BARCOM2008-09 REVIEW NOTES FOR TAXATION 2 1

TRANSFER TAXATION Purpose and justification of estate tax:

The following theories have been advanced to justify death taxation: (BRAP)
Transfer Taxes
a.) Benefit-Received Theory
those imposed upon the gratuitous disposition of private property For the performance of services rendered by the government in the distribution of
the estate of the decedent and other benefits that accrue to the estate and the
Under our law, they are taxes levied on the transmission of private properties heirs, the state collects the tax.
from a prior decedent to his heirs in the case of estate tax, or from a donor to a
donee in the case of donors tax. b.) Redistribution of Wealth Theory
Estate tax is a contributing factor to the inequalities in wealth and income. The
Kinds of Transfer Taxes imposition of death tax reduces the property received by the successor bringing
about a more equitable distribution of wealth in society.
1. Death / Estate taxes
- those levied on the gratuitous transfers of property upon ones death, formerly c.) Ability to pay theory
comprised of the estate and inheritance taxes: Both taxes are now integrated into one The receipt of inheritance places assets in the hands of the heirs and beneficiaries
estate tax. thereby creating an ability to pay the tax and thus, ability to contribute to
governmental income; and
2. Gift Taxes
- Are imposed on the gratuitous transfers of property during ones lifetime, formerly d.) Privilege theory or State Partnership theory
comprised of the donors and donees gift taxes; both taxes are now integrated into a Inheritance is not a right but a privilege granted by the state and large estates
donors tax. have been acquired only with the protection of the state. The State, as a passive
and silent partner in the accumulation of property has the right to collect the
share which is properly due to it.
I. DEATH / ESTATE TAX
Incidence or burden of estate of tax
Estate tax Three views on who is the taxpayer in estate taxation:
graduated tax imposed on the privilege of the decedent to transmit property at
1. PREDECESSOR the object of the tax is the property which has been held or
death and is base on the entire net estate, regardless of the number heirs and
accumulated by the deceased and the tax has fallen upon him in the sense it has
relations to the decedent.
affected the amount of the property which he could dispose.
a transfer tax not a property tax.
2. SUCCESSOR the tax is not paid by the predecessor who has no liability till he
dies and who is free to ignore the duty if he wishes, while the successor comes
tax on the right to transmit property at death and on certain transfers which are into less than he would have, and has no kind of redress.
made by the statute the equivalent of testamentary dispositions.
3. No Personal Incidence - the estate tax has no personal incidence at all, merely
Nature of Estate Tax falling upon the estate as such.
It is not a direct tax on property nor is it a capitation tax, that is, the tax is laid
neither on the property, nor on the transferee or transferor, but on the right of the Law applicable
decedent to transmit his estate. Estate taxation is governed by the statute in force at the time of the death of the
It is not a property tax but an excise tax. decedent.

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Reciprocity B. In cases of nonresident aliens:

There is reciprocity if the foreign country of which the decedent was a citizen or 1. Real property within the Philippines;
resident at the time of his death: 2. Tangible personal property within the Philippines and;
3. Intangible personal property within the Philippines, unless there is reciprocity in which
1.) Did not impose an estate tax; or case, it is not taxable.
2.) Allowed a similar exemption from estate tax with respect
to intangible personal property owned by Filipino citizens Note: These are either:
residing in that foreign country. A) Properties actually owned at the time of death
B) Properties deemed by law to be owned by the decedent
Note: under Sec. 85
1. Reciprocity applies only when:
a.) The property is an intangible; and Inter Vivos Transfers Subject to Estate Tax
b.) The decedent is a nonresident alien
The gross estate extends to gratuitous transfers made by the decedent during his
2. The following intangibles are deemed located in the Philippines: (an exception to the lifetime which are treated by the law as substitutes for testamentary dispositions.
principle of Res Mobilia Sequuntur Personam and Situs of Taxation) They are transfers inter vivos in form but mortis causa in substance.

a.) Franchises which must be exercised in the Philippines;
b.) Shares, obligations or bonds issued by any corporation or
sociedad anonima organized or constituted in the Philippines in accordance with its
laws;
c.) Shares, obligations or bonds issued by any foreign corporation 85% of the business of
which is located in the Philippines;
d.) Shares, obligations or bonds issued by any foreign corporation if such shares
obligations or bonds have acquired a business situs in the Philippines; and
e.) Shares or rights in any partnership, business, or industry
established in the Philippines.
GROSS ESTATE
the total value of all property, whether real or personal, tangible or intangible
belonging to the decedent at the time of his death, situated within or outside the
Philippines, where such decedent was a resident or citizen of the Philippines.
In the case of a nonresident alien decedent, it shall include only property situated
in the Philippines.
Rationale for taxability:
To reach such transfers which are really substitutes for testamentary dispositions
and thus prevent the evasion of the estate tax.
These transfers are:
a.) transfers in contemplation of death (sec.85 b);
b.) transfers with retention or reservation of certain rights (sec.85 b);
c.) revocable transfers (sec.85 c)
d.) transfers of property arising under a general power of appointment ( sec.85 d);
and
e.) transfers for insufficient consideration (sec.85 g)
Note:
Transfers by virtue of a bona fide sale of property for an adequate and full
consideration in money or moneys worth are excluded and not taxable.
INCLUSIONS IN THE GROSS ESTATE (CR2IG DIP)

1) Decedents interest at a specific property

Property Included in the Gross Estate (INCLUSIONS): - To the extent of the interest therein of the decedent at the time of his death. (Sec. 85
A. In case of resident citizens, nonresident citizens and resident aliens: A)
1. Real Property within and without the Philippines;
2. Tangible personal property within and without the Philippines; and - Ex: partnership interest, dividends
3. Intangible personal property within and without the Philippines.
2) Transfer in contemplation of death
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- A transfer with the thought of death.
- The term in contemplation of death means that the impelling or controlling motive
is the thought of death, regardless of whether the transferor is near the possibility of
death or not, which induces the disposition of the property for the purpose of avoiding
the tax.
- Example: donation was made concurrently with the execution of a will (Vidal de Rocs
vs. Posadas, 58 Phil 108)
Circumstances taken into account in determining in whether the transfer was made in
contemplation of death:
A.) Age and state of health of the decedent at the time of the gift;
B.) Length of time between the gift and the date of death; and
C.) Concurrent making of a will or making a will within a short time after the transfer.
Note: Check the factual settings before and at time of death because proximity to death
is not always conclusive.
Examples of motives precluding the category of a transfer in contemplation of
death:
Note: In relation to transfers with retention of rights which are made in contemplation of
death if the right of retention by the Decedent is co-terminous with his lifetime.
- Ex: X has a house and lot which he transferred to Y
a) with the condition that X will use it while X lives
- Effect: Still part of estate of X as he has control over it
b) with the condition that X will use it only for 10 years and then X dies before 10 years
- Effect: Not part of the estate of X as he is not the actual owner
3.) Transfer with retention or reservation of certain rights
- This contemplates the instances where the owner transfers his property during his
lifetime but still retains economic benefits (the possession or enjoyment of the property
or the power to designate the person who may exercise such rights).
- It includes:
A. Transfer without retention of interest but intended to take
effect at or after the decedents death.
- Example: donations mortis causa.

a.) To relieve the donor from the burden of management; B. Transfer with retention of interest in respect to:
b.) To save income or property taxes; - 1. The possession or enjoyment of or the right to the
c.) To settle family litigated and unlitigated disputes; income from the property; or
d.) To provide independent income for dependents; 2. The right either alone or in conjunction with any person, to designate the person who
e.) To see the children enjoy the property while the donor is alive; shall possess or enjoy the property or the income therefrom. And such interest is
f.) To protect the family from hazards of business operations; retained by the decedent for his life or for any period which does not in fact end
g.) To reward services rendered before his death.

Note:
The THREE (3) YEAR PRESUMPTION provides that any transfer of a material part of his
property in the nature of a final disposition or distribution thereof made by the decedent
within three years prior to his death without such adequate and full consideration shall,
unless shown to the contrary, be deemed to be have been made in contemplation of
death.
C. Transfer with reversionary interest, wherein there is a possibility that the transferred
property may return to the decedent or his estate or that it may become subject to a
power of disposition by the decedent.
- Ex: A transfers his property to B in naked ownership and to C in usufruct throughout Cs
lifetime subject to the condition that if C predeceases A, the property shall return to A. If
A dies during Cs lifetime, the value of the reversionary interest of A at death is included
in his gross estate.

This provision, however, has been already deleted in Sec. 100 (b) now sec. 85 (B) of the 3.) Revocable transfer
Tax Code by PD No. 1705. - the decedent has full control of disposition of property
- even if the control is not exercised, it is enough that it is
Under BIR Ruling No. 261 September 2, 1987, the law does not specify the number of exists
years prior to a decedents death within which a transfer can be considered in - A transfer where:
contemplation of death.

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BARCOM2008-09 REVIEW NOTES FOR TAXATION 2
a.) The decedent or in conjunction with any other person has reserved the right to alter,
amend, revoke, or terminate; or
b.) Any such power is relinquished in contemplation of the decedents death.
The power to alter, amend or revoke shall be considered to exist on the date of the
decedents death even though:
a.) the exercise of the power is subject to a precedent giving of notice; or
b.) The alteration, amendment or revocation takes effect only upon the expiration of
a stated period after the exercise of the power.
If the notice has not been given or the power has not been exercised on or
before the decedents death, such notice or the power shall be considered to have
been given or exercised on the date of the decedents death.
4.) Transfer of property under a general power of appointment
- A transfer where the donor of the power of appointment authorizes the donee of such
power to designate any person he chooses to be given the right over the appointed
property.
- The transferee may choose freely any person who will own the property after he dies
- Rationale: the will of the transferee is followed; hence, part of transferees estate
* Note: the decedent is the transferee in this provision
General power of appointment vs. special power of appointment:
A.) A power is general, when it authorizes the donee of the power to appoint any
person he pleases including himself, thus having a full dominion over the property
as if he owned it.
B.) It is special when, the donee can appoint only among a restricted or designated
class of persons other than himself.
Note:
If the power of appointment is general, it makes the appointed property a part of
the donees property.
Under a general power of appointment, title to the property is legally transferred
to the donee. Therefore the property shall form part of the gross estate of the donee.
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5.) Transfer for insufficient consideration
- A transfer that is not a bona fide sale of property for an adequate and full
consideration in money or moneys worth. The excess of the fair market value at the
time of death over the value of the consideration received by the decedent shall form
part of his gross estate.
- However, if the purported absolute sale inter vivos by the decedent is shown to be
fictitious, then the total value of the property transferred is subject to inclusion in the
taxable estate.
- Ex: X owns a house and lot, he wants to help Y so he sells his house worth P5M for only
P1M. At the time of Xs death, his house and lot is worth P10M.
How much is included in the gross estatre of X? 10-1 = 9M
- Ex: X bought a car worth P1.3M. X needed money so he sells his car to Y for only P1M.
This is not a transfer for insufficient consideration as this is a bona fide transfer at arms
length; hence, a valid transfer.
6.) Proceeds of life insurance
- Proceeds of life insurance taken by the decedent on his own life shall be included in the
gross estate if the beneficiary:
A.) Is the estate of the decedent, his executor, or administrator (regardless whether
the designation is revocable or irrevocable); or
B.) Third person other than the estate, executor, administrator but the designation of
the beneficiary is revocable.
- Presumption: proceeds are revocable
- include in the estate only if it is revocable as the decedent retained control over the
proceeds
7.) Prior Interest
- Except as otherwise specifically provided therein, subsections (B), (C), (E) of Section 85
referring to transfer in contemplation of death, revocable transfer and proceeds of life
insurance respectively shall apply to the transfers, trusts, estates, interests, rights,
powers and relinquishment of powers as severally enumerated and described therein,
whether made, created, arising, existing, exercised or relinquished before or after the
effectivity of the CTRP.
NOTE:
In most of these transfers the property remains substantially that of the transferor
during his lifetime notwithstanding the transfer since he still retains either the beneficial
ownership or naked title to the property.
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EXCLUSIONS FROM THE GROSS ESTATE
1. Merger of usufruct in the owner of the naked title
- ex: X has a house and lot. X gave the title to Z.
X also allows Y to use the same and that in case Y dies, the use goes to Z. What are the
effects?
a) If X dies include the house and lot in Xs estate
b) If Y dies exclude from the estate of Y as the will of X is being followed, there is a
merger of usufruct in Z (the owner of the naked title).
2. Fideicommisary and transmissions from the first heir, legatee, or donee in
favor of another beneficiary, in accordance with the desire of the predecessor
- ex: X has a house and lot. In the will of X, Y may have the title to the house and lot but
in case Y dies, the property will go to Z. What are the effects?
a) If X dies include as part of Xs estate as he actually owns it
b) If Y dies excluded from the estate of Y as he has no control over its disposition
- Ex: X has a house and lot which he wants to give to Y but Y is a minor at the moment so
that X institutes T to hold the property in trust for Y until Y reaches the age of majority. X
died. The property passed to T. T died. Y reached the age of majority. Effect if T dies: Not
part of estate of T.
Note: Common reasons for 1 and 2 the will of the first decedent is followed, the second
decedent has no control over the disposition.
3. Transfers to social welfare, cultural, and charitable institutions
- Requisites:
a) Qualified organization
b) Not more than 30% will be used for administrative purposes
- Reason: to encourage such transfers
4. Proceeds of insurance not includible in the gross estate of the decedent
a) Amount receivable by any beneficiary irrevocably designated in the policy of insurance
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 and
employees.
d) Benefits accruing under the Social Security Act.
e) Proceeds of life insurance payable to the heirs of deceased members of the military
personnel of the United States Army or Philippine Army under laws administered by the
United States Veterans Administration.
f) Accident insurance proceeds.
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5. Separate property of the surviving spouse.
Note:
In the determination of the gross estate, the nature of the property, whether common
property of the spouses, separate or exclusive property either of the deceased or of
the surviving spouse, becomes of vital 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 by the Conjugal Partnership of Gains, while those who got married
on or after August 3, 1988 are governed by the Absolute Community of Property,
unless a different regime was agreed upon in the marriage settlement.
EXEMPTION FROM ESTATE TAX
A. The first P200, 000.00 value of the estate (sec. 84 NIRC)
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 another beneficiary
in accordance with the desire of the predecessor.
D. All bequest, devises, legacies or transfers to social welfare, cultural and charitable
institutions, no part of the net income of which inured to the benefit of any individual
and provided that not more than 30% of the said bequest, etc shall be used by such
institution for administration purposes.
E. Intangible personal property of non-resident aliens under the principle of reciprocity.
F. Retirement benefits of employees of private firms from private pension plans approved
by the BIR.
G. Amount received for war damages.
H. Grants and donations to the Intramuros administration.
ALLOWABLE DEDUCTIONS FROM THE GROSS ESTATE
- Granted by mere legislative grace
- Construed strictly against the taxpayer
- Requisites:
a) Substantiate the claim for deduction
b) Identify the provision granting the deduction.
The provision must be clear and definite.
RESIDENT DECEDENT
A. Ordinary Deductions (ELIT):
1) Funeral Expenses
BARCOM2008-09 REVIEW NOTES FOR TAXATION 2 6

- The amount deductible is equal to 5% of the gross estate or the amount of the actual - ex: expenses to be declared as administrator vs. an oppositor is a personal expense
funeral expenses whichever is lower, but in no case to exceed P200,000;

- Actual funeral expenses are those which were actually incurred in connection with the
interment or burial of the deceased and paid for from the estate of said deceased.
3) Claims against the decedents estate
- Debts or obligations of the decedent that is enforceable
- Funeral expenses include: against the estate provided that the following requisites are
a) Costs of coffin, tombstone, mausoleum, and burial lot; met:
b) Funeral parlor fees; a) They were contracted in good faith and for an adequate and full consideration in
c) Mourning clothing of the surviving spouse and the unmarried minor children; money or moneys worth.
d) Costs of obituary notices; and b) They must be existing against the estate.
e) Expenses during the wake. c) They must be legally enforceable obligations of the decedent and ought to be
enforced by the claimants.
- The following cannot be deducted under funeral expenses: d) They must be reasonably certain in amount; and;
a) Cash advances of the surviving spouse and the heirs; e) At the time the indebtedness was incurred, the debt instrument was duly
b) Expenses paid by the relatives and friends; and notarized and if the loan was contracted within three (3) years before the death of
c) Expenses after the burial. the decedent, the administrator or executor shall submit a statement showing the
disposition of the proceeds of the loan.
- Requisites:
a) The expenses must be due to the interment, wake and burial; hence, expenses on
the death anniversary are not included 4) Claims against the insolvent persons
b) The expenses must have been shouldered by the estate and not by other people - Requisites for deductibility:
a) The amount of said claims has been initially included as part of the gross estate;
2) Judicial expenses of the testamentary or intestate proceedings and
- Requisite: administration expenses to those actually incurred in the administration of b) The incapacity of the debtors to pay their obligations is proven and not merely
the estate. alleged.

- Examples: 5) Unpaid mortgages indebtedness

a) fees of the executor or administrator;
b) attorneys fees; - Requisites for deductibility:
c) accountants fees; a) The fair market value of the property mortgaged without deducting the mortgage
d) court fees; indebtedness has been initially included as part of his gross estate;
e) salaries of employees; and b) The mortgage indebtedness was contracted in good faith and for an adequate
f) All other expense related to the administration of the estate. and full consideration in money or moneys worth.

Note: - ex: X obtained a 3M loan from Y and executed a Real Estate Mortgage over his house
This includes all expenses necessary to settle or preserve the estate hence, and lot worth 5M. X paid 1M. X died.
extrajudicial expenses are included. Effect: in the estate of X, include the 5M in the gross estate of X and claim as deduction
the unpaid 2M.
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. Accommodated Loan

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- Ex: X owns a house and lot worth 5M. Y obtained a 3M loan from Z with Xs house and
lot as collateral. Y paid 1M. Z died. X died.
Effect: Include in the gross estate of X the 5M as receivable from Y (reason: right of
reimbursement); and claim as deduction the unpaid 2M.
6) Casualty Losses (TRECUSO)
- 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.
- Requisites for deductibility:
a) Losses not compensated by an insurance or
otherwise;
b) Losses that were not claimed as a deduction for income tax purposes; and
c) Losses incurred not later than the last day for payment of the estate tax (6
months from death).
d) Include the worth of the property in the gross estate
e) File a sworn declaration of the fact of loss within 45 days from its occurrence
7) Unpaid Taxes
- 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 of the 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 accrued before his death, or any estate tax cannot be deducted because
they are chargeable to the income of the estate.
- except: estate tax because estate tax liability is determined at the time of death
- Factors necessary in vanishing deduction, these are;
a. There are two (2) deceased persons and the first is the donor; and
b. 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.
- Rationale:
The deduction operates to ease the harshness of successive taxation of the same
property within a relatively short period of time.
Requisites for deductibility:
1. The present decedent must have acquired the property by inheritance or by
donation.
2. The property must have been acquired within five (5) years prior to the death of the
present decedent
3. The property must have formed part of the gross estate of the prior decedent if
acquired by inheritance, or the taxable gift of the donor if acquired by donation.
4. The estate tax or the donors tax, as the case may be, must have been paid on the
previous transfer.
5. The property must be identified as the one received from the prior decedent or from
the donor, as the case may be.
6. The estate of the prior decedent must not have previously availed of the vanishing
deduction on the subject property.
Procedure in computing vanishing deductions:
1. Value taken of property previously taxed
Less:Mortgage paid by the present decedent on property previously mortgaged by
prior decedent / donor, if any (Ist deduction)
= Initial basis

B. Vanishing / Alternating Deduction Or Property Previously Taxed 2. Initial basis divided by the value of the gross estate of present decedent X Expenses,
- an amount allowed to reduce the taxable estate of a decedent where the property was: and transfer for public purpose
a. received by him from prior decedent by gift, bequest, devise or inheritance, or =2nddeduction
b. transferred to him by gift, has been the object of previous transfer deduction.
3. Initial Basis
- VANISHING DEDUCTION: because the rate of deduction gradually diminishes and Less: 2nd deduction
entirely vanishes depending upon the time interval between the two (2) successive Final Basis
transfers. Multiplied by rate deduction (sec.86 (A.2), NIRC)
Vanishing Deduction
- ALTERNATING DEDUCTION: because the present decedents estate cannot claim it if
the prior decedents estate claimed it
C. Transfers For Public Use

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- Requisites:
1. The disposition must be testamentary in character.
2. To take effect after death.
3. In favor of the government of the Philippines, or any
political subdivision thereof.
4. Exclusively for public purpose.
5. Included in the gross estate
Query: If in a will the property was bequeathed to a city and an NGO, are the tax effects
the same? No.
a) City - included in the gross estate and claimed as deduction
b) NGO excluded from the gross estate and subject to the limitation that not more than
30% must be used for administrative purposes
D. Family Home
- Refers to the dwelling house, including the land on which it is situated, where the
husband and wife, or an unmarried person who is the head of the family and
members of their immediate family resides as certified 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 may constitute only one family home.
- The amount deductible is equivalent to the current fair market value of the
decedents family home if said current fair market value exceeds P1,000,000, the
excess shall be subject to estate tax.
- on top of other deductions, unlike the optional standard deduction which is in lieu of
other deductions; hence, it does not include the P 200,000 exemption
F. Medical Expenses
- Requisites:
a. Must be incurred by the decedent within one (1) year
prior to his death
b. Must be duly substantiated by receipts; and
c. Must not exceed P500, 000
*Opinion of JB: medical expense must be related to the cause of death as it is the estate
that is being settled. Otherwise, if not related, it is a personal expense.
G. Amounts Received By Heirs Under RA 4917 From The Decedents Employer
As A Consequence Of The Death Of The DecedentEmployee, Provided That
Such Amount Is Included In The Gross Estate Of The Decedent.
- retirement benefits
- Requisite: include in gross estate
H. NET SHARE OF THE SURVIVING SPOUSE IN THE CONJUGAL / COMMUNITY
PROPERTY.
- Requisite: Include the entire amount in the gross estate then deduct the share of the
surviving spouse
- Ex: H owns a car worth 1M and a house and lot worth 5M
W owns a truck worth 2M and jewelry worth 10M
H and W owns a conjugal lot worth 20M
H died.

- Requisites to be deductible: Gross estate of H:

a. The family home must be the actual residential home of the decedent and his family at Exclusive Conjugal
the time of his death. (Decedent is married and has dependents or is a head of family 5 M house and lot 20 M lot
with dependents.) 1M car _________ _______
b. Such fact must be certified by the Barangay Captain of the locality where the family is 6M 20 M
situated. Total gross estate = 26 M
c. The total value of the family home must be included in the gross estate of the
decedent. Then claim as deduction the 10M, which is the share of the surviving spouse in
d. The allowable deduction must be in an amount equivalent to the current fair market the conjugal lot.
value of the family home as declared or included in the gross estate not exceeding
P1, 000,000. - Ex: H and W died simultaneously. In computing the gross estate of H and W, their shares
shares as to the conjugal lot may immediately be split as there is no surviving spouse
E. Standard Deduction Of P1, 000,000.00 left.

I) Tax Credit For Estate Tax Paid To A Foreign Country

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- The estate tax imposed by the tax code shall be credited with the amount of any estate
tax paid to a foreign country.
- Concept: if a property located in the Philippines was already subjected to estate tax
abroad and the same property is also subjected to estate tax in the Philippines, the
foreign tax paid is allowed to reduce his Philippine estate tax
- Purpose: minimize the effect of international double taxation
- applicable only to residents and citizens, not to NRA since he is taxed only on his
properties within the Philippines; hence, the NRA will not be made to pay estate taxes
twice for his property located abroad = no international double taxation = no tax credit.
(Sec. 86 (E)(2))
The deductions allowed to citizens or residents of the Philippines are also
extended to a non-resident alien decedent with respect to his estates situated in the
Philippines at the time of his death.
In case of deductions for expenses, losses, indebtedness and taxes, the amount of
the allowable deduction is limited only to the proportion of such deductions with the
value of such part of his gross estate which at the time of his death, is situated in the
Philippines, bears to the value of his entire gross estate wherever situated. (Sec. 86 (B))
Formula:
Allowable deduction of non-resident estate =

- Requisites: Philippine Gross Estate x Deductions Claimed

1. Prove that the foreign estate tax has been paid Entire Gross estate
2. Prove reciprocity : that in the decedents foreign country, a similar tax credit is given
to Filipinos As a prerequisite to the deduction, it must be included in the return required to be
filed the value at the time of his death, of that part of the gross estate of the non-resident
Limitations on tax credit: not situated in the Philippines, to determine the ratable portion of the deduction for
A.)The tax credit limit for estate taxes paid to one foreign country is determined by the expenses allowable.
following:

TAX CREDIT LIMIT= Valuation of Property

The estate shall be appraised at its fair market value (FMV) at the time of death of the
Decedents Net Estate situated in a foreign country x Phil. Estate tax of the Entire net decedent (Sec.88, NIRC). This is regardless of any subsequent contingency affecting the
estate estate. (Lorenzo vs. Posadas, 64 Phil. 353)

B.) The tax credit limit for estate taxes paid to two or more countries is determined as 1. Real Property
follows: - higher amount of :
a) FMV as determined by the Commissioner
TAX CREDIT LIMIT = - This is the zonal value (of the land) as fixed by the CIR, and can be obtained from
the BIR website or regional office
Decedents net estate situated outside of the Phil X Phil. Estate tax of Entire net Estate
b) FMV fixed by the provincial or city assessor
Note: - This is the value as shown in the tax declaration of the property
1.) Under limitation A the allowable tax credit is the lower amount between the tax credit - Use this amount for real properties with no zonal values (i.e. real properties other
limit and the estate tax paid to the foreign country. than land such as buildings and improvements)

2.) Under limitation B the allowable tax credit is the lower amount between the tax credit * Note : The law does not state that the prevailing market rate or the consideration as a
limit computed under (A) and that computed under (B) basis for determining the FMV

B.) IF DECEDENT IS A NON RESIDENT ALIEN

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BARCOM2008-09 REVIEW NOTES FOR TAXATION 2 10

* Note: If there are no improvements in the property, get a Certificate of No-

improvement, (which you can get only after obtaining a Certificate of Non-tax Filing of Return and Payment of Tax
delinquency) and attach these to the estate tax return.
1.) By whom?
2. Personal Properties An estate tax return under oath is required by law to be filed by the executor,
a) Shares of Stock administrator, or any of the legal heirs:
- book or par value at the time of death, and can be obtained by writing a letter of
inquiry, asking for a formal certification from the corporation which issued the shares of a.) Where the gross value of the estate exceeds P200,000 though exempt from
stock as to the value of such stock at the time of death of the decedent the estate tax; or

b) Inventories
- value as stated in the invoices (i.e.: price at purchase); or the prevailing market rate
(ask for the value from those engaged in the same business); or if value cannot be
definitely ascertained, state the approximate reasonable value (but this will be subject to
the discretion of the BIR inspector)
c) Motor vehicles
- these depreciate 20% per year from purchase
- Hence, motor vehicles are fully liquidated and has no estate tax liability after 5 years
but include in the gross estate placing zero as the amount (to secure a tax clearance
therefor)
3. Right to Usufruct, use or habitation; or annuity
- probable life of the beneficiary shall be taken into account, in accordance with the latest
basic mortality table, to be approved by the Sec. of Finance, upon recommendation of the
Insurance Commissioner
Filing of Notice of Death
Where the gross value of the estate exceeds P 20,000 although exempt, the executor,
administrator, or any of the legal heirs shall give, within 2 months after the decedents
death or within like period after the executor or administrator qualifies as such, a written
notice thereof, to the Commissioner of Internal Revenue. (Sec. 89, NIRC)
b.) Regardless of the gross value of the estate, where the said estate consists of
registered or registrable real property, such as real property (land, bank
accounts, others with definite records), motor vehicle, shares of stock or other
similar property for which a clearance from the Bureau of Internal Revenue is
required as a condition precedent for the transfer of ownership thereof in the
name of the transferee.
2.) When to file?
The return shall be filed within 6 months from the decedents death.
The Commissioner shall have the authority to grant, in meritorious cases, a
reasonable extension not exceeding 30 days for filing the return.
3.) Where to file?
Except in cases where the Commissioner otherwise permits, the return shall be filed
with:
* if the decedent is a resident
a) an authorized agent bank
b) Revenue District Officer
c) Revenue Collection Officer
d) duly authorized treasurer of the city or municipality where the decedent was
domiciled at the time of his death, or

- Contents of the letter:

* if the decedent is a non-resident
1. The fact that the decedent died
a) with the Revenue District Office where his executor/administrator is registered
2. Residence of the decedent
b) with the Revenue District Office having jurisdiction over the residence of the
3. Date of death
executor/administrator
e) with the Office of the Commissioner if the decedent has no executor or
- Effect of failure to file notice: subject to penalty not lower than P1,000
administrator
* Note: Filing with the nearest Revenue District Office is sufficient compliance.
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BARCOM2008-09 REVIEW NOTES FOR TAXATION 2
4.) Copies:
The return shall be filed in triplicate, two (2) for the BIR and one (1) copy for the
taxpayer.
5.) When to Pay
Pay the estate tax at the time you will file your estate tax return. (Pay as you file
system)
6.) Extension for Payment:
- allowed in meritorious cases when the Commisioner finds that the payment of the
esate tax on the due date would impose undue hardships upon the estate or any
heir :
At most 2 years if estate extrajudicially settled
At most 5 years if estate judicially settled
- NOTE: The taxpayer must not be guilty of
a) negligence
b) intentional disregard of the rules and regulations, or
c) fraud
- the taxpayer may also be required to pay a bond not exceeding double the amount of
tax and with such sureties, as the Commissioner deems necessary
* Note: The filing of the estate tax return is not sufficient to obtain a tax clearance, the
administrator/executor/heir must submit additional documents to determine the
correctness of the values stated by him in the estate tax return.
- such as the title of the land, tax declaration of the land and its improvements or
Certificate of No-improvement, vicinity map to fix the exact location and zonal value, etc.
(Read: Revenue Memorandum Order 15-2003)
* Note: To avoid the imposition of penalties while there is no extra/judicial settlement
yet, any heir may file a sworn declaration to the BIR stating the fact of death, that the
estate has not yet been settled and the list of the properties included in the estate, as
basis for payment of estate tax.
If Gross Estate >2M, additional requirement:
- must submit a certificate of an independent CPA stating:
1. itemized assets of the decedent with corresponding gross value at the time of his
death;
or if NRA, that part of his gross estate situated in the Philippines
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2. itemized deductions from the gross estate
3. amount of tax due, whether paid or still due and outstanding
Liability for Payment of Estate Tax
Primarily Liable : Executor or administrator - before delivery to any beneficiary of his
distributive shares. After due payment, the executor or administrator shall be
discharged from personal liability.
Subsidiarily Liable : Beneficiary - to the extent of his distributive share, liable for the
portion of the estate tax as his distributive share bears to the value of the total net
estate.
NOTE: There are two ways the government may enforce collection of estate taxes from
the decedents heirs:
1. It can collect from all the heirs the amount of the estate tax proportionate to the
inheritance they received.
2. It can subject properties of the estate which are in the hands of the heirs/transferees
to the payment of the tax. (CIR vs. Pineda, 21 SCRA 105)
NOTE: The heirs have a solidary obligation to settle the estate. Hence, the BIR can
collect from or sue any of the heirs, but only up to the amount of that heirs share in the
hereditary estate. This is without prejudice to such heirs right of reimbursement from his
co-heirs of their share in the payment of the estate tax. (CIR vs. Pineda, 21 SCRA 105)
Measures to Insure Payment of Estate Tax
a. No judge shall authorize the executor or judicial administrator to deliver a
distributive share to any party interested in the estate unless a certification from the
Commissioner that the estate tax has been paid as shown. (Sec.94)
- by the court requiring the executor/administrator to submit an inventory of properties of
the estate, these properties are to be distributed only after payment of estate taxes and
receipt of clearance by the Commissioner or his duly authorized representative
- NOTE: The approval of the probate court is not required before estate taxes may be
collected. The enforcement and collection of taxes are executive in nature. (Marcos II vs.
CA, 273 SCRA 47)
b. Registers of Deeds shall not register in the Registry of Property any document
transferring real property any document transferring real property or real right therein or
any chattel mortgage, by way of gift inter vivos or mortis causa, legacy or inheritance,
unless certification from the commissioner that the tax has been paid and the y shall
BARCOM2008-09 REVIEW NOTES FOR TAXATION 2
immediately notify the Commissioner, Regional Director, Revenue District Officer, or
Revenue collection Officer or treasurer of the city or municipality where their officer are
located, of the non-payment of the tax discovered by them. (Sec. 95)
- before the properties are transferred in the name of the heirs, a Certificate Authorizing
Registration (CAR) must be shown
c. Any lawyer notary public, or any Government Officer who, by reason of his
official duties, intervenes in the preparation or acknowledgement of documents regarding
partition or disposal of donation inter vivos or mortis causa, legacy or inheritance, shall
have the duty of furnishing the Commissioner, etc., with copies of such documents and
any information whatsoever, which may facilitate the collection of the aforementioned
tax. (Sec. 95)
- ex: deed of extrajudicial settlement, deed of donation
d. Neither shall a debtor of a deceased pay his debts to the heirs, legatees,
executor or administrator of his creditor, unless a certification of the Commissioner that
the tax fixed has been paid is shown; but he may pay the executor or judicial
administrator without said certification if the credit is included in the inventory of the
estate of the deceased. (Sec. 95)
- else: debtor may be personally liable for the payment of the lost tax, like a withholding
agent who fails to withhold taxes
e. Corporations, sociedad anonima, partnerships, business or industry organized
in the Philippines shall not transfer in their books any shares obligations, bonds or rights
by way of gift inter vivos or mortis causa, legacy or inheritance to the new owner unless
a certification from the Commissioner that the taxes fixed and due thereon have been is
shown; (Sec. 97)
- obligation of corporate secretary
f. If a bank has knowledge of the death of a person who maintained a bank deposit
account alone or jointly with another, it shall not allow any withdrawal from the said joint
deposit account unless the Commissioner has certified that the estate taxes imposed
thereon have been paid. However, the administrator of the estate or any of the heirs of
the decedent may, upon authorization by the Commissioner of Internal Revenue
withdraw an amount not exceeding P 20,00 without the said certification . (Sec. 97)
- For this purpose, all withdrawal slips shall contain a statement to the effect that all of
the joint depositors are still living at the time of withdrawal by any one of the joint
depositors and such statement shall be under oath. Otherwise, the joint depositor will be
liable for perjury (Sec. 267).
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12
- joint accounts covered by this rule include and and and/or accounts, but do not
include an account subject to a Survivorship Agreement with a survivor-take-all feature
(because there is an automatic transfer of right to the survivor; hence, not included in
gross estate of the joint depositor who died tax avoidance scheme)
g. The estate tax together with interest, penalties, and costs that may accrue in
addition thereto constitutes a lien upon all property and rights to property belonging to
the taxpayer. The lien attaches when the taxpayer neglects or refuses to pay after
demand. (Sec. 219)
h. In judicial settlement of estates, the court is required to furnish the
commissioner of Internal Revenue a certified copy of the schedule of participation and
the court order approving the same within 30 days after its promulgation. (Sec. 91(b));
i. The estate tax shall be paid by the executor or administrator before delivery to
any beneficiary his distributive share of the estate (Sec. 91 (c)). He may be discharged
from personal liability for deficiency in the estate tax only after written application to the
commissioner and upon determination that no such deficiency appears. (Sec. 92)
NOTE: Additional Readings
1. Revenue Regulation 2-2003
2. Revenue Memorandum Order 15-2003
TAX TIPS: Avoidance of Estate Tax Liability
1. Maximize your claims for deductions such as the use of the transfers falling under the
exclusions from gross estate.
2. Donate properties to your relatives as the tax rates for donors taxes are lower than for
estate taxes.
3. Estate Planning (Section 40 (c), NIRC)
- execute a Deed of Exchange; the properties of at most 5 persons in exchange for
shares of stock in order to obtain control of the corporation (more than 51% ownership)
- this exchange is not taxable for income tax purposes
- more tax savings if real properties are exchanged
- the properties in the deed will no longer be part of the gross estate as it is now owned
by the corporation
- the stock shares will be included in the gross estate but the tax would be lower as the
value at time of death might still be the same original value at the time of exchange;
on the other hand, if there was no exchange the estate tax for the land would be
BARCOM2008-09 REVIEW NOTES FOR TAXATION 2 13

higher as the value of the land at time of death will be higher than at the time of the gift estate
acquisition.
II. DONORS TAX / GIFT TAX
4. Set up a living trust
- Trust: obligation imposed by a person regarding his A. NATURE
property - It is an excise (privilege) tax, imposed on the privilege of the donor to give or on the
- Create an irrevocable trust over your properties so that they will not form part of your privilege of the done to receive. It is not a tax on the property as such because its
gross estate when you die. This is because the Irrevocable Trust is a new taxpayer imposition does not rest upon general ownership.
created.
- Ex: grandfather (Grantor) during his lifetime would like to give certain properties to his - The tax is imposed without reference to the death of the donor unlike in the case of
grandchild. Until he reaches the age of maturity, the properties will be held in trust by X estate tax.
(trustee) for the grandchild (Beneficiary).
Donation / Gift
- an act of liberality whereby a person disposes gratuitously of a thing or right in favor of
another who accepts it.

- For tax purposes, the term has a much wider meaning, it includes:

a. any transfer in trust or otherwise, whether the gift is direct or indirect, and whether
the property is real or personal, tangible or intangible. (Sec. 98)
DISTINCTION BETWEEN DONORS AND ESTATE TAX
b. any transfer of property by gift, except in forced sales and in the sale of real
DONORS TAX ESTATE TAX property which is a capital asset, for less than and adequate and full consideration
Tax on the privilege to Tax on the privilege to in money or moneys worth. (Sec. 100)
transmit property transmit property upon
during the lifetime of ones death c. Condonation or remission of debt, where the creditor merely desires to benefit a
the donor debtor and without any consideration therefore cancels the debt.
Tax rates are lower (2 Tax rates are higher (5
to 15) to20) Requisites Of A Taxable Gift:
Exemption is only P Tax exemption is 1.) CAPACITY of the donor to make the donation;
100,000.00 P200,000.00 2.) DONATIVE INTENT or INTENT on the part of the donor to make a gift;
Notice of donation is Notice of death is 3.) DELIVERY, whether actual or constructive, of the gift; and
generally not required required 4.) ACCEPTANCE of the gift by the donee.

Extension of payment Extension of payment Note:

is not provided may be granted by the A. The donee, unlike the donor need not be capacitated.
Commissioner of B. donors tax applies now to both natural and juridical
Internal Revenue persons.
Payable within 30 days Payable within 6 C. donative intent must be present in direct gift but with respect to indirect gift, e.g.
from the date of gift months from the date transfer of property for less than an adequate and full consideration, donative intent is
of death superfluous. Thus, donative intent is not always essential to constitute a gift.
Imposed on the net Imposed on the net
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BARCOM2008-09 REVIEW NOTES FOR TAXATION 2
D. In Abello vs. CIR (Feb. 25, 2005), donative intent is evidenced by a reduction of
patrimony of one and an increase in patrimony to the other.
Purposes Of Gift Tax
1.) The gift tax was enacted originally to supplement the estate and inheritance taxes
by preventing their avoidance through the taxation of gifts inter vivos.
2.) The donors tax is also intended to prevent the avoidance of income tax through
the device of splitting income among numerous/different donees with the donor
thereby escaping the effect of the progressive rates of income taxation.
Kinds Of Gift Taxes:
1. Donors tax or tax levied on the act of giving; it supplements the estate tax; and
2. Donees tax or tax levied on the act of receiving; it was formerly the counterpart
of the inheritance tax, which has been integrated into an estate tax.
*Both taxes have now been integrated into a donors tax.
Parties To A Donation:
1. Donor - the Person who disposes of his property or right.
2. Donee - the Person who receives the property or right.
Properties Included In The Term Gift
(A). In the case of resident citizens, non-resident citizens and resident aliens:
1. Real property within and without the Philippines.
2. Tangible personal property within and without the Philippines; and
3. Intangible personal property within and without the Philippines.
(B.) In the case of non-resident aliens:
1. Real property within the Philippines.
2. Tangible personal property within the Philippines.
3. Intangible personal property within the Philippines, unless there is reciprocity in
which case, it is not taxable.
Note:
The specific items includible in the gross estate are applicable to and are embraced
by the term gift.
B. FACTORS AFFECTING LIABILITY FOR GIFT TAXES
1. Relationship of the donor and the donee
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14
a) when the donee is considered a stranger to the
donor, the donors tax shall be 30% of the net gifts.
b) when the donee is a relative of the donor, the tax
shall be based on the 2-15% table under Sec. 99(A).
Stranger
1.) one who is not a :
(a) brother/sister (whole or half blood), spouse,
ancestor and lineal descendant
(b) relative by consanguinity in the collateral line
within the fourth degree of relationship
2.) donations made between individuals and business
organizations are considered donations to
strangers
3.) donations made between business organizations
are considered donations made to strangers
(RR 2-2003)
Note: Donees who have no blood relation to the donor are considered strangers to the
donor, such as those made to ones in-laws or to juridical persons.
2. Value of the Gift
- the higher the value of the gift, the higher the gift taxes
C. DEDUCTIONS / EXEMPTIONS FROM GIFT TAX
1. Gifts Made by a Resident:
a.) Dowries or gifts made on account of marriage before its celebration or within one year
thereafter by parents to each of their legitimate, illegitimate or adopted children to the
extent of the first P10,000.00.
Requisites:
1. The donation must be given on account of marriage.
2. The parent must give it to his child.
3. The child must be either the legitimate, recognized natural or legally adopted
child of the donor, and;
4. It must be given before or one year after the celebration of the marriage.
b.) Gifts made to or for the use of the National Government or any of its agencies which
is not conducted for profit, or to any political subdivision of the said government.
BARCOM2008-09 REVIEW NOTES FOR TAXATION 2
c.) Gifts in favor of educational, charitable, religious, cultural or social welfare
corporation, institutions, foundations, trust or philanthropic organization, research
institution or organization, or accredited non-government organization. Provided, that no
more than 30% of said gifts shall be used by such donee for administration purposes.
Note:
For purposes of exemption, a non-profit educational and/or charitable corporation,
institution, accredited non-government organization, trust or philanthropic
organization is defined as:
school, trust or university and/ or charitable corporation, foundation trust or
philanthropic organization and/ or research institution or organization incorporated
as a non-stock entity:
paying no dividends.
governed by trustees who receive no compensation; and
devoting all its income to the accomplishment and promotion of the purposes
enumerated in its articles of incorporation.
Note:
Only donations made to non-stock, non-profit educational institutions are exempt from
gift taxes as although Article 14 of the Constitution states that proprietary educational
institutions may be given the same privileges subject to a guideline; as a guideline, the
NIRC does not provide for such exemption to them.
2. Gifts made by a Non-Resident Alien
a.) Gifts made to or for the use of the National Government or any entity created by of
its agencies which is not conducted for profit, or to any political subdivision of the
said government.
b.) Gifts in favor of educational, charitable, religious, cultural or social welfare
corporation, institution, foundations trust or philanthropic organization, research
organization or institution; Provided, that no more than 30% of said gifts shall be
used by such donee for administration purposes.
Note: doesnt include accredited NGO
Note:
1. Intangible personal property in the gross gift of a NON-RESIDENT ALIEN donor shall be
taxable in the Philippines, if the PRINCIPLE OF RECIPROCITY is not cognizable.
2. Intangible personal properties considered situated in the Philippines.
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15
Franchise which must be exercised in the Philippines
Shares of stocks issued by any corporation or sociedad anonima organized or
constituted in the Philippines in accordance with its laws.
Shares of stocks issued by any foreign corporation 85% of the business of which is
situated in the Philippines.
Shares of stock issued by a foreign corporation, if such shares, obligations, or
bonds, have acquired a business situs in the Philippines; and
Shares or rights in any partnership, business or industry established in the
Philippines.
D. TAX TREATMENT OF PROPERTIES TRANSFERRED FOR LESS THAN FULL /
ADEQUATE CONSIDERATION
General Rule: The amount by which the FMV of the property exceeded the value of the
consideration shall be deemed a gift
Exception: real properties classified as capital assets (not used in business) as there were
already subjected to Capital Gains Tax
E. TAX TREATMENT OF POLITICAL CONTRIBUTIONS
- any contribution in cash or in kind to any candidate, political party or coalition of parties
for campaign purposes shall be governed by the Election Code; hence, this is not subject
to gift tax (report to COMELEC?)
F. TAX CREDIT FOR DONORS TAXES PAID TO A FOREIGN COUNTRY
1. Donor was a Filipino citizen or resident alien, at the time of foreign donation
2. Donors taxes of any character and description are imposed and paid by the authority
of a foreign country.
Limitations:
A.) For donors tax paid to one foreign country;
BARCOM2008-09 REVIEW NOTES FOR TAXATION 2
The amount of tax credit in respect to the tax paid to any country shall not exceed
the same proportion of the tax against which credit is taken which the net gifts
situated within such country taxable under the National Internal Revenue Code bears
to his entire net gift, and
B.) For donors tax paid to two or more foreign countries:
The total amount of the credit shall not exceed the same proportion of the tax
against which such credit is taken, which the donors net gift situated outside the
Philippines taxable under the National Internal Revenue Code bears to his entire net
gift.
Formula:
1. Donors Tax Paid to 1 Foreign Country
Tax Credit Limit =
Net gift situated in a foreign country X Phil. Donors Tax
Entire net gifts
2. Donors Taxes paid to 2 or more Foreign Countries
Tax Credit Limit =
Net gifts outside the Philippines X Phil. Donors Tax
Entire net gifts
Note:
Under limitation A the allowable tax credit limit is the LOWER AMOUNT between
the tax credit limit and the gift tax paid to the foreign country.
Under limitation B the allowable tax credit is the LOWER AMOUNT between the tax
credits; limit computed under A and that computed Under B.
Note: Void Donations Are Not Subject To Donors Tax
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16
Such as:
Between husband and wife, even if the relationship has not been solemnized.
Between persons guilty of adultery or concubinage.
Between those found guilty of the same criminal offenses.
Between those made to a public officer or his wife, descendants, ascendants by
reason of his office.
Note: Effects Of General And Specific Renunciation
- An heirs general renunciation of inheritance in favor of a co-heir is not subject to
donors tax, but if it is specifically renounced in favor of a co-heir to the exclusion of
others, it shall be subject to donors tax.
Note: Renunciation of a surviving spouse of his/her share in the conjugal
partnership or absolute community after dissolution of marriage
- whether made in favor of the heirs of the deceased spouse or in favor of a third person,
the same is subject to donors tax
G. NET GIFT
- the total amount of gifts less the allowable deductions and specific exemptions.
- the total net gifts made during the SAME calendar year is used as basis for computing
the donors tax
H. VALUATION
- the gift tax is based on the fair market value of the gift at the time it was given
I. LAW APPLICABLE
- the law in force at the time of the perfection / completion of the donation shall govern
the imposition of donors tax. A donation is considered as completed FOR TAX PURPOSES
at the time the donee accepts the gift.
J. ADMINISTRATIVE PROVISIONS
1. Filing of notice of donation
General Rule: Filing of notice of donation is not required
Exception: if the donor wishes to claim exemption from tax and the donee is an
organization under Sec.101(A3) and Sec. 101 (B2)
Requisites to be exempt from gift tax :
1. Donor is engaged in business
BARCOM2008-09 REVIEW NOTES FOR TAXATION 2 17

2. Donee is any of the organizations mentioned under Sec. 101(A3) and Sec. 101 (B2) - Yes, provided these were made on account of marriage, before the marriage or 1 year
3. Donor must give notice to the RDO on every donation worth at least P50,000. thereafter.
4. The notice must be given within 30 days from the issuance by the donee of a
Certificate of Donation. 2. January - A married B and was given dowry
5. The certificate of Donation must be attached to the notice. February B died
2. Filing of Donors Tax Return December A married C and was given dowry
- within 30 days after the completion of the gift Can the parents of A still claim dowry deduction even if it was claimed already for the
- donation is completed FOR TAX PURPOSES at the time the donee accepts the gift January dowry?
- Contents:
1. Gifts made during the calendar year - There is no rule on the matter yet but it is submitted that as it was made on account of
2. Deductions claimed and allowed
3. Previous net gifts made during the year 2 different marriages, the deduction for the December dowry may be made.
4. Name of the done
5. Relationship of the donor and the done 3. A and C are the children of H and W
6. Other information as may be required January - A married B, given dowry
February C married D, given dowry
3. Payment of Donors Tax
Can H and W claim dowry deduction for both?
- pay as you file the tax return
-Yes, as the dowries were given to different children
- Note: if the donors tax was paid for the transfer, there is no more need to subject the
transfer again to estate tax. Applying the Back Tax Theory, there is no tax that remained
4. H and W jointly donated to their child A 1M on account of his marriage to B. Show
unpaid regarding this transfer.
computation.
4. Extensions For Payment Of Donors Tax
For each of H and W the computation is:
- the NIRC does not provide for any extension for payment of gift tax, as it is presumed
500,000 to A 250,000
that if you can donate, you still have sufficient properties to pay for the tax. Unlike in
- to B 250,000
estate tax where extension is granted, because the payment of the tax may cause
undue hardship on the heirs specifically for non-liquid properties which requires time to
A B
be sold first to be converted into cash for payment of the estate tax.
250,000 250,000
-10,000 _______
TAX TIPS : Avoidance of Gift Taxes
240,000 250,000
Execute a Deed of Extra-judicial Settlement with simultaneous general renunciation of all
*2 to 15% * 30%
inheritance
3, 600 75,000
(by operation of law, the renounced inheritance will go to the co-heirs anyway).
Note: Do not deduct the first 100,000 in case of donee-relatives as this is incorporated
PROBLEMS ON DOWRY DEDUCTION
already in the table under Section 99.
1. A is the child of H and W
January A got married, H and W gave him P2,000
General Rule: H and W are considered separate and distinct taxpayers for purposes of
March H and W gave A P2,000
donors tax.
April H and W gave A another P2,000
Exception: What was donated is a conjugal property and only H signed. There is only one
Can the parents claim dowry deduction even if these were made on a staggered basis?
donor, without prejudice to the right of W to question the validity of the donation
without her consent.
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BARCOM2008-09 REVIEW NOTES FOR TAXATION 2 18

PROBLEMS A. Value Added Tax

1. Donations made by X - Indirect Tax
January 300,000 to his brother - It is not the tax itself which is shifted or passed but it is the
April 400,000 to his sister burden to pay the tax
August 500,000 to his mother Why? Tax is Personal. Seller is still liable, only that
the economic burden is shouldered by the buyer.
Compute donors tax:
a) For January donation
= 300,000 * (percentage in the 2 to 15% table) = tax B. Transactions Subject to VAT (ISBEL)
b) For April Donation a. Importation whether or not in the regular course of
= (300,000 + 400,000) * (2 to 15% table) = tax business
c) For August Donation b. Sale conducted in the
= (300,000 + 400,000 + 700,000) * (2 to 15% table) c. Barter regular course
= tax less tax paid for January and April d. Exchange of business
2. X wants to give Y 200,000, will there be tax savings to X if he will donate one time the e. Lease
amount of 200,000 or should he split by donating 100,000 on December 2007 and
100,000 on January 2008? * The phrase in the course of business means the regular conduct or pursuit of a commercial
or an economic activity, including transactions incidental thereto, by any person regardless of
- It depends if X and Y are relative or not. whether or not the person engaged therein is a non-stock, non-profit private organization
(irrespective of the disposition of its net income and whether or not it sells exclusively to
a) relatives yes, there will be savings as under the table in Section 99, the first 100,000 members or their guests), or government entity.
is exempt from Donors tax. No donors tax will then be paid for both donations.
* VAT becomes due when the following conditioned concur:
b) strangers nom there will be no tax savings. A flat rate if 30% is imposed on donations
made between strangers; hence, the same amount of P60,000 donors tax will be paid a. There is sale, barter, exchange, transfer or similar transactions, either for nominal or
whether made one time or split. valuable consideration, intended to transfer ownership of, or title to, articles imported,
milled, produced or manufactured; and
3. X died and left 1M each to his heirs A, B, C. The heirs agreed to settle extrajudicially.
b. The sale is consummated, not merely perfected, in the Philippines. The place where
a) A renounced his inheritance in favor of B. Is there liability for donors tax? the title to the thing passes determines the place of delivery or tax situs.

- Yes, this is a case of waiver. A is deemed to have accepted the property before he gave C. Specific Characteristics of VAT
it to B as one cannot give what one does not own. A specific renunciation is taxable.
a. Consumption Based Tax
b) A renounced his share without specifying a co-heir who will receive the same. Is there - the person who last consumes the product absorbs the effect of VAT
liability for donors tax?
1. Destination Principle
- No donors tax because as if A never inherited anything from X and the transfer was - Goods are destined to be consumed in the Philippines
made directly from X to B and C.
2. Cross-border principle
- Goods going out of the Philippines shall not be subjected to tax since these
VALUE ADDED TAX goods are not destined to be consumed in the Phils.
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BARCOM2008-09 REVIEW NOTES FOR TAXATION 2 19

*VAT is imposed only on whatever value was added.
D. Exempt Transactions (Sec. 109, NIRC, as amended by RA 9337)
E. Zero rating vs. Exemption
a. A zero-rated scale is taxable transaction, but does not result in an output tax
while an exempted transaction is not subject to the output tax;
b. The input VAT on the purchases of VAT-registered person with zero-rated sales
may be allowed as tax credits or refunded while the seller in an exempt
transaction is not entitled to any input tax on his purchases despite the issuance
of a VAT invoice or receipt; and
c. Persons engaged in transactions which are zero-rated, being subject to VAT, are
required to register while registration is option for VAT-exempt persons.
F. Tax Credits
a. Transitional Input Tax Credits (Sec. 111(A), NIRC, as amended by RA 9337)
b. Presumptive Input Tax Credits (Sec. 111(B), NIRC, as amended by RA 9337)
TAX ADMINISTRATION AND ENFORCEMENT
- The Bureau of Internal Revenue shall be under the supervision and control
of the Department of Finance and its powers and duties shall comprehend
the assessment and collection of all national internal revenue taxes, fees,
and charges, and the enforcement of all forfeitures, penalties, and fines
connected therewith, including the execution of judgments in all cases
decided in its favor by the Court of Tax Appeals and the ordinary courts.
The Bureau shall give effect to and administer the supervisory and police
powers conferred to it by this Code or other laws. (Sec. 2, NIRC)
ii. Specific
1. Interpret tax laws and decide cases (Sec.4, NIRC)
- The power to interpret the provisions of this Code and other tax laws
shall be under the exclusive and original jurisdiction of the Commissioner,
subject to review by the Secretary of Finance.
The power to decide disputed assessments, refunds of internal revenue
taxes, fees or other charges, penalties imposed in relation thereto, or other
matters arising under this Code or other laws or portions thereof
administered by the Bureau of Internal Revenue is vested in the
Commissioner, subject to the exclusive appellate jurisdiction of the Court
of Tax Appeals.

A. Tax Administration: Its general concepts a. BIR Issuances and rules relevant thereto
- is the power of the Bureau of Internal Revenue (BIR) to enforced and
administer taxes.
The power to issue regulations is expressly conferred in the Tax
B. Government agencies involved in tax administration Code. Thus, the Secretary of Finance, upon the recommendation of
- the BIR and Bureau of Customs are tasked to implement revenues laws as the Commissioner, shall promulgate all needful rules and
the case may be. regulations for the effective enforcement of the provisions of the
Tax Code. (see Sec.244, NIRC). The rules and regulations of the
Bureau shall contain, among others, provisions specifying,
C. The Bureau of Internal Revenue prescribing or defining the time and manner of canvassing revenue
regions, form of labels, conditions to be observed by revenue
a. Composition Functions officers respecting the institutions and conduct of legal actions. (see
- The Bureau of Internal Revenue shall have a chief to be known as Sec.245, NIRC)
Commissioner of Internal Revenue, hereinafter referred to as the
Commissioner and four (4) assistant chiefs to be known as Deputy
Commissioners. (Sec. 3, NIRC) - the Bureau has the power to issue rules and issuances as the case may
be but subject to the following rule:
b. Powers and Duties
i. In general SEC. 246. Non-Retroactivity of Rulings. - Any revocation, modification
or reversal of any of the rules and regulations promulgated in accordance with the
BAR OPERATIONS COMMITTEE
BARCOM2008-09 REVIEW NOTES FOR TAXATION 2
preceding Sections or any of the rulings or circulars promulgated by the
Commissioner shall not be given retroactive application if the revocation,
modification or reversal will be prejudicial to the taxpayers, except in the following
cases:
(a) Where the taxpayer deliberately misstates or omits material facts from his
return or any document required of him by the Bureau of Internal Revenue;
(b) Where the facts subsequently gathered by the Bureau of Internal Revenue are
materially different from the facts on which the ruling is based; or
(c) Where the taxpayer acted in bad faith.
2. Examination of Books of Accounts (Sec. 5, NIRC)
- the Bureau has the power to examine books of accounts of every person
(taxpayer) engaged in a business
a. however before a tax official could inquire into said books of
accounts a letter of authority is required.
b. What is third-party verification rule?
- In ascertaining the correctness of any return, or in making a return when
none has been made, or in determining the liability of any person for any
internal revenue tax, or in collecting any such liability, or in evaluating tax
compliance, the Commissioner is authorized to obtain on a regular basis from
any person other than the person whose internal revenue tax liability is
subject to audit or investigation, or from any office or officer of the national
and local governments, government agencies and instrumentalities, including
the Bangko Sentral ng Pilipinas and government-owned or -controlled
corporations, any information such as, but not limited to, costs and volume of
production, receipts or sales and gross incomes of taxpayers, and the names,
addresses, and financial statements of corporations, mutual fund companies,
insurance companies, regional operating headquarters of multinational
companies, joint accounts, associations, joint ventures of consortia and
registered partnerships, and their members;
c. Inquiry into bank deposits (Sec 6 {f}), NIRC)
General Rule:
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20
The Bureau of Internal Revenue has no power to inquire into the bank
deposits of a person or taxpayer.
Exceptions:
Notwithstanding any contrary provision of Republic Act No. 1405 and other
general or special laws, 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 on his claim that his financial position demonstrates a clear inability to pay the
tax assessed, his application shall not be considered unless and until he waives in writing
his privilege under Republic Act No. 1405 or under other general or special laws, and
such waiver shall constitute the authority of the Commissioner to inquire into the bank
deposits of the taxpayer.
Such limited power of the Commissioner does not conflict with R.A 1405 or the
Secrecy of Bank Deposits Law because the provisions of the Tax Code granting this power
are an exception to the said legislation.
If the bank has knowledge of the death of a person, who maintained a bank
deposit account either alone or jointly with another, it shall not allow any withdrawal from
the said deposit account, unless the Commissioner has certified that the transfer taxes
imposed thereon have been paid. However the administrator of the estate or any one of
the heirs of the decedent may, upon authorization by the Commissioner, withdraw an
amount not exceeding twenty thousand pesos (P20, 000.00) without the certification. For
this purpose all withdrawal slips shall contain a statement to the effect that all of the joint
depositors are still living at the time of withdrawal by any one of the joint depositors and
such statement shall be under oath by the said depositors.
d. Summons persons, take testimony
In ascertaining the correctness of any return, or in making a return when none has
been made, or in determining the liability of any person for any internal revenue tax, or
in collecting any such liability, or in evaluating tax compliance, the Commissioner is
authorized:
BARCOM2008-09 REVIEW NOTES FOR TAXATION 2
1. To summon the person liable for tax or required to file a return, or any officer or
employee of such person, or any person having possession, custody, or care of the books
of accounts and other accounting records containing entries relating to the business of
the person liable for tax, or any other person, to appear before the Commissioner or his
duly authorized representative at a time and place specified in the summons and to
produce such books, papers, records, or other data, and to give testimony (Sec.5 {c},
NIRC)
2. To take such testimony of the person concerned, under oath, as may be
relevant or material to such inquiry (Sec.5 {d}, NIRC)
- To summon the person liable for tax or required to file a return, or any
officer or employee of such person, or any person having possession, custody, or care of
the books of accounts and other accounting records containing entries relating to the
business of the person liable for tax, or any other person, to appear before the
Commissioner or his duly authorized representative at a time and place specified in the
summons and to produce such books, papers, records, or other data, and to give
testimony.
3. Power to assess and prescribe requirements for tax administration
a. Power to examine returns (Sec. 6 {a}, NIRC)
- After a return has been filed as required under the provisions of this
Code, the Commissioner or his duly authorized representative may
authorize the examination of any taxpayer and the assessment of the
correct amount of tax: Provided, however; That failure to file a return shall
not prevent the Commissioner from authorizing the examination of any
taxpayer.
Any return, statement of declaration filed in any office authorized to
receive the same shall not be withdrawn: Provided, That within three (3)
years from the date of such filing, the same may be modified, changed, or
amended: Provided, further, That no notice for audit or investigation of
such return, statement or declaration has in the meantime been actually
served upon the taxpayer.
i. Amendment of Returns
When a report required by law as a basis for the assessment of any
national internal revenue tax shall not be forthcoming within the time fixed
by laws or rules and regulations or when there is reason to believe that any
such report is false, incomplete or erroneous, the Commissioner shall
assess the proper tax on the best evidence obtainable.
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In case a person fails to file a required return or other document at
the time prescribed by law, or willfully or otherwise files a false or
fraudulent return or other document, the Commissioner shall make or
amend the return from his own knowledge and from such information as
he can obtain through testimony or otherwise, which shall be prima facie
correct and sufficient for all legal purposes. (Sec. 6 {b}, NIRC)
ii. Rule on confidentiality of tax returns and exceptions thereto
(Sec.71 and 270, NIRC)
- After the assessment shall have been made, as provided in this
Title, the returns, together with any corrections thereof which may have
been made by the Commissioner, shall be filed in the Office of the
Commissioner and shall constitute public records and be open to
inspection as such upon the order of the President of the Philippines, under
rules and regulations to be prescribed by the Secretary of Finance, upon
recommendation of the Commissioner.
The Commissioner may, in each year, cause to be prepared and
published in any newspaper the lists containing the names and addresses
of persons who have filed income tax returns. (see Sec.71, NIRC)
Any internal revenue officer who is or shall become interested,
directly or indirectly, in the manufacture, sale or importation of any article
subject to excise tax under Title VI of this Code or in the manufacture or
repair or sale, of any die for printing, or making of stamps, or labels shall
upon conviction for each act or omission, be punished by a fine of not less
than Five thousand pesos (P5,000) but not more than Ten thousand pesos
(P10,000), or suffer imprisonment of not less than two (2) years and one
(1) day but not more than four (4) years, or both. (see Sec.270, NIRC)
b. Power to make a returns (Sec.6 {b}, NIRC)
What is Best Evidence Obtainable Rule?
- In case a person fails to file a required return or other document at the
time prescribed by law, or willfully or otherwise files a false or fraudulent
return or other document, the Commissioner shall make or amend the
return from his own knowledge and from such information as he can
BARCOM2008-09 REVIEW NOTES FOR TAXATION 2
obtain through testimony or otherwise, which shall be prima facie correct
and sufficient for all legal purposes.
c. Power to conduct inventory taking, surveillance and to issue
presumptive gross sales/receipts (see Sec.6 {c}, NIRC)
- The Commissioner may, at any time during the taxable year, order
inventory-taking of goods of any taxpayer as a basis for determining his internal
revenue tax liabilities, or may place the business operations of any person,
natural or juridical, under observation or surveillance if there is reason to believe
that such person is not declaring his correct income, sales or receipts for internal
revenue tax purposes. The findings may be used as the basis for assessing the
taxes for the other months or quarters of the same or different taxable years and
such assessment shall be deemed prima facie correct.
When it is found that a person has failed to issue receipts and invoices in
violation of the requirements of Sections 113 and 237 of the Tax Code, or when
there is reason to believe that the books of accounts or other records do not
correctly reflect the declarations made or to be made in a return required to be
filed under the provisions of this Code, the Commissioner, after taking into
account the sales, receipts, income or other taxable base of other persons
engaged in similar businesses under similar situations or circumstances or after
considering other relevant information may prescribe a minimum amount of such
gross receipts, sales and taxable base, and such amount so prescribed shall be
prima facie correct for purposes of determining the internal revenue tax liabilities
of such person.
d. Power to terminate tax period (see Sec. 6 {d}), NIRC)
- When it shall come to the knowledge of the Commissioner that a taxpayer
is retiring from business subject to tax, or is intending to leave the
Philippines or to remove his property therefore or to hide or conceal his
property, or is performing any act tending to obstruct the proceedings for
the collection of the tax for the past or current quarter or year or to
render the same totally or partly ineffective unless such proceedings are
begun immediately, the Commissioner shall declare the tax period of
such taxpayer terminated at any time and shall send the taxpayer a
notice of such decision, together with a request for the immediate
payment of the tax for the period so declared terminated and the tax for
the preceding year or quarter, or such portion thereof as may be unpaid,
and said taxes shall be due and payable immediately and shall be subject
to all the penalties hereafter prescribed, unless paid within the time fixed
in the demand made by the Commissioner.
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- the BIR has the power to terminate tax period under the following
instances:
when the taxpayer conceals his properties with the intention to evade
taxes
when the taxpayer is leaving the Philippines with the intention to
evade taxes
when the taxpayer is obstructing proceedings for the collection of
taxes
when the taxpayer is removing properties with the intention of
evading taxes
when the taxpayer is retiring form business
e. Power to fix real property values (see Sec.6 {e}, NIRC)
- The Commissioner is authorized to divide the Philippines into different
zones or areas and shall, upon consultation with competent appraisers
both from the private and public sectors, determine the fair market value
of real properties located in each zone or area. For purposes of computing
any internal revenue tax, the value of the property shall be whichever the
higher is of:
(1) The fair market value as determined by the Commissioner, or
(2) The fair market value as shown in the schedule of values of the
Provincial and City Assessors.
f. Power to accredit tax agents (see Sec.6 {g}, NIRC)
- The Commissioner shall accredit and register, based on their professional
competence, integrity and moral fitness, individuals and general
professional partnerships and their representatives who prepare and file
tax returns, statements, reports, protests, and other papers with or who
appear before, the Bureau for taxpayers. Within one hundred twenty
(120) days from January 1, 1998, the Commissioner shall create national
and regional accreditation boards, the members of which shall serve for
three (3) years, and shall designate from among the senior officials of the
Bureau, one (1) chairman and two (2) members for each board, subject to
such rules and regulations as the Secretary of Finance shall promulgate
upon the recommendation of the Commissioner.
Individuals and general professional partnerships and their
representatives who are denied accreditation by the Commissioner and/or
BARCOM2008-09 REVIEW NOTES FOR TAXATION 2
the national and regional accreditation boards may appeal such denial to
the Secretary of Finance, who shall rule on the appeal within sixty (60)
days from receipt of such appeal. Failure of the Secretary of Finance to
rule on the Appeal within the prescribed period shall be deemed as
approval of the application for accreditation of the appellant.
g. Power to prescribe procedural/documentary requirements
- the BIR has the power to prescribe the manner of filing of a returns
h. Power to delegate (see Sec.7, NIRC)
- The Commissioner may delegate the powers vested in him under the
pertinent provisions of the Tax Code to any or such subordinate officials
with the rank equivalent to a division chief or higher, subject to such
limitations and restrictions as may be imposed under rules and
regulations to be promulgated by the Secretary of finance, upon
recommendation of the Commissioner: Provided, however, That the
following powers of the Commissioner shall not be delegated:
(a) The power to recommend the promulgation of rules and regulations by
the Secretary of Finance;
(b) The power to issue rulings of first impression or to reverse, revoke or
modify any existing ruling of the Bureau;
(c) The power to compromise or abate, under Sec. 204 (A) and (B) of this
Code, any tax liability: Provided, however, That assessments issued by the
regional offices involving basic deficiency taxes of Five hundred thousand
pesos (P500,000) or less, and minor criminal violations, as may be
determined by rules and regulations to be promulgated by the Secretary of
finance, upon recommendation of the Commissioner, discovered by
regional and district officials, may be compromised by a regional
evaluation board which shall be composed of the Regional Director as
Chairman, the Assistant Regional Director, the heads of the Legal,
Assessment and Collection Divisions and the Revenue District Officer
having jurisdiction over the taxpayer, as members;
(d) The power to assign or reassign internal revenue officers to
establishments where articles subject to excise tax are produced or kept.
i. Non-delegable powers in relation to Section 16 of NIRC
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- the following are the powers which the Bureau of Internal Revenue cannot
delegate:
a. the power to compromise
- as a general rule the power of the BIR to compromise cannot be
delegated to other administrative agencies unless in the following
grounds:
1. a reasonable doubt as to the validity of the claim against
the taxpayer exists
2. financial inability to pay
The compromise settlement of any tax liability shall be subject to the following
minimum accounts:
a. For cases of financial inability to pay, a minimum compromise rate
equivalent to ten per cent (10%) of the basic tax assessed
b. For other cases, a minimum compromise rate equivalent to forty percent
(40%) of the basic tax assessed.
Where the basic tax involved exceeds One million pesos (P 1,000,000.00) or
where the settlement offered is less than the prescribed minimum rates, the
compromise shall be subject to the approval of the Evaluation Board which shall
be composed of the Commissioner and the Deputy Commissioners.
All criminal violations may be compromised except those
a. those already filed in court
b. those involving fraud (see Sec. 204 {a}, NIRC)
The taxpayers offer to compromise shall not be considered, unless and
until he waives in writing his privilege under RA 1405 or under other
general or special laws, and such waiver shall constitute the authority of
the Commissioner to inquire into his bank deposits. (see Sec. 6 {f}, NIRC)
b. power to abate
The BIR may abate or cancel tax liability when:
a. the tax or any portion thereof appears to be unjustly or
excessively assessed
BARCOM2008-09 REVIEW NOTES FOR TAXATION 2
b. the administration and collection costs involved do not justify
the collection of the amount due
The power to compromise or abate shall not be delegated by the Commissioner,
except in the following cases;
a. assessments issued by the regional offices involving basic taxes
of
P 500,000.00 or less
b. Minor criminal violations. These cases may be compromised by
the regional evaluation board. (see Sec.7, NIRC)
i. Enforcement of police power (see Sec.15, NIRC)
The Commissioner, the Deputy Commissioners, the Revenue Regional Directors,
the Revenue District Officers and other internal revenue officers shall have
authority to make arrests and seizures for the violation of any penal law, rule or
regulation administered by the Bureau of Internal Revenue. Any person so
arrested shall be forthwith brought before a court, there to be dealt with according
to law.
j. Authority to Abate and Compromise Tax Liabilities (see Sec.6 {f}{2},
204 in relation to Rev. Regs.30-2002 as amended by RR No.8-2004)
SEC. 204. Authority of the Commissioner to Compromise, Abate and
Refund or Credit Taxes. - The Commissioner may -
(A) Compromise the Payment of any Internal Revenue Tax, when:
(1) A reasonable doubt as to the validity of the claim against the taxpayer
exists; or
(2) The financial position of the taxpayer demonstrates a clear inability to
pay the assessed tax.
The compromise settlement of any tax liability shall be subject to the
following minimum amounts:
For cases of financial incapacity, a minimum compromise rate
equivalent to ten percent (10%) of the basic assessed tax; and
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For other cases, a minimum compromise rate
equivalent to forty percent (40%) of the basic assessed tax.
Where the basic tax involved exceeds One million pesos (P1,000.000) or where the
settlement offered is less than the prescribed minimum rates, the compromise shall be
subject to the approval of the Evaluation Board which shall be composed of the
Commissioner and the four (4) Deputy Commissioners.
(B) Abate or Cancel a Tax Liability, when:
(1) The tax or any portion thereof appears to be unjustly or excessively
assessed; or
(2) The administration and collection costs involved do not justify the
collection of the
amount due.
All criminal violations may be compromised except: (a) those already filed
in court, or (b) those involving fraud.
D. The rule on estoppel in relation to tax administration
a. Against the government
The error made by a tax official in the assessment of his tax liabilities does not have the
effect of relieving the taxpayer from the obligation to pay the full amount of his tax
liability, for taxes are fixed by law and the government is never estopped to collect the
legitimate taxes because of the errors committed by its agents. However, like other
principles, the principle of estoppel also admits exceptions in the interest of justice and
fair play. The Commissioner is precluded from adopting a position inconsistent with one
previously taken where in justice would result therefore or where there has been a
misrepresentation.
Any mistakes committed by the agents of the sovereign, namely
government officials and employees are their own and cannot bind the government,
which cannot be placed on estoppel on account of the mistakes of its agents.
b. Against the taxpayer
E. Assessments and its governing principles
a. Definition
BARCOM2008-09 REVIEW NOTES FOR TAXATION 2
The notice and demand for payment of a tax liability should not be confused with
assessment relative to real property taxation which refers to the listing and
evaluation of taxable real property.
b. What constitutes an assessment
i. CIR v. Pascor Realty, 29 June 1999
Neither the NIRC nor the revenue regulations governing the protest of
assessments provide a specific definition of form of an assessment however the
NIRC defines the specific function and effects of an assessment:
An assessment must be sent to and received by a tax payer, and must demand
payment of the taxes described therein within a specific period.
Issuance of an assessment is vital in determining the period of limitation
regarding its proper issuance and the period within which to protest.
An assessment is deemed made only when the collector of Internal Revenue
releases or mails or sends such notice to the tax payer.
An assessment is not necessary before acriminal charge can be filed.
Before an assessment is issued, there is by practice, a pre-assessment notice
sent to the tax payer.The tax Payer is then given a chance to submit position
papers and documents to prove that the assessment is unwarranted. If the
commissioner is unsatisfied, an assessment signed by him/her is then sent to
the tax payer informing the latter specifically and clearly that an assessment
has been made against him/her. In contrast, the criminal charge need not go
through all this.
ii. CIR v. Reyes, G.R. No. 159694, January 27, 2006
Tax payers shall be informed in writing of the law and the facts on which the
assessment and the assessment is made; otherwise the assessment shall be void.
(2nd paragraph of section 228 is clear and mandatory)
c. Kinds of Assessment
d. Statute of Limitation on Assessment of Internal Revenue Taxes (Sections
203, 222, NIRC)
General rule (sec203)
Internal revenue taxes shall be assessed within three years after the last day
prescribed for the filing of the return, and no proceeding in court without
assessment for the collection of sluch taxes shall begun after the expiration of
such period.
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Exceptions (sec.222)
In the case of a false of fraudulent return with intent to evade tax or of failure to
file a return, the tax collection may be filed without an assessment at any time
within ten years after the discovery of the falsity, fraud or omission:
If before the expiration of the time prescribed in the tax codes for the assessment
of the tax, both the commissioner and the taxpayer have agreed in writing to its
assessment after such time, the tax may be assessed within the period agreed
upon.
i. RMO 20-90, Philippine Journalist Inc., v. CIR, G.R. No. 162852, 16
December 2004
Appellate Jurisdiction of the CTA is not limited to cases which involve decisions of
the CIR on matters relating to assessments or refunds. The second part of the
provision covers other cases that arise out of the NIRC or related laws and
administered by the BIR. The wording of the provision is clear and simple. It gives
the CTA the Jurisdiction to determine if the warrant of distraint and levy issued by
the BIR is valid and to rule if the waiver of stature of limitations was validly
effected.
A waiver of the statute of limitations under the NIRC, to a certain extent, is a
derogation of the taxpayers right to security against prolonged and unscrupulous
investigations and must therefore be carefully and strictly construed. The waiver
of the statute of limitations is not a waiver of the right to invoke the defense of
prescription as erroneously held by the CA. It is an agreement between the
taxpayer and the BIR that the period to issue an assessment and collect the taxes
due id extended to a date certain.
The waiver does not mean that the taxpayer relinquishes the right to invoke
prescription unequivocally particularly where the language of the document is
equivocal. For the purpose of safeguarding taxpayers from any unreasonable
examination, investigation or assessment, out tax law provides a statute of
limitation in collection of taxes. Thus the law on prescription, being a remedial
measure should be liberally construed in order to afford such protection/
ii. CIR v. CA and Carnation, G. R. No. 115712, 25 February 1999
Finality of findings of facts as a matter of principle, this court will not set aside the
conclusion reached by an agency such as the CTA unless there has been an abuse
or improvident exercise of authority. By the very nature of its function, dedicated
BARCOM2008-09 REVIEW NOTES FOR TAXATION 2
exclusively to the study and consideration of tax problems and has necessarily
developed an expertise of the subject.
e. Instances where the running of the prescriptive period is suspended
(section 223)
i. Republic v. Hizon, 13 December 1999
Sec. 229 of the code mandates that a request for reconsideration must be made
within thirty (30) days from the tax payers receipt of tax deficiency assessment,
otherwise the assessment becomes final, unappealable and, therefore,
demandable. The notice of assessment for respondents tax deficiency was issued
by petitioner on July 18, 1986. On the other hand, respondent made her request
for reconsideration thereof only on November 3. 1992, without stating when she
received the notice of tax assessment. She explained that she was constrained to
ask for a reconsideration in order to avoid the harrrasment of BIR collectors. In all
likelihood, she must have been referring to the distraint and levy of her properties
by petitioners agents which took place of January 12, 1989. Even assuming that
she first learned of the deficiency assessment on this date her request for
reconsideration was nonetheless filed late since she made it more than 30 days
thereafter. Hence, her request for reconsideration did not suspend the running for
the prescriptive period provided under section 223. Although the commissioner
acted on her request by eventually denying it on August 11, 1994, this is of no
moment and does not distract from the fact that the assessment had become
demandable
ii. BPI v. CIR, G.R. No. 139736, 17 October 2005
The court had consistently ruled in a number of cases that a request for
reconsideration by the tax payer without a valid waiver of the prescriptive period
for the assessment and collection of tax, as required by the tax code and
implementing rules, will not suspend the running thereof. (Exception: section 224)
Wherein the statute of limitations on assessment and collection of taxes is
considered suspended, when the tax payer request for a reinvestigation which is
granted by the commissioner.
f. Procedure in the process of assessment (Section 228)
i. Estate of the Late Juliana Diez Vda. De Gabriel v. CIR, G.R. No. 155541,
January 27, 2004
g. Instances when pre-assessment is not required (Section 228)
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The rule that an assessment is deemed made for the purpose of giving effect to
such assessment when the notice is released, mailed or sent to the taxpayer to
effectuate the assessment requires that the notice must be sent to the taxpayer,
and not merely to a disinterested party. Although there is no specific requirement
that the taxpayer should receive that notice within the said period, due process
requires at the very least that such notice actually be received.
When an estate is under administration, notice must be sent to the administrator
of the estate.
ii. CIR v. Reyes, G.R. No. 159694, January 27, 2006
The tax payers shall be informed in writing of the law and facts on which the
assessment is made otherwise the assessment itself is void.
iii. CIR v. BPI, G.R. No. 134062, 17, April 2007
The inevitable conclusion is that BPIs failure to protest the assessments within
the 30-day period provided in the former section 270 meant that they became
final and unappealable. Thus, the CTA correctly dismissed BPIs appeal for lack of
jurisdiction. BPI was, from then on barred from disputing the correctness of the
assessments or invoking any defense that would reopen the question of its
liability on the merits. Not only that. There arose a presumption of correctness
when BPI failed to protest the assessments: Tax assessments by tax examiners
are presumed correct and made in good faith. The taxpayer has the duty to prove
otherwise. In the absence of proof of any irregularities in the performance of
duties, an assessment duly made by a BIR examiner and approved by his superior
offices will not be disturbed. All presumptions are in favor of the correctness of tax
assessments.
iv. PNOC v. Court of Appeals, G.R. No., 109976, April 26, 2005
The defense of prescription of the period for the assessment and collection of tax
liabilities shall be deemed waived when such defense was not properly pleaded
and the facts alleged and evidenced submitted by the parties were not sufficient
to support a finding by the supreme court on the matter prescription, being a
matter of defense, imposes the burden on the taxpayer to prove that the full
period of the limitation has expired, and this requires him to positively establish
the date when the period started running and when the same was fully
accomplished.
A preassessment notice shall not be required in the following cases:
BARCOM2008-09 REVIEW NOTES FOR TAXATION 2
When any tax deficiency is the result of mathematical error in the
computation of the tax as appearing on the face of the return.
When a discrepancy has been determined between the tax withheld and the
amount actually remitted by the withholding agent.
When a taxpayer who opted to claim a refund or tax credit of excess
creditable withholding tax for a taxable period was determined to have
carried over and automatically applied the same amount claimed against the
estimated tax liabilities for the taxable quarter or quarters of the succeeding
taxable year.
When the excise tax due on exciseable articles has not been paid.
When the article locally purchased or imported by an exempt person has
been sold, traded, or transferred to non-exempt persons.
h. Governing principles concerning assessment
Injunction is not available to restrain the collection of internal revenue taxes.
Exception: the Court of Appeals may issue injunctions against administrative
collection, when collection could jeopardize the interest of the Government or
taxpayer.
i. When do we reckon the period when the assessment was made?
Internal revenue taxes shall be assessed within three years after the last day
prescribed by law for the filing of the return.
In case where a return is filed beyond the three year period shall be counted form
the day the return was filed.
j. Is assessment necessary before a taxpayer could be prosecuted for
violation of the NIRC?
k. Are the procedures outlined in Section 228 of the NIRC retroactive?
i. Ungab v. Cusi, May 30, 1980
What is involved here is not collection of taxes where the assessment of the
commissioner of internal revenue may be reviewed by the court of tax appeals,
but a criminal prosecution for violations of the NIRC which is within the
recognizance of the CFI. While there can be no civil action to enforce collection
before the assessment procedures provided in the code have been followed, there
is no requirement for the precise computation and assessment of the tax before
there can be a criminal prosecution under the code.
BAR OPERATIONS COMMITTEE
27
ii. CIR v. CA, G.R. No. 119322, 4 June 1996
Reading Ungab carefully, the pronouncement therein that deficiency assessment
is not necessary prior to prosecution is pointedly and deliberately qualified by the
Court with following statement quoted form Guzik v. U. S.: the crime is complete
when the violator has knowingly and willfully filed a fraudulent return with intent
to evade and defeat a part or all of the tax. In plain words, for criminal
prosecution to proceed before assessment, there must be a prima facie showing
of willful attempt to evade taxes. There was willful attempt to evade tax in Ungab
because of the taxpayers failure to declare in his income tax return his income
derived from banana saplings. In the mind of the trial court and the Court of
Appeals, Fortunes situation is quite apart factually since the registered wholesale
price of the goods. Approved by the BIR, is presumed to be the actual wholesale
price, therefore, not fraudulent and unless and until the BIR has made a final
determination of what is supposed to be the correct taxes, the taxpayer should
not be placed in the crucible of criminal prosecution. Herein lies a whale of
difference between Ungab and the case at bar.
iii. CIR v. Pascor Realty, 29 June 1999
The issuance of an assessment is vital in determining the period of limitation
regarding its proper issuance and the period within which to protest it. Section
203 of NIRC provides that internal revenue taxes must be assessed within three
years from the last day within which to file the return. Section 222, on the other
hand, specifies a period of ten years in case a fraudulent return with intent to
evade was submitted or in case of failure to file a return. Also, Section 228 of the
same law states that said assessment may be protested only within thirty days
from receipt thereof. Necessarily, the taxpayer must be certain that a specific
document constitutes an assessment. Otherwise, confusion would arise regarding
the period within which t make an assessment or to protest the same, or whether
interest and penalty may accrue thereon.
i. CIR v. Reyes, G.R. No. 159694, January 27, 2006
The general rule is that statutes are prospective. However, statutes that are
remedial, or that do not create new or take away vested rights, do not fall under
the general rule against the retroactive operation of statutes. Clearly, Section 228
provides for the procedure in case an assessment is protested. The provision does
not create new or take away vested rights. In both instances, it can surely be
applied retroactively. Moreover, RA 8424 does not state, either expressly or by
BARCOM2008-09 REVIEW NOTES FOR TAXATION 2 28

necessary implication, that pending actions are excepted from the operation of
section 228, or that applying it to pending proceedings would impair vested rights.
INTERNAL REVENUE TAX REMEDIES
Tax Remedies: Its general concepts
Importance: They exist to enhance the Governments tax collection efforts, they,
too, come in as safeguards against arbitrary action. While taxes are the lifeblood of the
Government and should be collected without unnecessary hindrance, such collection
must nevertheless be made in accordance with law as any arbitrariness will negate the
very reason or the Government itself.
Classification:
Remedies Available to Taxpayers
A. Before Payment
1. Protest (Section 228, NIRC)
Protest is a vital document which is a formal declaration of resistance of
the taxpayer. It is a repository of all arguments. It can be used in court in case
administrative remedies have been exhausted. It is also the formal act of the
taxpayer questioning the official actuation of the CIR. This is equivalent to a
pleading. It may be a:
Request for reconsideration- a plea for the re-evaluation of an
assessment on the basis of existing records without need of additional evidence.
It may involve a question of fact or law or both.

1. Remedies in favor of the taxpayer Request for reinvestigation- a plea for reinvestigation of an assessment
A. Administrative on the basis of newly-discovered or additional evidence that a taxpayer intends to
(1) Before Payment present in the reinvestigation. It may also involve question of fact or law or both.
a. Filing of a petition or request for reconsideration or reinvestigation
(Administrative Protest);
b. Entering into compromise Requirements of a valid protest
(2) After Payment 1. In writing;
a. Filing of claim for tax refund; and 2. Addressed to the CIR;
b. Filing of claim for tax credit 3. Must be accompanied by a waiver of
B. Judicial the Statute of Limitations in favor of
(1) Civil action the government;
a. Appeal to the Court of Tax Appeals 4. States the Facts, applicable law rules
b. Action to contest forfeiture of chattel; and and regulations and jurisprudence on
c. Action for Damages which his protest is based; otherwise,
(2) Criminal Action his protest shall be considered void and
Filing of complaint against erring Bureau of Internal Revenue officials and without force and effect on the event
employees the letter of protest submitted by the
taxpayer is accepted;
2. Remedies available to the government 5. Contains the following:
1. Name of the taxpayer and
Applicability of the Doctrine Exhaustion of Administrative Remedies address for the immediate past
- No civil or criminal action for the recovery of taxes shall be filed in court three taxable years;
without the approval of the Commissioner. (Sec. 220, NIRC) 2. Nature of request whether
reinvestigation or
reconsideration specifying
newly discovered evidence that
he intends to present it is a
request for reinvestigation;
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BARCOM2008-09 REVIEW NOTES FOR TAXATION 2 29

3. Taxable periods covered by the The decision of the Commissioner or his duly rep shall (a) state the facts, applicable law,
assessment; rules and regulations or jurisprudence on which his protest is based, otherwise the
4. Amounts and kind/s of tax protest shall be considered void and without force and effect, in which case the same
involved, and Assessment shall not be considered a decision a disputed assessment and (b) that the same is his
Notice Number; final decision. (sec. 3.1.5, RR 12-99)
5. Date of receipt of assessment notice or letter of demand;
6. Itemized statement of the findings to which the taxpayer agrees, if any, as a basis
for computing the tax due, which amount should be paid immediately upon the B.Indirect Denial
a. Commissioner did not rule on the taxpayers MR of the assessment it was only when
filing of the protest. For this purpose, the protest shall not be deemed validly filed respondent received summons on the civil action for the collection of deficiency income
unless payment of the agreed portion of the tax is paid first; tax that the period to appeal commenced to run. (CIR vs. Union Shipping
7. Itemized schedule of the adjustments with which the taxpayer does not agree; b. Referral by the Commissioner of request for reinvestigation to the Solicitor General
8. Statement of facts and/or law in support of the protest; and (Republic vs.Lim Tian Teng Sons)
9. Documentary evidence as it may deem necessary and relevant to support its c. Reiterating the demand for immediate payment of the deficiency tax due to taxpayers
continued refusal to execute waiver (CIR vs. Ayala Securities Corp.)
protest to be submitted within sixty (60) days from the filing of the protest. If the d. Preliminary collection letter may serve as assessment notice (United Intl Pictures vs.
taxpayer fails to comply with this requirement, the assessment shall become final. CIR)
(Revenue Regulation No. 12-85, dated Nov. 27, 1985.)
Acts of BIR Commissioner Considered as Denial of Protest which serves as a
Effect of a protest on the period to collect deficiency taxes: Basis for Appeal to CTA:

The prescriptive period is arrested by the taxpayer's request for re-examination or
reinvestigation even if he has not previously waived it (CIR vs. Wyeth, G.R. No.
76281,Sep 30, 1991)
Failure of the BIR to act within the 180-day period.
If the Commissioner or his duly authorized representative fails to act on the taxpayers
protest within 180 days from the date of submission by the taxpayer of the required
documents in support of his protest, the taxpayer may appeal to the CA within 30 days
from the lapse of the 180-day period.
Administrative actions taken during the 180-day period.
1. Grant of the Protest
2. Denial of Protest:
A. Direct Denial
1. Filing by the BIR of a civil suit for collection of the deficiency tax (CIR v. Union
Shipping Corp . 185 SCRA 547)
2. Indication to the taxpayer by the Commissioner in clear and unequivocal
language of his final denial. (CIR v. Union Shipping Corp)
3. BIR demand letter reiterating his previous demand to pay, sent to taxpayer
after his protest of the assessment (Surigao Electric Co. Inc. v. CTA, 57 SCRA 523)
4. The actual issuance of a warrant of distraint and levy in certain cases cannot be
considered as final decision on a disputed settlement (CIR v. Union Shipping Corp)
b. Effect of protest filed out of time
The pendency of the taxpayer's appeal in the Court of Tax Appeals and in the Supreme
Court had the effect of temporarily staying the hands of the said Commissioner. If the
taxpayer's stand that the pendency of the appeal did not stop the running of the period
because the Court of Tax Appeals did not have jurisdiction over the case of taxes is
upheld, taxpayers would be encouraged to delay the payment of taxes in the hope of
ultimately avoiding the same. Under the circumstances, the running of the prescriptive
period was suspended. Deficiency Percentage Taxes must be imposed.(PROTECTOR'S
SERVICES, INC., petitioner, vs. CA, G.R. No. 118176, 2000 Apr 12)

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BARCOM2008-09 REVIEW NOTES FOR TAXATION 2 30

Remedies from a denial of protest The rationale in computing the two-year prescriptive period with respect to the petitioner
1. Motion for reconsideration corporation's claim for refund from the time it filed its final adjustment return is the fact
2. Appeal to the Court of Tax Appeals(RA 1125, as amended by RA 9282) that it was only then that ACCRAIN could ascertain whether it made profits or incurred
losses in its business operations. The "date of payment", therefore, in ACCRAIN's case
2. Compromise was when its tax liability, if any, fell due upon its filing of its final adjustment return.
(ACCRA vs CA, G.R. No. 96322, 1991 Dec 20)
B. After Payment
The two-year period for prescription should be counted from the date of payment of the
1. Refund (Section 229, NIRC) tax, which for actions for refund of corporate income tax should be computed from the
The Legal Principle of quasi-contracts or solutio indebiti (see Art. 2142 & 2154 of time of actual filing of the adjustment return or annual income tax return. This is so
because at that point, it can already be determined whether there has been an
the Civil Code). The Government is within the scope of the principle of solutio indebiti. overpayment by the taxpayer. Moreover, under Sec. 49 (a) by the NIRC (now Sec. 56(a),
(CIR vs. Firemans Fund Insurance Co.) 1997 NIRC), payment is made at the time the return is filed. (CIR V CA, CTA, BPI, GR No.
117254. January 21, 1999)
a. Must be strictly construed against taxpayer There is some likelihood that the above rule could apply also to individuals who are self
employed (i.e., in business and professional practice) as well as estates and trusts, which
are likewise required to file quarterly returns.
Grounds for filing a claim for refund:
Erroneously or illegally assessed or collected internal revenue taxes; The prescriptive period of two years should commence to run only from the time that the
refund is ascertained, which can only be determined after a final adjustment return is
Taxpayer pays under the mistake of fact, as for instance in a case where he is not aware accomplished.(CIR V PHILAMLIFE, 244 SCRA 446. May 29, 1995)
of the existing exemption in his favor at the time payments were made.
2. In case of Amended Returns
A tax is illegally collected if payments are made under duress.

3. In case of taxpayers contemplating dissolution

1. Penalties imposed without authority; and
2. Any sum alleged to have been excessive or in any manner wrongfully collected.
c. Who has the personality to file a claim for refund?
The value of internal revenue stamps when they are returned in good condition by the
purchaser may also be redeemed.
The duty of the withholding agent to withhold the corresponding tax arises at the time of
such accrual. The withholding agent/corporation is then obliged to remit the tax to the
b. Period within which to file a claim for refund Government since it already and properly belongs to the Government. If a withholding
agent who is personally liable for income tax withheld at source fails to pay said
1. General Rule is two years from the date of payment withholding tax, an assessment for said deficiency withholding tax would, therefore, be
legal and proper. (FILIPINAS SYNTHETIC FIBER CORP. V CA, GR No.113347. June 14, 1996)

The two-year prescriptive period provided in Section 292 (now Section 230 of the Tax
Code should be computed from the time of filing the Adjustment Return or Annual Income d. Is setting-off of taxes against a pending claim for refund allowed?
Tax Return and final payment of income tax.(CIR vs. TMX SALES, G.R. No. 83736, 1992 e. Is automatic application of excess tax credits allowed?
Jan 15,)
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BARCOM2008-09 REVIEW NOTES FOR TAXATION 2 31

f. Effect of existing tax liability on a pending claim for refund
g. Period of validity of a tax refund/credit
1. Returns are not actionable documents for purposes of the rules on civil procedure and
evidence
h. Refund and Protest are mutually exclusive remedies
Action partakes the nature of an ordinary civil action for recovery of personal property or
the net proceeds of its sale which must be brought in the ordinary courts and not the CTA
2. Redemption of Property Sold (Sec. 214)

Remedies available to the Government

A. No Injunction to restrain collection of taxes ( Sec. 218, NIRC)

i. Is the taxpayer entitled to claim interest on the refunded tax? G.R. No Court shall have the authority to grant an injunction to restrain the
collection of any national internal revenue tax, fee, or charge imposed by the
General Rule: The Government cannot be required to pay interest on taxes refunded to NIRC.
the taxpayer, unless: EXC: CTA may enjoin the collection of Internal Revenue taxes.
REQUISITES:
1. there is a pending case before the CTA (ancillary remedy, not a main
1. The Commissioner acted with patent arbitrariness cause of action)
Arbitrariness presupposes inexcusable or obstinate disregard of legal provisions. (CIR vs. 2. identify that the collection of tax is prejudicial to the interest of either
Victorias Milling Corp., Inc. L-19607, Nov. 29, 1966.) the TP or government.

B. Period within which the government could collect ( Secs. 203, 222, NIRC)
2. In case of Income Tax withheld on the wages of employees
Any excess of the taxes withheld over the tax due from the taxpayer shall be returned or
credited within 3 months from the fifteenth (15 th) day of April. Refund or credit after such
time earn interest at the rate of 6% per annum, starting after the lapse of the 3-month
period to the date the refund or credit is made (Sec 79 (c) (2) 1997 NIRC
b. Other Remedies
1. Action to Contest Forfeiture of Chattel (Sec. 231)
In case of seizure of personal property under claim for forfeiture, the owner desiring to
contest the validity of the forfeiture may bring an action:
a. Before sale or destruction of the property to recover the property from the
person seizing the property or in possession thereof upon filing of the proper bond to
enjoin the sale.
b. After the sale and within 6 months to recover the net proceeds realized at
the sale (see. Sec. 231, 1997 NIRC)
BAR OPERATIONS COMMITTEE
Assessment of Tax Liability
Three (3)years from the following, whichever comes later:
1. The last day prescribed by law for filing the return
2. The day when the return was actually filed
Ten (10) years after the discovery of the falsity, fraud or omission in case
of:
1. False or fraudulent return with intent to evade tax, or
2. Failure to file a return
Within the period agreed upon, when both the TP and the Commissioner
have agreed in writing, before the expiration of the period in Sec. 203 for
the assessment of the tax.
CASES:
REPUBLIC V. HIZON, DEC. 13, 1999
Revenue Adm. Order No. 10-95 specifically authorizes the Litigation and
Prosecution section of the Legal Division of regional district offices to
institute the necessary civil and criminal actions for tax collection. As the
complaint filed in this case was signed by the BIRs Chief of Legal Division
for Region 4 and verified by the Regional Director, there was, therefore,
compliance with the law.
BARCOM2008-09 REVIEW NOTES FOR TAXATION 2 32

Sec. 7 of NIRC, authorizes the BIR Commissioner to delegate the powers
vested in him under the pertinent provision of the Code to any subordinate
official with the rank equivalent to a division chief or higher.
CIR V. JAVIER, JULY 31, 1991
There was no actual intentional fraud in filing the return. Private
respondents notation on the tax return was at most an error or mistake of
fact or law not constituting fraud, an invitation for investigation and
private respondent had literally laid his cards on the table.
PNOC V. CA, APRIL 26, 2005
C. OVERVIEW OF REMEDIES (SECTION 205)
1. Tax Lien (Sec 219, NIRC)
When a taxpayer neglects or refuses to pay his internal revenue tax
liability after demand, the amount so demanded shall be a lien in favor of
the government from the time the assessment was made by the
Commissioner until paid with interest, penalties, and costs that may secure
in addition thereto, upon all property and rights to property belonging to
the taxpayer.
A tax lien created in favor of the government is superior to all other claims
and preferences, even to that of a private litigant predicated on a court
judgment. The tax lien attaches not only from the service of the warrant of
distraint of personal property but from the time the tax became due and
payable.
2. Compromise
CIR may compromise both civil and criminal liability of the taxpayer.
REQUISITES:
1. The taxpayer have a tax liability
2. There must be an offer by the taxpayer of an amount to be paid by the
taxpayer
3. There must be an acceptance by the Commissioner or the taxpayer as
the case may be of the offer in the settlement of the original claim
Grounds for compromise
1. A reasonable doubt as to the validity of the claim against the taxpayer
exists; or
2. The financial position of the taxpayer demonstrates a clear inability to pay
the assessed tax

Lien shall not be valid against any mortgagee, purchaser or judgment

creditor until notice of such lien shall be filed by the Commissioner in the Cases that may be compromised
Register of Deeds of the province or city where the property of the
taxpayer is located. 1. Delinquent accounts
2. Cases under administrative protest
A tax lien created in favor of the government is superior to all other claims 3. Cases disputed before the courts
and preferences, even to that of a private litigant predicated on a court 4. Cases for collection already filed in courts
judgment. 5. Criminal violations except those already filed, and those involving fraud.

Extinguishment of Tax Lien Cases that cannot be compromised

1. Payment or remission of the tax
2. Prescription of the right of the government to assess or collect. 1. Withholding tax cases
3. Failure to file notice of such lien in the office of register of Deeds, purchases or 2. Criminal tax fraud cases
judgment creditor. 3. Criminal cases already filed in court
4. Destruction of the property subject to the lien. 4. Delinquent accounts with duly approved schedule of installment payments
NOTE: In Nos. 1 and 2, there is no more tax liability while under nos. 3 and 4, the 5. Cases where reduction of payments had already been granted.
taxpayer is still liable. 6. cases already decided and are final and executory

CASE: CIR V. NLRC, NOV. 09, 1994 Compromise of criminal violation

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BARCOM2008-09 REVIEW NOTES FOR TAXATION 2 33

With in two days thereafter, a return of the proceeding is duly made.

In criminal violations, the compromise
must be made prior to the filing of the information in court. How enforced:
All criminal violations may be compromised except: a. In case of personal property by seizure and sale or destruction of the
specific forfeited property.
1. those already filed in court; and b. In case of real property by a judgment of condemnation and sale in a
2. those involved in fraud. legal action or proceeding, civil or criminal, as the case may require.

Limitations: When forfeited property to be destroyed or sold:

1. Minimum compromise rate: a. To be destroyed by order of the CIR when the sale for consumption or use
a. 10% of the basic tax assessed in case of financial incapacity. of the following would be injurious to the public health or prejudicial to the
b. 40% of basic tax assessed other cases. enforcement of the law: (at least 20 days after seizure)
2. Subject to approval of the Evaluation Board 1. distilled spirits
a. When basic tax involved exceeds P1,000,000.00 or 2. liquors
b. Where settlement offered is less than the prescribed minimum rates. 3. cigars
4. cigarettes, and other manufactured products of tobacco
Delegation of Power to Compromise 5. playing cards
General Rule: The power to compromise or abate shall not be delegated by the 6. All apparatus used in or about the illicit production of such articles.
commissioner. b. To be sold or destroyed depends upon the discretion of CIR
Exception: The Regional Evaluation Board may compromise the assessment issued by 1. All other articles subject to exercise tax, (wine, automobile, mineral
the regional offices involving basic taxes of P 500,000.00 or less. products, manufactured oils, miscellaneous products, non-essential
Remedy in case of failure to comply: items a petroleum products) manufactured or removed in violation
The CIR may either: of the Tax Code.
a. Enforce the compromise, or 2. Dies for printing or making IR stamps, labels and tags, in imitation
b. Regard it as rescinded and insists upon the original demand. of or purport to be lawful stamps, labels or tags.

3. Distraint and/or Levy Where to be sold:

4. Civil Action a. Public sale: provided, there is notice given not less than 20 days.
5. Criminal Action b. Private sale: provided, it is with the approval of the Secretary of Finance.
6. Forfeiture
Implies a divestiture of property without compensation, in consequence Right of Redemption:
of a default or offense. a. Personal entitled taxpayer or anyone for him
b. Time to redeem within one (1) year from forfeiture
It includes the idea of not only losing but also having the property c. Amount to be paid full amount of the taxes and penalties, plus interest
and cost of the sale
transferred to another with out the consent of the owner and wrongdoer. d. To whom paid Commissioner or the Revenue Collection Officer
e. Effect of failure to redeem forfeiture shall become absolute.
Effect: Transfer the title to the specific thing from the owner to the government.
NOTE:
When available: The Register of Deeds is duty bound to transfer the title of property forfeited to
a. No bidder for the real property exposed for sale. the government with out necessity of an order from a competent court.
b. If highest bid is for an amount insufficient to pay the taxes, penalties and 7. Suspension of Business Operations
costs.
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BARCOM2008-09 REVIEW NOTES FOR TAXATION 2 34

8. Enforcement of Administrative Fines 4. Period with in to assess or collect has not yet prescribed.

D. ADMINISTRATIVE REMEDIES IN DETAIL (SECS. 206-217, NIRC) When remedy not available:
A. DISTRAINT - Seizure by the government of personal property, tangible or Where amount involved does not exceed P100.
intangible, to enforce the payment of faces, to be followed by its public sale, if the taxes In keeping with the provision on the abatement of the collection of tax as the cost
are not voluntarily paid. of same might even be more than P100.
KINDS Procedure:
a. Actual There is taking of possession of personal property out of the taxpayer into 1. Service of warrant of distraint upon taxpayer or upon person in possession of
that of the government. In case of intangible property, taxpayer is also diverted of the taxpayers personal property.
power of control over the property. 2. Posting of notice is not less than two places in the municipality or city and notice
b. Constructive The owner is merely prohibited from disposing of his personal to the taxpayer specifying time and place of sale and the articles distrained.
property. 3. Sale at public auction to highest bidder
4. Disposition of proceeds of the sale.

Who may effect distraint Amount

Involved
Difference between Actual and Constructive Distraint 1. Commissioner or his In excess of
Actual Constructive duly authorized P1,000,000.00
Made on the property May be made on the representative P1,000,000.00
only of a delinquent property of any 2. Revenue District Officer or less
taxpayer. taxpayer whether (RDO)
delinquent or not
There is actual taking or Taxpayer is merely
possession of the prohibited from
property. disposing of his
property. How Actual Distraint Effected
Effected by having a list Effected by requiring 1. In case of Tangible Property:
of the distraint property the taxpayer to sign a a. Copy of an account of the property distrained, signed by the officer, left
or by service or warrant receipt of the property either with the owner or person from whom property was taken, at the
of distraint or or by leaving a list of dwelling or place of business and with someone of suitable age and
garnishment. same discretion
An immediate step for Such immediate step b. Statement of the sum demanded.
collection of taxes is not necessary; tax c. Time and place of sale.
where amount due is due may not be
definite. definite or it is being 2. In case of intangible property:
questioned. a. Stocks and other securities
Serving a copy of the warrant upon taxpayer and upon president,
Requisites: manager, treasurer or other responsible officer of the issuing corporation,
1. Taxpayer is delinquent in the payment of tax. company or association.
2. Subsequent demand for its payment. b. Debts and credits
3. Taxpayer must fail to pay delinquent tax at time required. 1. Leaving a copy of the warrant with the person owing the debts or
having in his possession such credits or his agent.
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BARCOM2008-09 REVIEW NOTES FOR TAXATION 2 35

2. Warrant shall be sufficient authority for such person to pay CIR his NOTE: The requisites are the same as that of distraint.
credits or debts.
Procedure:
c. Bank Accounts garnishment 1. International Revenue officer shall prepare a duly authenticated certificate
1. Serve warrant upon taxpayer and president, manager, treasurer or showing
responsible officer of the bank. a. Name of taxpayer
2. Bank shall turn over to CIR so much of the bank accounts as may be b. Amount of tax and
sufficient. c. Penalty due.
- enforceable throughout the Philippines
How constructive Distraint Effected 2. Officer shall write upon the certificate a description of the property upon which
1. Require taxpayer or person in possession to: levy is made.
- Sign a receipt covering property distrained 3. Service of written notice to:
- Obligate him to preserve the same properties. a. The taxpayer, and
- Prohibit him from disposing the property from disposing the property in any b. RD where property is located.
manner, with out the authority of the CIR. 4. Advertisement of the time and place of sale.
2. Where Taxpayer or person in possession refuses to sign: 5. Sale at public auction to the highest bidder.
- Officer shall prepare list of the property distrained. 6. Disposition of proceeds of sale.
- In the presence of two witnesses of sufficient age and discretion, leave a NOTE: The excess shall be turned over to owner.
copy in the premises where property is located. Redemption of property sold or forfeited
a. Person entitled: Taxpayer or anyone for him
Grounds of Constructive Distraint b. Time to redeem: one year from date of sale or forfeiture
1. Taxpayer is retiring from any business subject to tax. - Begins from registration of the deed of sale or declaration of forfeiture.
2. Taxpayer is intending to leave the Philippines; or - Cannot be extended by the courts.
3. To remove his property there from. c. Possession pending redemption: owner not deprived of possession
4. Taxpayer hides or conceals his property. d. Price: Amount of taxes, penalties and interest thereon from date of delinquency
5. Taxpayer acts tending to obstruct collection proceedings. to the date of sale together with interest on said purchase price at 15% per
annum from date of purchase to date of redemption.
NOTE:
1. Bank accounts may be distrained without violating the confidential nature of bank Difference between Distraint and Levy
accounts for no inquiry is made. BIR simply seizes so much of the deposit with Distraint Levy
out having to know how much the deposits are or where the money or any part of personal property real property
it came from. forfeiture by forfeiture by
2. If at any time prior to the consummation of the sale, all proper charges are paid to government, not government authorized
the officer conducting the same, the goods distrained shall be restored to the provided where there is no bidder
owner. or the highest bid is not
3. When the amount of the bid for the property under distraint is not equal to the sufficient to pay the
amount of the tax or is very much less than the actual market value of articles, taxes, penalties and
the CIR or his deputy may purchase the distrained property on behalf of the costs.
national government. Taxpayer no given the Taxpayer can redeem
right of redemption properties levied upon
B. LEVY OF REAL PROPERTY - an act of seizure of real property in order to and sold/forfeited to the
enforce the payment of taxes. The property may be sold at public sale, if after seizure government.
the taxes are not voluntarily paid.
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BARCOM2008-09 REVIEW NOTES FOR TAXATION 2
1. Both are summary remedies for collection of taxes.
2. Both cannot be availed of where amount involved is not more than P100.
NOTE:
1. It is the duty of the Register of Deeds concerned upon registration of the
declaration of forfeiture, to transfer the title to the property with out of an order
from a competent court
2. The remedy of distraint or levy may be repeated if necessary until the full amount,
including all expenses, is collected.
C. GARNISHMENT
Bank Accounts garnishment
1. Serve warrant upon taxpayer and president, manager, treasurer or responsible officer
of the bank.
2. Bank shall turn over to CIR so much of the bank accounts as may be sufficient.
E. JUDICIAL REMEDIES IN DETAIL (SEC 220, NIRC)
1. Period within which the action may be filed
Civil and Criminal Actions:
1. Brought in the name of the Government of the Philippines.
2. Conducted by Legal Officer of BIR
3. Must be with the approval of the CIR, in case of action, for recovery of
taxes, or enforcement of a fine, penalty or forfeiture.
A. CIVIL CASES (SECS 203,222,NIRC)
Three (3)years from the following, whichever comes later:
3. The last day prescribed by law for filing the return
4. The day when the return was actually filed
Ten (10) years after the discovery of the falsity, fraud or omission in case
of:
3. False or fraudulent return with intent to evade tax, or
4. Failure to file a return
Within the period agreed upon, when both the TP and the Commissioner
have agreed in writing, before the expiration of the period in Sec. 203 for
the assessment of the tax.
Where to File
1) Court of Tax Appeals- where the principal amount of taxes and fees exclusive of
charges and penalties claimed is one million pesos and above
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36
2) RTC, Mun. TC, Metro TC- where the principal amount of taxes and fees, exclusive of
charges and penalties claimed is less thanP1,000,000.00 (Sec 7[c], RA 9282)
The approval of the CIR is essential in civil cases (Sec. 220). However
under Sec. 7 of
NIRC, the Commissioner may delegate suchpower to a Regional Director.
Actions instituted by the government to collect internal revenue taxes in regular
courts (RTC or MTCs, depending on the amount involved). It includes filing by the
government with the probate court claims against the deceased taxpayer.
Resorted to when the tax liability becomes final and unappealable, or when the
decision of the
Commissioner becomes final or executory. When:
A tax is assessed and the assessment becomes final and unappealable because
the taxpayer
fails to file an administrative protest with the BIR within 30 days from the receipt
of the assessment.
When an administrative protest filed by the taxpayer against the assessment is
denied, in whole and in part or Is not acted upon within 180 days from submission
of the documents, and
The taxpayer adversely affected by the decision or inaction fails to file an appeal
with the CTA within 30 days from receipt of said decision or from the lapse of
the180 day period.
B. CRIMINAL CASES ( TITLE X, NIRC; SEC. 281, NIRC)
All violations of any provision of the tax code shall prescribe after five (5) years.
NOTE:
When should it commence: The five (5) year prescriptive period shall begin to
run from the
a. If known, day of the commission of the violation.
b. If not known, from the time of discovery and the institution of judicial
proceeding for its investigation and punishment.
When is it interrupted:
a. When a proceeding is instituted against the guilty person
b. When the offender is absent from the Philippines.
When should it run again: When the proceeding is dismissed for reason not
constituting jeopardy.
Where to file
BARCOM2008-09 REVIEW NOTES FOR TAXATION 2
1) Court of Tax Appeals- on criminal offenses arising from violations of the NIRC or TCC
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 P1,000,000.00 and above.
2) RTC, Mun. TC, Metro TC- on criminal offenses arising from violations of the NIRC or TCC
and
other laws administered by the BIR and the BOC, where the principal amount of taxes
and fess
exclusive of charges and penalties claimed is less than P1,000,000.00 or where there is
no specified amount claimed (Sec 7[b], RA 9282)
CASES:
REPUBLIC V. HIZON, DEC. 13, 1999 (re: approval of filing of civil and criminal actions)
Revenue Adm. Order No. 10-95 specifically authorizes the Litigation and
Prosecution section of the Legal Division of regional district offices to institute the
necessary civil and criminal actions for tax collection. As the complaint filed in this
case was signed by the BIRs Chief of Legal Division for Region 4 and verified by
the Regional Director, there was, therefore, compliance with the law.
Sec. 7 of NIRC, authorizes the BIR Commissioner to delegate the powers vested in
him under the pertinent provision of the Code to any subordinate official with the
rank equivalent to a division chief or higher.
CIR V. LA SUERTE CIGAR, JULY 04, 1992 (re: participation of the Office of the Solicitor
General)
The institution or commencement before a proper court of civil and criminal
actions and proceedings arising under the Tax Reform Act which "shall be
conducted by legal officers of the Bureau of Internal Revenue" is not in dispute.
An appeal from such court, however, is not a matter of right. Section 220 of the
Tax Reform Act must not be understood as overturning the long established
procedure before this Court in requiring the Solicitor General to represent the
interest of the Republic. This Court continues to maintain that it is the Solicitor
General who has the primary responsibility to appear for the government in
appellate proceedings.
PNOC V. CA, APRIL 26, 2005
LIM V. CA, OCT. 18, 1990 ( re: prescription of criminal actions, Sec, 281, NIRC)
should be filed 5 years from the (1) day of the commission of the violation of the
law, and if the same shall be not known, from the (2) discovery thereof and the
institution of the judicial proceedings for its investigation and punishment.
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37
MARCOS II V. CA, JUNE 5, 1997 (re: enforcement of tax liability during pendency of
probate proceedings)
The BIR is authorized to collect estate tax deficiency through the summary
remedy of the levying upon and sale of properties of a decedent, without the
cognition and authority of the court sitting in probate over the supposed will of
the deceased, because the collection of estate tax is executive in character. As
such the estate tax is exempted from the application of the statute of the non
claims, and this is justified by the necessity of the government finding,
immortalized in the maxim that taxes are the lifeblood of the government
E. EFFECTS OF FAILURE TO PAY THE TAX ON TIME: ADDITIONS TO THE TAX
(CHAPTER I, TITLE X, NIRC)
1. SURCHARGES- a civil penalty imposed by law as an addition to the main tax
required to be paid. It is not a criminal penalty but a civil administrative sanction
provided primarily as safeguard for the protection of the State revenue and to
reimburse the government for the expenses of investigation and the loss resulting from
the taxpayers fraud. A surcharge added to the main tax is subject to interest.
a. ORDINARY (SEC. 248A, NIRC)
Penalty: 25% of the amount due, in addition to the tax required to be paid
a. Failure to file any return and to pay the tax due thereon as required by the
NIRC or rules.
b. Filing a return with an internal revenue officer other than those with whom
the return is required to be fired. Not authorized officer.
c. Failure to pay the deficiency tax within the time prescribed for its payment
in the notice of assessment.
d. Failure to pay the full or part of the amount of tax shown on any return, or
the full amount of tax due for which no return is required to be filed, on or
before the date prescribed for its payment.
b. FRAUD PENALTY (SEC. 248B, NIRC)
Penalty: 50% of the amount due, in addition to the tax required to be paid
a. In case of willful neglect to file the return within the period prescribed by
the NIRC or rule.
b. In case a false or fraudulent return is willfully made.
CASE: CIR V. JAVIER, JULY 31, 1991
BARCOM2008-09 REVIEW NOTES FOR TAXATION 2 38

There was no actual intentional fraud in filing the return. Private 2. It is pain in lieu of a criminal prosecution.
respondents notation on the tax return was at most an error or mistake of 3. Since it is voluntary in character, the same may be collected only if the taxpayer
fact or law not constituting fraud, an invitation for investigation and is willing to pay them.
private respondent had literally laid his cards on the table.
Failure to File Certain Information Returns (Sec. 250, NIRC)
2. INTEREST- This is an increment on any unpaid amount of tax assessed at the A) Penalty: P 1,000 for each failure
rate of 20% per annum or such higher rate as may be prescribed by the regulations B) The aggregate amount for all such failure shall not exceed P 25,000 during a
from the date prescribed for payment until the amount is fully paid. calendar year
C) Upon notice and demand by the Commissioner
Classes of interest D) Unless it is shown that such failure is due to reasonable cause and not to willful
neglect.
1. Deficiency interest In the case of each failure to file:
2. Delinquency interest 1) information return;
3. Interest on extended payment 2) statement or list;
3) keep any record;
Deficiency interest 4) supply any information
E) required by this Code or by the Commissioner on the date prescribed thereof.
Any deficiency in the tax due shall be subject to the interest of 20% per annum
which shall be assessed and collected from the date prescribed for its payment
until the full payment thereof. LOCAL TAXATION

When delinquency interest imposed? A. Local Taxation: General Concepts

1. Nature of Local Taxing Power
Delinquency interest is imposed in case of failure to pay:
1. The amount of the tax due on any return required to be filed; or a. Constitutional Provision (Section 5, Article X)
2. The amount of tax due for which no return is required; or
3. A deficiency tax or any surcharge or interest thereon on the issue date Each local government unit shall have the power to create its own sources of
appearing in the notice and demand of the Commissioner. revenues and to levy taxes, fees and charges subject to such guidelines and
limitations as the Congress may provide, consistent with the basic policy of
local autonomy. Such taxes, fees, and charges shall accrue exclusively to the
Rate is 20% per annum until the amount is fully paid which interest shall form part
local governments.
of the tax.
b. Delegated Power
Interest on Extended Payment.
i. City of San Pablo Laguna vs. Reyes, March 25, 1999
1) any person who is qualified and elects to pay the tax on installment but fails to pay the
tax, or any installment, or any part on or before the date prescribed; or
The power to tax is primarily vested in Congress. However, in our
2) where the Commissioner has authorized an extension of time within which to pay a tax
jurisdiction, it may be exercised by local legislative bodies, no longer
or a deficiency tax or any part thereof,
merely by virtue of a valid delegation as before, but pursuant to direct
3) from the date of notice and demand until it is paid.
authority conferred by Section 5, Article X of the Constitution. The
important legal effect of Section 5 is that henceforth, in interpreting
Compromise Penalty
statutory provisions on municipal fiscal powers, doubts will have to
1. It is a certain amount of money which the taxpayer pays to compromise a tax
resolved in favor of municipal corporations.
violation.
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BARCOM2008-09 REVIEW NOTES FOR TAXATION 2
ii. Meralco vs. Province of Laguna, May 5, 1999
Prefatorily, it might be well to recall that local governments do not have
the inherent power to tax except to the extent that such power might be
delegated to them either by the basic law or by statute. Presently, under
Article X of the 1987 Constitution, a general delegation of that power has
been given in favor of local government units. The 1987 Constitution has a
counterpart provision in the 1973 Constitution, which did come out with a
similar delegation of revenue making powers to local governments. Under
the regime of the 1935 Constitution no similar delegation of tax powers
was provided, and local government units instead derived their tax powers
under a limited statutory authority. Whereas, then, the delegation of tax
powers granted at that time by statute to local governments was confined
and defined (outside of which the power was deemed withheld), the
present constitutional rule (starting with the 1973 Constitution), however,
would broadly confer such tax powers subject only to specific exceptions
that the law might prescribe. Under the now prevailing Constitution, where
there is neither a grant nor a prohibition by statute, the tax power must be
deemed to exist although Congress may provide statutory limitations and
guidelines. The basic rationale for the current rule is to safeguard the
viability and self-sufficiency of local government units by directly granting
them general and broad tax powers. Nevertheless, the fundamental law
did not intend the delegation to be absolute and unconditional; the
constitutional objective obviously is to ensure that, while the local
government units are being strengthened and made more autonomous,
the legislature must still see to it that (a) the taxpayer will not be over-
burdened or saddled with multiple and unreasonable impositions; (b) each
local government unit will have its fair share of available resources, (c) the
resources of the national government will not be unduly disturbed; and (d)
local taxation will be fair, uniform, and just.
iii. Mactan Cebu International Airport Authority vs. Marcos, September 11,
1996
The taxing powers of local government units cannot extend to the levy of,
inter alia, taxes, fees and charges of any kind on the National
Government, its agencies and instrumentalities, and local government
units; however, pursuant to Section 232, provinces, cities, and
municipalities in the Metropolitan Manila Area may impose the real
property tax except on, inter alia, real property owned by the Republic of
the Philippines or any of its political subdivisions except when the
beneficial use thereof has been granted, for consideration or otherwise, to
BAR OPERATIONS COMMITTEE
39
a taxable person, as provided in item (a) of the first paragraph of Section
234.
iv. NAPOCOR vs. City of Cabanatuan, April 9, 2003
In recent years, the increasing social challenges of the times expanded
the scope of state activity, and taxation has become a tool to realize social
justice and the equitable distribution of wealth, economic progress and the
protection of local industries as well as public welfare and similar
objectives. Taxation assumes even greater significance with the ratification
of the 1987 Constitution. Thenceforth, the power to tax is no longer vested
exclusively on Congress; local legislative bodies are now given direct
authority to levy taxes, fees and other charges pursuant to Article X,
section 5 of the 1987 Constitution.
This paradigm shift results from the realization that genuine development
can be achieved only by strengthening local autonomy and promoting
decentralization of governance. For a long time, the countrys highly
centralized government structure has bred a culture of dependence among
local government leaders upon the national leadership. It has also
dampened the spirit of initiative, innovation and imaginative resilience in
matters of local development on the part of local government leaders.
The only way to shatter this culture of dependence is to give the LGUs a
wider role in the delivery of basic services, and confer them sufficient
powers to generate their own sources for the purpose. To achieve this goal,
section 3 of Article X of the 1987 Constitution mandates Congress to enact
a local government code that will, consistent with the basic policy of local
autonomy, set the guidelines and limitations to this grant of taxing
powers.
- Extent of the Power of Congress in Local Taxation
- City Govt. of Quezon City vs. Bayantel, March 6, 2006
The power to tax is primarily vested in the Congress; however, in our
jurisdiction, it may be exercised by local legislative bodies, no longer merely
be virtue of a valid delegation as before, but pursuant to direct authority
conferred by Section 5, Article X of the Constitution. Under the latter, the
exercise of the power may be subject to such guidelines and limitations as the
Congress may provide which, however, must be consistent with the basic
policy of local autonomy.
BARCOM2008-09 REVIEW NOTES FOR TAXATION 2
Clearly then, while a new slant on the subject of local taxation now prevails in
the sense that the former doctrine of local government units delegated power
to tax had been effectively modified with Article X, Section 5 of the 1987
Constitution now in place, .the basic doctrine on local taxation remains
essentially the same. For as the Court stressed in Mactan, "the power to tax is
[still] primarily vested in the Congress."
In net effect, the controversy presently before the Court involves, at bottom, a
clash between the inherent taxing power of the legislature, which necessarily
includes the power to exempt, and the local governments delegated power to
tax under the aegis of the 1987 Constitution.
2. Fundamental Principles in the exercise of Local Taxing Power (Sec. 130, LGC)
3. Exercise of Local Taxing Power
B. Common Limitations on the Exercise of Local Taxing Power
1. The Principle of Preemption / Exclusionary Rule (Sec. 133, LGC)
- If the national government elects to tax a particular subject within a Local
Government Unit, it is impliedly withholding the power of LGU to tax the same.
- Adopted in the Philippines despite non-prohibition of double taxation unless
expressly allowed by Congress.
2. Cases:
a. Province of Bulacan vs. CA, November 27, 1998
A province may not levy excise taxes on articles already taxed by the National
Internal Revenue Code. It is clearly apparent from Section 151 of the National
Internal Revenue Code levies a tax on all quarry resources, regardless of
origin, whether extracted from public or private land. Thus, a province may
not ordinarily impose taxes on stones, sand, gravel, earth and other quarry
resources, as the same are already taxed under the National Internal Revenue
Code. The province can, however, impose a tax on stones, sand, gravel, earth
and other quarry resources extracted from public land because it is expressly
empowered to do so under the Local Government Code. As to stones, sand,
gravel, earth and other quarry resources extracted from private land, however,
it may not do so, because of the limitation provided by Section 133 of the
Code in relation to Section 151 of the National Internal Revenue Code.
b. First Philippine Industrial Corp. vs. CA, December 9, 1998 (Section 133j; Local
Tax on Common Carriers)
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40
There is no doubt that petitioner is a "common carrier" and, therefore, exempt
from the business tax as provided for in Section 133 (j), of the Local
Government Code, to wit:
"Section 133. Common Limitations on the Taxing Powers of Local Government
Units.
Unless otherwise provided herein, the exercise of the taxing powers of
provinces, cities, municipalities, and barangays shall not extend to the levy of
the following :
xxx xxx xxx
(j) Taxes on the gross receipts of transportation contractors and persons
engaged in the transportation of passengers or freight by hire and common
carriers by air, land or water, except as provided in this Code."
It is clear that the legislative intent in excluding from the taxing power of the
local government unit the imposition of business tax against common carriers
is to prevent a duplication of the so-called "common carrier's tax."
Petitioner is already paying three (3%) percent common carrier's tax on its
gross sales/earnings under the National Internal Revenue Code.[19] To tax
petitioner again on its gross receipts in its transportation of petroleum
business would defeat the purpose of the Local Government Code.
c. Palma Development Corp. vs. Municipality of Malangas, October 16, 2003 (Sec.
133e)
By express language of Sections 153 and 155 of RA No. 7160, local
government units, through their Sanggunian, may prescribe the terms and
conditions for the imposition of toll fees or charges for the use of any public
road, pier or wharf funded and constructed by them. A service fee imposed on
vehicles using municipal roads leading to the wharf is thus valid. However,
Section 133(e) of RA No. 7160 prohibits the imposition, in the guise of
wharfage, of fees -- as well as all other taxes or charges in any form
whatsoever -- on goods or merchandise. It is therefore irrelevant if the fees
imposed are actually for police surveillance on the goods, because any other
form of imposition on goods passing through the territorial jurisdiction of the
municipality is clearly prohibited by Section 133(e).
d. Batangas Power Corp. vs. Batangas City, April 28, 2004 (Section 133g)
Sec. 133 (g) of the LGC, which proscribes local government units (LGUs) from
levying taxes on BOI-certified pioneer enterprises for a period of six years from
BARCOM2008-09 REVIEW NOTES FOR TAXATION 2 41

the date of registration, applies specifically to taxes imposed by the local 4. Time of Payment (Section 167, LGC)
government, like the business tax imposed by Batangas City on BPC in the
case at bar. Reliance of BPC on the provision of Executive Order No. 226,[18] Unless otherwise provided in LGC, all local taxes, fees, and charges shall be paid
specifically Section 1, Article 39, Title III, is clearly misplaced as the six-year within the first twenty (20) days of January or of each subsequent quarter, as the
tax holiday provided therein which commences from the date of commercial case may be. The Sanggunian concerned may, for a justifiable reason or cause,
operation refers to income taxes imposed by the national government on BOI- extend the time for payment of such taxes, fees, or charges without surcharges or
registered pioneer firms. Clearly, it is the provision of the Local Government penalties, but only for a period not exceeding six (6) months.
Code that should apply to the tax claim of Batangas City against the BPC. The
6-year tax exemption of BPC should thus commence from the date of BPCs 5. Surcharges, Interests and Penalties
registration with the BOI on July 16, 1993 and end on July 15, 1999.
C. Residual Power to Tax (Sec. 186)
3. Local Taxing Power cannot extend to: - The power of LGU to tax even of not expressly granted by the LGC provided
that there is no express prohibition.
- Those already covered by the National Internal Revenue Code, i.e. Income
tax, Transfer tax, VAT, percentage tax, Excise Tax, Documentary Stamp Tax; D. Specific Taxing Units
1. Provinces may tax:
- Those already covered by the Tariff and Customs Code; i. Transfer of Real Property ownership
- Duties upon products about to be exported and goods passing - Onerous or gratuitous
through territorial jurisdiction cannot be taxed by LGUs. - Preemption rule is not applicable
- of 1%
- Taxation of the National Government, including its agencies and
instrumentalities as we as local government units; ii. Printing and Publication

- Those subjects not within the ambit of real taxation by reason of public
policy, i.e. Cooperatives registered under RA 6938 (CDA);
iii. Franchise Tax
- Those enjoying privileges as granted by the Board of Investments - Government franchise, whether primary or secondary, i.e. public utility
(Investments Priorities Plan); companies
- Both pioneer and non-pioneer enterprises enjoy such kind of - If the franchise grants tax exemption and the same was executed prior to
privileges under the Omnibus Investments Code. 1991 LGC, it is deemed revoked by reason of the laws blanket revocation.
- At a rate not exceeding of 1% of the Gross Amount receipt of the
- Taxes on agricultural or aquatic products sold by marginal enterprises; preceding calendar year

- Taxes, fees, or charges for the registration of motor vehicles and for the
issuance of all kinds of licenses or permits for the driving thereof, except
tricycles.
- LTO vs. Butuan Congress has no intention to delegate issuance of permits
to LGUs. The intention of the law is to centralize issuance of permits to
drive motor vehicles including tricycles is to monitor the operation of the
same. Section 133(l) is only for franchise where to grant the same is
within the discretion of LGUs. The permit to drive is issued by LTO.
iv. Professional Tax
- Those who have passed government licensure examinations are the ones
liable
- Amount not exceeding Php 300.00
- Imposed by the city or province where the taxpayers principal office is
located
- With employer-employee relationship liability to PTR depends on the extent
of services provided. If services provided is exclusive to the employer, PTR is
not necessary, otherwise, the employee is liable.

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BARCOM2008-09 REVIEW NOTES FOR TAXATION 2 42

v. Sand and Gravel Tax d. Release of distrained property upon payment prior to sale
- Imposed on extraction of sand, gravel and other quarry resources
- Not more than 10% of the FMV of what was extracted e. Procedure of sale
- Case: Province of Bulacan vs. CA
f. Disposition of proceeds
vi. Amusement Tax
- As high as 30% 4) Levy (Sec. 174 and 176,. LGC)
- Applies to theaters, cinemas, concert halls, boxing stadiums, circuses and
other places of amusements.
Contents of assessment:
vii. Taxes on Delivery trucks
1. Meralco vs. Barlis (Feb. 1, 2002) - A notice of assessment as provided for in
2. Cities may tax those that may be taxed by a province and a municipality. They the Real Property Tax Code should effectively inform the taxpayer of the value
may impose a tax rate which is 50% higher than the rates being imposed by of a specific property, or proportion thereof subject to tax, including the
provinces and municipalities.
discovery, listing, classification, and appraisal of properties. The petitioner is
3. Municipalities also correct in pointing out that the last paragraph of the said notices that
i. Business permit inform the taxpayer that in case payment has already been made, the notices
ii. Community Taxes may be disregarded is an indication that it is in fact a notice of collection. It
iii. May levy taxes, fees, and charges not otherwise levied by provinces (Sec. 142) could only qualify as a notice of collection if there is an unmistakable demand
for payment of back taxes.

REMEDIES IN LOCAL TAXATION Who is entitled to the notice of assessment

A. REMEDIES OF THE GOVERNMENT
1. Talusan vs. Tayag, (April 04, 2001) - Cases involving an auction sale of land
a. ADMINISTRATIVE for the collection of delinquent taxes are in personam. Thus, notice by
publication, though sufficient in proceedings in rem, does not as a rule satisfy
1) Local Governments Lien (Sec 173, LGC) the requirement of proceedings in personam. As such, mere publication of the
notice of delinquency would not suffice, considering that the procedure in tax
2) Assessment by the Local Treasurer sales is in personam. It was, therefore, still incumbent upon the city treasurer
to send the notice of tax delinquency directly to the taxpayer in order to
3) Distraint of goods, chattels or effect and other personal properties of
protect the interests of the latter.
whatever character (Sec. 174 and 175, LGC)
In the present case, the notice of delinquency was sent by registered
a. Seizure mail to the permanent address of the registered owner in Manila. In that notice,
the city treasurer of Baguio City directed him to settle the charges immediately
b. Accounting of distrained goods and to protect his interest in the property. Under the circumstances, we hold
that the notice sent by registered mail adequately protected the rights of the
c. Publication taxpayer, who was the registered owner of the condominium unit.

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BARCOM2008-09 REVIEW NOTES FOR TAXATION 2 43

For purposes of the real property tax, the registered owner of the
property is deemed the taxpayer. Hence, only the registered owner is entitled
to a notice of tax delinquency and other proceedings relative to the tax sale.
Not being registered owners of the property, petitioners cannot claim to have
been deprived of such notice. In fact, they were not entitled to it.
ii. The Sanggunian concerned may, for a justifiable reason or cause, extend the
time for payment of such taxes, fees, or charges or penalties, but only for a
period not exceeding 6 months.
Surcharges, Interests and Penalties (Sec. 168, LGC)

b. JUDICIAL (Sec. 174, LGC) - Sanggunian may impose:

1) Civil Action in the court i. Surcharge not exceeding 25% of the amount of taxes, fees or charges not
paid on time and
2) Filed by Local Treasurer
ii. Interest not exceeding 2% per month of the unpaid taxes, fees or charges,
including surcharges, until such amount is fully paid, BUT in no case shall the
3) Within 5 years from the date the taxes, fees or charges became due
total interest on the unpaid amount or portion thereof exceed 36 months.

B. REMEDIES OF THE TAXPAYER

Period within which to collect within 5 years from the date of
assessment by administrative or judicial action a. ADMINISTRATIVE

Appeal to the Secretary of Justice; Re: newly enacted tax

c. OTHER PROVISIONS ordinance (Sec. 187, LGC) Any question on the constitutionality or
legality of tax ordinances or revenue measures; Within 30 days from its
Accrual of the tax (Sec. 166, LGC) effectivity.

- General rule: All local taxes, fees, and charges shall accrue on the 1 st day of 1. Drilon vs. Lim, (August 4, 1994) - Section 187 authorizes the Secretary
January of each year. of Justice to review only the constitutionality or legality of the tax
ordinance and, if warranted, to revoke it on either or both of these
- Except: grounds. When he alters or modifies or sets aside a tax ordinance, he is
not also permitted to substitute his own judgment for the judgment of the
i. Unless otherwise provided in the LGC, local government that enacted the measure. Secretary Drilon did set aside
the Manila Revenue Code, but he did not replace it with his own version of
ii. New taxes, fees or charges, or changes in the rates thereof, shall accrue on the what the Code should be. He did not pronounce the ordinance unwise or
1st day of the quarter next following the effectivity of the ordinance imposing unreasonable as a basis for its annulment. He did not say that in his
such new levies or rates judgment it was a bad law. What he found only was that it was illegal. All
he did in reviewing the said measure was determine if the petitioners
Time of payment (Sec. 167, LGC)
were performing their functions is accordance with law, that is, with the
- General Rule: All local taxes, fees and charges shall be paid within the first 20 prescribed procedure for the enactment of tax ordinances and the grant of
days of January or of each subsequent quarter, as the case may be. powers to the city government under the Local Government Code. As we
see it, that was an act not of control but of mere supervision.
- Except:
2. Hagonoy Market Vednors Assn. vs. Municipality of Hagonoy.
i. Unless otherwise provided by the LGC Bulacan, (February 6, 2002) - Sec. 187, LGC requires that an appeal of a
tax ordinance or revenue measure should be made to the Secretary of
Justice within 30 days from effectivity of the ordinance and even during its
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BARCOM2008-09 REVIEW NOTES FOR TAXATION 2
pendency, the effectivity of the assailed ordinance shall not be
suspended. In the case at bar, Municipal Ordinance No. 28 took effect in
October 1996. Petitioner filed its appeal only in December 1997, more
than a year after the effectivity of the ordinance in 1996. Clearly, the
Secretary of Justice correctly dismissed it for being time-barred. At this
point, it is apropos to state that the timeframe fixed by law for parties to
avail of their legal remedies before competent court is not a "mere
technicality" that can be easily brushed aside. The periods stated in the
section are mandatory. Ordinance No. 28 is a revenue measure adopted
by the municipality of Hagonoy to fix and collect public market stall
rentals. Being its lifeblood, collection of revenues by the government is of
paramount importance. The funds for the operation of its agencies and
provision of basic services to its inhabitants are largely derived from its
revenues and collections. Thus, it is essential that the validity of revenue
measures is not left uncertain for a considerable length of time. Hence,
the law provided a time limit for an aggrieved party to assail the legality
of revenue measures and tax ordinances.
3. Ty vs. Trampe, (December 1, 1995) Petitioners failed to appeal the
assessment of their properties to the Board of Assessment Appeal within
sixty (60) days from the date of receipt of the written Notice of
Assessment, and if it is true that petitioner, as alleged in their pleadings,
was not afforded the opportunity to appeal to the board of assessment
appeal, then they could have availed of the provisions of Section 252, of
the same R.A. 7160 by paying the real estate tax under protest. Because
of petitioners failure to avail of either Sections 226 or 252 of R.A. 7160,
they failed to exhaust administrative remedies provided for by law before
bringing the case to Court. Therefore the filing of this case before this
Court is premature, the same not falling under the exception because the
issue involved is not a question of law but of fact.
Appeal to the Board of Assessment Appeals (Secs. 226 and 252,
LGC)
- Sec. 226, LGC Any owner or person who is not satisfied with the action
of the provincial, city or municipal assessor in the assessment of his
property; Within 60 days from receipt of the written notice of assessment;
Appeal to the BAA of the province or city by filing a petition under oath
and copies of the tax declarations and affidavits or documents in support
of appeal.
- Sec. 252 (d), LGC In the event that the protest is denied or upon the
lapse of the 60-day period to decide, the taxpayer may appeal to the BAA.
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Protest of the assessment (Sec. 226 and 252, LGC)
- Pay under protest and such shall be annotated in the tax receipt
- Protest in writing must be filed within 30 days from payment of the tax to
the provincial, city or municipal treasurer, who shall decide the protest
within 60 days from receipt.
- The tax or a portion thereof paid under protest shall be held in trust by
the treasurer concerned.
- Protest decided in favor of taxpayer the amount or portion of the tax
protested shall be refunded to the protestant or applied as tax credit
against his existing or future tax liability.
- Protest denied or upon lapse of the period to decide - appeal to the BAA.
Claim for refund (Sec. 253, LGC)
- When an assessment of basic real property tax, or any other tax levied is
found to be illegal or erroneous and the tax is accordingly reduced or
adjusted,
- The taxpayer may file a written claim for refund or credit of taxes and
interests
- With the provincial or city treasurer
- Within 2 years from the date the taxpayer is entitled to such reduction or
adjustment.
- The provincial or city treasurer shall decide the claim for refund or credit
within 60 days from receipt
- In case the claim is denied, the taxpayer may appeal to the BAA.
Remedies from a denial of the protest and refund
- It should not only be the written claim before the treasurer that must be
filed in 2 years but the taxpayer must also be able to file a case in court
before the expiration of the 2 year period.
- There is no appellate remedy from the denial of the treasurer before the
regular court but an independent and original action for refund.
BARCOM2008-09 REVIEW NOTES FOR TAXATION 2 45

b. JUDICIAL government units where the property is located. Under the Local Government Code,
local government units are mandated to fix a uniform rate of basic real property tax
Questioning Tax Sale applicable to their respective localities, the proceeds of which exclusively accrue to them.
(See Secs. 233 and 271, LGC), [Page 479, Tax Law and Jurisprudence, 2000 Edition by
Justice Vitug and Judge Acosta].
REAL PROPERTY TAXATION
CHARACTERISTIC OF REAL PROPERTY TAX:
Real Property Tax, defined
1. Direct tax on the ownership of real property
A direct tax on ownership of lands and buildings or other improvements thereon
2. Ad Valorem tax. The value is based on the tax base
Payable regardless of whether the property is used or not,
3. Proportion - the tax is calculated on the basis of a certain percentage of the
although the value may vary in accordance with such factor.
value assessed
4. Indivisible single obligation
A. Governing Law 5. Local Tax
Historical Background:
1. Commonwealth Act No. 470 Old Assessment Law C. Fundamental Principles Governing Appraisal and Assessment of Real
- since 1920 Property (Section 198, LGC)
2. Real Property Tax Code (Presidential Decree No. 464, 1. Real property shall be appraised at its current and fair market value.
as amended) 2. Real property shall be classified for assessment purposes on the basis of
- June 1, 1974 its actual use.
3. Local Government Code (Republic Act No. 7160) 3. Real property shall be assessed on the basis of a uniform standard within
- January 1, 1992 each local government unit.
- The changes however were only on the tax rate ceilings and assessment 4. The appraisal, assessment, and collection of real property tax shall not be
levels. let to any private person; and
5. The appraisal and assessment of real property shall be equitable.
The Local Government Code covers the administration, appraisal,
assessment, levy and collection of Real Property Tax, i.e. tax on land and building and D. Properties Covered (Sec. 232, LGC)
other structures and improvements on it, including machineries. (Subject to the 1. Land,
definition given by Art. 415 of the New Civil Code) 2. Buildings
3. Machinery and
B. Nature of Real Property Tax National or Local? 4. Other improvements not otherwise exempted under said code (Sec 232,
Hybrid of national and local tax LGC)
Provisions of LGC are applied nationwide but rates imposed are different
per LGU ordinance Machinery embraces machines, equipment, mechanical contrivances,
instruments, appliances or apparatus which may or may not be attached,
The real property tax has been considered and held to be national, despite the permanently or temporarily, to the real property. It includes the physical facilities
fact that in practice it is local in its imposition and utilization. for production, the installations and appurtenant service facilities, those which are
mobile, selfpowered or self-propelled, and those not permanently attached to the
Justice Vitug points out that: The real property tax has been considered and held real property which are actually, directly, and exclusively used to meet the needs
to be a national, not a local tax in Meralco Securities Industrial Corp v. CBAA, 114 SCRA of the particular industry, business or activity and which by their very nature and
260. The Court said that realty tax has always been imposed by the national law-making purpose are designed for, or necessary to its manufacturing, mining, logging,
body. The real estate tax is enforced throughout the Philippines and not in a particular commercial, industrial or agricultural purposes. (Sec. 199 [o], LGC)
political subdivision, although the bulk of the tax proceeds accrue to the various local
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BARCOM2008-09 REVIEW NOTES FOR TAXATION 2
Machinery which are of general purpose use including but not limited to office
equipment, typewriters, telephone equipment, breakable or easily damaged
containers (glass or cartons), microcomputers, facsimile machines, telex machine,
cash dispensers, furnitures and fixtures, freezers, refrigerators, display cases or
racks, fruit juice or beverage automatic dispensing machines which are not
directly and exclusively used to meet the needs of a particular industry,
business or activity shall not be considered within the definition of
machinery. (Sec. 290 [o], IRR of RA 7160)
Improvements include valuable additions made to a property or an amelioration
in its condition, amounting to more than a mere repair or replacement of parts
involving capital expenditures and labor, which is intended to enhance its value,
beauty or utility or to adopt it for new or further purposes.
Note: Although the term real property has not been expressly defined in the LGC,
early decisions of the Supreme Court in Mindanao Bus Co. v City Assessor of Cagayan
de Oro, 6 SCRA `97; Board of Assessment Appeals v Meralco, 119 PHIL 328; Manila
Electric Co. v Board of Assessment Appeals,10 SCRA 68) seem to suggest that Art.
415 of the Civil Code could also be controlling, to wit:.
Art. 415. The following are immovable property:
(1) Land, buildings, roads and constructions of all kinds adhered to the soil;
(2) Trees, plants, and growing fruits, while they are attached to the land or form
an integral part of an immovable;
(3) Everything attached to an immovable in a fixed manner, in such a way that it
cannot be separated therefrom without breaking the material or deterioration of
the object;
(4) Statues, reliefs, paintings or other objects for use or ornamentation, placed in
buildings or on lands by the owner of the immovable in such a manner that it
reveals the intention to attach them permanently to the tenements;
(5) Machinery, receptacles, instruments or implements intended by the owner of
the tenement for an industry or works which may be carried on in a building or on
a piece of land, and which tend directly to meet the needs of the said industry or
works;
(6) Animal houses, pigeon-houses, beehives, fish ponds or breeding places of
similar nature, in case their owner has placed them or preserves them with the
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intention to have them permanently attached to the land, and forming a
permanent part of it; the animals in these places are included;
(7) Fertilizer actually used on a piece of land;
(8) Mines, quarries, and slag dumps, while the matter thereof forms part of the
bed, and waters either running or stagnant;
(9) Docks and structures which, though floating, are intended by their nature and
object to remain at a fixed place on a river, lake, or coast;
(10) Contracts for public works, and servitudes and other real rights over
immovable property.
In Caltex vs. CBAA, May 31, 1982:
Machinery and equipment, consisting of underground tanks, elevated
tanks, water tanks, gasoline pumps, computing pumps, water pumps, car washer,
car and truck hoists, air compressors and similar articles, installed by Caltex
(Philippines) Inc. in its gasoline stations, located on leased land, have been held to
be real property subject to the tax. (real properties which have characteristics of
permanency, the lease is for a long period of time)
2001 BAR QUESTION: Under Article 415 of the Civil Code, in order for
machinery and equipment to be considered real property, they must be
placed by the owner of the land and, in addition, must tend to directly meet
the needs of the industry or works carried on by the owner. Oil companies,
such as Caltex and Shell, install underground tanks in the gasoline stations
located in land leased by the oil companies from others. Are those
underground tanks, which were not placed there by the owner of the land
but by the lessee, considered real property for purposes of real property
taxation under the LGC?
SUGGESTED ANSWER FROM UP LAW CENTER: Yes. The underground
tanks although installed by the lessee, Shell and Caltex, are considered as
real property for purposes of the imposition of real property taxes. It is only
for purposes of executing a final judgment that these machinery and
equipment, installed by the lessee on a leased land, would not be
considered as real property. But in the imposition of real property tax, the
underground tanks are taxable as necessary fixtures of the gasoline station
without which the gasoline station would not be operational. (Caltex v.
CBAA, 114 SCRA 296).
BARCOM2008-09 REVIEW NOTES FOR TAXATION 2 47

d. any cause which legally/physically prevents the owner of the

SPECIAL CLASSES OF REAL PROPERTY (Sec. 216, LGC)
1. HOSPITALS
2. CULTURAL and SCIENTIFIC purposes
3. owned and used by LOCAL WATER DISTRICTS
4. GOCCs rendering essential public services in the supply and distribution of
water and/or generation or transmission of electric power.
E. Properties Exempt
1. Section 234, LGC
a. Real property owned by the Republic of the Philippines or any of its
political subdivisions except when the beneficial use thereof has been
granted, for consideration or otherwise, to a taxable person;
- except: when beneficial use thereof is granted to a taxable person
- cases of MIAA and MCAA: GOCCs are not automatically exempt
from real property tax, depending on its charter giving it exemption
- charter enacted after LGC so that the exemption is not revoked
property or person having legal interest therein from
improving, utilizing, or cultivating the same
What Are Considered as Idle Lands: (Sec. 237, LGC)
1. Agricultural lands More than 1 hectare if more than of which remain
uncultivated or unimproved by the owner of the property or person having legal interest
therein.
Not Idle Lands:
Agricultural lands planted to permanent or perennial crops with at least 50 trees
to a hectare
Lands actually used for grazing purposes
2. Non-Agricultural Lands More than 1,000 sq. m. in area if more than of
which remain uncultivated or unimproved by the owner of the property or person having
legal interest therein.

b. Charitable institutions, churches, parsonages, or convents appurtenant Proof of Tax Exemption:

thereto, mosques, non profit or religious cemeteries, and all lands,
buildings, and improvements actually, directly and exclusively used
for religious, charitable, or educational purposes.
- traditional exemptees
c. All pieces of machinery and equipment that are actually, directly, and
exclusively used by local water districts, and government owned or
controlled corporations engaged in the supply and distribution of water
and/or generation and transmission of electric power.
Every person by or for whom real property is declared who shall claim the
exemption shall file with the provincial, city or municipal assessor within 30 days from
date of declaration of real property sufficient documentary evidence in support of
such claim (i.e. corporate charters, title of ownership,articles of incorporation,
contracts, affidavits, etc.)
3. Constitutional Exemptions
- actually, directly, exclusively used for religious, educational and
charitable purposes are exempt from real property tax

d. All real property owned by duly registered cooperatives as provided for Query: To where does the exemption attach? To the property or to the entity?
under RA 6938, and
Case: X owns a parcel of land, leased by church. May X claim exemption from
e. Machinery and equipment used for pollution control and environmental Real Property Taxation? Yes, exemption attaches on property as long as
protection. exclusively used for religious purchases.

2. Section 238, LGC Case: School - not subject to Real Property Tax if directly used for educational
Idle Lands Exempt From Tax: purposes.
By reason of: A. Has a mansion near the school where the president of the school resides
a. force majeure and where guests may be accommodated - incidental, president has to live
b. civil disturbance near school
c. natural calamity

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BARCOM2008-09 REVIEW NOTES FOR TAXATION 2
B. Near the school is a hospital where medical students are trained -
incidental to operation of the school (Herrera vs. CBAA use as trainee
students)
C. Near the school is a mens dorm, a student center
exempt, incidental to operation of the school
D. Near the school is another school building with 2 floors used as
classrooms while 2 floors are for commercial stores.
- incidental to operation of school (Bishop of Neva Segovia Case vegetable
garden near convent is incidental to convent operation)
- that part not used for educational purpose is subject to real property tax
- As to the land, pro-rate according to use, one-half taxed pursuant to
Abra Valley College Case
Note:
Incidental exemptions promulgated prior to 1987 Constitution
meant, primarily used for the purposes even if not solely.
CASES:
1. In MIAA v. Paranaque, July 20, 2006, the Court declared the Airport
Lands and Buildings of the Manila International Airport Authority exempt
from the real estate tax imposed by the City of Paraaque. The Court
declared void all the real estate tax assessments issued by the City of
Paraaque on the Airport Lands and Buildings of the MIAA, except for the
portions that the MIAA has leased to private parties. The Court based its
ruling under Section 2(10) and (13) of the Introductory Provisions of the
Administrative Code, which governs the legal relation and status of
government units, agencies and offices within the entire government
machinery, under which MIAA is a government instrumentality and not a
government-owned or controlled corporation. Under Section 133(o) of the
Local Government Code, MIAA as a government instrumentality is not a
taxable person because it is not subject to "[t]axes, fees or charges of any
kind" by local governments. The only exception is when MIAA leases its
real property to a "taxable person" as provided in Section 234(a) of the
Local Government Code, in which case the specific real property leased
becomes subject to real estate tax. Thus, only portions of the Airport
Lands and Buildings leased to taxable persons like private parties are
subject to real estate tax by the City of Paraaque.
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Under Article 420 of the Civil Code, the Airport Lands and Buildings
of MIAA, being devoted to public use, are properties of public dominion and
thus owned by the State or the Republic of the Philippines. Article 420
specifically mentions "ports x x x constructed by the State," which includes
public airports and seaports, as properties of public dominion and owned
by the Republic. As properties of public dominion owned by the Republic,
there is no doubt that the Airport Lands and Buildings are expressly
exempt from real estate tax under Section 234(a) of the Local Government
Code.
Furthermore, the Court made a distinction between a GOCC and an
instrumentality. Thus:
Government-owned or controlled corporation refers to any agency
organized as a stock or non-stock corporation, vested with functions
relating to public needs whether governmental or proprietary in nature,
and owned by the Government directly or through its instrumentalities
either wholly, or, where applicable as in the case of stock corporations, to
the extent of at least fifty-one (51) percent of its capital stock: x x x
A government-owned or controlled corporation must be "organized as a
stock or non-stock corporation." MIAA is not organized as a stock or non-
stock corporation. MIAA is not a stock corporation because it has no capital
stock divided into shares. MIAA has no stockholders or voting shares.
MIAA is also not a non-stock corporation because it has no members.
Since MIAA is neither a stock nor a non-stock corporation, MIAA does not
qualify as a government-owned or controlled corporation.
Thus, for an entity to be considered as a GOCC, it must either be organized
as a stock or non-stock corporation. Two requisites must concur before one
may be classified as a stock corporation, namely: (1) that it has capital
stock divided into shares, and (2) that it is authorized to distribute
dividends and allotments of surplus and profits to its stockholders. If only
one requisite is present, it cannot be properly classified as a stock
corporation. As for non-stock corporations, they must have members and
must not distribute any part of their income to said members.
2. In Lung Center of the Philippines vs. Quezon City, June 29, 2004, the
Court held that Lung Center of the Philipines, a charitable institution does
BARCOM2008-09 REVIEW NOTES FOR TAXATION 2
not lose its character as such and its exemption from taxes simply because
it derives income from paying patients, whether out-patient, or confined in
the hospital, or receives subsidies from the government, so long as the
money received is devoted or used altogether to the charitable object
which it is intended to achieve; and no money inures to the private benefit
of the persons managing or operating the institution. However, those
portions of its real property that are leased to private entities are not
exempt from real property taxes as these are not actually, directly and
exclusively used for charitable purposes.
Under the 1973 and 1987 Constitutions and Rep. Act No. 7160 in
order to be entitled to the exemption, the petitioner is burdened to prove,
by clear and unequivocal proof, that (a) it is a charitable institution; and (b)
its real properties are ACTUALLY, DIRECTLY and EXCLUSIVELY used for
charitable purposes. "Exclusive" is defined as possessed and enjoyed to
the exclusion of others; debarred from participation or enjoyment; and
"exclusively" is defined, "in a manner to exclude; as enjoying a privilege
exclusively." If real property is used for one or more commercial purposes,
it is not exclusively used for the exempted purposes but is subject to
taxation. The words "dominant use" or "principal use" cannot be
substituted for the words "used exclusively" without doing violence to the
Constitutions and the law. Solely is synonymous with exclusively.
What is meant by actual, direct and exclusive use of the property
for charitable purposes is the direct and immediate and actual application
of the property itself to the purposes for which the charitable institution is
organized. It is not the use of the income from the real property that is
determinative of whether the property is used for tax-exempt purposes.
The petitioner failed to discharge its burden to prove that the
entirety of its real property is actually, directly and exclusively used for
charitable purposes. While portions of the hospital are used for the
treatment of patients and the dispensation of medical services to them,
whether paying or non-paying, other portions thereof are being leased to
private individuals for their clinics and a canteen. Further, a portion of the
land is being leased to a private individual for her business enterprise
under the business name "Elliptical Orchids and Garden Center."
Accordingly, the Court held that the portions of the land leased to
private entities as well as those parts of the hospital leased to private
individuals are not exempt from such taxes. On the other hand, the
portions of the land occupied by the hospital and portions of the hospital
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used for its patients, whether paying or non-paying, are exempt from real
property taxes.
Analysis:
Is Lung Center liable for Real Property Tax?
Yes.
a. exclusively used means solely used for charitable purposes
b. exemption in its charter revoked by new LGC
c. incidental exemption no longer recognized
d. taxed on orchidarium, canteen, private clinics
Query: are the older cases now not applicable so that they are
now taxable?
- not clear as to the extent of Lung Center case as to areas
which used to be considered as real property tax exempted
as incidental
- If city decides to tax SLU on its hospital, parking lot, etc., use
as ground that they should be exempt due to necessity, do
not use the word incidental
3. In LRTA vs. CBAA, October 12, 2000, though the creation of the LRTA
was impelled by public service to provide mass transportation in MM- its
operations undeniably partakes of ordinary business. . . Given that it is
engage in a service-oriented commercial endeavour, its carriage ways and
terminal stations are patrimonial property subject to tax, notwithstanding
its claim of being a GOCC.
Under its charter, LRT is not exempt from real property tax.
Taxation is the rule and exemption is the exception.
4. In DIGITEL vs. Province of Pangasinan, February 23, 2007, the Court
ruled that in view of the unequivocal intent of Congress to exempt from
real property tax those real properties actually, directly and exclusively
used by petitioner DIGITEL in the pursuit of its franchise, respondent
Province of Pangasinan can only levy real property tax on the remaining
real properties of the grantee located within its territorial jurisdiction not
part of the above-stated classification. Said exemption, however, merely
applies from the time of the effectivity of petitioner DIGITELs legislative
franchise and not a moment sooner.
5. In Philippine Fisheries Development Authority vs. Court of Appeals, July
31, 2007, the Court reversed the Court of Appeals decision which held that
BARCOM2008-09 REVIEW NOTES FOR TAXATION 2
petitioner Philippine Fisheries Development Authority is liable to pay real
property taxes on the land and buildings of the Iloilo Fishing Port Complex
which are owned by the Republic of the Philippines but operated and
governed by the Authority.
The Court ruled that the Authority is not a GOCC but an
instrumentality of the national government which is generally exempt from
payment of real property tax. However, said exemption does not apply to
the portions of the IFPC which the Authority leased to private entities. With
respect to these properties, the Authority is liable to pay real property tax.
The Authority should be classified as an instrumentality of the
national government. As such, it is generally exempt from payment of real
property tax, except those portions which have been leased to private
entities.
F. May LGUs grant exemption? Yes
Power to Grant Local Exemptions (Sec. 192 LGC)
- LGUs, may through ordinances duly approved, grant tax exemptions, incentives or
reliefs under such terms and conditions, as they may deem necessary.
- Although powerless to grant RPT exemption, LGU in MM can exempt the 5% ad valorem
tax on idle lands.
- LGUs (within and outside MM) may also grant condonation which actually partake of
exemption.
G. Who are liable for the Real Property Taxes
1. Ownership vs. Use
Doctrine of Ownership
- owner is liable
Doctrine of Use
- property is exempt due to Use (REC-religious, educational,
charitable)
Actual Use of Property as Basis for Assessment (Sec. 217, LGC)
Real property shall be classified, valued and assessed on the basis of
actual use regardless of where located, whoever owns it, and whoever uses it.
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Beneficial User May Be Liable if:
* he leased property from the government
* he leased property from an exempt owner
* use is not exempt from real property tax
2. In Testate Estate of Concordia Lim vs. Manila, February 21, 1990, GSIS
foreclosed the property mortgaged by Lim and for failure to redeem, owned by
GSIS for the years 1977 to 1978. In 1979, heirs of Lim repurchased the property.
Manila sought to levy real property tax on heirs for back taxes covering 1977 and 1978.
Who is lible for the back taxes?
a. not the heirs because they were not the owners nor beneficial owners at the
time
b. not GSIS because at the time it was exempt
c. beneficial users or those using the property for commercial use must pay
however not made liable since not impleaded
H. Procedure in Real Property Taxation
In Lopez vs. City of Manila, February 19, 1999, the Court discussed the steps to be
followed for the mandatory conduct of General Revision of Real Property assessments,
pursuant to the provision of Sec. 219, of R.A. No. 7160 which are as follows:
1. The preparation of Schedule of Fair Market Values.
2. The enactment of Ordinances:
a) levying an annual "ad valorem" tax on real property and an additional
tax accruing to the SEF.
b) fixing the assessment levels to be applied to the market values of real
properties;
c) providing necessary appropriation to defray expenses incident to
general revision of real property assessments; and
d) adopting the Schedule of Fair Market Values prepared by the assessors.
The preparation of fair market values as a preliminary step in the conduct of general
revision was set forth in Section 212 of R.A. 7160, to wit: (1) The city or municipal
assessor shall prepare a schedule of fair market values for the different classes of real
property situated in their respective Local Government Units for the enactment of an
ordinance by the sanggunian concerned. (2) The schedule of fair market values shall be
published in a newspaper of general circulation in the province, city or municipality
concerned or the posting in the provincial capitol or other places as required by law.
BARCOM2008-09 REVIEW NOTES FOR TAXATION 2
The Court also laid down the procedure in computing the real property tax. With
the introduction of assessment levels, tax rates could be maintained, although tax
payments can be made either higher or lower depending on their percentage
(assessment level) applied to the fair market value of property to derive its assessed
value which is subject to tax. Moreover, classes and values of real properties can be
given proper consideration, like assigning lower assessment levels to residential
properties and higher levels to properties used in business. The procedural steps in
computing the real property tax are as follows:
1) Ascertain the assessment level of the property
2) Multiply the market value by the applicable assessment level of the property
3) Find the tax rate which corresponds to the class (use) of the property and
multiply the assessed value by the applicable tax rates.
The computation of real property tax is cited below:
Market Value Pxxx
Multiplied by Assessment Level (x %)
Assessed Value Pxxx
Multiplied by Rate of Tax (x %)
Real Property Tax Pxx
1. Declaration of Real Properties whose duty?
DECLARATION OF REAL PROPERTY
It shall be the responsibility of the owner, administrator or their
representatives to declare, under oath, the true value of real property,
taxable or exempt, within 60 days after the acquisition. The sworn
declaration shall be filed once every 3 years before June 30 th of the year
commencing 1992. The failure or refusal to make that declaration within the
prescribed period would authorize the provincial or city assessor to declare
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the property in the name of the defaulting owner, if known, or against an
unknown owner as the case may be, and to assess the property for taxation.
(Secs. 201-204 LGC).
In the case of Testate Estate of Concordia Lim V. City of Manila, February 21,
1990, it was held that the unpaid tax attaches to the property and is chargeable
against the person who had actual or beneficial use and possession of it regardless of
whether or not he is the owner. To impose the real property tax on the subsequent
owner who was neither the owner nor the beneficial user of the property during the
designated periods would not only be contrary to law but also unjust.
a. Owner or Administrator (Secs. 202-203, LGC)
When: once every 3 years during the period from January 1 to June
30
What: file a sworn declaration with the assessor with description of the
property
IF newly acquired property -
a. files with assessor within 60 DAYS from date of transfer a
b. SWORN statement containing FMV and description of property
IF improvement on real property
a. file w/in 60 DAYS upon completion or occupation (whichever is
earlier)
b. SWORN statement containing FMV and description of property
b. Provincial / City / Municipal Assessor (Sec. 204)
WHEN only when the person under Sec 202 refuses or fails to make the
declaration within the prescribed time. No oath by assessor is required
NOTE: IF FILING FOR EXEMPTION (Sec. 206)
WHAT person claiming exemptions must file with assessor sufficient
documentary evidence to support claim
WHEN within 30 days from the date of DECLARATION of property
IF required evidence is not submittedwithin 30 days, the property will be listed
as taxable in the roll
IF proven to be tax-exempt, property will be dropped from the roll
NOTE: IF PROPERTY DECLARED FOR THE FIRST TIME (Sec. 222)
If declared for 1st time, real property shall be assessed for back taxes
a) for not more than ten (10) years prior to the date of initial assessment
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b) taxes shall be computed on the basis of applicable schedule of values
in force during the corresponding periods
*Assessor will compare the entry on file with the Registry of Deeds and the
assessment roll in his office.
c. building officials
Prior to construction of building, as required in procuring building permit.
Permit transmitted by building officials to Registry of Deeds.
d. Geodetic engineers - For lands surveyed
e. Notaries Public - For document notarization, must furnish the assessors a
copy
2. Valuation by Assessors
Assessment
- the act or process of determining the value of a property, or proportion thereof subject
to tax, including the discovery, listing, classification, and appraisal of properties.
In Callanta vs. Ombudsman, January 30, 1998, where the issue was whether
officials and employees of the Office of the City Assessor may reduce the new assessed
values of real properties upon requests of the affected property owners, the Court ruled
that forestall the practice of initially setting unreasonably high reassessment values only
to eventually change them to unreasonably lower values upon "requests" of property
owners, the law gives no such authority to the city assessor or his subalterns.. . Thus,
petitioners' unauthorized reduction of the assessed values ineluctably resulted in the
local government's deprivation of the corresponding revenues. Lost or reduced revenues
undeniably translate into damages or injury within the contemplation of the law. The city
government of Cebu, therefore, had every legal right to feel aggrieved and to institute
the proceeding against petitioners.
3. Preparation of Schedule of Fair Market Values
APPRAISAL AND VALUATION OF REAL PROPERTY
(Sec 212-214, 224-225)
How to determine Fair Market Value:

Appraisal For Land

- the act or process of determining the value of property as of a specific date for a
specific purpose.
LISTING OF REAL PROPERTY IN THE ASSESSMENT ROLLS
(Secs. 205, 207)
Listing of all Real Property whether taxable or exempt within the jurisdiction of LGU in
the assessment roll.
o Undivided real property in the name of the estate or heirs or devisees
o Corporation, partnership and association same as individuals
o Owned by the Republic of the Philippines, its instrumentalities, political
subdivisions, beneficial use is transferred to a taxable person in the name of
the possessor
All declarations shall be kept and filed under a uniform classification system to be
established by the provincial, city or municipal assessor.
Steps in assessment of Real Property :
1. Listing of all properties subject to the tax; and
2. The valuation of such properties.
1. Assessor of the province/city or municipality may summon the owners of the
properties to be affected and may take depositions concerning the property, its
ownership amount, nature and value. (sec. 213,LGC)
2. Assessor prepares a schedule of FMV for different classes of properties.
3. Sanggunian enacts an ordinance.
4. The schedule of FMV is published in a newspaper of general circulation in the province
city or municipality concerned or in the absence thereof shall be posted in the provincial
capitol city or municipal hall places therein (Sec. 212, LGC)
Classification of Land for purposes of assessment - Sec 218, LGC
1. Commercial land devoted principally for the object of profit and is not classified as
agricultural, industrial, mineral, timber, or residential land
2. Agricultural land devoted principally to the planting of trees, raising of crops,
livestock and poultry, dairying, salt making, inland fishing and similar aquacultural
activities, and other agricultural activities
3. Residential land principally devoted to habitation
4.Mineral- lands which minerals, metallic or non-metallic, exist in sufficient quantity or
grade to justify the necessary expenditures to extract and utilize such materials
5. Industrial-land devoted principally to industrial activity as capital investment and is not
classified as agricultural, commercial, timber, mineral or residential land
6. Timberland
7. Special

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- Classification of lands made by respective sanggunian in accordance with zoning - on lands specially benefited by public works, projects or improvements funded
ordinances. by the LGU
-It is based on actual use. Actual use refers to the purpose for which the property is - May be imposed even by municipalities outside MM provided:
principally or predominantly utilized by the person in possession thereof. - Special levy shall not exceed 60% of the actual cost of such projects and
improvements, including the costs of acquiring land and such other real property in
For Machinery connection therewith not apply to lands exempt from basic real property tax and the
1. For Brand New machinery : FMV is acquisition cost remainder of the land have been donated to the local government unit concerned for the
2. In all other cases: construction of said projects. (Sec. 240, LGC).
FMV = Remaining economic life x Replacement cost
Special Levy
DETERMINE ASSESSED VALUE (Sec. 218) Requirements for validity:
Procedure 1. infrastructure project financed by government whereby real property owners
1. take the schedule of FMV (Fair Market Value) benefit from it
2. Assessed value = FMV x Assessment level 2. not more than 60% of actual cost of project
3. Real Property Tax = Assessed value x Allowable Real Property Tax rate 3. not less than five but not more than ten years
4. thru an ordinance
4.Enactment of a Real Property Tax Ordinance a. nature of project
b. extent of project
Barangays cannot impose realty taxes. c. cost spent
Municipalities cannot fix real estate tax rates. d. metes and bounds

Procedure: What may be done:

a.hearing and modification of prepared schedule i. levy ad valorem taxes (see above)
b.publication ii. Fix Assessment levels
c.adoption of the schedule Assessment level is the percentage applied to the fair market value to determine
d.adoption of real property ordinance with assessment levels the taxable or taxation value of the property.

Coverage / Types of Real Property Tax: In City Assessor of Cebu City vs. Association of Benevola de Cebu, June 8, 2007,
1. Basic real property tax / Annual Ad Valorem Tax applying Secs. 215-216, of LGC, in line with City Tax Ordinance LXX of Cebu City, the 10%
For real property not specifically exempted special assessment should be imposed for the Chong Hua Hospital Medical Arts Center
a.Provinces not more than 1% of assessed value; (CHHMAC) building which should be classified as special. Sec. 216, LGC states that:
b.Cities, Municipalities in MM not more than 2% of assessed value
SEC. 216. Special Classes of Real Property.All lands, buildings, and
2. Special levies: other improvements thereon actually, directly and exclusively used
a. Special Education Fund (SEF) for hospitals, cultural or scientific purposes, and those owned and
- 1% additional real estate tax to finance the SEF (Sec.236) within MM area only used by local water districts, and government-owned or controlled
corporations rendering essential public services in the supply and
distribution of water and/or generation and transmission of electric
b. Additional Ad Valorem on the Lands
power shall be classified as special.
not exceeding 5% of the assessed value of the property (Sec. 236, LGC)
iii. Provide for appropriations
iv. Adopt Schedule of Fair Market Values
c. Special Assessments/ For Public Works
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Fair Market Value and Assessed Value Whats the difference?
Fair Market Value (FMV)
- price at which a property may be sold by a seller who is not compelled to
sell and bought by a buyer who is not compelled to buy
Assessed Value or Assessment Value (AV)
- fair market value of the real property multiplied by the assessment level.
It is synonymous with taxable value.
a) advance payment - discount not exceeding 20% of annual tax (Sec 251, LGC)
b) prompt payment - discount not exceeding 10% of annual tax due(Art 342 IRR)
Collection of Tax (Sec.247, LGC)
The collection of the real property tax with interest thereon and related expenses
and the enforcement of the remedies provided by the LGC or any applicable laws shall be
the responsibility of the city or municipal treasurer concerned.
The city or municipal treasurer my deputize the barangay treasurer to collect all
taxes on real property located in the barangay provided the barangay treasurer is
properly bonded.

Payment of Tax Who Collects:

The provincial, city, municipal or barangay treasurer
When: January 1 of every year (Sec 246)
The tax shall constitute as superior lien (Sec. 246) Period Within Which To Collect (Sec 270):
Within five (5) yrs from the date they become due within ten (10) yrs. from discovery of
How: fraud, in case there is fraud or intent to evade
a. basic real prop tax in 4 equal installments (Mar 31,Jun 30,Sep 30, Dec 31)
b. special levy - governed by ordinance Period of prescription shall be SUSPENDED when: (Sec 270, LGC)
1. local treasurer is legally prevented to collect tax
Interest for Late Payment 2. the owner of prop requests for reinvestigation and writes a waiver before
- two percent (2%) each month on unpaid amount until the delinquent amt is paid. expiration of period to collect
- provided in no case shall the total interest exceed thirty-six (36) months 3. the owner of the property is out of the country or cannot be located

Advance and Prompt Payment

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