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I. General Principles

A. Definition and Concept of Taxation

As a process, it is a means by which the sovereign, through its law-making body,raises revenue to defray the necessary expenses of the government. It is merely a way ofapportioning the costs of government among those who in some measures are privileged toenjoy its benefits and must bear its burdens.

As a power, taxation refers to the inherent power of the state to demand enforcedcontributions for public purpose or purposes.

Taxation is a symbiotic relationship, whereby in exchange for the protection that thecitizens get from the government, taxes are paid.1

B. Nature of Taxation

1. It is an inherent attribute of sovereignty

2. It is legislative in character

C. Characteristics of Taxation

1. The power of taxation is an incident of sovereignty as it is inherent in the State,belonging as a matter of right to every independent government. It does need constitutionalconferment. Constitutional provisions do not give rise to the power to tax but merelyimpose limitations on what would otherwise be an invincible power. No attribute ofsovereignty is more pervading, and at no point does the power of government affect moreconstantly and intimately all the relations of life than through the exactions made under it.2

2. The power to tax is inherent in the State, and the State is free to select the objectof taxation, such power being exclusively vested in the legislature, except where theConstitution provides otherwise.3

The Congress may by law authorize the President to fix within specified limits, andsubject to such limitations and restrictions as it may impose, tariff rates, import and exportquotas, tonnage and wharfage dues, and other duties or imposts within the framework of thenational development program of the Government.

Each local government unit shall have the power to create its own sources ofrevenues and to levy taxes, fees, and charges subject to such guidelines and limitations as theCongress may provide, consistent with the basic policy of local autonomy. Such taxes, fees,and charges shall accrue exclusively to the local governments.4

1 Commissioner of Internal Revenue vs. Allegre, Inc., et al., L-28896, Feb. 17, 19882 Churchill and Tait v. Concepcion, 34 Phil 9693 Art. VI, Sec, 28 (2); Art. X, Sec. 5; Art. VI, Sec. 28. par. 2.4 Art. X, Sec. 5

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3. It is subject to Constitutional and inherent limitations; hence, it is not an absolutepower that can be exercised by the legislature anyway it pleases.

D. Power of Taxation Compared With Other Powers

1. Police Power2. Power of Eminent Domain

Taxation Police Power Eminent DomainPurpose

Raising revenue Promote public welfarethru regulations

Taking of property forpublic use

Amount of exaction

No limit Limited to the cost ofregulations, issuance ofthe license or surveillance

No exaction,compensation paid by thegovernment

Benefits received

No special or direct benefitsreceived but the enjoyment of theprivileges of living in an organizedsociety

No direct benefits but ahealthy economic standardof society or “damnumabsque injuria” is attained

Direct benefit results inthe form of justcompensation

Non-impairment of contracts

The impairment rule subsist Contracts may beimpaired

Contracts may beimpaired

Transfer of property rights

Taxes paid become part of publicfunds

No transfer but onlyrestraint on the exercise ofproperty right exists

Property is taken by thegov’t upon payment ofjust compensation

Scope

Affects all persons, property andexcise

Affects all persons,property, privileges, andeven rights

Affects only the particularproperty comprehended

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Basis

Public necessity Public necessity and theright of the state and thepublic to self-protectionand self-preservation

Public necessity, privateproperty is taken forpublic use

Authority which exercises the power

Only by the government orits political subdivisions

Only by the government orits political subdivisions

May be granted to publicservice, companies, or publicutilities

E. Purpose of Taxation

1. Revenue-raising

To provide funds or property with which the State promotes the general welfare andprotection of its citizens.

2. Non-revenue/special or regulatory

Promotion of General Welfare Taxation may be used as an implement of police power inorder to promote the general welfare of the people.5

Regulation As in the case of taxes levied on excises and privileges likethose imposed in tobacco or alcoholic products oramusement places like night clubs, cabarets, cockpits, etc.6

Reduction of Social Inequality This is made possible through the progressive system oftaxation where the objective is to prevent the under-concentration of wealth in the hands of few individuals.

Encourage Economic Growth In the realm of tax exemptions and tax reliefs, forinstance, the purpose is to grant incentives or exemptionsin order to encourage investments and thereby promote

5 see Lutz vs. Araneta, 98 Phil 148 and Osmeňa vs. Orbos, G.R. No. 99886, Mar. 31, 19936 In the case of Caltex Phils. Inc. vs. COA (G.R. No. 92585, May 8, 1992), it was held that taxes may also beimposed for a regulatory purpose as, for instance, in the rehabilitation and stabilization of a threatenedindustry which is affected with public industry like the oil industry.

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the country’s economic growth.

e. Protectionism In some important sectors of the economy, as in the caseof foreign importations, taxes sometimes provideprotection to local industries like protective tariffs andcustoms

F. Principles of Sound Tax System

1. Fiscal Adequacy

The sources of tax revenue should coincide with, and approximate the needs ofgovernment expenditure. Neither an excess nor a deficiency of revenue vis-à-vis the needs ofgovernment would be in keeping with the principle.

2. Administrative Feasibility

Tax laws should be capable of convenient, just and effective administration

3. Theoretical Justice

The tax burden should be in proportion to the taxpayer’s ability to pay7. The 1987Constitution requires taxation to be equitable and uniform.

G. Theory and Basis of Taxation

1. Lifeblood Theory

Taxes are the lifeblood of the government, being such, their prompt and certainavailability is an imperious need.8 Without taxes, the government would be paralyzed for lackof motive power to activate and operate it.

2. Necessity Theory

Taxes proceed upon the theory that the existence of the government is a necessity;that it cannot continue without the means to pay its expenses; and that for those means, ithas the right to compel all citizens and properties within its limits to contribute. 9

7 ability-to-pay principle8 Collector of Internal Revenue vs. Goodrich International Rubber Co., Sept. 6, 19659 In a case, the Supreme Court held that:

Taxation is a power emanating from necessity. It is a necessary burden to preserve the State’ssovereignty and a means to give the citizenry an army to resist aggression, a navy to defend its shoresfrom invasion, a corps of civil servants to serve, public improvements designed for the enjoyment of thecitizenry and those which come with the State’s territory and facilities, and protection which a

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3. Benefits-Protection Theory10

The basis of taxation is the reciprocal duty of protection between the state and itsinhabitants. In return for the contributions, the taxpayer receives the general advantages andprotection which the government affords the taxpayer and his property.

4. Jurisdiction over subject and objects

Rules:

a) Tax laws cannot operate beyond a State’s territorial limits.

b) The government cannot tax a particular object of taxation which is not within itsterritorial jurisdiction.

c) Property outside ones jurisdiction does not receive any protection of the State.

d) If a law is passed by Congress, it must always see to it that the object or subject oftaxation is within the territorial jurisdiction of the taxing authority.

H. Doctrines in Taxation

1. Prospectivity of tax laws

General Rule:

Taxes must only be imposed prospectively.

Exception:

The language of the statute clearly demands or express that it shall have aretroactive effect.

2. Imprescriptibility

General Rule:

Taxes are imprescriptible.

Exception:

When provided otherwise by the tax law itself.11

government is supposed to provide (Phil. Guaranty Co., Inc. vs Commissioner of Internal Revenue, 13 SCRA775)10 Symbiotic Relationship11 Example: NIRC provides for statutes of limitation in the assessment and collection of taxes thereinimposed.

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3. Double taxation

a. Strict sense

Referred to as direct duplicate taxation, it means:

1. Taxing twice;

2. by the same taxing authority;

3. within the same jurisdiction or taxing district;

4. for the same purpose;

5. in the same year or taxing period;

6. some of the property in the territory

b. Broad sense

Referred to as indirect double taxation, it is taxation other than direct duplicatetaxation. It extends to all cases in which there is a burden of two or more impositions.

c. Constitutionality of double taxation

Unlike in the United States Constitution, our Constitution does not prohibit doubletaxation.

However, while it is not forbidden, it is something not favored. Such taxationshould, whenever possible, be avoided and prevented.

In addition, where there is direct double taxation, there may be a violation of theconstitutional precepts of equal protection and uniformity in taxation.12

The law on prescription, being a remedial measure, should be liberally construed to afford protection asa corollary, the exceptions to the law on prescription be strictly construed. (CIR vs CA. G.R. No. 104171,Feb. 24, 1999)12 The argument against double taxation may not be invoked where one tax is imposed by the State andthe other is imposed by the city, it being widely recognized that there is nothing inherently obnoxious inthe requirement that license fees or taxes be exacted with respect to the same occupation, calling, oractivity by both the State and a political subdivision thereof. And where the statute or ordinance inquestion, there is no infringement of the rule on equality (City of Baguio v. De Leon, 25 SCRA 938)

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d. Modes of eliminating double taxation

Two (2) methods of relief:13

Exemption method The income or capital which is taxable at the state of source orsitus is exempted at the state of residence, although in someinstances it may be taken into account in determining the rateof tax applicable to the taxpayer’s remaining income or capital

Credit method Although the income or capital which is taxed in the state ofsource is still taxable in the state of residence, the tax paid inthe former is credited against the tax levied in the latter. Thebasic difference between the two methods is that in theexemption method, the focus is on the income or capital,whereas the credit method focuses upon the tax.

13 A tax treaty resorts to several methods. First, it sets out the respective rights to tax of the state ofsource or situs and of the state of residence with regard to certain classes of income or capital. Insome cases, an exclusive right to tax is conferred on one of the contracting states; however, for otheritems of income or capital, both states are given the right to tax, although the amount of tax that may beimposed by the state of source is limited. The second method for the elimination of double taxationapplies whenever the state of source is given a ful l or limited right to tax together with thestate of residence. In this case, the treaties make it incumbent upon the state of residence to allowrelief on order to avoid double taxation.

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4. Escape from taxation

a. Shifting of tax burden14

1) Ways of shifting the tax burden

a. Forward shifting When the burden of the tax is transferred from a factor ofproduction through the factors of distribution until it finallysettles on the ultimate purchaser or consumer.15

b. Backward shifting When the burden of the tax is transferred from the consumeror purchaser through the factors of distribution to the factorsof production.16

c. Onward shifting When the tax is shifted two or more times either forward orbackward.17

2) Taxes that can be shifted

Only indirect taxes may be shifted;18 direct taxes19 cannot be shifted.

14 The transfer of the burden of a tax by the original payer or the one on whom the tax was assessed orimposed to someone else.

Process by which such tax burden is transferred from statutory taxpayer to another without violatingthe law.

What is transferred is not the payment of the tax, but the burden of the tax15 Example:

Manufacturer or producer may shift tax assessed to wholesaler, who in turn shifts it to the retailer, whoalso shifts it to the final purchaser or consumer16 Example:

Consumer or purchaser may shift tax imposed on him to retailer by purchasing only after the price isreduced, and from the latter to the wholesaler, or finally to the manufacturer or producer17 Example:

Thus, a transfer from the seller to the purchaser involves one shift; from the producer to thewholesaler, then to retailer, we have two shifts; and if the tax is transferred again to the purchaser by theretailer, we have three shifts in all.18 e.g. VAT19 e.g. Income tax

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3) Meaning of impact and incidence of taxation

Impact of taxation Incidence of taxation

The point on which a tax is originallyimposed. In so far as the law is concerned,the taxpayer is the person who must pay thetax to the government. He is also termed asthe statutory taxpayer-the one on whom thetax is formally assessed. He is the subject ofthe tax.

The point on which the tax burden finallyrests or settle down. It takes place whenshifting has been effected from the statutorytaxpayer to another.

b. Tax avoidance20

The exploitation of the taxpayer of legally permissible alternative tax rates ormethods of assessing taxable property or income in order to avoid or reduce tax liabilit

c. Tax evasion21

The use by the taxpayer of illegal or fraudulent means to defeat or lessen thepayment of tax.

20 also known as “tax minimization”; it is not punished by law21 also known as “tax dodging”; it is punishable by law

Elements of tax evasion:1. The end to be achieved, i.e. payment of less than that known by the taxpayer to be legally due, or

paying no tax when it is shown that tax is due2. An accompanying state of mind which is described as being “evil”, “in bad faith”, “willful”, or

“deliberate” and not “accidental”3. A course of action (or failure of action) which is unlawfulIndicia of fraud in tax evasion:

1. Failure to declare for taxation purposes true and actual income derived from business for two (2)consecutive years; or

2. Substantial under declaration of income tax returns of the taxpayer for four (4) consecutive yearscoupled with unintentional overstatement of deductions

Evidence to prove tax evasion:Since fraud is a state of mind, it need not be proved by direct evidence but may be proved from the

circumstances of the case.Failure of the taxpayer to declare for taxation purposes his true and actual income derived from his

business for two (2) consecutive years is an indication of his fraudulent intent to cheat the government ofits due taxes. (Republic vs. Gonzales, 13 SCRA 638)

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5. Exemption from taxation

a. Meaning of exemption from taxation

It is the grant of immunity to particular persons or corporations or to persons orcorporations of a particular class from a tax which persons and corporations generally withinthe same state or taxing district are obliged to pay. It is an immunity or privilege; it isfreedom from a financial charge or burden to which others are subjected.22

b. Nature of tax exemption

1) It is a mere personal privilege of the grantee.

2) It is generally revocable by the government unless the exemption is founded on acontract which is contract which is protected from impairment.

3) It implies a waiver on the part of the government of its right to collect whatotherwise would be due to it, and so is prejudicial thereto.

4) It is not necessarily discriminatory so long as the exemption has a reasonablefoundation or rational basis.

5) It is not transferable except if the law expressly provides so.

c. Kinds of tax exemption

1) Express23

When certain persons, property or transactions are, by express provision, exemptedfrom all certain taxes, either entirely or in part.

2) Implied24

When a tax is levied on certain classes of persons, properties, or transactions withoutmentioning the other classes.25

22 Exemption is allowed only if there is a clear provision therefor.It is not necessarily discriminatory as long as there is a reasonable foundation or rational basis.Exemptions are not presumed, but when public property is involved, exemption is the rule and taxation

is the exemption.23 or affirmative exemption24 or exemption by omission

No tax exemption by implicationIt must be expressed in clear and unmistakable language

25 Every tax statute makes exemptions because of omissions.

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3) Contractual

Agreed to by the taxing authority in contracts lawfully entered into by them underenabling laws.

d. Rationale/grounds for exemption

Rationale for granting tax exemptions Grounds for granting tax exemptions

Its avowed purpose is some public benefit orinterests which the lawmaking body considerssufficient to offset the monetary loss entailed inthe grant of the exemption.The theory behind the grant of tax exemptionsis that such act will benefit the body of thepeople. It is not based on the idea of lesseningthe burden of the individual owners ofproperty.

1) May be based on contract.26

2) May be based on some ground ofpublic policy.27

3) May be based on grounds ofreciprocity or to lessen the rigors ofinternational double or multipletaxation.28

e. Revocation of tax exemption

It is an act of liberality which could be taken back by the government unless thereare restrictions. Since taxation is the rule and taxation therefrom is the exception, theexemption may be withdrawn by the taxing authority.29

26 In such a case, the public, which is represented by the government is supposed to receive a fullequivalent therefor, i.e. charter of a corporation.27 i.e., to encourage new industries or to foster charitable institutions. Here, the government need notreceive any consideration in return for the tax exemption.28 Equity is not a ground for tax exemption. Exemption is allowed only if there is a clear provision therefor.29 Mactan Cebu International Airport Authority vs., Marcos, 261 SCRA 667.

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6. Compensation and Set-off30

General Rule:

Taxes are not subject to set-off or legal compensation. The government and thetaxpayer are not creditors and debtors or each other. Obligations in the nature of debts aredue to the government in its corporate capacity, while taxes are due to the government in itssovereign capacity.31

Exception:

Where both the claims of the government and the taxpayer against each other havealready become due and demandable as well as fully liquated.32

7. Compromise

A contract whereby the parties, by reciprocal concessions, avoid litigation or put anend to one already commenced.33

8. Tax amnesty

a. Definition

A general pardon or intentional overlooking by the State of its authority to imposepenalties on persons otherwise guilty of evasion or violation of a revenue to collect whatotherwise would be due it and, in this sense, prejudicial thereto.34

30 Requisites of Compensation in taxation1. The tax assessed and the claim against the government be fully liquidated.2. The tax assessed and the claim against the government is due and demandable, and3. The government had already appropriated funds for the payment of the claim (Domingo v. Garlitos,

L-18904, June 29, 1963)31 Philex Mining Corp. vs. CIR, 294 SCRA 687; Republic vs. Mambulao Lumber Co., 6 SCRA 62232 see Domingo vs. Garlitos, supra33 Art. 2028, New Civil Code

Requisites:1. Taxpayer must have a tax liability.2. There must be an offer by taxpayer or CIR, of an amount to be paid by taxpayer.3. There must be acceptance of the offer in settlement of the original claim.

When taxes may be compromised:1. A reasonable doubt as to the validity if the claim against the taxpayer exists;2. The financial position of the taxpayer demonstrates a clear inability to pay the assessed tax.3. Criminal violations, except:

a. Those already filed in courtb. Those involving fraud.

34 Tax amnesty, like tax exemption, is never favored nor presumed in law and if granted by statute mustbe construed strictly against the taxpayer, who must show compliance with the law.

The government is not estopped from questioning the tax liability even if amnesty tax payments werealready received

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b. Distinguished from tax exemption

Tax amnesty Tax exemption

Partakes of an absolute forgiveness or waiverby the Government of its right to collectwhat otherwise would be due it and, in thissense, prejudicial thereto, particularly to taxevaders who wish to relent and are willing toreform are given a chance to do so andtherefore become a part of the society with aclean slate.

The grant of immunity to particular personsor corporations of a particular class from atax of which persons and corporationsgenerally within the same state or taxingdistrict are obliged to pay.

Immunity from all criminal, civil andadministrative liabilities arising from non-payment of taxes

Immunity from civil liability only

Applies only to past tax periods, henceretroactive application

Prospective application

There is revenue loss since there was actuallytaxes due but collection was waived by thegovernment.

None, because there was no actual taxes dueas the person or transaction is protected bytax exemption.

Never favored nor presumed in law, and is granted by statute. The terms of the amnesty orexemption must be strictly construed against the taxpayer and liberally in favor of thegovernment.

Erroneous application and enforcement of the law by public officers do not block subsequent correctapplication of the statute. The government is never estopped by mistakes or errors by its agents.

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9. Construction and Interpretation of:

a. Tax laws

1) General Rule

Tax laws are liberally interpreted in favor of the taxpayer and strictly against thegovernment.

2) Exception

Liberal interpretation does not apply to tax exemptions which should be construedin strictissimi juris against the taxpayer.35

b. Tax exemption and exclusion

1) General Rule

In the construction of tax statutes, exemptions are not favored and are construedstrictissimi juris against the taxpayer.36 The fundamental theory is that all taxable propertyshould bear its share in the cost and expense of the government.

Taxation is the rule and exemption. He who claims exemption must be able to justifyhis claim or right thereto by a grant express in terms “too plain to be mistaken and toocategorical to be misinterpreted.” If not expressly mentioned in the law, it must be at leastwithin its purview by clear legislative intent.

2) Exceptions

1. The law itself expressly provides for a liberal construction thereof.

2. In cases of exemptions granted to religious, charitable and educational institutionsor to the government or its agencies or to public property because the general rule is thatthey are exempted from tax.

35 Reason: Lifeblood doctrine36 Strict interpretation does not apply to the government and its agencies

Petitioner cannot invoke the rule of strictissimi juris with respect to the interpretation of statutesgranting tax exemptions to the NPC. The rule on strict interpretation does not apply in the case ofexemptions in favor of a political subdivision or instrumentality of the government [Maceda v. Macaraig]

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c. Tax rules and regulations

1) General rule only

They shall not be given retroactive application if the revocation, modification orreversal will be prejudicial to the taxpayers.37

d. Penal provisions of tax laws

Tax laws are civil and not penal in nature, although there are penalties provided fortheir violation.

The purpose of tax laws in imposing penalties for delinquencies is to compel thetimely payment of taxes or to punish evasion or neglect of duty in respect thereof.

e. Non-retroactive application to taxpayers

1) Exceptions

A statute may operate retroactively provided it is expressly declared or is clearly thelegislative intent. But a tax law should not be given retroactive application when it would beharsh and oppressive.

I. Scope and Limitation of Taxation

1. Inherent Limitations

a. Public Purpose38

The tax must be used:

1) for the support of the state or

2) for some recognized objects of governments or

3) directly to promote the welfare of the community39

37 Sec. 24638 Test in determining Public Purposes in tax:

a. Duty Test – whether the thing to be threatened by the appropriation of public revenue is somethingwhich is the duty of the State, as a government.

b. Promotion of General Welfare Test – whether the law providing the tax directly promotes thewelfare of the community in equal measure.

The term “public purpose” is synonymous with “governmental purpose”; a purpose affecting theinhabitants of the state or taxing district as a community and not merely as individuals.

A tax levied for a private purpose constitutes a taking of property without due process of law.The purposes to be accomplished by taxation need not be exclusively public. Although private

individuals are directly benefited, the tax would still be valid provided such benefit is only incidental.

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b. Inherently Legislative

1) General Rule

Taxation is purely legislative, Congress cannot delegate the power to others. Thislimitation arises from the doctrine of separation of powers among the three branches ofgovernment.

2) Exceptions

a) Delegation to local governments40

The power of local government units to impose taxes and fees is always subject tothe limitations which the Congress may provide, the former having no inherent power totax.41

The power to tax is primarily vested in the Congress, however, in our jurisdiction, itmay be exercised by local legislative bodies, no longer merely by virtue of a valid delegationbut pursuant to direct authority conferred by Section 5,42 Article X of the1987 Constitution,subject to guidelines and limitations which Congress may provide which must be consistentwith the basic policy of local autonomy.43

b) Delegation to the President44

The power granted to Congress under this constitutional provision to authorize thePresident to fix within specified limits and subject to such limitations and restrictions as itmay impose, tariff rates and other duties and imposts include tariffs rates even for revenuepurposes only. Customs duties which are assessed at the prescribed tariff rates are very muchlike taxes which are frequently imposed for both revenue-raising and regulatory purposes.45

c) Delegation to administrative agencies

With respect to aspects of taxation not legislative in character.46

The test is not as to who receives the money, but the character of the purpose for which it is expended;not the immediate result of the expenditure but rather the ultimate.

In the imposition of taxes, public purpose is presumed.39 taxation as an implement of police power40 Art. X. Sec. 541 Basco v. PAGCOR42 Each local government unit shall have the power to create its own sources of revenues and to levytaxes, fees and charges subject to such guidelines and limitations as the Congress may provide, consistentwith the basic policy of local autonomy. Such taxes, fees, and charges shall accrue exclusively to the localgovernments.43 MCIAA v. Marcos, 261 SCRA 66744 Art.VI, Sec. 28(2)45 Garcia vs. Executive Secretary, et. al., G.R. No. 101273, July 3, 199246 Example: assessment and collection

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c. Territorial

1) Situs of Taxation47

a) Meaning

Literally means “the place of taxation.”

The place or the authority that has the right to impose and collect taxes.48 It ispremised upon the symbiotic relation between the taxpayer and the State.

b) Situs of Income Tax

1) From sources within thePhilippines

2) From sources without thePhilippines

Determined by the nationality, residence of the taxpayer and source of income.49

3) Income partly within and partlywithout the Philippines

Allocated or apportioned to sources within or without the Philippines.50

Certain aspects of the taxing process that are not really legislative in nature are vested inadministrative agencies. In these cases, there really is no delegation, to wit:

a) power to value propertyb) power to assess and collect taxesc) power to perform details of computation, appraisement or adjustments.

For the delegation to be constitutionally valid, the law must be complete in itself and must set forthsufficient standards.47 “It is an inherent mandate that taxation shall only be exercised on persons, properties, and excisewithin the territory of the taxing power because:

1. Tax laws do not operate beyond a country’s territorial limit.2. Property which is wholly and exclusively within the jurisdiction of another state receives none of

the protection for which a tax is supposed to be compensation.However, the fundamental basis of the right to tax is the capacity of the government to provide

benefits and protection to the object of the tax. A person may be taxed, even if he is outside the taxingstate, where there is between him and the taxing state, a privity of relationship justifying the levy.48 Commissioner vs. Marubeni, G.R. No. 137377, Dec.18, 200149 Sec. 42

Theories:1. Domicillary theory - the location where the income earner resides is the situs of taxation2. Nationality theory - the country where the income earner is a citizen is the situs of taxation3. Source rule - the country which is the source of the income or where the activity that produced the

income took place is the situs of taxation.50 For the purpose of computing the taxable income therefrom, where items of gross income areseparately allocated to sources within the Philippines, there shall be deducted:

(a) the expenses, losses and other deductions properly apportioned or allocated thereto, and

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c) Situs of Property Taxes

(1) Taxes on Real Property

The place where the property is located. The applicable concept is lex situs or lex reisitae.51

(2) Taxes on Personal Property

Tangible personal property Intangible personal property

Where the property is physically locatedalthough the owner resides in anotherjurisdiction.52

The place where the owner is located. Theapplicable concept is mobilia sequunturpersonam.53

d) Situs of Excise Tax

(1) Estate Tax(2) Donor’s Tax

Determined by the nationality and residence of the taxpayer and the place where theproperty is located.

(b) a ratable part of other expenses, losses or other deductions which cannot definitely be allocated tosome items or classes of gross income. The remainder, if any, shall be included in full as taxable incomefrom sources within the Philippines.51 We can only impose property tax on the properties of a person whose residence is in the Philippines.52 51 Am Jur. 46753 movables follow the owner or domicile of the owner

Exceptions:1. When the property has acquired a business situs in another jurisdiction;2. When an express provision of the statute provide for another rule.

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e) Situs of Business Tax

The place where the act or business is performed or occupation is engaged in.54

(1) Sale of Real Property

The place or location of the real property.55

(2) Sale of Personal Property

The place of sale.

(3) VAT

Where the goods, property or services are destined, used or consumed.

d. International Comity56

The property of a foreign state or government may not be taxed by another.57

54 where the transaction is performed because it is that place that gives protectionThe power to levy an excise upon the performance of an act or the engaging in an occupation does not

depend upon the domicile of the person subject to the exercise, nor upon the physical location of theproperty or in connection with the act or occupation taxed, but depends upon the place on which the actis performed or occupation engaged in.

Thus, the gauge of taxability does not depend on the location of the office, but attaches upon the placewhere the respective transaction is perfected and consummated (Hopewell vs. Com. of Customs)55 So, if the property sold is situated within the Phils., the income derived from such sale is considered asincome within.56 Comity is the respect accorded to other sovereign nations.57 The grounds for the above are:

1. sovereign equality among states2. usage among states that when one enter into the territory of another, there is an implied

understanding that the power does not intend to degrade its dignity by placing itself under thejurisdiction of the latter

3. foreign government may not be sued without its consent so that it is useless to assess the tax since itcannot be collected

4. reciprocity among states

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e. Exemption of Government Entities, Agencies, andInstrumentalities

i. Agencies performing governmental functions - tax exempt58

ii. Agencies performing proprietary functions - subject to tax.

2. Constitutional Limitations

a. Provisions Directly Affecting Taxation

1) Prohibition against imprisonment for non-payment of polltax

No person shall be imprisoned for debt or non-payment of poll tax.59

2) Uniformity and equality of taxation

The rule of taxation shall be uniform and equitable. The Congress shall evolve aprogressive system of taxation.60

58 The exemption applies only to governmental entities through which the government immediately anddirectly exercises its sovereign powers.

Tax exemption of property owned by the Republic of the Philippines refers to the property owned bythe government and its agencies which do not have separate and distinct personality (NDC vs. Cebu City)

Those created by special charter (incorporated agencies) are not covered by the exemption59 Sec. 20, Art. III

The only penalty for delinquency in payment is the payment of surcharge in the form of interest at therate of 24% per annum which shall be added to the unpaid amount from due date until it is paid. (Sec.161, LGC)

The prohibition is against “imprisonment” for “non-payment of poll tax”. Thus, a person is subject toimprisonment for violation of the community tax law other than for non-payment of the tax and for non-payment of other taxes as prescribed by law.

The non-imprisonment rule applies to non-payment of poll tax which is punishable only by a surcharge,but not to other violations like falsification of community tax certificate or non-payment of other taxes.60 Sec. 28(1), Art. VI

Uniformity (equality or equal protection of the laws) means all taxable articles or kinds or property ofthe same class shall be taxed at the same rate. A tax is uniform when the same force and effect in everyplace where the subject of it is found.

Equitable means fair, just, reasonable and proportionate to one’s ability to pay.Progressive system of Taxation places stress on direct rather than indirect taxes, or on the taxpayers’

ability to payInequality which results in singling out one particular class for taxation or exemption infringes no

constitutional limitation. (see Commissioner vs. Lingayen Gulf Electric, 164 SCRA 27)The rule of uniformity does not call for perfect uniformity or perfect equality, because this is hardly

attainable.

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3) Grant by Congress of authority to the President to imposetariff rates

The Congress may, by law, authorize the President to fix tariff rates, import andexport quotas, tonnage and wharfage dues, and other duties or imposts within theframework of the national development program of the government.61

4) Prohibition against taxation of religious, charitable entities,and educational entities

Subject to the conditions prescribed by law, all grants, endowments, donations orcontributions used actually, directly and exclusively for educational purposes shall be exemptfrom tax.62

5) Prohibition against taxation of non-stock, non-profitinstitutions

All revenues and assets of non-stock, non-profit educational institutions usedactually, directly, and exclusively for educational purposes shall be exempt from taxes andduties.63

6) Majority vote of Congress for grant of tax exemption

No law granting any tax exemption shall be passed without the concurrence of amajority of all the members of the Congress.64

61 Art. 28 (2), Art. VI62 Sec. 4(4), Art. XIV.

The exemption granted to non-stock, non-profit educational institution covers income, property, anddonor’s taxes, and custom duties.

To be exempt from tax or duty, the revenue, assets, property or donation must be used actually,directly and exclusively for educational purpose.

In the case or religious and charitable entities and non-profit cemeteries, the exemption is limited toproperty tax.

The said constitutional provision granting tax exemption to non-stock, non-profit educational institutionis self-executing.

Tax exemptions, however, of proprietary (for profit) educational institutions require prior legislativeimplementation. Their tax exemption is not self-executing.

Lands, Buildings, and improvements actually, directly, and exclusively used for educational purposedare exempt from property tax, whether the educational institution is proprietary or non-profit63 Sec. 4 (3), Art. XIV

Proceeds of the sale of real property by the Roman Catholic church is exempt from income tax becausethe transaction was an isolated one (Manila Polo Club vs. CTA)

Income derived from the hospital pharmacy, dormitory and canteen was exempt from income taxbecause the operation of those entities was merely incidental to the primary purpose of the exemptcorporation (St. Paul Hospital of Iloilo vs. CIR)

Where the educational institution is private and non-profit (but a stock corporation), it is subject toincome tax but at the preferential rate of ten percent (10%)64 Sec. 28(4), Art. VI

The provision requires the concurrence of a majority, not of attendees constituting a quorum, but of allmembers of the Congress.

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7) Prohibition on use of tax levied for special purpose

All money collected or any tax levied for a special purpose shall be treated as aspecial fund and paid out for such purpose only. If the purpose for which a special fund wascreated has been fulfilled or abandoned the balance, if any, shall be transferred to the generalfunds of the government.65

8) President’s veto power on appropriation, revenue, tariffbills

The President shall have the power to veto any particular item or items in anAppropriation, Revenue or Tariff bill but the veto shall not affect the item or items to whichhe does not object.66

9) Non-impairment of jurisdiction of the Supreme Court

The Congress shall have the power to define, prescribe, and apportion thejurisdiction of the various courts but may not deprive the Supreme Court of its jurisdictionover cases enumerated in Sec. 567 hereof.

65 Sec. 29(3), Art. VIAn example is the Oil Price Stabilization Fund created under P.D. 1956 to stabilize the prices of

imported crude oil. In a decide case, it was held that where under an executive order of the President, thisspecial fund is transferred from the general fund to a “trust liability account,” the constitutional mandateis not violated. The OPSF, according to the court, remains as a special fund subject to COA audit (Osmeňavs Orbos, et al., G.R. No. 99886, Mar. 31, 1993)66 Sec. 27(2), Art. VI67 The Supreme Court shall have the following powers:

1. Exercise original jurisdiction over cases affecting ambassadors, other public ministers and consuls,and over petitions for certiorari, prohibition, mandamus, quo warranto, and habeas corpus.

2. Review, revise, reverse, modify, or affirm on appeal or certiorari, as the law or the Rules of Court mayprovide, final judgments and orders of lower courts in:

a. All cases in which the constitutionality or validity of any treaty, international or executiveagreement, law, presidential decree, proclamation, order, instruction, ordinance, or regulation is inquestion.

b. All cases involving the legality of any tax, impost, assessment, or toll, or any penalty imposed inrelation thereto.

c. All cases in which the jurisdiction of any lower court is in issue.d. All criminal cases in which the penalty imposed is reclusion perpetua or higher.e. All cases in which only an error or question of law is involved.

3. Assign temporarily judges of lower courts to other stations as public interest may require. Suchtemporary assignment shall not exceed six months without the consent of the judge concerned.

4. Order a change of venue or place of trial to avoid a miscarriage of justice.5. Promulgate rules concerning the protection and enforcement of constitutional rights, pleading,

practice, and procedure in all courts, the admission to the practice of law, the integrated bar, and legalassistance to the under-privileged. Such rules shall provide a simplified and inexpensive procedure for thespeedy disposition of cases, shall be uniform for all courts of the same grade, and shall not diminish,increase, or modify substantive rights. Rules of procedure of special courts and quasi-judicial bodies shallremain effective unless disapproved by the Supreme Court.

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10) Grant of power to the local government units to create itsown sources of revenue

Each local government unit has the power to create its own revenue and to levytaxes, fees and charges subject to such guidelines and limitations as the Congress mayprovide.68

11) Flexible tariff clause

This clause provides the authority given to the President to adjust tariff rates underSection 40169 of the Tariff and Customs Code.70

12) Exemption from real property taxes

Charitable institutions, churches and parsonages or convents appurtenant thereto,mosques, non-profit cemeteries, and all lands, building, and improvements actually, directly andexclusively used for religious, charitable or educational purposes shall be exempt fromtaxation.71

6. Appoint all officials and employees of the Judiciary in accordance with the Civil Service Law. (Art. VIII)68 Sec 5, Art. X

Local government units have no power to further delegate said constitutional grant to raise revenue,because what is delegated is not the enactment or the imposition of a tax, it is the administrativeimplementation.

The power of local government units to impose taxes and fees is always subject to the limitationswhich Congress may provide, the former having no inherent power to tax.

Municipal corporations are mere creatures of Congress which has the power to create and abolishmunicipal corporations. Congress therefore has the power to control over local government units. IfCongress can grant to a municipal corporation the power to tax certain matters, it can also provide forexemptions or even take back the power (Basco vs. PAGCOR)69 In the interest of national economy, general welfare and/or national security, the President upon therecommendation of the National Economic and Development Authority is empowered:

1) To increase, reduce or remove existing protective rates of import duty, provided that the increaseshould not be higher than 100% ad valorem

2) To establish import quota or to ban imports of any commodity3) To impose additional duty on all imports not exceeding 10% ad valorem.

70 Garcia v. Executive Secretary, G.R. No. 101273, July 3, 1992)71 Sec. 28(3), Art. VI

Lest of the tax exemption: the use and not ownership of the propertyTo be tax-exempt, the property must be actually, directly and exclusively used for the purposes

mentioned.The word “exclusively” means “primarily’.The exemption is not limited to property actually indispensable but extends to facilities which are

incidental to and reasonably necessary for the accomplishment of said purposes.The constitutional exemption applies only to property tax.However, it would seem that under existing law, gifts made in favor or religious charitable and

educational organizations would nevertheless qualify for donor’s gift tax exemption. (Sec. 101(9)(3), NIRC)The constitutional tax exemptions refer only to real property that are actually, directly and exclusively

used for religious, charitable or educational purposes, and that the only constitutionally recognizedexemption from taxation of revenues are those earned by non-profit, non-stock educational institutions

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13) No appropriation or use of public money for religiouspurposes

No public money or property shall be appropriated, applied, paid or employed,directly or indirectly for the use, benefit, support of any sect, church, denomination,sectarian institution, or system of religion or of any priest, preacher, minister, or otherreligious teacher or dignitary as such except when such priest, preacher, minister or dignitaryis assigned to the armed forces or to any penal institution, or government orphanage orleprosarium.72

b. Provisions Indirectly Affecting Taxation

1) Due process

No person shall be deprived of life, liberty or property without due process of law73

x x x.

2) Equal protection

xxx nor shall any person be denied the equal protection of the laws.74

3) Religious freedom

No law shall be made respecting an establishment of religion or prohibiting the freeexercise thereof. The free exercise and enjoyment of religious profession and worship,without discrimination or preference, shall be forever allowed. 75

4) Non-impairment of obligations of contracts

No law impairing the obligation of contract shall be passed.76

which are actually, directly and exclusively used for educational purposes. (Commissioner of InternalRevenue v. Court of Appeals, et al., 298 SCRA 83)72 Sec. 29(2), Art. VI

Public property may be leased to a religious group provided that the lease will be totally under thesame conditions as that to private persons (amount of rent).

Congress is without power to appropriate funds for a private purpose.73 Sec. 1, Art. III74 Ibid.75 Sec. 5 Art. III

License fees/taxes would constitute a restraint on the freedom of worship as they are actually in thenature of a condition or permit of the exercise of the right.

However, the Constitution or the Free Exercise of Religion clause does not prohibit imposing a generallyapplicable sales and use tax on the sale of religious materials by a religious organization. (see Tolentino vsSecretary of Finance, 235 SCRA 630)76 Sec. 10, Art. III

A law which changes the terms of the contract by making new conditions, or changing those in thecontract, or dispenses with those expressed, impairs the obligation.

The non-impairment rule, however, does not apply to public utility franchise since a franchise is subjectto amendment, alteration or repeal by the Congress when the public interest so requires.

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J. Stages of Taxation

1. Levy

Determination of the persons, property or excises to be taxed, the sum or sums to beraised, the due date thereof and the time and manner of levying and collecting taxes.

2. Assessment and Collection

The manner of enforcement of the obligation on the part of those who are taxed.77

The two processes together constitute the “taxation system.”3. Payment

The act of compliance by the taxpayer, including such options, schemes or remediesas may be legally available.

4. Refund

The recovery of any tax alleged to have been erroneously or illegally assessed orcollected, or of any penalty claimed to have been collected without authority, or of any sumalleged to have been excessively, or in any manner wrongfully collected.

K. Definition, Nature, and Characteristics of Taxes

Definition Taxes are the enforced proportional contributions frompersons and property levied by the law-making body of theState by virtue of its sovereignty for the support ofgovernment and for public needs.

Nature They are not arbitrary exactions but contributions levied byauthority of law, and by some rule of proportion which isintended to ensure uniformity of contribution and a justapportionment of the burdens of government.

Characteristics 1. It is levied by the law-making body of the State.78

2. It is an enforced contribution.79

3. It is generally payable in money.80

77 This includes payment by the taxpayer and is referred to as tax administration78 The power to tax is a legislative power which under the Constitution only Congress can exercise throughthe enactment of laws. Accordingly, the obligation to pay taxes is a statutory liability.79 A tax is not a voluntary payment or donation. It is not dependent on the will or contractual assent,express or implied, of the person taxed. Taxes are not contracts but positive acts of the government.

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4. It is proportionate in character.81

5. It is levied on persons or property.82

6. It is levied for public purpose or purposes.83

7. It is levied by the State which has jurisdiction over thepersons or property.84

L. Requisites of a valid tax

1) It should be for a public purpose

2) The rule of taxation should be uniform

3) Either the person or property taxed be within the jurisdiction of the taxingauthority

4) The assessment and collection be in consonance with the due process clause

5) The tax must not infringe on the inherent and constitutional limitations of thepower of taxation.85

M. Tax as distinguished from other forms of exactions

1. Tariff

May be used in three (3) senses:

a. A book of rates drawn usually in alphabetical order containing the names ofseveral kinds of merchandise with the corresponding duties to be paid for the same.

b. Duties payable on goods imported or exported.86

c. The system or principle of imposing duties on the importation/exportation ofgoods.

80 Tax is a pecuniary burden – an exaction to be discharged alone in the form of money which must be inlegal tender, unless qualified by law, such as RA 304 which allows backpay certificates as payment oftaxes.81 It is ordinarily based on the taxpayer’s ability to pay.82 A tax may also be imposed on acts, transactions, rights or privileges.83 Taxation involves, and a tax constitutes, a burden to provide income for public purposes.84 The persons, property or service to be taxed must be subject to the jurisdiction of the taxing state.85 Taxes are the lifeblood of the government and should be collected without unnecessary hindrance. Buttheir collection should not be tainted with arbitrariness86 P.D. No. 230

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2. Toll

Sum of money for the use of something, generally applied to the consideration whichis paid for the use of a road, bridge of the like, of a public nature.

Tax Toll

Demand of sovereignty Demand of proprietorship

Paid for the support of the government Paid for the use of another’s property

Generally, no limit as to amount imposed Amount depends on the cost of constructionor maintenance of the public improvementused

Imposed only by the government Imposed by the government or privateindividuals or entities

3. License fee

A charge imposed under the police power for the purposes of regulation.87

Tax License/Permit Fee

Enforced contribution assessed by sovereignauthority to defray public expenses

Legal compensation or reward of an officerfor specific purposes

For revenue purposes For regulation purposes

87 Three kinds of licenses are recognized in the law:1. Licenses for the regulation of useful occupations.2. Licenses for the regulation or restriction of non-useful occupations or enterprises3. Licenses for revenue onlyImportance of the distinctions between tax and license fee:1. Some limitations apply only to one and not to the other, and that exemption from taxes may not

include exemption from license fees.2. The power to regulate as an exercise of police power does not include the power to impose fees for

revenue purposes. (see American Mail Line vs City of Butuan, L-12647, May 31, 1967 and related cases)3. An extraction, however, maybe considered both a tax and a license fee.4. But a tax may have only a regulatory purpose.5. The general rule is that the imposition is a tax if its primary purpose is to generate revenue and

regulation is merely incidental; but if regulation is the primary purpose, the fact that incidentally revenueis also obtained does not make the imposition of a tax. (see Progressive Development Corp. vs QuezonCity, 172 SCRA 629)

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An exercise of the taxing power An exercise of the police power

Generally no limit in the amount of tax to bepaid

Amount is limited to the necessary expensesof inspection and regulation

Imposed also on persons and property Imposed on the right to exercise privilege

4. Special assessment

An enforced proportional contribution from owners of lands especially or peculiarlybenefited by public improvements.88

Tax Special Assessment

Imposed on persons, property and excise Levied only on land

Personal liability of the person assessed Not a personal liability of the personassessed, i.e. his liability is limited only to theland involved

Based on necessity as well as on benefitsreceived

Based wholly on benefits

General application89 Exceptional both as time and place

88 Since special assessments are not taxes within the constitutional or statutory provisions on taxexemptions, it follows that the exemption under Sec. 28(3), Art. VI of the Constitution does not apply tospecial assessments.

However, in view of the exempting proviso in Sec. 234 of the Local Government Code, properties whichare actually, directly and exclusively used for religious, charitable and educational purposes are notexactly exempt from real property taxes but are exempt from the imposition of special assessments aswell. (see Aban)

The general rule is that an exemption from taxation does not include exemption from specialassessment.89 see Apostolic Prefect vs Treas. Of Baguio, 71 Phil 547

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5. Debt

Debt is based upon juridical tie, created by law, contracts, delicts or quasi-delictsbetween parties for their private interest or resulting from their own acts or omissions.

Tax Debt

Based on law Based on contracts, express or implied

Generally, cannot be assigned Assignable

Generally payable in money May be paid in kind

Generally not subject to set-off orcompensation

May be subject to set-off or compensation

Imprisonment is a sanction for non-paymentof tax except poll tax

No imprisonment for non-payment of debt

Governed by special prescriptive periodsprovided for in the Tax Code

Governed by the ordinary periods ofprescriptions

Does not draw interest except only whendelinquent

Draws interest when so stipulated, or in caseof default

N. Kinds of Taxes

1. As to object

a. Personal, capitation, or poll tax

Tax of a fixed amount imposed on persons residing within a specified territory,whether citizens or not, without regard to their property or the occupation or business inwhich they may be engaged.90

b. Property tax

Tax imposed on property, real or personal, in proportion to its value or inaccordance with some other reasonable method of apportionment.

90 i.e. community tax.

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c. Privilege tax

A charge imposed upon the performance of an act, the enjoyment of privilege, or theengaging in an occupation.

2. As to burden or incidence

a. Direct

Demanded from the person who also shoulders the burden of the tax. It is a taxwhich the taxpayer is directly or primarily liable and which he or she cannot shift to another.

b. Indirect

Demanded from a person in the expectation and intention that he or she shallindemnify himself or herself at the expense of another, falling finally upon the ultimatepurchaser or consumer. A tax which the taxpayer can shift to another.

3. As to tax rates

a. Specific

The computation of the tax or the rates of the tax is already provided for by law.

b. Ad valorem

Tax upon the value of the article or thing subject to taxation; the intervention ofanother party is needed for the computation of the tax.

c. Mixed

Tax rates are partly progressive and partly regressive.

4. As to purposes

a. General or fiscal

Imposed for the purpose of raising public funds for the service of the government.

b. Special, regulatory, or sumptuary

Imposed primarily for the regulation of useful or non-useful occupation orenterprises and secondarily only for the purpose of raising public funds.

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5. As to scope or authority to impose

a. National – internal revenue taxes

Imposed by the National Government.

b. Local – real property tax, municipal tax

Imposed by the municipal corporations or local government units.

6. As to graduation

a. Progressive

Rate or amount of tax increases as the amount of the income or earning to be taxedincreases.

b. Regressive

Tax rate decreases as the amount of income to be taxed increases.

b. Proportionate

Tax based on a fixed percentage of the amount of the property receipts or otherbasis to be taxed.91

91 Example: real estate tax.

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II. National Internal Revenue Code of 1997 as amended (NIRC)

A. Income Taxation

1. Income Tax Systems

a. Global Tax System

All income received by the taxpayer are grouped together, without any distinction asto the type or nature of the income, and after deducting therefrom expenses and otherallowable deductions, are subjected to tax at a fixed rate.

b. Schedular Tax System

The various types or items of income92 are classified accordingly and are accordeddifferent tax treatments, in accordance with schedules characterized by graduated tax rates.Since these types of income are treated separately, the allowable deductions shall likewisevary for each type of income.

Schedular system Global system

There are different tax rates There is a single tax rate

There are different categories of taxableincome

There is no need for classification as alltaxpayers are subjected to a single tax rate.

Usually used in the income taxation ofindividuals

Usually applied to corporations.

c. Semi-schedular or semi-global tax system93

A system where the compensation, business or professional income, capital gain andpassive income not subject to final tax, and other income are added together to arrive at thegross income, and after deducting the sum of allowable deductions from business orprofessional income, capital gain and passive income not subject to final tax, and otherincome, in the case of corporations, as well as personal and additional exemptions, in thecase of individual taxpayers, the taxable income is subjected to one set of graduated tax rates;method of taxation under the law.

92 compensation, business or professional income93 approach used in the Philippines

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2. Features of the Philippine Income Tax Law

a. Direct tax

One assessed upon the property, person, business income, etc. of those who paythem.

b. Progressive

The tax rates increase as the tax base increases. In certain cases, however, final taxesare imposed on passive income.94

c. Comprehensive

The Philippine Income tax law adopted the so-called “comprehensive tax situs” –comprehensive in the sense that it practically applies all possible rules of tax situs.

d. Semi-schedular or semi-global tax system95

3. Criteria in Imposing Philippine Income Tax

a. Citizenship Principle

A citizen of the Philippines is subject to Philippine income tax

(a) on his worldwide income, if he resides in the Philippines, or

(b) only on his income from sources within the Philippines, if he qualifies asnonresident citizen.

b. Residence Principle

A resident alien is liable to pay income tax on his income from sources within thePhilippines but exempt from tax on his income from sources outside the Philippines.

c. Source Principle

An alien is subject to Philippine income tax because he derives income from sourceswithin the Philippines. Thus, a nonresident alien is liable to pay Philippine income tax on hisincome from sources within the Philippines96 despite the fact that he has not set foot in thePhilippines.

94 The individual income tax system, in the main, is progressive in nature95 supra96 such as dividend, interest, rent, or royalty

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4. Types of Philippine Income Tax

a. Presumptive Income Tax – A scale of income taxes is imposed in relation to agroup of person’s actual expenditure and the presumed income.

b. Composite Tax – A tax consisting of a series of separate quasi-personal taxes,assessed on the particular source of income with a superimposed personal tax on the incomeas a whole.

c. Unitary Income Tax – Incomes are arranged according to source. The separateitems are added together and the rate applied to the resulting total income.

5. Taxable Period

a. Calendar Period

A period of twelve (12) months commencing from January 1 and ending December31.

b. Fiscal Period

An accounting period of 12 months ending on the last day of any month other thanDecember.97

c. Short Period

A period of less than twelve (12) months.

97 ex. Feb. 1 to Jan. 31

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6. Kinds of Taxpayers

a. Individual Taxpayers

1) Citizens

a) Resident citizens98

Citizens of the Philippines who are residing therein.

b) Non-resident citizens99

1. A citizen of the Philippines who establishes to the satisfaction of theCommissioner of Internal Revenue (CIR) the fact of his physical presence abroad with adefinite intention to reside therein.

2. A citizen of the Phils. who leaves the country during the taxable year to resideabroad, either as immigrant or for employment or on permanent basis.

3. A citizen of the Phils. who works and derives from abroad and whoseemployment thereat requires him to be physically present abroad most of the time during thetaxable year.

4. A citizen who has been previously considered as non-resident citizen and whoarrives in the Phils. at any time during the taxable year to reside permanently in thecountry.100

5. A citizen who shall have stayed outside the Phils. for 183 days or more by the endof the year.101

98 Taxable for income derived from all sources based on taxable (i.e., net) income99 Taxable for income derived within the Philippines based on taxable (i.e., net) income100 He shall be considered a NRC for the taxable year in which he arrives in the Phils. with respect to hisincome derived from sources abroad until the date of his arrival in the Phils.101 Sec. 22 (E)

The continuity of residence abroad is not essential. If physical presence is established, such physicalpresence for the calendar year is not interrupted by reasons of travels to the Phils. (Rev. Regs. No. 9-73,November 26, 1973)

An overseas contract worker is taxable only on income from sources within the Philippines. (Sec.23 (c).

A seaman who is a Filipino citizen and who receives compensation for services rendered abroad asmember of the complement of a vessel engaged exclusively in international trade is treated as anoverseas contract worker.

Length of stay is indicative of intention. A citizen of the Philippines who shall have stayed outsidethe Philippines for 183 days or more by the end of the year is a non-resident citizen. His presenceabroad, however, need not be continuous. [RR1-79]

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2) Aliens102

a) Resident aliens

Those whose residence are within the Philippines but who are not citizens thereof.103

b) Non-resident alien104

Those not residing in the Phils. and who are not citizens thereof.105

(1) Engaged in trade or business

An alien who stays in the Philippines for more than 180 days.106

102 What makes an alien a resident or non-resident alien is his intention with regard to the length andnature of his stay. Thus:

a. One who comes to the Philippines for a definite purpose which in its very nature maybe promptly accomplished is not a resident citizen.

b. One who comes to the Philippines for a definite purpose which in its very nature wouldrequire an extended stay, and to that end, makes his home temporarily in the Philippines, becomes aresident, though it may be his intention at all times to return to his domicile abroad when the purposefor which he came has been consummated or abandoned. (Sec. 5, RR 2)

Length of stay is indicative of intention.An alien who shall have stayed in the Philippines for more than one (1) year by the end of the

taxable year is a resident alienAn alien who shall come to the Philippines and stay for an aggregate period of more than one hundred

eighty (180) days during a calendar year shall be considered a non-resident alien in business, or in thepractice of profession, in the Philippines. [Sec. 25(A)(1)] Thus, if an alien stays in the Philippines for 180days or less during the calendar year, he shall be deemed a non-resident alien not doing business in thePhilippines, regardless of whether he owns

1. Stock in trade of the taxpayer, or other property of a kind which would properly be included in aninventory of a taxpayer if on hand at the end of the taxable year (example: Raw Materials Inventory, Workin Process Inventory, Office Supplies Inventory)

2. Property held by the taxpayer primarily for sale to customers in the ordinary course of his tradeor business (example: Merchandise Inventory)

3. Property used in the trade or business which is subject to the allowance for depreciation(example: Office Equipment) actually engages in trade or business therein. (Mamalateo)103 Sec. 22 [F], NIRC

A mere floating intention, indefinite as to time, to return to another country is not sufficient toconstitute him a transient.

For tax purposes, a resident alien is;1. An alien who lives in the Phils. with no definite intention to stay as a resident.2. One who comes in the Phils. for definite purposes which in its very nature would require an

extended stay and to that end, makes his home temporarily in the Phils.3. An alien who stay within the Phils. for more than 12 months from the date of his arrival in the Phils.

104 A “non-resident alien” individual who came to the Phils. and stayed therein for an aggregate period ofmore than 180 days during any calendar year shall be deemed a NRA doing business in the Phils.105 Sec. 22 (G), id.106 Sec. 25 [A], NIRC

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(2) Not engaged in trade or business

An alien who stays in the Philippines for 180 days or less.107

(3) Special Class of Individual Employees

a) Minimum wage earner

A worker in the private sector paid the statutory minimum wage, or to an employeein the public sector with compensation income of not more than the statutory minimumwage in the non-agricultural sector where he/she is assigned.108

By virtue of the passage of R.A. 9504, minimum wage earners are exempted from thepayment of the net income tax.109

b) Corporations110

1) Domestic corporations

Created or organized in the Phils. or under its laws.111

2) Foreign corporations

Created, organized or existing under any laws other than those of the Phils.

(1) Resident

Engaged in trade or business112 within the Phils.

107 Sec. 25 [B], id.It is the length of stay in the Philippines that determines whether or not he is engaged in trade or

business. The number of transaction he entered into is immaterial.108 Sec. 22 (HH), id. as amended by R.A. 9504109 They are not required to file an income tax return

Thus: “xxx, That minimum wage earners shall be exempt from the payment of income tax on theirtaxable income: Provided, further, that the holiday pay, overtime pay, night shift differential pay andhazard pay received by such minimum wage earners shall likewise be exempt from income tax.”110 The term shall include partnership, no matter how created or organized, joint stock companies, jointaccounts, or insurance companies, but does not include general professional partnerships and a jointventure or consortium formed for the purpose of undertaking construction projects or engaging inpetroleum, coal, geothermal and other energy operations pursuant to operating or consortiumagreement under a service contract with the government. (Sec. 24(b), id)111 liable for income from sources within and without the Philippines (Sec 22[C], id.)112 The term implies a continuity of commercial dealings and arrangements and contemplates to thatextent, the performance of acts or works or the exercise of some of the functions normally insistent toand in the progressive prosecution of commercial gain or for the purpose and the object of the businessorganization (Comm. vs. British Overseas Airways Corporation – BOAC case 149 SCRA 395)

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(2) Non-resident

Not engaged in trade or business within the Phils.

c. Partnerships113

Partnership is a contract whereby two or more persons bind themselves to contributemoney, property, or industry to a common fund with the intention of dividing the profitsamong themselves.114

d. General Professional Partnerships

Formed by persons for the role purpose of exercising their common profession, nopart of the income of which is derived from engaging in any trade & business.115

e. Estates and Trusts

Estate Trust

The mass of property, rights and obligationsleft behind by the decedent upon his death.116

An arrangement created by will or co-agreement under which title to property ispassed to another for conservation orinvestment with the income therefrom andultimately the corpus117 to be distributed inaccordance with the directions of the creatoras expressed in the governing instrument.118

113 An ordinary business partnership is considered as a corporation and is thus subject to tax as such.Partners are considered stockholders and, therefore, profits distributed to them by the partnership areconsidered as dividends.114 Partnerships, no matter how created or organized, including joint ventures or consortiums, are taxable.

What are taxable unregistered partnerships?The SC in Evangelista v. CIR 102, Phil 140, held that Sec. 24 covered unregistered partnerships and even

associations or joint accounts which have no legal personalities apart from their individual members.Accordingly, a pool of individual real property owners dealing in real estate business was considered acorporation for tax purposes [Afisco Insurance Corporation v. CA, 302 SCRA 1]115 Sec. 22 (b)

e. g. Law firmGeneral professional partnerships are not taxable but partners are taxed on their share of partnership

profits actually or constructively paid during the year.116 Estates may be classified as follows:

1. Estates not under judicial settlement - are subject to income tax generally as mere co-ownership.- The tax liability on income of the co-ownership levied directly on the co-owners. Thus, the heirs

shall include in their respective returns their distributive shares of the net income of the estate.2. Estates under judicial settlement - are subject to income tax in the same manner as individual.- Income received during the settlement of the estate is taxable to the fiduciary (guardian, executor,

trustee, and administrator).- The return should be filed by executor or administrator of the trust.

117 principal118 Two (2) Kinds of Trust :

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f. Co-ownerships119

It is created whenever the ownership of an undivided thing or right belongs todifferent persons.

7. Income Taxation

a. Definition

A tax on all yearly profits arising from property, profession, trade or business, or atax on person’s income, emoluments, profits and the like.120

b. Nature

It is generally regarded as an excise tax. It is not levied upon persons, property,funds or profits but on the privilege of receiving said income or profit.

1. Irrevocable Trust - is considered as a separate taxpayer.2. Revocable Trust - is one where at anytime the power to revest the title to any part of the corpus of

the trust is vested:(a) in the grantor (creator of the trust) either alone or in conjunction with any person not having a

substantial adverse interest in the disposition of such part of the corpus or the income therefrom; or(b) in any person not having a substantial adverse interest in the disposition of such part of the

corpus or the income therefrom.The tax shall be imposed on taxable income of the grantor.

119 General rule: Co-ownership is exempt from income tax because the activities of the co-owners areusually limited to the “preservation” of the properties owned in common and the collection of the incometherefrom.

Exceptions: (When co-ownership is subject to tax).(1) When the income of the co-ownership is invested by the co-owners in other income-producing

properties or income-producing activities, and(2) When there is no attempt to divide inherited property for more than ten (10) years and the said

property was not under any administration proceedings nor held in trust, an unregistered partnership isdeemed to exist.

Tax liability of co-owners:The co-owners in exempt co-ownership shall be liable for income tax only in their separate and

individual capacity.Filing of return:The owners shall report and include in their respective personal income tax returns their shares of the

net income of the co-ownership.Test to determine whether co-ownership is a taxable unregistered partnership:Find out whether the heirs have made substantial improvements on the inherited property. If so, the

implication is that they will engage in business for profit (Evangelista Doctrine). If that happens, the co-ownership will be taxed as an unregistered partnership.120 Fisher v. Trinidad, GR L-19030, Oct. 20, 1922

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c. General principles

1. A citizen of the Philippines residing therein is taxable on all income derived fromsources within and without the Philippines.

2. A non-resident citizen is taxable only on income derived from sources within thePhilippines.

3. An individual citizen of the Philippines, who is working and deriving income fromabroad as an overseas contract worker, is taxable only on income derived from sourceswithin the Philippines. Provided, that a seaman who is a citizen of the Philippines and whoreceives compensation for services rendered abroad as a member of the complement of avessel engaged exclusively in international trade shall be treated as an overseas contractworker.

4. An alien individual, whether or not a resident of the Philippines, is taxable only onincome derived from sources within the Philippines.

5. A domestic corporation is taxable on all income derived from sources within andwithout the Philippines.

6. A foreign corporation, whether engaged or not in trade or business in thePhilippines, is taxable only on income derived from sources within the Philippines.

8. Income

a. Definition

It means cash or its equivalent coming to a person within a specified period, whetheras payment for services, interest or profit from investment. It covers gain derived fromcapital, from labor, or from both combined, including gain from sale or conversion of capitalassets.121

b. Nature

All wealth which flows to the taxpayer other than a mere return of capital.

It is an amount of money coming to a person/corporation within a specified time,whether as payment for services, interest or profit from investment. Unless otherwisespecified, it means cash or its equivalent. Income can also be thought of as a flow of thefruits of one's labor.122

121 It denotes the amount of money or property received by a person or corporation within a specifiedtime, whether as payment for services, interests, or profits from investments (Fisher vs. Trinidad, 43 Phil973)

Income is not merely increase in value of property; but a gain, a profit in excess of capital as a result ofexchange transactions.122 Conwi v. Court of Tax Appeals

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Income includes earnings, lawfully or unlawfully acquired, without consensualrecognition, express or implied, of an obligation to repay and without restriction as theirdisposition.

c. When income is taxable

1) Existence of income

There must be gain – a value received in the form of cash or its equivalent as a resultof rendition of service or earnings in excess of capital invested.123

2) Realization of income

a) Tests of Realization

Unless income is deemed realized, then there is no taxable income.

Revenue is generally recognized when both conditions are met:

a. The earning process is complete or virtually complete; and

b. An exchange has taken place.124

b) Actual vis-à-vis Constructive receipt

Actual receipt Constructive receipt

Income may be actual receipt or physicalreceipt.

When money consideration or its equivalentis placed at the control of the person whorendered the service without restrictionby the payor.125

123 A mere expectation of profits is not an incomeA transaction whereby nothing of exchangeable value comes to or is received by the taxpayer does not

give rise to or create taxable income.Items or amounts received which do not add to the taxpayer’s net worth or redound to his benefits

such as amounts merely deposited or entrusted to him are not considered as gains (CIR vs. ToursSpecialist, 183 SCRA 402).

Gain need not be necessarily in cash. It may be in form of payment, reduction or cancellation of T’sindebtedness, or gain from exchange of property.124 Manila Mandarin Hotels, Inc. v. CIR125 Sec. 4.108-A, RR 16-2005

Examples of income constructively received:a. Deposit in banks which are made available to the seller of services without restrictionsb. Issuance by the debtor of a notice to offset any debt or obligation and acceptance thereof by the

seller as payment for services renderedc. Transfer of the amounts retained by the payor to the account of the contractord. Interest coupons that have matured and are payable but have not been encashede. Undistributed share of a partner in the profits of a general partnership

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3) Recognition of income

a. There is income, gain or profit

b. The income, gain or profit is received or realized during the taxable year

c. The income gain or profit is not exempt from income tax

4) Methods of accounting

a) Cash method vis-à-vis Accrual method

Cash method Accrual method

Recognition of income and expensedependent on inflow or outflow of cash.126

Gains and profits are included in grossincome when earned whether received ornot, and expenses are allowed as deductionswhen incurred, although not yet paid. It isthe right to receive and not the actual receiptthat determines the inclusion of the amountin gross income

b) Installment payment vis-à-vis Deferredpayment vis-àvis Percentage completion127

Installment payment Deferred payment Percentage completion

Appropriate whencollections extend overrelatively long periods oftime and there is a strongpossibility that full collectionwill not be made.

Initial payments exceed 25%of the gross selling price andsuch transaction shall betreated as cash sale whichmakes the entire selling pricetaxable in the month of sale.

Persons whose gross incomeis derived from long-termcontracts shall report suchincome upon the basis ofpercentage of completion.

126 meaning, you recognize the income when you actually receive the cash payment for the sale, and yourecognize the expense when you actually pay cash for the expense127 in long term contracts

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d. Tests in determining whether income is earned for taxpurposes

1) Realization test

No taxable income until there is a separation from capital of something ofexchangeable value, thereby supplying the realization or transmutation which would result inthe receipt of income.128

2) Claim of right doctrine or Doctrine of ownership,command, or control

A taxable gain is conditioned upon the presence of a claim of right to the allegedgain and the absence of a definite unconditional obligation to return or repay.

The power to dispose of income is the equivalent of ownership of it. The exercise ofthat power to procure the payment of income to another is the enjoyment and hence, therealization of the income by him who exercises it. The dominant purpose of the revenuelaws is the taxation of income to those who earn or otherwise create the right to receive itand enjoy the benefit of it when paid.

3) Economic benefit test, Doctrine of proprietaryinterest

Income realized is taxable only to the extent that the taxpayer is economicallybenefited.

Any economic benefit to the employee that increases his net worth is taxable.

4) Severance test

There is no taxable income until there is a separation from capital of somethingwhich is of exchangeable value129 thereby supplying the realization or transmutation whichwould result in the receipt of income. Thus, income is not taxable unless separated orsevered from the capital or labor that bore it.

128 There must be separation from capital of something of exchangeable value (e.g., sale of asset)129 Eisner vs. Macomer, 252 US 189

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9. Gross Income

a. Definition

All income derived during a taxable year by a taxpayer from whatever source,whether legal or illegal,130 including the following items:

1. Gross income derived from the conduct of trade or business or the exercise of aprofession.

2. Rents

3. Interests

4. Prizes and winnings

5. Compensation for services in whatever form paid, including, but not limitedto fees, salaries, wages, commissions, and similar items

6. Annuities

7. Royalties

8. Dividends

9. Gains derived from dealings in property

10. Pensions

11. Partner's distributive share from the net income of the general professionalpartnership.131

130 As such, income includes the following, among others:1. Treasure found;2. Punitive damages representing profit lost;3. Amount received by mistake;4. Cancellation of the taxpayer’ indebtedness;5. Receipt of usurious interest;6. Illegal gains;7. Taxes paid and claimed as deduction subsequently refunded;8. Bad debt recovery.

131 The above enumeration can be simplified into five (5) categories:1. Compensation Income - income derived from rendering of services under an employer-employee

relationship.2. Professional Income - fees derived from engaging in an endeavor requiring special training as

professional as a means of livelihood, which includes, but not limited to, the fees of CPAs, lawyers,engineers and the like.

3. Business Income - gains or profits derived from rendering services, selling merchandise,manufacturing products, farming and long-term contracts.

4. Passive Income - income in which the taxpayer merely waits for the amount to come in, whichincludes, but not limited to interest income, royalty income, dividend income, prizes and

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b. Concept of income from whatever source derived

Implies the inclusion of all income under the law, irrespective of the voluntary orinvoluntary action of the taxpayer in producing the gains.132

All income not expressly excluded or exempted from the class of taxable income,irrespective of the voluntary or involuntary action of the taxpayer in producing theincome.133

c. Gross Income vis-à-vis Net Income vis-à-vis TaxableIncome

Gross Income Net Income or Taxable IncomeAs to deductions

Allows no deductions Allows deductions

As to exemptions

Grants no exemptions Grants exemptionsAs to tax base

Gross Income Net Income

Advantages/Disadvantages

Simplifies the income taxsystem

Confusing and complexprocess of filing incometax return

Substantial reduction in corruption and taxevasion as the exercise of discretion, to allowor disallow deductions, is dispensed with.

Vulnerable to corruption on account ofmargin of discretion in the grant ofdeductions

More administratively feasible Provides equitable releifs in the form ofdeductions, exemptions and tax credit

Does away with wastage of manpower andsupplies

Tax audit minimizes fraud

winnings.5. Gains from Dealings in Property – It includes all income derived from the disposition of property

whether real, personal or mixed.132 It includes illegal gains arising from gambling, betting, lotteries, extortion and fraud.133 Gutierrez v. CIR, CTA case

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d. Classification of Income as to Source

1) Gross income and taxable income from sourceswithin the Philippines

1) Interests:

a) Interests derived from sources within the Phils.

b) Interests on bonds, notes or other interest-bearing obligations ofresidents, corporate or otherwise.134

2) Dividends:

a) From a domestic corporation, and

b) From a foreign corporation 50% or more of the gross income of whichfor the 3-year period ending with the close of the taxable year preceding thedeclaration of such dividends, or for such part of such period as the corporationwithin the Phils.135 has been in existence, was derived from sources. It must beonly in an amount which bears the same ratio to such dividends as the grossincome of the corporation for such period derived from sources within thePhilippines bears to its gross income from all sources.

3) Compensation for labor or personal services performed in the Phils.136

4) Rentals and Royalties from property located in the Phils. or from any interest insuch property, including rentals or royalties for –

a) The use of, or the right or privilege to use in the Phils. any copyright,patent, design or model, plan, secret formula or process, goodwill, trademark, tradebrand or other like property or night;

b) The use of, or the right to use in the Phils. any industrial, commercial orscientific equipment;

c) The supply of scientific, technical, industrial or commercial knowledge orinformation;

d) The supply of any assistance that is ancillary and subsidiary to, and isfurnished as a means of enabling the application or enjoyment of, any such propertyor right as is mentioned in paragraph (a), any such equipment as is mentioned inparagraph (b) or any such knowledge or information as is mentioned in paragraph(c);

134 Sec. 42, (A)( 1)135 Id. (A)(2)136 Id. (A)(3)

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e) The supply of services by a nonresident person or his employee inconnection with the use of property or rights belonging to, or the installation oroperation of any brand, machinery or other apparatus purchased from suchnonresident person;

f) Technical advice, assistance or services rendered in connection withtechnical management or administration of any scientific, industrial or commercialundertaking, venture, project or scheme; and

g) The use of, or the right to use:

1. motion picture films;

2. films or video tapes for use in connection with television; and

3. tapes for use in connection with radio broadcasting

5) Gains, profits, and income from the sale of real property located in the Phils. and

6) Gains, profits, and income from sale of personal property, treated as derivedentirely from the country where it is sold.137

2) Gross income and taxable income from sourceswithout the Philippines

1) Interest other than those derived from sources within the Phils.

2) Dividends other than those derived from sources within the Phils.

a. Dividends from foreign corporations in general; and

137 Exception to the rule: gain from the sale of shares of stock in a domestic corporation which is treatedas derived entirely from sources within the Phils. regardless of where the shares are sold.

Passage of title test: it is the prevailing view that in ascertaining the place of sale, the determination ofwhere and when the title to the goods passes from the seller to the buyer is decisive.

Enumeration in Section 42 not all-inclusive.In the case of Commissioner vs. British Overseas Airways Corporation (BOAC) [149 SCRA 395], the

Supreme Court held:“xxx Section 37 (now Section 42) by its language, does not intend the enumeration to be exclusive. It

merely directs that the types of income listed therein be treated as income from sources within the Phils.a cursory reading of the section will show that it does not state that it is an all-inclusive enumeration, andthat no other kind of income may be so considered xxx”

The Supreme Court further held:“xxx The absence of flight operations to and from the Phils. is not determination of the source of

income on the situs of income taxation. Admittedly, BOAC was an off-line international airline at the timepertinent to this case. The test of taxability is the source, and the source of an income is that activity xxxwhich produced the income. Unquestionably the passage documentations in these cases were sold in thePhils. and the revenue therefrom was derived from a business activity regularly pursued within the Phils.xxx”

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b. Dividends derived from foreign corporations, 50% or more of the grossincome of which for the 3-year period preceding the declaration ofdividends.

3) Compensation for labor or personal services performed outside the Phils.

4) Rentals or royalties from property located outside the Phils. or from any interestin such property including rentals or royalties for the use of or for the privilege of usingoutside the Phils., patents, etc.

5) Gains, profits and income from the sale of real property located outside the Phils.

6) Gains, profits and income from the sale of personal property located outside thePhils., and

7) Income derived from the purchase of personal property within and its saleoutside the Phils.138

3) Income partly within or partly without thePhilippines

1) Income from transportation such as foreign steamship companies whose vesseltouch the Phil. ports139 and other services rendered partly within and partly outside the Phils.such as foreign corporations carrying on the business of transmission of telegraph and cablemessages between points outside the Phils.140

2) Income from the sale of personal property produced in whole or in part by thetaxpayer within and sold outside the Phils. or produced by the taxpayer outside and soldwithin the Phils.

138 Sec. 42139 Sec. 163, Regulations140 Sec. 164, id.

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e. Sources of income subject to tax

1) Compensation Income141

All remuneration for services performed by an employee for his employer, includingthe cash value of all remuneration paid in any medium other than cash.142

It includes all remuneration for services rendered by an employee for his employerunless specifically excluded under the NIRC.143

2) Fringe Benefits144

a) Special treatment of fringe benefits

Applied to fringe benefits given or furnished to managerial or supervisingemployees and not to the rank and file.145

b) Definition

Any good, service or other benefit furnished or granted in cash or in kind by anemployer to an individual employee, except rank and file employee.

141 Forms of Compensationa. moneyb. in kindCompensation paid to an employee of a corporation in its stock is to be treated as if the corporation

sold the stock for its market value and paid to the employee in cash.Living quarters furnished to the employee in addition to cash salary. The rental value should be

reported as income.Meals given to employee, the value thereof substitutes income.

142 Sec. 78(A)It includes:

1. Salaries and wages2. Commissions3. Tips4. Allowances5. Bonuses6. Fringe Benefits of rank and file employees

It does not include remuneration paid:For agricultural labor paid entirely in products of the farm where the labor is performed, orFor domestic service in a private home, orFor casual labor not in the course of the employer's trade or business, orFor services by a citizen or resident of the Philippines for a foreign gov’t or an int’l organization.

143 Sec. 2.78.1, RR 2-98144 Sec. 33

The fringe benefit covered refers to those enjoyed by managerial and supervisory employees145 Pursuant to Revenue Regulations No. 3 – 98 (dated May 21, 1998) implementing section 33 of the TaxCode.

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c) Taxable and non-taxable fringe benefits

Taxable fringe benefits Non-taxable fringe benefits

1) Housing Privileges

(a) Lease of residential property forthe use of the employee as his usual place ofresidence.

(b) Residential Property owned byemployer and assigned to employee as hisusual place of residence.

(c) Residential property purchased byemployer on installment basis for the use ofemployer as his usual place of residence.

(d) Residential property purchased byER and ownership is transferred to EE ashis usual place of residence.

(e) Residential property transferred toemployee at less than employer’s acquisitioncost.146

2) Household Expenses – refer to expensesof the employee paid by the employer forhousehold personnel or other personalexpenses, which shall include:

(a) salaries of household helper

(b) personal driver of the employee

(c) payment for homeowner assoc.,

etc.

3) Interest on loan at less than market rate147

1) Fringe benefits which are authorized andexempted from tax under special laws;

2) Contributions of the employer for thebenefit of the employee to retirement,insurance and hospitalization benefit plans;

3) Benefits given to the rank and fileemployees, whether granted under acollective bargaining agreement or not;

4) De minimis benefits;

5) When the fringe benefit is required by thenature of, or necessary to the trade, businessor profession of the employer

6) When the fringe benefit is for theconvenience of the employer. This is knownas Employer’s Convenience Rule.155

146 Non – taxable Housing Fringe Benefits(a) Housing privilege of military officials of AFP(b) Housing unit, which is situated inside or adjacent to the premise of a business or factory. A housing

unit is considered adjacent if it is located within the maximum 50 meters from the perimeter of thebusiness premises.

(c) Housing benefit granted to employees on a temporary basis not exceeding three (3) months147 If the employer lends money to his employee:

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4) Expenses for Foreign Travel

General rule:

Expenses for foreign travel insured bythe employee and/or family members of theemployee borne by the employer shall betreated as taxable fringe benefits of theemployee.

Except:

Where the expenses for foreign travelpaid by the employer for the employee arefor the purpose of attending businessmeeting or convention. The exemptioncovers only the following expenses:

a) Inland travel expenses exceptlodging cost in hotel averaging US$ 300 orless per day;148 and

b) Cost of economy or business classairline ticket.149

5) Membership fees, dues and otherexpenses borne by the employer for hisemployee, in social or athletic clubs or othersimilar organizations.150

6) Life or Health Insurance -

General rule:

The cost of life or health insuranceand other non – life insurance premiums orsimilar amounts in excess of what the law

Free of interest or at a rate lower than 12% (or prevailing market rate) the interest foregone by theemployer or the difference of the interest assumed by the employer and the 12% rate shall be treated astaxable fringe benefit.

Applicable to installment payment or loan with interest rate lower than 12% starting January 1, 1998.155 Sec. 32, NIRC; Sec. 2.33 [C], RR 3-98148 Travel expenses should be supported by documents proving the actual occurrences of the meetings orconventions. Likewise, documents and evidence showing the business purpose of the employees’ travelmust be presented otherwise, the entire cost will be considered taxable fringe benefit.149 However, if the ticket is a first class one, 30% of the cost of the ticket shall be subject to a fringe benefittax.150 These are treated as taxable Fringe Benefits of the employee in full.

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allows borne by the employer for hisemployees shall be treated as taxable fringebenefits.

Except:

a) Contribution of the employer for thebenefits of the employee pursuant to existinglaws.151

b) The cost of premium borne by theemployer for the group insurance of hisemployees.

7) Holidays and Vacation Expense

8) Motor Vehicle

a) Motor vehicle purchased byemployer in name of employee.

b) “Cash for the purchased provided bythe employer, the ownership is placed in thename of the employee

c) Purchase on “Installment” basis, theownership is placed in the name of theemployee

d) “Portion” of purchased priceshouldered by employer

e) Fleet of motor vehicle “leased” bythe employer

f) Fleet of Motor vehicles owned andmaintained by employer.152

151 such as R.A. 8287 (SSS) or R.A. 8291 (GSIS).152 In case of letters a, b, c and d, regardless of whether the motor vehicle is used for the personal purposeof the employee and partly for the benefit of his employer, the monetary value shall be the entire value ofthe benefit.

Under letters e and f, the fleet of motor vehicles is for the use of the business and the employees. Thevalue of the benefit shall be the rental payments (e) or the acquisition cost (f) of all motor vehicles notnormally used for sales, freight, delivery service and non-personal use.

The use of yacht whether owned and maintained or leased by the employer shall be treated as taxablefringe benefit – the value of the benefit shall be measured based on the depreciation of the Yacht at anestimated useful life of 20 yrs.

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9) Expense Account

a) Expenses incurred by the employeebut paid by his employer.

b) Expenses paid by the employee butreimbursed by his employer.153

10) Educational Assistance

General Rule: The cost of theeducational assistance to the employee or hisdependents which are borne by the employershall be treated as Taxable Fringe Benefits.

Exception:

a) Education granted to employee154

b) Educational Assistance granted tothe dependents of the employee inthe nature of educational assistanceto the dependents of the employeethrough a competitive schemeunder a scholarship program of thecompany.

The use of aircraft (including helicopters) owned and maintained by the employer shall be treated as“business use” and not subject to FBT.153 Expense account not subject to FBT.

a) expenses duly receipted for in the name of the employer andb) The expenditures do not partake the nature of personal expenses attributable to the employee.Personal expenses of the employee (like groceries) paid for or reimbursed by the employer are

taxable fringe benefits, whether or not duly receipted for in the name of the EE.Representation and Transportation Allowances (RATA) refers to fixed amounts which are regularly

received by the employees as part of their monthly compensation income. They are not treated asTaxable Fringe Benefits but the same are treated as Taxable Compensation Income.154 Requisites:

1. Educational grant whereby the study is directly connected with the trade, business or profession ofthe ER.

2. And there is a written contract obligating the EE to remain under the employment for a certainperiod.

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3) Professional Income

The fees received by a professional from the practice of his profession, provided thatthere is no employer-employee relationship between him and his clients.

4) Income from Business

The income derived from merchandising, mining, manufacturing and farmingoperations.

5) Income from Dealings in Property

a) Types of Properties

(1) Ordinary assets

Properties held by the taxpayer in the pursuit of his profession, trade or business:

i. Stock in Trade;

ii. Property of a kind which would properly be included in the inventory if onhand at the close of the taxable year;

iii. Property held by the taxpayer primarily for sale to customers in the ordinarycourse of trade or business;

iv. Property used in trade or business which in subject to the allowance fordepreciation; and

v. Real property used in trade or business.156

(2) Capital assets

Properties not specifically included in the statutory definition157 constitutes capitalassets, the profits or losses on the sale or the exchange of which are treated as capital gainsor capital.158

The statutory definition of "capital assets" practically excludes from its scope, allproperty held by the taxpayer if used in connection with his trade or business.

156 Sec. 39, [A]157 Include personal property (not used in trade or business) such as movables in one’s residence, personalvehicles, appliances and furniture for personal use, jewelries etc. as well as real property (not used intrade or business) such as residential land, idle land not used in business operations and residentialhouse.158 Sec. 39, [A]

This is an enumeration by exclusion, all others not enumerated are capital assets.

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b) Types of Gains from dealings in property

(1) Ordinary income vis-à-vis Capitalgain

Ordinary gain Capital gain

Any gain from the sale or exchange ofproperty which is not a capital asset.159

Any gain from the sale or exchange ofproperty which is a capital asset.

(2) Actual gain vis-à-vis Presumedgain

Actual gain Presumed gain

Excess of the cost from a sale of asset. Presumption of law that the seller realizedgains, which is taxed at 6% of the sellingprice or fair market value, whichever ishigher.

(3) Long term capital gain vis-à-visShort term capital gain

Long term capital gain Short term capital gain

The profit realized from selling orexchanging a capital asset held for more thana specified period, usu. one (1) year.160

The profit realized from selling orexchanging a capital asset held for less than aspecified period, usu. one (1) year.161

(4) Net capital gain, Net capital loss

Net Capital gain Net capital Loss

The excess of the gains from sales orexchange of capital assets over the lossesfrom such sales or exchanges.162

The excess of the losses from sales orexchanges of capital assets over the gainsfrom such sales or exchanges.163

159 Sec. 22, [Z]160 Black’s Law Dictionary, 9th Ed.161 ibid.162 Sec. 39, [A, 2]163 Sec. 39, [A, 3]

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(5) Computation of the amount ofgain or loss

The gain from the sale or other disposition of property shall be the excess of theamount realized therefrom over the basis or adjusted basis for determining gain, and the lossshall be the excess of the basis or adjusted basis for determining loss over the amountrealized. The amount realized from the sale or other disposition of property shall be the sumof money received plus the fair market value of the property received.164

(a) Cost or basis of theproperty sold

Acquired by purchase The cost of the property

Acquired by inheritance The fair market price or value as of the dateof acquisition.

Acquired by gift The same as if it would be in the hands ofthe donor or the last preceding owner bywhom it was not acquired by gift.

Acquired for less than an adequateconsideration

The amount paid by the transferee for theproperty.165

(b) Cost or basis of theproperty exchanged incorporate readjustment

(1) Merger(2) Consolidation

A merger or consolidation has income tax consequences to the corporation which isa party to the merger or consolidation, to its stockholders, and to its security holders. To thecorporation, or to its stockholders, or to its security holders, loss is not recognized from themerger or consolidation.166

Gain will be recognized only if, on the exchange under the merger or consolidation,the taxpayer received cash or property. The gain to be recognized should not exceed the sumof money and the fair market value of the property received.

164 Sec. 40 (A)165 Id., (B)166 Id., (C)

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(3) Transfer to acontrolledcorporation167

When a taxpayer transfers property to a corporation, in consideration of stockreceived for the transfer, as a result of which transfer, the taxpayer168 gains control of thecorporation, no loss is recognized on the transfer of property.169

(c) Recognition of gain or lossin exchange of property

(1) General rule

Upon the sale or exchange or property, the entire amount of the gain or loss, as thecase may be, shall be recognized.170

(a) Where nogain or lossshall berecognized

a) Exchange solely in kind171 in legitimate mergers or consolidations.

1) A corporation which is a party to a merger or consolidation exchangesproperty solely for stock in a corporation which is a party to the merger orconsolidation;

2) A corporation which is a party to a merger or consolidation receives inexchange for property not only stock of another corporation but also money and/orother property and distributes it in pursuance of the plan of merger or consolidation.

3) A shareholder exchanges stock in a corporation which is a party to themerger or consolidation solely for the stock of another corporation, also a party tothe merger or consolidation.

167 tax-free exchanges168 alone or together with others not exceeding four [or a total of five]169 Id., (C)(2)(c), last par.

Suppose the transfer resulted in a gain to the transferor, will the gain be recognized? Gain will berecognized only if on the transfer, the taxpayer received cash or property in addition to the sharesreceived. The gain to be recognized shall not exceed the sum of money and fair market value of theproperty received.

If before the transfer to the corporation, the transferor already had control over the corporation, thegain or loss on the transfer will be recognized170 Id., (C) (1)171 exchange of property solely for stocks

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4) A security holder of a corporation which is a party to the merger orconsolidation exchanges his securities in such corporation solely for stock orsecurities in another corporation, a party to the merger or consolidation.

b) Transfer or exchange of property for stock resulting in acquisition of corporatecontrol.172

(2) Exceptions

(a) Meaning ofmerger,consolidation,controlsecurities

"Merger" or "consolidation means:

1. the ordinary merger or consolidation, or

2. the acquisition by one corporation of all or substantially all the propertiesof another corporation solely for stock.173

"Control” means ownership of stocks in a corporation possessing at least fifty-onepercent (51%) of the total voting power of all classes of stocks entitled to vote.174

(b) Transfer ofa controlledcorporation175

172 A person exchanges his property for stock or unit of participation in a corporation of which as a resultof such exchange said person, alone or together with others, not exceeding four persons, gains control ofsaid corporation

“Control” means ownership of stocks in a corporation possessing at least 51% of the total voting powerof all classes of stock entitled to vote.

The items enumerated above are also called “tax-exempt exchanges.”173 Provided:

1. It must be undertaken for a bona fide business purpose and not solely for the purpose of escapingthe burden of taxation

2. In determining whether a bona fide business purpose exists, each and every step of the transactionshall be considered and the whole transaction or series of transaction shall be treated as a single unit.

3. In determining whether the property transferred constitutes a substantial portion of the property ofthe transferor, the term 'property' shall be taken to include the cash assets of the transferor.174 Id., (C)(6)175 supra

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(6) Income tax treatment of capitalloss

(a) Capital loss limitationrule176

Capital losses are deductible only to the extent of capital gains.

(b) Net loss carry-over rule177

If any taxpayer178 sustains in any taxable year a net capital loss

1. Such net capital loss cannot be deducted from ordinary income due to the losslimitation rule;

2. Such loss could be carried over to the next taxable year as a deduction against netcapital gain in an amount not in excess of the taxable income in the year the loss wassustained; and

3. Such loss shall be treated as a loss from the sale or exchange of capital assets heldfor not more than twelve (12) months.179

(7) Dealings in real property situatedin the Philippines180

6% final tax - on the gross selling price, or the current fair market value at the timeof the sale, whichever is higher.181

(8) Dealings in shares of stock ofPhilippine corporations

(a) Shares listed and traded inthe stock exchange

Not subject to income tax but to percentage tax of ½ of 1% of the gross sellingprice.

176 applicable to both corporations and individuals177 applicable only to individuals178 other than a corporation179 Sec. 39 [D]180 The real property involved must be considered capital asset. A capital asset is property held by thetaxpayer whether or not connected in his trade or business except:

1. Stock in trade or other property of any kind which would be included in the inventory of thetaxpayer if on hand at the end of the taxable year.

2. Property primarily held for sale to customers in the ordinary course of trade or business.3. Property used in trade or business subject to depreciation.4. Real property used in trade or business.

181 Sec. 24 (D)

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(b) Shares not listed andtraded in the stockexchange

A final tax at the rates as follows:

Not over P100,000……………………………........ 5%

On any amount in excess of P100,000……………. 10%

(9) Sale of principal residence

Not liable for capital gains tax when:

a. Sold or disposed of by natural persons.

b. The proceeds of the sale are fully utilized in acquiring or constructing a newprincipal residence within 18 calendar months from the date of sale or disposition.

c. The Commissioner is duly notified by the taxpayer within 30 days from the dateof sale or disposition through a prescribed return of his intention to avail of the taxexemption.

d. A deposit is made of the 6% capital gain tax otherwise due, in cash or manager’scheck, in an interest-bearing account with an Authorized Agent Bank (AAB), under anEscrow Agreement between the taxpayer and the Bureau of Internal Revenue that the sameshall be released to the taxpayer when the proceeds of the sale shall have been utilized asintended.

e. The tax exemption can only be availed of once every 10 years.182

6) Passive Investment Income

a) Interest Income

An earning derived from depositing or lending of money, goods or credits.183

182 Sec. 24 (D)(2)Conditions for tax exemption of gain from the sale or exchange of principal residence:1. Proceeds are fully utilized in acquiring or constructing a new principal residence within18 months

from the date of sale or disposition;2. Historical cost or adjusted basis or the real property sold or disposed shall be carried over to the new

principal residence built or acquired;3. Notice to the Commissioner of Internal Revenue shall be given within thirty (30) days from the date

of sale or disposition; and4. If the proceeds of the sale were not fully utilized, the portion of the gain presumed to have been

realized from the sale or disposition shall be subject to capital gains tax183 General rule: Interest received by a taxpayer, whether usurious or not, is subject to income tax.

Except: When interest income is exempted by law from income tax.

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b) Dividend Income184

(1) Cash dividend

A dividend paid in cash and is taxable to the extent of the cash received.

(2) Stock dividend

A transfer of a portion of retained earnings to capital stock by action ofstockholders. It simply means the capitalization of retained earnings.185

(3) Property dividend

A dividend paid in property186 held by the corporation and to the extent of the FMVof the property received at the time of the distribution.

(4) Liquidating dividend

A dividend distributed to the shareholders upon dissolution of the corporation.

c) Royalty Income

Compensation or payment for the use of property and is paid to the owner of aright.

184 Dividends means any distributions made by a stock corporation to its stockholders (SHs)) out of itsearnings or profits and payable to its SHs in money or other property.185 General rule: A mere issuance of stock dividends is not subject to income tax, because it merelyrepresents capital and it does not constitute income to its recipient. Before disposition thereof, stockdividends are nothing but a representation of interest in the corporate entity.

Exceptions: When stock dividends are subject to tax;a) These shares are later redeemed for a consideration by the corporation or otherwise conveyed by

the stockholder to the extent of such contribution. Under the NIRC, if a corporation, after the distributionof a non-taxable stock dividend, proceeds to cancel or redeem its stock at such time and in such manneras to make the distribution and cancellation or redemption essentially equivalent to the distribution of atax of a taxable dividend, the amount received in redemption or cancellation of the stock shall be treatedas a taxable dividend to the extent that it represents a distribution of earnings or profits. (Sec.73 (B),NIRC). Depending on the circumstances, corporate earnings may be distributed under the guise of initialcapitalization by declaring the stock dividends previously issued and later redeem or cancel said dividendsby paying cash to the stockholder. This process amounts to distribution of taxable dividends which is justdelayed so as to escape the tax. (CIR vs. CA, 301 SCRA 152)

b) The recipient is other than the stockholder. (Bachrach vs. Seifert, 57 PHIL 483)c) A change in the stockholder’s equity results by virtue of the stock dividend issuance.

186 such as stock investment, bonds or securities

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d) Rental Income

(1) Lease of personal property(2) Lease of real property

Earnings derived from leasing of real estate as well as personal property. 187 Itincludes all other obligations assumed to be paid by the lessee to the third party in behalf ofthe lessor.

(3) Tax treatment of

(a) Leasehold improvementsby lessee

Outright Method Spread Out Method

The fair market value of the building orimprovement shall be reported as additionalrent income.

Allocate the depreciated value over theremaining term of the lease contract. Everyyear, an aliquot part of the depreciated valueshould be reported as additional rent inaddition to the regular rent income.

(b) VAT added to rental/paidby the lessee

Any additional amount paid, directly or indirectly, by the lessee in consideration forthe lease is considered rental. Therefore, taxes paid by the lessee on leased property are partof rental income of the landlord.

(c) Advance rental/long termlease

Advanced rental is a Security Deposit whichrestricts the lessor as to its use

Advance rental is prepaid rental receivedwithout restriction as to its use

The amount shall be “excluded” in thedetermination of rental income.

The entire amount is “taxable” in the year itis received.

187 Taxes paid by the tenant (lessee) to or for a lessor for a business property are additional rent andconstitute income taxable to the lessor.

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7) Annuities, Proceeds from life insurance or othertypes of insurance

Annuities Amounts payable yearly or at other regularintervals for a certain or uncertain period.They also represent as installment paymentsfor life insurance sold by insurancecompanies.188

Proceeds of life insurance Paid by reason of the death of the insured tohis estate or to any beneficiary,189 directly orin trust.

Return of insurance premium190

8) Prizes and awards

Contest prizes and awards received are generally taxable. Such payment constitutesgain derived from labor.191

188 If the part of annuity payments represent “interest” = taxable income.If the annuity is a mere return of premium = not taxable.189 Individual, partnership, or corporation, but not a transferee for a valuable consideration.

If the proceeds are retained by the insurer, the interest thereon is taxable;190 If such amounts (when added to amounts already received before the taxable year under suchcontracts) exceed the aggregate premiums or considerations paid (whether or not paid during the taxableyear), then the excess shall be included in the gross income. However, in the case of a transfer for avaluable consideration, by assignment or otherwise, of a life insurance, endowment or annuity contract,or any interest therein, only the actual value of such consideration and the amount of the premiums andother sums subsequently paid by the transferee are exempt from taxation. No loss is realized onsurrender of a life insurance policy for its surrender value.191 Exceptions:

1. Prizes and awards received in recognition of religious, charitable, scientific, educational, artistic,literary or civic achievements are exclusions from gross income if:

a. The recipient was selected without any action on his part to enter a contest or proceedings; andb. The recipient is not required to render substantial future services as a condition to receiving the

prize or award.2. Prizes and awards granted to athletes in local and int’l sports competitions and tournaments held

in the Philippines and abroad and sanctioned by their national associations shall be exempt from incometax.

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9) Pensions, retirement benefit, or separation pay

Pension refers to allowance paid regularly to a person on his retirement or to hisdependents on his death, in consideration of past services, meritorious work, age, loss orinjury.

Retirement benefits received under RA 7641 and those received by officials andemployees of private firms in accordance with a reasonable private benefit plan maintainedby the employer.192

Any amount received by an employee or by his heirs from the employer as aconsequence of separation of such official or employee from the service of the employerbecause of death, sickness, other physical disability or for any cause beyond the control ofthe employee.193

The social security benefits, retirement gratuities, pensions and other similar benefitsreceived by resident or nonresident citizens of the Philippines or aliens who come to residepermanently in the Philippines from foreign government agencies and other institutions.

Payments of benefits due or to become due to any person residing in the Philippinesunder the laws of the United States administered by the United States VeteransAdministration

Benefits received from or enjoyed under the Social Security System.

Benefits received from the GSIS, including retirement gratuity received bygovernment officials and employees.

10) Income from any source whatever

All income not expressly excluded or exempted from the class of taxable income,irrespective of the voluntary or involuntary action of the taxpayer in producing theincome.194

192 Requisites:1. The retiring employee has been in the service of the same employer for at least 10 years.2. The retiring employee is not less than 50 years of age at the time of his retirement3. The benefits shall be availed of by an employee only once.4. That there be a reasonable private benefit plan as defined below.

193 i.e., the separation of the employee must be involuntary and not initiated by him194 Gutierrez vs. Collector of Internal Revenue, CTA case no. 65, August 31, 1965.

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a) Forgiveness of indebtedness

Dependent upon the circumstances, may amount to:

1. income;195

2. a gift;196 or

3. a capital transaction.197

b) Recovery of accounts previously writtenoff

To be included as part of the taxpayer’s gross income in the year of such recovery tothe extent of the income tax benefit of said deduction.198 There is an income tax benefitwhen the deduction of the bad debt in the prior year resulted in lesser income and hence, taxsavings for the company.199

c) Receipt of tax refunds or credit200

As a general rule, a refund of a tax related to the business or the practice ofprofession is taxable income in the year of receipt to the extent of the income tax benefit ofsaid deduction.201

d) Income from any source whatever202

195 If, for example, an individual performs services for a creditor who, in consideration thereof cancels thedebt, income to that amount is realized by the debtor as compensation for his service.196 If, however, a creditor merely desires to benefit a debtor and without any consideration thereofcancels the debt, the amount of the debt is a gift from the creditor to the debtor and need not beincluded in the latter’s gross income.197 If a corporation to which a stockholder is indebted forgives the debt, the transaction has the effect ofpayment of dividends (Sec. 50, Rev. Reg. 2)198 Tax Benefit Rule199 Sec. 4, RR 5-99200 Tax credit takes place upon the issuance of a tax certificate or tax credit memo, which can be appliedagainst any sum that may be due and collected from the taxpayer.201 i.e., the tax benefit rule applies

However, the following tax refunds are not to be included in the computation of gross income:1. Philippine income tax, except the fringe benefit tax2. 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 taxes4. Taxes assessed against local benefits of a kind tending to increase the value of the property assessed

(Special assessments)5.ValueAddedTax6. Fines and penalties due to late payment of tax7.Final taxes8. Capital Gains Tax

202 supra

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f. Source rules in determining income from within andwithout203

Income from sources within the Philippines:

1) Interests

Interests derived from sources within the Philippines, and interests on bonds,notes or other interest-bearing obligation of residents, corporate or otherwise.

2) Dividends

The amount received as dividends:

(a) from a domestic corporation; and

(b) from a foreign corporation, unless less than fifty percent (50%) of thegross income of such foreign corporation for the three-year period ending with theclose of its taxable year preceding the declaration of such dividends or for such partof such period as the corporation has been in existence was derived from sourceswithin the Philippines as determined under the provisions of this Section; but only inan amount which bears the same ration to such dividends as the gross income of thecorporation for such period derived from sources within the Philippines bears to itsgross income from all sources.

3) Services

Compensation for labor or personal services performed in the Philippines.

4) Rentals

Rentals and royalties from property located in the Philippines or from anyinterest in such property, including rentals or royalties for -

(a) The use of or the right or privilege to use in the Philippines any copyright,patent, design or model, plan, secret formula or process, goodwill, trademark, tradebrand or other like property or right;

(b) The use of, or the right to use in the Philippines any industrial,commercial or scientific equipment;

(c) The supply of scientific, technical, industrial or commercial knowledge orinformation;

203 Sec. 42

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(d) The supply of any assistance that is ancillary and subsidiary to, and isfurnished as a means of enabling the application or enjoyment of, any such propertyor right as is mentioned in paragraph (a), any such equipment as is mentioned inparagraph (b) or any such knowledge or information as is mentioned in paragraph(c);

(e) The supply of services by a non-resident person or his employee inconnection with the use of property or rights belonging to, or the installation oroperation of any brand, machinery or other apparatus purchased from such non-resident person;

(f) Technical advice, assistance or services rendered in connection withtechnical management or administration of any scientific, industrial or commercialundertaking, venture, project or scheme; and

(g) The use of or the right to use:

(i) Motion picture films;

(ii) Films or video tapes for use in connection with television; and

(iii) Tapes for use in connection with radio broadcasting.

5) Royalties204

6) Sale of real property

Gains, profits and income from the sale of real property located in thePhilippines.

7) Sale of personal property

Gains, profits and income from the sale of personal property

Items of gross income treated as income from sources without thePhilippines:

(1) Interests other than those derived from sources within the Philippines

(2) Dividends other than those derived from sources within the Philippines

(3) Compensation for labor or personal services performed without thePhilippines;

(4) Rentals or royalties from property located without the Philippines orfrom any interest in such property including rentals or royalties for the use of or for

204 See 4) Rentals, supra

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the privilege of using without the Philippines, patents, copyrights, secret processesand formulas, goodwill, trademarks, trade brands, franchises and other likeproperties; and

(5) Gains, profits and income from the sale of real property located withoutthe Philippines.

8) Shares of stock of domestic corporation

Gain from the sale of shares of stock in a domestic corporation shall be treated asderived entirely form sources within the Philippines regardless of where the said shares aresold.

g. Situs of Income Taxation205

h. Exclusions from Gross Income206

Income received or earned but is not taxable as income because it is exempted bylaw or by treaty. Receipts which are not in fact income are also excluded from GrossIncome.207

1) Rationale for the exclusions

They

a. Represent return of capital;

b. Are not income, gain or profit;

c. Are subject to another kind of internal revenue tax;

d. Are income, gain or profit that are expressly exempt from income tax.208

2) Taxpayers who may avail of the exclusions

All kinds of taxpayers - individuals, estates, trusts and corporations, whether citizens,aliens, whether residents or non-residents.

205 See Inherent Limitations, Territorial, supra206 See Sec. 32 (B)207 Exclusions are in the nature of tax exemptions, thus, the claimant must establish them convincingly.208 under the Constitution, Tax treaty, Tax Code, or general or a special law.

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3) Exclusions distinguished from deductions and taxcredit

Exclusions Deductions Tax credit

Income received or earnedbut is not taxable because bylaw or treaty. Such tax – freeincome is not to be includedin the income tax returnunless information regardingit is specifically called for.209

The items or amountsauthorized by law to besubtracted from thepertinent items of grossincome to arrive at taxableincome.210

An amount subtracted froman individual’s or entity’s taxliability to arrive at the totaltax liability.211

4) Under the Constitution

a) Income derived by the government or itspolitical subdivisions from the exercise ofany essential governmental function

From:

1) any public utility; and

2) the exercise of any essential governmental function.212

5) Under the Tax Code

a) Proceeds of life insurance policies

Paid to the heirs or beneficiaries upon the death of the insured, whether in a singlesum or otherwise.213

b) Return of premium paid

Paid by the insured under life insurance, endowment, or annuity contracts, eitherduring the term or at the maturity of the term of the contract or upon surrender.214

209 Sec. 61, Rev. Regs. No. 2210 Secs. 34 and 35, NIRC211 M.E. Holding Corp. vs. Commissioner of Internal Revenue, CTA Case No. 5314, prom. August 17, 1998citing Black’s Law Dictionary, 6th Ed.212 Thus, income from sources other than those mentioned is subject to income tax.213 Reason for exclusion: The contract of insurance is a contract of indemnity, hence, the proceeds thereofare considered indemnity rather than a gain or profits.

Instances when proceeds from insurance are taxable:a) Where proceeds are held by the insurer under an agreement to pay interest. The interest is

included in determination of gross income.b) Where the transfer is for valuable consideration.

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c) Amounts received under life insurance,endowment or annuity contracts

If the insured dies, and the beneficiary receives the life insurance proceeds, these arenot taxable income because they are excluded from gross income.

If the insured does not die and survives the designated period, the amount pertainingto the premiums he paid are excluded from gross income, but the excess shall be consideredpart of his gross income.

d) Value of property acquired by gift, bequest,devise or descent

The income from such property, as well as gift, bequest, devise, or descent ofincome from property, in cases of transfers of divided interest, shall be included in grossincome.

The estate of the testator or the decedent is subject to estate tax, while the heirs orbeneficiary/ies are not required to pay donee’s tax as the same was already abolished. Thevalue of the bequest and/or the devise received by the heirs or beneficiary/ies is notincluded in the computation of their gross income since gifts, bequest and devises areexcluded from gross income.215

e) Amount received through accident orhealth insurance

As compensation for personal injuries or sickness, plus the amounts of any damagesreceived, whether by suit or agreement, on the account of such injuries or sickness.216

f) Income exempt under tax treaty

Income of any kind, to the extent required by any treaty obligation binding upon theGovernment of the Philippines.217

214 Reason for the exclusion: The return of premium is a mere return of capital. However, where theincluded in the gross amount received exceed the aggregate premiums paid, the excess shall be income215 Sec. 32[B], NIRC216 Example of damages recovered from personal injuries: Moral damages for personal injuries.

If the award of damages is to compensate loss of property or an award of damages to compensate lossof income / profits, such is subject to tax.217 Sec. 32[B](5), id.

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g) Retirement benefits, pensions, gratuities,etc.

a) Retirements benefits received under RA 7641 and those received by officials andemployees of private firms in accordance with reasonable private benefit plan.218

b) Any amount received by an official or employees or by his heirs from theemployer as a “consequence of separation from service due to death, sickness or otherphysical disability beyond the control of the said official or employer.

c) Terminal leave and other social security benefits.219

d) Benefits received under the US veterans Administration.

e) Benefits received from SSS

f) Benefits received from GSIS.

h) Winnings, prizes and awards, includingthose in sports competition

1) Prizes and Awards - to be excluded, the following conditions must concur:

a. Prizes and award made primarily in recognition of religious, charitable,scientific, educational, artistic, literary, or civic achievement.

b. The recipient was selected without any action on his part to enter thecontest or proceeding.

c. The recipient is not required to render substantial future services as acondition in receiving the award.

2) Prizes and Awards in Sports Competition –

All prizes and award granted to athletes in local and international sportscompetitions and tournaments whether held in the Phils. or abroad andsanctioned by sports associations.

218 Requisites:1. The retiring official or employees has been in service of the same employer for at least ten years.2. Is not less than 50 yrs. of age at the time of his retirement and3. Available to official or employee only once.

A “reasonable private benefit plan” means a pension; gratuity, stock bonus or profit sharing planmaintained by an employer for the benefit of some or all of his employees –

a. wherein contributions are made by such employer or employees, or both, for the purpose ofdistributing to such employer the earnings and principal of the fund thus accumulated; and

b. wherein said plan provides that at no time shall any part of the principal or income of the fund beused for, or be diverted to, any purpose other than for the exclusive benefit of said employee219 The terminal leave pay of government employees whose employment is co-terminus is exempt since itfalls within the meaning of the phrase “for any cause beyond the control of the said official or employees”(BIR Ruling 143-98)

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6) Under a Tax Treaty

To the extent required by any treaty obligation binding upon the Philippinegovernment.

7) Under Special Laws

a) Prizes received by winners in charity horse race sweepstakes from PCSO.

b) Back pay benefits

c) Income of cooperative marketing association

d) Salaries and stipends in dollars received by non - Filipino citizens on the technicalstaff of International Rice Research Institutes (IRRI)

e) Supplemental allowances per diem, benefits received by officer or employees ofthe Foreign Service.

f) Income from bonds and securities for sale in the international market.

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i. Deductions from Gross Income220

1) General rules

a) Deductions must be paid or incurred inconnection with the taxpayer’s trade,business or profession

It must be directly connected with trade or business or profession of the taxpayer.

b) Deductions must be supported by adequatereceipts or invoices221

The claimed deduction must be evidenced by official receipts or other adequaterecords.222

2) Return of capital223

a) Sale of inventory of goods bymanufacturers and dealers of properties

b) Sale of stock in trade by a real estate dealerand dealer in securities

c) Sale of services

220 These are items or amounts authorized by the law to be subtracted from the pertinent items of thegross income to arrive at the taxable income.

Basic Principles Governing Tax Deductions:He who claims it must point to the specific provision of the statute authorizing it, and he must be

able to prove that he is entitled to it.If the exemption is not expressly stated in the law, the taxpayer must at least be within the purview of

the exemption by clear legislative intent. However, if there is an express mention in the law or if thetaxpayer falls within the purview of the exemption by clear legislative intent, the rule on strictconstruction against the taxpayer-claimant will not apply.

Unlike gross income, there is no catch-all provision for deductions. Deductions must comply with thesubstantiation requirement.221 except standard deduction222 The evidence must establish the following;

a) the amount of expenses being deductedb) the direct relation of such to the development, management, operation, and/or conduct of the

trade, business or profession of the taxpayer.223 cost of sales or services

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3) Itemized deductions224

a) Expenses225

(1) Requisites for deductibility

1. It must be ordinary and necessary.

2. It must be paid or incurred during the taxable year.

3. It must be paid or incurred in carrying on or which are directly attributable to thedevelopment, management, operation and/or conduct of the trade, business or exercise ofa profession.

4. The amount must be reasonable.

5. It must be substantiated with sufficient evidence, such as official receipts or otheradequate records, showing:

i. the amount of the expense being deducted, and

ii. the direct connection or relation of the expense being deducted to thedevelopment, management, operation and/or conduct of the trade,business or profession of the taxpayer

6. It is not contrary to law, public policy or morals.

7. The tax required to be withheld on the amount paid or payable must have beenpaid to the BIR by the taxpayer, who is constituted as a withholding agent of thegovernment.226

224 The following can claim itemized deductions:a. Corporations, whether domestic or (resident) foreignb. General Professional Partnershipsc. Individuals engaged in trade, profession or business (citizen, resident alien, non-resident alien

doing business in the Philippines)d. Estates and trusts engaged in trade or businesse. Proprietary educational institutions and hospitals (non-profit)f. Government-owned or controlled corporationsOnly individuals, except non-resident aliens, can elect between itemized deductions and optional

standard deduction.225 Sec. 34(A)

Only deductions allowable are ordinary and necessary trade, business or professional expenses226 For instance, withholding tax on compensation income paid to employees, fringe benefit tax onfringe benefits given to managerial and supervisory employees, etc. ( Sec. 2.58.5, RR 2-98 as amended bySec. 6, RR 14-2002)

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(a) Nature: Ordinary andnecessary227

Ordinary Necessary

When it connotes a payment, which isnormal in relation to the business of thetaxpayer and the surrounding circumstances.

Where the expenditure is appropriate orhelpful in the development of taxpayer’sbusiness or that the same is proper for thepurpose of realizing a profit or minimizing aloss.

(b) Paid and incurred duringtaxable year

Paid Incurred

The payment is on cash receipt basis,expenses are deductible in the year they areincurred.

The payment thereof is on accrual basis,expenses are deductible in the year they areincurred, whether paid or not.

(2) Salaries, wages and other forms ofcompensation for personalservices actually rendered,including the grossed-up monetaryvalue of the fringe benefitsubjected to fringe benefit taxwhich tax should have been paid228

(3) Travel/Transportation expenses229

227 The two conditions must concur. A court may decide on when an expense is, or is not, ordinary, butas much as possible, it will refuse to substitute its judgment for that of the taxpayer on the necessity of anexpense.228 Sec. 34 (A)(1)(a)(i)229 For travel expenses, here and abroad, while away from home, in the pursuit of trade, business orprofession.

Include meals and lodging, here and/or abroad.While away from home means away from principal place of businessIf the trip is undertaken for purposes other than business or exercise of profession, the transportation

expenses are personal expenses and the meals and lodging are living expenses and are not deductible.Transportation expenses of an employee from his residence to his office and back are not deductible.

They are personal expenses. However, transportation expenses from his office to his customer’s place ofbusiness and back are deductible. They are business expenses.

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(4) Cost of materials

Materials and supplies are deductible only to the amount actually consumed or usedin the operation during the taxable year.

(5) Rentals and/or other payments foruse or possession of property230

(6) Repairs and maintenance231

(7)Expenses under lease agreements232

(8) Expenses for professionals

(9) Entertainment expenses233

(10) Political campaign expenses

(11) Training expenses

b) Interest234

(1) Requisites for deductibility

a. There must be a valid and existing indebtedness

b. The indebtedness must be that of the taxpayer;

c. The interest must be legally due and stipulated in writing;

d. The interest expense must be paid or incurred during the taxable year;

e. The indebtedness must be connected with the taxpayer's trade, business orexercise of profession;

f. The interest payment arrangement must not be between related taxpayers;235

230 Required as a condition for the continued use or possession, for purposes of the trade, business orprofession, of property to which the taxpayer has not taken or is not taking title or in which he has noequity other than that of a lessee, user or possessor.231 Extraordinary repairs - those in the nature of replacements, alteration, and expansion to the extentthat they arrest deterioration and prolong the life of the property.

Ordinary repairs - those made to keep the property ordinarily efficient working condition and do notmaterially add to the value of the property232 See 5) Rentals, etc., supra233 Include “representation expenses and/or depreciation or rental expense relating to entertainmentfacilities.” (1st par., Sec. 2, Rev. Regs. 110-2002)234 The amount of interest paid or incurred within a taxable year on indebtedness in connection with thetaxpayer's profession, trade or business shall be allowed as deduction from gross income. (Sec. 34,B (1))235 infra

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g. The interest is not expressly disallowed by law to be deducted from the taxpayer’sgross income;236 and

h. The amount of interest deducted from gross income does not exceed the limit setforth in the law.237

(2) Non-deductible interest expense

a. Interest on preferred stock, which in reality is dividend

b. Interest on unpaid salaries and bonuses

c. Interest calculated for cost keeping

d. Interest paid where parties provide no stipulation in writing to pay interest

e. If the indebtedness is incurred to finance petroleum exploration

f. Interest paid on indebtedness between related taxpayers238

g. Interest on indebtedness paid in advance through discount or otherwise and thetaxpayer reports income on cash basis.239

(3) Interest subject to special rules

(a) Interest paid in advance

If the indebtedness is payable in periodic amortizations, the amount of interestwhich corresponds to the amount of the principal amortized or paid during the year shall beallowed as deduction in such taxable year.

236 e.g., interest on indebtedness to finance petroleum operations237 In other words, the taxpayer’s otherwise allowable deduction for interest expense shall be reduced byforty-two percent (42%) of the interest income subjected to final tax beginning November 1, 2005 underR.A. 9337, and that effective January 1, 2009, the percentage shall be thirty-three percent (33%)(Sec.34(B)(1)238 1. Members of the same family, brothers and sisters, whether in full or half blood, spouse, ancestorsand lineal descendants

2. Stockholders and a corporation, when he holds more than 50% in value of its outstanding capitalstock, except in case of distribution in liquidation

3. Corporation and another corporation, with interlocking stockholders4. Grantor and fiduciary in a trust5. Fiduciary of a trust and fiduciary in another trust, if the same person is a grantor with respect to

each trust6. Fiduciary of a trust and beneficiary of such trust

239 Interest is allowed as a deduction in the year the indebtedness is paid, not when the interest was paidin advance.

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(b) Interest periodicallyamortized240

(c) Interest expense incurredto acquire property for useintrade/business/profession

At the option of the taxpayer, may be allowed as a deduction or treated as a capitalexpenditure.241

c) Taxes242

(1) Requisites for deductibility

1. It must be paid or incurred within the taxable year.

2. It must be paid or incurred in connection with the taxpayer’s trade,profession or business.243

3. It must be imposed directly on the taxpayer.

4. It must not be specifically excluded by law from being deducted from thetaxpayer’s gross income.

240 See a), above241 Sec. 34 (B)(3)242 The word ‘taxes’ means taxes proper and no deduction should be allowed for amountsrepresenting interest, surcharge, or penalties incident to delinquency. (Sec. 80, RR-2)243 Examples:

1. Import duties2. Business taxes3. Occupation taxes4. Privilege and license taxes5. Excise taxes6. Documentary stamp taxes7. Automobile registration fees8. Real property taxes

Limitation: In the case of a nonresident alien individual engaged in trade or business (NRAETB)and a resident foreign corporation (RFC), the deductions for taxes shall be allowed only if and to theextent that they are connected with income from sources within the Philippines.

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(2) Non-deductible taxes

Taxes not allowed as deduction from gross income to arrive at taxable income:

a. Income tax provided under the NIRC

b. Income taxes imposed by authority of any foreign country244

(3)Treatment/ofsurcharges/interests/fines/fordelinquency245

(4) Treatment of special assessment246

Deductible as taxes where these are made for the purpose of:

1. Maintenance or repair of local benefits, if the payment of such assessment isordinary and necessary in the conduct of trade, business or profession

2. Constructing local benefits tending to increase the value of the property assessed,the payments are in the nature of capital expenditures.247

244 Income tax imposed by a foreign country are deductible only if:a) the taxpayer is qualified to avail of tax credit;b) He does not signify in its return his desire to avail of the same.The right to deduct income taxes paid to a foreign government is given only as an “alternative or

substitute “to his right to claim a tax credit for such foreign income taxes.Limitation on deduction:a) non – resident alien engaged in trade or business in the Phils.b) resident foreign corporation --- the deductions for taxes shall be allowed only if and to the extent

that they are connected with income from “sources within” the Phils.245 See (F)(3)(a)(2), under Tax Remedies under the NIRC, infra246 An enforced proportional contribution from owners of lands, especially or peculiarly benefited bypublic improvements.247 The burden is on the taxpayer to show the allocation of the amounts assessed to the differentpurposes.

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(5) Tax credit248 vis-à-vis deduction

Tax Credit Tax deduction

Deducted from Phil. income tax Deducted from the gross income

All taxes are allowed to be deducted with theexception of the taxes expressly excluded

Only foreign income taxes may be claimed ascredits

d) Losses

Losses actually sustained during the taxable year and not compensated for byinsurance or other forms of indemnity.249

(1) Requisites for deductibility250

a) The loss must be that of the taxpayer.251

b) There must be an actual loss suffered in a closed and completed transaction.252

c) The loss must be connected with the taxpayer’s trade, business or profession.

d) The loss must not be compensated for by insurance or otherwise.

e) The loss must be actually sustained and charge – off during the taxable year.253

248 Refers to the taxpayer’s right to deduct from the income tax due, the amount of tax he has paid toforeign country.

Persons entitled to tax credit1 .Resident Citizen of the Philippines2. Domestic Corp. except General Professional Partnership3. Members of the GPP4. Beneficiaries of Estates and Trusts.

Persons not entitled to Tax credit1. Non Resident Citizen2. Aliens, whether residents or non – residents3. Foreign Corporation, whether residents or non - residents

249 Sec. 34 D [1]250 Despite concurrence of requisites, when is loss nonetheless not deductible?

In computing net income, no deductions shall in any case be allowed in respect of losses fromsales or exchanges of property directly or indirectly [between related taxpayers (Sec. 36 (B)251 The loss is personal to the taxpayer and is not transferable or usable by another. The loss of apredecessor partnership is not deductible by a successor corporation. The loss of the parent companymay not be deducted by its subsidiary.252 “Closed transaction “means that taxable year when the amount of loss was finally ascertained.253 The deduction shall be in full or not at all.

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f) In the case of casualty loss, declaration of loss254 must be filed within 45days from the occurrence of the casualty loss.255

g) The loss must not be claimed as deduction for estate tax purposes in the estate taxreturn.

(2) Other types of losses

(a) Capital losses

Losses from sale or exchange of capital assets. Deductible to the extent of capitalgains only.

(b) Securities becomingworthless256

The loss resulting therefrom to the taxpayer257 is not considered as a bad debt but asa capital loss.

(c) Losses on wash sales ofstocks or securities

Not deductible when:

1) A taxpayer who is not a dealer of stocks in trade has disposed shares and

2) Within the period of 60(sixty) days beginning 30 days before the date of such saleand ending 30 days after such date, the taxpayer has acquired substantially identical stocks orsecurities.258

(d) Wagering losses

Deductible only to the extent of the gains from such wagering transaction. If thereis no gain from the wagering transaction, the loss therefrom cannot be deducted from grossincome.259

However, if the loss is compensated by insurance or otherwise, the loss is postponed to a subsequentyear in which it appears that no compensation at all can be had, or there is a remaining net loss (orthere is no full compensation). Deduction will be denied if there is a measurable right to compensation forthe loss, with ultimate collection reasonably clear. So where there is reasonable ground forreimbursement, the taxpayer must seek his redress and may not secure a loss deduction until heestablishes that no recovery may be had. In other words, the taxpayer must first exhaust his remediesto recover or reduce his loss. (Plaridel Surety and Insurance Co. v. Collector, 21 SCRA 1187)254 Sworn Declaration of Loss255 RR 12-77256 Securities which are capital assets ascertained to be worthless and charged-off within the taxable year.257 other than a bank or trust company incorporated under the laws of the Phil.258 However, if losses from wash sales are claimed by a “dealer” in securities in the ordinary course ofbusiness, such losses are deductible.259 Wagering transactions - those in which the outcome is uncertain or those that involve games ofchance.

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(e) NOLCO260

It is the excess of allowable deductions over gross income of business for any taxableyear which had not been previously offset as deduction from gross income.

It shall be carried over as deduction from gross income for the next 3 consecutiveyears following the year of such loss. Provided that:

1. The taxpayer was not exempt from income tax in the year of such net operatingloss; and

2. There has been no substantial change in the ownership of the business orenterprise.

e) Bad debts

Debts due to the taxpayer when actually ascertained to be worthless261 and charged-off within the taxable year.262

They refer to those debts resulting from the worthlessness or uncollectibility, inwhole or in part, of amounts due to the taxpayer by others, arising from money lent or fromuncollectible amounts of income from goods sold or services rendered.263

(1) Requisites for deductibility

1) There must be a valid and subsisting debt.264

2) The same must be connected with the taxpayer’s trade, business or practice ofprofession.

3) The same must not be sustained in a transaction entered into between relatedparties.265

260 Net Operating Loss Carry – over261 In general, a debt is not worthless simply because it is of doubtful value or difficult to collect.Worthlessness is not determined by an inflexible formula or slide rule calculation but upon the exercise ofsound business judgment. The determination of worthlessness in a given case must depend upon theparticular facts and the circumstances of the case. A taxpayer may not postpone a bad debt deduction onthe basis of a mere hope of ultimate collection or because of a continuance of attempts to collect noteswhich have long become overdue, and where there is no showing that the surrounding circumstancesdiffer from those relating to other notes which were charged off in a prior year. While a mere hopeprobably will not justify postponement of the deduction, a reasonable possibility of recovery will permitthe account to be carried along notwithstanding that the probabilities are that the debt may not becollected at all.262 Sec.34 [E1]263 Sec.2 [a], Rev. Regs. No.5-99264 A valid and subsisting debt is one the collection of which may be enforced in a court of law. A debtwhich had prescribed is no longer valid and subsisting.265 infra

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4) The same must be actually charged-off the books of accounts of the taxpayer asof the end of the taxable year.266

5) The same must be actually ascertained to be worthless and uncollectible as of theend of the taxable year.267

f) Depreciation

The gradual diminution in the useful value of tangible property used in trade orbusiness resulting from exhaustion, wear and tear, and normal obsolescence.

The term is also applied to amortization of value of intangible assets the use ofwhich in trade or business is definitely limited in duration.268

(1) Requisites for deductibility

a) The allowance for depreciation must be reasonable269

b) It must be for property arising out of its use or employment in the business ortrade, or out of its not being used temporarily during the year270

c) It must be charged-off during the taxable year;271

d) A statement on the allowance must be attached to the return.

e) The property must have a limited useful life.

(2) Methods of computingdepreciation allowance

(a) Straight-line method272

Spreads the total depreciation over the useful life of the asset and generally results inan equal depreciation per unit of time regardless of the use to which the properties are put.

266 A partial writing-off of a bad debt is not allowed; it must be charged-off in full or not at all (FernandezHermanos, Inc. vs. Commissioner, 29 SCRA 552; Philippine Refining Co. vs. Court of Appeals, 70 SCAD 544,256 SCRA 667).267 In general, a debt is not worthless simply because it is of doubtful value or difficult to collect.Worthlessness is determined upon the exercise of a sound business judgment. The determination ofworthlessness in a given case must depend upon the particular facts and circumstances of the case.268 Basilan Estates, Inc. vs. Comm., 21 SCRA 17269 Bacolod-Murcia Milling Co. Inc. vs. Comm., CTA Case No. 1402, Oct. 31, 1969270 Connel Bros. Co. vs. Collector, CTA Cases No. 411 & 610, April 30, 1966).271 The deduction must be made in the year in which the wear & tear occurs. Depreciation may not beaccumulated.272 Fixed Percentage Method

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(b) Declining-balance method

Uses a rate to the declining book value of the asset. Depreciation is largest in amountthe first year and declines in the years thereafter.

(c)Sum-of-the-years-digitmethod

Requires the application of a changing fraction to the cost basis of the property,reduced by the estimated residual salvage value.

g) Charitable and other contributions273

(1) Requisites for deductibility

a) Must actually be paid or made to the Phil. Government or any of its agencies orpolitical subdivision or to any domestic corporations or associations.

b) Must be made within the taxable year;

c) Must not exceed 10% of the individual’s taxable income and 5% of thecorporation’s taxable income before deducting the contribution; and

d) Must be evidenced by adequate records or receipts.274

(2) Amount that may be deducted

Subject to limit275 Deductible in full

a) Donations to the Philippine governmentor any of its agencies or any politicalsubdivision thereof exclusively for publicpurposes;

b) Donations to accredited domesticcorporations or associations organized andoperated exclusively for:

1. Religions;

2. Charitable;

3. Scientific;

a) Donations to the government of thePhilippines or to any of its agencies orpolitical subdivisions, including fully-ownedgovernment corporations exclusively tofinance, to provide for, or to be used inundertaking priority activities in:

1. Education;

2. Health;

3. Youth and sports development;

4. Human settlements;

273 Kinds of contributions allowed as deduction:1) Ordinary or contributions with limit or subject to limitation2) Special or contributions deductible in full

274 Sec. 34 (H)275 5%/10%

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4. Youth and sports development;

5. Cultural; or

6. Educational purposes; or for the

7. Rehabilitations of veterans; and

c) Donations to social welfare institutions orto non-government organizations inaccordance with rules and regulationspromulgated by the Secretary of Finance,provided no part of the net income of whichinures to the benefit of any privatestockholders or individual.276

5. Science and culture; and

6. Economic development.

b) Donations to foreign institutions orinternational organizations in pursuance orcompliance with agreements, treaties, orcommitments entered into by thegovernment of the and the foreign laws orinternational organizations or in pursuanceof special laws, and

c) Donations to certain accredited non-government organization.277

h) Contributions to pension trusts

(1) Requisites for deductibility

a) The employer must have established a pension or retirement plan to provide forthe payment of reasonable pensions to its employees;

b) The pension plan is reasonable and actuarially sound.278

c) It must be funded by the employer;

a) The amount contributed must no longer be subject to its control or disposition;and

b) The payment has not therefore been allowed as a deduction.

4) Optional standard deduction

a) Individuals, except non-resident aliens

A maximum of forty percent (40%) of gross sales or gross receipts during the taxableyear.

The “cost of sales” or the “cost of services” is not allowed to be deducted forpurposes of determining the basis of the OSD inasmuch as the law279 is specific as to the

276 Sec. 34 (H)(1)277 Ibid.,( 2)278 Sec. 118, Regs.279 R.A. 9504, Minimum Wage Earner Law

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basis thereof which states that for individuals, the basis of the 40% OSD shall be the “grosssales” or “gross receipts” and not “gross income.”280

b) Corporations, except non-resident foreigncorporations

Not exceeding forty percent (40%) of their gross income.

5) Personal and additional exemption281

a) Basic personal exemptions

Fifty thousand pesos (P50,000) – each individual taxpayer.282

b) Additional exemptions for taxpayer withdependents

Twenty-five thousand pesos (P25,000) - each dependent283 not exceeding four (4).284

c) Status-at-the-end-of-the-year rule

1. Taxpayer marries during taxable year - may claim the corresponding BPE in fullfor such year.

2. Taxpayer should have additional dependent(s) during taxable year - may claimcorresponding AE in full for such year.

2. Taxpayer dies during taxable year - his estate may still claim BPE and AE forhimself and his dependent(s) as if he died at the close of such year.

4. If during the taxable year

a. spouse dies, or

b. any of the dependents dies or marries, turns 21 years old or becomesgainfully employed, taxpayer may still claim same exemptions as if the spouse or any

280 Rev. Reg. No. 16-2008281 R. A. 9504282 Sec. 4, id.

In the case of married individual where only one of the spouses is deriving gross income, only suchspouse shall be allowed the personal exemption.283 A legitimate, illegitimate or legally adopted child chiefly dependent upon and living with the taxpayer ifsuch dependent is not more than twenty-one (21) years of age, unmarried and not gainfully employed orif such dependent, regardless of age, is incapable of self-support because of mental or physical defect.284 In the case of legally separated spouses, additional exemptions may be claimed only by the spousewho has custody of the child or children:

The total amount of additional exemptions that may be claimed by both shall not exceed the maximumadditional exemptions herein allowed. (ibid)

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of the dependents died, or married, turned 21 years old or became gainfullyemployed at the close of such year.285

6) Items not deductible

a) General rules

These items are not related to the trade, business or profession of the taxpayer.

b) Personal, living or family expenses

These are personal expenses and not related to the conduct of trade or business.

c) Amount paid for new buildings or forpermanent improvements

These are capital expenditures added to the cost of the property and the periodicdepreciation is the amount that is considered as deductible expense.286

d) Amount expended in restoring property287

They are capital expenditures or those expenditures that result in obtaining benefitsof a permanent nature.288

e) Premiums paid on life insurance policycovering life or any other officer oremployee financially interested

When the taxpayer is directly or indirectly a beneficiary under such policy.289

285 Sec. 35 (C)286 Does not apply to intangible drilling and development cost incurred in petroleum operations.287 major repairs288 such as lands, buildings and machineries289 Sec. 36 [A]

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f) Interest expense, bad debts, and losses fromsales of property between related parties

Interest Expense Bad Debts Losses from sales ofproperty between relatedparties

In general, the amount ofinterest paid or incurredwithin a taxable year onindebtedness in connectionwith the taxpayer'sprofession, trade orbusiness.290

In general, debts due to thetaxpayer actually ascertainedto be worthless and chargedoff within the taxable yearexcept those not connectedwith profession, trade orbusiness and those sustainedin a transaction entered intobetween parties.291 Recoveryof bad debts previouslyallowed as deduction in thepreceding years shall beincluded as part of the grossincome in the year ofrecovery to the extent of theincome tax benefit of saiddeduction.292

(1) Between members of afamily;293 or(2) Except in the case ofdistributions in liquidation,between an individual andcorporation more than fiftypercent (50%) in value of theoutstanding stock of which isowned, directly or indirectly,by or for such individual; or

(3) Except in the case ofdistributions in liquidation,between two corporationsmore than fifty percent(50%) in value of theoutstanding stock of which isowned, directly or indirectly,by or for the same individualif either one of suchcorporations, with respect tothe taxable year of thecorporation preceding thedate of the sale of exchangewas under the law applicableto such taxable year, apersonal holding company ora foreign personal holdingcompany;

(4) Between the grantor anda fiduciary of any trust; or

(5) Between the fiduciary ofand the fiduciary of a trust

290 Sec. 34 (B)291 supra292 Id., (E)293 The family of an individual shall include only his brothers and sisters (whether by the whole or half-blood), spouse, ancestors, and lineal descendants;

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and the fiduciary of anothertrust if the same person is agrantor with respect to eachtrust; or

(6) Between a fiduciary of atrust and beneficiary of suchtrust.294

g) Losses from sales or exchange or property

In general, losses actually sustained during the taxable year and not compensated forby insurance or other forms of indemnity:

1. If incurred in trade, profession or business;

2. Of property connected with the trade, business or profession, if the loss arisesfrom fires, storms, shipwreck, or other casualties, or from robbery, theft or embezzlement.295

h) Non-deductible interest296

i) Non –deductible taxes297

j) Non-deductible losses

1. Losses from illegal transactions

2. Losses from sales or exchanges of property between related taxpayers298 – but thegains are taxable

k) Losses from wash sales of stock orsecurities299

294 Sec. 36 (B)295 Sec. 34 (D)(1)296 supra297 Ibid.298 ibid299 Ibid.

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j. Exempt Corporations

1. General Professional Partnerships300

2. Joint Venture under a service contract with the government301

3. Government-owned or controlled corporations:

i. Government Service Insurance System (GSIS),

ii. the Social Security System (SSS),

iii. the Philippine Health Insurance Corporation (PHIC),

iv. the Philippine Charity Sweepstakes Office (PCSO) and

v. the Philippine Amusement and Gaming Corporation (PAGCOR)

Other exempt corporations:

The following organizations shall not be taxed in respect to income received by themas such:

(A) Labor, agricultural or horticultural organization not organized principally forprofit;

(B) Mutual savings bank not having a capital stock represented by shares, andcooperative bank without capital stock organized and operated for mutual purposes andwithout profit;

(C) A beneficiary society, order or association, operating for the exclusive benefit ofthe members such as a fraternal organization operating under the lodge system, or mutualaid association or a non-stock corporation organized by employees providing for thepayment of life, sickness, accident, or other benefits exclusively to the members of suchsociety, order, or association, or non-stock corporation or their dependents;

(D) Cemetery company owned and operated exclusively for the benefit of itsmembers;

300 Any other partnership is liable for corporate income tax.Two (2) requisites to be exempt from corporate income tax:

1. It is formed by persons for the sole purpose of exercising their common profession; and2. No part of the income of which is derived from engaging in any trade or business.

301 A merger of two (2) or more corporations for the purpose of engaging in construction projects orenergy operations pursuant to a consortium agreement or a service contract with the government. Thecorporations comprising the joint venture or consortium must be engaged in the same line of business.

It is only the joint venture or consortium itself which is exempt from corporate income tax, not theincome of each corporation from the joint venture consortium. Thus, each corporation comprising of thejoint venture or consortium is liable for corporate income tax (Batangas Land Transportation Co. vs.Collector, 102 Phil. 822)

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(E) Non-stock corporation or association organized and operated exclusively forreligious, charitable, scientific, athletic, or cultural purposes, or for the rehabilitation ofveterans, no part of its net income or asset shall belong to or inures to the benefit of anymember, organizer, officer or any specific person;

(F) Business league chamber of commerce, or board of trade, not organized forprofit and no part of the net income of which inures to the benefit of any private stock-holder, or individual;

(G) Civic league or organization not organized for profit but operated exclusively forthe promotion of social welfare;

(H) A non-stock and nonprofit educational institution;

(I) Government educational institution;

(J) Farmers' or other mutual typhoon or fire insurance company, mutual ditch orirrigation company, mutual or cooperative telephone company, or like organization of apurely local character, the income of which consists solely of assessments, dues, and feescollected from members for the sole purpose of meeting its expenses; and

(K) Farmers, fruit growers, or like association organized and operated as a sales agentfor the purpose of marketing the products of its members and turning back to them theproceeds of sales, less the necessary selling expenses on the basis of the quantity of producefinished by them;

Notwithstanding the provisions in the preceding paragraphs, the income of whateverkind and character of the foregoing organizations from any of their properties, real orpersonal, or from any of their activities conducted for profit regardless of the dispositionmade of such income, shall be subject to tax imposed under this Code.302

302 Sec. 30

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10. Taxation of Resident Citizens, Non-resident Citizens, and ResidentAliens

a. General rule that resident citizens are taxable on incomefrom all sources within and without the Philippines

A citizen of the Philippines residing therein is taxable on all income derivedfrom sources within and without the Philippines.

b. Taxation on Compensation Income

1) Inclusions

a) Monetary compensation

(1) Regular salary/wage

Compensation income derived from an employer-employee relationship inconsideration of services rendered, except in the case of a minimum wage earner.303

(2) Separation pay/retirement benefitnot otherwise exempt

Separation pay received by an employee who voluntarily resigns is subject to incometax. Retirements benefits may be subject to tax if it does not comply with the provision ofSec. 32 (B)(6)(a).304

(3) Bonuses, 13th month pay, andother benefits not exempt

Amount in excess of Thirty thousand pesos (P30,000.00).

(4) Director’s fees305

b) Non-monetary compensation

(1) Fringe benefit not subject tax306

(1) Fringe benefits which are authorized and exempted from tax under special laws;

(2) Contributions of the employer for the benefit of the employee to retirement,insurance and hospitalization benefit plans;

303 infra304 See Reference305 See (1) Regular salary/wage, supra306 Sec. 33, consolidated with Sec. 2.33 (C), RR 03-98

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(3) Benefits given to the rank and file employees, whether granted under a collectivebargaining agreement or not; and

(4) De minimis benefits.307

(5) If the grant of fringe benefits to the employee is required by the nature of, ornecessary to the trade, business, or profession of the employer.

(6) If the grant of the fringe benefits is for the convenience of the employer.308

2) Exclusions

a) Fringe benefit subject to tax

Any good, service or other benefit furnished or granted in cash or in kind by anemployer to an individual employee309 such as, but not limited to, the following:

(1) Housing;

(2) Expense account;

(3) Vehicle of any kind;

(4) Household personnel, such as maid, driver and others;

(5) Interest on loan at less than market rate to the extent of the difference betweenthe market rate and actual rate granted;

(6) Membership fees, dues and other expenses borne by the employer for theemployee in social and athletic clubs or other similar organizations;

(7) Expenses for foreign travel;

(8) Holiday and vacation expenses;

(9) Educational assistance to the employee or his dependents; and

(10) Life or health insurance and other non-life insurance premiums or similaramounts in excess of what the law allows.310

307 infra308 Convenience of the employer rule309 except rank and file employees310 A: If the benefit is not tax-exempt and the recipient is:

1. A rank and file employee – the value of such fringe benefit shall be considered as part of thecompensation income of such employee subject to tax payable by the employee.2. Where the recipient is not a rank and file employee – the value shall not be included in thecompensation income of such employee subject to tax. The fringe benefit tax is instead levied upon theemployer who is required to pay. (Sec. 33)

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b) De minimis benefits

Limited to facilities or privileges furnished or offered by an employer to hisemployees that are of relatively small value and are offered or furnished by the employer as ameans of promoting the health, goodwill, contentment, or efficiency of his employees.

They include:

Monetized unused vacation leave credits ofemployees

1. Private employees:

a. Vacation leave - exemptup to 10 days

b. Sick leave – always taxable

2. Government employees:

Vacation and sick leave are always taxexempt regardless of the no. ofdays.

Medical cash allowance to dependents ofemployees

Not exceeding P750 persemester or P125 per month

Rice subsidy P1,500 or one sack of 50-kg rice per monthamounting to not more than P1,500

Uniforms and clothing allowances actualmedical benefits

Not exceeding P4,000 per annum

Actual medical benefits Not exceeding P10,000 per annum

Laundry allowance Not exceeding P300 per month

Employee achievement awards311 In the form of tangible personal propertyother than cash or gift certificate with anannual monetary value not exceedingP10,000

311 e.g. for length of service or safety achievement

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Gifts given during Christmas and majoranniversary celebrations

Not exceeding P5,000 peremployee per annum

Flowers, fruits and books or similar itemsgiven to employees under certaincircumstances

Reasonable value –dependingon the employer’s capacity

Daily meal allowance for overtime work Not exceeding 25% of the basic minimumwage.312

c) 13th month pay and other benefits andpayments specifically excluded fromtaxable compensation income

Gross benefits received by officials and employees of public and private entities, thetotal exclusion of which shall not exceed Thirty thousand pesos (P30,000) which shall cover:

(a) Benefits received by officials and employees of the national and localgovernment.313

(b) Benefits received by employees.314

(c) Benefits received by officials and employees not covered by (b)

(d) Other benefits315

3) Deductions

a) Personal exemptions and additionalexemptions

Basic personal exemption Additional exemption

Fifty thousand pesos (P50,000) for eachindividual taxpayer.316

Twenty-five thousand pesos (25,000) foreach dependent not exceeding four (4).317

312 RR 5-2008313 under R.A. No. 6686;314 under P.D. No. 851, as amended by Memorandum Order No. 28, dated August 13, 1986315 such as productivity incentives and Christmas bonus316 Sec. 35(A), as amended by R.A. 9504

In the case of married individual where only one of the spouses is deriving gross income, only suchspouse shall be allowed the personal exemption317 Sec. 35 (B), id.

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b) Health and hospitalization insurance

The amount of premiums not to exceed Two thousand four hundred pesos (P2,400)per family or Two hundred pesos (P200) a month paid during the taxable year taken by thetaxpayer for himself, including his family who has a gross income of not more than Twohundred fifty thousand pesos (P250,000) for the taxable year.

In the case of married taxpayers, only the spouse claiming the additional exemptionfor dependents shall be entitled to this deduction.318

c) Taxation of compensation income of aminimum wage earner

(1) Definition of Statutory MinimumWage

The rate fixed by the Regional Tripartite Wage and Productivity Board, as defined bythe Bureau of Labor and Employment Statistics (BLES) of the Department of Labor andEmployment (DOLE).319

(2) Definition of Minimum WageEarner320

(3) Income also subject to taxexemption: holiday pay, overtimepay, night shift differential, andhazard pay321

c. Taxation of Business Income/Income from Practice ofProfession

Optional Standard Deduction (OSD) or Itemized deductions.

Optional Standard Deductions – 10 % of the gross income. May be availed only byindividuals322 who are not purely compensation income earners. This is in lieu of theitemized deductions.

The additional exemption for dependents shall be claimed by only one of the spouses in the case ofmarried individuals.

In the case of legally separated spouses, additional exemptions may be claimed only by the spouse whohas custody of the child or children:

The total amount of additional exemptions that may be claimed by both shall not exceed the maximumadditional exemptions allowed.318 Sec. 34 (M)319 Sec. 22, as amended by R.A. 9504320 See II. (A) (6), Kinds of Taxpayers, supra321 Sec. 24(A)(2) as amended by R.A. 9504322 except non-resident aliens

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d. Taxation of Passive Income

1) Passive income subject to final tax

a) Interest income

Interest income derived by a resident individual323 from a depositary bank under theexpanded foreign service deposit system – 7.5%.

Interest income from long term deposit or investment evidenced by certificatesprescribed by BSP:

a) Exempt, if investment is held for more than 5 years

b) If investment is pre-terminated, interest income on such investment shall besubject to the following rates:

20% - If pre-terminated in less than 3 years

12% - If pre-terminated after 3 years to less than 4 years

5% - If pre-terminated after 4 years to less than 5 years

b) Royalties

Royalties, except on books, as well as other literary works and musical compositions–20%

Royalties on books literary works and musical compositions – 10%

c) Dividends from domestic corporation

Cash and or property dividend actually or constructively received from a domesticcorporation or from a joint stock company, insurance or mutual fund companies andregional operating headquarters of multinational companies. – 10%

d) Prizes and other winnings

Prizes over P10,000 – 20%

Prizes less than P10,000 are included in the income tax of the individual subject tothe schedular rate of 5% up to P125,000 + 32% of excess of P500,000.

Other winnings, except PCSO and Lotto, derived from sources within thePhilippines – 20%

323 non-resident citizen not included

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2) Passive income not subject to final tax

Interest income from long-term deposit or investment in the form of savings,common or individual trust funds, deposit substitutes, investment management accounts andother investments evidenced by certificates - exempt from final tax.324

e. Taxation of capital gains

1) Income from sale of shares of stock of a Philippinecorporation

a) Shares traded and listed in the stockexchange

The gains are not subject to income tax. The tax applicable will be a business taxknown as percentage tax.

A tax at the rate of one-half of one percent (1/2 of 1%) of the gross selling price orgross value in money of the shares of stock sold, bartered, exchanged or otherwise disposedwhich shall be paid by the seller or transferor.325

b) Shares not listed and traded in the stockexchange

A final tax as follows::

Not over P100,000…………………………..... 5%

Amount in excess of P100,000…………….. 10%326

2) Income from the sale of real property situated inthe Philippines

A final tax of six percent (6%) based on the gross selling price or current fair marketvalue, whichever is higher, upon capital gains presumed to have been realized from the sale,exchange, or other disposition of real property classified as capital assets, including pacto deretro sales and other forms of conditional sales, by individuals, including estates and trustsxxx.327

3) Income from the sale, exchange, or otherdisposition of other capital assets

A final tax of 6% on the gross selling price, or the current fair market value at thetime of the sale, whichever is higher.

324 See Sec. 24 (B)(1)325 Sec. 127 (A)326 Sec. 27 (D)(2)327 Sec. 24 (D)

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11. Taxation of Non-resident Aliens Engaged in Trade or Business

a. General rules

A nonresident alien individual engaged in trade or business in the Philippines shall besubject to an income tax in the same manner as an individual citizen and a resident alienindividual, on taxable income received from all sources within the Philippines.328

b. Cash and/or property dividends

10% final tax, on cash and or property dividend actually or constructively receivedfrom a domestic corporation or from a joint stock company, insurance or mutual fundcompanies and regional operating headquarters of multinational companies. 329

c. Capital gains330

12. Individual Taxpayers Exempt from Income Tax

a. Senior citizens

A senior Citizen is:

1. any resident citizen of the Philippines

2. at least sixty (60) years old, including those who have retired from bothgovernment offices and private enterprises, and

3. has an income of not more than sixty thousand pesos (P60,000.00) per annumsubject to the review of the National Economic Development Authority(NEDA) every three(3) years.

b. Exemptions granted under international agreements

NRAETB331 may deduct personal exemption332 but only to the extent allowed by hiscountry to Filipinos not residing therein, and shall not exceed the aforementioned amounts.NRANETB cannot claim any personal or additional exemption.

328 A nonresident alien individual who shall come to the Philippines and stay therein for an aggregateperiod of more than one hundred eighty (180) days during any calendar year shall be deemed a'nonresident alien doing business in the Philippines (Sec. 25 (A)(1))329 Id., (A)(2)330 See e. Taxation of capital gains, supra331 Non-resident alien engaged in trade or business332 but not additional exemption

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13. Taxation of Domestic Corporations333

a. Tax payable

1) Regular tax

Thirty percent (30%)334 of taxable income.

2) Minimum corporate income tax (MCIT)

a) Imposition of MCIT335

Two percent (2%) on the gross income.

b) Carry forward of excess minimum tax

Any excess of the minimum corporate income tax (MCIT) over the normal incometax shall be carried forward on an annual basis and credited against the normal income tax forthe three (3) immediately succeeding taxable years.

c) Relief from the MCIT under certainconditions

The imposition of MCIT may be suspended, upon showing that the corporationsuffers losses due to any of the following causes:

a. Prolonged labor dispute336

b. Legitimate business reverses337

c. Force majeure338

333 The term "corporation" shall include partnerships, no matter how created or organized, joint-stockcompanies, joint accounts (cuentas en participacion), association, or insurance companies, but does notinclude general professional partnerships and a joint venture or consortium formed for the purpose ofundertaking construction projects or engaging in petroleum, coal, geothermal and other energyoperations pursuant to an operating consortium agreement under a service contract with theGovernment. (Sec. 22(B))334 beginning January 1, 2009 (R.A. 9337)335 a. It is imposed beginning the fourth (4th) taxable year immediately following the taxable yr. in whichsuch corporation starts its business operation.

b. It is imposable only if such corporation has zero or negative taxable income or whenever theamount of MCIT is greater than the Normal Corporate Income Tax (NCIT) due from such corporation.336 e.g. strikes for more than 6 months337 Ibid.338 e.g. war

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d) Corporations exempt from the MCIT

1. Proprietary Educational Institution

2. Non-profit hospitals

3. Depository banks under expended FCDU

4. International carriers

5. Offshore Banking Units

6. ROHQs of resident foreign corp.

e) Applicability of the MCIT where acorporation is governed both under theregular tax system and a special incometax system

Only one may be imposed.

“A minimum corporate income tax of 2% of the gross income xxx is imposed xxxon a corporation339 xxx when the minimum income tax is greater than the (net incometax)”340

b. Allowable deductions

1) Itemized deductions

Business341 expenses which are ordinary and necessary in the conduct of business.342

2) Optional standard deduction343

May be taken by an individual, in lieu of itemized deductions.344

339 domestic and resident foreign340 Secs. 27 (E) and 28 (A)(2)341 or professional342 or in the exercise of profession343 See also (9)(h)(4)(b), supra344 Section 34(L)

Requisites:a. Available only to citizens and resident aliensb. The standard deduction is optional; i.e., unless the taxpayer signifies in his return his intention to

elect this deduction, he is considered as having availed of the itemized deductions.c. Such election, when made by the qualified taxpayer, is irrevocable for the year in which made;

however, he can change to itemized deductions in succeeding years.

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c. Taxation of Passive Income

1) Passive income subject to tax

a) Interest from deposits and yield or anyother monetary benefit from depositsubstitutes and from trust funds andsimilar arrangements and royalties345

Twenty percent (20%) final tax.

b) Capital gains from the sale of shares ofstock not traded in the stock exchange

On the net capital gain:

Not over P100,000Final Tax of 5%

On any amount in excess of P100,000plus 10% Final tax on the excess

c) Income derived under the expandedforeign currency deposit system346

Ten percent (10%) final tax.

Exempt - any income of nonresidents, whether individuals or corporations, fromtransactions with depository banks.

d) Intercorporate dividends

Not subject to tax.

e) Capital gains realized from the sale,exchange, or disposition of lands and/orbuildings

Six percent (6%) final tax347- on the gross selling price, or the current fair marketvalue at the time of the sale, whichever is higher.

345 received by domestic corporations derived from sources within the Philippines346 by a depository bank with local commercial banks, including branches of foreign banks authorized bythe BSP to transact business with foreign currency deposit system units.347 Tax treatment is the same as that of individuals

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2) Passive income not subject to tax348

d. Taxation of Capital Gains

1) Income from sale of shares of stock349

2) Income from the sale of real property situated inthe Philippines350

3) Income from the sale, exchange, or otherdisposition of other capital assets351

e. Tax on proprietary educational institutions352 and hospitals

Ten percent (10%) on their taxable income.353

Thirty percent (30%) - if gross income from unrelated trade, business or otheractivity354 exceeds fifty percent (50%) of the total gross income derived from all sources.355

f. Tax on government-owned or controlled corporations,agencies or instrumentalities

Such rate of tax imposed upon corporations or associations engaged in similarbusiness, industry, or activity, except

1. The Government Service Insurance System (GSIS),

2. The Social Security System (SSS),

3. The Philippine Health Insurance Corporation (PHIC),

4. The Philippine Charity Sweepstakes Office (PCSO) and

5. The Philippine Amusement and Gaming Corporation (PAGCOR)356

348 supra349 See 10 (e), Taxation of Capital Gains, supra350 Ibid.351 See (A)(10)(e)(3), Taxation of Capital Gains, supra352 A "Proprietary educational institution" is any private school maintained and administered by privateindividuals or groups with an issued permit to operate from the Department of Education, Culture andSports (DECS), or the Commission on Higher Education (CHED), or the Technical Education and SkillsDevelopment Authority (TESDA), as the case may be, in accordance with existing laws and regulations.353 except on certain passive incomes (Sec. 27 (D))354 The term 'unrelated trade, business or other activity' means any trade, business or other activity, theconduct of which is not substantially related to the exercise or performance by such educationalinstitution or hospital of its primary purpose or function.355 Sec. 27 (B)356 Id., (C)

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14. Taxation of Resident Foreign Corporations357

a. General rule

Resident foreign corporations are subject to any or some of the following:

1. Capital Gains Tax

2. Final Tax on Passive Income

3. Normal Tax [or] Minimum Corporate Income Tax (MCIT) [or] GrossIncome Tax (GIT)

4. Branch Profit Remittance Tax

b. With respect to their income from sources within thePhilippines358

c. Minimum corporate income tax359

d. Tax on certain income

(1) Interest from deposits and yield or any othermonetary benefit from deposit substitutes, trustfunds and similar arrangements and royalties360

(2) Income derived under the expanded foreigncurrency deposit system361

(3) Capital gain from sale of shares of stock nottraded in the stock exchange362

(4) Intercorporate dividends363

357 Income subject to Normal Tax [or] Minimum Corporate Income Tax (MCIT) [or] Gross Income Tax (GIT)under the subheading of domestic corporations is equally applicable to resident foreign corporations,both as to concepts and computations, except that RFCs are taxed only on income from sources withinthe Philippines.358 See Tax Payable under Taxation of Domestic Corporations, supra359 ibid.

The MCIT is imposed on RFCs under the same conditions as domestic corporations (Sec. 28(A)(2))360 See Taxation of Passive Income under Taxation of Domestic Corporations, supra361 ibid.362 ibid.363 ibid.

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15. Taxation of Non-resident Foreign Corporations

a. General rule

Non-resident foreign corporations are subject to any or some of the following:

1. Capital Gains Tax

2. Final Tax on Passive Income

3. Final Tax on [Other] Gross Income from sources within the Philippines

b. Tax on certain income

(1) Interest on foreign loans

Twenty percent (20%) final withholding tax. 364

(2) Intercorporate dividends

Fifteen percent (15%) - as long as the country in which the nonresident foreigncorporation is domiciled allows a tax credit for taxes “deemed paid” in the Philippinesequivalent to 15%.

Thirty percent (30%) withholding tax - if the country within which the NRFC isdomiciled does not allow a tax credit.365

(3) Capital gains from sale of shares of stock nottraded in the stock exchange366

16. Improperly Accumulated Earnings of Corporations

Every corporation formed or availed for the purpose of avoiding the income taxwith respect to its shareholders or the shareholders of any other corporation, by permittingearnings and profits to accumulate instead of being divided or distributed.

364 Sec. 28 (B)(5)(2)365 Sec. 28 (B)(5)(b)

In other words, the dividends are subject to the third kind of tax: Final Tax on [Other] Gross Incomefrom sources within the Philippines.366 See 10 (e)(1)(b), under Taxation of capital gains

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17. Exemption from tax on corporations367

18. Taxation of Partnerships368

Rules:

1. Subject to the same rules on corporations,369 but is not subject to the improperlyaccumulated earnings tax [IAET]. The partnership must file quarterly and year-end incometax returns.

2. The taxable income of the partnership, less the normal corporate income taxthereon, is the distributable net income of the partnership.

3. Ten percent (10%) final tax - the share of a partner in the partnership’sdistributable net income of a year deemed to have been actually or constructively receivedby the partners in the same taxable year taxed to them in their individual capacity, whetheractually distributed or not,370 withheld by the partnership.371

19. Taxation of General Professional Partnerships372

Rules:

1. Not subject to income tax.

2. The partners shall only be liable for income tax only in their separate andindividual capacities.

3. For purposes of computing the distributive share of the partners, the netincome of the GPP shall be computed in the same manner as a corporation.

367 See Other exempt corporations, supra368 partnerships wherein all or part of their income is derived from the conduct of trade or business369 capital gains tax, final tax on passive income, normal tax, minimum corporate income tax [MCIT] andgross income tax [GIT]370 Sec. 73(D)371 Sec. 24(B)(2)372 GPP is not a taxable entity à The partnership is a mere mechanism or a flow-through entity in thegeneration of income by, and the ultimate mechanism distribution of such income to the individualpartners. (Tan v. Commissioner [Oct. 3, 1994]) But, the partnership itself is required to file income taxreturns for the purpose of furnishing information as to the share in the gains or profits which each partnershall include in his individual return. (RR 2- 1998)

The share of an individual partner in the net profit of a general professional partnership is deemed tohave been actually or constructively received by the partner in the same taxable year in which suchpartnership net income was earned, and shall be taxed to them in their individual capacities, whetheractually distributed or not, at the graduated income tax ranging from 5% to 32%. Thus, the principle ofconstructive receipt of income or profit is being applied to undistributed profits of GPPs. The payment [tothe partners] of such tax-paid profits in another year should no longer be liable to income tax.(Mamalateo)

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4. Each partner shall report as gross income his distributive share, actually orconstructively received, in the net income of the partnership.

5. The share of a partner shall be subject to a creditable withholding income tax of15%.373

20. Taxation on Estates and Trusts

a) Application

The tax imposed upon individuals shall apply to the income of estates or of any kindof property held in trust, including:

1. Income accumulated in trust for the benefit of unborn or unascertainedperson or persons with contingent interests, and income accumulated or held for futuredistribution under the terms of the will or trust;

2. Income which is to be distributed currently by the fiduciary to the beneficiaries,and income collected by a guardian of an infant which is to be held or distributed as thecourt may direct;

3. Income received by estates of deceased persons during the period ofadministration or settlement of the estate; and

4. Income which, in the discretion of the fiduciary, may be either distributed to thebeneficiaries or accumulated.

b) Exception

The tax shall not apply to employee's trust which forms part of a pension,stock bonus or profit-sharing plan of an employer for the benefit of some or all of hisemployees:

1. If contributions are made to the trust by such employer, or employees, or bothfor the purpose of distributing to such employees the earnings and principal of the fundaccumulated by the trust in accordance with such plan, and

2. If under the trust instrument it is impossible, at any time prior to the satisfactionof all liabilities with respect to employees under the trust, for any part of the corpus orincome to be used for, or diverted to, purposes other than for the exclusive benefit of hisemployees.374

373 RR 2- 1998374 Any amount actually distributed to any employee or distributee shall be taxable to him in the year inwhich so distributed to the extent that it exceeds the amount contributed by such employee ordistributee.

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c) Determination of tax

1) Consolidation of income of two or more trusts

Where the creator of the trust in each instance is the same person, and thebeneficiary in each instance is the same, the taxable income of all the trusts shall beconsolidated and the tax computed on such consolidated income, and such proportion ofsaid tax shall be assessed and collected from each trustee which the taxable income of thetrust administered by him bears to the consolidated income of the several trusts

2) Taxable income375

General rule:

Any amount actually distributed to any employee or distributee shall be taxable tohim in the year in which so distributed to the extent that it exceeds the amount contributedby such employee or distributee.

3) Revocable trusts

Where at any time the power to revest in the grantor title to any part of the corpusof the trust is vested:

a. in the grantor either alone or in conjunction with any person not having asubstantial adverse interest in the disposition of such part of the corpus or the incometherefrom, or

b. in any person not having a substantial adverse interest in the disposition of suchpart of the corpus or the income therefrom, the income of such part of the trust shall beincluded in computing the taxable income of the grantor.376

375The taxable income of the estate or trust shall be computed in the same manner and on the same basisas in the case of an individual, except that:

(A) There shall be allowed as a deduction in computing the taxable income of the estate or trustthe amount of the income of the estate or trust for the taxable year which is to be distributed currentlyby the fiduciary to the beneficiaries, and the amount of the income collected by a guardian of an infantwhich is to be held or distributed as the court may direct, but the amount so allowed as a deductionshall be included in computing the taxable income of the beneficiaries, whether distributed to them ornot. Any amount allowed as a deduction under this Subsection shall not be allowed as a deduction underSubsection (B) of this Section in the same or any succeeding taxable year.

(B) In the case of income received by estates of deceased persons during the period of administrationor settlement of the estate, and in the case of income which, in the discretion of the fiduciary, may beeither distributed to the beneficiary or accumulated, there shall be allowed as an additional deduction theamount of the income of the estate or trust for its taxable year, which is properly paid or credited duringsuch year to any legatee, heir or beneficiary but the amount so allowed as a deduction shall be included incomputing the taxable income of the legatee, heir or beneficiary.

(C) In the case of a trust administered in a foreign country, the deductions mentioned in Subsections(A) and (B) of this Section shall not be allowed: Provided, That the amount of any income included in thereturn of said trust shall not be included in computing the income of the beneficiaries. (Sec. 61)

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4) Income for benefit of grantor

Where any part of the income of a trust

a. is, or in the discretion of the grantor or of any person not having asubstantial adverse interest in the disposition of such part of the income may be held oraccumulated for future distribution to the grantor, or

b. may, or in the discretion of the grantor or of any person not having asubstantial adverse interest in the disposition of such part of the income, be distributed tothe grantor, or

c. is, or in the discretion of the grantor or of any person not having asubstantial adverse interest in the disposition of such part of the income may be applied tothe payment of premiums upon policies of insurance on the life of the grantor, such part ofthe income of the trust shall be included in computing the taxable income of the grantor.377

5) Meaning of "in the discretion of the grantor"

Either alone or in conjunction with any person not having a substantial adverseinterest in the disposition of the part of the income in question.

21. Withholding tax378

a. Concept

The requirement that taxes imposed or prescribed by the NIRC are to be deductedand withheld by the payor-corporations and/or persons from payments made to payees-corporations and/or persons for the former to pay the same directly to the BIR. R. Hence,the taxes are collected practically at the same time the transaction is made or when thetaxable transaction occurs. It is taxation at source.

376 Exception377 ibid378 also known as “taxation at source”

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b. Kinds

Withholding of final tax of certain income Withholding of creditable tax at sourceAs to income subject of the system

1. Passive incomes

2. Fringe benefits

1. Compensation Income

2. Professional/talent fees

3. Rentals

4. Cinematographic film rentals and otherpayments

5.Income payments to certain contractors

As to whether or not income should be reported as partof the gross income

The recipient may not report the saidincome in his gross income because the taxwithheld constitutes final and fullsettlement of the tax liability

The employee is required to include theincome in his gross income

As to the effect of the tax withheld

The tax withheld cannot be claimed as taxcredit

The tax withheld can be claimed as a taxcredit or may be deducted from the tax dueor payable

As to filing of ITR

If the only source of income is subject tofinal tax, no need to file an ITR on the partof the earner

There is a necessity to file onthe earner

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c. Withholding on wages

1) Requirement for withholding

No withholding of a tax where the total compensation income of an individualdoes not exceed the statutory minimum wage, or five thousand pesos(P5,000.00) per month, whichever is higher.379

2) Tax paid by recipient

If the employer fails to deduct and withhold the tax as required, and thereafter thetax against which such tax may be credited is paid, the tax so required to be deducted andwithheld shall not be collected from the employer; but in no case relieve the employer fromliability for any penalty or addition to the tax otherwise applicable in respect of such failureto deduct and withhold.380

3) Refunds or credits

(a) Employer When there has been an overpayment of tax,refund or credit shall be made only to theextent that the amount of such overpaymentwas not deducted and withheld by theemployer.

(b) Employees The amount deducted and withheldduring any calendar year shall be allowed as acredit to the recipient of such income againstthe tax imposed under Section 24(A).381

Any excess of the taxes withheld over the tax due from the taxpayer shall be returnedor credited within three (3) months from the fifteenth (15th) day of April. Refunds or creditsmade after such time shall earn interest at the rate of six percent (6%) per annum, startingafter the lapse of the three-month period to the date the refund of credit is made.382

4) Year-end adjustment

On or before the end of the calendar year but prior to the payment of thecompensation for the last payroll period, the employer shall determine the tax due from eachemployee on taxable compensation income for the entire taxable year. The differencebetween the tax due from the employee for the entire year and the sum of taxes withheld

379 Sec. 79 (A)380 Id. (B)381 See Reference382 Id. (C)

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from January to November shall either be withheld from his salary in December of thecurrent calendar year or refunded to the employee not later than January 25 of thesucceeding year.383

5) Liability for tax

The employer shall be liable for the withholding and remittance of the correctamount of tax required to be deducted and withheld.384

d. Withholding of VAT

(a) The government or any of its political subdivisions, instrumentalities or agencies,including government-owned or controlled corporations (GOCCs) shall, before makingpayment on account of each purchase of goods and/or services taxed at twelve percent(12%) VAT, deduct and withhold a final VAT due at the rate of five percent (5%) of thegross payment thereof.

The five percent (5%) final VAT withholding rate shall represent the net VATpayable of the seller. The remaining seven percent (7%) effectively accounts for the standardinput VAT for sales of goods or services to government or any of its political subdivisions,instrumentalities or agencies, including GOCCs, in lieu of the actual input VAT directlyattributable or ratably apportioned to such sales. Should actual input VAT attributable to saleto government exceeds seven percent (7%) of gross payments, the excess may form part ofthe seller’s expense or cost. On the other hand, if actual input VAT is less than sevenpercent (7%) of gross payment, the difference must be closed to expense or account.

(b) The government or any of its political subdivisions, instrumentalities or agencies,including government-owned or controlled corporations(GOCCs), as well as privatecorporations, individuals, estates and trusts, whether large or non-large taxpayers, shallwithhold twelve percent (12%) VAT, starting February 1, 2006, with respect to the followingpayments:

(1) Lease or use of properties or property rights owned by non-residents; and

(2) Other services rendered in the Philippines by non-residents.385

383 Id. (H)384 See Sec. 80385 RR 16-2005, as amended by RR 4-2007

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e. Filing of return and payment of taxes withheld

1) Return and payment in case of governmentemployees

The return of the amount deducted and withheld upon any wage shall be made bythe officer or employee having control of the payment of such wage, or by any officer oremployee duly designated for the purpose.386

2) Statements and returns

(A) Requirements Every employer required to deduct and withhold a tax shall furnishto each such employee in respect of his employment during thecalendar year, on or before January thirty-first (31st) of thesucceeding year, or if his employment is terminated before the closeof such calendar year, on the same day of which the last payment ofwages is made, a written statement confirming the wages paid by theemployer to such employee during the calendar year, and theamount of tax deducted and withheld under this Chapter in respectof such wages. The statement required to be furnished by thisSection in respect of any wage shall contain such other information,and shall be furnished at such other time and in such form as theSecretary of Finance, upon the recommendation of theCommissioner, may, by rules and regulation, prescribe.

(B) AnnualInformation Returns.

Every employer required to deduct and withhold the taxes in respectof the wages of his employees shall, on or before January thirty-first(31st) of the succeeding year, submit to the Commissioner an annualinformation return containing a list of employees, the total amountof compensation income of each employee, the total amount oftaxes withheld therefrom during the year, accompanied by copies ofthe statement referred to in the preceding paragraph, and such otherinformation as may be deemed necessary.387

386 Sec. 82387 see Sec. 83

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f. Final withholding tax at source388

g. Creditable withholding tax

1) Expanded withholding tax389

2) Withholding tax on compensation

Every employer must withhold from compensation paid, an amount computed inaccordance with the regulations. 390

Exception:

Where such compensation income of an individual:

1. Does not exceed the statutory minimum wages; or

2. Five thousand pesos (P5,000) monthly391 - whichever is higher

h. Fringe benefit tax

Final tax of thirty-two percent (32%) - on the grossed-up monetary value of fringebenefit furnished or granted to the employee392 by the employer, whether an individual or acorporation, unless the fringe benefit is required:

1. by the nature of, or necessary to the trade, business or profession of the employer,

or

2. when the fringe benefit is for the convenience or advantage of the employer.393

388 Sec. 57 (A), supra389 Id. (B), supra390 Elements of Withholding on Compensation:

1. There must be an employer-employee relationship2. There must be payment of compensation or wages

for services rendered3. There must be a payroll period

391 P60,000 a year392 except rank and file employees393 Sec. 33 (A)

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B. Estate Tax

1. Basic principles

The estate tax accrues as of the death of the decedent and the accrual of the tax isdistinct from the obligation to pay the same. Upon the death of the decedent, successiontakes place and the right of the State to tax the privilege to transmit the estate vests instantlyupon death.394

Not a direct tax on the property transmitted or transferred although its amount isbased thereon.

2. Definition

A graduated tax imposed on the privilege of the decedent to transmit property atdeath and is based on the entire net estate, regardless of the number heirs and relations tothe decedent.

3. Nature

A tax imposed on the privilege of transmitting property upon the death of theowner. The liability for estate tax is generated by death and accrues at the time of death. It isgoverned by the law in force at the time of death notwithstanding the postponement of theactual possession or enjoyment of the estate by the beneficiary. Consequently, all propertiesthat are included in the taxable estate should be valued at the moment of death of adecedent.

4. Purpose or object

a) Benefit-Received Theory

For the performance of services rendered by the government in the distribution ofthe estate of the decedent and other benefits that accrue to the estate and the heirs, the statecollects the tax.

b) Redistribution of Wealth Theory

A contributing factor to the inequalities in wealth and income. The imposition ofdeath tax reduces the property received by the successor bringing about a more equitabledistribution of wealth in society.

c) Ability-to pay- theory

The receipt of inheritance places assets in the hands of the heirs and beneficiariesthereby creating an ability to pay the tax and thus to contribute to governmental income; and

394 Sec. 3, RR 2-2003

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d) Privilege theory or State Partnership theory

Inheritance is not a right but a privilege granted by the state and large estates havebeen acquired only with the protection of the state. The State, as a “passive and silentpartner” in the accumulation of property has the right to collect the share which is properlydue to it

5. Time and transfer of properties

At the time of death.395

6. Classification of decedent

a) resident decedent

b) non – resident alien decedent

7. Gross estate vis-à-vis Net estate

Gross estate Net estate

The total value of all property, whether realor personal, tangible or intangible belongingto the decedent at the time of his death,situated within or outside the Philippines,where such decedent was a resident orcitizen of the Philippines.

In the case of a nonresident alien decedent, itshall include only property situated in thePhilippines.

Determined by deducting from the value ofthe gross estate the following items ofdeductions:

1. Expenses, losses indebtedness, and taxes.

2. Property previously taxed.

3. Transfers for public use.

4. The Family Home

5. Standard Deductions

6. Medical Expenses

7. Amount received by heirs under R.A.4917

8. Net share of the surviving spouse in theconjugal partnership or community property.

395 The tax should not be construed as a direct tax on the property of the decedent although the tax isbased thereon.

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8. Determination of gross estate and net estate

Decedent is a resident or nonresident citizen,or a resident alien

Decedent is a non-resident alien

All properties, real or personal, tangible orintangible, wherever situated.

Only properties situated in the Philippinesprovided that, intangible personalproperty is subject to the rule ofreciprocity provided for under Section104 of the NIRC.396

9. Composition of gross estate

Decedent is a resident or nonresident citizen,or a resident alien

Decedent is a non-resident alien

Value at the time of deathof all:

1. Real property wherever situated

2. Personal property, tangible or intangible,wherever situated

3. To the extent of the interest therein of thedecedent at the time of his death.

Value at the time of death of all:

1. Tangible personal property situated inthe Philippines

2. Intangible personal property with situsin the Philippines unless exempted onthe basis of reciprocity

396 Sec. 85

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10. Items to be included in gross estate

a. Decedent's interest It includes any interest having value orcapable of being valued, transferred by thedecedent at his death.

b. Transfer in contemplation of death A transfer motivated by the thought ofimpending death although death may not beimminent:

1. When the decedent has, at any time,made a transfer in contemplation of orintended to take effect in possession orenjoyment at or after death; or

2. When decedent has, at any time, made atransfer under which he has retained forhis life or for a period not ascertainablewithout reference to his death or anyperiod which does not in fact end beforehis death:

a. Possession, enjoyment or right toincome from the property; or

b. The right alone or in conjunctionwith any other person to designatethe person who will possess or enjoythe property or income there from.397

c. Revocable transfer A transfer by trust or otherwise, where theenjoyment thereof was subject at the date ofhis death to any change through the exerciseof a power to alter or amend or revoke orterminate such transfer by:

a. Decedent alone;

397 Sec. 85[B]The concept of transfer in contemplation of death has a technical meaning. This does not constitute any

transfers made by a dying person. It is not the mere transfer that constitutes a transfer in contemplationof death but the retention of some type of control over the property transferred. In effect, there is no fulltransfer of all interests in the property inter vivos.

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b. By the decedent in conjunction withany other person without regard to when orfrom what source the decedent acquiredsuch power, to alter, amend, revoke orterminate; or

c. Where any such power is relinquishedin contemplation of the decedent’s deathother than a bone fide sale for an adequateand full consideration in moneyor money’s worth.398

d. Property passing under general powerappointment

The right to designate the person who willsucceed to the property of the priordecedent, in favor of anybody, includinghimself, his estate, his creditors, or thecreditors of his estate. If the donationcontains a provision of reversion to thedonor, this is similar to a revocabletransfer.399

e. Proceeds of life insurance When the beneficiary is:

a. The estate of the decedent, his executor oradministrator regardless of whether thedesignation is revocable or irrevocable; and

b. A third person, other than the decedent’sestate, executor, or administrator providedthat the designation is revocable.400

f. Prior interests All transfers, trusts, estates, interests, rights,powers and relinquishment of powers made,

398 Sec. 85(C)(1)399 A power is not general (specific) if it can be exercised only in favor of one or more designatedperson or classes of persons exclusive of the decedent, his estate, his creditors and creditors of his estate,or if it expressly not exercisable in favor of the decedent, his estate, his creditors, or creditors of hisestate.400 Not part of the gross estate when:

a. Proceeds receivable by a beneficiary designated as irrevocable provided that the beneficiary is notthe decedent’s estate, executor and administrator; and

b. Where the insurance was not taken by the decedent upon his own life and the beneficiary is not thedecedent’s estate, executor, or administrator. (Section 85(E)

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created, arising existing, exercised orrelinquished before or after the effectivity ofthe Tax Code.401

g. Transfers of insufficient consideration402 Only the excess of the fair market value ofthe property at the time of the decedent’sdeath over the consideration received shallbe included in the gross estate.

11.Deductions from estate

Decedent is a resident citizen, non-residentcitizen, or resident alien

Decedent is a nonresident alien

Ordinary deductions:

a. Funeral Expenses403

b. Medical expenses404

c. Judicial expenses of the testamentary orintestate proceedings.405

The deductions allowed to citizens orresidents of the Philippines are also extendedto a non-resident alien decedent with respectto his estates situated in the Philippines atthe time of his death.

In case of deductions for expenses, losses,indebtedness and taxes, the amount of the

401 Sec.85402 b, c, d and g - properties not physically in the estate (these have already been transferred duringthe lifetime of the decedent but are still subject to payment of estate tax) - are transfers inter vivos whichare considered part of gross estate.403 The amount deductible is equal to 5% of the gross estate or the amount of the actual funeral expenseswhichever is lower, but in no case to exceed P200, 000.

“Actual funeral expenses” are those which were actually incurred in connection with the interment orburial of the deceased and paid for from the estate of said deceased.

Funeral expenses include:a) Costs of coffin, tombstone, mausoleum, and burial lot;b) Funeral parlor fees;c) Mourning clothing of the surviving spouse and the unmarried minor children;d) Costs of obituary notices; ande) Expenses during the wakeThe following cannot be deducted under funeral expenses:a) Cash advances of the surviving spouse and the heirs;b) Expenses paid by the relatives and friends; andc) Expenses after the burial.

404 Provided, that the following requisites are met:a. Must be incurred by the decedent within one (1) year prior to his deathb. Must be duly substantiated by receipts; andc. Must not exceed P500, 000.00.

405 Include “administration expenses” to those actually incurred in the administration of the estateExamples:a) fees of the executor or administrator;

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d. Claims against the decedent’s estate406

e. Claims against insolvent persons407

f. Unpaid mortgages indebtedness408

g. Casualty Losses409

h. Unpaid Taxes410

i. Vanishing deduction411

allowable deduction is limited only to theproportion of such deductions with the valueof such part of his gross estate which at thetime of his death, is situated in thePhilippines, bears to the value of his entiregross estate wherever situated.415

b) attorney’s fees;c) accountant’s fees;d) court fees;e) salaries of employees; andAll other expense related to the administration of the estate.Expenses not essential to the proper settlement of the estate but incurred for the individual benefit of

the heirs, legatees, or devisees are not allowed as deductions.406 Debts or obligations of the decedent that is enforceable against the estate provided that the followingrequisites are met:

a) They were contracted in good faith and for an adequate and full consideration in money or money’sworth.

b) They must be existing against the estate.c) They must be legally enforceable obligations of the decedent and ought to be enforced by the

claimants.d) They must be reasonably certain in amount; and;e) At the time the indebtedness was incurred, the debt instrument was duly notarized and if the loan

was contracted within three (3) years before the death of the decedent, the administrator or executorshall submit a statement showing the disposition of the proceeds of the loan.407 Requisites for deductibility:

a) The amount of said claims has been initially included as part of the gross estate; andb) The incapacity of the debtors to pay their obligations is proven and not merely alleged.

408 Requisites for deductibility:a. The fair market value of the property mortgaged without deducting the mortgage indebtedness has

been initially included as part of his gross estate; andb. The mortgage indebtedness was contracted in good faith and for an adequate and full consideration

in money or money’s worth.409 They include all losses incurred during the settlement of the estate arising from fires, storms,shipwreck or other casualties or from robbery, theft or embezzlement.

Provided, that the following requisites are met:a. Losses not compensated by an insurance or otherwise;b. Losses not have been claimed as a deduction for income tax purposes; andc. Losses incurred not later than the last day for payment of the estate tax (6 months from death).

410 Unpaid income tax on income due or received before death of the decedent, and real property taxes,which have accrued prior to the death of the decedent (real property taxes accrued at the beginning ofthe year but may be paid before or at the end of each quarter) are deductible.

Income taxes upon income received after the death of the decedent, or property taxes not accruedbefore his death, or any estate tax cannot be deducted because they are chargeable to the income of theestate.411 Property – previously taxed

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j. Transfer for public use412

k. Family home413

l. Standard deduction equivalent to P1,000,000.00414

m. Amounts received by heirs under R.A.No. 4917 from the decedent’s employer as aconsequence of the death of the decedent –employee provided that such amount isincluded in the gross estate of the decedent.

n. Net share of the surviving spouse in theconjugal partnership or community property.

o. Tax credit for estate tax paid to a foreigncountry.

An amount allowed to reduce the taxable estate of a decedent where the property:a. received by him from prior decedent by gift, bequest, devise or inheritance, orb. transferred to him by gift, has been the object of previous transfer deduction.

It is so-called a vanishing deduction because the rate of deduction gradually diminishes and entirelyvanishes depending upon the time interval between the two (2) successive transfers.

Two (2) factors necessary in vanishing deduction, these are;a. There are two (2) deceased persons and the first is the donor; andb. The second decedent dies within five (5) years after the death of the prior decedent or in the case

of gifts the decedent – donee dies within the same period after the date of the gift.415 Sec. 86 (B)412 Requisites:

a. The disposition must be testamentary in character.b. To take effect after death.c. In favor of the government of the Philippines, or any political subdivision thereof.d. Exclusively for public purpose.

413 Refers to the dwelling house, including the land on which it is situated, where the husband and wife, oran unmarried person who is the head of the family and members of their immediate family resides ascertified by the Barangay Captain of the locality.

For the purpose of availing of a family home deduction to the extent provided by law, a person mayconstitute only one family home.

The amount deductible is equivalent to the current fair market value of the decedent’s family home ifsaid current fair market value exceeds P1, 000,000.00., the excess shall be subject to estate tax.

Requisites to be deductible:a. The family home must be the actual residential home of the decedent and his family at the time of

his death as certified by the barangay Captain of the locality where the family is situated.b. The total value of the family home must be included in the gross estate of the decedent.c. The allowable deduction must be in an amount equivalent to the current fair market value of the

family home as declared or included in the gross estate not exceeding P1, 000,000.00.414 does not include the P 200,000.00 exemption

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12. Exclusions from estate

The following properties are excluded from gross estate:416

a) Amount receivable by any beneficiary irrevocably designated in the policy ofinsurance by the insured.

b) Proceeds of a group insurance policy taken out by a company for its employees.

c) Proceeds of insurance policies issued by the GSIS to government officials andemployees.

d) Benefits accruing under the Social Security Act.

e) Proceeds of life insurance payable to the heirs of deceased members of themilitary personnel of the United States Army or Philippine Army under laws administered bythe United State veterans Administration.

f) Accident insurance proceeds.417

g) Separate property of the surviving spouse.

13. Tax credit for estate taxes paid in a foreign country

The estate tax imposed by the tax code shall be credited with the amount of anyestate tax paid to a foreign country.

14. Exemption of certain acquisitions and transmissions

a. The first P200, 000.00 value of the estate.418

b. The merger of the usufruct in the owner of the naked title.

c. The transmission from the first heir, legatee, or donee in favor of anotherbeneficiary in accordance with the desire of the predecessor.

d. All bequest, devises, legacies or transfers to social welfare, cultural and charitableinstitutions, no part of the net income of which inured to the benefit of any individual andprovided that not more than 30% of the said bequest, etc. shall be used by such institutionfor administration purposes.

416 In the determination of the gross estate, the nature of the property, whether common property of thespouses, separate or exclusive property either of the deceased or of the surviving spouse, becomes ofvital importance. What regime of property relations shall govern the spouses?

Under the Civil Code, the husband and wife who got married before August 3, 1988 are governed bythe Conjugal Partnership of Gains, while those who got married on or after August 3, 1988 are governedby the Absolute Community of Property, unless a different regime was agreed upon in the marriagesettlement.417 Items a - f are proceeds of insurance not includible in the gross estate of the decedent418 Sec. 84

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e. Intangible personal property of non-resident aliens under the principle ofreciprocity.

f. Retirement benefits of employees of private firms from private pension plansapproved by the BIR.

g. Amount received for war damages.

h. Grants and donations to the Intramuros administration.

15. Filing of notice of death

Within two (2) months after the decedent’s death419 to the Commissioner of InternalRevenue where the gross value of the estate exceeds twenty thousand pesos (P 20,000.00).420

16. Estate tax return

To be filed by the executor, administrator, or any of the legal heirs;

In cases of:

1. Transfers subject to tax

2. Where gross value of estate exceeds P200,000

3. Where estate consists of registered or registrable property, regardless ofAmount.421

419 or within like period after the executor or administrator qualifies as such420 Sec. 89421 Sec. 90 (A)

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C. Donor’s Tax

1. Basic principles

It is levied, assessed, collected and paid upon the transfer of any person, resident ornon-resident, of the property by gift inter vivos. It applies whether the transfer is in trust orotherwise, whether the gift is direct or indirect, and whether the property is real or personal,tangible or intangible.422

Donor’s tax shall be imposed whether the transfer is in trust or otherwise, whetherthe gift is direct or indirect and whether the property is real or personal, tangible orintangible.

A “gift” is merely subjected to donor’s tax.

2. Definition

A tax on the privilege of transmitting one’s property or property rights to another orothers without adequate and full valuable consideration.

3. Nature

It is an excise tax on the privilege of the donor to give or on the transfer of propertyby way of gift inter vivos. It is not a property tax.

4. Purpose or object

To:

a. Raise revenues

b. Tax the wealthy and to reduce certain other excise taxes

c. Discourage inter vivos transfers of property which could reduce mortis causa transferson which a higher tax423 can be collected

d. Prevent avoidance of income tax throughthe device of splitting income amongnumerous donees who are usually members of a family or into many trusts, with the donorthereby escaping the effect of the progressive rates of income taxation

422 Sec. 98423 estate tax

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5. Requisites of valid donation

a. The donor must have capacity to donate424

b. There must be an intent to donate425

c. There must be delivery, either actual or constructive

d. The donee must accept the donation

6. Transfers which may be constituted as donation

a. Sale/exchange/transfer of property for insufficientconsideration426

If bona fide sale No value shall be included in the grossestate.

If not a bona fide sale The excess of the fair market value at thetime of death over the value of theconsideration received by the decedent shallform part of his gross estate.

If inter vivos transfer is proven fictitious Total value of the property at the time ofdeath included in the gross estate.427

b. Condonation/remission of debt

If the creditor condones the indebtedness of the debtor the following rules apply:

1. On account of debtor’s services to the creditor the same is in taxable income tothe debtor.

2. If no services were rendered but the creditor simply condones the debt, it istaxable gift and not a taxable income.

424 The donor’s capacity shall be determined as of the time of the making of the donation (Art. 737, NCC)425 Donative intent is necessary only in cases of direct gift. If the gift is indirectly taking place by way ofsale, exchange or other transfer of property as contemplated in cases of transfers for less than adequateand full consideration (Sec. 100, NIRC), not always essential to constitute a gift.426 Transfers that are not bona fide sales of property for an adequate and full consideration in money ormoney’s worth427 Sec. 85 (G)

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7. Transfer for less than adequate and full consideration

The amount by which the fair market value of the property exceeded the value of theconsideration shall be deemed a gift, and shall be included in computing the amount of giftsmade during the calendar year.428

8. Classification of donor

Taxable within and outside Philippines Taxable only within the Philippines

a. Resident citizen

b. Non-resident citizen

c. Resident alien

d. Domestic corporation

a. Non-resident aliens

b. Foreign corporation

9. Determination of gross gift

All property, real or personal, tangible or intangible, that was given by the donor tothe donee by way of gift, without the benefit of any deduction.429

10. Composition of gross gift

Resident citizen, non-resident citizen, andresident alien

Non-resident alien

a. Real property wherever situated;

b. Personal property wherever situated,tangible or intangible.

a. Real property situated within thePhilippines;

b. Personal property:

i. Tangible property situated within thePhilippines

ii. Intangible personal property with situsin the Philippines unless exempted on thebasis of reciprocity.430

428 Sec. 100429 Sec. 104430 Where the decedent or donor was a nonresident alien at the time of his death or donation, his realand personal property so transferred but which are situated outside the Philippines shall not be includedas part of his "gross estate" or "gross gift (see Sec. 104)

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11. Valuation of gifts made in property

Personal property Real property

The fair market value of the property givenat the time of the gift.

The fair market value at the time of donationor the value fixed by the assessor, whicheveris higher.431

12. Tax credit for donor’s taxes paid in a foreign country

The tax imposed upon a donor who was a citizen or a resident at the time ofdonation shall be credited with the amount of any donor's tax of any character anddescription imposed by the authority of a foreign country. 432

13. Exemptions of gifts from donor’s tax

1. Donation for political campaign purposes433

2. Certain gifts made by residents434

3. Certain gifts made by non-residents435

431 Sec. 102.432 Sec. 101(C)433 Sec. 99[C]434 (1) Dowries or gifts made on account of marriage and before its celebration or within one (1) yearthereafter by parents to each of their legitimate, recognized natural, or adopted children to the extent ofthe first Ten thousand pesos (P10,000):

(2) Gifts made to or for the use of the National Government or any entity created by any of itsagencies which is not conducted for profit, or to any political subdivision of the said Government; and

(3) Gifts in favor of an educational and/or charitable, religious, cultural or social welfare corporation,institution, accredited nongovernment organization, trust or philanthropic organization or researchinstitution or organization. Not more than thirty percent (30%) of said gifts shall be used by such doneefor administration purposes (Sec.101[A])

For the purpose of the exemption, a 'non-profit educational and/or charitable corporation, institution,accredited nongovernment organization, trust or philanthropic organization and/or research institution ororganization' is a school, college or university and/or charitable corporation, accredited nongovernmentorganization, trust or philanthropic organization and/or research institution or organization, incorporatedas a non-stock entity, paying no dividends, governed by trustees who receive no compensation, anddevoting all its income, whether students' fees or gifts, donation, subsidies or other forms ofphilanthropy, to the accomplishment and promotion of the purposes enumerated in its Articles ofIncorporation.435 (1) Gifts made to or for the use of the National Government or any entity created by any of its agencieswhich is not conducted for profit, or to any political subdivision of the said Government.

(2) Gifts in favor of an educational and/or charitable, religious, cultural or social welfare corporation,institution, foundation, trust or philanthropic organization or research institution or organization. Notmore than thirty percent (30%) of said gifts shall be used by such donee for administration purposes(Sec.101[B])

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4. Donation of intangibles subject to reciprocity436

5. Donation for athlete’s prizes and awards437

6. Donation under the “Adopt-a-School Program”438

7. Exemption under other special laws.439

14. Person liable

Any person, resident or nonresident, of the property transferred by gift.

Any person making a donation unless the donation is specifically exempted underNIRC or other special laws, is required for every donation to accomplish under oath adonor’s tax return in duplicate.

15. Tax basis

The total net gifts made during the calendar year.440

436 Sec. 104437 1. The donation must be prizes and awards given to athletes in local and international tournamentsand competitions;

2. held in the Philippines or abroad; and3. sanctioned by their respective sports association. (Sec. 1, R.A. 7549)

438 Any aid, help, contribution or donation provided by an adopting private entity to a government school,whether elementary, secondary or tertiary are exempt from donor’s taxes. The assistance may be in theform of, but not limited to infrastructure, teaching, and skills development, learning, support, computerand science laboratories and food and nutrition (R.A. 8525)439 1. Donation to International Rice Research Institute (IRRI)

2. Donation to Ramon Magsaysay Award Foundation3. Donation to Philippines Inventors Convention (PIC)4. Donation to Integrated Bar of the Philippines (IBP)5. Donation to the Development Academy of the Philippines6. Donation to social welfare, cultural or charitable institution, no part of the net income of which

inures to the benefit of any individual, if not more than 30% of the donation shall be used by the done foradministration purposes

7. Donation to Aquaculture Department of the Southeast Asian Fisheries Development Center of thePhilippines

8. Donation to the National Museum9. Donation to the National Library

10. Donation to the National Social Action Council11. Donation to the Philippine American Cultural Foundation12. Donation to Task Force on Human Settlement on the donation of equipment, materials, and services

440 Sec. 99 (A)

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D. Value-Added Tax (VAT)

1. Concept

VAT is a percentage tax imposed at every stage of the distribution process on thesale, barter, or exchange, or lease of goods or properties, and on the performance of servicein the course of trade or business, or on the importation of goods, whether for businessor non-business purposes.

It is a business tax levied on certain transactions involving a wide range ofgoods, properties, and services, such tax being payable by the seller, lessor, or transferor. Thetax is so- called because it is imposed on the value not previously subjected to VAT.441

It is also an excise tax, or a tax on the privilege of engaging in the business of sellinggoods or services, or in the importation of goods.

The taxpayer442 determines his tax liability by computing the tax on the gross sellingprice or gross receipt443 and subtracting or crediting the earlier VAT on the purchase orimportation of goods or on the sale of service444 against the tax due on his own sale.

2. Characteristics

It is an indirect tax, the amount of which may be shifted to or passed on the buyer,transferee, or lessee of the goods, properties or services.445

It is equitable: The law is equipped with a threshold margin (P1.5M). Also, basicmarine and agricultural products in their original state are still not subject to tax.Congress also provided for mitigating measures to cushion the impact of the imposition ofthe tax on those previously exempt. Excise taxes on petroleum products and natural gaswere reduced. Percentage tax on domestic carriers was removed. Power producers arenow exempt from paying franchise tax.

VAT, by its very nature, is regressive. But the Constitution does not reallyprohibit the imposition of indirect taxes which is essentially regressive. What it simplyprovides is that Congress shall “evolve a progressive system of taxation.”446

441 De Leon, “The National Internal Revenue Code Annotated,” 2000 edition442 seller443 output tax444 input tax445 Sec. 105

This rule shall likewise apply to existing contracts of sale or lease of goods, properties or services at thetime of the effectivity of R.A. No. 9337 (RR 16-2005)446 In Tolentino v. Sec. of Finance, the Court said that direct taxes are to be preferred, and as much aspossible, indirect taxes should be minimized… but not avoided entirely because it is difficult, if notimpossible, to avoid them.

The Constitution mandate to “evolve a progressive system of taxation” simply means that direct taxesare to be preferred as much as possible, and indirect taxes should be minimized. Resort to indirect taxesshould be minimized but not avoided entirely. Also, the regressive effects are corrected by the zero rating

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Other Characteristics:

a. It is consumption-based

b. It is imposed on the value-added in each stage of distribution

c. It is a credit-invoice method value-added tax

d. It is not a cascading tax.

3. Impact of tax447

The seller448 upon whom the tax has been imposed.

4. Incidence of tax449

It is on the final consumer, the place at which the tax comes to rest. The tax isshifted to the buyer of the goods, properties, or services.

5. Tax credit method450

The input tax shifted by the seller to the buyer is credited against the buyer’s outputtaxes when he in turn sells the taxable goods, properties or services.

This method relies on invoices, an entity can credit against or subtract from the VATcharged on its sales or outputs the VAT paid on its purchases, inputs and imports.451

If at the end of a taxable period, the output taxes charged by a seller are equal to theinput taxes passed on by the suppliers, no payment is required. It is when the output taxesexceed the input taxes that the excess has to be paid. If however, the input taxes exceed theoutput taxes, the excess shall be carried over to the succeeding quarter or quarters. Shouldthe input taxes result from zero-rated or effectively zero-rated transactions or from

of certain transactions and through the exemptions. The transactions which are subject to VAT are thosewhich involve goods and services which are used or availed of mainly by higher income groups (Realproperties held primarily for sale to customers, right or privilege to use patent, copyright.)447 The point on which a tax is originally imposed. In so far as the law is concerned, the taxpayer is theperson who must pay the tax to the government. He is also termed as the statutory taxpayer-the one onwhom the tax is formally assessed. He is the subject of the tax448 manufacturer449 That point on which the tax burden finally rests or settle down. It takes place when shifting has beeneffected from the statutory taxpayer to another450 also called “invoice method”451 Commissioner of Internal Revenue v. Seagate Technology Philippines, G. R. No. 153866, February 11,2005 citing various cases and authorities; Abakada Guro Party List (etc.) v. Ermita, etc., et al., G. R. No.168056, September 1, 2005 and companion cases)

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acquisition of capital goods, any excess over the output taxes shall instead be refunded to thetaxpayer or credited against other internal revenue taxes.452

6. Destination principle453

Under this doctrine, goods and services are taxed only in the country where they areconsumed. No VAT shall be imposed to form part of the cost of goods destined outside theterritorial border of the taxing authority. Thus, exports are zero-rated, whileimports are taxed.

Actual shipment of the goods from the Philippines to a foreign country is aprecondition of an export sale following the destination principle being adhered to by ourVAT system.

VAT is imposed in the country in which the products or services are actuallyconsumed or used. Exports exempt, imports taxable.454

7. Persons liable455

A. Any person who, in the regular course of trade or business456

1) sells, barters, exchanges goods or properties,

2) leases goods or properties,

3) renders services; and

4) any person who imports goods.457

452 Commissioner of Internal Revenue v. Seagate Technology (Philippines), G. R. No. 153866, February 11,2005 citing various cases and authorities453 or the “Cross Border Doctrine454 Situs: country of Consumption.

Exception to the destination principle:A zero percent VAT rate for services that are performed in the Philippines, "paid for in acceptable

foreign currency and accounted for in accordance with the rules and regulations of the BSP."Hence, actual or constructive export of goods and services from the Philippines to a foreign country

must be zero-rated for VAT; while, those destined for use or consumption within the Philippines shall beimposed the twelve percent (12%) VAT.455 whether or not in the regular course of business (Sec. 105)

Present law requires a threshold amount of P1,500,000.00 gross sale or gross receipt to become liablefor value-added tax.456 The phrase “in the course of trade or business” means the regular conduct or pursuit of a commercialor an economic activity, including transactions incidental thereto, by any person regardless of whether ornot the person engaged therein is a non-stock, nonprofit organization (irrespective of the disposition of itsnet income and whether or not it sells exclusively to members or their guests), or government entity (Sec.105)457 The importer, whether an individual or corporation and whether or not made in the course of histrade or business, shall be liable to pay VAT. (RR 16-2005)

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Consequently, any sale, barter or exchange of goods or services not in the course oftrade or business is not subject to VAT.458

8. VAT on sale of goods or properties

a. Requisites of taxability of sale of goods or properties:

1. There is an actual or deemed sale, barter or exchange of goods or personalproperties for valuable consideration;

2. The sale is in the course of trade or business or exercise of profession in thePhilippines;

3. The goods or properties are located in the Philippines and are for use orconsumption therein; and

4. The sale is not exempt from VAT under Section 109 of NIRC, special law,international agreement binding upon the government of the Philippines.459

9. Zero-rated sales of goods or properties, and effectively zero-ratedsales of goods or properties

The gross selling price of goods or properties is multiplied by 0% VAT rate. Zero-rated sale of goods or properties by a VAT-registered person is a taxable transaction forVAT purposes but the sale does not result in any output tax.

However, the input tax on the purchases of goods, properties or services related tosuch zero-rated sale shall be available as tax credit or refund.

Zero-rated sales of goods by a VAT-registered person:

a. Export Sales460

b. Foreign Currency Denominated Sale461

c. Sale to persons or entities which is VAT exempt under special laws orinternational agreements to which the Philippines is a signatory462

d. Transactions subject to zero-rated (0%)463

458 Commissioner v. Magsaysay Lines Inc., G.R. No. 146984, July 28, 2006459 Absence of any of the above requisites exempts the transaction from VAT. However, percentage taxesmay apply (Section 116, NIRC).460 as provided in Section 106(A)(2)(a), See Reference461 id. (A)(2)(b)462 id. (A)(2)(c)463 as provided in Section 108(B)

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10. Transactions deemed sale464

a. Transfer, use or consumption not in the course of businessof goods/properties originally intended for sale or use inthe course of business.

e.g. when a VAT-registered person withdraws goods from his business for hispersonal use.

b. Distribution or transfer to shareholders, investors orcreditors

1. Shareholders or investors as share in the profits of the VAT-registered persons;or2. Creditors in payment of debt.465

c. Consignment of goods if actual sale not made within 60days from date of consignment

Consigned goods returned by the consignee within the 60-day period are not deemedsold.466

d. Retirement from or cessation of business with respect toinventories on hand

As of the date of such retirement or cessation, whether or not the business iscontinued by the new owner or successor. Examples are change of ownership of thebusiness467 and dissolution of a partnership and creation of a new partnership which takesover the business.468

464 Sec. 106 (B)The transactions are “deemed sale” because in reality there is no sale, but still the law provides that

the following transactions are considered as sale and are thus subject to VAT.465 Property dividends which constitute stocks in trade or properties primarily held for sale or leasedeclared out of retained earnings on or after Jan. 1, 1996 and distributed by the company to itsshareholders shall be subject to VAT based on the zonal value or FMV at the time of the distribution,whichever is applicable. ( RR 16-2005)466 RR 16-2005467 e.g. when a sole proprietorship incorporates, or the proprietor sells his entire business468 RR 16-2005

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11. Change or cessation of status as VAT-registered person

VAT shall apply to goods disposed of or existing as of a certain date if under thecircumstances, the status of a person as a VAT-registered person changes or is terminated.

a. Subject to VAT

Subject to output tax - applicable to goods/properties originally intended for sale oruse in business and capital goods which are existing as of the occurrence of the following:

1) Change of business activity from VAT taxablestatus to VAT-exempt status

2) Approval of request for cancellation of aregistration due to reversion to exempt status

3) Approval of request for cancellation of registrationdue to desire to revert to exempt status after lapseof 3 consecutive years469

b. Not subject to VAT

1) Change of control of a corporation

By the acquisition of the controlling interest of such corporation by anotherstockholder or group of stockholders.

The goods or properties used in the business or those comprising the stock-in tradeof the corporation will not be considered sold, bartered or exchanged despite the change inthe ownership interest. However, exchange of property by corporation acquiring control forthe shares of stocks of the target corporation is subject to VAT.

2) Change in the trade or corporate name

Change in the trade or corporate name of the business.

3) Merger or consolidation of corporations

The unused input tax of the dissolved corporation, as of the date of merger orconsolidation, shall be absorbed by the surviving or new corp.

469 from the time of registration by a person who voluntarily registered despite being exempt under Sec.109 (2)

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12. VAT on importation of goods

VAT shall be assessed and collected upon goods brought into the Philippines,whether or not goods are for use in business.

a. Transfer of goods by tax exempt persons

The subsequent purchasers, transferees or recipients of such imported goods shall beconsidered as importers who shall be liable for the tax on importation.

The tax due on such importation shall constitute a lien on the goods superior to allcharges or liens on the goods, irrespective of the possessor thereof.470

13. VAT on sale of service and use or lease of properties

a. Requisites for taxability

1. There is a sale or exchange of service or lease or use of property enumerated inthe law or other similar services;

2. The service is performed or to be performed in the Philippines;

3. The service is in the course of trade of taxpayer’s trade or business or profession;

4. The service is for a valuable consideration actually or constructively received; and

5. The service is not exempt under the Tax Code, special law or internationalagreement.471

14. Zero-rated sale of services472

1) Processing, manufacturing or repacking goods for other persons doing businessoutside the Philippines which goods are subsequently exported, where the services are paidfor in acceptable foreign currency and accounted for in accordance with the rules andregulations of the BSP.

2) Services other than those mentioned in the preceding paragraph rendered to aperson engaged in business conducted outside the Philippines or to a nonresident personnot engaged in business who is outside the Philippines when the services are performed, theconsideration for which is paid for in acceptable foreign currency and accounted for inaccordance with the rules and regulations of the BSP.

470 Sec. 107 (B)471 Absence of any of the requisites renders the transaction exempt from VAT but may be subject to otherpercentage tax under Title V of the Tax Code.472 Ibid. (B)

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3) Services rendered to persons or entities whose exemption under special laws orinternational agreements to which the Philippines is a signatory effectively subjects thesupply of such services to zero percent (0%) rate.

4) Services rendered to persons engaged in international shipping or international airtransport operations, including leases of property for use thereof;473 Provided, however, thatthe services referred to herein shall not pertain to those made to common carriers by air andsea relative to their transport of passengers, goods or cargoes from one place in the Phil. toanother place in the Phil., the same being subject to 12% VAT under Sec. 108.474

5) Services performed by subcontractors and/or contractors in processing,converting, of manufacturing goods for an enterprise whose export sales exceed seventypercent (70%) of total annual production.

6) Transport of passengers and cargo by air or sea vessels from the Philippines to aforeign country and;

7) Sale of power or fuel generated through renewable sources of energy such as, butnot limited to, biomass, solar, wind, hydropower, geothermal, ocean energy, and otheremerging energy sources using technologies such as fuel cells and hydrogen fuels.475 Zero-rating shall apply strictly to the sale of power or fuel generated through renewable sources ofenergy, and shall not extend to the sale of services related to the maintenance or operationof plants generating said power.

15. VAT exempt transactions

a. VAT exempt transactions, in general

It involves goods or services which, by their nature, are specifically listed in andexpressly exempted from VAT under the Tax Code, without regard to the tax status of theparty to the transaction.

473 Ibid..474 supra475 Ibid.

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b. Exempt transactions, enumerated

1. Sale/ import of agricultural, marine food products in original state;476 of livestockand poultry.477

Polished and/or husked rice, corn grits, raw cane sugar and molasses, ordinary salt,and copra shall be considered in their original state.

2. Sale/ import of fertilizers; seeds, seedlings and fingerlings; fish, prawn, livestockand poultry feeds.

3. Import of personal and household effects of Phil resident returning from abroadand nonresident citizens coming to resettle in the Philippines

4. Import of professional instruments and implements, wearing apparel, domesticanimals, and personal household effects belonging to persons coming to settle in thePhilippines, for their own use and not for sale, barter or exchange.

5. Services subject to percentage tax.

6. Services by agricultural contract growers and milling for others of palay into rice,corn into grits and sugar cane into raw sugar;

7. Medical, dental, hospital and veterinary services except those rendered byprofessionals.478

8. Educational services rendered by private educational institutions, dulyaccredited by DEPED, CHED, TESDA, and those rendered by government educationalinstitutions.

9. Services rendered by individuals pursuant to an employer-employee relationship;

10. Services rendered by regional or area headquarters established in the Philippinesby multinational corporations which act as supervisory, communications and coordinatingcenters for their affiliates, subsidiaries or branches in the Asia-Pacific Region and donot earn or derive income from the Philippines;

11. Transactions which are exempt under international agreements to which thePhilippines is a signatory or under special laws, except those under P.D. No. 529.479

476 Original state –including preservation using advanced technological means of packaging, such as shrinkwrapping in plastics, vacuum packing, tetra-pack, and other similar packaging methods (RR 16-2005)

Original state even if they have undergone the simple processes of preparation or preservation for themarket, such as freezing, drying, salting, broiling, roasting, smoking or stripping.477 Livestock or poultry does not include fighting cocks, race horses, zoo animals and other animalsgenerally considered as pets478 Ibid

Laboratory services are exempted. If the hospital or clinic operates a pharmacy or drug store, thesale of drugs and medicine is subject to VAT. [RR 16-2005]479 Petroleum Exploration Concessionaires under the Petroleum Act of 1949

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12. Sales by agricultural cooperatives duly registered with the CooperativeDevelopment Authority to their members as well as sale of their produce. Exemptionincludes importation of direct farm inputs, machineries and equipment, including spare partsthereof, to be used directly and exclusively in the production and/or processing of theirproduce.

13. Gross receipts from lending activities by credit or multi-purpose cooperativesduly registered with the Cooperative Development Authority.

14. Sales by non-agricultural, non- electric and non-credit cooperatives dulyregistered with the Cooperative Development Authority are exempt but their importation ofmachineries and equipment, including spare parts thereof, to be used by them are subject tovat.

15. Export sales by persons who are not VAT- registered;

16. Sale of real properties – the ff. sales are exempt:

a. Sale of real properties NOT primarily held for sale to customers or heldfor lease in the ordinary course of trade or business.

b. Sale of real properties utilized for low-cost housing480

c. Sale of real properties utilized for socialized housing.481

d. Sale of residential lot valued at P1.5M and below, or house & lot andother residential dwellings valued at P2.5M and below, where the instrument ofsale/transfer/disposition was executed on or after July 1, 2005.482

480 “Low-cost housing" refers to housing projects intended for homeless low-income family beneficiaries,undertaken by the Government or private developers, which may either be a subdivision or acondominium registered and licensed by the Housing and Land Use Regulatory Board/Housing (HLURB)under B.P. Blg. 220, P.D. No. 957 or any other similar law, wherein the unit selling price is within theselling price ceiling per unit of P750,000.00 under R.A. No. 7279, and other laws, such as R.A. No. 7835and R.A. No. 8763.481 "Socialized housing" refers to housing programs and projects covering houses and lots or home lotsonly undertaken by the Government or the private sector for the underprivileged and homeless citizenswhich shall include sites and services development, long-term financing, liberated terms on interestpayments, and such other benefits in accordance with the provisions of RA No. 7279 and RA No. 7835and RA No. 8763. "Socialized housing" shall also refer to projects intended for the underprivilegedand homeless wherein the housing package selling price is within the lowest interest rates under theUnified Home Lending Program (UHLP) or any equivalent housing program of the Government, the privatesector or non-government organizations482 To be adjusted every 3 years from Jan 31, 2009

If two or more adjacent residential lots are sold or disposed in favor of one buyer, for the purpose ofutilizing the lots as one residential lot, the sale shall be exempt from VAT only if the aggregate value of thelots does not exceed P1.5M. Adjacent residential lots, although covered by separate titles and/orseparate tax declarations, when sold or disposed to one and the same buyer, whether covered by one orseparate Deed of Conveyance, shall be presumed as a sale of one residential lot (RR 16-2005)

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17. Lease of residential units with a monthly rental per unit not exceeding P10K,regardless of the amount of aggregate rentals received by the lessor during the year.Lease of residential units where the monthly rental per unit exceeds P10K but theaggregate of such rentals of the lessor during the year do not exceed One Million FiveHundred Pesos (P1.5M) shall likewise be exempt from VAT, however, the same shallbe subjected to three percent (3%) percentage tax.

In cases where a lessor has several residential units483 for lease, some areleased out for a monthly rental per unit of not exceeding P10K while others are leased outfor more than P10K per unit, his tax liability will be as follows:

a. The gross receipts from rentals not exceeding P10K per month per unitshall be exempt from VAT regardless of the aggregate annual gross receipts.

b. The gross receipts from rentals exceeding P10K per month per unit shallbe subject to VAT if the aggregate annual gross receipts from said units only484

exceeds P1.5M. Otherwise, the gross receipts will be subject to the 3% tax.

18. Sale, importation, printing or publication of books and any newspaper, magazinereview or bulletin which appears at regular intervals with fixed prices for subscription andsale and which is not devoted principally to the publication of paid advertisements;

19. Sale, importation or lease of passenger or cargo vessels and aircraft, includingengine, equipment and spare parts thereof for domestic or international transportoperations.

20. Importation of fuel, goods, and supplies by persons engaged in internationalshipping or air transport operations.

21. Services of banks, non-bank financial intermediaries performing quasi-bankingfunctions and other non-bank financial intermediaries; and

22. Sale or lease of goods or properties or the performance of services other than thetransactions mentioned in the preceding paragraphs, the gross annual sales and/orreceipts do not exceed the amount of P1,500,0000.485

16. Input tax and output tax, defined

483 The term 'residential units' shall refer to apartments and houses & lots used for residential purposes,and buildings or parts or units thereof used solely as dwelling places (e.g., dormitories, rooms and bedspaces) except motels, motel rooms, hotels and hotel rooms.

The term 'unit' shall mean an apartment unit in the case of apartments, house in the case ofresidential houses; per person in the case of dormitories, boarding houses and bed spaces; and per roomin case of rooms for rent. [RR 16-2005]484 not including the gross receipts from units leased for not more than P10K485 Sec. 109

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Input tax Output tax

The VAT due from or paid by a VAT-registered person in the course of his tradeor business on importation of goods orlocal purchase of goods or services, includinglease or use of property, from a VAT-registered person. It includes the transitionalinput tax determined in accordance withSection 111486 of this Code.

It includes input taxes which can be directlyattributed to transactions subject to the VATplus a ratable portion of any input tax whichcannot be directly attributed to either thetaxable or exempt activity. Input tax must beevidenced by a VAT invoice or officialreceipt issued by a VAT- registered person inaccordance with Secs. 113 and 237487 of theTax Code.488

The VAT due on the sale or lease of taxablegoods or properties or services by anyperson registered or required to registerunder Section 236489 of the Code.

17. Sources of input tax

a. Purchase or importation of goods490

b. Purchase of real properties for which a VAT has actuallybeen paid

c. Purchase of services in which VAT has actually been paid

d. Transactions deemed sale491

e. Transitional input tax492

486 Ibid.487 Ibid.488 RR 16-2005489 See Reference490 (i) For sale; or

(ii) For conversion into or intended to form part of a finished product for sale including packagingmaterials; or

(iii) For use as supplies in the course of business; or(iv) For use as materials supplied in the sale of service; or(v) For use in trade or business for which deduction for depreciation or amortization is allowed under

this Code, except automobiles, aircraft and yachts. (Sec. 110 (A)(1)491 supra492 See input tax, supra

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It is an input tax credit allowed to person who becomes liable to value-added tax orany person who elects to be a VAT-registered person. The allowed input tax shall bewhichever is higher between:

1. 2% of the value of the taxpayer’s beginning inventory of goods, materialsand supplies; or

2. The actual value-added tax paid on such goods.493

f. Presumptive input tax

It is an input tax credit allowed to persons or firms engaged in the:

1. processing of:

a. sardines

b. mackerel

c. milk

2. manufacturing of:

a. refined sugar

b. cooking oil

c. packed noodle based instant meals

The allowed input tax shall be equivalent to four percent (4%) of the gross value inmoney of their purchases of primary agricultural products which are used as inputs to theirproduction.494

g. Transitional input tax credits allowed under the transitoryand other provisions of the regulations495

A person who becomes liable to value-added tax or any person who elects to be aVAT-registered person shall be allowed input tax on his beginning inventory of goods,materials and supplies equivalent to two percent (2%) of the value of such inventory or theactual value-added tax paid on such goods, materials and supplies, whichever is higher,which shall be creditable against the output tax.496

493 Sec.111 (A)494 The term "processing" shall mean pasteurization, canning and activities which through physical orchemical process alter the exterior texture or form or inner substance of a product in such manner as toprepare it for special use to which it could not have been put in its original form or condition (Id. (B))495 See e) Transitional input tax, supra496 Sec. 111 (A)

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18. Persons who can avail of input tax credit

(a) Purchaser - upon consummation of sale and on importation of goods orproperties;497 and

(b) Importer - upon payment of the value-added tax prior to the release of thegoods from the custody of the Bureau of Customs.

However, in the case of purchase of services, lease or use of properties, theinput tax shall be creditable to the purchaser, lessee or licensee upon payment of thecompensation, rental, royalty or fee.498

19. Determination of output/input tax; VAT payable; Excess inputtax credits

a. Determination of output tax

Sellers of goods or properties:

Gross selling price (X) VAT rate

Sellers of service:

Gross receipts (X) VAT rate

b. Determination of input tax creditable

The sum of the excess input tax carried over from the preceding month or quarterand the input tax creditable to a VAT-registered person during the taxable month or quartershall be reduced by the amount of claim for refund or tax credit for value-added tax andother adjustments, such as purchase returns or allowances and input tax attributable toexempt sale.

The claim for tax credit shall include not only those filed with the Bureau of InternalRevenue but also those filed with other government agencies.499

497 In the case of purchase of services, lease or use of properties, the input tax shall be creditable to thepurchaser, lessee or licensee upon payment of the compensation, rental, royalty or fee.498 Sec. 110 (A)(2)499 such as the Board of Investments or the Bureau of Customs (Sec. 110 (C))

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c. Allocation of input tax on mixed transactions

A VAT-registered person who is also engaged in transactions not subject to Vat shallbe allowed to recognize input tax credit on transactions subject to Vat as follows:

1. All the input taxes that can be directly attributed to transactions subject to VATmay be recognized for input tax credit. Input taxes that can be directly attributable to VATtaxable sales of goods and services to the Government or any of its political subdivisions,instrumentalities or agencies, including government-owned or controlled corporations(GOCCs) shall not be credited against output taxes arising from sales to non-Governmententities; and

2. If any input tax cannot be directly attributed to either a VAT taxable or VAT-exempt transaction, the input tax shall be pro-rated to the VAT taxable and VAT-exempttransactions and only the ratable portion pertaining to transactions subject to VAT may berecognized for input tax credit.500

d. Determination of the output tax and VAT payable andcomputation of VAT payable or excess tax credits

Output taxLess: Input taxVAT payable/ excess tax credits

20. Substantiation of input tax credits501

Transactions Required Support

Input taxes on domestic purchases of goodsor properties made in the course of trade orbusiness

VAT invoice

Input tax on purchases of real property

a. Cash/deferred basis Public instrument502 together with the VATinvoice for the entire selling price andnon-VAT Official Receipt for the initial andsucceeding payments.

500 Input tax attributable to VAT-exempt sales shall not be allowed as credit against the output tax butshould be treated as part of cost of goods sold.

For persons engaged in both zero-rated sales and nonzero rated sales, the aggregate input taxes shallbe allocated ratably between the zero-rated and non-zero rated sales.501 RR 16-2005502 i.e., deed of absolute sale, deed of conditional sale, contract/agreement to sell, etc.

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b. Installment basis Public instrument and VAT Official Receiptfor every payment

Input tax on domestic purchases of service VAT Official Receipt

Input tax on importation of goods Import entry or other equivalent documentshowing actual payment of VAT on theimported goods

Transitional input tax Inventory of goods asshown in a detailed list tobe submitted to the BIR

Input tax on “deemed sale transaction” Required invoices

Input tax from payments made to non-residents503

Monthly Remittance Return of Value AddedTax Withheld504 filed by the resident payor inbehalf of the non-resident evidencingremittance of VAT due which was withheldby the payor.

Advance VAT on sugar Payment order showing payment of theadvance VAT

503 such as for services, rentals, or royalties504 BIR Form 1600

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21.Refund or tax credit of excess input tax

a. Who may claim for refund/apply for issuance of tax creditcertificate (TCC)

Any VAT-registered person, whose sales are zero-rated or effectively zero-rated mayapply for the issuance of a tax credit certificate or refund of creditable input tax due or paidattributable to such sales, except transitional input tax, to the extent that such input tax hasnot been applied against output tax.505

b. Period to file claim/apply for issuance of TCC

Within two (2) years after the close of the taxable quarter when the sales were made.

c. Manner of giving refund

Upon warrants drawn by the Commissioner or by his duly authorized representativewithout the necessity of being countersigned by the Chairman, Commission on audit, subjectto post audit by the Commission on Audit.506

d. Destination principle or Cross-border doctrine507

Destination principle Cross border doctrine

Goods and services are taxed only in thecountry where these are consumed

Mandates that no VAT shall be imposed toform part of the cost of the goods destinedfor consumption outside the territorialborder of the taxing authority.

22. Invoicing requirements

a. Invoicing requirements in general

For every sale, a VAT-registered person shall issue an invoice or receipt.

Aside from the information required under Section 237,508 the following informationshall be indicated in the invoice or receipt:

(1) A statement that the seller is a VAT-registered person, followed by his taxpayer'sidentification number (TIN); and

505 Sec. 112 (A)506 Id. (E)507 See also (D)(7), supra508 See Reference

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(2) The total amount which the purchaser pays or is obligated to pay to the sellerwith the indication that such amount includes the value-added tax.

b. Invoicing and recording deemed sale transactions

Transaction Invoicing Requirement

Transfer, use or consumption not inthe course of business of goods orproperties originally intended for saleor for use in the course of business

Memorandum entry in the subsidiary salesjournal to record withdrawal of goods forpersonal use

Distribution or transfer toshareholders/investors or creditors

Invoice, at the time of the transaction,which should include all the info prescribedin Sec. 113 (B)509Consignment of goods if actual sale is

not made within 60 days

Retirement from or cessation ofbusiness with respect to all goods inhand

An inventory shall be prepared andsubmitted to the RDO who has jurisdictionover the taxpayer’s principal place ofbusiness not later than 30 days afterretirement or cessation from the business.An invoice shall be prepared for the entireinventory, which shall be the basis of theentry into the subsidiary sales journal. Theinvoice need not enumerate the specificitems appearing in the inventory regardingthe description of the goods. If the businessis to be continued by the new owners orsuccessors, the entire amount of output taxon the amount deemed sold shall be allowedas input taxes.

509 Ibid.

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c. Consequences of issuing erroneous VAT invoice or VATofficial receipt

1. In case of non-VAT registered person who issues a VAT invoice/receipt shall beheld liable to:

a. payment of percentage tax if applicable;

b. payment of VAT without input tax;

c. 50% surcharge on tax due; and

d. the purchaser shall be allowed to recognize an input tax credit provided that theinvoice/official receipt contains the required information.

2. In case of VAT-registered who issues a VAT invoice/official receipt for a VAT –exempt sale without the words “VAT Exempt Sale” shall be held liable to pay 12% VAT.510

23.Filing of return and payment

Every person liable to pay the VAT shall file a quarterly return of the amount of hisgross sales or receipts within 25 days following the close of each taxable quarter prescribedfor each taxpayer.

Required to file VAT return:

1. Every person or entity who in the course of trade or business, sells or leasesgoods, properties, and services subject to VAT, if the aggregate amount of actual grosssales or receipts exceed P1.5 million for any twelve month period

2. A person required to register as VAT taxpayer but failed to register

3. Any person who imports goods

4. Professional practitioners.511

VAT-registered shall pay the VAT on a monthly basis. The monthly return shall befiled not later than the 20th day following the end of each month.

510 Sec. 113 (D)511 Services of Professional Practitioners are subject to:

VAT if the gross professional fees exceed P1.5 million for a 12-month period; or3% percentage tax if the gross professional fees does not exceed P1.5 million for a 12-month period

(RR 16-2005)

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24. Withholding of final VAT on sales to government

The Government or any of its political subdivisions, instrumentalities or agencies,including government owned or controlled corporations (GOCCs) shall, before makingpayment on account of its purchase of goods and/or services taxed at 12% shall deduct andwithhold a final VAT of 5% of the gross payment.512

512 Sec. 114 (C)The five percent (5%) final VAT withholding rate shall represent the net VAT payable to the sellerThe remaining seven percent (7%) effectively accounts for the standard input VAT for sales of goods or

services to government or any of its political subdivisions, instrumentalities or agencies including GOCCs,in lieu of the actual Input VAT directly attributable or ratably apportioned to such sales.

Should actual input VAT attributable to sale to government exceed seven percent (7%) of grosspayments, the excess may form part of the seller’s expense or cost

If actual input VAT attributable to sale to government is less than 7% of gross payment, the differencemust be closed to expense or cost.

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E. Compliance Requirements (Internal Revenue Taxes)

1. Administrative requirements

a. Registration requirements

1) Annual registration fee

Five hundred pesos (P500) - upon registration and every year thereafter on or beforethe last day of January for every separate or distinct establishment or place of business.513

2) Registration of each type of internal revenue tax

Every person who is required to register with the Bureau of Internal Revenue shallregister each type of internal revenue tax for which he is obligated, shall file a return andshall pay such taxes, and shall update such registration of any changes.514

3) Transfer of registration

In case a registered person decides to transfer his place of business or his head officeor branches, it shall be his duty to update his registration status by filing an application forregistration information update in the form prescribed therefor.515

4) Other updates

Any person registered shall, whenever applicable, update his registration informationwith the Revenue District Office where he is registered, specifying therein any change in typeand other taxpayer details.516

5) Cancellation of registration

The registration of any person who ceases to be liable to a tax type shall be cancelledupon filing with the Revenue District Office where he is registered an application forregistration information update in a form prescribed therefor.517

513 Cooperatives, individuals earning purely compensation income, whether locally or abroad, andoverseas workers are not liable to the registration fee herein imposed.

The registration fee shall be paid to an authorized agent bank located within the revenue district, orto the Revenue Collection Officer, or duly authorized Treasurer of the city of municipality where eachplace of business or branch is registered.Sec. 236 (B)514 in accordance with Subsection (E), Id., (C)515 Id., (D)516 Id., (E)517 Id., (F)

Other instances where a VAT registered person may apply for cancellation ofRegistration:

1. A change of ownership, in case of a single proprietorship2. Dissolution of a partnership or corporation

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6) Power of the Commissioner to suspend thebusiness operations of any person who fails toregister

The temporary closure of the establishment shall be for the duration of not less thanfive (5) days and shall be lifted only upon compliance with whatever requirements prescribedby the Commissioner in the closure order.518

b. Persons required to register for VAT

1) Optional registration for VAT of exempt person

Any person who is not required to register for VAT519 may elect to register for VATby registering with the RDO that has jurisdiction over the head office of that person, andpaying the annual registration fee.520

2) Cancellation of VAT registration

Requirements:

1. The VAT-registered person makes written application and demonstrates to theCommissioner’s satisfaction that his gross sales or receipts for the following 12 months,other than those that are exempt,521 will not exceed P1.5 million.

2. He has ceased to carry on his trade or business and does not expect torecommence any trade or business within the next 12 months.522

3) Changes in or cessation of status of a VAT-registered person523

c. Supplying taxpayer identification number (TIN)

A taxpayer must have only one TIN. Any person who secures more than one TINshall be criminally liable.524

3. Merger or consolidation with respect to the dissolved corporation4. A person who has registered prior to commencement of a planned business, but failed to actually

start his business518 Sec. 115519 under Subsection G520 Sec. 236 (H)521 under Sec. 109 1A to U522 Sec. 236 (F2)523 supra524 Sec. 236

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d. Issuance of receipts or sales or commercial invoices

All persons subject to an internal revenue tax shall, for each sale or transfer ofmerchandise or for services rendered valued at 25 pesos or more, issue duly registeredreceipts or sales or commercial invoices, prepared at least in duplicate, showing the date oftransaction, quantity, unit cost and description of merchandise or nature of service.525

1) Printing of receipts or sales or commercial invoices

Receipts must be serially numbered and shall show the name, style, TIN and thebusiness address of the person.526

2) Invoicing requirements for VAT

a) Information contained in the VAT invoiceor VAT official receipt

1. A statement that the seller is a VAT-registered person, followed by his taxpayer'sidentification number (TIN); and

2. The total amount which the purchaser pays or is obligated to pay to the seller withthe indication that such amount includes the value-added tax.

a. The amount of the tax shall be shown as a separate item in the invoice orreceipt;

b. If the sale is exempt from value-added tax, the term "VAT-exempt sale"shall be written or printed prominently on the invoice or receipt;

c. If the sale is subject to zero percent (0%) value-added tax, the term "zero-rated sale" shall be written or printed prominently on the invoice or receipt;

d. If the sale involves goods, properties or services some of which are subjectto and some of which are VAT zero-rated or VAT exempt, the invoice or receiptshall clearly indicate the breakdown of the sale price between its taxable, exempt andzero rated components, and the calculation of the value added tax on each portionof the sale shall be shown on the invoice or receipt. The seller may issue separateinvoices or receipts for the taxable, exempt, and zero rated components of the sale.

3. The date of transaction, quantity, unit cost and description of the goods orproperties or nature of the service; and

4. In the case of sales in the amount of one thousand pesos (P1, 000) or more wherethe sale or transfer is made to a VAT registered person, the name, business style, if any,address and taxpayer identification number (TIN) of the purchaser, customer or client.527

525 Sec. 237526 Sec. 238

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b) Consequences of issuing erroneous VATinvoice or official receipts528

e. Exhibition of certificate of payment at place of business

The certificate or receipts showing payment of taxes issued to a person engaged in abusiness subject to an annual registration fee shall be kept conspicuously exhibited in plainview in or at the place where the business is conducted. Peddlers are required to show thecertificate upon demand.529

f. Continuation of business of deceased person

The person interested in the estate should submit to the BIR inventories of goodsand stocks had at the time of such death, transfer or change of name. No additional paymentshall be required for the residue of the term of which the tax was paid.530

g. Removal of business to other location

Any business for which the annual registration fee has been paid may be removedand continued in any other place without the payment of additional tax during the term forwhich the payment was made.531

527 Sec. 113 (B)528 supra529 Sec. 241530 Sec. 242531 Sec. 243

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2. Tax returns

A tax return is a report made by the taxpayer to the BIR on all gross income receivedduring the taxable year, the allowable deduction including exemptions, the net taxableincome, the income tax rate, the income tax due, the income tax withheld, if any, and theincome tax still to be paid or refundable.

a. Income Tax Returns

1) Individual Tax Returns

a) Filing of individual tax returns

(1) Who are required to file

Resident citizens receiving income fromsources within or outside the Philippines

a. Individuals deriving compensation incomefrom 2 or more employers, concurrently orsuccessively at anytime during the taxableyear;

b. Employees deriving compensation incomeregardless of the amount, whether from asingle or several employers during thecalendar year, the income tax of which hasnot been withheld correctly resulting tocollectible or refundable return;

c.Employees whose monthly grosscompensation income does not exceed 5,000or the statutory minimum wage, whichever ishigher, and opted for non-withholding of taxon said income;

d. Individuals deriving non-business, non-professional related income in addition tocompensation income not otherwise subjectto a final tax;

e. Individuals receiving purely compensationincome from a single employer, although theincome of which has been correctlywithheld, but whose spouse is not entitled tosubstituted filing.

Non-resident citizens receiving incomefrom sources within the Philippines.

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Citizens working abroad receiving incomefrom sources within the Philippines.

Aliens, whether resident or not, receivingincome from sources within the Philippines.

(a) Return of husband andwife

Married individuals, whether citizens, resident or nonresident aliens, who do notderive income purely from compensation, shall file a return for the taxable year to includethe income of both spouses.

Where it is impracticable for the spouses to file one return, each spouse may file aseparate return of income but the returns so filed shall be consolidated by the Bureau forpurposes of verification for the taxable year.532

(b) Return of parent to includeincome of children

The income of unmarried minors derived from property received from a livingparent shall be included in the return of the parent, except

(1) when the donor's tax has been paid on such property, or

(2) when the transfer of such property is exempt from donor's tax.533

(c) Return of persons underdisability

May be made by his duly authorized agent or representative or by the guardian orother person charged with the care of his person or property, the principal and hisrepresentative or guardian assuming the responsibility of making the return and incurringpenalties provided for erroneous, false or fraudulent returns.534

532 Id., (D)533 Id., (E)534 Id., (F)

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(2) Who are not required to file

(a) An individual whose gross income does not exceed his total personal andadditional exemptions for dependents.535

(b) An individual with respect to pure compensation income536 derived from sourceswithin the Philippines, the income tax on which has been correctly withheld.537

(c) An individual whose sole income has been subjected to final withholding tax;538

and(d) A minimum wage earner or an individual who is exempt from income tax.539

b) Where to file

With an authorized agent bank, Revenue District Officer, Collection Agent or dulyauthorized Treasurer of the city or municipality in which such person has his legal residenceor principal place of business in the Philippines.

If there be no legal residence or place of business in the Philippines, with the Officeof the Commissioner.540

c) When to file

On or before the fifteenth (15th) day of April of each year covering income for thepreceding taxable year.

However, individuals who are self-employed or in practice of a profession arerequired to file and pay estimated income tax every quarter as follows:

1. First Quarter - April 15

2. Second Quarter - August 15

535 under Sec. 35, supraA citizen of the Philippines and any alien individual engaged in business or practice of profession within

the Philippine shall file an income tax return, regardless of the amount of gross income.536 Compensation for services in whatever form paid, including, but not limited to fees, salaries, wages,commissions, and similar items.537 under the provisions of Sec. 79, supra

An individual deriving compensation concurrently from two or more employers at any time during thetaxable year shall file an income tax return.

An individual whose compensation income derived from sources within the Philippines exceeds Sixtythousand pesos (P60,000) shall also file an income tax return;538 pursuant to Sec. 57(A), supra539 Id., (A)(2)

Individuals not required to file an income tax return may nevertheless be required to file aninformation return. Under R.A. 9504, minimum wage earners are granted full tax exemption from payingincome tax.540 Id., (B)

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3. Third Quarter - November 15

4. Final Quarter - April 15 of the following year541

2) Corporate Returns

a) Requirement for filing returns

Every corporation subject to tax under the NIRC shall file a corporate tax return,except foreign corporations not engaged in trade or business in the Philippines.542

(1) Declaration of quarterly corporateincome tax

Every corporation shall file in duplicate a quarterly summary declaration of its grossincome and deductions on a cumulative basis for the preceding quarter or quarters uponwhich the income tax shall be levied, collected and paid. The tax so computed shall bedecreased by the amount of tax previously paid or assessed during the preceding quartersand shall be paid not later than sixty (60) days from the close of each of the first three (3)quarters of the taxable year, whether calendar or fiscal year.543

(a) Place of filing

With the authorized agent banks or Revenue District Officer or Collection Agent orduly authorized Treasurer of the city or municipality having jurisdiction over the location ofthe principal office of the corporation filing the return or place where its main books ofaccounts and other data from which the return is prepared are kept.544

(b) Time of fling

Within sixty (60) days following the close of each of the first three (3) quarters of thetaxable year.

(2) Final adjustment return

It is a return that covers the total taxable income of a corporation for the precedingcalendar or fiscal year. The quarterly tax payments are in the nature of advances or portionsof the annual income tax due. They have to be adjusted at the end of the calendar or fiscalyear through the Final Adjustment return.

541 Individuals subject to tax on capital gains;(a) Sale or exchange of shares of stock not traded thru a local stock exchange - within thirty (30) days

after each transaction and a final consolidated return on or before April 15 of each year covering all stocktransactions of the preceding taxable year; and

(b) Sale or disposition of real property - within thirty (30) days following each sale or other disposition.(Sec. 52)542 Ibid.543 Sec. 75544 Sec. 77 (A)

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(a) Place of filing545

(b) Time of filing

On or before the fifteenth (15th) day of April, or on or before the fifteenth (15th)day of the fourth (4th) month following the close of the fiscal year, as the case may be.546

(3) Taxable year of corporations

A corporation may employ either calendar year or fiscal year as a basis for filing itsannual income tax return.

The corporation shall not change the accounting period employed without priorapproval from the Commissioner.547

(4)Extension of time to file return

The Commissioner may, in meritorious cases, grant a reasonable extension of timefor filing returns of income.548

b) Return of corporation contemplatingdissolution or reorganization

Within thirty (30) days after the adoption by the corporation of a resolution or planfor its dissolution, or for the liquidation of the whole or any part of its capital stock,including a corporation which has been notified of possible involuntary dissolution by theSecurities and Exchange Commission, or for its reorganization.549

c) Return on capital gains realized from sale ofshares of stock not traded in the local stockexchange

Within thirty (30) days after each transactions and a final consolidated return of alltransactions during the taxable year on or before the fifteenth (15th) day of the fourth (4th)month following the close of the taxable year.

3) Returns of receivers, trustees in bankruptcy orassignees

In the same manner and form as the corporation whose properties and businessesthey operate is required to make returns, and any tax due on the income as returned byreceivers, trustees or assignees shall be assessed and collected in the same manner as if

545 See Sec. 77 (A), supra546 Id., (B)547 in accordance with the provisions of Sec. 47 (See Reference)( Sec. 52 (B))548 or final and adjustment returns in case of corporations, subject to the provisions of Section 56 (Sec. 53)549 Sec. 52 (C)

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assessed directly against the organizations of whose businesses or properties they havecustody or control.550

4) Returns of general partnerships

In duplicate, setting forth the items of gross income and of deductions allowed, andthe names, Taxpayer Identification Numbers (TIN), addresses and shares of each of thepartners.551

5) Fiduciary returns

In duplicate, a return of the income of the person, trust or estate for whom or whichthe fiduciary act, which apply to individuals in case such person, estate or trust has a grossincome of Twenty thousand pesos (P20,000) or over during the taxable year.552

b. Estate Tax Returns

1) Notice of death to be filed

a. In all cases of transfers subject to tax; or

b. Even if exempt from tax, if gross value of estate exceeds Twenty thousand pesos(P20,000).553

2) Estate tax returns

a) Requirements

An estate tax return is required:

1. In all cases of transfers subject to tax;

2. Even though exempt, where gross value of estate exceeds P200,000;

3. When the gross estate consists of registered or registrable property,regardless of amount.554

550 Sec. 54551 Sec. 55552 Sec. 65553 Sec. 89554 Sec. 90 (A)

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b) Time of filing and extension of time

Within six (6) months after the decedent's death.

The Commissioner shall have authority to grant, in meritorious cases, a reasonableextension not exceeding thirty (30) days for filing the return.555

c) Place of filing

Resident Decedent Non-Resident Decedent

1. Authorized Agent Bank (AAB) or

2. Revenue District Officer (RDO),Collection Officer, or

3. Duly authorized Treasurer of the city ormunicipality in which the decedent wasdomiciled at the time of his death, or

4. Any other place where the CIR permitsthe estate tax return to be filed.556

1. Office of the CIR

2. Revenue District Officer or

3. Philippine Embassy or Consulate in thecountry where decedent is residing at thetime of his/her death

4. Any other place where the CIR permitsthe estate tax return to be filed.

3) Discharge of executor or administrator frompersonal liability

The executor or administrator must:

a. File a written application to the Commissioner for the determination of theamount of the estate tax and further stating his desire to be absolved or to be dischargedfrom the liability.

b. The Commissioner must notify the executor or administrator –

Return was filed No return filed

Within one (1) year after the return is filed Within one (1) year after the making of suchapplication.557

3. The executor or administrator, upon payment of the amount of which he isnotified, shall be discharged from personal liability for any deficiency in the tax thereafterfound to be due and shall be entitled to a receipt or writing showing such discharge.558

555 id., (B)(C)556 Id., (D)557 But not after the expiration of the period prescribed for the assessment of the tax in Section 203.558 Sec.92

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a) Definition of deficiency

(a) The amount by which the estate tax imposed exceeds the amount shown as thetax by the executor, administrator or any of the heirs upon his return; or

(b) If no amount is shown as the tax by the executor, administrator or any of theheirs upon his return, or if no return is made by the executor, administrator, or any heir,then the amount by which the tax exceeds the amounts previously assessed559 as adeficiency.560

c. Donor’s Tax Returns

1) Requirements

Notice of donation is not required.

Except:

1. Donation to NGO worth at least P50, 000, provided, not more than 30% ofwhich will be used for administration purposes.

2. Donation to any candidate, political party, or coalition of parties

2) Time and place of filing

Within thirty (30) days after the date the gift is made.

The return must be filed with:

1. AAB, RDO, RCO, or duly authorized treasurer of the City or municipality wherethe donor was domiciled at the time of the transfer;

2. If there is no legal residence in the Philippines, with the office of theCommissioner;

3. For gifts made by non-residents, with the Phil embassy or Consulate in thecountry where he is domiciled at the time of the transfer or directly with the office of theCommissioner.561

559 Ibid.560 Sec. 93

Deficiency occurs when one files a return and pay the tax but the tax paid is less than the amount oftax due, or if a return is filed but the taxpayer did not pay the tax, or when one did not file the return norpaid the tax.561 Sec.103 (B)

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d. VAT Returns

1) In general

A quarterly return of the amount of a taxpayer’s gross sales or receipts filed withintwenty-five (25) days following the close of each taxable quarter. VAT-registered personsshall pay the value-added tax on a monthly basis.

Any person, whose registration has been cancelled shall file a return and pay the taxdue thereon within twenty-five (25) days from the date of cancellation of registration. Onlyone consolidated return shall be filed by the taxpayer for his principal place of business orhead office and all branches.562

2) Where to file the return

With an authorized agent bank, Revenue Collection Officer or duly authorized cityor municipal Treasurer in the Philippines located within the revenue district where thetaxpayer is registered or required to register.563

e. Withholding Tax Returns

1) Quarterly returns and payments of taxes withheld

Taxes deducted and withheld shall be covered by a return and paid to an authorizedTreasurer of the city or municipality where the withholding agent has his legal residence orprincipal place of business, or where the withholding agent is a corporation, where theprincipal office is located.

The taxes deducted and withheld shall be held as a special fund in trust for thegovernment until paid to the collecting officers. 564

2) Annual information return

Containing the list of payees and income payments, amount of taxes withheld fromeach payee and such other pertinent information as may be required.

In the case of final withholding taxes, the return shall be filed on or before January31 of the succeeding year, and for creditable withholding taxes, not later than March 1 of theyear following the year for which the annual report is being submitted.565

562 Sec. 114 (A)563 Id., (B)564The return for final withholding tax shall be filed and the payment made within twenty-five (25) daysfrom the close of each calendar quarter, while the return for creditable withholding taxes shall be filedand the payment made not later than the last day of the month following the close of the quarter duringwhich withholding was made (Sec. 58)565 Sec. 144 (C)

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3. Tax payments

a. Income Taxes

1) Payment, in general; time ofpayment

Pay-as-you-file system.

The total amount of income tax imposed shall be paid by the person subject theretoat the time the return is filed.

In the case of tramp vessels, the shipping agents and/or the husbanding agents, andin their absence, the captains thereof are required to file the return and pay the tax duethereon before their departure. Upon failure of the said agents or captains to file the returnand pay the tax, the Bureau of Customs is authorized to hold the vessel and prevent itsdeparture until proof of payment of the tax is presented or a sufficient bond is filed toanswer for the tax due.566

2) Installment payment

When the tax due is in excess of Two thousand pesos (P2,000), the taxpayer567 mayelect to pay the tax in two (2) equal installments, the first installment to be paid at the timethe return is filed and the second installment, on or before July 15 following the close of thecalendar year.

If any installment is not paid on or before the date fixed for its payment, the wholeamount of the tax unpaid becomes due and payable, together with the delinquencypenalties.568

3) Payment of capital gains tax

On the date the return is filed by the person liable thereto.569

566 Sec. 56 (A)(1)567 other than a corporation568 Sec. 56 (A)(2)569 Sec.56 [A] [3]

If the seller submits proof of his intention to avail himself of the benefit of exemption of capital gainsunder existing special laws, no such payment shall be required.

In case of failure to qualify for exemption, the tax due on the gains realized from the originaltransaction shall immediately become due and payable, and subject to the penalties prescribed under therules and the NIRC.

If the seller, having paid the tax, submits such proof of intent within 6 months from the registration ofthe document transferring the real property, he shall be entitled to a refund of such tax upon verificationof his compliance with the requirements for such exemption.

In case the taxpayer elects and is qualified to report the gain by installments (under Sec. 249), the taxdue from each installment shall be paid within 30 days from receipt of such payments.

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b. Estate Taxes

1) Time of payment

At the time the return is filed and before delivery to any heir or beneficiary, of hisdistributive share of the estate.570

a) Extension of time

An extension for the payment of the estate tax may be granted by the Commissioneron meritorious cases.571

Judicial settlement of estate Extra – judicial settlement of estate

Not exceeding five (5) years Not exceeding two (2) years.572

2) Liability for payment

a) Discharge of executor oradministrator frompersonal liability573

b) Definition of deficiency574

570 Sec. (91) (A)Philippines implement the “Pay as you file” system.

571 There can be no extension of the period of payment if there is negligence, intentional disregard ofrules and regulations or fraud.

The amount shall be paid on or before expiration of the extension and running of the statute oflimitations for assessment shall be suspended for the period of anyof such extension.

The CIR may require a bond not exceeding double the amount of the tax and with such sureties as theCIR deems necessary when the extension of payment is granted.

Any amount paid after the statutory due date of the tax, but within the extension period, shall besubject to interest but not to surcharge.572 Sec.91 [B]573 supra574 Ibid.

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3) Payment before delivery byexecutor or administrator

No judge shall authorize the executor or judicial administrator to deliver adistributive share to any party interested in the estate unless a certification from theCommissioner that the estate tax has been paid is shown.575

a) Payment of tax antecedentto the transfer of shares,bonds or rights

A certification from the Commissioner that the taxes due thereon have been paidmust be shown before any transfer to any new owner in the books of any corporation,sociedad anonima, partnership, business, or industry organized or established in the Philippinesof any share, obligation, bond or right by way of gift inter vivos or mortis causa, legacy orinheritance.576

4) Duties of certain officers anddebtors

Registers of Deeds shall not register in the Registry of Property any documenttransferring real property or real rights therein or any chattel mortgage, by way of gifts intervivos or mortis causa, legacy or inheritance, unless a certification from the Commissioner thatthe tax actually due thereon had been paid is shown, and they shall immediately notify theCommissioner, Regional Director, Revenue District Officer, or Revenue Collection Officeror Treasurer of the city or municipality where their offices are located, of the non-paymentof the tax discovered by them.

Any lawyer, notary public, or any government officer who, by reason of his officialduties, intervenes in the preparation or acknowledgment of documents regarding partition ordisposal of donation inter vivos or mortis causa, legacy or inheritance, shall have the duty offurnishing the Commissioner, Regional Director, Revenue District Officer or RevenueCollection Officer of the place where he may have his principal office, with copies of suchdocuments and any information whatsoever which may facilitate the collection of theaforementioned tax.

Neither shall a debtor of the deceased pay his debts to the heirs, legatee, executor oradministrator of his creditor, unless the certification of the Commissioner that the tax fixedin this Chapter had been paid is shown; but he may pay the executor or judicial administratorwithout said certification if the credit is included in the inventory of the estate of thedeceased.577

575 Sec. 94576 Sec. 97577 Sec. 95

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5) Restitution of tax upon satisfactionof outstanding obligations

If after the payment of the estate tax, new obligations of the decedent shall appear,and the persons interested shall have satisfied them by order of the court, they shall have aright to the restitution of the proportional part of the tax paid.578

c. Donor’s Taxes

1) Time and place of payment

Donor’s tax is paid at the time the return is filed since the Philippine Tax systemobserves the “Pay as you file” system.

Donor’s tax is paid with the

1. Authorized agent bank, Revenue district officer, Revenue Collection Officer, orduly authorized treasurer of the City or municipality where the donor was domiciled at thetime of the transfer;

2. If there is no legal residence in the Philippines, with the office of theCommissioner;

3. For gifts made by non-residents, with the Phil embassy or Consulate in thecountry where he is domiciled at the time of the transfer or directly with the office of theCommissioner.579

d. VAT

1) Payment of VAT580

2) Where to pay the VAT

With an authorized agent bank, Revenue Collection Officer or duly authorized cityor municipal Treasurer in the Philippines located within the revenue district where thetaxpayer is registered or required to register.581

578 Sec. 96579 Sec. 103 (B)580 supra581 Sec. 114 (B)

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F. Tax Remedies under the NIRC

1. Taxpayer’s Remedies

a. Assessment

1) Concept of assessment

The notice that the amount therein stated is due as a tax, with a demand for paymentwithin a stated period of time.582

The official action of the administrative officer in determining the tax due from ataxpayer.583

a) Requisites for valid assessment

The assessment must:

1. Be in writing and signed by the BIR;

2. Contain the law and the facts on which the assessment is made; and

3. Contain a demand for payment within the prescribed period.584

582 A notice of assessment contains not only a computation of tax liabilities but also a demand for thepayment within a prescribed period. It also signals the time when penalties and interests begin to accrue.583 The following are not considered assessments:

1. A letter containing a computation of supposed liabilities, giving the taxpayer an opportunity toshow the incorrectness of the findings, or urging the taxpayer to produce his books or records forverification, or to present his side.

2. A letter-notice that did not provide, even in a general way, reasons why deficiency taxes were beingcollected

3. An affidavit by a revenue officer stating the tax liabilities of a taxpayer and attached to a criminalcomplaint for tax evasion.

4. A pre-assessment notice signed by a revenue official.5. A deficiency assessment outside the scope of the letter of authority (a nullity).

The following may be considered assessments:1. A letter from the Commissioner demanding the amount of a rubber check previously paid by a

taxpayer, if it declares the tax to be payable and demands the settlement thereof.2. A preliminary collection letter, if it was the initial notice received by the taxpayer regarding his

internal revenue tax liabilities,a. and if it can be proven that the taxpayer did not receive any assessment notice,b. and no follow up letter was sent nor was a preliminary conference arranged.

An assessment is relevant:1. as an essential step towards the initiation of administrative proceeding or judicial action to collect

taxes,2. to enforce taxpayer liabilities and matters relating to it (imposition of surcharges and interest),3. to apply the statute of limitations,4. to the establishment of tax liens,5. in estimating the revenues that may be collected by the government in the coming year.

584 Sec. 228

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b) Constructive methods of incomedetermination

1. Percentage method The computed amount of revenues based onthe percentage computation is compared tothe amount of revenues reflected on thereturn. The percentages used may beobtained from the taxpayer, industrypublication, prior year’s audit results, or thirdparties. The comparison will provide anindication on the possibility of revenue beingunderstated.

2. Net worth method A method of reconstructing income which isbased on the theory that if the taxpayer’s networth has increased in a given year in anamount larger than his reported income, hehas understated his income for that year.The net worth on a fixed starting date iscompared with the net worth on a fixedending date. Any increase in net worth ispresumed to be income not declared for taxpurposes.585

3. Bank deposit method The bank records of the taxpayer areanalyzed and the BIR estimates income onthe basis of the total bank deposits aftereliminating non-income items. This methodstands on the premise that deposits representtaxable income unless otherwise explained asbeing non-taxable items. This method maybe used only where the BIR has been legallyallowed access to the taxpayer’s bankrecords.

4. Cash expenditure method Assumes that the excess of a taxpayer’sexpenditures during the tax period over hisreported income for that period is taxable tothe extent not disproved otherwise

585 The difficulty of establishing the opening net worth of a tax payer has led to the “Cohan Rule” which isthe use of estimates or approximations of the amount of cash and other asserts where the taxpayer lacksadequate records.

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5. Unit and value method The determination or verification of grossreceipts may be computed by applying priceand profit figures to the known ascertainablequality of business of the taxpayer.

6. Third party information or access torecords method

The BIR may require third parties, public orprivate to supply information to the BIR,and thus, “obtain on a regular basis from anyperson other than the person whose internalrevenue tax liability is subject to audit orinvestigation, or from any office or officer ofthe national and local governments,government agencies and instrumentalitiesincluding the Bangko Sentral ng Pilipinas andgovernment-owned or –controlledcorporations, any information such as, butnot limited to, costs and volume ofproduction, receipts or sales and grossincomes of taxpayers, and the names ,addresses, and financial statements ofcorporations, mutual fund companies,insurance companies, regional operatingheadquarters or multinational companies,joint accounts, associations, joint ventures orconsortia and registered partnerships, andtheir members.”586

7. Surveillance and assessment method A letter sent by the Bureau of InternalRevenue to a taxpayer asking him to explainwithin a period of fifteen (15) days fromreceipt why he should not be the subject ofan assessment notice. It is part of the dueprocess rights of a taxpayer.587

586 Sec. 5 (B), NIRC of 1997587 As a general rule, the BIR could not issue an assessment notice without first issuing a pre-assessmentnotice because it is part of the due process rights of a taxpayer to be given notice in the form of a pre-assessment notice, and for him to explain why he should not be the subject of an assessment notice.

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c) Inventory method588 for incomedetermination589

d) Jeopardy assessment

A delinquency tax assessment made without the benefit of a complete or partialinvestigation by a belief that the assessment and collection of a deficiency tax will bejeopardized by delay caused by the taxpayer’s failure to:

a. Comply with audit and investigation requirements to present his books ofaccounts and/or pertinent records, or

b. Substantiate all or any of the deductions, exemptions or credits claimed in hisreturn.

An assessment made demanding immediate payment of the tax due without the usualformalities in instances when the Commissioner believes that if the tax will be collectedunder normal procedures, the collection of such tax is at risk which might result in loss tothe government. 590

588 also called Net Worth Method589 See table590 This is issued when the revenue officer finds himself without enough time to conduct an appropriate orthorough examination in view of the impending expiration of the prescriptive period for assessment. Toprevent the issuance of a jeopardy assessment, the taxpayer may be required to execute a waiver of thestatute of limitations.

Instances when jeopardy assessment may be issued:When it shall come to the knowledge of the Commissioner that a taxpayer is:

1. retiring from business subject to tax; or2. intending

a. to leave the Philippines or remove his property therefrom; orb. to hide or conceal his property;

3. performing any act tendinga. to obstruct the proceedings for the collection of the tax for the past or current quarter or year;

orb. to render the same totally or partly ineffective unless such proceedings are begun immediately

(Sec. 6 (D), R.A. 8424)Jeopardy assessment is an indication of the doubtful validity of the assessment, hence it may be

subject to a compromise. [Sec. 3.1 (a), Rev. Regs. No. 6-2000]

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e) Tax delinquency and tax deficiency

Delinquency Tax Deficiency Tax

A taxpayer is considered delinquent in thepayment of taxes when:

a. Self-assessed tax per return filed by thetaxpayer on the prescribed date was not paidat all591 or only partially paid; or

b. Deficiency tax assessed by the BIRbecomes final and executory.

a. The amount by which the tax imposed bylaw as determined by the CIR or hisauthorized representative exceeds theamount shown as tax by the taxpayer uponhis return;592 or

b. If no amount is shown as tax by thetaxpayer upon his return is made by thetaxpayer, then the amount by which thetax593 exceeds the amounts previouslyassessed or collected withoutassessment as deficiency.

Collection

Can immediately be collectedadministratively through the issuance of awarrant of distraint and levy, and/or judicialaction

Civil Action

The filing of a civil action for the collectionof the delinquent tax in the ordinary court isa proper remedy

The filling of a civil action at the ordinarycourt for collection during the pendency ofprotest may be the subject of a motion todismiss. In addition to a motion to dismiss,the taxpayer must file a petition for reviewwith the CTA to toll the running of theprescriptive period

Penalties

A delinquent tax is subject to administrativepenalties such as 25% surcharge, interest,and compromise penalty

A deficiency tax is generally not subject tothe 25% surcharge, although subject tointerest and compromise penalty

591 The taxpayer did not file a return592 The taxpayer filed a return but the same was deficient. Deficiency is the difference between the taxdue and the tax paid.593 as determined by the CIR or his authorized representative

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2) Power of the Commissioner to make assessmentsand prescribe additional requirements for taxadministration and enforcement

a) Power of the Commissioner to obtaininformation, and to summon/examine,and take testimony of persons

The Commissioner is authorized:

(A) To examine any book, paper, record, or other data which may be relevant ormaterial to such inquiry;

(B) To obtain on a regular basis from any person other than the person whoseinternal revenue tax liability is subject to audit or investigation, or from any office or officerof the national and local governments, government agencies and instrumentalities, includingthe Bangko Sentral ng Pilipinas and government-owned or -controlled corporations, anyinformation such as, but not limited to, costs and volume of production, receipts or salesand gross incomes of taxpayers, and the names, addresses, and financial statements ofcorporations, mutual fund companies, insurance companies, regional operating headquartersof multinational companies, joint accounts, associations, joint ventures of consortia andregistered partnerships, and their members;

(C) To summon the person liable for tax or required to file a return, or any officer oremployee of such person, or any person having possession, custody, or care of the books ofaccounts and other accounting records containing entries relating to the business of theperson liable for tax, or any other person, to appear before the Commissioner or his dulyauthorized representative at a time and place specified in the summons and to produce suchbooks, papers, records, or other data, and to give testimony;

(D) To take such testimony of the person concerned, under oath, as may be relevantor material to such inquiry; and

(E) To cause revenue officers and employees to make a canvass from time to time ofany revenue district or region and inquire after and concerning all persons therein who maybe liable to pay any internal revenue tax, and all persons owning or having the care,management or possession of any object with respect to which a tax is imposed.

The Commissioner has no authority to inquire into bank deposits other than asprovided for in Section 6(F)594 of this Code.595

594 see Reference595 Sec. 5

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3) When assessment is made

When it is released, mailed or sent by the collector of internal revenue to thetaxpayer within the three-year or ten-year period, as the case may be.596

a) Prescriptive period for assessment

(1) False, fraudulent, and non-filing ofreturns

Ten (10) years from the discovery of the falsity, fraud or omission to file thereturn.597

b) Suspension of running of statute oflimitations

1) Periods suspended:

(a) periods for assessment

(b) beginning of distraint or levy

(c) proceeding in court for collection

2) Grounds for suspension of prescriptive periods:

a) Commissioner is prohibited from making the assessment or beginningdistraint or levy or a proceeding in court and for 60 days thereafter

b) Taxpayer requests for Reinvestigation which is granted598

c) Taxpayer cannot be located in the address given in the return filed, exceptif the taxpayer informs the Commissioner of a change in address the prescriptiveperiod will not be suspended

d) When the warrant is duly served upon the taxpayer and no property couldbe located599

e) When the taxpayer is out of the Phils.600

f) When there is an Answer filed by the BIR to the petition for review in theCTA601 where the court justified this by saying that in the answer filed by the BIR, itprayed for the collection of taxes.

596 CIR v. Pascor, G.R. 128315, June 29, 1999597 Sec. 222598 A request for reconsideration alone does not suspend the period to assess/collect.599 proper only for suspension of the period to collect600 Sec. 223

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4) General provisions on additions to the tax

a) Civil penaltiesb) Interest602

Additions to the tax consist of the:

(1) civil penalty, otherwise known as surcharge, which may either be 25% or 50 % ofthe tax depending upon the nature of the violation;

(2) interest either for a deficiency tax or delinquency as to payment603

(3) other civil penalties or administrative fines such as for failure to file certaininformation returns and violations committed by withholding agents.604

601 Hermanos v. CIR, GR. No. L-24972. Sept.30, 1969602 This is an increment on any unpaid amount of tax, assessed at the rate of twenty percent (20%) perannum, or such higher rate as may be prescribed y rules and regulations, from the date prescribed forpayment until the amount is fully paid. (Sec. 249 [A], 1997 NIRC)603 Interest is classified into:

1.Deficiency interestAny deficiency in the tax due shall be subject to the interest of 20% per annum, or such higher rate as

may be prescribed by rules and regulations, which shall be assessed and collected from the dateprescribed for its payment until the full payment thereof (Sec. 249 [B], 1997 NIRC)

2.Delinquency interestThis kind of interest is imposed in case of failure to pay:

a. The amount of the tax due on any return required to be filed, orb. The amount of the tax due for which no return is required, orc. A deficiency tax, or any surcharge or interest thereon on the due date appearing in the notice and

demand of the Commissioner.604 General Considerations on the Addition to tax

a. Additions to the tax or deficiency tax apply to all taxes, fees, and charges imposed in the Tax Code.b. The amount so added to the tax shall be collected at the same time, in the same manner, and as part

of the tax.c. If the withholding agent is the government or any of its agencies, political subdivisions or

instrumentalities, or a government owned or controlled corporation, the employee thereof responsiblefor the withholding and remittance of the tax shall be personally liable for the additions to the taxprescribed (Sec. 247[b], 1997 NIRC) such as the 25% surcharge and the 20% interest per annum on thedelinquency (Secs. 248 and 249 [C], 1997 NIRC)

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5) Assessment process605

a) Tax audit

The process of examining, going over, or scrutinizing the books and records of thetaxpayer to ascertain the correctness of the tax declared and paid by the taxpayer.

It can only be performed upon a Letter of Authority issued by the Commissioner orRegional Director.

b) Notice of informal conference

A written notice informing a taxpayer that the findings of the audit conducted on hisbooks of accounts and accounting records indicate that additional taxes or deficiencyassessments have to be paid.

If, after the culmination of an audit, a Revenue Officer recommends the impositionof deficiency tax assessments, this recommendation is communicated by the Bureau to thetaxpayer concerned during an informal conference called for this purpose, the taxpayer shallhave 15 days from receipt of the notice of informal conference to explain his side.

c) Issuance of preliminary assessment notice(PAN)

Communication issued by the Regional Assessment Division or any other concernedBIR office, informing a taxpayer who has been audited of the findings of the RevenueOfficer, following the review of these findings. The assessment shall be in writing, andshould inform the taxpayer of the law and the facts on which the assessment is made;otherwise, the assessment is void.

d) Exceptions to Issuance of PAN

(a) The finding for any deficiency tax is the result of mathematical error in thecomputation of the tax as appearing on the face of the return; or

(b) A discrepancy has been determined between the tax withheld and the amountactually remitted by the withholding agent; or

(c) A taxpayer who opted to claim a refund or tax credit of excess creditablewithholding tax for a taxable period was determined to have carried over and automaticallyapplied the same amount claimed against the estimated tax liabilities for the taxable quarteror quarters of the succeeding taxable year; or

(d) The excise tax due on excisable articles has not been paid; or

605 Assessments prima facie correct. Tax assessments by tax examiners are presumed correct and madein good faith. The taxpayer has the duty to prove otherwise. (Sy Po v. CTA, GRN L- 81446 August 18, 1988.)

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(e) The article locally purchased or imported by an exempt person, such as, but notlimited to, vehicles, capital equipment, machineries and spare parts, has been sold, traded ortransferred to non-exempt persons.606

e) Reply607 to PAN

Within 15 days, the taxpayer has to file a written reply contesting the proposedassessment if he disagrees with the findings of the PAN.

Failure of the taxpayer to file a reply would now enable the RO to issue a FAN.608

However no liability for additional or deficiency tax arises from such failure.

f) Issuance of formal letter of demand andassessment notice/final assessmentnotice609

Notice of Assessment is a formal letter of demand where a declaration of deficiencytaxes is issued to a taxpayer who fails to respond to a pre-assessment notice within theprescribed period of time, or whose reply to the PAN was found to be without merit.610

g) Disputed assessment

When the taxpayer, indicates its protest against the delinquent assessment of the ROand requests for reconsideration, through a letter. After the request is filed and received bythe BIR, the assessment becomes a disputed assessment.611

.

606 Sec. 3.1.3, RR 12-99607 For purposes of contesting a PAN, the regulations used the word reply to distinguish it from the writtenobjections to a FAN wherein the generic word protest or specific term request for reconsideration orrequest for reinvestigation is used.608 If fails to respond, he shall be considered in default. A formal letter of demand or assessment noticeshall be issued by the Assessment Division of the Revenue Regional Office or the Commissioner or hisauthorized representative.609 General rule: Taxes are self-assessing and do not require the issuance of an assessment notice inorder to establish the tax liability of a taxpayer.

Exceptions:1. Tax period of a taxpayer is terminated (Sec. 6 (d), NIRC)2. Deficiency tax liability arising from a tax audit conducted by a BIR (sec 56b, NIRC)3. Tax lien (Sec. 219, NIRC)4. Dissolving Corporation (Sec. 52 (c), NIRC)

610 This is commonly known as the Final Assessment Notice. An assessment contains not only acomputation of underdeclaration of taxable sales, receipts or income, or a substantial overstatement ofdeductions.611 CIR v. Isabela Cultural Corp., GR 135210, July 11, 2001

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j) Administrative decision on a disputedassessment

The taxpayer may elevate the protest to the CIR within 30 days from receipt of thedecision for a request for reconsideration and that his case is referred to the Bureau’sAppellate Division. Otherwise, it becomes final and appeal to the CTA may be taken. 612

6) Protesting assessment

It is the act by the taxpayer of questioning the validity of the imposition of thecorresponding delinquency increments for internal revenue taxes as shown in the notice ofassessment and letter of demand.

a) Protest613 of assessment by taxpayer

(1) Protested assessment

The taxpayer files an administrative protest against the assessment. Such protest mayeither be a request for reconsideration or for reinvestigation.

Prescriptive period provided by law to make collection by distraint or levy or by aproceeding in court is interrupted once a taxpayer protests the assessment and requests forits cancellation.

(2) When to file a protest

Within thirty (30) days from receipt of assessment.

(3) Forms of protest

Request for reconsideration Request for reinvestigation

A claim for re-evaluation of the assessmentbased on existing records without need ofadditional evidence. It may involve aquestion of fact or law or both. It does nottoll the statute of limitations.

A claim for re-evaluation of the assessmentbased on newly-discovered or additionalevidence. It may also involve a question offact or law or both. It tolls the statute oflimitations.

612 But where the taxpayer adversely affected has not received the decision or ruling, he could not appealthe same to the CTA within 30 days from notice. Hence, it could not become final and executory (Republicvs. De la Rama, 18 SCRA 861)

Motion for reconsideration suspends the running of the 30 - day period of perfecting an appeal. Mustadvance new grounds not previously alleged to toll the reglementary period; otherwise, it would bemerely pro-forma (Roman Catholic Archbishop vs. Coll., L-16683, Jan. 31, 1962)613 A vital document which is a formal declaration of resistance of the taxpayer. It is a repository of allarguments. It can be used in court in case of administrative remedies have been exhausted. It is also theformal act of the taxpayer questioning the official actuations of the CIR. This is equivalent to a pleading.

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b) Submission of documents within 60 daysfrom filing of protest

All relevant documents should be filed, otherwise assessment becomes final andcannot be appealed.614

c) Effect of failure to protest

It makes the FAN final and executory, and the taxpayer loses his right to contest theassessment, at the administrative and judicial levels.615

7) Rendition of decision by Commissioner

a) Denial of protest

Direct Denial Indirect Denial

The decision of the Commissioner or hisduly rep. shall

a. state the facts, applicable law, rules andregulations or jurisprudence on which hisprotest is based, otherwise the protest shallbe considered void and without force andeffect, in which case the same shall not beconsidered a decision a disputed assessmentand

b. that the same is his final decision.616

a. Commissioner did not rule on thetaxpayer’s MR of the assessment – it wasonly when respondent received summons onthe civil action for the collection ofdeficiency income tax that the period toappeal commenced to run.617

b. Referral by the Commissioner of requestfor reinvestigation to the Solicitor General618

c. Reiterating the demand for immediatepayment of the deficiency tax due totaxpayer’s continued refusal to executewaiver619

d. Preliminary collection letter may serve asassessment notice620

614 Sec. 228Submission of documents within the 60 days period is optional to the taxpayer. The relevant

supporting documents mentioned in the law refers to such documents which the taxpayer feels would benecessary to support his protest and not what the Commissioner feels should be submitted, otherwise thetaxpayer would always be at the mercy of the BIR which may require production of such documents whichtaxpayer could not produce. (Standard Chartered Bank v. CTA, Case No. 5696, Aug. 16, 2001)615 Thus, the filing of the protest within 30 days from the receipt of the assessment would be mandatoryfor the taxpayer to use the other administrative and judicial remedies.616 Sec. 3.1.5, RR 12-99617 CIR vs. Union Shipping Corp.618 Republic vs. Lim Tian Teng Sons619 CIR vs. Ayala Securities Corp620 United Int’l Pictures vs. CIR

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(1) Commissioner’s actions equivalentto denial of protest

(a) Filing of criminal actionagainst taxpayer

(b) Issuing a warrant ofdistraint and levy

These actions of the CIR serve as bases for appeal to the CTA.

(2) Inaction by Commissioner

The protest is not acted upon by the Commissioner within 180 days fromsubmission of documents.

8) Remedies of taxpayer to action by Commissioner

a) In case of denial of protest

Appeal the decision to the Court of Tax Appeals (CTA) within 30 days from receiptof decision denying the protest.621

b) In case of inaction by Commissioner within180 days from submission of documents

The taxpayer has two alternative options:

1. File a petition for review with the CTA within 30 days after the expiration of the180-day period; or

2. Wait for the final decision of the CIR on the disputed assessment and appeal thefinal decision to the CTA within 30 days from the receipt of the decision.

c) Effect of failure to appeal

1. The decision or assessment becomes final and executory.

2. In an action for the collection of the tax by the government, the taxpayer is barredfrom re-opening the question already decided.

3. The assessment is considered correct which may be enforced by summary orjudicial remedies.

621 If the taxpayer elevates his protest to the CIR within 30 days from date of receipt of the final decisionof the CIR’s duly authorized representative, such decision will not be final and executory.

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4. In a proceeding for collection of tax by judicial action, the taxpayer’s defenses aresimilar to those of the defendant in a case for the enforcement of a judgment by judicialaction.

5. The assessment which has become final and executory cannot be superseded by anew assessment.

b. Collection

1) Requisites

Collection is only allowed when there is already a final assessment made for thedetermination of the tax due.

Assessments are deemed final when:

1. The taxpayer failed to file a protest 30 days from receipt of the assessment

2. After the 180 day period and the CIR has not yet acted on the protest the taxpayerfails to appeal it

3. After 30 days from the receipt of the decision of the CIR the taxpayer fails toappeal.

2) Prescriptive periods

Assessment was made False or fraudulent return or failure to filea return,

By distraint or levy or by a proceeding incourt - within three (3) years following theassessment released, mailed, or sent.622

A proceeding in court for the collection ofsuch tax may be filed without assessment - atany time within ten (10) years after thediscovery of the falsity, fraud or omission.623

622 BPI v. CIR, G.R. 139736, Oct. 17, 2005623 Sec.222 [a]

181

3) Distraint of personal property includinggarnishment

a) Summary remedy of distraint of personalproperty

(1) Procedure for distraint andgarnishment

a. The officer serving the warrant shall make an account of the goods distrained. Acopy signed by him shall be left with the owner or to the person in possession of the goodsto which list shall be added a statement of the sum demanded and note of the time and placeof sale.

b. Stocks and securities – warrant of distraint shall be served upon the taxpayer andupon the president, manager, treasurer or other responsible officer of cooperation, companyor association, which issued the said stocks.

c. Debts and Credits – serving the warrant of distraint upon the taxpayer and theperson owing such debts. Such warrant is sufficient authority to the person owning thedebts or having possession or under his control any credits. The warrant of distraint issufficient authority to such person to pay the Commissioner;

d. Bank Accounts – serving the warrant upon the taxpayer and upon the president,manager, treasurer and other responsible officer of the bank. Upon receipt of the warrant,the bank shall turn over to the Commissioner the amount sufficient to satisfy the claim.624

(2) Sale of property distrained anddisposition of proceeds

a. Notice of the sale must specify the time and place of sale and the articlesdistrained;

b. The Notice must be exhibited in not less than 2 public places; one of such placesshall be at the Office of the Mayor;

c. The time of sale shall not be less than 20 days after notice to the owner orpossessor of the property and the publication or posting of such notice.

d. The sale shall be at public auction to the highest bidder for cash or with theapproval of the Commissioner, through duly licensed commodity or stock exchanges.

e. In case of stocks or securities, the officer making the sale shall execute a bill ofsale which shall deliver to the buyer and a copy thereof furnished the corporation, company,or association which issued the stocks or other securities.

624 Sec. 208

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f. Residue over and above what is required to pay the entire claim, includingexpenses, shall be returned to the owner of the property sold.625

(a) Release of distrainedproperty upon paymentprior to sale

If at any time prior to the consummation of the sale, all proper charges are paid tothe officer conducting the sale, the goods or effects distrained shall be restored to theowner.626

(3) Purchase by the government at saleupon distraint

a. When the amount for the bid property under distraint is not equal to the amount

of the tax;

b. When the amount for the bid is very much less than the actual market value of the

articles for sale;

The property purchased may be resold by the Commissioner or his deputy.627

(4) Report of sale to BIR

Within two (2) days after the sale, the officer making the same shall make a report ofhis proceedings in writing to the Commissioner and shall himself preserve a copy of suchreport as an official record.628

(5) Constructive distraint to protectthe interest of the government

The Commissioner may place under constructive distraint the property of adelinquent taxpayer or any taxpayer who, in his opinion, is retiring from any business subjectto tax, or is intending to leave the Philippines or to remove his property therefrom or to hideor conceal his property or to perform any act tending to obstruct the proceedings forcollecting the tax due or which may be due from him.

The constructive distraint of personal property shall be affected by requiring thetaxpayer or any person having possession or control of such property to sign a receiptcovering the property distrained and obligate himself to preserve the same intact andunaltered and not to dispose of the same ;in any manner whatever, without the expressauthority of the Commissioner.

625 Sec. 209626 Sec. 210627 Sec. 212628 Sec. 211

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In case the taxpayer or the person having the possession and control of the propertysought to be placed under constructive distraint refuses or fails to sign the receipt hereinreferred to, the revenue officer effecting the constructive distraint shall proceed to prepare alist of such property and, in the presence of two (2) witnesses, leave a copy thereof in thepremises where the property distrained is located, after which the said property shall bedeemed to have been placed under constructive distraint.629

4) Summary remedy of levy on real property

a) Advertisement and sale

1. Twenty days after levy, the officer conducting the proceedings shall proceed toadvertise the property or a usable portion thereof as may be necessary to satisfy the claimand cost of the sale and such advertisement shall be for a period of at least 30 days.

2. The notice of sale shall:

a. Be posted at the main entrance of the municipal building; and

b. public and conspicuous place in the barrio or district; and

c. be published once a week for three consecutive weeks in a newspaper ofgeneral circulation.

3. Right of Pre-emption – At any time before the day fixed for the sale, the taxpayermay discontinue all proceedings by paying the taxes, penalties, and interest.

4. 5 days after the sale, a return by the distraining or levying officer of theproceedings shall be entered upon the records of the Revenue Collection Officer (RCO), theRDO and Revenue Regional Director.

5. A certificate of sale shall be delivered to the purchaser.

6. Excess of the proceeds of the sale shall be delivered to the taxpayer.630

b) Redemption of property sold

Within one (1) year from the date of sale, the delinquent taxpayer, or any one forhim, shall have the right of paying to the Revenue District Officer the amount of the publictaxes, penalties, and interest thereon from the date of delinquency to the date of sale,together with interest on said purchase price at the rate of fifteen percent (15%) per annumfrom the date of purchase to the date of redemption, and such payment shall entitle theperson paying to the delivery of the certificate issued to the purchaser and a certificate fromthe said Revenue District Officer that he has thus redeemed the property, and the RevenueDistrict Officer shall forthwith pay over to the purchaser the amount by which suchproperty has thus been redeemed, and said property thereafter shall be free from the lien ofsuch taxes and penalties.

629 Sec. 206630 Sec. 213

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The owner shall not, however, be deprived of the possession of the said propertyand shall be entitled to the rents and other income thereof until the expiration of the timeallowed for its redemption.631

c) Final deed of purchaser

In case the taxpayer shall not redeem the property, the Revenue District Officershall, as grantor, execute a deed conveying to the purchaser so much of the property as hasbeen sold, free from all liens of any kind whatsoever, and the deed shall succinctly recite allthe proceedings upon which the validity of the sale depends.632

5) Forfeiture to government for want of bidder

a) Remedy of enforcement of forfeitures

(1) Action to contest forfeiture ofchattel

In case of the seizure of personal property under claim of forfeiture, the ownerdesiring to contest the validity of the forfeiture may, at any time before sale or destruction ofthe property, bring an action against the person seizing the property or having possessionthereof to recover the same, and upon giving proper bond, may enjoin the sale; or after thesale and within six (6) months, he may bring an action to recover the net proceeds realized atthe sale.633

b) Resale of real estate taken for taxes

The Commissioner shall have charge of any real estate obtained by the Governmentof the Philippines in payment or satisfaction of taxes, penalties or costs or in compromise oradjustment of any claim therefore, and said Commissioner may, upon the giving of not lessthan twenty (20) days’ notice, sell and dispose of the same of public auction or dispose ofthe same at private sale.

In either case, the proceeds of the sale shall be deposited with the National Treasury,and an accounting of the same shall be rendered to the Chairman of the Commission onAudit.634

631 Sec. 214632 Sec. 202633 Sec. 231634 Sec. 216

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c) When property to be sold or destroyed

Upon forfeiture, distilled spirits, liquors, cigars, cigarettes, other manufacturedproducts of tobacco, and all apparatus used in or about the illicit production of such articlesmay be destroyed by order of the Commissioner, when the sale of the same for consumptionor use would be injurious to public health or prejudicial to the enforcement of the law.635

Forfeited property shall not be destroyed until at least twenty (20) days afterseizure.636

d) Disposition of funds recovered in legalproceedings or obtained from forfeiture

All judgments and monies recovered and received for taxes, costs, forfeitures, finesand penalties shall be paid to the Commissioner or his authorized deputies as the taxesthemselves are required to be paid and shall be accounted for and dealt with the same way.637

6) Further distraint or levy

The remedy by distraint of personal property and levy on realty may be repeated ifnecessary until the full amount due, including all expenses, is collected.638

7) Tax lien639

A legal claim or charge on property, either real or personal, established by law as asecurity in default of the payment of taxes.

635 All other articles subject to excise tax, which have been manufactured or removed in violation of theCode, as well as dies for the printing or making of internal revenue stamps and labels which are inimitation of or purport to be lawful stamps, or labels may, upon forfeiture, be sold or destroyed in thediscretion of the Commissioner (Sec. 225)636 ibid.637 Sec. 226638 Sec. 217

Otherwise, a clever taxpayer who is also able to conceal most of the valuable part of his propertywould escape payment of his tax liability by sacrificing an insignificant portion of his holdings.639 Nature:

A lien in favor of the government of the Philippines when a person liable to pay a tax neglects or failsto do so upon demand.

Duration:Exists from time assessment is made by the CIR until paid, with interests, penalties and costs.Extent:Upon all property and rights to property belonging to the taxpayer.Effectivity against third persons:Only when notice of such lien is filed by the CIR in the Register of Deeds concerned.

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8) Compromise640

a) Authority of the Commissioner tocompromise and abate taxes641

Compromise the payment of any internalrevenue tax

Abate or cancel a tax liability

When:

1. There is reasonable doubt as to the validityof the claim against the taxpayer; or

2. The financial position of the taxpayerdemonstrates a clear inability to pay theassessed tax.642

When:

1. The tax or any portion thereof appears tobe unjustly or excessively assessed; or

2. The administration and collection costsinvolved do not justify the collection of theamount due.

9) Civil and criminal actions

a) Suit to recover tax based on false orfraudulent returns

If tax is collected under an assessment that the list, statement or return isfalse/fraudulently made, it cannot be recovered by any suit unless it is proved that the saidlist, statement or return was not false nor fraudulent & did not contain any understatementor undervaluation.643

640 Contract whereby the parties, by making reciprocal concessions, avoid litigation or put an end to onealready commenced.641 The power to compromise or abate shall not be delegated by the Commissioner except in the followingcases:

1. Assessments issued by the Regional Offices involving basic tax of P 500,000 or less;2. Minor criminal violationsAll criminal violations may be compromised except: (a) those already filed in court, or (b) those

involving fraud (Sec. 204 (A)(B))All criminal violations may be compromised except: (a) those already filed in court, or (b) those

involving fraud (Sec. 204 (A)(B))642 Minimum Compromise Amounts:

1. Financial incapacity – 10% of the basic tax assessed;2. Other cases – 40% of the basic tax assessed

When approval of Evaluation Board necessary:1. The basic tax involved exceeds one million pesos;2. Where the settlement offered is less than the prescribed minimum rate.

643 Not applicable to statements or returns made or to be made in good faith regarding annualdepreciation of oil or gas wells & mines.

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c. Refund644

1) Grounds and requisites for refund

Grounds Requisites

a. Tax is erroneously or illegally collected.

b. Sum collected is excessive or in anymanner wrongfully collected.

c. Penalty is collected without authority.

a. There must be a written claim with theCIR, as it would enable the CIR to correctthe errors of his subordinate and to notifythe government;

b. Must be a categorical claim for refund orcredit;

c. Must be filed within 2 years after thepayment of the tax or penalty otherwise norefund or credit could be taken. No suit orproceeding shall be instituted after theexpiration of the 2 year period regardless ofany supervening cause that may arise afterpayment; and

d. Present proof of payment of the tax.

2) Requirements for refund as laid down by cases

a) Necessity of written claim for refund

This requirement is mandatory.645

Except:

Where on the face of the return upon which payment is made, such payment appearsclearly to have been erroneous.646

644 A suit or proceedings for tax refund may be maintained whether or not such tax, penalty or sum hasbeen paid under protest or duress (Sec. 229)

Similarly, payment under protest is not necessary in refund for local taxes. (Sec. 196 LGC),however, under protest is necessary to claim for

a. real property taxes (Sec. 252, LGC)b. custom duties (Sec. 2308, TCC)

645 Reasons:a. to afford the commissioner an opportunity to correct the action of subordinate officer andb. to notify the government that the taxes sought to be refunded are under question and that,

therefore, such notice should then be borne in mind in estimating the revenue available forexpenditure (Bermejo vs. CIR, 87 Phil 96)646 Sec. 229

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b) Claim containing a categorical demand forreimbursement

c) Filing of administrative claim for refundand the suit/proceeding before the CTAwithin 2 years from date of paymentregardless of any supervening cause647

The requirement is a condition precedent and non-compliance therewith barsrecovery.648

It refers not only to the “administrative” claim that the taxpayer should file within 2years from date of payments with the BIR, but also the judicial claim or the action for refundthe taxpayer should commence with the CTA.649

3) Legal basis of tax refunds

Legal principle of quasi-contracts or solutio indebiti.650

The Government is within the scope of the principle of solutio indebiti.651

4) Statutory basis for tax refund under the Tax Code

a) Scope of claims for refund

The Commissioner may credit or refund taxes:

a) Erroneously or illegally assessed or collected internal revenue taxes

b) Penalties imposed without authority

c) Any sum alleged to have been excessive or in any manner wrongfullycollected.652

b) Necessity of proof for claim or refund

Refund claim partakes of the nature of an exemption which cannot be allowed unlessgranted in the most explicit and categorical language.653

Failure to discharge burden of giving proof is fatal to claim.

647 Secs.204 (c) & 229648 Phil. Acetylene Co. Inc, vs. Commissioner, CTA Case No. 1321, Nov. 7, 1962649 see Gibbs vs.. Collector of Internal Revenue, 107 Phil 232650 see Art. 2142 & 2154, CC651 CIR vs. Fireman’s Fund Insurance Co652 Secs. 204 and 209653 CIR vs. Johnson and Sons

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It must be shown that payment was an independent single act of voluntarypayment of a tax believed to be due, collectible and accepted by the government, andwhich therefore, become part of the state moneys subject to expenditure and perhapsalready spent or appropriated.654

c) Burden of proof for claim of refund

Written claim for refund or tax credit filed by the taxpayer with the Commissioner.

d) Nature of erroneously paid tax/illegallyassessed collected

Taxpayer pays under the mistake of fact, as for instance in a case where he is notaware of the existing exemption in his favor at the time payments were made.

A tax is illegally collected if payments are made under duress.

e) Tax refund vis-à-vis tax credit655

Tax refund Tax credit

Requires a physical return of the sumerroneously paid by the taxpayer.

The taxpayer to whom the tax is refundedwould have the option, among others, toinvest for profit the returned sum, an optionnot proximately available if the taxpayerchooses instead to receive a tax credit.656

Generally refers to an amount that issubtracted directly from one’s total taxliability, an allowance against the tax itself, ora deduction from what is owned.

Reduces the tax due, including –wheneverapplicable – the income tax that isdetermined after applying the correspondingtax rates to taxable income.657

f) Essential requisites for claim of refund

1. The claim is filed with the Commissioner of Internal Revenue within the two-yearperiod from the date of the payment of the tax.

2. It is shown on the return of the recipient that the income payment received wasdeclared as part of the gross income; and

654 CIR vs. Li Yao, L-11875,Dec. 28, 1963655 It may be that there is no essential difference between a tax refund and a tax credit since both aremoves of recovering taxes erroneously or illegally paid to the government. (Commissioner of Customs v.Philippine Phosphate Fertilizer Corporation, G. R. No. 144440, September 1, 2004)656 Commissioner of Customs v. Philippine Phosphate Fertilizer Corporation, ibid.657 Commissioner of Internal Revenue v. Central Luzon Drug Corporation, G. R. No. 159647, April 15,2005

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3. The fact of withholding is established by a copy of a statement duly issued by thepayee showing the amount paid and the amount of tax withheld therefrom.658

5) Who may claim/apply for tax refund/tax credit

a) Taxpayer/withholding agents of non-resident foreign corporation

A withholding agent is subject to and liable for deficiency assessments, surchargesand penalties should the amount of the tax withheld be finally found to be less than theamount that should have been withheld under the law.

A “person liable for tax” has been held to be a “person subject to tax” and properlyconsidered a “taxpayer.” xxx By any reasonable standard, such a person should be regardedas a party in interest, or as a person having sufficient legal interest, to bring a suit for refundof taxes.659

6) Prescriptive period for recovery of tax erroneouslyor illegally collected

Two (2) years from the date of payment of the tax or penalty.

7) Other consideration affecting tax refunds

a) Taxpayer may file an action for refund in the CTA even before the Commissionerdecides his pending claim in the BIR.660

b) Suspension of the 2-year prescriptive period may be had when:

i. there is a pending litigation between the two parties (government andtaxpayer) as to the proper tax to be paid and of the proper interpretation of thetaxpayer’s charter in relation to the disputed tax; and

ii. the commissioner in that litigated case agreed to abide by the decision ofthe Supreme Court as to the collection of taxes relative thereto.661

c) Even if the 2-year period has lapsed, the same is not jurisdictional and may besuspended for reasons of equity and other special circumstances.662

d) 2-year prescriptive period for filing of tax refund or credit claim computed fromdate of payment of tax of penalty except in the following:

658 Banco Filipino Savings and Mortgage Bank v. Court of Appeals, et al., G. R. No. 155682, March 27, 2007659 CIR vs. Procter and Gamble PMC, 204 SCRA 377660 Commissioner of Internal Revenue vs. Palanca, Jr., L-16626, Oct. 29, 1966661 Panay Electric Co., Inc. vs. Collector of Internal Revenue, 103 Phil. 819662 CIR vs. Phil. American Life Ins. Co., G.R. No. 105208, May 29, 1995

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i. Corporations:

2-year prescriptive period for overpaid quarterly income tax iscounted not from the date the corporation files its quarterly income taxreturn, but from the date the final adjusted return is filed after the taxableyear.663

ii. Taxes payable in installment:

2-year period is counted form the payment of the last installment.664

iii. Withholding Taxes

Prescriptive period counted not from the date the tax is withheld andremitted to the BIR, but from the end of the taxable year.665

iv. VAT Registered Person whose sales are zero-rated or effectively zero-rated

2-year period computed from the end of the taxable quarter when thesales transactions were made.666

e) Interest on Tax Refund:

The Government cannot be required to pay interest on taxes refunded to thetaxpayer unless:

i. The Commissioner acted with patent arbitrariness667

ii. In case of Income Tax withheld on the wages of employees.668

663 Commissioner of Internal Revenue vs. TMX Sales, Inc., G.R. No.83736, Jan. 15, 1992664 CIR vs. Palanca, Jr., supra665 Gibbs vs. Commissioner of Internal Revenue, supra666 Sec. 112 (A)667 Arbitrariness presupposes inexcusable or obstinate disregard of legal provisions (CIR vs.VictoriasMilling Corp., Inc. L-19607, Nov. 29,1966)668 Any excess of the taxes withheld over the tax due from the taxpayer shall be returned or creditedwithin 3 months from the fifteenth (15th) day of April. Refund or credit after such time earn interest atthe rate of 6% per annum, starting after the lapse of the 3-month period to the date the refund or creditis made (Sec 79 (c) (2))

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2. Government Remedies

a. Administrative remedies

1) Tax lien669

2) Levy and sale of real property

Levy - is the seizure of real property and interest in or rights to such properties forthe satisfaction of taxes due from the delinquent taxpayer.

The requisites are the same as that of distraint.670

3) Forfeiture of real property to the government forwant of bidder671

Implies a divestiture of property without compensation, in consequence of a defaultor offense.

Includes the idea of not only losing but also having the property transferred toanother without the consent of the owner and wrongdoer.

4) Further distraint and levy672

5) Suspension of business operation673

6) Non-availability of injunction to restrain collectionof tax

No court shall have the authority to grant an injunction to restrain the collection ofany national internal revenue tax, fee or charge imposed by the Code.674

669 supra670 Ibid.671 Effect: Transfer the title to the specific thing from the owner to the government.

When available:a. No bidder for the real property exposed for sale.b. If highest bid is for an amount insufficient to pay the taxes, penalties and costs.

- Within two days thereafter, a return of the proceeding is duly made.How enforced:

a. In case of personal property – by seizure and sale or destruction of the specific forfeited property.b. In case of real property – by a judgment of condemnation and sale in a legal action or proceeding,

civil or criminal, as the case may require.672 supra673 Ibid.674 Sec. 218

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Exception:

Injunction may be issued by the CTA in aid of its appellate jurisdiction.675

b. Judicial remedies676

Civil Action677 Criminal Action678

1. By filing a civil case679 to collect internalrevenue taxes in regular courts680

2. By filing an answer to the petition forreview filed by the taxpayer with the CTA681

Generally resorted to by the BIR when thesummary remedies for the collection of taxeshave proven ineffective and futile.682

Instituted not to demand payment but topenalize taxpayer for the violation of theNIRC.

675 Under Sec. 11 of R.A. 1125, (as amended by RA 9282) - when in the opinion of the Court the collectionmay jeopardize the interest of the Government and/or the taxpayer, the Court, at any stage of theproceeding, may suspend the said collection and require the taxpayer either to deposit the amountclaimed or to file a surety bond for not more than double the amount with the Court.676 Civil and Criminal Actions:

1. Brought in the name of the Government of the Philippines.2. Conducted by Legal Officer of BIR3. Must be with the approval of the CIR, in case of action, for recovery of taxes, or enforcement of a

fine, penalty or forfeiture.677 For tax remedy purposes, these are actions instituted by the government to collect internalrevenue taxes in the regular courts after assessment by CIR has become final and executory.

It includes, however, the filing by the government of claims against the deceased taxpayer with theprobate court.678 The criminal charge is filed directly with the Department of Justice with the approval of the CIR.

The information should be filed:1. CTA - on criminal offenses arising from violations of the NIRC or Tariff and Customs Code and other

laws administered by the BIR and the BOC where the principal amount of taxes and fees, exclusive ofcharges and penalties claimed is P1 million and above.

2. RTC, MTC, MeTC - on criminal offenses arising from violations of the NIRC or Tariff and CustomsCode and other laws administered by the BIR and the BOC where the principal amount of taxes and fees,exclusive of charges and penalties claimed is less than P1 million. (Sec. 7, R.A. 9282)679 within 5 years from the date of the assessment680 RTC or MTCs, depending on the amount involved

When assessment made has become final and executory for failure or taxpayer to:a. Dispute same by filing protest with CIRb. Appeal adverse decision of CIR to CTA

Jurisdiction:If case involves collection of assessed principal taxes amounting to 1M or more- CTAIf lower than 1M- RTC and other lower courts

681 If Commissioner files the case- Republic of the Phils. is the party plaintiff; when it is the taxpayer whofiles a petition for review in CTA, the respondent is the Commissioner.682 A direct mode of collection of taxes, the judgment of which shall not only impose the penalty but alsoorder payment of taxes.

An assessment of a tax deficiency is not necessary to a criminal prosecution for tax evasion, providedthere is a prima facie showing of willful attempt to evade.

194

3. Statutory Offenses and Penalties

a. Civil penalties

They are imposed in addition to the tax required to be paid.

1) Surcharge

A civil penalty imposed by law as an addition to the main tax required to be paid. Itis not a criminal penalty but a civil administrative sanction provided primarily as safeguardfor the protection of the State revenue and to reimburse the government for the expenses ofinvestigation and the loss resulting from the taxpayer’s fraud.683

A surcharge added to the main tax is subject to interest.

2) Interest

a) In General

Assessed and collected on any unpaid amount of tax at the rate of twenty percent(20%) per annum from the date prescribed for payment until the amount is fully paid.684

b) Deficiency interest

The interest due on any amount of tax due or installment thereof which is not paidon or before the date prescribed for its payment computed at the rate of 20% per annum,685

from the date prescribed for its payment until it is fully paid.

c) Delinquency interest

The interest of 20% per annum required to be paid in case of failure to pay:

(1) The amount of the tax due on any return to be filed, or

(2) The amount of the tax due for which no return is required, or

(3) A deficiency tax, or any surcharge or interest thereon on the due date appearingin the notice and demand of the Commissioner.686

683 A surcharge added to the main tax is subject to interest.684 Sec. 249 (A)685 or such higher rate as may be prescribed by the rules and regulations686 Id., (C)

195

d) Interest on extended payment

If any person required to pay the tax is qualified and elects to pay the tax oninstallment but fails to pay the tax or any installment hereof, or any part of such amount orinstallment on or before the date prescribed for its payment, or where the Commissioner hasauthorized an extension of time within which to pay a tax or a deficiency tax or any partthereof, there shall be assessed and collected interest at the rate prescribed on the tax ordeficiency tax or any part thereof unpaid from the date of notice and demand until it ispaid.687

4. Compromise and Abatement of taxes688

a. Compromise

Involves a mere reduction of the tax.

b. Abatement

A cancelation of the entire liability.

687 Id., (D)688 supra

196

G. Organization and Function of the Bureau of Internal Revenue

1. Rule-making authority of the Secretary of Finance

a. Authority of Secretary of finance to promulgate rules andregulations

Upon recommendation of the Commissioner, for the effective enforcement of theprovisions of the Code.689

b. Specific provisions to be contained in rules and regulations

(1) The time and manner in which Revenue Regional Director shall canvass theirrespective Revenue Regions for the purpose of discovering persons and property liable tonational internal revenue taxes, and the manner in which their lists and records of taxablepersons and taxable objects shall be made and kept;

(2) The forms of labels, brands or marks to be required on goods subject to an excisetax, and the manner in which the labelling, branding or marking shall be effected;

(3) The conditions under which and the manner in which goods intended for export,which if not exported would be subject to an excise tax, shall be labelled, branded ormarked;

(4) The conditions to be observed by revenue officers respecting the institutions andconduct of legal actions and proceedings;

(5) The conditions under which goods intended for storage in bonded warehousesshall be conveyed thither, their manner of storage and the method of keeping the entries andrecords in connection therewith, also the books to be kept by Revenue Inspectors and thereports to be made by them in connection with their supervision of such houses;

(6) The conditions under which denatured alcohol may be removed and dealt in, thecharacter and quantity of the denaturing material to be used, the manner in which theprocess of denaturing shall be effected, so as to render the alcohol suitably denatured andunfit for oral intake, the bonds to be given, the books and records to be kept, the entries tobe made therein, the reports to be made to the Commissioner, and the signs to be displayedin the business ort by the person for whom such denaturing is done or by whom, suchalcohol is dealt in;

(7) The manner in which revenue shall be collected and paid, the instrument,document or object to which revenue stamps shall be affixed, the mode of cancellation ofthe same, the manner in which the proper books, records, invoices and other papers shall bekept and entries therein made by the person subject to the tax, as well as the manner inwhich licenses and stamps shall be gathered up and returned after serving their purposes;

689 Sec. 244

197

(8) The conditions to be observed by revenue officers respecting the enforcement ofTitle III imposing a tax on estate of a decedent, and other transfers mortis causa, as well as ongifts and such other rules and regulations which the Commissioner may consider suitable forthe enforcement of the said Title III;

(9) The manner in which tax returns, information and reports shall be prepared andreported and the tax collected and paid, as well as the conditions under which evidence ofpayment shall be furnished the taxpayer, and the preparation and publication of tax statistics;

(10) The manner in which internal revenue taxes690 shall be paid through thecollection officers of the Bureau of Internal Revenue or through duly authorized agent bankswhich are hereby deputized to receive payments of such taxes and the returns, papers andstatements that may be filed by the taxpayers in connection with the payment of the tax.

c. Non-retroactivity of rulings

If the revocation, modification or reversal will be prejudicial to the taxpayers, except:

(a) Where the taxpayer deliberately misstates or omits material facts from his returnor any document required of him by the Bureau of Internal Revenue;

(b) Where the facts subsequently gathered by the Bureau of Internal Revenue arematerially different from the facts on which the ruling is based; or

(c) Where the taxpayer acted in bad faith.691

2. Power of the Commissioner to suspend the business operation ofa taxpayer692

690 such as income tax, including withholding tax, estate and donor's taxes, value-added tax, otherpercentage taxes, excise taxes and documentary stamp taxes691 Sec. 246692 supra

198

III. Local Government Code of 1991, as amended

A. Local Government Taxation693

1. Fundamental principles694

a. Taxation shall be uniform695 in each LGU

b. Taxes, fees, charges and other impositions shall be:

1. Equitable and based on the taxpayer’s ability to pay.

2. For public purpose.696

3. Not unjust, excessive, oppressive or confiscatory.

4. Not contrary to law, public policy, national economic policy, or in restraint

of trade.

c. The collection of local taxes, fees, charges and other impositions shall in no casebe Let to any private person;

d. The revenue collected pursuant to the provisions of the LGC shall Inure solelyto the benefit of, and be subject to the disposition by, the local government unit levying thetax, fee, charge or other imposition unless otherwise specifically provided herein; and

e. Each LGU shall, as far as practicable, evolve a progressive system of taxation.697

693 The power to tax which may be exercised by local legislative bodies is no longer merely by nature of avalid delegation as before but pursuant to direct authority conferred by Sec. 5, Art. X of the Constitution(Mactan Ceby Intn’l Airport vs. Marcos, G.R. No. 120082, Sept 11, 1996)

Where there is neither a grant nor a prohibition by statute, the tax power must be deemed to existalthough Congress may provide statutory limitations and guidelines. The basic rationale for the currentrule is to safeguard the viability and self-sufficiency of local government units by directly granting themgeneral and broad tax power (MERALCO vs. Prov. of Laguna, G.R. No 131359, May 5, 1999694 also known as the requisites of municipal taxation695 Uniformity of Taxation – Equality and uniformity of local taxation is that all taxable articles of the sameclass shall be taxed at the same rate within the same territorial jurisdiction of the taxing authority.696 Public Purpose – Proceeds obtained are to be used to support the existence of theLGU.697 Just Taxation – Municipal corporations are allowed a wide range in determining tax rates of imposabletaxes and license fees.

199

2. Nature and source of taxing power

a. Grant of local taxing power under the Local GovernmentCode

Each local government unit shall exercise its power to create its own sources ofrevenue and to levy taxes, fees, and charges subject to the provisions herein, consistent withthe basic policy of local autonomy. Such taxes, fees, and charges shall accrue exclusively tothe local government units.698

b. Authority to prescribe penalties for tax violations

The sanggunian of a local government unit is authorized to prescribe fines or otherpenalties for violation of tax ordinances but in no case shall such fines be less than Onethousand pesos (P1,000.00) nor more than Five thousand pesos (P5,000.00), nor shallimprisonment be less than one (1) month nor more than six (6) months. Such fine or otherpenalty, or both, shall be imposed at the discretion of the court.

The sangguniang barangay may prescribe a fine of not less than One hundred pesos(P100.00) nor more than One thousand pesos (P1,000.00).699

c. Authority to grant local tax exemptions

Local government units may, through ordinances duly approved, grant taxexemptions, incentives or reliefs under such terms and conditions as they may deemnecessary.700

d. Withdrawal of exemptions

Tax exemptions or incentives granted to, or presently enjoyed by all persons,whether natural or juridical, including government-owned or -controlled corporations,except local water districts, cooperatives duly registered under R.A. No. 6938, non-stock andnon-profit hospitals and educational institutions, are hereby withdrawn upon the effectivityof this Code.701

e. Authority to adjust local tax rates

LGUs are given authority to adjust the tax rates, but the adjustment should be madenot oftener than once every 5 years but in no case shall the adjustment exceed 10% of therates fixed under the LGC.702

698 Sec. 129699 Sec. 516700 Sec. 192

The power to grant tax exemptions, tax incentives and tax reliefs shall not apply to regulatory feeswhich are levied under the police power of the LGU.701 Sec. 193702 Sec 191

200

f. Residual taxing power of local governments

LGUs may exercise the power to levy taxes, fees or charges on any base or subjectnot otherwise specifically enumerated herein or taxed under the

1. Local Government Code;

2. National Internal Revenue Code; or

3. Other applicable laws.703

g. Authority to issue local tax ordinances

The power to impose a tax, fee, or charge or to generate revenue shall be exercisedby the sanggunian of the local government unit concerned through an appropriateordinance.704

3. Local taxing authority

a. Power to create revenues exercised thru LGUs

Local governments are authorized to impose and collect the following charges:

1. Reasonable fees and charges for services rendered.705

2. Public Utility Charges if:

a. Owned, operated and maintained

b. Within their jurisdiction706

3. Tools, Fees or Charges for:

a. Use of public road, pier or wharf, waterway bridge, ferry ortelecommunication system

b. Funded and constructed by the local government707

703 Sec. 186704 Sec. 132705 Sec. 153706 Sec. 154707 Sec. 155

201

b. Procedure for approval and effectivity of tax ordinances

1. The procedure applicable to local government ordinances in general should beobserved.708

The following procedural details must be complied with:

a. Necessity of quorum

b. Submission for approval by the local chief executive

c. The matter of veto and overriding the same

d. Publication and effectivity709

2. Public hearings are required before any local tax ordinance is enacted.710

3. Within 10 days after their approval, publication in full for 3 consecutive days in anewspaper of general circulation. In the absence of such newspaper in the province, city ormunicipality, then the ordinance may be posted in at least two conspicuous and publiclyaccessible places.711

4. Scope of taxing power

a. Each local government unit shall exercise its power to create its own sources ofrevenue and to levy taxes, fees, and charges, consistent with the basic policy of localautonomy. Such taxes, fees, and charges shall exclusively accrue to it.712

b. All local government units are granted general powers to levy taxes, fees orcharges on any base or subject not otherwise specifically enumerated herein or taxed underthe provisions of the NIRC, as amended, or other applicable laws. The levy must not beunjust, excessive, oppressive, confiscatory or contrary to a declared national economicpolicy.713

c. No such taxes, fees or charges shall be imposed without a public hearing havingbeen held prior to the enactment of the ordinance.714

d. Copies of the provincial, city, and municipal tax ordinances or revenue measuresshall be published in full for three consecutive days in a newspaper of local circulation orposted in at least two conspicuous and publicly accessible places.715

708 Sec. 187709 Secs. 54, 55, and 59710 Sec. 187711 Sec. 188 & 189712 Sec. 129713 Sec. 186714 Sec. 187

202

5. Specific taxing power of local government unit (LGUs)

a. Taxing powers of provinces

1) Tax on transfer of real property716 ownership

Transaction taxed Sale, barter, or any other mode of transferring ownershipof, or title to, real property

Rate At not more than 50% of 1% total consideration.717

Exception from tax The sale, transfer or other disposition of real propertypursuant to R.A. 6657.718

2) Tax on business of printing and publication

Transaction taxed Business of printing and publication of books, cards,posters, leaflets, handbills, certificates, receipts, pamphlets,and other similar nature

Tax Rate Not exceeding 50% of 1% of the gross annual receipts forthe preceding calendar year, in the case of newly startedbusiness, not to exceed 1/20 of 1% of the capitalinvestment

Exception The receipts from the printing and/ or publishing of booksor other reading materials prescribed by the DECS asschool text or references are not subject to the tax imposed

715 Sec. 188716 Real Property – refers only to lands, buildings, and machineries intended by the owner of the land orbuilding for an industry or works which may by carried on in a building or on a piece of land and whichtend directly to meet the needs of the industry or works.717 Tax base –

1. total consideration or2. fair market value, whichever is higher

718 Comprehensive Agrarian Reform Law

203

3) Franchise tax719

Franchise Generally refers to a privilege conferred by thegovernment on an individual or corporation, whichdoes not belong to the citizens by common right

Tax Rate Not exceeding 50% of 1%, if newly started business,1/20 of 1 %

Tax base Gross annual receipts of preceding calendar yearbased on:

a) Incoming receipts, orb) Realized within territorial jurisdiction.

4) Tax on sand, gravel and other quarry services720

Tax Rate Not more than 10% of fair market value

Issuance of Permit To permit to extract the sand, gravel and otherquarry resources shall be issued exclusively by theprovincial governor pursuant to the ordinance ofthe sangguniang panlalawigan

719 Purpose of Franchise Tax – to be in addition to the franchise tax imposed by the national governmenton business which are holders of franchise except when otherwise prohibited by law.719

720 Distribution of the Proceeds – The proceeds of the tax shall be distributed as followsa. Province – 30%b. Component city or municipality where the sand, etc are extracted – 30%c. Barangay where the sand, etc. are extracted – 40%

204

5) Professional tax721

Tax rate In such as Sanggunian may determine and in no caseto exceed P300

When paid On or before Jan. 20

Where Paid on the place where you practice yourprofession.722

6) Amusement tax723

Tax Rate Not more than 30% of the gross receipt fromadmission fees

Exemption Operas, concerts, dramas, recitals, painting and artexhibitions, flower shows, musical programs,literary and oratorical presentation

Exceptions to exemption Pop, rock, or similar concert.

7) Tax on delivery truck/van

Transaction taxed Use of truck, van vehicle in the delivery ordistribution of distilled spirits, fermented liquors,softdrinks, cigar and cigarettes and other products,determined by the Sanggunian to sales outlets or

721 Profession – a calling w/c requires the passing of an appropriate government board or barexamination, such as the practice of law, medicine, public accounting, engineering, etc.

Nature of Tax – professional tax applies only to natural or physical persons and not to juridicalentities. Said tax is fixed on the privilege of exercising or engaging in a profession. The tax is not based onthe amount of earnings of the taxpayer.722 government employees are exempted from paying PT723 Amusement – pleasurable diversion and entertainment

Amusement Place – includes theaters, cinemas, concert halls, circuses and other places of amusementwhere one seeks admission to entertain himself by seeing or viewing the show or performance (Sec 131(c))

205

consumers.

Tax rate Not exceeding P500 for every truck, van or anyvehicle used

Exemption Exempt from tax on peddlers.

b. Taxing powers of cities

Cities are authorized specifically to impose taxes, fees and charges that provinces andmunicipalities may levy.

Rate: May be above the maximum established forprovinces and municipalities but not exceeding50% of such maximum rates except the rates ofprofessional and amusement taxes

c. Taxing powers of municipalities

Municipality may levy taxes, fees and charges not otherwise levied by provinces andcities

1) Tax on various types of businesses

Manufacturers, assemblers, repackers ofliquors, distilled spirits and wines

Rate

At graduated annual fixed tax based ongross sales or receipts for the precedingcalendar year in an amount not to exceedP6.5 M or more, a rate not exceeding 37½ of 1% is imposed

Wholesalers, distributors or dealers in anyarticle of Commerce

Graduated annual fixed rate based ongross sales or receipts not exceedingP2M or more, the rate not exceeding50% of 1%

Exporters, manufacturers, millers, producersof essential commodities

Not exceeding ½ of the rates prescribedin (a) and (b)724

724 supra

206

Contractors and other independentcontractors

Graduated annual fixed rate when thegross receipts exceeds P2M the rate isnot exceeding 50% of 1%

Banks and other financial institutions Not exceeding 50% of 1% on the grossreceipts of preceding calendar year

Peddlers Not exceeding 50% per peddler annually

Any business not otherwise specified As the Sanggunian may deem proper.When subject to excise, VAT orpercentage tax, it shall not exceed 2% ofgross receipts of the preceding calendaryear.725

2) Ceiling on business tax impossible onmunicipalities within Metro Manila

The municipalities within the Metropolitan Manila Area may levy taxes at rates whichshall not exceed by fifty percent (50%) the maximum rates prescribed in the precedingSection.726

3) Tax on retirement on business

A business subject to tax shall, upon termination thereof, submit a sworn statementof its gross sales or receipts for the current year. If the tax paid during the year be less thanthe tax due on said gross sales or receipts of the current year, the difference shall be paidbefore the business is considered officially retired.

If the tax paid during the year be less than the tax due on said gross sales of receiptsof the current year, the difference shall be paid before the business is considered officiallyretired.727

4) Rules on payment of business tax

a. It shall be payable for every separate or distinct establishment or place where thebusiness subject to the tax is conducted and one line of business does not become exemptby being conducted with some other business for which such tax has been paid.

725 Sec. 143726 Sec. 144727 Sec. 145

207

b. The tax on a business must be paid by the person conducting the same.

c. In cases where a person conducts or operates 2 or more of the businesses:

1. subject to the same rate of tax - the tax shall be computed on thecombined total gross sales or receipts of the said 2 or more related businesses.

2. subject to different rates of tax - the gross sales or receipts of eachbusiness shall be separately reported for the purpose of computing the tax due fromeach business.

5) Fees and charges for regulation & licensing

The municipality may impose and collect such reasonable fees and charges onbusiness and occupation except professional taxes reserved for provinces.728

a. Fees for Sealing and Licensing of Weights and Measures729

b. Fishery Rentals, Fees and Charges, including the authority to grant fisheryprivileges within municipal waters, as well as issue licenses for the operation of fishingvessels of three tons or less.

c. The sanggunian may penalize the use of explosives, noxious or poisonoussubstances, electricity, muro –ami, and other deleterious methods of fishing and prescribe acriminal penalty therefore.730

728 Sec. 147729 Sec. 148730 Sec. 149

208

6) Situs of tax collected

Situation Recognition of sale Payment of tax

With branch or sales officeor warehouse

All sales made in the localitywhere the branch or officeor warehouse is located

The tax shall be payable tothe city or municipalitywhere the same is located.

Where there is no branch orsalesoffice or warehouse.

The municipality where thesale or transaction is made.

The sale shall be recorded inthe principal office alongwith the sales made by saidprincipal office

The tax shall accrue to thecity or municipality wheresaid principal office islocated

Branch office – a fixed place in a locality which conducts operations of the business as anextension of the principal office.

Principal office – head or main office of the business appearing in pertinent documentssubmitted to the SEC and specifically mentioned in the Articles of Incorporation.

Where there is a factory,project office, plant orplantation in pursuit ofbusiness

All sales shall be recorded inthe principal office

Of all sales recorded in theprincipal office:

1. 30% taxable to the city ormunicipality where theprincipal office is located.

2. 70% taxable to the city ormunicipality where thefactory, plant, etc. is located.

The 70% (above) shall bedivided as follows:

1. 60% to the city ormunicipality where thefactory is.

2. 40% to the city ormunicipality where theplantation is located.

If plantation is at a placeother than where the factoryis located

If manufacturer,contractor, etc. has two ormore factories, projectoffices, plants or plantationslocated in differentlocalities.

209

d. Taxing powers of barangays

Taxes on stores / retailers with fixedbusiness establishment with gross sales orreceipts of the preceding calendar year ofP50,000 or less in the cities & municipalities

Rate: Not exceeding 1% on such gross salesor receipts

Service Fees/ Charges It may collect reasonable fees or charges forservices rendered in connection with theregulation or the use of barangay ownedproperty or service facilities

Barangay Clearance No city municipality may issue any license/permit for any business / activity is located.For such clearance, the sangguniang brgy.may impose reasonable fee.

Other fees & charges The brgy. may levy reasonable fees &charges

a) On commercials breeding of fightingcocks & cockpits;

b) On places of recreation w/c chargeadmission fees; and

c) On billboards, signs boards, neon signsand outdoor advertisement

210

e. Common revenue raising powers

1) Service fees and charges

LGUs may impose and collect such reasonable fees and charges for servicesrendered.731

2) Public utility charges

LGUs may fix the rates for the operation of public utilities owned, operated andmaintained by them within their jurisdiction.732

3) Toll fees or charges

The sanggunian concerned may prescribe the terms and conditions and fix the ratesfor the imposition of toll fees or charges for the use of any public road, pier, orwharf,waterway, bridge, ferry or telecommunication system funded and constructed by thelocal government unit concerned.733

f. Community tax

The community tax, which replaced the residence tax, is essentially a poll orcapitalization tax. It is of fixed amount imposed upon certain inhabitants of the countrywithout regard to the property/ occupation in which they may be engaged.

Who are authorized to levy Cities or municipalities may levy acommunity tax, as well as the rates & accrualof the proceeds thereof.734

Persons liable to tax 1. Individuals –

Rate: P5.00 an annual additional tax of P1.00for every P1,000 income regardless ofwhether from business, exercise ofprofession or from property w/c in no caseshall exceed P5,000.

2. Corporations -

Rate: Annual community tax of P500 and anannual additional tax w/c in no case shall

731 Sec. 153732 Sec. 154733 Sec. 155734 Sec 156

211

Exemptions from the Community Tax

exceed P10,000

1. Diplomatic and consular representativesand

2. Transient visitors when their stay in thePhil. Does not exceed 3 mos.

Estates of deceased persons, being neither corporations nor individuals, are notsubject to the tax, but the heirs must declare their proportionate shares of their income.

Community Tax Certificate – shall be issued to every person or corporation uponpayment of the community tax. It may also be issued to any corporation/person not subjectto the community tax.735

735 Sec 162

212

6. Common limitations on the taxing powers of LGUs736

Unless otherwise provided herein, the exercise of the taxing power of provinces,cities, municipalities, and barangays shall not extend to the levy of the following:

1. Income tax737

2. Documentary Stamp Tax

3. Tax on estates, inheritance, gifts, legacies and other acquisitions mortis causa738

4. Excise taxes on articles enumerated under the NIRC,739 as amended, and taxes,fees or charges on petroleum products.

5. Percentage or VAT on sales, barters or exchanges or similar transactions on goodsor services exchanges or similar transactions on goods or services except as otherwiseprovided herein740

6. Taxes on the gross receipts of transportation of contractors and persons engagedin the transportation of passengers or freight by hire and common carriers by air, land orwater except as provided by the code.741

7. Taxes, fees and charges imposed under the Tariff and Customs Code and otherSpecial Laws

8. Customs duties, registration fees of vessels and wharfage on wharves, tonnagedues and all other kinds of customs fees, charges and dues, except wharfage on wharvesconstructed and maintained by LGU concerned.

9. Taxes, fees and charges and other Impositions which contravene ExistingGovernment Policies or which are violative of the Fundamental Principles of Taxation.

736 Sec 133737 Exception: banks and other financial institutions738 Exception: tax on transfer of real property ownership739 Taxable Articles embodied in the NIRC are:

1. Alcoholic products2. Tobacco products3. Petroleum products4. Miscellaneous articles5. Mineral productsLocal governments can tax the selling of these finished products or the raw materials.

740 Percentage of taxes – imposed when there is set of ration between the amount of tax and the volumeof sales.741 Transportation contractors including persons who transport passengers for hire and other domesticcarriers by land, air or water for transport of passengers, except owners of bancas and owners of animaldrawn two-wheeled vehicle are subject to 3% percentage tax on their gross quarterly receipt (Sec 117,NIRC)

Sec. 117 of NIRC specifies that the gross receipt of common carriers derived from their incoming andoutgoing freight shall not be subjected to local taxes imposed under LGC.

213

10.Taxes, fees, and charges and other impositions upon goods carried into or out of,or passing through, the territorial jurisdiction of LGU in the guise of charges for wharfage,tolls for bridges or otherwise, or other taxes, fees or charges in any form whatever uponsuch goods or merchandise.

11. Taxes, fees, or charges on agricultural and aquatic products when sold bymarginal farmers or fishermen.

12. Taxes on business enterprises certified to by the Board of Investment as pioneeror non-pioneer who enjoy tax holidays742 for a period of 6 and 4 years, respectively from thedate of registration

13. Taxes on premiums paid by way of reinsurance or retrocession.

14. Taxes, fees or other charges on Philippine products actually exported, exceptedotherwise provided herein in the LGC.

15. Taxes, fees or charges on Countryside and Baranggay Business Enterprises andCooperative duly registered under RA No. 6810 and RA 6938 otherwise known as theCooperative Code of the Phil. Respectively.

16. Taxes, fees or charges of any kind on the National Government, its agencies andinstrumentalities and LGU.

17. Taxes, fees, and charges imposed under special laws.

18. Taxes, fees or charges for registration of motor vehicles.743

742 exemption from income tax only743 Exception: Tricycles

214

7. Collection of business tax

a. Tax period and manner of payment

The calendar year,744 which may be paid in quarterly installments.745

b. Accrual of tax

On the 1st day of January of each year.746

New taxes, fees or charges or changes accrue on the 1st day of the quarter nextfollowing the effectively of the ordinance imposing such new rates.747

c. Time of payment

Within the first 20 days of January or of each subsequent quarter.748

Not exceeding 6 months – in case of extension of payment.749

d. Penalties on unpaid taxes, fees or charges

A surcharge not exceeding 27% of the amount of taxes, fees or charges and aninterest at the rate not exceeding 2% per month until such amount is fully paid.

In no case the total interest on the unpaid amount or portion thereof exceed 36months750

e. Authority of treasurer in collection and inspection of books

All local taxes, fees, and charges shall be collected by the provincial, city, municipal,or barangay treasurer, or their duly authorized deputies. The provincial, city or municipaltreasurer may designate the barangay treasurer as his deputy to collect local taxes, fees, orcharges. In case a bond is required for the purpose, the provincial, city or municipalgovernment shall pay the premiums thereon in addition to the premiums of bond that maybe required under this Code.751

The provincial, city, municipal or barangay treasurer may, by himself or through anyof his deputies duly authorized in writing, examine the books, accounts, and other pertinentrecords of any person, partnership, corporation, or association subject to local taxes, fees

744 unless otherwise provided745 Sec. 165746 unless otherwise provided747 Sec 166748 unless otherwise provided749 Sec 167750 Sec 168751 Sec. 170

215

and charges in order to ascertain, assess, and collect the correct amount of the tax, fee, orcharge. Such examination shall be made during regular business hours, only once for everytax period, and shall be certified to by the examining official. Such certificate shall be madeof record in the books of accounts of the taxpayer examined. In case the examination hereinauthorized is made by a duly authorized deputy of the local treasurer, the written authority ofthe deputy concerned shall specifically state the name, address, and business of the taxpayerwhose books, accounts, and pertinent records are to be examined, the date and place of suchexamination, and the procedure to be followed in conducting the same. For this purpose, therecords of the revenue district office of the Bureau of Internal Revenue shall be madeavailable to the local treasurer, his deputy or duly authorized representative.752

8. Taxpayer’s remedies

a. Periods of assessment and collection of local taxes, fees orcharges753

Assessment Collection

- within five years from the date theybecome due.

- within 10 years, in case of fraud of intent toevade payment

- within 5 years from the date of assessmentby administrative or judicial action

b. Protest of assessment

a. Assessment made by the local Treasurer

b. Taxpayer has 60 days from receipt to file written protest with Treasurer,otherwise it shall become final and executory

c. Treasurer has 10 days within which to decide.754

752 Sec. 171753 Suspension of the running of the prescriptive Period -

a. Treasurer legally prevented from the making the assessment or collectionb. Taxpayer requests for reinvestigation and executes waiver in writingc. Taxpayer out of the countryd. Taxpayer cannot be located

754 Treasurer cancels assessmentTreasurer denies protest

- Taxpayer appeals within 30 days after receipt of denialTreasurer does not act within 60 days

- Taxpayer has 30 days from the lapse of 60 days to appeal

216

c. Claim for refund of tax credit for erroneously or illegallycollected tax, fee or charge

A written claim for refund or credit is filed with the local Treasurer within 2 yearsfrom the date of payment of such tax, fee, or charge, or from the date the taxpayer is entitledto a refund or credit

9. Civil remedies by the LGU for collection of revenues

a. Local government’s lien for delinquent taxes, fees orcharges

1. Superior to all items, charges or encumbrances in favor of any person,enforceable by the administrative of judicial action

2. Covers not only property or rights subject to the lien but also upon property usedin business.

b. Civil remedies, in general

1) Administrative action

1. Distraint of goods, chattels or effects and other personal property of whatevercharacter

2. Levy upon real property and interest in or rights to real property

2) Judicial action

Either of these remedies or all may be pursued concurrently or simultaneously at thediscretion of local government unit concerned.755

c. Procedure for administrative action

1) Distraint of personal property

(a) Seizure Upon failure of the person owing any local tax, fee, orcharge to pay the same at the time required, the localtreasurer or his deputy may, upon written notice, seize orconfiscate any personal property belonging to that person orany personal property subject to the lien in sufficientquantity to satisfy the tax, fee, or charge in question,together with any increment thereto incident to delinquencyand the expenses of seizure. In such case, the local treasureror his deputy shall issue a duly authenticated certificate

755 Sec 174

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based upon the records of his office showing the fact ofdelinquency and the amounts of the tax, fee, or charge andpenalty due. Such certificate shall serve as sufficient warrantfor the distraint of personal property aforementioned,subject to the taxpayer's right to claim exemption under theprovisions of existing laws. Distrained personal propertyshall be sold at public auction in the manner hereonprovided for.

(b) Accounting of distrainedgoods.

The officer executing the distraint shall make or cause to bemade an account of the goods, chattels or effects distrained,a copy of which signed by himself shall be left either withthe owner or person from whose possession the goods,chattels or effects are taken, or at the dwelling or place orbusiness of that person and with someone of suitable ageand discretion, to which list shall be added a statement ofthe sum demanded and a note of the time and place of sale.

(c) Publication The officer shall forthwith cause a notification to beexhibited in not less than three (3) public and conspicuousplaces in the territory of the local government unit wherethe distraint is made, specifying the time and place of sale,and the articles distrained. The time of sale shall not be lessthan twenty (20) days after the notice to the owner orpossessor of the property as above specified and thepublication or posting of the notice. One place for theposting of the notice shall be at the office of the chiefexecutive of the local government unit in which the propertyis distrained.

(d) Release of distrainedproperty upon payment priorto sale

If at any time prior to the consummation of the sale, all theproper charges are paid to the officer conducting the sale,the goods or effects distrained shall be restored to theowner.

(e) Procedure of sale At the time and place fixed in the notice, the officerconducting the sale shall sell the goods or effects sodistrained at public auction to the highest bidder for cash.Within five (5) days after the sale, the local treasurer shall

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make a report of the proceedings in writing to the local chiefexecutive concerned.756

(f) Disposition of proceeds The proceeds of the sale shall be applied to satisfy the tax,including the surcharges, interest, and other penaltiesincident to delinquency, and the expenses of the distraintand sale. The balance over and above what is required to paythe entire claim shall be returned to the owner of theproperty sold. The expenses chargeable upon the seizureand sale shall embrace only the actual expenses of seizureand preservation of the property pending the sale, and nocharge shall be imposed for the services of the local officeror his deputy. Where the proceeds of the sale are insufficientto satisfy the claim, other property may, in like manner, bedistrained until the full amount due, including all expenses,is collected.757

2) Levy of real property, procedure

After the expiration of the time required to pay the delinquent tax, fee, or charge,real property may be levied on before, simultaneously, or after the distraint of personalproperty belonging to the delinquent taxpayer. To this end, the provincial, city or municipaltreasurer, as the case may be, shall prepare a duly authenticated certificate showing the nameof the taxpayer and the amount of the tax, fee, or charge, and penalty due from him. Saidcertificate shall operate with the force of a legal execution throughout the Philippines.

Levy shall be effected by writing upon said certificate the description of the propertyupon which levy is made. At the same time, written notice of the levy shall be mailed to orserved upon the assessor and the Register of Deeds of the province or city where theproperty is located who shall annotate the levy on the tax declaration and certificate of titleof the property, respectively, and the delinquent taxpayer or, if he be absent from thePhilippines, to his agent or the manager of the business in respect to which the liabilityarose, or if there be none, to the occupant of the property in question.

In case the levy on real property is not issued before or simultaneously with thewarrant of distraint on personal property, and the personal property of the taxpayer is notsufficient to satisfy his delinquency, the provincial, city or municipal treasurer, as the casemay be, shall within thirty (30) days after execution of the distraint, proceed with the levy onthe taxpayer's real property.

756 Should the property distrained be not disposed of within one hundred and twenty (120) days from thedate of distraint, the same shall be considered as sold to the local government unit concerned for theamount of the assessment made thereon by the Committee on Appraisal and to the extent of the sameamount, the tax delinquencies shall be cancelled.757 Sec. 165

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A report on any levy shall, within ten (10) days after receipt of the warrant, besubmitted by the levying officer to the sanggunian concerned.758

3) Further distraint or levy

The remedies by distraint and levy may be repeated if necessary until the full amountdue, including all expenses, is collected.759

4) Exemption of personal property from distraint orlevy

(a) Tools and implements necessarily used by the delinquent taxpayer in his trade oremployment;

(b) One (1) horse, cow, carabao, or other beast of burden, such as the delinquenttaxpayer may select, and necessarily used by him in his ordinary occupation;

(c) His necessary clothing, and that of all his family;

(d) Household furniture and utensils necessary for housekeeping and used for thatpurpose by the delinquent taxpayer, such as he may select, of a value not exceeding Tenthousand pesos (P10,000.00);

(e) Provisions, including crops, actually provided for individual or family usesufficient for four (4) months;

(f) The professional libraries of doctors, engineers, lawyers and judges;

(g) One fishing boat and net, not exceeding the total value of Ten thousand pesos(P10,000.00), by the lawful use of which a fisherman earns his livelihood; and

(h) Any material or article forming part of a house or improvement of any realproperty.760

5) Penalty on local treasurer for failure to issue andexecute warrant of distraint or levy

Any local treasurer who fails to issue or execute the warrant of distraint or levy afterthe expiration of the time prescribed, or who is found guilty of abusing the exercise thereofby competent authority shall be automatically dismissed from the service after due noticeand hearing.761

758 Sec. 166759 Sec. 184760 Sec. 185761 Sec. 177

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d. Procedure for judicial action

1) In any court of competent jurisdiction

2) Filed by local Treasurer

3) Within 5 years from the date taxes, fees or charges become due

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B. Real Property Taxation

1. Fundamental principles

a) Real property shall be appraised at its current and fair market value.

b) Real property shall be classified for assessment purposes on the basis of its actual

use.

c) Real property shall be assessed on the basis of a uniform standard within eachlocal government unit.

d) The appraisal, assessment, and collection of real property tax shall not be let toany private person; and

e. ) The appraisal and assessment of real property shall be equitable762

2. Nature of real property tax

Property taxes are assessed on all property, or all property of a certain class locatedwithin a certain territory on a specified date in proportion to its value or in accordance withsome other reasonable method of apportionment.763

In the Philippines, a real property tax is an annual ad valorem tax imposed by LGU’son real property within their jurisdiction, determined on the basis of a fixed proportion ofthe value of the property.

3. Imposition of real property tax

a. Power to levy real property tax

A province or city or a municipality within the Metropolitan Manila Area may levy anannual ad valorem tax on real property such as land, building, machinery, and otherimprovement not hereinafter specifically exempted.764

762 Sec. 198763 The function of a property tax is to raise revenue. Such tax does not impose any condition nor does itplace any restriction upon the use of the property taxed.764 Sec. 232

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b. Exemption from real property tax765

1. Real property owned by the Republic of the Philippines or any of its politicalsubdivisions except when the beneficial use thereof has been granted to a taxable person;

2. Charitable institutions, churches, parsonages, or convents appurtenant thereto,mosques, non profit or religious cemeteries, and all lands, buildings, and improvementsactually, directly and exclusively used for religious, charitable, or educational purposes.

3. All pieces of machinery and equipment that are actually, directly, and exclusivelyused by local water districts, and government – owned or controlled corporations engaged inthe supply and distribution of water and/or generation and transmission of electric power.

4. All real property owned by duly registered cooperatives,766 and

5. Machinery and equipment used for pollution control and environmentalprotection.

4. Appraisal and assessment of real property tax

a. Rule on appraisal of real property at fair market value

All real property, whether taxable or exempt, shall be appraised at the current andfair market value prevailing in the locality where the property is situated.767

b. Declaration of real property

It shall be the responsibility of the owner, administrator or their representatives todeclare, under oath, the true value of real property, taxable or exempt, within 60 days afterthe acquisition. The sworn declaration shall be filed once every 3 years before June 30 th ofthe year commencing 1992. The failure or refusal to make that declaration within theprescribed period would authorize the provincial or city assessor to declare the property inthe name of the defaulting owner, if known, or against an unknown owner as the case maybe, and to assess the property for taxation.768

765 Real properties of review schools are subject to tax (why? Considered an ordinary corporation)Non-stock, nonprofit private schools are exempt.Proprietary schools (stock and profit) duly accredited by DECS or CHED are exempt, if property is

actually, directly and exclusively used for educational purposes.The term “exclusively” under the Constitution does not mean “solely” but only “primarily” (Roman

Catholic Church v. Hastings, 5 Phil 701, Province of Abra v. Hernando, 107 SCRA 104 & other cases).766 as provided for under R.A. 6938767 Sec. 201768 Secs. 201-204

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c. Listing of real property in assessment rolls

(a) In every province and city, including the municipalities within the MetropolitanManila Area, there shall be prepared and maintained by the provincial, city or municipalassessor an assessment roll wherein shall be listed all real property, whether taxable orexempt, located within the territorial jurisdiction of the local government unit concerned.Real property shall be listed, valued and assessed in the name of the owner or administrator,or anyone having legal interest in the property.

(b) The undivided real property of a deceased person may be listed, valued andassessed in the name of the estate or of the heirs and devisees without designating themindividually; and undivided real property other than that owned by a deceased may be listed,valued and assessed in the name of one or more co-owners. Such heir, devisee, or co-ownershall be liable severally and proportionately for all obligations and the payment of the realproperty tax with respect to the undivided property.

(c) The real property of a corporation, partnership, or association shall be listed,valued and assessed in the same manner as that of an individual.

(d) Real property owned by the Republic of the Philippines, its instrumentalities andpolitical subdivisions, the beneficial use of which has been granted, for consideration orotherwise, to a taxable person, shall be listed, valued and assessed in the name of thepossessor, grantee or of the public entity if such property has been acquired or held forresale or lease.769

d. Preparation of schedules of fair market value

Before any general revision of property assessment is made, there shall be prepared aschedule of fair market values by the provincial, city and municipal assessor of themunicipalities within the Metropolitan Manila Area for the different classes of real propertysituated in their respective local government units for enactment by ordinance of thesanggunian concerned. The schedule of fair market values shall be published in a newspaperof general circulation in the province, city or municipality concerned or in the absencethereof, shall be posted in the provincial capitol, city or municipal hall and in two otherconspicuous public places therein.770

1) Authority of assessor to take evidence

For the purpose of obtaining information on which to base the market value of anyreal property, the assessor of the province, city or municipality or his deputy may summonthe owners of the properties to be affected or persons having legal interest therein andwitnesses, administer oaths, and take deposition concerning the property, its ownership,amount, nature, and value.771

769 Sec. 205770 Sec. 212771 Sec. 213

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2) Amendment of schedule of fair market value

The provincial, city or municipal assessor may recommend to the sanggunianconcerned amendments to correct errors in valuation in the schedule of fair market values.The sanggunian concerned shall, by ordinance, act upon the recommendation within ninety(90) days from receipt thereof.772

e. Classes of real property

For purposes of assessment, real property shall be classified as residential,agricultural, commercial, industrial, mineral, timberland or special.

The city or municipality within the Metropolitan Manila Area, through theirrespective sanggunian, shall have the power to classify lands as residential, agricultural,commercial, industrial, mineral, timberland, or special in accordance with their zoningordinances.773

f. Actual use of property as basis of assessment

Regardless of where located, whoever owns it, and whoever uses it.774

g. Assessment of real property

1) Assessment levels

The assessment levels to be applied to the fair market value of real property todetermine its assessed value shall be fixed by ordinances of the sangguniang panlalawigan,sangguniang panlungsod or sangguniang bayan of a municipality within the Metropolitan ManilaArea, at the rates not exceeding the following:

(a) On Lands:

CLASS ASSESSMENT LEVELS

Residential 20%Agricultural 40%Commercial 50%Industrial 50%Mineral 50%Timberland 20%

772 Sec. 214773 Sec. 215774 Sec. 217

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(b) On Buildings and Other Structures:

(1) ResidentialFair market Value

Over Not Over Assessment Levels

P175,000.00 0%P175,000.00 300,000.00 10%300,000.00 500,000.00 20%500,000.00 750,000.00 25%750,000.00 1,000,000.00 30%1,000,000.00 2,000,000.00 35%2,000,000.00 5,000,000.00 40%5,000,000.00 10,000,000.00 50%10,000,000.00 60%

(2) Agricultural

Fair Market ValueOver Not Over Assessment Levels

P300,000.00 25%P300,000.00 500,000.00 30%500,000.00 750,000.00 35%750,000.00 1,000,000.00 40%1,000,000.00 2,000,000.00 45%2,000,000.00 50%

(3) Commercial / Industrial

Fair Market ValueOver Not Over Assessment Levels

P300,000.00 30%P300,000.00 500,000.00 35%500,000.00 750,000.00 40%750,000.00 1,000,000.00 50%1,000,000.00 2,000,000.00 60%2,000,000.00 5,000,000.00 70%5,000,000.00 10,000,000.00 75%10,000,000.00 80%

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(4) Timberland

Fair Market ValueOver Not Over Assessment Levels

P300,000.00 45%P300,000.00 500,000.00 50%500,000.00 750,000.00 55%750,000.00 1,000,000.00 60%5,000,000.00 2,000,000.00 65%2,000,000.00 70%

(c) On Machineries

Class Assessment Levels

Agricultural 40%Residential 50%Commercial 80%Industrial 80%

(d) On Special Classes: The assessment levels for alllands buildings, machineries and otherimprovements;

Actual Use Assessment Level

Cultural 15%Scientific 15%Hospital 15%Local water districts 10%Government-owned or controlled corporationsengaged in the supply and distribution of waterand/or generation and transmission of electric power

10%775

2) General revisions of assessments and propertyclassification

Within two (2) years after the effectivity of this Code and every three (3) yearsthereafter, the provincial, city or municipal assessor shall undertake a general revision of realproperty assessments.776

775 Sec. 218776 Sec. 219

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3) Date of effectivity of assessment or reassessment

Made after the first (1st) day of January of any year - shall take effect on the first (1st)day of January of the succeeding year.777

4) Assessment of property subject to back taxes

Real property declared for the first time shall be assessed for taxes for the periodduring which it would have been liable but in no case of more than ten (10) years prior tothe date of initial assessment. Such taxes shall be computed on the basis of the applicableschedule of values in force during the corresponding period.778

5) Notification of new or revised assessment

When real property is assessed for the first time or when an existing assessment isincreased or decreased, the provincial, city or municipal assessor shall within thirty (30) daysgive written notice of such new or revised assessment to the person in whose name theproperty is declared. The notice may be delivered personally or by registered mail or throughthe assistance of the punong barangay to the last known address of the person to be served.

h. Appraisal and assessment of machinery

(a) The fair market value of a brand-new machinery shall be the acquisition cost.779

(b) If the machinery is imported, the acquisition cost includes freight, insurance,bank and other charges, brokerage, arrastre and handling, duties and taxes, plus charges atthe present site.780

777 The reassessment of real property due to its partial or total destruction, or to a major change in itsactual use, or to any great and sudden inflation or deflation of real property values, or to the grossillegality of the assessment when made or to any other abnormal cause, shall be made within ninety (90)days from the date any such cause or causes occurred, and shall take effect at the beginning of thequarter next following the reassessment.778 Sec. 222779 In all other cases, the fair market value shall be determined by dividing the remaining economic life ofthe machinery by its estimated economic life and multiplied by the replacement or reproduction cost.780 The cost in foreign currency of imported machinery shall be converted to peso cost on the basis offoreign currency exchange rates as fixed by the Central Bank.

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5. Collection of real property tax

a. Date of accrual of real property tax

On the first day of January.781

b. Collection of tax

1) Collecting authority

The responsibility of the city or municipal treasurer concerned.

The city or municipal treasurer may deputize the barangay treasurer to collect alltaxes on real property located in the barangay: Provided, the barangay treasurer is properlybonded for the purpose and the premium on the bond shall be paid by the city or municipalgovernment concerned.782

2) Duty of assessor to furnish local treasurer withassessment rolls

The provincial, city or municipal assessor shall prepare and submit to the treasurer ofthe local government unit, on or before the thirty-first (31st) day of December each year, anassessment roll containing a list of all persons whose real properties have been newlyassessed or reassessed and the values of such properties.783

3) Notice of time for collection of tax

On or before the thirty-first (31st) day of January each year or any other date to beprescribed by the sanggunian concerned/

Said notice shall likewise be published in a newspaper of general circulation in thelocality once a week for two (2) consecutive weeks.

c. Periods within which to collect real property tax

Within five (5) years from the date they become due.784

Within ten (10) years from discovery - in case there is fraud or intent to evadepayment of the tax.785

781 From that date it shall constitute a lien on the property which shall be superior to any other lien,mortgage, or encumbrance of any kind whatsoever, and shall be extinguished only upon the payment ofthe delinquent tax (Sec. 246)782 Sec. 247783 Sec. 248784 No action for the collection of the tax, whether administrative or judicial, shall be instituted after theexpiration of such period.785 Sec. 270

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d. Special rules on payment

1) Payment of real property tax in installments

The owner of the real property or the person having legal interest therein may paythe basic real property tax and the additional tax for Special Education Fund (SEF) duethereon without interest in four (4) equal installments; the first installment to be due andpayable on or before March Thirty-first (31st); the second installment, on or before JuneThirty (30); the third installment, on or before September Thirty (30); and the lastinstallment on or before December Thirty-first (31st), except the special levy the payment ofwhich shall be governed by ordinance of the sanggunian concerned.

Payments of real property taxes shall first be applied to prior years delinquencies,interests, and penalties, if any, and only after said delinquencies are settled may tax paymentsbe credited for the current period.786

2) Interests on unpaid real property tax

Two percent (2%) per month, until the delinquent tax shall have been fully paid.

In no case shall the total interest on the unpaid tax or portion thereof exceed thirty-six (36) months.787

3) Condonation of real property tax

In case of a general failure of crops or substantial decrease in the price of agriculturalor agri-based products, or calamity in any province, city or municipality, the sanggunianconcerned, by ordinance passed prior to the first (1st) day of January of any year and uponrecommendation of the Local Disaster Coordinating Council, may condone or reduce,wholly or partially, the taxes and interest thereon for the succeeding year or years in the cityor municipality affected by the calamity.788

The President of the Philippines may, when public interest so requires, condone orreduce the real property tax and interest for any year in any province or city or a municipalitywithin the Metropolitan Manila Area.789

The period of prescription within which to collect shall be suspended for the time during which:1. The local treasurer is legally prevented from collecting the tax;2. The owner of the property or the person having legal interest therein requests for reinvestigation

and executes a waiver in writing before the expiration of the period within which to collect; and3. The owner of the property or the person having legal interest therein is out of the country or

otherwise cannot be located786 Sec. 250787 Sec. 255788 Sec. 276789 Sec. 277

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e. Remedies of LGUs for collection of real property tax

1) Issuance of notice of delinquency for real propertytax payment

To be posted at the main hall and in a publicly accessible and conspicuous place ineach barangay of the local government unit concerned. The notice of delinquency shall alsobe published once a week for two (2) consecutive weeks, in a newspaper of generalcirculation in the province, city, or municipality.790

2) Local government’s lien

The basic real property tax and any other tax levied constitutes a lien on the propertysubject to tax, superior to all liens, charges or encumbrances in favor of any person,irrespective of the owner or possessor thereof, enforceable by administrative or judicialaction, and may only be extinguished upon payment of the tax and the related interests andexpenses.791

3) Remedies in general

The local government unit concerned may avail of the remedies by administrativeaction thru levy on real property or by judicial action.792

4) Resale of real estate taken for taxes, fees or charges

The sanggunian concerned may, by ordinance duly approved, and upon notice of notless than twenty (20) days, sell and dispose of the real property acquired at public auction.The proceeds of the sale shall accrue to the general fund of the local government unitconcerned.793

790 Such notice shall specify the date upon which the tax became delinquent and shall state that personalproperty may be distrained to effect payment. It shall likewise state that any time before the distraint ofpersonal property, payment of the tax with surcharges, interests and penalties may be made, and unlessthe tax, surcharges and penalties are paid before the expiration of the year for which the tax is due exceptwhen the notice of assessment or special levy is contested administratively or judicially, the delinquentreal property will be sold at public auction, and the title to the property will be vested in the purchaser,subject, however, to the right of the delinquent owner of the property or any person having legal interesttherein to redeem the property within one (1) year from the date of sale (Sec. 254)791 Sec. 257792 Sec. 256793 Sec. 264

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5) Further levy until full payment of amount due

Levy may be repeated if necessary until the full amount due, including all expenses, iscollected.794

6. Refund or credit of real property tax

a. Payment under protest

(a) No protest shall be entertained unless the taxpayer first pays the tax. There shallbe annotated on the tax receipts the words "paid under protest". The protest in writing mustbe filed within thirty (30) days from payment of the tax to the provincial, city treasurer ormunicipal treasurer, in the case of a municipality within Metropolitan Manila Area, who shalldecide the protest within sixty (60) days from receipt.

(b) The tax or a portion thereof paid under protest, shall be held in trust by thetreasurer concerned.

(c) In the event that the protest is finally decided in favor of the taxpayer, theamount or portion of the tax protested shall be refunded to the protestant, or applied as taxcredit against his existing or future tax liability.

(d) In the event that the protest is denied or upon the lapse of the sixty (60) dayperiod prescribed in subparagraph (a), the taxpayer may appeal.795

b. Repayment of excessive collections

When an assessment of basic real property tax or any other tax levied is found to beillegal or erroneous and the tax is accordingly reduced or adjusted, the taxpayer may file awritten claim for refund or credit for taxes and interests with the provincial or city treasurerwithin two (2) years from the date the taxpayer is entitled to such reduction or adjustment.

The provincial or city treasurer shall decide the claim for tax refund or credit withinsixty (60) days from receipt thereof. In case the claim for tax refund or credit is denied, thetaxpayer may appeal.796

794 Sec. 265795 Sec. 252796 Sec. 253

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7. Taxpayer’s remedies

a. Contesting an assessment of value of real property

1) Appeal to the Local Board of AssessmentAppeals (LBAA)

Within sixty (60) days from the date of receipt of the written notice of assessment,any owner or person having legal interest in the property who is not satisfied with the actionof the provincial, city or municipal assessor in the assessment of his property may appeal tothe Board of Assessment Appeals of the provincial or city by filing a petition under oath inthe form prescribed for the purpose, together with copies of the tax declarations and suchaffidavits or documents submitted in support of the appeal.797

2) Appeal to the Central Board of AssessmentAppeals (CBAA)

Within thirty (30) days after receipt of the decision of said Board, the owner of theproperty or the person having legal interest therein or the assessor who is not satisfied withthe decision of the Board, may appeal to the Central Board of Assessment Appeals. Thedecision of the Central Board shall be final and executory.798

3) Effect of payment of tax

Appeal on assessments of real property shall, in no case, suspend the collection ofthe corresponding realty taxes on the property involved as assessed by the provincial or cityassessor, without prejudice to subsequent adjustment depending upon the final outcome ofthe appeal.799

b. Payment of real property under protest

1) File protest with local treasurer800

2) Appeal to the Local Board of AssessmentAppeals801

3) Appeal to the Central Board of AssessmentAppeals802

797 Sec. 226798 Sec. 229 (c), last par.799 Sec. 231800 See B. (6)(a), under Refund or credit of real property tax, supra801 See (a)(1), supra802 See (a)(2), supra

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4) Appeal to the CTA

By filing a petition for review803 with the CTA within thirty (30) days from the receiptof the decision or ruling or in the case of inaction, from the expiration of the period fixed bylaw to act thereon.804

5) Appeal to the SC

By filing with the said Court of Appeals a notice of appeal and with the SupremeCourt a petition for review, within thirty (30) days from the date he receives notice of theruling, order or decision. If, within the aforesaid period, he fails to perfect his appeal, thesaid ruling, order or decision shall become final and conclusive against him.

If no decision is rendered by the Court within thirty days from the date a case issubmitted for decision, the party adversely affected by said ruling, order or decision may filewith said Court a notice of his intention to appeal to the Supreme Court, and if, within thirty(30) days from the filing of said notice of intention to appeal, no decision has as yet beenrendered by the Court, the aggrieved party may file directly with the Supreme Court anappeal from said ruling, order or decision, notwithstanding the foregoing provisions of thissection.

If any ruling, order or decision of the Court of Tax Appeals be adverse to theGovernment, the Collector of Internal Revenue, the Commissioner of Customs, or theprovincial or city Board of Assessment Appeals concerned may likewise file an appealtherefrom to the Supreme Court in the manner and within the same period as aboveprescribed for private parties.805

803 under a procedure analogous to that provided for under Rule 42 of the 1997 Rules of Civil Procedure804 Sec. 11, RA No. 1125805 Any proceeding directly affecting any ruling, order or decision of the Court of Tax Appeals shall havepreference over all other civil proceedings except habeas corpus, workmen's compensation and electioncases.

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IV. Tariff and Customs Code of 1978, as amended (TCC)

A. Tariff and duties, defined

Custom duties Tariff

Duties which are one charged uponcommodities on their being imported into orexported out of a country.

A book of rates, a table or catalogue drawnusually in alphabetical order containing thenames of several kinds of merchandise withthe duties to be paid for the same as settledor agreed upon between several states thatholds commerce together.

B. General rule: All imported articles are subject to duty. Importation by thegovernment taxable.

All articles when imported from a foreign country including those previouslyexported from the Philippines are subject to duty unless otherwise specifically provided forin the Tariff and Customs Code or other laws.806

C. Purpose for imposition

For the protection of consumers and manufacturers, as well as Phil. products fromundue competition posed by foreign-made products.

D. Flexible tariff clause

A provision in the Tariff and Customs Code,807 which implements theconstitutionally delegated power to the Congress to further delegate to the President of thePhilippines, in the interest of national economy, general welfare and/or national securityupon recommendation of the NEDA (a) to increase, reduce or remove existing protectiverates of import duty, provided the increase should not be higher than 100% ad valorem; (b) toestablish import quota or to ban imports of any commodity, and (c) to impose additionalduty on all imports not exceeding 10% ad valorem, among others.

806 Sec. 100807 Sec. 401

235

E. Requirements of importation

1. Beginning and ending of importation

Importation begins when the carrying vessel or aircraft enters the jurisdiction of thePhilippines with the intention to unload808 therein.

Importation is deemed terminated upon payment of duties, taxes and other chargesdue upon the articles or secured to be paid at a port of entry and the legal permit forwithdrawal shall gave been granted or in case said articles are free of duties, taxes and othercharges, until they have legally left the jurisdiction of the customs.809

2. Obligations of importer

a. Cargo manifest

A cargo manifest shall in no case be changed or altered, except after entry of thevessel, by means of an amendment by the master, consignee, or agent thereof, under oath,and attached to the original manifest.810

b. Import entry

It is a declaration to the BOC showing particulars of the imported article that willenable the customs authorities to determine the correct duties. An importer is required tofile an import entry. It must be accomplished from disembarking of last cargo from vessel.

c. Declaration of correct weight or value

The declaration, ascertainment or verification of the correct weight of the cargo atthe port of loading is the duty or obligation of the master, pilot, owner, officer or employeeof the vessel.811 If he omits or disregards this duty and a punishable discrepancy between thedeclared weight and actual weight of the cargo exists, the inevitable conclusion is that he isnegligent or careless.812 Similarly, if in the exercise or performance of this duty, he isnegligent or careless resulting in the commission of excessive discrepancy in the weight ofthe ship's cargo penalized under the law, carelessness or incompetency is, nonetheless,imputable to him.

808 Even if not yet unloaded, and there is unmanifested cargo, forfeiture may take place becauseimportation has already begun.809 Sec. 1202810 Sec. 1228, 3rd par., Rev. Adm. Code811 Sec. 2523812 See Delgado Shipping Agencies, Inc. vs. Commissioner of Customs, C.T.A. Case No. 2685, Feb. 15, 1977;Macondray & Co., Inc. vs. Commissioner of Customs, C.T.A. Case No. 274 1, Feb. 3, 1977; Macondray &Co., Inc, vs. Commissioner of Customs, C.T.A. Case No. 2656, January 21, 1977 and cases cited therein.

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d. Liability for payment of duties

The liability for duties, taxes, fees and other charges attaching on importationconstitutes a personal debt due from the importer to the government which can bedischarged only by payment in full of all duties, taxes, fees and other charges legally accruing.It also constitutes a lien upon the articles imported which may be enforced while sucharticles are in custody or subject to the control of the government.813

e. Liquidation of duties

If the Collector shall approve the returns of the appraiser and the report of theweights, gauge or quantity, the liquidation shall be made on the face of the entry showing theparticulars thereof, initiated by the liquidating clerk, approved by the chief liquidator, andrecorded in the record of liquidations.

A daily record of all entries liquidated shall be posted in the public corridor of thecustomhouse, stating the name of the vessel or aircraft, the port from which she arrived, thedate of her arrival, the name of the importer, and the serial number and date of the entry. Adaily record must also be kept by the Collector of all additional duties, taxes and othercharges found upon liquidation, and notice shall promptly be sent to the interested parties.814

If to determine the exact amount due under the law, some future action is required,the liquidation shall be deemed to be tentative as to the item or items affected and shall tothat extent be subject to future and final readjustment and settlement. The entry in such caseshall be stamped "Tentative liquidation".815

When articles have been entered and passed free of duty or final adjustment of dutiesmade, with subsequent delivery, such entry and passage free of duty or settlement of dutieswill, after the expiration of one year, from the date of the final payment of duties, in theabsence of fraud or protest, be final and conclusive upon all parties, unless the liquidation ofthe import entry was merely tentative.816

In determining the total amount of duties, taxes, surcharges, wharfage and/or othercharges to be paid on entries, a fraction of a peso less than fifty centavos shall bedisregarded, and a fraction of a peso amounting to fifty centavos or more shall be consideredas one peso. In case of overpayment or underpayment of duties, taxes, surcharges, wharfageand/or other charges paid on entries, where the amount involved is less than five pesos, norefund or collection shall be made.817

f. Keeping of records

813 Sec. 1204814 Sec. 1601815 Sec. 1602816 Sec. 1603817 Sec. 1604

237

F. Importation in violation of TCC

1. Smuggling

a. An act of any person who shall:

1. Fraudulently import any article contrary to law, or

2. Assist in so doing, or

3. Receive, conceal, buy, sell, facilitate, transport, conceal or sell sucharticle knowing its illegal importation.818

4. Export contrary to law.819

b. The Philippines is divided into various ports of entry – entry other than port ofentry, will be smuggling.

2. Other fraudulent practices

Any person who makes or attempts to make any entry of imported or exportedarticle by means of any false or fraudulent invoice, declaration, affidavit, letter, paper, or bymeans of any false statement, written or verbal, or by means of any false or fraudulentpractice whatsoever, or shall be guilty of any willful act or omission by means of whereof theGovernment might be deprived of the lawful duties, taxes and other charges accruing fromthe article or any portion thereof, embraced or referred to in such invoice, declaration,affidavit, letter, paper, or statement, or affected by such act or omission, shall, for eachoffense, be punished by a fine of not less than six hundred pesos nor more than fivethousand pesos and by imprisonment for not less than six months nor more than two (2)years. If the offender is an alien, he shall be deported after serving the sentence.820

G. Classification of goods

1. Taxable importation

All articles imported from any foreign country into the Philippines, upon eachimportation, even though previously exported from the Philippines, except as otherwisespecifically provided.821

818 Sec. 3601819 Sec. 3514820 Sec. 3602821 Sec. 101

238

2. Prohibited importation

a. Dynamite, gunpowder, ammunitions and other explosives, firearm and weapons ofwar, and detached parts thereof, except when authorized by law.1awphil©

b. Written or printed article in any form containing any matter advocating or incitingtreason, rebellion, insurrection or sedition against the Government of the Philippines, offorcible resistance to any law of the Philippines, or containing any threat to take the life of orinflict bodily harm upon any person in the Philippines.

c. Written or printed articles, photographs, engravings, lithographs, objects,paintings, drawings or other representation of an obscene or immoral character.

d. Articles, instruments, drugs and substances designed, intended or adapted forpreventing human conception or producing unlawful abortion, or any printed matter whichadvertises or describes or gives directly or indirectly information where, how or by whomhuman conception is prevented or unlawful abortion produced.

e. Roulette wheels, gambling outfits, loaded dice, marked cards, machines, apparatusor mechanical devices used in gambling, or in the distribution of money, cigars, cigarettes orother articles when such distribution is dependent upon chance, including jackpot andpinball machines or similar contrivances.

f. Lottery and sweepstakes tickets except those authorized by the PhilippineGovernment, advertisements thereof and lists of drawings therein.

g. Any article manufactured in whole or in part of gold silver or other precious metal,or alloys thereof, the stamps brands or marks of which do not indicate the actual fineness orquality of said metals or alloys.

h. Any adulterated or misbranded article of food or any adulterated or misbrandeddrug in violation of the provisions of the "Food and Drugs Act."

i. Marihuana, opium poppies, coca leaves, or any other narcotics or synthetic drugswhich are or may hereafter be declared habit forming by the President of the Philippines,any compound, manufactured salt, derivative, or preparation thereof, except when importedby the Government of the Philippines or any person duly authorized by the Collector ofInternal Revenue, for medicinal purposes only.

j. Opium pipes and parts thereof, of whatever material.

k. All other articles the importation of which is prohibited by law.822

822 Sec. 102

239

H. Classification of duties

1. Ordinary/Regular duties

Imposed on imported articles that enter the country of the Philippines in avoidancewith the schedules and classifications provided under the Tariff and Customs Code.

a. Ad valorem; Methods of valuation

1) Transaction value

The price actually paid or payable for the goods when sold for export to thePhilippines, adjusted by adding:

a. The following to the extent that they are incurred by the buyer but are notincluded in the price actually paid or payable for the imported goods:

1. Commissions and brokerage fees;823

2. Cost of containers;

3. The cost of packing, whether for labour or materials;

4. The value, apportioned as appropriate, of the following goods andservices: materials, components, parts and similar items incorporated in the importedgoods; tools; dies; moulds and similar items used in the production of importedgoods; materials consumed in the production of the imported goods; andengineering, development, artwork, design work and plans and sketches undertakenelsewhere than in the Philippines and necessary for the production of importedgoods, where such goods and services are supplied directly or indirectly by the buyerfree of charge or at a reduced cost for use in connection with the production andsale for export of the imported goods;

5. The amount of royalties and license fees related to the goods being valuedthat the buyer must pay, either directly or indirectly, as a condition of sale of thegoods to the buyer;

b. The value of any part of the proceeds of any subsequent resale, disposal or use ofthe imported goods that accrues directly or indirectly to the seller;

c. The cost of transport of the imported goods from the port of exportation to theport of entry in the Philippines;

d. Loading, unloading and handling charges associated with the transport of theimported goods from the country of exportation to the port of entry in the Philippines; and

823 except buying commissions

240

e. The cost of insurance.824

2) Transaction value of identical goods

Where the dutiable value cannot be determined under method one, the dutiablevalue shall be the transaction value of identical goods sold for export to the Philippines andexported at or about the same time as the goods being valued.

"Identical goods" shall mean goods which are the same in all respects, includingphysical characteristics, quality and reputation. Minor differences in appearances shall notpreclude goods otherwise conforming to the definition from being regarded as identical.825

3) Transaction value of similar goods

Where the dutiable value cannot be determined under the preceding method, thedutiable value shall be the transaction value of similar goods sold for export to thePhilippines and exported at or about the same time as the goods being valued.

"Similar goods" shall mean goods which, although not alike in all respects, have likecharacteristics and like component materials which enable them to perform the samefunctions and to be commercially interchangeable. The quality of the goods, their reputationand the existence of a trademark shall be among the factors to be considered in determiningwhether goods are similar.826 xxx

4) Deductive value

Based on the unit price at which the imported goods or identical or similar importedgoods are sold in the Philippines, in the same condition as when imported, in the greatestaggregate quantity, at or about the time of the importation of the goods being valued, topersons not related to the persons from whom they buy such goods, subject to deductionsfor the following:

(1) Either the commissions usually paid or agreed to be paid or the additions usuallymade for profit and general expenses in connection with sales in such country of importedgoods of the same class or kind;

(2) The usual costs of transport and insurance and associated costs incurred withinthe Philippines; and

(3) Where appropriate, the costs and charges referred to in subsection (A) (3), (4) and(5); and

824 Sec. 1 (A), R.A. 9135, amending Sec. 201 of TCC825 Sec. 1 (B), Id.826 Sec. 1 (C), id.

241

(4) The customs duties and other national taxes payable in the Philippines by reasonof the importation or sale of the goods.827 xxx

5) Computed value

The sum of:

(1) The cost or the value of materials and fabrication or other processing employedin producing the imported goods;

(2) The amount for profit and general expenses equal to that usually reflected in thesale of goods of the same class or kind as the goods being valued which are made byproducers in the country of exportation for export to the Philippines;

(3) The freight, insurance fees and other transportation expenses for the importationof the goods;

(4) Any assist, if its value is not included under paragraph (1) hereof; and

(5) The cost of containers and packing, if their values are not included underparagraph (1) hereof.828 xxx

6) Fallback value

If the dutiable value cannot be determined under the preceding methods describedabove, it shall be determined by using other reasonable means and on the basis of dataavailable in the Philippines.

If the importer so requests, the importer shall be informed in writing of the dutiablevalue determined under Method Six and the method used to determine such value.

No dutiable value shall be determined under Method Six on the basis of:

(1) The selling price in the Philippines of goods produced in the Philippines;

(2) A system that provides for the acceptance for customs purposes of the higher oftwo alternative values;

(3) The price of goods in the domestic market of the country of exportation;

(4) The cost of production, other than computed values, that have been determinedfor identical or similar goods in accordance with Method Five hereof;

(5) The price of goods for export to a country other than the Philippines;

(6) Minimum customs values; or

827 Sec. 1 (D), id.828 Sec. 1 (E), id.

242

(7) Arbitrary or fictitious values.829

b. Specific

Duty based on the dutiable weight of goods number or measurement.

2. Special duties

Imposed in addition to regular or ordinary duties principally in order to protect localindustries against unfair competition from foreign manufacturers or procedures; consumeragainst possible deceptions; and national interest.

a. Dumping duties

Imposed by the Secretary of Finance, upon the recommendation of the TariffCommission when:

a. The price of the imported article is deliberately or continually fixed at lessthan the fair market value or cost of production; and

b. Importation would cause or likely cause and injury to local industries engagedin the manufacture or production of the same or similar articles or preventtheir establishment.

Amount of special duty: extent of the underpricing.

b. Countervailing duties

Special duty imposed on imported articles which are granted any kind or form ofsubsidy by the government in the country or origin or exportation, the importation of whichhas caused or threatens to cause material injury to a domestic industry or has materiallyrelaided the growth or, prevents the establishment of a domestic industry.830

c. Marking duties

Special duty of five percent (5%) ad valorem imposed or articles properly marked,collected by the commissioner, except when such article is exported or destroyed under thecustoms supervision and prior to final liquidation of the corresponding entry.831

829 Sec. 1 (F), id.830 R.A. 8751

Requisites:1. The levy of an excise tax or inland tax or local goods of the same or similar class as the article

imported or the grant of subsidy to the foreign exporter by his government; and2. The importation is likely to insure materially established local industries or prevent their

establishments.Amount of special duty: Equal to the bounty or subsidy or subvention.

831 Purpose: To prevent possible deception of the consumers.

243

d. Retaliatory/Discriminatory duties

Imposed on imported goods whenever it is found as a fact that the country of origindiscriminates against the commerce of the Philippines in such a manner as to place thecommerce of the Philippines at a disadvantage compared with the commerce of any foreigncountry.

e. Safeguard

Safeguard measures are emergency measures, including tariffs, to protect domesticindustries and producers from increased imports which inflict or could inflict serious injuryon them.832

The CTA is vested with jurisdiction to review decisions of the Secretary of Tradeand Industry imposing safeguard measures.833

The DTI Secretary cannot impose the safeguard measures if the Tariff Commissiondoes not favorably recommend its imposition.

I. Drawbacks

A drawback is a refund or tax credit granted on duties that had been paid onproducts that are subsequently exported, such as on all fuel imported into the Philippinesused for propulsion of vessels engaged in trade with foreign countries, or in the coastwisetrade, or articles used as raw materials for items subsequently exported.

A drawback is a device resorted to for enabling a commodity affected by taxes to beexported and sold in foreign markets upon the same terms as if it had not been taxed at all.It refers to duties or taxes paid back or remitted by the government on the exportation ofthat on which they were levied under the Tariff and Customs Code. It refers to refund ofduties on imported fuel used for provision of vessels.

832 Safeguard measures that may be imposed. Additional tariffs, import quotas or banning of imports.833 as provided under Rep. Act No. 8800, the Safeguard Measures Act (SMA) (Southern Cross CementCorporation v. The Philippine Cement Manufacturers Corp., et al., G. R. No. 158540, July 8, 2004)

244

J. Remedies

1. Government

a. Administrative/Extrajudicial

1) Search, seizure, forfeiture, arrest

For the enforcement of the customs and tariff laws, the following persons areauthorized to effect searches, seizures and arrests conformably with the provisions of saidlaws:

a. Officials of the Bureau of Customs, collectors, assistant collectors, deputycollectors, surveyors, security and secret-service agents, inspectors, port patrol officers andguards of the Bureau of Customs.

b. Officers of the Philippine Navy when authorized by the Commissioner.

c. Any person especially authorized in writing by the Commissioner.

d. Officers generally empowered by law to effect arrests and execute processes ofcourts, when acting under direction of the Collector.

e. Any person especially authorized by a Collector, subject to restrictions.

Persons exercising the powers hereinabove conferred shall, in the exercise thereof,have the same authority, be entitled to the proper protection, and shall be governed by thesame law as other officers exercising police authority in general.834

Persons acting under authority conferred pursuant to subsection (e) may exercisetheir authority within the limits of the collection district only and in or upon the particularvessel or aircraft, or in the particular place, or in respect to the particular article specified inthe appointment. All such appointments shall be in writing, and the original shall be filed inthe customhouse of the district where made.

All other persons exercising the powers hereinabove conferred may exercise thesame at any place within the jurisdiction of the Bureau of Customs.835

It shall be within the power of a customs official or person authorized as aforesaid,and it shall be his duty, to make seizure of any vessel, aircraft, cargo, articles, animal or othermovable property when the same is subject to forfeiture or liable for any fine imposed undercustoms and tariff laws, and also to arrest any person subject to arrest for violation of anycustoms and tariff laws.836

834 Sec. 2203835 Sec. 2204836 Sec. 2205.

245

It shall be the duty of any person exercising authority as aforesaid, upon beingquestioned at the time of the exercise thereof, to make known his official character as anofficer or official of the Government, and if his authority is derived from specialauthorization in writing to exhibit the same for inspection, if demanded.837

Any person exercising police authority under the customs and tariff laws maydemand assistance of any police officer when such assistance shall be necessary to effect anysearch, seizure or arrest which may be lawfully made or attempted by him. It shall be theduty of any police officer upon whom such requisition is made to give such lawful assistancein the matter as may be required.838

For the more effective discharge of his official duties, any person exercising thepowers herein conferred, may at anytime enter, pass through, or search any land or enclosureor any warehouse, store or other building, not being a dwelling house.839

A warehouse, store or other building or enclosure used for the keeping of storage ofarticles does not become a dwelling house within the meaning hereof merely by reason ofthe fact that a person employed as watchman lives in the place, nor will the fact that hisfamily stays there with him alter the case.

A dwelling house may be entered and searched only upon warrant issued by a judgeor justice of the peace, upon sworn application showing probable case and particularlydescribing the place to be searched and person or thing to be seized.840

It shall be lawful for any official or person exercising police authority under theseprovisions to go aboard any vessel or aircraft within the limits of any collection district, andto inspect, search and examine said vessel or aircraft and any trunk, package, box orenvelope on board, and to search any person on board the said vessel or aircraft and to thisend to hail and stop such vessel or aircraft if under way, to use all necessary force to compelcompliance; and if it shall appear that any breach or violation of the customs and tariff lawsof the Philippines has been committed, whereby or in consequence of which such vessels oraircrafts, or the article, or any part thereof, on board of or imported by such vessel oraircraft, is liable to forfeiture, to make seizure of the same or any part thereof.

The power of search shall extend to the removal of any false bottom, partition,bulkhead or other obstruction, so far as may be necessary to enable the officer to discoverwhether any dutiable or forfeitable articles may be concealed therein.

No proceeding herein shall give rise to any claim for the damage thereby caused toarticle or vessel or aircraft.841

837 Sec. 2206838 Sec. 2207.839 Sec. 2208.840 Sec. 2209841 Sec. 2210

246

It shall also be lawful for a person exercising authority as aforesaid to open andexamine any box, trunk, envelope or other container, wherever found where he hasreasonable cause to suspect the presence therein of dutiable or prohibited article or articlesintroduced into the Philippines contrary to law, and likewise to stop, search and examine anyvehicle, beast or person reasonably suspected of holding or conveying such article asaforesaid.842

All persons coming into the Philippines from foreign countries shall be liable todetention and search by the customs authorities under such regulations as may be prescribedrelative thereto.

Female inspectors may be employed for the examination and search of persons oftheir own sex.843

Upon making any seizure, the Collector shall issue a warrant for the detention of theproperty; and if the owner or importer desires to secure the release of the property forlegitimate use, the Collector may surrender it upon the filing of a sufficient bond, in anamount to be fixed by him, conditioned for the payment of the appraised value of the articleand/or any fine, expenses and costs which may be adjudged in the case. The articles theimportation of which is prohibited by law shall not be released under bond.844

When a seizure is made for any cause, the Collector of the district wherein theseizure is effected shall immediately make report thereof to the Commissioner and to theAuditor General.845

The Collector shall give the owner or importer of the property or his agent a writtennotice of the seizure and shall give him an opportunity to be heard in reference to thedelinquency which was the occasion of such seizure.

For the purpose of giving such notice and of all other proceedings in the matter ofsuch seizure, the importer, consignee or person holding the bill of lading shall be deemed tobe the "owner" of the article included in the bill.

For the same purpose, "agent" shall be deemed to include not only any agent in factof the owner of the seized property but also any person having responsible possession of theproperty at the (missing) of the seizure, if the owner or his agent in fact is unknown orcannot be reached.846

Notice to an unknown owner shall be effected by posting a notice for fifteen days inthe public corridor of the customhouse of the district in which the seizure was made, and, in

842 Sec. 2211843 Sec. 2212844 Sec. 2301845 Sec. 2302846 Sec. 2303

247

the discretion of the Commissioner, by publication in a newspaper or by such other meansas he shall consider desirable.847

The Collector shall also cause a list and particular description of the property seizedto be prepared and an appraisement or classification of the same at its wholesale value in thelocal market in the usual wholesale quantities to be made by at least two appraising officials,if there are such officials at or near the place of seizure; in the absence of such officials, thenby two competent and disinterested citizens of the Philippines, to be selected by him for thatpurpose, residing at or near the place of seizure, which list and appraisement shall beproperly attested to by such Collector and the persons making the appraisal.848

If, within fifteen days after the notification prescribed in section twenty-threehundred and four849 of this Code, no owner or agent can be found or appears before theCollector, the latter shall declare the property forfeited to the government to be sold atauction in accordance with law.850

If, in any seizure case, the owner or agent shall, while the case is yet before theCollector of the district of seizure, pay to such Collector the fine imposed by him or, in caseof forfeiture, shall pay the appraised value of the property, or, if after appeal of the case, heshall pay to the Commissioner the amount of the fine as finally determined by him, or, incase of forfeiture, shall pay the appraised value of the property, such property shall beforthwith surrendered, and all liability which may or might attach to the property by virtue ofthe offense which was the occasion of the seizure and all liability which might have beenincurred under any bond given by the owner or agent in respect to such property shallthereupon be deemed to be discharged.

Redemption of forfeited property shall not be allowed in any case where theimportation is absolutely prohibited or where the surrender of the property to the personoffering to redeem the same would be contrary to law.851

b. Judicial

1) Rules on appeal including jurisdiction

The party aggrieved by a ruling of the Commissioner in any matter brought beforehim upon protest or by his action or ruling in any case of seizure may appeal to the Court ofTax Appeals.

Unless an appeal is made to the Court of Tax Appeals, the action or ruling of theCommissioner shall be final and conclusive.852

847 Sec. 2304848 Sec. 2305849 supra850 Sec. 2306.851 Sec. 2307852 Sec. 2402

248

2) Taxpayer

a. Protest

When a ruling or decision of the Collector is made whereby liability for duties, fees,or other money charge is determined, except the fixing of fines in seizure cases, the partyadversely affected may protest such ruling or decision by presenting to the Collector at thetime when payment of the amount claimed to be due the Government is made, or withinthirty (30) days thereafter, a written protest setting forth his objections to the ruling ordecision in question, together with the reasons therefor. No protest shall be consideredunless payment of the amount due after final liquidation has first been made.853

In all cases subject to protest, the interested party who desires to have the action ofthe Collector reviewed, shall make a protest, otherwise, the action of the Collector shall befinal and conclusive against him, except as to matters correctible for manifest error.854

Every protest shall point out the particular decision or ruling of the Collector towhich exception is taken or objection made, and shall indicate with reasonable precision theparticular ground or grounds upon which the protesting party bases his claim for relief.

The scope of a protest shall be limited to the subject matter of a single adjustment orother independent transaction; but any number of issues may be raised in a protest withreference to the particular item or items constituting the subject matter of the protest.

"Single adjustment" refers to the entire content of one liquidation, including allduties, fees, surcharges or fines incident thereto.855

If the nature of the articles permit, importers filing protests involving questions offact must, upon demand, supply the Collector with samples of the articles which are thesubject matter of the protests. Such samples shall be verified by the custom official whomade the classification against which the protest are filed.856

When a protest in proper form is presented in a case where protest in required, theCollector shall reexamine the matter thus presented, and if the protest is sustained, in wholeor in part, he shall enter the appropriate order, the entry reliquidated if necessary.

In seizure cases, the Collector, after a hearing, shall in writing make a declaration offorfeiture or fix the amount of the fine or take such other action as may be proper.857

The person aggrieved by the decision or action of the Collector in any matterpresented upon protest or by his action in any case of seizure may, within fifteen (15) daysafter notification in writing by the Collector of his action or decision, give written notice to

853 Sec. 2308854 Sec. 2309855 Sec. 2310.856 Sec. 2311857 Sec. 2312

249

the Collector of his desire to have the matter reviewed by the Commissioner. Thereupon theCollector shall forthwith transmit all the records of the proceedings to the Commissioner,who shall approve, modify or reverse the action or decision of the Collector and take suchsteps and make such orders as may be necessary to give effect to his decision.858

Notice of the decision of the Commissioner shall be given to the party by whom thecase was brought before him for review, and in seizure cases such notice shall be effected bypersonal service if practicable.859

If in any case involving the assessment of duties the importer shall fail to protest theruling of the Collector, and the Commissioner shall be of the opinion that the ruling waserroneous and unfavorable to the Government, the latter may order a reliquidation; and ifthe ruling of the Commissioner in any unprotested case should, in the opinion of thedepartment head, be erroneous and unfavorable to the Government, the department headmay require the Commissioner to order a reliquidation.860

b. Abandonment

Express - when it is made direct to the Collector by the interested party in writing.

Implied – when an intention to abandon can be clearly inferred from the action oromission of the interested party.

The failure of any interested party to file the import entry within fifteen days or anyextension thereof from the discharge of the vessel or aircraft shall be implied abandonment.

An implied abandonment shall not be effective until the article is declared by theCollector to have been abandoned after notice thereof is given to the interested party as inseizure cases.

Any person who abandons an imported article renounces all his interests andproperty rights therein.861

The owner or importer of any articles may, within ten (10) days after filing of theimport entry, abandon to the Government all or a part of the articles included in an invoice,and, thereupon, he shall be relieved from the payment of duties, taxes and all other chargesand expenses due thereon.

The portion so abandoned is not less than ten per cent (10%) of the total invoiceand is not less than one package, except in cases of articles imported for personal or familyuse. The article so abandoned shall be delivered by the owner or importer at such placewithin the port of arrival as the Collector shall designate, and upon his failure to so comply,the owner or importer shall be liable for all expenses that may be incurred in connectionwith the disposition of the articles.

858 Sec. 2313859 Sec. 2314860 Sec. 2315861 Sec. 1801

250

Nothing shall be construed as relieving such owner or importer from any criminalliability which may arise from any violation of law committed in connection with theimportation of the abandoned article.862

The owner or importer of an article impliedly abandoned may, at any time before itis sold or otherwise disposed of, reclaim such article provided all legal requirementsregarding its importation are complied with and the corresponding duties, taxes and othercharges as well as all expenses incurred as a consequence of the abandonment, are paid.863

c. Abatement and refund

No abatement of duties shall be made on account of damage incurred ordeterioration suffered during the voyage of importation; and duties will be assessed on theactual quantity imported, as shown by the return of weighers, gaugers, measures, examinersor appraisers, as the case may be.864

When any package or packages appearing on the manifest or bill of lading aremissing, a remission or refund of the duty thereon shall be made if it is shown by proofsatisfactory to the Collector that the package or packages in question have not beenimported into the Philippines.865

If, upon opening any package, a deficiency or absence of any article, or of part of thecontents thereof, as called for by the invoice shall be found to exist, such deficiency shall becertified to the Collector by the appraiser; and upon the production of proof satisfactory tothe Collector showing that the shortage occurred before the arrival of the article in thePhilippines, the proper abatement or refund of the duty shall be made.866

A Collector may abate or refund the amount of duties accruing or paid, and maylikewise make a corresponding allowance or credit on the entry bond, or other document,upon satisfactory proof of the injury, destruction, or loss by theft, fire or other causes of anyarticle as follows:

a. While within the limits of any port of entry prior to unlading under customs

supervision.

b. While remaining in customs custody after unlading.

c. While in transit under bond from the port of entry to any port in the Philippines.

d. While released under bond to export, except in case of loss by theft.867

862 Sec. 1802863 Sec. 1803864 Sec. 1701865 Sec. 1702866 Sec. 1703867 Sec. 1704

251

Where it is satisfactorily shown to the Collector that an animal which is the subjectof importation dies or suffers injury before arrival, or while in customs custody, the dutyshall be correspondingly abated by him, provided the carcass of any dead animal remainingon board or in customs custody be removed in the manner required by the Collector and atthe expense of the importer.868

The Collector shall in all cases of allowances, abatements or refunds of duties, causean examination and report in writing to be made as to any fact discovered during suchexamination which tends to account for the discrepancy or difference and cause thecorresponding adjustment to be made on the import entry.869

Manifest clerical errors made in an invoice or entry, errors in return of weight,measure and gauge, when duly certified to by the surveyor or examining official870 and errorsin the distribution of charges on invoices not involving any question of law and certified toby the examining official, may be corrected in the computation of duties, if such errors bediscovered before the payment of duties, or, if discovered within one year after the finalliquidation, upon written request and notice of error from the importer, or upon statementof error certified by the Collector.

For the purpose of correcting the specified errors, the Collector is authorized toreliquidate entries and collect additional charges, or to make refunds on statement of errorwithin the statutory time limit.871

All claims for refund of duties shall be made in writing, and forwarded to theCollector to whom such duties are paid, who upon receipt of such claim shall verify thesame by the records of his office, and if found to be correct and in accordance with law,shall certify the same to the Commissioner with his recommendation together with allnecessary papers and documents. Upon receipt by the Commissioner of such certified claimhe shall cause the same to be paid if found correct.872

868 Sec. 1705869 Sec. 1706870 when there are such officials at the port871 Sec. 1707872 Sec. 1708

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V. Judicial Remedies873

A. Jurisdiction of the Court of Tax Appeals

1. Exclusive appellate jurisdiction over civil tax cases

a. Cases within the jurisdiction of the Court en banc

(a) Decisions or resolutions on motions for reconsideration or new trial of the Courtin Divisions in the exercise of its exclusive appellate jurisdiction over:

(1) Cases arising from administrative agencies – Bureau of Internal Revenue,Bureau of Customs, Department of Finance, Department of Trade and Industry,Department of Agriculture;

(2) Local tax cases decided by the Regional Trial Courts in the exercise oftheir original jurisdiction; and

(3) Tax collection cases decided by the Regional Trial Courts in the exerciseof their original jurisdiction involving final and executory assessments for taxes, fees,charges and penalties, where the principal amount of taxes and penalties claimed isless than one million pesos;

(b) Decisions, resolutions or orders of the Regional Trial Courts in local tax casesdecided or resolved by them in the exercise of their appellate jurisdiction;

(c) Decisions, resolutions or orders of the Regional Trial Courts in tax collectioncases decided or resolved by them in the exercise of their appellate jurisdiction;

(d) Decisions, resolutions or orders on motions for reconsideration or new trial ofthe Court in Division in the exercise of its exclusive original jurisdiction over tax collectioncases;

873 Republic Act 1125, as amended, and the Revised Rules of the Court of Tax AppealsThe Court of Tax Appeals (CTA) is a court of special appellate jurisdiction and a part of our judicial

system. The proceedings therein are judicial in nature although the Court is not bound by the technicalrules of evidence. (Purakan Plantation Co. vs. Domingo L-18571, 29 Oct. 1966)

It is a regular court vested with exclusive appellate jurisdiction over cases arising under the:1.National Internal Revenue Code2.Tariff and Customs Code3.Assessment law

The CTA is a highly specialized body specially created for the purpose of reviewing tax cases, its findingswill not be ordinarily be reviewed absent a showing of gross error or abuse on its part. These findings arebinding upon the Supreme Court and in the absence of strong reasons for the court to delve on facts, onlyquestions of law are open for determination.

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(e) Decisions of the Central Board of Assessment Appeals (CBAA) in the exercise ofits appellate jurisdiction over cases involving the assessment and taxation of real propertyoriginally decided by the provincial or city board of assessment appeals;

(f) Decisions, resolutions or orders on motions for reconsideration or new trial ofthe Court in Division in the exercise of its exclusive original jurisdiction over cases involvingcriminal offenses arising from violations of the National Internal Revenue Code or the Tariffand Customs Code and other laws administered by the Bureau of Internal Revenue orBureau of Customs;

(g) Decisions, resolutions or orders on motions for reconsideration or new trial ofthe Court in Division in the exercise of its exclusive appellate jurisdiction over criminaloffenses mentioned in the preceding subparagraph; and

(h) Decisions, resolutions or orders of the Regional trial Courts in the exercise oftheir appellate jurisdiction over criminal offenses mentioned in subparagraph (f).874

b. Cases within the jurisdiction of the Court in divisions

(a) Exclusive original or appellate jurisdiction to review by appeal the following:

(1) Decisions of the Commissioner of Internal Revenue in cases involvingdisputed assessments, refunds of internal revenue taxes, fees or other charges,penalties in relation thereto, or other matters arising under the National InternalRevenue Code or other laws administered by the Bureau of Internal Revenue;

(2) Inaction by the Commissioner of Internal Revenue in cases involvingdisputed assessments, refunds of internal revenue taxes, fees or other charges,penalties in relation thereto, or other matters arising under the National InternalRevenue Code or other laws administered by the Bureau of Internal Revenue, wherethe National Internal Revenue Code or other applicable law provides a specificperiod for action.

In case of disputed assessments, the inaction of the Commissioner ofInternal Revenue within the one hundred eighty day-period under Section 228875 ofthe National Internal revenue Code shall be deemed a denial for purposes ofallowing the taxpayer to appeal his case to the Court and does not necessarilyconstitute a formal decision of the Commissioner of Internal Revenue on the taxcase.

Should the taxpayer opt to await the final decision of the Commissioner ofInternal Revenue on the disputed assessments beyond the one hundred eighty day-

874Rule 4, Sec. 2, Revised Rules of the Court Of Tax Appeals875 supra

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period abovementioned, the taxpayer may appeal such final decision to the Courtunder Section 3(a), Rule 8876 of these Rules.

In the case of claims for refund of taxes erroneously or illegally collected, thetaxpayer must file a petition for review with the Court prior to the expiration of thetwo-year period under Section 229877 of the National Internal Revenue Code;

(3) Decisions, resolutions or orders of the Regional Trial Courts in local taxcases decided or resolved by them in the exercise of their original jurisdiction;

(4) Decisions of the Commissioner of Customs in cases involving liability forcustoms duties, fees or other money charges, seizure, detention or release ofproperty affected, fines, forfeitures of other penalties in relation thereto, or othermatters arising under the Customs Law or other laws administered by the Bureau ofCustoms;

(5) Decisions of the Secretary of Finance on customs cases elevated to himautomatically for review from decisions of the Commissioner of Customs adverse tothe Government under Section 2315878 of the Tariff and Customs Code; and

(6) Decisions of the Secretary of Trade and Industry, in the case ofnonagricultural product, commodity or article, and the Secretary of Agriculture, inthe case of agricultural product, commodity or article, involving dumping andcountervailing duties under Section 301 and 302,879 respectively, of the Tariff andCustoms Code, and safeguard measures under Republic Act No. 8800, where eitherparty may appeal the decision to impose or not to impose said duties;

(b) Exclusive jurisdiction over cases involving criminal offenses, to wit:

(1) Original jurisdiction over all criminal offenses arising from violations ofthe National internal Revenue Code or Tariff and Customs Code and other laws

876 A party adversely affected by a decision, ruling or the inaction of the Commissioner of InternalRevenue on disputed assessments or claims for refund of internal revenue taxes, or by a decision or rulingof the Commissioner of Customs, the Secretary of Finance, the Secretary of Trade and Industry, theSecretary of Agriculture, or a Regional Trial Court in the exercise of its original jurisdiction may appeal tothe Court by petition for review filed within thirty (30) days after receipt of a copy of such decision orruling, or expiration of the period fixed by law for the Commissioner of Internal Revenue to act on thedisputed assessments. In case of inaction of the Commissioner of Internal revenue on claims for refund ofinternal revenue taxes erroneously or illegally collected, the taxpayer must file a petition for review withinthe two-year period prescribed by law from payment or collection of the taxes.877 supra878 Supervisory Authority of Commissioner And of Department Head in Certain Cases. — If in any caseinvolving the assessment of duties the importer shall fail to protest the ruling of the Collector, and theCommissioner shall be of the opinion that the ruling was erroneous and unfavorable to the Government,the latter may order a reliquidation; and if the ruling of the Commissioner in any unprotested case should,in the opinion of the department head, be erroneous and unfavorable to the Government, thedepartment head may require the Commissioner to order a reliquidation.879 supra

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administered by the Bureau of Internal Revenue of the Bureau of Customs, wherethe principal amount of taxes and fees, exclusive of charges and penalties, claimed isone million pesos or more; and

(2) Appellate jurisdiction over appeals from the judgments, resolutions ororders of the Regional Trial Courts in their original jurisdiction in criminal offensesarising from violations of the National Internal Revenue Code or Tariff and CustomsCode and other laws administered by the Bureau of Internal Revenue or Bureau ofCustoms, where the principal amount of taxes and fees, exclusive of charges andpenalties, claimed is less than one million pesos or where there is no specifiedamount claimed;

(c) Exclusive jurisdiction over tax collections cases, to wit:

(1) Original jurisdiction in tax collection cases involving final and executoryassessments for taxes, fees, charges and penalties, where the principal amount oftaxes and fees, exclusive of charges and penalties, claimed is one million pesos ormore; and

(2) Appellate jurisdiction over appeals from the judgments, resolutions ororders of the Regional Trial Courts in tax collection cases originally decided by themwithin their respective territorial jurisdiction.880

2. Criminal cases

a. Exclusive original jurisdiction

Over all criminal cases arising from violations of the NIRC or Tariff and CustomsCode and other laws administered by the BIR or the Bureau of Customs

Where the principal amount of taxes and fees, exclusive of charges and penaltiesclaimed is less than one million pesos (P1,000, 000. 00) or where there is no specifiedamount claimed - the offenses or penalties shall be tried by the regular courts and thejurisdiction of the CTA shall be appellate.

The criminal action and the corresponding civil action for the recovery of civilliability for taxes and penalties shall, at all times, be simultaneously instituted with, and jointlydetermined in the same proceeding by the CTA, the filing of the criminal action beingdeemed to necessarily carry with it the filing of the civil action, and no right to reserve thefiling of such civil action separately from the criminal action will be recognized.

b. Exclusive appellate jurisdiction in criminal cases

Over appeals from the judgments, resolutions or orders of the RTC in tax casesoriginally decided by them, in their respective territorial jurisdiction.

880 Rule 4, Sec. 3, Revised Rules of the Court Of Tax Appeals

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Over petitions for review of the judgments, resolutions, or orders of the RTC in theexercise of their appellate jurisdiction over tax cases originally decided by the MetropolitanTrial Courts, Municipal Trial Courts, and Municipal Circuit Trial Courts in their respectivejurisdiction.

B. Judicial Procedures

1. Judicial action for collection of taxes

a. Internal revenue taxes

Upon the issuance of any ruling, order or decision by the CTA favorable to thenational government, the CTA shall issue an order authorizing the Bureau of InternalRevenue, through the Commissioner to seize and distraint any goods, chattels, or effects,and the personal property, including stocks and other securities, debts, credits, bankaccounts, and interests in and rights to personal property and/or levy the real property ofsuch persons in sufficient quantity to satisfy the tax or charge together with any incrementthereto incident to delinquency. This remedy shall not be exclusive and shall not precludethe Court from availing of other means under the Rules of Court.881

b. Local taxes

1) Prescriptive period

Five (5) years from date of assessment.

2. Civil cases

a. Who may appeal, mode of appeal, effect of appeal

Any party adversely affected by a decision, ruling or inaction of the Commissioner ofInternal Revenue, the Commissioner of Customs, the Secretary of Finance, the Secretary ofTrade and Industry or the Secretary of Agriculture or the Central Board of AssessmentAppeals or the Regional Trial Courts may file an appeal with the CTA within thirty (30) daysafter the receipt of such decision or ruling or after the expiration of the period fixed by lawfor action as referred to in Section 7(a)(2) herein.

Appeal shall be made by filing a petition for review under a procedure analogous tothat provided for under Rule 42882 of the 1997 Rules of Civil Procedure with the CTA withinthirty (30) days from the receipt of the decision or ruling or in the case of inaction as hereinprovided, from the expiration of the period fixed by law to act thereon. A Division of theCTA shall hear the appeal: With respect to decisions or rulings of the Central Board ofAssessment Appeals and the Regional Trial Court in the exercise of its appellate jurisdictionappeal shall be made by filing a petition for review under a procedure analogous to that

881 Sec. 13, R.A. No. 1125, as amended by Sec. 9 of RA No. 9282882 See Reference

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provided for under Rule 43883 of the 1997 Rules of Civil Procedure with the CTA, whichshall hear the case en banc.

All other cases involving rulings, orders or decisions filed with the CTA as providedfor in Section 7 shall be raffled to its Divisions. A party adversely affected by a ruling, orderor decision of a Division of the CTA may file a motion for reconsideration of new trialbefore the same Division of the CTA within fifteens (15) days from notice thereof: Provide,however, That in criminal cases, the general rule applicable in regular Courts on matters ofprosecution and appeal shall likewise apply.

No appeal taken to the CTA from the decision of the Commissioner of InternalRevenue or the Commissioner of Customs or the Regional Trial Court, provincial, city ormunicipal treasurer or the Secretary of Finance, the Secretary of Trade and Industry andSecretary of Agriculture, as the case may be shall suspend the payment, levy, distraint,and/or sale of any property of the taxpayer for the satisfaction of his tax liability as providedby existing law. When in the opinion of the Court the collection by the aforementionedgovernment agencies may jeopardize the interest of the Government and/or the taxpayerthe Court any stage of the proceeding may suspend the said collection and require thetaxpayer either to deposit the amount claimed or to file a surety bond for not more thandouble the amount with the Court.

In criminal and collection cases covered respectively by Section 7(b) and (c) of thisAct, the Government may directly file the said cases with the CTA covering amounts withinits exclusive and original jurisdiction.884

1) Suspension of collection of tax

a) Injunction not available to restraincollection

Sec. 11 of RA No. 1125885 grants CTA power to suspend collection of tax if suchcollection works to serious prejudice of either taxpayer or government.

However, Sec. 218 of the Tax Code provides that “no court may grant injunction torestrain collection of any tax, fee or charge imposed by Tax Code.” 886

Appeal to the CTA does not automatically suspend collection unless CTA issuessuspension order at any stage of proceedings.

883 Ibid.884 Sec. 11 of R.A. No. 1125, id.885 as amended by Sec. 9 of RA No. 9282886 The provision in the Tax Code refers to courts other than the CTA (Blaquera vs. Rodriguez, GR No. L-11295, March 29, 1958)

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2) Taking of evidence

The Court may direct that a case, or any issue thereof, be assigned to one of itsmembers for the taking of evidence, when the determination of a question of fact arisesupon motion or otherwise in any stage of the proceedings, or when the taking of an accountis necessary, or when the determination of an issue of fact requires the examination of a longaccount. The hearing before such member shall proceed in all respects as though the samehad been made before the Court.

Upon the recommendation of such hearing of such member, he shall promptlysubmit to the Court his report in writing, stating his findings and conclusions; and thereafter,the Court shall render its decisions on the case, adopting, modifying, or rejecting the reportor the Court may recommit it with instructions, or receive further evidence.887

3) Motion for reconsideration or New trial

A party adversely affected by a decision or resolution of a Division of the Court on amotion for reconsideration or new trial may appeal to the Court by filing before it a petitionfor review within fifteen days from receipt of a copy of the questioned decision orresolution. Upon proper motion and the payment of the full amount of the docket and otherlawful fees and deposit for costs before the expiration of the reglementary period hereinfixed, the Court may grant an additional period not exceeding fifteen days from theexpiration of the original period within which to file the petition for review.888

An appeal from a decision or resolution of the Court in Division on a motion forreconsideration or new trial shall be taken to the Court by petition for review.889 The Courten banc shall act on the appeal.890

b. Appeal to the CTA, en banc

No civil proceeding involving matter arising under the National Internal RevenueCode, the Tariff and Customs Code or the Local Government Code shall be maintained,until and unless an appeal has been previously filed with the CTA and disposed of.891

"A party adversely affected by a resolution of a Division of the CTA on a motion forreconsideration or new trial, may file a petition for review with the CTA en banc.

c. Petition for review on certiorari to the Supreme Court

A party adversely affected by a decision or ruling of the CTA en banc may file withthe Supreme Court a verified petition for review on certiorari.892

887 Sec. 12, R.A. 1125888 Sec. 3 (b), Revised Rules of the CTA889 as provided in Rule 43 of the Rules of Court890 Sec. 4 (b), Revised Rules of the CTA891 Sec. 18, id.892 pursuant to Rule 45 of the 1997 Rules of Civil Procedure (Sec. 19. Id.)

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3. Criminal cases

a. Institution and prosecution of criminal actions

1) Institution on civil action in criminal action

In cases within the jurisdiction of the Court, the criminal action and thecorresponding civil action for the recovery of civil liability for taxes and penalties shall bedeemed jointly instituted in the same proceeding. The filing of the criminal action shallnecessarily carry with it the filing of the civil action. No right to reserve the filing of suchcivil action separately from the criminal action shall be allowed or recognized.893

b. Appeal and period to appeal

1) Solicitor General as counsel for the People andgovernment officials sued in their official capacity

The Solicitor General shall represent the People of the Philippines and governmentofficials sued in their official capacity in all cases brought to the Court in the exercise of itsappellate jurisdiction. He may deputized the legal officers of the Bureau of Internal Revenuein cases brought under the National Internal Revenue Code or other laws enforced by theBureau of Internal Revenue, or the legal officers of the Bureau of Customs in cases broughtunder the Tariff and Customs Code of the Philippines or other laws enforced by the Bureauof Customs, to appear in behalf of the officials of said agencies sued in their official capacity.Such duly deputized legal officers shall remain at all times under the direct control andsupervision of the Solicitor General.894

c. Petition for review on certiorari to the Supreme Court

A party adversely affected by a decision or ruling of the Court en banc may appealtherefrom by filing with the Supreme Court a verified petition for review on certiorari withinfifteen (15) days from receipt of a copy of the decision or resolution.895 If such party hasfiled a motion for reconsideration or for new trial, the period herein fixed shall run from theparty’s receipt of a copy of the resolution denying the motion for reconsideration or for newtrial.896

893 Rule 9, Sec. 11, id.;, Rule 111, sec. 1[a], par. 1a; Rules of Court894 Sec. 10, id.895 as provided in Rule 45 of the Rules of Court896 Rule 16, Sec. 1, id.

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C. Taxpayer’s suit impugning the validity of tax measures or acts of taxingauthorities

a. Taxpayer’s suit, defined

A case where the act complained of directly involves the illegal disbursement ofpublic funds derived from taxation.897

b. Distinguished from citizen’s suit

The plaintiff in a taxpayer’s suit is in a different category from the plaintiff in acitizen’s suit. In the former, the plaintiff is affected by the expenditure of public funds, whilein the latter, he is but the mere instrument of the public concern.898

c. Requisites for challenging the constitutionality of a taxmeasure or act of taxing authority

1) Concept of locus standi as applied in taxation

It is a party’s personal and substantial interest in the case, such that the party hassustained or will sustain direct injury as a result of the government act being challenged. Itcalls for more than just a generalized grievance.899

A party need not be a party to the contract to challenge its validity.900

2) Doctrine of transcendental importance

The Court has adopted a rule that even where the petitioners have failed to showdirect injury, they have been allowed to sue under the principle of "transcendentalimportance."901

897 Justice Melo, dissenting in Kilosbayan, Inc. v. Guingona, Jr., 232 SCRA 110Requisites for a taxpayer’s petition:1. That money is being extracted and spent in violation of specific constitutional

protections against abuses of legislative power2. That public money is being deflected to any improper purpose3. That the petitioner seeks to restrain respondents from wasting public funds through the

enforcement of an invalid or unconstitutional law.The Supreme Court has discretion whether or not to entertain taxpayers suit and could brush aside lack

of locus standi (Kilos Bayan vs. Guingona)898 Beauchamp v. Silk

As held by the New York Supreme Court in People ex rel Case v. Collins: "In matters of mere publicright, however…the people are the real parties…It is at least the right, if not the duty, of every citizen tointerfere and see that a public offence be properly pursued and punished, and that a public grievance beremedied." With respect to taxpayer’s suits, Terr v. Jordan held that "the right of a citizen and a taxpayerto maintain an action in courts to restrain the unlawful use of public funds to his injury cannot be denied."899 Abaya v. Ebdane, G. R. No. 167919, February 14, 2007900 Ibid.901 David v. Arroyo, G.R. No. 171396 (2006)

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The doctrine applies when paramount public interest is involved.

3) Ripeness for judicial determination

In our jurisdiction, the issue of ripeness is generally treated in terms of actual injuryto the plaintiff. Hence, a question is ripe for adjudication when the act being challenged hashad a direct adverse effect on the individual challenging it.902 An alternative road to reviewsimilarly taken would be to determine whether an action has already been accomplished orperformed by a branch of government before the courts may step in.903

To be ripe for judicial adjudication, the petitioner must show a personal stake in theoutcome of the case or an injury to himself that can be redressed by a favorable decision ofthe Court.904

An issue is of transcendental importance because of the following:1. the character of the funds or other assets involved in the case;2. the presence of a clear disregard of a constitutional or statutory prohibition by an instrumentality

of the government; and3. the lack of any other party with a more direct and specific interest in raising the question.

(Francisco vs. House of Representatives, 415 SCRA 44; Senate v. Ermita G.R. No. 169777 (2006))902 Guingona, Jr. v. Court of Appeals, 354 Phil. 415, 427-428 (1998).903 Francisco, Jr. v. House of Representatives, 460 Phil. 830, 901-902 (2003).904 ABAKADA Guro Party List, etc., v. Purisima, etc., citing Cruz v. Secretary of Environment and NaturalResources, 400 Phil. 904 (2000), Vitug, J., separate opinion

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Reference

National Internal Revenue Code of the Phils.905

Sec. 6. Power of the Commissioner to Make assessments and Prescribe additional Requirementsfor Tax Administration and Enforcement.

xxx

(F) Authority of the Commissioner to inquire into Bank Deposit Accounts. -Notwithstanding any contrary provision of Republic Act No. 1405 and other general or speciallaws, the Commissioner is hereby authorized to inquire into the bank deposits of:

(1) a decedent to determine his gross estate; and

(2) any taxpayer who has filed an application for compromise of his tax liability under Sec. 204(A) (2) of this Code by reason of financial incapacity to pay his tax liability.

In case a taxpayer files an application to compromise the payment of his tax liabilities onhis claim that his financial position demonstrates a clear inability to pay the tax assessed, hisapplication shall not be considered unless and until he waives in writing his privilege underRepublic Act No. 1405 or under other general or special laws, and such waiver shall constitute theauthority of the Commissioner to inquire into the bank deposits of the taxpayer.

Sec. 24

Sec. 32 (B)(6)(a)

Retirement benefits received under Republic Act No. 7641 and those received by officials andemployees of private firms, whether individual or corporate, in accordance with a reasonable privatebenefit plan maintained by the employer: Provided, That the retiring official or employee has been in theservice of the same employer for at least ten (10) years and is not less than fifty (50) years of age at thetime of his retirement: Provided, further, That the benefits granted under this subparagraph shall be availedof by an official or employee only once. For purposes of this Subsection, the term 'reasonable privatebenefit plan' means a pension, gratuity, stock bonus or profit-sharing plan maintained by an employer forthe benefit of some or all of his officials or employees, wherein contributions are made by such employerfor the officials or employees, or both, for the purpose of distributing to such officials and employees theearnings and principal of the fund thus accumulated, and wherein its is provided in said plan that at no timeshall any part of the corpus or income of the fund be used for, or be diverted to, any purpose other than forthe exclusive benefit of the said officials and employees.

SEC. 33. Special Treatment of Fringe Benefit.-

(A) Imposition of Tax.- A final tax of thirty-four percent (34%) effective January 1, 1998; thirty-three percent (33%) effective January 1, 1999; and thirty-two percent (32%) effective January 1, 2000 andthereafter, is hereby imposed on the grossed-up monetary value of fringe benefit furnished or granted to theemployee (except rank and file employees as defined herein) by the employer, whether an individual or acorporation (unless the fringe benefit is required by the nature of, or necessary to the trade, business orprofession of the employer, or when the fringe benefit is for the convenience or advantage of the

905 R.A. 8424, as amended

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employer). The tax herein imposed is payable by the employer which tax shall be paid in the same manneras provided for under Section 57 (A) of this Code. The grossed-up monetary value of the fringe benefitshall be determined by dividing the actual monetary value of the fringe benefit by sixty-six percent (66%)effective January 1, 1998; sixty-seven percent (67%) effective January 1, 1999; and sixty-eight percent(68%) effective January 1, 2000 and thereafter: Provided, however, That fringe benefit furnished toemployees and taxable under Subsections (B), (C), (D) and (E) of Section 25 shall be taxed at theapplicable rates imposed thereat: Provided, further, That the grossed -Up value of the fringe benefit shallbe determined by dividing the actual monetary value of the fringe benefit by the difference between onehundred percent (100%) and the applicable rates of income tax under Subsections (B), (C), (D), and (E) ofSection 25.

(B) Fringe Benefit defined.- For purposes of this Section, the term "fringe benefit" means anygood, service or other benefit furnished or granted in cash or in kind by an employer to an individualemployee (except rank and file employees as defined herein) such as, but not limited to, the following:

(1) Housing;(2) Expenseaccount;(3) Vehicle of any kind;(4) Household personnel, such as maid, driver and others;(5) Interest on loan at less than market rate to the extent of the difference between the market rateand actual rate granted;(6) Membership fees, dues and other expenses borne by the employer for the employee in socialand athletic clubs or other similar organizations;(7) Expenses for foreign travel;(8) Holiday and vacation expenses;(9) Educational assistance to the employee or his dependents; and(10) Life or health insurance and other non-life insurance premiums or similar amounts in excessof what the law allows.

(C) Fringe Benefits Not Taxable. - The following fringe benefits are not taxable under this Section:(1) fringe benefits which are authorized and exempted from tax under special laws;(2) Contributions of the employer for the benefit of the employee to retirement, insurance andhospitalization benefit plans;(3) Benefits given to the rank and file employees, whether granted under a collective bargainingagreement or not; and(4) De minimis benefits as defined in the rules and regulations to be promulgated by the Secretaryof Finance, upon recommendation of the Commissioner.

SEC. 58. Returns and Payment of Taxes Withheld at Source. -

(A) Quarterly Returns and Payments of Taxes Withheld. - Taxes deducted and withheld underSection 57 by withholding agents shall be covered by a return and paid to, except in cases where theCommissioner otherwise permits, an authorized Treasurer of the city or municipality where the withholdingagent has his legal residence or principal place of business, or where the withholding agent is a corporation,where the principal office is located.

The taxes deducted and withheld by the withholding agent shall be held as a special fund in trustfor the government until paid to the collecting officers.

The return for final withholding tax shall be filed and the payment made within twenty-five (25)days from the close of each calendar quarter, while the return for creditable withholding taxes shall be filedand the payment made not later than the last day of the month following the close of the quarter duringwhich withholding was made: Provided, That the Commissioner, with the approval of the Secretary ofFinance, may require these withholding agents to pay or deposit the taxes deducted or withheld at morefrequent intervals when necessary to protect the interest of the government.

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(B) Statement of Income Payments Made and Taxes Withheld. - Every withholding agentrequired to deduct and withhold taxes under Section 57 shall furnish each recipient, in respect to his or itsreceipts during the calendar quarter or year, a written statement showing the income or other paymentsmade by the withholding agent during such quarter or year, and the amount of the tax deducted andwithheld therefrom, simultaneously upon payment at the request of the payee, but not late than thetwentieth (20th) day following the close of the quarter in the case of corporate payee, or not later thanMarch 1 of the following year in the case of individual payee for creditable withholding taxes. For finalwithholding taxes, the statement should be given to the payee on or before January 31 of the succeedingyear.

(C) Annual Information Return. - Every withholding agent required to deduct and withhold taxesunder Section 57 shall submit to the Commissioner an annual information return containing the list ofpayees and income payments, amount of taxes withheld from each payee and such other pertinentinformation as may be required by the Commissioner. In the case of final withholding taxes, the return shallbe filed on or before January 31 of the succeeding year, and for creditable withholding taxes, not later thanMarch 1 of the year following the year for which the annual report is being submitted. This return, if madeand filed in accordance with the rules and regulations approved by the Secretary of Finance, uponrecommendation of the Commissioner, shall be sufficient compliance with the requirements of Section 68of this Title in respect to the income payments.

The Commissioner may, by rules and regulations, grant to any withholding agent a reasonableextension of time to furnish and submit the return required in this Subsection.

(D) Income of Recipient. - Income upon which any creditable tax is required to be withheld atsource under Section 57 shall be included in the return of its recipient but the excess of the amount of tax sowithheld over the tax due on his return shall be refunded to him subject to the provisions of Section 204; ifthe income tax collected at source is less than the tax due on his return, the difference shall be paid inaccordance with the provisions of Section 56.

All taxes withheld pursuant to the provisions of this Code and its implementing rules andregulations are hereby considered trust funds and shall be maintained in a separate account and notcommingled with any other funds of the withholding agent.

(E) Registration with Register of Deeds. - No registration of any document transferring realproperty shall be effected by the Register of Deeds unless the Commissioner or his duly authorizedrepresentative has certified that such transfer has been reported, and the capital gains or creditablewithholding tax, if any, has been paid: Provided, however, That the information as may be required by rulesand regulations to be prescribed by the Secretary of Finance, upon recommendation of the Commissioner,shall be annotated by the Register of Deeds in the Transfer Certificate of Title or Condominium Certificateof Title: Provided, further, That in cases of transfer of property to a corporation, pursuant to a merger,consolidation or reorganization, and where the law allows deferred recognition of income in accordancewith Section 40, the information as may be required by rules and regulations to be prescribed by theSecretary of Finance, upon recommendation of the Commissioner, shall be annotated by the Register ofDeeds at the back of the Transfer Certificate of Title or Condominium Certificate of Title of the realproperty involved: Provided, finally, That any violation of this provision by the Register of Deeds shall besubject to the penalties imposed under Section 269 of this Code.

Sec.. 75.

Declaration of Quarterly Corporate Income Tax. - Every corporation shall file in duplicate aquarterly summary declaration of its gross income and deductions on a cumulative basis for the precedingquarter or quarters upon which the income tax, as provided in Title II of this Code, shall be levied,collected and paid. The tax so computed shall be decreased by the amount of tax previously paid or

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assessed during the preceding quarters and shall be paid not later than sixty (60) days from the close ofeach of the first three (3) quarters of the taxable year, whether calendar or fiscal year.

Sec. 106

(a) Export Sales. - The term "export sales" means:

(1) The sale and actual shipment of goods from the Philippines to a foreign country, irrespectiveof any shipping arrangement that may be agreed upon which may influence or determine the transfer ofownership of the goods so exported and paid for in acceptable foreign currency or its equivalent in goods orservices, and accounted for in accordance with the rules and regulations of the Bangko Sentral ng Pilipinas(BSP);

(2) Sale of raw materials or packaging materials to a nonresident buyer for delivery to a residentlocal export-oriented enterprise to be used in manufacturing, processing, packing or repacking in thePhilippines of the said buyer's goods and paid for in acceptable foreign currency and accounted for inaccordance with the rules and regulations of the Bangko Sentral ng Pilipinas (BSP);

(3) Sale of raw materials or packaging materials to export-oriented enterprise whose export salesexceed seventy percent (70%) of total annual production;

(4) Sale of gold to the Bangko Sentral ng Pilipinas (BSP); and

(5) Those considered export sales under Executive Order NO. 226, otherwise known as theOmnibus Investment Code of 1987, and other special laws.

(b) Foreign Currency Denominated Sale. - The phrase "foreign currency denominated sale"means sale to a nonresident of goods, except those mentioned in Sections 149 and 150, assembled ormanufactured in the Philippines for delivery to a resident in the Philippines, paid for in acceptable foreigncurrency and accounted for in accordance with the rules and regulations of the Bangko Sentral ng Pilipinas(BSP).

(c) Sales to persons or entities whose exemption under special laws or international agreements towhich the Philippines is a signatory effectively subjects such sales to zero rate.

Sec. 108

(B) Transactions Subject to Zero Percent (0%) Rate. - The following services performed in the Philippinesby VAT- registered persons shall be subject to zero percent (0%) rate.

(1) Processing, manufacturing or repacking goods for other persons doing business outside thePhilippines which goods are subsequently exported, where the services are paid for in acceptable foreigncurrency and accounted for in accordance with the rules and regulations of the Bangko Sentral ng Pilipinas(BSP);

(2) Services other than those mentioned in the preceding paragraph, the consideration for which is paidfor in acceptable foreign currency and accounted for in accordance with the rules and regulations of theBangko Sentral ng Pilipinas (BSP);

(3) Services rendered to persons or entities whose exemption under special laws or internationalagreements to which the Philippines is a signatory effectively subjects the supply of such services to zeropercent (0%) rate; `

(4) Services rendered to vessels engaged exclusively in international shipping; and

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(5) Services performed by subcontractors and/or contractors in processing, converting, of manufacturinggoods for an enterprise whose export sales exceed seventy percent (70%) of total annual production.

SEC. 111. Transitional/Presumptive Input Tax Credits. -

(A) Transitional Input Tax Credits. - A person who becomes liable to value-added tax or anyperson who elects to be a VAT-registered person shall, subject to the filing of an inventory according torules and regulations prescribed by the Secretary of finance, upon recommendation of the Commissioner,be allowed input tax on his beginning inventory of goods, materials and supplies equivalent for eightpercent (8%) of the value of such inventory or the actual value-added tax paid on such goods, materials andsupplies, whichever is higher, which shall be creditable against the output tax.

(B) Presumptive Input Tax Credits. -

(1) Persons or firms engaged in the processing of sardines, mackerel and milk, and inmanufacturing refined sugar and cooking oil, shall be allowed a presumptive input tax, creditable againstthe output tax, equivalent to one and one-half percent (1 1/2%) of the gross value in money of theirpurchases of primary agricultural products which are used as inputs to their production.

As used in this Subsection, the term "processing" shall mean pasteurization, canning and activitieswhich through physical or chemical process alter the exterior texture or form or inner substance of aproduct in such manner as to prepare it for special use to which it could not have been put in its originalform or condition.

(2) Public works contractors shall be allowed a presumptive input tax equivalent to one and one-half percent (1 1/2%) of the contract price with respect to government contracts only in lieu of actual inputtaxes therefrom.

SEC. 112. Refunds or Tax Credits of Input Tax. -

(A) Zero-Rated or Effectively Zero-Rated Sales. - any VAT-registered person, whose sales arezero-rated or effectively zero-rated may, within two (2) years after the close of the taxable quarter when thesales were made, apply for the issuance of a tax credit certificate or refund of creditable input tax due orpaid attributable to such sales, except transitional input tax, to the extent that such input tax has not beenapplied against output tax: Provided, however, That in the case of zero-rated sales under Section106(A)(2)(a)(1), (2) and (B) and Section 108 (B)(1) and (2), the acceptable foreign currency exchangeproceeds thereof had been duly accounted for in accordance with the rules and regulations of the BangkoSentral ng Pilipinas (BSP): Provided, further, That where the taxpayer is engaged in zero-rated oreffectively zero-rated sale and also in taxable or exempt sale of goods of properties or services, and theamount of creditable input tax due or paid cannot be directly and entirely attributed to any one of thetransactions, it shall be allocated proportionately on the basis of the volume of sales.

(B) Capital Goods. - A VAT-registered person may apply for the issuance of a tax creditcertificate or refund of input taxes paid on capital goods imported or locally purchased, to the extent thatsuch input taxes have not been applied against output taxes. The application may be made only within two(2) years after the close of the taxable quarter when the importation or purchase was made.

(C) Cancellation of VAT Registration. - A person whose registration has been cancelled due toretirement from or cessation of business, or due to changes in or cessation of status under Section 106(C) ofthis Code may, within two (2) years from the date of cancellation, apply for the issuance of a tax creditcertificate for any unused input tax which may be used in payment of his other internal revenue taxes.

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(D) Period Within Which Refund or Tax Credit of Input Taxes Shall be Made. - In proper cases, theCommissioner shall grant a refund or issue the tax credit certificate for creditable input taxes within onehundred twenty (120) days from the date of submission of compete documents in support of the applicationfiled in accordance with Subsections (A) and (B) hereof.

In case of full or partial denial of the claim for tax refund or tax credit, or the failure on the part of theCommissioner to act on the application within the period prescribed above, the taxpayer affected may,within thirty (30) days from the receipt of the decision denying the claim or after the expiration of the onehundred twenty day-period, appeal the decision or the unacted claim with the Court of Tax Appeals.-

(E) Manner of Giving Refund. - Refunds shall be made upon warrants drawn by the Commissioner or byhis duly authorized representative without the necessity of being countersigned by the Chairman,Commission on audit, the provisions of the Administrative Code of 1987 to the contrary notwithstanding:Provided, That refunds under this paragraph shall be subject to post audit by the Commission on Audit.

SEC. 113.

Invoicing and Accounting Requirements for VAT-Registered Persons. -

(A) Invoicing Requirements. - A VAT-registered person shall, for every sale, issue an invoice orreceipt. In addition to the information required under Section 237, the following information shall beindicated in the invoice or receipt:

(1) A statement that the seller is a VAT-registered person, followed by his taxpayer's identificationnumber (TIN); and(2) The total amount which the purchaser pays or is obligated to pay to the seller with theindication that such amount includes the value-added tax.

(B) Accounting Requirements. - Notwithstanding the provisions of Section 233, all personssubject to the value-added tax under Sections 106 and 108 shall, in addition to the regular accountingrecords required, maintain a subsidiary sales journal and subsidiary purchase journal on which the dailysales and purchases are recorded. The subsidiary journals shall contain such information as may be requiredby the Secretary of Finance.

Sec. 143. Tax on Business. - The municipality may impose taxes on the following businesses:

(a) On manufacturers, assemblers, repackers, processors, brewers, distillers, rectifiers, andcompounders of liquors, distilled spirits, and wines or manufacturers of any article of commerce ofwhatever kind or nature, in accordance with the following schedule:

With gross sales or receipts for the precedingcalendar year in the amount of:

Amount of Tax PerAnnum

Less than 10,000.00 165.00

P 10,000.00 or more but less than 15,000.00 220.00

15,000.00 or more but less than 20,000.00 202.00

20,000.00 or more but less than 30,000.00 440.00

30,000.00 or more but less than 40,000.00 660.00

40,000.00 or more but less than 50,000.00 825.00

50,000.00 or more but less than 75,000.00 1,320.00

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75,000.00 or more but less than 100,000.00 1,650.00

100,000.00 or more but less than 150,000.00 2,200.00

150,000.00 or more but less than 200,000.00 2,750.00

200,000.00 or more but less than 300,000.00 3,850.00

300,000.00 or more but less than 500,000.00 5,500.00

500,000.00 or more but less than 750,000.00 8,000.00

750,000.00 or more but less than 1,000,000.00 10,000.00

1,000,000.00 or more but less than 2,000,000.00 13,750.00

2,000,000.00 or more but less than 3,000,000.00 16,500.00

3,000,000.00 or more but less than 4,000,000.00 19,000.00

4,000,000.00 or more but less than 5,000,000.00 23,100.00

5,000,000.00 or more but less than 6,500,000.00 24,375.00

6,000,000.00 or more at a rate not exceeding thirty-seven and a half percent(37½%) of one percent (1%)

(b) On wholesalers, distributors, or dealers in any article of commerce of whatever kind or naturein accordance with the following schedule:

With gross sales or receipts for the precedingcalendar year in the amount of:

Amount of Tax PerAnnum

Less than 1,000.00 18.00

P 1,000.00 or more but less than 2,000.00 33.00

2,000.00 or more but less than 3,000.00 50.00

3,000.00 or more but less than 4,000.00 72.00

4,000.00 or more but less than 5,000.00 100.00

5,000.00 or more but less than 6,000.00 121.00

6,000.00 or more but less than 7,000.00 143.00

7,000.00 or more but less than 8,000.00 165.00

8,000.00 or more but less than 10,000.00 187.00

10,000.00 or more but less than 15,000.00 220.00

15,000.00 or more but less than 20,000.00 275.00

20,000.00 or more but less than 30,000.00 330.00

30,000.00 or more but less than 40,000.00 440.00

40,000.00 or more but less than 50,000.00 660.00

50,000.00 or more but less than 75,000.00 990.00

75,000.00 or more but less than 100,000.00 1,320.00

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100,000.00 or more but less than 150,000.00 1,870.00

150,000.00 or more but less than 200,000.00 2,420.00

200,000.00 or more but less than 300,000.00 3,300.00

300,000.00 or more but less than 500,000.00 4,400.00

500,000.00 or more but less than 750,000.00 6,600.00

750,000.00 or more but less than 1,000,000.00 8,800.00

1,000,000.00 or more but less than 2,000,000.00 10,000.00

2,000,000.00 or more at a rate not exceeding fifty percent (50%) of onepercent (1%).

(c) On exporters, and on manufacturers , millers, producers, wholesalers, distributors, dealers orretailers of essential commodities enumerated hereunder at a rate not exceeding one-half (½) of the ratesprescribed under subsection (a), (b) and (d) of this Section:

(1) Rice and corn;

(2) Wheat or cassava flour, meat, dairy products, locally manufactured, processed orpreserved food, sugar, salt and other agricultural, marine, and fresh water products,whether in their original state or not;

(3) Cooking oil and cooking gas;

(4) Laundry soap, detergents, and medicine;

(5) Agricultural implements. equipment and post-harvest facilities, fertilizers, pesticides,insecticides, herbicides and other farm inputs;

(6) Poultry feeds and other animal feeds;

(7) School supplies; and

(8) Cement.

(d) On retailers.

With gross sales or receipts for the precedingcalendar year in the amount of:

Rate of Tax PerAnnum

P400,000.00 or less 2%

more than P400,000.00 1%

Provided, however, That barangays shall have the exclusive power to levy taxes, as providedunder Section 152 hereof, on gross sales or receipts of the preceding calendar year of Fiftythousand pesos (P50,000.00) or less, in the case of cities, and Thirty thousand pesos (P30,000.00)or less, in the case of municipalities.

(e) On contractors and other independent contractors, in accordance with the following schedule:

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With gross sales or receipts for the precedingcalendar year in the amount of:

Amount of Tax PerAnnum

Less than 5,000.00 27.50

P 5,000.00 or more but less than P 10,000.00 61.60

10,000.00 or more but less than 15,000.00 104.50

15,000.00 or more but less than 20,000.00 165.00

20,000.00 or more but less than 30,000.00 275.00

30,000.00 or more but less than 40,000.00 385.00

40,000.00 or more but less than 50,000.00 550.00

50,000.00 or more but less than 75,000.00 880.00

75,000.00 or more but less than 100,000.00 1,320.00

100,000.00 or more but less than 150,000.00 1,980.00

150,000.00 or more but less than 200,000.00 2,640.00

200,000.00 or more but less than 250,000.00 3,630.00

250,000.00 or more but less than 300,000.00 4,620.00

300,000.00 or more but less than 400,000.00 6,160.00

400,000.00 or more but less than 500,000.00 8,250.00

500,000.00 or more but less than 750,000.00 9,250.00

750,000.00 or more but less than 1,000,000.00 10,250.00

1,000,000.00 or more but less than 2,000,000.00 11,500.00

2,000,000.00 or more at a rate not exceeding fifty percent (50%) of onepercent (1%)

(f) On banks and other financial institutions, at a rate not exceeding fifty percent (50%) of onepercent (1%) on the gross receipts of the preceding calendar year derived from interest,commissions and discounts from lending activities, income from financial leasing, dividends,rentals on property and profit from exchange or sale of property, insurance premium.

(g) On peddlers engaged in the sale of any merchandise or article of commerce, at a rate notexceeding Fifty pesos (P50.00) per peddler annually.

(h) On any business, not otherwise specified in the preceding paragraphs, which the sanggunianconcerned may deem proper to tax: Provided, That on any business subject to the excise, value-added or percentage tax under the National Internal Revenue Code, as amended, the rate of taxshall not exceed two percent (2%) of gross sales or receipts of the preceding calendar year.

The sanggunian concerned may prescribe a schedule of graduated tax rates but in no case to exceed therates prescribed herein.

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SEC. 236. Registration Requirements. -

(A) Requirements. - Every person subject to any internal revenue tax shall register once with theappropriate Revenue District Officer:

(1) Within ten (10) days from date of employment, or

(2) On or before the commencement of business,or

(3) Before payment of any tax due, or

(4) Upon filing of a return, statement or declaration as required in this Code.

The registration shall contain the taxpayer's name, style, place of residence, business and such otherinformation as may be required by the Commissioner in the form prescribed therefor.

A person maintaining a head office, branch or facility shall register with the Revenue District Officerhaving jurisdiction over the head office, brand or facility. For purposes of this Section, the term "facility"may include but not be limited to sales outlets, places of production, warehouses or storage places.

(B) Annual Registration Fee. - An annual registration fee in the amount of Five hundred pesos (P500) forevery separate or distinct establishment or place of business, including facility types where salestransactions occur, shall be paid upon registration and every year thereafter on or before the last day ofJanuary: Provided, however, That cooperatives, individuals earning purely compensation income, whetherlocally or abroad, and overseas workers are not liable to the registration fee herein imposed.

The registration fee shall be paid to an authorized agent bank located within the revenue district, or to theRevenue Collection Officer, or duly authorized Treasurer of the city of municipality where each place ofbusiness or branch is registered.

(C) Registration of Each Type of Internal Revenue Tax. - Every person who is required to register with theBureau of Internal Revenue under Subsection (A) hereof, shall register each type of internal revenue tax forwhich he is obligated, shall file a return and shall pay such taxes, and shall updates such registration of anychanges in accordance with Subsection (E) hereof.

(D) Transfer of Registration. - In case a registered person decides to transfer his place of business or hishead office or branches, it shall be his duty to update his registration status by filing an application forregistration information update in the form prescribed therefor.

(E) Other Updates. - Any person registered in accordance with this Section shall, whenever applicable,update his registration information with the Revenue District Office where he is registered, specifyingtherein any change in type and other taxpayer details.

(F) Cancellation of Registration. - The registration of any person who ceases to be liable to a tax type shallbe cancelled upon filing with the Revenue District Office where he is registered an application forregistration information update in a form prescribed therefor.

(G) Persons Commencing Business. - Any person, who expects to realize gross sales or receipts subject tovalue-added tax in excess of the amount prescribed under Section 109(z) of this Code for the next 12-month period from the commencement of the business, shall register with the Revenue District Officewhich has jurisdiction over the head office or branch and shall pay the annual registration fee prescribed inSubsection (B) hereof.

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(H) Persons Becoming Liable to the Value-added Tax. - Any person, whose gross sales or receipts in any12-month period exceeds the amount prescribed under Subsection 109(z) of this Code for exemption fromthe value-added tax shall register in accordance with Subsection (A) hereof, and shall pay the annualregistration fee prescribed within ten (10) days after the end of the last month of that period, and shall beliable to the value-added tax commencing from the first day of the month following his registration.

(I) Optional Registration of Exempt Person. - Any person whose transactions are exempt from value-addedtax under Section 109(z) of this Code; or any person whose transactions are exempt from the value-addedtax under Section 109(a), (b), (c), and (d) of this Code, who opts to register as a VAT taxpayer with respectto his export sales only, may update his registration information in accordance with Subsection (E) hereof,not later than ten (10) days before the beginning of the taxable quarter and shall pay the annual registrationfee prescribed in Subsection (B) hereof.

In any case, the Commissioner may, for administrative reasons, deny any application for registrationincluding updates prescribed under Subsection (E) hereof.

For purposes of Title IV of this Code, any person who has registered value-added tax as a tax type inaccordance with the provisions of Subsection (C) hereof shall be referred to as VAT-registered person whoshall be assigned only one Taxpayer Identification Number.

(J) Supplying of Taxpayer Identification Number (TIN). - Any person required under the authority of thisCode to make, render or file a return, statement or other document shall be supplied with or assigned aTaxpayer Identification Number (TIN) which he shall indicate in such return, statement or document filedwith the Bureau of Internal Revenue for his proper identification for tax purposes, and which he shallindicate in certain documents, such as, but not limited to the following:

(1) Sugar quedans, refined sugar release order or similar instruments;(2) Domestic bills of lading;(3) Documents to be registered with the Register of Deeds of Assessor's Office;(4) Registration certificate of transportation equipment by land, sea or air;(5) Documents to be registered with the Securities and Exchange Commission;(6) Building construction permits;(7) Application for loan with banks, financial institutions, or other financial intermediaries;(8) Application for mayor's permit;(9) Application for business license with the Department of Trade & Industry; and(10) Such other documents which may hereafter be required under rules and regulations to be

promulgated by the Secretary of Finance, upon recommendation of the Commissioner.

In cases where a registered taxpayer dies, the administrator or executor shall register the estate ofthe decedent in accordance with Subsection (A) hereof and a new Taxpayer Identification Number (TIN)shall be supplied in accordance with the provisions of this Section.

In the case of a nonresident decedent, the executor or administrator of the estate shall register theestate with the Revenue District Office where he is registered: Provided, however, That in case suchexecutor or administrator is not registered, registration of the estate shall be made with the TaxpayerIdentification Number (TIN) supplied by the Revenue District Office having jurisdiction over his legalresidence.

Only one Taxpayer identification Number (TIN) shall be assigned to a taxpayer. Any person whoshall secure more than one Taxpayer Identification Number shall be criminally liable under the provision ofSection 275 on 'Violation of Other Provisions of this Code or Regulations in General'.

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Sec. 237.

Issuance of Receipts or Sales or Commercial Invoices. All persons subject to an internal revenuetax shall, for each sale or transfer of merchandise or for services rendered valued at Twenty-five pesos(P25.00) or more, issue duly registered receipts or sales or commercial invoices, prepared at least induplicate, showing the date of transaction, quantity, unit cost and description of merchandise or nature ofservice: Provided, however, That in the case of sales, receipts or transfers in the amount of One hundredpesos (P100.00) or more, or regardless of the amount, where the sale or transfer is made by a person liableto value-added tax to another person also liable to value-added tax; or where the receipt is issued to coverpayment made as rentals, commissions, compensations or fees, receipts or invoices shall be issued whichshall show the name, business style, if any, and address of the purchaser, customer or client: Provided,further, That where the purchaser is a VAT-registered person, in addition to the information hereinrequired, the invoice or receipt shall further show the Taxpayer Identification Number (TIN) of thepurchaser.

The original of each receipt or invoice shall be issued to the purchaser, customer or client at thetime the transaction is effected, who, if engaged in business or in the exercise of profession, shall keep andpreserve the same in his place of business for a period of three (3) years from the close of the taxable yearin which such invoice or receipt was issued, while the duplicate shall be kept and preserved by the issuer,also in his place of business, for a like period.

The Commissioner may, in meritorious cases, exempt any person subject to internal revenue taxfrom compliance with the provisions of this Section.

SEC. 248. Civil Penalties. –xxx

(B) In case of willful neglect to file the return within the period prescribed by this Code or by rulesand regulations, or in case a false or fraudulent return is willfully made, the penalty to be imposed shall befifty percent (50%) of the tax or of the deficiency tax, in case, any payment has been made on the basis ofsuch return before the discovery of the falsity or fraud: Provided, That a substantial underdeclaration oftaxable sales, receipts or income, or a substantial overstatement of deductions, as determined by theCommissioner pursuant to the rules and regulations to be promulgated by the Secretary of Finance, shallconstitute prima facie evidence of a false or fraudulent return: Provided, further, That failure to reportsales, receipts or income in an amount exceeding thirty percent (30%) of that declared per return, and aclaim of deductions in an amount exceeding (30%) of actual deductions, shall render the taxpayer liable forsubstantial underdeclaration of sales, receipts or income or for overstatement of deductions, as mentionedherein.

SEC. 282.

Informer's Reward to Persons Instrumental in the Discovery of Violations of the National Internal RevenueCode and in the Discovery and Seizure of Smuggled Goods. -

(A) For Violations of the National Internal Revenue Code. - Any person, except an internalrevenue official or employee, or other public official or employee, or his relative within the sixth degree ofconsanguinity, who voluntarily gives definite and sworn information, not yet in the possession of theBureau of Internal Revenue, leading to the discovery of frauds upon the internal revenue laws or violationsof any of the provisions thereof, thereby resulting in the recovery of revenues, surcharges and fees and/orthe conviction of the guilty party and/or the imposition of any of the fine or penalty, shall be rewarded in asum equivalent to ten percent (10%) of the revenues, surcharges or fees recovered and/or fine or penaltyimposed and collected or One Million Pesos (P1,000,000) per case, whichever is lower. The same amountof reward shall also be given to an informer where the offender has offered to compromise the violation of

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law committed by him and his offer has been accepted by the Commissioner and collected from theoffender: Provided, That should no revenue, surcharges or fees be actually recovered or collected, suchperson shall not be entitled to a reward: Provided, further, That the information mentioned herein shall notrefer to a case already pending or previously investigated or examined by the Commissioner or any of hisdeputies, agents or examiners, or the Secretary of Finance or any of his deputies or agents: Provided,finally, That the reward provided herein shall be paid under rules and regulations issued by the Secretary ofFinance, upon recommendation of the Commissioner.

(B) For Discovery and Seizure of Smuggled Goods. - To encourage the public to extend fullcooperation in eradicating smuggling, a cash reward equivalent to ten percent (10%) of the fair marketvalue of the smuggled and confiscated goods or One Million Pesos (P1,000,000) per case, whichever islower, shall be given to persons instrumental in the discovery and seizure of such smuggled goods.

The cash rewards of informers shall be subject to income tax, collected as a final withholding tax,at a rate of ten percent (10%).The provisions of the foregoing Subsections notwithstanding, all public officials, whether incumbent orretired, who acquired the information in the course of the performance of their duties during theirincumbency, are prohibited from claiming informer's reward.

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RULES OF COURT

RULE 42

Petition for Review From the Regional Trial Courts to the Court of Appeals

Section 1. How appeal taken; time for filing. — A party desiring to appeal from a decision of theRegional Trial Court rendered in the exercise of its appellate jurisdiction may file a verified petition forreview with the Court of Appeals, paying at the same time to the clerk of said court the correspondingdocket and other lawful fees, depositing the amount of P500.00 for costs, and furnishing the Regional TrialCourt and the adverse party with a copy of the petition. The petition shall be filed and served within fifteen(15) days from notice of the decision sought to be reviewed or of the denial of petitioner's motion for newtrial or reconsideration filed in due time after judgment. Upon proper motion and the payment of the fullamount of the docket and other lawful fees and the deposit for costs before the expiration of thereglementary period, the Court of Appeals may grant an additional period of fifteen (15) days only withinwhich to file the petition for review. No further extension shall be granted except for the most compellingreason and in no case to exceed fifteen (15) days. (n)

Section 2. Form and contents. — The petition shall be filed in seven (7) legible copies, with theoriginal copy intended for the court being indicated as such by the petitioner, and shall (a) state the fullnames of the parties to the case, without impleading the lower courts or judges thereof either as petitionersor respondents; (b) indicate the specific material dates showing that it was filed on time; (c) set forthconcisely a statement of the matters involved, the issues raised, the specification of errors of fact or law, orboth, allegedly committed by the Regional Trial Court, and the reasons or arguments relied upon for theallowance of the appeal; (d) be accompanied by clearly legible duplicate originals or true copies of thejudgments or final orders of both lower courts, certified correct by the clerk of court of the Regional TrialCourt, the requisite number of plain copies thereof and of the pleadings and other material portions of therecord as would support the allegations of the petition.

The petitioner shall also submit together with the petition a certification under oath that he has nottheretofore commenced any other action involving the same issues in the Supreme Court, the Court ofAppeals or different divisions thereof, or any other tribunal or agency; if there is such other action orproceeding, he must state the status of the same; and if he should thereafter learn that a similar action or

275

proceeding has been filed or is pending before the Supreme Court, the Court of Appeals, or differentdivisions thereof, or any other tribunal or agency, he undertakes to promptly inform the aforesaid courtsand other tribunal or agency thereof within five (5) days therefrom. (n)

Section 3. Effect of failure to comply with requirements. — The failure of the petitioner to complywith any of the foregoing requirements regarding the payment of the docket and other lawful fees, thedeposit for costs, proof of service of the petition, and the contents of and the documents which shouldaccompany the petition shall be sufficient ground for the dismissal thereof. (n)

Section 4. Action on the petition. — The Court of Appeals may require the respondent to file acomment on the petition, not a motion to dismiss, within ten (10) days from notice, or dismiss the petitionif it finds the same to be patently without merit, prosecuted manifestly for delay, or that the questions raisedtherein are too insubstantial to require consideration. (n)

Section 5. Contents of comment. — The comment of the respondent shall be filed in seven (7)legible copies, accompanied by certified true copies of such material portions of the record referred totherein together with other supporting papers and shall (a) state whether or not he accepts the statement ofmatters involved in the petition; (b) point out such insufficiencies or inaccuracies as he believes exist inpetitioner's statement of matters involved but without repetition; and (c) state the reasons why the petitionshould not be given due course. A copy thereof shall be served on the petitioner. (a)

Section 6. Due course. — If upon the filing of the comment or such other pleadings as the courtmay allow or require, or after the expiration of the period for the filing thereof without such comment orpleading having been submitted, the Court of Appeals finds prima facie that the lower court has committedan error of fact or law that will warrant a reversal or modification of the appealed decision, it mayaccordingly give due course to the petition. (n)

Section 7. Elevation of record. — Whenever the Court of Appeals deems it necessary, it mayorder the clerk of court of the Regional Trial Court to elevate the original record of the case including theoral and documentary evidence within fifteen (15) days from notice. (n)

Section 8. Perfection of appeal; effect thereof. — (a) Upon the timely filing of a petition forreview and the payment of the corresponding docket and other lawful fees, the appeal is deemed perfectedas to the petitioner.

The Regional Trial Court loses jurisdiction over the case upon the perfection of the appeals filed in duetime and the expiration of the time to appeal of the other parties.

However, before the Court of Appeals gives due course to the petition, the Regional Trial Court may issueorders for the protection and preservation of the rights of the parties which do not involve any matterlitigated by the appeal, approve compromises, permit appeals of indigent litigants, order execution pendingappeal in accordance with section 2 of Rule 39, and allow withdrawal of the appeal. (9a, R41)

(b) Except in civil cases decided under the Rule on Summary Procedure, the appeal shall stay the judgmentor final order unless the Court of Appeals, the law, or these Rules shall provide otherwise. (a)

Section 9. Submission for decision. — If the petition is given due course, the Court of Appealsmay set the case for oral argument or require the parties to submit memoranda within a period of fifteen(15) days from notice. The case shall be deemed submitted for decision upon the filing of the last pleadingor memorandum required by these Rules or by the court itself. (n)

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RULE 43

Appeals From the Court of Tax Appeals and Quasi-Judicial Agencies to the Court of Appeals

Section 1. Scope. — This Rule shall apply to appeals from judgments or final orders of the Courtof Tax Appeals and from awards, judgments, final orders or resolutions of or authorized by any quasi-judicial agency in the exercise of its quasi-judicial functions. Among these agencies are the Civil ServiceCommission, Central Board of Assessment Appeals, Securities and Exchange Commission, Office of thePresident, Land Registration Authority, Social Security Commission, Civil Aeronautics Board, Bureau ofPatents, Trademarks and Technology Transfer, National Electrification Administration, Energy RegulatoryBoard, National Telecommunications Commission, Department of Agrarian Reform under Republic ActNo. 6657, Government Service Insurance System, Employees Compensation Commission, AgriculturalInvention Board, Insurance Commission, Philippine Atomic Energy Commission, Board of Investments,Construction Industry Arbitration Commission, and voluntary arbitrators authorized by law. (n)

Section 2. Cases not covered. — This Rule shall not apply to judgments or final orders issuedunder the Labor Code of the Philippines. (n)

Section 3. Where to appeal. — An appeal under this Rule may be taken to the Court of Appealswithin the period and in the manner herein provided, whether the appeal involves questions of fact, of law,or mixed questions of fact and law. (n)

Section 4. Period of appeal. — The appeal shall be taken within fifteen (15) days from notice ofthe award, judgment, final order or resolution, or from the date of its last publication, if publication isrequired by law for its effectivity, or of the denial of petitioner's motion for new trial or reconsiderationduly filed in accordance with the governing law of the court or agency a quo. Only one (1) motion forreconsideration shall be allowed. Upon proper motion and the payment of the full amount of the docket feebefore the expiration of the reglementary period, the Court of Appeals may grant an additional period offifteen (15) days only within which to file the petition for review. No further extension shall be grantedexcept for the most compelling reason and in no case to exceed fifteen (15) days. (n)

Section 5. How appeal taken. — Appeal shall be taken by filing a verified petition for review inseven (7) legible copies with the Court of Appeals, with proof of service of a copy thereof on the adverseparty and on the court or agency a quo. The original copy of the petition intended for the Court of Appealsshall be indicated as such by the petitioner.

Upon the filing of the petition, the petitioner shall pay to the clerk of court of the Court of Appeals thedocketing and other lawful fees and deposit the sum of P500.00 for costs. Exemption from payment ofdocketing and other lawful fees and the deposit for costs may be granted by the Court of Appeals upon averified motion setting forth valid grounds therefor. If the Court of Appeals denies the motion, thepetitioner shall pay the docketing and other lawful fees and deposit for costs within fifteen (15) days fromnotice of the denial. (n)

Section 6. Contents of the petition. — The petition for review shall (a) state the full names of theparties to the case, without impleading the court or agencies either as petitioners or respondents; (b) containa concise statement of the facts and issues involved and the grounds relied upon for the review; (c) beaccompanied by a clearly legible duplicate original or a certified true copy of the award, judgment, finalorder or resolution appealed from, together with certified true copies of such material portions of the recordreferred to therein and other supporting papers; and (d) contain a sworn certification against forumshopping as provided in the last paragraph of section 2, Rule 42. The petition shall state the specificmaterial dates showing that it was filed within the period fixed herein. (2a)

Section 7. Effect of failure to comply with requirements. — The failure of the petitioner to complywith any of the foregoing requirements regarding the payment of the docket and other lawful fees, the

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deposit for costs, proof of service of the petition, and the contents of and the documents which shouldaccompany the petition shall be sufficient ground for the dismissal thereof. (n)

Section 8. Action on the petition. — The Court of Appeals may require the respondent to file acomment on the petition not a motion to dismiss, within ten (10) days from notice, or dismiss the petition ifit finds the same to be patently without merit, prosecuted manifestly for delay, or that the questions raisedtherein are too unsubstantial to require consideration. (6a)

Section 9. Contents of comment. — The comment shall be filed within ten (10) days from noticein seven (7) legible copies and accompanied by clearly legible certified true copies of such materialportions of the record referred to therein together with other supporting papers. The comment shall (a) pointout insufficiencies or inaccuracies in petitioner's statement of facts and issues; and (b) state the reasons whythe petition should be denied or dismissed. A copy thereof shall be served on the petitioner, and proof ofsuch service shall be filed with the Court of Appeals. (9a)

Section 10. Due course. — If upon the filing of the comment or such other pleadings ordocuments as may be required or allowed by the Court of Appeals or upon the expiration of the period forthe filing thereof, and on the records the Court of Appeals finds prima facie that the court or agencyconcerned has committed errors of fact or law that would warrant reversal or modification of the award,judgment, final order or resolution sought to be reviewed, it may give due course to the petition; otherwise,it shall dismiss the same. The findings of fact of the court or agency concerned, when supported bysubstantial evidence, shall be binding on the Court of Appeals. (n)

Section 11. Transmittal of record. — Within fifteen (15) days from notice that the petition hasbeen given due course, the Court of Appeals may require the court or agency concerned to transmit theoriginal or a legible certified true copy of the entire record of the proceeding under review. The record to betransmitted may be abridged by agreement of all parties to the proceeding. The Court of Appeals mayrequire or permit subsequent correction of or addition to the record. (8a)

Section 12. Effect of appeal. — The appeal shall not stay the award, judgment, final order orresolution sought to be reviewed unless the Court of Appeals shall direct otherwise upon such .terms as itmay deem just. (10a)

Section 13. Submission for decision. — If the petition is given due course, the Court of Appealsmay set the case for oral argument or require the parties to submit memoranda within a period of fifteen(15) days from notice. The case shall be deemed submitted for decision upon the filing of the last pleadingor memorandum required by these Rules or by the court of Appeals. (n)