer,
nationality or
supra]
residence of donor
Estate Tax Location of property; b. Broad sense (Indirect Duplicate

nationality or Taxation)
residence of
deceased There is double taxation in the broad sense or
indirect duplicate taxation if any of the
elements for direct duplicate taxation is
Situs of Business Tax
absent.
Kind of Business Situs
Tax It extends to all cases in which there is a
burden of two or more pecuniary impositions.
VAT Where transaction is For example, a tax upon the same property
made (i.e. where the imposed by two different states.
good/service is
sold/perform and Double taxation, standing alone and not being
consumed) forbidden by our fundamental law, is not a valid
defense against the legality of a tax measure
Sale of Real Where the real
[Pepsi Cola v. Mun. of Tanauan, G.R. No. L-
Property property is located
31156 (1976)].
Sale of Personal Where the personal
Constitutionality of double taxation
Property property was sold
There is no constitutional prohibition
against double taxation in the Philippines. It is
4. Double Taxation something not favored, but is permissible,
provided some other constitutional requirement
Double taxation means taxing the same is not thereby violated. [Villanueva v. City of
property twice when it should be taxed only Iloilo, G.R. No. L-26521 (1968)]
once; that is, “taxing the same person twice by
the same jurisdiction for the same thing.” If the tax law follows the constitutional rule on
[Swedish Match Phils., Inc. v. Treasurer, G.R. uniformity, there can be no valid objection to
No. 181277 (2013)] taxing the same income, business or property
twice. [China Banking Corp. v. CA, G.R. No.
a. Strict sense (Direct Duplicate 146749 (2003)]
Taxation)
Double taxation in its narrow sense is
undoubtedly unconstitutional but in the broader
The same property must be taxed twice when
sense is not necessarily so. [DE LEON, citing
it should be taxed once. The requisites are:
26 R.C.L 264-265]. Where double taxation (in
1. Both taxes must be imposed on the same
its narrow sense) occurs, the taxpayer may
property or subject matter;
seek relief under the uniformity rule or the
2. For the same purpose;
equal protection guarantee. [DE LEON, citing
3. By the same State, Government, or
84 C.J.S.138].
taxing authority;
4. Within the same territory, jurisdiction or
taxing district;
5. During the same taxing period; and
Page 29 of 256
International Double Taxation tax but the burden of the tax.

Double taxation usually takes place when a
person is resident of a contracting state and All indirect taxes may be shifted; direct taxes
derives income from, or owns capital in, the cannot be shifted.
other contracting state and both states impose
tax on that income or capital. In order to Ways of shifting the tax burden
eliminate double taxation, a tax treaty resorts 1. Forward shifting - When the burden of the
to several methods. tax is transferred from a factor of
production through the factors of
The purpose of these international agreements distribution until it finally settles on the
is to reconcile the national fiscal legislations of ultimate purchaser or consumer.
the contracting parties in order to help the ! Examples: VAT, percentage tax.
taxpayer avoid simultaneous taxation in two 2. Backward shifting - When the burden of
different jurisdictions. More precisely, the tax the tax is transferred from the consumer or
conventions are drafted with a view towards purchaser through the factors of
the elimination of international juridical distribution to the factor of production.
double taxation, which is defined as the ! Example: Consumer or purchaser
imposition of comparable taxes in two or more may shift tax imposed on him to
states on the same taxpayer in respect of the retailer by purchasing only after the
same subject matter and for identical periods. price is reduced, and from the latter
to the wholesaler, and finally to the
The apparent rationale for doing away with manufacturer or producer.
double taxation is to encourage the free flow 3. Onward shifting - When the tax is shifted
of goods and services and the movement of two or more times either forward or
capital, technology and persons between backward.
countries, conditions deemed vital in creating
robust and dynamic economies. [CIR v. SC Factors determining tax shifting
Johnson & Sons, Inc., G.R. No. 127105 (1999)] 1. Elasticity of demand and supply - The
more the elasticity, the lower the incidence
Modes of eliminating double taxation on the sales and the higher the incidence
a. Allowing reciprocal exemption either by law on supply.
or by treaty; 2. Nature of markets – In an oligopolistic
b. Allowance of tax credit for foreign taxes market (i.e. few sellers and many buyers)
paid; tax shifting to buyers is high since few
c. Allowance of deductions such as for sellers can team up to determine the
foreign taxes paid, and vanishing market price. In a situation where there are
deductions in estate tax; or many buyers and sellers, a large portion of
d. Reduction of Philippine tax rate. tax will be borne by sellers. For a
monopolistic market, the entire tax burden
5. Escape from Taxation falls on the shoulders of the buyer.
3. Government policy on pricing – In the
case of government price control, the
a. Shifting of Tax Burden
supplier cannot increase prices, hence
cannot shift tax burden to buyers and vice
Shifting
versa.
The act of transferring the burden of a tax from
4. Geographical location – If taxes are
the original payer or the one on whom the tax
imposed on certain regions, it is hard to
was assessed or imposed to someone else.
shift them to consumers because
What is transferred is not the payment of the
Page 30 of 256
consumers will move to regions with low Impact Distinguished from Incidence
taxes.
Impact Incidence
5. Nature of tax (Direct or Indirect tax) –
Direct tax e.g. PAYE (pay-as-you-earn)
cannot be shifted whatsoever while indirect Initial burden of tax Ultimate burden of
taxes can be shifted through increase in the tax
prices.
6. Rate of tax – If the rate is too high, shifting
can occur backwards or forwards; if the At the point of At the point of
rate is too low, it may be absorbed by the imposition settlement
manufacturer.
7. Time available for adjustment – The
person who can adjust faster (buyer or Falls upon the Rests on the person
seller) will be able to shift the tax e.g. if the person from whom who pays it
buyer can shift to substitute goods, the the tax is collected eventually
seller will bear the tax burden.
8. The tax point
May be shifted Cannot be shifted
Taxes that can be shifted
1. Value-added Tax Incidence is the end
2. Percentage Tax of the shifting
3. Excise Tax process. Sometimes,
however, when no
Meaning of Impact and Incidence of shifting is possible,
Taxation as in the case of
Impact of taxation is the point where the tax income tax or such
is originally imposed or the one on whom the other direct taxes,
tax is formally assessed. [Ingles, Tax Made the impact coincides
Less Taxing (2018)] In so far as the law is with incidence on the
concerned, the taxpayer, the subject of tax, is same person.
the person who must pay the tax to the
government. Application:
Suppose a tax — excise duty — is imposed on
Incidence of taxation is the point on whom the soap. Its impact is on the producers, in the first
tax burden finally rests. [INGLES] It takes place instance, as they are liable to pay it to the
when shifting has been effected from the government. But, the producers may succeed
statutory taxpayer to another. in collecting it from the consumers by raising
the price of soap by the amount of tax. In that
case, consumers eventually pay the tax and so
the incidence falls upon them.
Page 31 of 256
Relationship between Impact, Shifting, and taxpayer to be legally due, or in paying no

Incidence of a Tax tax when such is due;
b. An accompanying state of mind described
Impact Shifting Incidence
as being “evil,” “in bad faith,” “willful,” or
“deliberate and not accidental”; and
Initial Intermediate Result c. A course of action (or failure of action)
phenomenon process which is unlawful. [CIR v. Estate of Toda,
G.R. No. 147188 (2004)]
Imposition of Transfer of Setting or Since fraud is a state of mind, it need not be

the tax the tax coming to proved by direct evidence but may be inferred
rest of the from the circumstances of the case. Thus:
tax ! The failure of the taxpayer to declare for
taxation purposes his true and actual
income derived from his business for
two consecutive years has been held as
Example: Impact in VAT is on the producer who an indication of his fraudulent intent to
shifts the burden to the customer who finally cheat the government of its due taxes.
bears the incidence of the tax
[Republic v. Gonzales, G.R. No. L-17962
(1965)]
b. Tax Avoidance (Tax Minimization) ! The substantial underdeclaration of
income in the income tax returns of the
The exploitation by the taxpayer of legally taxpayer for four (4) consecutive years
permissible alternative tax rates or methods of coupled with his intentional
assessing taxable property or income in order overstatement of deductions justifies the
to avoid or reduce tax liability. It is politely finding of fraud. [Perez v. CTA and
called “tax minimization” and is NOT Collector, G.R. No. L-10507 (1958)].
punishable by law.
Mere understatement of a tax is not itself proof
Example: A person refrains from engaging in of fraud for the purpose of tax evasion. The
some activity or enjoying some privilege in burden of proof is on the prosecution to prove
order to avoid the incidental taxation or to lower beyond reasonable doubt that the accused
his tax bracket for a taxable year. willfully failed to supply correct and accurate
information. [People v. Judy Ann Santos, CTA
c. Tax Evasion (Tax Dodging) Crim. Case No. 0-012 (2013)]
Tax Evasion - is the use by the taxpayer of The Willful Blindness doctrine states that a
illegal or fraudulent means to defeat or taxpayer can no longer raise the defense that
lessen the payment of a tax. It is also known as the errors on their tax returns are not their
“tax dodging.” It is punishable by law. responsibility or that it is the fault of the
accountants they hired. Intent to defraud need
Example: Deliberate failure to report a taxable not be shown for a conviction of tax evasion.
income or property; deliberate reduction of The only thing that needs to be proven is that
income that has been received; overstatement the taxpayer was aware of his obligation to file
of expenses. the tax return but he nevertheless voluntarily,
knowingly, and intentionally failed to file the
Elements of Tax Evasion required returns. [INGLES citing People v.
a. The end to be achieved. Example: the Kintanar, C.T.A. E.B. No. 006 (2010)]
payment of less than that known by the
Page 32 of 256
Tax Avoidance v. Tax Evasion It is a waiver of the government's right to collect

the amounts that would have been collectible
Tax Avoidance Tax Evasion
under our tax laws. Thus, when the law speaks
of a tax exemption, it should be understood as
Also Tax Tax Dodging freedom from the imposition and payment of a
called as Minimization particular tax. [Secretary of Finance v. Lazatin,
G.R. No. 210588 (2016)]
Means Legal Illegal Taxation is the rule; exemption is the

exception. He who claims exemption must be
able to justify his claim or right thereto, by a
Outcome of tax Outcome of grant expressed in terms “too plain to be
planning tax fraud mistaken and too categorical to be
misinterpreted.” If not expressly mentioned in
the law, it must at least be within its purview by
Punisha No Yes clear legislative intent. [Jaka Investments Corp.
ble? v. CIR, G.R. No. 147629 (2010)]
Purpose Merely Entirely
He who claims an exemption must be able to
minimize escape point to some positive provision of law creating
payment of payment of the right; it cannot be allowed to exist upon a
taxes (tax taxes mere vague implication or inference. The right
savings) of taxation will not be held to have been
surrendered unless the intention to surrender
d. Transformation is manifested by words too plain to be
mistaken, for the state cannot strip itself of the
Method of escape in taxation whereby the most essential power of taxation by doubtful
manufacturer or producer upon whom the tax words; it cannot, by ambiguous language, be
has been imposed pays the tax and endeavors deprived of this highest attribute of sovereignty.
to recoup himself by improving his process of [Manila Electric Corporation v. Vera, G.R. No.
production thereby turning out his units of L-29987 (1975)]
products at a lower cost. The taxpayer escapes
by a transformation of the tax into a gain If there is nothing in a law that points that the
through the medium of production. word “exemption” refers to taxes, the
implication would be that the term would be an
exemption of something else, such as
6. Exemption from Taxation regulatory or reporting requirements. [Ingles
citing PLDT v. City of Davao, G.R. No. L-29987
Meaning of exemption from taxation
(1975)]
The grant of immunity to particular persons or
corporations or to persons or corporations of a
Grounds for Tax Exemption
particular class from a tax which persons and
a. It may be based on a contract.
corporations generally within the same state or
b. It may be based on some ground of public
taxing district are obliged to pay. It is an
policy.
immunity or privilege; it is freedom from a
c. It may be created in a treaty on grounds of
financial charge or burden to which others are
reciprocity or to lessen the rigors of
subjected. It is strictly construed against the
international or multiple taxation.
taxpayer.
Page 33 of 256
But equity is NOT a ground for tax exemption. when a tax is levied on certain classes
While equity cannot be used as a basis or without mentioning the other classes.
justification for tax exemption, a law may validly Every tax statute, in a very real sense,
authorize the condonation of taxes on makes exemptions since all those not
equitable considerations. mentioned are deemed exempted. The
omission may be either accidental or
There is no tax exemption solely on the ground intentional.
of equity. [Davao Gulf Lumber Corp. v. CIR,
G.R. No. 117359 (1998)] Exemptions are not presumed, but when
public property is involved, exemption is
Nature of tax exemption the rule, and taxation is the exception.
a. Mere personal privilege – cannot be
assigned or transferred without the consent c. Contractual - The legislature of a
of the legislature. The legislative consent to State may, in the absence of special
the transfer may be given either in the restrictions in its constitution, make a
original act granting the exemption or in a valid contract with a corporation in
subsequent law. respect to taxation, and that such
b. General rule: Revocable by the contract can be enforced against the
government. State at the instance of the corporation.
Exception: If founded on a contract which [Casanovas v. Hord, G.R. No. 3473
is protected from impairment. But the (1907)]
contract must contain the essential
elements of other contracts. An exemption In the real sense of the term and where
provided for in a franchise, however, may the non-impairment clause of the
be repealed or amended pursuant to the Constitution can rightly be invoked, this
Constitution [Sec. 11, Art. XII, 1987 includes those agreed to by the taxing
Constitution]. A legislative franchise is a authority in contracts, such as those
mere privilege. contained in government bonds or
c. Implies a waiver on the part of the debentures, lawfully entered into by
government of its right to collect taxes due them under enabling laws in which the
to it, and, in this sense, is prejudicial government, acting in its private
thereto. Hence, it exists only by virtue of an capacity, sheds its cloak of authority
express grant and must be strictly and waives its governmental immunity.
construed.
d. Not necessarily discriminatory, provided These contractual tax exemptions,
it has a reasonable foundation or rational however, are not to be confused with
basis. Where, however, no valid distinction tax exemptions granted under
exists, the exemption may be challenged franchises. A franchise partakes the
as violative of the equal protection nature of a grant which is beyond the
guarantee or the uniformity rule. purview of the non-impairment clause
of the Constitution. [Manila Electric
Kinds of Tax Exemption Company v. Province of Laguna, G.R.
a. Express or Affirmative - either entirely or No. 131359 (1999)]
in part, may be made by provisions of the
Constitution, statutes, treaties, ordinances, Rationale of Tax Exemption
franchises, or contracts. Such exemption will benefit the body of the
people and not particular individuals or private
b. Implied or Exemption by Omission - interest and that the public benefit is sufficient
Page 34 of 256
to offset the monetary loss entailed in the grant 8. Prohibition on Compensation

of the exemption.
and Set-Off
Principles of Tax Exemption:
a. As the power of taxation is a high General rule: Taxes cannot be subject to
prerogative of sovereignty, the compensation [South African Airways v. CIR,
relinquishment is never presumed and G.R. No. 180356 (2010)]
any reduction or diminution thereof with
respect to its mode or its rate, must be Reasons:
strictly construed, and the same must be a. This would adversely affect the
couched in clear and unmistakable terms in government revenue system [Philex Mining
order that it may be applied. [Floro Cement v. CA, G.R. No. 125704 (1998)].
v. Gorospe, G.R. No. L-46787 (1991) b. The government and the taxpayer are not
b. When granted, they are strictly construed creditors and debtors of each other. There
against the taxpayer [Luzon Stevedoring is a material distinction between a tax and
Co. v. CTA, G.R. No. L-30232 (1988)] debt. Debts are due to the Government in
c. Tax exemptions are strictly construed its corporate capacity, while taxes are due
against the taxpayer, they being highly to the Government in its sovereign
disfavored and may almost be said “to be capacity. We find no cogent reason to
odious to the law.” [Manila Electric deviate from the aforementioned
Company v. Vera, supra] distinction. [South African Airways v. CIR,
supra]
Revocation of Tax Exemption
General Rule: Revocable by the government. Exception: If the claims against the
government have been recognized and an
Exception: Contractual tax exemptions may amount has already been appropriated for that
not be unilaterally so revoked by the taxing purpose. Where both claims have already
authority without thereby violating the non- become:
impairment clause of the Constitution. a. Due,
b. Demandable, and
c. Fully liquidated,
7. Doctrine of Equitable compensation takes place by operation of law
Recoupment under Art. 1200 in relation to Articles 1279 and
1290 of the NCC, and both debts are
The doctrine of equitable recoupment allows a extinguished to the concurrent amount.
taxpayer whose claim for refund has been [Domingo v. Garlitos, G.R. No. L-18994 (1963)]
barred by prescription to offset such claims
against a current assessment. 9. Compromise
The doctrine also allows the government to
A contract whereby the parties, by making
offset taxes that have not been collected from
the taxpayer against a current claim for refund, reciprocal concessions, avoid litigation or put
an end to one already commenced [Art. 2028,
although the government is time-barred from
Civil Code]. It involves a reduction of the
collecting the previous taxes.
taxpayer’s liability.
The doctrine finds NO application in this
jurisdiction. Requisites of a tax compromise:
a. The taxpayer must have a tax liability.
b. There must be an offer (by the taxpayer or
Page 35 of 256
Commissioner) of an amount to be paid by No. 156 (1946)]. It is generally prospective in

the taxpayer. application [Dimaampao, 2005, p. 111].
c. There must be acceptance (by the
Commissioner or the taxpayer, as the case Tax Amnesty v. Tax Exemption
may be) of the offer in settlement of the
Tax Tax
original claim.
Amnesty Exemption
10. Tax Amnesty

Benefit Immunity Immunity
Definition from civil, from civil
A tax amnesty partakes of an absolute criminal, liability
forgiveness or waiver by the Government of administrati (relief from
its right to collect what otherwise would be due ve liability paying
it, and in this sense, prejudicial thereto, arising from taxes)
particularly to give tax evaders, who wish to non-
relent and are willing to reform a chance to do payment of
so and become a part of the new society with a taxes
clean slate. [Republic v. IAC, G.R. No. L-69344
(1991)] Coverage Past tax Future tax
liability liability
A tax amnesty, much like a tax exemption, is
never favored nor presumed in law. If granted,
the terms of the amnesty, like that of a tax Actual Yes None
exemption, must be construed strictly Revenue Loss
against the taxpayer and liberally in favor of
the taxing authority.
K. CONSTRUCTION AND
He who claims an exemption (or an amnesty) INTERPRETATION OF TAX LAWS,
from the common burden must justify his claim RULES, AND REGULATIONS
by the clearest grant of organic or state law. It
cannot be allowed to exist upon a vague 1. Tax Laws
implication. If a doubt arises as to the intent of
the legislature, that doubt must be resolved in General Rule: Tax laws are construed strictly
favor of the state. [CIR v. Marubeni Corp., G.R. against the government and liberally in favor of
No. 137377 (2001)]. the taxpayer. [Manila Railroad Co. v. Coll. of
Customs, G.R. No. L-30264 (1929)].
Amnesty distinguished from tax exemption
Tax amnesty is immunity from all criminal and No person or property is subject to taxation
civil obligations arising from non-payment of unless within the terms or plain import of a
taxes. It is a general pardon given to all taxing statute. [see 72 Am. Jur. 2d 44] Taxes,
taxpayers. It applies to past tax periods, hence being burdens, are not to be presumed beyond
of retroactive application. [People v. what the statute expressly and clearly
Castañeda, G.R. No. L-46881 (1988)] declares. [Coll. v. La Tondena, G.R. No. L-
10431 (1962)].
Tax exemption is immunity from all civil
liability only. It is an immunity or privilege, a Thus, a tax payable by “individuals” does not
freedom from a charge or burden of which apply to “corporations.”
others are subjected. [Greenfield v. Meer, C.A.
Page 36 of 256
Tax statutes offering rewards are liberally mere vague implication or inference.
construed in favor of informers. [Penid v. c. RCPI v Provincial Assessor of South
Virata, G.R. No. L-44004 (1983)]. Cotabato [G.R. No. 144486 (2005)]:
Exemptions are strictly construed against
Exceptions: the taxpayer and liberally in favor of the
a. The rule of strict construction as against the taxing authority—it is the taxpayer’s duty to
government is not applicable where the justify the exemption by words too plain to
language of the statute is plain and there is be mistaken and too categorical to be
no doubt as to the legislative intent [see 51 misinterpreted.
Am. Jur. 368]. E.g. Word “individual” was d. CIR v. CA [supra]: Refunds are in the
changed by the law to “person”. This clearly nature of exemption and must be
indicates that the tax applies to both natural construed strictly against the
and juridical persons, unless otherwise grantee/taxpayer.
expressly provided. e. Quezon City v. ABS-CBN Broadcasting
b. The rule does not apply where the Corporation [G.R. No. 166408 (2008)]:
taxpayer claims exemption from the tax. Since taxation is the rule and exemption
the exception, the intention to make an
Tax statutes are to receive a reasonable exemption ought to be expressed in clear
construction or interpretation with a view to and unambiguous terms
carrying out their purpose and intent. They
should not be construed as to permit the Exceptions:
taxpayer easily to evade the payment of tax. a. When the law itself expressly provides for
[Carbon Steel Co. v. Lewellyn, 251 U.S. 201]. a liberal construction, that is, in case of
Thus, the good faith of the taxpayer is not a doubt, it shall be resolved in favor of
sufficient justification for exemption from the exemption;
payment of surcharges imposed by the law for b. When the exemption is in favor of the
failing to pay tax within the period required by government itself or its agencies, or of
law. religious, charitable, and educational
2. Tax Exemption and Exclusion institutions because the general rule is that
they are exempt from tax.
Tax exemptions must be shown to exist clearly c. When the exemption is granted under
and categorically, and supported by clear special circumstances to special classes of
legal provisions. [NPC v. Albay, G.R. No. persons.
87479 (1990)] d. If there is an express mention or if the
taxpayer falls within the purview of the
General Rule: exemption by clear legislative intent, the
In the construction of tax statutes, exemptions rule on strict construction does not apply.
are not favored and are construed strictissimi [Comm. v. Arnoldus Carpentry Shop, Inc.,
juris against the taxpayer. [Republic Flour Mills G.R. No. 71122 (1988)].
v. Comm. & CTA, G.R. No. L-25602 (1970)]
a. NPC v. Albay [supra]: Tax exemptions 3. Tax Rules and Regulations
must be shown to exist clearly and
categorically, and supported by clear General Rule:
legal provisions. The Secretary of Finance, upon
b. Floro Cement v. Gorospe [supra]: Claims recommendation of the CIR, shall promulgate
for an exemption must be able to point out all needful rules and regulations for the
some provision of law creating the right, effective enforcement of the provisions of the
and cannot be allowed to exist upon a NIRC. [Sec. 244, NIRC]
Page 37 of 256
It is an elementary rule in administrative law and original jurisdiction of the Commissioner of

that administrative regulations and policies Internal Revenue subject to review by the
enacted by administrative bodies to interpret Secretary of Finance [Sec. 4, par.1, NIRC].
the law which they are entrusted to enforce
have the force of law and are entitled to great Revenue regulations are the formal
respect. They have in their favor a presumption interpretation of the provisions of the NIRC and
of legality [Gonzales v. Land Bank, G.R. No. other laws by the Secretary of Finance upon
76759 (1990)] the recommendation of the Commissioner of
Internal Revenue.
It is of course axiomatic that a rule or regulation
must bear upon, and be consistent with, the General rule: The Commissioner has the sole
provisions of the enabling statute if such rule or authority to issue rulings but he also has the
regulation is to be valid. In case of conflict power to delegate said authority to his
between a statute and an administrative order, subordinates with the rank equivalent to a
the former must prevail. [Fort Bonifacio division chief or higher.
Development Corp v. CIR, GR 175707 (2014)]
Exceptions: The Commissioner may not
Requisites for validity and effectivity of delegate the following:
regulations a. The power to recommend the promulgation
a. Reasonable; of rules and regulations by the Secretary of
b. Within the authority conferred; Finance;
c. Not contrary to law and the Constitution b. The power to issue rulings of first
[Art. 7, NCC]; and impression or to reverse, revoke, or modify
d. Must be published. any existing ruling of the Bureau; and
c. The power to compromise or abate any tax
Tax regulations whose purpose is to enforce or liability as provided by Sec. 204 and 205 of
implement existing law must comply with the the NIRC
following requisites to be effective [RP v.
Pilipinas Shell Petroleum Corp., G.R. No. Exception to the exception: BUT
173918 (2008)]: assessments issued by RDOs involving (a)
a. Be published in a newspaper of general Php500,000 or less, and (b) minor criminal
circulation [Art. 2, NCC]; AND violations as determined by the Secretary of
b. Filed with the UP Law Center Office of the Finance as recommended by the
National Administrative Register (ONAR) Commissioner, may be compromised by a
[Ch 2, Book VII, EO 292] Regional Evaluation Board [Sec. 7, NIRC].
Note: Administrative rules and regulations Decisions of the Supreme Court applying or
must always be in harmony with the provisions interpreting existing tax laws are binding on all
of the law. In case of conflict with the law or subordinate courts and have the force and
the Constitution, the administrative rules and effect of law. As provided for in Article 8 of the
regulations are null and void. As a matter of Civil Code, they “form part of the law of the
policy, however, courts will declare a regulation land.”
or provision thereof invalid only when the
conflict with the law is clear and unequivocal. The same is also true with respect to decisions
of the Court of Tax Appeals. However, by the
Administrative interpretations and opinions nature of its jurisdiction, the decisions of this
The power to interpret the provisions of the Tax court are still appealable to the Supreme Court
Code and other tax laws is under the exclusive by a petition for review on certiorari (Rule 45).
Page 38 of 256
[Sec. 11, RA 9282]

b. Power of the Commissioner to
4. Penal Provisions of Tax Laws Interpret Tax Laws and to Decide
Tax Cases
Penal provisions of tax laws must be strictly
construed. It is not legitimate to stretch the Power to Interpret
language of a rule, however beneficent its The power to interpret provisions of the NIRC
intention, beyond the fair and ordinary meaning and other tax laws shall be under the exclusive
of its language. and original jurisdiction of the CIR, subject to
review by the Secretary of Finance. [Sec. 4,
A penal statute should be construed strictly NIRC]
against the State and in favor of the accused.
The reason for this principle is the tenderness A ruling by the CIR that interprets provisions of
of the law for the rights of individuals and the the NIRC and other tax laws shall be presumed
object is to establish a certain rule by valid unless modified, reversed or superseded
conformity to which mankind would be safe, by the Secretary of Finance. A taxpayer who
and the discretion of the court limited. [People receives an adverse ruling from the CIR may,
v. Purisima, G.R. No. L-42050-66 (1978)]. within thirty (30) days from the date of receipt
of such ruling, seek its review by the Secretary
II. NATIONAL INTERNAL of Finance. The Secretary of Finance may also
review the rulings motu proprio. [DOF Order
REVENUE CODE (NIRC) OF
No. 007-02, 7 May 2002]
1997, AS AMENDED
Taxpayers acting in good faith should not be
A. TAXING AUTHORITY made to suffer for adhering to general
interpretative rules of the Commissioner
interpreting tax laws, should such interpretation
1. Jurisdiction, Power and later turn out to be erroneous and be reversed
by the Commissioner or this Court. Indeed,
Functions of the Section 246 of the Tax Code expressly
Commissioner of Internal provides that a reversal of a BIR regulation or
Revenue ruling cannot adversely prejudice a taxpayer
who in good faith relied on the BIR regulation
a. Powers and Duties of the Bureau of or ruling prior to its reversal. [CIR v. San
Roque, G.R. No. 187485 (2013)]
Internal Revenue [Sec. 2, NIRC]
Power to Decide Tax Cases
1. To assess and collect all national
The power to decide (1) disputed
internal revenue taxes, fees, and
assessments, (2) refunds of internal revenue
charges;
taxes, fees, charges and penalties, or (3) other
2. To enforce all forfeitures, penalties and
matters arising under the NIRC or other laws
fines connected therewith;
administered by the BIR is vested in the CIR,
3. To execute judgment in all cases
subject to the exclusive appellate jurisdiction of
decided in its favor by the CTA and the
the CTA. [Sec. 4, NIRC]
ordinary courts; and
4. To give effect to and administer the
supervisory and police powers
conferred upon it by the Tax Code or
other special laws.
Page 39 of 256
c. Non-retroactivity of rulings (Sec. b. Specific Provisions to be

246, NIRC) Contained in Rules and
Regulations [Sec. 245, NIRC]
General Rule: Any revocation, modification or
reversal of (1) rules and regulations 1. The manner in which revenue shall be
promulgated in accordance with the NIRC, or collected and paid, the instrument, document
(2) any rulings or circulars promulgated by the or object to which revenue stamps shall be
CIR shall not be given retroactive application if affixed, the mode of cancellation of the same,
the revocation, modification, or reversal is the manner in which the proper books, records,
prejudicial to the taxpayers. invoices and other papers shall be kept and
entries therein made by the person subject to
Exceptions: the tax, as well as the manner in which licenses
1. Where the taxpayer deliberately misstates and stamps shall be gathered up and returned
or omits material facts from his return or after serving their purposes;
any document required of him by the BIR;
2. Where the facts subsequently gathered by 2. The manner in which tax returns, information
the BIR are materially different from the and reports shall be prepared and reported and
facts on which the ruling is based; or the tax collected and paid, as well as the
3. Where the taxpayer acted in bad faith. conditions under which evidence of payment
shall be furnished the taxpayer, and the
Under Sec. 246, taxpayers may rely upon a preparation and publication of tax statistics;
rule or ruling issued by the CIR from the time
the rule or ruling is issued up to its reversal by 3. The manner in which internal revenue taxes,
the CIR or this Court. The reversal is not given such as income tax, including withholding tax,
retroactive effect. There must, however, be a estate and donor's taxes, value-added tax,
rule or ruling issued by the Commissioner that other percentage taxes, excise taxes and
is relied upon by the taxpayer in good faith. A documentary stamp taxes shall be paid
mere administrative practice, not formalized through the collection officers of the BIR or
into a rule or ruling, will not suffice because through duly authorized agent banks which are
such a mere administrative practice may not be hereby deputized to receive payments of such
uniformly and consistently applied. [CIR v. San taxes and the returns, papers and statements
Roque, supra]. that may be filed by the taxpayers in connection
with the payment of the tax:
2. Rule-Making Authority of the
Provided, however, that notwithstanding the
Secretary of Finance other provisions of this Code prescribing the
place of filing of returns and payment of taxes,
a. Authority of the Secretary of the CIR may, by rules and regulations require
Finance to Promulgate Rules and that the tax returns, papers and statements and
Regulations [Sec. 244, NIRC] taxes of large taxpayers be filed and paid,
respectively, through collection officers or
The Secretary of Finance, upon through duly authorized agent banks:
recommendation of the CIR, shall promulgate
all needful rules and regulations for effective Provided, further, That the CIR can exercise
enforcement of the provisions of the Code. this power within six (6) years from the
approval of R.A. 7646 (An Act Authorizing the
CIR to Prescribe the Place for Payment of
Internal Revenue Taxes by Large Taxpayers)
Page 40 of 256
or the completion of its comprehensive income, emoluments, profits and the like. It
computerization program, whichever comes may be succinctly defined as a tax on income,
earlierFor the purpose of this Section, 'large whether gross or net, realized in one taxable
taxpayer' means a taxpayer who satisfies any year. [DE LEON citing CJS and AmJur]
of the following criteria:
a. Value-Added Tax (VAT) – Business Nature
establishment with VAT paid or payable of Income tax is generally classified as an excise
at least P100,000 for any quarter of the tax. It is not levied upon persons, property,
preceding taxable year; funds or profits but upon the right of a person
b. Excise tax – Business establishment with to receive income or profits. [DE LEON]
excise tax paid or payable of at least
P1,000,000 for the preceding taxable year; General Principles [Sec. 23, NIRC]
c. Corporate Income Tax - Business 1. A resident citizen of the Philippines is
establishment with annual income tax paid taxable on all income derived from sources
or payable of at least P1,000,000 for the within and without the Philippines;
preceding taxable year; and 2. A nonresident citizen is taxable only on
d. Withholding tax - Business establishment income derived from sources within the
with withholding tax payment or remittance Philippines
of at least P1,000,000 for the preceding 3. An individual citizen of the Philippines
taxable year. who is working and deriving income from
abroad as an overseas contract worker is
Provided, however, That the Secretary of taxable only on income derived from sources
Finance, upon recommendation of the CIR, within the Philippines: Provided, That a
may modify or add to the above criteria for seaman shall be treated as an overseas
determining a large taxpayer after considering contract worker if he (1) is a citizen of the
such factors as inflation, volume of business, Philippines, and (2) receives compensation for
wage and employment levels, and similar services rendered abroad as a member of the
economic factors. complement of a vessel engaged exclusively in
international trade;
The penalties prescribed under Sec. 248 shall 4. An alien individual, whether a resident or
be imposed on any violation of the rules and not of the Philippines, is taxable only on
regulations issued by the Secretary of Finance, income derived from sources within the
upon recommendation of the CIR, prescribing Philippines;
the place of filing of returns and payments of 5. A domestic corporation is taxable on all
taxes by large taxpayers. income derived from sources within and
without the Philippines; and
6. A foreign corporation, whether engaged or
B. INCOME TAX not in trade or business in the Philippines, is
taxable only on income derived from sources
within the Philippines.
1. Definition, Nature and
Taxpayer Within Without
General Principles
Resident Citizen √ √
Definition
Income Tax is defined as a tax on all yearly Non-resident Citizen
√ X
profits arising from property, professions, and OCW
trades, or offices, or as a tax on the person’s
Page 41 of 256
Resident Alien √ X Global System Schedular System
Non-resident Alien √ X A personal tax based

A tax on income-
on the income of the
Domestic Corporation √ √ producing activities.
taxpayer.
Foreign Corporation √ X Emphasizes the Emphasizes revenue
burden allocation and administrative
a. Income Tax Systems aspects. aspects.
Most equitable Because of its

i. Global
system yet multiple rates, the tax
developed for burden of a person
Under a global tax system, it does not matter
distributing tax does not correspond
whether the income received by the taxpayer is
burden. The burden to his income but
classified as compensation income, business of an individual is rather falls
or professional income, passive investment
closely related to his fortuitously on the
income, capital gain, or other income. All items resources and his type of his income. It
of gross income, deductions, and personal and ability to pay. is fixed and final.
additional exemptions, if any, are reported in
one income tax return, and one set of tax rates It serves as a means This function is alien
are applied on the tax base. for redistributing to schedular system
income and wealth. where in times of
A global tax system is one where the tax Big income earners plenty or in times of
treatment views indifferently the tax base and are subject to higher need, people pay the
generally treats in common all categories of taxes than small same fixed tax on
taxable income of the taxpayer. [Tan v. Del income earners. their income.
Rosario, Jr., G.R. No. 109289 (1994)]
Administration is not
ii. Schedular The administration is
quite as easy as
simple, being
schedular because
confined to each
Under a schedular tax system, different types one has to consider
of income are subject to different sets of transaction or
all income from
activity.
graduated or flat income tax rates. The whatever source.
applicable tax rate(s) will depend on the
classification of the taxable income and the
iii. Semi-schedular or Semi-global Tax
basis could be gross income or net income.
System
Separate income tax returns (or other types of
return applicable) are filed by the recipient of
All compensation income, business or
income for the particular types of income
professional income, capital gain and passive
received. [MAMALATEO]
income not subject to final tax, and other
income are added together to arrive at the
A schedular approach in taxation is one where
gross income, and after deducting the sum of
the income tax treatment varies and is made to
allowable deductions, the taxable income is
depend on the kind or category of taxable
subjected to one set of graduated tax rates or
income of the taxpayer. [Tan v. Del Rosario,
normal corporate income tax. With respect to
Jr., supra]
such income the computation is global.
For those other income not mentioned above,
Page 42 of 256
they remain subject to different sets of tax rates Philippines, if he qualifies as a non-resident
and covered by different returns. [Mamalateo] citizen. [MAMALATEO]
Note: The Philippines, under the NIRC, follows ii. Residence

a semi-schedular and semi-global tax system.
A resident alien is liable to pay Philippine
b. Features of the Philippine Income income tax only on his income from sources
Tax Law within the Philippines but is exempt from tax on
his income from sources outside the
i. Direct Tax – The tax burden is borne Philippines. [MAMALATEO]
by the income recipient upon whom the
tax is imposed. iii. Source
ii. Progressive – The tax rate increases
as the tax base increases. It is founded An alien is subject to Philippine income tax
on the ability to pay principle and is because he derives income from sources
consistent with Sec. 28, Art. VI, 1987 within the Philippines. Thus, a non-resident
Constitution. alien or non-resident foreign corporation is
iii. Comprehensive – The Philippines has liable to pay Philippine income tax on income
adopted the most comprehensive from sources within the Philippines, such as
system of imposing income tax by dividend, interest, rent, or royalty, despite the
adopting the citizenship principle, the fact that he has not set foot in the Philippines.
residence principle, and the source [MAMALATEO]
principle. Any of the three principles is
enough to justify the imposition of d. Types of Philippine Income Tax
income tax on the income of a resident
citizen and a domestic corporation that There are several types of income tax under
are taxed on a worldwide income. the NIRC, namely: [MAMALATEO]
iv. Semi-Schedular or Semi-Global Tax i. Graduated income tax and fixed tax on
System – The Philippines follows the gross sales or receipts for individuals;
semi-schedular or semi-global system ii. Normal corporate income tax on
of income taxation, although certain corporations;
passive investment incomes and
iii. Minimum corporate income tax on
capital gains from sale of capital assets
(namely: (a) shares of stock of corporations;
domestic corporations, and (b) real iv. Special income tax on certain
property) are subject to final taxes at corporations;
preferential tax rates [MAMALATEO]. v. Capital gains tax on sale or exchange
of unlisted shares of stock of a
c. Criteria in Imposing Philippine domestic corporation classified as
Income Tax capital assets;
vi. Capital gains tax on sale or exchange
i. Citizenship
of real property located in the
A citizen of the Philippines is subject to Philippines classified as a capital
Philippine income tax: asset;
a. On his worldwide income, if he resides in vii. Final withholding tax on certain passive
the Philippines; or investment income paid to residents;
b. Only on his income from sources within the
Page 43 of 256
viii. Final withholding tax on income Special

payments made to non-residents; Classes
ix. Fringe benefits tax on fringe benefits of of Minimum Wage Earner
Individu
supervisory or managerial employees; als
x. Branch profit remittance tax; and
xi. Tax on improperly accumulated Domestic Corporations
earnings of corporations Resident

Corporation
e. Kinds of Taxpayers s
Corporations
Foreign
Corporations Non-
Taxpayer – any person subject to tax imposed resident
by Title II of the Tax Code. [Sec. 22(N), NIRC] Corporation
s
Person – means an individual, a trust, estate
Estates and
or corporation. [Sec. 22(A), NIRC]
Trusts
For income tax purposes, taxpayers are General Partnership

classified generally as follows: Partnerships
a. Individuals General Professional Partnership
b. Corporations
c. Estates and Trusts i. Individual Taxpayers
d. Partnerships (General Partnership and
General Professional Partnerships) CITIZENS
a. Resident Citizens (RC)
Primary b. Non-resident Citizens (NRC) [Sec. 22 (E),
Sub-Classification(s)
Classification NIRC]
1. PH citizen who establishes to the
Citizens Resident citizens
satisfaction of the CIR the fact of his
of the
Philippi physical presence abroad with a
Non-resident citizens definite intention to reside therein.
nes
2. PH citizen who leaves the Philippines
Residents during the taxable year to reside
abroad, either as an immigrant or for
Engaged in
Trade or
employment on a permanent basis.
Individuals Business in 3. PH citizen who works and derives
the income from abroad and whose
Non-
Philippines employment thereat requires him to be
Aliens
resident physically present abroad most of the
Not time during the taxable year. To be
s
Engaged in
Trade or
considered physically present abroad
Business in most of the time during the taxable
the year, a contract worker must have
Philippines been outside the PH for not less than
183 days during such taxable year.
[BIR R.R. 1-79, Sec. 2]
4. PH citizen previously considered as a
non-resident citizen and who arrives
Page 44 of 256
during the taxable year to reside b. Not engaged in trade or business

permanently in the PH - Treated as within the Philippines - If the
NRC with respect to his income derived aggregate period of his stay in the
from sources abroad until his arrival in Philippines does not exceed 180 days.
the PH
ii. Corporations
Note: The term ‘residence’ is to be understood
not in its common acceptation as referring to Includes all types of corporations, partnerships
‘dwelling’ or ‘habitation,’ but rather to ‘domicile’ (no matter how created or organized), joint
or legal residence, that is, ‘the place where a stock companies, joint accounts (cuentas en
party actually or constructively has his participacion), associations, or insurance
permanent home, where he, no matter where companies, whether or not registered with the
he may be found at any given time, eventually SEC. [MAMALATEO]
intends to return and remain (animus
manendi). [Japzon v. COMELEC, G.R. No. Excludes general professional partnerships
180088 (2009)] (GPP); joint ventures or consortiums formed for
the purpose of (1) undertaking construction
ALIENS projects or (2) engaging in petroleum, coal,
1. Resident Alien – An alien actually present geothermal and other energy operations
in the Philippines who is not a mere pursuant to an operating or consortium
transient or sojourner is a resident for agreement under a service contract with the
income tax purposes. government. [Sec. 22 (B), NIRC]
a. No/Indefinite Intention = RESIDENT:
If he lives in the Philippines and has no Law of Incorporation Test
definite intention as to his stay, he is a To determine the residence of a corporation,
resident. A mere floating intention the Philippines adopted the Law of
indefinite as to time, to return to Incorporation test under which a corporation is
another country is not sufficient to considered domestic if it is organized or
constitute him a transient. created in accordance with or under the laws of
b. Definite Intention = TRANSIENT: the Philippines and foreign if it is organized or
One who comes to the Philippines for a created in accordance with or under the laws of
definite purpose, which in its nature a foreign country. [MAMALATEO]
may be promptly accomplished, is a
transient. Domestic corporations
A corporation created and organized in the
Exception: Definite Intention but such cannot Philippines or under its laws. [Sec. 22 (C),
be promptly accomplished; If his purpose is of NIRC]
such nature that an extended stay may be
necessary for itsnot accomplishment, and thus Foreign corporations
the alien makes his home temporarily in the A corporation which is not domestic. [Sec. 22
Philippines, then he becomes a resident. (D), NIRC]
1. Resident foreign corporations – Foreign
2. Non-resident Alien corporation engaged in trade or business
a. Engaged in trade or business within within the Philippines. [Sec. 22 (H), NIRC]
the Philippines - If the aggregate 2. Non-resident foreign corporations –
period of his stay in the Philippines is Foreign corporation not engaged in trade
more than 180 days during any or business within the Philippines. [Sec. 22
calendar year. [Sec. 25(A)(1), NIRC] (I), NIRC]
Page 45 of 256
DOING BUSINESS – implies a continuity of subject to certain special rules [Sec 61, NIRC]
commercial dealings and arrangements, and
contemplates, to that extent, the performance Estate
of acts or works or the exercise of some of the Refers to all the property, rights and obligations
functions normally incident to, and in of a person which are not extinguished by his
progressive prosecution of commercial gain or death and those which have accrued thereto
for the purpose and object of the business since the opening of the succession. [DE
organization. [CIR v. BOAC, G.R. No. L-65773 LEON citing Arts. 776 and 781 NCC]
(1987)]
Trust
Includes: An arrangement created by will or an
1. soliciting orders, service contracts agreement under which legal title to property is
2. opening offices, whether called "liaison" passed to another for conservation or
offices or branches investment with the income therefrom and
3. appointing representatives or distributors ultimately the corpus (principal) to be
domiciled in the Philippines or who in any distributed in accordance with the directions of
calendar year stay in the country for a the creator as expressed in the governing
period totaling 180 days or more instrument. [DE LEON]
4. participating in the management,
supervision or control of any domestic d. Partnerships, Joint Ventures, Co-
business, firm, entity or corporation in the ownership
Philippines.
General Partnerships
Excludes: A partnership which is not a general
1. mere investment as a shareholder in professional partnership. Treated as a
domestic corporations, and/or the exercise corporation.
of rights as such investor
2. having a nominee director or officer to General Professional Partnerships (GPP)
represent its interests in such corporation A partnership formed by persons for the sole
3. appointing a representative or distributor purpose of exercising their common
domiciled in the Philippines which profession, no part of the income of which is
transacts business in its own name and for derived from engaging in any trade or
its own account. [RA 7042, Foreign business. [Sec. 22 (B), NIRC]
Investments Act]
The partners themselves, not the partnership,
f. Estates and Trusts shall be liable for income tax in their separate
and individual capacities. Each partner shall
Income tax imposed on individuals shall apply report as gross income his distributive share,
to income of estates or of any kind of property actually or constructively received, in the net
held in trust. [Sec. 60 (A), NIRC] income of the partnership. [Sec. 26, NIRC]
Exceptions: (1) Employee’s trust [Sec. 60, Joint venture and consortium
NIRC]; (2) Revocable trusts [Sec. 63, NIRC]; Essential factors of a joint venture or
(3) Income for Benefit of Grantor [Sec. 64, consortium:
NIRC] 1. Each party must make a contribution,
not necessarily of capital but by way of
Taxable income of the estate or trust is services, skill, knowledge, material or money;
computed in the same manner as an individual, 2. Profits must be shared among the
Page 46 of 256
parties; which starts after the first month of the

3. There must be a joint proprietary tax year or ends before the last month
interest and right of mutual control over the of the tax year (less than 12 months).
subject matter of the enterprise; Instances whereby short accounting
4. There is a single business transaction. period arises:
i. When a corporation is newly
A joint venture or consortium is treated as a organized.
corporation, except those formed for the ii. When a corporation is
purpose of: dissolved. [Sec. 52(c), NIRC]
1. Undertaking construction projects, or iii. When a corporation changes
2. engaging in petroleum, coal, its accounting period. [Sec 46,
geothermal and other energy operations NIRC]
pursuant to an operating consortium iv. When the taxpayer dies.
agreement under a service contract with the
Government. General rule: Taxable income shall be
computed based on the taxpayer’s annual
Co-ownership accounting period, which may be fiscal year or
There is co-ownership whenever the calendar year
ownership of an undivided thing or right
belongs to different persons. [Art. 484, NCC] Exception: Taxable income shall be computed
based on the basis of calendar year only:
Co-ownerships are not subject to tax as a a. If the taxpayer's annual accounting period
corporation if the activities of the co-owners are is other than a fiscal year;
limited to the preservation of the property and b. If the taxpayer has no annual accounting
the collection of the income therefrom, in which period;
case each co-owner is taxed individually on his c. If the taxpayer does not keep books of
distributive share in the income of the co- accounts; or
ownership. [DE LEON citing Sec. 210 Regs] d. If the taxpayer is an individual [Sec. 43,
NIRC].
f. Taxable Period
2. Concept of Income
"Taxable year" means the calendar year, or
the fiscal year ending during such calendar a. Definition
year, upon the basis of which the net income is Income means all wealth which flows to the
computed. Taxable year includes, in the case taxpayer other than a mere return of capital.
of return made for a fractional part of a year Income is a gain derived from labor or capital,
under the provisions of Title II (Tax on Income), or both labor and capital; and includes the gain
the period for which such return is made [Sec. derived from the sale or exchange of capital
22 (P), NIRC]. assets. [DE LEON]
a. Calendar Year – An accounting period Income includes earnings, lawfully or

of 12 months ending on the last day of unlawfully acquired, without consensual
December. recognition, express or implied, of an obligation
b. Fiscal Year – An accounting period of to repay and without restriction as their
12 months ending on the last day of disposition. [James v. US, 366 US 213 (1961)]
any month other than December [Sec. Income may be received in the form of cash,
22(Q), NIRC]. property, service, or a combination of the three.
c. Short Period – An accounting period
Page 47 of 256
Income v. Capital assets. [VALENCIA AND ROXAS]

" The essential difference between capital and
income is that capital is a fund; income is a b. When Income is Taxable
flow. A fund of property existing at an instant of
time is called capital. A flow of services i. Existence of Income
rendered by that capital by the payment of
money from it or any other benefit rendered by Requisites for income to be taxable [DE
a fund of capital in relation to such fund through LEON]
a period of time is called income." [Madrigal v. 1. There is INCOME, gain or profit
Rafferty, G.R. No. 12287 (1918)] 2. RECEIVED or REALIZED during the
taxable year
Income Capital 3. NOT EXEMPT from income tax
Denotes a flow of ii. Realization of Income

Fund or property
wealth during a
existing at one Income is realized when there is a gain or profit
definite period of
distinct point in time. derived from a closed and completed
time.
transaction. The realization of gain may take
Service of wealth Wealth itself the form of actual receipt of cash or may occur
as a constructive receipt of income. [Valencia
Return of capital is and Roxas]
Subject to tax
not subject to tax
Mere increase in the value of property without
Fruit Tree actual realization, either through sale or other
disposition, is not taxable. [De Leon]
Classification of Income
1. Compensation Income Actual v. Constructive receipt
Means all remuneration for services 1. Actual receipt – Income is actually
performed by an employee for his reduced to possession. The realization of
employer under an employer-employee gain may take the form of actual receipt of
relationship, unless explicitly excluded by cash.
the Tax Code of special law. 2. Constructive receipt – An income is
[MAMALATEO] considered constructively received when it
2. Profession or Business Income is credited to the account of, or segregated
The value derived from an exercise of in favor of, a person.
profession, business or utilization of capital
including profit and gain derived from sale Examples of Constructive receipt:
or conversion of assets. Examples are net 1. Interest credited on savings bank deposit;
income from business and gain from the 2. Matured interest coupons not yet collected
sale of assets used in trade or business. by the taxpayer;
3. Passive Income 3. Dividends applied by the corporation
An income in which the taxpayer merely against the indebtedness of a stockholder;
waits for the amount to come in. Examples 4. Share in the profit of a partner in a general
are royalty, interest, prizes, and winnings. professional partnership, although not yet
4. Capital Gain distributed, is regarded as constructively
An income derived from sale of assets not received; or
used in trade or business. Examples are 5. Intended payment deposited in court
sale of family home and other capital (consignation).
Page 48 of 256
The doctrine of constructive receipt is designed ii. Claim of Right Doctrine

to prevent the taxpayer using the cash basis
from deferring or postponing the actual receipt a.k.a. Doctrine of Ownership, command, or
of taxable income. Without the rule, the control
taxpayer can conveniently select the year in
which he will report the income. [DIMAAMPAO] In the claim-of-right doctrine, if a taxpayer
receives money or other property and treats it
iii. Recognition of Income as its own under the claim of right that the
payments are made absolutely and not
Income realized pertains to the accrual basis of contingently, such amounts are included in the
accounting. taxpayer's income, even though the right to the
income has not been perfected at that time. It
Recognition of income in the books is when it does not matter that the taxpayer's title to the
is realized and expenses are recognized when property is in dispute and that the property may
incurred. It is the right to receive and not the later be recovered from the taxpayer. [CIR v.
actual receipt that determines the inclusion of Meralco, C.T.A. EB No. 773 (2012)]
the amount in gross income
iii. Economic Benefit Test,
Examples: Doctrine of Proprietary
i. Interest or rent income earned but not Interest
yet received
ii. Rent expense accrued but not yet paid Any economic benefit to the employee that
iii. Wages due to workers but remaining increases his net worth, whatever may have
unpaid been the mode by which it is effected, is
taxable. Thus, in stock options, the difference
c. Tests in Determining Whether between the fair market value of the shares at
Income is Earned for Tax Purposes the time the option is exercised and the option
price constitutes additional compensation
i. Realization Test income to the employee at the time of exercise
(not upon the grant or vesting of the right).
No taxable income until there is a separation
from capital of something of exchangeable Anything that benefits a person materially or
value, thereby supplying the realization or economically in whatever way is taxable.
transmutation which would result in the receipt However, note that a mere increase in the
of income [Eisner v. Macomber, 252 U.S. 189, value of property without actual realization is
190 (1920)]. Thus, stock dividends are not not taxable. [INGLES]
income subject to income tax on the part of the
stockholder when he merely holds more shares iv. Severance Test
representing the same equity interest in the
corporation that declared stock dividends Under the severance test of income, in order
[Fisher v. Trinidad, supra]. that income may exist, it is necessary that there
be a separation from capital of something of
Income is recognized when both of the exchangeable value. The income requires a
following conditions are met: (a) the earning is realization of gain.
complete or virtually complete; and (b) an
exchange has taken place. [INGLES] Hence, the increase in value of an asset is not
income as it has not yet been exchanged or
transferred for something else. Once the asset
Page 49 of 256
is exchanged, then a severance of the gain property [Sec 49 (B), NIRC]; and
from its original value takes place, resulting into Sellers of real property [Sec 49 (B) &
taxable income. [Ingles] (C), NIRC]
d. Methods of Accounting Personal Property Real Property

Dealer
PRINCIPAL METHODS: ● Installment ● Installment
1. Cash method – income, profits and gains method method if initial
earned are not included in gross income ● Person who payments do
until received, and expenses are not regularly not exceed
deducted until paid. [DE LEON] sells/disposes of 25% of the
2. N.B. “received” here includes actual and personal gross selling
constructive receipt. property on price
3. Accrual method – income, profits and instalment plan ● Deferred
gains are included in gross income when ● Held as ordinary payment
earned, whether received or not, and asset method if initial
expenses are allowed as deductions when ● Regardless of payments
incurred, although not yet paid. It is the amount of exceed 25% of
right to receive and not the actual receipt percentage of the gross
that determines the inclusion of the amount initial payments selling price
in gross income. [DE LEON] ● Held as
4. Hybrid method – income and expenses inventory
are reported by employing the combination Casual Sale
of cash and accrual method. Example: ● Installment
where a taxpayer is engaged in more than method if :(1)
one trade or business, he may use a Selling price
different method of accounting for each exceeds P1k
trade or business. [DE LEON] and (2) Initial
payments do not
SPECIAL METHODS: exceed 25% of
1. Installment Basis [Sec. 49, NIRC] selling price
Taxpayer reports as income only a part of ● Deferred
the gross profit to be realized from the sale payment
on the instalment plan equivalent to that method if
proportion of the instalments received neither of the 2
every year which the gross profit realized conditions are
or to be realized when payment is met
completed bears to the contract price. ● Personal
property not
Gross considered
Income to be Profit inventory
Instalment Sale by Individuals
reported for = ×
Received Contract ● Installment
the year
Price method
provided; initial
payments do not
Installment basis is available to:
exceed 25% of
Dealers in personal property [Sec 49
selling price
(A), NIRC]; Casual Sellers of personal
Page 50 of 256
● Held as capital e. Situs of Income

asset
Income Situs
Interest Residence of the debtor
Initial payments mean the payments received Dividends Residence of the corporation
in cash or property (other than evidence of declaring the dividends
indebtedness of the purchaser) by the seller Services Place of performance
during the taxable year of the disposition of the Rentals Location of the property
real property. [Sec 49(B), NIRC] Royalties Place of use or exercise
Sale of Real Location of realty
2. Deferred Payment Sales Property
a. Applicable when the initial payments Sale of ● Tangible
exceed 25% of the selling price Personal ▪ Manufactured w/in
b. The income to be reported during the Property and sold w/o: Partly
year of sale is the difference between w/in and partly w/o
the selling or contract price and the the PH
cost of the property, even though the ▪ Manufactured w/o
entire purchase price has not been and sold w/in: Partly
actually received in the year of sale. w/in and partly w/o
c. The obligations of the purchaser the PH
received by the vendor are considered ▪ Purchased w/in but
as equivalent of cash. sold w/o: Place of
Sale
3. Percentage of completion [Sec. 48, ▪ Purchased w/o but
NIRC] sold w/in: Place of
Income from long-term contracts is sale
reported for tax purposes on the basis of ● Intangible
percentage of completion. “Long-term ▪ General rule: Place
contracts” means building, installation or of Sale
construction contracts covering a period in ▪ Exception: Shares of
excess of 1 year. stock of domestic
corporations: Place
Gross income already earned though not of incorporation
yet received, based on estimates of
architects or engineers duly certified by
them, is reported in a taxable year; and all 3. Gross Income
deductions relating to such gross income
for the taxable year, even if not yet paid are a. Definition
taken into account. [DE LEON] Gross Income [Sec. 32(A)]
Completed contract method – No longer Gross Income means all income derived from
allowed since January 1, 1998 as per RA whatever source, including (but not limited to)
8424. Cost of the contract is accumulated the following items:
during the years of construction and • Compensation for services in whatever
deducted from the income of the contract in form paid, including, but not limited to fees,
the year it is completed. salaries, wages, commissions, and similar
items;
• Gross income derived from the conduct of
Page 51 of 256
trade or business or the exercise of a 2. Fringe benefits;

profession; 3. Professional income;
• Gains derived from dealings in property; 4. Income from business;
interests; rents; royalties; dividends; 5. Income from dealings in property;
annuities; prizes and winnings; pensions; 6. Passive investment income;
and partner's distributive share from the net 7. Annuities, proceeds from life insurance or
income of the general professional other types of insurance;
partnership. 8. Prizes and awards;
9. Pensions, retirement benefits, or
The list here is NOT exclusive. separation pay.
10. Income from any source
The definition of gross income is broad enough
to include all passive income subject to specific i. Compensation Income
rates or final taxes. However, since these
passive incomes are already subject to All remunerations for services performed by an
different rates and taxed finally at source, they employee for his employer under an employer-
are no longer included in the computation of employee (ER-EE) relationship, unless
gross income which determines taxable excepted under the provisions of the NIRC are
income. [CIR v. PAL, GR 160628 (2006)] considered as compensation income. [RR No.
02-98, Sec 2.78.1]
b. Distinguish: gross income, net
income, and taxable income It includes, but is not limited to, salaries and
wages, honoraria and emoluments, allowances
Gross income – The total income of a (e.g., transportation, representation,
taxpayer subject to tax. It includes the gains, entertainment), commissions, fees (including
profits, and income derived from whatever directors’ fees, if the director is, at the same
source, whether legal or illegal. [Sec. 32(A), time, an employee of the payor-corporation),
NIRC] It does not include income excluded by tips, taxable bonuses, fringe benefits except
law, or which are exempt from income tax. those subject to Fringe Benefit Tax (FBT)
[Sec. 32(B), NIRC] under Section 33 of the Tax Code, and taxable
pensions and retirement pay (e.g., retirement
Net income – Means gross income less benefits earned without meeting the conditions
statutory deductions and exemptions. [Sec. 31, for exemption thereof, such as retirement of
NIRC ] less than 50 years of age.)
Taxable income – means the pertinent items The term wages does NOT include
of gross income specified in the Tax Code, less remuneration paid:
the deductions and/or personal and additional a. For agricultural labor paid entirely in
exemptions, if any, authorized for such types of products of the farm where the labor is
income by the Tax Code or other special laws performed
[Sec. 31, NIRC ]. It is synonymous to the term b. For domestic service in a private home
“net income.” [VALENCIA and ROXAS] c. For casual labor not in the course of the
employer's trade or business
d. For services by a citizen or resident of the
c. Sources of Income Subject to Tax
Philippines for a foreign government or an
int’l organization. [Sec. 78(A), NIRC]
The following sources of income subject to tax
are the following.
1. Compensation income;
Page 52 of 256
The term “remuneration for domestic the absence of evidence to the contrary, such
services” refers to remuneration paid for price will be presumed to be the FMV of the
services of a household nature performed by remuneration received.
an employee in or about the private home of
the person whom he is employed. The services If meals, living quarters, and other facilities and
of household personnel furnished to an privileges are furnished to an employee for the
employee (except rank and file employees) by convenience of the employer, and incidental to
an employer shall be subject to the fringe the requirement of the employee’s work or
benefits tax pursuant to Sec. 33 of the Tax position, the value of that privilege need not be
Code. included as compensation [Henderson v.
Collector, G.R. No. L-12954 (1961)]
The term “casual labor” includes labor which
is occasional, incidental or regular. “Not in the ii. Fringe Benefits
course of the employer’s trade or business”
includes labor that does not promote or Definition
advance the trade or business of the employer. Fringe benefit means any goods, services, or
other benefit furnished or granted in cash or in
General Rule: Compensation income kind, in addition to basic salaries, to an
including overtime pay, holiday pay, night shift individual employee, except a rank and file
differential pay, and hazard pay, earned by employee [RR No. 03-98, Sec 2.23b]
MINIMUM WAGE EARNERS (MWE) who has
no other returnable income are NOT taxable Fringe benefit means includes but not limited to
and not subject to withholding tax on wages the following:
[RA 9504]; • Housing
• Expense Account
Exception: If he receives/earns additional • Vehicle of any kind
compensation such as commissions, • Household personnel, such as maid,
honoraria, fringe benefits, benefits in excess of driver and others
the allowable statutory amount of P90,000 • Interest on loan at less than market rate
[RA 10963], taxable allowance, and other to the extent of the difference between
taxable income other than the statutory the market rate and actual rate
minimum wage (SMW), holiday pay, overtime granted.
pay, hazard pay and night shift differential pay. • Membership fees, dues and other
expenses borne by the employer for
FORMS OF COMPENSATION AND HOW the employee in social and athletic
THEY ARE ASSESSED clubs and similar organizations
• Expenses for foreign travel
Cash – If compensation is paid in cash, the full • Holiday and vacation expenses
amount received is the measure of the income • Educational assistance to the
subject to tax. employee or his dependents; and
• Life or health insurance and other non-
Medium other than money – If services are life insurance premiums or similar
paid for in a medium other than money (e.g., amounts on excess of what the law
shares of stock, bonds, and other forms of allows. [Sec. 33(B)]
property), the fair market value (FMV) of the
thing taken in payment is the amount to be
included as compensation subject to tax. If the
services are rendered at a stipulated price, in
Page 53 of 256
Tax Rate and Tax Base employer.
Tax base is based on the grossed-up Payor of Fringe Benefit Tax (FBT): The
monetary value (GMV) of fringe benefits. employer withholds and pays the FBT but the
Rate is generally 35%, since this is the law allows him to deduct such tax from his
headline or the highest tax rate for individual gross income.
income taxpayers.
Taxable and non-taxable fringe benefits
FBT is calculated using the GMV multiply by
the 35%. [Sec. 33 (A), NIRC] Fringe Benefits NOT subject to Tax
GMV represents Fringe benefits not considered as gross

i. the whole amount of income realized by income – if it is required or necessary to the
the employee which includes the net business of employer; if it is for the
amount of money or net monetary value of convenience or advantage of employer
property that has been received; and
ii. the amount of fringe benefit tax due from Fringe Benefit that is not taxable under Sec. 32
the employee which has been withheld (B) – Exclusions from Gross Income
and paid by the employer for and in behalf
of his employee. Fringe benefits not subject to Fringe Benefit
Tax:
How GMV is determined a. Fringe Benefits which are authorized and
GMV is determined by dividing the actual exempted from income tax under the Code
monetary value of the fringe benefit by 65% or under special laws;
[100% - tax rate of 35%]. b. Contributions of the employer for the
benefit of the employee for retirement,
For example, the actual monetary value of the insurance and hospitalization benefit
fringe benefit is P1,000. The GMV is equal to plans;
P1,538.46 [P1,000 / 0.65]. The fringe benefit c. Benefits given to the rank-and-file
tax, therefore, is P538.46 [P1538.46 x 35%]. employees, whether granted under a
collective bargaining agreement or not;
Special Cases: and
For fringe benefits received by non-resident d. Fringe benefits granted for the
alien not engaged in trade of business in the convenience of the employer;
Philippines (NRANETB), the tax rate is 25% of e. De minimis benefits
the GMV. The GMV is determined by dividing
the actual monetary value of the fringe benefit If the Fringe Benefit is exempted from the FBT,
by 75% [100% - 25%]. the same may, however, still form of the
employee’s gross compensation income which
What is the tax implication if the employer is subject to income tax; hence, likewise
gives ‘fringe benefits’ to rank-and-file subject to withholding tax on compensation
employees? income payment.
Fringe benefits given to a rank-and-file
employee are treated as part of his De Minimis Benefits
compensation income subject to normal tax De Minimis Benefits are facilities and privileges
rate and withholding tax on compensation furnished or offered by an employer to his
income, except de minimis benefits and employees that are relatively small value and
benefits provided for the convenience of the are offered or furnished by the employer
Page 54 of 256
merely as means of promoting health, goodwill, highly paid employees; [RR No. 5-2011]
contentment, and efficiency of his employees 9. Gifts given during Christmas and major
[RR No. 3-98, Sec 2.23c] anniversary celebrations not exceeding
P5,000 per employee per annum; [RR No.
The following De Minimis Benefits are exempt 5-2011]
from income tax and withholding tax on 10. Daily meal allowance for overtime work
compensation income of BOTH managerial and night/graveyard shift not exceeding
and rank and file EEs [as provided by R.R. No. twenty-five percent (25%) of the basic
11-2018/ R.R. No. 5-2011 / R.R. No. 8-2012 minimum wage on a per region basis; [RR
and R.R. No. 1-2015 ]: No. 3-98]
1. Monetized unused vacation leave credits of 11. Benefits received by an employee by virtue
PRIVATE employees not exceeding ten of a collective bargaining agreement (CBA)
(10) days during the year. Note that the and productivity incentive schemes
monetization of unused VL credits in provided that the total monetary value
excess of 10 days and monetization of SL received from both CBA and productivity
even if not exceeding 10 days are subject incentive schemes combined do not
to tax; [RR No. 5-2011] exceed P10,000.00 per employee per
2. Monetized value of vacation and sick leave taxable year. [RR No 1-2015]
credits paid to GOVERNMENT officials
and employees. Note that there is no limit All other benefits given by employers which are
as to the number of credits; [RR No. 5- not included in the above enumeration shall
2011] NOT be considered as "de minimis" benefits
3. Medical cash allowance to dependents of and hence, shall be subject to withholding tax
employees, not exceeding P1,500 per on compensation (rank and file employees)
employee per semester or P250 per and FBT (managerial/supervisory employees).
month; [RR No. 11-2018]
4. Rice subsidy of P2,000 or one (1) sack of Housing
50 kg. rice per month amounting to not Fringe Benefit
more than P2,000; [RR No. 11-2018]
Tax Base
5. Uniform and Clothing allowance not Housing Privilege
(Monetary
exceeding P6,000 per annum; [RR No. 11-
Value)
2018]
6. Actual medical assistance, e.g. medical LEASE of residential MV= 50% of
allowance to cover medical and healthcare property for the lease payments,
needs, annual medical/executive check- residential use of where MV =
up, maternity assistance, and routine employees monetary value
consultations, not exceeding P10,000.00 of the FB
per annum; [RR No. 5-2011]
7. Laundry allowance not exceeding P300 per Assignment of MV= [5% (FMV or
month; [RR No. 5-2011] residential property ZV, whichever is
8. Employees achievement awards, e.g., for owned by employer for higher) x 50%]
length of service or safety achievement, use of employees
which must be in the form of a tangible
personal property other than cash or gift Purchase of residential MV= 5% x
certificate, with an annual monetary value property in installment acquisition cost
not exceeding P10,000 received by the basis for the use of the exclusive of
employee under an established written employee interest x 50%
plan which does not discriminate in favor of
Page 55 of 256
Purchase of residential MV= FMV or ZV, Employer owns and

property and ownership whichever is maintains a fleet of
MV = (AC/5) x
is transferred in the higher motor vehicles for use
50%
name of the employee of the business and of
employees
ZV = Zonal Value = value of the land or
improvement, as declared in the Real Property Employer leases and
Declaration Form maintains a fleet for the MV = 50% of
use of the business and rental payment
FMV = Fair Market Value = FMV as determined of employees
by the Commissioner of Internal Revenue
Non-taxable housing fringe benefit: Pure Compensation Earner

a. Housing privilege of the Armed Forces of (Minimum Wage Earner, Rank & File,
the Philippines (AFP) officials – i.e. those of Executive)
the Philippine Army, Philippine Navy, or Minimum
Philippine Air Force Managerial or
Wage Rank and File
b. A housing unit, which is situated inside or Supervisory
Earner
adjacent to the premises of a business or
factory – maximum of 50 meters from Basic Compensation
perimeter of the business premises
c. Temporary housing for an employee who Taxable Taxable
Exempt
stays in housing unit for three months or Compensation Compensation
less
Holiday Pay, OT, Nightshift Pay, Hazard
Pay
Motor Vehicle
Fringe Benefit Taxable Taxable
Exempt
Tax Base Compensation Compensation
Motor Vehicle
(Monetary
13th Month Pay up to P90,000
Value)
Exempt Exempt Exempt
Purchased in the name MV = acquisition
of the employee cost Other Benefit in Excess of P90,000
Cash given to employee MV = cash N/A (with Taxable Taxable

to purchase in his own received by caveat) Compensation Compensation
name employee
Fringe Benefit
Purchase on MV = acquisition
installment, in the name cost exclusive of Subject to
Taxable
of employee interest Fringe Benefit
Compensation
Tax
N/A Tax
Employee shoulders Tax
MV = amount shouldered by
part of the purchase shouldered by
shouldered by employee
price, ownership in the employer
employer
name of employee
De Minimis Benefit
Exempt Exempt Exempt
Page 56 of 256
iii. Professional Income

Ordinary Asset Capital Asset
Refers to fees received by a professional from Gain from sale, exchange or other
the practice of his profession, provided that disposition
there is NO employer-employee relationship
between him and his clients. Ordinary Gain (part
Capital Gain
of Gross Income)
It includes the fees derived from engaging in an
endeavor requiring special training as Loss from sale, exchange, or other
professional as means of livelihood, which disposition
includes, but is not limited to, the fees of CPAs,
doctors, lawyers, engineers, and the like [RR Ordinary Loss (part
No. 2-98]. of Allowable
Capital Loss
Deductions from
The existence of employee-employer Gross Income)
relationship is the distinguishing factor
between compensation income versus Excess of Gains over Losses
professional income.
Part of Gross Income Net Capital Gain
iv. Income from Business Excess of Losses over Gains
Any income derived from doing business. Part of Allowable

Deductions from Net Capital Loss
Doing business: The term implies a continuity Gross Income
of commercial dealings and arrangements, and
contemplates, to that extent, the performance
of acts or works or the exercise of some of the (a) Capital v. Ordinary Asset
functions normally incident to, and in
progressive prosecution of, the purpose and Ordinary Assets Capital Assets
object of its organization. 1. Stock in trade of Property held by the
the taxpayer/ taxpayer, whether
v. Income from Dealings in Property other property of or not connected
a kind which with his trade or
Dealings in property such as sales or would properly business which is
exchanges may result in gain or loss. The kind be included in not an ordinary
of property involved (i.e., whether the property the inventory of asset.
is a capital asset or an ordinary asset) the taxpayer if on
determines the tax implication and income tax hand at the close
treatment, as follows: of the taxable
year.
2. Property held by
Net Capital the taxpayer
Taxable Ordinary Gains (other primarily for sale
Net Net than those to customers in
= +
Income Income subject to the ordinary
final CGT) course of his
trade or
business.
Page 57 of 256
3. Property used in located in the Philippines, classified as capital

the trade or asset, the tax base is the gross selling price or
business of a fair market value, whichever is higher. The law
character which presumes that the seller makes a gain from
is subject to the such sale.
allowance for
depreciation, or Thus, whether or not the seller makes a profit
4. Real property from the sale of real property, he has to pay 6%
used in the trade capital gains tax.
or business of
the taxpayer, Actual Gain: The tax base in the sale of real
including property classified as an ordinary asset is the
property held for actual gain.
rent.
Computation of the amount of gain or loss
Note in ordinary assets, that the list is
EXCLUSIVE. The actual use determines Amount realized from sale or other
whether a property is an ordinary asset or a disposition of property
capital asset. [BIR Ruling No. DA 212-07, April Less: Basis or Adjusted Basis
3, 2007] ______________________________
NET GAIN (LOSS)
(b) Types of Gains (c) Special rules pertaining to
income or loss from dealings in
ORDINARY INCOME VIS-À-VIS CAPITAL property classified as capital
GAIN. asset
a. If the asset involved is classified as
ordinary, the entire amount of the gain Long Term Capital Gain Vis-À-Vis Short
from the transaction shall be included in Term Capital Gain
the computation of gross income [Sec
32(A)], and the entire amount of the loss Long-term capital gain: Capital asset is held
shall be deductible from gross income. for more than twelve months before it is sold.
[Sec 34(D)]. (See Allowable Deductions Only 50% of the gain is recognized.
from Gross Income - Losses
b. If the asset involved is a capital asset, the Short-term capital gain: Capital asset is held
rules on capital gains and losses apply in for 12 months or less, 100% of the gain is
the determination of the amount to be subject to tax.
included in gross income. (See Capital
Gains and Losses). Note: If the taxpayer is a corporation, 100% of
the gain is recognized regardless of the holding
These rules do not apply to: period.
a. real property with a capital gains tax (final
tax), or Net Capital Gain Vis-À-Vis Net Capital Loss
b. shares of stock of a domestic corporation
with a capital gains tax (final tax). Net Capital Gain: Excess of the gains over the
losses on sales or exchange of capital assets
ACTUAL GAIN VIS-À-VIS PRESUMED GAIN during the taxable year.
Presumed Gain: In the sale of real property Net Capital Loss: Excess of the losses over
Page 58 of 256
the gains on sales or exchanges of capital corporation, which is a party to the merger
assets during the taxable year. [Sec. 39 (A), or consolidation, solely for the stock of
NIRC] another corporation also a party to the
merger or consolidation; or
Income Tax Treatment of Capital Loss c. A security holder of a corporation, which is
a party to the merger or consolidation,
Capital loss limitation rule (applicable to both exchanges his securities in such
corporations and individuals) corporation, solely for stock or securities in
General Rule: Losses from sales or such corporation, a party to the merger or
exchanges of capital assets shall be allowed consolidation.
only to the extent of the gains from such sales
or exchanges [Sec. 39(C), NIRC]. Both corporations in the aforementioned cases
must be parties to a merger or consolidation.
Exception for Banks and Trust Companies:
If a bank or trust company incorporated under Merger occurs when one corporation acquires
the laws of the Philippines, a substantial part of all or substantially all the properties of another
whose business is the receipt of deposits, sells corporation. Consolidation occurs when two or
any bond, debenture, note, certificate or other more corporations merge to form one
evidence of indebtedness issued by any corporation.
corporation (including one issued by a
government or political subdivision thereof) Substantially all the properties of another
with interest coupons or in registered form, any corporation means the acquisition of at least
loss resulting from such sale shall not be 80% of the assets, including cash, of another
subject to the foregoing limitation and shall not corporation which has the element of
be included in determining the applicability of permanence and not merely momentary
such limitation to other losses [Sec. 39(C), holding [Banggawan citing BIR Gen.Circ. V-
NIRC]. 253 (1957)]
Net loss carry-over rule (applicable only to Initial Acquisition of Control

individuals) No gain or loss shall also be recognized if
If an individual sustains in any taxable year a property is transferred to a corporation by a
net capital loss, such loss (in an amount not in person in exchange for stock or unit of
excess of the net income for the year) shall be participation in such a corporation of which as
treated in the succeeding taxable year as a loss a result of such exchange said person, alone
from the sale or exchange of a capital asset or together with others, not exceeding four (4)
held for not more than 12 months [Sec. 39(D), persons, gains control of said corporation:
NIRC]. Provided, That stocks issued for services shall
(d) Tax free exchanges [Sec. 40 not be considered as issued in return for
(c)(2)] property.
Merger or Consolidation vi. Passive Investment Income

No gain or loss shall be recognized if in
pursuance of a plan of merger or consolidation Under Sec 24(B) of the Tax Code, a final tax is
a. A corporation, which is a party to a merger imposed upon gross passive income of citizen
or consolidation, exchanges property and resident aliens. An income is considered
solely for stock in a corporation, which is a passive if the taxpayer merely waits for it to be
party to the merger or consolidation; or realized.
b. A shareholder exchanges stock in a
Page 59 of 256
Sources distributed in redemption or cancellation of

The following are the sources of passive the stock shall be considered as taxable
income subject to final tax income to the extent that it represents a
a. Interest income; distribution of earnings or profits [Sec.
b. Dividend Income; 73(B), NIRC]; or
c. Royalty Income; and b. Where there is an option that some
d. Rental Income. stockholders could take cash or property
dividends instead of stock dividends; some
Note that these sources of income are NOT stockholders exercised the option to take
added to other income in the determination of cash of property dividends; and the exercise
ordinary income tax liability. of option resulted in a change of the
stockholders’ proportionate share in the
Passive income is only subject to final tax if the outstanding share of the corporation.
source is within the Philippines.
Property dividends
(a) Interest Income Property dividends are subject to tax at the
preferential rate under the NIRC.
An earning derived from depositing or lending
of money, goods or credits [Valencia and Liquidating dividends
Roxas] Represents distribution of all the property or
assets of a corporation in complete liquidation
(b) Dividend Income or dissolution. It is strictly not dividend income,
but rather is treated in effect, a return of capital
A form of earnings derived from the distribution to the extent of the shareholder’s investment.
made by a corporation out of its earnings or
profits and payable to its stockholders, whether The difference between the cost or other basis
in money or in property. of the stock and the amount received in
liquidation of the stock is a capital gain or a
The following are the classification of capital loss. Where property is distributed in
dividends: liquidation, the amount received is the FMV of
1. Cash dividends such property. The income is subject to
2. Stock dividends ordinary income tax rates. It is subject neither
3. Property dividends; and to the FWT on dividends nor to the CGT on sale
4. Liquidating dividends. of shares.
Cash dividends (c) Royalty Income

Dividends are subject to final tax under the
NIRC. However, dividends received by a Where a person pays royalty to another for the
domestic corporation from another domestic use of its intellectual property, such royalty is
corporation, and a non-resident foreign generally a passive income of the owner
corporation from a domestic corporation is thereof subject to withholding tax.
exempt from income tax.
(d) Rental Income
Stock dividends
Stock dividend is generally exempt from Refers to earnings derived from leasing real
income tax, EXCEPT: estate as well as personal property. Aside from
a. If a corporation cancels or redeems stock the regular amount of payment for using the
issued as a dividend xxx the amount so property, it also includes all other obligations
Page 60 of 256
assumed to be paid by the lessee to the third consideration of capital paid by him. It is paid
party in behalf of the lessor (e.g., interest, annually, monthly, or periodically, computed
taxes, loans, insurance premiums, etc.) [RR upon the amount paid yearly, but necessarily
19-86] for life. [Peralta v. Auditor General, G.R. No. L-
8480 (1957)]
Lease of personal property
Rental income on the lease of personal The annuity payments represent a part that is
property located in the Philippines and paid to taxable and not taxable. If part of annuity
a non-resident taxpayer shall be taxed as payment represents interest, then it is a taxable
follows: income. If the annuity is a return of premium, it
is not taxable.
NRA-
NRFC viii. Prizes and Awards
NETB
Vessel 4.5% 25% A prize is a reward for a contest or a

competition. Such payment constitutes gain
Aircraft, 7.5% 25% derived from labor.
machineries and
other Equipment The EXCEPTIONS are as follows:
1. Prizes and awards made primarily in
Other assets 30% 25% recognition of religious, charitable,
scientific, educational, artistic, literary or
Leasehold improvements by lessee civic achievements are EXCLUSIONS
from gross income if:
Rent Income from leasehold improvements: 2. The recipient was selected without any
1. Outright method- lessor shall report as action on his part to enter a contest or
income FMV of the buildings or proceedings; and
improvements subject to the lease in the 3. The recipient is not required to render
year of completion. substantial future services as a condition
2. Spread-out method- lessor shall spread to receiving the prize or award.
over the remaining term of the lease the 4. Prizes and awards granted to athletes in
estimated depreciated (book) value of local and international sports competitions
such buildings or improvements at the and tournaments held in the Philippines
termination of the lease, and reports as and abroad and sanctioned by their
income for each remaining term of the national associations shall be EXEMPT
lease an aliquot part thereof. from income tax.
Estimated BV at the end of the lease contract/ ix. Pensions, Retirement Benefit, or
remaining lease term = Income per year Separation Pay
vii. Annuities, Proceeds from Life A stated allowance paid regularly to a person
insurance or Other Types of on his retirement or to his dependents on his
Insurance death, in consideration of past services,
meritorious work, age, loss or injury.
It refers to periodic installment payments of [VALENCIA]
income or pension by insurance companies
during the life of a person or for a guaranteed
fixed period of time, whichever is longer, in
Page 61 of 256
x. Income from Any Source Illustration:

Case A Case B Case C
Inclusion of all income not expressly exempted
within the class of taxable income under the Year 1
laws irrespective of the voluntary or involuntary
action of the taxpayer in producing the gains, Gross
and whether derived from legal or illegal 500,000 400,000 500,000
Income
sources
Less:
(a) Condonation of Indebtedness Allowable
Deduction
The cancellation of indebtedness may have s (before
(200,00 (480,000 (495,000
any of three possible consequences: write-off of
0) ) )
1. It may amount to payment of income. If, for Uncollectib
example, an individual performs services le
to or for a creditor, who, in consideration Accounts/
thereof, cancels the debt, income in that Debts)
amount is realized by the debtor as
compensation for personal services. Taxable
2. It may amount to a gift. If a creditor wishes Income
merely to benefit the debtor, and without (Net Loss)
300,000 (60,000) 5,000
any consideration therefore, cancels the before
debt, the amount of the debt is a gift to the write-off
debtor and need not be included in the
latter’s report of income. Deduction
3. It may amount to a capital transaction. If a for
corporation to which a stockholder is Accounts
(2,000) (2,000) (6,000)
indebted forgives the debt, the transaction Receivable
has the effect of a payment of dividend. written off
Taxable
(b) Recovery of Accounts
Income
Previously Written-off
(Net Loss) 298,000 (62,000) (1,000)
after write-
Bad debts claimed as a deduction in the
off
preceding year(s) but subsequently recovered
shall be included as part of the taxpayer’s gross Year 2
income in the year of such recovery to the
extent of the income tax benefit of said Recovery
deduction. There is an income tax benefit when of
the deduction of the bad debt in the prior year 2,000 2,000 6,000
Amounts
resulted in lesser income and hence tax Written Off
savings for the company. [Sec. 4, RR 5-99]
Taxable
Income on
2,000 - 5,000
the
Recovery
In Case A, the entire amount recovered
Page 62 of 256
(P2,000) is included in the computation of

gross income in Year 2 because the taxpayer Note: The enumeration of tax refunds that are
benefited by the same extent. Prior to the write- not taxable (income) is derived from an
off, the taxable income was P300,000; after the enumeration of tax payments that are not
write-off, the taxable income was reduced to deductible from gross income.
P298,000.
If a tax is not an allowable deduction from gross
In Case B, none of the P2,000 recovered would income when paid (no reduction of taxable
be recognized as gross income in Year 2. Note income, hence no tax benefit), the refund is not
that even without the write-off, the taxpayer taxable.
would not have paid any income tax anyway.
The “taxable income” before the write-off was
actually a net loss.
In Case C, only P5,000 of the P6,000

recovered would be recognized as gross
income in Year 2. It was only to this extent that
the taxpayer benefited from the write-off. The
taxpayer did not benefit from the extra P1,000
because at this point, the P1,000 was already
a net loss.
(c) Receipt of tax refunds or credit
General rule: A refund of a tax related to the

business or the practice of profession, is
taxable income (e.g., refund of fringe benefit
tax) in the year of receipt to the extent of the
income tax benefit of said deduction.
Exceptions: However, the following tax

refunds are not to be included in the
computation of gross income:
1. Philippine income tax, except the fringe
benefit tax
2. Income tax imposed by authority of any
foreign country, if the taxpayer claimed a
credit for such tax in the year it was paid or
incurred.
3. Estate and donor’s taxes
4. Taxes assessed against local benefits of a
kind tending to increase the value of the
property assessed (Special assessments)
5. Value Added Tax
6. Fines and penalties due to late payment of
tax
7. Final taxes
8. Capital Gains Tax
Page 63 of 256
d. Exclusions Items of Exclusions because they are

expressly exempt from income tax
Exclusions from gross income refer to income a. Under the Constitution
received or earned but is not taxable as income b. Under a tax treaty
because it is exempted by law or by treaty. c. Under special laws
Such tax-free income is not to be included in
the income tax return unless information i. Rationale
regarding it is specifically called for. Receipts
which are not in fact income are, of course, The term “exclusions” refers to items that are
excluded from gross income. not included in the determination of gross
income because:
The exclusion of income should not be a. They represent return of capital or are not
confused with the reduction of gross income by income, gain or profit;
the application of allowable deductions. While b. They are subject to another kind of internal
exclusions are simply not taken into account in revenue tax;
determining gross income, deductions are c. They are income, gain or profit expressly
subtracted from gross income to arrive at net exempt from income tax under the
income. [DE LEON] Constitution, tax treaty, Tax Code, or a
general or special law. [MAMALATEO]
Items of Exclusions representing return of
capital ii. Taxpayers Who May Avail
Amount of capital is generally recovered
through deduction of the cost or adjusted basis Exclusion Taxpayer
of the property sold from the gross selling price
or consideration, or through the deduction from All taxpayers since
gross income of depreciation relating to the Return of capital
there is no income.
property used in trade or business before it is
sold. All taxpayers unless
Already subject to
provided that income
internal revenue tax
It may also relate to indemnities, such as is to be included.
proceeds of life insurance paid to the insured’s
beneficiaries and return of premiums paid by As expressly
Express exclusion
the insurance company to the insured under a provided.
life insurance, endowment or annuity contract.
iii. Exclusions Distinguished from
Damages, in certain instances, may also be Deductions and Tax Credit
exempt because they represent return of
capital. Exclusions from gross income refer to flow of
wealth to the taxpayer which are not treated as
Items of Exclusion because it is subject to part of gross income for purposes of computing
another internal revenue tax the taxpayer’s taxable income, due to the
The value of property acquired by gift, bequest, following reasons: (1) it is exempted by the
devise or descent is exempt from income tax Constitution or a statute; or (2) it does not come
on the part of the recipient because the receipt within the definition of income.
of such property is already subject to transfer
taxes (estate tax or donor’s tax). Deductions, on the other hand, are the
amounts which the law allows to be subtracted
from gross income in order to arrive at net
Page 64 of 256
income. (b) Return of premium paid

Exclusions pertain to the computation of gross
income, while deductions pertain to the General rule: The amount received by the
computation of net income. insured as a return of premiums paid by him
under life insurance, endowment, or annuity
Exclusions are something received or earned contracts, either during the term or at the
by the taxpayer which do not form part of gross maturity of the term mentioned in the contract
income while deductions are something spent or upon surrender of the contract is a return of
or paid in earning gross income. capital and not income.
Tax Credit refers to amounts subtracted from This refers to the cash surrender value of the
the computed tax in order to arrive at taxes contract.
payable.
Exception: If the amounts received by the
iv. Exclusions Under the Constitution insured (when added to the amounts already
received before the taxable year under such
Income derived by the government or its contract) exceed the aggregate premiums or
political subdivisions from the exercise of any considerations paid (whether or not paid during
essential governmental function the taxable year), then the excess shall be
included in gross income.
Also, all assets and revenues of a non-stock,
non-profit private educational institution used (c) Amounts received under life
directly, actually and exclusively for private insurance, endowment or
educational purposes shall be exempt from annuity contracts
taxation.
Amounts received (other than amounts paid by
v. Exclusions Under the Tax Code reason of the death of the insured and interest
[Sec. 32(b), NIRC] payments on such amounts) under a life
insurance, endowment or annuity contracts are
(a) Proceeds of life insurance excluded from gross income, but if such
policies amounts (when added to amounts already
received before the taxable year under such
The proceeds of life insurance policies paid to contract) exceed the aggregate premiums of
his estate or to any beneficiary (but not a considerations paid (whether or not paid during
transferee for a valuable consideration), the taxable year), then the excess shall be
directly or in trust, upon the death of the included in gross income. However, in the case
insured, are excluded from the gross income of of a transfer for valuable consideration, by
the beneficiary. assignment or otherwise, of a life insurance,
endowment, or annuity contract, or any interest
However, if such amounts are held by the therein, only the actual value of such
insurer under an agreement to pay interest consideration and the amount of the premiums
thereon, the interest payments received by the and other sums subsequently paid by the
insured shall be included in gross income. The transferee are exempt from taxation.
interest income shall be taxed at the graduated
income tax rates.
Page 65 of 256
(d) Value of property acquired by

Alienation of Any damages as
gift, bequest, devise or descent
affection, or breach compensation for
of promise to marry unrealized income
Gifts, bequests and devises (which are subject
to estate or gift taxes) are excluded from gross Any amount received
income, BUT not the income from such as a return of capital
property. If the amount received is on account or reimbursement of
of services rendered, whether constituting a expenses
demandable debt or not, or the use or
opportunity to use of capital, the receipt is
income [Pirovano v. Commissioner, G.R. No. (f) Income exempt under tax treaty
L-19865, July 31, 1965]
Income of any kind, to the extent required by
(e) Amount received through any treaty obligation binding upon the
accident or health insurance Government of the Philippines.
(Compensation for damages)
(g) Retirement benefits, pensions,
As a rule, amounts received through accident gratuities, etc.
or health insurance or under workmen’s
compensation acts, as compensation for These are:
personal injuries or sickness, plus the amount • Retirement benefits under RA 7641, RA
of any damages received, whether by suit or 4917, and Section 60(B) of the NIRC
agreement, on account of such injuries or • Terminal pay
sickness are excluded from gross income. • Retirement Benefits from foreign
government agencies
Examples of non-taxable and taxable • Veterans benefits
damages recoveries are: • Benefits under the Social Security Act
• GSIS benefits
Non-taxable – Taxable –
compensation for compensation for
Retirement benefits received under RA
damages on damages on
7641(The Retirement Pay Law) and those
account of account of
received by officials and employees of private
Actual damages for firms under a reasonable private benefit plan
Personal (physical) (RPBP) maintained by the employer under RA
loss of anticipated
injuries or sickness 4917 (now Section 32(B)(6)(a) of NIRC) are
profits
excluded from gross income subject to income
Any other damages Moral and exemplary tax.
recovered on damages awarded
account of personal as a result of break of RA 7641 RPBP
injuries or sickness contract
Retiring employee Retiring official or
Exemplary and moral must be in the employee must have
damages for out-of- Interest for non- service of same been in the service of
court settlement, taxable damages employer the same employer
including attorney’s above CONTINUOUSLY for for at least ten (10)
fees at least five (5) years years.
Page 66 of 256
Terminal pay/Separation pay

Retiring employee
Retiring official or Any amount received by an employee or by his
must be at least sixty
employee must be at heirs from the employer as a consequence of
(60) years old but not
least fifty (50) years separation of such official or employee from the
more than 65 years
old at the time of service of the employer because of death,
of age at the time of
retirement sickness, other physical disability or for any
retirement
cause beyond the control of the employee. The
Retiring employee phrase “for any cause beyond the control of the
shall not have said official or employee” means that the
Availed of only once, separation of the employee must be
previously availed of
and only when there involuntary and not initiated by him.
the privilege under a
is no RPBP
retirement benefit
plan of the same or The separation must not be of his own making.
another employer
Notes:
Plan must be a. Sickness must be life-threatening or one
reasonable. Its which renders the employee incapable of
implementation must working
be fair and equitable b. Retrenchment of the employee due to
for the benefit of all unfavorable business conditions or
employees (e.g. from financial reverses is considered as
president to laborer) involuntary.
c. BIR Ruling 143-98: The “terminal leave
Plan must be pay” (amount paid for the commutation of
approved by BIR leave credits) of retiring government
employees is considered not part of the
A 'reasonable private benefit plan' means a gross salary, and is exempt from taxes.
pension, gratuity, stock bonus or profit-sharing [Commissioner v. CA and Castaneda,
plan maintained by an employer for the benefit G.R. 96016 (1991)].
of some or all of his employees wherein
contributions are made by such employer, or Retirement BENEFITS from foreign
employees, or both for the purpose of government agencies – The social security
distributing to such employees the earnings benefits, retirement gratuities, pensions and
and principal of the fund thus accumulated by other similar benefits received by resident or
the trust in accordance with such plan (trust non-resident citizens or aliens who come to
fund) reside permanently in the Philippines from
foreign government agencies and other
Further, it should be provided in the plan that at institutions, private or public;
no time prior to the satisfaction of all liabilities
with respect to employees under any trust, Payments of VETERANS benefits under
shall any part of the corpus or income of the U.S. Veterans Administration – Payments of
fund be used for, or be diverted to, any purpose benefits due or to become due to any person
other than for the exclusive benefit of his residing in the Philippines under the laws of the
employees. United States administered by the United
States Veterans Administration
Social Security Act benefits – Payments of

benefits received under the Social Security Act
Page 67 of 256
of 1954 [RA 8282], as amended, e.g., Maternity [Commissioner v. Anoldus Carpentry Shop,
Benefits G.R. No. 71122 (1988)]
GSIS benefits – Benefits received from GSIS Types of Deductions

under the GSIS Act of 1937, as amended, and There are four (4) types of deductions from
the retirement gratuity received by government gross income:
officials and employees are not taxable. [Sec. 1. itemized deductions in Section 34(A) to (J)
32B6., NIRC; Sec. B1, RR 2-98] and (M) available to all kinds of taxpayers
engaged in trade or business or practice of
h. Winnings, prizes and award, including profession in the Philippines;
those in sports competitions 2. optional standard deduction in Section
34(L) available only to individual taxpayers
All prizes and awards granted to athletes in deriving business, professional, capital
local and international sports competitions and gains and passive income not subject to
tournaments whether held in the Philippines or final tax, or other income; and
abroad, AND sanctioned by their national 3. optional standard deduction available to
sports associations shall not be included in corporations under Section 34(L) of the
gross income and shall be tax exempt. [Sec. 32 Tax Code (introduced by RA No. 9504)
B7d, NIRC] 4. the special deductions in Sections 37 and
38 of the NIRC, and in special laws like the
Prizes and awards made primarily in BOI law (E.O. 226).
recognition of charitable, literary, educational,
artistic, religious, scientific, or civic a. General Rules
achievement are not taxable, provided
recipient was selected without any action on 1. Deductions must be paid or incurred in
his part to enter the contest or proceeding; and connection with the taxpayer’s trade,
recipient is not required to render substantial business or profession
future services as a condition to receiving the 2. Deductions must be supported by
prize or award adequate receipts or invoices (except
standard deduction)
4. Deductions from Gross
Income b. Concept of Return of Capital
Deductions are items or amounts authorized by Income tax is levied by law only on income;
law to be subtracted from the pertinent items of hence, the amount representing return of
gross income to arrive at taxable income. capital should be deducted from proceeds from
sales of assets and should not be subject to
Deductions from income tax purposes partake income tax.
of the nature of tax exemptions; hence, if tax
exemptions are to be strictly construed, then it Costs of goods purchased for resale, with
follows that deductions must also strictly proper adjustment for opening and closing
construed. [CIR v. Isabela Cultural Co., G.R. inventories, are deducted from gross sales in
No. 172231 (2007)] computing gross income [Sec. 65, Rev. Reg. 2]
However, if there is an express mention in the Sale of inventory of goods by manufacturers

law or if the taxpayer falls within the purview of and dealers of properties: In sales of goods
the exemption by clear legislative intent, the representing inventory, the amount received by
rule on strict construction will not apply. the seller consists of return of capital and gain
Page 68 of 256
from sale of goods or properties. That portion expenditures directly connected with or
of the receipt representing return of capital is pertaining to the taxpayer’s trade or business.
not subject to income tax. Accordingly, cost of The cost of goods purchased for resale, with
goods manufactured and sold (in the case of proper adjustment for opening and closing
manufacturers) and cost of sales (in the case inventories, is deducted from gross sales in
of dealers) is deducted from gross sales and is computing gross income.
reflected above the gross income line in a profit
and loss statement. Requisites for deductibility
a. Ordinary AND necessary
Sale of stock in trade by a real estate dealer
and dealer in securities: Real estate dealers ORDINARY - normal and usual in relation to
and dealers in securities are ordinarily not the taxpayer's business and surrounding
allowed to compute the amount representing circumstances; need not be recurring
return of capital through cost of sales. Rather
they are required to deduct the total cost NECESSARY - appropriate and helpful in
specifically identifiable to the real property or the development of taxpayer's business or
shares of stock sold or exchanged. are proper for the purpose of realizing a
profit or minimizing a loss
Sale of services: Their entire gross receipts are
treated as part of gross income. b. Paid or incurred during the taxable year;
c. Paid or incurred in carrying on or which are
c. Distinguish: Itemized Deductions directly attributable to the development,
and Optional Standard Deductions management, operation and/or conduct of
the trade, business or exercise of
Itemized Deductions profession;
• Expenses d. Substantiated by adequate proof –
• Interest documented by official receipts or adequate
• Taxes records, which reflect the amount of
• Losses expense deducted and the connection or
relation of the expense to the
• Bad debts
business/trade of the taxpayer);
• Depreciation
e. Legitimately paid (not a BRIBE, kickback, or
• Depletion of oil and gas wells and mines
otherwise contrary to law, morals, public
• Charitable and other contributions
policy);
• Research and development
f. If subject to withholding tax, the tax required
• Pension trusts
to be withheld on the expense paid or
payable is shown to have been properly
Timing of Claiming Deductions
withheld and remitted to the BIR on time;
A taxpayer has the right to deduct all
g. Amount must be reasonable.
authorized allowances for the taxable year. As
a rule, if he does not within any year deduct Note: The expenses allowable to a non-
certain of his expenses, losses, interest, taxes resident alien or a foreign corporation consist
or other charges, he cannot deduct them from of only such expenses as are incurred in
the income of the next of any succeeding year carrying on any business or trade conducted
[Sec. 76, Income Tax Regulations]
within the Philippines exclusively. [Sec. 77 RR
2]
Expenses
Business expenses deductible from gross
income include the ordinary and necessary
Page 69 of 256
Substantiation requirement – Sec. personal services actually rendered

34(A)(1)(b), NIRC: No deduction from gross 3. such payments, when added to the
income shall be allowed unless the taxpayer stipulated salaries, do not exceed a
shall substantiate with sufficient evidence, reasonable compensation for the
such as official receipts or other adequate services rendered
records: (1) the AMOUNT of the expense being
deducted, and (2) the DIRECT CONNECTION Traveling expenses
or relation of the expense being deducted to This include transportation expenses and
the development, management, operation meals and lodging [Secs. 65 and 66, Rev. Reg.
and/or conduct of the trade, business or No. 2]
profession of the taxpayer.
Expenses must be reasonable and necessary.
Kinds of business expenses
These are: Must be incurred or paid “while away from
a. Salaries, wages and other forms of home;” tax home is the principal place of
compensation for personal services business, when referring to “away from home”
actually rendered, including the grossed-
up monetary value of the fringe benefit Incurred or paid in the conduct of trade or
subjected to fringe benefit tax which tax business.
should have been paid
b. Travelling expenses Note: However, necessary transportation
c. Cost of materials expenses of the taxpayer in its “tax home” are
d. Rentals and/or other payments for use or deductible. Thus, a taxpayer operating its
possession of property business in Manila is allowed transportation
e. Repairs and maintenance expenses from its office to its customers’ place
f. Expenses under lease agreements of business and back. But the transportation
g. Expenses for professionals expenses of an employee from his residence to
h. Entertainment expenses its office and back are not deductible as they
i. Political campaign expenses are considered personal expenses.
j. Training expenses
k. Others Cost of materials
Deductible only to the amount that they are
Salaries, wages and other forms of actually consumed and used in operation
compensation for personal services actually during the year for which the return is made,
rendered, including the grossed-up monetary provided that their cost has not been deducted
value of the fringe benefit subjected to fringe in determining the net income for any previous
benefit tax which tax should have been paid year.
Given for personal services must be actually Rentals and/or other payments for use or
rendered and reasonable. possession of property
a. Required as a condition for continued use
For income payment to be allowed as or possession of property.
deduction, the withholding tax must have been b. For purposes of trade business or
paid [RR No. 12-2013]. profession.
c. Taxpayer has not taken or is not taking title
Bonuses are deductible when: to the property or has no equity other than
1. made in good faith that of lessee, user, or possessor.
2. given as additional compensation for d. On the accrual basis, rent is deductible as
Page 70 of 256
expense when liability is incurred during accuracy, which implies something less than
the period of use. On cash basis, rent is an exact or completely accurate amount.
deductible when it is incurred and paid. [Commissioner v. Isabela Cultural Corporation,
[VALENCIA and ROXAS] G.R. No. 172231 (2007)]
Repairs and maintenance A professional may claim as deductions the

Incidental or ordinary repairs are deductible. cost of supplies used by him in the practice of
Repairs which neither materially add to the his profession, expenses paid in the operation
value of the property nor appreciably prolong and repair of transportation equipment used in
its life, but keep it in an ordinarily efficient making professional calls, dues to professional
working condition, may be deducted as societies and subscriptions to professional
expenses, provided the plant or property journals. [MAMALATEO]
account is not increased by the amount of such
expenditure. [Visayan Transportation Co. v. Entertainment/Representation expenses
CTA, CTA Case No. 1119, (1964)] These are entertainment, amusement and
recreation (EAR) expenses incurred or paid
Extraordinary repairs are not deductible – they during the year that are directly connected to
are capital expenditures the development, management and operation
of the trade, business or profession of the
Repairs which add material value to the taxpayer.
property or appreciably prolong its life
Repairs in the nature of replacement, to the Requisites for deductibility:
extent that they arrest deterioration and 1. Reasonable in amount.
appreciably prolong the life of the property, 2. Paid or incurred during the taxable
should be charged against the depreciation period.
reserves if such account is kept. [Sec. 68, Rev. 3. Directly connected to the development,
Regs. 2] management, and operation of the trade,
business or profession of the taxpayer,
All maintenance expenses on account of non- or that are directly related to or in
depreciable vehicles for taxation purposes are furtherance of the conduct thereof.
disallowed in its entirely. [RR No. 12-2012] 4. Not to exceed 0.50% of net sales for
sellers of goods or properties or 1% of
Expenses for professionals net revenues for sellers of services,
Deductible in the year the professional services including taxpayers engaged in the
are rendered, not in the year they are billed, exercise of profession and use or lease
provided that the “all events” is present. of properties)
5. Not incurred for purposes contrary to
“All events test” requires: law, morals, public policy or public order.
1. Fixing a right to income or liability to pay; 6. Must be substantiated with sufficient
and evidence such as receipts and/or
2. The availability of reasonably accurate adequate records.
determination of such income or liability.
Exclusions from EAR expenses:
The “all-events test” does not demand that the 1. Expenses which are treated as
amount of income or liability be known compensation or fringe benefits for
absolutely; it only requires that a taxpayer has services rendered under an employer-
at its disposal the information necessary to employee relationship
compute the amount with reasonable 2. Expenses for charitable or fund raising
Page 71 of 256
events proprietary educational institution may at its

3. Expenses for bona fide business OPTION, elect either:
meeting of stockholders, partners or a. To deduct expenditures otherwise
directors considered as capital outlays or
4. Expenses for attending or sponsoring an depreciable assets incurred during the
employee to a business league or taxable year for the expansion of school
professional organization meeting facilities, OR
5. Expenses for events organized for b. To deduct allowances for depreciation
promotion marketing and advertising, thereof.
including concerts, conferences,
seminars, workshops, conventions and Thus, where the expansion expense has been
other similar events; and claimed as a deduction, no further claims for
6. Other expenses of a similar nature. yearly depreciation of the school facilities are
allowed.
Political campaign expenses
Amount expended for political campaign Advertising Expenses
purposes or payments to campaign funds are The media advertising expenses which were
NOT deductible either as business expenses found to be inordinately large and thus, not
or as contribution [CTA Case No. 695, April 30, ordinary, and which were incurred in order to
1969, citing Mertens] protect the taxpayer’s brand franchise which is
analogous to the maintenance of goodwill or
Training expenses title to one’s property, are not ordinary and
Organization and pre-operating expenses of a necessary expenses but are capital
corporation (including training expenses) are expenditures, which should be spread out over
considered as capital expenditures and are a reasonable period of time. [CIR v. General
therefore, not deductible in the year they are Foods Phils. Inc, G.R. No. 143672 (2003)]
paid or incurred.
Interest
But taxpayers who incur these expenses and Requisites for deductibility
subsequently enter the trade or business to 1. There is a valid and existing indebtedness.
which the expenditures relate can elect to 2. The indebtedness is that of the taxpayer
amortize these expenditures over a period not 3. The indebtedness is connected with the
less than sixty (60) months. [BIR Ruling 102- taxpayer‘s trade, profession, or business.
97, Sept. 29, 1997] 4. The interest must be legally due.
5. The interest must be stipulated in writing.
This rule, however, does not apply to a 6. The taxpayer is LIABLE to pay interest on
situation where an existing corporation incurs the indebtedness.
these same expenditures for the purpose of 7. The indebtedness must have been paid or
expanding its business in a new line of trade, accrued during the taxable year.
venture or activity. 8. The interest payment arrangement must
not be between related taxpayers
OTHERS 9. The interest must not be incurred to finance
petroleum operations.
Expenses Allowable to Private Educational 10. In case of interest incurred to acquire
Institutions property used in trade, business or
exercise of profession, the same was not
In addition to the expenses allowable as treated as a capital expenditure,
deductions under the NIRC, a private
Page 72 of 256
Non-deductible interest expense respect to each trust; or

Interest paid in advance by the taxpayer who d. Fiduciary and Beneficiary
reports income on cash basis shall only be
allowed as deduction in the year the INTEREST SUBJECT TO SPECIAL RULES
indebtedness is paid. Interest paid in advance
No deduction shall be allowed if within the
If the indebtedness is payable in periodic taxable year an individual taxpayer reporting
amortizations, only the amount of interest income on cash basis incurs an indebtedness
which corresponds to the amount of the on which an interest is paid in advance through
principal amortized or paid during the year shall discount or otherwise.
be allowed as deduction in such taxable year.
But the deduction shall be allowed in the year
Interest payments made between related the indebtedness is paid.
taxpayers.
Interest periodically amortized
Interest on indebtedness incurred to finance If the indebtedness is payable in periodic
petroleum exploration. amortizations, the amount of interest which
corresponds to the amount of the principal
Related Taxpayers amortized or paid during the year shall be
a. Between members of the family, i.e. allowed as deduction in such taxable year.
brothers and sisters (whether by the whole
or half-blood), spouse, ancestor, and lineal Interest expense incurred to acquire
descendants; or property for use in
a. Except in case of distributions in trade/business/profession
liquidation, between an individual At the option of the taxpayer, interest expense
and a corporation, where the on a capital expenditure may be allowed as
individual owns directly or indirectly a. A deduction in full in the year when
more than 50% of the outstanding incurred;
stock of the corporation b. A capital expenditure for which the
b. Except in the case of distributions taxpayer may claim only as a deduction
in liquidation, between two the periodic amortization of such
corporations where: expenditure.
i. Either one is a personal
holding company of a Should the taxpayer elect to deduct the interest
foreign personal holding payments against its gross income, the
company with respect to taxpayer cannot at the same time capitalize the
the taxable year preceding interest payments. In other words, the taxpayer
the date of the sale of is not entitled to both the deduction from gross
exchange; and income and the adjusted (increased) basis for
ii. More than 50% of the determining gain or loss and the allowable
outstanding stock of each depreciation charge. [Paper Industries Corp. v.
is owned, directly or Commissioner, G.R. Nos. 106949-50 (1995)]
indirectly, by or for the
same individual; or Reduction of interest expense/interest
b. Between parties to a trust – Grantor and arbitrage
Fiduciary; or The taxpayer's allowable deduction for interest
c. Fiduciary of a trust and fiduciary of another expense shall be reduced by an amount equal
trust if the same person is a grantor with to 33% of the interest income subjected to final
Page 73 of 256
tax; effective January 1, 2009. [RA 9337] [CIR v. Palanca, G.R. No. L-16626 (1966)]
Taxes Treatment of special assessment

Taxes Proper: Refers to national and local Special assessments and other taxes
taxes assessed against local benefits of a kind
tending to increase the value of the property
Requisites for deductibility assessed are non-deductible from gross
a. Paid or incurred within the taxable year; income.
b. Paid or incurred in connection with the
taxpayer‘s trade, profession or business; Tax credit vis-à-vis deduction
c. Imposed directly on the taxpayer; Tax credit – amount allowed by law to reduce
d. Not specifically excluded by law from the Philippine income tax due, subject to
being deducted from the taxpayer‘s gross limitations, on account of taxes paid or accrued
income. to a foreign country
The following taxes are deductible: Tax Credit Tax Deduction

a. Import duties;
b. Business tax; Taxes are deductible
c. Professional/occupation tax; Taxes are deductible
from gross income in
d. Privilege and excise tax; from the Phil.
computing the
e. DST; Income tax itself
taxable income
f. Motor vehicle registration fees;
g. Real property tax; Effect: Reduces
Effect: Reduces
h. Electric energy consumption tax; and taxable income upon
Philippine income
i. Interest on delinquent taxes. which the tax liability
tax liability
is calculated
Non-deductible taxes
a. Philippine income tax, except Fringe Sources: Only
Benefit Taxes; foreign income taxes
Sources: Deductible
b. Income tax imposed by authority of any may be claimed as
taxes (e.g. business
foreign country, if taxpayer avails of the credits against
tax, excise tax)
Foreign Tax Credit (FTC) Philippine income
tax.
However, when the taxpayer does NOT signify
his desire to avail of the tax credit for taxes of The following may claim tax credits:
foreign countries, the amount may be allowed a. Resident citizens
as a deduction from gross income of citizens b. Domestic corporations, which include all
and domestic corporations subject to the partnerships except general professional
limitations set forth by law. partnerships
c. Members of general professional
Treatments of surcharges/interests/fines partnerships
for delinquency d. Beneficiaries of estates or trusts
The amount of deductible taxes is limited to the
basic tax and shall not include the amount for The following may NOT claim tax credits:
any surcharge or penalty on delinquent taxes. a. Non-resident citizens
However, interest on delinquent taxes, b. Aliens, whether resident or non-resident
although not deductible as tax, can be c. Foreign corporations, whether resident on
deducted as interest expense at its full amount. non-resident
Page 74 of 256
Note: Tax credits for foreign taxes are allowed

only for income derived from sources outside Worldwide
the Philippines. The above taxpayers are not Taxable
entitled to tax credit; they are taxable only on Income
income derived from Philippine sources.
Limitations on Tax Credit. Note: Computation of FTC: Limit #2 applies

where taxes are paid to two or more foreign
Per Country Limit countries. Allowable tax credit is the lower
The amount of tax credit shall not exceed the between the tax credit computed under Limit
same proportion of the tax against which such #1 and that computed under Limit#2.
credit is taken, which the taxpayer's taxable
income from sources within such country bears FTC Limitations – lowest of the 3:
to his entire taxable income for the same 1. Actual FTC
taxable year; and 2. For taxes paid to one foreign country
3. For taxes paid to 2 or more foreign
Worldwide Limit countries
The total amount of the credit shall not exceed
the same proportion of the tax against which Losses
such credit is taken, which the taxpayer's
taxable income from sources without the Requisites for deductibility
Philippines taxable bears to his entire taxable a. Loss must be that of the taxpayer (e.g.,
income for the same taxable year. losses of the parent corp. cannot be
deducted by its subsidiary);
Formula: b. Actually sustained and charged off within
Limit #1 Per Country Limit the taxable year;
c. Incurred in trade, business or profession;
Taxable d. Of property connected with the trade,
Income Per business, or profession, if the loss arises
Foreign from fires, storms, shipwreck or other
Country Phil. Limit on casualties, or from robbery, theft, or
x Income = amount of embezzlement;
Tax tax credit e. Sustained in a closed and completed
Worldwide transaction;
Taxable f. Not compensated for by insurance or other
Income form of indemnity;
g. Not claimed as a deduction for estate tax
purposes;
h. In case of casualty loss, filing of notice of
Limit #2 World Limit loss with the BIR within 45 days from the
Limit #2 World Limit
date of the event that gave rise to the
casualty; and
i. The taxpayer must prove the elements of
Taxable Limit on
Phil. the loss claimed, such as the actual nature
Income Per amount
x Income = and occurrence of the event and amount
Foreign of tax
Tax of the loss.
Country credit
In case a non-depreciable vehicle is sold at a
Page 75 of 256
loss, the loss incurred from the sale of non- Losses on wash sales of stocks or securities
depreciable vehicle is not allowed as a
deduction. [RR No. 2-2013] Wash Sale - a sale or other disposition of stock
or securities where substantially identical
securities (substantially the same as those
No loss is recognized in the following: disposed of) are acquired or purchased (or
a. Merger, consolidation, or control securities there was an option to acquire, and the
(where no gains are recognized either); acquisition or option should be by purchase or
b. Exchanges not solely in kind; exchange upon which gain or loss is
c. Related taxpayers (see above – (c) recognized under the income tax law) within a
Interest expense incurred to acquire 61-day period, beginning 30 days before the
property for use in sale and ending 30 days after the sale
trade/business/profession)
d. Wash sales; General rule: Not deductible from gross
e. Illegal transactions income
OTHER TYPES OF LOSSES Exception: If by a dealer in securities in the

a. Capital losses course of ordinary business, it is deductible.
b. Incurred in the sale or exchange of capital
assets (allowable only to the extent of Wagering losses
capital gains, except for banks and trust Losses from wagering (gambling) are
companies under conditions in Sec. 39 of deductible only to the extent of gains from such
NIRC where loss from such sale is not transactions. A wager is made when the
subject to the foregoing limitation) outcome depends upon CHANCE.
c. Resulting from securities becoming
worthless and which are capital assets Net Operating Loss Carry Over (NOLCO)
(considered loss from sale or exchange) Net operating loss (NOL) is the excess of
on last day of the taxable year allowable deductions over gross income for
d. Losses from short sales of property; any taxable year immediately preceding the
e. Losses due to failure to exercise privileges current taxable year.
or options to buy or sell property.
NOLCO: The NOL of the business or
Securities becoming worthless enterprise which had not been previously offset
as deduction from gross income shall be
Loss in shrinkage in value of stock through carried over as a deduction from gross income
fluctuation in the market is not deductible from for the next three (3) consecutive taxable years
gross income. (To be deductible, the loss must immediately following the year of such loss,
be actually suffered when the stock is disposed provided however, that any net loss incurred in
of.) a taxable year during which the taxpayer was
exempt from income tax shall not be allowed
Exception: If the stock of the corporation as a deduction. [Sec. 34(3)(D), NIRC]
becomes worthless, the cost or other basis
may be deducted by its owner in the taxable Exception: Mines other than oil and gas wells,
year in which the stock became worthless, where a net operating loss without the benefit
provided a satisfactory showing of its of incentives provided for under EO No. 226
worthlessness be made, as in the case of bad (Omnibus Investments Code) incurred in any of
debts. the first ten (10) years of operation may be
carried over as a deduction from taxable
Page 76 of 256
income for the next five (5) years immediately uncollectibility, in whole or in part, of amounts
following the year of such loss. due the taxpayer actually ascertained to be
worthless and the corresponding receivable
Requisites for NOLCO should have been written off or charged off
a) The taxpayer was not exempt from income within the taxable year.
tax the year the loss was incurred;
b) There has been no substantial change in A debt is worthless when after taking
the ownership of the business or enterprise reasonable steps to collect it, there is no
wherein: likelihood of recovery at any time in the future.
c) AT LEAST 75% of nominal value of
outstanding issued shares is held by or on Requisites for deductibility
behalf of the same persons; or a. Valid and legally demandable debt due to
d) AT LEAST 75% of the paid up capital of the the taxpayer
corporation is held by or on behalf of the b. Debt is connected with the taxpayer's
same persons. trade, business or practice of profession;
c. Debt was not sustained in a transaction
Taxpayers Entitled to NOLCO entered into between related parties;
Individuals engaged in trade or business or in d. Actually ascertained to be worthless and
the exercise of his profession (including uncollectible as of the end of the taxable
estates and trusts); year (taxpayer had determined with
reasonably degree of certainty that the
Note: An individual who avails of 40% OSD claim could not be collected despite the
shall not simultaneously claim deduction of fact that the creditor took reasonable steps
NOLCO. However, the three-year to collect); and
reglementary period shall continue to run e. Actually charged off the books of accounts
during such period notwithstanding the fact that of the taxpayer as of the end of the taxable
the aforesaid taxpayer availed of OSD during year
the said period.
General rule: Taxpayer must ascertain and
Domestic and resident foreign corporations demonstrate with reasonable certainty the
subject to the normal income tax or preferential uncollectibility of debt
tax rates under the Code (e.g., private
educational institutions, hospitals, and regional Exceptions:
operating headquarters) or under special laws a. Banks as creditors – BSP Monetary Board
(e.g., PEZA-registered companies) shall ascertain the worthlessness and
Note: Domestic and resident foreign uncollectibility of the debt and shall
corporations taxed during the taxable year with approve the writing off
Minimum Corporate b. Receivables from an insurance or surety
company (as debtor) may be written off as
Income Tax cannot enjoy the benefit of bad debts only when such company is
NOLCO. However, the three-year period for declared closed due to insolvency or
the expiry of the NOLCO is not interrupted by similar reason
the fact that the corporation is subject to MCIT
during such three-year period. The taxpayer must show that the debt is indeed
uncollectible even in the future. He must prove
Bad debts that he exerted diligent efforts to collect:
a. Sending of statement of accounts
Debts resulting from the worthlessness or b. Collection letters
Page 77 of 256
c. Giving the account to a lawyer for

collection Depreciation
d. Filing the case in court [Phil. Refining An annual reasonable allowance to reduce the
Corp. v. CA, G.R. No. 118794 (1996)] wasteful value of the tangible fixed assets
resulting from wear and tear and normal
Rev. Reg. No. 5-1999 obsolescence
“Actually ascertained to be worthless” –
Determination of worthlessness must depend For intangible assets, the annual allowance to
upon the particular facts and circumstances of reduce their useful value is called amortization.
the case. A taxpayer may not postpone a bad
debt deduction on the basis of a mere hope of Requisites for Deductibility
ultimate collection or because of a continuance a. It must be reasonable.
of attempts to collect, where there is no b. It must be charged off during the year.
showing that the surrounding circumstances c. The asset must be used in profession,
differ from those relating to other notes which trade or business.
were charged off in a prior year. d. The asset must have a limited useful life.
Accounts receivable may be written off as bad The depreciable asset must be located in the
debts even without conclusive evidence that Philippines if the taxpayer is a nonresident
they had definitely become worthless when: alien or a foreign corporation. [VALENCIA and
a. the amount is insignificant; and ROXAS]
b. collection through court action may be
more costly to the taxpayer. No depreciation shall be allowed for yachts,
helicopters, airplanes and/or aircrafts, and land
“Actually charged off from the taxpayer’s book vehicles which exceed the threshold amount of
of accounts” – Receivable which has actually P2,400,000, unless the taxpayer’s main line of
become worthless at the end of the taxable business is transport operations or lease of
year has been cancelled and written off. Mere transportation equipment and the vehicles
recording in the books of account of estimated purchased are used in the operations. [RR No.
uncollectible accounts does not constitute a 12-2012]
write-off.
Methods of computing depreciation
EFFECT OF RECOVERY OF BAD DEBTS allowance
(cost- salvage
Tax Benefit Rule on Bad Debts
Straight-line value) ÷
Bad debts claimed as deduction in the
estimated life
preceding year(s) but subsequently recovered
shall be included as part of the taxpayer‘s gross Cost x Rate of
income in the year of such recovery the extent Depreciation*
of the income tax benefit of said deduction.
Also called the equitable doctrine of tax benefit. *rate = (1÷
estimated life) x
Requisites: Declining balance
multiplier applicable
a. Allowance must be reasonable ex. Double
b. Charged off during the taxable year from declining balance
the taxpayer‘s books of accounts. multiplier is 200%
c. Does not exceed the acquisition cost of
the property.
Page 78 of 256
9. in accordance with a National Priority Plan

Note: depreciation
determined by NEDA (otherwise, subject
allowance should
to statutory limit)
not cause the asset
10. Donations to Certain Foreign Institutions
to be valued below
or International Organizations which are
its salvage value
fully deductible in compliance with
(remaining life ÷ agreements, treaties or commitments
Sum-of-the-year- SYD) x (cost- entered into by the Government of the
digit (SYD) salvage value) Philippines and the foreign institutions or
international organizations or in
pursuance of special laws
11. Donations to Accredited Non-government
Charitable and other contributions Organizations subject to conditions set
forth in RR No. 13-98 – NGO means a
Requisites for deductibility non-stock non-profit domestic corporation
a) Actually PAID or made to the ENTITIES or or organization:
institutions specified by law; a. Organized and operated exclusively
b) Made within the TAXABLE year. for:
c) It must be EVIDENCED by adequate i. scientific,
receipts or records. ii. research,
d) For Contributions Other than Money: The iii. educational,
amount shall be BASED on the acquisition iv. character-building and youth and
cost of the property (i.e., not the fair market sports development,
value at the time of the contribution). v. health,
e) For Contributions subject to the statutory vi. social welfare,
limitation: It must NOT EXCEED 10% vii. cultural or
(individual) or 5% (corporation) of the viii. charitable purposes, or
taxpayer‘s taxable income before ix. a combination thereof,
charitable contributions
No part of the net income of which inures to the
Amount that May Be Deducted benefit of any private individual
Kinds of Contributions: Administrative expense, on an annual basis,

a. Contributions deductible in full; must not exceed 30% of total expenses for the
b. Contributions subject to the statutory limit. taxable year
Contributions Deductible in Full: Contributions subject to the Statutory

1. Donations to the Government of the Limit:
Philippines, or to any of its agencies, or These contributions are not deductible in full as
political subdivisions, including fully specified by the law or such deduction has not
owned government corporations met the requirements to be deducted in full.
2. Exclusively to finance, provide for, or to be
used in undertaking priority activities in Those made to:
3. Education a. Government or any of its agencies or
4. Health political subdivisions exclusively for public
5. Youth and sports development purposes (contributions for non-priority
6. Human settlements activities)
7. Science and culture, and b. Accredited domestic corporation or
8. Economic development
Page 79 of 256
associations organized exclusively for Requisites for deductibility of payments to

c. Religious pension trusts
d. Charitable a. There must be a pension or retirement
e. Scientific plan established to provide for the
f. youth and sports development payment of reasonable pensions to
g. cultural employees;
h. educational purposes or b. The pension plan is reasonable and
i. rehabilitation of veterans actuarially sound;
j. Social welfare institutions c. It must be funded by the employer;
k. Non-government organizations: No part of d. The amount contributed must no longer be
the net income of which inures to the subject to the employer’s control or
benefit of any private stockholder or disposition; and
individual e. The payment has not theretofore been
allowed before as a deduction.
Statutory Limit:
a. 10% in the case of an individual (individual Optional Standard Deduction
donor), and
b. 5% in the case of a corporation (corporate Individuals, except non-resident aliens
donor), of the taxpayer's/donor’s income May be taken by an individual in lieu of itemized
derived from trade, business or profession deductions except those earning purely
computed before the deduction for compensation income.
contributions and donations
If an individual opted to use OSD, he is no
The amount deductible is the actual longer allowed to deduct cost of sales or cost
contribution or the statutory limit computed, of services.
whichever is lower.
Amount: 40% of gross sales or gross receipts
Contributions to pension trusts (under RA 9504, effective July 6, 2008)
Contribution to a pension trust may be claimed Requisites:
as deduction as follows: a. Taxpayer is a citizen or resident alien;
a. Amount contributed for the present/normal b. Taxpayer’s income is not entirely from
service cost – 100% deductible compensation;
b. Amount contributed for the past service c. Taxpayer signifies in his return his
cost – 1/10 of the amount contributed is intention to elect this deduction; otherwise
deductible in year the contribution is he is considered as having availed of the
made, the remaining balance will be itemized deductions;
amortized equally over nine consecutive d. Election is irrevocable for the year in which
years made; however, he can change to
itemized deductions in succeeding years.
General Rule: An employer establishing or
maintaining a pension trust to provide for the Corporations, except non-resident foreign
payment of reasonable pensions to his corporations
employees shall be allowed as a deduction, a The option to elect Optional Standard
reasonable amount transferred or paid into Deduction granted is now granted to
such trust in excess of the contributions to such corporations by virtue of RA 9504. The OSD is
trust made during the taxable year. 40% of its gross income.
Corporations availing of OSD are still required
Page 80 of 256
to submit their financial statements when they same time capitalize such interest and
file their annual ITR and to keep such records claim depreciation on the undepreciated
pertaining to its gross income. [RR 2-2010]. cost which includes the interest. [PICOP v.
Commissioner, G.R. No. 106949-50
Partnerships (1995)]
For purposes of taxation, the Code considers h. Non–deductible taxes
general co-partnerships as corporations. i. Non-deductible losses
Hence, rules on OSD for corporations are j. Losses on Wash Sales (except if by dealer
applicable to general co-partnerships. in securities in ordinary course of exempt
corporations) These are:
d. Items Not Deductible k. Proprietary Educational Institutions and
hospitals
General rule: In determining deductions, one l. Government owned and controlled
of the general rules is that deductions must be corporations
paid or incurred in connection with the m. Others
taxpayer’s trade, business or profession.
Capital expenditures (e.g. acquisition cost of a Relevant points regarding related taxpayers
building) are also not deductible, because a. Payment of interest is not deductible.
these are not expenses, but form part of b. Bad debts are not deductible.
assets. c. Losses from sales or exchanges of
property are not deductible.
Exceptions: In computing taxable net income,
no deduction shall be allowed with respect to: Related Parties [Sec. 34(B), NIRC]
a. Personal, living or family expenses a. Between members of a family (which shall
b. Any amount paid out for new buildings or include only his brothers and sisters,
for permanent improvements (capital spouse, ancestors and lineal
expenditures), or betterments made to descendants)
increase the value of any property or b. Between an individual and a corporation
estate more than 50% in value of the outstanding
c. Any amount expended in restoring stock of which is owned, directly or
property (major repairs) or in making good indirectly, by or for such individual –
the exhaustion thereof for which an except in the case of distributions in
allowance [for depreciation or depletion] is liquidation
or has been made c. Between two corporations more than 50%
d. Premiums paid on any life insurance policy in value of the outstanding stock of each
covering the life of any officer, employee, of which is owned, directly or indirectly by
or any person financially interested in the or for the same individual
trade or business carried on by the d. Between the grantor and the fiduciary of a
taxpayer, individual or corporate, when the trust
taxpayer is directly or indirectly a e. Between the fiduciary of a trust and the
beneficiary under such policy fiduciary of another trust if the same
e. Interest expense and bad debts between person is a grantor with respect to each
related parties [Sec. 36(B), NIRC)] trust
f. Losses from sales or exchanges of f. Between the fiduciary of a trust and a
property between related taxpayers. beneficiary of such trust [Section 36(B),
g. Non-deductible interest – should the NIRC]
taxpayer elect to deduct interest payments
against its gross income, he cannot at the
Page 81 of 256
5. Income Tax on Individuals Worker (OCW) is taxable only on

income from sources within the
Summary Table for Taxation of Individuals Philippines (i.e. sideline income in the
(all individual taxpayers, including non- Philippines).
resident aliens) b. OCW – Filipino citizens who are
physically present in a foreign country
Tax as a consequence of their employment.
Classification Taxable Income
Rates
Their salaries and wages are paid by
Income from an employer abroad and is not borne
Resident sources within and by an entity or person in the
0%-35%
Citizen outside the Philippines. [Sec. 2, RR 1-11]
Philippines c. An OCW’s income arising from sources
outside the Philippines is exempt from
Income from
Non-Resident income tax.
sources within the 0%-35%
Citizen 3. Resident Aliens
Philippines
A resident alien is taxable only on income
Income from from sources within the Philippines.
Resident Alien sources within the 0%-35%
Philippines
ii. Taxation on Compensation Income
Non-resident
Income from Income arising from an employer-employee
Alien Engaged
sources within the 0%-35%
in Trade or relationship.
Philippines
Business
(a) Inclusions
Non-resident
Alien Not Income from
Engaged in sources within the 25% 1. Monetary compensation – If
Trade or Philippines compensation is paid in cash, the full
Business amount received is the measure of the
income subject to tax.
2. Regular salary/wage
a. Resident Citizens, Non-Resident
Salary – earnings received periodically for
Citizens and Resident Aliens [Sec. a regular work other than manual labor,
24(A)(1)] such as monthly salary of an employee.
i. Coverage Wages – all remuneration for services

performed by an employee for his
1. Resident Citizens employer, including the cash value of all
A Filipino resident citizen is taxable on non-cash remuneration. [Sec. 78(A), NIRC]
income from all sources (both within and
outside Philippines). Separation pay/retirement benefit not
2. Non-resident Citizens exempt
A non-resident citizen is taxable only on
income derived from sources within the Retirement pay – a lump sum payment
Philippines. received by an employee who has served
a company for a considerable period of
Other considerations: time and has decided to withdraw from
a. A Filipino citizen working and deriving work into privacy. [Sec. 2(b), RR No. 6-82]
abroad as an Overseas Contract
Page 82 of 256
General rule: Retirement pay is taxable 4. Directors’ fees, allowances and

bonuses
Exceptions:
i. SSS or GSIS retirement pays [Sec. General Rule: taxable as compensation
32(B)(6), NIRC] income when the recipient director has an
ii. Retirement benefit under R.A. employee-employer relationship with the
7641 provided the following corporation which pays the same
requirements are met:
iii. Retirement program is approved by Exception: not taxable as compensation
the Commissioner; income when recipient director’s duties is
iv. Retirement benefit is pursuant to a confined to attendance and participation only in
reasonable private benefit plan. the meetings of the Board of Directors, but
v. Retiree employed for 10 years by taxable as income arising from exercise of
the employer; profession [R.M.C 34-08].
vi. Retiree should have been 50 years
old or above at the time of 5. Non-monetary compensation – measure
retirement; and of income subject to tax is the equivalent
vii. Retirement benefit availed only value in money.
once [Sec. 32 (B)(6)(a), NIRC].
(b) Exclusions
Separation pay
General Rule: Separation pay taxable 1. Fringe benefit subject to tax
if voluntarily availed of. (See Gross Income, supra for the
discussion of Taxable and Non-taxable
Exception: if due to causes such as fringe benefits)
death, sickness, disability,
reorganization or bankruptcy of the If the recipient of the fringe benefits is a
company or for any other cause rank and file employee, and the said fringe
beyond the control of the said benefit is not tax-exempt, then the value of
employee. such fringe benefit shall be considered as
3. Bonuses, 13th month pay, and other part of taxable compensation income.
benefits not exempt [DOMONDON]
Tips and Gratuities – those paid directly Where the recipient of the fringe benefit is
to the employee (usually by employer’s not a rank and file employee, and the said
customer) which are not accounted for by benefit is not tax-exempt, then the value of
the employee to the employer. (taxable such fringe benefit shall not be included in
income but not subject to withholding tax) the taxable compensation income. It is
[Sec. 2.78.1, RR No. 2-98] instead levied upon the employer.
[DOMONDON]
13th month pay – taxable only for the part
which exceeds P90,000 [Sec. 32(7)(e), Convenience of the employer Rule
NIRC] If meals, living quarters, and other facilities
and privileges are furnished to an
Overtime Pay – premium payment employee for the convenience of the
received for working beyond regular hours employer, and incidental to the
of work which is included in the requirement of the employee’s work or
computation of gross salary of employee. position, the value of that privilege need not
Page 83 of 256
be included as compensation [Henderson employment and/or practice of profession,

v. Collector (1961)] whose gross sales/receipts and other non-
operating income does not exceed the VAT
2. De minimis benefits threshold as provided under Sec. 109 (BB) of
Facilities or privileges of relatively small the Tax Code, as amended, shall have the
value furnished by an employer to his option to avail of:
employees and are as a means of a. The graduated rates under Sec. 24
promoting the health, goodwill, (A)(2)(a) of the Tax Code, as amended;
contentment, or efficiency of his employees OR
[RR No. 11-18]. b. An eight percent (8%) tax on gross sales
or receipts and other non-operating
These are exempt from both fringe benefit income in excess of two hundred fifty
tax and compensation income tax [Sec. 33 thousand pesos (P250,000.00) in lieu of
(C)(4), NIRC]. the graduated income tax rates under Sec.
24 (A) and the percentage tax under Sec.
(See Gross Income, supra for the 116 of the NIRC.
discussion of de minimis benefits)
Individuals earning mixed income
3. 13th month pay and other benefits and For mixed income earners, the income tax
payments specifically excluded from rates applicable are:
taxable compensation income a. The compensation income shall be subject
Gross benefits received by employees up to the tax rates prescribed under Section 24
to P90,000 (amounts in excess are (A)(2)(a); AND
considered compensation income) b. The income from business or practice of
profession shall be subject to the following:
Benefits include: c. If the gross sales/receipts and other non-
a) Benefits received by government operating income do not exceed the VAT
employees under RA 6686; threshold, the individual has the option to be
b) Benefits received by employees taxed at:
pursuant to PD 851 (13th Month Pay d. The aforementioned graduated taxable
Decree); income rates; OR
c) Benefits received by employees not e. The aforementioned optional 8% gross
covered by PD 851 as amended by income tax.
Memorandum Order No. 28; and, f. If the gross sales/receipts and other non-
d) Other benefits such as productivity operating income exceeds the VAT
incentives and Christmas bonus. threshold, the individual shall be subject to
the graduated income tax rates.
iii. Taxation of Business
Income/Income From Exercise of iv. Taxation of Partners in a General
Profession Professional Partnership
All income obtained from doing business or GPP is not subject to income tax imposed
exercising of profession shall be included in the pursuant to Sec. 26 of the Tax Code, as
computation of gross income. amended. However, the partners shall be liable
to pay income tax on their separate and
Individuals earning purely business or individual capacities for their respective
professional income distributive share in the net income of the GPP.
Individuals earning income purely from self-
Page 84 of 256
Each partner shall report as gross income his

4 years to less than 5 5%
distributive share in the net income of the GPP,
years
actually or constructively received.
3 years to less than 4 12%
In computing the distributive share of the years
partners, the net income of the GPP shall be
computed in the same manner as a less than 3 years 20%
corporation. [Sec. 26, NIRC]
Any income of nonresidents, whether
If the partnership sustains a net operating loss,
individuals or corporations, from transactions
the partners shall be entitled to deduct their
with depository banks under the expanded
respective shares in the net operating loss from
system shall be exempt from income tax.
their individual gross income.
For interest from foreign currency loans
v. Taxation of Passive Income
granted by FCDUs to residents other than
Offshore Banking Units (OBUs) or other
Passive Income Subject to Final Tax
depository banks under the expanded system
“Final tax” means tax withheld from source,
– tax rate is 10% if payors are RESIDENTS,
and the amount received by the income earner
whether individuals or corporations.
is net of the tax already. The income having
been tax-paid already, it need not be included
Royalties
in the gross income in the yearly submission of
(See summary table, infra)
ITR.
Dividends from domestic corporation
Interest income
a. cash and/or property dividends actually or
• on any currency bank deposit, yield or any
constructively received by an individual
other monetary benefit from deposit
from
substitutes, trust funds and similar
b. a domestic corporation
arrangements - 20% final tax
c. a joint stock company
• under the expanded foreign currency
d. insurance or mutual fund companies
deposit system (EFCDS) - 15% final tax
e. regional operating headquarters of
for residents, exempt if non-residents
multinational companies
f. share of an individual in the distributable
Treatment of income from long-term
net income after tax of a partnership
deposits
(except a general professional
On long-term deposit or investment certificates
partnership) of which he is a partner
(LTDIC) in banks (e.g., savings, common or
g. share of an individual member or co-
individual trust funds, deposit substitutes,
venturer in the net income after tax of an
investment management accounts and other
association, a joint account, or a joint
investments, which have maturity of 5 years or
venture or consortium taxable as a
more) – exempt
corporation
Should LTDIC holder pre-terminate LTDIC
Rate:
before the 5th year, a final tax shall be imposed
a. 10% for residents (RC, RA) and non-
on the entire income based on the remaining
resident citizens (NRC);
maturity:
b. 20% for non-resident aliens engaged in
trade or business (NRAETB)
Page 85 of 256
However, if a corporation cancels or redeems NIRC].

stock issued as a dividend at such time and in
such manner as to make the distribution and Shares not listed and traded in the stock
cancellation or redemption, in whole or in part, exchange – subject to final tax
essentially equivalent to the distribution of a
taxable dividend, the amount so distributed in On sale, barter, exchange or other disposition
redemption or cancellation of the stock shall be of shares of stock of a domestic corporation not
considered as taxable income to the extent that listed and traded through a local stock
it represents a distribution of earnings or exchange, held as a capital asset
profits. [Sec. 73 (B), NIRC]
On the net capital gain: Final Tax of 15%
In other words, stock dividends are generally
not subject to tax as long as there are no Net capital gain: selling price less cost
options in lieu of the shares of stock. Selling price: consideration on the sale OR fair
market value of the shares of stock at the time
On the other hand, a stock dividend constitutes of the sale, whichever is higher
income if it gives the shareholder an interest Cost: original purchase price
different from that which his former
stockholdings represented. Income from the sale of real property situated
in the Philippines
Prizes and other winnings
Prizes and other winnings - 20%, except What property covered
a. Prizes amounting to P10,000 or less, which Property located in the PH classified as capital
shall be subjected to the graduated rates assets
under Subsection A of Section 24; and
b. Philippine Charity sweepstakes / lotto What transactions covered
winnings which does not exceed P10,000 - Sales, exchanges, or other disposition of real
exempt ; property (classified as capital assets), including
c. Prizes excluded from gross income. pacto de retro sales and other forms of
conditional sales of the following: citizens,
Prize, differentiated from winnings: resident aliens, NRAETB, NRANETB,
A prize is the result of an effort made (e.g., domestic corporations.
prize in a beauty contest), while winnings are
the result of a transaction where the outcome Tax rate
depends upon chance (e.g., betting). General rule: 6% of —whichever is higher of:
Taxation of Capital Gains GSP, or FMV in accordance with Sec. 6 (E).
Income from sale of shares of stock of a Exception:

Philippine corporation a. In case of sales made to the government,
any of its political subdivisions or
Shares traded and listed in the stock exchange agencies, or to GOCCs, it can be taxed
– CGT-exempt, but subject to business tax either:
b. Under Sec. 24 (D)(1) – 6% CGT, or
The transaction is exempt from income tax c. Under Sec. 24 (A), at the option of the
regardless of the nature of business of the taxpayer.
seller or transferor. However, it is subject to a d. In case of the sale of or disposition of their
business tax of six-tenths of one percent principal residence by natural persons
(0.6%) of the gross selling price [Sec. 127 (A),
Page 86 of 256
Requirements: Less: Gross selling price of old

a. Sale or disposition by a natural person of principal residence (XXX)
his principal residence,
b. The proceeds of which is fully utilized in Additional cost to acquire new
acquiring/constructing a new principal principal residence XXX
residence,
c. Such acquisition/construction taking place
within 18 calendar months from the date of
sale or disposition, (c) Income from the sale, exchange,
d. The taxpayer notifies the Commissioner or other disposition of other
within 30 days from the sale/disposition capital assets
through a prescribed return of his intention
to avail of the exemption, Other properties shall be subject to income
e. The tax exemption can only be availed of tax
once every 10 years. a. At the graduated income tax rates, if the
seller is an individual
Tax treatment of sale of principal residence: b. Long-term capital gains: only 50% is
Exempt from capital gains tax (CGT). If there is recognized.
no full utilization of the proceeds of sale or c. Short-term capital asset transactions:
disposition, the portion of the gain presumed to 100% subject to tax [Sec. 39(B), NIRC].
have been realized from the sale or disposition
shall be subject to CGT. Determination of whether short- or long-
term: Short-term if held for 12 months or less;
How taxable portion and tax determined: otherwise, it is a long-term capital gain.
[HIGHER of Gross selling price or FMV @
sale] At 30% corporate income tax, if the seller is a
The historical cost or adjusted basis of the real corporation.
property sold or disposed shall be carried over
to the new principal residence built or acquired. Rule: Capital gain/loss is recognized in full.
Capital assets shall refer to all real properties
Computation for the basis of new principal held by a taxpayer, whether or not connected
residence: with his trade or business, and which are not
included among the real properties considered
as ordinary assets under Section 39(A)(1).
Historical cost of old principal
residence XXX Ordinary assets shall refer to all real
properties specifically excluded from the
Add: Additional cost to acquire
definition of capital assets under Section
new principal residence* XXX
39(A)(1), NIRC, namely:
Adjusted cost basis of the new a. Stock in trade of a taxpayer or other real
principal residence XXX property of a kind which would properly be
included in the inventory of the taxpayer if
on hand at the close of the taxable year; or
b. Real property held by the taxpayer
*Additional cost to acquire new primarily for sale to customers in the
principal residence: ordinary course of his trade or business; or
c. Real property used in trade or business
Cost to acquire new principal (i.e., buildings and/or improvements) of a
residence XXX character which is subject to the allowance
Page 87 of 256
for depreciation provided for under Sec. (25%) of the gross income  
34(F) of the Code; or d. Interest income from long-term deposit or
d. Real property used in trade or business of investment in the form of savings,
the taxpayer common or individual trust funds, deposit
substitutes, investment management
b. Non-Resident Aliens Engaged in accounts and other investments
Trade or Business evidenced by certificates in such form
prescribed by the Bangko Sentral ng
General Rule: Subject to income tax in the Pilipinas (BSP) shall be exempt from the
same manner as an individual citizen and a tax  
resident alien individual on taxable income
from all sources within the Philippines. But should the holder of the certificate pre-
terminate the deposit or investment before the
The following shall be subject to an income fifth (5th) year, a final tax shall be imposed on
tax of 20% on the total amount thereof:  the entire income and shall be deducted and
a. Cash and/or property dividends from: withheld by the depository bank from the
b. A domestic corporation; proceeds of the long-term deposit or
c. A joint stock company; investment certificate based on the remaining
d. An insurance or mutual fund company; maturity thereof:
e. A regional operating headquarters of a. Four (4) years to less than five (5) years -
multinational company; 5%;
f. The share of a nonresident alien individual b. Three (3) years to less than four (4) years
in the distributable net income after tax of - 12%; and  
a partnership (except a general c. Less than three (3) years - 20%.  
professional partnership) of which he is a
partner; Capital gains
g. The share of a nonresident alien individual Capital gains realized from sale, barter or
in the net income after tax of an exchange of shares of stock in domestic
association, a joint account, or a joint corporations not traded through the local stock
venture taxable as a corporation of which exchange, and real properties shall be subject
he is a member or a co-venturer; to the similar tax prescribed on citizens and
h. Interests   resident aliens.
i. Royalties (in any form); and  
j. Prizes (except prizes amounting to Ten Sale, barter or exchange of Shares of stock in
thousand pesos (P10,000) or less which domestic corporation not traded – 15% of net
shall be subject to graduated tax) and capital gains
other winnings (except PCSO/lotto
winnings which shall not exceed P10,000) Sale, barter or exchange of real properties –
6% of gross selling price or current FMV
Except: whichever is higher
The following Royalties shall be subject to
a final tax of ten percent (10%) on the total c. Non-Resident Aliens Not Engaged
amount thereof: in Trade or Business [Sec. 25 (B),
a. On books as well as other literary works; NIRC]
and
b. On musical compositions There shall be levied, collected, and paid for
c. Cinematographic films and similar works each taxable year upon the entire income
shall be subject to twenty-five percent received from all sources within the PH by
Page 88 of 256
every NRANETB within the PH as interest, required shall subject him to the payment of
cash and/or property dividends, rents, salaries, appropriate withholding taxes due on the
wages, premiums, annuities, compensation, transaction. [RMC No. 8-14]
remuneration, emoluments, or other fixed or
determinable annual or periodic or casual i. Minimum Wage Earners
gains, profits, and income, and capital gains, a
tax equivalent to 25% of such income. Rule: they shall be exempt from payment of
income tax on their taxable income. 
d. Aliens Employed by Regional
Headquarters, Regional Operating Limit: However, if he receives “other benefits”
Headquarters, Offshore Banking in excess of the allowable statutory amount of
P90,000, then he shall be taxable on the
Units, and Petroleum Service exceeds benefits as well as his salaries,
Contractors wages, and allowances, just like an employee
receiving compensation income beyond the
The preferential tax treatment of 15% shall no statutory minimum wage.
longer be applicable to employees of regional
headquarters (RHQs), regional operating The treatment of bonuses and other benefits
headquarters (ROHQs), offshore banking units that [a minimum wage earner] receives from
(OBUs) or petroleum service contractors and the employer in excess of the [₱90,000] ceiling
subcontractors. They are now subject to cannot but be the same as the prevailing
regular income tax rates [Sec. 25 (F)]. [Note treatment prior to R.A. 9504 - anything in
item A of veto message of the President on excess of ₱30,000 is taxable; no more, no less.
TRAIN Law] The treatment of this excess cannot operate to
disenfranchise the MWE from enjoying the
e. Individual Taxpayers exempt from exemption explicitly granted by R.A. 9504.
income tax are: [Soriano v. Secretary of Finance, G.R. No.
184450 (2017)]
a. Senior Citizens (with qualifications)  
b. Minimum wage earners The minimum wage shall be exempt from the
c. Exemptions granted under international payment of income tax on their taxable income:
agreements Provided, further, That the holiday pay,
overtime pay, night shift differential pay and
All individuals and entities claiming exemption hazard pay received by such minimum wage
from imposition of taxes on income and, earners shall likewise be exempt from income
consequently, from withholding taxes are tax.
required to provide a copy of a valid, current
and subsisting tax exemption certificate or Compensation income including overtime pay,
ruling, as per existing administrative issuances holiday pay and hazard pay, earned by
and any issuance that may be issued from time minimum wage earners who have no other
to time, before payment of the related income. returnable income are NOT taxable and not
subject to withholding tax on wages [RA 9504].
The tax exemption certificate or ruling must
explicitly recognize the grant of tax exemption, ii. Exemptions Granted Under
as well as the corresponding exemption from International Agreements
imposition of withholding tax. Failure on the
part of the taxpayer to present the said tax See RMC No, 31-2013, April 12, 2013 –
exemption certificate or ruling as herein taxation of compensation income of Philippine
Page 89 of 256
nationals and alien individuals employed by

foreign governments/embassies/diplomatic
missions and international organizations
situated in the Philippines.
The Government of the Philippines is a

signatory of certain international agreements
and a party to different tax treaties which
specifically provide for the exemption of certain
persons or entities from taxes imposed by the
Philippines.
Examples of these tax exemptions are those

accorded to diplomats or ambassadors of other
countries here in the Philippines. The World
Health Organization is also tax exempt upon an
international agreement [CIR v. Gotamco, G.R.
No. L-31092 (1987)
Page 90 of 256
SUMMARY TABLES OF RATES
Citizens,
Interest, Royalties, Prizes and Other Winnings NRAETB NRANETB
Residents
Interest from any currency bank deposit 20% 20% 25%
Yield or any other monetary benefit from deposit substitute 20% 20% 25%
Yield or any other monetary benefit from trust funds and similar
20% 20% 25%
arrangements
Royalties, in general 20% 20% 25%
Royalties on books as well as other literary works and musical

10% 10% 25%
compositions
Prizes exceeding P10,000 20% 20% 25%
Other winnings (except Philippine Charity Sweepstakes and

20% 20% 25%
Lotto winnings not exceeding P10,000)
15%
Interest incomes received from a depositary bank under Note: NRC –
Exempt Exempt
expanded foreign currency deposit system exempt (RR 1-
11)
Interest income from long-term deposit or investment

evidenced by certificates prescribed by BSP. If preterminated
before fifth year, a final tax shall be imposed based on
remaining maturity Exempt Exempt 25%
4 years to less than 5 years 5% 5% 25%
3 years to less than 4 years 12% 12% 25%
Less than 3 years 20% 20% 25%
Citizens,
Cash and/or Property Dividends NRAETB NRANETB
Residents
Cash and/or property dividends actually or constructively

received from a domestic corp. or from a joint stock corp.,
insurance or mutual fund companies and regional operation 10% 20% 25%
headquarters of multinational companies (beginning Jan. 1,
2000)
Share of an individual in the distributable net income after tax

of a PARTNERSHIP (other than a general professional 10% 20% 25%
partnership) (beginning Jan. 1, 2000)
Share of an individual in the net income after tax of an

ASSOCIATION, a JOINT ACCOUNT, or a JOINT VENTURE
10% 20% 25%
or CONSORTIUM taxable as a corporation, of which he is a
member or a co-venturer (beginning Jan. 1, 2000)
Page 91 of 256
Sec. 24 (C). Capital Gains Tax from Sale of Shares

Citizens,
of Stock of a domestic corporation NOT TRADED NRAETB NRANETB
Residents
in the Stock Exchange
Tax base: Net Capital Gain 15% 15% 15%
Sec. 24 (D). Capital Gains Tax from Sale of Real Citizens,

NRAETB NRANETB
Property Classified as Capital Asset Residents
Tax base: Gross selling price or current fair market

value, whichever is higher
Tax Rate 6% 6% 6%
Resident Non-Resident
Citizen Alien Citizen NRAETB NRANETB

Category of income
Within the Within the Within the Within the
All sources
Philippines Philippines Philippines Philippines
Based on Taxable (i.e. Net) Income
Schedular Income Tax Rates (i.e. 0% to 35% (Sec. 24) (See table
below)
Compensation/ Business/
Profession
For those earning purely business or professional income or mixed
income not exceeding the threshold gross sales/receipts for the year
Prizes of P10,000 or less
of P3,000,000, the taxpayer can opt to avail of the 8% tax on gross
sales/receipts in lieu of graduated income tax rates and percentage
tax – for the business/professional income portion – upon the option
of the taxpayer
Interest from any currency bank

deposit, etc.
Gross Income Within the Philippines (GIW) – 20% Final Withholding
Royalties, in general
Tax
GIW – 25%
Winnings/ Prizes (except prizes
P10,000 and below)
Royalties from books, literary

GIW – 10% Final Withholding Tax
works, musical compositions
EXEMPT; However:
Interest from long-term deposit or In case of pre-termination, with remaining maturity of:
investment certificates, which have 4 years to less than 5 years -5% on entire income
a maturity of 5 years or more 3 years to less than 4 years – 12% on entire income
less than 3 years – 20% on entire income
Cash/ Property Dividends from a

domestic corporation, etc., OR share
in the distributed net income after tax GIW – 10% Final Withholding Tax GIW – 20%
of a partnership (except a general
professional partnership), etc.
Page 92 of 256
Interest (Expanding Foreign

GIW – 15% Final Withholding Tax Exempt
Currency Deposit System)
Prizes Subject to schedular rates if not exceeding P10,000
Winnings on Philippine
Exempt if P10,000 and below
Sweepstakes/ Lotto
Capital Gains on Sale of

Shares of Domestic Corp Net capital gains: 15% Final Tax
(not traded in a domestic
stock exchange
Capital Gains on Sale of

Real Property in the Gross Selling Price or FMV, whichever is higher – 6% Final Withholding Tax
Philippines
Sale of Shares of Domestic 0.6 of 1% of the Selling Price (Stock Transaction Tax)
Corp. (traded in a domestic
stock exchange) Note: Stock Transaction Tax is not an income tax, but a business (percentage) tax
Sale of Real Property

located Abroad
Schedular/Graduated Income Tax Rates (i.e. 0% to 35%) (Sec. 24)
For those earning purely business or professional income or mixed income, the
Sale of Shares of Foreign
taxpayer can opt to avail of the 8% tax on gross sales/receipts in lieu of graduated
Corp.
rates – for the business/professional income portion – upon the option of the taxpayer
Passive Income from Abroad
SCHEDULE OF INCOME TAX RATES FOR INDIVIDUAL CITIZENS, RESIDENTS, AND NRAETB
RANGE OF TAXABLE INCOME TAX DUE (a+b)
Basic Amount (a) Additional Rate (b)
0 to 250,000 - -
Over 250,000 but not more than 400,000 - 20% of excess over 250,000
Over 400,000 but not more than 800,000 30,000 25% of excess over 400,000
Over 800,000 but not over 2,000,000 130,000 30% of excess over 800,000
32% of excess over

Over 2,000,000 but not over 8,000,000 490,000
2,000,000
35% of excess over

Over 8,000,000 2,410,000
8,000,000
Page 93 of 256
Computations [RR 08-2018] Pure Compensation Income
Illustration: Mr. CSO earned, aside from his basic wage, additional pay of P140,000.00 which consists
of the overtime pay — P80,000.00, night shift differential — P30,000.00, hazard pay — P15,000.00,
and holiday pay — P15,000.00. He has P5,000 mandatory contributions (SSS, Pag-Ibig, Phil-health,
etc.) and P11,000 non-taxable benefits.
Total Compensation Income P135,000.00
Add: Overtime, night shift differential, hazard, and holiday pay 140,000.00
–––––––––––
Total Income P275,000.00
Less: Mandatory contributions P5,000.00
Non-taxable benefits 11,000.00 16,000.00
––––––––––– –––––––––––
Net taxable income P259,000.00
Tax due (20% in excess of P250,000) 1,800
Mixed-income (i.e. compensation income and business income/income from the practice of
profession – opted to avail of 8% tax on business/professional income)
Illustration: Mr. MAG, a Financial Comptroller of JAB Company, earned annual compensation in 2018
of P1,500,000.00, inclusive of 13th month and other benefits in the amount of P120,000.00 but net of
mandatory contributions to SSS and Philhealth. Aside from employment income, he owns a
convenience store, with gross sales of P2,400,000. His cost of sales and operating expenses are
P1,000,000.00 and P600,000.00, respectively, and with non-operating income of P100,000.00.
a. His tax due for 2018 shall be computed as follows if he opted to be taxed at eight percent
(8%) income tax rate on his gross sales for his income from business:
Total compensation income P1,500,000.00

Less: Non-taxable 13th month pay and other benefits (max) 90,000.00
––––––––––––
Taxable Compensation Income P1,410,000.00
Tax due:
1. On Compensation:
On P800,000.00 P130,000.00
On excess (P1,410,000 - P800,000) x 30% 183,000.00
––––––––––––
Tax due on Compensation Income P313,000.00
––––––––––––
2. On Business Income:
Gross Sales P2,400,000.00
Add: Non-operating Income 100,000.00
Page 94 of 256
––––––––––––
Taxable Business Income P2,500,000.00
Multiplied by income tax rate 8%
––––––––––––
Tax Due on Business Income P200,000.00
––––––––––––
Total Income Tax Due (Compensation and Business) P513,000.00
* The option of 8% income tax rate is

applicable only to taxpayer's income from
business, and the same is in lieu of
the income tax under the
graduated income tax rates and the
percentage tax under Section 116 of
the Tax Code, as amended.
* The amount of P250,000.00 allowed as
deduction under the law for taxpayers
earning solely from self-
employment/practice of profession, is not
applicable for mixed income earner under
the 8% income tax rate option.
* The P250,000.00 mentioned above is
already incorporated in the first tier of the
graduated income tax rates applicable to
compensation income.
|||
Mixed-income (i.e. compensation income and business income/income from the practice of
profession)
Illustration: Same facts for Mr. MAG. His tax due for 2018 shall be computed as follows if he did not
opt for the eight percent (8%) income tax based on gross sales/receipts and other non-operating
income:
Total compensation income P1,500,000.00

Less: Non-taxable 13th month pay and other benefits-max 90,000.00
––––––––––––
Taxable Compensation Income P1,410,000.00
Add: Taxable Income from Business —
Gross Sales P2,400,000.00
Less: Cost of Sales 1,000,000.00
–––––––––––
Gross Income P1,400,000.00
Less: Operating Expenses 600,000.00
–––––––––––
Net Income from Operation P800,000.00
Add: Non-operating Income 100,000.00 900,000.00
––––––––––– ––––––––––––
Total Taxable Income P2,310,000.00
Tax Due:
On P2,000,000.00 P490,000.00
Page 95 of 256
On excess (P2,310,000 - 2,000,000) x 32% 99,200.00

––––––––––––
Total Income Tax P589,200.00
* The taxable income from both compensation and business shall be combined for purposes of
computing the income tax due if the taxpayer chose to be subject under the
graduated income tax rates.
Pure Business/Professional Income (Opted to be taxed at 8% of gross sales or receipts)

Illustration: Ms. EBQ operates a convenience store while she offers bookkeeping services to her
clients. In 2018, her gross sales amounted to P800,000.00, in addition to her receipts from
bookkeeping services of P300,000.00. She already signified her intention to be taxed at 8% income
tax rate in her 1st quarter return.
Her income tax liability for the year will be computed as follows:
Gross Sales — Convenience Store P800,000.00

Gross Receipts — Bookkeeping 300,000.00
––––––––––––
Total Sales/Receipts P1,100,000.00
Less: Amount allowed as deduction under Sec. 24 (A) (2) (b) 250,000.00
––––––––––––
Taxable Income P850,000.00
Tax Due:
8% of P850,000.00 P68,000.00
* The total of gross sales and gross receipts is below the VAT threshold of P3,000,000.00.
* Taxpayer's source of income is purely from self-employment, thus she is entitled to the amount
allowed as deduction of P250,000.00 under Sec. 24 (A) (2) (b) of the Tax Code, as amended.
* Income tax imposed herein is based on the total of gross sales and gross receipts.
* Income tax payment is in lieu of the graduated income tax rates under subsection (A) hereof and
percentage tax due, by express provision of law.
Pure Business/Professional Income (Opted to be taxed at schedular rates)

Illustration: Ms. EBQ above, failed to signify her intention to be taxed at 8% income tax rate on gross
sales in her initial Quarterly Income Tax Return, and she incurred cost of sales and operating expenses
amounting to P600,000.00 and P200,000.00, respectively, or a total of P800,000.00, the income tax
shall be computed as follows:
Gross Sales/Receipts P1,100,000.00

Less: Cost of Sales 600,000.00
––––––––––––
Gross Income P500,000.00
Less: Operating Expenses 200,000.00
––––––––––––
Taxable Income P300,000.00
Tax Due:
On excess (P300,000 - P250,000) x 20% P10,000.00
Page 96 of 256
6. Income Tax on Corporations

i. Taxation in General
a. Domestic Corporations and (a) Regular Corporate Income Tax
Resident Foreign Corporations (RCIT)
Domestic Corporations Default income tax. Except as otherwise

A corporation created and organized in the provided, income tax of 30% is imposed on
Philippines or under its laws (the law of taxable income.
incorporation test) [Sec. 22 (C), NIRC].
Applies equally to both: (a) Domestic
Taxable on all income derived from sources corporations (on income from within and
within and without the Philippines; and without the Philippines) and (b) Resident
Foreign Corporations (on income from within
Resident Foreign Corporations the Philippines)
A corporation organized under the laws of a
Normal/Regular Corporate Income Tax Rate:
foreign country, which is engaged in trade or
30% of Taxable Income
business in the Philippines. [See “Doing
Business” definition under the FIA above]
Gross Income xxx
Less: Allowable Deductions xxx
Taxable only on income derived from sources
Taxable Income xxx
A Philippine branch of a foreign corporation (b) Optional gross income tax (GIT)
duly licensed by the SEC is considered a
resident foreign corporation. Thus, only the Section 27 (A) provides for an optional gross
income of the Philippine branch from sources income tax of 15% based on gross income.
within the Philippines is subject to Philippine
income tax. (c) Minimum Corporate Income Tax
(MCIT)
As general rule, the head office of a foreign
corporation is the same juridical entity as its a. Applies to domestic corporations and
branch in the Philippines following the single RFCs whenever such corporations
entity concept. Thus, the income from sources b. have zero or negative taxable income, or
within the Philippines of the foreign head office whenever the
shall thus be taxable to the Philippine branch. c. MCIT is greater than the normal income
tax due.
But, when the head office of a foreign d. Imposed beginning the fourth taxable year
corporation independently and directly from the taxable year the corporation
invested in a domestic corporation without the commenced its business operations. For
funds passing through its Philippine branch, purposes of MCIT, the taxable year in
the taxpayer, with respect to the tax on which business operations commenced
dividend income, would be the non-resident shall be the year when the corporation
foreign corporation itself and the dividend registers with the BIR (not in which the
income shall be subject to the tax similarly corporation started commercial
imposed on non- resident foreign corporations. operations).
[Marubeni v. Commissioner, G.R. No. 76573 e. Tax rate: 2% of Gross Income
(1989)]
Page 97 of 256
Gross Income
Gross Sales xxx Direct cost of services all direct costs and
Less: Sales Returns xxx expenses necessarily incurred to provide the
Sales Discounts xxx services required by the customers and clients
including (i) salaries and employee benefits of
Allowances xxx
personnel, consultants and specialists directly
Cost of Goods Sold xxx xxx rendering the service and (ii) cost of facilities
Gross Income xxx directly utilized in providing the service such as
depreciation or rental of equipment used and
If apart from deriving income from core cost of supplies. In the case of banks, it
business activities there are other items of includes interest expense.
gross income realized or earned by the
taxpayer which are subject to the normal MCIT is in the nature of a tax credit, not an
corporate income tax, they must be included as allowable deduction.
part of gross income for computing MCIT. [Sec.
27 (E), NIRC; RR 12-07] It addresses the previously rampant practice of
some corporations not declaring their actual
This means that the term “gross income” will income or bloating their expenses.
also include all items of gross income
enumerated under Section 32(A), except: (a) There is no MCIT on the first three taxable
income exempt from income tax, and (b) years as incentive to do business.
income subjected to FWT.
What amount of income tax is paid by the
Cost of goods sold corporation to the BIR? 
In general – includes all business expenses Whichever is higher between the normal tax
directly incurred to produce the merchandise to and the minimum corporate income tax.
bring them to their present location and use.
Coverage
Trading or merchandising – includes invoice The MCIT covers domestic and resident
cost of the goods sold, plus import duties, foreign corporations which are subject to the
freight in transporting the goods to the place regular income tax. Corporations subject to a
where the goods are actually sold including special corporate tax system do not fall within
insurance while the goods are in transit. the coverage of the MCIT.
Manufacturing – include all costs of These special corporations include Proprietary

production of finished goods, such as raw educational institutions, nonprofit hospitals,
materials used, direct labor and manufacturing OBUs, FCDUs, ROHQs, firms registered in
overhead, freight cost, insurance premiums PEZA/BCDA/other ecozones, International
and other costs incurred to bring the raw Carriers .
materials to the factory or warehouse.
For corporations whose operations or activities
Gross Receipts xxx are partly covered by regular income tax and
Less: Sales Returns xxx special income tax system, MCIT shall apply
Sales Discounts xxx on operations covered by the regular corporate
income tax system.
Allowances xxx
Cost of Services xxx xxx
Gross Income xxx
Page 98 of 256
Illustration:
E Co., a domestic trading corporation, in its fourth year of operations had a gross income from sales
of P300,000 and net taxable income of P100,000. How much was the income tax paid by the
corporation for the year?
MCIT (P300,000 x 2%) P6,000

Normal Income Tax (P100,000 x 30%) P30,000
Income Tax to be paid for the year (whichever is higher) P30,000
Carry forward of excess minimum tax

Any excess of the minimum corporate income tax over the normal income tax shall be carried forward
on an annual basis. The excess can be credited against the normal income tax in the next three (3)
succeeding taxable years only [Sec. 27(E)(2), NIRC]. In the year to which it was carried forward, the
normal tax should be higher than the MCIT.
Sample Computation of MCIT Carry Forward:

A domestic corporation had the following data on computations of the normal tax (NT) and the
minimum corporate income tax (MCIT) for five years.
Yr 4 Yr 5 Yr 6 Yr 7 Yr 8
MCIT 80K 50K 30K 40K 35K
NT 20K 30K 40K 20K 70K
The excess MCIT over NT carried-forward as follows:
Year 4 Year 5 Year 6 Year 7 Year 8

MCIT 80,000 50,000 30,000 40,000 35,000
NT 20,000 30,000 40,000 20,000 70,000
Excess MCIT over 60,000(a) 20,000(b) n/a 20,000(c) n/a

NT
(MCIT – NT)
Income Tax to be 80,000 50,000 40,000 40,000 70,000

paid
(Higher of MCIT or
NT)
Less: MCIT carry n/a n/a (40,000) (a) n/a (20,000) (a)
forward
(20,000) (b)
Tax Due 80,000 50,000 0 40,000 30,000
(a) 60k excess MCIT from year 4 is credited against the normal tax to be paid in year 6 and 8.
(b) 20k excess MCIT from year 5 is credited against the normal tax to be paid in year 8.
(c) 20k excess MCIT from year 7 will be credited against future normal tax to be paid.
Page 99 of 256
Relief from MCIT [Sec. 27 (E)(3), NIRC] the normal income tax due is higher than the
The Secretary of Finance may suspend computed annual MCIT, the following shall be
imposition of MCIT on any corporation which allowed to be credited against the annual
sustained substantial losses on account of income tax: (a) quarterly MCIT payments, (b)
(LMB): quarterly normal income tax payments, (c)
a. Prolonged labor dispute (losses from a excess MCIT in the prior year/s (subject to the
strike staged by employees that lasts for prescriptive period allowed for its creditability),
more than 6 months and caused the (d) CWTs in the current year, (d) excess CWTs
temporary shutdown of operations), or in the prior year.
b. Force majeure (acts of God and other
calamity; includes armed conflicts like war If in the computation of annual income tax due,
or insurgency), or the computed annual MCIT due is higher than
c. Legitimate business reverses (substantial the annual normal income tax due, the
losses due to fire, robbery, theft or other following may be credited against the annual
economic reasons). income tax: (a) quarterly MCIT payments of
current taxable quarter, (b) quarterly normal
Quarterly MCIT Computation income tax payments in current year, (c) CWTs
The computation and the payment of MCIT in the current year, (d) excess CWTs in the
shall likewise apply at the time of filing the prior year.
quarterly corporate income tax. In the
computation of the tax due for the taxable Excess MCIT from the previous taxable year/s
quarter, if the quarterly MCIT is higher than the shall not be allowed to be credited against the
quarterly normal income tax, the tax due to be annual MCIT due as the same can only be
paid for such taxable quarter at the time of filing applied against normal income tax.
the quarterly corporate income tax return shall
be the MCIT. Manner of Filing and Payment.
The MCIT shall be paid in the same manner
Items allowed to be credited against quarterly prescribed for the payment of the normal
MCIT due: (a) CWT, (b) Quarterly income tax corporate income tax which is on a quarterly
payments under the normal income tax; and (c) and on a yearly basis.
MCIT paid in the previous taxable quarter(s).
(d) Taxation of Passive Income
Excess MCIT from the previous taxable year/s
shall not be allowed to be credited against the Interest from deposits and yield or any other
quarterly MCIT tax due. monetary benefit from deposit substitutes and
from trust funds and similar arrangements and
Annual Income Tax Computation. royalties
The final comparison between the normal a. 20% final tax on:
income tax payable and the MCIT shall be b. interest on any currency bank deposit,
made at the end of the taxable year. The c. yield or any other monetary benefit from
payable or excess payment in the Annual deposit substitutes, trust funds and similar
Income Tax Return shall be computed taking arrangements, and
into consideration corporate income tax d. Royalties
payment made at the time of filing of quarterly e. same for Domestic Corporations and
corporate income tax returns whether this be Resident Foreign Corporations
MCIT or normal income tax. f. Collected as Final Withholding Tax [Sec.
57, NIRC]
In the computation of annual income tax due, if
Page 100 of 256

Interest Income derived by a domestic taxable year from the sale, barter, exchange or
corporation from depository bank under the other disposition of shares of stock in a
expanded foreign currency deposit system domestic corporation not listed and traded
[Section 27 (D)(1), NIRC] through a local stock exchange:
a. 15% final income tax
b. same for Domestic Corporations and Capital gains realized from the sale,
Resident Foreign Corporations exchange, or disposition of lands and/or
c. Collected as Final Withholding Tax [Sec. buildings
57, NIRC] a. On the sale, exchange or disposition of
lands and/or buildings which are not
Inter-corporate dividends actually used in the business of a
a. Dividends received from a domestic corporation and are treated as capital
corporation by another domestic assets
corporation or resident foreign corporation b. On the gross selling price, or the current
- Exempt fair market value at the time of the sale,
b. Dividends received from a domestic whichever is higher, a final tax of 6%;
corporation by a non-resident foreign c. If it is a Resident Foreign Corporation., it is
corporation (NRFC): 30% of the amount of subject to the regular corporate income tax
cash and/or property dividend; provided rate of 30%
that it may be reduced to 15% of the d. The capital gains tax is applied on the
amount of cash and/or property dividend, gross selling price, or the current fair
if the country in which the NRFC is market value at the time of the sale,
domiciled shall allow a credit against the whichever is higher. Any gain or loss on
tax due from the NRFC deemed to have the sale is immaterial because there is a
been paid in the Philippines equivalent to conclusive presumption by law that the
15%, which represents the difference sale resulted in a gain.
between the regular income tax of 30% e. Applicable to domestic corporations only.
and the 15% tax sparing rate. f. Tax treatment is similar to that of
individuals.
Stock dividends are exempt if there is no
change in proportionate interest. (e) Improperly Accumulated
Earnings Tax
Taxation of Capital Gains
[Sec. 29, NIRC, as implemented by RR 2-2001]
Capital gain from sale of shares of stock not
traded in the stock exchange  Rule: In addition to other income taxes, there
is imposed for each taxable year a tax equal to
Final tax on net capital gains realized by a 10% of the improperly accumulated taxable
domestic corporation during the taxable year income.
from the sale, barter, exchange or other
disposition of shares of stock in a domestic Applies to every corporation formed or availed
corporation not listed and traded through a for the purpose of avoiding the income tax with
local stock exchange: 15% of net capital gains respect to its shareholders or the shareholders
[Sec. 27 (D)(2), NIRC]. of any other corporation, by permitting earnings
and profits to accumulate instead of being
Final tax on net capital gains realized by divided or distributed.
Resident Foreign Corporations and
Nonresident Foreign Corporations during the
Page 101 of 256

Rationale: It is a tax in the nature of a penalty Less: Amount that may be

to the corporation for the improper retained (100% of Paid-Up xx
accumulation of its earnings, and a deterrent to Capital) xx
the avoidance of tax upon shareholders who xx
are supposed to pay dividends tax on the IAE xx
earnings distributed to them. 10
Multiply by: IAET Rate %
Effect of imposition of IAET xx
Once the profit has been subjected to IAET, the IAET xx
same shall no longer be subjected to IAET in
later years even if not declared as dividend.
The use of undistributed earnings and profits
Profits which have been subjected to IAET, for the reasonable needs of the business would
when finally declared as dividends, shall generally not make the accumulated or
nevertheless be subject to tax on dividends. undistributed earnings subject to IAET.
In applying the above rules, dividends shall be Immediacy Test: The term "reasonable needs
deemed to have been paid out of the most of the business" means (1) the immediate
recently accumulated profits (LIFO: last in, first needs of the business, including (2) reasonably
out). anticipated needs.
Sample computation (RMC No. 35-2011) The corporation should be able to prove (1) an
xx immediate need for the accumulation of the
Taxable Income for the Year xx earnings and profits, or (2) the direct
Add: correlation of anticipated needs to such
xx accumulation of profits.
(a) Income subjected to Final Tax xx
xx Accumulation for Reasonable needs under
(b) NOLCO xx RR 2-2001
xx Accumulation of earnings up to 100% of paid-
(c) Income exempt from tax xx up capital;
(d) Income excluded from gross xx xx
income xx xx Definite corporate expansion projects requiring
xx considerable capital expenditure (approved by
xx Board of Directors or equivalent body);
Less:
xx Building, Plant or Equipment Acquisition
Income Tax paid xx (approved by Board of Directors or equivalent
xx xx body)
Dividends declared/paid xx xx a. compliance with any Loan Covenant or
xx pre-existing obligation (established under
Total xx a legitimate business agreement);
Add: Retained Earnings from xx b. required by Law or applicable regulations
prior years xx to be retained;
Accumulated Earnings as of end xx c. in case of subsidiaries of foreign
of current year xx corporations in the Philippines,
undistributed earnings reserved for
Investments within the Philippines
Page 102 of 256

Coverage: Determination of Purpose to Avoid Income

a. IAET applies to: domestic corporations Tax
classified as closely- held corporations. Being a holding or investment company is
b. IAET does not apply to: prima facie evidence of purpose to avoid
c. Banks and other non-bank financial dividend tax. Holding or investment company –
intermediaries; corporation having practically no activities
d. Insurance companies; except holding property, and collecting the
e. Publicly-held corporations; income therefrom or investing the same;
f. Taxable partnerships;
g. General professional partnerships; Accumulation in excess of reasonable needs is
h. Non- taxable joint ventures; and determinative of the purpose to avoid dividend
i. Enterprises registered with PEZA (RA tax. Prima facie instances of this include: (i)
7916), BCDA (RA 7227), and other special investment of substantial earnings and profits
economic zones declared by law which in unrelated business or in stock or securities
enjoy a special tax rate in lieu of other of unrelated business; (ii) investment in
taxes. bonds and other long-term securities; (iii)
accumulation of earnings in excess of 100% of
Closely-held corporations are those: paid-up capital
a. at least 50% in value of the outstanding
capital stock; or The controlling intention of the taxpayer is that
b. at least 50% of the total combined voting which is manifested at the time of
power of all classes of stock entitled to accumulation, not subsequently declared
vote intentions which are merely the product of
c. is owned directly or indirectly by or for not afterthought.
more than 20 individuals. Domestic
corporations not falling under the A speculative and indefinite purpose will not
aforesaid definition are, therefore, suffice. Definiteness of plan/s coupled with
publicly- held corporations. action/s taken towards its consummation are
essential.
N.B. the same definition and rules as in Tax on
IPO in Sec. 127 (B); not the same as close Branch Profit Remittance Tax (BPRT)
corporation under the Revised Corporation Coverage
Code] a. Applies to non-resident foreign
corporations. Imposed on profits remitted
BIR Ruling 025-02 by the Philippine branch to the head office.
The ownership of a domestic corporation for b. Collected as Final Withholding Tax [Sec.
purposes of determining whether it is a closely 57, NIRC]
held corporation or a publicly held corporation
is ultimately traced to the individual Taxable transaction – any profit remitted by a
shareholders of the parent company. branch to its head office
Where at least 50% of the outstanding capital Tax Rate and Base – 15% final tax based on
stock or at least 50% of the total combined the total profits applied or earmarked for
voting power of all classes of stock entitled to remittance without any deduction for the tax
vote in a corporation is owned directly or component (except those activities registered
indirectly by at least 21 or more individuals, the with PEZA).
corporation is considered as a publicly-held
corporation, thus, exempt from IAET.
Page 103 of 256

The following are not treated as branch profits iii. Government-owned or Controlled
unless effectively connected with the conduct Corporations, Agencies,
of trade or business in the Philippines: Instrumentalities [Sec. 27(C), NIRC]
a. Interests, dividends, rents, royalties
(including remuneration for technical GOCCs
services), General rule: GOCCs are taxable as any other
b. salaries, wages, corporation engaged in similar business,
c. premiums, annuities, emoluments, or industry or activity
d. other fixed or determinable annual,
periodic or casual gains, profits, income Exceptions:
and capital gains received during each a. Government Service Insurance System
taxable year from all sources within the (GSIS)
Philippines b. Social Security System (SSS)
c. Philippine Health Insurance Corporation
Income Tax on Special Domestic (PHIC)
Corporations d. Local water districts (LWDs) [Sec. 27 (C),
NIRC]
ii. Proprietary Educational Institutions
and Non-profit Hospitals [Sec. 27(B), Government agencies or instrumentalities
NIRC] General rule: The government is exempt from
tax.
Tax Rate and Base –10% tax on taxable
income (except on income subject to capital Exception: When it chooses to tax itself.
gains tax and passive income subject to final Nothing can prevent Congress from decreeing
tax) within and without the Philippines that even instrumentalities or agencies of the
government performing governmental
Caveat: If gross income from unrelated trade or functions may be subject to tax. Where it is
business or other activity exceeds 50% of total done precisely to fulfill a constitutional mandate
gross income derived from all sources, the tax and national policy, no one can doubt its
rate of 30% shall be imposed on the entire wisdom. [Mactan Cebu Airport v Marcos
taxable income. (1996)]
Unrelated trade, business or other activity – iv. Foreign Currency Deposit Units
any trade, business or other activity, the [Sec. 27(D)(3), NIRC]
conduct of which is not substantially related to
the exercise or performance by such Income derived by a depository bank under the
educational institution or hospital of its primary expanded foreign currency deposit system
purpose or function. from:
Proprietary educational institution – any private Foreign currency transactions with

school maintained and administered by private nonresidents, offshore banking units in the
individuals or groups with an issued permit to Philippines, local commercial banks, including
operate from DepEd, CHED or TESDA [Sec. branches of foreign banks authorized by the
27 (B), NIRC]. BSP to transact business with foreign currency
depository system units and other depository
banks under the EFCDS – exempt from income
tax
Page 104 of 256

Except net income from transactions specified Air Canada vs. CIR (CTA Case No. 6572):
by the Secretary of Finance upon A foreign airline company selling tickets in the
recommendation by the Monetary Board – Philippines through their local agents shall be
subject to regular income tax payable by banks considered as a resident foreign corporation
engaged in trade or business in the country.
Foreign currency loans granted to residents
(other than offshore banking units in the The absence of flight operations within the
Philippines) – interest income subject to a final Philippine territory cannot alter the fact that the
tax of 10% income received was derived from activities
Income of nonresidents, individuals or
corporations, from transactions with depository The test of taxability is the source, and the
banks under the EFCDS – exempt from income source is that activity which produced the
tax income.
Same for Domestic and Resident Foreign International Shipping, GPB means: 
Corporations. Gross revenue for (a) passenger, cargo or mail
(b) originating from the Philippines up to final
Similar treatment to OBUs. destination, (c) regardless the place of sale or
payments of the passage or freight documents.
v. Resident Foreign Corporations
Subject to Preferential Tax Rates (b) Foreign Currency Deposit Units
and Offshore Banking Units
(a) International Carriers
FOREIGN CURRENCY DEPOSIT UNITS
Tax Rate and Base – 2.5% on Gross Philippine [Sec. 28(A)(7)]
Billings (GPB) Interest from Deposits and Yield or any other
Monetary Benefit from Deposit Substitutes,
International Air Carriers, GPB means: Trust Funds and Similar Arrangements and
a. gross revenue derived from Royalties [Sec. 28(B)(7)(a), NIRC]
b. carriage of persons, excess baggage,
cargo and mail Derived from sources within the Philippines -
c. originating from the Philippines in a Final income tax at tax rate of 20% of interest
continuous and uninterrupted flight, income
d. irrespective of the place of sale or issue
and the place of payment of the ticket or Interest income derived by RFC from a
passage document depository bank under the expanded foreign
e. tickets revalidated, exchanged and/or currency deposit system - 7.5% of interest
indorsed to another international airline – income
part of GPB if passenger boards a plane in
a port or point in the PH Income derived by a depository bank under
f. flights which originate from the PH, but the expanded foreign currency deposit
transshipment of passenger takes place at system [Sec. 28(B)(7)(b), NIRC]
a port outside PH on another airline – part Note: The provision discussing income derived
of GPB only the aliquot portion of the cost by a resident foreign corporation under the
of the ticket corresponding to the leg flown expanded foreign currency deposit system
from the PH to transshipment point [RR cites the same rule as that derived by a
15-02] domestic corporation [Sec. 27(D)(3), NIRC].
Page 105 of 256

See discussion above. business planning and coordination; (iii)

sourcing and procurement of raw
Offshore Banking Units [Sec. 28(A)(4), materials and components; (iv) corporate
NIRC] finance advisory services; (v) marketing
Income derived by OBUs authorized by the control and sales promotion; (vi) training
BSP from: and personnel management; (vii) logistic
a. foreign currency transactions with services; (viii) research and development
nonresidents, other OBUs, local services and product development; (ix)
commercial banks, including branches of technical support and maintenance; (x)
foreign banks authorized by the BSP to data processing and communications; and
transact business with OBUs – exempt (xi) business development. [Sec. 22 (EE),
from income tax NIRC]
b. except net income from transactions b. tax of 10% of their taxable income.
specified by the Secretary of Finance upon
recommendation by the Monetary Board –
subject to regular income tax payable by
banks
c. foreign currency loans granted to
residents (other than offshore banking
units in the Philippines)– interest income
subject to a final tax of 10%
d. income of nonresidents, individuals or
corporations, from transactions with OBUs
– exempt from income tax
e. similar treatment to FCDUs
(c) Regional or Area Headquarters

and Regional Operating
Headquarters [Sec. 28(A)(6),
NIRC]
Regional or area headquarters

a. branch established in the Philippines by
multinational companies and which
headquarters do not earn or derive income
from the Philippines and which act as
supervisory, communications and
coordinating center for their affiliates,
subsidiaries, or branches in the Asia-
Pacific Region and other foreign markets
[Sec. 22 (DD)]
b. not subject to income tax
Regional operating headquarters

a. branch established in the Philippines by
multinational companies which are
engaged in any of the following services:
(i) general administration and planning; (ii)
Page 106 of 256

Summary of Tax Bases and Rates of Special Corporations

Type of Corporation Tax Base Tax Rate
Domestic Corporation
Proprietary Educational Institutions and Hospitals
Taxable income from all sources 10%
(Non-profit)
Depository Banks (Foreign Currency Deposit
Units) Exempt (except that net income
With respect to income derived under the from such transactions is subject
expanded foreign currency deposit system from to the regular income tax payable
certain foreign currency transactions by banks)
With respect to interest income from foreign
currency loans to residents other than offshore
banking units in the Philippines or other
depository banks under the expanded system Amount of interest income 10%
Resident Foreign Corporation
International Carriers Gross Philippines Billings 2.5%
Offshore Banking Units Exempt (except that net income
With respect to income derived by offshore from such transactions is subject
banking units from certain foreign currency to the regular income tax payable
transactions by banks)
With respect to interest income derived from
foreign currency loans granted to residents other
than offshore banking units or local commercial
banks Amount of interest income 10%
Resident Depository Banks (Foreign Currency
Deposit Units) Exempt (except that net income
With respect to income derived under the from such transactions is subject
expanded foreign currency deposit system from to the regular income tax payable
certain foreign currency transactions by banks)
With respect to interest income from foreign
currency loans to residents other than offshore
banking units in the Philippines or other
depository banks under the expanded system Amount of interest income 10%
Regional Operation Headquarters of Multinational Taxable income from within the
10%
Companies Philippines
Non-Resident Foreign Corporation
Non-resident cinematographic film owners, Gross income from the
25%
lessors or distributors Philippines
Non-resident owner or lessor of vessels charted Gross rentals, lease and charter
4.5%
by Philippines nationals fees from the Philippines
Non-resident owner or lessor of aircraft, Gross rentals, lease and charter
7.5%
machineries or other equipment fees from the Philippines
Page 107 of 256

b. Non-resident Foreign gross rentals, charters or other fees

Corporations (NRFC) [Sec. 28(B),
NIRC] TAX ON CERTAIN INCOME RECEIVED BY
NRFC
Tax on Interest on foreign loans: contracted on
i. Taxation of NRFC in general
or after August 1, 1986 – 20% [Sec. 28
(B)(5)(a), NIRC]
A corporation organized under the laws of a
foreign country, which is not engaged in trade
Tax on Inter-corporate dividends
or business in the Philippines. [See “Doing
Inter-corporate Dividend – 15% on dividends
Business” definition under the FIA in B.7.2.
received from domestic corporations, if the
Corporations]
country in which the nonresident foreign
Taxable only on income derived from sources corporation is domiciled allows a tax credit of at
least 15% for taxes “deemed paid” in the
Philippines
Income taxes on nonresident foreign
15% foreign tax credit represents the
corporations are collected as Final Withholding
difference between the regular income tax of
Tax under Sec. 57, NIRC.
30% on corporations and the 15% tax on
dividends (“tax sparing credit”)
General rule
The tax is 30% of gross income received during
If the country within which the NRFC is
each taxable year from all sources within the
Philippines domiciled does NOT allow a tax credit, the tax
is 30% on dividends received from a domestic
corporation.
This includes: interests, dividends, rents,
royalties, salaries, premiums (except
Tax on Capital gain from sale of shares of
reinsurance premiums), annuities,
emoluments or other fixed or determinable stock not traded in the stock exchange 
annual, periodic or casual gains, profits and Final tax on net capital gains realized during
income, and capital gains (except capital gains the taxable year from the sale, barter,
on the sale of shares not traded in the stock exchange or other disposition of shares of
exchange) stock in a domestic corporation not listed and
traded through a local stock exchange:
ii. NRFCs subject to preferential tax
rates First P100k – 5%
Non-resident cinematographic film owner, Amount in excess of P100k – 10%

lessor or distributor – 25% of gross income
from all sources within the Philippines c. Corporations Exempt from Income
Tax
Non-resident owner or lessor of vessels
chartered by Philippine nationals – 4.5% of Tax exempt corporations [Sec. 30, NIRC]
gross rentals, lease or charter fees from leases a. Labor, agricultural or horticultural
or charters to Filipino citizens or corporations, organization – non-profit
as approved by the Maritime Authority b. mutual savings bank or cooperative bank
– non-stock, non-profit, operated for
Non-resident owner or lessor of aircraft, mutual purposes
machineries and other equipment – 7.5% of c. Beneficiary society, order, or association –
Page 108 of 256

operating for the exclusive benefits of their passive income, etc. applies to these otherwise
members; includes: fraternal organization exempt organizations.
operating under the lodge system; or
mutual aid association or a nonstock Tax on Other Entities: General Partnerships,
corporation organized by employees General Professional Partnerships, Co-
providing life, sickness, accident, or other ownerships, Joint Ventures, and Consortia
benefits exclusively to the members
d. Cemetery company – owned and General Partnerships
operated exclusively for the benefit of its Partnerships where all or part of their income is
members derived from the conduct of trade or business;
e. Non-stock corporation or association it is treated as a corporation [Sec. 22 (B),
organized and operated exclusively for NIRC].
religious, charitable, scientific, athletic, or
cultural purposes or for the rehabilitation of General rule: The partnership is subject to the
veterans, provided that no part of its same rules and rates as corporations.
income or asset belong to or inure to the
benefit of any individual Exceptions: A partner’s share in the
f. Business league, chamber of commerce, partnership’s distributable net income is
or board of trade – Non-profit; no part of deemed actually or constructively received by
net income inures to the benefit of an the partners in the same taxable year [Sec. 73
individual (D), NIRC]. Consequently:
g. Civic league or organization – Non-profit; a. such share will be subjected to dividend
operating exclusively for the promotion of tax (10%) whether actually distributed or
social welfare not.
h. Non-stock and non-profit educational b. there can never be an instance of
institutions improperly accumulated taxable income;
i. Government educational institutions note that RR 2-01 provides that IAET does
j. Organizations of a purely local character not apply to taxable partnerships.
whose income consists solely of
assessment, duties and fees collected Distributable net income of the partnership is
from their members to meet expenses; its taxable income less the normal corporate
includes: farmers’ or other mutual typhoon income tax (30%).
or fire insurance company, mutual ditch or
irrigation company and mutual or A partner’s contribution to the general
cooperative telephone company partnership fund is a capital investment and is
k. Farmers’, fruit growers’, and like not taxable income of the partnership.
association – whose primary function is to
market the product of their members General Professional Partnerships
Partnerships formed by persons for the sole
Notwithstanding the provisions in the purpose of exercising their common
preceding paragraphs, the income of the profession, no part of the income of which is
foregoing organizations from (1) their derived from engaging in any trade or
properties, real or personal, or from (2) their business. [Sec 22 (B), NIRC]
activities conducted for profit regardless of the
disposition made of such income, shall be A GPP as such shall not be subject to the
subject to tax imposed under the NIRC. income tax. It is not a taxable entity for income
tax purposes.
N.B. This means capital gains tax, tax on
Page 109 of 256

GPP is not a taxable entity net of cost and expenses. [RR No. 08-2018]
The GPP is deemed to be no more than a mere
mechanism or a flow-through entity in the Co-ownerships
generation of income by, and the ultimate There is co-ownership whenever the
mechanism distribution of such income to the ownership of an undivided thing or right
individual partners [Tan v. Commissioner, G.R. belongs to different persons. [Art. 484, NCC] It
No. 109289 (1994)]. may be created by succession or donation.
But the partnership itself is required to file When Co-ownership is not subject to tax
income tax returns for the purpose of furnishing When the co-ownership’s activities are limited
information as to the share in the gains or merely to the preservation of the co-owned
profits which each partner shall include in his property and to the collection of the income
individual return [RR 2-98]. from the property. Each co-owner is taxed
individually on his distributive share in the
The share of an individual partner in the net income of the co-ownership. [De Leon]
profit of a general professional partnership is
deemed to have been actually or constructively When Co-ownership is subject to tax
received by the partner in the same taxable The following circumstances would render a
year in which such partnership net income was co-ownership subject to a corporate income
earned, and shall be taxed to them in their tax:
individual capacities, whether actually a. When a co-ownership is formed or
distributed or not, at the graduated income tax established voluntarily, or upon
ranging from 5% to 32%. agreement of the parties;
b. When the individual co-owner reinvested
Because the principle of constructive receipt is his share, and
applied to undistributed profits of GPPs, the c. When the inherited property remained
actual distribution to the partners of such tax- undivided for more than ten years, and no
paid profits in another year should no longer be attempt was ever made to divide to same
liable to income tax. [MAMALATEO] among the co-heirs, nor was the property
under administration proceedings nor held
A GPP may claim either the itemized in trust, the property should be considered
deductions allowed under Section 34 of the as owned by an unregistered partnership.
Code or in lieu thereof, it can opt to avail of the [Valencia and Roxas]
OSD allowed to corporations in claiming the
deductions in an amount not exceeding forty Automatically converted into an unregistered
percent (40%) of its gross income. partnership the moment the said common
properties and/or the incomes derived from
The distributable net income of the partnership them are used as a common fund with intent to
may be determined by claiming either itemized produce profits for the heirs in proportion to
deductions or OSD. The share in the net their respective shares in the inheritance as
income of the partnership, actually or determined in a project partition either duly
constructively received, shall be reported as executed in an extrajudicial settlement or
taxable income of each partner. The partners approved by the court in the corresponding
comprising the GPP can no longer claim further testate or intestate proceeding. [Ona v. CIR,
deduction from their distributive share in the G.R. No. L-19342 (1972)]
net income of the GPP and are not allowed to
avail of the 8% income tax rate option since
their distributive share from the GPP is already
Page 110 of 256

Joint Ventures and Consortiums Examples of tax returns are:

To constitute a” joint venture,” certain factors a. BIR Form Nos. 1700 and 1701 – Annual
are essential. Each party to the venture must Income Tax Returns for Individual
make a contribution, not necessarily of capital, b. BIR Form No. 1702 – Annual Income Tax
but by way of services, skill, knowledge, Return for Corporations and Partnerships
material or money; profits must be shared c. BIR Form No. 1800 – Donor’s Tax Return
among the parties; there must be a joint d. BIR Form No. 1801 – Estate Tax Return
proprietary interest and right of mutual control
over the subject matter of the enterprise; and Information Return
usually, there is single business transaction. Any individual not required to file an income tax
return may nevertheless be required to file an
General rule: An unincorporated joint venture information return pursuant to rules and
is taxed like a corporation. The share of the regulations prescribed by the Secretary of
joint venture partners will no longer be taxable Finance, upon recommendation of the
to them because they partake in the nature of Commissioner. [Sec. 51(A)(3), NIRC]
inter-corporate dividends.
Every withholding agent required to deduct and
Exception: an unincorporated joint venture withhold taxes under Section 57 shall submit to
formed for the purpose of undertaking a the Commissioner an annual information return
construction project or engaging in petroleum containing the list of payees and income
operations pursuant to the consortium payments, amount of taxes withheld from each
agreement with the Philippine Government is payee and such other pertinent information as
not subject to the corporate income tax. Only may be required by the Commissioner [Sec. 58
the joint venture partners will be taxed on their (C), NIRC].
respective shares in the income of the joint
ventures. [Sec. 22 (B), NIRC] Every employer required to deduct and
withhold the taxes in respect of the wages of
Two elements necessary to exempt a joint his employees shall, on or before January 31st
venture or consortium from tax of the succeeding year, submit to the
a. The joint venture must be an unincorporated Commissioner an annual information return
entity formed by two or more persons containing a list of employees, the total amount
b. The joint venture was formed for the of compensation income of each employee, the
purpose of undertaking a construction total amount of taxes withheld therefrom during
project, or engaging in the petroleum and the year, accompanied by copies of the
other energy operations with operating statement referred to in the preceding
contract with the government. paragraph, and such other information as may
be deemed necessary [Sec. 83 (B), NIRC].
7. Filing of Returns and
Payment a. Individual Return
i. Who are required to file; Exceptions

Tax Return
[Sec. 51(A), NIRC]
Tax return refers to a formal report prepared by
the taxpayer or his agent in a prescribed form
General Rule: The following are required to file
showing an enumeration of taxable amounts
income tax return:
and description of taxable transactions,
a. Resident citizen
allowable deductions, amount of tax and tax
b. Non-resident citizen, on income from
payable to the government.
sources within the Philippines
Page 111 of 256

c. Resident alien, on income from sources been paid on such property, or (b) when the
within the Philippines transfer of such property is exempt from the
d. Non-resident alien engaged in trade or donor’s tax [Sec. 51 (E), NIRC].
business or in the exercise of profession in
the Philippines, on income from sources If the taxpayer is unable to make his return,
within the Philippines such as when he suffers from disability, the
return may be made by his duly authorized
Exceptions: The following shall not be agent or representative or by the guardian or
required to file income tax return: other person charged with the care of the
a. Individuals whose gross income does not taxpayer or his property; the principal and his
exceed P250,000 except citizen and alien representative or guardian assuming
individuals engaged in business or responsibility for penalties for erroneous, false
practice of profession within the or fraudulent returns [Sec. 51 (F), NIRC].
Philippines who shall file income tax
returns regardless of the amount of gross ii. Substituted Filing
income.
b. Individuals with respect to pure Applicable to individual taxpayers:
compensation income from sources within a. receiving purely compensation income,
the Philippines, the income tax on which regardless of amount
has been withheld; except when such b. from only one employer in the Philippines
compensation has been derived from for the calendar year, and
more than one employer. c. the income tax of which has been withheld
c. Individuals whose sole income has been correctly by the employer
subjected to final withholding tax
(pursuant to Sec. 57 (A)). The certificate of withholding filed by their
d. Minimum wage earner (as defined in Sec. respective employers, duly stamped ‘received’
22 (HH)) by the BIR, shall be tantamount to the
e. Individuals who are exempt from income substituted filing of income tax returns by the
tax pursuant to the provisions of the Tax employee [Sec. 51-A, NIRC].
Code and other laws.
iii. When and Where to File
Special Provisions
Married individuals (whether citizens, resident Income tax return of an individual who is not on
or nonresident aliens) who do not derive a substituted basis shall be filed on or before
income purely from compensation, shall file April 15 of each year covering income of the
only one consolidated return to cover the preceding taxable year. [Sec. 51 (C)(1), NIRC]
income of both spouses for the taxable year,
but where it is impracticable for the spouses to Individuals subject to capital gains tax [Sec.
file one return, each spouse may file a separate 51 (C)(2), NIRC]:
return of income but the returns so filed shall a. Sale of shares not traded thru a local stock
be consolidated by the BIR for verification [Sec. exchange – file a return within 30 days
51 (D), NIRC]. from the transaction, and a final
consolidated return on or before April 15
The income of unmarried minors is a tax liability of each year covering all stock
of the minor but where such income is derived transactions of the preceding taxable year
from property received from a living parent, the b. Sale of real property – file a return within
income shall be included in the return of the 30 days from each sale
parent except (a) when the donor’s tax has
Page 112 of 256

Individuals deriving self-employment corporations not engaged in trade or business

income (as sole source of income or mixed) – in the Philippines.
must file quarterly return of summary
declaration of gross income and deductions, The return shall be filed by the President, Vice-
and a final or adjustment [Sec. 74 (A), NIRC]. President or other principal officer, and shall be
sworn to by such officer and by the treasurer or
Due Date for Filing assistant treasurer.
Period
Return
Q1 Return May 15 of the same year ii. When and Where to File
August 15 of the same
Q2 Return Domestic corporations and resident foreign
year
November 15 of the same corporations shall file quarterly corporate
Q3 Return income tax returns within 60 days after the end
year
April 15 of the following of the calendar or fiscal quarter used, and
Annual Return annual corporate income tax return on or
year
before the 15th day of the fourth month
Self-employment income consists of earnings following the close of the calendar year or fiscal
derived by the individual from the practice of year, as the case may be [Sec. 74].
profession or conduct of trade or business, as
a sole proprietor or as a member in a general The filing of the tax returns by a corporation
professional partnership. [Sec. 74 (A), NIRC] using the calendar year:
Filing of these returns shall be in lieu of filing of Period Due Date for Filing Return
a declaration of estimated income under Sec. Period Due Date for Filing
74, primarily for the reason that the procedure Return
prescribed in Sec. 74 may not reasonably Q1 Return May 31 of the same year
approximate the correct amount of tax to be Q2 Return August 31 of the same
paid. [DE LEON citing RR No. 2-93] year
Q3 Return November 30 of the same
Where to File year
Except in cases where the CIR otherwise Annual Return April 15 of the following
permits, the return shall be filed with an year
authorized agent bank, Revenue District
Officer, Collection Agent or duly authorized Where to File
Treasurer of the city or municipality in which Except in cases where the CIR otherwise
such person has his legal residence or permits, the return shall be filed with an
principal place of business in the Philippines, authorized agent bank, Revenue District
or if there be no legal residence or place of Officer, Collection Agent or duly authorized
business in the Philippines, with the Office of Treasurer of the city or municipality having
the Commissioner [Sec. 51 (B), NIRC]. jurisdiction over the place where the
corporation’s principal office is located and
b. Corporate Returns where its books of accounts and other data are
kept; otherwise, the returns shall be filed and
i. Quarterly Income Tax the tax paid thereon with the Office of the
Commissioner of Internal Revenue [Sec. 77
All corporations subject to income tax shall (A), NIRC].
render quarterly income tax returns and a final
or adjustment return, except foreign
Page 113 of 256

Payment of Income Tax

General rule: The total amount of tax imposed In the operation of the withholding tax system,
by this Title (Tax on Income) shall be paid by the payee is the taxpayer, the person on whom
the person subject thereto at the time the return the tax is imposed, while the payor, a separate
is filed. entity, acts no more than an agent of the
government for the collection of the tax in order
Exception: When the tax due is in excess of to ensure its payment.
P2,000, the taxpayer other than a corporation
may elect to pay the tax in 2 equal installments: The duty to withhold is different from the duty
the first installment paid at the time the return to pay income tax. The revenue officers
is filed and the second installment, on or before generally disallow the expenses claimed as
October 15 following the close of the calendar deduction from gross income, if no withholding
year. [Sec. 56 (A)(2), NIRC] of tax as required by law or the regulations was
withheld and remitted to the BIR within the
Return of Corporations Contemplating prescribed dates.
Dissolution or Reorganization
Within 30 days after the adoption of the plan for In addition, the withholding tax that should
dissolution or reorganization (including have been withheld and remitted to the BIR as
corporations notified of possible involuntary well as the penalties for non-, late or erroneous
dissolution by the SEC), render a correct return payment of the withholding tax such as
to the CIR, verified under oath, setting forth the surcharges and deficiency interest are
terms of such plan and such other information assessed by the BIR. [MAMALATEO]
required by rules and regulations. Prior to the
issuance by the SEC of the Certificate of b. Final Withholding Tax
Dissolution or Reorganization, the corporation
shall secure a certificate of tax clearance from The amount of income tax withheld by the
the BIR which shall be submitted to the SEC. withholding agent is constituted as a full and
[Sec. 52 (C), NIRC] final payment of the income tax due from the
payee on the said income.
c. Return on Capital Gains Realized
from Sale of Shares of Stock and The liability for payment of the tax rests
Real Estate primarily on the payor as withholding agent.
Thus, in case of his failure to withhold the tax
Return on Capital Gains Realized from Sale of or in case of under withholding, the deficiency
Shares of Stock not Traded in the Local Stock tax shall be collected from the
Exchange – file a return within 30 days from the payor/withholding agent. The payee is not
transaction, and a final consolidated return on required to file an income tax return for the
or before the 15th day of the fourth month particular income.
following the close of the taxable year [Sec. 52
(D), NIRC] c. Creditable Withholding Tax
8. Withholding of Taxes Under the creditable withholding tax system,

taxes withheld on certain income payments are
intended to equal or at least approximate the
a. Concept
tax due of the payee on said income.
Withholding tax is a method of collecting
The income recipient is still required to file an
income tax in advance from the taxable income
income tax return, to report the income and/or
of the recipient of income.
Page 114 of 256

pay the difference between the tax withheld Withholding of VAT [Sec 114 (C), NIRC]
and the tax due on the income. Taxes withheld The government (political subdivisions,
on income payments covered by the expanded instrumentalities, agencies, GOCCs) shall
withholding tax and compensation income are deduct and withhold final VAT of 5% of gross
creditable in nature. payment on purchase of goods and services
subject to VAT. If the payment is for lease or
i. Expanded Withholding Tax use of properties to a nonresident owner,
withholding tax shall be 12%.
Withholding Tax at Source [Sec 57, NIRC]
Withholding of final tax of certain income – Note: Beginning January 1, 2021, the VAT
Subject to rules and regulations the Secretary withholding system shall shift from final to a
of Finance may promulgate, upon the creditable system.
recommendation of the CIR, the tax imposed
or prescribed by the NIRC on certain specified ii. Withholding Tax on Compensation
items of income shall be withheld by payor-
corporation and/or person. Except in the case of minimum wage earner,
every employer making payment of wages
N.B. Sec. 57 contains an extensive list of taxes. shall deduct and withhold upon such wages a
These items of income include taxes on certain tax determined in accordance with the rules
passive incomes (interest, dividends), capital and regulations to be prescribed by the
gains tax (shares not traded, real property), Secretary of Finance, upon recommendation of
branch profit remittance tax, and certain the CIR.
payments to nonresident aliens /foreign
corporations.] d. Fringe Benefits Tax
Withholding of creditable tax at source – Note: See earlier discussion on Fringe Benefits
The Secretary of Finance may, upon the under Gross Income.
recommendation of the CIR, require the
withholding of a tax on the items of income
payable to natural or juridical persons, residing
in the Philippines, by payor-
corporation/persons as provided for by law, at
the rate of not less than 1% but not more than
32%, which shall be credited against the
income tax liability of the taxpayer for the
taxable year. Provided, That, beginning
January 1, 2019, the rate of withholding shall
not be less than one percent (1%) but not more
than fifteen percent (15%) of the income
payment. [Sec. 57 (B), NIRC]
Page 115 of 256

TAXATION 2
TAXATION LAW
Page 116 of 256

Taxable objects/subjects:
TRANSFER TAXES 1. Right/privilege of the deceased person to
transmit his/her estate to his/her lawful
heirs and beneficiaries at the time of death;
2. Certain transfers, during his lifetime, which
A. ESTATE TAX are made by law as equivalent to
testamentary disposition.
1. Basic Principles, Concept, Justification Theories for its Imposition:

and Definition 1. Benefits-received theory – The State
collects the tax because of the services it
Estate tax is an excise tax on the right of renders in the distribution of the estate of
transmitting property at the time of death and the decedent, either by law or in
on the privilege that a person is given in accordance with his will.
controlling to a certain extent the disposition of 2. Privilege theory or state partnership
his property to take effect upon death. [Vitug theory – Succession to the property of a
and Acosta at 211] deceased person is not a right but a
privilege granted by the State and
Estate tax is levied upon the transfer of the net consequently, the legislature can
estate [Sec. 84, NIRC]. constitutionally burden such succession
with a tax
1. Estate tax accrues at the time of the 3. Ability-to-pay theory – Receipt of
decedent’s death, distinct from the inheritance is in the nature of unearned
obligation to pay the same as fixed by law. wealth which creates an ability to pay the
2. The tax is measured by the value of the tax and thus contributes to government
property AT THE TIME OF DEATH. income.
Subsequent appreciation or depreciation is 4. Redistribution of wealth theory – The
immaterial; imposition of estate tax reduces the
3. Estate taxation is governed by the statute property received by the successor, which
in force at the time of the death of the helps promote a more equitable distribution
decedent. Tax laws cannot be given of wealth in society.
retroactive effect unless they explicitly
provide for it. [Sec. 3, RR 12-2018] a. Time and Transfer of Properties
Nature, Purpose, and Object The rights to the succession are transmitted
It is a transfer tax (i.e. an excise tax on the from the moment of the death of the decedent.
right of transmitting property), not a property [Art. 777, Civil Code]. The decedent’s estate
tax. Unlike the old inheritance tax, estate tax is includes property to the extent of the interest
a tax on the right to transfer and not the right to therein of the decedent at the time of his death.
inherit property. [Sec. 85(A), NIRC]
Purpose: To tax the shift of economic benefits The executor or administrator shall not deliver
and enjoyment of property from the dead to the a distributive share to any party interested in
living. the estate despite the transfer of properties and
rights at the time of death, unless there is a
certification from CIR that estate tax has been
paid. [Sec. 94, NIRC]
Page 117 of 256

Time of death governs: 2. Classification of Decedent

1. The determination of the extent of the
decedent’s interest for computing his gross Estate Tax applies only to individuals. The
estate. decedent may be classified into:
2. The statute that governs estate taxation. 1. Citizens and residents (RC/NRC/RA) or
3. The accrual of the estate tax. 2. Non-resident alien (NRA).
Taxable Transfers Concept of residence

1. Transfers Mortis Causa. These are For purposes of estate taxation, “residence”
gratuitous transfers that take effect after refers to domicile, the permanent home or the
death, either testate or intestate. These are place to which whenever absent, one intends
subject to estate tax. to return (animus revertendi), and depends on
facts and circumstances, in the sense that they
A donation which purports to be one inter disclose intent. It is, therefore, not necessarily
vivos but withholds from the donee the right the actual place of residence. [Corre v Tan
to dispose of the donated property during Corre, G.R. No. L-10128 (1956)
the donor's lifetime is in truth one mortis
causa. [Maglasang v Heirs of Cabatingan, Situs of Intangible Personal Properties
G.R. No. 131953 (2002)] General Rule: Mobilia Sequuntur Personam
(movables follow the person)
2. Transfers Inter Vivos. Gratuitous Principle: Taxation of intangible personal
transfers that take effect during the lifetime properties (such as credits, bills, bank deposits
of the donor. (See Donor’s Tax for promissory notes, and corporate stocks)
requisites) follows the residence/domicile of the owner.
[Collector v Fisher, G.R. No. L-11622 (1961)]
General Rule: Donation Inter Vivos is subject
to donor’s tax. Exception: When it is inconsistent with
express provisions of law.
Exceptions: Donation Inter Vivos is subject to Exception to the exception: Rule of
estate tax when it is treated by law as Reciprocity with respect to an NRA.
substitutes for testamentary dispositions:
a. Transfers in contemplation of death [Sec. Intangible Properties which are considered
85(B), NIRC] situated in the Philippines [Sec 104, NIRC]
b. Revocable transfers [Sec. 85(C), NIRC] 1. Franchise which must be exercised in the
c. Transfers of property arising under general Philippines
power of appointment [Sec. 85(D), NIRC] 2. Shares, obligations or bonds issued by any
d. Transfers for insufficient consideration corporation or sociedad anonima
[Sec. 85(G), NIRC] organized or constituted in the Philippines
in accordance with its laws
Note: These transfers would be included in the 3. Shares, obligations or bonds issued by any
computation of the gross value of estate. foreign corporation 85% of the business of
which is located in the Philippines
4. Shares, obligations or bonds issued by any
foreign corporation if such shares,
obligations or bonds have acquired a
business situs in the Philippines
Page 118 of 256

5. Shares or rights in any partnership, none is available on the date of

business or industry established in the death
Philippines b. If unlisted = book value at the time
Rule of Reciprocity of death (common shares) or par
There is reciprocity if the foreign country of value (preferred shares) [Sec. 5, RR
which the decedent was a citizen and resident 12-2018]
at the time of his death:
1. Did not impose a transfer tax of any Note: In determining the book value, appraisal
character, in respect of intangible surplus and the value assigned to preferred
personal property of citizens of the shares, if any, shall not be considered. The
Philippines not residing in that foreign valuation of unlisted shares shall be exempt
country; OR from the provisions of RR 6-2013, which
2. Allowed a similar exemption from prescribes the use of the Adjusted Net Asset
transfer tax in respect of intangible Method. [Sec. 5, RR 12-2018]
personal property owned by citizens
of the Philippines not residing in that Units of Participation in Any Association,
country Recreation or Amusement Club (golf, polo,
etc.)
If there is reciprocity, the intangible personal FMV shall be the bid price nearest the date of
property of an NRA shall not be included in his death published in any newspaper or
gross estate. If there is no reciprocity, such publication of general circulation. [Sec. 5, RR
intangible personal property will be included. 12-2018]
[Sec. 104, NIRC]
Right to Usufruct, Use or Habitation, and
Valuation of Gross Estate [Sec. 88, NIRC] Annuity
General Rule: Gross Estate = FMV at the time The probable life of the beneficiary in
of the decedent’s death [Sec. 5, RR 12-2018] accordance with the latest basic standard
mortality table shall be taken into account.
Real Property [Sec. 5, RR 12-2018]
1. Appraised value, whichever is higher
between: 3. Composition of Gross Estate
a. FMV, as determined by the
Commissioner of Internal Revenue Items to be included in the Gross Estate
(zonal value) or [Sec. 85, NIRC]
b. FMV, as shown in the schedule of 1. Decedent’s interest [Sec. 85(A), NIRC] –
values fixed by the Provincial or City This includes property owned by the
Assessor. decedent actually and physically
2. If there is an improvement, the value of present in his estate at the time of his
improvement is the construction cost per death [MAMALATEO 2014 at 358];
building permit or the FMV per latest tax 2. Properties not physically in the estate, such
declaration. [Sec. 5, RR 12-2018] as:
a. Transfers in contemplation of death
Personal Property [Sec. 85(B), NIRC];
1. FMV at the time of death. b. Revocable transfers [Sec. 85(C),
2. Shares of stocks NIRC];
a. If listed = FMV is the mean between c. Property passing under general
the highest and lowest quotation at power of appointment [Sec. 85(D),
a date nearest the date of death, if NIRC];
Page 119 of 256

d. Proceeds of life insurance [Sec. purpose of avoiding the tax. The decedent’s
85(E), NIRC]; motive is a question of fact. Thus, the
e. Prior interest [Sec. 85(F), NIRC] imminence of death may afford convincing
f. Transfers for insufficient evidence of the impelling cause of transfer.
consideration [Sec. 85(G), NIRC]; [MAMALATEO, Reviewer on Taxation]
i. Decedent’s interest [Sec. 85(A), iii. Revocable Transfers [Sec. 85(C),

NIRC] NIRC]
All property owned by the decedent to the General Rule: A transfer is revocable where:
extent of his interest therein at the time of his 1. There is a transfer by trust or
death. This includes any interest, having value otherwise,
or capable of being valued or transferred, in
property owned or possessed by the decedent Exception: In case of a bona fide sale
at the time of his death., This also includes for an adequate and full consideration
those transferred by the decedent at the time in money or money’s worth
of his death.
2. The enjoyment thereof was subject at
Examples: the date of his death to any change
a. dividend declared on or before death, but through the exercise of a power (in
is received by the estate after death whatever capacity exercisable) by:
b. partnership profits which have accrued a. The decedent alone;
b. The decedent in conjunction with
before his death, but received after death
any other person (without regard to
when or from what source the
ii. Transfers in Contemplation of Death decedent acquired such power), to
[Sec. 85(B), NIRC] alter, amend, revoke, or terminate;
or
It is a transfer in contemplation of death if the c. Where any such power is
decedent either has retained for his life or for relinquished in contemplation of
any period which does not in fact end before the decedent death.
his death:
a. the possession or enjoyment of, or the right Note: The power to alter, amend or revoke shall
to the income from the property, or be considered to exist on the date of the
b. the right, either alone or in conjunction with decedent’s death even though:
any person, to designate the person who a) The exercise of the power is subject to
shall possess or enjoy the property or the a precedent giving of notice, or
income therefrom b) The alteration, amendment or
revocation takes effect only on the
expiration of a stated period after the
Exception: In case of a bona fide sale for an
exercise of the power, whether or not
adequate and full consideration in money or
on or before the date of the decedent’s
money's worth
death notice has been given or the
power has been exercised.
Note: The term “in contemplation of death”
c) If notice has not been given or the
does not refer to the general expectation of
power has not been exercised before
death. The words mean that it is the thought
the date of his death, such notice shall
of death, as a controlling motive, which
be considered to have been given, or
induces the disposition of the property for the
Page 120 of 256

the power exercised, on the date of his v. Proceeds of Life Insurance [Sec.
death. 85(E), NIRC]
iv. Property Passing under a Special Inclusion of proceeds of life insurance to the
Power of Appointment [Sec. 85(D), gross estate depends on (i) the designated
NIRC] beneficiary; (ii) the revocability of the
insurance; and (iii) the period and source of
Power of Appointment – the right to funds used in premiums.
designate the person or property who shall
enjoy and possess certain property from a When included in the gross estate
donor or a prior decedent. Proceeds of life insurance taken out by the
a. General Power of Appointment (GPA): decedent on his own life shall be included in
when it gives to the decedent the power to the gross estate when the beneficiary is:
appoint any person he pleases including 1. The estate of the deceased, his executor or
administrator, irrespective of whether or
himself, thus having as full dominion over
not the insured retained the power of
the property as though he owned it revocation; or
b. Special Power of Appointment (SPA): 2. Any beneficiary designated in the policy,
when the decedent can appoint only except when designation is irrevocable.
among a designated class of persons other
than himself, his estate, the creditors of his When not taxable
estate [AmJur] 1. Irrevocably designated; how done
a. By expressly stating it in the policy
(if not stated, the designation is
General Rule: Property passing under a GPA
PRESUMED to be REVOCABLE);
is excluded from gross estate
b. By not changing the beneficiary
during the lifetime of the insured, it
Exception: Included in the gross estate if the
is deemed irrevocable. [Sec. 11,
property arises under a GPA exercised by the
RA 10607 (2013)]
decedent:
2. Accident insurance proceeds as the Tax
1. By will; or
Code specifically mentions only life
2. By deed executed in contemplation of, or
insurance policies
intended to take effect in possession or
3. Proceeds of a group insurance policy taken
enjoyment at or after his death; or
out by a company for its employees.
3. By deed under which he has retained for
4. Amount receivable by any beneficiary
his life or any period not ascertainable
irrevocably designated in the policy of
without reference to his death or for any
insurance by the insured. The transfer is
period which does not in fact end before his
absolute and the insured did not retain any
death –
legal interest in the insurance.
a. The possession or enjoyment of, or the
5. Proceeds of insurance policies issued by
right to the income from the property; or
the GSIS are exempt from all taxes; [PD
b. The right, either alone or in conjunction
1146]
with any person, to designate the
6. Benefits accruing under the SSS Law [RA
persons who shall enjoy or possess the
1161]
property or the income therefrom.
7. Proceeds of life insurance payable to heirs
of deceased members of military personnel
[RA 360]
Page 121 of 256

To determine the conjugal or separate Capital of the Surviving Spouse [Sec.85(H),

character of proceeds, the following factors NIRC]
are considered: It is NOT part of the gross estate of the
1. Policy was taken before marriage – deceased spouse.
source of funds determines ownership of
the proceeds of life insurance The capital of the surviving spouse is
2. Policy was taken during marriage: considered an exclusion from the deceased’s
a. Beneficiary is estate of the gross estate.
insured – proceeds are presumed
conjugal; hence, one-half share of b. Allowable Deductions and
the surviving spouse is not taxable Exclusions from Estate
b. Beneficiary is third person –
proceeds are payable to Deductions and/or losses already deducted
beneficiary even if premiums were from gross income can no longer be
paid out of the conjugal interest deducted from gross estate. Deductions
[MAMALATEO] should not be compensated for by any
insurance or extrajudicial settlement.
vi. Prior Interest [Sec. 85(F), NIRC] Otherwise, they are not valid deductions.
The subsections pertaining to (1) transfers in 1. Ordinary Deductions

contemplation of death, (2) revocable transfers
and (3) proceeds of life insurance shall apply to a. Losses, Indebtedness and
the transfers, trusts, estates, interests, rights, Taxes, Etc. (LIT)
powers and relinquishment of powers whether
made, created, arising, existing, exercised or i. Claims Against the Estate
relinquished before or after the effectivity of the [Sec. 86 (A)(2)]
NIRC.
“Claims” generally mean debts or demands of
vii. Transfers for Insufficient a pecuniary nature which could have been
Consideration [Sec. 85(G), NIRC] enforced against the deceased in his lifetime
and could have been reduced to simple money
This refers to any (1) transfer in contemplation judgments. Claims against the estate or
of death, (2) revocable transfer or (3) property indebtedness in respect of property may arise
passing under GPA that is made, created, out of contract, tort, or operation of law. [Sec.
exercised or relinquished for a consideration in 6(2), RR 12-2018]
money or money’s worth, but is NOT a bona
fide sale for an adequate and full consideration Requisites for Deductibility [Sec. 6 (2.1) and
in money or money’s worth. (2.2), RR 12-2018].
a. The liability represents a personal
The value to be included in the gross estate is obligation of the deceased existing at the
the excess of the FMV of the property at the time of his death;
time of the decedent’s death over the b. The liability was contracted in good faith
consideration received. and for adequate and full consideration in
money or money’s worth;
Note: The transfer is subject to estate tax if the c. The claim must be a debt or claim which is
3 instances mentioned are present. Otherwise, valid in law and enforceable in court;
it is subject to donor’s tax. d. The indebtedness must not have been
condoned by the creditor or the action to
Page 122 of 256

collect from the decedent must not have Note: Where the settlement is made through
prescribed; and the Court in a testate or intestate proceeding,
e. They must be reasonably certain in pertinent documents filed with the Court
amount, and substantiated. evidencing the claims against the estate, and
the Court Order approving the said claims, if
Substantiation Requirements [Sec. 6 (2.2), already issued, in addition to the documents
RR 12-2018]. mentioned in the preceding paragraphs. [Sec.
In case of simple loan (including advances): 6(2.2.3), RR 12-2018]
a. The debt instrument must be duly
notarized at the time the indebtedness ii. Claims against Insolvent
was incurred, except for loans granted by Persons [Sec. 86 (A)(3),
financial institutions where notarization is NIRC]
not part of the business practice/policy.
b. Duly notarized Certification from the These are claims of the deceased against
creditor as to the unpaid balance of the insolvent persons as defined under RA 10142
debt, including interest as of the time of (The Financial Rehabilitation and Insolvency
death. Act of 2010) and other existing laws, where the
c. Proof of financial capacity of the value of the decedent’s interest therein is
creditor to lend the amount at the time the included in the value of the gross estate. [Sec.
loan was granted, as well as its latest 6(3), RR 12-2018]
audited balance sheet showing the unpaid
balance of the decedent-debtor. Requirements for deductibility:
d. A statement under oath executed by the 1. The full amount owed by the insolvent must
administrator or executor of the estate first be included in the decedent’s gross
reflecting the disposition of the proceeds of estate; and
the loan if it was contracted within 3 2. The incapacity of the debtor to pay his
years prior to the death of the decedent. obligation should be proven, although a
judicial declaration of insolvency is not
If the unpaid obligation arose from required. [Monserrat v. Collector of Internal
purchase of goods or services: Revenue, CTA Case No. 11 (1955)]
a. Documents evidencing the purchase of
goods or service (e.g., sales Note: If the insolvent could only pay a partial
invoice/delivery receipt or contract for amount, the full amount owed shall be included
services), and statement of account given in the gross estate, and the amount
by the creditor uncollectible shall be allowed as a deduction.
b. Duly notarized certification from the
creditor as to the unpaid balance of the iii. Unpaid Mortgages, Losses,
debt, including interest as of the time of and Taxes [Sec. 86(A)(4),
death. NIRC]
c. Certified true copy of the latest audited
balance sheet of the creditor with a Unpaid Mortgages
detailed schedule of its receivable showing Requisites for Deductibility [Sec. 6(4.1), RR 12-
the unpaid balance of the decedent-debtor. 2018]:
A certified true copy of the updated latest a. The value of the decedent’s interest
subsidiary ledger/records of the debtor- therein, undiminished by such mortgage or
decedent, should likewise be submitted. indebtedness, is included in the value of
the gross estates.
Page 123 of 256

b. The mortgages were contracted bona fide

and for an adequate and full consideration Casualty loss can be allowed as deduction
in money or money’s worth. in one instance only, either for income tax
or estate tax purposes. [Sec. 6(A)(5)), Rev.
Note: In case the loan of the decedent is only Reg 2-2003]
an accommodation loan where the loan
proceeds went to another person, the value of Note: See Formula for computing Ordinary
the unpaid loan must be included as a Deductions of NRA below (footnotes under
receivable of the estate. If there is a legal table).
impediment to recognize the same as a
receivable of the estate, said unpaid obligation b. Property Previously Taxed
shall not be allowed as a deduction. In all (Vanishing Deduction) [Sec.
instances, the mortgaged property, to the 86(A)(5)]
extent of the decedent’s interest therein,
should always form part of the gross taxable This is an amount allowed to reduce the gross
estate. [Sec. 6(4), RR 12-2018] estate where the property was previously
subjected to transfer taxes, either donor’s tax
iv. Unpaid Taxes [Sec. 6(4.2), RR or estate tax.
12-2018]
Requisites for deductibility:
Requisites for Deductibility: 1. Death – The present decedent died within
a. Taxes which have accrued as of or before 5 YEARS from the date of death of the prior
the death of the decedent, and decedent OR the date of gift.
b. Unpaid as of the time of his death, 2. Identity of the property – The property
regardless of whether or not it was incurred can be identified as the one received from
in connection with trade or business. prior decedent or donor.
3. Inclusion of the property – The property
Casualty Losses must have formed part of the gross estate
Requisites for Deductibility: situated in the Philippines of the prior
a. Incurred during the settlement of the estate decedent, or have been included in the
b. Arising from fires, storms, shipwreck, or total amount of the gifts of the donor.
other casualties, or from robbery, theft, or 4. Previous taxation of property – The
embezzlement estate tax on the prior succession, or the
c. Not compensated for by insurance or donor’s tax on the gift must have been
otherwise finally determined and paid by the prior
d. At the filing of the estate tax return, such decedent or by the donor.
losses have NOT been claimed as a 5. No previous vanishing deduction on the
deduction for income tax purposes in an property – No such deduction on the
income tax return property was allowed in determining the
e. Incurred not later than the last day for the value of the net estate of the prior
payment of the estate tax (i.e., 1 YEAR decedent. This is intended to preclude the
from decedent’s death).. Therefore, all application of vanishing deduction on the
casualty losses after the prescribed period same property more than once.
from the payment of tax are not deductible.
Steps (L.I.A.R):
Value to deduct: The difference of the FMV 1. Lower value – Identify the property and its
before and after incurring the loss. proper value (i.e., the value at the time
[AMPONGAN] previously taxed or the value of the
Page 124 of 256

property in the present estate, whichever is Note: Amount of Vanishing Deduction is

lower) deducted from the exclusive property of the
decedent, NOT from the conjugal property.
2. Initial Basis - Deduct any mortgage or lien
paid by the present decedent to arrive at c. Transfers for Public Use [Sec.
the initial basis. 86(A)(6)]
3. Actual or Final Basis - From the initial
basis, deduct the proportionate amount for Requisites for deductibility:
(a) claims against the estate, (b) claims 1. The disposition is in a last will and
against insolvent persons, (c) unpaid testament
mortgages, taxes and casualty losses, and 2. To take effect after death
(d) transfers for public use [pars. 2, 3, 4 and 3. In favor of the Government of the Republic
6 of Sec. 86(A) of the NIRC] based on the of the Philippines, or any political
ratio of the initial basis over the gross subdivision thereof
estate. Thus, deductions are only Losses 4. Exclusively for public purposes
Indebtedness and Taxes (LIT) and 5. The value of the property given is included
Transfer for Public Use (TPU). in the gross estate.
Formula for proportionate deduction:

2. Special Deductions
𝐼𝑛𝑖𝑡𝑖𝑎𝑙 𝐵𝑎𝑠𝑖𝑠
𝑥 (𝐿𝐼𝑇
𝐺𝑟𝑜𝑠𝑠 𝑒𝑠𝑡𝑎𝑡𝑒 𝑜𝑓 𝑝𝑟𝑒𝑠𝑒𝑛𝑡 𝑑𝑒𝑐𝑒𝑑𝑒𝑛𝑡 a. Family Home [Sec. 86(A)(7),
+ 𝑇𝑃𝑈) NIRC; Sec. 6(7), RR 12-2018]
Family home – The dwelling house, including

4. Rate - Multiply the actual basis by the the land on which it is situated, where the
applicable rate based on the length of time husband and wife, or a head of the family, and
the property has been acquired: members of their family reside, as certified to
by the Barangay Captain of the locality. It is
More than Not more than Rate deemed constituted on the house and lot from
- 1 year 100% the time it is actually occupied as the family
1 year 2 years 80% residence and considered as such for as long
2 years 3 years 60% as any of its beneficiaries actually resides
3 years 4 years 40% therein.
4 years 5 years 20%
Temporary absence from the constituted family
home due to travel or studies or work abroad,
FORMULA: etc. does not interrupt actual occupancy. The
family home is generally characterized by
Value Taken of Property (Lower) permanency, that is, the place to which one still
Less: Mortgage debt paid, if any intends to return.
= Initial Basis
Less: Proportionate Deduction It must be part of the ACP/CPG/exclusive
= Actual or Final Basis property of the decedent. It may also be
Multiplied by Applicable Rate constituted by an unmarried head of a family on
= VANISHING DEDUCTION his or her own property.
Page 125 of 256

For purposes of availing this deduction, a b. Standard Deduction [Sec.

person may constitute only one family home. 86(A)(1), NIRC]
[Sec. 6(7.1), RR 12-2018 citing Arts. 152, 153,
156 and 161, Family Code] An amount equivalent to P5,000,000 shall be
deducted from the gross estate without need
Requisites for Deductibility [Sec. 6(7.2), RR of substantiation.
12-2018]
1. The decedent was married (or if single, was For NRAs, the Standard Deduction is
the head of the family). P500,000 [Sec. 86 (B)(1)].Amounts Received
2. Along with the decedent, any of the by Heirs Under RA 49171 [Sec. 86(A)(8),
beneficiaries must be dwelling in the family NIRC]
home.
3. The family home as well as the land on Any amount received by the heirs from the
which it stands must be owned by the decedent’s employer as a consequence of the
decedent. death of the decedent-employee in accordance
4. The family home must be the actual with RA 4917, provided that such amount is
residential home of the decedent and his included in the gross estate of the decedent.
family at the time of his death, as certified
by the Barangay Captain of the locality This includes retirement benefits given by
where the same is situated. private firms with a reasonable private benefit
5. The total value of the family home must be plan, if the employee is not less than 50 years
included as part of the gross estate. old and has been with the same employer for
6. Allowable deduction must be in an amount at least 10 years. Such benefit may be availed
equivalent to whichever is lowest of: of only once.
a. the current FMV of the family home as
declared or included in the gross 3. Net Share of Surviving Spouse in
estate, or CPG/ACP [Sec. 86(C), NIRC; Sec. 6(9),
b. the extent of the decedent’s interest RR 12-2018]
(whether conjugal/community or
exclusive property), or (Compare with Capital of Surviving Spouse
c. P10,000,000. [AMPONGAN, 2017 and which is excluded from the gross estate).
TABAG, 2019]
The amount deductible from the net estate of
Beneficiaries of a Family Home [Sec. 6(7), the decedent is the net share of the surviving
RR 12-2018] spouse in the conjugal property. The net share
1. The husband and wife, or an unmarried is equivalent to ½ of the conjugal property after
person who is the head of a family; and deducting the obligations chargeable to such
2. Their parents, ascendants, descendants, property. The net share of the surviving spouse
brothers and sisters, whether the is neither an ordinary nor a special deduction.
relationship be legitimate or illegitimate,
who are living in the family home and who
depend upon the head of the family for
legal support.
1 An Act Providing that Retirement Benefits of Employees
of Private Firms shall not be subject to attachment, levy,

execution or any tax whatsoever
Page 126 of 256

c. Summary of the Composition of the Gross Estate and Exclusions, Deductions

therefrom
RC/NRC/RA NRA
Composition and Determination of GROSS Estate [Sec. 85, NIRC]
All properties, real or personal, tangible or Only properties situated in the Philippines,
intangible, wherever situated [Sec. 4, RR 12- provided that the inclusion of intangible personal
2018] property is subject to the rule of reciprocity
provided for under Section 104 of the NIRC [Sec.
4, RR 12-2018]
Note: If there is reciprocity, intangible assets are

excluded from gross estate
Exclusions from Gross Estate [Sec 85(H) and Sec 87 of NIRC, and special laws]
Exclusion
a. Separate property of the surviving spouse [Sec. 85 (H), NIRC]
Exemptions under the NIRC

b. Merger of usufruct in the owner of the naked title [Sec. 87 (A), NIRC]
c. Transmission of inheritance or legacy by fiduciary heir or legatee to the fideicommissary
[Sec. 87 (B), NIRC]
d. Transmission from the first heir, legatee, or donee in favor of another beneficiary, in
accordance with the desire of the predecessor [Sec. 87 (C), NIRC]
e. Bequests, devises, legacies or transfers to social welfare, cultural and charitable institutions,
no part of the net income of which inures to the benefit of any individual: provided that not
more than 30% of said transfer shall be used for administration purposes [Sec. 87 (D), NIRC]
Exemptions under special laws

f. GSIS proceeds/benefits [P.D. 1146]
g. Accruals from SSS [R.A. 1161]
h. Proceeds of life insurance where the beneficiary is irrevocably appointed
i. Proceeds of life insurance under a group insurance taken by employer
j. War damage payments and Benefits received from US Veterans Administration [R.A. 227]
k. Transfer of property to the National Government or to any of its political subdivisions
l. Benefits received by beneficiaries residing in the Philippines under laws administered by the
US Veteran Administration [R.A. 360]
m. Grants and donations to the Intramuros Administration [P.D 1616]
n. Properties held in trust by the decedent
o. Acquisition and/or transfer expressly declared as not taxable
p. Personal equity and Retirement Account (PERA) assets of the decedent-contributor (Sec.
14, RA 9505) [TABAG, 2019 at 43-44]
Page 127 of 256

Deductions from Gross Estate to arrive at the Net Estate [Sec. 86 (A) and (B), NIRC]
Ordinary deductions2:
Ordinary deductions:
a. Proportionate deductions for LIT3
a. Losses, indebtedness, taxes (LIT)
● Claims against the estate
● Claims against the estate
● Claims against insolvent persons
● Claims against insolvent persons
● Unpaid mortgages
● Unpaid mortgages
● Taxes
● Taxes
● Casualty losses
● Casualty losses
b. Vanishing deductions (property previously
b. Vanishing deductions (property previously
taxed)
taxed)
c. Transfers for public use
c. Transfers for public use
Special deduction
Special deductions
d. Standard Deduction of P500,000
d. Family home (max of P10Million)
e. Standard deduction (fixed at P5Million)
Net share of the surviving spouse
f. Amounts received under R.A. 4917
N.B: No deduction for Family home and
Net share of the surviving spouse
Amounts received under R.A. 4917
[Sec. 6, RR 12-2018]
[Sec. 7, RR 12-2018]
* Funeral expenses, judicial expenses, and medical expenses are no longer allowed as
deductions under the TRAIN LAW
Gross Estate vis-à-vis Net Estate Formula for Estate Tax

Gross Estate Net Estate Gross Estate (Sec. 85)
Value at the time of The value of the Less: Deductions (Sec. 86(A), (B))
death of all the gross estate less -------------------------------------------------------
decedent’s property allowable Net estate before share of surviving spouse, if
wherever situated deductions; also married
called net taxable Less: ½ share of the surviving spouse in the
HOWEVER, in the estate, after deducting conjugal property (Sec. 86(C))
case of an NRA at the the net share of -------------------------------------------------------
time of his death, only surviving spouse, if
= Net taxable estate
that part of the entire any.
Multiply by: tax rate of 6% (Sec. 84)
gross estate which is
-------------------------------------------------------
situated in the Tax Rate: FLAT RATE
Philippines shall be OF 6% [Sec. 84, NIRC] = Estate Tax Due
included in his taxable Tax Base: Net Estate Less: Tax Credit, if any (Sec. 86(E)
estate. [Sec 85, NIRC] -------------------------------------------------------
= Estate Tax Payable
2 No deduction shall be allowed for NRA, if the executor, administrator, or anyone of the heirs DID NOT include in the return required
to be filed under Section 90 of the Code the value at the time of the decedent’s death of that part of his gross estate NOT situated in
the Philippines. [Sec. 86 (D), NIRC]
3 Formula for Proportionate Deductions of NRA [Sec. 7, RR 12-2018]: Allowable Deduction = Phil Gross Estate World Gross Estate
x LIT
Page 128 of 256

d. Tax Credit for Estate Taxes Paid in Compare the tax credit allowed under
a Foreign Country Limitation A and Limitation B. The lower of the
two amounts is the final allowable tax credit.
Estate Tax Credit is a remedy against
international double taxation to minimize the The resulting amount will be compared to the
onerous effect of taxing the same property actual tax paid to the foreign country. The
twice. lower amount will be the final allowable tax
credit.
General Rule: The estate tax imposed by the
NIRC shall be credited with the amounts of any Illustration:
estate tax imposed by the authority of a foreign A resident decedent died leaving the following:
country. [Sec. 86(E), NIRC] Net estate, Philippines P8,000,000
Net estate, Indonesia P3,000,000
Who may claim: RC/NRC/RA. Only the estate Estate tax paid, Indonesia P200,000
of a decedent who was a citizen or a resident Net estate, UK P2,000,000
of the Philippines at the time of his death can Estate tax paid, UK P100,000
claim tax credit for any estate tax paid to a Net estate, Australia (P1,000,000)
foreign country.
Question: How much is the estate tax payable
LIMITATIONS ON CREDIT after estate tax credit?
1. Specific Country Limitation; Limit A
The amount of the credit in respect to the ANSWER: P480,000
tax paid to any country shall not exceed the Total taxable net estate P12,000,000
same proportion of the tax against which Multiplied by tax rate 6%
such credit is taken, which the decedent's Estate tax due 720,000
net estate situated within such country Less: estate tax credit (240,000)*
taxable under the tax code bears to his Estate tax payable 480,000
entire net estate. [Sec. 86(E)(2)(a), NIRC]
SOLUTION:
Tax Credit Limit A: Limit A:
𝑁𝑒𝑡 𝐸𝑠𝑡𝑎𝑡𝑒 (𝑝𝑒𝑟 𝐹𝑜𝑟𝑒𝑖𝑔𝑛 𝐶𝑜𝑢𝑛𝑡𝑟𝑦) Indonesia:
𝑥 𝑃𝐻 𝐸𝑠𝑡𝑎𝑡𝑒 𝑇𝑎𝑥
𝐸𝑛𝑡𝑖𝑟𝑒 𝑁𝑒𝑡 𝐸𝑠𝑡𝑎𝑡𝑒
Limit P180,000**
Actual P200,000
2. Global Limitation; Limit B Allowed P180,000
The total amount of the credit shall not UK:
exceed the same proportion of the tax
against which such credit is taken, which Limit P120,000**
the decedent's net estate situated outside Actual P100,000
the Philippines taxable under the tax code Allowed P100,000
bears to his entire net estate. [Sec.
86(E)(2)(b), NIRC] Total Allowed (Indonesia and UK):
P280,000
Tax Credit Limit B:
𝑁𝑒𝑡 𝐸𝑠𝑡𝑎𝑡𝑒 (𝑎𝑙𝑙 𝐹𝑜𝑟𝑒𝑖𝑔𝑛 𝐶𝑜𝑢𝑛𝑡𝑟𝑖𝑒𝑠) Limit B:
𝑥 𝑃𝐻 𝐸𝑠𝑡𝑎𝑡𝑒 𝑇𝑎𝑥
𝐸𝑛𝑡𝑖𝑟𝑒 𝑁𝑒𝑡 𝐸𝑠𝑡𝑎𝑡𝑒
Limit P240,000***
Actual P300,000
Page 129 of 256

Allowed: P240,000 **Apply the Limit A computation (per foreign

country)
*Allowable Tax Credit (lower between Limit A ***Apply the Limit B computation (total of all
or B): P240,000 foreign countries)
e. Filing of estate tax returns and NRA, of that part of his gross estate
payment of estate tax situated in the Philippines;
b. Itemized deductions from gross estate
Filing of Notice of Death allowed in Sec. 86; and
[Sec. 89, NIRC] – Repealed by the TRAIN Law c. The amount of tax due whether paid or
[R.A. 10963]. Hence, no such requirement. still due and outstanding.
FILING OF ESTATE TAX RETURN [Sec. 90, Period for Filing [Sec. 90 (B), NIRC]
NIRC] General Rule: Must be filed within 1 year from
the decedent's death.
When Required (Copies in duplicate) [Sec.
90 (A), NIRC] Exception [Sec. 90 (C), NIRC]
1. In all cases of transfers subject to estate The CIR shall have authority to grant, in
tax, or meritorious cases, a reasonable extension not
2. Regardless of the gross value of the estate, exceeding 30 days for filing the return.
when the said estate consists of registered
or registrable property such as real Who will file: The executor, administrator, or
property, motor vehicle, shares of stock or any of the legal heirs, as the case may be,
other similar property for which a clearance under oath. If there is no executor or
from the BIR is required as a condition administrator appointed, qualified, and acting
precedent for the transfer of ownership within the Philippines, any person in actual or
thereof in the name of the transferee. constructive possession of any property of the
decedent may file this return.
Contents [Sec. 90 (A), NIRC]
The return shall be filed in duplicate, setting Where to file the estate tax return and pay
forth: the tax due [Sec. 90(D), NIRC]
1. The value of the gross estate of the 1. Resident Citizen (RC and RA): The
decedent at the time of his death, or in case executor or administrator shall register the
of a NRA, of that part of his gross estate estate of the decedent and secure a new
situated in the Philippines; TIN from the RDO where the decedent was
2. The deductions allowed from gross estate domiciled at the time of his death and shall
in determining the net taxable estate; and file the estate tax return and pay the
3. Such part of such information as may at the corresponding estate tax with:
time be ascertainable and such a. An authorized agent bank (AAB), or
supplemental data as may be necessary to b. Revenue District Officer (RDO), or
establish the correct taxes. c. Collection Officer, or
4. For estate tax returns showing a gross d. Duly authorized Treasurer of the city or
value exceeding P5,000,000, there must municipality in which the decedent was
be a statement duly certified to by a CPA domiciled at the time of his death
containing the following:
a. Itemized assets of the decedent with
their corresponding gross value at the
time of his death, or in the case of a
Page 130 of 256

2. Non-resident decedent (NRA/NRC) The heirs shall be liable in proportion to their

a. With executor or administrator in the share in the inheritance. [Marcos v. CA, G.R.
Philippines No. 120880 (1997)]
The estate tax return shall be filed with and
the TIN for the estate shall be secured from Extension of Payment [Sec. 91(B), NIRC]
the RDO where such executor or The CIR may allow an extension of payment, if
administrator is registered. payment on the due date would impose undue
hardship upon the estate or any of the heirs:
If the executor or administrator is not 1. Extension not to exceed 5 years, in case
registered, it shall be filed with and the TIN the estate is settled judicially, or
for the estate shall be secured from the 2. Two (2) years in case the estate is settled
RDO having jurisdiction over the executor extrajudicially.
or administrator’s legal residence. [Section
9(8), RR 12-2018] Where the taxes are assessed by reason of
negligence, intentional disregard of rules
b. Without an executor or and regulations, or fraud on the part of the
administrator in the Philippines taxpayer, no extension will be granted by the
The estate tax return shall be filed with and CIR.
the TIN for the estate shall be secured from
the Office of the Commissioner through If extension is granted, the CIR may require the
RDO 39 QC. [Section 9(8), RR 12-2018] executor, or administrator, or beneficiary, as
the case may be, to furnish a bond in such
PAYMENT OF ESTATE TAX [Sec. 91, NIRC] amount, not exceeding double the amount of
the tax and with such sureties as the CIR
Time of Payment [Sec. 91(A), NIRC] deems necessary, conditioned upon the
“Pay as you file”: At the time the return is filed payment of the said tax in accordance with the
by the executor, administrator or the heirs. terms of the extension.
Who are liable for the payment of estate Effects of granting an extension
taxes 1. Payment of the amount in respect of which
Primarily, the estate, through the executor or the extension is granted on or before the
administrator. date of the expiration of the period of the
1. Payment shall be made before the delivery extension
of the distributive share in the inheritance. 2. Suspension of the running of the statute of
2. If there are two or more executors or limitations for deficiency assessment for
administrators, all of them are severally the period of any extension
liable for the payment of the tax. 3. Any amount paid after the statutory due
3. The tax clearance issued by the CIR or the date of the tax, but within the extension
RDO having jurisdiction over the estate will period, shall be subject to interest but not
serve as the authority to distribute the to surcharge. [Sec. 9(5), RR 12-2018]
remaining properties.
Payment by installment [Sec. 91(C), NIRC]
Subsidiarily, the heirs or beneficiaries, for the In case the available cash of the estate is
payment of that portion of the estate tax which insufficient to pay the total estate tax due,
his distributive share bears to the value of the payment by installment shall be made within 2
total net estate. [Sec. 9(9), RR 12-2018] years from the statutory date of filing, without
civil penalty and interest.
Page 131 of 256

Restitution of tax paid [Sec. 96, NIRC] transfer is in trust or otherwise, whether the gift
If, after the payment of the estate tax, new is direct or indirect, and whether the property is
obligations of the decedent appear, and the real or personal, tangible or intangible. [Sec.
persons interested satisfied them by order of 98(B), NIRC]
the court, they shall have a right to the
restitution of the proportional part of the tax It is a tax on donations. Thus, it is a tax on –
paid. 1. An act of the donor disposing gratuitously
of a thing/right in favor of a donee; and
Withdrawal from bank account of decedent 2. Sales, exchanges or other transfers of
General rule: If a bank has knowledge of the properties, other than real property
death of a person, who maintained a bank (defined in Sec. 24(D)) classified as capital
deposit account alone, or jointly with another, asset within the Philippines, for less than
it shall allow withdrawal from the said deposit an adequate and full consideration in
account, subject to a final withholding tax of money or money’s worth. [Sec. 100, NIRC]
6%. [Sec. 97, NIRC]
Nature of donor’s tax
Exception: No withholding tax shall be 1. Donor’s tax is not a property tax, but a tax
imposed where the bank deposit accounts imposed on the transfer of property by way
have been duly included in the gross estate of of gift inter vivos (i.e., an excise tax). [Sec
the decedent and the estate tax due thereon 12, RR 12-2018 citing Lladoc v. CIR, G.R.
has been paid provided that an eCAR is No. L-19201 (1965)]
presented prior to withdrawing. [Sec. 10, RR 2. It is a direct tax imposed on the donor.
12-2018] 3. It applies to both natural and juridical
persons. [AMPONGAN, 2014]
Tax deficiency after distribution of
properties Object: To prevent avoidance of income tax
1. The BIR may recover the deficiency from through the device of splitting income among
all the heirs and collect from each of them numerous donees, who are usually members
the amount proportionate to the inheritance of a family, or into many trusts, with the donor
received. thereby escaping the effect of the progressive
2. By virtue of a lien created under Sec. 219, rates of income tax.
it may go after one heir and subject the
property he received from the estate to the Time and Transfer of Properties
payment of estate tax. Such heir may seek Donor’s tax shall not apply unless and until
reimbursement from the other heirs. there is a completed gift. The transfer of
property by gift is perfected from the moment
the donor knows of the acceptance by the
B. DONOR’S TAX donee; it is completed by delivery, either
actually or constructively, of the donated
property, to the donee. Thus, the law in force at
the time of the perfection/completion of the
1. Basic Principles, Concept, donation shall govern the imposition of the
and Definition donor’s tax. [Sec. 12, RR 12-2018]
A donor’s tax is levied, assessed, collected

and paid upon the transfer by any person,
resident or nonresident, of the property by gift.
[Sec. 98(A), NIRC]. It shall apply whether the
Page 132 of 256

2. Requisites of Valid Donation 3. Transfers which May be

Considered as Donation
Art. 725, NCC. Donation is an act of
liberality whereby a person disposes a. Sale, Exchange, or Transfer of
gratuitously of a thing or right in favor of Property for Less Than Adequate
another, who accepts it.
and Full Consideration
Requisites of a VALID and COMPLETE
General rule: Where property, other than real
donation
property referred to in Sec. 24(D), is
1. Donative intent of the donor
transferred for less than an adequate and full
Donative intent must be present in a direct
consideration, then the amount by which the
gift. It is not, however, required in transfers
FMV of the property exceeded the value of the
of property for less than adequate and full
consideration shall be deemed a gift.
consideration. [MAMALATEO; Sec. 100,
NIRC]
Exception: A transfer of property made in the
2. Capacity of the donor
ordinary course of business (a transaction
3. Delivery of the donated property
which is bona fide, at arm’s length, and free
4. Acceptance of the donee
from any donative intent), will be considered as
5. Donation must be in the proper form
made for an adequate and full consideration in
a. Movable: orally or in writing if value is
money or money’s worth. [Sec. 100, NIRC]
equal to or less than P5,000.
Otherwise, it shall be in writing.
Requisites:
b. Immovable: must be made in a public
The excess of FMV over the value of the
document.
consideration will be considered a donation
and subject to donor’s tax when:
Re: Acceptance [Sec. 12, RR 12-2018]
1. The transfer was for less than adequate
1. For movables exceeding P5,000 –
and full consideration;
Acceptance shall be in writing [Art. 748,
2. Such transfer was effective during his
Civil Code]
lifetime (inter vivos); and
2. For immovable [Art. 749, Civil Code] –
3. It involves property other than real property
a. Must be in the same deed of donation;
classified as capital asset within the
OR
Philippines as defined in Sec. 24(D). [Sec.
b. In a separate public document – the
100, NIRC]
donor shall be notified thereof in an
authentic form, and this step shall be
Note: Real property considered as capital
noted in both instruments
assets under the Tax Code are exempted
from this rule because the taxable value
Note: Acceptance shall not take effect
taken into account in the computation of
unless it is done during the lifetime of
tax is the higher of either the gross selling
the donor and of the donee [Art. 746,
price or the FMV; not gain. [Sec. 100 in
Civil Code].
relation to Sec. 24(D), NIRC]
Note: The absence of donative intent does not

exempt the sales of stock transaction from
donor's tax since Sec. 100 of the NIRC
categorically states that the amount by which
the fair market value of the property exceeded
Page 133 of 256

the value of the consideration shall be deemed If donor is:

a gift. [Philam Life v. Secretary of Finance, G.R. 1. RC/NRC/RA/DC/RFC = liable for donor’s
No. 210997 (2014)] tax REGARDLESS of where the gift was
made or where property is located
b. Condonation or Remission of Debt 2. NRA/NRFC = liable for donor’s tax only if
the property donated is within the
Condonation or remission of debt is defined as Philippines
an act of liberality, by virtue of which, without
receiving any equivalent, the creditor Situs of Intangible Personal Properties
renounces the enforcement of the obligation, General Rule: Mobilia Sequuntur Personam
which is extinguished in its entirety or in that Principle: Taxation of intangible personal
part or aspect of the same to which the properties (such as credits, bills, bank deposits
remission refers. It is an essential promissory notes, and corporate stocks)
characteristic of remission that it be gratuitous. follows the residence/domicile of owner
[Dizon v. CTA, G.R. No. 140944, (2008)] thereof. Situs is the domicile or residence of the
owner. [Collector v. Fisher, supra.]
c. Renunciation of inheritance
Exceptions: When it is inconsistent with
Renunciation in favor of other heirs is subject express provisions of law
to donor’s tax. [Sec 12, RR 12-2018]
a. Renunciation by the surviving spouse of Rule of Reciprocity
his/her share in the ACP/CPG after the Same as in Estate Tax, supra.
dissolution of the marriage in favor of heirs
of the deceased spouse or any other
person/s
b. Renunciation by an heir, specifically and
categorically in favor of identified heir/s to
the exclusion or disadvantage of the other
co-heirs in the hereditary estate
However, general renunciation by an heir,

including the surviving spouse, of his/her
share in the hereditary estate left by the
decedent is NOT subject to donor’s tax. [Sec
12, RR 12-2018]
4. Classification of Donor
Donor’s tax applies to individuals and
corporations. Classifications:
1. Residents (RC/RA/DC/RFC)
2. Non-Residents (NRC/NRA/NRFC)
Such classification is important in determining

the deductions from the gross gift of the donor,
and in filing the return.
Page 134 of 256

5. Determination of Gross Gift (including Composition and

Exemptions)
RC/NRC/RA/DC/RFC NRA/NRFC
Composition and Determination of Gross Gift
All properties, real or personal, tangible or ● Only properties situated in the
intangible, wherever situated Philippines, provided that the inclusion
of intangible personal property is subject
to the rule of reciprocity
Note: If there is reciprocity, intangible assets are

excluded from gross gifts [Sec. 104, NIRC]
Exemptions from GROSS gift to arrive at NET Gifts
Gifts made to or for the use of the National Government or any entity created by any of its agencies
which is not conducted for profit, or to any political subdivision of the said Government. [Sec. 101
(A)(1), NIRC]
Gifts in favor of an educational and/or charitable, religious, cultural or social welfare corporation,
institution, accredited nongovernment organization, trust or philanthropic organization or research
institution or organization: Provided not more than 30% of said gifts will be used by such donee for
administration purposes.
For the purpose of this exemption, a 'non-profit educational and/or charitable corporation,
institution, accredited nongovernment organization, trust or philanthropic organization
and/or research institution or organization' is a:
1. school, college or university and/or charitable corporation,
2. accredited nongovernment organization, or;
3. trust or philanthropic organization and/or research institution or organization, that is:
a. incorporated as a non-stock entity,
b. paying no dividends,
c. governed by trustees who receive no compensation, and
d. devoting all its income, whether students' fees or gifts, donation, subsidies or other forms
of philanthropy, to the accomplishment and promotion of the purposes enumerated in its
Articles of Incorporation. [Sec. 101 (A)(2), NIRC]
Common Exemptions
1. Encumbrances on the property donated if assumed by the donee in the deed of donation.
2. Donations made to entities exempted under special laws
NOT SUBJECT TO DONOR’S TAX

1. Contributions to a candidate or political Under R.A. 7166, contributions duly
party for campaign purposes duly reported reported to the BIR are not subject to
to COMELEC [Sec. 99 (B), NIRC] donor’s tax, as long as it is utilized in his
campaign. Unutilized/excess campaign
Donation to a Political Candidate funds, that is, campaign contributions net
Prior to R.A. 7166, a donation for a political of the candidate’s campaign expenditures,
candidate was subject to donor’s tax. shall be considered as subject to income
[ACCRA v CIR, G.R. No. 120721 (2005)] tax and must be included in the candidate’s
Page 135 of 256

taxable income as stated in his/her ITR subtracted from the gross value of the property
[Sec. 2, RR 7-2011] donated to arrive at the value of the net gift,
which is the tax base for donor’s tax. [DE
2. Gift to Parish Priest or Church (applies only LEON]
to real property tax)
3. Onerous donations or donations in 1. Gifts made to or for the use of the National
exchange for goods/services (they are Government or any entity created by any of
subject to income tax) its agencies which is not conducted for
profit, or to any political subdivision of the
SUBJECT TO DONOR’S TAX said Government. [Sec. 101 (A)(1), NIRC]
Gratuitous Donations to Homeowners’ 2. Gifts in favor of an educational and/or
Association charitable, religious, cultural or social
welfare corporation, institution, accredited
Valuation of Gifts Made in Property nongovernment organization, trust or
philanthropic organization or research
TAXABLE BASE: institution or organization: Provided not
Net gifts - the net economic benefit from the more than 30% of said gifts will be used by
transfer that accrues to the donee AT THE such donee for administration purposes.
TIME OF DONATION [Sec. 101 (A)(2), NIRC]
3. Encumbrances on the property donated if
1. If gift is personal property = FMV at the assumed by the donee in the deed of
time of donation [Sec. 102, NIRC] donation.
2. If gift is real property = whichever is 4. Donations made to entities exempted
HIGHER under special laws.
a. FMV as determined by the CIR (Zonal a. Aquaculture Department of the
Value) or Southeast Asian Fisheries
b. FMV in the latest schedule of values Development Center of the Philippines
fixed by the provincial and city b. Development Academy of the
assessor (MV per Tax Declaration) Philippines
[Sec. 102 in relation to Sec. 88(B), c. Integrated Bar of the Philippines
NIRC] d. International Rice Research Institute
3. If there is an improvement = construction e. National Museum
cost per building permit or the FMV based f. National Library
on the latest tax declaration. g. National Social Action Council
4. If unlisted stocks = Adjusted Net Asset h. Ramon Magsaysay Foundation
Method shall be used whereby all assets i. Philippine Inventor’s Commission
and liabilities are adjusted to fair market j. Philippine American Cultural
values. The net of adjusted asset minus Foundation
the adjusted liability value is the indicated k. Task Force on Human Settlement on
value of the equity. [RR 6-2013] the donation of equipment, materials
and services
Note: Where the consideration is fictitious,
the entire value of the property shall be subject
to donor’s tax.
Exemptions of Gifts from Donor’s Tax
It is more appropriate to consider these

“exemptions” as “deductions” as they are
Page 136 of 256

6. Tax Credit for Donor’s Taxes Contents

1. Each gift made during the calendar year
Paid in a Foreign Country which is to be included in computing net
gifts;
Donor’s tax credit 2. The deductions claimed and allowable;
The donor’s tax imposed upon a citizen or 3. Any previous net gifts made during the
resident at the time of the donation shall be same calendar year;
credited with the amount of any donor’s tax, of 4. The name of the donee; and
any character and description, imposed by the 5. Such further information as the CIR may
authority of a foreign country. [Sec. 101(C), require. [Sec. 103(A), NIRC]
NIRC]
Period for Filing
Who may claim the tax credit: The return must be filed within 30 days after
Resident or Citizen: RC, NRC, RA, DC, RFC the date when the gift was made or completed.
(not NRA or NRFC) The tax due thereon shall be paid at the same
time that the return is filed (pay-as-you-file).
Limitations on credit [Sec. 103(B), NIRC]
1. Per Country Limit
𝑁𝑒𝑡 𝐺𝑖𝑓𝑡 (𝐹𝑜𝑟𝑒𝑖𝑔𝑛 𝐶𝑜𝑢𝑛𝑡𝑟𝑦)
𝑥 𝑃𝐻 𝐷𝑜𝑛𝑜𝑟′𝑠 𝑇𝑎𝑥 Who will file: Any person who made a gift
𝐸𝑛𝑡𝑖𝑟𝑒 𝑁𝑒𝑡 𝐺𝑖𝑓𝑡 (whether direct or indirect), is required to file
2. Worldwide Limit under oath a donor’s tax return in duplicate
𝑁𝑒𝑡 𝐺𝑖𝑓𝑡 (𝐴𝑙𝑙 𝐹𝑜𝑟𝑒𝑖𝑔𝑛 𝐶𝑜𝑢𝑛𝑡𝑟𝑖𝑒𝑠) [Sec. 103(A), NIRC]
𝑥 𝑃𝐻 𝐷𝑜𝑛𝑜𝑟′𝑠 𝑇𝑎𝑥
𝐸𝑛𝑡𝑖𝑟𝑒 𝑁𝑒𝑡 𝐺𝑖𝑓𝑡
Where to File the Donor’s Tax Return and
Pay the Tax Due
Note: The allowable tax credit is the lower of
the tax limit and the actual tax paid. 1. Residents
Unless the CIR permits otherwise, the return
shall be filed and the tax paid to:
7. Filing of Return and Payment a. AAB
b. Revenue District Officer
Persons liable
c. Revenue Collection Officer
Every person, whether natural or juridical,
d. duly Authorized City or Municipal
resident or non-resident, who transfers or
Treasurer where the donor was
causes to transfer property by gift, whether in
domiciled at the time of the transfer
trust or otherwise, whether the gift is direct or
[Sec. 103(B), NIRC]
indirect and whether the property is real or
personal, tangible or intangible [Sec. 98, NIRC]
2. Non-residents
The Philippine Embassy or Consulate in the
Donor’s tax return
country where he is domiciled at the time of the
Separate return is filed for each gift made on
transfer, or
different dates during the year reflecting therein
any previous net gifts made in the same
Directly with the Office of the Commissioner
calendar year. If the gift involves
(i.e., Revenue District Office No. 39 – South
conjugal/community property, each spouse
QC) [Sec. 103(B), NIRC; Sec. 15(B), RR 12-
shall file separate return with respect to his/her
2018]
respective share in the said property.
Page 137 of 256

PAYMENT OF DONOR’S TAX General Formula

Payment: “Pay as you file” Gross Gifts
The donor’s tax is paid upon filing of the return Less: Allowable deductions
[Sec. 103(B), NIRC] -----------------------------------------------------
Net Gifts
Notice of donation to donee institutions Less: Exempt gift of P250,000
duly accredited by the Philippine Council -----------------------------------------------------
for NGO Certification, Inc. (PCNC) Taxable Net Gift
Requisites to be exempt from donor’s tax and Multiply by: Tax rate of 6%
to claim full deduction: -----------------------------------------------------
1. Donor must give notice on every donation = Donor’s Tax Due
worth at least P50,000 Less: Tax Credit, if any
2. Notice is given to the RDO which has -----------------------------------------------------
jurisdiction over donor’s place of business = Donor’s Tax Payable
3. Notice must be given within 30 days after
receipt of the qualified done institution’s If there are several gifts during the year
Certificate of Donation Gifts made on a certain date
4. Certificate of Donation must be attached to Less: Deductions from gross gifts
the Notice -----------------------------------------------------
5. Notice must state that not more than 30% Net gifts made on a certain date
of the donation for the taxable year shall be Add: Prior gifts during the year
used by the qualified donee institution for -----------------------------------------------------
administration purposes [Sec. 15 (C), RR = Aggregate Net Gifts
12-2018 in relation to Sec. 101(A)(2) and -----------------------------------------------------
(B)(2)] Less: Exempt gift of P250,000
-----------------------------------------------------
Tax Basis Taxable Net Gift
Multiply by: Tax rate of 6%
The tax for each calendar year shall be -----------------------------------------------------
computed on the basis of the total gifts in = Donor’s Tax on Aggregate Gifts
excess of P250,000 made during the calendar Less: Tax credits:
year. Payments for Prior Net Gifts During the
Year
Tax Rate: FLAT RATE OF 6% [Sec. 99, NIRC] Foreign Donor’s Tax Credit
-----------------------------------------------------
= Donor’s Tax Payable, if any
Page 138 of 256

SUMMARY OF TRANSFER TAXES

TRANSFER TAXES
Estate Tax Donor’s Tax
Time for filing a return and payment of tax
FILED: FILED: within thirty (30) days after the gift
GR: within one (1) year from the decedent's (donation) is made
death.
EXC: extension not exceeding 30 days (in PAID: upon filing of return
meritorious cases)
Note:
PAID: upon filing of return and before the ● If the gift involves conjugal/community
delivery of the distributive share in the property, each spouse shall file separate
inheritance to any heir or beneficiary return with regard to his/her respective share
in the property.
Extension: (when payment on the due date ● A separate return is filed for each gift made
would impose undue hardship) not to exceed: on different dates during the year reflecting
● 5 years, in case the estate is settled therein any previous net gifts made in the
judicially; or same calendar year.
● 2 years if settled extra-judicially.
N.B. when extension is granted, a bond may be
required by CIR not exceeding double the
amount of tax
Where to file and to whom paid
Resident Resident
To the Authorized Agent Bank (AAB), or To the AAB, RDO, RCO or duly authorized
Revenue District Officer (RDO), Revenue Treasurer of the city or municipality in which the
Collection Officer (RCO) or duly authorized decedent was domiciled at the time of his death
Treasurer of the city or municipality in the
Revenue District Office having jurisdiction over Non-resident
the place of domicile of the decedent at the time ● The Philippine Embassy or Consulate in
of his death the country where he is domiciled at the
time of the transfer, or
Nonresident ● Directly with the Office of the
Commissioner.
● With executor/administrator in the
Philippines: to the RDO where such
executor/administrator is registered or,
if not registered, to the RDO having
jurisdiction over his/her legal residence
● Without executor/administrator in the
Philippines: to the Office of the
Commissioner through RDO No. 39-
South QC
Who should file
● The executor/administrator or any of the Any person, natural or juridical, resident or non-
legal heirs of the decedent, whether resident resident, who transfers or causes to transfer
or non-resident of the Philippines, under any property by gift, whether in trust or otherwise,
of the following situations: whether the gift is direct or indirect and whether
Page 139 of 256

the property is real or personal, tangible or

1. In all cases of transfers subject to estate intangible.
tax, or
2. Regardless of the gross value of the
estate, where the said estate consists of
registered or registrable property such
as real property, motor vehicle, shares
of stock or other similar property for
which a clearance from the BIR is
required as a condition precedent for the
transfer of ownership thereof in the
name of the transferee; or
● If there is no executor or administrator
appointed, qualified, and acting within the
Philippines, then any person in actual or
constructive possession of any property of
the decedent.
N.B: The executor/administrator has the primary

obligation to pay the estate tax but the heir or
beneficiary has subsidiary liability for the
payment of that portion of the estate which his
distributive share bears to the value of the total
net estate. The extent of his liability, however,
shall in no case exceed the value of his share in
the inheritance.
ESTATE TAX
EXCLUSIVE COMMUNITY TOTAL

Gross Estate4
Real Properties (excluding family home)
Personal Properties
4 DO NOT INCLUDE: Exemptions
Page 140 of 256

Add:
Taxable Transfers & Others Value Taken of Property
Revocable Transfers/Donation Mortis Causa Less: Mortgage debt paid, if any
Transfers in contemplation of death
Property passing under GPA Initial Basis
Transfers for insufficient consideration5 Less: Proportionate Deduction**
Decedent’s Interest Accrued6
Proceeds of Life Insurance7 Final Basis
Family Home Multiplied by Vanishing Deduction Rate
Claims against an Insolvent Person8
Amount received by heirs VANISHING DEDUCTION
Less: (Ordinary Deductions)

**Proportionate Deduction:
LIT9: Claims against the Estate
=
Claims against Insolvent Persons
Unpaid Mortgages, Taxes and Casualty
Losses
Vanishing Deductions
Transfers for Public Use
Retirement Benefits Received by Heirs10
Estate After Ordinary Deductions

Less: (Special Deductions11)
Standard Deduction12
Family Home13
Amounts received by heirs
5 Amount included in the GE = FMV at the time of death – consideration amount
6 Accrued before his death but only received after his death, e.g., dividends declared on/before, and received after death; partnership’s
profit earned on/before and received after, accrued interest and rents on/before and collected after death
7 Beneficiary must be the estate of the decedent, or the executor or administrator or any beneficiary designated as revocable. If
premiums are paid using conjugal funds, the proceeds shall form part of the conjugal property.
8 Full amount of the receivable. However, the uncollectible amount may be deducted from GE under LIT.
9 In case of an NRA, these are prorated.
10 This is not allowed as deduction for an NRA.
11 These are not allowable deductions when taxpayer is NRA (except SD of P500,000).
12 P5M for RC/NRC/RA, P500,000 for NRA
13 Maximum of P10M
Page 141 of 256

Net Estate If only 1 country is involved: (whichever is lower)

Less: Share of Surviving Spouse
(Community Property less Ordinary
Estate Tax Credit =
Deductions = Net Community
Property
OR actual estate tax paid to foreign country
Divided by 2)
Net Taxable Estate If two or more countries are involved: (whichever is lower)
Multiply by Tax Rate of 6%
Estate Tax Credit =
OR
OR actual estate tax paid to foreign country
Estate Tax Due

Less: Tax Credit14, if any
ESTATE TAX PAYABLE
Illustration: [RR 12-2018]
(1) Decedent is an unmarried head of the family, family home more than P10,000,000:
Real and personal properties P 14,000,000

Family Home 30,000,000
Gross Estate P44,000,000
Less: Deductions
Ordinary Deductions
Unpaid real estate tax (2,000,000)
Special Deductions
Family Home (10,000,000)
Standard Deduction (5,000,000)
Total Deductions (17,000,000)
NET TAXABLE ESTATE P27,000,000
Although the family home is valued at P30 million, the maximum allowable deduction for the
family home is P10 million only.
14 Applies only to RC/NRC/RA
Page 142 of 256

(2) Decedent is married, the family home is conjugal property, more than P10,000,000:
Exclusive Conjugal Total

Conjugal Properties:
Family Home P30,000,000 P30,000,000
Real and personal properties 14,000,000 14,000,000
Exclusive Properties: 5,000,000 5,000,000
Gross Estate 5,000,000 44,000,000 P49,000,000
Less:
Ordinary Deductions
Conjugal Ordinary (2,000,000) (2,000,000)
Deductions
Net Conjugal Estate 42,000,000
Special Deductions
Family Home (10,000,000)
Standard Deduction (5,000,000)
Total Deductions (17,000,000)
Net Estate 32,000,000

Less: ½ Share of Surviving
Spouse (21,000,000)
Conjugal Property P44,000,000
Conjugal Deductions (2,000,000)
Net Conjugal Estate P42,000,000
(P42,000,000/2)
NET TAXABLE ESTATE P11,000,000
Page 143 of 256

Aggregate Net Gifts xxx

Less: Exempt Gift of P250,000 xxx
Taxable Net Gift xxx
Multiply by Tax Rate of 6% xxx
Donor’s Tax Due xxx

Less: Tax Credit Payments:
Donor’s tax on previous net gifts during the year xxx
Foreign Donor’s Tax Credit16 xxx
DONOR’S TAX PAYABLE xxx
Illustration: [RR 12-2018]

Donations were made on January 30, 2018 at P2,000,000; on March 30, 2018 at P1,000,000; and August 15, 2018 at
P500,000.
Solution/computation:
Date of donation Amount Donor’s Tax

1. January 30, 2018 P2,000,000
January 30, 2018 donation 2,000,000
Less: Exempt Gift (250,000)
1,750,000 P105,000
2. March 30, 2018 1,000,000
March 30, 2018 donation 1,000,000
Add: January 30, 2018 donation 2,000,000
Total 2,750,000
Tax Due Thereon 165,000

Less: Tax due/paid on January donation 105,000
Tax due/payable on the March donation 60,000
3. August 15, 2018 500,000

August 15, 2018 donation 500,000
Add: January 2018 donation 2,000,000
March 2018 donation 1,000,000
Total 3,250,000
Tax Due Thereon 195,000

Less: Tax due/paid on Jan./March donation 165,000
Tax due/payable on the August donation 30,000
16 Applies only to RC/NRC/RA
Page 147 of 256

C. VALUE-ADDED TAX d. Indirect tax: Impact and Incidence

of Tax
(VAT)
Impact Incidence
1. Nature & Characteristics of
Refers to the statutory Refers to the buyer /
VAT taxpayer (i.e., the final consumer, the
seller/importer), the one who ultimately
a. Tax on value added one who collects tax bears the burden of
and pays to the taxation
It is imposed only on the value added of a government
taxpayer. “Value added” is the difference
between total sales of the taxpayer and his total
purchases for the same period subject also to e. Tax Credit Method
VAT. [MAMALATEO]
Under the VAT method of taxation, which is
b. Sales Tax invoice-based, an entity can credit against or
subtract from the VAT charged on its sales or
The taxpayer (seller) determines his tax liability outputs the VAT paid on its purchases, inputs
by computing the tax on the gross selling price and imports. [CIR v. Seagate, G.R. No. 153866
or gross receipts (output tax), and subtracting (2005)].
or crediting the VAT on the purchase (or
importation) of goods or services (input tax) The VAT payable is the excess of output tax
against the tax due on his own sale. over input tax:
VAT rate: 12% standard rate; 0% on certain OUTPUT VAT – INPUT VAT = VAT PAYABLE
sales or transactions or EXCESS INPUT TAX
VAT base: gross selling price or gross receipts Note: If input VAT is higher than output VAT,
the excess input tax is carried over to the
c. Tax on Consumption succeeding taxable quarter/s as tax credit.
However, any input tax attributable to zero-
VAT is a consumption tax imposed at every rated sales may instead be refunded or
stage of the distribution process on (i) the sale, credited against other internal revenue taxes.
barter, exchange, or lease of goods or [Sec. 4.110-7, RR 16-2005]
properties, (ii) rendition of services in the
course of trade or business, and (iii) the f. Destination Principle and Cross-
importation of goods, whether or not such Border Doctrine
imported goods are for use in business. [Sec.
4.105-2, RR 16-2005] General rule: The VAT system uses the
destination principle as a basis for the
jurisdictional reach of the tax. Goods and
services are taxed only in the country where
they are consumed. Thus, exports are zero-
rated, while imports are taxed. [CIR v.
American Express International, G.R. No.
152609 (2005)]
Page 148 of 256

Exception: Zero-rated services under Sec. CHARACTERISTICS OF A VAT-TAXABLE

108(b)(1)[1] and (2) TRANSACTION
Requisites for the exception to apply: General Characteristics/Nature:

1. The service is performed in the Philippines; 1. Percentage Tax – imposed by law not on
2. The service falls under any of the the thing or service but on the act (sale,
categories provided in Section 108(b) of barter, exchange, lease, importation, or
the Tax Code; and performance of service)
2. Ad Valorem Tax – the amount or rate is
Note: The recipient of such services must based on the gross selling price or gross
be doing business outside the Philippines. value in money, or the gross receipts
[CIR v. Burmeister, G.R. No. 153205 derived from the transaction
(2007)] 3. Indirect Tax – The seller is the one
statutorily liable for the payment of the tax,
3. It is paid for in acceptable foreign currency but the amount of the tax may be shifted or
that is accounted for in accordance with the passed on to the buyer, transferee or
regulations of the BSP. [CIR v. American lessee of the goods, properties or services.
Express International, G.R. No. 152609 [Sec. 105, NIRC]
(2005)]
Note: In the case of importation, the
In a zero-rated service, the place where the importer is the one liable for VAT. [Sec.
service is rendered determines the 4.105.2, RR 16-2005]
jurisdiction to impose the VAT. The place of
payment is immaterial; much less is the place 4. Excise Tax - a tax on the privilege of
where the output of the service will be further engaging in the business of selling goods
or ultimately used. [ibid.] or services, or in the importation of goods
5. Broad-based Tax on Consumption – VAT
CONSTITUTIONALITY OF VAT is levied on every sale of goods, properties
ABAKADA Guro Party List, et. al. v. Ermita, or services at all stages of manufacture,
G.R. No. 168056 (2005): production, and distribution of goods and
1. The VAT law is uniform: it provides a services. [MAMALATEO]
standard rate of 10% (now 12%) on all 6. Regressive Tax – By its very nature, VAT
goods or services and 0% rate on certain is regressive. The principle of progressive
sales and transactions. taxation has no relation with the VAT
2. It is equitable: The law is equipped with a system inasmuch as the VAT paid by the
threshold margin where VAT does not consumer or business for every goods
apply to sales of goods or services with bought or services enjoyed is the same
gross annual sales or receipts not regardless of income. [ABAKADA Guro
exceeding P1.5 million (now P3 million). Party List v. Executive Secretary, G.R.
3. VAT, by its very nature, is regressive, 168056 (2005)]
BUT the Constitution does not prohibit
the imposition of indirect taxes. What it ELEMENTS OF A VAT-TAXABLE
simply provides is that Congress shall TRANSACTION IN GENERAL
“evolve a progressive system of taxation”. 1. There must be a sale, barter, exchange, or
lease of goods or properties, performance
of service in the Philippines, or importation
of good
Page 149 of 256

2. The subject matter must be taxable goods Exceptions:

or properties or services a. A non-VAT-registered person whose
3. The sale must be made by a taxable annual gross sales or receipts do not
person in the course of trade or business exceed P3M.
or in the furtherance of one’s profession. b. Franchise grantees under Sec. 119 of
this Code whose annual gross receipts
Meaning of “in the course of trade or do not exceed P10M and who are not
business” (Rule of Regularity) VAT-registered.
The regular conduct or pursuit of a commercial
or economic activity, including transactions 2. Any person who imports goods, whether or
incidental thereto, by any person regardless of not in the course of business
whether or not the person engaged therein is a 3. Any person who voluntarily registers its
nonstock, nonprofit private organization business under the VAT system,
(irrespective of the disposition of its net income regardless of level of sales.
and whether or not it sells exclusively to
members or their guests), or government The term “person” refers to any individual,
entity. [Sec. 105, NIRC; Section 4.105-3, RR trust, estate, partnership, corporation, joint
16-2005] venture, cooperative or association [Sec.
4.105-1, RR 16-2005].
Exceptions:
1. Services rendered by non-resident foreign VAT and Percentage Tax
persons shall be considered as being General Rule: VAT and Percentage Tax cannot
rendered in the course of trade or be charged together. The transaction is subject
business, even if the performance of to either VAT or Other Percentage Tax, but not
services is not regular. [Section 4.105-3, both.
RR 16-2005]
2. Importation are subject to VAT whether or Exception: When a non-VAT registered person
not made in the course of trade or business erroneously issues a VAT invoice [Sec. 4.113-
[Sec. 4.105-1, RR 16-2005] 4, RR 16-2005]
3. Any business where the gross sales or
receipts do not exceed P100,000 during 3. Composition of Value-Added
the 12-month period shall be considered
principally for subsistence or livelihood and Tax
not in the course of trade or business.
Thus, they are exempt from VAT and a. On sale of goods or properties
percentage tax. [RMC 7-2014 in relation to
RR 7-2012] Transactions:
! Every sale, barter or exchange (actual sale
2. Persons Liable to Value- and in the course of trade or business)
! Transactions “deemed sale” of taxable
Added Tax goods or properties [Sec. 4.106-1, RR 16-
2005]
Persons Liable:
1. Any person who sells, barters, exchanges, Rate: 12% VAT [Sec. 106, NIRC]
or leases goods or properties, or who
renders services, in the course of trade or Who Pays: Seller/Transferor[Sec. 106(A),
business NIRC]
Page 150 of 256

Meaning of goods or properties

Commercial
Goods or properties – all tangible and
Property
intangible objects which are capable of
(Sale/Lease)
pecuniary estimation, including:
a. Real properties held primarily for sale to Residential If monthly rental ≤
customers or held for lease in the ordinary Units (Lease) P15,000 = VAT
course of trade or business; and OPT-exempt
b. The right or the privilege to use patent, If monthly rental >
copyright, design, or model, plan, secret P15,000 but
formula or process, goodwill, trademark, aggregate annual
trade brand or other like property or right; rentals ≤ P3M =
c. The right or the privilege to use in the subject to OPT
Philippines of any industrial, commercial or If monthly rental >
scientific equipment; P15,000 and
d. The right or the privilege to use motion aggregate annual
picture films, films, tapes and discs; rentals > P3M =
e. Radio, television, satellite transmission and subject to VAT
cable television time. [Sec. 106(A)(1),
NIRC] Sale of If SP > P1.5M =
Residential Lot subject to VAT
Requisites for Taxability of Sale of Goods If SP ≤ P1.5M = VAT-
or Personal Properties exempt
a. There is an actual or deemed sale of
goods or properties for a valuable Sale of If SP > P2.5M =
consideration Residential subject to VAT
b. Undertaken in the course of trade or House and Lot If SP ≤ P2.5M = VAT-
business exempt
c. For use or consumption in the
Philippines (regardless of the payment Sales of real properties subject to VAT
arrangements) Sale of real properties held primarily for sale to
d. Not exempt from VAT under Sec. 109 customers or held for lease in the ordinary
of the NIRC, special law, or course of trade or business of the seller shall
international agreement be subject to VAT. [Sec. 4.106-3, RR 16-2005]
[MAMALATEO]
Requisites for Taxability of Sale or
Exchange of Real Property
Summary of Rules on Transactions a. The seller executes a deed of sale,
Involving Real Properties barter or exchange, assignment or
Casual sale conveyance, or contract to sell of real
(Capital Subject to 6% CGT property.
Assets) b. The real property is located within the
Philippines.
Regular sales c. The seller or transferor is engaged in
(Ordinary Subject to 12% VAT real estate business either as a real
Assets): estate dealer, developer, or lessor.
d. The real property is held primarily for
sale or for lease in the ordinary course
of his trade or business, or at least an
Page 151 of 256

Exception: Zero-rated services under Sec. CHARACTERISTICS OF A VAT-TAXABLE

108(b)(1)[1] and (2) TRANSACTION
Requisites for the exception to apply: General Characteristics/Nature:

1. The service is performed in the Philippines; 1. Percentage Tax – imposed by law not on
2. The service falls under any of the the thing or service but on the act (sale,
categories provided in Section 108(b) of barter, exchange, lease, importation, or
the Tax Code; and performance of service)
2. Ad Valorem Tax – the amount or rate is
Note: The recipient of such services must based on the gross selling price or gross
be doing business outside the Philippines. value in money, or the gross receipts
[CIR v. Burmeister, G.R. No. 153205 derived from the transaction
(2007)] 3. Indirect Tax – The seller is the one
statutorily liable for the payment of the tax,
3. It is paid for in acceptable foreign currency but the amount of the tax may be shifted or
that is accounted for in accordance with the passed on to the buyer, transferee or
regulations of the BSP. [CIR v. American lessee of the goods, properties or services.
Express International, G.R. No. 152609 [Sec. 105, NIRC]
(2005)]
Note: In the case of importation, the
In a zero-rated service, the place where the importer is the one liable for VAT. [Sec.
service is rendered determines the 4.105.2, RR 16-2005]
jurisdiction to impose the VAT. The place of
payment is immaterial; much less is the place 4. Excise Tax - a tax on the privilege of
where the output of the service will be further engaging in the business of selling goods
or ultimately used. [ibid.] or services, or in the importation of goods
5. Broad-based Tax on Consumption – VAT
CONSTITUTIONALITY OF VAT is levied on every sale of goods, properties
ABAKADA Guro Party List, et. al. v. Ermita, or services at all stages of manufacture,
G.R. No. 168056 (2005): production, and distribution of goods and
1. The VAT law is uniform: it provides a services. [MAMALATEO]
standard rate of 10% (now 12%) on all 6. Regressive Tax – By its very nature, VAT
goods or services and 0% rate on certain is regressive. The principle of progressive
sales and transactions. taxation has no relation with the VAT
2. It is equitable: The law is equipped with a system inasmuch as the VAT paid by the
threshold margin where VAT does not consumer or business for every goods
apply to sales of goods or services with bought or services enjoyed is the same
gross annual sales or receipts not regardless of income. [ABAKADA Guro
exceeding P1.5 million (now P3 million). Party List v. Executive Secretary, G.R.
3. VAT, by its very nature, is regressive, 168056 (2005)]
BUT the Constitution does not prohibit
the imposition of indirect taxes. What it ELEMENTS OF A VAT-TAXABLE
simply provides is that Congress shall TRANSACTION IN GENERAL
“evolve a progressive system of taxation”. 1. There must be a sale, barter, exchange, or
lease of goods or properties, performance
of service in the Philippines, or importation
of good
Page 149 of 256

2. The subject matter must be taxable goods Exceptions:

or properties or services a. A non-VAT-registered person whose
3. The sale must be made by a taxable annual gross sales or receipts do not
person in the course of trade or business exceed P3M.
or in the furtherance of one’s profession. b. Franchise grantees under Sec. 119 of
this Code whose annual gross receipts
Meaning of “in the course of trade or do not exceed P10M and who are not
business” (Rule of Regularity) VAT-registered.
The regular conduct or pursuit of a commercial
or economic activity, including transactions 2. Any person who imports goods, whether or
incidental thereto, by any person regardless of not in the course of business
whether or not the person engaged therein is a 3. Any person who voluntarily registers its
nonstock, nonprofit private organization business under the VAT system,
(irrespective of the disposition of its net income regardless of level of sales.
and whether or not it sells exclusively to
members or their guests), or government The term “person” refers to any individual,
entity. [Sec. 105, NIRC; Section 4.105-3, RR trust, estate, partnership, corporation, joint
16-2005] venture, cooperative or association [Sec.
4.105-1, RR 16-2005].
Exceptions:
1. Services rendered by non-resident foreign VAT and Percentage Tax
persons shall be considered as being General Rule: VAT and Percentage Tax cannot
rendered in the course of trade or be charged together. The transaction is subject
business, even if the performance of to either VAT or Other Percentage Tax, but not
services is not regular. [Section 4.105-3, both.
RR 16-2005]
2. Importation are subject to VAT whether or Exception: When a non-VAT registered person
not made in the course of trade or business erroneously issues a VAT invoice [Sec. 4.113-
[Sec. 4.105-1, RR 16-2005] 4, RR 16-2005]
3. Any business where the gross sales or
receipts do not exceed P100,000 during 3. Composition of Value-Added
the 12-month period shall be considered
principally for subsistence or livelihood and Tax
not in the course of trade or business.
Thus, they are exempt from VAT and a. On sale of goods or properties
percentage tax. [RMC 7-2014 in relation to
RR 7-2012] Transactions:
! Every sale, barter or exchange (actual sale
2. Persons Liable to Value- and in the course of trade or business)
! Transactions “deemed sale” of taxable
Added Tax goods or properties [Sec. 4.106-1, RR 16-
2005]
Persons Liable:
1. Any person who sells, barters, exchanges, Rate: 12% VAT [Sec. 106, NIRC]
or leases goods or properties, or who
renders services, in the course of trade or Who Pays: Seller/Transferor[Sec. 106(A),
business NIRC]
Page 150 of 256

Meaning of goods or properties

Commercial
Goods or properties – all tangible and
Property
intangible objects which are capable of
(Sale/Lease)
pecuniary estimation, including:
a. Real properties held primarily for sale to Residential If monthly rental ≤
customers or held for lease in the ordinary Units (Lease) P15,000 = VAT
course of trade or business; and OPT-exempt
b. The right or the privilege to use patent, If monthly rental >
copyright, design, or model, plan, secret P15,000 but
formula or process, goodwill, trademark, aggregate annual
trade brand or other like property or right; rentals ≤ P3M =
c. The right or the privilege to use in the subject to OPT
Philippines of any industrial, commercial or If monthly rental >
scientific equipment; P15,000 and
d. The right or the privilege to use motion aggregate annual
picture films, films, tapes and discs; rentals > P3M =
e. Radio, television, satellite transmission and subject to VAT
cable television time. [Sec. 106(A)(1),
NIRC] Sale of If SP > P1.5M =
Residential Lot subject to VAT
Requisites for Taxability of Sale of Goods If SP ≤ P1.5M = VAT-
or Personal Properties exempt
a. There is an actual or deemed sale of
goods or properties for a valuable Sale of If SP > P2.5M =
consideration Residential subject to VAT
b. Undertaken in the course of trade or House and Lot If SP ≤ P2.5M = VAT-
business exempt
c. For use or consumption in the
Philippines (regardless of the payment Sales of real properties subject to VAT
arrangements) Sale of real properties held primarily for sale to
d. Not exempt from VAT under Sec. 109 customers or held for lease in the ordinary
of the NIRC, special law, or course of trade or business of the seller shall
international agreement be subject to VAT. [Sec. 4.106-3, RR 16-2005]
[MAMALATEO]
Requisites for Taxability of Sale or
Exchange of Real Property
Summary of Rules on Transactions a. The seller executes a deed of sale,
Involving Real Properties barter or exchange, assignment or
Casual sale conveyance, or contract to sell of real
(Capital Subject to 6% CGT property.
Assets) b. The real property is located within the
Philippines.
Regular sales c. The seller or transferor is engaged in
(Ordinary Subject to 12% VAT real estate business either as a real
Assets): estate dealer, developer, or lessor.
d. The real property is held primarily for
sale or for lease in the ordinary course
of his trade or business, or at least an
Page 151 of 256

ordinary asset used in the trade or Sale of Real Property NOT subject to VAT
business of the VAT taxpayer as an a. Sale of real properties not primarily held for
incident to his VAT-taxable activity. sale or lease in the course of trade or
e. The sale is not exempt from VAT under business
Sec. 109 of the NIRC, special law, or b. Real property utilized for low cost or
international agreement. socialized housing
[MAMALATEO] c. Residential lot valued at P1.5M and below
d. House and lot, and other residential
Modes of Sales of Real Estate; Effects dwellings valued at P2.5M and below
a. Cash sale – the entire selling price is [Sec. 109(1)(P)]
taxable in the month of sale
Note: Beginning January 1, 2021, the
b. Installment sales VAT exemption for sale of house and
1. Meaning of installment sale: a lot, and other residential dwellings shall
sale in which the initial payments in apply only to those with selling price of
the year of sale do not exceed 25% not more than P2,000,000.
Gross Selling Price (GSP)
2. Effect: VAT is recognized based e. Transfer of property to a corporation in
on collection, including interest and exchange for shares of stocks in a tax-
penalties, actually and/or free exchange under Sec. 40(C)(2) of
constructively received by the the NIRC [Sec. 109(1)(X), NIRC]
seller. [Sec. 4.106-3, RR 16-2005] f. Transmission of property to a trustee if
the property is to be merely held in trust
Note: “Initial payments” means for the trustor and/or beneficiary [Sec.
payment or payments which the seller 4.106-3, RR 16-2005]
receives before or upon execution of
the instrument of sale and payments Exception: If the property transferred is
which he expects or is scheduled to originally intended for sale, lease or
receive in cash or property during the use in the ordinary course of trade or
taxable year when the sale or business AND the transfer constitutes
disposition of the real property was a completed gift, the transfer is subject
made. It covers any down payment to VAT as a deemed sale transaction.
made and includes all payments The transfer is a completed gift if the
actually or constructively received transferor divests himself absolutely of
during the year of sale, the aggregate control over the property, i.e.,
of which determines the limit set by law. irrevocable transfer of corpus and/or
irrevocable designation of beneficiary.
c. Sale on a deferred-payment basis [Sec. 4.106-3, RR 16-2005]
1. Meaning: initial payments in the
year of sale exceed 25% of the i. Tax base: gross selling price
GSP
2. Effect: The transaction shall be Basis: Gross selling price or gross value in
treated as cash sale which makes money of the goods or properties sold,
the entire selling price taxable in bartered or exchanged.
the month of sale. Subsequent
payments are no longer subject to Meaning of Gross Selling Price (GSP): The
VAT. [Sec. 4.106-3, RR 16-2005] total amount of money or its equivalent which
the purchaser pays or is obligated to pay to the
Page 152 of 256

seller in consideration of the sale, barter or

exchange of the goods or properties, excluding These refer to the value of goods or
VAT. The excise tax, if any, on such goods or properties sold and subsequently returned
properties shall form part of the gross selling or for which allowances were granted by a
price [Sec. 106(A), NIRC] VAT-registered person.
• Excludes: VAT, sales discounts and, b. Sales Discounts – bona fide or regular
allowances and returns discounts given to purchasers, which are
• Includes: Excise tax paid, initial ascertainable and definitely agreed upon
payments, interests and penalties (if between the vendor and the vendee at the
installment), commission income (if time of sale
exported), purchase price, charges for 1. Must be determined and granted at
packing, delivery and insurance the time of sale
2. Must be expressly indicated in the
GSP in case of sale or exchange of real sales invoice and the amount
property forming part of the gross sales duly
a. The consideration stated in the sales recorded in the books of accounts
document or 3. The grant is not dependent upon
b. The fair market value (FMV) whichever is the happening of a future event
higher.
ii. Transactions deemed sale
Meaning of FMV – Whichever is higher of the
following: Rate: 12% VAT
1. The FMV as determined by the CIR (zonal
value) or Basis: Market value of the goods deemed sold
2. The FMV as shown in the schedule of as of the time of the occurrence of the
values of the Provincial and City Assessors transactions
(real property tax declaration). [Sec. 4.106-
4, RR 16-2005] However, in case of retirement or cessation of
business, the tax base shall be the acquisition
Note: If the VAT is not billed separately in cost or the current market price of the goods or
the document of sale, the stated selling properties, whichever is lower.
price or consideration shall be deemed
inclusive of VAT. However, if the GSP is In the case of a sale where the gross selling
based on the zonal value or market value price is unreasonably lower than the FMV, the
of the property, the zonal or market value actual market value shall be the tax base. The
shall be deemed exclusive of VAT. Thus, gross selling price is unreasonably lower than
the zonal value/market value, net of the the actual market value if it is lower by more
output VAT, should still be higher than the than 30% of the actual market value of the
consideration in the document of sale, same goods of the same quantity and quality
exclusive of the VAT. [Sec. 4.106-4, RR sold in the immediate locality on or nearest the
16-2005] date of sale. [Sec. 4.106-7, RR 16-2005]
Allowable Deductions from GSP The following are transactions deemed sale:
a. Sales returns and allowances – those for [Sec. 106(B), NIRC]
which a proper credit or refund was made a. Transfer, use or consumption not in the
during the month or quarter to the buyer for course of business of goods or properties
sales previously recorded as taxable sales originally intended for sale or for use in the
Page 153 of 256

course of business [Sec. 4.106-7(a)(1), RR proprietorship incorporates, or the

16-2005] sole proprietor sells his entire
business)
Example: when a VAT-registered (ii) dissolution of a partnership and
person withdraws goods from his creation of a new partnership which
business for his personal use takes over the business
Note: Transmission of property to a i. Change or cessation of

trustee, if such property is one for sale, status as value-added tax-
lease or use in the ordinary course of registered person
trade or business and the transfer
constitutes a completed gift, is subject Rate: 12% VAT
to VAT as a deemed sale transaction.
[Sec. 4.106-3, RR 16-2005] Basis: the acquisition cost or the current
market price of the goods or properties,
b. Distribution or transfer to: whichever is LOWER
VAT shall apply to goods disposed of or
(i) shareholders or investors as share existing as of a certain date if, under certain
in the profits of the VAT-registered circumstances, the status of a person as a
person; or VAT-registered person changes or is
terminated. [Sec. 106(C), NIRC]
(ii) creditors in payment of debt. [Sec.
4.106-7(a)(2), RR 16-2005] (a) Subject to VAT
c. Consignment of goods if actual sale is The 12% VAT is applicable to goods or

not made within 60 days following the properties originally intended for sale or
date such goods were consigned use in business and capital goods which
are existing as of the occurrence of the
Note: Consigned goods returned by the following:
consignee within the 60-day period are
not deemed sold. [Sec. 4.106-7(a)(3), a. Change of business activity from VAT
RR 16-2005] taxable status to VAT-exempt status –
Example: A VAT-registered person
d. Retirement from or cessation of engaged in a taxable activity like
business with respect to goods on wholesaler or retailer who decides to
hand discontinue such activity and engages
instead in life insurance business or in
This covers ALL goods on hand, any other business not subject to VAT.
whether capital goods, stock-in-trade,
supplies or materials, as of the date of b. Approval of request for cancellation of
such retirement or cessation, whether a registration due to reversion to
or not the business is continued by the exempt status
new owner or successor. [Sec. 4.106-
7(a)(3), RR 16-2005] c. Approval of request for cancellation of
registration due to:
Examples: 1. Reversion to exempt status
(i) change of ownership of the 2. A desire to revert to exempt status
business (e.g., when a sole after lapse of 3 consecutive years
Page 154 of 256

from the time of registration by a Who Pays: IMPORTER prior to the release of
person who voluntarily registered such goods from customs custody [Sec. 107
despite being exempt under Sec. (A), NIRC]
109(2) of the NIRC
3. Failure to exceed the threshold of Importer: any person who brings goods into
P3,000,000 by one who the Philippines, whether or not made in the
commenced business with the course of his trade or business, including non-
expectation of gross sales or exempt persons or entities who acquire tax-
receipts exceeding said threshold free imported goods from exempt persons,
[Sec. 4.106-8(a), RR 16-2005] entities or agencies [Sec. 4.107-1 (b), RR 16-
2005]
(b) Not Subject to VAT
Customs duty – amount of customs duty
VAT shall not apply to goods or properties legally due and paid by the importer
originally intended for sale or use in the
course of business which existing as of the Other similar chargers:
occurrence of the following: a. Other taxes (special import tax)
b. Bank charges
a. Change of control of a corporation by c. Arrastre charges
the acquisition of the controlling d. Wharfage dues
interest of such corporation by another e. Brokerage fees
stockholder (individual or corporate) or f. All other charges or expenses
group of stockholders.
Landed Cost - invoice amount including costs
b. Change in the trade or corporate name of loading, shipping and unloading, customs
of the business duties, freight, insurance, other charges,
excise tax (if any)
c. Merger or consolidation of
corporations: The unused input tax of Expenses incurred after the release of the
the dissolved corporation, as of the goods such as those incurred in delivering
date of merger or consolidation, shall goods do not form part of the landed cost.
be absorbed by the surviving or new
corporation. Transfer of Goods by Tax-Exempt Persons
(Technical Importation):
b. On importation of goods a. If the importer is tax-exempt, the
subsequent purchasers, transferees or
Rate: 12% VAT recipients who are non-exempt persons
shall be considered as importers who shall
Basis: Total value used by the Bureau of be liable for VAT due on such importation.
Customs (BOC) in determining tariff and b. The tax due on such importation shall
customs duties, plus customs duties, excise constitute a lien on the goods superior to all
taxes, if any, and other charges (such as charges or liens on the goods, irrespective
postage, commission) of the possessor thereof. [Sec. 107(B),
NIRC]
Where the customs duties are determined on
the basis of the quantity or volume of the
goods, VAT shall be based on the landed cost,
plus excise taxes, if any.
Page 155 of 256

c. On sale of services and use or d. The service is not exempt under the NIRC,
lease of properties special law or international agreement
[MAMALATEO]
Rate: 12% VAT
SALE OR EXCHANGE OF SERVICES
Basis: Gross receipts derived from the sale or Means the performance of all kinds of services
exchange of services, including the use or in the Philippines for others for a fee,
lease of properties remuneration or consideration [Sec 108 (A),
Gross Receipts – the total amount of money NIRC]
or its equivalent representing the contract
price, compensation, service fee, rental or “Sale or exchange of services” includes
royalty, including the amount charged for services performed by the following:
materials supplied with the services and a. Construction and service contractors
deposits and advanced payments actually or b. Stock, real estate, commercial, customs
constructively received during the taxable and immigration brokers
quarter for the services performed or to be c. Lessors of property, whether personal or
performed for another person, excluding VAT real
[Sec. 108 (A), NIRC]
Lease of property shall be subject to VAT
Gross receipts shall exclude those amounts regardless of the place where the contract
earmarked for payment to unrelated third party of lease or licensing agreement was
or received as reimbursement for advance executed if the property is leased or used
payment on behalf of another which do not in the Philippines. [Sec. 4.108-3 (a), RR 16-
redound to the benefit of the payor. [Sec. 11, 2005]
RR 4-2007]
VAT on rental and/or royalties payable to
“Constructive receipt” occurs when the money non-resident foreign corporations or
consideration or its equivalent is placed at the owners for the sale of services and use or
control of the person who rendered the service lease of properties in the Philippines shall
without restrictions by the payor. Examples be paid by the licensees on behalf of the
are: non-resident owner.
a. Deposit in banks which are made available
to the seller of services without restrictions Note: Lease of a residential unit with a
b. Notice by debtor to offset any debt or monthly rental not exceeding P15,000 shall
obligation and acceptance thereof by the be exempt from VAT. [Sec. 109(1)(Q),
seller as payment for services rendered NIRC]
c. Transfer of the amounts retained by the
contractee to the account of the contractor. d. Persons engaged in warehousing service
[Sec. 4.108-4, RR 16-2005] e. Lessors or distributors of cinematographic
films
Requisites for Taxability f. Persons engaged in milling, processing,
a. There is a sale or exchange of service or manufacturing or repacking goods for
lease or use of property enumerated in the others(except palay into rice, corn into
law or other similar services; corn grits, and sugarcane into raw sugar)
b. The service is performed or to be g. Proprietors, operators, or keepers of
performed in the Philippines; hotels, motels, rest houses, pension
c. For a valuable consideration actually or houses, inns, resorts
constructively received; and
Page 156 of 256

h. Proprietors or operators of restaurants, n. Franchise grantees of electric utilities,

refreshment parlors, cafes and other eating telephone and telegraph, radio and/or
places, including clubs and caterers television broadcasting and all other
i. Dealers in securities – merchants of stock franchise grantees
or securities who buy and sell securities to
customers with a view to the gains and Exceptions:
profits that may be derived therefrom ! Franchise grantees of radio and/or
television broadcasting whose annual
“Gross receipts” means gross selling gross receipts of the preceding year do
price less cost of the securities sold. not exceed P10,000,000 shall be
subject to 3% franchise tax, subject to
j. Lending investors – all persons OTHER optional registration; while franchise
than banks, non-bank financial grantees of gas and water utilities shall
intermediaries, finance companies and be subject to 2% franchise tax. [Sec.
other financial intermediaries NOT 119, NIRC; Sec. 4.108-3(h), RR 16-
performing quasi-banking functions who 2005]
make a practice of lending money for ! With respect to franchise grantees of
themselves or others at interest telephone and telegraph services,
k. Transportation contractors on their amounts received for overseas
transport of goods or cargoes, including dispatch, message, or conversation
persons who transport goods or cargoes originating from the Philippines are
for hire and other domestic common subject to the 10% percentage tax and
carriers by land relative to their transport of hence exempt from VAT. [Sec. 120,
goods or cargoes NIRC; Sec. 4.108-3, RR 16-2005]
Note: Common carriers which transport o. Non-life insurance companies (except crop
passengers by land are subject to the 3% insurances) including surety, fidelity,
percentage tax under Sec. 117 of the indemnity and bonding companies
NIRC. [Sec. 4.108-3(d), RR 16-2005]
Note: Life and disability insurance, and
l. Common carriers by air and sea relative to health and accident insurance are subject
their transport of passengers, goods or to the 2% percentage tax under Sec. 123
cargoes from one place in the Philippines of the NIRC.
to another place in the Philippines
Non-life reinsurance premiums are NOT
m. Sales of electricity by generation subject to VAT. However, insurance and
companies, transmission by any entity reinsurance commissions, whether life or
including the National Grid Corporation of non-life, are subject to VAT. [Sec. 4.108-
the Philippines (NGCP), and distribution 3(i), RR 16-2005]
companies, including electric cooperatives
(as amended by TRAIN Law; Sec. 2, RR p. Similar services regardless of whether or
13-2018) not the performance thereof calls for the
exercise or use of the physical or mental
Note: Sale of power or fuel generated faculties
through renewable sources of energy shall
be subject to 0% VAT (zero-rated). [Sec. Health Maintenance Organizations
108(B)(7), NIRC] (HMOs) – entities which arrange for
coverage or designated managed care
Page 157 of 256

services needed by plan holders/members f. The supply of technical advice,

for fixed prepaid membership fees and for assistance or services rendered in
a specified period of time [Sec. 4.108-3(k), connection with technical management
RR 16-2005] or administration of any scientific,
industrial or commercial undertaking,
HMO’s gross receipts shall be the total venture, project or scheme
amount of money or its equivalent g. The lease of motion picture films, films,
representing the service fee actually or tapes and discs
constructively received during the taxable h. The lease or the use of or the right to
period for the services performed or to be use radio, television, satellite
performed for another person, excluding transmission and cable television time
VAT. [Sec. 4.108-3(i), RR 16-2005]
Additional services subject to VAT:
The amounts earmarked and eventually a. Services performed in the exercise of
paid by the HMO to the medical service profession or calling by individuals
providers do not form part of its gross subject to professional tax under the
receipts for VAT purposes. [Medicard LGC, and professional services
Philippines, Inc. v. CIR, G.R. No. 222743 rendered by general professional
(2017)] partnerships (GPPs) [R.A. 7716, as
amended by R.A. 8241]
“Sale or exchange of services” shall
likewise include the following: Requisites:
a. The lease or the use of or the right or 1. The performance of services
privilege to use any copyright, patent, should not be in pursuit of an
design or model, plan secret formula or employer-employee relationship
process, goodwill, trademark, trade between the service-provider and
brand or other like property or right the service-recipient
b. The lease of the use of, or the right to 2. His/her gross receipts exceed
use of any industrial, commercial or P3,000,000
scientific equipment
c. The supply of scientific, technical, Note: Services rendered by doctors, and
industrial or commercial knowledge or lawyers were previously VAT-exempt
information under R.A. 9238, but such exemption has
d. The supply of any assistance that is since been removed by R.A. 9337.
ancillary and subsidiary to and is
furnished as a means of enabling the b. Services performed by
application or enjoyment of any such actors/actresses, talents, singers,
property, or right as is mentioned in emcees, radio/television broadcasters,
subparagraph (b) or any such choreographers, musical, radio, movie,
knowledge or information as is television, stage directors, and
mentioned in subparagraph (c) professional athletes [R.A. 7716, as
e. The supply of services by a amended by R.A. 8241]
nonresident person or his employee in c. Lease or use of sports facilities and
connection with the use of property or equipment by amateur players [R.A.
rights belonging to, or the installation or 7716, as amended by R.A. 8241]
operation of any brand, machinery or
other apparatus purchased from such
nonresident person
Page 158 of 256

4. Zero-rated and Effectively of the total annual production of the

preceding taxable year [Sec. 4.106-5(a)(3),
Zero-rated sales of goods or RR 16-2005]
properties, and services
4. Those considered export sales under the
Rate: 0% VAT Omnibus Investment Code of 1987, and
other special laws (e.g. Bases Conversion
Concept: A zero-rated sale of goods, & Development Act of 1992)
properties, or services by a VAT-registered
person is a taxable transaction for VAT Considered Export Sales under the
purposes but shall not result in any output Omnibus Investment Code (EO 226):
tax. However, the input tax on purchases of a. Philippine port F.O.B. value
goods, properties or services, related to such determined from invoices, bills of
zero-rated sale, shall be available as tax credit lading, inward letters of credit, landing
or refund. certificates, and other commercial
documents, of export products
The following transactions are subject to VAT exported directly by a registered export
at 0% producer; OR
a. Export sales b. Net selling price of export products sold
b. Sales of goods or property to persons by a registered export producer to
or entities who are tax-exempt another export producer, or to an
(Effectively Zero-Rated Sales) export trader that subsequently exports
c. Zero-rated sale of services the same (only when actually exported
by the latter) as evidenced by landing
Export Sales [Sec. 106(A)(2)(a), NIRC] certificates.
1. The (i) sale and actual shipment of goods
from the Philippines to a foreign country Constructive Exports (without actual
AND (ii) paid for in acceptable foreign exportation):
currency or its equivalent in goods or a. Sales to bonded manufacturing
services, AND (iii) accounted for in warehouses of export-oriented
accordance with the rules and regulations manufacturers
of the BSP b. Sales to export processing zones [R.A.
2. The (i) sale of raw materials or packaging 7916, R.A. 7922, R.A. 7903 and other
materials to a nonresident buyer (ii) for similar export zones];
delivery to a resident local export-oriented c. Sales to registered export traders
enterprise (iii) to be used in manufacturing, operating bonded trading warehouses
processing, packing or repacking in the supplying raw materials in the
Philippines of the said buyer's goods AND manufacture of export products;
(iv) paid for in acceptable foreign currency d. Sales to diplomatic missions and other
AND (v) accounted for in accordance with agencies and/or instrumentalities
the rules and regulations of the BSP granted tax immunities, of locally
3. Sale of raw materials or packaging manufactured, assembled or repacked
materials to export-oriented enterprise products, whether paid for in foreign
whose export sales exceed 70% of total currency or not [Sec. 4.106-5(a)(4), RR
annual production 16-2005]
Export-oriented enterprise – any

enterprise whose export sales exceed 70%
Page 159 of 256

Notes: Note: items (2), (3), and (4) above shall be

! Export sales of registered export subject to the 12% VAT and no longer be
traders shall include commission considered export sales subject to 0% VAT
income. rate upon satisfaction of the following
! The exportation of goods on conditions:
consignment shall not be deemed 1. The successful establishment and
export sales until the export products implementation of an enhanced VAT
consigned are in fact sold by the refund system that grants refunds of
consignee. creditable input tax within 90 days from
! Sales by a VAT-registered supplier to a the filing of the VAT refund application
manufacturer/producer whose with the Bureau; and
products are 100% exported are 2. All pending VAT refund claims as of
considered export sales. A certification December 31, 2017 shall be fully paid
to this effect must be issued by the in cash by December 31, 2019.
Board of Investment (BOI) which shall
be good for 1 year unless subsequently The Department of Finance shall establish a
re-issued [Sec. 4.106-5(a)(4), RR 16- VAT refund center in the BIR and in the BOC
2005] that will handle the processing and granting of
cash refunds of creditable input tax. [Sec.
5. The sale of goods, supplies, equipment 106(A), NIRC]
and fuel to persons engaged in
international shipping or international air Effectively Zero-Rated Sales [Sec.
transport operations: Provided, That the 106(A)(2)(b), NIRC]
goods, supplies, equipment and fuel shall This refers to (i) the local sale of goods and
be used exclusively for international properties (ii) by a VAT-registered person (iii)
shipping or air transport operations [as to a person or entity who was granted direct
amended by Train Law; Sec. 2, RR 13- and indirect tax exemption under special laws
2018] or international agreement (e.g., PEZA, Asian
a. Limited to goods, supplies, Development Bank, International Rice
equipment and fuel to be used in Research Institute). [MAMALATEO; RR 4-
the transport of goods and 2007]
passengers from a port in the
Philippines directly to a foreign ECOZONES
port, or vice versa without docking Ecozones shall be managed and operated by
or stopping at any other port in the PEZA as a separate customs territory [Sec. 8,
Philippines unless it is for RA 7916 or the “Special Economic Zone Act of
unloading passengers and/or 1995”].
cargoes originating abroad, or to
load passengers and/or cargoes Tax Treatment of Sales to and by PEZA-
bound for abroad registered Enterprises [RMC 74-99]:
b. If any portion of such fuel, goods, 1. Any sale of goods, property or services
supplies or equipment is used for made by a VAT registered supplier
purposes other than that from the Customs Territory to any
mentioned, such portion shall be registered enterprise operating in the
subject to 12% VAT [Sec. 4.106-5, ecozone, regardless of the class or
RR 16-2005 as amended by RR type of the latter’s PEZA registration,
13-2018] shall be subject to 0% VAT. [Sec. 3,
RMC 74-99]
Page 160 of 256

ii. subject to 0% VAT

“Customs Territory” shall mean the if PEZA registered
national territory of the Philippines seller is subject to
outside of the proclaimed boundaries taxes under NIRC (i.e.
of the ECOZONES except those areas not subject to 5%
specifically declared by other laws special tax regime)
and/or presidential proclamations to pursuant to “cross
have the status of special economic border doctrine” [Sec.
zones and/or free ports. [Sec. 2(g), 4, RMC 74-99]
Rule 1, Part I, RA 7916-IRR]
Zero Rated Sale of Services [Sec. 108 (B),
2. Sale of goods, property and services NIRC]
by a VAT-exempt supplier from the The following services performed in the
Customs Territory to a PEZA Philippines by a VAT-registered person shall
registered enterprise shall be EXEMPT be subject to 0% VAT:
from VAT, regardless of whether or not 1. Processing, manufacturing or repacking
the PEZA registered buyer is subject to goods for other persons doing business
taxes under the NIRC or enjoying the outside the Philippines which goods are
5% special tax regime. [Sec. 4, RMC subsequently exported, where the services
74-99] are paid for in acceptable foreign currency
and accounted for in accordance with the
3. Sales made by a PEZA registered rules and regulations of the BSP;
enterprise 2. Services other than those mentioned in
a. Sale of goods by a PEZA the preceding paragraph, rendered to a
registered enterprise to a buyer person engaged in business conducted
from the Customs Territory (i.e., outside the Philippines or to a
domestic sales) shall be treated as nonresident person not engaged in
a technical importation made by business who is outside the Philippines
the buyer. when the services are performed, the
b. Sale of services by a PEZA consideration for which is paid for in
registered enterprise to a buyer acceptable foreign currency and
from the Customs Territory is NOT accounted for in accordance with the
embraced by the 5% special tax rules and regulations of the BSP;
regime, hence, such seller shall be Note: The 0% VAT on services
subject to 12% VAT. performed in the Philippines is an
c. Sale of goods by a PEZA exception to the destination principle,
registered enterprise to another which states that goods and services
PEZA registered enterprise (intra- are taxed only in the country where
ecozone) shall be EXEMPT from they are consumed. [CIR v. American
VAT. [Sec. 5, RMC 74-99] Express International, G.R. No.
d. Sale of services by ecozone 152609 (2005)]
enterprise to another ecozone
enterprise (intra-ecozone) shall be: 3. Services rendered to persons or
i. exempt from VAT entities whose exemption under
if PEZA registered special laws or international
seller is subject to 5% agreements to which the Philippines is
special tax regime a signatory effectively subjects the
supply of such services to 0% rate;
Page 161 of 256

4. Services rendered to persons engaged Difference between Zero-rated and VAT-

in international shipping or international exempt
air transport operations, including
leases of property for use thereof: Zero-rated VAT-exempt
Provided, That these services shall be
exclusively for international shipping or It is a taxable Not subject to output
air transport operations [as amended transaction but does tax
by TRAIN Law]; not result in an output
5. Services performed by subcontractors tax.
and/or contractors in processing,
converting, or manufacturing goods for
an enterprise whose export sales The input VAT The seller is not
exceed 70% of total annual production; attributable to zero- entitled to any input
6. Transport of passengers and cargo by rated sales may be tax on his purchases
domestic air or sea vessels from the allowed as tax credits despite the issuance
Philippines to a foreign country [as or refund. of a VAT invoice or
amended by TRAIN Law]; and receipt.
Note: Gross receipts of international air or

shipping carriers doing business in the Persons engaged in Registration is
Philippines derived from transport of zero-rated optional for VAT-
passengers and cargo from the Philippines transactions are exempt persons.
to another country shall be subject to the required to register.
3% percentage tax. [Sec. 118, NIRC]
7. Sale of power or fuel generated

through renewable sources of energy 5. Value-added Tax-exempt
such as, but not limited to, biomass, Transactions
solar, wind, hydropower, geothermal,
ocean energy, and other emerging
VAT-exempt transactions refer to the sale of
energy sources using technologies
goods or properties and/or services and the
such as fuel cells and hydrogen fuels.
use or lease of properties that is NOT subject
to VAT (output tax) and the seller is not allowed
Note: Items (1) and (5) above shall be subject
any tax credit of VAT (input tax) on purchases.
to the 12% VAT and no longer be considered
[Sec. 4.109-1(A), RR 16-2005]
export sales subject to 0% VAT rate upon
satisfaction of the following conditions:
The person making the exempt sale of goods,
1. The successful establishment and
properties or services shall not bill any output
implementation of an enhanced VAT
tax to his customers. [Sec. 4.109-1(A), RR 16-
refund system that grants refunds of
2005]
creditable input tax within 90 days from
the filing of the VAT refund application
Note: The VAT-registered person may elect
with the Bureau; and
that the exemption not apply to its sale of goods
2. All pending VAT refund claims as of
or properties or services; provided that the
December 31, 2017 shall be fully paid
election made shall be irrevocable for a period
in cash by December 31, 2019. [Sec.
of three (3) years from the quarter the election
108(B), NIRC]
was made [Sec. 4.109-2, RR 16-2005 as
amended by RR 13-2018].
Page 162 of 256

Tariff and Customs Code of the

Exempt Transactions Philippines;
The following transactions are exempt from d. Importation of professional instruments
VAT: [Sec. 109, NIRC] and implements, tools of trade, occupation
a. Sale or importation of agricultural and or employment, wearing apparel, domestic
marine food products in their original animals, and personal household effects:
state, livestock and poultry of a kind i. belonging to persons coming to
generally used as, or yielding or producing settle in the Philippines, or Filipinos
foods for human consumption, and or their families and descendants
breeding stock and genetic materials who are now residents or citizens
therefor; of other countries (i.e., overseas
! Products in their original state Filipinos
remain as such even if they have ii. in quantities and of the class
undergone the simple processes of suitable to the profession, rank or
preparation or preservation for the position of the persons importing
market, such as freezing, drying, said items
salting, broiling, roasting, smoking iii. for their own use and not for barter
or stripping, including those using or sale,
advanced technological means of iv. accompanying such persons, or
packaging, such as shrink arriving within a reasonable time
wrapping in plastics, vacuum [as amended by TRAIN Law]
packing, tetra-pack, and other
similar packaging methods. Note: The Bureau of Customs may,
! Polished and/or husked rice, corn upon production of satisfactory
grits, raw cane sugar and evidence that such persons are
molasses, ordinary salt, AND actually coming to settle in the
COPRA shall be considered in their Philippines and that the goods are
original state brought from their former place of
! Livestock or poultry do not include abode, exempt such goods from
fighting cocks, race horses, zoo payment of duties and taxes [as
animals and other animals amended by TRAIN Law];
generally considered as pets. [Sec.
4.109-1(B)(1)(a), RR 16-2005] Exception: Vehicles, vessels,
b. Sale or importation of fertilizers, seeds, aircrafts, machineries, and other goods
seedlings and fingerlings, fish, prawn, for use in manufacturing shall be
livestock and poultry feeds including subject to duties, taxes and other
ingredients, whether locally produced or charges.
imported, used in the manufacture of
finished feeds (except specialty feeds for e. Services subject to percentage tax; (see
race horses, fighting cocks, aquarium fish, Percentage Tax, infra)
zoo animals, and other animals generally f. Services by agricultural contract growers
considered as pets); and milling for others of palay into rice, corn
c. Importation of personal and household into grits, and sugar cane into raw sugar;
effects belonging to (i) Philippine residents ! Agricultural contract growers refer
returning from abroad and (ii) non-resident to those producing for others
citizens coming to resettle in the poultry, livestock or other
Philippines; provided, that such goods are agricultural and marine food
also exempt from customs duties under the products in their original state.
Page 163 of 256

[Sec. 4.109-1(B)(1)(f), RR 16- VAT if the producer is the

2005] cooperative itself. If not (e.g.,
g. Medical, dental, hospital and veterinary trader), then only those sales to its
services, except those rendered by members shall be exempted from
professionals; VAT. [RR 4-2007]
! Laboratory services are exempted. m. Gross receipts from lending activities by
If the hospital or clinic operates a credit or multi-purpose cooperatives duly
pharmacy or drugstore, the sale of registered with the CDA;
drugs and medicine is subject to n. Sales by non-agricultural, non-electric and
VAT. [Sec. 4.109-1(B)(1)(g), RR non-credit cooperatives duly registered
16-2005] and in good standing with the CDA;
! Note: R.A. 9337 removed the VAT- Provided, that the share capital
exemption previously granted to contribution of each member does not
doctors and lawyers. exceed P15,000 and regardless of the
h. Educational services (i) rendered by aggregate capital and net surplus ratably
private educational institutions, duly distributed among the members;
accredited by DepEd, CHED, TESDA, and ! However, their importation of
(ii) those rendered by government machineries and equipment,
educational institutions; including spare parts thereof, to be
i. Services rendered by individuals pursuant used by them are subject to VAT.
to an employer-employee relationship; [Sec. 4.109-1(B)(1)(n), RR 16-
j. Services rendered by regional or area 2005]
headquarters established in the Philippines o. Export sales by persons who are not VAT-
by multinational corporations which act as registered;
supervisory, communications and p. Sale of real properties as follows:
coordinating centers for their affiliates, i. Sale of real properties NOT
subsidiaries or branches in the Asia-Pacific primarily held for sale to customers
Region and do not earn or derive income or held for lease in the ordinary
from the Philippines; course of trade or business.
k. Transactions which are exempt under
international agreements to which the ii. Sale of real properties utilized for
Philippines is a signatory or under special low-cost housing as defined by
laws, except those under PD No. 529 R.A. 7279 (Urban Development
(Petroleum Exploration Concessionaires and Housing Act of 1992) and other
under the Petroleum Act of 1949); related laws (e.g., R.A. 7835, R.A.
l. Sales by agricultural cooperatives duly 8763;
registered with the Cooperative ! Low-cost housing" refers to
Development Authority (CDA) to their housing projects intended
members, as well as sale of their produce, for homeless low-income
whether it is original state or processed family beneficiaries,
form, to non-members; their importation of undertaken by the
direct farm inputs, machineries and Government or private
equipment, including spare parts thereof, developers, which may
to be used directly and exclusively in the either be a subdivision or a
production and/or processing of their condominium registered
produce; and licensed by the
! Sale by agricultural cooperatives to Housing and Land Use
non-members are exempted from Regulatory Board /
Page 164 of 256

Housing (HLURB) under buyer (even if covered by

BP 220, PD 957 or any separate titles or tax
other similar law, wherein declarations or separate
the unit selling price is deeds of conveyance), for
within the selling price the purpose of utilizing the
ceiling per unit as set by the lots as one residential lot,
Housing and Urban the sale shall be exempt
Development Coordinating from VAT only if the
Council (HUDCC). [RR 13- aggregate value of the lots
2018] does not exceed P1.5M.
iii. Sale of real properties utilized for [RR 13-2018]
socialized housing as defined ! Sale of parking lots shall
under RA 7279, and other related not be considered a sale of
laws, such as RA 7835 and RA residential lot. Hence, it
8763, wherein the price ceiling per shall be subject to VAT
unit is P480,000 for a horizontal regardless of its selling
socialized housing with a minimum price. [RR 13-2012]
floor area of 24sq.m, and P700,000
(if within NCR and nearby areas) or Note: Beginning January 1, 2021,
P600,000 (in other areas) for the VAT exemption shall only apply
socialized vertical/condominium to (i) sale of real properties not
projects with a minimum floor area primarily held for sale to customers
of 22sq.m. [HUDCC Resolution or held for lease in the ordinary
Nos. 1 and 2, series of 2018] course of trade or business, (ii) sale
! "Socialized housing" refers of real property utilized for
to housing programs and socialized housing as defined by
projects covering houses RA No. 7279, (iii) sale of house and
and lots or home lots only lot, and other residential dwellings
undertaken by the with selling price of not more than
Government or the private P2,000,000 [Sec. 109(1)(P), NIRC,
sector for the as amended by TRAIN Law]
underprivileged and q. Lease of residential units with a monthly
homeless citizens which rental per unit not exceeding P15,000;
shall include sites and ! If more than P15,000 but the
services development, aggregate rentals of the lessor
long-term financing, during the year do not exceed P3M,
liberated terms on interest the lease shall be exempt from
payments, and such other VAT, but subject to 3% percentage
benefits. [RR 13-2018] tax.
iv. Sale of residential lot valued at ! Where a lessor has several
P1.5M and below, or house & lot residential units for lease, his tax
and other residential dwellings liability will be as follows:
valued at P2.5M and below, as ○ Gross receipts from rentals
adjusted in 2011 using the 2010 not exceeding P15,000
Consumer Price Index values. shall be exempt from VAT
! If two or more adjacent and percentage tax
residential lots are sold or regardless of the
disposed of in favor of one
Page 165 of 256

aggregate annual gross for domestic or international transport

receipts. operations;
○ Gross receipts from rentals ! The exemption from VAT on the
exceeding P15,000 shall importation and local purchase of
be subject to VAT IF the passenger and/or cargo vessels
aggregate annual gross shall be subject to the
receipts from said units requirements on restriction on
only exceed P3M. vessel importation and mandatory
Otherwise, the gross vessel retirement program of the
receipts will be subject to Maritime Industry Authority
the 3% tax imposed under (MARINA). [RR 13-2018]
Sec. 116 of the NIRC. u. Importation of fuel, goods, and supplies by
! Residential units' refers to persons engaged in international shipping
apartments and houses & lots used or air transport operations: Provided, That
for residential purposes, and the fuel, goods, and supplies shall be used
buildings or parts or units thereof for international shipping or air transport
used solely as dwelling places operations [as amended by TRAIN Law];
(e.g., dormitories, rooms and bed ! The said fuel, goods and supplies
spaces) except motels, motel shall be used exclusively or shall
rooms, hotels and hotel rooms, pertain to the transport of goods
lodging houses, inns and pension and/or passengers from a port in
houses. the Philippines directly to a foreign
! ‘Unit' means an apartment unit in port without stopping at any other
the case of apartments, house in port in the Philippines, except to
the case of residential houses; per unload passengers and/or cargoes
person in the case of dormitories, from abroad or load the same
boarding houses and bed spaces; bound for abroad.
and per room in case of rooms for ! If any portion of such fuel, goods or
rent. [RR 13-2018] supplies is used for any other
r. Sale, importation, printing or publication of purpose, such portion of fuel,
books and any newspaper, magazine, goods and supplies shall be
review or bulletin which appears at regular subject to VAT. [RR 13-2018]
intervals with fixed prices for subscription v. Services of banks, non-bank financial
and sale and which is not devoted intermediaries performing quasi-banking
principally to the publication of paid functions and other non-bank financial
advertisements; intermediaries (such as money changers
s. Transport of passengers by international and pawnshops) subject to percentage tax;
carriers; [added by TRAIN Law] [RR 13-2018]
! Note: Transport of cargoes by w. Sale or lease of goods and services to
international carriers doing senior citizens and persons with disability,
business in the Philippines is as provided under RA Nos. 9994
likewise exempt from VAT, but (Expanded Senior Citizens Act of 2010)
subject to 3% percentage tax under and 10754 (An Act Expanding the Benefits
Sec. 118 of the NIRC. and Privileges of Persons with Disability),
t. Sale, importation or lease of passenger or respectively [added by TRAIN Law];
cargo vessels and aircraft, including x. Transfer of property pursuant to Section
engine, equipment and spare parts thereof 40(C)(2) of the NIRC, as amended [added
by TRAIN Law];
Page 166 of 256

y. Association dues, membership fees, and shall be considered separate

other assessment and charges collected taxpayers. However, the
by homeowners association and aggregation rule (e.g., combining
condominium corporations [added by income from business and
TRAIN Law]; profession) for each taxpayer shall
z. Sale of gold to BSP [added by TRAIN Law]; apply.
aa. Sale of drugs and medicines prescribed for ! The VAT-exempt sales shall NOT
diabetes, high cholesterol, and be included in determining the
hypertension beginning January 1, 2019 threshold. [Sec. 4.109-1(B), RR 16-
[added by TRAIN Law]; 2005]
bb. Sale or lease of goods or properties or the cc. Self-employed individuals and
performance of services other than the professionals availing of the 8% tax on
transactions mentioned in the preceding gross sales and/or receipts and other non-
paragraphs, the gross annual sales and/or operating income, under Sections
receipts do not exceed the amount of P3M; 24(A)(2)(b) and 24(A)(2)(c)(2)(a) of the
! For purposes of the threshold of NIRC [RR 13-2018].
P3M, the husband and the wife
Page 167 of 256

SUMMARY OF VAT-EXEMPTIONS [SEC. 109, NIRC]
A Of agricultural and marine products in their original state

Sale or Of fertilizers; seeds, seedlings and fingerlings; fish, prawn, livestock
importation and poultry feeds.
B
Exception: specialty feeds for race horses, fighting cocks, aquarium
fish, zoo animals, and other animals generally considered pets.
Of personal and household effects belonging to (i) residents of the
C Philippines returning from abroad and (ii) nonresident citizens coming
to resettle in the Philippines
Of professional instruments and implements, tools of trade,
Importation
occupation or employment, wearing apparel, domestic animals and
D personal household effects, belong to persons coming to settle in the
Philippines or overseas Filipinos for their own use and not for
barter or sale.
E Subject to percentage tax
By agricultural contract growers and milling for others of palay into

F
rice, corn into grits and sugarcane into raw sugar
Medical, dental, hospital and veterinary services

G
Exception: those rendered by professionals
Services
Educational services rendered by private educational institutions duly
H accredited by DepEd, CHED, and TESDA, and those rendered by
governmental educational institutions
I Rendered pursuant to an employer-employee relationship
J Rendered by a RAHQ established in the Philippines
Transactions exempt under international agreements or special laws,

K Others
except those under PD 529 (Petroleum concessionaires)
Sales By agricultural cooperatives duly registered with the CDA

L
By agricultural cooperatives of direct farm inputs, machineries and
Importation
equipment
Gross receipts from lending activities by credit or multi-purpose

M Services
cooperatives duly registered with the CDA
By non-agricultural, non-electric, and non-credit cooperatives duly

N Sales registered with the CDA. Provided, the share capital contribution of
each member does not exceed P15,000
Page 168 of 256

O Export sales By persons who are not VAT-registered

Of real property not primarily held for sale to customers or held for
lease in the ordinary course of business, or real property for low-cost
P Sales and socialized housing, residential lot valued at P1.5M and below and
house and lot and other residential dwellings valued at P2.5M and
below
Q Lease Of a residential unit with a monthly rental not exceeding P15,000
Sale, importation, Of books and any newspaper, magazine, review or bulletin which
R printing, or appears at regular intervals with fixed prices for subscription and sale
publication and is not devoted principally to publication of paid advertisements
S Services Transport of passengers by international carriers

Of passenger or cargo vessels and aircraft, including engine,
Sale, importation,
T equipment and spare parts thereof for domestic or international
or lease
transport operations
Of fuel, goods, and supplies by persons engaged in international
U Importation
shipping or air transport operations
Of banks, non-bank financial intermediaries performing quasi-banking

V Services
functions and other non-bank financial intermediaries
W Sale or lease Of goods and services to senior citizens and persons with disability
Of property pursuant to Section 40(C)(2) of the NIRC (tax free

X Transfer
exchanges)
Association dues, membership fees, and other assessments and

Y Others charges collected by homeowners associations and condominium
corporations
Z Sale Of gold to BSP
Of drugs and medicines prescribed for diabetes, high cholesterol, and

AA Sale
hypertension beginning January 1, 2019
Sale or lease or Other than the transactions mentioned in the preceding paragraphs,
BB performance of the gross annual sales and/or receipts do not exceed the amount of
services P3M
Page 169 of 256

6. Input and Output Tax not exceed P3M (except franchise

grantees of radio and television
a. Definitions broadcasting whose threshold is
P10M) [Sec. 4.111-1(a), RR 16-
Input tax – the VAT due from or paid by a VAT- 2005]
registered person on importation of goods or
local purchase of goods, properties, or Transitional Input VAT credit:
services, including lease or use of properties, Whichever is higher of:
in the course of his trade or business [Sec. 1. two percent (2%) of the value of the
110(A)(3), NIRC] beginning inventory on hand, OR
2. actual VAT paid on such goods,
Output tax – the VAT due on the sale or lease materials and supplies.
of taxable goods or properties or services by
any person registered or required to register Note: A real estate dealer is entitled to
under Section 236 of the NIRC [Sec. 110(A)(3), claim transitional input VAT on its
NIRC] beginning inventory based on the value of
the entire real property, including the
b. Sources of Input Tax improvements thereon, regardless of
whether there was prior payment of VAT on
(a) Purchase or Importation of Goods the purchase of such real property. [Fort
(evidenced by VAT invoice/receipt) Bonifacio Development Corp. v. CIR, G.R.
(i) For sale; or Nos. 158885 and 170680 (2009)]
(ii) For conversion into or intended
to form part of a finished (f) Presumptive Input Tax [Sec. 111(B),
product for sale including NIRC]
packaging materials; or
(iii) For use as supplies in the Who may avail: Persons or firms engaged
course of business; or in the:
(iv) For use as materials supplied 1. processing of (i) sardines, (ii)
in the sale of service; or mackerel and (iii) milk, and
(v) For use in trade or business for 2. manufacturing (i) refined sugar, (ii)
which deduction for cooking oil and (iii) packed noodle
depreciation or amortization is based instant meals
allowed under the NIRC.
(b) Purchase of real properties for Rate and basis: 4% of the gross value in
which VAT has actually been paid money of their purchases of primary
(c) Purchase of services in which VAT agricultural products which are used as
has actually been paid inputs to their production [Sec. 111(B),
(d) Transactions deemed sale NIRC]
(e) Transitional Input Tax [Sec 111(A),
NIRC] “Processing” means pasteurization,
canning and activities which through
Who may avail of transitional input tax: physical or chemical process alter the
1. A person who becomes VAT-liable exterior texture or form or inner substance
for the first time upon exceeding of a product in such manner as to prepare
P3M in any 12-month period, or it for special use to which it could not have
2. any person who voluntarily been put in its original form or condition.
registers even if their turnover does [Sec. 111(B), NIRC]
Page 170 of 256

2. If the estimated useful life is less than

c. Persons Who Can Avail of Input Tax 5 years – the input tax shall be spread
Credit over such a shorter period by dividing
the input tax by the actual number of
Input tax on domestic purchase or months comprising the estimated
importation of goods or properties shall be useful life [Sec. 4.110-3, RR 16-2005]
creditable:
a. To the importer upon payment of the Notes:
VAT prior to the release of the goods ! If the aggregate acquisition cost does
from customs custody; not exceed P1,000,000, the total input
b. To the purchaser of domestic goods or taxes will be allowable as credit against
properties upon consummation of sale; output tax in the month of acquisition.
or ! If the depreciable capital good is
c. To the purchaser of services or the sold/transferred within 5 years or prior
lessee or licensee upon payment of the to the exhaustion of the amortizable
compensation, rental, royalty or fee. input tax, the entire unamortized input
[Sec. 4.110-2, RR 16-2005] tax can be claimed as input tax credit
during the month/quarter when the sale
d. Input Tax on Depreciable Goods or transfer was made. [Sec. 4.110-3,
RR 16-2005]
Capital goods or properties ! The amortization of the input VAT shall
1. Goods or properties with estimated only be allowed until December 31,
useful life greater than one (1) year; 2021 after which taxpayers with
2. Treated as depreciable assets under unutilized input VAT on capital goods
Sec. 34(F) of the NIRC; and purchased or imported shall be allowed
3. Used directly or indirectly in the to apply the same as scheduled until
production or sale of taxable goods or fully utilized
services. [Sec. 16, RR 4-2007]
Claiming of input tax on motor vehicles
Claims for input tax on depreciable goods subject to the following conditions:
Where a VAT-registered person purchases or a. Purchase of vehicle must be
imports capital goods, which are depreciable substantiated with official receipts or
assets for income tax purposes, the aggregate other adequate records;
acquisition cost of which (excluding VAT) in a b. Taxpayer has to prove the direct
calendar month exceeds P1,000,000, connection of the motor vehicle to the
regardless of the acquisition cost of each business;
capital good: c. Only one vehicle for land transport is
1. If the estimated useful life is 5 years or allowed for the use of an
more – the input tax shall be spread official/employee with value not
evenly over the month of acquisition exceeding P2.4 million;
and the 59 succeeding months (i.e., 60 d. No depreciation shall be allowed for
months) and the claim for input tax yachts, helicopters, airplanes [Sec. 3,
credit will start in the month of RR 12-2012]
acquisition
Page 171 of 256

ILLUSTRATION: CLAIMS FOR INPUT TAX ON DEPRECIABLE GOODS

[RR 13-2018]
(1) ABC Corporation sold capital goods on installment on October 1, 2018. It is agreed that the selling
price, including the VAT, shall be payable in 5 equal monthly installments with the first installment to
be paid on October 1, 2018. The data pertinent to the sold assets are as follows:
Selling Price 5,000,000 (exclusive of VAT)
Passed on VAT 600,000
Original Cost of Asset 3,000,000
Accumulated Depreciation 1,000,000
Unutilized Input Tax (Sold Asset) 100,000
Accounting:
SELLER BUYER
October 1, 2017 October 1, 2017
Cash [(P5M + P1,120,000 Asset P5,000,000

600k)/5]
Installment 4,480,000 Input Tax 600,000

Receivable
[(P5M+600k)-1.12M]
Accumulated 1,000,000
Depreciation
Output Tax (12% 600,000 Cash 1,120,000

x P5M)
Asset 3,000,000 Installment 4,480,000

Payable
Gain on sale of set 3,000,000
Page 172 of 256

To record VAT
liability:
Output Tax 600,000
Input Tax 100,000
VAT Payable 500,000
Periodic receipt of installment Periodic receipt of installment
Cash 1,120,000 Installment 1,120,000

Payable
Installment 1,120,000 Cash 1,120,000

Receivable
* The input tax of P600,000.00 shall be spread evenly over a period of 60 months starting on October
2018 or the month of purchase.
If the depreciable capital good is sold/transferred within a period of 5 years or prior to the exhaustion
of the amortizable input tax thereon, the entire unamortized input tax on the capital goods
sold/transferred can be claimed as input tax credit during the month/quarter when the sale or transfer
was made.
(2) A manufacturer purchased capital goods on different occasions as follow :
Month of Amount 12% Input Useful Life No. of Last Month of

Purchase Tax Monthly Amortization
Amortization
January 2018 P8,500,000 P1,020,000 6 Years 60 December 2022
February 2018 P8,500,000 P1,020,000 4 Years 48 January 2022
December P10,000,000 P1,020,000 5 Years 60 November 2022

2018
Page 173 of 256

January 2018 P10,000,000 P1,020,000 5 Years - *Outright claim

on January 2022
a. For purchase made in January 2018, the amortization shall be for the shorter period of 5 years
only or up to December 2022 although the useful life is 6 years.
b. For purchase made in February 2018, the amortization shall be for a period of 4 years only or
up to January 2022 since the useful life of the asset is shorter than 5 years.
c. For purchase made in December 2021, the amortization shall be for the period of 5 years or
up to November 2026.
d. For purchase made in January 2022, no amortization shall be made and the input VAT shall
be claimed on the month of purchase or January 2022
7. Refund or Tax Credit of

𝑶𝒖𝒕𝒑𝒖𝒕 𝑽𝑨𝑻
Excess Input Tax; Procedure 𝟏𝟐%
= 𝑻𝒐𝒕𝒂𝒍 𝒊𝒏𝒗𝒐𝒊𝒄𝒆 𝒂𝒎𝒐𝒖𝒏𝒕 ×
𝟏𝟏𝟐%
Output VAT – Input VAT = VAT Payable or

Excess input VAT Determination of input tax creditable
a. Add all input tax creditable to a VAT-
registered person during the taxable
month or quarter and any excess input
Determination of output tax tax carried over from the preceding
[Sec. 4.110-6, RR 16-2005] month or quarter.
a. Output VAT in a sale of b. The sum shall be reduced by the
goods/properties shall be computed by amount of claim for VAT refund or
multiplying the total amount indicated credit (whether filed with the BIR, the
in the invoice or receipt by 12%. Department of Finance, the BOI or the
BOC) and other adjustments, such as
𝑶𝒖𝒕𝒑𝒖𝒕 𝑽𝑨𝑻 = 𝑮𝒓𝒐𝒔𝒔 𝑺𝒆𝒍𝒍𝒊𝒏𝒈 𝑷𝒓𝒊𝒄𝒆 purchase returns or allowances and
× 𝑽𝑨𝑻 𝑹𝒂𝒕𝒆 input tax attributable to exempt sale.
[Sec. 4.110-5, RR 16-2005]
b. Output VAT in a sale of services shall
be computed by multiplying the total Allocation of input tax on mixed
amount indicated in the invoice or transactions
receipt by 12%. A VAT-registered person who is also engaged
in transactions not subject to VAT shall be
𝑶𝒖𝒕𝒑𝒖𝒕 𝑽𝑨𝑻 = 𝑮𝒓𝒐𝒔𝒔 𝑹𝒆𝒄𝒆𝒊𝒑𝒕𝒔 allowed tax credit as follows:
× 𝑽𝑨𝑻 𝑹𝒂𝒕𝒆 a. All input taxes directly attributable to
transactions subject to VAT may be
c. Where VAT is erroneously billed in the recognized for input tax credit. Input
invoice, the total invoice amount shall taxes directly attributable to VAT
be presumed to be comprised of the taxable sales to the Government,
gross selling price or gross receipts including GOCCs, shall not be credited
plus the correct amount of VAT. Hence, against output taxes arising from sales
the output tax is computed as follows: to non-government entities.
Page 174 of 256

b. If any input tax cannot be directly transactions subject to VAT may be

attributed to either a VAT taxable or recognized for input tax credit. [Sec.
VAT-exempt transaction, the input tax 4.110-4, RR 16-2005]
shall be pro-rated to the VAT taxable
and VAT-exempt transactions and
ONLY the ratable portion pertaining to
ILLUSTRATION: ALLOCATION OF INPUT TAX ON MIXED TRANSACTIONS

[Sec. 4.110-4, RR 16-2005, as amended by RR 4-2007]
ERA Corporation has the following sales during the month:
Sale to private entities subject to 12% 100,000
Sale to private entities subject to 0% 100,000
Sale of exempt goods 100,000
Sale to government subjected to 5% final withholding VAT 100,000
Total sales for the month 400,000
The following input taxes were passed on by its VAT suppliers:

Input tax on taxable goods (12%) 5,000
Input tax on zero-rated sales 3,000
Input tax on sale of exempt goods 2,000
Input tax on sale to government 4,000
Not attributable to any specific activity (monthly amortization for 60 months) 20,000
Page 175 of 256

The creditable input tax for the month shall be computed as follows:
Input tax on sale subject to 12% 5,000
Ratable portion of the input tax not directly attributable to any activity:
abcbdef gbefg (hi%)

× 𝐴𝑚𝑜𝑢𝑛𝑡 𝑜𝑓 𝑖𝑛𝑝𝑢𝑡 𝑡𝑎𝑥 𝑛𝑜𝑡 𝑑𝑖𝑟𝑒𝑐𝑡𝑙𝑦 𝑎𝑡𝑡𝑟𝑖𝑏𝑢𝑡𝑎𝑏𝑙𝑒 𝑡𝑜 𝑎𝑛𝑦 𝑎𝑐𝑡𝑖𝑣𝑖𝑡𝑦
ajkbe lbefg
100,000
× 20,000 = 5,000
400,000
Total input tax attributable to sales to private entities for the month: 10,000.00
The input tax attributable to zero-rated sales for the month shall be computed as follows:
Input directly attributable to zero-rated sale P 3,000
vfwj wbkfx gbefg

ajkbe lbefg
100,000
× 20,000 = 5,000
400,000
Total input tax attributable to zero-rated sales for the month: 8,000
The input tax attributable to VAT-exempt sales for the month shall be computed as follows:
Input tax on VAT-exempt sales - 2,000
yza fcf{|k gbefg

ajkbe lbefg
100,000
× 20,000 = 5,000
400,000
Total input tax attributable to VAT-exempt sales: 7,000
The input tax attributable to sales to government for the month shall be computed as follows:
Input tax on sale to gov’t. P 4,000
abcbdef gbefg kj k}f ~j•fw€{f€k

ajkbe lbefg
100,000
× 20,000 = 5,000
400,000
Total input tax attributable to sales to government: 9,000
Page 176 of 256

Determination of the VAT payable or excess f. Input tax on "deemed sale"

tax credits transactions – required invoice
If at the end of any taxable month or quarter: g. Input tax from payments made to
a. The output tax exceeds the input tax, non-residents (such as for services,
the excess shall be paid by the VAT- rentals and royalties) – copy of the
registered person Monthly Remittance Return of VAT
b. The input tax exceeds the output tax, Withheld (BIR Form 1600) filed by the
the excess shall be carried over to the resident payor in behalf of the non-
succeeding quarter or quarters. resident evidencing remittance of VAT
However, any input tax attributable to due which was withheld by the payor
zero-rated sales may be refunded or h. Advance VAT on sugar – Payment
credited. [Sec. 110(B), NIRC] Order showing payment of the advance
VAT
Illustration:
For a given taxable quarter ABC Corp. has Who May Claim for Refund/Apply for
output VAT of 100 and input VAT of 80. Since Issuance of Tax Credit Certificate
output tax exceeds the input tax for such
taxable quarter, all of the input tax may be a. Zero-Rated Sales [Sec. 112(A),
utilized to offset against the output tax. Thus, NIRC]
the VAT payable is 20.
Requirements:
Substantiation of Input Tax Credits A claim for refund or tax credit for unutilized
Input taxes must be substantiated and input VAT may be allowed only if the following
supported by the following documents, and requisites concur, namely:
must be reported in the information returns 1. the taxpayer is VAT-registered;
required to be submitted to the BIR: 2. the taxpayer is engaged in zero-rated
a. Importation of goods – import entry or or effectively zero-rated sales;
other equivalent document showing 3. the input taxes are due or paid;
actual payment of VAT on the imported 4. the input taxes are not transitional input
goods taxes;
b. Domestic purchase of goods and 5. the input taxes have not been applied
properties – invoice showing the against output taxes during and in the
information required under Secs. 113 succeeding quarters;
(Invoicing Requirements) and 237 6. the input taxes claimed are attributable
(Issuance of Receipts or Invoices) of to zero-rated or effectively zero-rated
the NIRC sales;
c. Purchase of real property – public 7. for zero-rated sales under Section
instrument, i.e., deed of absolute sale, 106(A)(2)(a)(1) and (3) and 108(B)(1)
deed of conditional sale, and (2), the acceptable foreign
contract/agreement to sell, etc., currency exchange proceeds have
together with VAT invoice issued by the been duly accounted for in accordance
seller with the rules and regulations of the
d. Purchase of services – official receipt BSP;
showing the information required under 8. where there are both zero-rated or
Secs. 113 and 237 of the NIRC effectively zero-rated sales and taxable
e. Transitional input tax – inventory of or exempt sales, and the input taxes
goods as shown in a detailed list to be cannot be directly and entirely
submitted to the BIR attributable to any of these sales, the
Page 177 of 256

input taxes shall be proportionately registration). [Sec. 112(A) and (B),

allocated on the basis of sales volume; NIRC]
and
9. the claim is filed within two (2) years Note: It is only the administrative claim that
after the close of the taxable quarter must be filed within the two-year period,
when such sales were made. [Luzon which must be reckoned from the close of
Hydro Corporation v. CIR, G.R. No. the taxable quarter when the relevant sales
188260 (2013); Sec. 4.112-1, RR 16- were made. [CIR v. San Roque Power
2005] Corporation, G.R. 187485 (2013)]
b. Cancelled VAT Registration [Sec. Note: In tax refunds of erroneous tax

112(B), NIRC] payments under Sec. 229 of the NIRC, the
1. A VAT-registered person whose administrative and judicial claims may be
registration has been cancelled due made simultaneously, and the reckoning
to (i) retirement from or cessation of point of the 2-year period is from the date
business, or due to changes in or (ii) of payment.
cessation of status under Section
106(C) of the NIRC may, within two (2) b. The CIR shall grant the refund within 90
years from the date of cancellation, days from the date of submission of the
apply for the issuance of a tax credit official receipts or invoices and other
certificate for any unused input tax documents in support of the
which may be used in payment of his application.
other internal revenue taxes.
2. The taxpayer shall be entitled to a Note: Prior to January 1, 2018, all claims
refund if he has no internal revenue tax for refund or tax credit will be governed by
liabilities against which the tax credit the 120-day processing period.
certificate may be utilized.
3. The date of cancellation shall be the c. Should the CIR find that the grant of
date of issuance of tax clearance by the refund is not proper, the CIR must state
BIR, after full settlement of all tax in writing the legal and factual basis for
liabilities. the denial.
4. The filing of the claim shall be made
only after completion of the mandatory Judicial Claim [Sec 112 (C), par. 2, NIRC]
audit of all internal revenue tax a. In case of full or partial denial of the
liabilities covering the immediately claim for tax refund, the taxpayer may
preceding year and the short period appeal to the CTA within 30 days from
return and the issuance of the the receipt of decision.
applicable tax clearance/s. [RR 13- b. The 30-day period to appeal is both
2018] mandatory and jurisdictional.
Period to File Claim/Apply for Issuance of Exception: Premature filing is allowed only
Tax Credit Certificate if filed between 10 December 2003 and 5
Administrative Claim [Sec 112(C), par. 1, October 2010, when BIR Ruling No. DA-
NIRC] 489-03 was still in force. [CIR v. San Roque
a. The claim must be filed within 2 years Power Corporation, G.R. 187485 (2013)]
after the close of the taxable quarter
when the sales were made (or 2 years
from the date of cancellation of
Page 178 of 256

Effect of inaction by the CIR b. A VAT official receipt (OR) for every
Failure on the part of any official, agent, or lease of goods or properties, and for
employee of the BIR to act on the application every sale, barter or exchange of
within the 90-day period shall be punishable services [Sec. 113(A), NIRC]
under Section 269 of the NIRC (Violations
Committed by Government Enforcement Only VAT-registered persons are
Officers). [Sec. 112(C), NIRC] required to print their TIN followed by
the word “VAT” in their invoice or ORs,
Note: The provision on the appeal of the CIR’s which shall be considered as a “VAT
failure to act on the application for refund or tax Invoice” or “VAT OR”. All purchases
credit was removed by the TRAIN Law. covered by invoices/receipts other than
VAT Invoice/VAT OR shall not give rise
Exclusive appellate jurisdiction of CTA to any input tax. [Sec. 4.113-1(A), RR
The CTA has exclusive appellate jurisdiction to 16-2005]
review by appeal the inaction by the CIR in
cases involving disputed assessments, refunds Information Contained in the VAT Invoice or
of internal revenue taxes, fees or other VAT Official Receipt:
charges, penalties in relations thereto, or other 1. A statement that the seller is a VAT-
matters arising under the NIRC or other laws registered person, followed by his
administered by the BIR, where the NIRC taxpayer's identification number (TIN);
provides a specific period of action, in which 2. The total amount which the purchaser pays
case the inaction shall be deemed a denial. or is obligated to pay to the seller with the
[Sec. 7(a)(2), R.A. 1125 as amended by R.A. indication that such amount includes the
9282] VAT:
a. The amount of the tax shall be shown
Manner of Refund as a separate item in the
Refunds shall be made upon warrants drawn invoice/receipt;
by the CIR or by his duly authorized b. If the sale is exempt from VAT, the term
representative without the necessity of being "VAT-exempt sale" shall be written or
countersigned by the Chairman of the printed prominently on the invoice or
Commission on Audit (COA), provided that receipt;
refunds shall be subject to post audit by COA. c. If the sale is subject to 0% VAT, the
[Sec. 112(D), NIRC] term "zero-rated sale" shall be written
or printed prominently on the invoice or
8. Compliance Requirements receipt;
d. If the sale involves goods, properties or
services some of which are subject to
a. Registration
and some of which are VAT zero-rated
or VAT-exempt, the invoice or receipt
Note: Refer to table below for flowchart of VAT
shall clearly indicate the breakdown of
registration
the sale price between its taxable,
exempt and zero-rated components,
b. Invoicing Requirements and the calculation of the VAT on each
portion of the sale shall be shown on
In General the invoice or receipt. The seller may
A VAT-registered person shall issue: issue separate invoices or receipts for
a. A VAT invoice for every sale, barter or the taxable, exempt, and zero-rated
exchange of goods or properties; and components of the sale.
Page 179 of 256

3. The date of transaction, quantity, unit cost Issuance of a VAT Invoice or VAT Receipt
and description of the goods or properties by a non-VAT person
or nature of the service; and If a person who is not a VAT-registered person
4. In the case of sales in the amount of issues an invoice or receipt showing his TIN,
P1,000 or more where the sale or transfer followed by the word "VAT", the erroneous
is made to a VAT-registered person, the issuance shall result to the following:
name, business style, if any, address and a. The issuer shall be liable to:
TIN of the purchaser, customer or client. 1. percentage taxes applicable to his
[Sec. 113(B), NIRC] transactions;
2. VAT due on transactions under Section
In Deemed Sale Transactions 106 or 108 of the NIRC, without the
a. Transfer, use or consumption not in the benefit of any input tax credit; and
course of business of goods or 3. a 50% surcharge under Section 248(B)
properties originally intended for sale or of the NIRC.
for use in the course of business – b. The VAT shall be recognized as an input
Memorandum entry in the subsidiary sales tax credit to the purchaser, if the other
journal to record withdrawal of goods for requisite information is shown on the
personal use invoice/receipt. [Sec. 113(D), NIRC]
b. Distribution or transfer to shareholders, Issuance of a VAT Invoice or VAT Receipt

investors or creditors; and on an Exempt Transaction by a VAT-
consignment of goods if actual sale is registered Person
not made within 60 days – Invoice, at the If a VAT-registered person issues a VAT
time of the transaction, which should invoice or VAT OR for a VAT-exempt
include all the information required in a transaction, but fails to display prominently on
VAT invoice; data in the invoice shall be the invoice or receipt the term "VAT-exempt
duly recorded in the subsidiary sales Sale”:
journal a. the transaction shall become taxable;
b. the issuer shall be liable to pay VAT
c. Retirement from or cessation of thereon; and
business with respect to all goods on c. the purchaser shall be entitled to claim
hand – An inventory shall be prepared and an input tax credit on his purchase.
submitted to the RDO with jurisdiction over [Sec. 4.113-4(B), RR 16-05]
the taxpayer’s principal place of business
not later than 30 days after retirement or c. Filing of Returns and Payment
cessation from business. An invoice shall
be prepared for the entire inventory, which Procedure
shall be the basis of the entry into the 1. Every person liable to pay VAT shall file a
subsidiary sales journal. If the business is quarterly return of the amount of his gross
to be continued by the new owners or sales or receipts within 25 days after the
successors, the entire amount of output tax close of each taxable quarter prescribed for
on the amount deemed sold shall be each taxpayer.
allowed as input taxes. [Sec. 4.113-2, RR 2. The monthly VAT Declarations of
16-2005] taxpayers whether large or non-large shall
be filed and the taxes paid not later than
the 20th day following the end of each
month.
Page 180 of 256

3. Beginning January 1, 2023, the filing of effectively accounts for the standard input
return and payment of VAT shall be done VAT, in lieu of the actual input VAT directly
within 25 days following the close of each attributable or ratably apportioned to such
taxable quarter. [Sec. 114(A), NIRC as sales. [Sec. 4.114-2, RR 16-2005]
amended by TRAIN Law; Sec. 4.114-1(A),
RR 16-2005] Should actual input VAT attributable to sales to
the government exceed 7% of the gross
Note: VAT is paid on a monthly basis. payments, the excess may form part of the
Payments in the monthly VAT declarations sellers’ expense or cost. On the other hand, if
shall be credited in the quarterly VAT return to actual input VAT is less than 7% of gross
arrive at the net VAT payable or excess input payment, the difference must be closed to
tax/overpayment as of the end of a quarter. expense or cost. [Sec. 4.114-2, RR 16-2005]
[Sec. 4.114-1(A), RR 16-2005]
Payments to non-residents
d. Withholding of Final Value-added The government, as well as private
Tax on Sales to Government corporations, individuals, estates and trusts,
whether large or non-large taxpayers, shall
General Rule: VAT cannot be collected by way withhold 12% VAT with respect to the
of withholding. following:
1. Lease or use of properties or property
Exceptions: rights owned by non-residents; and
1. Gross payments by the government shall 2. Other services rendered in the
be subject to the 5% final withholding VAT; Philippines by non-residents. [Sec. 22,
2. Gross payments by resident VAT- RR 4-2007]
taxpayers to non-residents shall be subject
to 12% withholding VAT. [Sec. 4.114-2, RR Note: Payments for purchases of goods and
16-2005] services arising from projects funded by Official
Development Assistance (ODA) as defined
Note: The payor or person in control of the under RA No. 8182, or the ‘ODA Act of 1996’,
payment is considered as the withholding as amended, shall NOT be subject to the
agent. final/creditable withholding tax system as
imposed in this Subsection. [Sec. 2, RR 13-
Sales to Government 2018]
The government or any of its political
subdivisions, instrumentalities or agencies, e. Administrative and Penal
including GOCCs shall, before making Sanctions
payment for purchases of goods and services
which are subject to the VAT, deduct and Surcharge, interest and other penalties –
withhold a 5% final VAT on the gross The interest on unpaid amount of tax, civil
payments. [Sec. 114(C), NIRC] penalties and criminal penalties imposed in
Title XI of the NIRC shall also apply to
Note: Beginning January 1, 2021, the VAT violations of the VAT provisions of the NIRC.
withholding system under this Subsection shall [Sec. 115, NIRC; Sec. 4.115-1, RR 16-2005]
shift from final to a creditable system. [Sec.
114(C), NIRC] Suspension of business operations – In
addition to other administrative and penal
The 5% final VAT shall represent the net VAT sanctions provided for in the NIRC and
payable of the seller. The remaining 7% implementing regulations, the CIR or his duly
Page 181 of 256

Illustration of the VAT System
VAT System (All VAT)

Raw Material (VAT) Manufacturer (VAT) Trader (VAT) End-User
SP (100+12) 100 112 SP (300 + 36) 300 SP (450 +54) 450

Cost 336 504
50 Cost (100 + 12) 100 Cost (300+36) 300
Profit 112 336
50 Profit 200 Profit 150
Purchase Purchases Purchases 504

112 336 12% VAT 54
Input VAT 12% VAT
12 36
OT 12% OT 12% OT 12%

12 36 54
IT IT IT
0 12 36
VAT Payable 12 Vat Payable 24 VAT Payable
18
VAT to BIR VAT to BIR VAT to BIR 18 Total VAT 54

12 24
VAT System (VAT Exempt 1st chain)

Raw Material Manufacturer Trader End-User
(VAT Exempt)
SP (100+ 0) 100 SP (300 + 36) 300 SP (450 +54) 450

Cost 50 336 504
Profit 50 Cost (100) 100 Cost (300+36) 300
Profit 200 336
Profit 150

100 336 12% VAT 54
Input VAT 12% VAT
0 36
Page 185 of 256

OT 0 OT 12% OT 12%
IT 36 54
0 IT IT
VAT Payable 0 0 36
Vat Payable VAT Payable 18
36
VAT to BIR VAT to BIR VAT to BIR Total VAT 54

0 36 18
VAT System (VAT Exempt mid-chain)

(VAT Exempt)
SP (100+12) 100 112 SP (300) SP (450 +54) 450

Cost 300 504
50 Cost (100 + 12) 100 Cost (300) 300
Profit 112 Profit 150
50 Profit
188

112 300 12% VAT 54
No Input VAT No VAT 0
0
OT 12% OT 0 OT 12%
12 IT 0 54
IT 0 Vat Payable 0 IT 0
VAT Payable VAT Payable
12 54

12 0 54
VAT System (VAT zero-rate mid-chain)

(VAT Zero-rated)
SP (100+12) 100 112 SP (300+ 0) SP (450 +54) 450

Cost 50 300 504
Profit 50 Cost (100 + 12) 100 Cost (300) 300
112 Profit 150
Page 186 of 256

Profit
188

112 300 12% VAT 54
12
OT 12% OT 12% OT 12%

12 0 54
IT IT IT
0 12 0
VAT Payable Vat Payable VAT Payable
12 (12) 54
VAT to BIR 12 VAT to BIR VAT to BIR Total VAT 54

(12) 54
Nature
D. PERCENTAGE TAXES: It is a privilege tax. Like VAT, it is imposed on
CONCEPT AND NATURE the privilege to sell commodities or services.
[DE LEON]
Concept
A percentage tax is a national tax measured by TAX BASE: Gross Receipts
a certain percentage of the gross selling price By its nature, a gross receipts tax applies to the
or gross value in money of goods sold, bartered entire receipts without any deduction,
or imported; or of the gross receipts or earnings exemption or exclusion, unless the law clearly
derived by any person engaged in the sale of provides otherwise. [China Banking Corp. v.
services. [CIR v. Solidbank Corp., G.R. No. CA, G.R. No. 146749 (2003)]
148191 (2003)]
TAX RATE
Percentage tax is a business tax imposed on Any person whose sales or receipts are
persons, entities, or transactions specified exempt from the payment of VAT and who is
under Sections 116 to 127 of the NIRC. not a VAT-registered person shall pay a tax
equivalent to 3% of his gross quarterly sales
or receipts.
Note: Cooperatives shall be exempt from the

3% gross receipts tax. [Sec. 116, NIRC]
Page 187 of 256

Illustration of the VAT System
VAT System (All VAT)

Raw Material (VAT) Manufacturer (VAT) Trader (VAT) End-User
SP (100+12) 100 112 SP (300 + 36) 300 SP (450 +54) 450

Cost 336 504
50 Cost (100 + 12) 100 Cost (300+36) 300
Profit 112 336
50 Profit 200 Profit 150

112 336 12% VAT 54
Input VAT 12% VAT
12 36
OT 12% OT 12% OT 12%

12 36 54
IT IT IT
0 12 36
VAT Payable 12 Vat Payable 24 VAT Payable
18
VAT to BIR VAT to BIR VAT to BIR 18 Total VAT 54

12 24
VAT System (VAT Exempt 1st chain)

(VAT Exempt)
SP (100+ 0) 100 SP (300 + 36) 300 SP (450 +54) 450

Cost 50 336 504
Profit 50 Cost (100) 100 Cost (300+36) 300
Profit 200 336
Profit 150

100 336 12% VAT 54
Input VAT 12% VAT
0 36
Page 185 of 256

OT 0 OT 12% OT 12%
IT 36 54
0 IT IT
VAT Payable 0 0 36
Vat Payable VAT Payable 18
36

0 36 18
VAT System (VAT Exempt mid-chain)

(VAT Exempt)
SP (100+12) 100 112 SP (300) SP (450 +54) 450

Cost 300 504
50 Cost (100 + 12) 100 Cost (300) 300
Profit 112 Profit 150
50 Profit
188

112 300 12% VAT 54
0
OT 12% OT 0 OT 12%
12 IT 0 54
IT 0 Vat Payable 0 IT 0
VAT Payable VAT Payable
12 54

12 0 54
VAT System (VAT zero-rate mid-chain)

(VAT Zero-rated)
SP (100+12) 100 112 SP (300+ 0) SP (450 +54) 450

Cost 50 300 504
Profit 50 Cost (100 + 12) 100 Cost (300) 300
112 Profit 150
Page 186 of 256

Profit
188

112 300 12% VAT 54
12
OT 12% OT 12% OT 12%

12 0 54
IT IT IT
0 12 0
VAT Payable Vat Payable VAT Payable
12 (12) 54
VAT to BIR 12 VAT to BIR VAT to BIR Total VAT 54

(12) 54
Nature
D. PERCENTAGE TAXES: It is a privilege tax. Like VAT, it is imposed on
CONCEPT AND NATURE the privilege to sell commodities or services.
[DE LEON]
Concept
A percentage tax is a national tax measured by TAX BASE: Gross Receipts
a certain percentage of the gross selling price By its nature, a gross receipts tax applies to the
or gross value in money of goods sold, bartered entire receipts without any deduction,
or imported; or of the gross receipts or earnings exemption or exclusion, unless the law clearly
derived by any person engaged in the sale of provides otherwise. [China Banking Corp. v.
services. [CIR v. Solidbank Corp., G.R. No. CA, G.R. No. 146749 (2003)]
148191 (2003)]
TAX RATE
Percentage tax is a business tax imposed on Any person whose sales or receipts are
persons, entities, or transactions specified exempt from the payment of VAT and who is
under Sections 116 to 127 of the NIRC. not a VAT-registered person shall pay a tax
equivalent to 3% of his gross quarterly sales
or receipts.
Note: Cooperatives shall be exempt from the

3% gross receipts tax. [Sec. 116, NIRC]
Page 187 of 256

PERSONS OR TRANSACTIONS SUBJECT TO PERCENTAGE TAX

Persons/ Transactions Percentage tax
Persons Exempt from 3% of gross quarterly sales or receipts
VAT [Sec. 116, NIRC]
Domestic Carriers; 3% of gross quarterly receipts

Keepers of Garages
[Sec. 117, NIRC]
International Carriers 3% of quarterly gross receipts
[Sec. 118, NIRC]
Franchises [Sec. 119,
NIRC] a. 3% on gross receipts derived from the business covered by the
a. Radio and/or law granting the franchise
television
broadcasting Note: The franchisees may opt to register as VAT taxpayer, which shall
companies with be irrevocable once exercised.
annual gross
receipts not b. 2% on gross receipts derived from the business covered by the
exceeding P10M law granting the franchise
b. Gas and water

utilities
Overseas Dispatch, 10% on the amount paid for such services
Message or
Conversation Originating Exemptions:
in the Philippines [Sec. 1. Government
120, NIRC] 2. Diplomatic services
3. International organizations
4. News services
Banks and Non-bank The following taxes are collected on gross receipts from sources within
Financial Intermediaries the Philippines.
[Sec. 121, NIRC] 1. Interest, commissions and discounts from lending activities as
well as income from financial leasing, based on remaining
maturities:
a. 5 years or less – 5%
b. More than 5 years – 1%
2. Dividends and equity shares and net income of subsidiaries –
0%
3. Royalties, rentals of property, profits from exchange and all
other items of gross income under Sec. 32, NIRC – 7%
4. Net trading gains within the year on foreign currency, debt
securities, derivatives, and other financial instruments – 7%
Page 188 of 256

Other Non-bank 5% on gross receipts derived from interest, commissions, discounts and
Financial Intermediaries other items of gross income
[Sec. 122, NIRC]
Note: Interests, commissions and discounts from lending, as well as
income from financial leasing shall be taxed based on the remaining
maturities:
1. 5 years of less – 5%
2. More than 5 years – 1%
Pawnshops are considered other non-bank financial intermediaries.

[First Planters Pawnshop v. CIR, G.R. No. 174134 (2008)]
Life Insurance Premiums 2% of total premiums collected, whether paid in money, notes, credits
[Sec. 123, NIRC] or substitute money
Taxable premiums exclude:

1. Premiums refunded within 6 months
2. Reinsurance
3. Premiums collected on the life insurance of a nonresident
insured
4. Premium collected on variable contracts in excess of the amount
necessary to insure the lives of variable contract owners.
Note: Purely cooperative companies or associations are exempted from

this tax.
Agents of Foreign A tax equal to twice the tax imposed in Sec. 123 of the NIRC
Insurance Companies ! This shall not apply to reinsurance.
[Sec. 124, NIRC] ! If property owner obtains insurance from foreign companies
without using an agent, he shall notify the Insurance
Commissioner and pay 5% on premiums paid.
Proprietors, Lessee or 1. Cockpits – 18%
Operator of Amusement 2. Cabarets, night or day clubs – 18%
Places [Sec. 125, NIRC] 3. Boxing exhibitions – 10%; exempt if a World or Oriental
Championship is at stake and a Filipino is a contender and the
exhibition is promoted by a Filipino or by an entity 60%-owned
by Filipinos
4. Professional basketball games – 15% in lieu of all other
percentage taxes
5. Jai-alai and racetracks – 30%
Gross receipts – all receipts of the proprietor, lessee or operator of the

amusement place, including income from TV, radio and motion picture
rights
Page 189 of 256

Winnings [Sec. 126, 1. Horse races – 10% on actual amount paid for every winning
NIRC] ticket after deducting the cost of ticket
2. Double forecast / quinella and trifecta bets – 4%
3. Owners of winning horses – 10% of the prizes
Sale, Barter or Exchange 1. Sale through the local stock exchange, other than sale by a
of Shares of Stock Listed dealer in securities – 6/10 of 1% of the gross selling price or
and Traded through the gross value in money of the shares of stock
Local Stock Exchange or 2. Sale through IPO of shares of stock in closely held corporations
through Initial Public
Offering (IPO) The tax is based on gross selling price or gross value in money of
said shares in accordance with the proportion of shares disposed to
the total outstanding shares after listing:
a. Up to 25% - 4%
b. Over 25% but not over 33 1/3% - 1%
Closely held corporation – any corporation at least 50% in value of the

outstanding capital stock or at least 50% of the total combined voting
power of all classes of stock entitled to vote is owned directly or
indirectly by or for not more than 20 individuals
SUMMARY OF TAX ON CARRIERS BY LAND / AIR / SEA
Area Object Kind Business Tax Income Tax
Person Domestic 3% Percentage Tax Regular Tax

By Land
Cargo/Goods Domestic 12% VAT Regular Tax
Domestic travel -
Domestic Regular Tax
Person / Cargo / 12% VAT
Goods International travel –
Domestic Regular tax
0% VAT
2.5% on Gross
Philippine Billing if
By Air / Sea Persons International VAT-exempt
doing business in
the Philippines
2.5% on Gross
International (doing
Philippine Billing if
Cargo / Goods business in the 3% Percentage Tax
doing business in
Philippines)
the Philippines
Page 190 of 256

Nature
E. EXCISE TAX: CONCEPT Excise taxes, whether under the specific or the
AND NATURE ad valorem tax system, is basically an indirect
tax imposed on certain types or classes of
Concept goods, whether locally manufactured or
Excise taxes are taxes imposed on certain imported. While the tax is directly levied upon
specified goods manufactured or produced in the manufacturer/importer upon removal of the
the Philippines for domestic sale or taxable goods from its place of production or
consumption or for any other disposition and to from the customs custody, the tax, in reality, is
things imported as well as services performed actually passed on to the end consumer as part
in the Philippines. [Sec. 129, par. 1, NIRC] of the transfer value or selling price of the
goods, sold, bartered or exchanged. [Silkair
Kinds of Excise Taxes [Sec. 129, par. 2, (Singapore) Pte. Ltd. v. CIR, G.R. No. 166482
NIRC] (2012)]
1. Specific tax – tax due is computed based
on: In the refund of indirect taxes, the proper party
o weight to question or seek a refund of the tax is the
o volume capacity statutory taxpayer, the person on whom the tax
o any other physical unit of is imposed by law and who paid the same even
measurement. when he shifts the burden thereof to another.
2. Ad valorem tax – tax due is computed The tax liability remains with the
based on: manufacturer/producer/importer that is
o selling price primarily, directly, and legally liable for the
o other specified value of the good or payment of excise taxes. [Ibid.]
service performed
Purpose
The NIRC enumerates the specific goods and 1. To curtail consumption of certain
services that are subject to Excise Tax: commodities, the excessive or
NIRC Goods/Services indiscriminate use of which is considered
Sec. 141 Distilled Spirits harmful to the individual or community
Sec. 142 Wines (e.g., alcoholic beverages and tobacco
Sec. 143 Fermented Liquors products);
Sec. 144 Tobacco Products 2. To protect a domestic industry, the
Cigars and products of which face competition from
Sec. 145 similar imported articles;
Cigarettes
Manufactured Oils 3. To distribute the tax burden in proportion to
Sec. 148 the benefit derived from a particular
and Other Fuels
government service (e.g., excise taxes on
Sec. 149 Automobiles
gasoline, lubricating oils and denatured
Non-essential
Sec. 150 alcohol for motive power); and
Goods
4. To raise revenue [DE LEON]
Non-essential
Sec. 150-A
Services*
Sweetened
Sec. 150-B
Beverages*
Sec. 151 Mineral Products
*Added by TRAIN Law
Page 191 of 256

Sec. 188 Certificates

F. DOCUMENTARY Sec. 189 Warehouse Receipts
STAMP TAX: CONCEPT Jai-alai, Horse Race Tickets,
AND NATURE Sec. 190 Lotto or Other Authorized
Numbers Games
Concept Sec. 191 Bills of Lading or Receipts
Documentary stamp tax (DST) is a tax on Sec. 192 Proxies
documents, instruments, loan agreements and Sec. 193 Powers of Attorney
papers evidencing the acceptance, Leases and Other Hiring
Sec. 194
assignment, sale or transfer of an obligation, Agreements.
right, or property incident thereto. [Sec. 173, Mortgages, Pledges, and Deeds
Sec. 195
NIRC] of Trusts
Deeds of Sale, Conveyances
Sec. 196
The NIRC enumerates the specific documents and Donation of Real Property
that are subject to DST: Charter Parties and Similar
Sec. 197
NIRC Documents Instruments
Documents, Loan Agreements, Assignments and Renewals of
Sec. 173 Sec. 198
Instruments and Papers Certain Instruments
Original Issue of Shares of
Sec. 174
Stocks Nature
Sales, Agreements to Sell, A DST is actually an excise tax because it is
Memoranda of Sales, Deliveries imposed on the transaction rather than on the
Sec. 175 or Transfer of Due-bills, document. It is levied on the exercise by
Certificates of Obligation, or persons of certain privileges conferred by law
Shares of Certificates of Stock for the creation, revision, or termination of
Bonds, Debentures, Certificates specific legal relationships through the
Sec. 176 of Stock or Indebtedness Issued execution of specific instruments. Hence, in
in Foreign Countries imposing the DST, the Court considers not only
Certificates of Profits or Interest the document but also the nature and character
Sec. 177 of the transaction is considered. [Phil. Banking
in Property or Accumulations
Bank Checks, Drafts, Certificates Corp. v. CIR, G.R. No. 170574 (2009)]
Sec. 178 of Deposit not Bearing Interest,
and Other Instruments Being an excise tax, it is paid only once. Since
Sec. 179 All Debt Instruments DST is not a tax on income, an exemption from
Sec. 180 All Bills of Exchange or Drafts income tax does not include DST. [BIR Ruling
Acceptance of Bills of Exchange No. DA-106-08, August 4, 2008]
Sec. 181
and Others
Foreign Bills of Exchange and The tax base is the document itself, not the
Sec. 182 transaction or the property described in the
Letters of Credit
Sec. 183 Life Insurance Policies document. Thus, the validity or invalidity of the
transaction, or the extent of the right to the
Policies of Insurance Upon
Sec. 184 property is not affected by payment or non-
Property
payment of the DST. [VITUG and ACOSTA]
Fidelity Bonds and Other
Sec. 185
Insurance Policies
Person liable
Policies of Annuities and Pre- It is paid by the person making, signing,
Sec. 186
Need Plans issuing, accepting or transferring the
Sec. 187 Indemnity Bonds documents. However, when one party to the
Page 192 of 256

taxable document enjoys the exemption from ii. Filing a claim for tax credit
the tax, the other party thereto who is not 2. Judicial Remedies (CTA/RTC)
exempt shall be the one directly liable for the a. Civil Action
tax. [TABAG, p. 429 (2019)] i. Appeal to the CTA
ii. Action to contest forfeiture
Purpose of chattel; and
The purpose of the law in imposing stamp iii. Action for damages
taxes is to raise revenue and not to invalidate b. Criminal Action
contracts or inflict penalties, and courts should i. Filing a criminal complaint
give it a liberal construction. [33 C.J.S. 315- against erring BIR officials
316] and employees
Filing and Payment Government Remedies

The tax return shall be filed and the tax due 1. Administrative Remedies
shall be paid at the same time within 10 days a. Enforcement of tax lien
after the close of the month when the taxable b. Distraint of personal property, and
document was signed, issued, accepted or garnishment of bank deposits
transferred. [Sec. 200(B), NIRC] c. Levy of real property
d. Forfeiture of property
Effect of Failure to Pay DST e. Compromise and abatement
a. Failure to stamp a taxable f. Penalties and fines
document shall not invalidate the g. Suspension of business operations
same. However, it shall not be 2. Judicial Remedies
recorded or admitted or used as a. Ordinary civil action
evidence in any court until the b. Criminal action
requisite stamp is affixed.
b. No notary or other officer 1. Assessment of Internal Revenue
authorized to administer oaths Taxes
shall add his jurat or
acknowledgment to the document Definition
unless the proper documentary To assess means to impose a tax; to fix or
stamp is affixed thereto or settle a sum to be paid by way of tax; to settle
cancelled. [Sec. 201, NIRC] determine or fix the amount of tax to be paid
(84 C.J.S 749-750)
1. Tax Remedies Under the NIRC
An assessment is the notice to the effect that
General Concepts the amount therein stated is due from a
taxpayer as a tax with a demand for payment
Taxpayer Remedies of the same within a stated period of time. [CIR
1. Administrative Remedies (BIR) v. CTA, G.R. No. L-21483 (1969)]
a. Before payment
i. Filing a protest with request Presumption of correctness
for reconsideration or An assessment is presumed correct and made
reinvestigation; and in good faith in the performance of official
ii. Entering into a compromise duties and failure to present proof of error will
b. After payment prosper such assessment. [Atlas Consolidated
i. Filing a claim for refund; Mining and Development Corp. v. CA, G.R. No.
and 104151 and 105563 (1995)].
Page 193 of 256

a. Procedural due process in tax Tax audit

assessments It is the process of examining, going over or
scrutinizing the books and records of the
[Sec. 228, NIRC; RR 12-99, as amended by taxpayer to ascertain the correctness of the tax
RR 18-13 and RR 7-18] declared and paid by the taxpayer.
i. Letter of Authority and Tax Audit There must be a grant of authority before any
revenue officer can conduct an examination or
Letter of Authority (LOA): An official assessment. Equally important is that the
document that empowers a Revenue Officer to revenue officer so authorized must not go
examine and scrutinize a taxpayer’s books of beyond the authority given. In the absence of
accounts and other accounting records, in such an authority, the assessment or
order to determine the taxpayer’s correct examination is a nullity. [CIR v. Sony
internal revenue tax liabilities. Philippines, Inc., G.R. No. 178697 (2010)]
General Rule: The issuance of an LOA is a Note: A Revenue Officer is allowed only 120
mandatory statutory requirement. [Sec. 13, days from the date of receipt of an LOA by the
NIRC] taxpayer to conduct the audit and submit the
required report of investigation. If the Revenue
Any tax assessment issued without an LOA is Officer is unable to submit his final report of
a violation of the taxpayers’ right to due investigation within the 120-day period, he
process and is therefore “inescapably void.” must then submit a progress report to his Head
[RMC 75-2018; Medicard Philippines, Inc. v. of Office, and surrender the LOA for
CIR, G.R. No. 222743 (2017)] revalidation.
Exception: The following cases need not be iii. Notice for Informal Conference (NIC)
covered by a valid LOA:
a. Cases involving civil or criminal tax The Revenue Officer who audited the
fraud which fall under the jurisdiction of taxpayer’s records shall state in his report
the Tax Fraud Division of the whether or not the taxpayer agrees with his
Enforcement Services, and findings that the taxpayer is liable for deficiency
b. Policy cases under audit by the special taxes. If the taxpayer is not amenable, based
teams in the National Office. [RMO 36- on the said Officer’s submitted report of
99] investigation, the taxpayer shall be informed, in
writing, of the discrepancies in the taxpayer’s
Letter of Authority vs. Letter Notice payment of his internal revenue taxes for the
A Letter Notice (LN) is not found in the NIRC purpose of “lnformal Conference,” in order to
and is not an authority to conduct an audit. The afford the taxpayer with an opportunity to
LN is merely a notice to the taxpayer that a present his side of the case.
discrepancy is found based on the BIR’s third
party information data matching programs. The Informal Conference shall in no case
Thus, an LOA must still be secured before extend beyond 30 days from receipt of the
proceeding with the further examination and notice for informal conference. If it is found that
assessment of the taxpayer. [Medicard the taxpayer is still liable for deficiency tax or
Philippines, Inc. v. CIR, G.R. No. 222743 taxes after presenting his side, and the
(2017)] taxpayer is not amenable, the case shall be
endorsed within 7 days from the conclusion of
Page 194 of 256

the Informal Conference for the issuance of a

deficiency tax assessment. Reply to the PAN
The taxpayer is given 15 days from the date of
iv. Issuance of Preliminary receipt of the PAN to respond.
Assessment Notice (PAN) • If the taxpayer fails to respond, he is
considered in default and a formal
General rule: A PAN shall be issued if it is letter of demand and assessment
determined that there exists sufficient basis to notice (FLD/FAN) shall be issued to the
assess the taxpayer for any deficiency tax. It taxpayer.
shall show in detail the facts and the law on • If he responds that he disagrees with
which the proposed assessment is based. the findings of deficiency taxes, an
FLD/FAN shall be issued within 15
Exceptions to the issuance of a PAN days from filing/submission of the
The NIC and the PAN shall not be required in taxpayer’s response, calling for
any of the following cases, in which case, a payment of the taxpayer’s deficiency
Formal Letter of Demand and Assessment tax liability, inclusive of the applicable
Notice (FLD/FAN) shall be issued outright: penalties. [RR 18-2013]
a. The finding for any deficiency tax is the
result of mathematical error in the v. Issuance of a Formal Letter of
computation of the tax as appearing on Demand and Final Assessment
the face of the return; or Notice (FLD/FAN)
b. A discrepancy has been determined
between the tax withheld and the An FLD/FAN is a declaration of deficiency
amount actually remitted by the taxes issued to a taxpayer who:
withholding agent; or a. fails to respond to a PAN within the
c. A taxpayer who opted to claim a refund prescribed period of time, or
or tax credit of excess creditable b. whose reply to the PAN was found to
withholding tax for a taxable period was be without merit.
determined to have carried over and
automatically applied the same amount Contents of the FLD/FAN
claimed against the estimated tax The taxpayer shall be informed in writing of the
liabilities for the taxable quarter or law and the facts on which the assessment is
quarters of the succeeding taxable made; otherwise the assessment shall be void.
year; or [Sec. 228, NIRC]
d. The excise tax due on excisable
articles has not been paid; or An assessment contains not only a
e. An article locally purchased or computation of tax liabilities, but also a demand
imported by an exempt person, such for payment within a certain period.
as, but not limited to, vehicles, capital Period for Issuance of the FLD/FAN
equipment, machineries and spare It must be issued within 15 days from the
parts, has been sold, traded or filing/submission of the taxpayer’s response to
transferred to a non-exempt person. the PAN.
[RR 18-2013] a. If the FLD/FAN is issued beyond the
15-day period, it shall still be valid, provided
Note: Prior to the issuance of a PAN, the that it is issued within the period of limitation
taxpayer may be allowed to make voluntary to assess internal revenue taxes.
payments of probable deficiency taxes and
penalties. [RMC 11-2014]
Page 195 of 256

Note: The revenue officers who caused the Modes of service of assessment notice
delay shall be subject to administrative 1. Personal Service – Notice is delivered
sanction. [RMC 11-2014] personally to the taxpayer at his known
address. If not practicable, notice shall be
b. If the FLD/FAN is issued before the served by substituted service or by mail.
lapse of the 15-day period, it shall be void. 2. Substituted Service – The notice is left with
a clerk or a person in charge at the
Note: Prematurely issuing an FLD/FAN before taxpayer’s known address.
the lapse of the 15-day period is a wanton 3. Service by mail [RR 18-2013]
disregard of the mandatory due process
requirement. [CIR v. Pacific Bayview Service to the tax agent shall be deemed
Properties, Inc., CTA EB No. 1677 (2018), service to the taxpayer. [RR 18-2013]
citing CIR v. Metro Star Superama, Inc., G.R.
No. 185371 (2010)] The notice shall first be served to the
taxpayer’s registered address before the same
vi. Disputed Assessment may be served to the taxpayer’s known
address, or in the alternative, may be served to
The taxpayer or his duly authorized the taxpayer’s registered address and known
representative may protest administratively address simultaneously. [RMC 11-2014]
against the FLD/FAN within 30 days from date
of receipt thereof. The taxpayer protesting an c. Tax Delinquency as
assessment may file a written request for Distinguished from Tax
reconsideration or reinvestigation. Deficiency
vii. Administrative Decision on a
Deficiency is defined as the amount still due
Disputed Assessment
and collectible from a taxpayer upon audit or
investigation; whereas delinquency is defined
viii. Appeal from an Administrative as the failure of the taxpayer to pay the tax due
Decision on Disputed Assessment
on the date fixed by law or indicated in the
assessment notice or letter of demand.
b. Requisites for a valid [Takenaka Corporation Philippine Branch v.
assessment CIR, CTA EB No. 745 (2012)]
1. The taxpayer shall be informed in writing of
the law and the facts on which the Tax Delinquency v. Tax Deficiency
assessment is made; otherwise, the Tax Delinquency Tax Deficiency
assessment notice shall be rendered null ● The self- ● The amount by
and void. [Sec. 228, NIRC] assessed tax per which the tax
2. assessment contains not only a return was not imposed by law
computation of tax liabilities, but also a paid or only exceeds the
demand for payment within a prescribed partially paid; or amount shown in
period. [CIR v. Pascor, G.R. No. 128315 ● The deficiency the tax return; or
(1999)] tax assessed by ● If no amount is
3. assessment must be served on and the BIR became shown in the
received by the taxpayer. [CIR v. Pascor, final and return, or if there
ibid] executory. is no return, then
the amount by
which the tax as
determined by the
CIR exceeds the
Page 196 of 256

amount 3. Failure to file a return. [Sec. 222, NIRC]

previously
assessed as a False return Fraudulent Failure to
deficiency [Sec. return file a return
56(B), NIRC] Contains Made with Omission to
Delinquency tax can Deficiency tax must wrong intent to file a return
be collected be assessed and information evade taxes within the
administratively by must go through the due to due time
distraint or levy or by process of filing the mistake, prescribed by
judicial action protest by the carelessness law
taxpayer and denial of or ignorance
such protest by the Deviation Intentional or Omission
BIR. may or may deceitful may or may
The filing of a civil The filing of a civil not be entry with not be
action for the action at the ordinary intentional intent intentional
collection of the court for collection Not subject to Subject to Not subject to
delinquent tax in the during the pendency 50% 50% 50%
ordinary court is a of protest may be the surcharge, surcharge surcharge,
proper remedy. subject of a motion to except if done except if
dismiss. In addition, willfully omission is
the taxpayer must file willful
a petition for review Assessment may be made within 10 years
with the CTA to toll after discovery of the falsity, fraud or omission
the running of the
prescriptive period. Waiver of the Statute of Limitations
Subject to Subject to The taxpayer and the CIR may agree in writing,
administrative administrative
before the expiration of the time prescribed in
penalties, such as penalties of interest
Sec. 203, to extend the period of assessment.
25% surcharge, and compromise
interest, and penalty, but NOT to
[Sec. 222(b), NIRC]
compromise penalty the 25% surcharge
[MAMALATEO] Note: A waiver of the statute of limitations is a
derogation of the taxpayers’ right to security
against prolonged and unscrupulous
d. Prescriptive Period for
investigations and must therefore be carefully
Assessment and strictly construed. However, the waiver
does not mean that the taxpayer relinquishes
General Rule: Within 3 years after the last day the right to invoke the defense of prescription
prescribed by law for the filing of the return or unequivocally particularly where the language
from the date of actual filing, whichever comes of the document is equivocal. [Philippine
later; provided, that a return filed before the last Journalists Inc. v. CIR, G.R. No. 162852
day prescribed by law for filing shall be (2004)]
considered as filed on such last day [Sec. 203,
NIRC] Requisites for a valid waiver under RMO 14-
2016:
Exception: Within 10 years after the discovery a. It must be in writing, but not necessarily in
of the falsity, fraud or omission in case of: (FFF) the form prescribed by RMO No. 20-90 or
1. False return RDAO No. 05-01, for as long as the
2. Fraudulent return with intent to evade tax; following are complied with:
or
Page 197 of 256

i. It is executed before the expiration government. [CIR v. Next Mobile, Inc., G.R.
of the prescriptive period. The date No. 212825 (2015)]
of execution shall be indicated.
ii. It is signed by the taxpayer himself Suspension of running of statute of
or his authorized representative. In limitations
a corporation, it must be signed by a. When the CIR is prohibited from
its responsible officials making the assessment or beginning
iii. The expiry date of the period agreed distraint or levy or a proceeding in
upon to assess/collect the tax after court, and for 60 days thereafter;
the regular 3-year period of b. When the taxpayer requests for a
prescription should be indicated. reinvestigation which is granted by the
b. Except for waiver of collection of taxes CIR;
which shall indicate the particular taxes c. When the taxpayer cannot be located
assessed, the waiver need not specify the in the address given by him in the
particular taxes to be assessed nor the return filed, BUT if the taxpayer informs
amount thereof, and it may simply state “all the CIR of any change in address, the
internal revenue taxes”. running of the statute of limitations
c. It may or may not be notarized. shall not be suspended;
d. CIR or designated officials or the d. When the warrant of distraint or levy is
concerned revenue district officer or group duly served upon the taxpayer, his
supervisor must indicate acceptance by authorized representative, or a
signing the same before the expiration of member of his household with
the period to assess or collect taxes, or sufficient discretion, and no property is
before the lapse of the period agreed upon located; and
in a prior agreement. e. When the taxpayer is out of the
e. The taxpayer has the duty to retain a copy Philippines.
of the accepted waiver.
Determining if prescription has set in
Two (2) material dates required on the The important date to remember is the date
waiver: when the demand letter or notice is released,
1. The date of execution of the waiver by the mailed or sent by the CIR to the taxpayer.
taxpayer or its authorized representative; [Basilan Estates, Inc. v. CIR, G.R. No. L-22492
and (1967)]
2. The expiry date of the period the taxpayer • Provided the release was effected
waives the statute of limitations BEFORE prescription sets in, the
assessment is deemed made on time,
Effect of noncompliance with the requisites even if the taxpayer actually receives it
General Rule: When a waiver does not comply AFTER the prescriptive period.
with the requisites for its validity, it is invalid and • Mailing of the assessment before the
ineffective to extend the prescriptive period to prescriptive period sets in must be proved
assess taxes. with substantial evidence by the CIR.
• Direct denial of receipt of a mailed demand
Exception: When both the BIR and the letter shifts the burden to the Government
taxpayer are in pari delicto or “in equal fault”, it to prove that such letter was indeed
would be more equitable if the BIR’s lapses received by the taxpayer [Republic v. CA,
were allowed to pass and consequently uphold G.R. No. L-38540 (1987)]. [INGLES]
the validity of the waivers in order to support
the principle that taxes are the lifeblood of the
Page 198 of 256

2. Taxpayer’s Remedies days from filing the

protest.
a. Protesting the assessment Counting of 180-day period for CIR to
decide
i. Period to File Protest From the filing of the From submission of
After issuance of the FLD/FAN, the taxpayer protest the complete
may protest the assessment within 30 days supporting
from receipt thereof by filing a request for documents
reconsideration or reinvestigation. [TABAG, p. 397 (2019]
ii. Kinds of Protest - request for Contents of the Protest

reconsideration or reinvestigation The protest shall state the following in his
protest; otherwise, the protest shall be
Request for Request for considered void and without force and effect.
Reconsideration Reinvestigation a. Nature of protest, whether reconsideration
As to nature/definition or reinvestigation, specifying newly
discovered or additional evidence he
It refers to a plea of It refers to a plea of
intends to present if it is a request for
re-evaluation of an re-evaluation of an
reinvestigation,
assessment on the assessment on the
b. Date of the assessment notice, and
basis of existing basis of newly
c. law, rules and regulations, or jurisprudence
records without need discovered evidence
on which his protest is based. [RR 18-
of additional that a taxpayer
2013]
evidence. It may intends to present in
involve both a the reinvestigation. It
Protest Against Some of Several Issues in
question of fact or of may also involve a
FLD/FAN
law or both. question of fact or
law or both. • If there are several issues in the FLD/FAN
and the taxpayer disputes or protests only
As to effect on the status of limitations
some of them, the assessment relating to
It shall not suspend A request for
the undisputed issue(s) shall become final,
the prescriptive reconsideration does
executory and demandable.
period to collect not toll the running of
• If the taxpayer fails to state the facts, the
the prescriptive
applicable law, rules and regulations, or
Note: It will only toll period for the
jurisprudence in support of his protest
the prescriptive collection of an
against some of the several issues, the
period to collect if the assessed tax. [CIR v.
same shall be considered undisputed and
request for Philippine Global
the related assessment shall likewise
reinvestigation is Communication Inc.,
become final, executory and demandable.
granted by the BIR. G.R. No. 167146
[RR 18-2013]
(2006)]
As to evidence
iii. Submission of Supporting
It is limited to the It entails the
Documents
evidence already at reception and
hand. evaluation of
For requests for reinvestigation, the taxpayer
additional evidence.
shall submit all relevant supporting documents
in support of his protest within 60 days from
Supporting
filing of the protest; otherwise, the assessment
documents must be
shall become final.
submitted within 60
Page 199 of 256

• “Relevant supporting documents” – to the FLD/FAN by the CIR’s duly authorized

documents necessary to support the representative. Under RR 18-2013, there is no
legal and factual bases in disputing a administrative appeal to the CIR for inaction by
tax assessment as determined by the the CIR’s representative. The remedy is to
taxpayer await the decision or file a petition for review to
• Assessment shall become final” – the CTA within 30 days after the lapse of the
taxpayer is barred from disputing the 180-day waiting period.
correctness of the issued assessment
by introduction of newly discovered or DECISION ON THE PROTEST FILED
additional evidence, and the FDDA 1. Denial of the protest through the
shall consequently be denied. issuance of a Final Decision on Disputed
• The 60-day period to submit supporting Assessment (FDDA)
documents shall NOT apply to
requests for reconsideration. [RR 18- The decision of the CIR or his duly authorized
2013 representatives shall state (a) the facts, the
applicable law, rules and regulations or
iv. Effect of Failure to File Protest jurisprudence on which such decision is based,
and (b) that the same is his final decision.
Failure of the taxpayer to file a protest against
the FLD/FAN within 30 days will make the Effect of a void FDDA
assessment final, executory and demandable. A void FDDA does not ipso facto render the
No request for reconsideration or assessment void. A “decision” differs from an
reinvestigation shall be granted on tax “assessment” and failure of the FDDA to state
assessments that have already become final, the facts and law on which it is based renders
executory and demandable. the decision void, but not the assessment. [CIR
v. Liquigaz Philippines Corp., GR No. 215534,
v. Action of the Commissioner on the (2016)]
Protest Filed
2. Indirect denial of the protest
Period to act upon or decide the protest
filed The following actions are equivalent to a denial
1. By the CIR’s duly authorized of the protest:
representative a. Filing of collection suit against taxpayer
a. In a request for reinvestigation, [CIR v. Union Shipping, G.R. No. L-66160
within 180 days from submission of (1990)]
documents; or b. Issuing a warrant of distraint and levy
b. In a request for reconsideration, [CIR v. Algue, G.R. No. L-28896 (1998)]
within 180 days from the date of c. A final demand letter from BIR
filing of the protest
2. By the CIR Note: A final demand letter from the BIR,
a. In case of protest, within 180 days reiterating to the taxpayer the immediate
from the filing of the protest payment of a tax deficiency assessment
b. In case of an administrative appeal, previously made, is tantamount to a denial of
within 180 days from the filing of the taxpayer’s request for reconsideration.
the administrative appeal Such letter amounts to an FDDA and is thus
appealable to the CTA. [CIR v. Isabela Cultural
Note: An administrative appeal to the CIR may Corporation, G.R. No. 135210 (2001)]
only be availed of upon the denial of the protest
Page 200 of 256

d. Filing of criminal action against 2. In case of inaction by the CIR or his

taxpayer duly authorized representative within the
180-day period
3. Inaction by the CIR or his duly
authorized representative a. Appeal to the CTA within 30 days from the
lapse of the 180-day period, OR
If the protest is not acted upon within the 180- b. Await the final decision of the CIR or his
day period, the inaction by the CIR is duly authorized representative on the
considered as a denial of protest. disputed assessment and appeal such final
decision to the CTA within 30 days after
REMEDIES OF THE TAXPAYER IN CASE OF receipt of such decision. [RR 18-2013]
DENIAL OR INACTION BY THE CIR
Note: These options are mutually exclusive,
1. In case of denial of protest and the resort to one bars the application of the
other. [Rizal Commercial Banking Corporation
a. If the protest is denied, in whole or in part, v. CIR, G.R. No. 168498 (2007); RR 18-2013]
by the CIR’s duly authorized
representative, the taxpayer may either: Effect of failure to appeal to the CTA in due
i. Appeal to the CTA within 30 time
days from the date of receipt of 1. The decision or assessment becomes final,
the decision executory and demandable.
ii. Elevate his protest through a 2. The taxpayer is barred, in an action for
request for reconsideration to collection, from invoking any defense that
the CIR within 30 days from will re-open the question of his liability on
date of receipt of the said the merits;
decision. 3. The assessment is considered correct and
may be enforced by summary remedies or
Note: No request for reinvestigation shall by judicial action;
be allowed in administrative appeal and 4. The taxpayer may raise only questions of
only issues raised in the decision of the jurisdiction, collusion between the parties,
Commissioner’s duly authorized or fraud in the party offering the record with
representative shall be entertained by the respect to the proceedings.
Commissioner. [RR 18-2013] 5. The assessment which has become final
and executory cannot be superseded by a
b. If the protest or administrative appeal, as new assessment. [DE LEON]
the case may be, is denied, in whole or in
part, by the CIR, the taxpayer may appeal b. Recovery of Tax Erroneously or
to the CTA within 30 days from receipt of Illegally Collected
the decision denying the protest.
Otherwise, the assessment shall become Tax Refund as Distinguished from Tax
final, executory and demandable. Credit
• Tax refund takes place when there is
Note: A motion for reconsideration of the CIR’s actual reimbursement.
denial of the protest or administrative appeal • Tax credit takes place upon the
shall not toll the 30-day period to appeal to the issuance of a tax certificate or tax credit
CTA. memo, which can be applied against
any sum that may be due and collected
from the taxpayer.
Page 201 of 256

i. Grounds, Requisites, and Period for tax regardless of any supervening cause
Filing a Claim for Refund or [Sec. 229, NIRC]
Issuance of a Tax Credit Certificate Note: Both the claim for refund with the BIR
(TCC) and the subsequent appeal to the CTA
must be filed within the 2-year period.
Grounds for filing a claim for tax refund or
credit e. Taxpayer must show proof of the payment
1. Tax is erroneously or illegally assessed or of tax [Sec. 229, NIRC]
collected Note: The two-year period is not jurisdictional.
a. Taxes are erroneously paid when a Even if it had already lapsed, the same may be
taxpayer pays under a mistake of suspended for reasons of equity and other
fact, as when he is not aware of an special circumstances. [CIR v. Philippine
existing exemption in his favor at American Life Ins. Co., G.R. 105208 (1995)]
the time that payment is made.
b. Taxes are illegally collected when It is subject to waiver in the absence of
payments are made under duress. objection to a claim filed after 2 years.
c. Penalty is collected without
authority Two-year period when counted
2. Penalty is collected without authority
3. Sum collected is excessive or in any General Rule: From the date the tax was paid
manner wrongfully collected [Sec. 229,
NIRC] Exceptions:
a. If the tax is withheld at source – from the
Requisites for tax refund or tax credit date it falls due at the end of the taxable
1. There is a tax collected erroneously or year [Gibbs v. CIR, G.R. No. L-17406
illegally, or a penalty collected without (1965)]
authority, or a sum excessively or b. If the income is paid on a quarterly basis –
wrongfully collected. from the time of filing the final adjustment
2. There must be a written claim for refund return [CIR v. CA, G.R. No. 117254 (1999)]
filed by the taxpayer to the CIR [Vda. De c. When the tax is paid in installments – from
Aguinaldo v. CIR, G.R. No. L-19927 the date of final payment or the last
(1965)] installment
Exceptions: Legal basis of tax refunds

a. When on the face of the return upon which Tax refunds are based on the principle of
payment was made, such payment quasi-contract or solutio indebiti. The
appears clearly to have been erroneously Government is not exempted from the
paid, the CIR may refund or credit the tax application of the time-honored doctrine that no
even without a written claim [Sec. 229, person shall unjustly enrich himself at the
NIRC] expense of another. [CIR v. Acesite
b. A return filed showing an overpayment (Philippines) Hotel Corporation, G.R. No.
shall be considered as a written claim for 147295 (2007); Secs. 2142 and 2154, NCC]
credit or refund. [Sec. 204(C), NIRC]
c. The  claim must be a categorical claim for Necessity of proof in claim for refund
reimbursement [Bermejo v. CIR, G.R. No. A claim for refund partakes of the nature of an
L-3029 (1950)] exemption and is strictly construed against the
d. The claim for refund must be filed within 2 claimant. The burden of proof is on the
years from the date of the payment of the taxpayer claiming the refund that he is entitled
Page 202 of 256

to the same. [CIR v. Tokyo Shipping, G.R. No.

L-68252 (1995)] Note: These two options under Section 76 are
alternative in nature. The choice of one
ii. Proper Party to File Claim for Refund precludes the other. [Republic v. Team (Phils.)
or Tax Credit Energy Corporation, G.R. No. 188016 (2015)]
General Rule: The “taxpayer” is the person Irrevocability rule

entitled to claim a tax refund; hence, the proper Once the option to carry over and apply the
party to file a claim for refund or credit. excess income tax payments to succeeding
quarters of the succeeding years is taken, that
Exceptions: option is irrevocable for that taxable period.
a. In case of indirect taxes, the proper party is Consequently, a taxpayer is barred from
the “statutory taxpayer, the person on securing a refund of, or tax credit certificate for,
whom the tax is imposed by law and who the excess amount that it has initially opted to
paid the same even if he shifts the burden carry-over. [Sec. 76, NIRC]
thereof to another.” [Silkair (Singapore)
Pte. Ltd. v. CIR, G.R. No. 173594 (2008)] Payment under protest not required
b. Withholding agent A suit or proceeding for tax refund may be
a. In case the taxpayer does not file a maintained whether or not such tax, penalty or
claim for refund, the withholding sum has been paid under protest or duress.
agent may file the claim. [CIR v. [Sec. 229, NIRC].
Smart Communications, Inc., G.R.
Nos. 179045-46 (2010)] Remedy upon Denial or Inaction by the CIR
b. The withholding agent of a non-
resident foreign corporation may Taxpayer’s remedies
file the claim. [CIR v. Procter & 1. If the CIR denies claim – appeal to the CTA
Gamble Phil. Mfg. Corp., G.R. No. within 30 days from receipt of the CIR’s
L-66838 (1991)] decision and within 2 years from the date
of payment
Reason: The withholding agent, who is made 2. If the CIR does not act on the claim and the
personally liable for the withholding tax, is a 2-year period is about to lapse – file a claim
“taxpayer” under the NIRC. The withholding before the CTA prior to the lapse of the 2-
agent is directly and independently liable for year period; otherwise, the claim shall be
the correct amount of tax that should be barred [R.A. 1125, as amended]
withheld and for deficiency assessments,
surcharges and penalties. [CIR v. Procter & Simultaneous filing allowed
Gamble Phil. Mfg. Corp., G.R. No. L-66838 If the CIR takes time in deciding the claim and
(1991)] the period of two years is about to end, the suit
or proceeding must be started in the CTA
Option of a corporate taxpayer in case of before the end of the 2 year period without
excess income tax payments awaiting the decision of the CIR. [Gibbs v. CIR,
If the sum of the quarterly tax payments made G.R. No. L-17406 (1965)]
during the taxable year exceeds the total tax
due on the entire taxable income of that year, Period for claiming refund once granted
the corporation shall either: The refund check or warrant must be claimed
a. carry-over the excess credit; or or cashed within 5 years from the date such
b. be credited or refunded with the excess warrant or check was mailed or delivered;
amount paid otherwise it shall be forfeited in favor of the
Page 203 of 256

government and the amount thereof shall Exception: The judicial claim need not await
revert to the general fund. [Sec. 230(A), NIRC] the expiration of the 90-day period, if such was
filed from December 10, 2003 (issuance of BIR
Period for using the TCC Ruling No. DA-489-03) to October 6, 2010
TCCs may be applied against all internal (promulgation of Aichi).
revenue taxes, excluding withholding tax.
TCCs which remain unutilized after 5 years Sec. 229 Sec. 112
from the date of issue shall, unless revalidated, Refers to a refund or Refers to a refund or
be considered as invalid, and shall revert to the credit of tax credit of excess
general fund. [Sec. 230, NIRC] 1. tax erroneously or unutilized input
or illegally VAT attributable to
All TCCs issued by the BIR shall not be allowed assessed or zero-rated sales
to be transferred or assigned to any person. collected, or
[RR 14-2011] 2. penalty collected
without authority,
iii. Distinction Between Refund of or
Unutilized Input VAT (Sec. 112, 3. any sum
NIRC) and Refund of Erroneously or excessively or
Illegally Collected Tax (Sec. 229, wrongfully
NIRC) collected
The 2-year period The 2-year period
Rules on refund of excess or unutilized shall be reckoned shall be reckoned
input VAT from the date of from the close of the
1. When to file an administrative claim with payment of the tax taxable quarter
the CIR: or penalty. when the sales were
a. General rule: Within 2 years from made.
the close of the taxable quarter Both the Only the
when the sales were made [Sec. administrative claim administrative claim
112(A), NIRC; CIR v. Mirant with the CIR and the is required to be filed
Pagbilao, G.R. No. 172129 (2008)] appeal to the CTA within the 2-year
b. Exception: Within 2 years from the must be made within period.
date of payment of the output VAT, the 2-year period.
if the administrative claim was filed If the 2-year period is Sec. 112(C) of the
from June 8, 2007 (promulgation of about to lapse and NIRC provides a 90-
Atlas v. CIR) to September 12, the CIR has not day waiting period
2008 (promulgation of Mirant) acted on the claim, for the CIR to decide
2. When to file a judicial claim with the CTA: the taxpayer may on the application for
a. General rule: Section 112(D) already appeal to the tax refund or credit.
applies; not Section 229 CTA without waiting Compliance with the
i. Within 30 days from the full or for the decision of 90-day waiting
partial denial of the the CIR. period is mandatory
administrative claim by the CIR; and jurisdictional.
or
ii. Within 30 days from the Thus, the taxpayer
expiration of the 90-day period may elevate his
provided to the CIR to decide claim to the CTA (a)
on the claim. This is mandatory within 30 days from
and jurisdictional. the full or partial
Page 204 of 256

denial of the claim, or clear inability to pay the assessed tax.

(b) within 30 days [Sec. 204(A), NIRC; Sec. 3, RR 30-2002]
after the lapse of the
90-day waiting Limits of the CIR’s power to compromise
period, in case of
inaction by the CIR. Ground Minimum compromise
[CIR v. San Roque Power Corporation, G.R. rate
No. 187485 (2013); Visayas Geothermal Financial 10% of the basic assessed
Power Company v. CIR, G.R. No. 197525 incapacity tax
(2014); Sec. 112, NIRC, as amended by Other cases 40% of the basic assessed
TRAIN Law] tax
[Sec. 204(A), NIRC]
c. Power of Commissioner of Internal
Revenue to Compromise Payment of compromise upon filing of
application
Authority to compromise and abate taxes The compromise offer shall be paid by the
General rule: The CIR has the authority to taxpayer upon filing of the application for
compromise or abate any tax liability. [Sec. compromise settlement. No application for
7(C), NIRC] compromise settlement shall be processed
without the full settlement of the offered
Exception: The power to compromise may be amount. In case of disapproval of the
delegated to: application for compromise settlement, the
1. the Regional Evaluation Board (REB), in amount paid upon filing of the aforesaid
case of: application shall be deducted from the total
a. assessments issued by regional outstanding tax liabilities. [RR 9-2013]
offices involving basic taxes of
P500,000 or less; and Requisites of a tax compromise
b. minor criminal violations • The taxpayer must have a tax liability;
discovered by regional and district • There must be an offer by the taxpayer or
officials [Sec. 7(C), NIRC] the Commissioner of an amount to be paid
2. the National Evaluation Board (NEB), by the taxpayer
when: • There must be an acceptance by the
a. the basic tax exceeds P1,000,000, Commissioner or taxpayer as the case may
or be, of the offer in settlement of the original
b. the settlement offered is less than claim.
the prescribed minimum rates
[Sec. 204(A), NIRC] Note: A compromise is consensual in nature.
Hence, it may not be imposed on the taxpayer
Grounds for a compromise without his consent. The BIR may only suggest
The CIR may compromise the payment of any settlement of the taxpayer’s liability through a
internal revenue tax in the following cases: compromise.
a. Doubtful validity of the assessment – when
there exists reasonable doubt as to the Cases which may be compromised:
validity of the claim against the taxpayer a. Delinquent accounts
(e.g., one arising from a jeopardy b. Cases under administrative protest after
assessment, arbitrary assessment); or issuance of the FAN to the taxpayer which
b. Financial incapacity – when the financial are still pending in the Regional Offices,
position of the taxpayer demonstrates a Revenue District Offices, Legal Service,
Page 205 of 256

Large Taxpayer Service (LTS), Collection Coverage of abatement

Service, Enforcement Service and other General rule: The CIR’s authority to abate is
offices in the National Office applicable to surcharge and compromise
c. Civil tax cases being disputed before the penalties only.
courts
d. Collection cases filed in courts Exception: In meritorious instances, the CIR
e. Criminal violations, except (i) those already may abate the interest as well as basic tax
filed in court or (ii) those involving criminal assessed, provided that cases for abatement
tax fraud [Sec. 2, RR 30-2002] or cancellation of tax, penalties and/or interest
by the CIR shall be coursed through certain
Cases which cannot be compromised: officials. [Sec. 4, NIRC]
a. Withholding tax cases, unless the
applicant-taxpayer invokes provisions of Compromise Abatement
law that cast doubt on the taxpayer's As to nature/definition
obligation to withhold It is a contract It is the cancellation
b. Criminal tax fraud cases confirmed as such whereby the parties, of the entire amount
by the CIR or his duly authorized by reciprocal of tax payable
representative concessions, avoid a because the tax
c. Criminal violations already filed in court litigation or to put an appears to be
d. Delinquent accounts with duly approved end to one already unjustly or
schedule of installment payments commenced. It excessively
e. Cases where final reports of reinvestigation reduces the amount assessed or the
or reconsideration have been issued of taxpayer’s liability. costs do not the
resulting in reduction in the original collection of the
assessment and the taxpayer is agreeable amount due.
to such decision by signing the required As to authorized officer
agreement form for the purpose. CIR and, in certain CIR
f. Cases which become final and executory cases, the NEB and
after final judgment of a court, where REB
compromise is requested on the ground of As to grounds
doubtful validity of the assessment 1. Doubtful validity 1. Unjustly or
g. Estate tax cases where compromise is of assessment excessively
requested on the ground of financial 2. Financial assessed tax
incapacity of the taxpayer [Sec. 2, RR 30- incapacity 2. Administration
2002] and collection
costs do not
ABATEMENT justify the
It refers to the cancellation of the entire amount collection of the
of tax payable. amount due
Grounds for abatement

d. Non-retroactivity of Rulings
a. The tax or any portion thereof appears to
be unjustly or excessively assessed; or
See Taxation 1 Reviewer, Part J. on
b. The administration and collection costs do
Prospectivity of Laws
not justify the collection of the amount due.
[Sec. 204(B), NIRC]
Page 206 of 256

3. Government Remedies for made after the 3-year period for making an
assessment. [Sec. 203, NIRC]
Collection of Delinquent
Taxes Exception: A proceeding in court for the
collection of such tax may be filed without
a. Requisites assessment in the case of (i) false or fraudulent
1. The government can initiate collection return with intent to evade tax or of (ii) failure to
administratively or judicially once the file a return [Sec. 222(a), NIRC]
assessment becomes final and executory.
2. Collection must be made within 5 years Waiver of prescriptive period
following the assessment of the tax. [Sec. If tax was assessed within the period agreed
222(c), NIRC] upon by the CIR and the taxpayer, such tax
may be collected by distraint or levy or by a
The government has two ways to collect: proceeding in court within the period agreed
1. Summary or administrative remedies upon in writing before the expiration of the 5-yr
a. Distraint on personal property period. [Sec. 222(d), NIRC]
b. Levy on real property
2. Judicial remedies (civil or criminal) Suspension of running of statute of
limitations
Note: The remedies of distraint and levy shall [see discussion under Assessments]
not be availed of where the amount of tax
involved is not more than P100. c. Administrative Remedies
b. Prescriptive Periods; Suspension i. Tax Lien

of Running of Statute of
Limitations A tax lien is a legal claim or charge on property,
whether real or personal, established by law as
a source of security for the payment of tax
Prescriptive period
obligations. [HSBC v. Rafferty, G.R. No. L-
General Rule: The taxes due must be
13188 (1918)]
collected within 5 years following the
assessment of the tax. [Sec. 222(c), NIRC]
Nature and extent of tax lien
Exception: 1. When a taxpayer neglects or refuses to pay
his internal revenue tax liability after
a. In case of (i) false or fraudulent return with
demand, the amount so demanded shall be
intent to evade tax or of (ii) failure to file a
a lien in favor of the government from the
return, a proceeding in court for the
time the assessment was made by the CIR
collection of such tax without assessment
until paid with interests, penalties, and
may be made within 10 years from
discovery of falsity, fraud or omission. [Sec. costs that may accrue in addition thereto
upon all property and rights to property
222(a), NIRC]
b. When a waiver of the statute of limitation is belonging to the taxpayer.
2. The lien shall NOT be valid against any
executed within the 5-year period,
collection may be made within the period mortgagee, purchaser or judgment creditor
until notice of such lien shall be filed by the
agreed upon. [Sec. 222(d), NIRC]
CIR in the office of the Register of Deeds
Court proceeding for collection of tax of the province or city where the property of
the taxpayer is situated or located. [Sec.
General rule: No proceeding in court without
assessment for the collection of taxes may be 219, NIRC]
Page 207 of 256

Grounds for Constructive Distraint:

Seizure under forfeiture vs. seizure to When the taxpayer is:
enforce a tax lien 1. delinquent; or
In the former, all the proceeds derived from the 2. retiring from any business subject to tax; or
sale of the thing forfeited are turned over to the 3. intending to leave the Philippines; or
CIR; in the latter, the residue after payment of 4. intending to remove his property from the
taxes and expenses is returned to the owner of Philippines or to hide or conceal his
the property. [BPI v. Trinidad, G.R. No. L- property; or
16014 (1921)] 5. planning to perform any act tending to
obstruct the proceedings for collecting the
ii. Distraint and Levy tax due or which may be due from him
[Sec. 206, NIRC]
DISTRAINT OF PERSONAL PROPERTY
How constructive distraint is effected:
Distraint is a remedy in which the collection of 1. By requiring the taxpayer or any person
tax is enforced on the goods, chattels, or having possession or control of such
effects, and other personal property of property to:
whatever character, including stocks and other a. sign a receipt covering the property
securities, debts, credits, bank accounts, and distrained;
interest in and rights to personal property. [Sec. b. obligate himself to preserve the
205(a), NIRC] same intact and unaltered; and
c. not to dispose of the same in any
Kinds of Distraint: manner whatever, without the
1. Constructive Distraint express authority of the CIR.
2. Actual Distraint 2. In case the taxpayer or the person having
the possession and control of the property
Constructive Distraint Actual Distraint refuses or fails to sign the receipt, the
As to procedure revenue officer effecting the constructive
The BIR does not take The personal property is distraint shall proceed to prepare a list of
physical possession of actually taken.
such property and, in the presence of 2
the personal property.
As to basis witnesses, leave a copy thereof in the
Delinquency of the The taxpayer is already premises where the property distrained is
taxpayer is not delinquent in the located. [Sec. 206, NIRC]
necessary. payment of his taxes.
As to the disposition of the personal property Garnishment
The personal property is The personal property is This refers to the taking of personal properties,
merely held as security taken to be sold in order
usually cash or sums of money, owned by a
to answer for any future to satisfy the tax
tax delinquencies. delinquencies. delinquent taxpayer which is in the possession
As to purpose of a third party (e.g., bank accounts).
The purpose is to protect The purpose is to
the government satisfy the tax, expenses Procedure for actual distraint
revenues and ensure of distraint and the cost 1. Commencement of distraint proceedings
that there are properties of the subsequent sale. The warrant of distraint is issued by:
that the government
could proceed against
a. CIR or his duly authorized
after a determination of representative – where the amount
the amount of deficiency involved is more than P1M
taxes.
(TABAG, p. 405-406 (2019))
Page 208 of 256

b. Revenue District Officer – where the 4. Notice of sale of distrained

amount involved is P1M or less [Sec. properties
207(A), NIRC] a. A notice of the public sale shall be posted
2. Service of warrant of distraint in not less than 2 public places in the
municipality or city (one of which is the
Distraint of tangible properties Office of the Mayor) where the distraint was
The officer serving the warrant shall leave a list made.
of the personal property distrained, including a b. The notice shall specify the time and place
statement of the sum demanded and note of of the sale.
the time and place of sale, either: c. The time of sale shall not be less than 20
a. with the owner or person from whose days after notice to the owner and the
possession such goods, chattels, or effects publication or posting of such notice. [Sec.
or other personal property were taken, OR 209, NIRC]
b. with someone of suitable age and
discretion at the dwelling or place of 5. Sale at public auction
business of such person [Sec. 208, NIRC] a. At the time of the public sale, the revenue
officer shall sell the goods, chattels, or
Distraint of intangible properties effects, or other personal property at a
a. Stocks and other securities: by serving a public auction, to the highest bidder for
copy of the warrants of distraint on the cash or with the approval of the CIR,
taxpayer, and upon the president, through a duly licensed commodity or stock
manager, treasurer or other responsible exchanges.
officer of the corporation, company or b. In case of stocks and other securities, the
association which issued the stocks or officer shall execute a bill of sale which he
securities shall deliver to the buyer, and copy thereof
b. Debts and credits: by leaving with the to the corporation, company or association
person owing the debts or having in his that issued the stocks or other securities.
possession or under his control such c. Any residue over and above what is
credits, or with his agent, a copy of the required to pay the entire claim, including
warrant of distraint expenses of sale and distraint, shall be
c. Bank accounts: by serving a warrant of returned to the owner of the property sold.
garnishment upon the taxpayer and upon The expenses shall be limited to actual
the president, manager, treasurer or other expenses of seizure and preservation of
responsible officer of the bank [Sec. 208, the property pending the sale, excluding
NIRC] charges for the services of the local internal
revenue officer or his deputy. [Sec. 209,
3. Report on the distraint NIRC]
A report shall be submitted by the distraining
officer to the Revenue District Officer, and to 6. Release of the properties from
the Revenue Regional Director within 10 days distraint
from receipt of the warrant. If at any time prior to the consummation of the
sale all proper charges are paid to the officer
Note: The CIR or his duly authorized conducting the sale, the goods or effects
representative may, in his discretion, allow the distrained shall be restored to the owner. [Sec.
lifting of the order of distraint. [Sec. 207(A), 210, NIRC]
NIRC]
Page 209 of 256

7. Purchase by the government at sale c. a description of the property levied

upon distraint upon.
If the highest bid is not equal to the amount of 2. Service of written notice
the tax or is very much less than the actual Written notice of the levy shall be mailed to or
market value of the articles offered for sale, the served upon:
CIR or his deputy may purchase the same on a. the Register of Deeds of the city of the
behalf of the National Government for the province where the property is located
amount of taxes, penalties and costs due. The and
property so purchased may be resold by the b. upon (i) the delinquent taxpayer, or (ii)
CIR or his deputy. [Sec. 212, NIRC] if he be absent from the Philippines, to
his agent or the manager of the
8. Report of sale to CIR business in respect to which the liability
Within 2 days after the sale, the officer making arose, or (iii) if there be none, to the
the same shall make a report of his occupant of the property in question.
proceedings in writing to the CIR. [Sec. 211, [Sec. 207(B), NIRC]
NIRC] 3. Advertisement of the sale
Within 20 days after levy, an advertisement of
LEVY ON REAL PROPERTY the sale of the property or a usable portion
thereof necessary to satisfy the claim and cost
Levy refers to the seizure of real properties and of sale shall be made, and the advertisement
interest in or rights to such properties for the shall cover a period of 30 days.
satisfaction of taxes due from the delinquent
taxpayer. It shall be effected by:
a. posting a notice at the main entrance of
When levy may be made the municipal building or city hall and in
It can be made before, simultaneously or after a public and conspicuous place in the
the distraint of personal property. [Sec. 207(B), barrio or district in which the real estate
NIRC] lies; and
b. publication once a week for 3 weeks in
Note: If the warrant of levy is not issued before a newspaper of general circulation in
or simultaneously with the warrant of distraint, the municipality or city where the
and the proceeds from the sale of the property is located.
distrained properties are not sufficient to satisfy
the tax delinquency, the CIR or his duly The advertisement shall contain:
authorized representative shall within 30 days a. the amount of taxes and penalties due;
after execution of the distraint, proceed with the b. the time and place of sale;
levy on the taxpayer’s real property. [Sec. c. the name of the taxpayer against whom
207(B), NIRC] taxes are levied; and
d. a short description of the property to be
Procedure for levy on real property sold.
1. Issuance of warrant of levy
The CIR or his duly authorized representative 4. Sale of real property
shall prepare a duly authenticated certificate At any time before the day fixed for the sale,
showing: the taxpayer may discontinue all proceedings
a. the name of the taxpayer; by paying the taxes, penalties and interest.
b. the amount of tax and penalty due from Otherwise, the sale shall proceed. [Sec. 213,
him; and NIRC]
Page 210 of 256

In case the proceeds of the sale exceed the Further distraint or levy
claim and cost of sale, the excess shall be The remedy by distraint of personal property
turned over to the owner of the property. [Sec. and levy on realty may be repeated if
213, NIRC] necessary until the full amount due, including
all expenses, is collected. [Sec. 217, NIRC]
5. Redemption of property sold
Within one (1) year from the date of sale, the SUMMARY
taxpayer or anyone for him, may pay to the It is the seizure of personal
Revenue District Officer the following: property, tangible or
a. public taxes Distraint intangible, by the government
b. penalties to effect collection of taxes
c. interest from the date of delinquency to including penalties.
the date of sale It is the taking of personal
d. interest of 15% per annum on said property, usually cash or sums
Garnishm
purchase price from the date of sale to of money, owned by the
ent
the date of redemption. [Sec. 214, delinquent taxpayer which is in
NIRC; RMC 46-2018] the possession of a third party.
It is the seizure of real property
Note: The owner shall not be deprived of Levy of of the taxpayer by the
possession of the said property and shall be real government in order to
entitled to rents and other income until the property enforcement payment of
expiration of the period for redemption [Sec. taxes.
214, NIRC] [TABAG, p. 406 (2019)]
6. Final deed of sale to the purchaser iii. Forfeiture of Real Property

If the property is not redeemed within the
period of redemption, a final deed of sale shall Forfeiture implies a divestiture of property
be issued in favor of the purchaser. without compensation in consequence of a
default or offense. The effect of forfeiture is to
7. Forfeiture in Favor of the transfer the title of the specific thing from the
Government owner to the government. [DE LEON]
a. If there is no bidder for the real property
OR Instances when forfeiture is appropriate
b. If the highest bid is not sufficient to pay 1. All chattels, machinery, and removable
the taxes, penalties and costs] fixtures of any sort used in the unlicensed
production of articles [Sec. 268(B), NIRC]
The Register of Deeds shall transfer the title of 2. Dies and other equipment used for the
the property upon registration with his office of printing or making of any internal revenue
any declaration of forfeiture. stamp, label or tag which is in imitation of or
purports to be a lawful stamp, label or tag [Sec.
The taxpayer may redeem said property by 268(B), NIRC]
paying the full amount of taxes and penalties, 3. Goods subject to excise tax which are
with interest thereon and the costs of sale illegally stored or removed [Sec. 268(C)]
within 1 year from date of forfeiture. Otherwise, 4. Liquor or tobacco shipped or removed
the forfeiture shall become absolute. [Sec. 215, under a false name or brand [Sec. 262, NIRC]
NIRC]
Page 211 of 256

Enforcement of forfeitures All judgments and monies recovered and

1. Forfeiture of chattels and removable received for taxes, costs, forfeitures, fines and
fixtures: enforced by the seizure, sale or penalties shall be paid to the CIR or his
destruction of the specific forfeited property authorized deputies as the taxes themselves
2. Forfeiture of real property: enforced by a are required to be paid, and except as specially
judgment of condemnation and sale in a provided, shall be accounted for and dealt with
legal action or proceeding civil or criminal in the same way. [Sec. 226, NIRC]
as the case may require [Sec. 224, NIRC]
iv. Suspension of Business Operation
Resale of real estate taken for taxes
In case of any real estate taken by the In addition to other administrative and penal
government in payment of taxes, penalties or sanctions, the CIR or his duly authorized
costs or in compromise or adjustment of any representative may order the suspension or
claim, the CIR may: closure of a business establishment for any of
a. sell the same at a public auction after the following violations:
giving not less than 20 days notice; or 1. Failure to issue receipts and invoices;
b. dispose of the same at a private sale 2. Failure to file VAT returns as required
upon approval of the Secretary of under Sec. 114 of the NIRC;
Finance. [Sec. 216, NIRC] 3. Understatement of taxable sales or
receipts by 30% or more of his correct
When property to be sold or destroyed taxable sales or receipt for the taxable
1. Forfeited chattels and removable fixtures: quarter; [Sec. 115(a), NIRC]
sold in the same manner and under the 4. Failure of any person to register as
same conditions as the public notice and required under Sec. 236 of the NIRC, in
the time and manner of sale as are which case, the closure shall be for a
prescribed for sales of personal property duration of not less than 5 days and shall
distrained for the non-payment of taxes be lifted only upon compliance [Sec.
2. Distilled spirits, liquors, cigars, cigarettes, 115(b), NIRC]
other manufactured products of tobacco
and all apparatus used in or about the illicit v. Judicial Remedies
production of such articles: destroyed by
the order of the CIR when the sale or use Form and Mode of Proceeding:
would be injurious to public health or Civil and criminal action and proceedings
prejudicial to the enforcement of the law instituted in behalf of the Government under
3. All other articles subject to excise tax the authority of this Code or other law enforced
manufactured or removed in violation of the by the BIR:
Code, dies for the printing or making of a. shall be brought in the name of the
internal revenue stamps and labels: sold or Government of the Philippines;
destroyed in the discretion of the CIR [Sec. b. shall be conducted by legal officers of the
225, NIRC] BIR; and
c. shall be filed in court only with the approval
Note: Forfeited property shall not be destroyed of the CIR. [Sec. 220, NIRC]
until at least 20 days after seizure. [Sec. 225,
NIRC] Civil Action
Two ways by which civil liability is enforced:
Disposition of funds recovered in legal a. By filing a civil case for the collection of
proceedings or obtained from forfeiture sum of money with the proper regular court;
and
Page 212 of 256

b. By filing an answer to the petition for review NIRC or who causes the commission of any
filed by the taxpayer with the CTA such offense by another shall be liable in the
[MAMALATEO] same manner as the principal. [Sec. 253(b),
NIRC]
Criminal Action
Any person convicted of a crime under the Offender Penalty
NIRC shall: Not a citizen He shall be deported
a. be liable for the payment of the tax, and of the immediately after serving the
b. be subject to the penalties imposed under Philippines sentence.
the NIRC. [Sec. 253(a), NIRC] The maximum penalty
prescribed for the offense shall
Prescriptive period for criminal action be imposed and he shall be
A public
All violations of any provision of the NIRC shall dismissed from public office,
officer or
prescribe after 5 years: employee
and perpetually disqualified
a. from the day of the commission of the from holding any public office,
violation, or to vote, and to participate in
any election.
b. if not known at the time, from the discovery
His license shall be
thereof and the institution of judicial CPA
automatically revoked or
proceedings for its investigation and
cancelled upon conviction.
punishment. [Sec. 281, NIRC]
Corporation The penalty shall be imposed
s, on the partner, president,
When prescription is interrupted general manager, branch
association
a. when proceedings are instituted against s, manager, treasurer, officer-in-
the guilty persons and the period shall run partnership charge and employees
again if the proceedings are dismissed for s etc. responsible for the violation.
reasons not constituting jeopardy; or [Sec. 253, NIRC]
b. when the offender is absent from the
Philippines. Minimum amount of fine:
The fines imposed for any violation of the NIRC
Assessment not necessary before filing a shall not be lower than the fines imposed
criminal charge for tax evasion herein or twice the amount of taxes, interests
An assessment is not necessary before a and surcharges due from the taxpayer,
criminal charge can be filed. The criminal whichever is higher. [Sec. 253(e), NIRC]
charge need only be proved by a prima facie
showing of a willful attempt to file taxes, such Common crimes punishable under the
as failure to file a required tax return. [CIR v. NIRC
Pascor, G.R. No. 128315 (1999)] a. Attempt to evade or defeat tax [Sec. 254,
NIRC]
Payment of tax not a defense b. Willful failure to file return, supply correct
Payment of the tax due after a criminal case and accurate information, pay tax, withhold
has been filed shall not constitute a valid and remit tax and refund excess taxes
defense in any prosecution for violation of the withheld on compensation [Sec. 255,
provisions under the NIRC. [Sec. 253(a), NIRC]
NIRC]
Liability of person who aids or abets

Any person who willfully aids or abets in the
commission of a crime penalized under the
Page 213 of 256

Willful blindness doctrine collected from the date prescribed for its
The neglect or omission of the taxpayer to payment until: (a) full payment thereof; or (b)
ensure compliance with her obligation to file upon issuance of a notice and demand by the
her ITRs and pay the tax due is tantamount to CIR or his authorized representative,
“deliberate ignorance” or “conscious whichever comes first [Sec 249(B), NIRC; Sec.
avoidance”. [People v. Kintanar, CTA EB Crim. 3, RR 21-2018]
No. 006 (2010)]
2. Delinquency interest – Interest at the
d. No Injunction Rule; Exceptions rate of 12% per annum on the unpaid amount
in case of failure to pay:
General Rule a. the amount of the tax due on any return
No court shall have the authority to grant an required to be filed; or
injunction to restrain the collection of any b. the amount of the tax due for which no
national internal revenue tax, fee or charge return is required; or
imposed by the NIRC. [Sec. 218, NIRC] c. a deficiency tax, or any surcharge or
interest thereon on the due date
Exception appearing in the notice and demand of
When in the opinion of the CTA, the collection the CIR or his authorized
of tax may jeopardize the interest of the representative until the amount is fully
government and/or the taxpayer, the CTA may paid, which interest shall form part of
suspend said collection and require the the tax [Sec. 249(C), NIRC; Sec. 4, RR
taxpayer to deposit the amount claimed or file 21-2018]
a surety bond. [Sec. 11, R.A. 1125, as
amended] Deficiency Delinquency
interest interest
4. Civil Penalties Basic tax +
deficiency
Base Basic tax
interest +
a. Delinquency Interest and surcharge
Deficiency Interest From the due
From the date
date appearing
INTEREST prescribed for
in the notice and
In general, interest is assessed and collected Reckoni its payment
demand of the
on any unpaid amount of tax at the rate of 12% ng date until the full
CIR until the
or double the legal interest rate for loans or payment
amount is fully
forbearance of any money as set by the BSP thereof
paid
from the date prescribed for payment until the Rate 12% per annum
amount is fully paid. [Sec. 249(A), NIRC; Sec.
2, RR 21-2018]
Note: Upon effectivity of the TRAIN Law on
January 1, 2018, the deficiency and the
Note: The rate of interest per BSP Circular No.
delinquency interest SHALL NOT be imposed
799 series of 2013 for loans or forbearance of
simultaneously. [Sec. 249(A), NIRC; Sec. 5,
any money in the absence of an express
RR 21-2018]
stipulation is 6%. Thus, the interest rate
imposable shall be 12%. [Sec. 2, RR 21-2018]
3. Interest on extended payment –
Interest at the rate of 12% per annum on the
1. Deficiency Interest – Interest at the
tax or deficiency tax or any part thereof unpaid
rate of 12% per annum on any deficiency tax
due, which interest shall be assessed and
Page 214 of 256

from the date of notice and demand until it is

paid in the following cases: Prima facie evidence of a false or fraudulent
a. When a person elects to pay the tax on return
installment, but fails to pay the tax or • Substantial underdeclaration of sales,
any installment, or any part of such receipts or income – failure to report
amount or installment on or before the sales, receipts or income in an amount
date prescribed for its payment; or exceeding 30% of that declared per
b. Where the CIR has authorized an return
extension of time within which to pay a • Substantial overstatement of
tax or a deficiency tax or any part deductions – a claim of deductions in
thereof [Sec. 249(D), NIRC] an amount exceeding 30% of actual
deductions [Sec. 248(B), NIRC]
Effectivity of the 12% interest rate
The interest rate of 12% is effective starting c. Compromise Penalty
January 1, 2018. Prior to such date, the
applicable interest rate shall be 20%. A compromise penalty is an amount of money
paid by a taxpayer to compromise a tax
b. Surcharge violation that he has committed, instead of the
BIR instituting a criminal action against the
This is a civil penalty imposed in addition to the taxpayer. A compromise is consensual in
tax required to be paid [Sec. 248, NIRC] character, hence, may not be imposed on the
taxpayer without his consent.[Sec. 6, RR 12-
Rates of Surcharge (25% or 50%) 99]
1. 25% of the amount due in the following
cases: Note: All criminal violations may be
a. Failure to file any return and pay the tax compromised except: (a) those already filed in
due on the prescribed date; or court, or (b) those involving fraud.
b. Filing a return with an internal revenue
officer other than those with whom the d. Fraud Penalty
return is required to be filed, unless the
CIR authorizes otherwise; or Fifty percent (50%) of the tax or of the
c. Failure to pay the deficiency tax within
deficiency tax xxx
the time prescribed for its payment in
the notice of assessment; or
d. Failure to pay the full or part of the Failure to report sales, receipts or income in an
amount of tax due on or before the date amount exceeding thirty percent (30%) of that
prescribed for its payment [Sec. declared per return, and a claim of deductions
248(A), NIRC] in an amount exceeding (30%) of actual
deductions, shall render the taxpayer liable for
2. 50% of the tax or of the deficiency tax
substantial under-declaration of sales, receipts
in case any payment has been made, in the
following cases: or income or for overstatement of deductions,
a. Willful neglect to file the return within as mentioned herein. [Sec. 248 (B), NIRC]
the prescribed period; or
b. A false or fraudulent return is willfully
made [Sec. 248(B), NIRC]
Page 215 of 256

ILLUSTRATION
Mr. A has been assessed deficiency income tax of P1,000,000, exclusive of interest and surcharge,
for taxable year 2015. The tax liability remained unpaid despite the lapse of June 30, 2017, the
deadline for payment stated in the notice and demand issued by the Commissioner. Payment was
made by Mr. A on February 10, 2018. The civil penalties are computed as follows:
Basic Tax Due P 1,000,000.00

P
Add: 25% surcharge for late payment 250,000.00
20% Deficiency Interest from
April 16, 2016 to June 30, 2017
(441 days) 241,643.84 491,643.84
Total Amount Due, June 30,2017 P 1, 491,643.84
Add: 20% Deficiency Interest
from July 1, 2017 to December
31, 2017 (184 days based on
P1M) 100,821.92
Add: 20% Delinquency Interest
from July 1, 2017 to December
31, 2017 (184 days; based on
total amount as of June 30, 2017) 150,390.39
Add: 12% Delinquency Interest
from January 1, 2018 to February
10, 2018 (41 days; based on total
amount due as of June 30, 2017) 20,106.54 271,318.85
Total Amount Due, February 10,
2018 P 1,762,962.90
obe levied and collected only for

III. LOCAL TAXATION Public purposes;
o not be Unjust, excessive,
oppressive, or confiscatory;
A. LOCAL GOVERNMENT o not be Contrary to law, public
policy, national economic policy, or
TAXATION in restraint of trade;
c. The collection of local taxes, fees, charges
1. Fundamental Principles (U- and other impositions shall not be left to
PUCE-PIP) any Private person;
a. Taxation shall be Uniform in each local d. The revenue collected shall Inure solely to
government unit (LGU); the benefit of, and be subject to the
b. Taxes, fees, charges and other impositions disposition by, the LGU levying the tax, fee,
shall: charge or other imposition, unless
o be Equitable and based as far as otherwise specifically provided herein; and,
practicable on the taxpayer's ability
to pay;
Page 216 of 256

substantial, whichever is the date of decedent's

higher death
Note: Evidence of
payment of tax must be
presented to the Register
of Deeds before
registration, and to the
provincial assessor before
cancellation of an old tax
declaration.
TAX ON BUSINESS OF PRINTING AND PUBLICATION
Imposed on the business Tax Rate: Not exceeding Receipts from printing
of persons engaged in the 50% of 1% and/or publishing of books
printing, and/or publication and other reading
of books, cards, posters, Tax Base: Gross annual materials prescribed by
leaflets, handbills, receipts for the preceding the Department of
certificates, receipts, calendar year Education as school texts
pamphlets, and others of or references
similar nature [Sec 136, In the case of a newly
LGC] started business:
● Tax Rate: Not
exceeding 1/20 of 1%
● Tax Base: Capital
investment
FRANCHISE TAX
Imposed on businesses Tax Rate: Not exceeding No exception Franchise tax is a tax on
enjoying a franchise [Sec 50% of 1 the privilege of transacting
137, LGC] Notwithstanding any business in the state and
Tax Base: Gross annual exemption granted by any exercising corporate
receipts for the preceding law or other special law, franchises granted by the
calendar year based on the province may impose a state. It is not levied on the
the incoming receipt, or tax on businesses corporation simply for
realized, within its enjoying a franchise. [Sec. existing as a corporation.
territorial jurisdiction 137, LGC]
Requisites to be covered
In the case of a newly by franchise tax:
started business: a. that one has a franchise
● Tax Rate: Not more in the sense of a
than 1/20 of 1% secondary or special
● Tax Base: Capital franchise; and
investment b. that it is exercising its
rights or privileges
under this franchise
within the territory of the
concerned LGU [NPC v.
Province of Isabela,
G.R. No. 165827
(2006)]
TAX ON SAND, GRAVEL AND OTHER QUARRY RESOURCES
Levied on ordinary stones, Tax Rate: Not more than Who issues permit to
gravel, earth and other 10% extract: issued exclusively
quarry resources, as by the provincial governor
defined in the NIRC, Tax Base: Fair market pursuant to an ordinance
extracted from public value in the locality per by the Sangguniang
lands or from the beds of Panlalawigan
Page 220 of 256

seas, lakes, rivers, cubic meter of the

streams, creeks, and other extracted resources Distribution of proceeds:
public waters within its a. Province - 30%
territorial jurisdiction [Sec b. Component city or
138, LGC] municipality where
resources were
extracted - 30%
c. Barangay where
resources were
extracted - 40%
PROFESSIONAL TAX
Exercise or practice of Tax Rate: Not to exceed Professionals exclusively Place of payment: To the
profession requiring P300 employed by the province where the
government examination government profession is practiced, or
[Sec 139, LGC] Tax Base: At such amount where the principal office is
and reasonable maintained
Note: A person who has classification determined
paid the professional tax is by the Sangguniang Time of payment:
entitled to practice his Panlalawigan Payable annually, on or
profession anywhere in the before January 31 or
country without being before beginning the
subjected to similar taxes practice of profession
for the practice of such
profession. Employers shall require
payment of professional
tax before employment
and annually thereafter.
AMUSEMENT TAX
Collected from proprietors, Tax Rate: Not more than Holding of operas, Note: In case of theaters or
lessees, or operators of 10% [RA 9640] concerts, dramas, recitals, cinemas, tax shall first be
theaters, cinemas, concert paintings, and art deducted and withheld by
halls, circuses, boxing Tax Base: Gross receipts exhibitions, flower shows, their proprietors, lessees
stadia, and other places of from admission fees musical programs, literary and operators before the
amusement [Sec 140, and oratorical gross receipts are divided
LGC] presentations among them.
Not subject to Exception to exemption Distribution of proceeds:

amusement tax under (taxable): Pop, rock, or Shared equally by the
the LGC: similar concerts province and the
a. Resorts, swimming municipality where
pools, bath houses, hot amusement places are
springs, and tourist located
spots [Pelizloy Realty
Corp. v. Province of
Benguet, G.R. No.
183137 (2013)]
b. Professional basketball
games [PBA v. CA, G.R.
No. 119122 (2000)]
c. Golf courses [Alta Vista
Golf and Country Club v.
City of Cebu, G.R. No.
180235 (2016)]
d. Those subject to
amusement tax under
Sec. 125 of the NIRC
Page 221 of 256

TAX ON DELIVERY TRUCK/VAN

Imposed on vehicles used Tax Rate: Not exceeding Such manufacturers,
by manufacturers, P500 producers, wholesalers,
producers, wholesalers, dealers and retailers shall
dealers or retailers in the Tax Base: Every truck, be exempt from the tax on
delivery or distribution of van, or vehicle peddlers.
distilled spirits, fermented
liquors, soft drinks, cigars
and cigarettes, and other
products, as may be
determined by the
Sangguniang
Panlalawigan, to sales
outlets, or consumers in
the province, whether
directly or indirectly [Sec
141, LGC]
b. Taxing Powers of Municipalities

Scope of taxing power: Municipalities may levy taxes, fees, and charges not otherwise levied by provinces. [Sec. 142,
LGC]
Tax on Various Types of Businesses [Sec. 143, LGC]

Businesses Taxed Rate/Amount and Base Other Information
Manufacturers, assemblers, Tax Rate: From P165 to P24,375
repackers, processors, brewers, per annum or at a rate not exceeding
distillers, rectifiers, and 37.5 % of 1%
compounders of liquors, distilled
spirits, and wines or manufacturers Tax Base: Gross sales or receipts
of any article of commerce of for the preceding calendar year
whatever kind or nature [Sec. 143(a),
LGC]
Wholesalers, distributors, or dealers Tax Rate: From P18 to P10,000 or “Wholesale” means a sale where
in any article of commerce of at a rate not exceeding 50% of 1% the purchaser buys or imports the
whatever kind or nature [Sec. 143(b), commodities for resale to persons
LGC] Tax Base: Gross sales or receipts other than the end user regardless of
for the preceding calendar year the quantity of the transaction. [Sec.
131(z), LGC]
“Dealer” means one whose

business is to buy and sell
merchandise, goods, and chattels as
a merchant. He stands immediately
between the producer or
manufacturer and the consumer.
[Sec. 131(k), LGC]
Exporters and manufacturers, Not exceeding ½ of rates prescribed Essential Commodities: [RWC-
millers, producers, wholesalers, under Sec. 143 (a), (b) and (d) of the CLAPS]
distributor, dealers or retailers of LGC (on manufacturers; a. Rice and corn
essential commodities enumerated wholesalers, distributors and b. Wheat or cassava flour, meat,
below: [Sec. 143(c), LGC] dealers; and retailers, respectively) dairy products, locally
manufactured, processed or
preserved food, sugar, salt, and
other agricultural, marine, and
Page 222 of 256

freshwater products, whether in

their original state or not
c. Cooking oil and cooking gas
d. Cement
e. Laundry soap, detergents, and
medicine
f. Agricultural implements,
Equipment and post-harvest
facilities, fertilizers, pesticides,
insecticides, herbicides and
other farm inputs
g. Poultry feeds and other animal
feeds
h. School supplies [Sec. 143(c),
LGC]
Retailers [Sec. 143(d), LGC] Tax Rate: Note: Barangays have the exclusive
a. 2% per annum on sales not power to tax gross sales or receipts
exceeding P400,000 amounting to:
b. 1% per annum on sales in a. 50,000 or less in case of cities
excess of the first P400,000 [Art. b. 30,000 or less in case of
232(d), LGC IRR] municipalities [Sec. 143(d), Sec.
152, LGC]
Tax Base: Gross sales or receipts
for the preceding calendar year “Retail” means a sale where the
purchaser buys the commodity for
his own consumption, irrespective of
the quantity of the commodity sold.
[Sec. 131(w), LGC]
Contractors and other independent Tax Rate: From P27.50 to P11,500 “Contractor” includes persons,
contractors [Sec. 143(e), LGC] or at a rate not exceeding 50% of 1% natural or juridical, not subject to
professional tax under Sec. 139 of
Tax Base: Gross sales or receipts the LGC, whose activity consists
for the preceding calendar year essentially of the sale of all kinds of
services for a fee, regardless of
whether or not the performance of
the service calls for the exercise or
use of the physical or mental
faculties of such contractor or his
employees. [Sec. 131(h), LGC]
Banks and other financial Tax Rate: Not exceeding 50% of 1% Note: All other income and receipts
institutions[Sec. 143(f), LGC] of banks and other financial
Tax Base: Gross receipts of the institutions not otherwise
preceding calendar year derived enumerated herein shall be
from interest, commissions and excluded from the taxing authority of
discounts from lending activities, the LGU concerned. [Art. 232(f),
income from financial leasing, LGC IRR]
dividends, rentals on property and
profit from exchange or sale of
property, insurance premium
Peddlers engaged in the sale of any Tax Rate and Base: Not exceeding “Peddler” means any person who,
merchandise or article of commerce P50 per peddler annually either for himself or on commission,
[Sec. 143(g), LGC] travels from place to place and sells
his goods or offers to sell and deliver
the same. [Sec. 131(t), LGC]
Page 223 of 256

substantial, whichever is the date of decedent's

higher death
Note: Evidence of
payment of tax must be
presented to the Register
of Deeds before
registration, and to the
provincial assessor before
cancellation of an old tax
declaration.
TAX ON BUSINESS OF PRINTING AND PUBLICATION
Imposed on the business Tax Rate: Not exceeding Receipts from printing
of persons engaged in the 50% of 1% and/or publishing of books
printing, and/or publication and other reading
of books, cards, posters, Tax Base: Gross annual materials prescribed by
leaflets, handbills, receipts for the preceding the Department of
certificates, receipts, calendar year Education as school texts
pamphlets, and others of or references
similar nature [Sec 136, In the case of a newly
LGC] started business:
● Tax Rate: Not
exceeding 1/20 of 1%
● Tax Base: Capital
investment
FRANCHISE TAX
Imposed on businesses Tax Rate: Not exceeding No exception Franchise tax is a tax on
enjoying a franchise [Sec 50% of 1 the privilege of transacting
137, LGC] Notwithstanding any business in the state and
Tax Base: Gross annual exemption granted by any exercising corporate
receipts for the preceding law or other special law, franchises granted by the
calendar year based on the province may impose a state. It is not levied on the
the incoming receipt, or tax on businesses corporation simply for
realized, within its enjoying a franchise. [Sec. existing as a corporation.
territorial jurisdiction 137, LGC]
Requisites to be covered
In the case of a newly by franchise tax:
started business: a. that one has a franchise
● Tax Rate: Not more in the sense of a
than 1/20 of 1% secondary or special
● Tax Base: Capital franchise; and
investment b. that it is exercising its
rights or privileges
under this franchise
within the territory of the
concerned LGU [NPC v.
Province of Isabela,
G.R. No. 165827
(2006)]
TAX ON SAND, GRAVEL AND OTHER QUARRY RESOURCES
Levied on ordinary stones, Tax Rate: Not more than Who issues permit to
gravel, earth and other 10% extract: issued exclusively
quarry resources, as by the provincial governor
defined in the NIRC, Tax Base: Fair market pursuant to an ordinance
extracted from public value in the locality per by the Sangguniang
lands or from the beds of Panlalawigan
Page 220 of 256

seas, lakes, rivers, cubic meter of the

streams, creeks, and other extracted resources Distribution of proceeds:
public waters within its a. Province - 30%
territorial jurisdiction [Sec b. Component city or
138, LGC] municipality where
resources were
extracted - 30%
c. Barangay where
resources were
extracted - 40%
PROFESSIONAL TAX
Exercise or practice of Tax Rate: Not to exceed Professionals exclusively Place of payment: To the
profession requiring P300 employed by the province where the
government examination government profession is practiced, or
[Sec 139, LGC] Tax Base: At such amount where the principal office is
and reasonable maintained
Note: A person who has classification determined
paid the professional tax is by the Sangguniang Time of payment:
entitled to practice his Panlalawigan Payable annually, on or
profession anywhere in the before January 31 or
country without being before beginning the
subjected to similar taxes practice of profession
for the practice of such
profession. Employers shall require
payment of professional
tax before employment
and annually thereafter.
AMUSEMENT TAX
Collected from proprietors, Tax Rate: Not more than Holding of operas, Note: In case of theaters or
lessees, or operators of 10% [RA 9640] concerts, dramas, recitals, cinemas, tax shall first be
theaters, cinemas, concert paintings, and art deducted and withheld by
halls, circuses, boxing Tax Base: Gross receipts exhibitions, flower shows, their proprietors, lessees
stadia, and other places of from admission fees musical programs, literary and operators before the
amusement [Sec 140, and oratorical gross receipts are divided
LGC] presentations among them.
Not subject to Exception to exemption Distribution of proceeds:

amusement tax under (taxable): Pop, rock, or Shared equally by the
the LGC: similar concerts province and the
a. Resorts, swimming municipality where
pools, bath houses, hot amusement places are
springs, and tourist located
spots [Pelizloy Realty
Corp. v. Province of
Benguet, G.R. No.
183137 (2013)]
b. Professional basketball
games [PBA v. CA, G.R.
No. 119122 (2000)]
c. Golf courses [Alta Vista
Golf and Country Club v.
City of Cebu, G.R. No.
180235 (2016)]
d. Those subject to
amusement tax under
Sec. 125 of the NIRC
Page 221 of 256

TAX ON DELIVERY TRUCK/VAN

Imposed on vehicles used Tax Rate: Not exceeding Such manufacturers,
by manufacturers, P500 producers, wholesalers,
producers, wholesalers, dealers and retailers shall
dealers or retailers in the Tax Base: Every truck, be exempt from the tax on
delivery or distribution of van, or vehicle peddlers.
distilled spirits, fermented
liquors, soft drinks, cigars
and cigarettes, and other
products, as may be
determined by the
Sangguniang
Panlalawigan, to sales
outlets, or consumers in
the province, whether
directly or indirectly [Sec
141, LGC]
b. Taxing Powers of Municipalities

Scope of taxing power: Municipalities may levy taxes, fees, and charges not otherwise levied by provinces. [Sec. 142,
LGC]
Tax on Various Types of Businesses [Sec. 143, LGC]

Businesses Taxed Rate/Amount and Base Other Information
Manufacturers, assemblers, Tax Rate: From P165 to P24,375
repackers, processors, brewers, per annum or at a rate not exceeding
distillers, rectifiers, and 37.5 % of 1%
compounders of liquors, distilled
spirits, and wines or manufacturers Tax Base: Gross sales or receipts
of any article of commerce of for the preceding calendar year
whatever kind or nature [Sec. 143(a),
LGC]
Wholesalers, distributors, or dealers Tax Rate: From P18 to P10,000 or “Wholesale” means a sale where
in any article of commerce of at a rate not exceeding 50% of 1% the purchaser buys or imports the
whatever kind or nature [Sec. 143(b), commodities for resale to persons
LGC] Tax Base: Gross sales or receipts other than the end user regardless of
for the preceding calendar year the quantity of the transaction. [Sec.
131(z), LGC]
“Dealer” means one whose

business is to buy and sell
merchandise, goods, and chattels as
a merchant. He stands immediately
between the producer or
manufacturer and the consumer.
[Sec. 131(k), LGC]
Exporters and manufacturers, Not exceeding ½ of rates prescribed Essential Commodities: [RWC-
millers, producers, wholesalers, under Sec. 143 (a), (b) and (d) of the CLAPS]
distributor, dealers or retailers of LGC (on manufacturers; a. Rice and corn
essential commodities enumerated wholesalers, distributors and b. Wheat or cassava flour, meat,
below: [Sec. 143(c), LGC] dealers; and retailers, respectively) dairy products, locally
manufactured, processed or
preserved food, sugar, salt, and
other agricultural, marine, and
Page 222 of 256

freshwater products, whether in

their original state or not
c. Cooking oil and cooking gas
d. Cement
e. Laundry soap, detergents, and
medicine
f. Agricultural implements,
Equipment and post-harvest
facilities, fertilizers, pesticides,
insecticides, herbicides and
other farm inputs
g. Poultry feeds and other animal
feeds
h. School supplies [Sec. 143(c),
LGC]
Retailers [Sec. 143(d), LGC] Tax Rate: Note: Barangays have the exclusive
a. 2% per annum on sales not power to tax gross sales or receipts
exceeding P400,000 amounting to:
b. 1% per annum on sales in a. 50,000 or less in case of cities
excess of the first P400,000 [Art. b. 30,000 or less in case of
232(d), LGC IRR] municipalities [Sec. 143(d), Sec.
152, LGC]
Tax Base: Gross sales or receipts
for the preceding calendar year “Retail” means a sale where the
purchaser buys the commodity for
his own consumption, irrespective of
the quantity of the commodity sold.
[Sec. 131(w), LGC]
Contractors and other independent Tax Rate: From P27.50 to P11,500 “Contractor” includes persons,
contractors [Sec. 143(e), LGC] or at a rate not exceeding 50% of 1% natural or juridical, not subject to
professional tax under Sec. 139 of
Tax Base: Gross sales or receipts the LGC, whose activity consists
for the preceding calendar year essentially of the sale of all kinds of
services for a fee, regardless of
whether or not the performance of
the service calls for the exercise or
use of the physical or mental
faculties of such contractor or his
employees. [Sec. 131(h), LGC]
Banks and other financial Tax Rate: Not exceeding 50% of 1% Note: All other income and receipts
institutions[Sec. 143(f), LGC] of banks and other financial
Tax Base: Gross receipts of the institutions not otherwise
preceding calendar year derived enumerated herein shall be
from interest, commissions and excluded from the taxing authority of
discounts from lending activities, the LGU concerned. [Art. 232(f),
income from financial leasing, LGC IRR]
dividends, rentals on property and
profit from exchange or sale of
property, insurance premium
Peddlers engaged in the sale of any Tax Rate and Base: Not exceeding “Peddler” means any person who,
merchandise or article of commerce P50 per peddler annually either for himself or on commission,
[Sec. 143(g), LGC] travels from place to place and sells
his goods or offers to sell and deliver
the same. [Sec. 131(t), LGC]
Page 223 of 256

Any other business which the Tax Base: Gross sales or receipts Note: This is a catch-all provision.
Sanggunian concerned may deem
proper to tax [Sec. 143(h), LGC] Tax Rate: The Sanggunian may Exception: Any business engaged
prescribe a schedule of graduated in the production, manufacture,
rates but in no case to exceed the refining, distribution or sale of oil,
rates prescribed herein. gasoline, and other petroleum
products shall not be subject to any
Note: For any business subject to local tax imposed under Sec. 143 of
excise, value-added or percentage the LGC. [Art. 232(h), LGC IRR]
tax under the NIRC, the rate of tax
shall not exceed 2% of gross sales
or receipts of the preceding calendar
year.
Tax base of local business tax current year. If the tax paid is less than the tax
Business tax must be based on gross sales or due, the difference shall be paid before the
receipts, it being different from gross revenue. business is considered officially retired. [Sec.
[Ericsson Telecommunications Inc. v. City of 145, LGC]
Pasig, G.R. No. 176667 (2007)]
Rules on payment of business tax
“Gross Sales or Receipts” include the total 1. Taxes imposed under Sec. 143 of the LGC
amount of money or its equivalent representing shall be paid for every separate or distinct
the contract price, compensation or service establishment or place where business
fee, including the amount charged or materials subject to tax is conducted.
supplied with the services and deposits or 2. One line of business is not exempted by
advance payments actually or constructively being conducted with some other
received during the taxable quarter for the businesses for which such tax has been
services performed or to be performed for paid.
another person excluding discounts if 3. The tax on a business must be paid by the
determinable at the time of sales, sales return, person conducting it.
excise tax, and VAT. [Sec. 131(n), LGC] 4. If a person operates 2 or more businesses
mentioned in Sec. 143, the tax shall be
“Gross revenue” covers money or its computed:
equivalent actually or constructively received, a. on the combined total gross sales
including the value of services rendered or or receipts, if they are subject to the
articles sold, exchanged or leased, the same tax rate
payment of which is yet to be received. b. separately based on the gross
[Ericsson Telecommunications Inc. v. City of sales or receipts of each business,
Pasig, G.R. No. 176667 (2007)] if they are subject to different tax
rates [Sec. 146, LGC]
Ceiling on business tax within Metro Manila
Municipalities within Metro Manila may levy Note: Condominium corporations are not
taxes at rates which shall not exceed by 50% business entities, and are thus not subject to
the maximum rates prescribed in Sec 143 of local business tax. Even though the
the LGC. [Sec. 144, LGC] corporation is empowered to levy assessments
or dues from the unit owners, these amounts
Tax on retirement of business are not intended for the incurrence of profit by
Upon termination of a business subject to tax the corporation, but to shoulder the multitude of
under Sec. 143 and 144, it shall submit a sworn necessary expenses for maintenance of the
statement of its gross sales or receipts for the
Page 224 of 256

condominium. [Yamane v. BA Lepanto 2. 70% shall be taxable by the

Condominium Corp., G.R. No. 154993 (2005)] city/municipality where the factory,
project office, plant, or plantation is
Situs of business tax located [Sec. 150(b), LGC]
a. Rule 1: In case of persons
maintaining/operating a branch or sales outlet Illustration of Rules 1 to 3
making the sale or transaction, the sale shall A company has a principal office in
be recorded in said branch or sales outlet and Mandaluyong, and a sales office and a factory
the tax paid to the municipality/city where the in Sta. Rosa:
branch or sales outlet is located. [Sec. 150(a), 1. Sales made in Mandaluyong will be
LGC] recorded in Mandaluyong.
2. Sales made in Sta. Rosa by the Sta.
“Branch or Sales Office” – a fixed place in a Rosa sales office will be recorded in
locality which conducts operations of the Sta. Rosa.
business as an extension of the principal office. 3. Sales made in Los Baños, Calamba or
Offices used only as display areas of the Cabuyao [i.e., delivered to customers
products where no stocks or items are stored located in these places and not made
for sale, although orders for the products may by the Sta. Rosa sales office] will be
be received thereat, are not branch or sales recorded in Mandaluyong where the
offices as herein contemplated. A warehouse principal office is located. The
which accepts orders and/or issues sales allocation shall be as follows:
invoices independent of a branch with sales a. 30% of all sales recorded in the
office shall be considered as a sales office. [Art. principal office shall be taxable
243(a)(2), LGC IRR] in Mandaluyong;
b. 70% of all sales recorded in the
b. Rule 2: Where there is NO branch or principal office shall be taxable
sales outlet in the city/municipality where the in Sta. Rosa where the factory
sale is made, the sale shall be recorded in the is located.
principal office and the tax shall be paid to such
city/municipality. [Sec. 150(a), LGC] d. Rule 4: In case the plantation is
located in a place other than the place where
“Principal Office” – the head or main office of the factory is located, the 70% in Rule 3 will be
the business appearing in the pertinent divided as follows:
documents (e.g., articles of incorporation) 1. 60% to the city/municipality where the
submitted to the SEC, or the DTI, or other factory is located; and
appropriate agencies, as the case may be [Art. 2. 40% to the city/municipality where the
243(a)(1), LGC IRR] plantation is located. [Sec. 150(c),
LGC]
c. Rule 3: In the case of manufacturers,
assemblers, contractors, producers, and e. Rule 5: In case of 2 or more factories,
exporters having factories, project offices, project offices, plants or plantations in different
plants, and plantations, proceeds shall be localities, the 70% shall be prorated among the
allocated as follows: localities where they are located in proportion
1. 30% of sales recorded in the principal to their respective volumes of production. [Sec.
office shall be taxable by the 150(d), LGC]
city/municipality where the principal
office is located; and Illustration: A company has a principal office
in Valenzuela and 2 factories located in
Page 225 of 256

Malolos City, Bulacan and Mandaue City, Municipal Fees and Charges For Regulation
Cebu, which produced 60% and 40%, & Licensing
respectively, of the total production for the
year. It also has branches selling merchandise General rule: The municipality may impose
in Muntinlupa, Bacolod and Cebu City. reasonable fees and charges on the conduct of
1. Sales made in Valenzuela will be business or practice of profession
recorded in Valenzuela; commensurate with the cost of regulation,
2. Sales made in Muntinlupa, Bacolod inspection and licensing. [Sec. 147, LGC]
and Cebu City shall be taxable in the
said cities; Exception: Professional tax reserved to the
3. Sales in all other places which do not province in Sec. 139 of the LGC [Sec. 147,
have a sales branch shall be LGC]
distributed as follows: 30% to
Valenzuela and 70% to be allocated Specific rules:
between Malolos City, and Mandaue 1. The municipality may impose
City based on the factories’ volume of reasonable fees for sealing and
production. Hence, 42% shall be taxed licensing of weights and measures.
in Malolos City; while 28% shall be [Sec. 148, LGC]
taxed in Mandaue City. 2. The municipality has exclusive
authority to grant fishery privileges in
Note: The sales allocation shall be applied municipal waters and impose rentals,
irrespective of whether or not sales are made fees or charges therefor. [Sec. 149,
in the locality where the factory, project office, LGC]
plant, or plantation is located. [Sec. 150(e),
LGC] c. Taxing Powers of Cities
Excise Tax: The business tax is imposed on Scope of taxing power: The city may levy taxes,
the performance of an act, enjoyment of a fees, charges which the province or
privilege, or engagement in an occupation. The municipality may impose.
power to levy such tax depends on the place in
which the act is performed or the occupation is 1. Those levied and collected by highly
engaged in, not upon the location of the office urbanized and independent component
or the domicile of the person. [Allied Thread cities shall accrue to them and
Co., Inc. v. City Mayor of Manila, G.R. No. L- distributed according to the provisions
40296 (1984)] of the LGC.
2. Rates of taxes that the city may levy
Sales Tax: It is the place of the consummation may exceed the maximum rates
of the sale, associated with the delivery of the allowed for the province or municipality
things which are the subject matter of the by not more than 50%. [Sec. 151, LGC]
contract, that determines the situs of the
contract for purposes of taxation, and not Exception: Rates of professional and
merely the place of the perfection of the amusement taxes [Sec. 151, LGC]
contract. [Shell Co., Inc. v. Municipality of
Sipocot, Camarines Sur, G.R. No. L-12680
(1959)]
Page 226 of 256

d. Taxing Powers of Barangays 5. Common Revenue-Raising

The following shall accrue exclusively to
Powers
1. Service fees and charges
the barangays:
LGUs may impose and collect such
1. Taxes on stores or retailers with fixed
reasonable fees and charges for services
business establishments with gross sales or
rendered. [Sec. 153, LGC]
receipts for the preceding calendar year of
P50,000 or less in case of cities, and P30,000
2. Public utility charges
or less in case of municipalities. [Sec. 152(a),
LGUs may fix the rates for the operation of
LGC]
public utilities owned, operated and
a. Tax Rate: not greater than 1%
maintained by them within their jurisdiction.
b. Tax Base: gross sales or receipts
[Sec. 154, LGC]
2. Service fees or charges – Barangays
3. Toll fees or charges
may collect reasonable fees or charges for
a. The Sanggunian may prescribe the
services rendered in connection with the
terms and conditions and fix the
regulation or the use of barangay-owned
rates for the imposition of toll fees
properties or facilities. [Sec. 152(b), LGC]
or charges for the use of any public
3. Barangay clearance – A city or
road, pier, or wharf, waterway,
municipality cannot issue a permit for business
bridge, ferry or telecommunication
without a clearance from the barangay
system funded and constructed by
concerned. The sangguniang barangay may
the LGU concerned.
impose a reasonable fee on the clearance.
b. The Sanggunian may discontinue
[Sec. 152(c), LGC]
the collection of the tolls when
public safety and welfare so
4. Reasonable fees and charges:
requires.
a. on commercial breeding of fighting
c. No toll fees or charges shall be
cocks, cockfights and cockpits;
collected from:
b. on places of recreation which charge
i. Officers and enlisted men
admission fees; and
of the AFP and members of
c. on billboards, signboards, neon signs,
the PNP on mission
and outdoor advertisements. [Sec.
ii. Post office personnel
152(d), LGC]
delivering mail
iii. Persons who are physically
handicapped
iv. Disabled citizens who are
65 years or older. [Sec.
155, LGC]
Page 227 of 256

6. Community Tax
Who may levy
Cities or municipalities
[Sec. 156, LGC]
1. Individuals who are:
a. Inhabitants of the Philippines
b. 18 years of age or over
c. Either:
● Regularly employed on a wage or salary basis for at least 30
consecutive working days during any calendar year, or
Persons Liable
● Engaged in business or occupation, or
[Sec. 157 & 158,
● Owns real property with an aggregate assessed value of P1,000 or
LGC]
more, or
● Is required by law to file an income tax return
2. Juridical Persons
a. Every corporation no matter how created or organized
b. Whether domestic or resident foreign
c. Engaged in or doing business in the Philippines
1. Individuals
a. Annual community tax of P5.00 PLUS annual additional tax of P1.00
per P1,000 of income regardless of whether from business, exercise of
profession or property, but which shall not exceed P5,000
b. Husband and wife shall pay a basic tax of P5.00 each PLUS an
additional tax of P1.00 for every P1,000 of income based on the total
property owned by them and/or the total gross receipts or earnings
derived by them [Art. 246(b)(2), LGC IRR]
2. Juridical Persons
Rates [Sec. 157
a. Annual community tax of P500 PLUS annual additional tax, which shall
& 158, LGC]
not exceed P10,000 according to the following schedule:
● P2.00 for every P5,000 worth of real property in the Philippines
owned during the preceding year, based on the assessed value
used for the payment of the real property tax; and
● P2.00 for every P5,000 of gross receipts or earnings derived from
business in the Philippines during the preceding year.
b. Dividends received by a corporation from another corporation shall be
deemed part of the gross receipts or earnings for purposes of
computing additional tax.
Persons Exempt 1. Diplomatic and consular representatives
[Sec. 159, LGC] 2. Transient visitors who stay in the Philippines for not more than 3 months
Where individual resides, or where the principal office of the juridical entity is
located
Place of
Payment [Sec.
Note: In case of branch, sales office or warehouse where sales are made and
160, LGC]
recorded, corresponding community tax shall be paid to the LGU where such
branch, sales office or warehouse is located. [Art. 246(e)(3), LGC IRR]
Time of Payment Accrues on January 1 of each year to be paid not later than the last day of
[Sec 161, LGC] February of each year
Page 228 of 256

1. If a person reaches 18 years of age or otherwise loses the benefit of

exemption:
a. on or before June 30 – he shall be liable on the day he reaches such
age or upon the day the exemption ends;
b. on or before March 31 – he shall have 20 days to pay without being
delinquent.
2. If a person comes to reside in the Philippines, or reaches 18 years old, or
ceases to belong to an exempt class on or after July 1, he shall not be
subject to community tax for that year.
3. If a corporation is established and organized:
a. on or before June 30 – it shall be liable to community tax for that year
b. on or before March 31 – it shall have 20 days to pay without becoming
delinquent
c. on or after July 1 – it shall not be subject to community tax for that
year
Penalty [Sec. If unpaid within the prescribed period, an interest of 24% per annum shall be
161, LGC added from the due date until payment.
Community Tax Certificate (CTC) Distribution of proceeds of community tax

It is issued to every person or corporation upon 1. If the community tax is actually and directly
payment of the community tax. It may also be collected by the city or municipal treasurer,
issued to any person or corporation not subject the proceeds shall accrue entirely to the
to the community tax upon payment of P1.00. general fund of the city or municipality.
[Sec. 162, LGC] 2. If the community tax is collected through
Presentation of CTC is necessary when an the barangay treasurers, the proceeds
individual subject to community tax: shall be apportioned equally between the
1. acknowledges any document before a city/municipality and the barangay. [Sec.
notary public; 164(c), LGC]
2. takes the oath of office upon election or
appointment to any position in the 7. Common Limitations on the
government service;
3. receives any license, certificate, or permit Taxing Powers of LGUs
from any public authority;
4. pays any tax or fee; Unless otherwise provided, the following
5. receives any money from any public fund cannot be levied by the local governments:
6. transacts other official business; or (IDEC-GAPEP-TRR-ECN):
7. receives any salary or wage from any a. Income tax, except when levied on banks
person or corporation [Sec. 163(a), LGC] and other financial institutions under Sec.
143(f) of the LGC;
Note: Presentation of CTC is not needed in the
registration of a voter. [Sec. 163(a), LGC] b. Documentary stamp tax;
Collection of community tax c. Taxes on Estate, inheritance, gifts,

The city or municipal treasurer shall deputize legacies and other acquisitions mortis
the barangay treasurers to collect, provided the causa;
latter be bonded. [Sec. 164(b), LGC]
Exception: Tax on transfer of real property)
[Sec. 135, LGC; Art. 221(c), LGC IRR]
Page 229 of 256

d. Customs duties, registration fees of vessel h. Excise taxes on articles enumerated under
and wharfage on wharves, tonnage dues, the NIRC, as amended, and taxes, fees or
and all other kinds of customs fees, charges on petroleum products;
charges and dues;
i. Percentage or VAT on sales, barters or
Exception: wharfage on wharves constructed exchanges or similar transactions on
and maintained by the LGU concerned goods or services except as otherwise
provided herein;
“Wharfage” means a fee assessed against the
cargo of a vessel engaged in foreign or Exceptions (Percentage taxes):
domestic trade based on quantity, weight, or 1. Tax on business of printing and
measure received and/or discharged by publication imposed by provinces/cities
vessel. [Sec. 131(y), LGC] [Sec. 136, LGC]
2. Amusement tax imposed by
e. Taxes, fees or charges on Goods carried provinces/cities [Sec. 140, LGC]
into or out of, or passing through, the 3. Tax on business imposed by
territorial jurisdictions of LGUs in the guise municipalities/cities on manufacturers,
of charges for wharfage, tolls for bridges or wholesalers, distributors, dealers, and
otherwise, or other taxes, fees, or charges contractors enumerated in Sec. 143 of
in any form; the LGC in accordance with the
schedules provided therein
Note: Sec.133(e) prohibits the imposition, in
the guise of wharfage, of fees, as well as all j. Taxes on the gross receipts of:
other taxes or charges in any form whatsoever, 1. Transportation contractors and
on goods or merchandise. It is therefore 2. persons engaged in the transportation
irrelevant if the fees imposed are actually for of passengers or freight by hire and
police surveillance on the goods, because any 3. common carriers by air, land or water
other form of imposition on goods passing
through the territorial jurisdiction of the Exception: Tax on the operation and
municipality is clearly prohibited. [Palma franchising of tricycles [Art. 221(j), LGC IRR]
Development Corp. v. Municipality of
Malangas, G.R. No. 152492 (2003)] k. Taxes on premiums paid by way of
Reinsurance or retrocession;
f. Taxes, fees or charges on Agricultural and
aquatic products when sold by marginal l. Taxes, fees or charges for the Registration
farmers or fishermen; of motor vehicles and for the issuance of all
kinds of licenses or permits for the driving
"Marginal Farmer or Fisherman" refers to an thereof, except tricycles;
individual engaged in subsistence farming or
fishing which shall be limited to the sale, barter m. Taxes, fees, or other charges on Philippine
or exchange of agricultural or marine products products actually Exported;
produced by himself and his immediate family.
[Sec. 131(p), LGC] Exception: Tax on exporters of essential
commodities [Sec. 143(c), LGC, Art. 221(m),
g. Taxes on business enterprises certified to LGC IRR]
by the Board of Investments as Pioneer or
non-pioneer for a period of 6 and 4 years, n. Taxes, fees, or charges on Countryside
respectively from the date of registration; and Barangay Business Enterprises and
Page 230 of 256

cooperatives duly registered under RA 2. The Sanggunian shall send written notices,
6810 (Magna Carta for Countryside and specifying the date and venue of public
Barangay Business Enterprises) and RA hearing, to the interested or affected
6938 (Cooperative Code of the parties operating or doing business within
Philippines), respectively; and the concerned LGU. [Art. 276(b)(2), (3),
LGC IRR]
o. Taxes, fees or charges of any kind on the 3. The public hearing must be held not earlier
National Government, its agencies and than 10 days from sending the notices, or
instrumentalities, and LGUs. [Sec. 133, the last day of publication, or date of
LGC] posting, whichever is later. [Art. 276(b)(3),
LGC IRR]
8. Requirements for a Valid Tax 4. An ordinance must be approved on third
reading by a majority of the sanggunian
Ordinance members present, there being a quorum.
[Art. 107(g), LGC IRR]
Local tax ordinance 5. The enacted ordinance shall be presented
The power to impose a tax, fee, or charge or to to the local chief executive (LCE), who
generate revenue under the LGC shall be may:
exercised by the Sanggunian concerned a. Approve the same by affixing his
through an appropriate ordinance. [Sec. 132, signature; or
LGC] b. Veto and return the same with his
objections to the Sanggunian
Tests of a valid ordinance: within 15 days in case of a
1. It must not contravene the Constitution or province, and 10 days in case of a
any statut city or municipality; otherwise, the
2. It must not be unfair or oppressive; ordinance shall be deemed
3. It must not be partial or discriminatory; approved. [Art. 108, LGC IRR]
4. It must not prohibit but may regulate trade;
5. It must be general and consistent with Note: The LCE, except the Punong Barangay,
public policy; and may veto any ordinance on the ground that it is
6. It must not be unreasonable [Magtajas v. ultra vires or prejudicial to public welfare. His
Pryce Properties, G.R. No. 111097 (1994)] reasons shall be stated in writing. The LCE
may veto an ordinance only once. [Art. 109,
Note: An ordinance is presumed valid unless LGC IRR]
declared otherwise by a court in an appropriate
proceeding. [Rural Bank of Makati v. 6. The sanggunian may override the veto of
Municipality of Makati, G.R. No. 150763 the LCE by 2/3 vote of all its members,
(2004)] thereby making the ordinance effective.
[Art. 109(c), LGC IRR]
Procedure for approval of tax ordinances 7. Once approved, the ordinance shall be
1. Within 10 days from the filing of the transmitted to the higher level sanggunian
proposed tax ordinance, the same shall be for review. If no action is taken by the latter
published for 3 consecutive days in a within 30 days after submission, the same
newspaper of local circulation or posted shall be deemed approved. [Arts. 110 and
simultaneously in at least 4 conspicuous 111, LGC IRR]
public places within the territorial 8. Within 10 days after the approval of the
jurisdiction of the LGU. [Art. 276(b)(1), LGC ordinance, certified true copies of all tax
IRR] ordinances or revenue measures shall be
Page 231 of 256

published in full for 3 consecutive days in a

newspaper of local circulation. It may be extended by the
Sanggunian for justifiable
Where there are no newspapers of local reasons, without surcharges
circulation, it must be posted in at least 2 or penalties, for a period not
conspicuous and publicly accessible places. exceeding 6 months. [Sec.
[Art. 276, LGC IRR] 167, LGC]
1. Surcharge not exceeding
Effectivity of ordinance 25% on taxes, fees or
1. Unless otherwise stated in the ordinance, charges NOT paid on
time; and
the same shall take effect after 10 days
2. Interest not exceeding
from the date a copy is posted at the Penalties on
2% per month of the
entrance of the provincial capitol or city, Unpaid
unpaid taxes, fees or
municipal, or barangay hall, as the case Taxes, Fees charges including
may be, and in at least 2 other conspicuous or Charges surcharges, until the
places in the LGU concerned. [Sec. 59, amount is fully paid
LGC] 3. In no case shall the total
2. In case the effectivity falls on any date interest exceed 36
other than the beginning of the quarter, the months. [Sec. 168, LGC]
same shall be considered as falling at the All local taxes, fees and
beginning of the next quarter and the taxes, charges shall be collected by
fees, or charges due shall begin to accrue the local treasurers or their
therefrom. [Art. 276(a), LGC IRR] duly authorized deputies.
Collection of
The provincial, city or
Taxes
9. Collection of Taxes municipal treasurer may
designate the barangay
treasurer as deputy to collect
Based on a calendar year,
local taxes. [Sec. 170, LGC]
Tax Period unless otherwise provided
The local treasurer may, by
[Sec. 165, LGC]
himself or through his
May be paid annually or in
Manner of deputies duly authorized in
quarterly installments [Sec.
Payment writing, examine the books,
165, LGC]
accounts, and other pertinent
General rule: Accrues on the records of any person
1st day of January of each subject to local taxes, fees
year and charges in order to
Inspection of ascertain, assess and collect
Exception: New taxes, fees the correct amount of the tax,
Books
Accrual of or charges, or changes in the fee or charge.
Tax rates thereof shall accrue on
the 1st day of the quarter next Examination must be done
following the effectivity of the during business hours, only
ordinance imposing such once for every tax period and
new levies or rates [Sec. shall be certified to by the
166, LGC] examining official. [Sec. 171,
Within the first 20 days of LGC]
January or of each
Time of
subsequent quarter. [i.e.,
Payment
January 20, April 20, July 20,
and October 20].
Page 232 of 256

10. Taxpayer’s Remedies by the Metropolitan, Municipal, and Municipal

Circuit Trial Courts in the proper cases, and not
those decided by non-judicial entities such as
a. Protest of Assessment
the City Treasurer. [China Banking Corp. v.
City Treasurer, G.R. No. 204117 (2015)]
1. Protest: The taxpayer may file a written
protest with the local treasurer within 60
days from receipt of the notice of b. Claim for Refund or Tax Credit of
assessment; otherwise it shall become Erroneously or Illegally Collected
final and executory. Tax, Fee or Charge
2. Decision: The local treasurer shall decide
the protest within 60 days from the time of
its filing.
a. If found to be wholly or partly Requisites:
meritorious, a notice cancelling 1. A written claim for refund or credit must be
wholly or partially the assessment filed with the local treasurer; and
will be issued. 2. The case or proceeding must be filed in
b. If denied or when the 60-day period court within 2 years from the payment of tax
already lapsed, the taxpayer shall or from the date the taxpayer became
have 30 days thereafter to appeal entitled to refund or credit. [Sec. 196, LGC]
with the court of competent
jurisdiction; otherwise, the c. Question the Legality of the
assessment becomes conclusive Ordinance
and unappealable. [Sec. 195, LGC]
Any question on the constitutionality or legality
Court of competent jurisdiction of tax ordinances or revenue measures may be
1. Depending on the amount involved, the raised on appeal to the Secretary of Justice.
taxpayer may appeal the decision of the [Sec. 187, LGC]
local treasurer to the MTC, MeTC, MCTC
or the RTC in the exercise of its original Procedure:
jurisdiction. 1. Appeal must be made to the Secretary of
2. Local tax cases decided by the MTC, Justice within 30 days from effectivity of the
MeTC and MCTC may be appealed to the ordinance.
RTC in the exercise of its appellate 2. The Secretary must render a decision
jurisdiction. within 60 days from receipt of the appeal.
3. Said cases decided by the RTC in its
original or appellate jurisdiction may be Note: The appeal shall not suspend the
elevated to the CTA. effectivity of the ordinance and the accrual and
payment of the tax, fee or charge levied
With the passage of R.A. 9282, the authority to therein.
exercise either original or appellate jurisdiction
over local tax cases depended on the amount 3. Within 30 days after receipt of the decision
of the claim. In cases where the RTC exercises or the lapse of the 60-day period without
appellate jurisdiction, it necessarily follows that any action from the Secretary of Justice,
there must be a court capable of exercising the aggrieved party may file appropriate
original jurisdiction – otherwise there would be proceedings with a court of competent
no appeal over which the RTC would exercise jurisdiction. [Sec. 187, LGC]
appellate jurisdiction. The RTC exercises
appellate jurisdiction only from cases decided
Page 233 of 256

Note: The Secretary of Justice can only review Note: If the property distrained is not disposed
the constitutionality or legality of the tax of within 120 days from the date of distraint, the
ordinance, and, if warranted, to revoke it on same shall be considered as sold to the LGU
either or both of these grounds. There is no for the amount of the assessment made. [Sec.
need for a written protest when disputing an 175(e), LGC]
ordinance. [Ingles]
f. Disposition of proceeds [Sec. 175, LGC]
11. Assessment and
LEVY ON REAL PROPERTY
Collection of Local Taxes Subject of Levy: real property and interest in
or rights to real property
a. Remedies of LGUs
i. Local Government’s Lien Procedure

a. After expiration of the time for payment of
Local taxes, fees, charges and other revenues delinquent tax, fee or charge, real property
constitute a lien, superior to all liens or may be levied on before, simultaneously or
encumbrances in favor of any person, after the distraint of personal property.
enforceable by administrative or judicial action. b. Preparation of a duly authenticated
[Sec. 173, LGC] certificate by the local treasurer effecting
the levy and showing:
The lien may only be extinguished upon full o the name of the taxpayer,
payment of the delinquent local taxes, fees, o the amount of the tax, fee or
and charges including related surcharges and charge, and penalty due, and
interest. [Sec. 173, LGC] o the description of the property.
c. Service of written notice of levy to the
ii. Civil Remedies, in General assessor, Register of Deeds, and the
delinquent taxpayer (or his agent if he be
(a) Administrative action absent from the Philippines, or if none, to
the occupant of the property in question)
DISTRAINT OF PERSONAL PROPERTY d. Annotation of the levy on the tax
Subject of distraint: goods, chattels or effects declaration and the certificate of title
and other personal property of whatever e. Report on any levy to be submitted to the
character, including stocks and other Sanggunian within 10 days after receipt of
securities, debts, credits, bank accounts, and warrant [Sec. 176, LGC]
interest in and rights to personal property [Sec. f. Advertisement of the sale or auction shall
174(a), LGC] be held within 30 days after the levy.
g. Before the date of sale, the taxpayer may
Procedure: stay the proceedings by paying the taxes,
a. Seizure of personal property fees, charges, penalties and interests.
b. Accounting of distrained goods h. Sale of the subject property [Sec. 178,
c. Publication of time and place of sale and LGC]
the articles distrained i. Redemption of property sold within 1 year
d. Release of distrained property upon from date of sale [Sec. 179, LGC]
payment prior to sale j. If not redeemed, the local treasurer shall
e. Sale of the goods or effects distrained at execute a deed conveying the property to
public auction. the purchaser [Sec. 180, LGC]
Page 234 of 256

k. Purchase of the real property by the local h. Any material or Article forming part of a
treasurer in case there is no bidder for said house or improvement of any real
property or if the highest bid is insufficient property [Sec. 185, LGC]
to pay the taxes, fees, or charges, related
surcharges, interests, penalties and costs; Penalty on local treasurer for failure to issue
resale of said property may be made at a and execute warrant of distraint or levy
public auction [Sec. 181 and 182, LGC] Automatic dismissal from service after due
notice and hearing [Sec. 177, LGC]
Further distraint or levy
The remedies of distraint or levy may be (b) Judicial Action
repeated if necessary until the full amount due,
including all expenses, is collected [Sec. 184, The LGU may enforce the collection of
LGC] delinquent taxes, fees, charges or other
revenues by civil action in any court of
Note: In case the levy is not issued before or competent jurisdiction within 5 years from the
simultaneously with the warrant of distraint, date they became due. [Secs. 183 and 194,
and the personal property of the taxpayer is not LGC]
sufficient to satisfy his delinquency, the local
treasurer shall within 30 days after execution of Note: Either of these remedies (administrative
the distraint, proceed with the levy on the or judicial action) or all may be pursued
taxpayer's real property. [Sec. 176, LGC] concurrently or simultaneously at the discretion
of the LGU concerned. [Sec. 174, LGC].
Property exempt from distraint or levy
(ToB-CUPLAF) Injunction against collection of local taxes
a. Tools and implements necessarily The LGC does not contain a provision
used by the taxpayer in his trade or prohibiting courts from enjoining the collection
employment of local taxes. Such lapse may have allowed
b. One horse, cow, carabao, or other preliminary injunction under Rule 58 of the
Beast of burden, such as the Rules of Court where local taxes are involved.
delinquent taxpayer may select and [Angeles City v. Angeles City Electric
necessarily used by him in his ordinary Corporation, G.R. No. 166134 (2010)]
occupation
c. His necessary clothing, and that of all Prescriptive Period
his family
d. Household furniture and Utensils Prescriptive period for assessment
necessary for housekeeping and used 1. General Rule: Within 5 years from the date
for that purpose by the delinquent they become due
taxpayer, such as he may select, of a 2. Exception: In case of fraud or intent to
value not exceeding P10,000 evade tax, within 10 years from discovery
e. Provisions, including crops, actually of fraud or intent to evade payment [Sec.
provided for individual or family use 194(a),(b), LGC]
sufficient for 4 months
f. The professional Libraries of doctors, Prescriptive period for collection
engineers, lawyers and judges Within 5 years from the date of assessment by
g. One Fishing boat and net, not administrative or judicial action. No such action
exceeding the total value of P10,000 by shall be instituted after the expiration of said
the lawful use of which a fisherman period. [Sec. 194(c), LGC]
earns his livelihood
Page 235 of 256

Grounds for suspension of prescriptive c. It is proportionate because the tax is

period calculated on the basis of a certain
1. The treasurer is legally prevented from percentage of the value assessed.
making the assessment or collection d. It creates a single, indivisible obligation.
2. The taxpayer requests for reinvestigation e. It attaches on the property (i.e., a lien) and
and executes a waiver in writing before the is enforceable against it.
lapse of the period for assessment or
collection 3. Imposition
3. The taxpayer is out of the country or
otherwise cannot be located [Sec. 194(d),
a. Power to Levy
LGC]
Extent of taxing power
A province or city or a municipality within Metro
B. REAL PROPERTY Manila may:
1. levy an annual ad valorem tax on real
TAXATION property such as land, building, machinery,
and other improvement not hereinafter
1. Fundamental Principles specifically exempted; and [Sec. 232, LGC]
2. fix a uniform rate of basic real property tax
a. Real property shall be appraised at its applicable to their respective localities.
current and fair market value. [Sec. 233, LGC]
b. Real property shall be classified for
assessment purposes on the basis of its The following may levy real property tax:
actual use. 1. Province
c. Real property shall be assessed based on 2. City
a uniform classification within each LGU. 3. Municipality within Metro Manila [Sec.
d. The appraisal, assessment, levy and 232, LGC]
collection of real property tax shall not be
left to any private person. Note: A special levy on lands benefited by
e. The appraisal and assessment of real public works may be imposed by municipalities
property shall be equitable. [Sec. 198, outside Metro Manila.
LGC]
PROPERTIES SUBJECT TO RPT
1. Land
2. Nature of Real Property Tax 2. Building
(RPT) 3. Machinery
4. Other improvements not specifically
a. It is a direct tax on the use of real property. exempted [Sec. 232, LGC]
Note: Real property shall be classified, valued Note: The LGC contains no definition of the
and assessed on the basis of its actual use term “real property”. Therefore, reference
regardless of where located, whoever owns it, should be made to the enumeration of
and whoever uses it. [Sec. 217, LGC] immovable property under Art. 415 of the Civil
Code.
b. It is an ad valorem tax where the tax base
is a fixed proportion of the value of the Machinery
property. [Sec. 199(c), LGC] It embraces machines, equipment, mechanical
contrivances, instruments, appliances or
apparatus which may or may not be attached,
Page 236 of 256

permanently or temporarily, to the real a. Special Education Fund (SEF) – annual tax
property. It includes the physical facilities for of 1% on the assessed value of real
production, the installations and appurtenant property which shall be in addition to the
service facilities, those which are mobile, self- basic RPT [Sec. 235, LGC]
powered or self-propelled, and those not b. Special Levy on Idle Lands – annual tax on
permanently attached to the real property idle lands at the rate not exceeding 5% of
which are actually, directly, and exclusively the assessed value of the property in
used to meet the needs of the particular addition to the basic RPT [Sec. 236, LGC]
industry, business or activity and which by their
very nature and purpose are designed for, or Idle lands covered
necessary to its manufacturing, mining, 1. Agricultural lands more than 1 hectare
logging, commercial, industrial or agricultural in area, suitable for cultivation,
purposes [Sec. 199(o), LGC] dairying, inland fishery, and other
agricultural uses, 1/2 of which remain
Summary of rules on machinery uncultivated or unimproved
1. Machinery that is permanently attached to 2. Non-agricultural lands more than 1,000
land and buildings is subject to RPT. square meters in area 1/2 of which
2. Machinery that is not permanently remain unutilized or unimproved
attached: 3. Residential lots in subdivisions
a. Subject to the RPT if it is an regardless of land area [Sec. 237,
essential and principal element of LGC]
an industry, work or activity without
which such industry, work or Lands not considered idle
activity cannot function; and 1. Agricultural lands planted to permanent
b. Not subject to RPT if it is not an or perennial crops with at least 50 trees
essential and principal element of to a hectare
an industry, work or activity. [DOF 2. Lands actually used for grazing
Local Finance Circular No. 001- purposes [Sec. 237(a), LGC]
2002]
Idle lands may be exempted by reason of:
Improvement 1. Force majeure,
It is a valuable addition made to a property or 2. Civil disturbance,
an amelioration in its condition, amounting to 3. Natural calamity, or
more than a mere repair or replacement of 4. Any cause or circumstance which
parts involving capital expenditures and labor, physically or legally prevents the owner
which is intended to enhance its value, beauty from improving, utilizing or cultivating
or utility or to adapt it for new or further the same. [Sec. 238, LGC]
purposes [Sec. 199(m), LGC]
c. Special Levy for Public Works – a special
TYPES OF REAL PROPERTY TAX levy on lands specially benefited by public
1. Basic RPT works projects or improvements funded by
a. Province: not exceeding 1% of the the LGU concerned, but which shall not
assessed value of real property; and exceed 60% of the actual cost of such
b. City or municipality within Metro Manila: not projects and improvements, including the
exceeding 2% of the assessed value of real costs of acquiring land and such other real
property. [Sec. 233, LGC] property in connection therewith [Sec. 240,
LGC]
2. Special levies on real property
Page 237 of 256

Exception: The special levy shall not apply to: Withdrawal of exemption
1. lands exempt from basic RPT; and Except as provided herein, any exemption from
2. the remainder of the land, portions of payment of RPT previously granted to, or
which were donated to the LGU for the presently enjoyed by, all persons, whether
construction of such projects or natural or juridical, including all government-
improvements. [Sec. 240, LGC] owned or controlled corporations (GOCCs) are
hereby withdrawn upon the effectivity of the
Note: Municipalities outside Metro Manila may LGC. [Sec. 234, LGC]
impose a special levy on lands benefited by
public works. Note: Section 234 of the LGC applies
specifically to RPT exemptions, while Section
b. Exemptions from RPT 193 of the LGC applies to exemptions from all
other local taxes.
1. Real property owned by the Republic of the
Philippines or any of its political Proof of exemption
subdivisions Every person who shall claim tax exemption
shall file with the local assessor within 30 days
Exception: when beneficial use is granted for from the date of declaration of real property
a consideration or to a taxable person. sufficient documentary evidence in support of
such claim (e.g., corporate charters, title of
2. Charitable institutions, churches, ownership, affidavits, by-laws, contract, articles
parsonages, or convents appurtenant of incorporation). Otherwise, the property will
thereto, mosques, non-profit or religious be listed as taxable in the assessment roll.
cemeteries, and all lands, buildings, and [Sec. 206, LGC]
improvements actually, directly and
exclusively used for religious, charitable, or GOCCs not exempt from RPT
educational purposes The last paragraph of Sec. 234 of the LGC
3. Machinery and equipment actually, directly expressly withdrew the exemption of GOCCs
and exclusively used by local water from RPT upon the effectivity of the LGC.
districts and GOCCs engaged in the supply
and distribution of water and/or generation Exemption of Charitable Institutions
and transmission of electric power To be entitled to the exemption, claimant must
4. Real property owned by duly registered prove, that (a) it is a charitable institution; and
cooperatives as provided for under RA (b) its real properties are actually, directly and
6938 [Cooperative Code of the Philippines] exclusively used for charitable purposes.
5. Machinery and equipment used for
pollution control and environmental What is meant by actual, direct and exclusive
protection [Sec. 234, LGC] use of the property for charitable purposes is
the direct and immediate and actual application
A claim for exemption under Sec. 234(e) of the of the property itself to the purposes for which
LGC should be supported by evidence that the the charitable institution is organized. [Lung
property sought to be exempted is actually, Center of the Philippines v. Quezon City, G.R.
directly and exclusively used for pollution No. 144104 (2004)]
control and environmental protection.
[Provincial Assessor of Marinduque v. CA,
G.R. No. 170532 (2009)]
Page 238 of 256

4. Appraisal and Assessment of permitee [BLGF Manual on Real Property

Appraisal and Assessment Operations]
Real Property 7. Special
a. all lands, buildings and other
Appraisal is the act or process of determining improvements actually, directly and
the value of property as of a specified date for exclusively used for hospitals,
a specific purpose. [Sec. 199(e), LGC] cultural, or scientific purposes, and
b. those owned and used by local
Assessment is the act or process of water districts, and GOCCs
determining the value of a property, or rendering essential public services
proportion thereof subject to tax, including the in the supply and distribution of
discovery, listing, classification, and appraisal water and/or generation and
of properties. [Sec. 199(f), LGC] transmission of electric power
[Sec. 216, LGC]
a. Classes of Real Property
Declaration of real property by owner or
For purposes of assessment, real property administrator
shall be classified as residential, agricultural, All persons owning or administering real
commercial, industrial, mineral, timberland or property, including improvements therein, shall
special. [Sec. 215, LGC] prepare a sworn statement:
1. declaring the true value of the property
1. Residential land – land principally which shall be the current and FMV of
devoted to habitation [Sec. 199(u), LGC] the property; and
2. Agricultural land – land devoted 2. containing a sufficient description of
principally to the planting of trees, raising of the property for assessment purposes.
crops, livestock and poultry, dairying, salt
making, inland fishing and similar The declaration must be filed with the assessor
aquaculture activities and other agricultural once every 3 years during the period from
activities and is not classified as mineral, January 1 to June 30. [Sec. 202, LGC]
timber, residential, commercial or industrial
land [Sec. 199(d), LGC] Declaration by person acquiring real
3. Commercial land – land devoted property or making improvements
principally for the object of profit and is not A sworn statement declaring the true value of
classified as agricultural, industrial, the property must be filed with the provincial,
mineral, timber or residential land [Sec. city or municipal assessor within 60 days after
199(i), LGC] the acquisition of a real property or upon
4. Industrial land – land devoted principally completion or occupancy of the improvement,
to industrial activity as capital investment whichever comes earlier. [Sec. 203, LGC]
and is not classified as agricultural,
commercial, timber, mineral or residential Declaration by the local assessor
land [Sec. 199(n), LGC] When the person required to file the sworn
5. Mineral land – land in which minerals exist declaration under Sec. 202 of the LGC refuses
in sufficient quantity or grade to justify the or fails to make such declaration, the
necessary expenditures to extract and provincial, city or municipal assessor shall
utilize such minerals [Sec. 199(p), LGC] declare the property in the name of the
6. Timberland – land identified as forest or defaulting owner, and shall assess the property
reserved area by the government, which for taxation. [Sec. 204, LGC]
may or may not be granted to a
concessionaire, licensee, lessee or
Page 239 of 256

Notice of transfer of real property the recommendation within 90 days from

Any person who shall transfer real property its receipt. [Sec. 214, LGC]
ownership to another shall notify the provincial,
city or municipal assessor within 60 days from FMV of Machinery
the date of such transfer. The notification shall Brand New The FMV is the acquisition cost.
include: [Sec. 224(a), LGC]
1. Mode of transfer,
2. Description of the property alienated, If the machinery is imported, the
and acquisition cost includes freight,
3. Name and address of the transferee insurance, bank and other
[Sec. 208, LGC] charges, brokerage, arrastre and
handling, duties and taxes, plus
cost of inland transportation,
Appraisal of Real Property at Fair Market
handling, and installation
Value
charges at the present site. [Sec.
All real property shall be appraised at the
224(b), LGC]
current and FMV prevailing at the locality
All Other FMV is determined by dividing
where the property is situated. [Sec. 201, LGC] Cases the remaining economic life of
the machinery by its estimated
FMV is the price at which property may be sold economic life and multiplied by
by a seller who is not compelled to sell and the replacement or reproduction
bought by a buyer who is not compelled to buy. cost. [Sec. 224(a), LGC]
[Sec. 199(l), LGC] Depreciatio Depreciation rate: not
n Allowance exceeding 5% of its original cost
Determination of FMV or its replacement or
1. The assessor of the province, city or reproduction cost, for each year
municipality or his deputy may summon the of use
owners or persons having legal interest
therein and witnesses, and may administer The remaining value shall be
oaths, and take deposition concerning the fixed at not less than 20% of such
property, its ownership, amount, nature, original, replacement or
and value. [Sec. 213, LGC] reproduction cost for so long as
2. The assessors shall prepare a schedule of the machinery is useful and in
FMV for the different classes of real operation. [Sec. 225, LGC]
property situated in their respective local
government units for enactment by b. Assessment of Real Property
ordinance of the Sanggunian concerned. Based on Actual Use
[Sec. 212, LGC]
3. The schedule of FMV shall be published in Basis of assessment
a newspaper of general circulation in the Real property shall be classified, valued and
LGU concerned or in the absence thereof, assessed on the basis of actual use regardless
shall be posted in the provincial capitol, city of where located, whoever owns it, and
or municipal hall and in 2 other whoever uses it. [Sec. 217, LGC]
conspicuous public places therein. [Sec.
212, LGC] “Actual Use” refers to the purpose for which
4. The assessor may recommend to the the property is principally or predominantly
Sanggunian amendments to correct errors utilized by the person in possession thereof
in valuation in the schedule of FMV. The [Sec. 199(b), LGC]
Sanggunian shall, by ordinance, act upon
Page 240 of 256

Note: Unpaid realty taxes attach to the property increasing the value of said property or of any
and are chargeable against the person who change in its actual use. [Sec. 220, LGC]
had actual or beneficial use and possession of
it regardless of whether or not he is the owner. Date of effectivity of assessment or
[Estate of Lim v. City of Manila, G.R. No. 90639 reassessment
(1990)] General rule: All assessments or
reassessments made after January 1 of any
Assessment levels year shall take effect on January 1 of the
It is the percentage applied to the FMV to succeeding year [Sec. 221, LGC]
determine the taxable value of the property.
[Sec. 199(g), LGC] Exceptions: Reassessments due to the
following causes shall be made within 90 days
Note: Assessment levels shall be fixed by from the date of any cause and shall take effect
ordinances of the Sanggunian at rates not at the beginning of the quarter subsequent to
exceeding those prescribed under Sec. 218 of the reassessment:
the LGC. 1. partial or total destruction
2. major change in actual use;
Assessed or Taxable Value 3. any great and sudden inflation or deflation
It is the FMV of the real property multiplied by of real property values;
the assessment level. [Sec. 199(h), LGC] 4. gross illegality of the assessment when
• Assessed Value = FMV × Assessment made; or
Level 5. any other abnormal cause. [Sec. 221, LGC]
• RPT = Assessed Value × Tax Rate
Assessment of property subject to back taxes
General revisions of assessments and Property declared for the first time shall be
property classification assessed for taxes for the period during which
The local assessor shall undertake a general it would have been liable but in no case for
revision of real property assessments every 3 more than 10 years prior to the date of initial
years. [Sec. 219, LGC] assessment [Sec. 222, LGC]
Valuation of real property by assessor Notification of new or revised assessment

The local assessor shall make a classification, When real property is assessed for the first
appraisal and assessment of the real property time or when an existing assessment is
irrespective of any previous assessment or increased or decreased, the local assessor
taxpayer’s valuation thereon in the following shall within 30 days give written notice of the
cases: new or revised assessment to the person in
1. real property is declared and listed for whose name the property is being declared.
taxation purposes for the first time;
2. there is an ongoing general revision of Notice may be given personally or by
property classification and assessment; or registered mail or through the assistance of the
3. a request is made by the person in whose Punong Barangay to the last known address of
name the property is declared. [Sec. 220, the person to be served. [Sec. 223, LGC]
LGC]
Note: The assessment shall not be increased

more often than once every 3 years except in
case of new improvements substantially
Page 241 of 256

5. Collection of Real Property Exception: In case there is fraud or intent to

evade payment of tax, within 10 years from
Tax discovery of fraud or intent to evade payment
[Sec. 270, LGC]
Collecting authority
The collection of RPT shall be the responsibility Grounds for suspension of prescriptive
of the city or municipal treasurer concerned. He period
may deputize the barangay treasurer to collect 1. The local treasurer is legally prevented
all taxes on real property located in the from collecting the tax;
barangay provided the latter is bonded. [Sec. 2. The owner of the property or the person
247, LGC] having legal interest therein requests
for reinvestigation and executes a
Duty of assessor to furnish local treasurer waiver in writing before the expiration
with assessment rolls of the period to collect; and
The provincial, city or municipal assessor shall 3. The owner of the property or the person
prepare and submit to the local treasurer, on or having legal interest therein is out of
before December 31 of each year, an the country or cannot be located. [Sec.
assessment roll containing a list of all persons 270, LGC]
whose real properties have been newly
assessed or reassessed and the values of RULES ON PAYMENT
such properties. [Sec. 248, LGC] Payment of RPT
1. Payment of RPT and the additional tax for
Notice of time for collection of tax SEF, without interest, may be made in 4
The local treasurer shall post the notice of the equal installments:
dates when the tax may be paid without interest • 1st: March 31
at a conspicuous and publicly accessible place • 2nd: June 30
at the city or municipal hall: • 3rd: September 30
1. on or before January 31 of each year in
• 4th: December 31
the case of basic RPT and additional
2. Any special levies shall be governed by
tax for SEF; or
ordinance of the Sanggunian concerned.
2. on any other date in the case of any
[Sec. 250, LGC]
other tax.
Note: Payments of RPT shall first be applied to
The notice shall also be published in a
prior years’ delinquencies, interests and
newspaper of general circulation in the locality
penalties, if any, and only after the
once a week for 2 consecutive weeks. [Sec.
delinquencies are settled may tax payments be
249, LGC]
credited for the current period. [Sec. 250, LGC]
a. Date of Accrual Interests on unpaid RPT

Interest at the rate of 2% per month on the
Real property tax for any year shall accrue on unpaid amount or a fraction thereof until the
the 1st day of January. [Sec. 246, LGC] delinquent tax shall have been fully paid, but
the total interest shall not exceed 36 months
b. Periods to Collect [Sec. 255, LGC]
General Rule: Within 5 years from the date the Discount for advance or prompt payment
taxes become due 1. Advance payment – not exceeding
20% of annual tax due [Sec. 251, LGC]
Page 242 of 256

2. Prompt payment – not exceeding 10% the assessor and the Register of Deeds
of annual tax due [Art. 342, LGC IRR] where the property is located.
e. The Register of Deeds must annotate the
c. Remedies of LGUs levy on the tax declaration and certificate of
title.
Issuance of notice of delinquency f. The levying officer shall submit a report on
When the real property tax becomes the levy to the Sanggunian within 10 days
delinquent, the local treasurer shall post a after receipt of warrant by the owner. [Sec.
notice of delinquency at the main hall and in a 258, LGC]
publicly accessible and conspicuous place in g. Advertisement of the sale or auction shall
each barangay of the LGU concerned. [Sec. be made within 30 days after service of
254, LGC] warrant.
h. Before the date of sale, the proceedings
1. Local Government’s Lien may be stayed by paying the delinquent
The RPT shall constitute a lien on the property tax.
subject to tax, superior to all liens, charges or i. Sale of the real property [Sec. 260, LGC]
encumbrances in favor of any person, j. Redemption of property sold within 1 year
irrespective of the owner or possessor thereof, from date of sale upon payment of the
enforceable by administrative or judicial action delinquent tax [Sec. 261, LGC]
and may only be extinguished upon payment of k. If not redeemed, the local treasurer shall
the tax and the related interests and expenses. execute a deed conveying the property to
[Sec. 257, LGC] the purchaser. [Sec. 262, LGC]
l. Purchase of property by local treasurer in
It constitutes a lien on the property from the case there is no bidder for the real property
date of accrual (i.e., January 1) [Sec. 246, or if the highest bid is insufficient to pay the
LGC]. RPT and other costs; resale of such
property may be made at a public auction
2. Administrative Action [Sec. 263 and 264, LGC]
1. Levy on real property Further levy until full payment

a. After expiration of the time required to pay Levy may be repeated if necessary until the full
the tax when due, the local treasurer shall due, including all expenses, is collected. [Sec.
issue a warrant of levy on or before, or 265, LGC]
simultaneously with, the institution of the
civil action for the collection of the 2. Distraint of personal property
delinquent tax. The notice of delinquency shall state that
b. The warrant shall include a duly personal property may be distrained to effect
authenticated certificate showing: payment. It shall likewise state that any time
1. the name of the owner or person before the distraint of personal property,
having legal interest therein, payment of the tax with surcharges, interests
2. description of the property, and and penalties may be made. [Sec. 254, LGC]
3. amount of the tax due and interest
thereon. 3. Judicial Action
c. Warrant must be mailed to or served upon The LGU concerned may enforce the collection
the delinquent owner or person having of the basic RPT or any other related tax by civil
legal interest in the property. action in any court of competent jurisdiction.
d. Written notice of levy with the attached The civil action shall be filed by the local
warrant must be mailed to or served upon treasurer within the period prescribed for
Page 243 of 256

Page 248 of 256

The provincial or city treasurer shall decide the

claim for tax refund or credit within 60 days
from receipt thereof. [Sec. 253, LGC]
Remedy in case of denial by the local

treasurer
In case the claim for tax refund or credit is
denied, the taxpayer may follow the procedure
in questioning an assessment (i.e., appeal to
the LBAA, then to the CBAA, and subsequently
to the CTA En Banc). [Sec. 253, LGC]
c. Compromising an RPT
assessment
Condonation or reduction of RPT

1. The Sanggunian:, in case of general
failure of crops or substantial decrease in the
price of agricultural or agri-based products or
calamity, may, by ordinance, condone or
reduce taxes and interest for the succeeding
year/s in the city or municipality affected by the
calamity. [Sec. 276, LGC]
2. The President of the Philippines may,
when public interest so requires, condone or
reduce the real property tax and interest for any
year in any province or city or municipality
within Metro Manila. [Sec. 277, LGC]
Compromise by authority of the President

The CTA allowed the compromise agreement
between Batangas City, represented by its
Mayor, and the taxpayer since it was entered
into in line with an executive order issued by
the President to address the real property tax
issues of independent power producers
through the reduction of their tax liabilities and
the condonation of fines, penalties and interest
on deficiency taxes. [Kepco Ilijan Corporation
v. CBAA, CTA EB No. 909 (2013)]
Page 246 of 256

2. Inaction by the CIR in cases involving

IV. JUDICIAL REMEDIES disputed assessments, refunds of internal
revenue taxes, fees or other charges,
penalties in relation thereto, or other
A. JURISDICTION OF THE matters arising under the NIRC or other
COURT OF TAX APPEALS laws administered by the BIR, where the
NIRC or other applicable law provides a
specific period for action: Provided, that in
[R.A. 1125, as amended by R.A. No. 3457 and case of disputed assessments, the inaction
further amended by R.A. 9282 and R.A. 9503, of the CIR within the one hundred eighty
and A.M. No. 05-11-07-CTA or the Revised day-period under Section 228 of the NIRC
Rules of the Court of Tax Appeals (RRCTA)] shall be deemed a denial for purposes of
allowing the taxpayer to appeal his case to
1. Civil Cases the Court and does not necessarily
constitute a formal decision of the CIR on
a. Exclusive Original Jurisdiction of the tax case; Provided, further, that should
the Court in Divisions the taxpayer opt to await the final decision
of the CIR on the disputed assessments
The Court in Divisions shall exercise exclusive beyond the one hundred eighty day-period
original jurisdiction in tax collection cases above mentioned, the taxpayer may appeal
involving final and executory assessments for such final decision to the Court under
taxes, fees, charges and penalties, where the Section 3(a), Rule 8 of these Rules; and
principal amount of taxes and fees, exclusive Provided, still further, that in the case of
of charges and penalties, claimed is one million claims for refund of taxes erroneously or
pesos or more. [Sec. 3(c)(1), Rule 4, RRCTA] illegally collected, the taxpayer must file a
petition for review with the Court prior to the
expiration of the two-year period under
b. Exclusive Appellate Jurisdiction in
Section 229 of the NIRC;
Civil Cases 3. Decisions, resolutions or orders of the RTC
in local tax cases decided or resolved by
The Court in Divisions shall exercise exclusive them in the exercise of their original
appellate jurisdiction over appeals from the jurisdiction;
judgments, resolutions or orders of the RTCs in 4. Decisions of the Commissioner of Customs
tax collection cases originally decided by them in cases involving liability for customs
within their respective territorial jurisdiction. duties, fees or other money charges,
[Sec. 3(c)(2), Rule 4, RRCTA] seizure, detention or release of property
affected, fines, forfeitures of other penalties
The Court in Divisions shall exercise exclusive in relation thereto, or other matters arising
original or appellate jurisdiction to review by under the Customs Law or other laws
appeal the following: administered by the Bureau of Customs;
5. Decisions of the Secretary of Finance on
1. Decisions of the CIR in cases involving customs cases elevated to him
disputed assessments, refunds of internal automatically for review from decisions of
revenue taxes, fees or other charges, the Commissioner of Customs adverse to
penalties in relation thereto, or other the Government under Section 2315 of the
matters arising under the NIRC or other Tariff and Customs Code; and
laws administered by the BIR;
Page 250 of 256

Page 248 of 256

criminal offenses arising from violations of Procedure

the NIRC or the Tariff and Customs Code i. Filing of an Action for Collection of
and other laws administered by the BIR or Taxes
Bureau of Customs;
2. Decisions, resolutions or orders on motions (a) Internal Revenue Taxes
for reconsideration or new trial of the Court
in Division in the exercise of its exclusive The remedies for the collection of internal
appellate jurisdiction over criminal offenses revenue taxes, fees or charges, and any
mentioned in the preceding subparagraph; increment thereto resulting from delinquency
and can be through the institution of a civil or
3. Decisions, resolutions or orders of the RTC criminal action. [Sec. 205, NIRC]
in the exercise of their appellate jurisdiction
over criminal offenses arising from Note: See Taxpayer’s Remedies – Collection
violations of the NIRC or the Tariff and above.
Customs Code and other laws
administered by the BIR or Bureau of When this remedy is resorted to:
Customs. The tax assessment becomes final and
executory because of the failure to appeal.
Does the CTA have jurisdiction over a
special civil action for certiorari assailing Even pending decision of the administrative
an interlocutory order issued by the RTC in protest [CIR v. Union Shipping, G.R. No. L-
a local tax case? YES. 66160 (1990)]
While there is no express grant of such power, (b) Local Taxes

with respect to the CTA, Section 1, Article VIII
of the 1987 Constitution provides, nonetheless, The LGU concerned may enforce the collection
that judicial power shall be vested in one of delinquent taxes, fees, charges or other
Supreme Court and in such lower courts as revenues by civil action in any court of
may be established by law and that judicial competent jurisdiction. The civil action shall be
power includes the duty of the courts of justice filed by the local treasurer. [Sec. 183, LGC]
to settle actual controversies involving rights
which are legally demandable and enforceable, MTC/RTC depending on jurisdictional
and to determine whether or not there has been threshold amount.
a grave abuse of discretion amounting to lack
or excess of jurisdiction on the part of any Prescriptive period
branch or instrumentality of the Government. Local taxes, fees, or charges shall be assessed
within five (5) years from the date they became
On the strength of the above constitutional due.
provisions, it can be fairly interpreted that the
power of the CTA includes that of determining No action for the collection of such taxes, fees,
whether or not there has been grave abuse of or charges, whether administrative or judicial,
discretion amounting to lack or excess of shall be instituted after the expiration of such
jurisdiction on the part of the RTC in issuing an period.
interlocutory order in cases falling within the
exclusive appellate jurisdiction of the tax court. In case of fraud or intent to evade the payment
[City of Manila v. Grecia-Cuerdo, G.R. No. of taxes, fees, or charges, the same may be
175723 (2014)] assessed within ten (10) years from discovery
of the fraud or intent to evade payment.
Page 252 of 256

Local taxes, fees, or charges may be collected for reconsideration or new trial may appeal
within 5 years from the date of assessment by within 15 days from receipt of the copy of the
administrative or judicial action. decision.
No judicial or administrative action for Mode of Appeal: Rule 43

collection can be instituted after lapse of the A party adversely affected by a decision or
period for assessment except when there is ruling of the Central Board of Assessment
fraud or intent to evade tax. [Sec. 194 LGC] Appeals and the Regional Trial Court in the
exercise of their appellate jurisdiction may
The running of the periods of prescription shall appeal within 30 days from the receipt of the
be suspended for the time during which: copy of the decision.
1. The treasurer is legally prevented from
@making the assessment of collection; b. Suspension of Collection of Taxes
2. The taxpayer requests for a
reinvestigation and executes a waiver in writing General rule: No appeal taken to the Court
before expiration of the period within which to shall suspend the payment, levy, distraint, or
assess or collect; and sale of any property of the taxpayer for the
3. The taxpayer is out of the country or satisfaction of his tax liability as provided under
otherwise cannot be located. [Sec. 194, LGC] existing laws.
3. Civil Cases Exception: Where the collection of the amount

of the taxpayer’s liability, sought by means of a
a. Who May Appeal, Mode of Appeal, demand for payment, by levy, distraint or sale
of any property of the taxpayer, or by whatever
Effect of Appeal
means, as provided under existing laws, may
jeopardize the interest of the Government or
Appeal to CTA Division
the taxpayer, an interested party may file a
1. A party aggrieved or adversely affected by
motion for the suspension of the collection of
the decision or ruling or inaction of
the tax liability [Sec. 11, RA 1125, as amended]
a. CIR;
b. Commissioner of Customs;
c. Secretary of Finance; c. Injunction not available to restrain
d. Secretary of Trade and Industry; collection
e. Secretary of Agriculture; or
f. RTC exercising original jurisdiction No court shall have authority to grant an
2. May appeal within 30 days from the receipt injunction to restrain the collection of any
of the copy of the decision or ruling, or the national internal revenue tax, fee or charge
expiration of the period fixed by law for the imposed by the Code. [Sec. 217, NIRC]
Commissioner to decide, to the Court of
Tax Appeals Division. Exception: Sec. 11, R.A. 1125, supra.
Mode of Appeal: Rule 42 The CTA has ample authority to dispense with
Aggrieved party may file a motion for the deposit of the amount claimed or the filing
reconsideration or new trial within 15 days from of the required bond, whenever the method
receipt of the copy of the decision. employed by the BIR in the collection of tax
jeopardizes the interest of the taxpayer for
Appeal to CTA en Banc being patently in violation of law. [Sps.
A party adversely affected by a decision or Pacquiao v. CTA First Division, G.R. No.
resolution of a Division of the Court on a motion 213394 (2016)]
Page 253 of 256

2. Inaction by the CIR in cases involving

IV. JUDICIAL REMEDIES disputed assessments, refunds of internal
revenue taxes, fees or other charges,
penalties in relation thereto, or other
A. JURISDICTION OF THE matters arising under the NIRC or other
COURT OF TAX APPEALS laws administered by the BIR, where the
NIRC or other applicable law provides a
specific period for action: Provided, that in
[R.A. 1125, as amended by R.A. No. 3457 and case of disputed assessments, the inaction
further amended by R.A. 9282 and R.A. 9503, of the CIR within the one hundred eighty
and A.M. No. 05-11-07-CTA or the Revised day-period under Section 228 of the NIRC
Rules of the Court of Tax Appeals (RRCTA)] shall be deemed a denial for purposes of
allowing the taxpayer to appeal his case to
1. Civil Cases the Court and does not necessarily
constitute a formal decision of the CIR on
a. Exclusive Original Jurisdiction of the tax case; Provided, further, that should
the Court in Divisions the taxpayer opt to await the final decision
of the CIR on the disputed assessments
The Court in Divisions shall exercise exclusive beyond the one hundred eighty day-period
original jurisdiction in tax collection cases above mentioned, the taxpayer may appeal
involving final and executory assessments for such final decision to the Court under
taxes, fees, charges and penalties, where the Section 3(a), Rule 8 of these Rules; and
principal amount of taxes and fees, exclusive Provided, still further, that in the case of
of charges and penalties, claimed is one million claims for refund of taxes erroneously or
pesos or more. [Sec. 3(c)(1), Rule 4, RRCTA] illegally collected, the taxpayer must file a
petition for review with the Court prior to the
expiration of the two-year period under
b. Exclusive Appellate Jurisdiction in
Section 229 of the NIRC;
Civil Cases 3. Decisions, resolutions or orders of the RTC
in local tax cases decided or resolved by
The Court in Divisions shall exercise exclusive them in the exercise of their original
appellate jurisdiction over appeals from the jurisdiction;
judgments, resolutions or orders of the RTCs in 4. Decisions of the Commissioner of Customs
tax collection cases originally decided by them in cases involving liability for customs
within their respective territorial jurisdiction. duties, fees or other money charges,
[Sec. 3(c)(2), Rule 4, RRCTA] seizure, detention or release of property
affected, fines, forfeitures of other penalties
The Court in Divisions shall exercise exclusive in relation thereto, or other matters arising
original or appellate jurisdiction to review by under the Customs Law or other laws
appeal the following: administered by the Bureau of Customs;
5. Decisions of the Secretary of Finance on
1. Decisions of the CIR in cases involving customs cases elevated to him
disputed assessments, refunds of internal automatically for review from decisions of
revenue taxes, fees or other charges, the Commissioner of Customs adverse to
penalties in relation thereto, or other the Government under Section 2315 of the
matters arising under the NIRC or other Tariff and Customs Code; and
laws administered by the BIR;
Page 250 of 256

6. Decisions of the Secretary of Trade and original jurisdiction over tax collection
Industry, in the case of nonagricultural cases; and
product, commodity or article, and the 4. Decisions of the Central Board of
Secretary of Agriculture, in the case of Assessment Appeals (CBAA) in the
agricultural product, commodity or article, exercise of its appellate jurisdiction over
involving dumping and countervailing cases involving the assessment and
duties under Section 301 and 302, taxation of real property originally decided
respectively, of the Tariff and Customs by the provincial or city board of
Code, and safeguard measures under assessment appeals.
Republic Act No. 8800, where either party
may appeal the decision to impose or not 2. Criminal Cases
to impose said duties. [Sec. 3(a), Rule 4,
RRCTA]
a. Exclusive Original Jurisdiction of
Civil cases within the jurisdiction of the the Court in Divisions
Court En Banc [Sec. 2(a-e), Rule 4, RRCTA]
The Court en banc shall exercise exclusive The Court in Divisions shall exercise exclusive
appellate jurisdiction to review by appeal the original jurisdiction over all criminal offenses
following: arising from violations of the NIRC or Tariff and
Customs Code and other laws administered by
1. Decisions or resolutions on motions for the BIR or the Bureau of Customs, where the
reconsideration or new trial of the Court in principal amount of taxes and fees, exclusive
Divisions in the exercise of its exclusive of charges and penalties, claimed is one million
appellate jurisdiction over: pesos or more. [Sec. 3(b)(1), Rule 4, RRCTA]
a. Cases arising from administrative
agencies – Bureau of Internal b. Exclusive Appellate Jurisdiction in
Revenue, Bureau of Customs, Criminal Cases
Department of Finance, Department of
Trade and Industry, Department of The Court in Divisions shall exercise exclusive
Agriculture; appellate jurisdiction over appeals from the
b. Local tax cases decided by the judgments, resolutions or orders of the RTC in
Regional Trial Courts in the exercise of their original jurisdiction in criminal offenses
their original jurisdiction; and arising from violations of the NIRC or Tariff and
c. Tax collection cases decided by the Customs Code and other laws administered by
Regional Trial Courts in the exercise of the BIR or Bureau of Customs, where the
their original jurisdiction involving final principal amount of taxes and fees, exclusive
and executory assessments for taxes, of charges and penalties, claimed is less than
fees, charges and penalties, where the one million pesos or where there is no specified
principal amount of taxes and penalties amount claimed. [Sec. 3(b)(2), Rule 4, RRCTA]
claimed is less than one million pesos.
2. Decisions, resolutions or orders of the RTC Criminal cases within the jurisdiction of the
in local tax cases and in tax collection Court En Banc [Sec. 2(f-h), Rule 4, RRCTA]
cases decided or resolved by them in the The Court en banc shall exercise exclusive
exercise of their appellate jurisdiction; appellate jurisdiction to review by appeal the
3. Decisions, resolutions or orders on motions following:
for reconsideration or new trial of the Court 1. Decisions, resolutions or orders on motions
in Division in the exercise of its exclusive for reconsideration or new trial of the Court
in Division in the exercise of its exclusive
original jurisdiction over cases involving
Page 251 of 256

criminal offenses arising from violations of Procedure

the NIRC or the Tariff and Customs Code i. Filing of an Action for Collection of
and other laws administered by the BIR or Taxes
Bureau of Customs;
2. Decisions, resolutions or orders on motions (a) Internal Revenue Taxes
for reconsideration or new trial of the Court
in Division in the exercise of its exclusive The remedies for the collection of internal
appellate jurisdiction over criminal offenses revenue taxes, fees or charges, and any
mentioned in the preceding subparagraph; increment thereto resulting from delinquency
and can be through the institution of a civil or
3. Decisions, resolutions or orders of the RTC criminal action. [Sec. 205, NIRC]
in the exercise of their appellate jurisdiction
over criminal offenses arising from Note: See Taxpayer’s Remedies – Collection
violations of the NIRC or the Tariff and above.
Customs Code and other laws
administered by the BIR or Bureau of When this remedy is resorted to:
Customs. The tax assessment becomes final and
executory because of the failure to appeal.
Does the CTA have jurisdiction over a
special civil action for certiorari assailing Even pending decision of the administrative
an interlocutory order issued by the RTC in protest [CIR v. Union Shipping, G.R. No. L-
a local tax case? YES. 66160 (1990)]
While there is no express grant of such power, (b) Local Taxes

with respect to the CTA, Section 1, Article VIII
of the 1987 Constitution provides, nonetheless, The LGU concerned may enforce the collection
that judicial power shall be vested in one of delinquent taxes, fees, charges or other
Supreme Court and in such lower courts as revenues by civil action in any court of
may be established by law and that judicial competent jurisdiction. The civil action shall be
power includes the duty of the courts of justice filed by the local treasurer. [Sec. 183, LGC]
to settle actual controversies involving rights
which are legally demandable and enforceable, MTC/RTC depending on jurisdictional
and to determine whether or not there has been threshold amount.
a grave abuse of discretion amounting to lack
or excess of jurisdiction on the part of any Prescriptive period
branch or instrumentality of the Government. Local taxes, fees, or charges shall be assessed
within five (5) years from the date they became
On the strength of the above constitutional due.
provisions, it can be fairly interpreted that the
power of the CTA includes that of determining No action for the collection of such taxes, fees,
whether or not there has been grave abuse of or charges, whether administrative or judicial,
discretion amounting to lack or excess of shall be instituted after the expiration of such
jurisdiction on the part of the RTC in issuing an period.
interlocutory order in cases falling within the
exclusive appellate jurisdiction of the tax court. In case of fraud or intent to evade the payment
[City of Manila v. Grecia-Cuerdo, G.R. No. of taxes, fees, or charges, the same may be
175723 (2014)] assessed within ten (10) years from discovery
of the fraud or intent to evade payment.
Page 252 of 256

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U.P.

LAW BOC TAXATION

2. RULE-MAKING AUTHORITY OF THE SECRETARY OF a. Domestic Corporations and Resident

IV. JUDICIAL REMEDIES ................................... 250

A. JURISDICTION OF THE COURT OF TAX

1. CIVIL CASES ................................................. 250

[PAL v. Edu, G.R. No. L-41383 (1988)]

being the recipients of unearned wealth b. Grant tax exemptions or

[PAL v. Edu, G.R. No. L-41383 (1988)]

being the recipients of unearned wealth b. Grant tax exemptions or

called a tax. [Phil. Airlines, Inc. v. Edu, G.R.

Note: Taxes may also be imposed for Debt

Special assessment Based on laws Generally based on

Levied not only on Levied only on land Generally cannot be Assignable

Imposed regardless Imposed because of Generally paid in May be paid in kind

Imposed only by Can be imposed by

A tax is not a debt in the ordinary sense of the

Violation of tax laws Any sanction

Primarily intended to Designed to regulate

May be imposed only May be imposed by

Cannot be a subject Can be a subject of

When the distinction of exercise of

Taxation Eminent Domain Police Power

The use of the

Protection and benefits Indirect benefits

Relatively free from

can be pointed out. [Lorenzo v. Posadas,

A tax law will retain its validity even if it is not in

2. Administrative feasibility F. INHERENT AND

No. L-75697 (1987)] settled maxims in constitutional law is that the

General Rule: Delegata potestas non potest Exceptions

power to tax on such local c. Delegation to administrative

Reasons: b. In international law, a foreign government

Reasons for the exemption: 2. Constitutional Limitations

a. Provisions directly affecting burden, not equality in amount

Equality and Uniformity distinguished: 3. Grant by Congress of authority to the

The progressive system of taxation would To be entitled to the exemption, the

5. Prohibition against taxation of non-

Revenues derived from assets used in the

7. Prohibition on use of tax levied for

The provision guaranteeing equal protection of

11. Flexible tariff clause

Scope of Judicial Review in taxation: limited

3. Religious freedom 4. Non-impairment of obligations of

The power to tax includes the power to destroy

2. Executive Act: Assessment

tax falls on the same person. (e.g., income

4. As to purpose on a fixed percentage of the amount of the

Note: The rule on non-retroactivity of rulings Counted from the discovery of

of the Local Government Code [Sec.

Situs of Income Tax

6. Of the same kind or character of tax.

Estate Tax Location of property; b. Broad sense (Indirect Duplicate

International Double Taxation tax but the burden of the tax.

Relationship between Impact, Shifting, and taxpayer to be legally due, or in paying no

Imposition of Transfer of Setting or Since fraud is a state of mind, it need not be

Tax Avoidance v. Tax Evasion It is a waiver of the government's right to collect

Means Legal Illegal Taxation is the rule; exemption is the

to offset the monetary loss entailed in the grant 8. Prohibition on Compensation