FRAMEWORK OF

UNDERSTANDING TAXES
IN THE PHILIPPINES
Overview
The provisions on Philippine national internal revenue taxes are codified in the National Internal
Revenue Code (the “Tax Code”) as amended by RA 10963 beginning January 1, 2018 or the Tax
Reform for Acceleration and Inclusion (the “TRAIN”). The national internal revenue taxes are
administered by the Bureau of Internal Revenue (“BIR”).
A. Income Tax
1. Regular Income Tax
A domestic corporation is taxable on all income derived from sources within and
without the Philippines. The general corporate income tax rate on taxable
income is 30%. For purposes of computing taxable income, the Tax Code allows
certain deductions. In lieu of an itemized deduction, the Tax Code allows a
standard deduction of 40% of the gross income.
A. Income Tax
2. Minimum Corporate Income Tax
Under the Tax Code, a minimum corporate income tax (“MCIT”) of 2% of the
gross income of a corporation is imposed beginning on the 4th taxable year
immediately following the corporation’s commencement of business operations,
when such MCIT is greater than the tax computed using the 30% regular or
normal tax rate. Any excess MCIT over the regular income tax is carried forward
and credited against the regular income tax of the corporation for the three
immediately succeeding taxable years.
A. Income Tax
2. Final Tax on Passive Income
A. Income Tax
2. Improperly Accumulated Earnings Tax
In addition to the other taxes imposed on domestic corporations, the Tax Code imposes a 10% tax on
“improperly accumulated taxable income” of corporations formed or availed for the purpose of
avoiding the income tax with respect to its shareholders or the shareholders of any other corporation
by permitting earnings and profits to accumulate instead of being divided or distributed. This tax,
however, does not apply to publicly-held corporations, banks and other non-bank financial
intermediaries and insurance companies.
“Improperly accumulated taxable income” means taxable income adjusted by:
(i) income exempt from tax;
(ii) income excluded from gross income;
(iii) income subject to final tax; (iv) the amount of net operating loss carry-over deducted; and reduced
by the sum of: (i) dividends actually or constructively paid; and (ii) income tax paid for the taxable year.
B. Value-Added Tax
Value-added tax (“VAT”) is a tax on consumption levied on the sale, barter, exchange or lease of
goods or properties and services in the Philippines and on importation of goods into the
Philippines. VAT is imposed upon the seller, who may pass on the same to the buyer, transferee
or lessee of the goods, properties or services
VAT is based on the gross selling price or gross value in money of the goods or properties sold,
bartered or exchanged, or the gross receipts derived from the sale or exchange of services or
the use or lease of properties.
With respect to the importation of goods, VAT is based on the total value used by the Bureau of
Customs in determining tariff and customs duties, plus customs duties, excise taxes, if any, and
other charges.
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
B. Value-Added Tax
As a general rule, VAT is imposed at the rate of 12%.
There are, however, sales which are subject to VAT at the rate of 0%. These include export sales
or services, foreign currency denominated sales, and sales to persons or entities whose
exemption under special laws or international agreements to which the Philippines is a signatory
effectively subjects such sales to zero rate. Certain transactions, however, are exempt from VAT.
C. Donor’s Tax
Donor's tax is imposed upon the transfer by any person of property by gift as provided under
Section 98 of the Tax Code
While the Tax Code does not define transfer of property by gift, donation is defined in Article
725 of the Civil Code as an act of liberality whereby a person disposes gratuitously of a thing or
right in favor of another, who accepts it.
Donation has the following elements:
(a) the reduction of the patrimony of the donor;
(b) the increase in the patrimony of the donee; and,
(c) the intent to do an act of liberality or animus donandi. 26 In a sale transaction where the fair
market value of the property sold exceeds its selling price, the excess is considered a donation
even in the absence of animus donandi
C. Donor’s Tax
C. Donor’s Tax
When the donee or beneficiary is a stranger, the tax payable by the donor shall be thirty percent
(30%) of the net gifts. For the purpose of donor’s tax, a 'stranger', is a person who is not a: (1)
Brother, sister (whether by whole or half-blood), spouse, ancestor and lineal descendant; or (2)
Relative by consanguinity in the collateral line within the fourth degree of relationship.
Note, however, that starting January 1, 2018, the donor’s tax is imposed at the rate of 6%
computed on the basis of the total gifts in excess of two hundred fifty thousand pesos (PhP
250,000) exempt gift made during the calendar year,30 regardless of whether or not the donee
is a stranger.
The Donor’s Tax Return (BIR Form No. 1800) must be filed within thirty (30) days after the date
the gift (donation) is made
D. Documentary Stamp Tax
The documentary stamp tax (“DST”) is an excise tax levied on documents, instruments, loan
agreements and papers evidencing the acceptance, assignment, sale or transfer of an obligation,
rights, or property incident thereto
The tax is paid by the person making, signing, issuing, accepting or transferring the documents.
However, whenever one party to the taxable document enjoys exemption from the tax, the
other party thereto who is not exempt shall be the one directly liable for the tax.
The tax return must be filed and the tax due paid at the same time within five (5) days after the
close of the month when the taxable document was signed, issued, accepted or transferred. In
lieu of the foregoing, the tax may be paid either through purchase of DST stamp and actual
affixture, or by imprinting a secured stamp on the taxable document through the web-based
Electronic Documentary Stamp Tax (eDST) System.
D. Documentary Stamp Tax
E. Assessment of National Internal Revenue Taxes
The Philippines follows the pay-as-you-file system in the enforcement and collection of taxes.
In the pay- as-you-file system, the taxpayer determines the amount of tax due, files his return
and pays the tax based on his own computation.
The pay-as-you-file system obliges the taxpayer to conduct self assessment in order to
determine and declare the amount to be used as the basis for the computation of the tax
liability, any deductions therefrom, and finally, the tax to be paid.
The tax due is paid at the time the return is filed. However, the BIR is empowered to ascertain
the correctness of the tax return filed and consequently, the amount of tax paid
E. Assessment of National Internal Revenue Taxes
1. Prescriptive Period for Assessment
The assessment for national internal revenue taxes must be made within three years from the
last day provided by law for the filing of tax return. When a return is filed beyond the period laid
down by law, the period will commence to run on the day the return is filed. However, if the
return is filed before the last day of filing, the three-year period will be counted on such last day.
Section 222 of the Tax Code provides exceptions on the three year prescriptive period to assess
internal revenue taxes. In case of false or fraudulent return with intent to evade tax or in case of
failure to file a return, the tax may be assessed within a ten-year period commencing from the
discovery of the falsity, fraud or omission. In addition, the BIR and the taxpayer may agree in
writing to an assessment beyond the three-year period, provided that the agreement was
entered into before the expiration of such period.
E. Assessment of National Internal Revenue Taxes
1. Prescriptive Period for Assessment
The running of the prescriptive period for making an assessment and the beginning of distraint
or levy is suspended for the period during which:
(a) the BIR is prohibited from making an assessment or beginning distraint or levy or a
proceeding in court and for 60 days thereafter;
(b) the taxpayer requests for a reinvestigation which is granted by the BIR;
(c) the taxpayer cannot be located in the address given by him in the return;
(d) the warrant of distraint and levy is duly served and no property could be located; and
(e) when the taxpayer is out of the Philippines.
 E. Assessment of National Internal Revenue Taxes
2. Procedure in the Issuance of Deficiency Tax Assessment
a. Letter of Authority
The BIR has the power to issue a Letter of Authority (“LOA”) against a taxpayer pursuant to Section 5 of the Tax Code which
shall authorize the BIR, in ascertaining the correctness of any entry in the tax return, or in making a return where none has
been filed, or in ascertaining the liability of any person for internal revenue taxes, or in collecting tax liability or in
determining tax compliance, to:
(a) examine any book, paper, record, or other data which maybe relevant or material to the inquiry;
(b) obtain on a regular basis any relevant information concerning a taxpayer from any person other than the taxpayer whose
tax liability is in question;
(c) summon the person liable for tax or required to file a return or any officer or employee of such person to appear before
the BIR or its duly authorized representative and to produce relevant books, papers, records or other data, and to give
testimony;
(d) take the testimony of the person concerned under oath; and
(e) cause revenue agents to canvass any revenue district or region and inquire after and concerning all persons therein who
may be liable for internal revenue taxes and all persons owning, managing or in possession of any taxable object
 E. Assessment of National Internal Revenue Taxes
2. Procedure in the Issuance of Deficiency Tax Assessment
a. Letter of Authority
As a general rule, the taxpayer’s books of accounts and accounting records may be audited only once
every taxable year except in the following instances:
(a) fraud, irregularity, or mistakes, as determined by the BIR;
(b) the taxpayer requests re-investigation;
(c) verification of compliance with withholding tax laws and regulations;
(d) verification of capital gains tax liabilities; and
(e) in the exercise of the BIR’s power under Section 5(B) of the Tax Code to obtain information from
other persons in which case, another or separate examination and inspection may be made.
 E. Assessment of National Internal Revenue Taxes
2. Procedure in the Issuance of Deficiency Tax Assessment
b. Notice of Informal Conference
After the examination of the taxpayer’s books of accounts and accounting records pursuant to the LOA,
a notice of informal conference, informing the taxpayer that the findings of the audit indicate that
deficiency taxes has to be paid, must be issued to the taxpayer.
The informal conference must afford the taxpayer an opportunity to know the results of the
investigation and to refute the same.
A second conference is allowed to enable the taxpayer to examine his position and gather evidence to
support his claim.
The taxpayer is given a period of 15 days within which to respond, counted from the receipt of the
notice of informal conference, otherwise, the taxpayer will be considered in default.47 In such a case,
the matter will be endorsed with the least possible delay to the Assessment Division of the BIR for
review and issuance of deficiency tax assessment, if necessary
 E. Assessment of National Internal Revenue Taxes
2. Procedure in the Issuance of Deficiency Tax Assessment
c. Preliminary Assessment Notice
The Assessment Division of the BIR will determine if there is sufficient basis to issue a deficiency tax
assessment.
If there is, a Preliminary Assessment Notice (“PAN”) will be issued to the taxpayer, at least by
registered mail.
A PAN informs the taxpayer of the audit findings of the Revenue Officer after a review of the said
findings.
 E. Assessment of National Internal Revenue Taxes
2. Procedure in the Issuance of Deficiency Tax Assessment
c. Preliminary Assessment Notice
Notice of Informal Conference and PAN are not necessary in the following instances:
(a) when the finding for any deficiency tax is the result of mathematical error in the computation of the tax
appearing on the face of the tax return filed by the taxpayer;
(b) when a discrepancy has been determined between the tax withheld and the amount actually remitted by the
withholding agent;
(c) when a taxpayer who opted to claim a refund or tax credit of excess creditable withholding tax for a taxable
period was determined to have carried over and automatically applied the same amount claimed against the
estimated tax liabilities for the taxable quarter or quarters of the succeeding taxable year;
(d) when the excise tax due on excisable articles has not been paid; or
(e) when an article locally purchased or imported by an exempt person, such as, but not limited to, vehicles, capital
equipment, machineries and spare parts, has been sold, traded or transferred to non- exempt persons.
 E. Assessment of National Internal Revenue Taxes
2. Procedure in the Issuance of Deficiency Tax Assessment
d. Formal Letter of Demand and Assessment Notice
If the taxpayer fails to respond within 15 days from receipt of the PAN, the taxpayer will be considered
in default. A Formal Letter of Demand (“FLD”) and Assessment Notice will thereafter be issued by the
concerned office.
An Assessment Notice is a declaration of deficiency taxes issued to a taxpayer who fails to respond to
the PAN or whose reply thereto was found not to be meritorious.
The FLD must state the facts, the law, rules and regulations or jurisprudence on which the assessment
is based. It must also include a demand for payment of deficiency taxes, otherwise, the FLD and
Assessment Notice will be void.
 E. Assessment of National Internal Revenue Taxes
2. Procedure in the Issuance of Deficiency Tax Assessment
e. Administrative Protest
A taxpayer has 30 days from receipt of the FLD and Assessment Notice to protest the same
administratively through either a request for reconsideration or a request for reinvestigation. All the
relevant supporting documents to the protest must be submitted within 60 days from filing of the
request for reinvestigation. Otherwise, the assessment will become final, executory and demandable
 E. Assessment of National Internal Revenue Taxes
2. Procedure in the Issuance of Deficiency Tax Assessment
f. Appeal to the Court of Tax Appeals
If the BIR denies the protest, in whole or in part, the taxpayer may appeal to the Court of Tax Appeals
(“CTA”) Division within 30 days from the receipt of the decision by filing a petition for review.
Otherwise, the decision will become final and demandable.
If the BIR or its duly authorized representative fails to act on the protest, a petition for review may be
filed within 30 days from the expiration of 180 days counted from the date of submission of the
required documents in the case of a request for reinvestigation or from the submission of the request
for reconsideration. Otherwise, the assessment shall become final and demandable.
 E. Assessment of National Internal Revenue Taxes
2. Procedure in the Issuance of Deficiency Tax Assessment
f. Appeal to the Court of Tax Appeals
If the taxpayer is not satisfied with the decision of the CTA Division, a motion for reconsideration can
be filed with the CTA Division within 15 days from receipt of the decision.
If the taxpayer is still dissatisfied with the decision, a Petition for Review can be filed with the CTA En
Banc within 15 days from receipt of the decision.
From the decision of the CTA En Banc, a motion for reconsideration can be filed within 15 days from
receipt of the decision.
Please note that there is a slight difference in the availment of these remedies when it comes to VAT
especially in the period of appeal
 E. Assessment of National Internal Revenue Taxes
2. Procedure in the Issuance of Deficiency Tax Assessment
g. Appeal to the Supreme Court
The decision of the CTA En Banc can be questioned before the Supreme Court by filing a Petition for
Review within 15 days from receipt of the decision.
 E. Assessment of National Internal Revenue Taxes
2. Procedure in the Issuance of Deficiency Tax Assessment
F. Collection of National Internal Revenue Taxes
Once the assessment becomes final, executory, and demandable by failure to protest the same
administratively and/or judicially, or the protest or appeal is denied or decided against the taxpayer,
the government may avail of the following remedies to collect deficiency taxes:
(a) distraint of personal property;
(b) levy of real property;
(c) civil action; and
(d) criminal action.
 E. Assessment of National Internal Revenue Taxes
2. Procedure in the Issuance of Deficiency Tax Assessment
F. Collection of National Internal Revenue Taxes
Revenue Memorandum Order (“RMO”) No. 39-200755 authorizes the immediate issuance and service
of warrants of distraint and garnishment and/or levy upon the issuance of the final decision on the
disputed assessment against the taxpayer by the Commissioner of Internal Revenue or the Regional
Director of the BIR or by the CTA Division or CTA En Banc of its decision upholding the assessment
against the taxpayer.
The BIR has a period of three years from expiration of the period within which to assess a taxpayer.
On the other hand, the BIR has a period of five (5) years from the date of the said assessment to
collect the assessed tax. In case of false or fraudulent return with intent to evade tax or in case of
failure to file a return, the BIR has five years following the assessment of tax to collect the same
Assignment
Define and discuss the following (Local Business Taxes):

1. Community Tax
2. Business Tax
3. Real Property Tax