You are on page 1of 79

UNIVERSITY OF THE PHILIPPINES WARNING:

UP LAW CENTER – Pre-Bar Review


These materials are copyrighted and/or based on the writer’s
books on Taxation and future revisions. It is prohibited to reproduce any
“BAR STAR NOTES” part of these Notes in any form or any means, electronic or mechanical,
including photocopying without the written permission of the author.
Unauthorized users shall not be prosecuted but SHALL BE SUBJECT
TO THE LAW OF KARMA SUCH THAT THEY WILL NEVER PASS

TAXATION
THE BAR OR WOULD BE UNHAPPY IN LIFE for stealing the
intellectual property of the author.

VER. 2010.06.12
copyrighted 2010
THE BEST OF LUCK AND
ADVANCE CONGRATULATIONS
Prepared by Prof. Abelardo T. Domondon
(AB (Econ), BSC (Acctg), LLB, MA (Econ), LLM, DCL (Cand.).
Lawyer-CPA-Customs Broker, Management Consultant, Professor of Law
and Pre-Bar Reviewer) TAXATION
How to use the “BAR STAR NOTES.” The “BAR STAR GENERAL PRINCIPLES OF TAXATION
NOTES” in the form of questions and answers as well as textual
discussion were specially prepared by Prof. Domondon for the
exclusive use of Bar Reviewees who attended his 2010 Lectures on TAXATION, IN GENERAL
TAXATION held at the University of the Philippines. Included in the
presentation are doctrines contained in Supreme Court decisions up to 1. State briefly and concisely the nature of taxation.
April 2010. Alternatively, define taxation.
SUGGESTED ANSWER: The inherent power of the sovereign
The purpose of the ‘BAR STAR NOTES” is to provide the Bar exercised through the legislature to impose burdens upon subjects and
Reviewee with a handy review material which serves as “memory- objects within its jurisdiction for the purpose of raising revenues to carry
joggers” for the September 12, 2010 Bar Examinations in Taxation. The out the legitimate objects of government.
author tries to second guess what would be included in the Bar Exams
using statistical analysis. The actual Bar questions may not be  2. What is the nature of the State’s power to tax ?
formulated in the same manner as the “BAR STAR NOTES”. However, Explain briefly.
the doctrines tested in the Bar would in all probability be included in these SUGGESTED ANSWER: The nature of the state’s power to tax is
Notes. two-fold. It is both an inherent power and a legislative power.
It is inherent in nature being an attribute of sovereignty. This is so,
If pressed for time, the author suggests that the reader should because without the taxes, the state’s existence would be imperiled.
focus his attention on the following: There is thus, no need for a constitutional grant for the state to exercise
 Nice to know this power.
 Should know It is a legislative power because it involves the promulgation of
 Must know and master rules. Taxation is a set of rules, how much is the tax to be paid, who
It is further suggested that the reader should merely browse those pays the tax, to whom it should be paid, and when the tax should be
without stars. paid.
2
3. What is the underlying theory of taxation ? Explain regulatory purposes only.
briefly. b. Basis: Tax imposed under power of taxation while license
SUGGESTED ANSWER: Taxes are the lifeblood of the nation. fee under police power.
Without revenue raised from taxation, the government will not c. Amount: In taxation, no limit as to amount while license fee
survive, resulting in detriment to society. Without taxes, the government limited to cost of the license and the expenses of police surveillance and
would be paralyzed for lack of motive power to activate and operate it. regulation.
(Commissioner of Internal Revenue v. Algue, Inc. et al., 158 SCRA 8, 16-17) d. Time of payment: Taxes normally paid after
commencement of business while license fee before.
4. Marshall said that, “the power to tax involves the e. Effect of payment: Failure to pay a tax does not make the
power to destroy.” On the other hand, Holmes stated that business illegal while failure to pay license fee makes business illegal.
“the power to tax is not the power to destroy while the f. Surrender: Taxes, being the lifeblood of the state, cannot
court sits.” be surrendered except for lawful consideration while a license fee may be
Reconcile the statements. surrendered with or without consideration. (Cooley on Taxation, pp. 1137-
In the alternative, what are the implications that flow 1138; Pacific Commercial Company v. Romualdez, et al., 49 Phil. 924)
from the above statements ? 8. How may the power to tax be utilized to carry out
SUGGESTED ANSWERS: Marshall’s view refers to a valid tax the social justice program of our government ?
while the Holmes’ view refers to an invalid tax. SUGGESTED ANSWER: The compensatory purpose of taxation is
a. The imposition of a valid tax could not be judicially to implement the social justice provisions of the constitution through the
restrained merely because it would prejudice taxpayer’s property. progressive system of taxation, which would result to equal distribution of
b. An illegal tax could be judicially declared invalid wealth, etc.
and should not work to prejudice a taxpayer’s property. Progressive income taxes alleviate the margin between rich and
5. Discuss briefly the basis/bases, or rationale of poor. (Southern Cross Cement Corporation v. Cement Manufacturers
Association of the Philippines, et al., G. R. No. 158540, August 3, 2005)
taxation.
In recent years, the increasing social challenges of the times
SUGGESTED ANSWER: a. Reciprocal duties of protection and
expanded the scope of the state activity, and taxation has become a tool
support between the state and its citizens and residents. Also called
to realize social justice and the equitable distribution of wealth, economic
“symbiotic relation” between the state and its citizens.
progress and the protection of local industries as well as public welfare
b. Jurisdiction by the state over persons and property
and similar objectives. (Batangas Power Corporation v. Batangas City, et
within its territory. al., G. R. No. 152675, and companion case, April 28, 2004 citing National Power
6. Discuss briefly but comprehensively the Corporation v. City of Cabanatuan, G. R. No. 149110, April 9, 2003)
objectives or purposes of taxation.
SUGGESTED ANSWER: The purposes or objectives of taxation 9. Explain the sumptuary purpose of taxation.
are the following: SUGGESTED ANSWER: The sumptuary purpose of taxation is to
a. The primary purpose: promote the general welfare and to protect the health, safety or morals of
1) Revenue purpose. the inhabitants. It is in the joint exercise of the power of taxation and police
b. The secondary purposes power where regulatory taxes are collected.
1) Sumptuary or regulatory purpose. Taxation may be made the implement of the state’s police power.
2) Compensatory purpose. The motivation behind many taxation measures is the implementation of
3) To implement the power of eminent domain. police power goals. [Southern Cross Cement Corporation v. Cement
Manufacturers Association of the Philippines, et al., G. R. No. 158540, August 3,
2005) The reader should note that the August 3, 2005 Southern Cross case
7. Distinguish a tax from a license fee. is the decision on the motion for reconsideration of the July 8, 2004
SUGGESTED ANSWER: The following are the distinctions:
Southern Cross decision.
a. Purpose: Tax imposed for revenue while license fee for
The so-called “sin taxes” on alcohol and tobacco manufacturers help
regulation. Tax for general public purposes while license fee for
dissuade the consumers from excessive intake of these potentially harmful
3
products. (Southern Cross Cement Corporation v. Cement Manufacturers 13. What are the elements or characteristics of a tax ?
Association of the Philippines, et al., G. R. No. 158540, August 3, 2005) SUGGESTED ANSWER:
a. Enforced contribution.
10. Taxation distinguished from police power. Taxation b. Generally payable in money.
is distinguishable from police power as to the means employed to c. Proportionate in character.
implement these public goals. Those doctrines that are unique to taxation d. Levied on persons, property or exercise of a right or
arose from peculiar considerations such as those especially punitive effects privilege.
(Southern Cross Cement Corporation v. Cement Manufacturers e. Levied by the state having jurisdiction.
Association of the Philippines, et al., G. R. No. 158540, August 3, 2005) as f. Levied by the legislature.
the power to tax involves the power to destroy and the belief that taxes are g. Levied for a public purpose.
lifeblood of the state. (Ibid.) taxes being the lifeblood of the government, h. Paid at regular periods or intervals.
their prompt and certain availability is of the essence.”
These considerations necessitated the evolution of taxation as a
distinct legal concept from police power. (Ibid.) 14. State the requisites of a valid tax.
SUGGESTED ANSWER:
11. How the power of taxation may be used to a. A valid tax should be within the jurisdiction of the taxing
implement power of eminent domain. Tax measures are but authority.
”enforced contributions exacted on pain of penal sanctions” and “clearly b. That the assessment and collection of certain kinds (The
imposed for public purpose.” In most recent years, the power to tax has same as the inherent limitations of the power of taxation) should be for a
indeed become a most effective tool to realize social justice, public welfare, public purpose.
and the equitable distribution of wealth. (Commissioner of Internal Revenue v. c. The rule of taxation should be uniform.
Central Luzon Drug Corporation, G.R. No. 159647, April 16, 2005) d. That either the person or property of taxes guarantees
Establishments granting the 20% senior citizens discount may against injustice to individuals, especially by way or notice and
claim the discounts granted to senior citizens as tax deduction based on opportunity for hearing be provided.
the net cost of the goods sold or services rendered: Provided, That the e. The tax must not impinge on the inherent and Constitutional
cost of the discount shall be allowed as deduction from gross income for limitations on the power of taxation.
the same taxable year that the discount is granted. Provided, further,
That the total amount of the claimed tax deduction net of value added tax 15. What are the classes or kinds of taxes according to
if applicable, shall be included in their gross sales receipts for tax the subject matter or object ?
purposes and shall be subject to proper documentation and to the SUGGESTED ANSWER:
provisions of the National Internal Revenue Code, as amended. [M.E. a. Personal, poll or capitalization – imposed on all residents,
Holding Corporation v. Court of Appeals, et al., G.R. No. 160193, March 3, 2008 whether citizen or not. Example – Community Tax.
citing Expanded Senior Citizens Act of 2003, Sec. 4 (a)]
b. Property - Imposed on property. Example – Real property
12. What are the three basic principles of a sound tax tax.
c. Excise – imposed upon the performance of an act, the
system? Explain each briefly. enjoyment of a privilege or the engaging in an occupation. Example –
SUGGESTED ANSWER: The canons of a sound tax system, also
income tax, estate tax.
known as the characteristics or, principles of a sound tax system, are
used as a criteria in order to determine whether a tax system is able to  16. What are the kinds of taxes classified as to who
meet the purposes or objectives of taxation. They are: bears the burden ? Explain each briefly.
a. Fiscal adequacy. SUGGESTED ANSWER: Based on the possibility of shifting the
b. Administrative feasibility. incidence of taxation, or as to who shall bear the burden of taxation, taxes
c. Theoretical justice. may be classified into:
a. Direct taxes. Those that are extracted from the very person
who, it is intended or desired, should pay them (Commissioner of Internal
4
Revenue v. Philippine Long Distance Telephone Company, G. R. No. 140230, inspection fees and other duties or taxes imposed in the
December 15, 2005); they are impositions for which a taxpayer is directly territory of the first Contracting Party. It invokes Maceda v.
liable on the transaction or business he is engaged in, (Commissioner of Macaraig, Jr., G.R. No. 88291, May 31, 1991, 197 SCRA
Internal Revenue v. Philippine Long Distance Telephone Company, supra)
which liability cannot be shifted or transferred to another. Example – 771.which upheld the claim for tax credit or refund by the
income tax, estate tax, donor’s tax, etc. National Power Corporation (NPC) on the ground that the NPC
b. Indirect taxes are those that are demanded in the first is exempt even from the payment of indirect taxes.
instance, from, or are paid by, one person in the expectation and intention Is Silkair entitled to the tax refund or credit it seeks ?
that he can shift the burden to (Commissioner of Internal Revenue v. Reason out your answer.
Philippine Long Distance Telephone Company, supra) to someone else not as SUGGESTED ANSWER: Silkair is not entitled to tax refund or
a tax but as part of the purchase price. (Commissioner, of Internal credit for the following reasons:
Revenue v. American Express International, Inc. (Philippine Branch), G. a. The excise tax on aviation fuel is an indirect tax. The proper
R. No. 152609, June 29, 2005 citing various cases and authorities) party to question, or seek a refund of, an indirect tax is the statutory
Example – value added tax (VAT), documentary stamp tax, excise tax, taxpayer, the person on whom the tax is imposed by law and who paid the
percentage tax, etc. same even if he shifts the burden thereof to another. (Philippine
Geothermal, Inc. v. Commissioner of Internal Revenue, G.R. No. 154028, July

17. Silkair (Singapore) PTE, Ltd., an international 29, 2005, 465 SCRA 308, 317-318) The NIRC provides that the excise tax
carrier, purchased aviation gas from Petron Corporation, should be paid by the manufacturer or producer before removal of
which it uses for its operations. It now claims for refund or tax domestic products from place of production. Thus, Petron Corporation,
not Silkair, is the statutory taxpayer which is entitled to claim a refund
credit for the excise taxes it paid claiming that it is exempt
based on Section 135 of the NIRC of 1997 and Article 4(2) of the Air
from the payment of excise taxes under the provisions of Sec. Transport Agreement between RP and Singapore.
135 of the NIRC of 1997 which provides that petroleum Even if Petron Corporation passed on to Silkair the burden of the
products are exempt from excise taxes when sold to “Exempt tax, the additional amount billed to Silkair for jet fuel is not a tax but part of
entities or agencies covered by tax treaties, conventions, and other international the price which Silkair had to pay as a purchaser. [Philippine Acetylene Co.,
agreements for their use and consumption: Provided, however, That the country Inc. v. Commissioner of Internal Revenue, 127 Phil. 461, 470 (1967)]
of said foreign international carrier or exempt entities or agencies exempts from
b. Silkair could not seek refuge under Maceda v. Macaraig, Jr.,
similar taxes petroleum products sold to Philippine carriers, entities or agencies”
G.R. No. 88291, May 31, 1991, 197 SCRA 771.which upheld the claim for
Silkair further anchors its claim on Article 4(2) of the Air tax credit or refund by the National Power Corporation (NPC) on the
Transport Agreement between the Government of the ground that the NPC is exempt even from the payment of indirect taxes.
Republic of the Philippines and the Government of the In Commissioner of Internal Revenue v. Philippine Long Distance
Republic of Singapore (Air Transport Agreement between RP Telephone Company, G.R. No. 140230, December 15, 2005, 478 SCRA
and Singapore) which reads: “Fuel, lubricants, spare parts, regular 61 the Supreme Court clarified the ruling in Maceda v. Macaraig, Jr., viz:
equipment and aircraft stores introduced into, or taken on board aircraft in the It may be so that in Maceda vs. Macaraig, Jr., the Court held that an
territory of one Contracting party by, or on behalf of, a designated airline of the exemption from “all taxes” granted to the National Power Corporation
other Contracting Party and intended solely for use in the operation of the agreed (NPC) under its charter includes both direct and indirect taxes.
services shall, with the exception of charges corresponding to the service
An exemption from “all taxes” excludes indirect taxes, unless the
performed, be exempt from the same customs duties, inspection fees and other
duties or taxes imposed in the territories of the first Contracting Party , even when exempting statute, like NPC’s charter, is so couched as to include indirect
these supplies are to be used on the parts of the journey performed over the tax from the exemption. The amendment under Republic Act No. 6395
territory of the Contracting Party in which they are introduced into or taken on enumerated the details covered by NPC’s exemption. Subsequently, P.D.
board. The materials referred to above may be required to be kept under 380, made even more specific the details of the exemption of NPC to
customs supervision and control.” cover, among others, both direct and indirect taxes on all petroleum
Silkair likewise argues that it is exempt from indirect products used in its operation. Presidential Decree No. 938 [NPC’s
taxes because the Air Transport Agreement between RP and amended charter] amended the tax exemption by simplifying the same law
Singapore grants exemption “from the same customs duties, in general terms. It succinctly exempts NPC from “all forms of taxes,
duties, fees…” The use of the phrase “all forms” of taxes demonstrates
5
the intention of the law to give NPC all the tax exemptions it has been e. Observance of the principle of comity. Comity is the respect
enjoying before. accorded by nations to each other because they are equals. On the other
The exemption granted under Section 135 (b) of the NIRC of 1997 hand taxation is an act of sovereign. Thus, the power should be imposed
and Article 4(2) of the Air Transport Agreement between RP and upon equals out of respect.
Singapore cannot, without a clear showing of legislative intent, be Some authorities include no double taxation.
construed as including indirect taxes. Statutes granting tax exemptions
must be construed in strictissimi juris against the taxpayer and liberally in 2. What are the principles to consider in the
favor of the taxing authority, and if an exemption is found to exist, it must determination of whether tax revenues are devoted for a
not be enlarged by construction. (Silkair (Singapore) PTE, Ltd., v. public purpose ?
Commissioner of Internal Revenue, G.R. No. 173594, February 6, 2008)
SUGGESTED ANSWER:
a. The tax revenues are for a public purpose if utilized for the
18. What are the different kinds of taxes benefit of the community in general. An alternative meaning is that tax
classified as to purpose ? proceeds should be utilized only to attain the objectives of government.
SUGGESTED ANSWER: b. Inequalities resulting from the singling out of one particular
a. General, fiscal or revenue – imposed for the purpose of class for taxation or exemption infringe no constitutional limitation.
raising public funds for the service of the government. REASON: It is inherent in the power to tax that the legislature is
b. Special or regulatory – imposed primarily for the regulation of free to select the subjects of taxation.
useful or non-useful occupation or enterprises and secondarily only for the BASIS: The lifeblood theory.
raising of public funds. c. An individual taxpayer need not derive direct benefits from
the tax.
LIMITATIONS OR RESTRICTIONS ON THE POWER REASON: The paramount consideration is the welfare of the
greater portion of the population.
1. Purpose for the limitations on the power of taxation. d. A tax may be imposed, not so much for revenue purposes,
The inherent and constitutional limitations to the power of taxation are but under police power for the general welfare of the community. This
safeguards which would prevent abuse in the exercise of this otherwise would still be for a public purpose.
unlimited and plenary power. e. Public purpose continually expanding. Areas formerly left to
The limitations also serve as a standard to measure the validity of a private initiative now lose their boundaries and may be undertaken by the
tax law or the act of a taxing authority. A violation of the limitations serves government if it is to meet the increasing social challenges of the times.
to invalidate a tax law or act in the exercise of the power to tax. f. Tax revenue must not be used for purely private purposes or
for the exclusive benefit of private persons.
INHERENT LIMITATIONS g. Private persons may be benefited but such benefit should be
merely incidental as its main object is the benefit of the community in
1. What are the inherent limitations on the power of general.
h. Determined at the time of enactment of tax law and not at
taxation ?
the time of implementation.
SUGGESTED ANSWERS:
i. There is a presumption of public purpose even if the tax law
a. Public purpose. The revenues collected from taxation should
does not specifically provide for its purpose. (Santos & Co., v. Municipality
be devoted to a public purpose.
of Meycauayan, et al., 94 Phil. 1047)
b. No improper delegation of legislative authority to tax. Only j. Public use is no longer confined to the traditional notion of use
the legislature can exercise the power of taxes unless the same is by the public but held synonymous with public interest, public benefit,
delegated to some other governmental body by the constitution or through public welfare, and public convenience. (Commissioner of Internal Revenue
a law which does not violate any provision of the constitution. v. Central Luzon Drug Corporation, G.R. No. 159647, April 16, 2005)
c. Territoriality. The taxing power should be exercised only
within territorial boundaries of the taxing authority. 3. A law was enacted imposing a tax on manufacturers
d. Recognition of government exemptions; and
of coconut oil, the proceeds of which are to be used
6
exclusively for the protection and promotion of the coconut d. For concerned citizens, there must be a showing that the
industry, namely, to improve the working conditions in issues raised are of transcendental importance which must be settled
coconut mills and to conduct research on the use of coconut early.
oil for motor fuel. Some of the manufacturers of coconut oil e. For legislators, there must be a claim that the official action
complained of infringes upon their prerogatives as legislators. (David, et
challenge the validity of the law, contending that the tax is to al., v. President Gloria Macapagal-Arroyo, etc., et al., G. R. No. 171396,
be used for a private purpose, and therefore, the law violates May 3, 2006)
the rule that public revenues shall not be appropriated for
anything but a public purpose. Decide with reason. 5. Only those directly affected have locus standi to
SUGGESTED ANSWER: The levy is for a public purpose. It
impugn the alleged encroachment by the executive
cannot be denied that the coconut industry is one of the major industries
supporting the national economy. It is, therefore, the state’s concern to department into the legislative domain of Congress.
make it a strong and secure source not only of the livelihood of the a. Only those who shall be directly affected by such executive
significant segment of the population, but also of export earnings, the encroachment, such as for example employees who would find
sustained growth of which is one of the imperatives of economic growth. themselves subject to disciplinary powers that may be imposed under the
(Philippine Coconut Producers Federation, Inc. (Cocofed v. Presidential questioned Executive Order as they have a direct and specific interest in
Commission on Good Government, 178 SCRA 236, 252) raising the substantive issue therein (Automotive Industry Workers
Alliance (AIWA),etc., et al., v. Romulo, etc. ,et al., G. R. No. 157509,
4. Requisites for taxpayers, concerned citizens, January 18, 2005) or employees who are going to be demoted,
transferred or otherwise affected by any personnel action subject o the
voters or legislators to have locus standi to sue. rule on exhaustion of administrative remedies.
a. In general, the case should involve constitutional issues.
b. Moreover, and if at all, only Congress, can claim any injury
(David, et al., v. President Gloria Macapagal-Arroyo, etc., et al., G. R. No.
171396, May 3, 2006) from the alleged executive encroachment of the legislative function to
b. For taxpayers, there must be a showing: amend, modify and/or repeal laws. (Automotive Industry Workers Alliance
1) That tax money is “being extracted and spent in (AIWA),etc., et al., supra, citing Gonzales v. Narvasa, G. R. No. 140835,
violation of specific constitutional protections against abuses of August 14,2000, 337 SCRA 733, 741)
legislative power.” (Flast v. Cohen, 392 U.S. 83)
2) That public money is being deflected to any improper 6. Locus standi being merely a matter of procedure,
purpose (Pascual v. Secretary of Public Works, 110 Phil. 33) or a have been waived in certain instances where a party who is
claim of illegal disbursement of public funds or that the tax not personally injured may be allowed to bring suit. The
measure is unconstitutional. (David, supra) following are examples of instances where suits have been brought by
3) A taxpayer is allowed to sue where there is a claim parties who have not have been personally injured by the operation of a law
that public funds are illegally disbursed, or that public money is or any other government act but by concerned citizens, taxpayers or voters
being deflected to any improper purpose, or that there is a wastage of who actually sue in the public interest:
public funds through the enforcement of an invalid or a. Taxpayer’s suits to question contracts entered into by the
unconstitutional law. (Abaya v. Ebdane, G. R. No. 167919, national government or government-owned or controlled corporations
February 14, 2007; Garcia v. Enriquez, Jr. G.R. No. 112655 allegedly in contravention of the law.
December 9, 1993, Minute Resolution) b. A taxpayer is allowed to sue where there is a claim that public
A taxpayer’s suit is properly brought only when there is funds are illegally disbursed, or that public money is being deflected to any
an exercise of the spending or taxing power of Congress. improper purpose, or that there is a wastage of public funds through the
(Automotive Industry Workers Alliance (AIWA),etc., et al., v. Romulo, enforcement of an invalid or unconstitutional law. (Abaya v. Ebdane, G. R.
etc. ,et al., G. R. No. 157509, January 18, 2005 citing No. 167919, February 14, 2007)
Gonzales v. Narvasa, G. R. No. 140835, August 14, 2000, 337 SCRA
733, 741)
c. For voters, there must be a showing of obvious interest in
7. The VAT law provides that, the President, upon the
the validity of the election law in question. recommendation of the Secretary of Finance, shall, effective
7
January 1, 2006, raise the rate of value-added tax to twelve local legislative bodies are now given direct authority to levy taxes, fees
percent (12%) after any of the following conditions have been and other charges pursuant to Article X, section 5 of the 1987 Constitution.
satisfied. “(i) value-added tax collection as a percentage of (Batangas Power Corporation v. Batangas City, et al. G. R. No. 152675, and
companion case, April 28, 2004 citing National Power Corporation v. City of
Gross Domestic Product (GDP) of the previous year exceeds Cabanatuan, G. R. No. 149110, April 9, 2003)
two and four-fifth percent (2 4/5%) or (ii) national government Local government legislation, “is not regarded as a transfer of
deficit as a percentage of GDP of the previous year exceeds general legislative power, but rather as the grant of authority to prescribe
one and one-half percent (1 ½%).” local regulations, according to immemorial practice, subject, of course, to
Was there an invalid delegation of legislative power ? the interposition of the superior in cases of necessity.” (People v. Vera, 65
SUGGESTED ANSWER: No. There is no undue delegation of Phil. 56)
legislative power but only of the discretion as to the execution of the law.
This is constitutionally permissible. 10. Taxing power of the local government is limited.
Congress does not abdicate its functions or unduly delegate power The taxing power of local governments is limited in the sense that
when it describes what job must be done, who must do it, and what is the Congress can enact legislation granting tax exemptions.
scope of his authority. In the above case the Secretary of Finance While the system of local government taxation has changed with
becomes merely the agent of the legislative department, to determine and the onset of the 1987 Constitution, the power of local government units to
declare the even upon which its expressed will takes place. The President tax is still limited.
cannot set aside the findings of the Secretary of Finance, who is not under While the power to tax by local governments may be exercised by
the conditions acting as the execute alter ego or subordinate. . [Abakada local legislative bodies, no longer merely by virtue of a valid delegation as
Guro Party List (etc.) v. Ermita, etc., et al., G. R. No. 168056, September before, but pursuant to direct authority conferred by Section 5, Article X of
1, 2005 and companion cases citing various cases]] the Constitution, the basic doctrine on local taxation remains essentially
the same, “the power to tax is [still] primarily vested in the Congress.”
8. Instances of proper delegation: When taxing power (Quezon City, et al., v. ABS-CBN Broadcasting Corporation, G. R. No. 166408,
October 6, 2008 citing City Government of Quezon City, et al. v. Bayan
could be delegated: Exceptions to the rule on non- Telecommunications, Inc., G.R. No. 162015, March 6, 2006, 484 SCRA 169 in
delegation: turn referring to Mactan Cebu International Airport Authority, v. Marcos, G.R. No.
a. Delegation of tariff powers by Congress to the President under 120082, September 11, 1996, 261 SCRA 667, 680)
the flexible tariff clause, Section 28 (2), Article VI of the Constitution.
b. Delegation of emergency powers to the President under 11. Further amplification by Bernas of the local
Section 23 (2) of Article VI of the Constitution. government’s power to tax. “What is the effect of Section 5 on the
c. The delegation to the President of the Philippines to enter into fiscal position of municipal corporations? Section 5 does not change the
executive agreements, and to ratify treaties which may contain tax doctrine that municipal corporations do not possess inherent powers of
exemption provisions subject to the concurrence by the Senate in the taxation. What it does is to confer municipal corporations a general
ratification made by the President. power to levy taxes and otherwise create sources of revenue. They no
d. Delegation to the people at large. longer have to wait for a statutory grant of these powers. The power of
e. Delegation to administrative bodies [Abakada Guro Party List the legislative authority relative to the fiscal powers of local governments
(Formerly AASJS), etc., v, Ermita, et al., G. R. No.168056, September 1, has been reduced to the authority to impose limitations on municipal
2005], which is referred to as subordinate legislation. powers. Moreover, these limitations must be “consistent with the basic
In this instance, there is a requirement that the law is complete in policy of local autonomy.” The important legal effect of Section 5 is thus
all aspects so what is delegated is merely the implementation of the law to reverse the principle that doubts are resolved against municipal
or there exists sufficiently determinate standards to guide the delegate corporations. Henceforth, in interpreting statutory provisions on municipal
and prevent a total transference of the taxing power. fiscal powers, doubts will be resolved in favor of municipal corporations.
It is understood, however, that taxes imposed by local government must
9. “Paradigm shift” from exclusive Congressional be for a public purpose, uniform within a locality, must not be
power to direct grant of taxing power to local legislative confiscatory, and must be within the jurisdiction of the local unit to pass.”
bodies. The power to tax is no longer vested exclusively on Congress; (Quezon City, et al., v. ABS-CBN Broadcasting Corporation, G. R. No. 166408,
8
October 6, 2008 citing City Government of Quezon City, et al. v. Bayan e. A domestic corporation is taxable on all income derived from
Telecommunications, Inc., G.R. No. 162015, March 6, 2006, 484 SCRA 169) sources within and without the Philippines; and
f. A foreign corporation, whether engaged or not in trade or
12. Reconciliation of the local government’s authority business in the Philippines, is taxable only on income derived from
to tax and the Congressional general taxing power. Congress sources within the Philippines. (Sec. 23, NIRC of 1997, emphasis supplied)
has the inherent power to tax, which includes the power to grant tax
exemptions. On the other hand, the power of local governments, such  14. Juliane a non-resident alien appointed as a
as provinces and cities for example Quezon City, to tax is prescribed by commission agent by a domestic corporation with a sales
Section 151 in relation to Section 137 of the LGC which expressly commission of 10% all sales actually concluded and collected
provides that notwithstanding any exemption granted by any law or other through her efforts. The local company withheld the amount of
special law, the City or a province may impose a franchise tax. It must be P107,000 from her sales commission and remitted the same to
noted that Section 137 of the LGC does not prohibit grant of future
the BIR.
exemptions.
The Supreme Court in a series of cases has sustained the power She filed a claim for refund alleging that her sales
of Congress to grant tax exemptions over and above the power of the commission is not taxable because the same was a
local government’s delegated power to tax. (Quezon City, et al., v. ABS- compensation for her services rendered in Germany and
CBN Broadcasting Corporation, G. R. No. 166408, October 6, 2008 citing City therefore considered as income from sources outside the
Government of Quezon City, et al. v. Bayan Telecommunications, Inc., G.R. No. Philippines.
162015, March 6, 2006, 484 SCRA 16)
Is her contention correct ?
“Indeed, the grant of taxing powers to local government units under
SUGGESTED ANSWER: Yes. The important factor which
the Constitution and the LGC does not affect the power of Congress to
determines the source of income of personal services is not the residence
grant exemptions to certain persons, pursuant to a declared national
of the payor, or the place where the contract for service is entered into, or
policy. The legal effect of the constitutional grant to local governments
the place of payment, but the place where the services were actually
simply means that in interpreting statutory provisions on municipal taxing
performed.
powers, doubts must be resolved in favor of municipal corporations.”
[Ibid., referring to Philippine Long Distance Telephone Company, Inc. (PLDT) vs.
Since the activity of securing the sales were in Germany, then the
City of Davao] income did not originate from sources from within the Philippines.
(Commissioner of Internal Revenue v. Baier-Nickel, G. R. No. 153793, August 29,
2006)
 13. General principles of income taxation in
the Philippines or the source rule of income taxation as 15. Ensite, Ltd.. is a Canadian corporation not
provided in the NIRC of 1997. doing business in the Philippines. It holds 40% of the shares
a. A citizen of the Philippines residing therein is taxable on all of Philippine Stamping Plant, Inc.,., a Philippine company
income derived from sources within and without the Philippines;
while the 60% is owned by Fred Corporation, a Filipino-owned
b. A nonresident citizen is taxable only on income derived
from sources within the Philippines; Philippine corporation. Ensite Co. also owns 100% of the
c. An individual citizen of the Philippines who is working and shares of Susanto Co., an Indonesian company which has a
deriving income abroad as an overseas contract worker is taxable only duly licensed Philippine branch. Due to worldwide
on income from sources within the Philippines: Provided, That a restructuring of the Ensite Ltd.,. group, Ensite Ltd.,. decided
seaman who is a citizen of the Philippines and who receives to sell all its shares in Philippine Stamping Plant, Inc. and
compensation for services rendered abroad as a member of the Susanto Co. The negotiations for the buy-out and the signing
complement of a vessel engaged exclusively in international trade shall of the Agreement of Sale were all done in the Philippines.
be treated as an overseas contract worker; The Agreement provides that the purchase price will be paid
d. An alien individual, whether a resident or not of the to Ensite Ltd’s bank account in the U.S. and that title to the
Philippines, is taxable only on income derived from sources within the
Philippines;
Philippine Stamping Plant, Inc. and Susanto Co. shall be
transferred to General Co., in Toronto Canada where stock
9
certificates will be delivered. General Co. seeks your advice contract of employment in the Philippines. He will also be
as to whether or not it will subject the payments of the receiving rental income for the lease of his Philippine
purchase price to withholding tax. Explain your advice. residence.
SUGGESTED ANSWER: The payments of the purchase price will Are these salaries, allowances and rentals subject to
be subject to withholding tax. Considering that all the activities (sales) Philippine income tax? Explain briefly.
occurred within the Philippines, the income is considered as income from SUGGESTED ANSWER: The salaries and allowances of Larry,
within, subject to Philippine income taxation. Ensite, Ltd. being a foreign being derived from labor or personal services rendered outside of the
corporation is to be taxed on its income derived from sources within the Philippines is considered as income from without. Since Larry is an
Philippines. OCW, then he is to be taxed only on his income derived from within the
Philippines such as the rentals on his Philippine residence, and not on his
16. Ensite, Ltd. is a Canadian corporation, which income from without.
has a duly licensed Philippine branch engage in trading
activities in the Philippines. Ensite, Ltd.. also invested  18. Obama Airlines, Inc., a foreign airline company
directly in 40% of the shares of stock of Philippine Stamping which does not maintain any flight to and from the Philippines
Plant, Inc.., a Philippine corporation. These shares are sold air tickets in the Philippines, through a general sales
booked in the Head Office of Ensite, Ltd.. and are not agent, relating to the carriage of passengers and cargo
reflected as assets of the Philippine branch. In 2009, between two points, both outside the Philippines.
Philippine Stamping Plant, Inc.. declared dividends to its a. Is Obama, Inc., subject to income taxes on the sale
stockholders. Before remitting the dividends to Ensite Ltd.,., of the tickets ?
SUGGESTED ANSWER: Yes. The source of income which is
Philippine Stamping Plant, Inc. Co. seeks your advice as to taxable is that “activity” which produced the income. The ”sale of tickets” in
whether it will subject the remittance to withholding tax. the Philippines is the activity that determines whether such income is
There is no need to discuss WT rates, if applicable. Focus taxable in the Philippines.
your discussion on what is the issue. The tickets exchanged hands here and payments for fares were also
SUGGESTED ANSWER: Philippine Stamping Plant, Inc.. made here in Philippine currency. The situs of the source of payments is
should subject the remittance to withholding tax.. Since Philippine the Philippines. the flow of wealth proceeded from and occurred, within the
Stamping Plant. is a Philippine corporation, its shares of stock have Philippine territory, enjoying the protection accorded by the Philippine
obtained a business situs in the Philippines, hence the dividends are Government. In consideration of such protection, the flow of wealth should
considered as income from within. Ensite. Ltd., being a foreign share the burden of supporting the government. [Commissioner of Internal
corporation, should be subject to tax on its income from within. Revenue v. British Overseas Airways Corporation (BOAC), 149 SCRA
395]
17. Philippine Stamping Plant, Inc., a Philippine
Off-line air carriers having general sales agents in the Philippines
corporation, has an executive Larry who is a Filipino citizen. are engaged in or doing business in the Philippines and their income
Philippine Stamping Plant, Inc,. has a subsidiary in Malaysia from sales of passage documents here is income from within the
(Kuala Lumpur Manufacturing, Inc.) and will assign Larry for Philippines. Thus, the off-line air carrier liable for the 32% (now 30%) tax
an indefinite period to work full time for Kuala Lumpur on its taxable income. [South African Airways v. Commissioner of Internal
Manufacturing, Inc.. Larry will bring his family to reside in Revenue, G.R. No. 180356, February 16, 2010 citing Commissioner of Internal
Malaysia and will lease out his residence in the Philippines. Revenue v. British Overseas Airways Corporation (British Overseas Airways),
No. L-65773-74, April 30, 1987, 149 SCRA 395]
The salary of Larry will be shouldered 50% by Philippine
b. Supposing that Obama, Inc., sells tickets outside of
Stamping Plant, Inc.. while the other 50% plus housing, cost
the Philippines for passengers it carry from Gold City, South
of living and educational allowances of Larry’s dependents
Africa to the Philippines but returns to South Africa without
will be shouldered by Kuala Lumpur Manufacturing, Inc..
any cargo or passengers. Would it then be subject to any
Philippine Stamping Plant, Inc.. will credit the 50% of Larry’s
Philippine tax on such sales ?
salary to his Philippine bank account. Larry will sign the
10
SUGGESTED ANSWER: It would not be subject to any tax. It is b. Equal protection clause;
not subject to any income tax because the activity which generated the c. Freedom of the press;
income (the sale of the tickets) was performed outside of the Philippines. d. Religious freedom;
It is not subject to the carrier’s tax based on gross Philippine e. No taking of private property without just compensation;
billings because there were no lifts that originated from the Philippines. f. Non-impairment clause;
“Gross Philippine Billings” refers to the amount of gross revenue derived g. Law-making process:
from carriage of persons, excess baggage, cargo and mail originating 1) Bill should embrace only one subject expressed in
from the Philippines in a continuous and uninterrupted flight, irrespective the title thereof;
of the place of sale or issue and the place of payment of the ticket or 2) Three (3) readings on three separate days;
passage document.” [NIRC of 1997, Sec. 28(A)(3)(a)] 3) Printed copies in final form distributed three (3) days
c. Would your answer be the same if Obama, Inc. sold before passage.
tickets outside of the Philippines for travelers who are going to h. Presidential power to grant reprieves, commutations and
picked up by Obama, Inc., planes from the Diosdado pardons and remittal of fines and forfeiture after conviction by final
Macapagal Intl. Airport at Clark, Angeles, Pampanga, bound for judgment.
Nairobi, Kenya ? Reason out your answer.
SUGGESTED ANSWER: No more. This time Obama, Inc., would 3. The specific or direct constitutional limitation.
be subject to the carrier’s tax based on Gross Philippine Billings. (GPB). a. No imprisonment for non-payment of a poll tax;
“Gross Philippine Billings” refers to the amount of gross revenue b. Taxation shall be uniform and equitable;
derived from carriage of persons, excess baggage, cargo and mail c. Congress shall evolve a progressive system of taxation;
originating from the Philippines in a continuous and uninterrupted flight, d. All appropriation, revenue or tariff bills shall originate
irrespective of the place of sale or issue and the place of payment of the exclusively in the House of Representatives, but the Senate may propose
ticket or passage document.” [NIRC of 1997, Sec. 28(A)(3)(a)] and concur with amendments;
The place of sale is irrelevant; as long as the uplifts of e. The President shall have the power to veto any particular item or
passengers and cargo occur from the Philippines, income is included in items in an appropriation, revenue, or tariff bill, but the veto shall not affect
GPB. (South African Airways v. Commissioner of Internal Revenue, G.R. No. the item or items to which he does not object;
180356, February 16, 2010) f. Delegated power of the President to impose tariff rates, import
and export quotas, tonnage and wharfage dues:
19. No improper delegation of legislative authority to 1) Delegation by Congress
2) through a law
tax. The power to tax is inherent in the State, such power being
3) subject to Congressional limits and restrictions
inherently legislative, based on the principle that taxes are a grant of the
4) within the framework of national development program.
people who are taxed, and the grant must be made by the immediate
g. Tax exemption of charitable institutions, churches,
representatives of the people; and where the people have laid the power,
parsonages and convents appurtenant thereto, mosques, and all lands,
there it must remain and be exercised. (Commissioner of Internal Revenue
buildings and improvements of all kinds actually, directly and exclusively
v. Fortune Tobacco Corporation, G. R. Nos. 167274-75, July 21, 2008)
used for religious, charitable or educational purposes;
h. No tax exemption without the concurrence of majority vote of
CONSTITUTIONAL LIMITATIONS all members of Congress;
i. No use of public money or property for religious purposes
1. Constitutional limitations on the power of taxation . except if priest is assigned to the armed forces, penal institutions,
The general or indirect constitutional limitations as well as the specific or government orphanage or leprosarium;
direct constitutional limitations. j. Money collected on tax levied for a special purpose to be
used only for such purpose, balance if any, to general funds;
2. The general or indirect constitutional limitations on k. The Supreme Court's power to review judgments or orders of
the power of taxation are: lower courts in all cases involving the legality of any tax, impose,
a. Due process clause;
11
assessment or toll or the legality of any penalty imposed in relation to the It is imperative to duly establish that the one invoking equal
above; protection and the person to which she is being compared were indeed
l. Authority of local government units to create their own similarly situated, i.e., that they committed identical acts for which they
sources of revenue, to levy taxes, fees and other charges subject to were charged with the violation of the same provisions of the NIRC; and
guidelines and limitations imposed by Congress consistent with the basic that they presented similar arguments and evidence in their defense - yet,
policy of local autonomy; they were treated differently. (Santos, supra)
m. Automatic release of local government's just share in national
taxes; 8. Tests to determine validity of classification. The
n. Tax exemption of all revenues and assets of non-stock, non- United States Supreme Court has established different tests to determine
profit educational institutions used actually, directly and exclusively for the validity of a classification and compliance with the equal protection
educational purposes; clause. The recognized tests are:
o. Tax exemption of all revenues and assets of proprietary or a. The traditional (or rational basis) test.
cooperative educational institutions subject to limitations provided by law b. The strict scrutiny (or compelling interest) test.
including restrictions on dividends and provisions for reinvestment of c. The intermediate level of scrutiny (or quasi-suspect class) test.
profits;
p. Tax exemption of grants, endowments, donations or 9. The traditional (or rational basis) test used in order
contributions used actually, directly and exclusively for educational to determine the validity of classification. The classification is
purposes subject to conditions prescribed by law. valid if it is rationally related to a constitutionally permissible state interest.
The complainant must prove that the classification is “invidous,”
5. Equal protection of the law clause is subject to “wholly arbitrary,” or ”capricious,” otherwise the classification is presumed
reasonable classification. If the groupings are characterized by to be valid. (Lindsley v. Natural Carboinic Gas Co., 220 U.S. 61; McGowan v.
substantial distinctions that make real differences, one class may be Maryland, 366 U.S. 420; United States Railroad Retirement Board v. Fritz, 449
treated and regulated differently from another. The classification must also U.S. 166)
be germane to the purpose of the law and must apply to all those belonging
to the same class. (Tiu, et al., v. Court of Appeals, et al., G.R. No. 127410, 10. The strict scrutiny (or compelling interest) test
January 20, 1999) used in order to determine the validity of the classification.
Government regulation that intentionally discriminates against a “suspect
6. Requisites for valid classification. All that is required class” such as racial or ethnic minorities, is subject to strict scrutiny and
of a valid classification is that it be reasonable, which means that a. considered to violate the equal protection clause unless found necessary
the classification should be based on substantial distinctions which to promote a compelling state interest.
make for real differences, A classification is necessary when it is narrowly drawn so that no
b. that it must be germane to the purpose of the law; alternative, less burdensome means is available to accomplish the state
c. that it must not be limited to existing conditions only; and interest.
d. that it must apply equally to each member of the class. Thus, it was held that denial of free public education to the children
The standard is satisfied if the classification or distinction is based of illegal aliens imposes an enormous and lasting burden based on a
on a reasonable foundation or rational basis and is not palpably arbitrary. status over which the children have no control is violative of equal
[ABAKADA Guro Party List, etc., v. Purisima, etc., et al., G. R. No. 166715, protection because there is no showing that such denial furthers a
August 14, 2008] “substantial” state goal. (Plyler v. Doe, 457 U.S. 202)
7. Equal protection does not demand absolute
11. The intermediate level of scrutiny (or quasi-
equality. It merely requires that all persons shall be treated alike, under
suspect class) test used in order to determine the validity of
like circumstances and conditions, both as to the privileges conferred and
liabilities enforced. (Santos v. People, et al, G. R. No. 173176, August 26, he classification. Classification based on gender or legitimacy are not
2008) “suspect,” but neither are they judged by the traditional or rational basis
test.
12
Intentional discriminations against members of a quasi-suspect
class violate equal protection unless they are substantially related to 10. The rewards law to tax collectors does not violate
important government objectives. (Craig v. Boren, 429 U.S. 190) equal protection. The equal protection clause recognizes a valid
Thus, a state law granting a property tax exemption to widows, but classification, that is, a classification that has a reasonable foundation or
not widowers, has been held valid for it furthers the state policy of rational basis and not arbitrary. With respect to RA 9335, it’s expressed
cushioning the financial impact of spousal loss upon the sex for whom public policy is the optimization of the revenue-generation capability and
that loss usually imposes a heavier burden. (Kahn v. Shevin, 416 U.S. collection of the BIR and the BOC. Since the subject of the law is the
351) revenue- generation capability and collection of the BIR and the BOC, the
incentives and/or sanctions provided in the law should logically pertain to
12. Equality and uniformity of taxation may mean the the said agencies. Moreover, the law concerns only the BIR and the BOC
same as equal protection. In such a case, the terms would mean that because they have the common distinct primary function of generating
all subjects and objects of taxation which are similarly situated shall be revenues for the national government through the collection of taxes,
subject to the same burdens and granted the same privileges without any customs duties, fees and charges.
discrimination whatsoever. Indubitably, such substantial distinction is germane and intimately
13. It is inherent in the power to tax that the State be related to the purpose of the law. Hence, the classification and treatment
free to select the subjects of taxation, and it has been repeatedly accorded to the BIR and the BOC under RA 9335 fully satisfy the
held that, "inequalities which result from a singling out of one particular demands of equal protection. (ABAKADA Guro Party List, etc., v. Purisima,
class of taxation, or exemption, infringe no constitutional limitation." etc., et al., G. R. No. 166715, August 14, 2008)
(Commissioner of Internal Revenue, et al., v. Santos, et al., 277 SCRA
617) 11. The prosecution of one guilty person while others
equally guilty are not prosecuted, however, is not, by itself, a
9. Benjie is a law-abiding citizen who pays his real denial of the equal protection of the laws . Where the official
estate taxes promptly. Due to a series of typhoons and action purports to be in conformity to the statutory classification, an
adverse economic conditions, an ordinance is passed by erroneous or mistaken performance of the statutory duty, although a
violation of the statute, is not without more a denial of the equal protection
Soliman City granting a 50% discount for payment of unpaid of the laws.
real estate taxes for the preceding year and the condonation The unlawful administration by officers of a statute fair on its face,
of all penalties on fines resulting from the late payment. resulting in its unequal application to those who are entitled to be treated
Arguing that the ordinance rewards delinquent tax alike, is not a denial of equal protection unless there is shown to be
payers and discriminates against prompt ones, Benjie present in it an element of intentional or purposeful discrimination. This
demands that he be refunded an amount equivalent to one- may appear on the face of the action taken with respect to a particular
half of the real property taxes he paid. The municipal attorney class or person, or it may only be shown by extrinsic evidence showing a
rendered an opinion that Benjie cannot be reimbursed discriminatory design over another not to be inferred from the action
because the ordinance did not provide for such itself.
(Santos v. People, et al, G. R. No. 173176, August 26, 2008)
reimbursement. Benjie files suit to declare the ordinance void
on the ground that it is a class legislation. Will his suit 12. Equal protection should not be used to protect
prosper ? Explain your answer briefly. commission of crime. While all persons accused of crime are to be
SUGGESTED ANSWER: No. There is no class legislation treated on a basis of equality before the law, it does not follow that they
because there is no violation of the equal protection suit. There is a valid are to be protected in the commission of crime. It would be
classification between those who already paid their taxes and those who unconscionable, for instance, to excuse a defendant guilty of murder
have not. Furthermore, the taxing authority has the prerogative to select because others have murdered with impunity.
the subjects and objects of taxation, including granting a 50% discount in Likewise, if the failure of prosecutors to enforce the criminal laws
the payment of unpaid real estate taxes, and the condonation of all as to some persons should be converted into a defense for others
penalties on fines resulting from late payment. charged with crime, the result would be that the trial of the district
13
attorney for nonfeasance would become an issue in the trial of many of the Local Government Code that its tax exemption privilege was reinstated.
persons charged with heinous crimes and the enforcement of law would However, Smart Communications, Inc. v. The City of Davao, etc., et al., G. R.
suffer a complete breakdown. (Santos v. People, et al, G. R. No. 173176, No. 155491, September 16, 2008 is explicit in its holding that Smart is not
August 26, 2008) entitled to a tax exemption.

13. Illustration of double taxation in local taxation. there 17. When withdrawal of a tax exemption impairs the
is indeed double taxation if Coca-Cola is subjected to the taxes under obligation of contracts. The Contract Clause has never been
both Sections 14 and 21 of Tax Ordinance No. 7794, since these are thought as a limitation on the exercise of the State’s power of taxation
being imposed: (1) on the same subject matter – the privilege of doing save only where a tax exemption has been granted for a valid
business in the City of Manila; (2) for the same purpose – to make consideration. (Smart Communications, Inc. v. The City of Davao, etc., et al.,
persons conducting business within the City of Manila contribute to city G. R. No. 155491, September 16, 2008) citing Tolentino v. Secretary of Finance,
revenues; (3) by the same taxing authority – City of Manila; (4) within the G. R. No. 115455, August 25, 1994, 235 SCRA 630, 685) The author opines
same taxing jurisdiction – within the territorial jurisdiction of the City of that since practically all franchises granted to telecommunications
Manila; (5) for the same taxing periods – per calendar year; and (6) of the companies are similarly worded that the above doctrine finds application
same kind or character – a local business tax imposed on gross sales or to the others)
receipts of the business. (The City of Manila, et al., v. Coca-Cola Bottlers
Philippines, Inc., G. R. No. 181845, August 4, 2009) 18. The primary reason for the withdrawal of tax
exemption privileges granted to government owned and
14. A lawful tax on a new subject, or an increased tax controlled corporations and all other units of government was that
on an old one, does not interfere with a contract or impairs its such privilege resulted to serious tax base erosion and distortions in the tax
obligation, within the meaning of the constitution. (Tolentino v. treatment of similarly situated enterprises, hence resulting in the need for
Secretary of Finance, et al., and companion cases, 235 SCRA 630) these entities to share in the requirements of development, fiscal or
otherwise, by paying the taxes and other charges due them. (Philippine
15. The withdrawal of a tax exemption should not be Ports Authority v. City of Iloilo, G. R. No. 109791, July 14, 2003)
construed as prohibiting future grants of exemption from all
taxes. (Philippine Long Distance Telephone Company, Inc., v. City of Davao, et 19. National Power Corporation (NPC) is of the
al., etc., G. R. No. 143867, August 22, 2001) insistence that it is not subject to the payment of franchises
taxes imposed by the Province of Isabela because all of its
16. Tax exemptions in franchises are always subject shares are owned by the Republic of the Philippines. It is thus,
to withdrawal. A legislative franchise is granted with the express an instrumentality of the National Government which is exempt
condition that it is subject to amendment, alteration, or repeal. (1987 from local taxation. As such it is not a private corporation
Constitution, Art. XII, Sec. 11) engaged in “business enjoying franchise”
It is enough to say that the parties to a contract cannot, through the Is such contention meritorious ?
exercise of prophetic discernment, fetter the exercise of the taxing power SUGGESTED ANSWER: No. Philippine Long Distance Telephone
of the State. For not only are existing laws read into contracts in order to Company, Inc., v. City of Davao, et al., etc., G. R. No. 143867, August 22,
fix obligations as between parties, but the reservation of essential 2001, upheld the authority of the City of Davao, a local government unit, to
attributes of sovereign power is also read into contracts as a basic impose and collect a local franchise tax because the Local Government
postulate of the legal order. The policy of protecting contracts against Code has withdrawn all tax exemptions previously enjoyed by all persons
impairment presupposes the maintenance of a government which retains and authorized local government units to impose a tax on business
adequate authority to secure the peace and good order of society. (Smart enjoying a franchise tax notwithstanding the grant of tax exemption to
Communications, Inc. v. The City of Davao, etc., et al., G. R. No. 155491,
them.
September 16, 2008)
NOTES AND COMMENTS: Philippine Long Distance Telephone
Company, Inc., v. City of Davao, et al., etc., G. R. No. 143867, August 22, 2001 20. “In lieu of all taxes” in the franchise of ABS-CBN
made the observation that since Smart’s franchise was granted after the effectivity does not exempt it from local franchise taxes. It does not
14
expressly provide what kind of taxes ABS-CBN is exempted from. It is x x x in lieu of any and all taxes of any kind, nature or description
not clear whether the exemption would include both local, whether levied, established or collected by any authority whatsoever, municipal,
municipal, city or provincial, and national tax. Whether the “in lieu of all provincial or national, from which the grantee is hereby expressly
taxes provision” would include exemption from local tax is not exempted, x x x. (Emphasis supplied).
unequivocal. However, Congress did not expressly exempt Smart from local
The right to exemption from local franchise tax must be clearly taxes. Congress used the "in lieu of all taxes" clause only in reference to
established and cannot be made out of inference or implications but must national internal revenue taxes. The only interpretation, under the rule on
be laid beyond reasonable doubt. Verily, the uncertainty in the “in lieu of strict construction of tax exemptions, is that the "in lieu of all taxes"
all taxes” provision should be construed against ABS-CBN. ABS-CBN clause in Smart's franchise refers only to national and not to local taxes.
has the burden to prove that it is in fact covered by the exemption so [Smart Communications, Inc. v. The City of Davao, etc., et al., G. R. No. 155491,
claimed but has failed to do so. (Quezon City, et al., v. ABS-CBN September 16, 2008 citing Philippine Long Distance Telephone Company, Inc. v.
Broadcasting Corporation, G. R. No. 166408, October 6, 2008) City of Davao, 447 Phil. 571, 594 (2003)]
NOTES AND COMMENTS: This is practically the same holding in an NOTES AND COMMENTS: The author opines that the above finds
earlier case involving another telecommunications company Smart application to all telecommunications companies.
Communications, Inc. v. The City of Davao, etc., et al., G. R. No. 155491,
September 16, 2008. The author opines that since practically all franchises 22. The “in lieu of all taxes” clause in the franchise of
granted to telecommunications companies are similarly worded that the above ABS-CBN has become functus officio with the abolition of the
doctrine finds application to the others.) franchise tax on broadcasting companies with yearly gross
receipts exceeding Ten Million Pesos. The clause “in lieu of all
21. “In lieu of all taxes” refers to national internal taxes” does not pertain to VAT or any other tax. It cannot apply when
revenue taxes and not to local taxes. The “in lieu of all taxes” what is paid is a tax other than a franchise tax. Since the franchise tax
clause applies only to national internal revenue taxes and not to local on the broadcasting companies with yearly gross receipts exceeding ten
taxes. As appropriately pointed out in the separate opinion of Justice million pesos has been abolished, the “in lieu of all taxes” clause has now
Antonio T. Carpio in a similar case involving a demand for exemption become functus officio, rendered inoperative. (Quezon City, et al., v. ABS-
from local franchise taxes: CBN Broadcasting Corporation, G. R. No. 166408, October 6, 2008)
[T]he "in lieu of all taxes" clause in Smart's franchise refers only to NOTES AND COMMENTS: This is practically the same holding in an
taxes, other than income tax, imposed under the National Internal earlier case involving another telecommunications company. Smart
Revenue Code. The "in lieu of all taxes" clause does not apply to local Communications, Inc. v. The City of Davao, etc., et al., G. R. No. 155491,
taxes. The proviso in the first paragraph of Section 9 of Smart's franchise September 16, 2008. The author opines that since practically all franchises
states that the grantee shall "continue to be liable for income taxes granted to telecommunications companies are similarly worded that the above
payable under Title II of the National Internal Revenue Code." Also, the doctrine finds application to the others.)
second paragraph of Section 9 speaks of tax returns filed and taxes paid
to the "Commissioner of Internal Revenue or his duly authorized 23. Double taxation in its generic sense, this
representative in accordance with the National Internal Revenue Code." means taxing the same subject or object twice during the
Moreover, the same paragraph declares that the tax returns "shall be same taxable period. In its particular sense, it may mean direct
subject to audit by the Bureau of Internal Revenue." Nothing is mentioned duplicate taxation, which is prohibited under the constitution because it
in Section 9 about local taxes. The clear intent is for the "in lieu of all violates the concept of equal protection, uniformity and equitableness of
taxes" clause to apply only to taxes under the National Internal Revenue taxation. Indirect duplicate taxation is not anathematized by the above
Code and not to local taxes. Even with respect to national internal constitutional limitations.
revenue taxes, the "in lieu of all taxes" clause does not apply to income
tax. 24. Elements of direct duplicate taxation:
If Congress intended the "in lieu of all taxes" clause in Smart's a. Same
franchise to also apply to local taxes, Congress would have expressly 1) Subject or object is taxed twice
mentioned the exemption from municipal and provincial taxes. Congress 2) by the same taxing authority
could have used the language in Section 9(b) of Clavecilla's old franchise, 3) for the same taxing purpose
as follows: 4) during the same taxable period
15
b. Taxing all of the subjects or objects for the first time without 29. A tax deduction is defined as a subtraction fro income for
taxing all of them for the second time. tax purposes, or an amount that is allowed by law to reduce income prior to
If any of the elements are absent then there is indirect duplicate the application of the tax rate to compute the amount of tax which is due.
taxation which is not prohibited by the constitution. A tax deduction reduces the income that is subject to tax in order to
NOTES AND COMMENTS: arrive at taxable income. (Commissioner of Internal Revenue v. Central Luzon
a. Presence of the 2nd element violates the equal protection Drug Corporation, G. R. No. 159647, April 15, 2005)
clause. If only the 1st element is present, taxing the same subject or object twice,
by the same taxing authority, etc., there is no violation of the equal protection
clause because all subjects and objects that are similarly situated are subject to
30. The petitioners allege that the R-VAT law is
the same burdens and granted the same privileges without any discrimination constitutional because the Bicameral Conference Committed
whatsoever, has exceeded its authority in including provisions which were
The presence of the 2nd element, taxing all of the subjects and objects for never included in the versions of both the House and Senate
the first time, without taxing all for the second time, results to discrimination among
subjects and objects that are similarly situated, hence violative of the equal
such as inserting the stand-by authority to the President to
protection clause. increase the VAT from 10% to 12%; deleting entirely the no
25. Double taxation a valid defense against the legality of pass-on provisions found in both the House and Senate Bills;
a tax measure if the double taxation is direct duplicate inserting the provision imposing a 70% limit on the amount of
taxation, because it would violate the equal protection clause of the input tax to be credited against the output tax; and including
constitution. the amendments introduced only by Senate Bill No. 1950
regarding other kinds of taxes in addition to the value-added
26. When an item of income is taxed in the Philippines tax. Thus, there was a violation of the constitutional mandate
and the same income is taxed in another country, this would that revenue bills shall originate exclusively from the House of
be known as international juridical double taxation which is the Representatives.
imposition of comparable taxes in two or more states on the same taxpayer Are the contentions of such weight as to constitute grave
in respect of the same subject matter and for identical grounds. abuse of discretion which may invalidate the law ? Explain
(Commissioner of Internal Revenue v. S.C. Johnson and Son, Inc., et al., G.R. No.
127105, June 25, 1999)
briefly.
SUGGESTED ANSWER: No. There was no grave abuse of
discretion because all the changes and modifications made by the

27. Methods for avoiding double taxation (indirect Bicameral Conference Committee were germane to subjects of the
duplicate taxation). provisions referred to it for reconciliation.
a. Tax treaties which exempts foreign nationals from local The Bicameral Conference Committee merely exercised the
taxation and local nationals from foreign taxation under the principle of judicially recognized long-standing legislative practice of giving said
reciprocity. conference committee ample latitude for compromising differences
b. Tax credits where foreign taxes are allowed as deductions between the Senate and the House. [Abakada Guro Party List (etc.) v. Ermita,
from local taxes that are due to be paid. etc., et al., G. R. No. 168056, September 1, 2005 and companion cases]
c. Allowing foreign taxes as a deduction from gross income.
31. The VAT while regressive is NOT violative of the
28. Tax credit generally refers to an amount that is subtracted mandate to evolve a progressive system of taxation. Do you
directly from one’s total tax liability, an allowance against the tax itself, or a agree ? The mandate to Congress is not to prescribe but to evolve a
deduction from what is owned. progressive system of taxation. Otherwise, sales taxes which perhaps are
A tax credit reduces the tax due, including –whenever applicable – the oldest form of indirect taxes, would have been prohibited with the
the income tax that is determined after applying the corresponding tax rates proclamation of the constitutional provision. Sales taxes are also
to taxable income. (Commissioner of Internal Revenue v. Central Luzon Drug regressive. . [Abakada Guro Party List (etc.) v. Ermita, etc., et al., G. R. No.
Corporation, G. R. No. 159647, April 15, 2005) 168056, September 1, 2005 and companion cases citing Tolentino v. Secretary of
Finance, et al., G. R. No. 115455, August 25, 1994, 235 SCRA 630]
16
2. Compensation takes place by operation of law, where the
32. All revenues and assets of non-stock, non-profit local government and the taxpayer are in their own right reciprocally
educational institutions that are actually, directly and debtors and creditors of each other, and that the debts are both due and
exclusively used for educational purposes shall be exempt demandable, in consequence of Articles 1278 and 1279 of the Civil Code.
from taxation. (Domingo v. Garlitos, 8 SCRA 443)

33. Revenues and assets of proprietary educational 3. May there be compensation or set-off between a
institutions, including those which are cooperatively owned, national tax and a debt ? Reason out your answer.
SUGGESTED ANSWER: As a general rule, there could be
may be entitled to exemptions subject to limitations provided no compensation or set-off between a tax and a debt for the following
by law including restrictions on dividends and provisions for reasons:
reinvestments. There is no law at the present which grants exemptions, a. Lifeblood theory.
other the exemptions granted to cooperatives. b. Taxes are not contractual obligations but arise out of a duty
to, and are the positive acts of government, to the making and enforcing
OTHER CONCEPTS of which the personal consent of the individual taxpayer is not required.
(Republic v. Mambulao Lumber Co., 4 SCRA 622)

1. Distinguish tax from debt. c. Taxes cannot be the subject of compensation because the
government and taxpayer are not mutually creditors and debtors of each
TAX DEBT other and a claim for taxes is not such a debt, demand, contract or
Basis based on law based on contract or judgment as is allowed to be set-off.
judgment Thus, it is correct to say that the offsetting of a taxpayer’s tax
refund with its alleged tax deficiency is unavailing under Art. 1279 of the
Failure to Pay may result in no imprisonment Civil Code. (South African Airways v. Commissioner of Internal Revenue, G.R.
imprisonment No. 180356, February 16, 2010 reiterating Caltex Philippines, Inc. v.
Commission on Audit, which applied Francia v. Intermediate Appellate Court)
Mode of generally payable in payable in money,
Payment money property or service
Assignability not assignable assignable
4. Exceptions: When set-off or compensation allowed
for local taxes. a.
Payment unless it becomes a may be a subject Where both claims already become overdue and demandable as
debt is not subject to well as fully liquidated. Compensation takes place by operation of law
compensation or set- under Art. 1200 in relation to Arts. 1279 and 1290 all of the Civil Code.
off (Domingo v. Garlitos, 8 SCRA 443) b.
Compensation takes place by operation of law, where the
Interest does not draw interest draws interest if
government and the taxpayer are in their own right reciprocally debtors
unless delinquent stipulated or delayed
and creditors of each other, and that the debts are both due and
Authority imposed by public can be imposed by demandable. This is in consequence of Article 1278 and 1279 of the Civil
authority private individuals Code. (Domingo v. Garlitos, 8 SCRA 443)
c. ,The Supreme Court upheld the validity of a set-off
Prescription Prescriptive periods debt under the Civil between the taxpayer and the government. In both cases, the claims of
for tax under NIRC Code the taxpayers therein were certain and liquidated. The claims were certain
since there were no doubts or disputes as to their refundability. In fact,
WARNING: Do not use the above arrangement in answering Bar the government admitted the fact of over-payment. (Commissioner of
questions. Internal Revenue v. Esso Standard Eastern, Inc., 172 SCRA 364)
d. In case of a tax overpayment, the BIR’s obligation to refund
or off-set arises from the moment the tax was paid. REASON: Solutio
17
indebeti. (Commissioner of Internal Revenue v. Esso Standard Eastern, Inc 172 (Ibid., citing CIR v. Philippine American Accident Insurance Company, Inc., G.R.
SCRA 364) No. 141658, March 18, 2005, 453 SCRA 668)
e. While judgment should be rendered in favor of Republic
for unpaid taxes, judgment ought at the same time to issue for 8. Strict interpretation of tax exemption laws. Taxes
Sampaguita Pictures commanding payment to the latter by the Republic are what civilized people pay for civilized society. They are the lifeblood
of the value of the backpay certificates which the Republic received. of the nation. Thus, statutes granting tax exemptions are construed
(Republic v. Ericta, 172 SCRA 623) stricissimi juris against the taxpayer and liberally in favor of the taxing
5. Gilbert obtained a judgment for a sum of money authority. A claim of tax exemption must be clearly shown and based on
language in law too plain to be mistaken. Otherwise stated, taxation is
against the municipality of Camiling. The judgment has the rule, exemption is the exception. (Quezon City, et al., v. ABS-CBN
become final although execution has not issued. Upon Broadcasting Corporation, G. R. No. 166408, October 6, 2008 citing Mactan
receiving an assessment for municipal sales taxes from the Cebu International Airport Authority v. Marcos, G.R. No. 120082, September 11,
Municipal Treasurer, Gilbert executed a partial assignment of 1996, 261 SCRA 667, 680) The burden of proof rests upon the party
his judgment sufficient to cover the assessment in favor of claiming the exemption to prove that it is in fact covered by the exemption
the Municipality. May the Municipal Treasurer validly accept so claimed. (Quezon City, supra citing Agpalo, R.E., Statutory Construction,
2003 ed., p. 301)
the assignment? Why?
SUGGESTED ANSWER: Yes. The parties in this case are
mutually debtors and creditors of each other, and since both of the claims 9. Rationale for strict interpretation of tax exemption
became overdue, demandable and fully liquidated, compensation takes laws. The basis for the rule on strict construction to statutory provisions
place by operation of law. Such was the holding in Domingo v. Garlitos, 8 granting tax exemptions or deductions is to minimize differential treatment
SCRA 443, a case decided by the Supreme Court whose factual and foster impartiality, fairness and equality of treatment among
antecedents are similar to the problem. taxpayers. (Quezon City, et al., v. ABS-CBN Broadcasting Corporation, G. R.
No. 166408, October 6, 2008) He who claims an exemption from his share
6. In case of doubt, tax laws must be construed of common burden must justify his claim that the legislature intended to
exempt him by unmistakable terms. For exemptions from taxation are
strictly against the State and liberally in favor of the taxpayer
not favored in law, nor are they presumed. They must be expressed in
because taxes, as burdens which must be endured by the taxpayer, should
the clearest and most unambiguous language and not left to mere
not be presumed to go beyond what the law expressly and clearly declares.
(Lincoln Philippine Life Insurance Company, Inc., etc., v. Court of Appeals, et al., implications. It has been held that “exemptions are never presumed the
293 SCRA 92, 99) burden is on the claimant to establish clearly his right to exemption and
cannot be made out of inference or implications but must be laid beyond
7. Interpretation in the imposition of taxes, is not the reasonable doubt. In other words, since taxation is the rule and
similar doctrine as that applied to tax exemptions. The rule in exemption the exception, the intention to make an exemption ought to be
the interpretation of tax laws is that a statute will not be construed as expressed in clear and unambiguous terms. (Quezon City, supra citing
imposing a tax unless it does so clearly, expressly, and unambiguously. Agpalo, R.E., Statutory Construction, 2003 ed., p. 302)
A tax cannot be imposed without clear and express words for that
purpose. Accordingly, the general rule of requiring adherence to the letter 10. Why are tax exemptions are strictly construed
in construing statutes applies with peculiar strictness to tax laws and the against the taxpayer and liberally in favor of the State ?
provisions of a taxing act are not to be extended by implication. In SUGGESTED ANSWER: Taxes are necessary for the continued
answering the question of who is subject to tax statutes, it is basic that in existence of the State.
case of doubt, such statutes are to be construed most strongly against
the government and in favor of the subjects or citizens because burdens 11. In case of a tax overpayment, where the BIR’s
are not to be imposed nor presumed to be imposed beyond what statutes obligation to refund or set-off arises from the moment the tax
expressly and clearly import. [Commissioner of Internal Revenue v. Fortune was paid under the principle of solutio indebeti. (Commissioner of
Tobacco Corporation, G. R. Nos. 167274-75, July 21, 2008 citing CIR v. Court
Internal Revenue v. Esso Standard Eastern, Inc, 172 SRCA 364)
of Appeals, 338 Phil. 322, 330-331 (1997)] As burdens, taxes should not be
unduly exacted nor assumed beyond the plain meaning of the tax laws.
18
12. But note Nestle Phil. v. Court of Appeals, et al., G.R. 14. Tax refunds premised upon a tax exemption
No. 134114, July 6, 2001 which held that in order for the rule on solutio strictly construed, Tax exemption is a result of legislative grace. And
indebeti to apply it is an essential condition that the petitioner must first he who claims an exemption from the burden of taxation must justify his
show that its payment of the customs duties was in excess of what was claim by showing that the legislature intended to exempt him by words
required by the law at the time the subject 16 importations of milk and milk too plain to be mistaken. [Commissioner of Internal Revenue v. Fortune
products were made. Unless shown otherwise, the disputable presumption Tobacco Corporation, G. R. Nos. 167274-75, July 21, 2008 citing Surigao
of regularity of performance of duty lies in favor of the Collector of Consolidated Mining Co. Inc. v. Commissioner of Internal Revenue and Court of
Customs. Tax Appeals, 119 Phil. 33, 37 (1963)]
13. Strict interpretation of a tax refund that partakes of The rule is that tax exemptions must be strictly construed such that
the exemption will not be held to be conferred unless the terms under
the nature of a tax does not apply to tax refund based on which it is granted clearly and distinctly show that such was the intention.
erroneous payment or where there is no law that authorizes [Commissioner, supra citing Phil. Acetylene Co. v. Commission of Internal
collection of the tax. There is parity between tax refund and tax Revenue, et al., 127 Phil. 461, 472 (1967); Manila Electric Company v. Vera,
exemption only when the former is based either on a tax exemption G.R. No. L-29987, 22 October 1975, 67 SCRA 351, 357-358; Surigao
statute or a tax refund statute. (Commissioner of Internal Revenue v. Consolidated Mining Co. Inc. v. Commissioner of Internal Revenue, supra]
Fortune Tobacco Corporation, G. R. Nos. 167274-75, July 21, 2008) A claim for tax refund may be based on statutes granting tax
Tax refunds (or tax credits), on the other hand, are not founded exemption or tax refund. In such case, the rule of strict interpretation
principally on legislative grace but on the legal principle which underlies against the taxpayer is applicable as the claim for refund partakes of the
all quasi-contracts abhorring a person’s unjust enrichment at the expense nature of an exemption, a legislative grace, which cannot be allowed
of another. [Commissioner, supra citing Ramie Textiles, Inc. v. Hon. Mathay, unless granted in the most explicit and categorical language. The
Sr., 178 Phil. 482 (1979); Puyat & Sons v. City of Manila, et al., 117 Phil. 985 taxpayer must show that the legislature intended to exempt him from the
(1963)] tax by words too plain to be mistaken. [Commissioner, supra with a note to
The dynamic of erroneous payment of tax fits to a tee the see Surigao Consolidated Mining Co. Inc. v. CIR, supra at 732-733; Philex
prototypic quasi-contract, solutio indebiti, which covers not only mistake Mining Corp. v. Commissioner of Internal Revenue, 365 Phil. 572, 579 (1999);
in fact but also mistake in law. (Commissioner, supra citing CIVIL CODE, Davao Gulf Lumber Corp. v. Commissioner of Internal Revenue, 354 Phil. 891-
Arts. 2142, 2154 and 2155) 892 (1998); . Commissioner of Internal Revenue v. Tokyo Shipping Co., Ltd.,
The Government is not exempt from the application of solutio 314 Phil. 220, 228 (1995)]
indebiti. (Commissioner, supra citing Commissioner of Internal Revenue v.
Fireman’s Fund Insurance Co., G.R. No. L-30644, 9 March 1987, 148 SCRA 15. Effect of a BIR reversal of a previous ruling
315, 324-325; Ramie Textiles, Inc. v. Mathay, supra; Gonzales Puyat & Sons v. interpreting a law as exempting a taxpayer. A reversal of a BIR
City of Manila, supra) ruling favorable to a taxpayer would not necessarily create a perpetual
Indeed, the taxpayer expects fair dealing from the Government, exemption in his favor, for after all the government is never estopped from
and the latter has the duty to refund without any unreasonable delay what collecting taxes because of mistakes or errors on the part of its agents.
it has erroneously collected. (Commissioner, supra citing Commissioner of (Lincoln Philippine Life Insurance Company, Inc., etc., v. Court of Appeals, et al.,
Internal Revenue v. Tokyo Shipping Co., supra at 338) If the State expects its 293 SCRA 92, 99)
taxpayers to observe fairness and honesty in paying their taxes, it must
hold itself against the same standard in refunding excess (or erroneous) 16. A tax amnesty is a general pardon or intentional
payments of such taxes. It should not unjustly enrich itself at the overlooking by the State of its authority to impose penalties on persons
expense of taxpayers. [Commissioner, supra citing AB Leasing and Finance otherwise guilty of evasion or violation of a revenue or a tax law.
Corporation v. Commissioner of Internal Revenue, 453 Phil. 297 in turn citing It partakes of an absolute waiver by the government of its right to
BPI-Family Savings Bank, Inc. v. Court of Appeals, 330 SCRA 507, 510, 518
collect what is due it and to give tax evaders who wish to relent a chance
(2000)] And so, given its essence, a claim for tax refund necessitates only
to start with a clean slate. A tax amnesty, much like a tax exemption, is
preponderance of evidence for its approbation like in any other ordinary
never favored nor presumed in law. The grant of a tax amnesty, similar to
civil case. (Commissioner, supra)
a tax exemption, must be construed strictly against the taxpayer and
liberally in favor of the taxing authority. (Philippine Banking Corporation,
etc., v. Commissioner of Internal Revenue, G. R. No. 170574, January 30, 2009)
19
22. Tax sparing is a provision in some tax treaties which
17. The purpose of tax amnesty is to provides that the state of residence allows as credit the amount that
a. give tax evaders who wish to relent a chance to start a clean would have been paid, as if no reduction has been made. (Vogel, Klaus on
slate, and to Double Taxation Conventions, Third Edition, p.1255 cited in Segarra, Venice H,
b. give the government a chance to collect uncollected tax from Tax Treaties: Trick or treat ?, Philippine Daily Inquirer, December 6, 2002, p. C5)
tax evaders without having to go through the tedious process of a There may be instances where a particular income is exempt from
tax case. (Banas, Jr. v. Court of Appeals, et al., G.R. No. 102967, February taxation in order to encourage foreign investments which may lead to
10, 2000) economic development. If the tax credit method is used, there would be
no more tax to credit since there is no more tax to credit as a result of the
18. Tax amnesty distinguished from tax exemption. tax exemption. Consequently, when the tax method credit method is
a. Tax amnesty is an immunity from all criminal, civil and applied to these items of income, such incentives are siphoned off since,
administrative liabilities arising from nonpayment of taxes (People v. in effect, the tax benefits are cancelled out. (Ibid.) Thus, the need for the
Castaneda, G.R. No. L-46881, September 15, 1988) WHILE a tax tax sparing provision.
exemption is an immunity from civil liability only. It is an immunity or
privilege, a freedom from a charge or burden to which others are subjected. NATIONAL INTERNAL REVENUE CODE
(Florer v. Sheridan, 137 Ind. 28, 36 NE 365)
b. Tax amnesty applies only to past tax periods, hence of ORGANIZATION AND FUNCTIONS OF THE BUREAU OF
retroactive application (Castaneda, supra) WHILE tax exemption has INTERNAL REVENUE
prospective application.
1. Rep. Act No. 1405, the Bank Deposits Secrecy Law
19. Tax avoidance is the use of legally permissible means to prohibits inquiry into bank deposits. As exceptions to Rep.
reduce the tax while tax evasion is the use of illegal means to escape the
payment of taxes.
Act No. 1405, the Commissioner of Internal Revenue is only
authorized to inquire into the bank deposits of:
20. Tax evasion connotes the integration of three a. a decedent to determine his gross estate; and
b. any taxpayer who has filed an application for compromise of
factors: his tax liability by reason of financial incapacity to pay his tax liability. [Sec.
a. The end to be achieved, i.e., the payment of less than that 5 (F), NIRC of 1997]
known by the taxpayer to be legally due, or the non-payment of tax when it c. A taxpayer who authorizes the Commissioner to inquire into
is shown that a tax is due; his bank deposits.
b. an accompanying state of mind which is described as being
“evil” on “bad faith,” “willful,” or ”deliberate and not accidental”; and
2. Purpose of the NIRC of 1997. Revenue generation
c. a course of action or failure of action which is unlawful.
(Commissioner of Internal Revenue v. The Estate of Benigno P. Toda, Jr., , etc., has undoubtedly been a major consideration in the passage
G. R. No. 147188, September 14, 2004) of the Tax Code. (Commissioner of Internal Revenue v. Fortune Tobacco
Corporation, G. R. Nos. 167274-75, July 21, 2008)

21. Tax avoidance distinguished from tax
evasion. 3. Purpose of shift from ad valorem system to
a. Tax avoidance is legal while tax evasion is illegal. specific tax system in taxation of cigarettes. The shift from the
b. The objective of tax avoidance in most instances is merely to ad valorem system to the specific tax system is likewise meant to
reduce the tax that is due while is tax evasion the object is to entirely promote fair competition among the players in the industries
escape the payment of taxes. concerned, to ensure an equitable distribution of the tax burden and to
c. Tax evasion warrants the imposition of civil, administrative simplify tax administration by classifying cigarettes, among others, into
and criminal penalties while tax avoidance does not. high, medium and low-priced based on their net retail price and
accordingly graduating tax rates. (Commissioner of Internal Revenue v.
Fortune Tobacco Corporation, G. R. Nos. 167274-75, July 21, 2008)
20
the Law of Partnership by Floyd R. Mechem, 2 nd Ed., Sec. 83, p. 74 cited in
TAX ON INCOME Pascual v. Commissioner of Internal Revenue, 166 SCRA 560)

1. The Tax Code has included under the term 5. The common ownership of property does not itself
“corporation” partnerships, no matter how created or organized, create a partnership between the owners , though they may use it
joint-stock companies, joint accounts (cuentas en participacion), for purpose of making gains, and they may, without becoming partners, are
associations, or insurance companies. [Sec. 24 now Sec. 24 (B) of the among themselves as to the management and use of such property and
NIRC of 1997] the application of the proceeds therefrom.. (Spurlock v,. Wilson, 142 S.W.
363, 160 No. App. 14, cited in Pascual v. Commissioner of Internal
2. In Evangelista v. Collector, 102 Phil. 140, the Supreme Court Revenue, 166 SCRA 560)
held citing Mertens that the term partnership includes a syndicate,
group, pool, joint venture or other unincorporated organization, through or 6. The income from the rental of the house, bought
by means of which any business, financial operation, or venture is carried from the earnings of co-owned properties, shall be treated as
on. the income of an unregistered partnership to be taxable as a
corporation because of the clear intention of the brothers to join together in
3. Certain business organizations do not fall under the a venture for making money out of rentals.
category of “corporations” under the Tax Code, and therefore not
subject to tax as corporations, include: 7. Income is gain derived and severed from capital, from labor
a. General professional partnerships; or from both combined. For example, to tax a stock dividend would be to
b. Joint venture or consortium formed for the purpose of tax a capital increase rather than the income. (Commissioner of Internal
undertaking construction projects engaging in petroleum, coal, geothermal, Revenue v. Court of Appeals, et al., G.R. No. 108576, January 20, 1999)
and other energy operations, pursuant to an operation or consortium
agreement under a service contract with the Government. [1 st sentence, 8. The term taxable income means the pertinent items of
Sec. 22 (B), BIRC of 1997] gross income specified in the Tax Code, less the deductions and/or
personal and additional exemptions, if any, authorized for such types of
4. Co-heirs who own inherited properties which income by the Tax Code or other special laws. (Sec. 31, NIRC of 1997)
produce income should not automatically be considered as
partners of an unregistered corporation subject to income tax 9. The cancellation and forgiveness of indebtedness
for the following reasons: may amount to (a) payment of income; (b) gift; or to a (c) capital
a. The sharing of gross returns does not of itself establish a transaction depending upon the circumstances.
partnership, whether or not the persons sharing them have a joint or
common right or interest in any property from which the returns are 10. If an individual performs services for a creditor
derived. There must be an unmistakable intention to form a partnership or who, in consideration thereof, cancels the debt, it is income to
joint venture. (Obillos, Jr. v. Commissioner of Internal Revenue, 139 SCRA 436) the extent of the amount realized by the debtor as compensation for his
b. There is no contribution or investment of additional capital to services.
increase or expand the inherited properties, merely continuing the
dedication of the property to the use to which it had been put by their 11. An insolvent debtor does not realize taxable income
forebears. (Ibid.) from the cancellation or forgiveness. (Commissioner v. Simmons
c. Persons who contribute property or funds to a common Gin Co., 43 Fd 327 CCA 10th)
enterprise and agree to share the gross returns of that enterprise in
proportion to their contribution, but who severally retain the title to their 12. The insolvent debtor realizes income resulting from
respective contribution, are not thereby rendered partners. They have no the cancellation or forgiveness of indebtedness when he
common stock capital, and no community of interest as principal proprietors becomes solvent. (Lakeland Grocery Co., v. Commissioner 36 BTA (F)
in the business itself from which the proceeds were derived. (Elements of 289)
21
18. Under the National Internal Revenue Code the global
13. If a creditor merely desires to benefit a debtor and system is applicable to taxable corporations and the schedular
without any consideration therefor cancels the amount of the to individuals.
debt it is a gift from the creditor to the debtor and need not be
included in the latter’s income. 19. Compensation income is considered as having
been earned in the place where the service was rendered and
14. If a corporation to which a stockholder is indebted not considered as sourced from the place of origin of the money.
forgives the debt, the transaction has the effect of payment of
a dividend. (Sec. 50, Rev. Regs. No. 2) 20. Payment for services, other than compensation
income, is considered as having been earned at the place
15. Members of cooperatives not subject to tax on the where the activity or service was performed.
interest earned from their deposits with the cooperative. No less
than our Constitution guarantees the protection of cooperatives. Section 15, 21. A non-resident alien, who has stayed in the
Article XII of the Constitution considers cooperatives as instruments for social Philippines for an aggregate period of more than 180 days
justice and economic development. At the same time, Section 10 of Article II of during any calendar year, shall be considered as a non-
the Constitution declares that it is a policy of the State to promote social justice in resident alien doing business in the Philippines. Consequently,
all phases of national development. In relation thereto, Section 2 of Article XIII of he shall be subject to income tax on his income derived from sources from
the Constitution states that the promotion of social justice shall include the within the Philippines. [Sec. 25 (A) (1), NIRC]
commitment to create economic opportunities based on freedom of initiative and He is allowed to avail of the itemized deductions including the
self-reliance. Bearing in mind the foregoing provisions, we find that an personal and additional exemptions subject to the rule on reciprocity.
interpretation exempting the members of cooperatives from the imposition of the
final tax under Section 24(B)(1) of the NIRC (tax on interest earned by deposits)
is more in keeping with the letter and spirit of our Constitution. (Dumaguete
22. What are considered as de minimis benefits
Cathedral Credit Coopertive [DCCC)] etc., v. Commissioner of Internal Revenue, not subject to withholding tax on compensation income of
G. R. No. 182722, January 22, 2010) both managerial and rank and file employees ?
In closing, cooperatives, including their members, deserve a preferential SUGGESTED ANSWER:
tax treatment because of the vital role they play in the attainment of economic a. Monetized unused vacation leave credits of employees not
development and social justice. Thus, although taxes are the lifeblood of the exceeding ten (10) days during the year;
government, the State’s power to tax must give way to foster the creation and b. Medical cash allowance to dependents of employees not
growth of cooperatives. To borrow the words of Justice Isagani A. Cruz: “The exceeding P750.00 per employee per semester or P125 per month;
power of taxation, while indispensable, is not absolute and may be subordinated c. Rice subsidy of P1,000.00 or one (1) sack of 50-kg. rice per
to the demands of social justice.” (Ibid., citing Commissioner of Internal Revenue month amounting to not more than P1,000.00;
v. American Express International, Inc. (Philippine Branch), 500 Phil. 586 (2005). d. Uniforms and clothing allowance not exceeding P3,000.00 per
annum;
16. The Global system of income taxation is a system e. Actual yearly medical benefits not exceeding P10,000.00 per
employed where the tax system views indifferently the tax base and annum;
generally treats in common all categories of taxable income of the f. Laundry allowance not exceeding P300 per month;
individual. (Tan v. del Rosario, Jr., 237 SCRA 324, 331) g. Employees achievement awards, e.g. for length of service or
safety achievement, which must be in the form of a tangible persona
17. The Schedular system of income taxation is a system property other than cash or gift certificate, with an annual monetary value
employed where the income tax treatment varies and is made to depend not exceeding P10,000.00 received by an employee under an established
on the kind or category of taxable income of the taxpayer. (Tan v. del written plan which does not discriminate in favor of highly paid employees;
Rosario, Jr., 237 SCRA 324, 331) h. Gifts given during Christmas and major anniversary
celebrations not exceeding P5,000 per employee per annum;
22
i. Flowers, fruits, books, or similar items given to employees b. Amounts received by the insured as a return of premiums
under special circumstances, e.g. on account of illness, marriage, birth of a paid by him under life insurance, endowment or annuity contracts either
baby, etc.; and during the term, or at maturity of the term mentioned in the contract, or
j. Daily meal allowance for overtime work not exceeding twenty upon surrender of the contract.
five percent (25%) of the basic minimum wage. c. Value of property acquired by gift, bequest, devise, or
The amount of de minimis benefits conforming to the ceiling herein descent.
prescribed shall not be considered in determining the P30,000 ceiling of d. Amounts received, through accident or health insurance or
“other benefits” provided under Section 32 (B)(7)(e) of the Code. However, Workmen’s Compensation Acts as compensation for personal injuries or
if the employer pays more than the ceiling prescribed by these regulations, sickness, plus the amounts of any damages received on whether by suit or
the excess shall be taxable to the employee receiving the benefits only if agreement on account of such injuries or sickness.
such excess is beyond the P30,000.00 ceiling, provided, further, that any e. Income of any kind to the extent required by any treaty
amount given by the employer as benefits to its employees, whether obligation binding upon the Government of the Philippines.
classified as de minimis benefits or fringe benefits, shall constitute as f. Retirement benefits received under Republic Act No. 7641.
deductible expense upon such employer. [Sec. 2.78.1 (A) (3), Rev. Regs. Retirement received from reasonable private benefit plan after compliance
2-98 as amended by Rev. Regs. No. 8-2000] with certain conditions. Amounts received for beyond control separation.
Foreign social security, retirement gratuities, pensions, etc. USVA
23. Income subject to “final tax” refers to an income benefits, SSS benefits and GSIS benefits.
collected through the withholding tax system. The payor of the
income withholds the tax and remits it to the government as a final 26. What are the conditions for excluding
settlement of the income tax as a final settlement of the income tax due on retirement benefits from gross income, hence tax-exempt ?
said income. The recipient is no longer required to include the income SUGGESTED ANSWER:
subjected to a final tax as part of his gross income in his income tax return. a. Retirement benefits received under Republic Act No. 7641
and those received by officials and employees of private firms, whether
24. Distinguish exclusions from deductions. individual or corporate, in accordance with the employer’s reasonable
SUGGESTED ANSWER: private benefit plan approved by the BIR.
a. Exclusions from gross income refer to a flow of wealth to the b. Retiring official or employee
taxpayer which are not treated as part of gross income for purposes of 1) In the service of the same employer for at least ten (10)
computing the taxpayer’s taxable income, due to the following reasons: (1) years;
It is exempted by the fundamental law; (2) It is exempted by statute; and 2) Not less than fifty (50) years of age at time of
(3) It does not come within the definition of income (Sec. 61, Rev. Regs. retirement;
No. 2) WHILE deductions are the amounts which the law allows to be 3) Availed of the benefit of exclusion only once. [Sec. 32
subtracted from gross income in order to arrive at net income. (B) (6) (a), NIRC of 1997] The retiring official or employee should not
b. Exclusions pertain to the computation of gross income WHILE have previously availed of the privilege under the retirement plan of
deductions pertain to the computation of net income. the same or another employer. [1st par., Sec. 2.78 (B) (1), Rev.
c. Exclusions are something received or earned by the taxpayer Regs. No. 2-98]
which do not form part of gross income WHILE deductions are something
spent or paid in earning gross income. 27. What kind of separation (retirement) pay is
An example of an exclusion from gross income are life insurance excluded from gross income, hence tax-exempt ?
proceeds, and an example of a deduction are losses. SUGGESTED ANSWER:
a. Any amount received by an official, employee or by his heirs,
25. What are excluded from gross income ? b. From the employer
SUGGESTED ANSWER: c. As a consequence of separation of such official or employee
a. Proceeds of life insurance policies paid to the heirs or from the service of the employer because of
beneficiaries upon the death of the insured whether in a single sum or 1) Death, sickness or other physical disability; or
otherwise.
23
2) For any cause beyond the control of said official or other from compensation income are allowed to deduct these expenses.
employee [Sec. 32 (B) (6) (b), NIRC of 1997], such as Domestic corporations, estates and trusts may also deduct this expense.
retrenchment, redundancy and cessation of business. [1st par., Nonresident citizens and foreign corporations on their gross incomes from
Sec. 2.78 (B), (1) (b), Rev. Regs. No. 2-98] within may also deduct this expense.
Nonresident alien individuals not engaged in trade or business in
28. What are the Itemized deductions from gross the Philippines are not allowed to deduct this expense.
income and who may avail of them ? f. Depreciation or a reasonable allowance for the exhaustion,
a. Ordinary and necessary trade, business or professional wear and tear (including reasonable allowance for obsolescence) of
expenses. property used in trade or business.
b. The amount of interest paid or incurred within a taxable year Resident citizens, resident alien individuals and nonresident alien
on indebtedness in connection with the taxpayer’s profession, trade or individuals who are engaged in trade and business, on their gross incomes
business. other from compensation income are allowed to deduct these expenses.
Resident citizens, resident alien individuals and nonresident alien Domestic corporations, estates and trusts may also deduct this expense.
individuals who are engaged in trade and business, on their gross incomes Nonresident citizens and foreign corporations on their gross incomes from
other from compensation income are allowed to deduct these expenses. within may also deduct this expense.
Domestic corporations, estates and trusts may also deduct this expense. Nonresident alien individuals not engaged in trade or business in
Nonresident citizens and foreign corporations on their gross incomes from the Philippines are not allowed to deduct this expense.
within may also deduct this expense. g. Depletion or deduction arising from the exhaustion of a non-
Nonresident alien individuals not engaged in trade or business in replaceable asset, usually a natural resource.
the Philippines are not allowed to deduct this expense. Resident citizens, resident alien individuals and nonresident alien
c. Taxes paid or incurred within the taxable year in connection individuals who are engaged in trade and business, on their gross incomes
with the taxpayer’s profession. other from compensation income are allowed to deduct these expenses.
Resident citizens, resident alien individuals and nonresident alien Domestic corporations, estates and trusts may also deduct this expense.
individuals who are engaged in trade and business, on their gross incomes Nonresident citizens and foreign corporations on their gross incomes from
other from compensation income are allowed to deduct these expenses. within may also deduct this expense.
Domestic corporations, estates and trusts may also deduct this expense. Nonresident alien individuals not engaged in trade or business in
Nonresident citizens and foreign corporations on their gross incomes from the Philippines are not allowed to deduct this expense.
within may also deduct this expense.  h. Charitable and other contributions. Resident citizens,
Nonresident alien individuals not engaged in trade or business in resident alien individuals and nonresident alien individuals who are
the Philippines are not allowed to deduct this expense. engaged in trade and business, on their gross incomes other from
d. Ordinary losses, losses from casualty, theft or compensation income are allowed to deduct these expenses. Domestic
embezzlement; and net operating losses. corporations, estates and trusts may also deduct this expense.
Resident citizens, resident alien individuals and nonresident alien Nonresident citizens and foreign corporations on their gross incomes from
individuals who are engaged in trade and business, on their gross incomes within may also deduct this expense.
other from compensation income are allowed to deduct these expenses. Nonresident alien individuals not engaged in trade or business in
Domestic corporations, estates and trusts may also deduct this expense. the Philippines are not allowed to deduct this expense.
Nonresident citizens and foreign corporations on their gross incomes from i. Research and development expenditures treated as deferred
within may also deduct this expense. expenses paid or incurred by the taxpayer in connection with his trade,
Nonresident alien individuals not engaged in trade or business in business or profession, not deducted as expenses and chargeable to
the Philippines are not allowed to deduct this expense. capital account but not chargeable to property of a character which is
 e. Bad debts due to the taxpayer, actually ascertained to subject to depreciation or depletion.
be worthless and charged off within the taxable year, connected with Resident citizens, resident alien individuals and nonresident alien
profession, trade or business, not sustained between related parties. individuals who are engaged in trade and business, on their gross incomes
Resident citizens, resident alien individuals and nonresident alien other from compensation income are allowed to deduct these expenses.
individuals who are engaged in trade and business, on their gross incomes Domestic corporations, estates and trusts may also deduct this expense.
24
Nonresident citizens and foreign corporations on their gross incomes from 1) Must be ordinary and necessary;
within may also deduct this expense. 2) Must be paid or incurred within the taxable year;
Nonresident alien individuals not engaged in trade or business in 3) Must be paid or incurred in carrying on a trade or
the Philippines are not allowed to deduct this expense. business.
j. Contributions to pension trusts. Resident citizens, resident 4) Must not be bribes, kickbacks or other illegal
alien individuals and nonresident alien individuals who are engaged in trade expenditures
and business, on their gross incomes other from compensation income are b. Compliance with the substantiation test. Proof by evidence or
allowed to deduct these expenses. Domestic corporations, estates and records of the deductions allowed by law including compliance with the
trusts may also deduct this expense. Nonresident citizens and foreign business test.
corporations on their gross incomes from within may also deduct this
expense. 31. What are the requisites for the deductibility of
Nonresident alien individuals not engaged in trade or business in ordinary and necessary trade, business, or professional
the Philippines are not allowed to deduct this expense. expenses, like expenses paid for legal and auditing services ?
k. Insurance premiums for health and hospitalization. Resident SUGGESTED ANSWER:
citizens, resident alien individuals and nonresident alien individuals who are a. the expense must be ordinary and necessary;
engaged in trade and business, on their gross incomes other from b. it must have been paid or incurred during the taxable year
compensation income are allowed to deduct these expenses. Nonresident dependent upon the method of accounting upon the basis of which the net
citizens and nonresident alien individual engaged in trade or business in the income is computed.
Philippine on their gross incomes from within may also deduct these c. it must be supported by receipts, records or other pertinent
premiums. papers. (Commissioner of Internal Revenue v, Isabela cultural
Nonresident alien individuals not engaged in trade or business in Corporation, G. R. No. 172231, February 12, 2007)
the Philippines are not allowed to deduct these premiums.
l. Personal and additional exemptions. Resident citizens, and  32. TMG Corporation is issuing the accrual
resident alien on their gross incomes and from compensation income are
method of accounting. In 2005 XYZ Law Firm and ABC
allowed to deduct these premiums. Nonresident citizens on their gross
incomes from within may also deduct this expense. Nonresident alien Auditing Firm rendered various services which were billed by
individuals engaged in trade or business in the Philippines are allowed to these firms only during the following year 2006. Since the bills
deduct these exemptions under reciprocity. for legal and auditing services were received only in 2006 and
Nonresident alien individuals not engaged in trade or business in paid in the same year, TMG deducted the same from its 2006
the Philippines are not allowed to deduct this expense. gross income. The BIR disallowed the deduction ?
Who is correct, TMG or BIR ? Explain.
29. Distinguish ordinary expenses from capital SUGGESTED ANSWER: The BIR is correct. TMG should have
expenditures. deducted the professional and legal fees in the year they were incurred in
SUGGESTED ANSWER: Ordinary expenses are those which are 2005 and not in 2006 because at the time the services were rendered in
common to incur in the trade or business of the taxpayer WHILE capital 2005, there was already an obligation to pay them. (Commissioner of
expenditures are those incurred to improve assets and benefits for more Internal Revenue v, Isabela Cultural Corporation, G. R. No. 172231,
than one taxable year. Ordinary expenses are usually incurred during a February 12, 2007)
taxable year and benefits such taxable year. Necessary expenses are NOTES AND COMMENTS:
those which are appropriate or helpful to the business. a. Accounting methods for tax purposes comprise a set of
rules for determining when and how to report income and deductions.
30. What are the requisites for the deductibility of (Commissioner of Internal Revenue v, Isabela cultural Corporation, G. R.
business expenses ? No. 172231, February 12, 2007)
SUGGESTED ANSWER: The following are the requisites for The two (2) principal accounting methods for recognition of income
deductibility of business expenses: are the (a) accrual method; and the (b) cash method.
a. Compliance with the business test:
25
b. Recognition of income and expenses under the accrual SUGGESTED ANSWER: For purposes of taxation, fringe benefit
method of accounting. Amounts of income accrue where the right to means any good, service, or other benefit furnished or granted in cash or in
receive them becomes fixed, where there is created an enforceable liability. kind by an employer to an individual employee (except rank and file
Liabilities, are incurred when fixed and determinable in nature without employees), such as but not limited to:
regard to indeterminacy merely of time of payment.. (Commissioner of a. Housing;
Internal Revenue v, Isabela cultural Corporation, G. R. No. 172231, b. Expense account;
February 12, 2007) c. Vehicle of any kind;
The accrual of income and expense is permitted when the all-events d. Household personnel, such as maid, driver and others;
test has been met. (Ibid.) e. Interest on loan at less than market rate to the extent of the
c. All-events test. This test requires: difference between the market rate and actual rate granted;
1) fixing of a right to income or liability to pay; and f. Membership fees, dues and other expenses borne by the
2) the availability of the reasonable accurate employer for the employee in social and athletic clubs or other similar
determination of such income or liability. organizations;
The test does not demand that the amount of such income or liability g. Expenses for foreign travel;
be known absolutely, only that a taxpayer has at his disposal the h. Holiday and vacation expenses;
information necessary to compute the amount with reasonable accuracy. i. Educational assistance to the employee or his dependents;
The all-events test is satisfied where computation remains uncertain; and
if its basis is unchangeable, the test is satisfied where a computation may j. Life or health insurance and other non-life insurance
be unknown, but is not as much as unknowable, within the taxable year. premiums or similar amounts in excess of what the law allows. [Sec. 33 (B),
The amount of liability does not have to be determined exactly,; it must be NIRC of 1997; 1st par., Sec. 2.33 (B), Rev. Regs. No. 3-98]
determined with “reasonable accuracy” implies something less than an
exact or completely accurate amount. 35. Fringe benefits that are not subject to the fringe
The propriety of an accrual must be judged by the fact that a benefits tax:
taxpayer knew, or could reasonably be expected to have known, at the a. When the fringe benefit is required by the nature of, or
closing of its books for the taxable year. Accrual method of accounting necessary to the trade, business or profession of the employer; or
presents largely a question of fact; such that the taxpayer bears the burden b. When the fringe benefit is for the convenience or advantage
of proof of establishing the accrual of an item of income or deduction. of the employer. [Sec. 32(A), NIRC of 1997; 1 st par., Sec. 2.33 (A), Rev.
(Commissioner of Internal Revenue v, Isabela cultural Corporation, G. R. Regs. No. 3-98]
No. 172231, February 12, 2007) c. Fringe benefits which are authorized and exempted from
d. Under the cash method income is to be construed as income income tax under the Tax Code or under any special law;
for tax purposes only upon actual receipt of the cash payment. It is also d. Contributions of the employer for the benefit of the employee
referred to as the “cash receipts and disbursements method” because both to retirement, insurance and hospitalization benefit plans;
the receipt and disbursements are considered. Thus, income is recognized e. Benefits given to the rank and file employees, whether
only upon actual receipt of the cash payment but no deductions are allowed granted under a collective bargaining agreement or not; and
from the cash income unless actually disbursed through an actual payment f. De minimis benefits as defined in the rules and regulations to
in cash. be promulgated by the Secretary of Finance upon recommendation of the
Commissioner of Internal Revenue. [1st par., Sec. 32 (C), NIRC of 1997; Sec.
33. The fringe benefits tax is a final withholding tax imposed 2.33 (C), Rev. Regs. No. 3-98]
on the grossed-up monetary value of fringe benefits furnished, granted or
paid by the employer to the employee, except rank and file employees . [1st 
36. De minimis benefits are facilities and privileges
par., Sec. 2.33 (A), Rev. Regs. No. 3-98] (such as entertainment, medical services, or so-called “courtesy discounts”
on purchases), furnished or offered by an employer to his employees.
34. What is meant by “fringe benefit” for purposes of They are not considered as compensation subject to income tax and
taxation ? consequently to withholding tax, if such facilities are offered or furnished by
the employer merely as a means of promoting the health, goodwill,
26
contentment, or efficiency of his employees. [Sec. 2.78,1 (A) (3), Rev. Regs. f. The debts are uncollectible despite diligent effort exerted by the
2-98 as amended by Rev. Regs. No. 8-2000] taxpayer. [Sec. 34 (E) (1), NIRC of 1997; Sec. 3, Rev. Regs. No. 5-99
reiterated in Rev. Regs. No. 25-2002; Philippine Refining Corporation v.
37. Preferred shares are considered capital regardless Court of Appeals, et al., 256 SCRA 667]
of the conditions under which such shares are issued and g. Must have been reported as receivables in the income tax return
dividends or “interests” paid thereon are not allowed as of the current or prior years. (Sec. 103, Rev. Regs. No. 2)
deductions from the gross income of corporations. (Revenue :
Memorandum Circular No. 17-71) 41. What is the “tax benefit” rule ?
SUGGESTED ANSWER: The “tax benefit rule” posits that the
 38. Bad debts are those which result from the worthlessness recovery of bad debts previously allowed as deduction in the preceding
or uncollectibility, in whole or in part, of amounts due the taxpayer by year or years shall be included as part of the taxpayer’s gross income in
others, arising from money lent or from uncollectible amounts of income the year of such recovery to the extent of the income tax benefit of said
from goods sold or services rendered. (Sec. 2.a, Rev. Regs. 5-99) deduction.
NOTES AND COMMENTS:
39. Who are related parties ? a. If in the year the taxpayer claimed deduction of bad debts
SUGGESTED ANSWER: The following are related parties: written-off, he realized a reduction of the income tax due from him on
a. Members of the same family. The family of an individual shall account of the said deduction, his subsequent recovery thereof from his
include only his brothers and sisters (whether by the whole or half-blood), debtor shall be treated as a receipt of realized taxable income. (Sec. 4, Rev.
Regs. 5-99)
spouse, ancestors, and lineal descendants;
b. An individual and a corporation more than fifty percent (50%) b. If the said taxpayer did not benefit from the deduction of the
in value of the outstanding stock of which is owned, directly or indirectly, by said bad debt written-off because it did not result to any reduction of his
or for such individual; income tax in the year of such deduction (i.e. where the result of his
c. Two corporations more than fifty percent (50%) in value of the business operation was a net loss even without deduction of the bad debts
outstanding stock of which is owned, directly or indirectly, by or for the written-off), then his subsequent recovery thereof shall be treated as a
same individual; mere recovery or a return of capital, hence, not treated as receipt of
d. A grantor and a fiduciary of any trust; or realized taxable income. (Sec. 4, Rev. Regs. 5-99)
e. The fiduciary of a trust and the fiduciary of another trust if the
same person is a grantor with respect to each trust; or 42. Depreciation is the gradual diminution in the useful value of
f. A fiduciary of a trust and a beneficiary of such. [Sec. 36 (B), tangible property resulting from ordinary wear and tear and from normal
NIRC of 1997] obsolescence. The term is also applied to amortization of the value of
intangible assets the use of which in the trade or business is definitely
40. What are the requisites for valid deduction of bad limited in duration.
debts from gross income ?
SUGGESTED ANSWER: 43. The methods of depreciation are the following:
a. There must be an existing indebtedness due to the taxpayer a. Straight line method;
which must be valid and legally demandable; b. Declining balance method;
b. The same must be connected with the taxpayer’s trade, business c. Sum of years digits method; and
or practice of profession; d. Any other method prescribed by the Secretary of Finance
c. The same must not be sustained in a transaction entered into upon the recommendation of the Commissioner of Internal Revenue:
between related parties; 1) Apportionment to units of production;
d. The same must be actually charged off the books of accounts of 2) Hours of productive use;
the taxpayer as of the end of the taxable year; and 3) Revaluation method; and
e. The debt must be actually ascertained to be worthless and 4) Sinking fund method.
uncollectible during the taxable year;
44. What are personal and additional exemptions ?
27
SUGGESTED ANSWER: These are the theoretical persona, living a. It is clear that under the amendment, single individuals may
and family expenses of an individual allowed to be deducted from the gross now claim for the additional exemptions. Furthermore, the concept of
or net income of an individual taxpayer. head of a family does not find application anymore.
These are arbitrary amounts which have been calculated by our b. “A dependent means
lawmakers to be roughly equivalent to the minimum of subsistence, taking a. a legitimate, illegitimate or legally adopted child
into account the personal status and additional qualified dependents of the b. chiefly dependent upon and living with the taxpayer
taxpayer. They are fixed amounts in the sense that the amounts have c. if such dependent is
been predetermined by our lawmakers and until our lawmakers make new 1) not more than twenty-one (21) years of age,
adjustments on these personal exemptions, the amounts allowed to be 2) unmarried and
deducted by a taxpayer are fixed as predetermined by Congress. 3) not gainfully employed or
[Pansacola v. Commissioner of Internal Revenue, G. R. No. 159991, November d. if such dependent,
16, 2006 citing Madrigal and Paterno v. Rafferty and Concepcion, 38 Phil. 414, 418 1) regardless of age
(1918)] 2) is incapable of self-support
3) because of mental or physical defect.” [2nd par., Sec.

45. What is the amount allowed as basic personal 2.79 (I) (1) (b), Rev. Regs. No. 2-98 as amended by Rev. Regs. No. 10-
exemption ? 2008, arrangement and numbering supplied; Sec. 35 (b), NIRC of 1997,
SUGGESTED ANSWER: There shall be allowed a basic personal as amended by Rep. Act No. 9504]
exemption amounting to Fifty thousand pesos (P50,000) for each c. It is to be noted that under the NIRC of 1997, as amended
individual taxpayer. by Rep. Act No. 9504, only qualified dependent children are considered
In the case of married individuals where only one of the spouse is for additional exemptions. Grandparents, parents, as well, as brothers or
deriving gross income, only such spouse shall be allowed the personal sisters, and other collateral relatives are not qualified dependents to be
exemption. [Sec. 35 (A), NIRC of 1997 as amended by Rep. Act No. 9504; claimed as additional exemptions.
Sec. 2.79 (I) (1) (a), Rev. Regs. No. 2-98 as amended by Rev. Regs. No. 10- However, if they are senior citizens they may qualify as additional
2008] exemptions under the “Senior Citizens Law” but not under the NIRC of
NOTES AND COMMENTS: It is clear from Rep. Act No. 9504 that 1997, as amended by Rep. Act No. 9504.
each of the spouses may claim the P50,000.00. Thus, the total familial Senior citizen shall be treated as dependents provided for in the
basic personal exemption for spouses is P100,000.00. National Internal Revenue Code, as amended, and as such, individual
Furthermore, the distinctions between the concepts of single, taxpayers caring for them, be they relatives or not shall be accorded the
married and head of the family for purpose of availing of the basic privileges granted by the Code insofar as having dependents are
personal exemption has already been eliminated by Rep. Act No. 9504. concerned. [last par. Sec. 5 (a), Rep. Act No. 7432, as amended by Rep. Act
9257, “The Expanded Senior Citizens Act of 2003”]

45. What are the amounts of additional exemptions ?
SUGGESTED ANSWER: “An individual,  47. Capital assets shall refer to all real properties held by a
a. whether single or married, taxpayer, whether or not connected with his trade or business, and which
b. shall be allowed an additional exemption of Twenty-Five are not included among the real properties considered as ordinary assets.
Thousand Pesos (P25,000.00) (Sec. 2.a, Rev. Regs. No. 7-2003)
c. for each qualified dependent child, The term “capital assets” means property held by the taxpayer
d. provided that the total number of dependents for which (whether or not connected with his trade or business), BUT DOES NOT
additional exemptions may be claimed INCLUDE:
1) shall not exceed four (4) dependents.” [1st par., Sec. a. Stock in trade of the taxpayer, or
2.79 (I) (1) (b), Rev. Regs. No. 2-98 as amended by Rev. Regs. No. 10- b. Other property of a kind which would properly be included in
2008, arrangement and numbering supplied; Sec. 35 (B), NIRC of 1997 the inventory of the taxpayer if on hand at the close of the taxable year, or
as amended by Rep. Act No. 9504] c. Property held by the taxpayer primarily for sale to customers in
NOTES AND COMMENTS: the ordinary course of his trade or business, or
d. Property used in the trade or business, of a character which is subject to
the allowance for depreciation; or real property used in the trade or
28
business of the taxpayer. [Sec. 39 (A) (1), NIRC of 1997, capitalized words, a. The machinery and equipment of a manufacturing concern
numbering and arrangement supplied; Sec. 2.a, Rev. Regs. No. 7-2003] subject to depreciation;
b. The tractors, trailers and trucks of a hauling company;

48. Examples of capital assets: c. The condominium building owned by a realty company the units
a. Stock and securities held by taxpayers other than dealers in of which are for rent or for sale;
securities; d. The wood, paint, varnish, nails, glue, etc. which are the raw
b. Jewelry not used for trade and business; materials of a furniture factory;
c. Residential houses and lands owned and used as such; e. Inherited parcels of land of substantial areas located in the
d. Automobiles not used in trade and business; heart of Metro Manila, which were subdivided into smaller lots then sold on
e. Paintings, sculptures, stamp collections, objects of arts which installment basis after introducing comparatively valuable improvements
are not used in trade or business; not for the purpose of simply liquidating the estate but to make them more
f. Inherited large tracts of agricultural land which were saleable ; the employment of an attorney-in-fact for the purpose of
subdivided pursuant to the government mandate under land reform, then developing, managing, administering and selling the lots; sales made with
sold to tenants. (Roxas v. Court of Tax Appeals, etc. L-25043, April 26, frequency and continuity; annual sales income from the sales was
1968) considerable; and the heir was not a stranger to the real estate business.
g. “Real property used by an exempt corporation in its exempt (Tuazon, Jr. v. Lingad, 58 SCRA 170)
operations, such as a corporation included in the enumeration of Section 30 f. Inherited agricultural property improved by introduction of good
of the Code, shall not be considered used for business purposes, and roads, concrete gutters, drainage and lighting systems converts the
therefore considered as capital asset.” (last sentence, 3rd par., Sec. 3.b, property to an ordinary asset. The property forms part of the stock in trade
Rev. Regs. No. 7-2003) of the owner, hence an ordinary asset. This is so, as the owner is now
h. “Real property, whether single detached, townhouse, or engaged in the business of subdividing real estate. (Calasanz v.
condominium unit, not used in trade or business as evidenced by a Commissioner of Internal Revenue, 144 SCRA at p. 672)
certification from the Barangay Chairman or from the head of
administration, in case of condominium unit, townhouse or apartment, and 
51. Tax treatment of real properties that have been
as validated from the existing available records of the Bureau of Internal transferred. Real properties classified as capital or ordinary asset in the
Revenue, owned by an individual engaged in business, shall be treated as hands of the seller/transferor may change their character in the hands of
capital asset.” (last par., Sec. 3.b., Rev. Regs. No. 7-2003) the buyer/transferee. The classification of such property in the hands of
the buyer/transferee shall be determined in accordance with the following
 49. Ordinary assets shall refer to all real properties rules:
specifically excluded from the definition of capital assets, a. Real property transferred through succession or donation to the
namely: heir or donee who is not engaged in the real estate business with respect
a. Stock in trade of a taxpayer or other real property of a kind which to the real property inherited or donated, and who does not subsequently
would properly be included in the inventory of a taxpayer if on hand at the use such property in trade or business, shall be considered as a capital
close of the taxable year; or asset in the hands of the heir or donee.
b. Real property held by the taxpayer primarily for sale to customers b. Real property received as dividend by stockholders who are not
in the ordinary course of his trade or business; or engaged in the real estate business and who not subsequently use such
c. Real property used in trade or business (i.e. buildings and/or real property in trade or business shall be treated as capital assets in the
improvements), of a character which is subject to the allowance for hands of the recipient even if the corporation which declared the real
depreciation; or property dividend is engaged in real estate business.
d. Real property used in trade or business of the taxpayer. (Sec. 2. c. The real property received in an exchange shall be treated as
b, Rev. Regs. No. 7-2003) ordinary asset in the hands of the transferee in the case of a tax-free
exchange by taxpayer not engaged in real estate business to a taxpayer
50.. Examples of ordinary assets hence not capital who is engaged in real estate business, or to a taxpayer who, even if not
assets: engaged in real estate business, will use in business the property received
in the exchange. (Sec. 3.f., Rev. Regs. No. 7-2003)
29
2) the fair market value as shown in the schedule of
52. The tax is “imposed upon capital gains presumed values of the Provincial and City Assessors. [Sec. 24 (D) (1) in
to have been realized from the sale, exchange, or other relation to Sec. 6 (E), both of the NIRC of 1997]
disposition of real property located in the Philippines, It does not matter whether there was an actual gain or loss
because the tax is a “presumed” capital gains tax. It is the transaction that
classified as capital assets.” [Sec. 24 (D) (1`), NIRC of 1997] Revenue is taxed not the gain.
Regulations No. 7-2003 has defined real property as having “the same
meaning attributed to that term under Article 415 of Republic Act No. 386,
otherwise known as the ‘Civil Code of the Philippines.’ (Sec. 2.c, Rev. Regs. 57. Holding period not applied to the taxation of the presumed
No. 7-2003) capital gains derived from the sale of real property considered as capital
assets.
53. Transactions covered by the presumed capital
gains tax on real property: 58. The tax liability, of individual taxpayers (not
a. sale, corporate), if any, on gains from sales or other dispositions of
b. exchange, real property, classified as capital assets, to the governm ent or
c. or other disposition, including pacto de retro sales and other any of its political subdivisions or agencies or to government owned or
forms of conditional sales. [Sec. 24 (D) (1), NIRC of 1997, numbering controlled corporations shall be determined, at the option of the taxpayer,
and arrangement supplied] by including the proceeds as part of gross income to be subjected to the
d. “ Sale, exchange, or other disposition” includes taking by the allowable deductions and/or personal and additional exemptions, then to
government through condemnation proceedings. (Gutierrez v. Court of Tax the schedular tax [Sec. 24 (D) (1), in relation to Sec. 24 (A) (1), both of the
Appeals, et al., 101 Phil. 713; Gonzales v. Court of Tax Appeals, et al., 121 Phil. NIRC of 1997] or the final presumed capital gains tax of six percent (6%).
861) [Sec. 24 (D) (1) in relation to Sec. 6 (E), both of the NIRC of 1997]

54. In case the mortgagor exercises his right of 59. The seller of the real property, classified as a capital
redemption within one (1) year from the issuance of the certificate of asset, pays the presumed capital gains tax whether:
sale, in a foreclosure of mortgage sale of real property, no capital gains tax a. an individual [Sec. 24 (D) (1), NIRC of 1997];
shall be imposed because no capital gains has been derived by the 1) Citizen, whether resident or not [Ibid.];
mortgagor and no sale or transfer of real property was realized. [Sec. 3 (1), 2) Resident alien [Ibid.];
Rev. Regs. No. 4-99] 3) Nonresident alien engaged in trade or business in the
Philippines [Sec. 25 (A) (3) in relation to Sec. 24 (D) (1), both of
55. In case of non-redemption of the property sold upon a the NIRC of 1997];
foreclosure of mortgage sale, the presumed capital gains tax shall be 4) Nonresident alien not engaged in trade or business in
imposed, based on the bid price of the highest bidder but only upon the the Philippines [Sec. 25 (B) in relation to Sec. 24 (D) (1), both of
expiration of the one year period of redemption provided for under Sec. 6 of the NIRC of 1997];
Act No. 3135, as amended by Act No. 4118, and shall be paid within thirty b. an estate or trust (Ibid.);
(30) days from the expiration of the said one-year redemption period. [Sec. c. a domestic corporation. [Sec. 27 (D) (5), NIRC of 1997]
3 (2), Rev. Regs. No. 4-99]
60. Excepted from the payment of the presumed
56. The basis for the final presumed capital gains tax capital gains tax are those presumed to have been realized
of six per cent (6%) is whichever is the higher of the from the disposition by natural persons of their principal place
a. gross selling price, or of residence
b. the current fair market value as determined below: a. the proceeds of which is fully utilized in acquiring or
1) the fair market value or real properties located in each constructing a new principal residence;
zone or area as determined by the Commissioner of Internal b. within eighteen (18) calendar months from the date of sale or
Revenue after consultation with competent appraisers both from disposition
the private and public sectors; or
30
c. the BIR Commissioner shall have been duly notified by the bank before the MCIT should be applied to it. (Manila Banking Corporation
taxpayer within thirty (30) days from the date of sale or disposition through v. Commissioner of Internal Revenue, G. R. No. 168118, August 26, 2006)
a prescribed return of his intention to avail of the tax exemption; and NOTES AND COMMENTS:
d. the said tax exemption can only be availed of once every ten a. The MCIT and when should be imposed and the four (4)
(10) years. [Sec. 24 (D) (2), NIRC of 1997] year grace period. “A minimum corporate income tax of two percent (2%)
of the gross income as of the end of the taxable year, as defined herein, is
61. MBC was incorporated in 1961 and engaged in hereby imposed on a corporation taxable under this Title, beginning on the
commercial banking operations since 1987. On May 22, 1987, fourth taxable year immediately following the year in which such
it ceased operations that year by reason of insolvency and its corporation commenced its business operations, when the minimum
assets and liabilities were placed under the charge of a corporate income tax is greater than the tax computed under Subsection
(A) of this section for the taxable year.” [Sec. 27 (E) (1), NIRC of 1997]
government-appointed receiver. On June 23, 1999, the BSP b. Period when a corporation becomes subject to the MCIT.
authorized MBC to operate as a thrift bank. “(5) Specific rules for determining the period when a corporation becomes
In 2000, It filed its tax return for the year 1999 paying the subject to the MCIT (minimum corporate income tax) -
amount of P33 million computed in accordance with the For purposes of the MCIT, the taxable year in which business
minimum corporate income tax (MCIT). It sought the BIR’s operations commenced shall be the year in which the domestic corporation
ruling on whether it is entitled to the four (4) year grace period registered with the Bureau of Internal Revenue (BIR).
for paying on the basis of MCIT reckoned from 1999. BIR then Firms which were registered with BIR in 1994 and earlier years shall
ruled that cessation of business activities as a result of being be covered by the MCIT beginning January 1, 1998. x x x” (Rev. Regs.
placed under involuntary receivership may be an economic No. 9-98)
Manila Banking Corporation v. Commissioner of Internal Revenue,
reason for suspending the imposition of the MCIT.
G. R. No. 168118, August 26, 2006 did not apply Rev. Regs. No. 9-98
As a result of the ruling MBC filed an application for because Rev. Regs. No. 4-95 specifically refers to thrift banks.)
refund of the P33 million. Due to the BIR’s inaction, MBC filed c. Purpose of the four (4) year grace period. The intent of
a petition for review with the CTA. Congress relative to the MCIT is to grant a four (43) – year suspension of
The CTA denied the petition on the ground that MBC is tax payment to newly organized corporations. Corporations still starting
not a newly organized corporation. In a volte facie the BIR now their business operations have to stabilize their venture in order to obtain a
maintains that MBC should pay the MCIT beginning January 1, stronghold in the industry. It does not come as a surprise then when many
1998 as it did not close its business operations in 1987 but companies reported losses in their initial years of operations.
merely suspended the same. Even if placed under Thus, in order to allow new corporations to grow and develop at the
receivership, the corporate existence was never affected. initial stages of their operations, the lawmaking body saw the need to
provide a grace period of four years from their registration before they pay
Thus, it falls under the category of an existing corporation their minimum corporate income tax. (Manila Banking Corporation v.
recommencing its banking operations. Commissioner of Internal Revenue, G. R. No. 168118, August 26, 2006)
Should the refund be granted ?
SUGGESTED ANSWER: Yes. The MCIT shall be imposed ESTATE TAXES
beginning in the fourth taxable year immediately following the year in which
the corporation commenced its business operations. [Sec. 27 (E) (1),
NIRC of 1997]
1. In determining the gross estate of a decedent,
The date of commencement of operations of a thrift bank is the date are his properties abroad to be included, and more
it was registered with the SEC or the date when the Certificate of Authority particularly, what constitutes gross estate ?
to Operate was issued to it by the Monetary Board, whichever comes later. SUGGESTED ANSWER: Yes, if the decedent is a Filipino citizen
(Sec. 6, Rev. Regs. No. 4-95) or a resident alien.
Clearly then. MBC is entitled to the grace period of four years from The gross estate of a Filipino citizen or a resident alien comprises
June 23, 1999 when it was authorized by the BSP to operate as a thrift all his real property, wherever situated; all his personal property, tangible,
31
intangible or mixed, wherever situated, to the extent of his interest 2) irrespective of whether or not the insured retained the
existing therein at the time of his death. power of revocation.
The gross estate of a non-resident alien comprises all his real
property, situated in the Philippines; all his personal property, tangible, 4. Proceeds of life insurance NOT included in a
intangible or mixed, situated in the Philippines, to the extent of his interest decedent’s gross estate.
existing therein at the time of his death. a. The decedent takes the insurance policy on his own life, and
b. the proceeds are receivable by a beneficiary designated as
2. William Smith, an American citizen, was a irrevocable. [Sec. 85 (E), NIRC of 1997)
permanent resident of the Philippines. He died in San NOTES AND COMMENTS: The beneficiary must not be the decedent’s
Francisco, California. He left 10,000 shares of San Miguel estate, executor or administrator, because the proceeds are includible as part of
gross estate whether or not the decedent retained the power of revocation.
Corporation, a condominium unit at the Twin Towers (Ibid.)
Building at Pasig, Metro Manila and a house and lot in c. Where the insurance was NOT taken by the decedent upon
Miami, Florida. his own life and the beneficiary is not the decedent’s estate, his executor
What assets shall be included in the Estate Tax Return to or administrator.
be filed with the BIR ?
SUGGESTED ANSWER: All of the assets should be included in the 4. Items deductible from the gross estate of a resident
Estate Tax Return to be filed with the BIR. or nonresident Filipino decedent or resident alien decedent:
Smith, an American citizen and a permanent resident of the a. Expenses, losses, claims, indebtedness and taxes;
Philippines is considered, for Philippine estate tax purposes, a resident b. Property previously taxed;
alien. Consequently, the assets to be included in the Estate Tax Return c. Transfers for public use;
to be filed with the BIR should be all property, real or personal, tangible, d. The Family Home up to a value not exceeding P1 million;
intangible or mixed, wherever situated, to the extent of the interest that e. Standard deduction of P1 million;
Smith has at the time of his death. Thus, all of the properties enumerated f. Medical expenses not exceeding P500,000.00;
in the problem irrespective of where they are situated are includible in the g. Amount of exempt retirement received by the heirs under
gross estate of Smith. Rep. Act Mo. 4917;
h. Net share of the surviving spouse in the conjugal partnership.
 3. Proceeds of life insurance includible in a
decedent’s gross estate. 5. There is no transfer in contemplation of death if
a. The decedent takes the insurance policy on his own life there is no showing that the transferor “retained for his life or for any
1) The amounts are receivable by period which does not in fact end before his death: (1) the possession or
a) the decedent’s estate, enjoyment of, or the right to the income from the property, or (2) the right,
b) his executor, or either alone or in conjunction with any person, to designate the person who
c) administrator irrespective of whether or not the shall possess or enjoy the property or the income therefrom.” [Sec. 85 (B),
insured retained the power of revocation, OR NIRC of 1997]
2) The amounts are receivable by any beneficiary
designated in the policy of insurance as revocable beneficiary. 6. Vanishing deduction (deduction for property
[Sec. 85 (E), NIRC of 1997]
previously taxed), defined. The deduction allowed from the gross
b. One, other than the decedent takes the insurance policy on
estates of citizens, resident aliens and nonresident estates for properties
the life of the decedent
which were previously subject to donor’s or estate taxes. The deduction
1) The amounts are receivable by
is called a vanishing deduction because the deduction allowed diminishes
a) the decedent’s estate,
over a period of five (5) years.
b) his executor, or
It is also known as a deduction for property previously taxed.
c) administrator
32
7. Vanishing deduction (property previously taxed) The tax assessment having become final, executory and
allowed as a deduction from the gross estate of a Filipino enforceable, the same can no longer be contested by means of a disguised
citizen, whether resident or not, of a resident alien decedent, protest. (Marcos, II v. Court of Appeals, et al., 273 SCRA 47)
or of a nonresident alien decedent.
a. An amount equal to the value specified below of DONOR’S TAXES
b. Any property forming a part of the gross estate situated in
the Philippines 1. What is the donor’s tax rate if the donee is a
c Of any person who died within five years prior to the stranger ?
death of the decedent, or transferred to the decedent by gift within five SUGGESTED ANSWER: When the donee or beneficiary is a
years prior to his death, stranger, the tax payable by the donor shall be 30% of the net gifts.
d. Where such property can be identified as having been
received by the decedent from the donor by gift, or from such prior 2. For purposes of the donor’s tax who is a
decedent by gift, bequest, devise, or inheritance, or stranger ?
e. Which can be identified as having been acquired in SUGGESTED ANSWER: A stranger is a is person who is not a:
exchange for property so received: a. Brother, sister (whether by whole or half-blood), spouse,
100% of the value if the prior decedent died within one year prior to ancestor and lineal descendant; or
the death of the decedent, or if the property was transferred to him by gift b. Relative by consanguinity in the collateral line within the fourth
within the same period prior to his death; degree of relationship.” [Sec. 99 (B), NIRC of 1997]
80% of the value if the prior decedent died more than one year but NOTES AND COMMENTS: All relatives by affinity, irrespective of
not more than two years prior to the death of the decedent, or if the the degree, are considered as strangers.
property was transferred to him by gift within the same period prior to his
death; 3. What is the tax base for donations ?
60% of the value if the prior decedent died more than two years but SUGGESTED ANSWER: The net gifts made during the calendar
not more than three years prior to the death of the decedent, or if the year. [Sec. 99 (A), NIRC of 1997]
property was transferred to him by gift within the same period prior to his
death; 4. For purposes of the donor’s tax, what is meant by
40% of the value if the prior decedent died more than three years “net gifts ?”
but not more than four years prior to the death of the decedent, or if the SUGGESTED ANSWER: The net economic benefit from the
property was transferred to him by gift within the same period prior to his transfer that accrues to the donee. Accordingly, if a mortgaged property
death; and is transferred as a gift, but imposing upon the donee the obligation to pay
20% of the value if the prior decedent died more than four years the mortgage liability, then the net gift is measured by deducting from the
but not more than five years prior to the death of the decedent, or if the fair market value of the property the amount of the mortgage assumed.
property was transferred to him by gift within the same period prior to his (last par., Sec. 11, Rev. Regs.No.2-2003)
death. [Sec. 86 (A) (2) and (B) (2), NIRC of 1997, numbering, arrangement and
underlining supplied]
5. How are gifts of personal property to be valued for
8. The approval of the court sitting in probate, or as a donor’s tax purposes ?
SUGGESTED ANSWER: The market value of the personal
settlement tribunal over the estate of the deceased is not a property at the time of the gift shall be considered the amount of the gift.
mandatory requirement for the collection of the estate. The (Sec. 102, NIRC of 1997)
probate court is determining issues which are not against the property of
the decedent, or a claim against the estate as such, but is against the 6. What is the valuation of donated real property for
interest or property right which the heir, legatee, devisee, etc. has in the
donor’s tax purposes ?
property formerly held by the decedent.
SUGGESTED ANSWER: The real property shall be appraised at its
The notices of levy were regularly issued within the prescriptive
fair market value as of the time of the gift.
period.
33
However, the appraised value of the real property at the time of the However, the Corporation Code prohibits corporations from making
gift shall be whichever is the higher of: political contributions. (Corp. Code, Title IV, Sec. 36.9)
a. the fair market value as determined by the Commissioner of d. Dowries or gifts made on account of marriage and before
Internal Revenue (zonal valuation) or its celebration or within one year thereafter by residents who are parents
b. the fair market value as shown in the schedule of values fixed to each of their legitimate, recognized natural, or adopted children to the
by the Provincial and City Assessors. [Sec. 102, in relation to Sec. 88 (B) both extent of the first ten thousand pesos (P10,000.00);
of the NIRC of 1997] e. Gifts made by residents or non-residents to or for the use of
the National Government or any entity created by any of its agencies
7. A died leaving as his only heirs, his surviving which is not conducted for profit, or to any political subdivisions of the
spouse B, and three minor children, X, Y and Z. Since B does said Government;
not want to participate in the distribution of the estate, she f. Gifts made by residents or non residents in favor of an
renounced her hereditary share in the estate. educational and/or charitable, religious, cultural or social welfare
a. Is the renunciation subject to donor’s tax ? corporation, institution, foundation, trust or philanthropic organization or
Explain. research institution or organization: Provided, however, That not more
SUGGESTED ANSWER: No. The general renunciation by an heir, than thirty percent (30%) of said gifts shall be used by such donee for
including the surviving spouse, as in the case B, of her share in the administration purposes. [Sec. 101 (A), NIRC of 1997, numbering and
hereditary estate left by the decedent is not subject to donor’s tax. (4 th arrangement supplied]
par., Sec. 11, Rev. Regs. No. 2-2003) g. Gifts made by non-resident aliens outside of the Philippines to
This is so because the general renunciation by B was not Philippine residents are exempt from donor’s taxes because taxation is
specifically and categorically done in favor of identified heir/s to the basically territorial. The transaction, which should have been subject to tax
exclusion or disadvantage of the other co-heirs in the hereditary estate. was made by non-resident aliens and took place outside of the Philippines.
b. Supposing that instead of a general renunciation,
B renounced her hereditary share in A’s estate to X who is a 9. What is the concept of donation or gift splitting ?
special child, would your answer be the same ? Explain. Illustrate.
SUGGESTED ANSWER: My answer would be different. The SUGGESTED ANSWER: Donation or gift splitting is spreading the
renunciation in favor of X would be subject to donor’s tax. gift over numerous calendar years in order to avail of lower donor’s taxes.
This is so because the renunciation was specifically and In 2008 Leon was thinking of donating a P200,000.00 to Miklos, his
categorically done in favor of X and identified heir to the exclusion or first cousin. The P200,000.00 is the totality of the net gifts for 2008. If
disadvantage of Y and Z, the other co-heirs in the hereditary estate. (4th he donated the P200,000.00 in 2008 the first P100,000 would be
par., Sec. 11, Rev. Regs. No. 2-2003) exempt and the remaining P50,000.00 would be subject to donor’s tax
If Leon spreads the P200,000 donation over two (2) calendar

8. Give some donations that are exempt from years, donating P100,000.00 on December 30, 2008 and the remaining
P100,000.00 on January 1, 2009 the transaction would be exempt from
donor’s tax. donor’s tax. This is so even if the donation is separated only by two days
SUGGESTED ANSWER:
because the basis is the calendar year. Leon would be enjoying the
a. The first P100,000.00 net donation during a calendar year is
exemption for the first P100,000.00 net gifts for each calendar year.
exempt from donor’s tax [Sec. 99 (A), NIRC of 1997] made by a resident or
non resident;
b. The donation by a resident or non-resident of a prize to an  10. A, who is engaged in the car “buy and sell”
athlete in an international sports tournament held abroad and sanctioned by business sold to B P7 million Jaguar for only P4 million. The
the national sports association is exempt from donor’s tax (Sec. 1, Rep. proper VAT on the sale was paid. If you are the BIR examiner
Act No. 7549) assigned to review the sale, would you issue a tax assessment
c. Political contributions made by a resident or non-resident on the transaction ? Explain your answer briefly.
individual if registered with the COMELEC irrespective of whether donated SUGGESTED ANSWER: Donor’s taxes would be due on the
to a political party or individual. insufficiency of consideration.
34
Where property, other than real property that has been subjected as a purchaser from its indirect burden of the VAT shifted to it by its VAT-
to the final capital gains tax, is transferred for less than an adequate and registered suppliers, the purchase transaction is not exempt.
full consideration in money or money’s worth, then the amount by which REASON: The VAT is a tax on consumption, the amount of which
the fair market value of the property at the time of the execution of the may be shifted or passed on by the seller to the purchaser of the goods,
Contract to Sell or execution of the Deed of Sale which is not preceded properties or services. [Commissioner of Internal Revenue v. Seagate
by a Contract to Sell exceeded the value of the agreed or actual Technology (Philippines), G. R. No. 153866, February 11, 2005)
consideration or selling price shall be deemed a gift, and shall be included
in computing the amount of gifts made during the calendar year. (5th par., 4. Illustration of effects of exemptions from VAT
Sec. 11, Rev. Regs. No. 2-2003) which is an indirect tax. A VAT exempt seller sells to a non-VAT
exempt purchaser. The purchaser is subject to VAT because the VAT is
VALUE-ADDED TAXES (VAT) merely added as part of the purchase price and not as a tax because the
burden is merely shifted. The seller is still exempt because it could pass
WARNING !!! Approximately 10% of the total questions asked in on the burden of paying the tax to the purchaser.
the Bar Examination are sourced from VAT and its concepts. This area is
probably the most difficult area to forecast because there are no statistically 5. The VAT is a tax on consumption. Meaning of
perceived patterns. The author has retained the “Stars System” for VAT. consumption as used under the VAT system. Consumption is
Considering the limited period of time, the reader is advised to focus on "the use of a thing in a way that thereby exhausts it."
areas marked with stars and just browse the unmarked areas. Applied to services, the term means the performance or
"successful completion of a contractual duty, usually resulting in the
 1. Value-added tax (VAT) is a tax which is imposed performer's release from any past or future liability x x x" Unlike goods,
only on the increase in the worth, merit or importance of goods, services cannot be physically used in or bound for a specific place when
properties or services, and not on the total value of the goods or services their destination is determined. Instead, there can only be a
being sold or rendered. "predetermined end of a course" when determining the service "location
or position x x x for legal purposes." [Commissioner of Internal Revenue v.
 2. Nature of VAT. VAT is an indirect tax that may be Placer Dome Technical Services (Phils.), Inc. G. R. No. 164365, June 8, 2007]
shifted or passed on to the buyer, transferee or lessee of the goods,
properties or services. As such, it should be understood not in the 6. Illustration of the meaning of consumption as used
context of the person or entity that is primarily, directly liable for its under the VAT system. For example the services rendered by a local
payment, but in terms of its nature as a tax on consumption. firm to its foreign client are performed or successfully completed upon its
[Commissioner of Internal Revenue v. Seagate Technology (Philippines), G. R. sending to a foreign client the drafts and bills it has gathered from service
No. 153866, February 11, 2005 citing various authorities} establishments here. Its services, having been performed in the
VAT is a percentage tax imposed on any person whether or not a Philippines, are therefore also consumed in the Philippines. Such
franchise grantee, who in the course of trade or business, sells, barters, facilitation service has no physical existence, yet takes place upon
exchanges, leases, goods or properties, renders services. It is also rendition, and therefore upon consumption, in the Philippines.
levied on every importation of goods whether or not in the course of trade [Commissioner of Internal Revenue v. Placer Dome Technical Services (Phils.),
or business. The tax base of the VAT is limited only to the value added Inc. G. R. No. 164365, June 8, 2007]
to such goods, properties, or services by the seller, transferor or lessor.
Further, the VAT is an indirect tax and can be passed on to the buyer. 
7. Who are liable for the value-added tax.
(Quezon City, et al., v. ABS-CBN Broadcasting Corporation, G. R. No. 166408,
a. Any person who, in the course of his trade or business,
October 6, 2008)
1) Sells, barters, exchanges or leases goods or
properties, or
 3. Effect of exemptions from VAT which is an 2) renders services, and
indirect tax. If a special law merely exempts a party as a seller from its b. any person who imports goods xxx
direct liability for payment of the VAT, but does not relieve the same party However, in the case of importation of taxable goods, the importer,
whether an individual or corporation and whether or not made in the
35
course of his trade or business, shall be liable to VAT xxx. (Rev. Regs. (ABAKADA Guro Party List, etc. et al. vs. Ermita, G.R. No. 168207, October 15,
No. 16-2005,Sec. 4.105-1, paraphrasing supplied) 2005, and companion cases, on the motion for reconsideration)


8. Various VAT methods and systems.  11. Output tax is the value-added tax due on the sale or
a. Cost deduction method. This is a single-stage tax which lease or taxable goods, properties or services by any VAT-registered
is payable only by the original sellers. (Abakada Guro Party List (etc.) v. person.
Ermita, etc., et al., G. R. No. 168056, September 1, 2005 and companion cases)
This was subsequently modified and a mixture of “cost deduction method”  12. Input tax is the value-added tax due on or paid by a
and “tax credit method” was used to determine the value-added tax VAT-registered person on importation of good or local purchases of
payable. (Ibid.) goods or services, including lease or use of properties, in the course of
b. Tax credit method. This method relies on invoices, an his trade or business. (Rev. Regs. No. 4.110-1, 1st par.)
entity can credit against or subtract from the VAT charged on its sales or
outputs the VAT paid on its purchases, inputs and imports. 13. Included in the input tax.
[Commissioner of Internal Revenue v. Seagate Technology (Philippines), a. the transitional input tax and
G. R. No. 153866, February 11, 2005] b. the presumptive input tax xxx.
If at the end of a taxable period, the output taxes charged by a It includes
seller are equal to the input taxes passed on by the suppliers, no c. input taxes which can be directly attributed to transactions
payment is required. It is when the output taxes exceed the input taxes subject to the VAT plus a ratable portion of any input tax which cannot be
that the excess has to be paid. directly attributed to either the taxable or exempt activity. (Rev. Regs.
If however, the input taxes exceed the output taxes, the excess No. 4.110-1, 1st par., 2nd sentence,. And 2nd par., paraphrasing,
shall be carried over to the succeeding quarter or quarters. Should the arrangement and numbering supplied )
input taxes result from zero-rated or effectively zero-rated transactions or 14. Concept of transitional input tax credits on
from acquisition of capital goods, any excess over the output taxes shall
beginning inventories. Taxpayers who become VAT-registered
instead be refunded to the taxpayer or credited against other internal
persons upon exceeding the minimum turnover of P1,500,000.00 in any
revenue taxes. (Ibid.)
12-month period, or who voluntarily register even if their turnover does
not exceed P1,500,000.00 (except franchise grantees of radio and
9. How the VAT is imposed on the increase in worth, television broadcasting whose threshold is P10,000,000.00) shall be
merit or improvement of the goods or services. The VAT entitled to a transitional input tax on the inventory on hand as of the
utilizes the concept of the output and input taxes. effectivity of their VAT registration, on the following:
Output VAT less Input VAT = VAT due on the increase in worth, a. goods purchased for resale in their present condition;
merit or improvement f the goods or services. b. materials purchased for further processing, but which have
not yet undergone processing;
10. The right to credit the input tax be limited by c. goods which have been manufactured by the taxpayer;
legislation because it is a mere creation of law. Prior to the d. goods in process for sale; or
enactment of multi-stage sales taxation, the sales taxes paid at every e. goods and supplies for use in the course of the taxpayer’s
level of distribution are not recoverable from the taxes payable. With the trade or business as a VAT-registered person. [Rev. Regs. No. 16-2005,
advent of Executive Order No. 273 imposing a 10% multi-stage tax on all Sec.4.111-1, (a), 1st par., arrangement and numbering supplied]
sales, it was only then that the crediting of the input tax paid on purchase
or importation of goods and services by VAT-registered persons against 15. Concept of presumptive input tax credits. Persons
the output tax was established. This continued with the Expanded VAT or firms engaged in the processing of sardines, mackerel, and milk, and
Law (R.A. No. 7716), and The Tax Reform Act of 1997 (R.A. No. 8424). in manufacturing refined sugar, cooking oil and packed noodle-based
The right to credit input tax as against the output tax is clearly a privilege instant meals, shall be allowed a presumptive input tax, creditable against
created by law, a privilege that also the law can limit. It should be the output tax, equivalent to four percent (4%) of the gross value in
stressed that a person has no vested right in statutory privileges. money of their purchases of primary agricultural products which are used
as inputs to their production.
36
As used in this paragraph, the term processing shall mean Limited of the Marden Group based in Hongkong . The bid
pasteurization, canning and activities which through physical or chemical was approved by the Committee on Privatization, and a
process alter the exterior texture or form or inner substance of a product Notice of Award was issued to Magsaysay Lines.
in such a manner as to prepare it for special use to which it could not Is the sale subject to VAT ?
have been put in its original form or condition. [Rev. Regs. No. 16-2005, SUGGESTED ANSWER: No. The term "carrying on business"
Sec.4.111-1, (b)]
does not mean the performance of a single disconnected act, but means
conducting, prosecuting and continuing business by performing
16. The VAT registration fee does NOT violate progressively all the acts normally incident thereof; while "doing
religious freedom. The VAT registration fee imposed on non-VAT business" conveys the idea of business being done, not from time to
enterprises which includes among others, religious sects which sells and time, but all the time. "Course of business" is what is usually done in the
distributes religious literature is not violative of religious freedom, management of trade or business. "Course of business" or "doing
although a fixed amount is not imposed for the exercise of a privilege but business" connotes regularity of activity. In the instant case, the sale was
only for the purpose of defraying part of the cost of registration. an isolated transaction.
The registration fee is thus more of an administrative fee, one not The sale which was involuntary and made pursuant to the declared
imposed on the exercise of a privilege, much less a constitutional right. policy of Government for privatization could no longer be repeated or
(Tolentino v. Secretary of Finance, et al., and companion cases, 235 SCRA 630) carried on with regularity. It should be emphasized that the normal VAT-
registered activity of NDC is leasing personal property. This
17. Interpretation of the term “In the Course of Trade finding is confirmed by the Revised Charter of the NDC which bears no
or Business” as used in the VAT system. The term "doing indication that the NDC was created for the primary purpose of selling
business" or “course of business” conveys the idea of business being real property. (Commissioner of Internal Revenue v. Magsaysay Lines, Inc., et
al., G. R. No. 146984, July 28, 2006)
done, not from time to time, but all the time. It does not include isolated
transactions. (Commissioner of Internal Revenue v. Magsaysay Lines, Inc., et
al., G. R. No. 146984, July 28, 2006) 19. Under the Value Added Tax (VAT), the tax is
imposed on sales, barter, or exchange or goods and services.

18. Pursuant to a government program of The VAT is also imposed on certain transactions “deemed
privatization, NDC, a VAT-registered entity created for the sales” which include:
purpose of selling real property, decided to sell to private a. Transfer, use or consumption not in the course of
enterprise all of its shares in its wholly-owned subsidiary the business or properties originally intended for sale or for use in the course
National Marine Corporation (NMC). The NDC decided to sell of business. xxx
in one lot its NMC shares and five (5) of its ships, which are b. Distribution or transfer to:
3,700 DWT Tween-Decker, "Kloeckner" type vessels. The 1) Shareholders or investors as share in the profits of the
vessels were constructed for the NDC between 1981 and VAT- registered person; xxx or
1984, then initially leased to Luzon Stevedoring Company, 2) Creditors in payment of debt or obligation
c. Consignment of goods if actual sale is not made within
also its wholly-owned subsidiary. Subsequently, the vessels sixty (60) days following the date such goods were consigned.
were transferred and leased, on a bareboat basis, to the NMC. Consigned goods returned by the consignee within the 60-day period are
The NMC shares and the vessels were offered for public not deemed sold.
bidding. Among the stipulated terms and conditions for the d. Retirement from or cessation of business, with respect
public auction was that the winning bidder was to pay "a to all goods on hand,
value added tax of 10% on the value of the vessels." 1) whether capital goods, stock-in-trade, supplies or
Magsaysay Lines, Inc., offered to buy the shares and the materials as of the date of such retirement, or cessation,
vessels for P168,000,000.00. The bid was made by 2) whether or not the business is continued by the new
Magsaysay Lines, purportedly for a new company still to be owner or successor. xxx [Rev. Regs. No. 16-2005, Sec. 4.106-7,
paraphrasing, arrangement and numbering supplied]
formed composed of itself, Baliwag Navigation, Inc., and FIM
37
Pesos (P2,500,000.00) and below where the instrument of
20. Transactions considered retirement or cessation sale/transfer/disposition was executed on or after November 1, 2005,
of business “deemed sale” subject to VAT. provided, That not later than January 31, 2009 and every three (3) years
a. Change of ownership of the business. There is change in thereafter, the amounts stated herein shall be adjusted to its present
the ownership of the business where a single proprietorship incorporates; value using the Consumer Price Index, as published by the National
or Statistics Office (NSO); provided, further, that such adjustment shall be
1) the proprietor of a single proprietorship sells his entire published through revenue regulations to be issued not later than March
business. 31 of each year.
b. Dissolution of a partnership and creation of a new If two or more adjacent residential lots are sold or disposed in favor
partnership which takes over the business. [Rev. Regs. No. 16-2005, of one buyer, for the purpose of utilizing the lots as one residential lot, the
Sec. 4.106-7 (a), (4) paraphrasing, arrangement and numbering supplied] sale shall be exempt from VAT only if the aggregate value of the lots do
not exceed P1,500,000.00. Adjacent residential lots, although covered by
21. Sale of or lease of real properties subject to VAT. separate titles and/or separate tax declarations, when sold or disposed of
Sale of real properties primarily for sale to customers or held for lease in to one and the same buyer, whether covered by one or separate Deed of
the ordinary course of trade or business of the seller shall be subject to Conveyance, shall be presumed as a sale of one residential lot. [Rev.
VAT. (Rev. Regs. No. 16-2005, Sec. 4.106-3, 1st par.) Regs. No. 4.109-1 (B), (p), paraphrasing and numbering supplied]
Thus, capital transactions of individuals are not subject to VAT.
Only real estate dealers are subject to VAT. 24. VAT on services and lease of properties.
a. There shall be levied, assessed, and collected,
22. On September 4, 2009, XYZ, Inc., a domestic b. a value-added tax equivalent to twelve percent (12%) of
corporation engaged in the real estate business, sold a gross receipts
c. derived from the sale or exchange of services,
building for P10,000,000.00. Is the sale subject to the value-
1) including the use or lease of properties. [NIRC of
added tax (VAT)? If so, how much? Explain. 1997, Sec. 108 (A), as amended by R.A. No. 9337, arrangement and
SUGGESTED ANSWER: Yes. 12% on the gross selling price numbering supplied]
because the sale was made in the ordinary course of trade of business of
X, a domestic corporation engaged in the real estate business. 25. “Sale or exchange of services”, defined. The term
“sale or exchange of services” means the performance of all kinds of

23. The following sales of real properties are services in the Philippines for others for a fee, remuneration or
exempt from VAT, namely: consideration, whether in kind or in cash, including those performed or
a. Sale of real properties not primarily held for sale to rendered by the following:
customers or held for lease in the ordinary course of trade or business; a. construction and service contractors;
b. Sale of real properties utilized for low-cost housing as b. stock, real estate, commercial, customs and immigration
defined by RA No. 7279, otherwise known as the “Urban and brokers;
Development Housing Act of 1992” and other related laws, such as RA c. lessors of property, whether personal or real;
No. 7835 and RA No. 8763. d. persons engaged in warehousing services
xxx xxx xxx e. lessors or distributors of cinematographic films;
c. Sale of real properties utilized for socialized housing as f. persons engaged in milling, processing,
defined under RA No. 7279, and other related laws wherein the price manufacturing or repacking goods for others;
ceiling per unit is P225,000.00 or as may from time to time be determined g. proprietors, operators or keepers of
by the HUDCC and the NEDA and other related laws. hotels, motels, rest-houses, pension houses, inns, resorts; theaters, and
xxx xxx xxx movie houses; h. proprietors or operators of
d. Sale of residential lot valued at One Million Five Hundred restaurants, refreshment parlors, cafes and other eating places, including
Thousand Pesos (P1,500,000.00) and below, or house & lot and other clubs and caterers; i. dealers in securities;
residential dwellings valued at Two Million Give Hundred Thousand j. lending investors;
38
k. transportation any scientific, industrial or commercial undertaking, venture, project of
contractors on their transport of goods or cargoes, including persons who scheme;
transport goods or cargoes for hire and other domestic common carriers g. The lease of motion picture films, film tapes and discs;
by land relative to their transport of goods or cargoes; h. The lease or the use of or the right to use radio,
l. common carriers by television, satellite transmission and cable television time. (Rev. Regs. No.
air and sea relative to their transport of passengers, goods or cargoes 16-2005, Sec. 4.108-2, 2nd par.)
from one place in the Philippines to another place in the Philippines;
m. sales of electricity by  27. Zero-rated Sales of Goods or Properties . A
generation companies, transmission, and/or distribution companies; zero-rated sale of goods or properties by a sale by a VAT-registered
n. franchise grantees of person is a taxable transaction for VAT purposes but the sale does not
electric utilities, telephone and telegraph, radio and television result in any output tax.
broadcasting and all other franchise grantees except franchise grantees However, the input tax on the purchases of goods, properties or
of radio and/or television broadcasting whose annual gross receipts of the services related to such zero-rated sale shall be available as tax credit or
preceding year do not exceed Ten Million Pesos (P10,000,000.00), and refund in accordance with Rev. Regulations No. 16-2005. (Rev. Regs. No.
franchise grantees of gas and water utilities; 16-2005, 1st par.)
o. non-life insurance
companies (except their crop insurances), including surety, fidelity,  28. Concept of VAT zero-rating. The tax rate is set
indemnity and bonding companies; and at zero. When applied to the tax base, such rate obviously results in no
p. tax chargeable against the purchaser. The seller of such transactions
similar services regardless of whether or not the performance thereof charges no output tax, but can claim a refund or a tax credit certificate for
calls for the exercise or use of the physical or mental faculties. [NIRC of the VAT previously charged by suppliers. [Commissioner of Internal
1997, Sec. 108 (A), as amended by R.A. No. 9337; Rev. Regs. No. 16-2005, Revenue v. Seagate Technology (Philippines), G. R. No. 153866,
Sec. 4,108-2, 1st par., arrangement and numbering supplied]
February 11, 2005]
Under a zero-rating scheme, the sale or exchange of a particular
26. Also included in the phrase “sale or exchange of service is completely freed from the VAT, because the seller is entitled to
services. recover, by way of a refund or as an input tax credit, the tax that is
a. The lease or the use of or the right or privilege to use any included in the cost of purchases attributable to the sale or exchange.
copyright, patent, design or model, plan, secret formula or process, The tax paid or withheld is not deducted from the tax base.
goodwill, trademark, trade brand or other like property or right; (Commissioner, of Internal Revenue v. American Express International, Inc.
b. The lease or the use of, or the right to use any industrial, (Philippine Branch), G. R. No. 152609, June 29, 2005 citing various cases)
commercial or scientific equipment;
c. The supply of scientific, technical, industrial or commercial 29. Situs of taxation of zero-rated VAT services such
knowledge or information; as facilitating the collection of receivables from credit card
d. The supply of any assistance that is ancillary and members situated in the Philippines and payment to service
subsidiary to and is furnished as a means of enabling the application or establishments in the Philippines. The place where the service is
enjoyment of any such property, or right as is mentioned in subparagraph
rendered determines the jurisdiction to impose the VAT
(2) hereof or any such knowledge or information as is mentioned in
Performed in the Philippines, the service is necessarily subject to
subparagraph (3) hereof; or
its jurisdiction for the State necessarily has to have a “substantial
e. The supply of services by a non-resident person or his
connection” to it in order to enforce a zero rate. The place of payment is
employee in connection with the use of property or rights belonging to, or
immaterial much less is the place where the output of the service will be
the installation or operation of any brand, machinery or other apparatus
further or ultimately used.
purchased from such non-resident person;
This is so because the law neither makes a qualification nor adds a
f. The supply of technical advice, assistance or services
condition in determining the tax situs of a zero-rated service.
rendered in connection with technical management or administration of (Commissioner of Internal Revenue v. American Express International, Inc.
(Philipppine Branch), G. R. No. 152609, June 29, 2005)
39
c. Foreign currency denominated sale; and

30. Destination principle under the VAT System. d. Sales to persons or entities deemed tax-exempt under
As a general rule, the VAT system uses the destination principle as a special law or international agreement. (Rev. Regs. No. 16-2005, Sec.
basis for the jurisdictional reach of the tax. 4.106-5, 2nd par., paraphrasing supplied)
Goods and services are taxed only in the country where they are
consumed. Thus, exports are zero-rated, while imports are taxed. 35. Sale of gold to the Central Bank considered as
This is also known as the “Cross Border Doctrine.” export sales. As export sales, the sale of gold to the Central Bank is
zero-rated, hence, no tax is chargeable to it as purchaser. Zero rating is

31. Exception to the destination principle. The primarily intended to be enjoyed by the seller, which charges no output
law clearly provides for an exception to the destination principle; that is, VAT but can claim a refund of or a tax credit certificate for the input VAT
for a zero percent VAT rate for services that are performed in the previously charged to it by suppliers. (Commissioner of Internal Revenue v.
Manila Mining Corporation, G.R. No. 153204, August 31, 2005)
Philippines, "paid for in acceptable foreign currency and accounted for in
accordance with the rules and regulations of the [BSP]." 36. Sales to ecozone, such as PEZA, considered
export-sale. Notably, while an ecozone is geographically within the
 32. Rationale for zero-rating of exports. The Philippines, it is deemed a separate customs territory and is regarded in
Philippine VAT system adheres to the Cross Border Doctrine, according law as foreign soil. Sales by suppliers from outside the borders of the
to which, no VAT shall be imposed to form part of the cost of goods ecozone to this separate customs territory are deemed as exports and
destined for consumption outside of the territorial border of the taxing treated as export sales. These sales are zero-rated or subject to a tax
authority. [Commissioner of Internal Revenue v. Toshiba Information rate of zero percent. (Commissioner of Internal Revenue v. Sekisui Jushi
Equipment (Phils.), Inc., G. R.. No. 150154, August 9, 2005] The “Cross Philippines, Inc., G. R. No. 149671, July 21, 2006 citing various authorities)
Border Doctrine” is also known as the destination principle.
Hence, actual or constructive export of 37. “Ecozone”, defined. An ECOZONE or a Special
goods and services from the Philippines to a foreign country must be Economic Zone has been described as – [S]elected areas with highly
zero-rated for VAT; while, those destined for use or consumption within developed or which have the potential to be developed into agro-
the Philippines shall be imposed the twelve percent (12%) VAT. industrial, industrial, tourist, recreational, commercial, banking,
investment and financial centers whose metes and bounds are fixed or

33. Zero-rated sale distinguished from exempt delimited by Presidential Proclamations. An ECOZONE may contain any
transactions: or all of the following: industrial estates (IEs), export processing zones
a. A zero-rated sale is a taxable transaction but does not result (EPZs), free trade zones and tourist/recreational centers. The national
in an output tax WHILE an exempt transaction is not subject to the output territory of the Philippines outside of the proclaimed borders of the
tax. ECOZONE shall be referred to as the Customs Territory. [Commissioner of
b. The input tax on the purchases of a VAT registered person Internal Revenue v. Toshiba Information Equipment (Phils.), Inc., G. R.. No.
150154, August 9, 2005]
who has 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.  38. Zero-rated sale of service, defined. A zero-
c. Persons engaged in transactions which are zero rated being rated sale of service (by a VAT-registered person) is a taxable transaction
subject to VAT are required to register WHILE registration is optional for for VAT purposes, but shall not result in any output tax. However, the
VAT-exempt persons. input tax on purchases of goods, properties or services related to such
zero-rated sale shall be available as tax credit or refund in accordance

34. Zero-rated sales by VAT-registered persons. with Rev. Regs. No. 16-2005. [Rev. Regs. No. 16-2005, Sec. Sec. 4.108-5
(a), words in italics supplied)
The following sales by VAT-registered persons shall be subject to zero
percent (0%) rate:
a. Export sales;  39. Service performed by American Express in
b. Considered export sales under Executive Order No. 224; facilitating the collection of receivables from credit card
40
members situated in the Philippines and payment to service NAPOCOR for the operation and maintenance of two power
establishments in the Philippines in behalf of its Hong-Kong barges appointed BWSC-Denmark as its coordination
based client is subject to VAT but zero-rated. This is so because manager. BWSCMI was established as the subcontractor to
it meets all the requirements for VAT imposition, as follows: perform the actual work in the Philippines. The Consortium
a. It regularly renders in the Philippines the service of paid BWSCMI in acceptable foreign exchange and accounted
facilitating the collection and payment of receivables belonging to a for in accordance with the rules and regulations of the BSP.
foreign company that is a clearly separate and distinct entity. Through a February 14, 1995 ruling the BIR declared
b. Such service is commercial in nature; carried on over a
that BWSCMI may choose to register as a VAT persons
sustained period of time; on a significant scale with a reasonable degree
of frequency; and not at random, fortuitous, or attenuated. subject to VAT at zero rate. For 1996, it filed the proper VAT
c. For this service, it definitely receives consideration in foreign returns showing zero rating. On December 29, 1997,
currency that is accounted for in conformity with law. believing that it is covered by Rev. Regs. 5-96, dated
d. It is not an entity exempt under any of our laws or February 20, 1996, BWSCMI paid 10% output VAT for the
international agreements. (Commissioner, of Internal Revenue v. American period April-December 1996, through the Voluntary
Express International, Inc. (Philippine Branch), G. R. No. 152609, June 29, Assessment Program (VAP).
2005)
On January 7, 1999, BWSCMI was able to obtain a
Ruling from the BIR reconfirming that it is subject to VAT at
40. While the service performed by American Express
zero-rating. On this basis, BWSCMI applied for a refund of
is subject to VAT it is zero-rated, and BIR Revenue
the output VAT it paid.
Regulations that alter the legal requirements for zero-rating
a. Is BWSCMI subject to the 10% VAT or is it zero
are ultra vires and invalid. The VAT system uses the destination
principle which posits that the goods and services are taxed only in the rated ?
country where they are consumed, SUGGESTED ANSWER: Yes. BWSCMI is not zero rated and is
However, the law itself provides for clear exceptions under which subject to the 10% VAT. It is rendering service for the Consortium which
the supply of services shall be zero-rated, among which are the following: is not doing business in the Philippines. Zero-rating finds application only
a. The service is performed in the Philippines; where the recipient of the services are other persons doing business
b. The services are within the categories provided for under the outside of the Philippines. BWSCMI provides services to the Consortium
Tax Code; and which by virtue of its contract with NAPOCOR is doing business within
c. It is paid for in acceptable foreign currency of the Bangko the Philippines. (Commissioner of Internal Revenue v. Burmeister and Wain
Scandinavian Contractor Mindanao, Inc., G. R. No. 153205, January 22,
Sentral ng Pilipinas.
American Express renders assistance to its foreign clients by 2007)
receiving the bills of service establishments located in the country and b. Could it obtain a refund of the VAT it paid through
forwarding them to their clients abroad. The services are performed or the VAP ? Explain.
successfully completed upon send to its foreign clients the drafts and bills SUGGESTED ANSWER: Yes. BWSCMI is entitled to refund of
it has gathered from service establishments here, Its services, having the 10% output VAT it paid the based on the non-retroactivity of the
been performed in the Philippines are therefore also consumed in the prejudicial revocation of the BIR Rulings which held that it’s services are
Philippines. Thus, its services are exempt from the destination principle subject to 0% VAT and which BWSCMI invoked in applying for refund of
and are zero-rated. the output VAT. (Commissioner of Internal Revenue v. Burmeister and
The BIR could not change the law. [Commissioner, of Internal Wain Scandinavian Contractor Mindanao, Inc., supra)
Revenue v. American Express International, Inc. (Philippine Branch), G. R. No. NOTES AND COMMENTS:
152609, June 29, 2005] a. Do not confuse the BWSCMI case with the
American Express case. American Express International, Inc.
 41. A foreign Consortium composed of BWSC- (Philippine Branch)] is a VAT-registered person that facilitates the
Denmark, Mitsui Engineering and Shipbuilding Ltd., and collection and payment of receivables belonging to its non-resident
Mitsui and Co., Ltd., which entered into a contract with foreign client [American Express International, Inc. (Hongkong Branch)],
41
for which it gets paid in acceptable foreign currency inwardly remitted and Marine food products shall include fish and crustaceans, such as,
accounted for in accordance with BSP rules and regulations. but not limited to, eels, trout, lobster, shrimps, prawns, oysters, mussels
(Commissioner of Internal Revenue v. Burmeister and Wain Scandinavian and clams.
Contractor Mindanao, Inc., G. R. No. 153205, January 22, 2007) Meat, fruit, fish, vegetables and other agricultural and marine food
 42. What are VAT-Exempt transactions ? SUGGESTED Products classified under this paragraph shall be considered in their
ANSWER: The sale of goods or properties and/or services and the original state even if they have undergone the simple processes of
use or lease of properties that is preparation or preservation for the market, such as freezing, drying,
b.not subject to VAT (output tax) and salting, broiling, roasting, smoking or stripping, including those using
c. the seller is not allowed any tax credit on VAT (input tax) advanced technological means of packaging, such as shrink wrapping in
purchases. plastics, vacuum packing, tetra-pack, and other similar packaging
The person making the exempt sale of goods, properties or methods. Polished and/or husked rice, corn grits, raw cane sugar and
services shall not bill any output tax to his customers because the said molasses, ordinary salt, and copra shall be considered in their original
transaction is not subject to VAT. [Rev. Regs. No. 16-2005, Sec. 4.109-1 (A), state.
arrangement and numbering supplied] Sugar whose content of sucrose by weight, in the dry state, has a
polarimeter reading of 99.5o and above are presumed to be refined
43. VAT-exempt transactions distinguished from sugar.
VAT-exempt entities. Cane sugar produced from the following shall be presumed, for
a. An exempt transaction, on the one hand, involves goods or internal revenue purposes, to be refined sugar:
(1) product of a refining process,
services which, by their nature, are specifically listed in and expressly
(2) products of a sugar refinery, or
exempted from the VAT under the Tax Code, without regard to the tax
(3) product of a production line of a sugar mill accredited by
status – VAT-exempt or not – of the party to the transaction.
the BIR to be producing sugar with polarimeter reading of 99.5o and
An exempt party, on the other hand, is a person or entity granted
above, and for which the quedanissued therefor, and verified by the
VAT exemption under the Tax Code, a special law or an international
Sugar Regulatory Administration, identifies the same to be of a
agreement to which the Philippines is a signatory, and by virtue of which
polarimeter reading of 99.5o and above.
its taxable transactions become exempt from VAT. [Commissioner of
Internal Revenue v. Toshiba Information Equipment (Phils.), Inc., G. R. No. Bagasse is not included in the exemption provided for under this
150154, August 9, 2005] section.
b. An exempt transaction shall not be the subject of any billing (B) Sale or importation of fertilizers; seeds, seedlings and
for output VAT but it shall not also be allowed any input tax credits fingerlings; fish, prawn, livestock and poultry feeds, including ingredients,
WHILE an exempt party being zero-rated is allowed to claim input tax whether locally produced or imported, used in the manufacture of finished
credits. feeds (except specialty feeds for race horses, fighting cocks, aquarium
fish, zoo animals and other animals generally considered as pets);
44. Transactions are exempt from VAT. (Subject to the “Specialty feeds” refers to non-agricultural feeds or food for race
election by a VAT-registered person not to be subject to the value-added horses, fighting cocks, aquarium fish, zoo animals and other animals
tax), the following shall be exempt from VAT: generally considered as pets.
(A) Sale or importation of agricultural and marine food products in (C) Importation of personal and household effects belonging to
their original state, livestock and poultry of a kind generally used as, or the residents of the Philippines returning from abroad and nonresident
yielding or producing foods for human consumption; and breeding stock citizens coming to resettle in the Philippines: Provided, That such goods
and genetic materials therefor. are exempt from customs duties under the Tariff and Customs Code of
Livestock shall include cows, bulls and calves, pigs, sheep, goats the Philippines;
and rabbits. Poultry shall include fowls, ducks, geese and turkey, (D) Importation of professional instruments and implements,
Livestock or poultry does not include fighting cocks, race horses, zoo wearing apparel, domestic animals, and personal household effects
animals and other animals generally considered as pets. (except any vehicle, vessel, aircraft, machinery, other goods for use in
the manufacture and merchandise of any kind in commercial quantity)
belonging to persons coming to settle in the Philippines, for their own use
42
and not for sale, barter or exchange, accompanying such persons, or “Agricultural contract growers” refers to those persons producing
arriving within ninety (90) days before or after their arrival, upon the for others poultry, livestock or other agricultural and marine food products
production of evidence satisfactory to the Commissioner of Internal in their original state.
Revenue, that such persons are actually coming to settle in the (G) Medical, dental, hospital and veterinary services except
Philippines and that the change of residence is bona fide; those rendered by professionals;
(E) Services subject to percentage tax under Title V of the Tax Laboratory services are exempted. If the hospital or clinic operates
Code, as enumerated below: a pharmacy or drug store, the sale of drugs and medicine is subject to
(1) Sale or lease of goods or properties or the VAT.
performance of services of non-VAT-registered persons, other (H) Educational services rendered by private educational
than the transactions mentioned in paragraphs (A) to (U) of Sec. institutions, duly accredited by the Department of Education (DEPED),
109 (1) of the Tax Code, the annual sales and/or receipts of the Commission on Higher Education (CHED), the Technical Education
which does not exceed the amount of One Million Five Hundred And Skills Development Authority (TESDA) and those rendered by
thousand Pesos (P1,500,000.00), Provided, That not later than government educational institutions;
January 31, 2009 and every three (3) years thereafter, the “Educational services” shall refer to academic, technical or
amount herein stated shall be adjusted to its present value using vocational education provided by private educational institutions duly
the Consumer Price Index, as published by the National Statistics accredited by the DepED, the CHED and TESDA and those rendered by
Office (NSO). (Sec. 116, Tax Code) government educational institutions and it does not include seminars, in-
(2) Services rendered by domestic common carriers by service training, review classes and other similar services rendered by
land for the transport of passengers and keepers of garages. persons who are not accredited by the DepED, the CHED and/or the
(Sec. 117) TESDA.
(3) Services rendered by international air/shipping (I) Services rendered by individuals pursuant to an employer-
carriers. (Sec. 118) employee relationship;
(4) Service rendered by franchise grantees of radio (J) Services rendered by regional or area headquarters
and/or television broadcasting whose annual gross receipts of the established in the Philippines by multinational corporations which act as
preceding year do not exceed Ten Million Pesos supervisory, communications and coordinating centers for their affiliates,
(P10,000,000.00) and by franchises of gas and water utilities. subsidiaries or branches in the Asia-Pacific Region and do not earn or
(Sec. 119) derive income from the Philippines;
(5) Service rendered for overseas dispatch message or (K) Transactions which are exempt under international
conversation originating from the Philippines. (Sc. 120) agreements to which the Philippines is a signatory or under special laws,
(6) Services rendered by any person, company or except those under Presidential Decree No. 529 – Petroleum Exploration
corporation (except purely cooperative companies or associations Concessionaires under the Petroleum Act of 1949; and;
) doing life insurance business of any sort in the Philippines. (L) Sales by agricultural cooperatives duly registered with the
(Sec. 123) Cooperative Development Authority (CDA) to their members as well as
(7) Services rendered by fire, marine or miscellaneous sale of their produce, whether in its original state or processed form, to
insurance agents of foreign insurance companies. (Sec. 124) non-members; their importation of direct farm inputs, machineries and
(8) Services of proprietors, lessees or operators of equipment, including spare parts thereof, to be used directly and
cockpits, cabarets, night or day clubs, boxing exhibitions exclusively in the production and/or processing of their produce;
professional basketball games, jai-Alai and race tracks. (Sec. (M) Gross receipts from lending activities by credit or multi-
125). and purpose cooperatives duly registered and in good standing with the
(9) Receipts on sale, barter or exchange of shares of Cooperative Development Authority;
stock listed and traded through the local stock exchange or (N) Sales by non-agricultural, non-electric and non-credit
through initial public offering. (Sec. 127) cooperatives duly registered with the Cooperative Development Authority:
(F) Services by agricultural contract growers and milling for Provided, That the share capital contribution of each member does not
others of palay into rice, corn into grits and sugar cane into raw sugar; exceed Fifteen thousand pesos (P15,000) and regardless of the
aggregate capital and net surplus ratably distributed among the members;
43
Importation by non-agricultural, non-electric and non-credit Philippines; provided, further, that if any portion of such fuel, goods or
cooperatives of machineries and equipment, including spare parts supplies is used for purposes other than that mentioned in this paragraph,
thereof, to be used by them are subject to VAT. such portion of fuel, goods and supplies shall be subject to 10% VAT
(O) Export sales by persons who are not VAT-registered; (now 12%);
(P) Sale of real properties not primarily held for sale to (U) Services of banks, non-bank financial intermediaries
customers or held for lease in the ordinary course of trade or business, or performing quasi-banking functions, and other non-bank financial
real property utilized for low-cost and socialized housing as defined by intermediaries; and
Republic Act No. 7279, otherwise known as the Urban Development and  (V) Sale or lease of goods or properties or the
Housing Act of 1992, and other related laws, such as RA No. 7835 and performance of services other than the transactions mentioned in the
RA No. 8765, residential lot valued at One million five hundred thousand preceding paragraphs, the gross annual sales and/or receipts do not
pesos (P 1,500,000) and below, house and lot, and other residential exceed the amount of One million five hundred thousand pesos
dwellings valued at Two million five hundred thousand pesos (P (P1,500,000): Provided, That not later than January 31, 2009 and every
2,500,000) and below: Provided, That not later than January 31, 2009 three (3) years thereafter, the amount herein stated shall be adjusted to
and every three (3) years thereafter, the amounts herein stated shall be its present value using the Consumer Price Index as published by the
adjusted to their present values using the Consumer Price Index, as National Statistics Office (NSO).
published by the National Statistics Office (NSO); For purposes of the threshold of P1,500,000.00, the husband and
(Q) Lease of a residential unit with a monthly rental not wife shall be cnsidered separate taxpayers. However, the aggregation
exceeding Ten thousand pesos (P 10,000) Provided, That not later than rule for each taxpayer shall apply. For instance, if a profesional, aside
January 31, 2009 and every three (3) years thereafter, the amount herein from the practice ofhis profession, also derives revenue from other lines
stated shall be adjusted to its present value using the Consumer Price of business which are otherwise subject to VAT, the same shall be
Index as published by the National Statistics Office (NSO); combined for purposes of determining whether the threshold has been
(R) Sale, importation, printing or publication of books and any exceeded. Thus, the VAT-exempt sales shall to be icluded in determining
newspaper, magazine, review or bulletin which appears at regular the threshold. [NIRC of 1997, Sec. 109 (1), as amended by R. A. No. 9337;
intervals with fixed prices for subscription and sale and which is not words in italics from Rev. Regs. No. 16-2005, Sec. 4.109-1 (B), words in
devoted principally to the publication of paid advertisements; parentheses supplied]
(S) Sale, importation or lease of passenger or cargo vessels and
aircraft, including engine, equipment and spare parts thereof for domestic 
45. Tax to be paid by persons exempt from VAT.
or international transport operations; Provided, that the exemption from a. Any person, whose sales or receipts are exempt under Sec.
VAT on the importation and local purchase of passenger and/or cargo 109 (1) (V) of the Tax Code,
vessels shall be limited to those of one hundred fifty (150) tons and (V) Sale or lease of goods or properties or the performance
above, including engine and spare parts of said vessels; Provided, of services other than the transactions mentioned in the
further, that the vessels be imported shall comply with the age limit preceding paragraphs, the gross annual sales and/or receipts do
requirement, at the time of acquisition counted from the date of the not exceed the amount of One million five hundred thousand
vessel’s original commissioning, as follows: (i) for passenger and/or pesos (P1,500,000): Provided, That not later than January 31,
cargo vessels, the age limit is fifteen years (15) years old, (ii) for 2009 and every three (3) years thereafter, the amount herein
tankers, the age limit is ten (10) years old, and (iii) For high-speed stated shall be adjusted to its present value using the Consumer
passenger cars, the age limit is five (5) years old, Provided, finally, that Price Index as published by the National Statistics Office (NSO),
exemption shall be subject to the provisions of section 4 of Republic Act from the payment of VAT and
No. 9295, otherwise known as “The Domestic Shipping Development Act b. who is not a VAT-registered person
of 2004.” c. shall pay a tax equivalent to three percent (3%) of his gross
(T) Importation of fuel, goods and supplies by persons engaged monthly sales or receipts;
in international shipping or air transport operations; Provided, that the Provided, that cooperatives shall be exempt from the three (3%)
said fuel, goods and supplies shall be used exclusively or shall pertain to gross receipts tax herein imposed. (Rev. Regs. No. 16-2005, Sec. 4.116-1,
the transport of goods and/or passenger from a port in the Philippines arrangement, numbering and words in italics supplied)
directly to a foreign port without stopping at any other port in the
44
RETURNS AND WITHHOLDING a. An individual whose gross income does not exceed his total
personal and additional exemptions for dependents, Provided, That a
1. Income tax returns being public documents, until citizen of the Philippines and any alien individual engaged in business or
controverted by competent evidence, are competent evidence, are prima practice of profession within the Philippines shall file an income tax return
facie correct with respect to the entries therein. (Ropali Trading v. NLRC, et regardless of the amount of gross income [Sec. 51 (A) (2), NIRC of 1997]
al., 296 SCRA 309, 317) b. An individual with respect to pure compensation income,
derived from such sources within the Philippines, the income tax on which
2. Individuals required to file an income tax return. has been correctly withheld: Provided, That an individual deriving
a. Every Filipino citizen residing in the Philippines; compensation concurrently from two or more employers at any time
b. Every Filipino citizen residing outside the Philippines on his during the taxable year shall file an income tax return [Sec. 51 (A) (2), NIRC
of 1997, as amended by Rep. Act No. 9504, paraphrasing supplied]
income from sources within the Philippines;
c. An individual whose sole income has been subject to final
c. Every alien residing in the Philippines on income derived from
withholding tax;
sources within the Philippines; and
d. A minimum wage earner (is a worker in the private sector
d. Every nonresident alien engaged in trade or business or in the
paid the statutory minimum wage, or is an employee in the public sector
exercise of profession in the Philippines. [Sec. 51 (A) (1), NIRC of 1997]
with compensation income of not more than the statutory minimum wage
in the non-agricultural sector where he/she is assigned), an individual who
3. Married individuals who are earning purely is exempt from income tax pursuant to the provisions of the Tax Code
compensation income allowed to file separate returns. and other laws, general or special. [Sec. 51 (A) (2), NIRC of 1997 in relation
to Sec. 22 (HH), both as amended by Rep. Act. 9504]
4. Married individuals, whether citizens, resident or
non-resident aliens, who do not derive income purely from 7. Minimum wage earners are exempt from income
compensation shall file a consolidated return for the taxable taxation. That minimum wage earners (is a worker in the private sector
year to include the income of both spouses, but where it is paid the statutory minimum wage, or is an employee in the public sector
impracticable for the spouses to file one return, each spouse may file a with compensation income of not more than the statutory minimum wage
separate return of income but the returns so filed shall be consolidated by in the non-agricultural sector where he/she is assigned) shall be exempt
the Bureau for purposes of verification.” [Section 51 (D) of the NIRC of from the payment of income tax on their taxable income: Provided,
1997] further, That the holiday pay, overtime pay, night shift differential pay and
hazard pay received by such minimum wage earners shall likewise be
5. Computation of income tax for married individuals exempt from income tax. [Sec. 51 (A) (2), NIRC of 1997 in relation to Sec. 22
whether citizens, resident or non-resident aliens, who do not (HH), both as amended by Rep. Act. 9504]
derive income purely from compensation required file a
consolidated return for the taxable year but could not do so. 8. An individual who is not required to file an income
For married individuals, the husband and wife, subject to no. 2, supra,, tax return may nevertheless be required to file an information
shall compute separately their individual income tax based on their return. [Sec. 51 (A) (3), NIRC of 1997]
respective total taxable income: Provided, that if any income cannot be
definitely attributed to or identified as income exclusively earned or 9. A corporation files its income tax return and pays
realized by either of the spouses, the same shall be divided equally its income tax four (4) times during a single taxable year.
between the spouses for the purpose of determining their respective Quarterly returns are required to be filed for the first three quarters, then a
taxable income. [2nd to the last par., Sec. 24 (A) (2), NIRC of 1997 as final adjustment return is filed covering the total taxable income for the
amended by Rep. Act No. 9504] whole taxable year, be it calendar or fiscal.

6. Individuals who are not required to file an income 10. An individual earning from the practice of his
tax return. profession or who engages in trade or business files his
income tax return and pays his income tax four (4) times
45
during a single taxable year . Quarterly returns are required to be filed
for the first three quarters, then an annual income tax return is filed 17. Under the creditable withholding tax system, taxes
covering the total taxable income for the whole of the previous calendar withheld on certain income payments are intended to equal or
year. at least approximate the tax due from the payee on the said
income. The income recipient is still required to file an income tax return
11. The purpose of the above four (4) times a year and/or pay the difference between the tax withheld and the tax due on the
requirement is to make available sufficient funds to meet the income. [1st and 2nd sentences, Sec. 257(B), Rev. Regs. No. 2-98]
budgetary requirements, on a quarterly basis thereby increasing
government liquidity. It also eases hardships on the part of individuals who 18. The two kinds of creditable withholding taxes are (a)
are required to make this four time return. Thus, the taxpayer does not taxes withheld on income payments covered by the expanded withholding
have to raise large sums of money in order to pay the tax. tax; and (b) taxes withheld on compensation income.

12. An individual earning purely compensation income 19. Payments to the following are exempt from the
files only one annual income tax return covering the total taxable requirement of withholding or when no withholding taxes
compensation income for the whole of the previous calendar year. required:
a. National Government and its instrumentalities including
13. Under the withholding tax system, taxes imposed provincial, city, or municipal governments;
or prescribed by the NIRC of 1997 are to be deducted and b. Persons enjoying exemption from payment of income taxes
withheld by the payors from payments made to payees for the pursuant to the provisions of any law, general or special, such as but not
former to pay directly to the Bureau of Internal Revenue. It is limited to the following:
also known as collection of the tax at source. 1) Sales of real property by a corporation which is registered
with and certified by the HLURB or HUDCC as engaged in socialized
14. A withholding agent is explicitly made personally housing project where the selling price of the house and lot or only
liable under the Tax Code for the payment of the tax required the lot does not exceed P180,000.00 in Metro Manila and other
highly urbanized areas and P150,000.00 in other areas or such
to be withheld, in order to compel the withholding agent to withhold the adjusted amount of selling price for socialized housing as may later
tax under any and all circumstances. In effect, the responsibility for the
be determined and adopted by the HLURB;
collection of the tax as well as the payment thereof is concentrated upon
2) Corporations registered with the Board of Investments and
the person over whom the Government has jurisdiction. (Filipinas Synthetic
enjoying exemptions from income under the Omnibus Investment
Fiber Corporation v. Court of Appeals, et al., G.R. Nos. 118498 & 124377, October
12, 1999) The system facilitates tax collection and reduces tax evasion.
Code of 1997;
3) Corporations exempt from income tax under Sec. 30,
of the Tax Code, like the SSS, GSIS, the PCSO, etc. However,
15. The two (2) types of withholding at source are the 1) income payments arising from any activity which is conducted for
final withholding tax; and 2) creditable withholding tax. profit or income derived from real or personal property shall be
subject to a withholding tax. (Sec. 57.5, Rev. Regs. No. 2-98)
16. Under the final withholding tax system the amount of
income tax withheld by the withholding agent is constituted as 20. For tax amnesty purposes, the withholding agent is
a full and final payment of the income due from the payee on not a taxpayer. He is made to pay the tax where he fails to withhold as
the said income. [1st sentence, 1st par., Sec. 2.57 (A), Rev. Regs. No. 2-98] a penalty and not because the tax is due from him. (Commissioner of
The liability for payment of the tax rests primarily on the payor or the Internal Revenue v. Court of Appeals, et al., G.R. No. 108576, January 20, 1999,
withholding agent.. Thus, in case of his failure to withhold the tax or in the Anscor case)
case of under withholding, the deficiency tax shall be collected from the
payor withholding agent. The payee is not required to file an income tax PENALTIES, INTERESTS AND SURCHARGES
return for the particular income.
46
1. Surtaxes or surcharges, also known as the civil penalties, are 7. Compromise penalty is the amount agreed upon between
the amounts imposed in addition to the tax required. the taxpayer and the Government to be paid as a penalty in cases of a
They are in the nature of penalties and shall be collected at the compromise.
same time, in the same manner, and as part of the tax. [Sec.248 (A),
NIRC of 1997] 8. As a result of divergent rulings on whether it is
subject to tax or not, the taxpayer was not able to pay his
2. What are the two (2) kinds of civil penalties ? taxes on time. Imposed surcharges and interests for such
SUGGESTED ANSWER: delay, the taxpayer not invokes good faith with the BIR
a. the 25% surcharge for late filing or late payment [Sec. 248 countering by saying that good faith is not a valid defense for
(A), NIRC of 1997] (also known as the delinquency surcharge), and
violation of a special law. Furthermore, the BIR further raises
b. the 50% willful neglect or fraud surcharge. [Sec. 248 (B),
Ibid.] the defense that the government is not bound by the errors of
its agents. Who is correct ?
3. Define deficiency income tax. SUGGESTED ANSWER: The taxpayer is correct. The settled rule
SUGGESTED ANSWER: Deficiency income tax is the amount by is that good faith and honest belief that one is not subject to tax on the
which the tax imposed under the NIRC of 1997 exceeds the amount shown basis of previous interpretation of government agencies tasked to
as the tax due by the taxpayer upon his return. [Sec. 56 (B) (1), NIRC of implement the tax, are sufficient justification to delete the imposition of
1997] surcharges. (Michel J. Lhuillier Pawnshop, Inc. v. Commissioner of Internal
Revenue, G. R. No. 166786, September 11, 2006)
4. Deficiency interest, defined. The interest assessed and
collected on any unpaid amount of tax at the rate of 20% per annum or REPUBLIC ACT NO. 1125, CREATING THE
such higher rate as may be prescribed by regulations, from the date COURT OF TAX APPEALS INCLUDING
prescribed for payment until the amount is fully paid. [Sec. 249 (A) (B),
NIRC of 1997]
JURISDICTION OF THE CTA, AS AMENDED

5. Delinquency interest, defined. The interest assessed COURT OF TAX APPEALS, IN GENERAL
and collected on the unpaid amount until fully paid where there is failure on
the part of the taxpayer to pay the amount die on any return required to be 1. Discuss the role of the judiciary in taxation.
filed; or the amount of the tax due for which no return is required; or a SUGGESTED ANSWER: The role of the judiciary is to be the
deficiency tax, or any surcharge or interest thereon, on the date appearing sympathetic or vigilant court which would check injustices or abuses of
in the notice and demand by the Commissioner of Internal Revenue. the legislative and administrative agents of the State in their exercise of
[Sec.249 (c), NIRC of 1997] the power of taxation.
2. What is the nature and composition of the Court of
6. After resolving the issues the BIR Commissioner Tax Appeals ?
reduced the assessment. Was it proper to impose delinquency SUGGESTED ANSWER: The Court of Tax Appeals is the special
interest despite the reduction of the assessment ? Why ? tax court created under Republic Act No. 1125, as amended, and is
SUGGESTED ANSWER: Yes. The intention of the law is to composed of a Presiding Justice and eight (8) Associate Justices,
discourage delay in the payment of taxes due to the State and in this sense organized into three (3) divisions.
the surcharge and interest charged are not penal but compensatory in
nature – they are compensation to the State for the delay in payment, or for 3. What are the purposes for the creation of the Court
the concomitant tuse of the funds by the taxpayer beyond the date he is of Tax Appeals ?
supposed to have paid them to the State. (Bank of the Philippine Islands v. SUGGESTED ANSWER:
Commissioner of Internal Revenue, G. R. No. 137002, July 27, 2006)
a. To prevent delay in the disposition of tax cases by the then
Courts of First Instance (now RTCs), in view of the backlog of civil,
47
criminal, and cadastral cases accumulating in the dockets of such courts; 7. Decisions of the Secretary of Trade and Industry, in case of
and nonagricultural product, commodity or article, and the Secretary of
b. To have a body with special knowledge which ordinary Agriculture in the case of agricultural product, commodity or article,
Judges of the then Courts of First Instance (now RTCs), are not likely to involving dumping and countervailing duties under Section 301 and 302,
possess, thus providing for an adequate remedy for a speedy respectively, of the Tariff and Customs Code, and safeguard measures
determination of tax cases. (Ursal v. Court of Tax Appeals, et al., 101 Phil. 209) under Republic Act No. 8800, where either party may appeal the decision
to impose or not to impose said duties. (DIVISION)

4. Jurisdiction of the Court of Tax Appeals. b. Jurisdiction over cases involving criminal offenses as
“a. Exclusive appellate jurisdiction to review by appeal, as herein provided:
herein provided: 1. Exclusive original jurisdiction over all criminal cases
1. Decisions of the Commissioner of Internal Revenue in cases arising from violations of the National Internal Revenue Code or Tariff and
involving disputed assessments, refunds of internal revenue taxes, fees or Customs Code and other laws administered by the Bureau of Internal
other charges, penalties, in relation thereto, or other matters arising under Revenue or the Bureau of Customs: Provided, however, That offenses or
the National Internal Revenue Code or other laws administered by the felonies mentioned in this paragraph where the principal amount of taxes
Bureau of Internal Revenue’; (DIVISION) and fees, exclusive of charges and penalties claimed, is less than One
2. Inaction by the Commissioner of Internal Revenue in cases million pesos (P1,000,000.00) or where there is no specified amount
involving disputed assessments, refunds or internal revenue taxes, fees or claimed shall be tried by the regular Courts and the jurisdiction of the CTA
other charges, penalties in relation thereto, or other matter arising under shall be appellate. Any provision of law or the Rules of Court to the contrary
the National Internal Revenue Code or other laws administered by the notwithstanding, the criminal action and the corresponding civil action for
Bureau of Internal Revenue, where the National Internal Revenue Code the recovery of civil liability for taxes and penalties shall at all times be
provides a specific period of action, in which case the inaction shall be simultaneously instituted with, and jointly determined in the same
deemed a denial; (The inaction on refunds in two years from the time tax proceeding by the CTA, the filing of the criminal action being deemed to
was paid. Thus, if the prescriptive period of two years is about to expire, necessarily carry with it the filing of the civil action, and no right to reserve
the taxpayer should interpose a petition for review with the CTA – the filing of such civil action separately from the civil action will be
DIVISION) recognized.
3. Decisions, orders or resolutions of the Regional Trial Courts in 2. Exclusive appellate jurisdiction in criminal offenses:
local tax cases originally decided or resolved by them in the exercise of a) Over appeals from the judgments, resolutions or orders
their original or appellate jurisdiction; (If original DIVISION; if appellate EN of the Regional Trial Courts in tax cases originally decided by them,
BANC) in their respective territorial jurisdiction.
4. Decisions of the Commissioner of Customs in cases involving b) Over petitions for review of the judgments, resolutions
liability for customs duties, fees or other money charges, seizure, detention or orders of the Regional Trial Courts in the exercise of their
or release of property affected, fines, forfeitures or other penalties in appellate jurisdiction over tax cases originally decided by the
relation thereto, or other matters arising under the Customs Law or other Metropolitan Trial Courts, Municipal Trial Courts and Municipal Circuit
laws administered by the Bureau of Customs; (DIVISION) Trial Courts in their respective jurisdiction.
5. Decisions of the Central Board of Assessment Appeals in the c. Jurisdiction over tax collection cases:
exercise of its appellate jurisdiction over cases involving the assessment 1. Exclusive original jurisdiction in tax collection cases involving
and taxation of real property originally decided by the provincial or city final and executory assessments for taxes, fees, charges and penalties:
board of assessment appeals; (EN BANC) Provided, however, That collection cases where the principal amount of
6. Decisions of the Secretary of Finance on customs cases taxes and fees, exclusive of charges and penalties, claimed is less than
elevated to him automatically for review from decisions of the One million pesos (P1,000,000) shall be tried by the proper Municipal Trial
Commissioner of Customs which are adverse to the Government under Court, Metropolitan Trial Court and Regional Trial Court.
Section 2315 of the Tariff and Customs Code; (This has reference to 2. Exclusive appellate jurisdiction in tax collection cases:
forfeiture cases where the decision is to release the seized articles – a) Over appeals from judgments, resolutions, or orders of
DIVISION) the Regional Trial Courts in tax collection cases originally decided by
them, in their respective territorial jurisdiction.
48
b) Over petitions for review of the judgments, resolutions constitutionality of regulations issued by the BIR. The reason was that this
or orders of the Regional Trial Courts in the exercise of their falls under the concept of decisions of the BIR Commissioner on “other
appellate jurisdiction over tax collection cases originally decided by the matter” arising under the provisions of laws administered by the
Metropolitan Trial Courts, Municipal Trial Courts and Municipal Commission. Issuance of revenue regulations are authorized under the
Circuit Trial Courts, in their respective jurisdiction.” (Sec. 7, R. A. No. NIRC.
1125, as amended by R. A. No. 9282, emphasis and words in parentheses British American Tobacco reversed Asia International Auctioneers
supplied) upon the concept of the judiciary’s “expanded power.”
The petition for review to be filed with the CTA en banc
as the mode for appealing a decision, resolution, or order of 6. Instances where the Court of Tax Appeals would
the CTA Division, under Section 18 of Republic Act No. 1125, have jurisdiction even if there is no decision of the
as amended, is not a totally new remedy, unique to the CTA, Commissioner of Customs:
with a special application or use therein. To the contrary, the a. Decisions of the Secretary of Trade and Industry or the
CTA merely adopts the procedure for petitions for review and appeals Secretary of Agriculture in anti-dumping and countervailing duty cases are
long established and practiced in other Philippine courts. Accordingly, appealable to the Court of Tax Appeals within thirty (30) days from receipt
doctrines, principles, rules, and precedents laid down in jurisprudence by of such decisions.
this Court as regards petitions for review and appeals in courts of general b. In case of automatic review by the Secretary of Finance in
jurisdiction should likewise bind the CTA, and it cannot depart therefrom. seizure or forfeiture cases where the value of the importation exceeds P5
(Santos v. People, et al, G. R. No. 173176, August 26, 2008) million or where the decision of the Collector of Customs which fully or
partially releases the shipment seized is affirmed by the Commissioner of
5. It is the Regional Trial Court that has jurisdiction to Customs.
rule upon the constitutionality of a tax law or a regulation c. In case of automatic review by the Secretary of Finance of a
issued by the taxing authorities. Where what is assailed is the decision of a Collector of Customs acting favorably upon a customs
validity or constitutionality of a law, or a rule or regulation issued by the protest.
administrative agency in the performance of its quasi-legislative function,
the regular courts have jurisdiction to pass upon the same. The ASSESSMENT OF INTERNAL REVENUE TAXES
determination of whether a specific rule or set of rules issued by an
administrative agency contravenes the law or the constitution is within the 1. Outline of tax remedies of a taxpayer and the
jurisdiction of the regular courts. government relative to ASSESSMENT of internal revenue
Indeed, the Constitution vests the power of judicial review or the taxes.
power to declare a law, treaty, international or executive agreement, a. The taxpayer files his tax return.
presidential decree, order, instruction, ordinance, or regulation in the b. A Letter of Authority is issued authorizing BIR examiner to
courts, including the regional trial courts. This is within the scope of audit or examine the tax return and determines whether the full and
judicial power, which includes the authority of the courts to determine in complete taxes have been paid.
an appropriate action the validity of the acts of the political departments. c. If the examiner is satisfied that the tax return is truly reflective
Judicial power includes the duty of the courts of justice to settle actual of the taxable transaction and all taxes have been paid, the process ends.
controversies involving rights which are legally demandable and However, if the examiner is not satisfied that the tax return is truly reflective
enforceable, and to determine whether or not there has been a grave of the taxable transaction and that the taxes have not been fully paid, a
abuse of discretion amounting to lack or excess of jurisdiction on the part Notice of Informal Conference is issued inviting the taxpayer to explain why
of any branch or instrumentality of the Government. (British American he should not be subject to additional taxes.
Tobacco v. Camacho et al., G. R. No. 163583, August 20, 2008 with an d. If the taxpayer attends the informal conference and the
intervenor)
examiner is satisfied with the explanation of the taxpayer, the process is
NOTES AND COMMENTS: The above doctrine supersedes Asia
again ended.
International Auctioneers, Inc., etc et al., .v. Parayno, Jr., etc.,, et al., G. R.
If the taxpayer ignores the invitation to the informal conference, or
No. 103445, December 18, 2007 which ruled that it is the Court of Tax
if the examiner is not satisfied with taxpayer’s explanation,, and he believes
Appeals that has jurisdiction relative to matters involving the
that proper taxes should be assessed, the Commissioner of Internal
49
Revenue or his duly authorized representative shall then notify the taxpayer the taxpayer adversely affected by the decision or inaction may appeal to
of the findings in the form of a pre-assessment notice. The pre- the Court of Tax Appeals within thirty (30) days from receipt of the adverse
assessment notice requires the taxpayer to explain within fifteen (15) days decision, or from the lapse of the one hundred eighty (180-) day period,
from receipt why no notice of assessment and letter of demand for with an application for the issuance of a writ of preliminary injunction to
additional taxes should be directed to him. enjoin the BIR from collecting the tax subject of the appeal.
e. If the Commissioner is satisfied with the explanation of the If the taxpayer fails to so appeal, the denial of the Commissioner
taxpayer, then the process is again ended. or the inaction of the Commissioner would result to the notice of
If the taxpayer ignores the pre-assessment notice by not assessment becoming final and collectible and the BIR could then utilize its
responding or his explanations are not accepted by the Commissioner, administrative and judicial remedies to collect the tax.
then a notice of assessment and a letter of demand is issued. i. A decision of a division of the Court of Tax Appeals adverse
The notice of assessment must be issued by the Commissioner to to the taxpayer or the government may be the subject of a motion for
the taxpayer within a period of three (3) years from the time the tax return reconsideration or new trial, a denial of which is appealable to the Court of
was filed or should have been filed whichever is the later of the two events. Tax Appeals en banc by means of a petition for review.
Where the taxpayer did not file a tax return or where the tax return filed is The Court of Tax Appeals, has a period of twelve (12) months from
false or fraudulent, then the Commissioner has a period of ten (10) years submission of the case for decision within which to decide.
from discovery of the failure to file a tax return or from discovery of the j. If the decision of the Court of Tax Appeals en banc affirms the
fraud within which to issue an assessment notice. The running of the denial of the protest by the Commissioner or the assessment in case of
above prescriptive periods may however be suspended under certain failure by the Commissioner to decide the taxpayer must file a petition for
instances. review on certiorari with the Supreme Court within fifteen (15) days from
The notice of assessment must be issued within the prescriptive notice of the judgment on questions of law. An extension of thirty (30)
period and must contain the facts, law and jurisprudence relied upon by the days may for justifiable reasons be granted. If the taxpayer does not so
Commissioner. Otherwise it would not be valid. appeal, the decision of the Court of Tax Appeals would become final and
f. The taxpayer should then file an administrative protest by this has the effect of making the assessment also final and collectible. The
filing a request for reconsideration or reinvestigation within thirty (30) days BIR could then use its administrative and judicial remedies to collect the
from receipt of the assessment notice. tax.
The taxpayer could not immediately interpose an appeal to the
Court of Tax Appeals because there is no decision yet of the 2. The word assessment when used in connection
Commissioner that could be the subject of a review. with taxation, may have more than one meaning. More
To be valid the administrative protest must be filed within the commonly the word “assessment” means the official valuation of a
prescriptive period, must show the error of the Bureau of Internal Revenue taxpayer’s property for purpose of taxation. The above definition of
and the correct computations supported by a statement of facts, and the assessment finds application under tariff and customs taxation as well as
law and jurisprudence relied upon by the taxpayer. There is no need to pay local government taxation.
under protest. If the protest was not seasonably filed the assessment For real property taxation, there may be a special meaning to
becomes final and collectible and the Bureau of Internal Revenue could use the burdens that are imposed upon real properties that have been
its administrative and judicial remedies in collecting the tax. benefited by a public works expenditure of a local government. It is
g. Within sixty (60) days from filing of the protest, all relevant sometimes called a special assessment or a special levy. (Commissioner of
supporting documents shall be submitted, otherwise the assessment shall Internal Revenue v. Pascor Realty and Development Corporation, et al., G.R. No.
become final and collectible and the BIR could use its administrative and 128315, June 29, 1999)
judicial remedies to collect the tax. For internal revenue taxation assessment as laying a tax. The
Once an assessment has become final and collectible, not even ultimate purpose of an assessment to such a connection is to ascertain the
the BIR Commissioner could change the same. Thus, the taxpayer could amount that each taxpayer is to pay. (Ibid.)
not pay the tax, then apply for a refund, and if denied appeal the same to
the Court of Tax Appeals. 3. An assessment is a notice duly sent to the taxpayer
h. If the protest is denied in whole or in part, or is not acted upon which is deemed made only when the BIR releases, mails or
within one hundred eighty (180) days from the submission of documents, sends such notice to the taxpayer . (Commissioner of Internal Revenue
50
v. Pascor Realty and Development Corporation, et al., G.R. No. 128315, June 29, Approximation in the calculation of taxes due is justified. To hold otherwise
1999) would be tantamount to holding that skillful concealment is an invincible
barrier to proof.” (Commissioner of Internal Revenue v. Hantex Trading Co., Inc.
4. Self-assessed tax, defined. A tax that the taxpayer G. R. No. 136975, March 31, 2005)
himself assesses or computes and pays to the taxing authority. It is a tax “However, the rule does not apply where the estimation is arrived at
that self-assessed by the taxpayer without the intervention of an arbitrarily and capriciously.” (Ibid.)
assessment by the tax authority to create the tax liability.
The Tax Code follows the pay-as-you-file system of taxation under 7. Meaning of "best evidence obtainable" under Sec. 6
which the taxpayer computes his own tax liability, prepares the return, and (B), NIRC of 1997. This means that the original documents must be
pays the tax as he files the return. The pay-as-you-file system is a self- produced. If it could not be produced, secondary evidence must be
assessing tax return. adduced. (Hantex Trading Co., Inc. v. Commissioner of Internal Revenue, CA -
Internal revenue taxes are self-assessing. (Dissent of J. Carpio in G.R. SP No. 47172, September 30, 1998)
Philippine National Oil Company v. Court of Appeals, et al., G. R. No. 109976, April
26, 2005 and companion case) 8. The following are the general methods developed by
A clear example of a self-assessed tax is the annual income tax, the Bureau of Internal Revenue for reconstructing a taxpayer’s
which the taxpayer himself computes and pays without the intervention of income where the records do not show the true income or where no
any assessment by the BIR. The annual income tax becomes due and return was filed or what was filed was a false and fraudulent return
payable without need of any prior assessment by the BIR. The BIR may or (a) Percentage method;
may not investigate or audit the annual income tax return filed by the (b) Net worth method.;
taxpayer. The taxpayer’s liability for the income tax does not depend on (c) Bank deposit method;
whether or not the BIR conducts such subsequent investigation or audit. (d) Cash expenditure method;
However, if the taxing authority is first required to investigate, and (e) Unit and value method;
after such investigation to issue the tax assessment that creates the tax (f) Third party information or access to records method;
liability, then the tax is no longer self-assessed. (Ibid.) (g) Surveillance and assessment method. (Chapter XIII. Indirect
Approach to Investigation, Handbook on Audit Procedures and Techniques
5. Sec. 6 (B) of the NIRC of 1997 allows the BIR to – Volume I, pp. 68-74)
make or amend a tax return from his own knowledge or
obtained through testimony or otherwise. Thus, the Commissioner 9. Third party information or access to records
of Internal Revenue investigates ”any circumstance which led him to method. The BIR may require third parties, public or private to supply
believe that the taxpayer had taxable income larger than that reported. information to the BIR, and thus, “obtain on a regular basis from any
Necessarily, this inquiry would have to be outside of the books because person other than the person whose internal revenue tax liability is subject
they supported the return as filed. He may take the sworn testimony of the to audit or investigation, or from any office or officer of the national and
taxpayer, he may take the testimony of third parties; he may examine and local governments, government agencies and instrumentalities including
subpoena, if necessary, traders’ and brokers’ accounts and books and the the Bangko Sentral ng Pilipinas and government-owned or –controlled
taxpayer’s books of accounts. The Commissioner is not bound to follow corporations, any information such as, but not limited to, costs and volume
any set of patterns. The existence of unreported income may be shown by of production, receipts or sales and gross incomes of taxpayers, and the
any particular proof that is available in the circumstances of the particular names , addresses, and financial statements of corporations, mutual fund
situation. (Commissioner of Internal Revenue v. Hantex Trading Co., Inc. G. R. companies, insurance companies, regional operating headquarters or
No. 136975, March 31, 2005)
multinational companies, joint accounts, associations, joint ventures or
consortia and registered partnerships, and their members; xxx ” [Sec. 5 (B),
6. General rule: When the Commissioner of Internal NIRC of 1997)
Revenue may rely on estimates. “The rule is that in the absence of
accounting records of a taxpayer, his tax liability may be determined by 10. A pre-assessment notice is a letter sent by the Bureau
estimation. The petitioner (Commissioner of Internal Revenue) is not of Internal Revenue to a taxpayer asking him to explain within a period of
required to compute such tax liabilities with mathematical exactness.
51
fifteen (15) days from receipt why he should not be the subject of an the collection of taxes. [Commissioner of Internal Revenue v. B.F. Goodrich Phils,
assessment notice. It is part of the due process rights of a taxpayer. Inc., (now Sime Darby International Tire Co., Inc.), et al., G.R. No. 104171,
As a general rule, the BIR could not issue an assessment notice February 24, 1999, 303 SCRA 546; Philippine Journalists, Inc. v. Commissioner of
without first issuing a pre-assessment notice because it is part of the due Internal Revenue, G. R. No. 162852, December 16, 2004], as well as their
process rights of a taxpayer to be given notice in the form of a pre- assessments.
assessment notice, and for him to explain why he should not be the subject The law prescribing a limitation of actions for the collection of the
of an assessment notice. income tax is beneficial both to the Government and to its citizens; to the
Government because tax officers would be obliged to act promptly in the
11. Instances where a pre-assessment notice is not making of assessment, and to citizens because after the lapse of the
required before a notice of assessment is sent to the taxpayer. period of prescription citizens would have a feeling of security against
a. When the finding for any deficiency tax is the result of unscrupulous tax agents who will always find an excuse to inspect the
mathematical error in the computation of the tax as appearing on the face books of taxpayers, not to determine the latter’s real liability, but to take
of the return; or advantage of every opportunity to molest peaceful, law-abiding citizens.
b. When a discrepancy has been determined between the tax Without such a legal defense taxpayers would furthermore be under
withheld and the amount actually remitted by the withholding agent; or obligation to always keep their books and keep them open for inspection
c. When a taxpayer opted to claim a refund or tax credit of excess subject to harassment by unscrupulous tax agents. The law on
creditable withholding tax for a taxable period was determined to have prescription being a remedial measure should be interpreted in a way
carried over and automatically applied the same amount claimed against conducive to bringing about the beneficent purpose of affording protection
the estimated tax liabilities for the taxable quarter or quarters of the to the taxpayer within the contemplation of the Commission which
succeeding table year; or recommend the approval of the law. [Bank of Philippine Islands (Formerly Far
East Bank and Trust Company) v. Commissioner of Internal Revenue, G. R. No.
d. When the excess tax due on excisable articles has not been paid; 174942, March 7, 2008]
or This mandate governs the question of prescription of the
e. When an article locally purchased or imported by an exempt government’s right to assess internal revenue taxes primarily to
person, such as, but not limited to vehicles, capital equipment, machineries safeguard the interests of taxpayers from unreasonable investigation.
and spare parts, has been sold, trade or transferred to non-exempt Accordingly, the government must assess internal revenue taxes on time
persons. (Sec. 228, NIRC of 1997) so as not to extend indefinitely the period of assessment and deprive the
taxpayer of the assurance that it will no longer be subjected to further
 12. Prescriptive periods for making assessments of investigation for taxes after the expiration of reasonable period of time.
internal revenue taxes. (Commissioner of Internal Revenue v. FMF Development Corporation, G. R. No.
a. Three (3) years from the last day within which to file a return 167765, June 30, 2008 citing Philippine Journalists, Inc. v. Commissioner of
or when the return was actually filed, whichever is later (Sec. 203, NIRC of Internal Revenue G.R. No. 162852, December 16, 2004, 447 SCRA 214, 225)
1997). The CIR has three (3) years from the date of actual filing of the tax
return to assess a national internal revenue tax or to commence court 14. Unreasonable investigation contemplates cases
proceedings for the collection thereof without an assessment. [Bank of where the period for assessment extends indefinitely because
Philippine Islands (Formerly Far East Bank and Trust Company) v. this deprives the taxpayer of the assurance that it will not longer be
Commissioner of Internal Revenue, G. R. No. 174942, March 7, 2008] subjected to further investigation for taxes after the expiration of a
b. ten years from discovery of the failure to file the tax return or reasonable period of time. (Philippine Journalists, Inc. v. Commissioner of
discovery of falsity or fraud in the return [Sec. 222 (a), NIRC of 1997[ ; or Internal Revenue, G. R. No. 162852, December 16, 2004 with note to see
c. within the period agreed upon between the government and Republic v. Ablaza, 108 Phil. 1105. 1108)
the taxpayer where there is a waiver of the prescriptive period for Laws on prescription should be liberally construed in favor of the
assessment (Sec. 222 (b), NIRC of 1997). taxpayer. Reason: for the purpose of safeguarding taxpayers from an
unreasonable examination, investigation or assessment, our tax laws
13. Purpose of period of limitations in taxation. For the provide a statute of limitation on the collection of taxes. Thus, the law on
purpose of safeguarding taxpayers from any unreasonable examination, prescription, being a remedial measure, should be liberally construed in
investigation or assessment, our tax law provides a statute of limitations in order to afford such protection, As a corollary, the exceptions to the law on
52
prescription should perforce be strictly construed. [Philippine Journalists, Inc. SUGGESTED ANSWER:
v. Commissioner of Internal Revenue, G. R. No. 162852, December 16, 2004 a. Lifeblood theory
citing Commissioner of Internal Revenue v. B.F. Goodrich Phils, Inc (now Sime b. Presumption of regularity (Commissioner of Internal Revenue v.
Darby International Tire Co., Inc.),., et al., G.R. No. 104171, February 24, 1999, Hantex Trading Co., Inc., G, R. No. 136975, March 31, 2005) in the
303 SCRA 546]
performance of public functions. (Commissioner of Internal Revenue v.
The prescriptive period was precisely intended to give the Tuazon, Inc., 173 SCRA 397)
taxpayers peace of mind. (Commissioner of Internal Revenue v. B.F. Goodrich c. The likelihood that the taxpayer will have access to the
Phils., Inc., et al., G.R. No. 104171, February 24, 1999)
relevant information [Commissioner of Internal Revenue, supra citing United
States v. Rexach, 482 F.2d 10 (1973). The certiorari was denied by the United
15. A “jeopardy assessment” is a delinquency tax States Supreme Court on November 19, 1973]
assessment which was assessed without the benefit of complete or partial d. The desirability of bolstering the record-keeping requirements
audit by an authorized revenue officer, who has reason to believe that the of the NIRC. (Ibid.)
assessment and collection of a deficiency tax will be jeopardized by delay
because of the taxpayer’s failure to comply with the audit and investigation 19. Give instances where prima facie correctness of a
requirements to present his books of accounts and/or pertinent records, or tax assessment does not apply.
to substantiate all or any of the deductions, exemptions, or credits claimed SUGGESTED ANSWER: The “prima facie correctness of a tax
in his return. [Sec. 3.1 (a), Rev. Regs. No. 6-2000) assessment does not apply upon proof that an assessment is utterly
Jeopardy assessment is an indication of the doubtful validity of the without foundation, meaning it is arbitrary and capricious. Where the BIR
assessment, hence it may be subject to a compromise. [Sec. 3.1 (a), Rev. has come out with a “naked assessment” i.e., without any foundation
Regs. No. 6-2000] character, the determination of the tax due is without rational basis.”
[Commissioner of Internal Revenue v. Hantex Trading Co., Inc., G, R. No. 136975,

16. Requisites for Formal Letter of Demand and March 31, 2005 citing United States v. Janis, 49 L. Ed. 2d 1046 (1976); 428 US
Assessment Notice. The formal letter of demand and assessment 433 (1976)] In such a situation, “the determination of the Commissioner
notice shall be issued by the Commissioner or his duly authorized contained in a deficiency notice disappears.” [Commissioner of Internal
representative. The letter of demand calling for payment of the Revenue, supra citing a U.S. Court of Appeals ruling, in Clark and Clark v.
taxpayer’s deficiency tax or taxes shall state the facts, the law, rules and Commissioner of Internal Revenue, 266 F. 2d 698 (1959)] “Hence, the
regulations, or jurisprudence on which the assessment is based, determination by the CTA must rest on all the evidence introduced and its
otherwise, the formal letter of demand and assessment notice shall be ultimate determination must find support in credible evidence.”
void. The same shall be sent to the taxpayer only by registered mail or [Commissioner of Internal Revenue, supra]
by personal delivery.
20. What are the instances that suspends the
17. What are the requirements for the validity of a running of the prescriptive periods (Statute of Limitations)
formal letter of demand and assessment notice ? within which to make an assessment and the beginning of
SUGGESTED ANSWER: distraint or levy or of a proceeding in court for the collection,
a. There must have been previously issued a pre-assessment in respect of any tax deficiencies?
notice until excepted; SUGGESTED ANSWER:
b. It must have been issued prior to the prescriptive period; and a. When the Commissioner is prohibited from making the
c. The letter of demand calling for payment of the taxpayer’s assessment, or beginning distraint, or levy or proceeding in court and for
deficiency tax or taxes shall state the facts, the law, rules and regulations, sixty (60) days thereafter;
or jurisprudence on which the assessment is based, otherwise, the formal b. When the taxpayer requests for and is granted a
letter of demand and assessment notice shall be void. (Sec. 3.1.4, Rev. reinvestigation by the commissioner;
Regs. No. 12-99) c. When the taxpayer could not be located in the address given
by him in the return filed upon which the tax is being assessed or collected;
18. What are the reasons for presumption of
correctness of assessments ?
53
d. When the warrant of distraint and levy is duly served upon the indicated in the original copy.
taxpayer, his authorized representative, or a member of his household with d. The foregoing procedures shall be strictly followed.
sufficient discretion, and no property could be located; and Any revenue official found not to have complied with this Order resulting
e. When the taxpayer is out of the Philippines. in prescription of the right to assess/collect shall be administratively dealt
NOTES AND COMMENTS: with. (Renumbering and emphasis supplied.)
The holding in Commissioner of Internal Revenue v. Court of If the above are not followed there is no valid waiver and
Appeals, et al., G.R. No. 115712, February 25, 1999 (Carnation case) that prescription would run. (Commissioner of Internal Revenue v. FMF
the waiver of the period for assessment must be in writing and have the Development Corporation, G. R. No. 167765, June 30, 2008 citing Philippine
written consent of the BIR Commissioner is still doctrinal because of the Journalists, Inc. v. Commissioner of Internal Revenue G.R. No. 162852,
provisions of Sec. 223, NIRC of 1997 which provides for the suspension of December 16, 2004, 447 SCRA 214, 228-229)
the prescriptive period:
22. The procedures in RMO No. 20-90 are NOT
merely directory and that the execution of a waiver is a
renunciation of a taxpayer’s right to invoke prescription.
21. Under RMO No. 20-90, which implements RMO No. 20-90 must be strictly followed. A waiver of the statute of
Sections 203 and 222 (b), the following procedures should be limitations under the NIRC, to a certain extent being a derogation of the
followed for a valid waiver of the prescriptive period for an taxpayer’s right to security against prolonged and unscrupulous
assessment: investigations, must be carefully and strictly construed. The waiver of the
statute of limitations does not mean that the taxpayer relinquishes the right
a. The waiver must be in the proper form;
to invoke prescription unequivocally, particularly where the language of the
b. The waiver shall be signed by the taxpayer himself or his
document is equivocal.
duly authorized representative. In the case of a corporation, the waiver
Thus a waiver becomes unlimited in time, and invalid, because it
must be signed by any of its responsible officials.
did not specify a definite date, agreed upon between the BIR and the
Soon after the waiver is signed by the taxpayer, the Commissioner
taxpayer, within which the former may assess and collect taxes. It also
of Internal Revenue or the revenue official authorized by him, as
would have no binding effect on the taxpayer if there was no consent by the
hereinafter provided, shall sign the waiver indicating that the Bureau has
Commissioner. On this basis, no implied consent can be presumed, nor
accepted and agreed to the waiver. The date of such acceptance by
can it be contended that the concurrence to such waiver is a mere
the Bureau should be indicated. Both the date of execution by the
formality. (Commissioner of Internal Revenue v. FMF Development Corporation,
taxpayer and date of acceptance by the Bureau should be before the
G. R. No. 167765, June 30, 2008 citing Philippine Journalists, Inc. v.
expiration of the period of prescription or before the lapse of the period Commissioner of Internal Revenue G.R. No. 162852, December 16, 2004, 447
agreed upon in case a subsequent agreement is executed. SCRA 214, 229 in turn citing Id. at 229, citing Commissioner of Internal Revenue
c. The following revenue officials are authorized to sign the v. Court of Appeals, G.R. No. 115712, February 25, 1999, 303 SCRA 614, 620-
waiver. 622.)
A. In the National Office
xxxx 23. BIR cannot rely on its invocation of the rule that the
3. Commissioner government cannot be estopped by the mistakes of its revenue
For tax cases involving more than P1M officers in the enforcement of RMO No. 20-90 because the law on
B. In the Regional Offices prescription should be interpreted in a way conducive to bringing about the
1. The Revenue District Officer with respect to beneficent purpose of affording protection to the taxpayer within the
tax cases still pending investigation and the period to assess is contemplation of the Commission which recommended the approval of the
about to prescribe regardless of amount. law. To the Government, its tax officers are obliged to act promptly in the
xxxx making of assessment so that taxpayers, after the lapse of the period of
d. The waiver must be executed in three (3) copies, the prescription, would have a feeling of security against unscrupulous tax
original copy to be attached to the docket of the case, the second copy agents who will always try to find an excuse to inspect the books of
for the taxpayer and the third copy for the Office accepting the waiver. taxpayers, not to determine the latter’s real liability, but to take advantage of
The fact of receipt by the taxpayer of his/her file copy shall be
54
a possible opportunity to harass even law-abiding businessmen. Without of additional evidence. It may involve both a question of fact or of law or
such legal defense, taxpayers would be open season to harassment by both.
unscrupulous tax agents. [Commissioner of Internal Revenue v. FMF b. Request for reinvestigation which refers to a plea for re-
Development Corporation, G. R. No. 167765, June 30, 2008 citing Republic of evaluation of an assessment on the basis of newly-discovered evidence or
the Phils. v. Ablaza, 108 Phil. 1105, 1108 (1960)] additional evidence that a taxpayer intends to present in the investigation.
It may also involve a question of fact or law or both. (Commissioner of
24. The signatures of both the Commissioner and Internal Revenue v. Philippine Global Communication, Inc., G. R. No. 167146,
the taxpayer, are required for a waiver of the prescriptive October 31, 2006 citing Rev. Regs. No. 12-85)
period, thus a unilateral waiver on the part of the taxpayer does not
suspend the prescriptive period. [Commissioner of Internal Revenue v. Court 3. What is that type of protest that suspends the
of Appeals, et al., G.R. No. 115712, February 25, 1999 (Carnation case)] running of the statute of limitations for the beginning of
distraint or levy or a proceeding in court for collection ?
47. The act of requesting a reinvestigation alone does Why ?
not suspend the running of the prescriptive period. The SUGGESTED ANSWER: It is that type of protest “when the
request for reinvestigation must be granted by the CIR. The taxpayer requests for a reinvestigation which is granted by the
Supreme Court declared that the burden of proof that the request for Commissioner” (Sec. 223, NIRC of 1997), that suspends the running of the
reinvestigation had been actually granted shall be on the Commissioner statute of limitations for collection of the tax. (Commissioner of Internal
of Internal Revenue. Such grant may be expressed in its Revenue v. Philippine Global Communication, Inc., G. R. No. 167146, October 31,
communications with the taxpayer or implied from the action of the 2006 citing Sec. 271, now Sec. 223, NIRC of 1997) When a taxpayer demands
Commissioner or his authorized representative in response to the request a reinvestigation, the time employed in reinvestigation should be deducted
for reinvestigation. [Bank of Philippine Islands (Formerly Far East Bank and from the total period of limitation. [Commissioner of Internal Revenue, supra
Trust Company) v. Commissioner of Internal Revenue, G. R. No. 174942, March citing Republic v. Lopez, 117 Phil. 575, 578; 7 SCRA 566, 568-569 (1963)]
7, 2008] Undoubtedly, a reinvestigation, which entails the reception and
evaluation of additional evidence, will take more time than a reconsideration
PROTESTING INTERNAL REVENUE TAX ASSESSMENTS of a tax assessment which will be limited to the evidence already at hand;
this justifies why the former can suspend the running of the statute of
1. What is the presumption that flows from a taxpayer’s limitations on collection of the assessed tax, while the latter cannot.
(Commissioner of Internal Revenue v. Philippine Global Communication, Inc., G.
failure to protest an assessment ? R. No. 167146, October 31, 2006 citing Bank of Philippine Islands v.
SUGGESTED ANSWER: “Tax assessments by tax examiners are Commissioner of Internal Revenue, G. R. No. 139736, 17 October 2005, 473
presumed correct and made in good faith. The taxpayer has the duty to SCRA 205, 230-231)
prove otherwise. In the absence of proof of any irregularities in the
performance of duties, an assessment duly made by a Bureau of Internal 4. What are the requirements for the validity of a
Revenue examiner and approved by his superior officers will not be taxpayer’s protest ?
disturbed. All presumptions are in favor of the correctness of tax SUGGESTED ANSWER:
assessments.” (Commissioner of Internal Revenue v. Bank of Philippine a. It must be filed within the reglementary period of thirty (30)
Islands., G, R. No. 134062, April 17, 2007 citing Sy Po v. Court of Appeals, G. R. days from receipt of the notice of assessment.
No. L-81446, 18 August 1988, 164 SCRA 524, 530, citations omitted)
b. The taxpayer must not only show the errors of the Bureau of
Internal Revenue but also the correct computation through
2. What are the two ways of protesting an assessment 1) A statement of the facts, the applicable law, rules and
notice for an internal revenue tax ? Alternatively, what are the regulations, or jurisprudence on which the taxpayer’s protest is
two types of protests ? Explain briefly. based,
SUGGESTED ANSWER: 2) If there are several issues involved in the disputed
a. Request for reconsideration which refers to a plea for re- assessment and the taxpayer fails to state the facts, the applicable
evaluation of an assessment on the basis of existing records without need law, rules and regulations, or jurisprudence in support of his protest
against some of the several issues on which the assessment is
55
based, the same shall be considered undisputed issue or issues, in theory that it was the CIR’s final act regarding the request for
which case, the taxpayer shall be required to pay the corresponding reconsideration. The very title expressly indicated that it was a final notice
deficiency tax or taxes attributable thereto. (Sec. 3.1.5, Rev. Regs. prior to seizure of property. The letter itself clearly stated that the taxpayer
12-99) was being given “this LAST OPPORTUNITY” to pay; otherwise, its
c. Within sixty (60) days from filing of the protest, the taxpayer properties would be subjected to distraint and levy.
shall submit all relevant supporting documents. [4th par., Sec. 228 (e), NIRC
of 1997] 2. The taxpayer seasonably protested the assessment
issued by the Commissioner of Internal Revenue. During the
5. “Relevant supporting documents,” defined. The pendency of the protest the CIR issued a warrant of distraint
term “relevant supporting documents” should be understood as those and levy to collect the taxes subject of the protest.
documents necessary to support the legal basis in disputing a tax
As counsel what advice shall you give the taxpayer.
assessment as determined by the taxpayer. The BIR can only inform the
taxpayer to submit additional documents. Explain briefly your answer.
The BIR cannot demand what type of supporting documents should SUGGESTED ANSWER: The taxpayer should appeal, by way of a
be submitted. Otherwise, a taxpayer will be at the mercy of the BIR, petition for review, to the Court of Tax Appeals not on the ground of the
which may require the production of documents that a taxpayer cannot denial of the protest but on other matter arising under the provisions of the
submit. (Commissioner of Internal Revenue v. First Express Pawnshop Company, National Internal Revenue Code. The actual issuance of a warrant of
Inc., G. R. 172045-46, June 16, 2009) distraint and levy in certain cases cannot be considered a final decision on
a disputed assessment.
JUDICIAL REMEDIES INVOLVING PROTESTED To be a valid decision on a disputed assessment, the decision of
the Commissioner or his duly authorized representative shall (a) state the
ASSESSMENTS facts, the applicable law, rules and regulations, or jurisprudence on which
such decision is based, otherwise, the decision shall be void, in which case
1. Acts of BIR Commissioner that may be the same shall not be considered a decision on the disputed assessment;
considered as denial of a protest which serve as basis for and (b) that the same is his final decision. (Sec. 3.1.6, Rev. Regs. 12-99)
appeal to the Court of Tax Appeals. These conditions are not complied with by the mere issuance of a warrant
a. Filing by the BIR of a civil suit for collection of the deficiency of distraint and levy. (Commissioner of Internal Revenue v. Union Shipping
tax is considered a denial of the request for reconsideration. (Commissioner Corp., 185 SCRA 547)
of Internal Revenue v. Union Shipping Corporation, 185 SCRA 547) Furthermore, a motion for the suspension of the collection of the tax
b. An indication to the taxpayer by the Commissioner “in clear may be filed together with the petition for review (Sec. 3, Rule 10, RRCTA
and unequivocal language” of his final denial not the issuance of the effective December 15, 2005) because the collection of the tax may
warrant of distraint and levy. What is the subject of the appeal is the final jeopardize the interest of the taxpayer.
decision not the warrant of distraint. (Ibid.)
c. A BIR demand letter sent to the taxpayer after his protest of 3. As a general rule, there must always be a decision
the assessment notice is considered as the final decision of the of the Commissioner of Internal Revenue or Commissioner of
Commissioner on the protest. (Surigao Electric Co., Inc. v. Court of Tax Customs before the Court of Tax Appeals, would have
Appeals, et al., 57 SCRA 523)
d. A letter of the BIR Commissioner reiterating to a taxpayer his jurisdiction. If there is no such decision, the petition would be dismissed
previous demand to pay an assessment is considered a denial of the for lack of jurisdiction unless the case falls under any of the following
request for reconsideration or protest and is appealable to the Court of Tax exceptions.
Appeals. (Commissioner v. Ayala Securities Corporation, 70 SCRA 204)
e. Final notice before seizure considered as commissioner’s 4. Instances where the Court of Tax Appeals would
decision of taxpayer’s request for reconsideration who received no other have jurisdiction even if there is no decision yet by the
response. Commissioner of Internal Revenue v. Isabela Cultural Commissioner of Internal Revenue:
Corporation, G.R. No. 135210, July 11, 2001 held that not only is the a. Where the Commissioner has not acted on the disputed
Notice the only response received: its content and tenor supports the assessment after a period of 180 days from submission of complete
56
supporting documents, the taxpayer has a period of 30 days from the b. Tax laws, unlike remedial laws, are not to be applied
expiration of the 180 day period within which to appeal to the Court of Tax retroactively. Revenue laws are substantive laws and their application
Appeals. (last par., Sec. 228 (e), NIRC of 1997; Commissioner of Internal must not be equated with remedial laws. (Acosta, supra)
Revenue v. Isabela Cultural Corporation, G.R. No. 135210, July 11, 2001)
b. Where the Commissioner has not acted on an application for 3. What is the prescriptive period for collecting
refund or credit and the two year period from the time of payment is about internal revenue taxes ?
to expire, the taxpayer has to file his appeal with the Court of Tax Appeals SUGGESTED ANSWER: There are four (4) prescriptive periods for
before the expiration of two years from the time the tax was paid. the collection of an internal revenue tax:
It is disheartening enough to a taxpayer to be kept waiting for an a. Collection upon a false or fraudulent return or no return
indefinite period for the ruling,. It would make matters more exasperating without assessment. In case of a false or fraudulent return with the intent
for the taxpayer if the doors of justice would be closed for such a relief until to evade tax or of failure to file a return, “a proceeding in court for the
after the Commissioner, would have, at his personal convenience, given his collection of such tax may be filed without assessment, at any time within
go signal. (Commissioner of Customs, et al, v. Court of Tax Appeals, et al., G.R. ten (10) years after the discovery of the falsity, fraud or omission.” [Sec.
No. 82618, March 16, 1989, unrep.) 222 (a), NIRC of 1997]
b. Collection upon a false or fraudulent return or no return with

5. The characteristic of a BIR denial of a protest such assessment. Any internal revenue tax which has been assessed (because
as would enable the taxpayer to appeal the same to the Court the return is false or fraudulent with intent to evade tax or of failure to fail a
of Tax Appeals. The Commissioner of Internal Revenue should always return), within a period of ten (10) years from discovery of the falsity, fraud
indicate to the taxpayer in clear and unequivocal language whenever his or omission “may be collected by distraint or levy or by a proceeding
action on an assessment questioned by a taxpayer constitutes his final in court within five (5) years following the assessment of the tax.”
determination on the disputed assessment. [Sec. 222 (c), in relation to Sec. 222 (a) NIRC of 1997, emphasis supplied]
On the basis of his statement indubitably showing that the c. Collection upon an extended assessment. Where a tax has
Commissioner’s communicated action is his final decision on the contested been assessed with the period agreed upon between the Commissioner
assessment, the aggrieved taxpayer would then be able to take recourse to and the taxpayer in writing (which should initially be within three (3) years
the tax court at the opportune time. Without needless difficulty, the from the time the return was filed or should have been filed), or any
taxpayer would be able to determine when his right to appeal to the tax extensions before the expiration of the period agreed upon, the tax “may
court accrues. (Commissioner of Internal Revenue v. Bank of the Philippines be collected by distraint or levy or by a proceeding in court within
Islands, G. R. No. 134062, April 17, 2007) the period agreed upon in writing before the expiration of the five (5)
year period. The period so agreed upon may be extended by subsequent
COLLECTION OF INTERNAL REVENUE TAXES written agreements made before the expiration of the period previously
agreed upon.” [Sec. 222 (d), in relation to Secs. 222 (b) and 203, NIRC of 1997,
1. General rule: Collection of taxes is imprescriptible. emphasis supplied]
While this may be so, statutes may provide for periods of prescription, d. Collection upon a return that is not false or fraudulent, or
where the assessment is not an extended assessment. “Except as
2. Why is the collection of taxes imprescriptible ? provided in Section 222, internal revenue taxes shall be assessed within
SUGGESTED ANSWER: three (3) years after the last day prescribed by law for the filing of the
a. As a general rule, revenue laws are not intended to be return, and no proceeding in court without assessment for the
liberally construed, and exemptions are not given retroactive application, collection of such taxes shall be begun after the expiration of such
considering that taxes are the lifeblood of the government and in Holmes’ period; Provided, That in case where a return is filed beyond the period
memorable metaphor, the price we pay for civilization, tax laws must be prescribed by law, the three (3) year period shall be computed from the day
faithfully and strictly implemented. (Commissioner of Internal Revenue v. the return was filed. For purposes of this Section, a return filed before the
Acosta, etc.,G. R. No. 154068, August 3, 2007) However, statutes may provide last day prescribed by law for the filing thereof shall be considered filed on
for prescriptive periods for the collection of particular kinds of taxes. such last day.” (Sec. 203, NIRC of 1997, emphasis supplied)
When the BIR validly issues an assessment within the three (3)-
year period, it has another three (3) years within which to collect the tax
57
due by distraint, levy, or court proceeding. The assessment of the tax is
deemed made and the three (3)-year period for collection of the assessed 5. What tax cases may be the subject of a
tax begins to run on the date the assessment notice had been released, compromise ?
mailed or sent to the taxpayer. [Bank of Philippine Islands (Formerly Far East SUGGESTED ANSWER: The following cases may, upon
Bank and Trust Company) v. Commissioner of Internal Revenue, G. R. No. taxpayer’s compliance with the basis for compromise, be the subject matter
174942, March 7, 2008 citing BPI v. Commissioner of Internal Revenue, G.R.
of compromise settlement:
No. 139736, 17 October 2005, 473 SCRA 205, 222-223]
a. Delinquent accounts;
NOTES AND COMMENTS:
b. Cases under administrative protest after issuance of the Final
a. Both the former Sec. 269, NIRC of 1977 and Sec.222 of
Assessment Notice to the taxpayer which are still pending in the Regional
NIRC of 1997 do not refer to a “regular return.” It is clear that in
Offices, Revenue District Offices, Legal Service, Large Taxpayer Service
enacting Sec. 222, entitled “Exceptions as to the period of limitation of
(LTS), Collection Service, Enforcement Service and other offices in the
assessment and collection of taxes,” the NIRC of 1997 has eliminated sub-
National Office;
paragraph c of the former Sec. 269 of the NIRC, also entitled “Exceptions
c. Civil tax cases being disputed before the courts;
as to the period of limitation of assessment and collection of taxes.” Said
d. Collection cases filed in courts;
Sec. 269 (c), reads “Any internal revenue tax which has been assessed
e. Criminal violations, other than those already filed in court, or
within the period of limitation above-prescribed may be collected by
those involving criminal tax fraud. (Sec. 2, Rev. Regs. No. 30-2002)
distraint or levy or by a proceeding in court within three years following the
assessment of the tax.”
A perusal of Sec. 222 of the NIRC is clear that it covers only three 
6. What tax cases could not be the subject of
scenarios only. 1) No assessment was made upon a false or fraudulent compromise ?
return or omission to file a return; 2) an assessment was made upon a SUGGESTED ANSWER:
false or fraudulent return or omission to file a return; and 3) an extended a. Withholding tax cases unless the applicant-taxpayer invokes
assessment issued within a period agreed upon by the Commissioner and provisions of law that cast doubt on the taxpayer’s obligation to withhold.;
the taxpayer. The same scenarios are those referred to in the former Sec. b. Criminal tax fraud cases, confirmed as such by the
269 which provided for a prescriptive period for collection of three (3) years. Commissioner of Internal Revenue or his duly authorized representative;
It is clear therefore that neither Sec. 222 nor the former Sec. 269 c. Criminal violations already filed in court;
provide for an instance where the assessment was made upon a “regular d. Delinquent accounts with duly approved schedule of
return” or one that is not false or fraudulent, or that there was an installment payments;
agreement to extend the period for assessment. e. Cases where final reports of reinvestigation or reconsideration
Resort should therefore be made to the three (3) year period have been issued resulting to reduction in the original assessment and the
referred to in Sec. 203 of the NIRC of 1997 which reads, “Except as taxpayer is agreeable to such decision by signing the required agreement
provided in Section 222, internal revenue taxes shall be assessed within form for the purpose. On the other hand, other protested cases shall be
three (3) years after the last day prescribed by law for the filing of the handled by the Regional Evaluation Board (REB) or the National Evaluation
return, and no proceeding in court without assessment for the Board (NEB) on a case to case basis;
collection of such taxes x x x “ (paraphrasing and emphasis supplied) f. Cases which become final and executory after final judgment
of a court where compromise is requested on the ground of doubtful validity
4. What is a compromise ? of the assessment; and
SUGGESTED ANSWER: A compromise is a contract whereby the g. Estate tax cases where compromise is requested on the
parties, by making reciprocal concessions, avoid a litigation or put an end ground of financial incapacity of the taxpayer. (Sec. 2, Rev. Regs. No. 30-
2002)
to one already commenced. (Art. 2028, Civil Code)
A compromise penalty could not be imposed by the BIR, if the
taxpayer did not agree. A compromise being, by its nature, mutual in  7. When may the Commissioner of Internal Revenue
essence requires agreement. The payment made under protest could only compromise the payment of any internal revenue tax ?
signify that there was no agreement that had effectively been reached Alternatively, what are the grounds for a compromise, and
between the parties. (Vda. de San Agustin, et al., v. Commissioner of Internal
Revenue, G. R. No. 138485, September 10, 2001)
58
what are the amounts for which a compromise may be entered The Supreme Court may enjoin the collection of taxes under its
into ? general judicial power but it should be apparent that the source of the
SUGGESTED ANSWER: power is not statutory but constitutional.
a. A reasonable doubt as to the validity of the claim against the
taxpayer exists provided that the minimum compromise entered into is 11. What is the procedure for suspension of
equivalent to forty percent (40%) of the basic tax; or collection of taxes ?
b. The financial position of the taxpayer demonstrates a clear SUGGESTED ANSWER: Where the collection of the amount of
inability to pay the assessed tax provided that the minimum compromise the taxpayer’s liability, sought by means of a demand for payment, by
entered into is equivalent to ten percent (10%) of the basic assessed tax levy, distraint or sale of property of the taxpayer, or by whatever means,
In the above instances the Commissioner is allowed to enter into a as provided under existing laws, may jeopardize the interest of the
compromise only if the basic tax involved does not exceed One million government or the taxpayer, an interested party may file a motion for the
pesos (P1,000,000.00), and the settlement offered is not less than the suspension of the collection of the tax liability (Sec. 1, Rule 10, RRCTA
prescribed percentages. [Sec. 204 (A), NIRC of 1997] effective December 15, 2005) with the Court of Tax Appeals.
In instances where the Commissioner is not authorized, the The motion for suspension of the collection of the tax may be filed
compromise shall be subject to the approval of the Evaluation Board together with the petition for review or with the answer, or in a separate
composed of the Commissioner and the four (4) Deputy Commissioners. motion filed by the interested party at any stage of the proceedings. (Sec.
3, Rule 10, RRCTA effective December 15, 2005)
 8. When is the Commissioner of Internal Revenue
authorized to abate or cancel a tax liability ?: REFUND OF INTERNAL REVENUE TAXES
SUGGESTED ANSWER:
a. The tax or any portion thereof appears to be unjustly or 1. What are the grounds for refund or credit of internal
excessively assessed; or revenue taxes ?
b. The administration and collection costs involved do not justify the SUGGESTED ANSWER: The grounds for refund or credit or
collection of the amount due. [Sec. 204 (B), NIRC of 1997] internal revenue taxes are the following:
a. The tax was illegally collected. There is no law that
9. The collection of a tax may not be suspended. Only authorizes the collection of the tax.
the Court of Tax Appeals may issue an order suspending the collection of a b. The tax was excessively collected. There is a law that
tax. authorizes the collection of a tax but the tax collected was more than what
the law allows.

10. As a general rule, “No court shall have the c. The tax was paid through a mistaken belief that the taxpayer
authority to grant an injunction to restrain the collection of any should pay the tax (solution indebeti)
national internal revenue tax, fee or charge.” (Sec. 218, NIRC)
“No appeal taken to the CTA from the decision of the Commissioner 2. What are the three (3) conditions for the grant of a
of Internal Revenue or the Commissioner of Customs or the Regional Trial claim for refund of creditable withholding tax ?
Court, provincial, city or municipal treasurer or the Secretary of Finance, SUGGESTED ANSWER:
the Secretary of Trade and Industry and Secretary of Agriculture, as the a. The claim is filed with the Commissioner of Internal Revenue
case may be shall suspend the payment, levy, distraint, and/or sale of any within the two-year period from the date of the payment of the tax.
property of the taxpayer for the satisfaction of his tax liability as provided by b. It is shown on the return of the recipient that the income
existing law: Provided, however, That when in the opinion of the Court the payment received was declared as part of the gross income; and
collection by the aforementioned government agencies may jeopardize the c. The fact of withholding is established by a copy of a statement
interest of the Government and/or the taxpayer the Court at any stage of duly issued by the payee showing the amount paid and the amount of tax
the proceeding may suspend the said collection and require the taxpayer withheld therefrom. (Banco Filipino Savings and Mortgage Bank v. Court of
either to deposit the amount claimed or to file a surety bond for not more Appeals, et al., G. R. No. 155682, March 27, 2007)
than double the amount with the Court.” (Sec. 11, Rep. Act No. 1125, as NOTES AND COMMENTS:
amended by Sec. 9, Rep. Act No. 9282 )
59
a. Proof of fact of withholding. “Sec. 10. Claim for tax credit which would trigger the 30-day period, the taxpayer should file an appeal,
or refund. – (a) Claims for Tax Credit or Refund of Income tax deducted despite the absence of a decision. (Commissioners, etc. v. Court of Tax
and withheld on income payments shall be given due course only when it is Appeals, et al., G. R. No. 82618, March 16, 1989, unrep.)
shown on the return that the income payment received has been declared
as part of the gross income and the fact of withholding is established by a 6. Where the taxpayer is a corporation the two year
copy of the Withholding Tax Statement duly issued by the payor to the prescriptive period from “date of payment” for refund of
payee showing the amount paid and the amount of the tax withheld income taxes should be the date when the corporation filed its
therefrom xxx” (Rev. Regs. No. 6-85, as amended) final adjustment return not on the date when the taxes were paid on a
The document which may be accepted as evidence of the third quarterly basis. (Philippine Bank of Communications v. Commissioner of Internal
condition, that is, the fact of withholding, must emanate from the payor Revenue, et al., G.R. No. 112024, January 28, 1999)
itself, and not merely from the payee, and must indicate the name of the It is only when the return, covering the whole year, is filed that the
payor, the income payment basis of the tax withheld, the amount of the tax taxpayer will be able to ascertain whether a tax is still due or refund can be
withheld and the nature of the tax paid. (Banco Filipino Savings and claimed based on the adjusted and audited figures. (Bank of the Philippine
Mortgage Bank v. Court of Appeals, et al., G. R. No. 155682, March 27, 2007) Islands v. Commissioner of Internal Revenue, G.R. No. 144653, August 28, 2001)

3. What should be established by a taxpayer for the 7. What is solutio indebeti as applied to tax
grant of a tax refund ? Why ? cases ?
SUGGESTED ANSWER: A taxpayer needs to establish not only SUGGESTED ANSWER: Under the principle of solutio indebiti
that the refund is justified under the law, but also the correct amount that provided in Art. 2154, Civil Code, “If something is received when there is
should be refunded. no right to demand it, and it was unduly delivered through mistake, the
If the latter requisite cannot be ascertained with particularity, there is obligation to return it arises.” The BIR received something “when there
cause to deny the refund, or allow it only to the extent of the sum that is [was] no right to demand it,” and thus, it has the obligation to return it.
actually proven as due. [State Land Investment Corporation v. Commissioner of Internal
Tax refunds partake of the nature of tax exemptions and are thus Revenue, G. R. No. 171956, January 18, 2008citing Citibank, N. A. v.
construed strictissimi juris against the person claiming the exemption. The Court of Appeals and Commissioner of Internal Revenue, G.R. No.
burden in proving the claim for refund necessarily falls on the taxpayer. 107434, October 10, 1997, 280 SCRA 459, in turn citing Ramie Textiles,
(Far East Bank Trust and Company, etc., v. Commissioner of Internal Revenue , et Inc. v. Mathay, Sr., 89 SCRA 586 (1979)]. It is an ancient principle that no
al., G. R. No. 138919, May 2, 2006) one, not even the state, shall enrich oneself at the expense of another.
Indeed, simple justice requires the speedy refund of the wrongly held
4. What is The legal remedy under the NIRC of 1997 taxes. (Ibid.)
at the judicial level with respect to refund or recovery of tax
erroneously or illegally collected ?
SUGGESTED ANSWER: Filing of a suit or proceeding with the
Court of Tax Appeals
a. before the expiration of two (2) years from the date of
payment of the tax regardless of any supervening cause that may arise
after payment (2nd par., Sec. 229, NIRC of 1997), or
b. within thirty (30) days from receipt of the denial by the 56. What are the reasons for requiring the filing of an
Commissioner of the application for refund or credit. (Sec. 11, R.A. No. administrative application for refund or credit with the BSUGGESTED
1125)  8. Why is it necessary to file an administrative claim
for refund with the BIR, before filing a case with the Court of
5. The two (2) year period and the thirty (30) day Tax Appeals ?
period should be applied on a whichever comes first basis .
Thus, if the 30 days is within the 2 years, the 30 days applies, if the 2 year
period is about to lapse but there is no decision yet by the Commissioner
60
SUGGESTED ANSWER: Yes. The failure to first file a written claim for
refund or credit is not fatal to a petition for review involving a disputed
assessment where an assessment was disputed but the protest was

a. a. To
afford the Commissioner an opportunity to correct his errors or that of
subordinate officers. (Gonzales v. Court of Tax Appeals, et al., 14 SCRA79)

b. To notify the Government that such taxes have been denied by the Bureau of Internal Revenue. To hold that the
questioned and the notice should be borne in mind in estimating the taxpayer has now lost the right to appeal from the ruling on the disputed
revenue available for expenditures. assessment and require him to file a claim for a refund of the taxes paid as
a condition precedent to his right to appeal, would in effect require of him to
go through a useless and needless ceremony that would only delay the
disposition of the case, for the Commissioner would certainly disallow the
claim for refund in the same way as he disallowed the protest against the
assessment. The law, should not be interpreted as to result in absurdities.
(vda. de San Agustin., etc., v. Commissioner of Internal Revenue, G.R. No.
138485, September 10, 2001 citing Roman Catholic Archbishop of Cebu v.
Collector of Internal Revenue, 4 SCRA 279) NOTE: Reconciliation between
above two numbers (8 and 9). An application for refund or credit under
Sec. 229 of the NIRC of 1997 is required where the case filed before the
CTA is a refund case, which is not premised upon a disputed assessment.
There is no need for a prior application for refund or credit, if the refund is
merely a consequence of the resolution of the BIR’s denial of a protested
9. As a assessment.
general rule the filing of an application for refund or credit with
the Bureau of Internal Revenue is an administrative
precondition before a suit may be filed with the Court of Tax
Appeals ?
Who could apply for
SUGGESTED a tax refund or credit ?
ANSWER:

10. Who could apply for a refund or credit ?


SUGGESTED ANSWER: The person who paid the tax may apply
for a refund or credit.
61
A withholding tax agent may also apply for a refund. In a sense, citing Philippine Bank of Communications v. Commissioner of Internal Revenue,
he is also a taxpayer because the tax may be collected from him if he does 361 Phil. 916 (1999)]
not withhold. This is known as the irrevocability rule and is embodied in the last
sentence of Section 76 of the Tax Code. The phrase “such option shall be
11. What is the nature of the taxpayer’s remedy of considered irrevocable for that taxable period” means that the option to
either to ask for a refund of excess tax payments or to apply carry over the excess tax credits of a particular taxable year can no
longer be revoked.
the same in payment of succeeding taxable periods’ taxes ? The rule prevents a taxpayer from claiming twice the excess
SUGGESTED ANSWER: Sec. 69 of the 1977 NIRC (now Sec. 76
quarterly taxes paid: (1) as automatic credit against taxes for the taxable
of the NIRC of 1997) provides that any excess of the total quarterly
quarters of the succeeding years for which no tax credit certificate has
payments over the actual income tax computed in the adjustment or final
been issued and (2) as a tax credit either for which a tax credit certificate
corporate income tax return, shall either (a) be refunded to the corporation,
will be issued or which will be claimed for cash refund. (Systra Philippines,
or (b) may be credited against the estimated quarterly income tax liabilities Inc., supra citing De Leon, Hector, THE NATIONAL INTERNAL REVENUE
for the quarters of the succeeding taxable year. To ease the administration CODE, Seventh Edition, 2000, p. 430)
of tax collection, these remedies are in the alternative and the choice of
one precludes the other. Since the Bank has chosen the tax credit 13. In the year 2000 Systra derived excess tax credits
approach it cannot anymore avail of the tax refund. (Philippine Bank of
and exercised the option to carry them over as tax credits for
Communications v. Commissioner of Internal Revenue, et al., G.R. No.
112024, January 28, 1999) the next taxable year. However, the tax due for the next
NOTES AND COMMENTS: taxable year is lower than excess tax credits. It now applies
a. The choice, is given to the taxpayer, whether to claim for for a refund of the unapplied tax credits. May its refund be
refund under Sec. 76 or have its excess taxes applied as tax credit for granted ? If the refund is denied, does Systra lose the
the succeeding taxable year, such election is not final. Prior verification unapplied tax credits ? Explain briefly your answer.
and approval by the Commissioner of Internal Revenue is required. The SUGGESTED ANSWER: Systra’s claim for refund should be
availment of the remedy of tax credit is not absolute and mandatory. It denied. Once the carry over option was made, actually or constructively,
does not confer an absolute right on the part of the taxpayer to avail of the it became forever irrevocable regardless of whether the excess tax
tax credit scheme if it so chooses. Neither does it impose a duty on the credits were actually or fully utilized Under Section 76 of the Tax Code, a
part of the government to sit back and allow an important facet of tax claim for refund of such excess credits can no longer be made. The
collection to be at the sole control and discretion of the taxpayer. (Paseo excess credits will only be applied “against income tax due for the taxable
Realty & Development Corporation v. Court of Appeals, et al., G. R. No. quarters of the succeeding taxable years.”
119286, October 13, 2004) Despite the denial of its claim for refund, Systra does not lose the
unapplied tax credits. The amount will not be forfeited in favor of the
12. What is the “irrevocability rule” in claims for refund government but will remain in the taxpayer’s account. Petitioner may
and what is the rationale behind this ? claim and carry it over in the succeeding taxable years, creditable against
SUGGESTED ANSWER: A corporation entitled to a tax credit or future income tax liabilities until fully utilized. (Systra Philippines, Inc., v.
refund of the excess estimated quarterly income taxes paid has two Commissioner of Internal Revenue, G. R. No. 176290, September 21, 2007
citing Philam Asset Management, Inc. v. Commissioner of Internal Revenue,
options: (1) to carry over the excess credit or (2) to apply for the issuance
G.R. Nos. 156637/162004, 14 December 2005, 477 SCRA 761)
of a tax credit certificate or to claim a cash refund. If the option to carry
Supposing in the above problem that Systra permanent
over the excess credit is exercised, the same shall be irrevocable for that
ceased operations, what happens to the unapplied credits ?
taxable period.
SUGGESTED ANSWER: Where, the corporation permanently
In exercising its option, the corporation must signify in its annual
ceases its operations before full utilization of the tax credits it opted to
corporate adjustment return (by marking the option box provided in the
carry over, it may then be allowed to claim the refund of the remaining tax
BIR form) its intention either to carry over the excess credit or to claim a
credits. In such a case, the remaining tax credits can no longer be carried
refund. To facilitate tax collection, these remedies are in the alternative
over and the irrevocability rule ceases to apply. Cessante ratione legis,
and the choice of one precludes the other. [Systra Philippines, Inc., v.
cessat ipse lex. (Footnote no. 23, Systra Philippines, Inc., v.
Commissioner of Internal Revenue, G. R. No. 176290, September 21, 2007
62
Commissioner of Internal Revenue, G. R. No. 176290, September 21, 16. Discuss the difference between tax refund and tax
2007) credit..
NOTES AND COMMENTS: The holding in State Land SUGGESTED ANSWER: There are unmistakable formal and
Investment Corporation v. Commissioner of Internal Revenue, G. R. No. practical differences between the two modes. Formally, a tax refund
171956, January 18, 2008 that the taxpayer is entitled to a refund requires a physical return of the sum erroneously paid by the taxpayer,
because during the succeeding year there was no tax due against which while a tax credit involves the application of the reimbursable amount
the excess tax credits may be applied is not doctrinal. This is so because against any sum that may be due and collectible from the taxpayer.
it interpreted the provisions of then Sec. 69 of the NIRC, which did not On the practical side, the taxpayer to whom the tax is refunded
provide for the “irrevocability rule” now contained in Sec. 76 of the NIRC would have the option, among others, to invest for profit the returned sum,
of 1997. an option not proximately available if the taxpayer chooses instead to
receive a tax credit. (Commissioner of Customs v. Philippine Phosphate
14. A simultaneous filing of the application with the BIR Fertilizer Corporation, G. R. No. 144440, September 1, 2004)
for refund/credit and the institution of the court suit with the NOTES AND COMMENTS: It may be that there is no essential
CTA is allowed. There is no need to wait for a BIR denial. REASONS: difference between a tax refund and a tax credit since both are moves of
a. The positive requirement of Section 230 NIRC (now Sec. 229, recovering taxes erroneously or illegally paid to the government.
NIRC of 1997); (Commissioner of Customs v. Philippine Phosphate Fertilizer Corporation, G. R.
b. The doctrine that delay of the Commissioner in rendering No. 144440, September 1, 2004)
decision does not extend the peremptory period fixed by the statute;
c. The law fixed the same period two years for filing a claim for 17. A bank-trustee of employee trusts filed an
refund with the Commissioner under Sec. 204, par. 3, NIRC (now Sec. 204 application for the refund of taxes withheld on the interest
[C], NIRC of 1997), and for filing suit in court under Sec. 230, NIRC (now incomes of the investments made of the funds of the
Sec. 229, NIRC of 1997), unlike in protests of assessments under Sec. 229 employees’ trusts. Instead of presenting separate accounts
(now Sec. 228, NIRC of 1997), which fixed the period (thirty days from for interest incomes made of these investments, the bank-
receipt of decision) for appealing to the court, thus clearly implying that the trustee instead presented witness to establish that it would
prior decision of the Commissioner is necessary to take cognizance of the next to impossible to single out the specific transactions
case. (Commissioner of Internal Revenue v. Bank of Philippine Islands, etc. et al., involving the employees’ trust funds from the totality of all
CA-G.R. SP No. 34102, September 9, 1994; Gibbs v. Collector of Internal
Revenue, et al., 107 Phil, 232; Johnston Lumber Co. v. CTA, 101 Phil. 151) interest income from its total investments. On the above
basis will the application for refund prosper ?
15. The grant of a refund is founded on the assumption SUGGESTED ANSWER: No. The application for refund will not
that the tax return is valid, i.e. that the facts stated therein are true prosper.
and correct. (Commissioner of Internal Revenue v. Court of Tax Appeals, The bank-trustee needs to establish not only that the refund is
G. R. No. 106611, July 21, 1994, 234 SCRA 348) Without the tax return it justified under the law (which is so because incomes of employees’ trusts
would be virtually impossible to determine whether the proper taxes have are tax exempt), but also the correct amount that should be refunded.
been assessed and paid. After all, it is axiomatic that a claimant has the Tax refunds partake of the nature of tax exemptions and are thus
burden of proof to establish the factual basis of his or her claim for tax construed strictissimi juris against the person or entity claiming the
credit or refund. Tax refunds, like tax exemptions, are construed strictly exemption. The burden in proving the amount to be refunded necessarily
against the taxpayer. (Paseo Realty & Development Corporation v. Court of falls on the bank-trustee, and there is an apparent failure to do so.
Appeals, et al., G. R. No. 119286, October 13, 2004) A necessary consequence of the special exemption enjoyed alone
However, in BPI-Family Savings Bank v. Court of Appeals, 386 Phil. by employees’ trusts would be a necessary segregation in the accounting
719; 326 SCRA 641 (2000), refund was granted, despite the failure to of such income, interest or otherwise, earned from those trusts from that
present the tax return, because other evidence was presented to prove that earned by the other clients of the bank-trustee. (Far East Bank and
the overpaid taxes were not applied. (Ibid.) Trust Company, etc., v. Commissioner, etc., et al., G.R. No. 138919, May
2, 2006) The amounts that are the exempt earnings of the employee’s
63
trust has not been shown as they have been commingled with the interest reflecting a refundable amount of P101,897,741, but only
income of the other clients of the bank-trustee. P77,931,812 was applied as tax credit for the succeeding
taxable year 1988.
18. CTA Circular No. 1-95 clearly requires that Acting on a yearly routinary Letter of Authority No.
photocopies of the receipts or invoices must be pre-marked 0018064 NA dated June 27, 1988 issued by petitioner,
and submitted to the CTA to verify the correctness of the directing the investigation of tax liabilities of respondent for
summary listing and the CPA certification. CTA Circular No. 1- taxable year 1987, an investigation was conducted by
95, issued on 25 January 1995, reads: Revenue Officer Frederick Capitan which showed that
“1. The party who desires to introduce as evidence such
respondent was liable for “1. deficiency income tax in the
voluminous documents must present: (a) Summary containing the total
amount/s of the tax account or tax paid for the period involved and a amount of P2,340,902.52; and 2. deficiency franchise tax in
chronological or numerical list of the numbers, dates and amounts the amount of P2,838,335.84.”
covered by the invoices or receipts; and (b) a Certification of an On April 17, 1989, respondent filed an amended final
independent Certified Public Accountant attesting to the correctness of corporate Income Tax Return ending December 31, 1988
the contents of the summary after making an examination and evaluation reflecting a refundable amount of P107,649,729.
of the voluminous receipts and invoices. Such summary and certification Respondent thus filed on March 30, 1990 a letter-claim
must properly be identified by a competent witness from the accounting for refund or credit in the amount of P107,649,729
firm. representing overpaid income taxes for the years 1987 and
2. The method of individual presentation of each and every receipt
1988.
or invoice or other documents for marking, identification and comparison
with the originals thereof need not be done before the Court or the Petitioner not having acted on its request, respondent
Commissioner anymore after the introduction of the summary and CPA filed on April 6, 1990 a judicial claim for refund or credit with
certification. It is enough that the receipts, invoices and other the Court of Tax Appeals.
documents covering the said accounts or payments must be pre- It is gathered that respondent paid the deficiency
marked by the party concerned and submitted to the Court in order franchise tax in the amount of P2,838,335.84. It protested the
to be made accessible to the adverse party whenever he/she desires payment of the alleged deficiency income tax and claimed as
to check and verify the correctness of the summary and CPA an alternative remedy the deduction thereof from its claim for
certification. However, the originals of the said receipts, invoices or refund or credit.
documents should be ready for verification and comparison in case doubt The Court of Tax Appeals granted the P107,649,729
on the authenticity of the particular documents presented is raised during
the hearing of the case.” (Emphasis supplied)
claim for refund, or in the alternative for the BIR to issue a tax
credit. Is the Court of Tax Appeals correct ?
19. Manila Electric Company a grantee of a legislative SUGGESTED ANSWER: Yes. Section 69 of the National Internal
Revenue Code of 1986, now Sec. 76 provides, if the sum of the quarterly
franchise under Act No. 484, as amended by Republic Act No. tax payments made during a taxable year is not equal to the total tax due
4159 and Presidential Decree No. 551,1[3] had been paying a on the entire taxable income of that year as shown in its final adjustment
2% franchise tax based on its gross receipts, in lieu of all return, the corporation has the option to either: (a) pay the excess tax
other taxes and assessments of whatever nature. Upon the still due, or (b) be refunded the excess amount paid. The returns
effectivity of Executive Order No. 72 on February 10, 1987, submitted are “merely pre-audited which consist mainly of checking
however, respondent became subject to the payment of mathematical accuracy of the figures in the return.” After such checking,
regular corporate income tax. the purpose of which being to “insure prompt action on corporate annual
For the last quarter ending December 31, 1987, income tax returns showing refundable amounts arising from overpaid
respondent filed on April 15, 1988 its tentative income tax quarterly income taxes,” (Revenue Memorandum Order No. 32-76 dated
June 11, 1976) the refund or tax credit is granted. (Commissioner of
1
64
Internal Revenue v. Manila Electric Company, G. R. No. 121666, October
10, 2007) 4. Customs duties defined. Customs duties is the name
given to taxes on the importation and exportation of commodities, the tariff
or tax assessed upon merchandise imported from, or exported to, a foreign
TARIFF AND CUSTOMS LAWS country. (Nestle Phils. v. Court of Appeals, et al., G.R. No. 134114, July 6,
2001)
ORGANIZATION AND FUNCTIONS OF THE BUREAU OF
INTERNAL REVENUE 5. Special customs duties are additional import duties
imposed on specific kinds of imported articles under certain
TARIFF AND CUSTOMS CODE conditions. The special customs duties under the Tariff and Customs
Code (TCCP) are the anti-dumping duty, the countervailing duty, the
1. When does importation begin, and why is it discriminatory duty, and the marking duty, and under the Safeguard
important to know whether importation has already begun or Measures Act (SMA) additional tariffs as safeguard measures.
not ?
SUGGESTED ANSWER: Importation begins when the conveying 6. The special customs duties are imposed for the
vessel or aircraft enters the jurisdiction of the Philippines with intention to protection of consumers and manufacturers, as well as
unlade therein. (Sec. 1202, TCCP) Philippine products.
The jurisdiction of the Bureau of Customs to enforce the provisions
of the TCCP including seizure and forfeiture also begins from the beginning 7. Dumping duty is an additional special duty
of importation. Thus, the Bureau of Customs obtains jurisdiction over amounting to the difference between the export price and the
imported articles only after importation has begun. normal value of such product, commodity or article (Sec. 301 (s)
(1), TCC, as amended by Rep. Act No. 8752, “Anti-Dumping Act of 1999.”)
2. When is importation deemed terminated and imposed on the importation of a product, commodity or article of commerce
why is it important to know whether importation has already into the Philippines at less than its normal value when destined for
ended? domestic consumption in the exporting country which is causing or is
SUGGESTED ANSWER: Importation is deemed terminated upon threatening to cause material injury to a domestic industry, or materially
payment of the duties, taxes and other charges due upon the agencies, or retarding the establishment of a domestic industry producing the like
secured to be paid, at the port of entry and the legal permit for withdrawal product. [Sec. 301 (s) (5), TCC, as amended by Rep. Act No. 8752, “Anti-
shall have been granted. Dumping Act of 1999”]
In case the articles are free of duties, taxes and other charges, until
they have legally left the jurisdiction of the customs. (Sec. 1202, TCCP) 8. When is the anti-dumping duty imposed ?
The Bureau of Customs loses jurisdiction to enforce the TCCP and to SUGGESTED ANSWER: The anti-dumping duty is imposed
make seizures and forfeitures after importation is deemed terminated. a. Where a product, commodity or article of commerce is exported
into the Philippines at a price less than its normal value when destined for
3. The flexible tariff clause is a provision in the Tariff domestic consumption in the exporting country,
and Customs Code, which implements the constitutionally delegated b. and such exportation is causing or is threatening to cause
power to the Congress to further delegate to the President of the material injury to a domestic industry, or materially retards the
Philippines, in the interest of national economy, general welfare and/or establishment of a domestic industry producing the like product. [Sec. 301
national security upon recommendation of the NEDA (a) to increase, (a), TCC, as amended by Rep. Act No. 8752, “Anti-Dumping Act of 1999”]
reduce or remove existing protective rates of import duty, provided that, the
increase should not be higher than 100% ad valorem; (b) to establish 9. Normal value for purposes of imposing the anti-
import quota or to ban imports of any commodity, and (c) to impose dumping duty is the comparable price at the date of sale of like product,
additional duty on all imports not exceeding 10% ad valorem, among commodity, or article in the ordinary course of trade when destined for
others.
65
consumption in the country of export. [Sec. 301 (s) (3 ), TCC, as amended article has caused or threatens to cause material injury to a domestic
by Rep. Act No. 8752, “Anti-Dumping Act of 1999”] industry or has materially retarded the growth or prevents the
establishment of a domestic industry. (Sec. 302, TCCP as amended by
10. The imposing authority for the anti-dumping duty is Section 1, R.A. No. 8751)
the Secretary of Trade and Industry in the case of non-
agricultural product, commodity, or article or the Secretary of 15. The imposing authority for the countervailing duties
Agriculture, in the case of agricultural product, commodity or is the Secretary of Trade and Industry in the case of non-
article, after formal investigation and affirmative finding of the Tariff agricultural product, commodity, or article or the Secretary of
Commission. [Sec. 301 (a), TCC, as amended by Rep. Act No. 8752, “Anti- Agriculture, in the case of agricultural product, commodity or
Dumping Act of 1999”] article, after formal investigation and affirmative finding of the Tariff
Commission.
11. Even when all the requirements for the imposition Even when all the requirements for the imposition have been fulfilled,
have been fulfilled, the decision on whether or not to impose a the decision on whether or not to impose a definitive anti-dumping duty
definitive anti-dumping duty remains the prerogative of the remains the prerogative of the Tariff Commission. ( Sec. 301 (a), TCC, as
Tariff Commission. [Sec. 301 (a), TCC, as amended by Rep. Act No. 8752, amended by Rep. Act No. 8752, “Anti-Dumping Act of 1999”)
“Anti-Dumping Act of 1999”] Thus, the cabinet secretaries could not
contravene the recommendation of the Tariff Commission. They could not 16. The countervailing duty is equivalent to the value of
impose the anti-dumping duty or any special customs duty without the the specific subsidy.
favorable recommendation of the Tariff Commission.
17. Marking duties are the additional customs duties
12. In the determination of whether to impose the anti- imposed on foreign articles (or its containers if the article itself cannot be
dumping duty, the Tariff Commission, may consider among marked), not marked in any official language in the Philippines, in a
others, the effect of imposing an anti-dumping duty on the conspicuous place as legibly, indelibly and permanently in such manner as
to indicate to an ultimate purchaser in the Philippines the name of the
welfare of the consumers and/or the general public, and other country of origin.
related local industries. (Sec. 301 (a), TCC, as amended by Rep. Act No.
8752, “Anti-Dumping Act of 1999”)
18. The Commissioner of Customs imposes the marking
13. The amount of anti-dumping duty that may be duty.
imposed is the difference between the export price and the
19. The marking duty is equivalent to five percent (5%)
normal value of such product, commodity or article. (Sec. 301 (s)
(1), TCC, as amended by Rep. Act No. 8752, “Anti-Dumping Act of 1999”) ad valorem.
The anti-dumping duty shall be equal to the margin of dumping on
such product, commodity or article thereafter imported to the Philippines 20. A discriminatory duty is a new and additional customs
under similar circumstances, in addition to ordinary duties, taxes and duty imposed upon articles wholly or in part the growth or product of, or
charges imposed by law on the imported product, commodity or article. imported in a vessel, of any foreign country which imposes, directly or
indirectly, upon the disposition or transportation in transit through or re-
14. What are countervailing duties and when are they exportation from such country of any article wholly or in part the growth or
imposed ? product of the Philippines, any unreasonable charge, exaction, regulation or
SUGGESTED ANSWER: Countervailing duties are additional limitation which is not equally enforced upon like articles of every foreign
customs duties imposed on any product, commodity or article of commerce country, or discriminates against the commerce of the Philippines, directly
which is granted directly or indirectly by the government in the country of or indirectly, by law or administrative regulation or practice, by or in respect
origin or exportation, any kind or form of specific subsidy upon the to any customs, tonnage, or port duty, fee, charge, exaction, classification,
production, manufacture or exportation of such product commodity or regulation, condition, restriction or prohibition, in such manner as to place
article, and the importation of such subsidized product, commodity, or
66
the commerce of the Philippines at a disadvantage compared with the a. Transaction value of identical goods
commerce of any foreign country. b. Transaction value of similar goods
c. Deductive method
21. The President of the Philippines imposes the d. Computed method
discriminatory duties. e. Fallback method

22. Safeguard measures are emergency measures, 27. How and to whom should claims for refund of
including tariffs, to protect domestic industries and producers from customs duties be made ?
increased imports which inflict or could inflict serious injury on them. SUGGESTED ANSWER: All claims for refund of duties shall be
The CTA is vested with jurisdiction to review decisions of the made in writing and forwarded to the Collector of Customs to whom such
Secretary of Trade and Industry imposing safeguard measures as provided duties are paid, who upon receipt of such claim, shall verify the same by
under Rep. Act No. 8800 the Safeguard Measures Act (SMA ). (Southern the records of his Office, and if found to be correct and in accordance with
Cross Cement Corporation v. The Philippine Cement Manufacturers Corp., et al., law, shall certify the same to the Commissioner of Customs with his
G. R. No. 158540, July 8, 2004) recommendation together with all necessary papers and documents. Upon
The DTI Secretary cannot impose the safeguard measures if the receipt by the Commissioner of such certified claim he shall cause the
Tariff Commission does not favorably recommend its imposition. same to be paid if found correct. (Sec. 1708, TCC)

23. Imposing authority for safeguard measures. The 28. What is mean by the term “entry” in Customs
imposing authority for the countervailing duties is the Law ?
Secretary of Trade and Industry in the case of non-agricultural SUGGESTED ANSWER: It has a triple meaning.
product, commodity, or article or the Secretary of Agriculture, a. the documents filed at the Customs house;
in the case of agricultural product, commodity or article, after b. the submission and acceptance of the documents; and
formal investigation and affirmative finding of the Tariff Commission. c. Customs declaration forms or customs entry forms required
to be accomplished by passengers of incoming vessels or passenger
24. Safeguards measures that may be imposed. planes as envisaged under Sec. 2505 of the TCCP (Failure to declare
Additional tariffs, import quotas or banning of imports. baggage). (Jardeleza v. People, G.R. No. 165265, February 6, 2006)

25. The basis of dutiable value of merchandise that is 29. A flight stewardess arrived from Singapore. Upon
subject to ad valorem customs duties is the transaction value, her arrival she was asked whether she has anything to declare.
which shall be the price actually paid or payable for the goods when sold She answered none, and she submitted her “Customs
for export to the Philippines, adjusted by adding certain cost elements to Baggage Declaration Form” which she accomplished and
the extent that they are incurred by the buyer but are not included in the signed with nothing or written on the space for items to be
price actually paid or payable for the imported goods, and may include the declared. When her hanger bag was examined some pieces of
following: jewelry were found concealed within the lining of said bag.
a. Cost of containers and packing, She was then convicted of violating of Sec. 3601 of the
b. Insurance, and Tariff and Customs Code for unlawful importation which
c. Freight. (Sec. 201, TCC as amended by Sec. 1, Rep. Act No.
penalizes any person who shall fraudulently import or bring
9135)
into the Philippines any article contrary to law.
26. The above transaction value is the primary She now appeals claiming that lower court erred n
convicting her under Sec. 3601 when the facts alleged both in
method of determining dutiable value. If the transaction value
the information and those shown by the prosecution constitute
of the imported article could not be determined using the
the offense under Sec. 2505 “Failure to Declare Baggage,” of
above, the following alternative methods should be used one
which she was acquitted. Is she correct ?
after the other:
67
SUGGESTED ANSWER: No. Sec. 3601 does not define a crime. entry. Entry through a custom house is not the essence of the act.
It merely provides, inter alia, the administrative remedies which can be (Jardeleza v. People, G.R. No. 165265, February 6, 2006)
resorted to by the Bureau of Customs when seizing dutiable articles found
the baggage of any person arriving in the Philippines which is not included  32. The Collector of Customs sitting in seizure and
in the accomplished baggage declaration submitted to the customs forfeiture proceedings has exclusive jurisdiction to hear and
authorities, and the administrative penalties that such person must pay for determine all questions touching on the seizure and forfeiture
the release of such goods if not imported contrary to law. of dutiable goods. RTCs are precluded from assuming
Such administrative penalties are independent of the criminal liability
cognizance over such matters even through petitions of
for smuggling that may be imposed under Sec. 3601, and other provisions
of the TCC which can only be determined after the appropriate criminal certiorari, prohibition or mandamus. (The Bureau of Customs, et
proceedings, prescinding from the outcome in any administrative case that al., v. Ogario, et al., G.R. No. 138081, March 20, 2000)
may have been filed and disposed of by the customs authorities. What is the rationale for this doctrine ?
Indeed the second paragraph of Sec. 2505 provides that nothing SUGGESTED ANSWER:
shall prevent the bringing of a criminal action against the offender for a. Regional Trial Courts have no jurisdiction to replevin a
smuggling under Section 3601. (Jardeleza v. People, G. R. No. 165265, property which is subject to seizure and forfeiture proceedings for violation
February 6, 2006) of the Tariff and Customs Code otherwise, actions for forfeiture of property
for violation of the Customs laws could easily be undermined by the simple
30. Payment is not a defense in smuggling . “When upon device of replevin. (De la Fuente v. De Veyra, et al., 120 SCRA 455)
trial for violation of this section, the defendant is shown to have possession b. The doctrine of exclusive customs jurisdiction over customs
of the article in question, possession shall be deemed sufficient evidence to cases to the exclusion of the RTCs is anchored upon the policy of placing
authorize conviction, unless the defendant shall explain the possession to no unnecessary hindrance on the government’s drive, not only to prevent
the satisfaction of the court: Provided, however, That payment of the tax smuggling and other frauds upon Customs,
due after apprehension shall not constitute a valid defense in any c. but more importantly, to render effective and efficient the
prosecution under this section.” (last par., Sec. 3601, TCC) collection of import and export duties due the State, which enables the
government to carry out the functions it has been instituted to perform.
(Jao, et al., v. Court of Appeals, et al., and companion case, 249 SCRA 35,
31. How is smuggling committed ?
43)
SUGGESTED ANSWER: Smuggling is committed by any person
d. The issuance by regular courts of writs of preliminary
who:
injunction in seizure and forfeiture proceedings before the Bureau of
a. fraudulently imports or brings into the country any article
Customs may arouse suspicion that the issuance or grant was for
contrary to law;
consideration other than the strict merits of the case. (Zuno v. Cabredo,
b. assists in so doing any article contrary to law; or
402 SCRA 75 [2003])
c. receives, conceals, buys, sells or in any manner facilitates
e. Under the doctrine of primary jurisdiction, the Bureau of Customs
the transportation, concealment or sale of such goods after importation,
has exclusive administrative jurisdiction to conduct searches, seizures and
knowing the same to have been imported contrary to law. (Jardeleza v.
forfeitures of contraband without interference from the courts. It could
People, G.R. No. 165265, February 6, 2006 citing Rodriguez v. Court of
conduct searches and seizures without need of a judicial warrant except if
Appeals, G. R. No. 115218, September 18, 1995, 248 SCRA 288, 296)
the search is to be conducted in a dwelling place.
NOTES AND COMMENTS:
Where an administrative office has obtained a technical expertise in
a. Importation consists of bringing an article into the country
a specific subject, even the courts must defer to this expertise.
from the outside. Importation begins when the conveying vessel or
NOTES AND COMMENTS: The Bureau of Customs could search
aircraft enters the jurisdiction of the Philippines with intention to unload
and seize articles without need of a judicial warrant unless the place to be
therein.
searched is a dwelling place. In such a case customs requires a judicial
b. When unlawful importation is complete. In the absence
warrant.
of a bona fide intent to make entry and pay duties when the prohibited
article enters the Philippine territory. Importation is complete when the
taxable, dutiable commodity is brought within the limits of the port of
68
33. “A” claiming to be the owner of a vessel which is the appraised value of the article and/or any fine, expenses and costs
the subject of customs warrant of seizure and detention which may be adjudged in the case: Provided, That such importation
sought the intercession of the RTC to restrain the Bureau of shall not be released under any bond when there is prima facie
Customs from interfering with his property rights over the evidence of fraud in the importation of the article: Provided, further,
That articles the importation of which is prohibited by law shall not be
vessel. Would the suit prosper? released under any circumstances whatsoever: Provided, finally, That
SUGGESTED ANSWER: No. His remedy was not with the RTC
nothing in this section shall be construed as relieving the owner or
but with the CTA, as issues of ownership of goods in the custody of
importer from any criminal liability which may arise from any violation of
customs officials are within the power of the CTA to determine.
law committed in connection with the importation of the article. (emphasis
The Collector of Customs has exclusive jurisdiction over seizure
supplied)
and forfeiture proceedings and trial courts are precluded from assuming
cognizance over such matters even through petitions for certiorari,
prohibition or mandamus. (Commissioner of Customs v. Court of 38. Instances where there is no right of redemption of
Appeals, et al., G. R. Nos. 111202-05, January 31, 2006) seized and forfeited articles:
a. There is fraud;
34. The customs authorities do not have to prove to the b. The importation is absolutely prohibited, or
c. The release of the property would be contrary to law.
satisfaction of the court that the articles on board a vessel (Transglobe International, Inc. v. Court of Appeals, et al., G.R. No. 126634,
were imported from abroad or are intended to be shipped January 25, 1999)
abroad before they may exercise the power to effect customs
searches, seizures, or arrests provided by law and continue 39. In Aznar v. Court of Tax Appeals, 58 SCRA 519, reiterated in
with the administrative hearings . (The Bureau of Customs, et al., v. Farolan, Jr. v. Court of Tax appeals, et al., 217 SCRA 298, the Supreme
Ogario, et al., G.R. No. 138081, March 20, 2000) Court clarified that the fraud contemplated by law must be actual
and not constructive. It must be intentional, consisting of deception,
35. The Tariff and Customs Code allows the Bureau of willfully and deliberately done or resorted to in order to induce another to
Customs to resort to the administrative remedy of seizure, such give up some right.
as by enforcing the tax lien on the imported article when the
imported articles could be found and be subject to seizure and 40. Requisites for forfeiture of imported goods:
forfeiture. a. Wrongful making by the owner, importer, exporter or
consignee of any declaration or affidavit, or the wrongful making or delivery
36. The Tariff and Customs Code allows the Bureau of by the same person of any invoice, letter or paper – all touching on the
Customs to resort to the judicial remedy of filing an action in importation or exportation of merchandise.
b. the falsity of such declaration, affidavit, invoice, letter or
court when the imported articles could not anymore be found.
paper; and
c. an intention on the part of the importer/consignee to evade
37. Section 2301 of the TCCP states that seized the payment of the duties due. (Republic, etc., v. The Court of Appeals, et
articles may not be released under bond if there is prima al., G.R. No. 139050, October 2, 2001)
facie evidence of fraud in their importation. Commissioner of
Customs v. Court of Tax Appeals, et al., G. R. No. 171516-17, February 41. On January 7, 1989, the vessel M/V ”Star Ace,
13, 2009 ”coming from Singapore laden with cargo, entered the Port of
Section 2301. Warrant for Detention of Property-Cash Bond. –
San Fernando, La Union for needed repairs. When the Bureau
Upon making any seizure, the Commissioner shall issue a warrant for the
detention of the property; and if the owner or importer desires to secure of Customs later became suspicious that the vessel’s real
the release of the property for legitimate use, the Collector shall, with the purpose in docking was to smuggle cargo into the country,
approval of the Commissioner of Customs, surrender it upon the filing of seizure proceedings were instituted and subsequently two
a cash bond, in an amount fixed by him, conditioned upon the payment of
69
Warrants of Seizure and Detention were issued for the vessel There may be instances where no warrants issued by the Bureau of
and its cargo. Customs or the regular courts is required, as in search and seizures of
Cesar does not own the vessel or any of its cargo but motor vehicles and vessels.
claimed a preferred maritime lien. Cesar then brought several
cases in the RTC to enforce his lien. Would these suits 43. Smuggled goods seized by virtue of a court warrant
prosper ? should be surrendered to the court that issued the warrant and
SUGGESTED ANSWER: No. The Bureau of Customs having first not to the Bureau of Customs because the goods are in custodia
obtained possession of the vessel and its goods has obtained jurisdiction legis.
to the exclusion of the trial courts.
When Cesar has impleaded the vessel as a defendant to enforce his 44. Decisions of the Commissioner of Customs
alleged maritime lien, in the RTC, he brought an action in rem under the “in cases involving liability for customs duties, fees or other
Code of Commerce under which the vessel may be attached and sold. money charges” that must be appealed to the Court of Tax
However, the basic operative fact is the actual or constructive Appeals Division within thirty (30) days from receipt specifically
possession of the res by the tribunal empowered by law to conduct the refer to his decisions on administrative tax protest cases, as stated in
proceedings. This means that to acquire jurisdiction over the vessel, as a Section 2402 of the Tariff and Customs Code of the Philippines (TCCP):
defendant, the trial court must have obtained either actual or constructive
possession over it. Neither was accomplished by the RTC as the vessel Section 2402. Review by Court of Tax Appeals.
was already in the possession of the Bureau of Customs. (Commissioner – The party aggrieved by a ruling of the
of Customs v. Court of Appeals, et al., G. R. Nos. 111202-05, January 31, Commissioner in any matter brought before him
2006) upon protest or by his action or ruling in any case of
NOTES AND COMMENTS: seizure may appeal to the Court of Tax Appeals, in the
a. Forfeiture of seized goods in the Bureau of Customs is in manner and within the period prescribed by law and
the nature of a proceeding in rem, i.e. directed against the res or regulations.
imported goods and entails a determination of the legality of their
importation. In this proceeding, it is in legal contemplation the property Unless an appeal is made to the Court of Tax Appeals in the
itself which commits the violation and is treated as the offender, without manner and within the period prescribed by laws and regulations, the
reference whatsoever to the character or conduct of the owner. action or ruling of the Commissioner shall be final and conclusive.
The issue is limited to whether the imported goods should be [Emphasis supplied.] (Pilipinas Shell Petroleum Corporation v. Commissioner
forfeited and disposed of in accordance with law for violation of the Tariff of Customs, G. R. No. 176380, June 18, 2009)
and Customs Code. .(Transglobe International, Inc. v. Court of Appeals, et
al., G.R. No. 126634, January 25, 1999) 45. Administrative tax protest under the Tariff and
Forfeiture of seized goods in the Bureau of Customs is a proceeding Customs Code (TCCP). A tax protest case, under the TCCP,
against the goods and not against the owner. (Asian Terminals, Inc. v. involves a protest of the liquidation of import entries. (Pilipinas Shell
Bautista-Ricafort, G .R. No. 166901, October 27, 2006 citing Transglobe) Petroleum Corporation v. Commissioner of Customs, G. R. No. 176380, June
18, 2009)
42. The Collector of Customs upon probable cause that
the articles are imported or exported, or are attempted to be 46. Liquidation, defined. A liquidation is the final
imported or exported, in violation of the tariff and customs computation and ascertainment by the collector of the duties on imported
laws shall issue a warrant of seizure. (Sec. 6, Title III, CAO No. 9- merchandise, based on official reports as to the quantity, character, and
93) value thereof, and the collector’s own finding as to the applicable rate of
If the search and seizure is to be conducted in a dwelling place, then duty; it is akin to an assessment of internal revenue taxes under the
a search warrant should be issued by the regular courts not the Bureau of National Internal Revenue Code where the tax liability of the taxpayer is
Customs. definitely determined. (Pilipinas Shell Petroleum Corporation v. Commissioner
of Customs, G. R. No. 176380, June 18, 2009)
70
47. The following letters of demand can not be regular courts, not a tax protest case before the CTA. Records do not
considered as a liquidation or an assessment of Shell’s show that Shell ever availed of this remedy.
import tax liabilities that can be the subject of an Alternatively, as held in Shell v. Republic of the Philippines, G.R.
administrative tax protest proceeding before the No. 161953, March 6, 2008, 547 SCRA 701, the appropriate forum for
Shell under the circumstances of this case should be at the collection
Commissioner of Customs whose decision is appealable to cases before the RTC where Shell can put up the fact of its payment as a
the Court of Tax Appeals: defense. (Pilipinas Shell Petroleum Corporation v. Commissioner of
a. the One Stop Shop Inter-Agency Tax Credit and Duty Customs, G. R. No. 176380, June 18, 2009)
Drawback Center (the Center) November 3 letter, signed by the Secretary
of Finance, informing it of the cancellation of the Tax Credit Certificates
48. A case becomes ripe for filing with the
(TCCs);
b. the Commissioner of Customs’ November 19 letter requiring Regional Trial Court (RTC), as a collection matter after the
Shell to replace the amount equivalent to the amount of the cancelled finality of the Commissioner of Customs assessment. (Pilipinas
Shell Petroleum Corporation v. Commissioner of Customs, G. R. No. 176380,
TCCs used by Shell; and
June 18, 2009 citing Shell v. Republic of the Philippines, G.R. No. 161953,
c. the Commissioner of Customs’ collection letters, issued March 6, 2008, 547 SCRA 701)
through Deputy Commissioner Atty. Valera, formally demanding the The assessment has long been final, and this recognition of finality
amount covered by the cancelled TCCs. removes all perceived hindrances, based on this case, to the continuation
None of these letters, however, can be considered as a liquidation of the collection suits.
or an assessment of Shell’s import tax liabilities that can be the subject of A suit for the collection of internal revenue taxes, where the
an administrative tax protest proceeding before the respondent whose assessment has already become final and executory, the action to collect
decision is appealable to the CTA. Shell’s import tax liabilities had long is akin to an action to enforce the judgment. No inquiry can be made
been computed and ascertained in the original assessments, and Shell therein as to the merits of the
paid these liabilities using the TCCs transferred to it as payment. In light of the conclusion that the present case does not involve a
It is even an error to consider the letters as a “reassessment” decision of the Commissioner of Customs on a matter brought to him as
because they refer to the same tax liabilities on the same importations a tax protest, Atty. Valera’s lack of authority to issue the collection letters
covered by the original assessments. The letters merely reissued the and to institute the collection suits is irrelevant. For this same reason, the
original assessments that were previously settled by Shell with the use of injunction against Atty. Valera cannot be invoked to enjoin the collection
the TCCs. However, on account of the cancellation of the TCCs, the tax of unpaid taxes due from Shell. (Pilipinas Shell Petroleum Corporation v.
liabilities of Shell under the original assessments were considered unpaid; Commissioner of Customs, supra)
hence, the letters and the actions for collection.
When Shell went to the CTA, the issues it raised in its petition were
all related to the fact and efficacy of the payments made, specifically the LOCAL GOVERNMENT TAXATION
genuineness of the TCCs; the absence of due process in the
enforcement of the decision to cancel the TCCs; the facts surrounding 1. The fundamental principles of local taxation are:
the fraud in originally securing the TCCs; and the application of estoppel. a. Uniformity;
These are payment and collection issues, not tax protest issues within the b. Taxes, fees, charges and other impositions shall be equitable
CTA’s jurisdiction to rule upon. and based on ability to pay, for public purposes, not unjust, excessive,
Shell never protested the original assessments of its tax liabilities oppressive or confiscatory, not contrary to law, public policy, national
and in fact settled them using the TCCs. These original assessments, economic policy or in restraint of trade;
therefore, have become final, incontestable, and beyond any subsequent c. The levy and collection shall not be let to any private person;
protest proceeding, administrative or judicial, to rule upon. d. Inures solely to the local government unit levying the tax;
To be very precise, Shell’s petition before the CTA principally e. The progressivity principle must be observed.
questioned the validity of the cancellation of the TCCs – a decision that
was made not by the Commissioner of Customs, but by the Center. As 2. A law which deprives local government units of
the CTA has no jurisdiction over decisions of the Center, Shell’s remedy their power to tax would be unconstitutional. The constitution has
against the cancellation should have been a certiorari petition before the
71
delegated to local governments the power to levy taxes, fees and other units are being strengthened and made more autonomous, the legislature
charges. This constitutional delegation may only be removed by a must still see to it that:
constitutional amendment. a. the taxpayer will not be over-burdened or saddled with
multiple and unreasonable impositions;
3. Under the now prevailing Constitution, where there is b. each local government unit will have its fair share of available
neither a grant nor prohibition by statute, the taxing power of resources;
local governments must be deemed to exist although c. the resources of the national government will be unduly
Congress may provide statutory limitations and guidelines in disturbed; and
order to safeguard the viability and self-sufficiency of local government d. local taxation will be fair, uniform and just. (Manila Electric
units by directly granting them general and broad tax powers. (City Company v. Province of Laguna, et al., G.R. No. 131359, May 5, 1999)
Government of San Pablo, Laguna, et al., v. Reyes, et al., G.R. No.
127708, March 25, 1999) 8. Taxing power of the local government is limited.
The taxing power of local governments is limited in the sense that
4. The Local Government Code explicitly authorizes Congress can enact legislation granting tax exemptions.
While the system of local government taxation has changed with
provinces and cities, notwithstanding “any exemption granted the onset of the 1987 Constitution, the power of local government units to
by any law or other special law” to impose a tax on businesses tax is still limited.
enjoying a franchise. Indicative of the legislative intent to carry out the While the power to tax by local governments may be exercised by
constitutional mandate of vesting broad tax powers to local government local legislative bodies, no longer merely be virtue of a valid delegation as
units, the Local Government Code has withdrawn tax exemptions or before, but pursuant to direct authority conferred by Section 5, Article X of
incentives theretofore enjoyed by certain entities. (City Government of San the Constitution, the basic doctrine on local taxation remains essentially
Pablo, Laguna, et al., v. Reyes, et al., G.R. No. 127708, March 25, 1999) the same, “the power to tax is [still] primarily vested in the Congress.”
(Quezon City, et al., v. ABS-CBN Broadcasting Corporation, G. R. No. 166408,
5. Philippine Long Distance Telephone Company, Inc., October 6, 2008 citing City Government of Quezon City, et al. v. Bayan
v. City of Davao, et al., etc., G. R. No. 143867, August 22, 2001, Telecommunications, Inc., G.R. No. 162015, March 6, 2006, 484 SCRA 169 in
upheld the authority of the City of Davao, a local government unit, to turn referring to Mactan Cebu International Airport Authority, v. Marcos, G.R. No.
120082, September 11, 1996, 261 SCRA 667, 680)
impose and collect a local franchise tax because the Local Government
has withdrawn all tax exemptions previously enjoyed by all persons and
authorized local government units to impose a tax on business enjoying a 9. Further amplification by Bernas of the local
franchise tax notwithstanding the grant of tax exemption to them. government’s power to tax. “What is the effect of Section 5 on the
fiscal position of municipal corporations? Section 5 does not change the
6. Explain the concept of the “paradigm shift” in doctrine that municipal corporations do not possess inherent powers of
local government taxation. taxation. What it does is to confer municipal corporations a general
SUGGESTED ANSWER: “Paradigm shift” from exclusive power to levy taxes and otherwise create sources of revenue. They no
Congressional power to direct grant of taxing power to local legislative longer have to wait for a statutory grant of these powers. The power of
bodies. The power to tax is no longer vested exclusively on Congress; the legislative authority relative to the fiscal powers of local governments
local legislative bodies are now given direct authority to levy taxes, fees has been reduced to the authority to impose limitations on municipal
and other charges pursuant to Article X, section 5 of the 1987 Constitution. powers. Moreover, these limitations must be “consistent with the basic
(Batangas Power Corporation v. Batangas City, et al. G. R. No. 152675, policy of local autonomy.” The important legal effect of Section 5 is thus
and companion case, April 28, 2004 citing National Power Corporation v. to reverse the principle that doubts are resolved against municipal
City of Cabanatuan, G. R. No. 149110, April 9, 2003) corporations. Henceforth, in interpreting statutory provisions on municipal
fiscal powers, doubts will be resolved in favor of municipal corporations.
It is understood, however, that taxes imposed by local government must
7. The fundamental law did not intend the direct grant to
be for a public purpose, uniform within a locality, must not be
local government units to be absolute and unconditional, the confiscatory, and must be within the jurisdiction of the local unit to pass.”
constitutional objective obviously is to ensure that, while local government (Quezon City, et al., v. ABS-CBN Broadcasting Corporation, G. R. No. 166408,
72
October 6, 2008 citing City Government of Quezon City, et al. v. Bayan that person of the tax on his profession before employment and annually
Telecommunications, Inc., G.R. No. 162015, March 6, 2006, 484 SCRA 169) thereafter.
Any person subject to the professional tax shall write in deeds,
10. Reconciliation of the local government’s authority receipts, prescriptions, reports, books of account, plans and designs,
to tax and the Congressional general taxing power. Congress surveys and maps, as the case may be, the number of the official receipt
has the inherent power to tax, which includes the power to grant tax exemptions. issued to him.
On the other hand, the power of local governments, such as provinces and Exemption: Professionals exclusively employed in the government
cities for example Quezon City, to tax is prescribed by Section 151 in relation to shall be exempt from payment. (Sec. 139, LGC)
Section 137 of the LGC which expressly provides that notwithstanding any NOTE: For the purpose of collecting the tax, the provincial or city
exemption granted by any law or other special law, the City or a province may
treasurer or his duly authorized representative shall require from such
impose a franchise tax. It must be noted that Section 137 of the LGC does not
prohibit grant of future exemptions. professionals their current annual registration cards issued by competent
The Supreme Court in a series of cases has sustained the power authority before accepting payment of their professional tax for the current
of Congress to grant tax exemptions over and above the power of the year. The PRC shall likewise require the professionals presentation of
local government’s delegated power to tax. (Quezon City, et al., v. ABS- proof of payment before registration of professionals or renewal of their
CBN Broadcasting Corporation, G. R. No. 166408, October 6, 2008 citing City licenses. (last par., Art. 228, Rules and Regulations Implementing the
Government of Quezon City, et al. v. Bayan Telecommunications, Inc., G.R. No. Local Government Code of 1991)
162015, March 6, 2006, 484 SCRA 16)
“Indeed, the grant of taxing powers to local government units under 13. Who are the professionals who, if they are in
the Constitution and the LGC does not affect the power of Congress to practice of their profession, are subject to professional tax ?
grant exemptions to certain persons, pursuant to a declared national SUGGESTED ANSWER: The professionals subject to the
policy. The legal effect of the constitutional grant to local governments professional tax are only those who have passed the bar examinations, or
simply means that in interpreting statutory provisions on municipal taxing any board or other examinations conducted by the Professional Regulation
powers, doubts must be resolved in favor of municipal corporations.” Commission (PRC). for example, a lawyer who is also a Certified Public
[Ibid., referring to Philippine Long Distance Telephone Company, Inc. Accountant (CPA) must pay the professional tax imposed on lawyers and
(PLDT) vs. City of Davao] that fixed for CPAs, if he is to practice both professions. [Sec. 238 (f), Rule
XXX, Rules and Regulations Implementing the Local Government Code of
11. Professional tax may be imposed by a 1991]
province or city but not by a municipality or barangay.
a. Transaction taxed: Exercise or practice of profession requiring 14. X City issued a notice of assessment against ABC
government licensure examination. Condominium Corporation for unpaid business taxes. The
b. Tax rate: In Accordance with a taxing ordinance which should Condominium Corporation is a duly constituted condominium
not exceed P300.00. corporation in accordance with the Condominium Act which
c. Tax base: Reasonable classification by the sanggunian. owns and holds title to the common and limited common areas
d. Exception: Payment to one province or city no longer subject
of the condominium. Its membership comprises the unit
to any other national or local tax, license or fee for the practice of such
profession in any part of the Philippine professionals exclusively employed owners and is authorized under its By-Laws to collect regular
in the government. assessments from its members for operating expenses, capital
e. Date of payment: or on before January 31 or engaging in the expenditures on the common areas and other special
profession. assessments as provided for in the Master Deed with ?
f. Place of payment: Province or city where the professional Declaration of Restrictions of the Condominium.
practices his profession or where he maintains his principal office in case ABC Condominium Corporation insists that the X City
he practices his profession in several places. Revenue Code and the Local Government Code do not contain
provisions upon which the assessment could be based.
12. Requirements: Any individual or corporation Resolve the controversy.
employing a person subject to professional tax shall require payment by
73
SUGGESTED ANSWER: ABC is correct. Condominium property is situated and classified for assessment purposes on the basis of
corporations are generally exempt from local business taxation under the its actual use. (Allied Banking Corporation, etc., v. Quezon City Government, et
Local Government Code, irrespective of any local ordinance that seeks to al., G. R. No. 154126, October 11, 2005)
declare otherwise.
X City, is authorized under the Local Government Code, to impose a 2. The reasonable market value is determined by the
tax on business, which is defined under the Code as ”trade or commercial assessor in the form of a schedule of fair market values.
activity regularly engaged in as a means of livelihood or with a view to The schedule is then enacted by the local sanggunian.
profit.” By its very nature a condominium corporation is not engaged in
business, and any profit that it derives is merely incidental, hence it may 3. Fair market value is the price at which a property
not be subject to business taxes. (Yamane , etc. v. BA Lepanto may be sold by a seller who is not compelled to sell and
Condominium Corporation, G. R. No. 154993, October 25, 2005)
bought by a buyer who is not compelled to buy, taking into
consideration all uses to which the property is adopted and might in reason
15. Authority of Local Government Units (LGUs) such be applied.
as the City of Manila to impose business taxes. Section 143 of The criterion established by the statute contemplates a hypothetical
the LGC, is the very source of the power of municipalities and cities to sale. Hence, the buyers need not be actual and existing purchasers.
impose a local business tax, and to which any local business tax imposed (Allied Banking Corporation, etc., v. Quezon City Government, et al., G. R.
by cities or municipalities such as the City of Manila must conform. It is No. 154126, October 11, 2005 )
apparent from a perusal thereof that when a municipality or city has NOTES AND COMMENTS: In fixing the value of real property,
already imposed a business tax on manufacturers, etc. of liquors, distilled assessors have to consider all the circumstances and elements of value
spirits, wines, and any other article of commerce, pursuant to Section and must exercise prudent discretion in reaching conclusions. (Allied
143(a) of the LGC, said municipality or city may no longer subject the Banking Corporation, etc., v. Quezon City Government, et al., G. R. No.
same manufacturers, etc. to a business tax under Section 143(h) of the 154126, October 11, 2005)
same Code. Section 143(h) may be imposed only on businesses that are Preparation of fair market values:
subject to excise tax, VAT, or percentage tax under the NIRC, and that a. The city or municipal assessor shall prepare a schedule of fair
are “not otherwise specified in preceding paragraphs.” In the same market values for the different classes of real property situated in their
way, businesses such as respondent’s, already subject to a local respective Local Government Units for the enactment of an ordinance by
business tax under Section 14 of Tax Ordinance No. 7794 [which is the sanggunian concerned; and
based on Section 143(a) of the LGC], can no longer be made liable for b. The schedule of fair market values shall be published in a
local business tax under Section 21 of the same Tax Ordinance [which is newspaper of general circulation in the province, city or municipality
based on Section 143(h) of the LGC]. (The City of Manila, et al., v. Coca- concerned or the posting in the provincial capitol or other places as
Cola Bottlers Philippines, Inc., G. R. No. 181845, August 4, 2009) required by law. (Lopez v. City of Manila, et al., G.R. No. 127139, February
19, 1999)
Proposed fair market values of real property in a local
REAL PROPERTY TAXATION government unit as well as the ordinance containing the schedule
must be published in full for three (3) consecutive days in a newspaper
1. The fundamental principles of real property taxation of local circulation, where available, within ten (10) days of its approval, and
are: posted in at lease two (2) prominent places in the provincial capitol, city,
a. Appraisal at current and fair market value; municipal or barangay hall for a minimum of three (3) consecutive weeks.
b. Classification for assessment on the basis of actual use; (Figuerres v. Court of Appeals, et al,. G.R. No. 119172, March 25, 1999)
c. Assessment on the basis of uniform classification;
d. Appraisal, assessment, levy and collection shall not be let to a 4. Approaches in estimating the fair market value of
private person; real property for real property tax purposes ?
e. Appraisal and assessment shall be equitable. a. Sales Analysis Approach. The sales price paid in actual
NOTES AND COMMENTS: Real properties shall be appraised at market transactions is considered by taking into account valid sales data
the current and fair market value prevailing in the locality where the accumulated from among the Registrar of Deeds, notaries public,
74
appraisers, brokers, dealers, bank officials, and various sources stated c. The invalidity is not cured by the prhase “whichever is higher”
under the Local Government Code. because an integral part of that system still permits valuing real property in
b. Income Capitalization Approach. The value of an income- disregard of its “actual use.”
producing property is no more than the return derived from it. An analysis d. The ordinance would result to real property assessments
of the income produced is necessary in order to estimate the sum which more than once every three (3) years and that is not the congressional
might be invested in the purchase of the property. intent as shown in the provisions of the Local Government Code and the
c. Reproduction cost approach is a formal approach used regulations. Consequently, the real property tax burden should not be
exclusively n appraising man-made improvements such as buildings and interpreted to include those beyond what the Code or the regulations
other structures, based on such data as materials and labor costs to expressly clearly state.
reproduce a new replica of the improvement. e. The proviso would provide a chilling effect on real property
The assessor uses any or all of these approaches in analyzing the owners or administrators to enter freely into contracts reflecting the
data gathered to arrive at the estimated fair market value to be included in increasing value of real properties in accordance with prevailing market
the ordinance containing the schedule of fair market values. (Allied conditions.
Banking Corporation, etc., v. Quezon City Government, et al., G. R. No. While the Local Government Code provides that the assessment of
154126, October 11, 2005 citing Local Assessment Regulations No. 1-92) real property shall not be increased once every three (3) years, the
questioned proviso subjects the property to a higher assessment every
5. An ordinance whereby the “parcels of land sold, time a sales transaction is made. Real property owners would therefore
ceded, transferred and conveyed for remuneratory postpone sales until after the lapse of the three (3) year period, or if they do
consideration after the effectivity of this revision shall be so within the said period they shall be compelled to dispose of the property
subject to real estate tax based on the actual amount reflected at a price not exceeding the last prior conveyance in order to avoid a higher
tax assessment.
in the deed of conveyance or the current approved zonal In the above two scenarios real property owners are effectively
valuation of the Bureau of Internal Revenue prevailing at the prevented from obtaining the best price possible for their properties and
time of sale, cession, transfer and conveyance, whichever is unduly hampers the equitable distribution of wealth. (Allied Banking
higher, as evidenced by the certificate of payment of the Corporation, etc., v. Quezon City Government, et al., G. R. No. 154126, October
capital gains tax issued therefore” is INVALID being contrary to 11, 2005)
public policy and for restraining trade for the following reasons:
a. It mandates an exclusive rule in determining the fair market 6. Examples of personal property under the civil law
value and departs from the established procedures such as the sales that may be considered as real property for purposes of taxes.
analysis approach, the income capitalization approach and the reproduction Personal property under the civil law may be considered as real property
approach provided under the rules implementing the statute. It unduly for purposes of taxes where the property is essential to the conduct of the
interferes with the duties statutorily placed upon the local assessor by business.
completely dispensing with his analysis and discretion which the Local a. Underground tanks are essential to the conduct of the
Government Code and the regulations require to be exercised. An business of a gasoline station without which it would not be operational.
ordinance that contravenes any statute is ultra vires and void. (Caltex Phils., Inc. v. Central Board of Assessment Appeals, et al., 114 SCRA 296)
b. The “consideration approach” in the ordinance is illegal since b. Light Rail Transit (LRT) improvements such as buildings,
“the appraisal, assessment, levy and collection of real property tax shall not carriageways, passenger terminals stations, and similar structures do not
be let to any private person”, it will also completely destroy the fundamental form part of the public roads since the former are constructed over the
principle in real property taxation – that real property shall be classified, latter in such a way that the flow of vehicular traffic would not be impaired.
valued and assessed on the basis of its actual use regardless of where The carriageways and terminals serve a function different from the public
located, whoever owns it, and whoever uses it. Allowing the parties to a roads. Furthermore, they are not open to use by the general public hence
private sale to dictate the fair market value of the property will dispense not exempt from real property taxes. Even granting that the national
with the distinctions of actual use stated in the Local Government Code and government owns the carriageways and terminal stations, the property is
in the regulations. not exempt because their beneficial use has been granted to LRTA a
taxable entity. (Light Rail Transit Authority v. Central Board of Assessment
Appeals, et al., G. R. No. 127316, October 12, 2000)
75
c. Barges on which were mounted gas turbine power plants
designated to generate electrical power, the fuel oil barges which supplied 9. Public hearings are mandatory prior to approval of
fuel oil to the power plant barges, and the accessory equipment mounted tax ordinance, but this still requires the taxpayer to adduce evidence to
on the barges were subject to real property taxes. show that no public hearings ever took place. (Reyes, et al., v. Court of
Moreover, Article 415(9) of the Civil Code provides that “[d]ocks and Appeals, et al., G.R. No. 118233, December 10, 1999) Public hearings are
structures which, though floating, are intended by their nature and object to required to be conducted prior to the enactment of an ordinance imposing
remain at a fixed place on a river, lake or coast” are considered immovable real property taxes. (Figuerres v. Court of Appeals, et al., G.R. No. 119172,
property by destination being intended by the owner for an industry or work March 25, 1999)
which may be carried on in a building or on a piece of land and which tend
directly to meet the needs of said industry or work. (FELS Energy, Inc., v. 10. The concurrent and simultaneous remedies
Province of Batangas, G. R. No. 168557, February 16, 2007 and companion case) afforded local government units in enforcing collection of real
property taxes:
7. Unpaid realty taxes attach to the property and is a. Distraint of personal property;
chargeable against the person who had actual or beneficial b. Sale of delinquent real property, and
use and possession of it regardless of whether or not he is the c. Collection of real property tax through ordinary court action.
owner. To impose the real property tax on the subsequent owner which
was neither the owner not the beneficial user of the property during the 11. Notice and publication, as well as the legal
designated periods would not only be contrary to law but also unjust. requirements for a tax delinquency sale, are mandatory, and the
Consequently, MERALCO the former owner/user of the property failure to comply therewith can invalidate the sale. The prescribed notices
was required to pay the tax instead of the new owner NAPOCOR. (Manila must be sent to comply with the requirements of due process . (De Knecht,
Electric Company v. Barlis, G.R. No. 114231, May 18, 2001) et al,. v. Court of Appeals; De Knecht, et al., v. Honorable Sayo, 290 SCRA
NOTES AND COMMENTS: The above May 18, 2001 decision 223,236)
was set aside by the Supreme Court when it granted the petitioner’s
second motion for reconsideration on June 29, 2004. The author submits 12. The reason behind the notice requirement is that
that the above ruling in the May 18, 2001 decision is still valid, not on the tax sales are administrative proceedings which are in
basis of the May 18, 2001 decision but in the light of pronouncements of
personam in nature. (Puzon v. Abellera, 169 SCRA 789, 795; De Asis v.
the Supreme Court in other cases. Thus, do not cite the doctrine as I.A.C., 169 SCRA 314)
emanating from the May 18, 2001 decision.
13. FELS Energy, Inc., had a contract to supply
8. Secretary of Justice can take cognizance of a case
NPC with the electricity generated by FELS’ power barges.
involving the constitutionality or legality of tax ordinances
The contract also stated that NPC shall be responsible for all
where there are factual issues involved. (Figuerres v. Court of
Appeals, et al., G.R. No. 119172, March 25, 1999) real estate taxes and assessments. FELS then received an
Taxpayer files appeal to the Secretary of Justice, within assessment of real property taxes on its power barges from
30 days from effectivity thereof. In case the Secretary decides the the Provincial Assessor of Batangas. If filed a motion for
appeal, a period also of 30 days is allowed for an aggrieved party to go to reconsideration with the Provincial Assessor.
court. But if the Secretary does not act thereon, after the lapse of 60 days, a. Upon denial, FELS elevated the matter to the Local
a party could already seek relief in court within 30 days from the lapse of Board of Assessment Appeals (LBAA), where it raised the
the 60 day period. following issues:
These three separate periods are clearly given for compliance as a 1) Since NPC is tax-exempt then FEL’s should
prerequisite before seeking redress in a competent court. Such statutory also be tax-exempt because of its contract with NPC.
periods are set to prevent delays as well as enhance the orderly and 2) The power barges are not real property
speedy discharge of judicial functions. For this reason the courts construe
subject to real property taxes.
these provisions of statutes as mandatory. (Reyes, et al., v. Court of Appeals,
et al., G.R. No. 118233, December 10, 1999)
76
b. Upon the other hand the Local Treasurer insists 15. If the ground for the protest is validity of the real
that the assessment has attained a state of finality hence the property tax ordinance and not the unreasonableness of the amount
appeal to the LBAA should be dismissed. collected the tax must be paid under protest, and the issue of legality may
Rule on the conflicting contentions. be raised to the proper courts on certiorari without need of exhausting
SUGGESTED ANSWER: administrative remedies.
a. All the contentions of FELS are without merit:
1) NPC is not the owner of the power barges nor the 16. If the ground for the protest is unreasonableness of
operator of the power barges. The tax exemption privilege granted the amounts collected there is need to pay under protest and
to NPC cannot be extended to FELS. the covenant is between administrative remedies must be resorted to before recourse to the proper
NPC and FELs and does not bind a third person not privy to the courts.
contract such as the Province of Batangas.
2) The Supreme Court of New York in Consolidated 17. Procedure for refund of real property taxes based on
Edison Company of New York, Inc., et al., v. The City of New York, unreasonableness or excessiveness of amounts collected.
et al., 80 Misc. 2d 1065 (1975) cited in FELS Energy, Inc., v. a. Payment under protest at the time of payment or within thirty
Province of Batangas, G. R. No. 168557, February 16, 2007 and (30) days thereafter, protest being lodged to the provincial, city or in the
companion case, held that barges on which were mounted gas case of a municipality within the Metro Manila Area the municipal treasurer.
turbine power plants designated to generate electrical power, the b. The treasurer has a period of sixty (60) days from receipt of
fuel oil barges which supplied fuel oil to the power plant barges, and the protest within to decide.
the accessory equipment mounted on the barges were subject to c. Within thirty (30) days from receipt of treasurer’s decision or if
real property taxes. the treasurer does not decide, within thirty (30) days from the expiration of
Moreover, Article 415(9) of the Civil Code provides that the sixty (60) period for the treasurer to decide, the taxpayer should file an
“[d]ocks and structures which, though floating, are intended by their appeal with the Local Board of Assessment Appeals.
nature and object to remain at a fixed place on a river, lake or coast” d. The Local Board of Assessment Appeals has 120 days from
are considered immovable property by destination being intended by receipt of the appeal within which to decide.
the owner for an industry or work which may be carried on in a e. The adverse decision of the Local Board of Assessment
building or on a piece of land and which tend directly to meet the Appeals should be appealed within thirty (30) days from receipt to the
needs of said industry or work. Central Board of Assessment Appeals.
b. The Treasurer is correct. The procedure do not allow a f. The adverse decision of the Central Board of Assessment
motion for reconsideration to be filed with the Provincial Assessor. Appeals shall be appealed to the Court of Tax Appeals (En Banc) by
To allow the procedure would indeed invite corruption in the system means of a petition for review within thirty (30) days from receipt of the
of appraisal and assessment. it conveniently courts a graft-prone situation adverse decision.
where values of real property ay be initially set unreasonably high, and then g. The decision of the CTA may be the subject of a motion for
subsequently reduced upon the request of a property owner. In the latter reconsideration or new trial after which an appeal may be interposed by
instance, allusions of possible cover, illicit trade-off cannot be avoided, and means of a petition for review on certiorari directed to the Supreme Court
in fact can conveniently take place. Such occasion for mischief must be on pure questions of law within a period of fifteen (15) days from receipt
prevented and excised from our system. (FELS Energy, Inc., v. Province of extendible for a period of thirty (30) days.
Batangas, G. R. No. 168557, February 16, 2007 and companion case)
18. The entitlement to a tax refund does not necessarily
14. A special levy or special assessment is an call for the automatic payment of the sum claimed. The amount
imposition by a province, a city, a municipality within the of the claim being a factual matter, it must still be proven in the normal
Metropolitan Manila Area, a municipality or a barangay upon real course and in accordance with the administrative procedure for obtaining a
property specially benefited by a public works expenditure of the LGU to refund of real property taxes, as provided under the Local Government
recover not more than 60% of such expenditure. Code. (Allied Banking Corporation, etc., v. Quezon City Government, et al., G. R.
No. 154126, September 15, 2006)
77
NOTES AND COMMENTS: In the above Allied Banking case, the directly and exclusively used for educational purposes. (Commissioner of
Supreme Court provided for the starting date of computing the two-year Internal Revenue v. Court of Appeals, et al., 298 SCRA 83)
prescriptive period within which to file the claim with the Treasurer, which is The constitutional tax exemption covers property taxes only. What is
from finality of the Decision. The procedure to be followed is that shown exempted is not the institution itself, those exempted from real estate taxes
below. are lands, buildings and improvements actually, directly and exclusively
used for religious, charitable or educational purposes. (Lung Center of the
19. Procedure for refund of real property taxes based Philippines v. Quezon City, et al., etc., G. R. No. 144104, June 29, 2004)
on validity of the tax measure or solutio indebeti.
a. Payment under protest not required, claim must be directed to 22. The 1935 Constitution stated that the lands,
the local treasurer, within two (2) years from the date the taxpayer is buildings, and improvements are “used exclusively” but the
entitled to such reduction or readjustment, who must decide within sixty present Constitution requires that the lands, buildings and
(60) days from receipt. improvements are “actually, directly and exclusively used.”
b. The denial by the local treasurer of the protest would fall The change should not be ignored. Reliance on past decisions would have
within the Regional Trial Court’s original jurisdiction, the review being the sufficed were the words “actually” as well as :directly” are not added. There
initial judicial cognizance of the matter. Despite the language of Section must be proof therefore of the actual and direct use to be exempt from
195 of the Local Government Code which states that the remedy of the taxation. (Lung Center of the Philippines v. Quezon City, et al., etc., G. R. No.
taxpayer whose protest is denied by the local treasurer is “to appeal with 144104, June 29, 2004)
the court of competent jurisdiction,” labeling the said review as an exercise
of appellate jurisdiction is inappropriate since the denial of the protest is not 23. The “actual, direct and exclusive use” of the
the judgment or order of a lower court, but of a local government official. property for charitable purposes is the direct and immediate
(Yamane , etc. v. BA Lepanto Condominium Corporation, G. R. No. and actual application of the property itself to the purposes for
154993, October 25, 2005) which the charitable institution is organized. It is not the use of the income
c. The decision of the Regional Trial Court should be appealed from the real property that is determinative of whether the property is used
by means of a petition for review directed to the Court of Tax Appeals for tax-exempt purposes.
(Division). If real property is used for one or more commercial purposes, it is
d. The decision of the Court of Tax Appeals (Division) may be not exclusively used for the exempted purpose but is subject to taxation,.
the subject of a review by the Court of Tax Appeals (en banc). The words “dominant use” or “principal use” cannot be substituted for the
e. The decision of the Court of Tax Appeals (en banc) may be words “used exclusively” without doing violence to the Constitution and the
the subject of a petition for review on certiorari on pure questions of law law. Solely is synonymous with exclusively. (Lung Center of the Philippines v.
directed to the Supreme Court. Quezon City, et al., etc., G. R. No. 144104, June 29, 2004)

 20. Charitable institutions, churches and 24. Portions of the land of a charitable institution, such
parsonages or convents appurtenant thereto, mosques, non- as a hospital, leased to private entities as well as those parts
profit cemeteries, and all lands, buildings and improvements of the hospital leased to private individuals are not exempt
that are actually, directly and exclusively used for religious, from real property taxes . On the other hand, the portion of the land
charitable or educational purposes are exempt from taxation. occupied by the hospital and portions of the hospital used for its patients,
[Sec.28 (3) Article VI, 1987 Constitution] whether paying or non-paying, are exempt from real property taxes. (Lung
Center of the Philippines v. Quezon City, et al., etc., G. R. No. 144104,
 21. The constitutional tax exemptions refer only June 29, 2004)
to real property that are actually, directly and exclusively used for
religious, charitable or educational purposes, and that the only 25. As a general principle, a charitable institution does
constitutionally recognized exemption from taxation of revenues are those not lose its character as such and its exemption from taxes
earned by non-profit, non-stock educational institutions which are actually, simply because it derives income from paying patients,
whether out-patient, or confined in the hospital, or receives
78
subsidies from the government. So long as the money received is public domain. (Manila International Airport Authority v. City of Pasay, et al., G.
devoted or used altogether to the charitable object which it is intended to R. No. 163072, April 2, 2009)
achieve; and no money inures to the private benefit of the persons
managing or operating the institution. (Lung Center of the Philippines v. 28. A telecommunications company was granted by
Quezon City, et al., etc., G. R. No. 144104, June 29, 2004) Congress on July 20, 1992, after the effectivity of the Local
Government Code on January 1, 1992, a legislative franchise
26. Property that are exempt from the payment of with tax exemption privileges which partly reads, “The
real property tax under the Local Government Code. grantee, its successors or assigns shall be liable to pay the
a. Real property owned by the Republic of the Philippines or any same taxes on their real estate, buildings and personal
of its political subdivisions except when the beneficial use thereof has been property, exclusive of this franchise, as other persons or
granted to a taxable person for a consideration or otherwise;
corporations are now or hereafter may be required by law to
b. Charitable institutions, churches, parsonages or convents
appurtenant thereto, mosques, non-profit or religious cemeteries, and all pay.” This provision existed in the company’s franchise prior
lands, buildings and improvements actually, directly and exclusively used to the effectivity of the Local Government Code. A City then
for religious, charitable and educational purposes; enacted an ordinance in 1993 imposing a real property on all
c. Machineries and equipment, actually, directly and exclusively real properties located within the city limits, and withdrawing
used by local water districts; and government owned and controlled all tax exemptions previously granted. Among properties
corporations engaged in the supply and distribution of water and generation covered are those owned by the company from which the City
and transmission of electric power; is now collecting P43 million. The properties of the company
d. Real property owned by duly registered cooperatives; were then scheduled by the City for sale at public auction.
e. Machinery and equipment used for pollution control and
The company then filed a petition for the issuance of a
environmental protection.
writ of prohibition claiming exemption under its legislative

27. Manila International Airport Authority (MIAA) it is franchise. The City defended its position raising the
not a government owned or controlled corporation but an following:
instrumentality of the government that is exempt from a. There was no exhaustion of administrative
taxation. remedies because the matter should have first been filed
It is not a stock corporation because its capital is not divided into before the Local Board of Assessment Appeals;
shares, neither is it a non-stock corporation because there are no b. The company’s properties are exempt from tax
members. It is instead an instrumentality of the government upon which under its franchise.
the local governments are not allowed to levy taxes, fees or other Resolve the issues raised.
charges. SUGGESTED ANSWERS:
An instrumentality “refers to any agency of the National a. There is no need to exhaust administrative remedies as the
Government, not integrated within the department framework vested with appeal to the LBAA is not a speedy and adequate remedy within the law.
special functions or jurisdiction by law, endowed with some if not all This is so because the properties are already scheduled for auction sale.
corporate powers, administering special funds, and enjoying operational Furthermore one of the recognized exceptions to the rule on
autonomy, usually through a charter. This term includes regulatory exhaustion is that if the issue is purely legal in character which is so in
agencies chartered institutions and government-owned or controlled this case.
corporations.” [Sec. 2 (10), Introductory Provisions, Administrative Code b. The properties are exempt from taxation. The grant of
of 1987] It is an instrumentality exercising not only governmental but also taxing powers to local governments under the Constitution and the Local
corporate powers. It exercises governmental powers of eminent domain, Government Code does not affect the power of Congress to grant tax
police power authority, and levying of fees and charges. exemptions.
Finally, the airport lands and buildings are property owned by the The term “exclusive of this franchise” is interpreted to mean
government that are devoted to public use and are properties of the properties actually, directly and exclusively used in the radio or
telecommunications business. The subsequent piece of legislation which
79
reiterated the phrase “exclusive of this franchise” found in the previous
tax exemption grant to the company is an express and real intention on
the part of Congress to once against remove from the LGC’s delegated
taxing power, all of the company’s properties that are actually, directly
and exclusively used in the pursuit of its franchise. (The City
Government of Quezon City, et al., v. Bayan Telecommunications, Inc.,
G. R. No. 162015, March 6, 2006)


29. The owner operator of a BOT and not the
ultimate owner is subject to real property taxes. Consistent with
the BOT concept and as implemented, BPPC – the owner-manager-
operator of the project – is the actual user of its machineries and
equipment. BPPC’s ownership and use of the machineries and
equipment are actual, direct, and immediate, while NAPOCOR’s is
contingent and, at this stage of the BOT Agreement, not sufficient to
support its claim for tax exemption. (National Power Corporation v. Central
Board of Assessment Appeals, et al., G, R. No. 171470, January 30, 2009)

ADVANCE CONGRATULATIONS
AND SEE YOU IN COURT

You might also like