Republic of the Philippines

SUPREME COURT
Manila
FIRST DIVISION
G.R. No. 120721 February 23, 2005
MANUEL G. ABELLO, JOSE C. CONCEPCION, TEODORO D. REGALA, AVELINO
V. CRUZ, petitioners,
vs.
COMMISSIONER OF INTERNAL REVENUE and COURT OF APPEALS,
respondents.
DECISION
AZCUNA, J.:
This is a petition for review on certiorari under Rule 45 of the Rules of Civil
Procedure, assailing the decision of the Court of Appeals in CA G.R. SP No. 27134,
entitled "Comissioner of Internal Revenue v. Manuel G. Abello, Jose C. Concepcion,
Teodoro D. Regala, Avelino V. Cruz and Court of Tax Appeals," which reversed and
set aside the decision of the Court of Tax Appeals (CTA), ordering the Commissioner
of Internal Revenue (Commissioner) to withdraw his letters dated April 21, 1988 and
August 4, 1988 assessing donors taxes and to desist from collecting donors taxes
from petitioners.
During the 1987 national elections, petitioners, who are partners in the Angara,
Abello, Concepcion, Regala and Cruz (ACCRA) law firm, contributed P882,661.31
each to the campaign funds of Senator Edgardo Angara, then running for the
Senate. In letters dated April 21, 1988, the Bureau of Internal Revenue (BIR)
assessed each of the petitioners P263,032.66 for their contributions. On August 2,
1988, petitioners questioned the assessment through a letter to the BIR. They
claimed that political or electoral contributions are not considered gifts under the
National Internal Revenue Code (NIRC), and that, therefore, they are not liable for
donors tax. The claim for exemption was denied by the
Commissioner.11vvphi1.nt
On September 12, 1988, petitioners filed a petition for review with the CTA, which
was decided on October 7, 1991 in favor of the petitioners. As aforestated, the CTA
ordered the Commissioner to desist from collecting donors taxes from the
petitioners.2
On appeal, the Court of Appeals reversed and set aside the CTA decision on April 20,
1994.3 The appellate Court ordered the petitioners to pay donors tax amounting to
P263,032.66 each, reasoning as follows:
The National Internal Revenue Code, as amended, provides:
Sec. 91. Imposition of Tax. (a) There shall be levied, assessed, collected, and paid
upon the transfer by any person, resident, or non-resident, of the property by gift, a
tax, computed as provided in Section 92. (b) The tax shall apply whether the
transfer is in trust or otherwise, whether the gift is direct or indirect, and whether
the property is real or personal, tangible or intangible.
Pursuant to the above-quoted provisions of law, the transfer of property by gift,
whether the transfer is in trust or otherwise, whether the gift is direct or indirect,
and whether the property is real or personal, tangible or intangible, is subject to
donors or gift tax.
A gift is generally defined as a voluntary transfer of property by one to another
without any consideration or compensation therefor (28 C.J. 620; Santos vs.
Robledo, 28 Phil. 250).
In the instant case, the contributions are voluntary transfers of property in the form
of money from private respondents to Sen. Angara, without considerations therefor.
Hence, they squarely fall under the definition of donation or gift.
As correctly pointed out by the Solicitor General:
The fact that the contributions were given to be used as campaign funds of Sen.
Angara does not affect the character of the fund transfers as donation or gift. There
was thereby no retention of control over the disposition of the contributions. There
was simply an indication of the purpose for which they were to be used. For as long
as the contributions were used for the purpose for which they were intended, Sen.
Angara had complete and absolute power to dispose of the contributions. He was
fully entitled to the economic benefits of the contributions.
Section 91 of the Tax Code is very clear. A donors or gift tax is imposed on the
transfer of property by gift.1awphi1.nt
The Bureau of Internal Revenue issued Ruling No. 344 on July 20, 1988, which reads:
Political Contributions. For internal revenue purposes, political contributions in the
Philippines are considered taxable gift rather than taxable income. This is so,
because a political contribution is indubitably not intended by the giver or
contributor as a return of value or made because of any intent to repay another
what is his due, but bestowed only because of motives of philanthropy or charity.
His purpose is to give and to bolster the morals, the winning chance of the
candidate and/or his party, and not to employ or buy. On the other hand, the
recipient-donee does not regard himself as exchanging his services or his product
for the money contributed. But more importantly he receives financial advantages
gratuitously.
When the U.S. gift tax law was adopted in the Philippines (before May 7, 1974), the
taxability of political contributions was, admittedly, an unsettled issue; hence, it
cannot be presumed that the Philippine Congress then had intended to consider or
treat political contributions as non-taxable gifts when it adopted the said gift tax
law. Moreover, well-settled is the rule that the Philippines need not necessarily
adopt the present rule or construction in the United States on the matter. Generally,
statutes of different states relating to the same class of persons or things or having
the same purposes are not considered to be in pari materia because it cannot be
justifiably presumed that the legislature had them in mind when enacting the
provision being construed. (5206, Sutherland, Statutory Construction, p. 546.)
Accordingly, in the absence of an express exempting provision of law, political
contributions in the Philippines are subject to the donors gift tax. (cited in National
Internal Revenue Code Annotated by Hector S. de Leon, 1991 ed., p. 290).
In the light of the above BIR Ruling, it is clear that the political contributions of the
private respondents to Sen. Edgardo Angara are taxable gifts. The vagueness of the
law as to what comprise the gift subject to tax was made concrete by the above-
quoted BIR ruling. Hence, there is no doubt that political contributions are taxable
gifts.4
Petitioners filed a motion for reconsideration, which the Court of Appeals denied in
its resolution of June 16, 1995.5
Petitioners thereupon filed the instant petition on July 26, 1995. Raised are the
following issues:
1. DID THE HONORABLE COURT OF APPEALS ERR WHEN IT FAILED TO CONSIDER IN
ITS DECISION THE PURPOSE BEHIND THE ENACTMENT OF OUR GIFT TAX LAW?
2. DID THE HONORABLE COURT OF APPEALS ERR IN NOT CONSIDERING THE
INTENTION OF THE GIVERS IN DETERMINING WHETHER OR NOT THE PETITIONERS
POLITICAL CONTRIBUTIONS WERE GIFTS SUBJECT TO DONORS TAX?
3. DID THE HONORABLE COURT OF APPEALS ERR WHEN IT FAILED TO CONSIDER THE
DEFINITION OF AN "ELECTORAL CONTRIBUTION" UNDER THE OMNIBUS ELECTION
CODE IN DETERMINING WHETHER OR NOT POLITICAL CONTRIBUTIONS ARE
TAXABLE?
4. DID THE HONORABLE COURT OF APPEALS ERR IN NOT CONSIDERING THE
ADMINISTRATIVE PRACTICE OF CLOSE TO HALF A CENTURY OF NOT SUBJECTING
POLITICAL CONTRIBUTIONS TO DONORS TAX?
5. DID THE HONORABLE COURT OF APPEALS ERR IN NOT CONSIDERING THE
AMERICAN JURISPRUDENCE RELIED UPON BY THE COURT OF TAX APPEALS AND BY
THE PETITIONERS TO THE EFFECT THAT POLITICAL CONTRIBUTIONS ARE NOT
TAXABLE GIFTS?
6. DID THE HONORABLE COURT OF APPEALS ERR IN NOT APPLYING AMERICAN
JURISPRUDENCE ON THE GROUND THAT THIS WAS NOT KNOWN AT THE TIME THE
PHILIPPINES GIFT TAX LAW WAS ADOPTED IN 1939?
7. DID THE HONORABLE COURT OF APPEALS ERR IN RESOLVING THE CASE MAINLY
ON THE BASIS OF A RULING ISSUED BY THE RESPONDENT ONLY AFTER THE
ASSESSMENTS HAD ALREADY BEEN MADE?
8. DID THE HONORABLE COURT OF APPEALS ERR WHEN IT DID NOT CONSTRUE THE
GIFT TAX LAW LIBERALLY IN FAVOR OF THE TAXPAYER AND STRICLTY AGAINST THE
GOVERNMENT IN ACCORDANCE WITH APPLICABLE PRINCIPLES OF STATUTORY
CONSTRUCTION?6
First, Fifth and Sixth Issues
Section 91 of the National Internal Revenue Code (NIRC) reads:
(A) There shall be levied, assessed, collected and paid upon the transfer by any
person, resident or nonresident, of the property by gift, a tax, computed as provided
in Section 92
(B) The tax shall apply whether the transfer is in trust or otherwise, whether the gift
is direct or indirect, and whether the property is real or personal, tangible or
intangible.
The NIRC does not define transfer of property by gift. However, Article 18 of the Civil
Code, states:
In matters which are governed by the Code of Commerce and special laws, their
deficiency shall be supplied by the provisions of this Code.
Thus, reference may be made to the definition of a donation in the Civil Code.
Article 725 of said Code defines donation as:
. . . an act of liberality whereby a person disposes gratuitously of a thing or right in
favor of another, who accepts it.
Donation has the following elements: (a) the reduction of the patrimony of the
donor; (b) the increase in the patrimony of the donee; and, (c) the intent to do an
act of liberality or animus donandi.7
The present case falls squarely within the definition of a donation. Petitioners, the
late Manuel G. Abello8 , Jose C. Concepcion, Teodoro D. Regala and Avelino V. Cruz,
each gave P882,661.31 to the campaign funds of Senator Edgardo Angara, without
any material consideration. All three elements of a donation are present. The
patrimony of the four petitioners were reduced by P882,661.31 each. Senator
Edgardo Angaras patrimony correspondingly increased by P3,530,645.249 . There
was intent to do an act of liberality or animus donandi was present since each of the
petitioners gave their contributions without any consideration.
Taken together with the Civil Code definition of donation, Section 91 of the NIRC is
clear and unambiguous, thereby leaving no room for construction. In Rizal
Commercial Banking Corporation v. Intermediate Appellate Court 10 the Court
enunciated:
It bears stressing that the first and fundamental duty of the Court is to apply the
law. When the law is clear and free from any doubt or ambiguity, there is no room
for construction or interpretation. As has been our consistent ruling, where the law
speaks in clear and categorical language, there is no occasion for interpretation;
there is only room for application (Cebu Portland Cement Co. v. Municipality of
Naga, 24 SCRA 708 [1968])
Where the law is clear and unambiguous, it must be taken to mean exactly what it
says and the court has no choice but to see to it that its mandate is obeyed
(Chartered Bank Employees Association v. Ople, 138 SCRA 273 [1985]; Luzon
Surety Co., Inc. v. De Garcia, 30 SCRA 111 [1969]; Quijano v. Development Bank of
the Philippines, 35 SCRA 270 [1970]).
Only when the law is ambiguous or of doubtful meaning may the court interpret or
construe its true intent.l^vvphi1.net Ambiguity is a condition of admitting two or
more meanings, of being understood in more than one way, or of referring to two or
more things at the same time. A statute is ambiguous if it is admissible of two or
more possible meanings, in which case, the Court is called upon to exercise one of
its judicial functions, which is to interpret the law according to its true intent.
Second Issue
Since animus donandi or the intention to do an act of liberality is an essential
element of a donation, petitioners argue that it is important to look into the
intention of the giver to determine if a political contribution is a gift. Petitioners
argument is not tenable. First of all, donative intent is a creature of the mind. It
cannot be perceived except by the material and tangible acts which manifest its
presence. This being the case, donative intent is presumed present when one gives
a part of ones patrimony to another without consideration. Second, donative intent
is not negated when the person donating has other intentions, motives or purposes
which do not contradict donative intent. This Court is not convinced that since the
purpose of the contribution was to help elect a candidate, there was no donative
intent. Petitioners contribution of money without any material consideration
evinces animus donandi. The fact that their purpose for donating was to aid in the
election of the donee does not negate the presence of donative intent.
Third Issue
Petitioners maintain that the definition of an "electoral contribution" under the
Omnibus Election Code is essential to appreciate how a political contribution differs
from a taxable gift.11 Section 94(a) of the said Code defines electoral contribution as
follows:
The term "contribution" includes a gift, donation, subscription, loan, advance or
deposit of money or anything of value, or a contract, promise or agreement to
contribute, whether or not legally enforceable, made for the purpose of influencing
the results of the elections but shall not include services rendered without
compensation by individuals volunteering a portion or all of their time in behalf of a
candidate or political party. It shall also include the use of facilities voluntarily
donated by other persons, the money value of which can be assessed based on the
rates prevailing in the area.
Since the purpose of an electoral contribution is to influence the results of the
election, petitioners again claim that donative intent is not present. Petitioners
attempt to place the barrier of mutual exclusivity between donative intent and the
purpose of political contributions. This Court reiterates that donative intent is not
negated by the presence of other intentions, motives or purposes which do not
contradict donative intent.
Petitioners would distinguish a gift from a political donation by saying that the
consideration for a gift is the liberality of the donor, while the consideration for a
political contribution is the desire of the giver to influence the result of an election
by supporting candidates who, in the perception of the giver, would influence the
shaping of government policies that would promote the general welfare and
economic well-being of the electorate, including the giver himself.
Petitioners attempt is strained. The fact that petitioners will somehow in the future
benefit from the election of the candidate to whom they contribute, in no way
amounts to a valuable material consideration so as to remove political contributions
from the purview of a donation. Senator Angara was under no obligation to benefit
the petitioners. The proper performance of his duties as a legislator is his obligation
as an elected public servant of the Filipino people and not a consideration for the
political contributions he received. In fact, as a public servant, he may even be
called to enact laws that are contrary to the interests of his benefactors, for the
benefit of the greater good.
In fine, the purpose for which the sums of money were given, which was to fund the
campaign of Senator Angara in his bid for a senatorial seat, cannot be considered as
a material consideration so as to negate a donation.
Fourth Issue
Petitioners raise the fact that since 1939 when the first Tax Code was enacted, up to
1988 the BIR never attempted to subject political contributions to donors tax. They
argue that:
. . . It is a familiar principle of law that prolonged practice by the government
agency charged with the execution of a statute, acquiesced in and relied upon by all
concerned over an appreciable period of time, is an authoritative interpretation
thereof, entitled to great weight and the highest respect. . . . 12
This Court holds that the BIR is not precluded from making a new interpretation of
the law, especially when the old interpretation was flawed. It is a well-entrenched
rule that
. . . erroneous application and enforcement of the law by public officers do not block
subsequent correct application of the statute (PLDT v. Collector of Internal Revenue,
90 Phil. 676), and that the Government is never estopped by mistake or error on the
part of its agents (Pineda v. Court of First Instance of Tayabas, 52 Phil. 803, 807;
Benguet Consolidated Mining Co. v. Pineda, 98 Phil. 711, 724). 13
Seventh Issue
Petitioners question the fact that the Court of Appeals decision is based on a BIR
ruling, namely BIR Ruling No. 88-344, which was issued after the petitioners were
assessed for donors tax. This Court does not need to delve into this issue. It is
immaterial whether or not the Court of Appeals based its decision on the BIR ruling
because it is not pivotal in deciding this case. As discussed above, Section 91 (now
Section 98) of the NIRC as supplemented by the definition of a donation found in
Article 725 of the Civil Code, is clear and unambiguous, and needs no further
elucidation.
Eighth Issue
Petitioners next contend that tax laws are construed liberally in favor of the
taxpayer and strictly against the government. This rule of construction, however,
does not benefit petitioners because, as stated, there is here no room for
construction since the law is clear and unambiguous.
Finally, this Court takes note of the fact that subsequent to the donations involved
in this case, Congress approved Republic Act No. 7166 on November 25, 1991,
providing in Section 13 thereof that political/electoral contributions, duly reported to
the Commission on Elections, are not subject to the payment of any gift tax. This all
the more shows that the political contributions herein made are subject to the
payment of gift taxes, since the same were made prior to the exempting legislation,
and Republic Act No. 7166 provides no retroactive effect on this point.
WHEREFORE, the petition is DENIED and the assailed Decision and Resolution of
the Court of Appeals are AFFIRMED.
No costs.
SO ORDERED.

Digest
Abello v. CIR
G.R. No. 120721
February 23, 2005

Topics: gift not defined in the Tax Code Civil Code definition on donation applies;
election contributions are subject to gift tax they are not exempt even if such
transfers are with intentions, motives or purpose
Facts: During the 1987 national elections, petitioners, who are partners in the
Angara, Abello, Concepcion, Regala and Cruz (ACCRA) law firm, contributed
P882,661.31 each to the campaign funds of Senator Edgardo Angara, then running
for the Senate. BIR assessed each of the petitioners P263,032.66 for their
contributions. Petitioners questioned the assessment to the BIR, claiming that
political or electoral contributions are not considered gifts under the NIRC so they
are not liable for donors tax. The claim for exemption was denied by the
Commissioner. The CTA ruled in favor of the petitioners, but such ruling was
overturned by the CA, thus this petition for review.
Issue: Whether or not electoral contributions are subject to donors tax.

Held: Yes, they are. The NIRC does not define transfer of property by gift. However,
Article 18 of the Civil Code, states: In matters which are governed by the Code of
Commerce and special laws, their deficiency shall be supplied by the provisions of
this Code. Thus, reference may be made to the definition of a donation in the Civil
Code. Article 725 of said Code defines donation as: . . . an act of liberality whereby
a person disposes gratuitously of a thing or right in favor of another, who accepts
it.

Donation has the following elements: (a) the reduction of the patrimony of the
donor; (b) the increase in the patrimony of the donee; and, (c) the intent to do an
act of liberality or animus donandi.

The present case falls squarely within the definition of a donation. Petitioners each
gave P882,661.31 to the campaign funds of Senator Edgardo Angara, without any
material consideration. All three elements of a donation are present. The patrimony
of the four petitioners were reduced by P882,661.31 each. Senator Angaras
patrimony correspondingly increased by P3,530,645.24. There was intent to do an
act of liberality or animus donandi was present since each of the petitioners gave
their contributions without any consideration. Taken together with the Civil Code
definition of donation, Section 91 of the NIRC is clear and unambiguous, thereby
leaving no room for construction.

Since animus donandi or the intention to do an act of liberality is an essential

element of a donation, petitioners argue that it is important to look into the
intention of the giver to determine if a political contribution is a gift. Petitioners
argument is not tenable. First of all, donative intent is a creature of the mind. It
cannot be perceived except by the material and tangible acts which manifest its
presence. This being the case, donative intent is presumed present when one gives
a part of ones patrimony to another without consideration. Second, donative intent
is not negated when the person donating has other intentions, motives or purposes
which do not contradict donative intent. This Court is not convinced that since the
purpose of the contribution was to help elect a candidate, there was no donative
intent. Petitioners contribution of money without any material consideration
evinces animus donandi.

Petitioners claim that since the purpose of electoral contributions is to influence the
results of the elections, donative intent is not present. They claim that the purpose
of electoral contributions is brought on by the desire of the giver to influence the
result of an election by supporting candidates who would influence the shaping of
government policies that would promote the general welfare and economic well-
being of the electorate, including the giver himself. Petitioners attempt to place the
barrier of mutual exclusivity between donative intent and the purpose of political
contributions. This Court reiterates that donative intent is not negated by the
presence of other intentions, motives or purposes which do not contradict donative
intent. Petitioners attempt is strained. The fact that petitioners will somehow in the
future benefit from the election of the candidate to whom they contribute, in no way
amounts to a valuable material consideration so as to remove political contributions
from the purview of a donation. Senator Angara was under no obligation to benefit
the petitioners. The proper performance of his duties as a legislator is his obligation
as an elected public servant of the Filipino people and not a consideration for the
political contributions he received. In fact, as a public servant, he may even be
called to enact laws that are contrary to the interests of his benefactors, for the
benefit of the greater good.
CIR V B.F. GOODRICH PHIL., INC., ET AL GR No. 104171, February 24, 1999

Sunday, January 25, 2009 Posted by Coffeeholic Writes

Labels: Case Digests, Taxation

Facts: Private respondent BF Goodrich Philippines Inc. was an American corporation

prior to July 3, 1974. As a condition for approving the manufacture of tires and other
rubber products, private respondent was required by the Central Bank to develop a
rubber plantation. In compliance therewith, private respondent bought from the
government certain parcels of land in Tumajubong Basilan, in 1961 under the Public
Land Act and the Parity Amendment to the 1935 constitution, and there developed a
rubber plantation.

On August 2, 1973, the Justice Secretary rendered an opinion that ownership rights
of Americans over Public agricultural lands, including the right to dispose or sell
their real estate, would be lost upon expiration on July 3, 1974 of the Parity
Amendment. Thus, private respondent sold its Basilan land holding to Siltown Realty
Phil. Inc., (Siltown) for P500,000 on January 21, 1974. Under the terms of the sale,
Siltown would lease the property to private respondent for 25 years with an
extension of 25 years at the option of private respondent.

Private respondent books of accounts were examined by BIR for purposes of

determining its tax liability for 1974. This examination resulted in the April 23, 1975
assessment of private respondent for deficiency income tax which it duly paid.
Siltowns books of accounts were also examined, and on the basis thereof, on
October 10, 1980, the Collector of Internal Revenue assessed deficiency donors tax
of P1,020,850 in relation to said sale of the Basilan landholdings.

Private respondent contested this assessment on November 24, 1980. Another

assessment dated March 16, 1981, increasing the amount demanded for the alleged
deficiency donors tax, surcharge, interest and compromise penalty and was
received by private respondent on April 9, 1981. On appeal, CTA upheld the
assessment. On review, CA reversed the decision of the court finding that the
assessment was made beyond the 5-year prescriptive period in Section 331 of the
Tax Code.

Issue: Whether or not petitioners right to assess has prescribed.

Held: Applying then Sec. 331, NIRC (now Sec. 203, 1997 NIRC which provides a 3-
year prescriptive period for making assessments), it is clean that the October 16,
1980 and March 16, 1981 assessments were issued by the BIR beyond the 5-year
statute of limitations. The court thoroughly studied the records of this case and
found no basis to disregard the 5-year period of prescription, expressly set under
Sec. 331 of the Tax Code, the law then in force.

For the purpose of safeguarding taxpayers from any unreasonable examination,

investigation or assessment, our tax law provides a statute of limitations in the
collection of taxes. Thus, the law or prescription, being a remedial measure, should
be liberally construed in order to afford such protection. As a corollary, the
exceptions to the law on prescription should perforce be strictly construed.
 TRANSFER TAXATION

Transfer Taxes

those imposed upon the gratuitous disposition of private property

Under our law, they are taxes levied on the transmission of private properties from a
prior decedent to his heirs in the case of estate tax, or from a donor to a donee in the
case of donors tax.

Kinds of Transfer Taxes

1. Death / Estate taxes

- those levied on the gratuitous transfers of property upon ones death, formerly comprised
of the estate and inheritance taxes: Both taxes are now integrated into one estate tax.

2. Gift Taxes
- Are imposed on the gratuitous transfers of property during ones lifetime, formerly
comprised of the donors and donees gift taxes; both taxes are now integrated into a
donors tax.

I. DEATH / ESTATE TAX

Estate tax
graduated tax imposed on the privilege of the decedent to transmit property at death
and is base on the entire net estate, regardless of the number heirs and relations to
the decedent.

a transfer tax not a property tax.

tax on the right to transmit property at death and on certain transfers which are
made by the statute the equivalent of testamentary dispositions.

Nature of Estate Tax

It is not a direct tax on property nor is it a capitation tax, that is, the tax is laid
neither on the property, nor on the transferee or transferor, but on the right of the
decedent to transmit his estate.
It is not a property tax but an excise tax.

Purpose and justification of estate tax:

The following theories have been advanced to justify death taxation: (BRAP)

a.) Benefit-Received Theory

For the performance of services rendered by the government in the distribution of the
estate of the decedent and other benefits that accrue to the estate and the heirs, the
state collects the tax.

b.) Redistribution of Wealth Theory

Estate tax is a contributing factor to the inequalities in wealth and income. The
imposition of death tax reduces the property received by the successor bringing
about a more equitable distribution of wealth in society.
c.) Ability to pay theory
The receipt of inheritance places assets in the hands of the heirs and beneficiaries
thereby creating an ability to pay the tax and thus, ability to contribute to
governmental income; and

d.) Privilege theory or State Partnership theory

Inheritance is not a right but a privilege granted by the state and large estates have
been acquired only with the protection of the state. The State, as a passive and
silent partner in the accumulation of property has the right to collect the share
which is properly due to it.

Incidence or burden of estate of tax

Three views on who is the taxpayer in estate taxation:

1. PREDECESSOR the object of the tax is the property which has been held or
accumulated by the deceased and the tax has fallen upon him in the sense it has
affected the amount of the property which he could dispose.

2. SUCCESSOR the tax is not paid by the predecessor who has no liability till he dies
and who is free to ignore the duty if he wishes, while the successor comes into less
than he would have, and has no kind of redress.

3. No Personal Incidence - the estate tax has no personal incidence at all, merely falling
upon the estate as such.

Law applicable
Estate taxation is governed by the statute in force at the time of the death of the
decedent.

Reciprocity
There is reciprocity if the foreign country of which the decedent was a citizen or
resident at the time of his death:

1.) Did not impose an estate tax; or

2.) Allowed a similar exemption from estate tax with respect
to intangible personal property owned by Filipino citizens
residing in that foreign country.

Note:
1. Reciprocity applies only when:
a.) The property is an intangible; and
b.) The decedent is a nonresident alien

2. The following intangibles are deemed located in the Philippines: (an exception to the
principle of Res Mobilia Sequuntur Personam and Situs of Taxation)

a.) Franchises which must be exercised in the Philippines;

b.) Shares, obligations or bonds issued by any corporation or
sociedad anonima organized or constituted in the Philippines in accordance with its laws;
c.) Shares, obligations or bonds issued by any foreign corporation 85% of the business of
which is located in the Philippines;
d.) Shares, obligations or bonds issued by any foreign corporation if such shares obligations
or bonds have acquired a business situs in the Philippines; and
e.) Shares or rights in any partnership, business, or industry
established in the Philippines.
 GROSS ESTATE
the total value of all property, whether real or personal, tangible or intangible
belonging to the decedent at the time of his death, situated within or outside the
Philippines, where such decedent was a resident or citizen of the Philippines.
In the case of a nonresident alien decedent, it shall include only property situated in
the Philippines.

Property Included in the Gross Estate (INCLUSIONS):

A. In case of resident citizens, nonresident citizens and resident aliens:
1. Real Property within and without the Philippines;
2. Tangible personal property within and without the Philippines; and
3. Intangible personal property within and without the Philippines.

B. In cases of nonresident aliens:

1. Real property within the Philippines;
2. Tangible personal property within the Philippines and;
3. Intangible personal property within the Philippines, unless there is reciprocity in which
case, it is not taxable.

Note: These are either:

A) Properties actually owned at the time of death
B) Properties deemed by law to be owned by the decedent
under Sec. 85

Inter Vivos Transfers Subject to Estate Tax

The gross estate extends to gratuitous transfers made by the decedent during his
lifetime which are treated by the law as substitutes for testamentary dispositions. They
are transfers inter vivos in form but mortis causa in substance.

Rationale for taxability:

To reach such transfers which are really substitutes for testamentary dispositions
and thus prevent the evasion of the estate tax.

These transfers are:

a.) transfers in contemplation of death (sec.85 b);
b.) transfers with retention or reservation of certain rights (sec.85 b);
c.) revocable transfers (sec.85 c)
d.) transfers of property arising under a general power of appointment ( sec.85 d); and
e.) transfers for insufficient consideration (sec.85 g)

Note:
Transfers by virtue of a bona fide sale of property for an adequate and full
consideration in money or moneys worth are excluded and not taxable.
INCLUSIONS IN THE GROSS ESTATE (CR2IG DIP)

1) Decedents interest at a specific property

- To the extent of the interest therein of the decedent at the time of his death. (Sec. 85 A)

- Ex: partnership interest, dividends

2) Transfer in contemplation of death
- A transfer with the thought of death.
- The term in contemplation of death means that the impelling or controlling motive is
the thought of death, regardless of whether the transferor is near the possibility of death
or not, which induces the disposition of the property for the purpose of avoiding the tax.
- Example: donation was made concurrently with the execution of a will (Vidal de Rocs vs.
Posadas, 58 Phil 108)

Circumstances taken into account in determining in whether the transfer was made in
contemplation of death:
A.) Age and state of health of the decedent at the time of the gift;
B.) Length of time between the gift and the date of death; and
C.) Concurrent making of a will or making a will within a short time after the transfer.

Note: Check the factual settings before and at time of death because proximity to death is
not always conclusive.

Examples of motives precluding the category of a transfer in contemplation of death:

a.) To relieve the donor from the burden of management;

b.) To save income or property taxes;
c.) To settle family litigated and unlitigated disputes;
d.) To provide independent income for dependents;
e.) To see the children enjoy the property while the donor is alive;
f.) To protect the family from hazards of business operations;
g.) To reward services rendered

Note:
The THREE (3) YEAR PRESUMPTION provides that any transfer of a material part of his
property in the nature of a final disposition or distribution thereof made by the decedent
within three years prior to his death without such adequate and full consideration shall,
unless shown to the contrary, be deemed to be have been made in contemplation of death.

This provision, however, has been already deleted in Sec. 100 (b) now sec. 85 (B) of the Tax
Code by PD No. 1705.

Under BIR Ruling No. 261 September 2, 1987, the law does not specify the number of years
prior to a decedents death within which a transfer can be considered in contemplation of
death.

Note: In relation to transfers with retention of rights which are made in contemplation of
death if the right of retention by the Decedent is co-terminous with his lifetime.

- Ex: X has a house and lot which he transferred to Y

a) with the condition that X will use it while X lives
- Effect: Still part of estate of X as he has control over it

b) with the condition that X will use it only for 10 years and then X dies before 10 years
- Effect: Not part of the estate of X as he is not the actual owner

3.) Transfer with retention or reservation of certain rights

- This contemplates the instances where the owner transfers his property during his lifetime
but still retains economic benefits (the possession or enjoyment of the property or the power
to designate the person who may exercise such rights).
 - It includes:
A. Transfer without retention of interest but intended to take
effect at or after the decedents death.
- Example: donations mortis causa.

B. Transfer with retention of interest in respect to:

- 1. The possession or enjoyment of or the right to the
income from the property; or
2. The right either alone or in conjunction with any person, to designate the person who
shall possess or enjoy the property or the income therefrom. And such interest is
retained by the decedent for his life or for any period which does not in fact end before
his death.

C. Transfer with reversionary interest, wherein there is a possibility that the transferred
property may return to the decedent or his estate or that it may become subject to a
power of disposition by the decedent.
- Ex: A transfers his property to B in naked ownership and to C in usufruct throughout Cs
lifetime subject to the condition that if C predeceases A, the property shall return to A. If A
dies during Cs lifetime, the value of the reversionary interest of A at death is included in his
gross estate.

3.) Revocable transfer

- the decedent has full control of disposition of property
- even if the control is not exercised, it is enough that it is
exists
- A transfer where:
a.) The decedent or in conjunction with any other person has reserved the right to alter,
amend, revoke, or terminate; or
b.) Any such power is relinquished in contemplation of the decedents death.

The power to alter, amend or revoke shall be considered to exist on the date of the
decedents death even though:
a.) the exercise of the power is subject to a precedent giving of notice; or
b.) The alteration, amendment or revocation takes effect only upon the expiration of a
stated period after the exercise of the power.

If the notice has not been given or the power has not been exercised on or
before the decedents death, such notice or the power shall be considered to have
been given or exercised on the date of the decedents death.

4.) Transfer of property under a general power of appointment

- A transfer where the donor of the power of appointment authorizes the donee of such
power to designate any person he chooses to be given the right over the appointed property.

- The transferee may choose freely any person who will own the property after he dies

- Rationale: the will of the transferee is followed; hence, part of transferees estate

* Note: the decedent is the transferee in this provision

General power of appointment vs. special power of appointment:

 A.) A power is general, when it authorizes the donee of the power to appoint any person
he pleases including himself, thus having a full dominion over the property as if he
owned it.

B.) It is special when, the donee can appoint only among a restricted or designated
class of persons other than himself.

Note:
If the power of appointment is general, it makes the appointed property a part of the
donees property.

Under a general power of appointment, title to the property is legally transferred to

the donee. Therefore the property shall form part of the gross estate of the donee.

5.) Transfer for insufficient consideration

- A transfer that is not a bona fide sale of property for an adequate and full consideration
in money or moneys worth. The excess of the fair market value at the time of death over
the value of the consideration received by the decedent shall form part of his gross
estate.

- However, if the purported absolute sale inter vivos by the decedent is shown to be
fictitious, then the total value of the property transferred is subject to inclusion in the
taxable estate.

- Ex: X owns a house and lot, he wants to help Y so he sells his house worth P5M for only
P1M. At the time of Xs death, his house and lot is worth P10M.
How much is included in the gross estatre of X? 10-1 = 9M

- Ex: X bought a car worth P1.3M. X needed money so he sells his car to Y for only P1M.
This is not a transfer for insufficient consideration as this is a bona fide transfer at arms
length; hence, a valid transfer.

6.) Proceeds of life insurance

- Proceeds of life insurance taken by the decedent on his own life shall be included in the
gross estate if the beneficiary:
A.) Is the estate of the decedent, his executor, or administrator (regardless whether the
designation is revocable or irrevocable); or
B.) Third person other than the estate, executor, administrator but the designation of the
beneficiary is revocable.
- Presumption: proceeds are revocable
- include in the estate only if it is revocable as the decedent retained control over the
proceeds

7.) Prior Interest

- Except as otherwise specifically provided therein, subsections (B), (C), (E) of Section 85
referring to transfer in contemplation of death, revocable transfer and proceeds of life
insurance respectively shall apply to the transfers, trusts, estates, interests, rights, powers
and relinquishment of powers as severally enumerated and described therein, whether
made, created, arising, existing, exercised or relinquished before or after the effectivity of
the CTRP.

NOTE:
 In most of these transfers the property remains substantially that of the transferor during
his lifetime notwithstanding the transfer since he still retains either the beneficial
ownership or naked title to the property.

EXCLUSIONS FROM THE GROSS ESTATE

1. Merger of usufruct in the owner of the naked title

- ex: X has a house and lot. X gave the title to Z.
X also allows Y to use the same and that in case Y dies, the use goes to Z. What are the
effects?
a) If X dies include the house and lot in Xs estate
b) If Y dies exclude from the estate of Y as the will of X is being followed, there is a merger
of usufruct in Z (the owner of the naked title).

2. Fideicommisary and transmissions from the first heir, legatee, or donee in favor
of another beneficiary, in accordance with the desire of the predecessor
- ex: X has a house and lot. In the will of X, Y may have the title to the house and lot but in
case Y dies, the property will go to Z. What are the effects?
a) If X dies include as part of Xs estate as he actually owns it
b) If Y dies excluded from the estate of Y as he has no control over its disposition

- Ex: X has a house and lot which he wants to give to Y but Y is a minor at the moment so
that X institutes T to hold the property in trust for Y until Y reaches the age of majority. X
died. The property passed to T. T died. Y reached the age of majority. Effect if T dies: Not
part of estate of T.

Note: Common reasons for 1 and 2 the will of the first decedent is followed, the second
decedent has no control over the disposition.

3. Transfers to social welfare, cultural, and charitable institutions

- Requisites:
a) Qualified organization
b) Not more than 30% will be used for administrative purposes
- Reason: to encourage such transfers

4. Proceeds of insurance not includible in the gross estate of the decedent

a) Amount receivable by any beneficiary irrevocably designated in the policy of insurance by
the insured.
b) Proceeds of a group insurance policy taken out by a company for its employees.
c) Proceeds of insurance policies issued by the GSIS to government officials and employees.
d) Benefits accruing under the Social Security Act.
e) Proceeds of life insurance payable to the heirs of deceased members of the military
personnel of the United States Army or Philippine Army under laws administered by the
United States Veterans Administration.
f) Accident insurance proceeds.

5. Separate property of the surviving spouse.

Note:
In the determination of the gross estate, the nature of the property, whether common
property of the spouses, separate or exclusive property either of the deceased or of the
surviving spouse, becomes of vital importance.

What regime of property relations shall govern the spouses?

 Under the Civil Code, the husband and wife who got married before August 3, 1988
are governed by the Conjugal Partnership of Gains, while those who got married on or
after August 3, 1988 are governed by the Absolute Community of Property, unless a
different regime was agreed upon in the marriage settlement.

EXEMPTION FROM ESTATE TAX

A. The first P200, 000.00 value of the estate (sec. 84 NIRC)

B. The merger of the usufruct in the owner of the naked title.
C. The transmission from the first heir, legatee, or donee in favor of another beneficiary in
accordance with the desire of the predecessor.
D. All bequest, devises, legacies or transfers to social welfare, cultural and charitable
institutions, no part of the net income of which inured to the benefit of any individual and
provided that not more than 30% of the said bequest, etc shall be used by such institution
for administration purposes.
E. Intangible personal property of non-resident aliens under the principle of reciprocity.
F. Retirement benefits of employees of private firms from private pension plans approved by
the BIR.
G. Amount received for war damages.
H. Grants and donations to the Intramuros administration.
ALLOWABLE DEDUCTIONS FROM THE GROSS ESTATE
- Granted by mere legislative grace
- Construed strictly against the taxpayer
- Requisites:
a) Substantiate the claim for deduction
b) Identify the provision granting the deduction.
The provision must be clear and definite.

RESIDENT DECEDENT

A. Ordinary Deductions (ELIT):

1) Funeral Expenses
- The amount deductible is equal to 5% of the gross estate or the amount of the actual
funeral expenses whichever is lower, but in no case to exceed P200,000;

- Actual funeral expenses are those which were actually incurred in connection with the
interment or burial of the deceased and paid for from the estate of said deceased.

- Funeral expenses include:

a) Costs of coffin, tombstone, mausoleum, and burial lot;
b) Funeral parlor fees;
c) Mourning clothing of the surviving spouse and the unmarried minor children;
d) Costs of obituary notices; and
e) Expenses during the wake.

- The following cannot be deducted under funeral expenses:

a) Cash advances of the surviving spouse and the heirs;
b) Expenses paid by the relatives and friends; and
c) Expenses after the burial.

- Requisites:
 a) The expenses must be due to the interment, wake and burial; hence, expenses on the
death anniversary are not included
b) The expenses must have been shouldered by the estate and not by other people

2) Judicial expenses of the testamentary or intestate proceedings

- Requisite: administration expenses to those actually incurred in the administration of the
estate.

- Examples:
a) fees of the executor or administrator;
b) attorneys fees;
c) accountants fees;
d) court fees;
e) salaries of employees; and
f) All other expense related to the administration of the estate.

Note:
This includes all expenses necessary to settle or preserve the estate hence,
extrajudicial expenses are included.

Expenses not essential to the proper settlement of the estate but incurred for the
individual benefit of the heirs, legatees, or devisees are not allowed as deductions.
- ex: expenses to be declared as administrator vs. an oppositor is a personal expense

3) Claims against the decedents estate

- Debts or obligations of the decedent that is enforceable
against the estate provided that the following requisites are
met:
a) They were contracted in good faith and for an adequate and full consideration in
money or moneys worth.
b) They must be existing against the estate.
c) They must be legally enforceable obligations of the decedent and ought to be
enforced by the claimants.
d) They must be reasonably certain in amount; and;
e) At the time the indebtedness was incurred, the debt instrument was duly notarized
and if the loan was contracted within three (3) years before the death of the
decedent, the administrator or executor shall submit a statement showing the
disposition of the proceeds of the loan.

4) Claims against the insolvent persons

- Requisites for deductibility:
a) The amount of said claims has been initially included as part of the gross estate; and
b) The incapacity of the debtors to pay their obligations is proven and not merely
alleged.

5) Unpaid mortgages indebtedness

- Requisites for deductibility:

a) The fair market value of the property mortgaged without deducting the mortgage
indebtedness has been initially included as part of his gross estate;
 b) The mortgage indebtedness was contracted in good faith and for an adequate and
full consideration in money or moneys worth.

- ex: X obtained a 3M loan from Y and executed a Real Estate Mortgage over his house and
lot worth 5M. X paid 1M. X died.
Effect: in the estate of X, include the 5M in the gross estate of X and claim as deduction the
unpaid 2M.

Accommodated Loan
- Ex: X owns a house and lot worth 5M. Y obtained a 3M loan from Z with Xs house and lot
as collateral. Y paid 1M. Z died. X died.
Effect: Include in the gross estate of X the 5M as receivable from Y (reason: right of
reimbursement); and claim as deduction the unpaid 2M.

6) Casualty Losses (TRECUSO)

- They include all losses incurred during the settlement of the estate arising from fires,
storms, shipwreck or other casualties or from robbery, theft or embezzlement.
- Requisites for deductibility:
a) Losses not compensated by an insurance or
otherwise;
b) Losses that were not claimed as a deduction for income tax purposes; and
c) Losses incurred not later than the last day for payment of the estate tax (6 months
from death).
d) Include the worth of the property in the gross estate
e) File a sworn declaration of the fact of loss within 45 days from its occurrence

7) Unpaid Taxes
- Unpaid income tax on income due or received before death of the decedent, and real
property taxes, which have accrued prior to the death of the decedent (real property
taxes accrued at the beginning of the year but may be paid before or at the end of each
quarter) are deductible.

- Income taxes upon income received after the death of the decedent, or property taxes
not accrued before his death, or any estate tax cannot be deducted because they are
chargeable to the income of the estate.

- except: estate tax because estate tax liability is determined at the time of death

B. Vanishing / Alternating Deduction Or Property Previously Taxed

- an amount allowed to reduce the taxable estate of a decedent where the property was:
a. received by him from prior decedent by gift, bequest, devise or inheritance, or
b. transferred to him by gift, has been the object of previous transfer deduction.

- VANISHING DEDUCTION: because the rate of deduction gradually diminishes and entirely
vanishes depending upon the time interval between the two (2) successive transfers.

- ALTERNATING DEDUCTION: because the present decedents estate cannot claim it if the
prior decedents estate claimed it

- Factors necessary in vanishing deduction, these are;

a. There are two (2) deceased persons and the first is the donor; and
b. The second decedent dies within five (5) years after the death of the prior decedent or in
the case of gifts the decedent donee dies within the same period after the date of the
gift.
- Rationale:
The deduction operates to ease the harshness of successive taxation of the same
property within a relatively short period of time.

Requisites for deductibility:

1. The present decedent must have acquired the property by inheritance or by donation.
2. The property must have been acquired within five (5) years prior to the death of the
present decedent
3. The property must have formed part of the gross estate of the prior decedent if acquired
by inheritance, or the taxable gift of the donor if acquired by donation.
4. The estate tax or the donors tax, as the case may be, must have been paid on the
previous transfer.
5. The property must be identified as the one received from the prior decedent or from the
donor, as the case may be.
6. The estate of the prior decedent must not have previously availed of the vanishing
deduction on the subject property.

Procedure in computing vanishing deductions:

1. Value taken of property previously taxed
Less:Mortgage paid by the present decedent on property previously mortgaged by prior
decedent / donor, if any (Ist deduction)
= Initial basis

2. Initial basis divided by the value of the gross estate of present decedent X Expenses, and
transfer for public purpose
=2nddeduction

3. Initial Basis
Less: 2nd deduction
Final Basis
Multiplied by rate deduction (sec.86 (A.2), NIRC)
Vanishing Deduction

C. Transfers For Public Use

- Requisites:
1. The disposition must be testamentary in character.
2. To take effect after death.
3. In favor of the government of the Philippines, or any
political subdivision thereof.
4. Exclusively for public purpose.
5. Included in the gross estate

Query: If in a will the property was bequeathed to a city and an NGO, are the tax effects the
same? No.
a) City - included in the gross estate and claimed as deduction
b) NGO excluded from the gross estate and subject to the limitation that not more than
30% must be used for administrative purposes

D. Family Home
- Refers to the dwelling house, including the land on which it is situated, where the
husband and wife, or an unmarried person who is the head of the family and members of
their immediate family resides as certified by the Barangay Captain of the locality.
 - For the purpose of availing of a family home deduction to the extent provided by law, a
person may constitute only one family home.

- The amount deductible is equivalent to the current fair market value of the decedents
family home if said current fair market value exceeds P1,000,000, the excess shall be
subject to estate tax.

- Requisites to be deductible:
a. The family home must be the actual residential home of the decedent and his family at
the time of his death. (Decedent is married and has dependents or is a head of family
with dependents.)
b. Such fact must be certified by the Barangay Captain of the locality where the family is
situated.
c. The total value of the family home must be included in the gross estate of the decedent.
d. The allowable deduction must be in an amount equivalent to the current fair market value
of the family home as declared or included in the gross estate not exceeding
P1, 000,000.

E. Standard Deduction Of P1, 000,000.00

- on top of other deductions, unlike the optional standard deduction which is in lieu of other
deductions; hence, it does not include the P 200,000 exemption

F. Medical Expenses
- Requisites:
a. Must be incurred by the decedent within one (1) year
prior to his death
b. Must be duly substantiated by receipts; and
c. Must not exceed P500, 000

*Opinion of JB: medical expense must be related to the cause of death as it is the estate that
is being settled. Otherwise, if not related, it is a personal expense.

G. Amounts Received By Heirs Under RA 4917 From The Decedents Employer As

A Consequence Of The Death Of The DecedentEmployee, Provided That Such
Amount Is Included In The Gross Estate Of The Decedent.
- retirement benefits
- Requisite: include in gross estate

H. NET SHARE OF THE SURVIVING SPOUSE IN THE CONJUGAL / COMMUNITY

PROPERTY.
- Requisite: Include the entire amount in the gross estate then deduct the share of the
surviving spouse
- Ex: H owns a car worth 1M and a house and lot worth 5M
W owns a truck worth 2M and jewelry worth 10M
H and W owns a conjugal lot worth 20M
H died.

Gross estate of H:
Exclusive Conjugal
5 M house and lot 20 M lot
1M car _________ _______
6M 20 M
Total gross estate = 26 M
 Then claim as deduction the 10M, which is the share of the surviving spouse in the
conjugal lot.

- Ex: H and W died simultaneously. In computing the gross estate of H and W, their shares
shares as to the conjugal lot may immediately be split as there is no surviving spouse left.

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

- The estate tax imposed by the tax code shall be credited with the amount of any estate tax
paid to a foreign country.
- Concept: if a property located in the Philippines was already subjected to estate tax abroad
and the same property is also subjected to estate tax in the Philippines, the foreign tax paid
is allowed to reduce his Philippine estate tax

- Purpose: minimize the effect of international double taxation

- applicable only to residents and citizens, not to NRA since he is taxed only on his properties
within the Philippines; hence, the NRA will not be made to pay estate taxes twice for his
property located abroad = no international double taxation = no tax credit. (Sec. 86 (E)(2))

- Requisites:
1. Prove that the foreign estate tax has been paid
2. Prove reciprocity : that in the decedents foreign country, a similar tax credit is given to
Filipinos

Limitations on tax credit:

A.)The tax credit limit for estate taxes paid to one foreign country is determined by the
following:

TAX CREDIT LIMIT=

Decedents Net Estate situated in a foreign country x Phil. Estate tax of the Entire net estate

B.) The tax credit limit for estate taxes paid to two or more countries is determined as
follows:

TAX CREDIT LIMIT =

Decedents net estate situated outside of the Phil X Phil. Estate tax of Entire net Estate

Note:
1.) Under limitation A the allowable tax credit is the lower amount between the tax credit
limit and the estate tax paid to the foreign country.

2.) Under limitation B the allowable tax credit is the lower amount between the tax credit
limit computed under (A) and that computed under (B)

B.) IF DECEDENT IS A NON RESIDENT ALIEN

The deductions allowed to citizens or residents of the Philippines are also extended to
a non-resident alien decedent with respect to his estates situated in the Philippines at the
time of his death.

In case of deductions for expenses, losses, indebtedness and taxes, the amount of
the allowable deduction is limited only to the proportion of such deductions with the value of
such part of his gross estate which at the time of his death, is situated in the Philippines,
bears to the value of his entire gross estate wherever situated. (Sec. 86 (B))

Formula:
Allowable deduction of non-resident estate =

Philippine Gross Estate x Deductions Claimed

Entire Gross estate

As a prerequisite to the deduction, it must be included in the return required to be

filed the value at the time of his death, of that part of the gross estate of the non-resident
not situated in the Philippines, to determine the ratable portion of the deduction for
expenses allowable.

Valuation of Property
The estate shall be appraised at its fair market value (FMV) at the time of death of the
decedent (Sec.88, NIRC). This is regardless of any subsequent contingency affecting the
estate. (Lorenzo vs. Posadas, 64 Phil. 353)

1. Real Property
- higher amount of :
a) FMV as determined by the Commissioner
- This is the zonal value (of the land) as fixed by the CIR, and can be obtained from the
BIR website or regional office

b) FMV fixed by the provincial or city assessor

- This is the value as shown in the tax declaration of the property
- Use this amount for real properties with no zonal values (i.e. real properties other
than land such as buildings and improvements)

* Note : The law does not state that the prevailing market rate or the consideration as a
basis for determining the FMV

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

(which you can get only after obtaining a Certificate of Non-tax delinquency) and attach
these to the estate tax return.

2. Personal Properties
a) Shares of Stock
- book or par value at the time of death, and can be obtained by writing a letter of inquiry,
asking for a formal certification from the corporation which issued the shares of stock as to
the value of such stock at the time of death of the decedent

b) Inventories
- value as stated in the invoices (i.e.: price at purchase); or the prevailing market rate (ask
for the value from those engaged in the same business); or if value cannot be definitely
ascertained, state the approximate reasonable value (but this will be subject to the
discretion of the BIR inspector)

c) Motor vehicles
- these depreciate 20% per year from purchase
- Hence, motor vehicles are fully liquidated and has no estate tax liability after 5 years but
include in the gross estate placing zero as the amount (to secure a tax clearance therefor)
3. Right to Usufruct, use or habitation; or annuity
- probable life of the beneficiary shall be taken into account, in accordance with the latest
basic mortality table, to be approved by the Sec. of Finance, upon recommendation of the
Insurance Commissioner

Filing of Notice of Death

Where the gross value of the estate exceeds P 20,000 although exempt, the executor,
administrator, or any of the legal heirs shall give, within 2 months after the decedents
death or within like period after the executor or administrator qualifies as such, a written
notice thereof, to the Commissioner of Internal Revenue. (Sec. 89, NIRC)

- Contents of the letter:

1. The fact that the decedent died
2. Residence of the decedent
3. Date of death

- Effect of failure to file notice: subject to penalty not lower than P1,000

* Note: Filing with the nearest Revenue District Office is sufficient compliance.

Filing of Return and Payment of Tax

1.) By whom?
An estate tax return under oath is required by law to be filed by the executor,
administrator, or any of the legal heirs:

a.) Where the gross value of the estate exceeds P200,000 though exempt from the
estate tax; or

b.) Regardless of the gross value of the estate, where the said estate consists of
registered or registrable real property, such as real property (land, bank accounts,
others with definite records), motor vehicle, shares of stock or other similar
property for which a clearance from the Bureau of Internal Revenue is required as
a condition precedent for the transfer of ownership thereof in the name of the
transferee.

2.) When to file?

The return shall be filed within 6 months from the decedents death.
The Commissioner shall have the authority to grant, in meritorious cases, a
reasonable extension not exceeding 30 days for filing the return.

3.) Where to file?

Except in cases where the Commissioner otherwise permits, the return shall be filed
with:

* if the decedent is a resident

a) an authorized agent bank
b) Revenue District Officer
c) Revenue Collection Officer
d) duly authorized treasurer of the city or municipality where the decedent was
domiciled at the time of his death, or
 * if the decedent is a non-resident
a) with the Revenue District Office where his executor/administrator is registered
b) with the Revenue District Office having jurisdiction over the residence of the
executor/administrator
e) with the Office of the Commissioner if the decedent has no executor or
administrator

4.) Copies:
The return shall be filed in triplicate, two (2) for the BIR and one (1) copy for the
taxpayer.

5.) When to Pay

Pay the estate tax at the time you will file your estate tax return. (Pay as you file
system)

6.) Extension for Payment:

- allowed in meritorious cases when the Commisioner finds that the payment of the esate
tax on the due date would impose undue hardships upon the estate or any heir :

At most 2 years if estate extrajudicially settled

At most 5 years if estate judicially settled

- NOTE: The taxpayer must not be guilty of

a) negligence
b) intentional disregard of the rules and regulations, or
c) fraud

- the taxpayer may also be required to pay a bond not exceeding double the amount of tax
and with such sureties, as the Commissioner deems necessary

* Note: The filing of the estate tax return is not sufficient to obtain a tax clearance, the
administrator/executor/heir must submit additional documents to determine the correctness
of the values stated by him in the estate tax return.
- such as the title of the land, tax declaration of the land and its improvements or Certificate
of No-improvement, vicinity map to fix the exact location and zonal value, etc.
(Read: Revenue Memorandum Order 15-2003)

* Note: To avoid the imposition of penalties while there is no extra/judicial settlement yet,
any heir may file a sworn declaration to the BIR stating the fact of death, that the estate has
not yet been settled and the list of the properties included in the estate, as basis for
payment of estate tax.

If Gross Estate >2M, additional requirement:

- must submit a certificate of an independent CPA stating:
1. itemized assets of the decedent with corresponding gross value at the time of his
death;
or if NRA, that part of his gross estate situated in the Philippines
2. itemized deductions from the gross estate
3. amount of tax due, whether paid or still due and outstanding

Liability for Payment of Estate Tax

 Primarily Liable : Executor or administrator - before delivery to any beneficiary of his
distributive shares. After due payment, the executor or administrator shall be discharged
from personal liability.

Subsidiarily Liable : Beneficiary - to the extent of his distributive share, liable for the
portion of the estate tax as his distributive share bears to the value of the total net
estate.

NOTE: There are two ways the government may enforce collection of estate taxes from the
decedents heirs:
1. It can collect from all the heirs the amount of the estate tax proportionate to the
inheritance they received.
2. It can subject properties of the estate which are in the hands of the heirs/transferees to
the payment of the tax. (CIR vs. Pineda, 21 SCRA 105)

NOTE: The heirs have a solidary obligation to settle the estate. Hence, the BIR can collect
from or sue any of the heirs, but only up to the amount of that heirs share in the hereditary
estate. This is without prejudice to such heirs right of reimbursement from his co-heirs of
their share in the payment of the estate tax. (CIR vs. Pineda, 21 SCRA 105)

Measures to Insure Payment of Estate Tax

a. No judge shall authorize the executor or judicial administrator to deliver a

distributive share to any party interested in the estate unless a certification from the
Commissioner that the estate tax has been paid as shown. (Sec.94)
- by the court requiring the executor/administrator to submit an inventory of properties of
the estate, these properties are to be distributed only after payment of estate taxes and
receipt of clearance by the Commissioner or his duly authorized representative
- NOTE: The approval of the probate court is not required before estate taxes may be
collected. The enforcement and collection of taxes are executive in nature. (Marcos II vs. CA,
273 SCRA 47)

b. Registers of Deeds shall not register in the Registry of Property any document
transferring real property any document transferring real property or real right therein or
any chattel mortgage, by way of gift inter vivos or mortis causa, legacy or inheritance,
unless certification from the commissioner that the tax has been paid and the y shall
immediately notify the Commissioner, Regional Director, Revenue District Officer, or
Revenue collection Officer or treasurer of the city or municipality where their officer are
located, of the non-payment of the tax discovered by them. (Sec. 95)
- before the properties are transferred in the name of the heirs, a Certificate Authorizing
Registration (CAR) must be shown

c. Any lawyer notary public, or any Government Officer who, by reason of his official
duties, intervenes in the preparation or acknowledgement of documents regarding partition
or disposal of donation inter vivos or mortis causa, legacy or inheritance, shall have the duty
of furnishing the Commissioner, etc., with copies of such documents and any information
whatsoever, which may facilitate the collection of the aforementioned tax. (Sec. 95)
- ex: deed of extrajudicial settlement, deed of donation

d. Neither shall a debtor of a deceased pay his debts to the heirs, legatees, executor
or administrator of his creditor, unless a certification of the Commissioner that the tax fixed
has been paid is shown; but he may pay the executor or judicial administrator without said
certification if the credit is included in the inventory of the estate of the deceased. (Sec. 95)
- else: debtor may be personally liable for the payment of the lost tax, like a withholding
agent who fails to withhold taxes

e. Corporations, sociedad anonima, partnerships, business or industry organized in

the Philippines shall not transfer in their books any shares obligations, bonds or rights by
way of gift inter vivos or mortis causa, legacy or inheritance to the new owner unless a
certification from the Commissioner that the taxes fixed and due thereon have been is
shown; (Sec. 97)
- obligation of corporate secretary

f. If a bank has knowledge of the death of a person who maintained a bank deposit
account alone or jointly with another, it shall not allow any withdrawal from the said joint
deposit account unless the Commissioner has certified that the estate taxes imposed
thereon have been paid. However, the administrator of the estate or any of the heirs of the
decedent may, upon authorization by the Commissioner of Internal Revenue withdraw an
amount not exceeding P 20,00 without the said certification . (Sec. 97)

- For this purpose, all withdrawal slips shall contain a statement to the effect that all of the
joint depositors are still living at the time of withdrawal by any one of the joint depositors
and such statement shall be under oath. Otherwise, the joint depositor will be liable for
perjury (Sec. 267).

- joint accounts covered by this rule include and and and/or accounts, but do not include
an account subject to a Survivorship Agreement with a survivor-take-all feature (because
there is an automatic transfer of right to the survivor; hence, not included in gross estate of
the joint depositor who died tax avoidance scheme)

g. The estate tax together with interest, penalties, and costs that may accrue in
addition thereto constitutes a lien upon all property and rights to property belonging to the
taxpayer. The lien attaches when the taxpayer neglects or refuses to pay after demand.
(Sec. 219)

h. In judicial settlement of estates, the court is required to furnish the commissioner

of Internal Revenue a certified copy of the schedule of participation and the court order
approving the same within 30 days after its promulgation. (Sec. 91(b));

i. The estate tax shall be paid by the executor or administrator before delivery to any
beneficiary his distributive share of the estate (Sec. 91 (c)). He may be discharged from
personal liability for deficiency in the estate tax only after written application to the
commissioner and upon determination that no such deficiency appears. (Sec. 92)

NOTE: Additional Readings

1. Revenue Regulation 2-2003
2. Revenue Memorandum Order 15-2003

TAX TIPS: Avoidance of Estate Tax Liability

1. Maximize your claims for deductions such as the use of the transfers falling under the
exclusions from gross estate.

2. Donate properties to your relatives as the tax rates for donors taxes are lower than for
estate taxes.

3. Estate Planning (Section 40 (c), NIRC)

 - execute a Deed of Exchange; the properties of at most 5 persons in exchange for shares
of stock in order to obtain control of the corporation (more than 51% ownership)
- this exchange is not taxable for income tax purposes
- more tax savings if real properties are exchanged
- the properties in the deed will no longer be part of the gross estate as it is now owned by
the corporation
- the stock shares will be included in the gross estate but the tax would be lower as the
value at time of death might still be the same original value at the time of exchange; on
the other hand, if there was no exchange the estate tax for the land would be higher as
the value of the land at time of death will be higher than at the time of the acquisition.

4. Set up a living trust

- Trust: obligation imposed by a person regarding his
property
- Create an irrevocable trust over your properties so that they will not form part of your
gross estate when you die. This is because the Irrevocable Trust is a new taxpayer created.
- Ex: grandfather (Grantor) during his lifetime would like to give certain properties to his
grandchild. Until he reaches the age of maturity, the properties will be held in trust by X
(trustee) for the grandchild (Beneficiary).

DISTINCTION BETWEEN DONORS AND ESTATE TAX

DONORS TAX ESTATE TAX

Tax on the privilege to Tax on the privilege to
transmit property transmit property upon
during the lifetime of ones death
the donor
Tax rates are lower (2 Tax rates are higher (5
to 15) to20)
Exemption is only P Tax exemption is
100,000.00 P200,000.00
Notice of donation is Notice of death is
generally not required required

Extension of payment Extension of payment

is not provided may be granted by the
Commissioner of
Internal Revenue
Payable within 30 days Payable within 6
from the date of gift months from the date
of death
Imposed on the net Imposed on the net
gift estate

II. DONORS TAX / GIFT TAX

A. NATURE
- It is an excise (privilege) tax, imposed on the privilege of the donor to give or on the
privilege of the done to receive. It is not a tax on the property as such because its imposition
does not rest upon general ownership.

- The tax is imposed without reference to the death of the donor unlike in the case of estate
tax.

Donation / Gift
- an act of liberality whereby a person disposes gratuitously of a thing or right in favor of
another who accepts it.

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

a. any transfer in trust or otherwise, whether the gift is direct or indirect, and whether
the property is real or personal, tangible or intangible. (Sec. 98)

b. any transfer of property by gift, except in forced sales and in the sale of real property
which is a capital asset, for less than and adequate and full consideration in money or
moneys worth. (Sec. 100)

c. Condonation or remission of debt, where the creditor merely desires to benefit a

debtor and without any consideration therefore cancels the debt.

Requisites Of A Taxable Gift:

1.) CAPACITY of the donor to make the donation;
2.) DONATIVE INTENT or INTENT on the part of the donor to make a gift;
3.) DELIVERY, whether actual or constructive, of the gift; and
4.) ACCEPTANCE of the gift by the donee.

Note:
A. The donee, unlike the donor need not be capacitated.
B. donors tax applies now to both natural and juridical
persons.
C. donative intent must be present in direct gift but with respect to indirect gift, e.g. transfer
of property for less than an adequate and full consideration, donative intent is
superfluous. Thus, donative intent is not always essential to constitute a gift.
D. In Abello vs. CIR (Feb. 25, 2005), donative intent is evidenced by a reduction of patrimony
of one and an increase in patrimony to the other.

Purposes Of Gift Tax

1.) The gift tax was enacted originally to supplement the estate and inheritance taxes by
preventing their avoidance through the taxation of gifts inter vivos.
2.) The donors tax is also intended to prevent the avoidance of income tax through the
device of splitting income among numerous/different donees with the donor thereby
escaping the effect of the progressive rates of income taxation.

Kinds Of Gift Taxes:

1. Donors tax or tax levied on the act of giving; it supplements the estate tax; and
2. Donees tax or tax levied on the act of receiving; it was formerly the counterpart of
the inheritance tax, which has been integrated into an estate tax.

*Both taxes have now been integrated into a donors tax.

Parties To A Donation:
1. Donor - the Person who disposes of his property or right.
2. Donee - the Person who receives the property or right.

Properties Included In The Term Gift

(A). In the case of resident citizens, non-resident citizens and resident aliens:
1. Real property within and without the Philippines.
2. Tangible personal property within and without the Philippines; and
3. Intangible personal property within and without the Philippines.

(B.) In the case of non-resident aliens:

1. Real property within the Philippines.
2. Tangible personal property within the Philippines.
3. Intangible personal property within the Philippines, unless there is reciprocity in which
case, it is not taxable.

Note:
The specific items includible in the gross estate are applicable to and are embraced by
the term gift.

B. FACTORS AFFECTING LIABILITY FOR GIFT TAXES

1. Relationship of the donor and the donee

a) when the donee is considered a stranger to the
donor, the donors tax shall be 30% of the net gifts.
b) when the donee is a relative of the donor, the tax
shall be based on the 2-15% table under Sec. 99(A).

Stranger
1.) one who is not a :
(a) brother/sister (whole or half blood), spouse,
ancestor and lineal descendant
(b) relative by consanguinity in the collateral line
within the fourth degree of relationship
2.) donations made between individuals and business
organizations are considered donations to
strangers
3.) donations made between business organizations
are considered donations made to strangers
(RR 2-2003)

Note: Donees who have no blood relation to the donor are considered strangers to the
donor, such as those made to ones in-laws or to juridical persons.

2. Value of the Gift

- the higher the value of the gift, the higher the gift taxes

C. DEDUCTIONS / EXEMPTIONS FROM GIFT TAX

1. Gifts Made by a Resident:

a.) Dowries or gifts made on account of marriage before its celebration or within one year
thereafter by parents to each of their legitimate, illegitimate or adopted children to the
extent of the first P10,000.00.
 Requisites:
1. The donation must be given on account of marriage.
2. The parent must give it to his child.
3. The child must be either the legitimate, recognized natural or legally adopted child of
the donor, and;
4. It must be given before or one year after the celebration of the marriage.

b.) Gifts made to or for the use of the National Government or any of its agencies which is
not conducted for profit, or to any political subdivision of the said government.

c.) Gifts in favor of educational, charitable, religious, cultural or social welfare corporation,
institutions, foundations, trust or philanthropic organization, research institution or
organization, or accredited non-government organization. Provided, that no more than 30%
of said gifts shall be used by such donee for administration purposes.

Note:
For purposes of exemption, a non-profit educational and/or charitable corporation,
institution, accredited non-government organization, trust or philanthropic organization is
defined as:
school, trust or university and/ or charitable corporation, foundation trust or
philanthropic organization and/ or research institution or organization incorporated as
a non-stock entity:
paying no dividends.
governed by trustees who receive no compensation; and
devoting all its income to the accomplishment and promotion of the purposes
enumerated in its articles of incorporation.

Note:
Only donations made to non-stock, non-profit educational institutions are exempt from gift
taxes as although Article 14 of the Constitution states that proprietary educational
institutions may be given the same privileges subject to a guideline; as a guideline, the NIRC
does not provide for such exemption to them.

2. Gifts made by a Non-Resident Alien

a.) Gifts made to or for the use of the National Government or any entity created by of its
agencies which is not conducted for profit, or to any political subdivision of the said
government.

b.) Gifts in favor of educational, charitable, religious, cultural or social welfare corporation,
institution, foundations trust or philanthropic organization, research organization or
institution; Provided, that no more than 30% of said gifts shall be used by such donee
for administration purposes.
Note: doesnt include accredited NGO
Note:
1. Intangible personal property in the gross gift of a NON-RESIDENT ALIEN donor shall be
taxable in the Philippines, if the PRINCIPLE OF RECIPROCITY is not cognizable.

2. Intangible personal properties considered situated in the Philippines.

Franchise which must be exercised in the Philippines

 Shares of stocks issued by any corporation or sociedad anonima organized or
constituted in the Philippines in accordance with its laws.
Shares of stocks issued by any foreign corporation 85% of the business of which is
situated in the Philippines.
Shares of stock issued by a foreign corporation, if such shares, obligations, or bonds,
have acquired a business situs in the Philippines; and
Shares or rights in any partnership, business or industry established in the
Philippines.

D. TAX TREATMENT OF PROPERTIES TRANSFERRED FOR LESS THAN FULL /

ADEQUATE CONSIDERATION

General Rule: The amount by which the FMV of the property exceeded the value of the
consideration shall be deemed a gift

Exception: real properties classified as capital assets (not used in business) as there were
already subjected to Capital Gains Tax

E. TAX TREATMENT OF POLITICAL CONTRIBUTIONS

- any contribution in cash or in kind to any candidate, political party or coalition of parties for
campaign purposes shall be governed by the Election Code; hence, this is not subject to gift
tax (report to COMELEC?)

F. TAX CREDIT FOR DONORS TAXES PAID TO A FOREIGN COUNTRY

1. Donor was a Filipino citizen or resident alien, at the time of foreign donation
2. Donors taxes of any character and description are imposed and paid by the authority of a
foreign country.

Limitations:
A.) For donors tax paid to one foreign country;

The amount of tax credit in respect to the tax paid to any country shall not exceed
the same proportion of the tax against which credit is taken which the net gifts situated
within such country taxable under the National Internal Revenue Code bears to his entire
net gift, and

B.) For donors tax paid to two or more foreign countries:

The total amount of the credit shall not exceed the same proportion of the tax
against which such credit is taken, which the donors net gift situated outside the
Philippines taxable under the National Internal Revenue Code bears to his entire net gift.
Formula:

1. Donors Tax Paid to 1 Foreign Country

Tax Credit Limit =

Net gift situated in a foreign country X Phil. Donors Tax

Entire net gifts

2. Donors Taxes paid to 2 or more Foreign Countries

Tax Credit Limit =

Net gifts outside the Philippines X Phil. Donors Tax

Entire net gifts

Note:
Under limitation A the allowable tax credit limit is the LOWER AMOUNT between the
tax credit limit and the gift tax paid to the foreign country.

Under limitation B the allowable tax credit is the LOWER AMOUNT between the tax
credits; limit computed under A and that computed Under B.

Note: Void Donations Are Not Subject To Donors Tax

Such as:
Between husband and wife, even if the relationship has not been solemnized.
Between persons guilty of adultery or concubinage.
Between those found guilty of the same criminal offenses.
Between those made to a public officer or his wife, descendants, ascendants by reason
of his office.

Note: Effects Of General And Specific Renunciation

- An heirs general renunciation of inheritance in favor of a co-heir is not subject to donors
tax, but if it is specifically renounced in favor of a co-heir to the exclusion of others, it shall
be subject to donors tax.

Note: Renunciation of a surviving spouse of his/her share in the conjugal

partnership or absolute community after dissolution of marriage
- whether made in favor of the heirs of the deceased spouse or in favor of a third person, the
same is subject to donors tax

G. NET GIFT
- the total amount of gifts less the allowable deductions and specific exemptions.
- the total net gifts made during the SAME calendar year is used as basis for computing the
donors tax

H. VALUATION
- the gift tax is based on the fair market value of the gift at the time it was given

I. LAW APPLICABLE
- the law in force at the time of the perfection / completion of the donation shall govern the
imposition of donors tax. A donation is considered as completed FOR TAX PURPOSES at the
time the donee accepts the gift.

J. ADMINISTRATIVE PROVISIONS

1. Filing of notice of donation

General Rule: Filing of notice of donation is not required

Exception: if the donor wishes to claim exemption from tax and the donee is an organization
under Sec.101(A3) and Sec. 101 (B2)

Requisites to be exempt from gift tax :

1. Donor is engaged in business
2. Donee is any of the organizations mentioned under Sec. 101(A3) and Sec. 101 (B2)
3. Donor must give notice to the RDO on every donation worth at least P50,000.
4. The notice must be given within 30 days from the issuance by the donee of a
Certificate of Donation.
5. The certificate of Donation must be attached to the notice.

2. Filing of Donors Tax Return

- within 30 days after the completion of the gift
- donation is completed FOR TAX PURPOSES at the time the donee accepts the gift
- Contents:
1. Gifts made during the calendar year
2. Deductions claimed and allowed
3. Previous net gifts made during the year
4. Name of the done
5. Relationship of the donor and the done
6. Other information as may be required

3. Payment of Donors Tax

- pay as you file the tax return
- Note: if the donors tax was paid for the transfer, there is no more need to subject the
transfer again to estate tax. Applying the Back Tax Theory, there is no tax that remained
unpaid regarding this transfer.

4. Extensions For Payment Of Donors Tax

- the NIRC does not provide for any extension for payment of gift tax, as it is presumed that
if you can donate, you still have sufficient properties to pay for the tax. Unlike in estate tax
where extension is granted, because the payment of the tax may cause undue hardship on
the heirs specifically for non-liquid properties which requires time to be sold first to be
converted into cash for payment of the estate tax.

TAX TIPS : Avoidance of Gift Taxes

Execute a Deed of Extra-judicial Settlement with simultaneous general renunciation of all
inheritance
(by operation of law, the renounced inheritance will go to the co-heirs anyway).

PROBLEMS ON DOWRY DEDUCTION

1. A is the child of H and W
January A got married, H and W gave him P2,000
March H and W gave A P2,000
April H and W gave A another P2,000
Can the parents claim dowry deduction even if these were made on a staggered basis?

- Yes, provided these were made on account of marriage, before the marriage or 1 year
thereafter.

2. January - A married B and was given dowry

February B died
December A married C and was given dowry
Can the parents of A still claim dowry deduction even if it was claimed already for the
January dowry?

- There is no rule on the matter yet but it is submitted that as it was made on account of 2
different marriages, the deduction for the December dowry may be made.

3. A and C are the children of H and W

January - A married B, given dowry
February C married D, given dowry
Can H and W claim dowry deduction for both?
-Yes, as the dowries were given to different children

4. H and W jointly donated to their child A 1M on account of his marriage to B. Show

computation.

For each of H and W the computation is:

500,000 to A 250,000
- to B 250,000

A B
250,000 250,000
-10,000 _______
240,000 250,000
*2 to 15% * 30%
3, 600 75,000

Note: Do not deduct the first 100,000 in case of donee-relatives as this is incorporated
already in the table under Section 99.

General Rule: H and W are considered separate and distinct taxpayers for purposes of
donors tax.
Exception: What was donated is a conjugal property and only H signed. There is only one
donor, without prejudice to the right of W to question the validity of the donation without
her consent.

PROBLEMS
1. Donations made by X
January 300,000 to his brother
April 400,000 to his sister
August 500,000 to his mother

Compute donors tax:

a) For January donation
= 300,000 * (percentage in the 2 to 15% table) = tax
b) For April Donation
 = (300,000 + 400,000) * (2 to 15% table) = tax
c) For August Donation
= (300,000 + 400,000 + 700,000) * (2 to 15% table)
= tax less tax paid for January and April
2. X wants to give Y 200,000, will there be tax savings to X if he will donate one time the
amount of 200,000 or should he split by donating 100,000 on December 2007 and 100,000
on January 2008?

- It depends if X and Y are relative or not.

a) relatives yes, there will be savings as under the table in Section 99, the first 100,000 is
exempt from Donors tax. No donors tax will then be paid for both donations.

b) strangers nom there will be no tax savings. A flat rate if 30% is imposed on donations
made between strangers; hence, the same amount of P60,000 donors tax will be paid
whether made one time or split.

3. X died and left 1M each to his heirs A, B, C. The heirs agreed to settle extrajudicially.

a) A renounced his inheritance in favor of B. Is there liability for donors tax?

- Yes, this is a case of waiver. A is deemed to have accepted the property before he gave it
to B as one cannot give what one does not own. A specific renunciation is taxable.

b) A renounced his share without specifying a co-heir who will receive the same. Is there
liability for donors tax?

- No donors tax because as if A never inherited anything from X and the transfer was made
directly from X to B and C.

VALUE ADDED TAX

A. Value Added Tax

- Indirect Tax
- It is not the tax itself which is shifted or passed but it is the
burden to pay the tax
Why? Tax is Personal. Seller is still liable, only that the
economic burden is shouldered by the buyer.

B. Transactions Subject to VAT (ISBEL)

a. Importation whether or not in the regular course of
business
b. Sale conducted in the
c. Barter regular course
d. Exchange of business
e. Lease

* The phrase in the course of business means the regular conduct or pursuit of a commercial or
an economic activity, including transactions incidental thereto, by any person regardless of
whether or not the person engaged therein is a non-stock, non-profit private organization
(irrespective of the disposition of its net income and whether or not it sells exclusively to
members or their guests), or government entity.
 * VAT becomes due when the following conditioned concur:

a. There is sale, barter, exchange, transfer or similar transactions, either for nominal or
valuable consideration, intended to transfer ownership of, or title to, articles imported,
milled, produced or manufactured; and

b. The sale is consummated, not merely perfected, in the Philippines. The place where the
title to the thing passes determines the place of delivery or tax situs.

C. Specific Characteristics of VAT

a. Consumption Based Tax

- the person who last consumes the product absorbs the effect of VAT

1. Destination Principle
- Goods are destined to be consumed in the Philippines

2. Cross-border principle
- Goods going out of the Philippines shall not be subjected to tax since these goods
are not destined to be consumed in the Phils.

*VAT is imposed only on whatever value was added.

D. Exempt Transactions (Sec. 109, NIRC, as amended by RA 9337)

E. Zero rating vs. Exemption

a. A zero-rated scale is taxable transaction, but does not result in an output tax while an
exempted transaction is not subject to the output tax;
b. The input VAT on the purchases of VAT-registered person with zero-rated sales may
be allowed as tax credits or refunded while the seller in an exempt transaction is not
entitled to any input tax on his purchases despite the issuance of a VAT invoice or
receipt; and
c. Persons engaged in transactions which are zero-rated, being subject to VAT, are
required to register while registration is option for VAT-exempt persons.

F. Tax Credits
a. Transitional Input Tax Credits (Sec. 111(A), NIRC, as amended by RA 9337)
b. Presumptive Input Tax Credits (Sec. 111(B), NIRC, as amended by RA 9337)

TAX ADMINISTRATION AND ENFORCEMENT

A. Tax Administration: Its general concepts

- is the power of the Bureau of Internal Revenue (BIR) to enforced and
administer taxes.

B. Government agencies involved in tax administration

- the BIR and Bureau of Customs are tasked to implement revenues laws as
the case may be.

C. The Bureau of Internal Revenue

a. Composition Functions
 - The Bureau of Internal Revenue shall have a chief to be known as
Commissioner of Internal Revenue, hereinafter referred to as the
Commissioner and four (4) assistant chiefs to be known as Deputy
Commissioners. (Sec. 3, NIRC)

b. Powers and Duties

i. In general

- The Bureau of Internal Revenue shall be under the supervision and control of
the Department of Finance and its powers and duties shall comprehend the
assessment and collection of all national internal revenue taxes, fees, and
charges, and the enforcement of all forfeitures, penalties, and fines
connected therewith, including the execution of judgments in all cases
decided in its favor by the Court of Tax Appeals and the ordinary courts. The
Bureau shall give effect to and administer the supervisory and police powers
conferred to it by this Code or other laws. (Sec. 2, NIRC)

ii. Specific
1. Interpret tax laws and decide cases (Sec.4, NIRC)

- The power to interpret the provisions of this Code and other tax laws shall
be under the exclusive and original jurisdiction of the Commissioner, subject
to review by the Secretary of Finance.

The power to decide disputed assessments, refunds of internal revenue taxes,

fees or other charges, penalties imposed in relation thereto, or other matters
arising under this Code or other laws or portions thereof administered by the
Bureau of Internal Revenue is vested in the Commissioner, subject to the
exclusive appellate jurisdiction of the Court of Tax Appeals.

a. BIR Issuances and rules relevant thereto

The power to issue regulations is expressly conferred in the Tax Code.

Thus, the Secretary of Finance, upon the recommendation of the
Commissioner, shall promulgate all needful rules and regulations for
the effective enforcement of the provisions of the Tax Code. (see
Sec.244, NIRC). The rules and regulations of the Bureau shall contain,
among others, provisions specifying, prescribing or defining the time
and manner of canvassing revenue regions, form of labels, conditions
to be observed by revenue officers respecting the institutions and
conduct of legal actions. (see Sec.245, NIRC)

- the Bureau has the power to issue rules and issuances as the case may be
but subject to the following rule:

SEC. 246. Non-Retroactivity of Rulings. - Any revocation, modification or

reversal of any of the rules and regulations promulgated in accordance with the
preceding Sections or any of the rulings or circulars promulgated by the
Commissioner shall not be given retroactive application if the revocation,
modification or reversal will be prejudicial to the taxpayers, except in the following
cases:

(a) Where the taxpayer deliberately misstates or omits material facts from his return
or any document required of him by the Bureau of Internal Revenue;
 (b) Where the facts subsequently gathered by the Bureau of Internal Revenue are
materially different from the facts on which the ruling is based; or

(c) Where the taxpayer acted in bad faith.

2. Examination of Books of Accounts (Sec. 5, NIRC)

- the Bureau has the power to examine books of accounts of every person
(taxpayer) engaged in a business

a. however before a tax official could inquire into said books of

accounts a letter of authority is required.

b. What is third-party verification rule?

- In ascertaining the correctness of any return, or in making a return when none

has been made, or in determining the liability of any person for any internal
revenue tax, or in collecting any such liability, or in evaluating tax compliance,
the Commissioner is authorized to obtain on a regular basis from any person
other than the person whose internal revenue tax liability is subject to audit or
investigation, or from any office or officer of the national and local governments,
government agencies and instrumentalities, including the Bangko Sentral ng
Pilipinas and government-owned or -controlled corporations, any information
such as, but not limited to, costs and volume of production, receipts or sales and
gross incomes of taxpayers, and the names, addresses, and financial statements
of corporations, mutual fund companies, insurance companies, regional operating
headquarters of multinational companies, joint accounts, associations, joint
ventures of consortia and registered partnerships, and their members;

c. Inquiry into bank deposits (Sec 6 {f}), NIRC)

General Rule:

The Bureau of Internal Revenue has no power to inquire into the bank deposits
of a person or taxpayer.

Exceptions:

Notwithstanding any contrary provision of Republic Act No. 1405 and other
general or special laws, the Commissioner is hereby authorized to inquire into the
bank deposits of:

1) a decedent to determine his gross estate; and

(2) any taxpayer who has filed an application for compromise of his tax
liability under Sec. 204 (A) (2) of this Code by reason of financial incapacity to pay his
tax liability.

In case a taxpayer files an application to compromise the payment of his tax

liabilities on his claim that his financial position demonstrates a clear inability to pay the tax
assessed, his application shall not be considered unless and until he waives in writing his
privilege under Republic Act No. 1405 or under other general or special laws, and such
waiver shall constitute the authority of the Commissioner to inquire into the bank deposits of
the taxpayer.
 Such limited power of the Commissioner does not conflict with R.A 1405 or the
Secrecy of Bank Deposits Law because the provisions of the Tax Code granting this power
are an exception to the said legislation.

If the bank has knowledge of the death of a person, who maintained a bank deposit
account either alone or jointly with another, it shall not allow any withdrawal from the said
deposit account, unless the Commissioner has certified that the transfer taxes imposed
thereon have been paid. However the administrator of the estate or any one of the heirs of
the decedent may, upon authorization by the Commissioner, withdraw an amount not
exceeding twenty thousand pesos (P20, 000.00) without the certification. For this purpose
all withdrawal slips shall contain a statement to the effect that all of the joint depositors are
still living at the time of withdrawal by any one of the joint depositors and such statement
shall be under oath by the said depositors.

d. Summons persons, take testimony

In ascertaining the correctness of any return, or in making a return when none has
been made, or in determining the liability of any person for any internal revenue tax, or in
collecting any such liability, or in evaluating tax compliance, the Commissioner is
authorized:

1. To summon the person liable for tax or required to file a return, or any officer or
employee of such person, or any person having possession, custody, or care of the books of
accounts and other accounting records containing entries relating to the business of the
person liable for tax, or any other person, to appear before the Commissioner or his duly
authorized representative at a time and place specified in the summons and to produce such
books, papers, records, or other data, and to give testimony (Sec.5 {c}, NIRC)

2. To take such testimony of the person concerned, under oath, as may be relevant
or material to such inquiry (Sec.5 {d}, NIRC)

- To summon the person liable for tax or required to file a return, or any officer
or employee of such person, or any person having possession, custody, or care of the books
of accounts and other accounting records containing entries relating to the business of the
person liable for tax, or any other person, to appear before the Commissioner or his duly
authorized representative at a time and place specified in the summons and to produce such
books, papers, records, or other data, and to give testimony.

3. Power to assess and prescribe requirements for tax administration

a. Power to examine returns (Sec. 6 {a}, NIRC)

- After a return has been filed as required under the provisions of this
Code, the Commissioner or his duly authorized representative may authorize
the examination of any taxpayer and the assessment of the correct amount of
tax: Provided, however; That failure to file a return shall not prevent the
Commissioner from authorizing the examination of any taxpayer.
Any return, statement of declaration filed in any office authorized to
receive the same shall not be withdrawn: Provided, That within three (3)
years from the date of such filing, the same may be modified, changed, or
amended: Provided, further, That no notice for audit or investigation of such
return, statement or declaration has in the meantime been actually served
upon the taxpayer.

i. Amendment of Returns
 When a report required by law as a basis for the assessment of any
national internal revenue tax shall not be forthcoming within the time fixed by
laws or rules and regulations or when there is reason to believe that any such
report is false, incomplete or erroneous, the Commissioner shall assess the
proper tax on the best evidence obtainable.
In case a person fails to file a required return or other document at the
time prescribed by law, or willfully or otherwise files a false or fraudulent
return or other document, the Commissioner shall make or amend the return
from his own knowledge and from such information as he can obtain through
testimony or otherwise, which shall be prima facie correct and sufficient for
all legal purposes. (Sec. 6 {b}, NIRC)

ii. Rule on confidentiality of tax returns and exceptions thereto (Sec.71

and 270, NIRC)

- After the assessment shall have been made, as provided in this Title,
the returns, together with any corrections thereof which may have been made
by the Commissioner, shall be filed in the Office of the Commissioner and shall
constitute public records and be open to inspection as such upon the order of
the President of the Philippines, under rules and regulations to be prescribed
by the Secretary of Finance, upon recommendation of the Commissioner.

The Commissioner may, in each year, cause to be prepared and

published in any newspaper the lists containing the names and addresses of
persons who have filed income tax returns. (see Sec.71, NIRC)

Any internal revenue officer who is or shall become interested, directly

or indirectly, in the manufacture, sale or importation of any article subject to
excise tax under Title VI of this Code or in the manufacture or repair or sale, of
any die for printing, or making of stamps, or labels shall upon conviction for
each act or omission, be punished by a fine of not less than Five thousand
pesos (P5,000) but not more than Ten thousand pesos (P10,000), or suffer
imprisonment of not less than two (2) years and one (1) day but not more
than four (4) years, or both. (see Sec.270, NIRC)

b. Power to make a returns (Sec.6 {b}, NIRC)

What is Best Evidence Obtainable Rule?

- In case a person fails to file a required return or other document at the time
prescribed by law, or willfully or otherwise files a false or fraudulent return or
other document, the Commissioner shall make or amend the return from his
own knowledge and from such information as he can obtain through
testimony or otherwise, which shall be prima facie correct and sufficient for
all legal purposes.

c. Power to conduct inventory taking, surveillance and to issue

presumptive gross sales/receipts (see Sec.6 {c}, NIRC)
- The Commissioner may, at any time during the taxable year, order inventory-
taking of goods of any taxpayer as a basis for determining his internal revenue tax
liabilities, or may place the business operations of any person, natural or juridical,
under observation or surveillance if there is reason to believe that such person is
not declaring his correct income, sales or receipts for internal revenue tax purposes.
The findings may be used as the basis for assessing the taxes for the other months or
quarters of the same or different taxable years and such assessment shall be
deemed prima facie correct.

When it is found that a person has failed to issue receipts and invoices in
violation of the requirements of Sections 113 and 237 of the Tax Code, or when there
is reason to believe that the books of accounts or other records do not correctly
reflect the declarations made or to be made in a return required to be filed under the
provisions of this Code, the Commissioner, after taking into account the sales,
receipts, income or other taxable base of other persons engaged in similar
businesses under similar situations or circumstances or after considering other
relevant information may prescribe a minimum amount of such gross receipts, sales
and taxable base, and such amount so prescribed shall be prima facie correct for
purposes of determining the internal revenue tax liabilities of such person.

d. Power to terminate tax period (see Sec. 6 {d}), NIRC)

- When it shall come to the knowledge of the Commissioner that a taxpayer is
retiring from business subject to tax, or is intending to leave the Philippines
or to remove his property therefore or to hide or conceal his property, or is
performing any act tending to obstruct the proceedings for the collection of
the tax for the past or current quarter or year or to render the same totally or
partly ineffective unless such proceedings are begun immediately, the
Commissioner shall declare the tax period of such taxpayer terminated at
any time and shall send the taxpayer a notice of such decision, together with
a request for the immediate payment of the tax for the period so declared
terminated and the tax for the preceding year or quarter, or such portion
thereof as may be unpaid, and said taxes shall be due and payable
immediately and shall be subject to all the penalties hereafter prescribed,
unless paid within the time fixed in the demand made by the Commissioner.

- the BIR has the power to terminate tax period under the following instances:

when the taxpayer conceals his properties with the intention to evade
taxes
when the taxpayer is leaving the Philippines with the intention to evade
taxes
when the taxpayer is obstructing proceedings for the collection of taxes
when the taxpayer is removing properties with the intention of evading
taxes
when the taxpayer is retiring form business

e. Power to fix real property values (see Sec.6 {e}, NIRC)

- The Commissioner is authorized to divide the Philippines into different zones

or areas and shall, upon consultation with competent appraisers both from the
private and public sectors, determine the fair market value of real properties
located in each zone or area. For purposes of computing any internal revenue
tax, the value of the property shall be whichever the higher is of:

(1) The fair market value as determined by the Commissioner, or

 (2) The fair market value as shown in the schedule of values of the
Provincial and City Assessors.

f. Power to accredit tax agents (see Sec.6 {g}, NIRC)

- The Commissioner shall accredit and register, based on their professional
competence, integrity and moral fitness, individuals and general professional
partnerships and their representatives who prepare and file tax returns,
statements, reports, protests, and other papers with or who appear before,
the Bureau for taxpayers. Within one hundred twenty (120) days from
January 1, 1998, the Commissioner shall create national and regional
accreditation boards, the members of which shall serve for three (3) years,
and shall designate from among the senior officials of the Bureau, one (1)
chairman and two (2) members for each board, subject to such rules and
regulations as the Secretary of Finance shall promulgate upon the
recommendation of the Commissioner.

Individuals and general professional partnerships and their representatives

who are denied accreditation by the Commissioner and/or the national and
regional accreditation boards may appeal such denial to the Secretary of
Finance, who shall rule on the appeal within sixty (60) days from receipt of
such appeal. Failure of the Secretary of Finance to rule on the Appeal within
the prescribed period shall be deemed as approval of the application for
accreditation of the appellant.

g. Power to prescribe procedural/documentary requirements

- the BIR has the power to prescribe the manner of filing of a returns

h. Power to delegate (see Sec.7, NIRC)

- The Commissioner may delegate the powers vested in him under the
pertinent provisions of the Tax Code to any or such subordinate officials with
the rank equivalent to a division chief or higher, subject to such limitations
and restrictions as may be imposed under rules and regulations to be
promulgated by the Secretary of finance, upon recommendation of the
Commissioner: Provided, however, That the following powers of the
Commissioner shall not be delegated:

(a) The power to recommend the promulgation of rules and regulations by the
Secretary of Finance;

(b) The power to issue rulings of first impression or to reverse, revoke or

modify any existing ruling of the Bureau;

(c) The power to compromise or abate, under Sec. 204 (A) and (B) of this
Code, any tax liability: Provided, however, That assessments issued by the
regional offices involving basic deficiency taxes of Five hundred thousand
pesos (P500,000) or less, and minor criminal violations, as may be determined
by rules and regulations to be promulgated by the Secretary of finance, upon
recommendation of the Commissioner, discovered by regional and district
officials, may be compromised by a regional evaluation board which shall be
composed of the Regional Director as Chairman, the Assistant Regional
Director, the heads of the Legal, Assessment and Collection Divisions and the
Revenue District Officer having jurisdiction over the taxpayer, as members;

(d) The power to assign or reassign internal revenue officers to establishments

where articles subject to excise tax are produced or kept.
 i. Non-delegable powers in relation to Section 16 of NIRC

- the following are the powers which the Bureau of Internal Revenue cannot
delegate:

a. the power to compromise

- as a general rule the power of the BIR to compromise cannot be delegated to

other administrative agencies unless in the following grounds:
1. a reasonable doubt as to the validity of the claim against the
taxpayer exists
2. financial inability to pay

The compromise settlement of any tax liability shall be subject to the following
minimum accounts:

a. For cases of financial inability to pay, a minimum compromise rate equivalent

to ten per cent (10%) of the basic tax assessed

b. For other cases, a minimum compromise rate equivalent to forty percent

(40%) of the basic tax assessed.

Where the basic tax involved exceeds One million pesos (P 1,000,000.00) or where
the settlement offered is less than the prescribed minimum rates, the compromise
shall be subject to the approval of the Evaluation Board which shall be composed of
the Commissioner and the Deputy Commissioners.

All criminal violations may be compromised except those

a. those already filed in court

b. those involving fraud (see Sec. 204 {a}, NIRC)

The taxpayers offer to compromise shall not be considered, unless and until
he waives in writing his privilege under RA 1405 or under other general or
special laws, and such waiver shall constitute the authority of the
Commissioner to inquire into his bank deposits. (see Sec. 6 {f}, NIRC)

b. power to abate

The BIR may abate or cancel tax liability when:

a. the tax or any portion thereof appears to be unjustly or excessively

assessed
b. the administration and collection costs involved do not justify the
collection of the amount due

The power to compromise or abate shall not be delegated by the Commissioner,

except in the following cases;

a. assessments issued by the regional offices involving basic taxes of

P 500,000.00 or less

b. Minor criminal violations. These cases may be compromised by the

regional evaluation board. (see Sec.7, NIRC)
 i. Enforcement of police power (see Sec.15, NIRC)

The Commissioner, the Deputy Commissioners, the Revenue Regional Directors, the
Revenue District Officers and other internal revenue officers shall have authority to
make arrests and seizures for the violation of any penal law, rule or regulation
administered by the Bureau of Internal Revenue. Any person so arrested shall be
forthwith brought before a court, there to be dealt with according to law.

j. Authority to Abate and Compromise Tax Liabilities (see Sec.6 {f}{2}, 204
in relation to Rev. Regs.30-2002 as amended by RR No.8-2004)

SEC. 204. Authority of the Commissioner to Compromise, Abate and Refund

or Credit Taxes. - The Commissioner may -

(A) Compromise the Payment of any Internal Revenue Tax, when:

(1) A reasonable doubt as to the validity of the claim against the taxpayer
exists; or
(2) The financial position of the taxpayer demonstrates a clear inability to
pay the assessed tax.

The compromise settlement of any tax liability shall be subject to the

following minimum amounts:

For cases of financial incapacity, a minimum compromise rate

equivalent to ten percent (10%) of the basic assessed tax; and
For other cases, a minimum compromise rate equivalent
to forty percent (40%) of the basic assessed tax.

Where the basic tax involved exceeds One million pesos (P1,000.000) or where the
settlement offered is less than the prescribed minimum rates, the compromise shall be
subject to the approval of the Evaluation Board which shall be composed of the
Commissioner and the four (4) Deputy Commissioners.

(B) Abate or Cancel a Tax Liability, when:

(1) The tax or any portion thereof appears to be unjustly or excessively

assessed; or
(2) The administration and collection costs involved do not justify the
collection of the
amount due.

All criminal violations may be compromised except: (a) those already filed in
court, or (b) those involving fraud.

D. The rule on estoppel in relation to tax administration

a. Against the government

The error made by a tax official in the assessment of his tax liabilities does not have the
effect of relieving the taxpayer from the obligation to pay the full amount of his tax liability,
for taxes are fixed by law and the government is never estopped to collect the legitimate
taxes because of the errors committed by its agents. However, like other principles, the
principle of estoppel also admits exceptions in the interest of justice and fair play. The
Commissioner is precluded from adopting a position inconsistent with one previously taken
where in justice would result therefore or where there has been a misrepresentation.

Any mistakes committed by the agents of the sovereign, namely

government officials and employees are their own and cannot bind the government, which
cannot be placed on estoppel on account of the mistakes of its agents.

b. Against the taxpayer

E. Assessments and its governing principles

a. Definition
The notice and demand for payment of a tax liability should not be confused with
assessment relative to real property taxation which refers to the listing and
evaluation of taxable real property.

b. What constitutes an assessment

i. CIR v. Pascor Realty, 29 June 1999

Neither the NIRC nor the revenue regulations governing the protest of assessments
provide a specific definition of form of an assessment however the NIRC defines the
specific function and effects of an assessment:

An assessment must be sent to and received by a tax payer, and must demand
payment of the taxes described therein within a specific period.
Issuance of an assessment is vital in determining the period of limitation regarding
its proper issuance and the period within which to protest.
An assessment is deemed made only when the collector of Internal Revenue
releases or mails or sends such notice to the tax payer.
An assessment is not necessary before acriminal charge can be filed.
Before an assessment is issued, there is by practice, a pre-assessment notice sent
to the tax payer.The tax Payer is then given a chance to submit position papers and
documents to prove that the assessment is unwarranted. If the commissioner is
unsatisfied, an assessment signed by him/her is then sent to the tax payer
informing the latter specifically and clearly that an assessment has been made
against him/her. In contrast, the criminal charge need not go through all this.

ii. CIR v. Reyes, G.R. No. 159694, January 27, 2006

Tax payers shall be informed in writing of the law and the facts on which the
assessment and the assessment is made; otherwise the assessment shall be void.
(2nd paragraph of section 228 is clear and mandatory)

c. Kinds of Assessment

d. Statute of Limitation on Assessment of Internal Revenue Taxes (Sections

203, 222, NIRC)

General rule (sec203)

Internal revenue taxes shall be assessed within three years after the last day
prescribed for the filing of the return, and no proceeding in court without assessment
for the collection of sluch taxes shall begun after the expiration of such period.

Exceptions (sec.222)
 In the case of a false of fraudulent return with intent to evade tax or of failure to file a
return, the tax collection may be filed without an assessment at any time within ten
years after the discovery of the falsity, fraud or omission:

If before the expiration of the time prescribed in the tax codes for the assessment of
the tax, both the commissioner and the taxpayer have agreed in writing to its
assessment after such time, the tax may be assessed within the period agreed upon.

i. RMO 20-90, Philippine Journalist Inc., v. CIR, G.R. No. 162852, 16

December 2004

Appellate Jurisdiction of the CTA is not limited to cases which involve decisions of the
CIR on matters relating to assessments or refunds. The second part of the provision
covers other cases that arise out of the NIRC or related laws and administered by the
BIR. The wording of the provision is clear and simple. It gives the CTA the Jurisdiction
to determine if the warrant of distraint and levy issued by the BIR is valid and to rule
if the waiver of stature of limitations was validly effected.

A waiver of the statute of limitations under the NIRC, to a certain extent, is a

derogation of the taxpayers right to security against prolonged and unscrupulous
investigations and must therefore be carefully and strictly construed. The waiver of
the statute of limitations is not a waiver of the right to invoke the defense of
prescription as erroneously held by the CA. It is an agreement between the taxpayer
and the BIR that the period to issue an assessment and collect the taxes due id
extended to a date certain.

The waiver does not mean that the taxpayer relinquishes the right to invoke
prescription unequivocally particularly where the language of the document is
equivocal. For the purpose of safeguarding taxpayers from any unreasonable
examination, investigation or assessment, out tax law provides a statute of limitation
in collection of taxes. Thus the law on prescription, being a remedial measure should
be liberally construed in order to afford such protection/

ii. CIR v. CA and Carnation, G. R. No. 115712, 25 February 1999

Finality of findings of facts as a matter of principle, this court will not set aside the
conclusion reached by an agency such as the CTA unless there has been an abuse or
improvident exercise of authority. By the very nature of its function, dedicated
exclusively to the study and consideration of tax problems and has necessarily
developed an expertise of the subject.

e. Instances where the running of the prescriptive period is suspended (section

223)

i. Republic v. Hizon, 13 December 1999

Sec. 229 of the code mandates that a request for reconsideration must be made
within thirty (30) days from the tax payers receipt of tax deficiency assessment,
otherwise the assessment becomes final, unappealable and, therefore, demandable.
The notice of assessment for respondents tax deficiency was issued by petitioner on
July 18, 1986. On the other hand, respondent made her request for reconsideration
thereof only on November 3. 1992, without stating when she received the notice of
tax assessment. She explained that she was constrained to ask for a reconsideration
in order to avoid the harrrasment of BIR collectors. In all likelihood, she must have
been referring to the distraint and levy of her properties by petitioners agents which
 took place of January 12, 1989. Even assuming that she first learned of the deficiency
assessment on this date her request for reconsideration was nonetheless filed late
since she made it more than 30 days thereafter. Hence, her request for
reconsideration did not suspend the running for the prescriptive period provided
under section 223. Although the commissioner acted on her request by eventually
denying it on August 11, 1994, this is of no moment and does not distract from the
fact that the assessment had become demandable

ii. BPI v. CIR, G.R. No. 139736, 17 October 2005

The court had consistently ruled in a number of cases that a request for
reconsideration by the tax payer without a valid waiver of the prescriptive period for
the assessment and collection of tax, as required by the tax code and implementing
rules, will not suspend the running thereof. (Exception: section 224)

Wherein the statute of limitations on assessment and collection of taxes is considered

suspended, when the tax payer request for a reinvestigation which is granted by the
commissioner.

f. Procedure in the process of assessment (Section 228)

i. Estate of the Late Juliana Diez Vda. De Gabriel v. CIR, G.R. No. 155541,
January 27, 2004

The rule that an assessment is deemed made for the purpose of giving effect to such
assessment when the notice is released, mailed or sent to the taxpayer to effectuate
the assessment requires that the notice must be sent to the taxpayer, and not merely
to a disinterested party. Although there is no specific requirement that the taxpayer
should receive that notice within the said period, due process requires at the very
least that such notice actually be received.

When an estate is under administration, notice must be sent to the administrator of

the estate.

ii. CIR v. Reyes, G.R. No. 159694, January 27, 2006

The tax payers shall be informed in writing of the law and facts on which the
assessment is made otherwise the assessment itself is void.

iii. CIR v. BPI, G.R. No. 134062, 17, April 2007

The inevitable conclusion is that BPIs failure to protest the assessments within the
30-day period provided in the former section 270 meant that they became final and
unappealable. Thus, the CTA correctly dismissed BPIs appeal for lack of jurisdiction.
BPI was, from then on barred from disputing the correctness of the assessments or
invoking any defense that would reopen the question of its liability on the merits. Not
only that. There arose a presumption of correctness when BPI failed to protest the
assessments: Tax assessments by tax examiners are presumed correct and made in
good faith. The taxpayer has the duty to prove otherwise. In the absence of proof of
any irregularities in the performance of duties, an assessment duly made by a BIR
examiner and approved by his superior offices will not be disturbed. All presumptions
are in favor of the correctness of tax assessments.

iv. PNOC v. Court of Appeals, G.R. No., 109976, April 26, 2005
 The defense of prescription of the period for the assessment and collection of tax
liabilities shall be deemed waived when such defense was not properly pleaded and
the facts alleged and evidenced submitted by the parties were not sufficient to
support a finding by the supreme court on the matter prescription, being a matter
of defense, imposes the burden on the taxpayer to prove that the full period of the
limitation has expired, and this requires him to positively establish the date when the
period started running and when the same was fully accomplished.

g. Instances when pre-assessment is not required (Section 228)

A preassessment notice shall not be required in the following cases:
When any tax deficiency is the result of mathematical error in the computation
of the tax as appearing on the face of the return.
When a discrepancy has been determined between the tax withheld and the
amount actually remitted by the withholding agent.
When a taxpayer who opted to claim a refund or tax credit of excess creditable
withholding tax for a taxable period was determined to have carried over and
automatically applied the same amount claimed against the estimated tax
liabilities for the taxable quarter or quarters of the succeeding taxable year.
When the excise tax due on exciseable articles has not been paid.
When the article locally purchased or imported by an exempt person has been
sold, traded, or transferred to non-exempt persons.

h. Governing principles concerning assessment

Injunction is not available to restrain the collection of internal revenue taxes.

Exception: the Court of Appeals may issue injunctions against administrative

collection, when collection could jeopardize the interest of the Government or
taxpayer.

i. When do we reckon the period when the assessment was made?

Internal revenue taxes shall be assessed within three years after the last day
prescribed by law for the filing of the return.

In case where a return is filed beyond the three year period shall be counted form the
day the return was filed.

j. Is assessment necessary before a taxpayer could be prosecuted for violation

of the NIRC?

i. Ungab v. Cusi, May 30, 1980

What is involved here is not collection of taxes where the assessment of the
commissioner of internal revenue may be reviewed by the court of tax appeals, but a
criminal prosecution for violations of the NIRC which is within the recognizance of the
CFI. While there can be no civil action to enforce collection before the assessment
procedures provided in the code have been followed, there is no requirement for the
precise computation and assessment of the tax before there can be a criminal
prosecution under the code.

ii. CIR v. CA, G.R. No. 119322, 4 June 1996

 Reading Ungab carefully, the pronouncement therein that deficiency assessment is
not necessary prior to prosecution is pointedly and deliberately qualified by the Court
with following statement quoted form Guzik v. U. S.: the crime is complete when the
violator has knowingly and willfully filed a fraudulent return with intent to evade and
defeat a part or all of the tax. In plain words, for criminal prosecution to proceed
before assessment, there must be a prima facie showing of willful attempt to evade
taxes. There was willful attempt to evade tax in Ungab because of the taxpayers
failure to declare in his income tax return his income derived from banana saplings.
In the mind of the trial court and the Court of Appeals, Fortunes situation is quite
apart factually since the registered wholesale price of the goods. Approved by the
BIR, is presumed to be the actual wholesale price, therefore, not fraudulent and
unless and until the BIR has made a final determination of what is supposed to be
the correct taxes, the taxpayer should not be placed in the crucible of criminal
prosecution. Herein lies a whale of difference between Ungab and the case at bar.

iii. CIR v. Pascor Realty, 29 June 1999

The issuance of an assessment is vital in determining the period of limitation

regarding its proper issuance and the period within which to protest it. Section 203 of
NIRC provides that internal revenue taxes must be assessed within three years from
the last day within which to file the return. Section 222, on the other hand, specifies
a period of ten years in case a fraudulent return with intent to evade was submitted
or in case of failure to file a return. Also, Section 228 of the same law states that said
assessment may be protested only within thirty days from receipt thereof.
Necessarily, the taxpayer must be certain that a specific document constitutes an
assessment. Otherwise, confusion would arise regarding the period within which t
make an assessment or to protest the same, or whether interest and penalty may
accrue thereon.

k. Are the procedures outlined in Section 228 of the NIRC retroactive?

i. CIR v. Reyes, G.R. No. 159694, January 27, 2006

The general rule is that statutes are prospective. However, statutes that are
remedial, or that do not create new or take away vested rights, do not fall under the
general rule against the retroactive operation of statutes. Clearly, Section 228
provides for the procedure in case an assessment is protested. The provision does
not create new or take away vested rights. In both instances, it can surely be applied
retroactively. Moreover, RA 8424 does not state, either expressly or by necessary
implication, that pending actions are excepted from the operation of section 228, or
that applying it to pending proceedings would impair vested rights.

INTERNAL REVENUE TAX REMEDIES

Tax Remedies: Its general concepts

Importance: They exist to enhance the Governments tax collection efforts, they, too,
come in as safeguards against arbitrary action. While taxes are the lifeblood of the
Government and should be collected without unnecessary hindrance, such collection must
nevertheless be made in accordance with law as any arbitrariness will negate the very
reason or the Government itself.

Classification:

1. Remedies in favor of the taxpayer

 A. Administrative
(1) Before Payment
a. Filing of a petition or request for reconsideration or reinvestigation
(Administrative Protest);
b. Entering into compromise
(2) After Payment
a. Filing of claim for tax refund; and
b. Filing of claim for tax credit
B. Judicial
(1) Civil action
a. Appeal to the Court of Tax Appeals
b. Action to contest forfeiture of chattel; and
c. Action for Damages
(2) Criminal Action
Filing of complaint against erring Bureau of Internal Revenue officials and
employees

2. Remedies available to the government

Applicability of the Doctrine Exhaustion of Administrative Remedies

- No civil or criminal action for the recovery of taxes shall be filed in court
without the approval of the Commissioner. (Sec. 220, NIRC)

Remedies Available to Taxpayers

A. Before Payment

1. Protest (Section 228, NIRC)

Protest is a vital document which is a formal declaration of resistance of the
taxpayer. It is a repository of all arguments. It can be used in court in case
administrative remedies have been exhausted. It is also the formal act of the
taxpayer questioning the official actuation of the CIR. This is equivalent to a pleading.
It may be a:

Request for reconsideration- a plea for the re-evaluation of an assessment

on the basis of existing records without need of additional evidence. It may involve a
question of fact or law or both.

Request for reinvestigation- a plea for reinvestigation of an assessment on

the basis of newly-discovered or additional evidence that a taxpayer intends to
present in the reinvestigation. It may also involve question of fact or law or both.

Requirements of a valid protest

1. In writing;
2. Addressed to the CIR;
3. Must be accompanied by a waiver of the
Statute of Limitations in favor of the
government;
4. States the Facts, applicable law rules and
regulations and jurisprudence on which his
protest is based; otherwise, his protest
 shall be considered void and without force
and effect on the event the letter of
protest submitted by the taxpayer is
accepted;
5. Contains the following:
1. Name of the taxpayer and address
for the immediate past three
taxable years;
2. Nature of request whether
reinvestigation or reconsideration
specifying newly discovered
evidence that he intends to present
it is a request for reinvestigation;
3. Taxable periods covered by the
assessment;
4. Amounts and kind/s of tax
involved, and Assessment Notice
Number;
5. Date of receipt of assessment notice or letter of demand;
6. Itemized statement of the findings to which the taxpayer agrees, if any, as a basis for
computing the tax due, which amount should be paid immediately upon the filing of
the protest. For this purpose, the protest shall not be deemed validly filed unless
payment of the agreed portion of the tax is paid first;
7. Itemized schedule of the adjustments with which the taxpayer does not agree;
8. Statement of facts and/or law in support of the protest; and
9. Documentary evidence as it may deem necessary and relevant to support its protest to
be submitted within sixty (60) days from the filing of the protest. If the taxpayer fails to
comply with this requirement, the assessment shall become final. (Revenue Regulation
No. 12-85, dated Nov. 27, 1985.)

Effect of a protest on the period to collect deficiency taxes:

The prescriptive period is arrested by the taxpayer's request for re-examination or

reinvestigation even if he has not previously waived it (CIR vs. Wyeth, G.R. No. 76281,Sep
30, 1991)

Failure of the BIR to act within the 180-day period.

If the Commissioner or his duly authorized representative fails to act on the taxpayers
protest within 180 days from the date of submission by the taxpayer of the required
documents in support of his protest, the taxpayer may appeal to the CA within 30 days from
the lapse of the 180-day period.

Administrative actions taken during the 180-day period.

1. Grant of the Protest
2. Denial of Protest:

A. Direct Denial
 The decision of the Commissioner or his duly rep shall (a) state the facts, applicable law,
rules and regulations or jurisprudence on which his protest is based, otherwise the protest
shall be considered void and without force and effect, in which case the same shall not be
considered a decision a disputed assessment and (b) that the same is his final decision. (sec.
3.1.5, RR 12-99)

B.Indirect Denial
a. Commissioner did not rule on the taxpayers MR of the assessment it was only when
respondent received summons on the civil action for the collection of deficiency income tax
that the period to appeal commenced to run. (CIR vs. Union Shipping
b. Referral by the Commissioner of request for reinvestigation to the Solicitor General
(Republic vs.Lim Tian Teng Sons)
c. Reiterating the demand for immediate payment of the deficiency tax due to taxpayers
continued refusal to execute waiver (CIR vs. Ayala Securities Corp.)
d. Preliminary collection letter may serve as assessment notice (United Intl Pictures vs. CIR)

Acts of BIR Commissioner Considered as Denial of Protest which serves as a Basis

for Appeal to CTA:

1. Filing by the BIR of a civil suit for collection of the deficiency tax (CIR v. Union
Shipping Corp . 185 SCRA 547)
2. Indication to the taxpayer by the Commissioner in clear and unequivocal language
of his final denial. (CIR v. Union Shipping Corp)
3. BIR demand letter reiterating his previous demand to pay, sent to taxpayer after
his protest of the assessment (Surigao Electric Co. Inc. v. CTA, 57 SCRA 523)
4. The actual issuance of a warrant of distraint and levy in certain cases cannot be
considered as final decision on a disputed settlement (CIR v. Union Shipping Corp)

b. Effect of protest filed out of time

The pendency of the taxpayer's appeal in the Court of Tax Appeals and in the Supreme Court
had the effect of temporarily staying the hands of the said Commissioner. If the taxpayer's
stand that the pendency of the appeal did not stop the running of the period because the
Court of Tax Appeals did not have jurisdiction over the case of taxes is upheld, taxpayers
would be encouraged to delay the payment of taxes in the hope of ultimately avoiding the
same. Under the circumstances, the running of the prescriptive period was suspended.
Deficiency Percentage Taxes must be imposed.(PROTECTOR'S SERVICES, INC., petitioner, vs.
CA, G.R. No. 118176, 2000 Apr 12)

Remedies from a denial of protest

1. Motion for reconsideration
2. Appeal to the Court of Tax Appeals(RA 1125, as amended by RA 9282)

2. Compromise

B. After Payment

1. Refund (Section 229, NIRC)

 The Legal Principle of quasi-contracts or solutio indebiti (see Art. 2142 & 2154 of the
Civil Code). The Government is within the scope of the principle of solutio indebiti. (CIR vs.
Firemans Fund Insurance Co.)

a. Must be strictly construed against taxpayer

Grounds for filing a claim for refund:

Erroneously or illegally assessed or collected internal revenue taxes;

Taxpayer pays under the mistake of fact, as for instance in a case where he is not aware of
the existing exemption in his favor at the time payments were made.
A tax is illegally collected if payments are made under duress.

1. Penalties imposed without authority; and

2. Any sum alleged to have been excessive or in any manner wrongfully collected.
The value of internal revenue stamps when they are returned in good condition by the
purchaser may also be redeemed.

b. Period within which to file a claim for refund

1. General Rule is two years from the date of payment

The two-year prescriptive period provided in Section 292 (now Section 230 of the Tax Code
should be computed from the time of filing the Adjustment Return or Annual Income Tax
Return and final payment of income tax.(CIR vs. TMX SALES, G.R. No. 83736, 1992 Jan 15,)

The rationale in computing the two-year prescriptive period with respect to the petitioner
corporation's claim for refund from the time it filed its final adjustment return is the fact that
it was only then that ACCRAIN could ascertain whether it made profits or incurred losses in
its business operations. The "date of payment", therefore, in ACCRAIN's case was when its
tax liability, if any, fell due upon its filing of its final adjustment return. (ACCRA vs CA, G.R.
No. 96322, 1991 Dec 20)

The two-year period for prescription should be counted from the date of payment of the tax,
which for actions for refund of corporate income tax should be computed from the time of
actual filing of the adjustment return or annual income tax return. This is so because at that
point, it can already be determined whether there has been an overpayment by the
taxpayer. Moreover, under Sec. 49 (a) by the NIRC (now Sec. 56(a), 1997 NIRC), payment is
made at the time the return is filed. (CIR V CA, CTA, BPI, GR No. 117254. January 21, 1999)
There is some likelihood that the above rule could apply also to individuals who are self
employed (i.e., in business and professional practice) as well as estates and trusts, which are
likewise required to file quarterly returns.

The prescriptive period of two years should commence to run only from the time that the
refund is ascertained, which can only be determined after a final adjustment return is
accomplished.(CIR V PHILAMLIFE, 244 SCRA 446. May 29, 1995)

2. In case of Amended Returns

3. In case of taxpayers contemplating dissolution

c. Who has the personality to file a claim for refund?

The duty of the withholding agent to withhold the corresponding tax arises at the time of
such accrual. The withholding agent/corporation is then obliged to remit the tax to the
Government since it already and properly belongs to the Government. If a withholding agent
who is personally liable for income tax withheld at source fails to pay said withholding tax,
an assessment for said deficiency withholding tax would, therefore, be legal and proper.
(FILIPINAS SYNTHETIC FIBER CORP. V CA, GR No.113347. June 14, 1996)

d. Is setting-off of taxes against a pending claim for refund allowed?

e. Is automatic application of excess tax credits allowed?
f. Effect of existing tax liability on a pending claim for refund
g. Period of validity of a tax refund/credit
1. Returns are not actionable documents for purposes of the rules on civil procedure and
evidence
h. Refund and Protest are mutually exclusive remedies

i. Is the taxpayer entitled to claim interest on the refunded tax?

General Rule: The Government cannot be required to pay interest on taxes refunded to the
taxpayer, unless:

1. The Commissioner acted with patent arbitrariness

Arbitrariness presupposes inexcusable or obstinate disregard of legal provisions. (CIR vs.
Victorias Milling Corp., Inc. L-19607, Nov. 29, 1966.)

2. In case of Income Tax withheld on the wages of employees

Any excess of the taxes withheld over the tax due from the taxpayer shall be returned or
credited within 3 months from the fifteenth (15 th) day of April. Refund or credit after such
time earn interest at the rate of 6% per annum, starting after the lapse of the 3-month
period to the date the refund or credit is made (Sec 79 (c) (2) 1997 NIRC

b. Other Remedies

1. Action to Contest Forfeiture of Chattel (Sec. 231)

In case of seizure of personal property under claim for forfeiture, the owner desiring to
contest the validity of the forfeiture may bring an action:
a. Before sale or destruction of the property to recover the property from the
person seizing the property or in possession thereof upon filing of the proper bond to enjoin
the sale.
b. After the sale and within 6 months to recover the net proceeds realized at the
sale (see. Sec. 231, 1997 NIRC)

Action partakes the nature of an ordinary civil action for recovery of personal property or the
net proceeds of its sale which must be brought in the ordinary courts and not the CTA

2. Redemption of Property Sold (Sec. 214)

Remedies available to the Government

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

G.R. No Court shall have the authority to grant an injunction to restrain the collection
of any national internal revenue tax, fee, or charge imposed by the NIRC.
EXC: CTA may enjoin the collection of Internal Revenue taxes.
REQUISITES:
1. there is a pending case before the CTA (ancillary remedy, not a main cause
of action)
2. identify that the collection of tax is prejudicial to the interest of either the
TP or government.

B. Period within which the government could collect ( Secs. 203, 222, NIRC)
Assessment of Tax Liability

Three (3)years from the following, whichever comes later:

1. The last day prescribed by law for filing the return
2. The day when the return was actually filed
Ten (10) years after the discovery of the falsity, fraud or omission in case of:
1. False or fraudulent return with intent to evade tax, or
2. Failure to file a return
Within the period agreed upon, when both the TP and the Commissioner have
agreed in writing, before the expiration of the period in Sec. 203 for the
assessment of the tax.

CASES:

REPUBLIC V. HIZON, DEC. 13, 1999

Revenue Adm. Order No. 10-95 specifically authorizes the Litigation and
Prosecution section of the Legal Division of regional district offices to institute
the necessary civil and criminal actions for tax collection. As the complaint
filed in this case was signed by the BIRs Chief of Legal Division for Region 4
and verified by the Regional Director, there was, therefore, compliance with
the law.
Sec. 7 of NIRC, authorizes the BIR Commissioner to delegate the powers
vested in him under the pertinent provision of the Code to any subordinate
official with the rank equivalent to a division chief or higher.

CIR V. JAVIER, JULY 31, 1991

There was no actual intentional fraud in filing the return. Private respondents
notation on the tax return was at most an error or mistake of fact or law not
constituting fraud, an invitation for investigation and private respondent had
literally laid his cards on the table.
PNOC V. CA, APRIL 26, 2005
 C. OVERVIEW OF REMEDIES (SECTION 205)
1. Tax Lien (Sec 219, NIRC)

When a taxpayer neglects or refuses to pay his internal revenue tax liability
after demand, the amount so demanded shall be a lien in favor of the
government from the time the assessment was made by the Commissioner
until paid with interest, penalties, and costs that may secure in addition
thereto, upon all property and rights to property belonging to the taxpayer.

Lien shall not be valid against any mortgagee, purchaser or judgment creditor
until notice of such lien shall be filed by the Commissioner in the Register of
Deeds of the province or city where the property of the taxpayer is located.

A tax lien created in favor of the government is superior to all other claims
and preferences, even to that of a private litigant predicated on a court
judgment.

Extinguishment of Tax Lien

1. Payment or remission of the tax
2. Prescription of the right of the government to assess or collect.
3. Failure to file notice of such lien in the office of register of Deeds, purchases or
judgment creditor.
4. Destruction of the property subject to the lien.
NOTE: In Nos. 1 and 2, there is no more tax liability while under nos. 3 and 4, the taxpayer
is still liable.

CASE: CIR V. NLRC, NOV. 09, 1994

A tax lien created in favor of the government is superior to all other claims
and preferences, even to that of a private litigant predicated on a court
judgment. The tax lien attaches not only from the service of the warrant of
distraint of personal property but from the time the tax became due and
payable.

2. Compromise
CIR may compromise both civil and criminal liability of the taxpayer.

REQUISITES:
1. The taxpayer have a tax liability
2. There must be an offer by the taxpayer of an amount to be paid by the
taxpayer
3. There must be an acceptance by the Commissioner or the taxpayer as the
case may be of the offer in the settlement of the original claim

Grounds for compromise

1. A reasonable doubt as to the validity of the claim against the taxpayer exists;
or
2. The financial position of the taxpayer demonstrates a clear inability to pay the
assessed tax

Cases that may be compromised

 1. Delinquent accounts
2. Cases under administrative protest
3. Cases disputed before the courts
4. Cases for collection already filed in courts
5. Criminal violations except those already filed, and those involving fraud.

Cases that cannot be compromised

1. Withholding tax cases

2. Criminal tax fraud cases
3. Criminal cases already filed in court
4. Delinquent accounts with duly approved schedule of installment payments
5. Cases where reduction of payments had already been granted.
6. cases already decided and are final and executory

Compromise of criminal violation

In criminal violations, the compromise

must be made prior to the filing of the information in court.
All criminal violations may be compromised except:

1. those already filed in court; and

2. those involved in fraud.

Limitations:
1. Minimum compromise rate:
a. 10% of the basic tax assessed in case of financial incapacity.
b. 40% of basic tax assessed other cases.
2. Subject to approval of the Evaluation Board
a. When basic tax involved exceeds P1,000,000.00 or
b. Where settlement offered is less than the prescribed minimum rates.

Delegation of Power to Compromise

General Rule: The power to compromise or abate shall not be delegated by the
commissioner.
Exception: The Regional Evaluation Board may compromise the assessment issued by the
regional offices involving basic taxes of P 500,000.00 or less.
Remedy in case of failure to comply:
The CIR may either:
a. Enforce the compromise, or
b. Regard it as rescinded and insists upon the original demand.

3. Distraint and/or Levy

4. Civil Action
5. Criminal Action
6. Forfeiture
Implies a divestiture of property without compensation, in consequence of a
default or offense.

It includes the idea of not only losing but also having the property transferred
to another with out the consent of the owner and wrongdoer.

Effect: Transfer the title to the specific thing from the owner to the government.
 When available:
a. No bidder for the real property exposed for sale.
b. If highest bid is for an amount insufficient to pay the taxes, penalties and
costs.
With in two days thereafter, a return of the proceeding is duly made.

How enforced:
a. In case of personal property by seizure and sale or destruction of the specific
forfeited property.
b. In case of real property by a judgment of condemnation and sale in a legal
action or proceeding, civil or criminal, as the case may require.

When forfeited property to be destroyed or sold:

a. To be destroyed by order of the CIR when the sale for consumption or use of
the following would be injurious to the public health or prejudicial to the
enforcement of the law: (at least 20 days after seizure)
1. distilled spirits
2. liquors
3. cigars
4. cigarettes, and other manufactured products of tobacco
5. playing cards
6. All apparatus used in or about the illicit production of such articles.
b. To be sold or destroyed depends upon the discretion of CIR
1. All other articles subject to exercise tax, (wine, automobile, mineral
products, manufactured oils, miscellaneous products, non-essential
items a petroleum products) manufactured or removed in violation of
the Tax Code.
2. Dies for printing or making IR stamps, labels and tags, in imitation of or
purport to be lawful stamps, labels or tags.

Where to be sold:
a. Public sale: provided, there is notice given not less than 20 days.
b. Private sale: provided, it is with the approval of the Secretary of Finance.

Right of Redemption:
a. Personal entitled taxpayer or anyone for him
b. Time to redeem within one (1) year from forfeiture
c. Amount to be paid full amount of the taxes and penalties, plus interest and
cost of the sale
d. To whom paid Commissioner or the Revenue Collection Officer
e. Effect of failure to redeem forfeiture shall become absolute.

NOTE:
The Register of Deeds is duty bound to transfer the title of property forfeited to the
government with out necessity of an order from a competent court.
7. Suspension of Business Operations
8. Enforcement of Administrative Fines

D. ADMINISTRATIVE REMEDIES IN DETAIL (SECS. 206-217, NIRC)

A. DISTRAINT - Seizure by the government of personal property, tangible or intangible,
to enforce the payment of faces, to be followed by its public sale, if the taxes are not
voluntarily paid.
KINDS
a. Actual There is taking of possession of personal property out of the taxpayer into that
of the government. In case of intangible property, taxpayer is also diverted of the power of
control over the property.
b. Constructive The owner is merely prohibited from disposing of his personal property.

Difference between Actual and Constructive Distraint

Actual Constructive
Made on the property May be made on the
only of a delinquent property of any
taxpayer. taxpayer whether
delinquent or not
There is actual taking or Taxpayer is merely
possession of the prohibited from
property. disposing of his
property.
Effected by having a list Effected by requiring
of the distraint property the taxpayer to sign a
or by service or warrant receipt of the property
of distraint or or by leaving a list of
garnishment. same
An immediate step for Such immediate step
collection of taxes is not necessary; tax
where amount due is due may not be
definite. definite or it is being
questioned.

Requisites:
1. Taxpayer is delinquent in the payment of tax.
2. Subsequent demand for its payment.
3. Taxpayer must fail to pay delinquent tax at time required.
4. Period with in to assess or collect has not yet prescribed.

When remedy not available:

Where amount involved does not exceed P100.
In keeping with the provision on the abatement of the collection of tax as the cost of
same might even be more than P100.
Procedure:
1. Service of warrant of distraint upon taxpayer or upon person in possession of
taxpayers personal property.
2. Posting of notice is not less than two places in the municipality or city and notice to
the taxpayer specifying time and place of sale and the articles distrained.
3. Sale at public auction to highest bidder
4. Disposition of proceeds of the sale.

Who may effect distraint Amount

Involved
1. Commissioner or his In excess of
duly authorized P1,000,000.00
representative P1,000,000.00
2. Revenue District Officer or less
 (RDO)

How Actual Distraint Effected

1. In case of Tangible Property:
a. Copy of an account of the property distrained, signed by the officer, left either
with the owner or person from whom property was taken, at the dwelling or
place of business and with someone of suitable age and discretion
b. Statement of the sum demanded.
c. Time and place of sale.

2. In case of intangible property:

a. Stocks and other securities
Serving a copy of the warrant upon taxpayer and upon president,
manager, treasurer or other responsible officer of the issuing corporation,
company or association.
b. Debts and credits
1. Leaving a copy of the warrant with the person owing the debts or having in
his possession such credits or his agent.
2. Warrant shall be sufficient authority for such person to pay CIR his credits
or debts.

c. Bank Accounts garnishment

1. Serve warrant upon taxpayer and president, manager, treasurer or
responsible officer of the bank.
2. Bank shall turn over to CIR so much of the bank accounts as may be
sufficient.

How constructive Distraint Effected

1. Require taxpayer or person in possession to:
- Sign a receipt covering property distrained
- Obligate him to preserve the same properties.
- Prohibit him from disposing the property from disposing the property in any
manner, with out the authority of the CIR.
2. Where Taxpayer or person in possession refuses to sign:
- Officer shall prepare list of the property distrained.
- In the presence of two witnesses of sufficient age and discretion, leave a copy
in the premises where property is located.

Grounds of Constructive Distraint

1. Taxpayer is retiring from any business subject to tax.
2. Taxpayer is intending to leave the Philippines; or
3. To remove his property there from.
4. Taxpayer hides or conceals his property.
5. Taxpayer acts tending to obstruct collection proceedings.

NOTE:
1. Bank accounts may be distrained without violating the confidential nature of bank
accounts for no inquiry is made. BIR simply seizes so much of the deposit with out
having to know how much the deposits are or where the money or any part of it
came from.
2. If at any time prior to the consummation of the sale, all proper charges are paid to
the officer conducting the same, the goods distrained shall be restored to the owner.
 3. When the amount of the bid for the property under distraint is not equal to the
amount of the tax or is very much less than the actual market value of articles, the
CIR or his deputy may purchase the distrained property on behalf of the national
government.

B. LEVY OF REAL PROPERTY - an act of seizure of real property in order to enforce

the payment of taxes. The property may be sold at public sale, if after seizure the taxes are
not voluntarily paid.
NOTE: The requisites are the same as that of distraint.

Procedure:
1. International Revenue officer shall prepare a duly authenticated certificate showing
a. Name of taxpayer
b. Amount of tax and
c. Penalty due.
- enforceable throughout the Philippines
2. Officer shall write upon the certificate a description of the property upon which levy is
made.
3. Service of written notice to:
a. The taxpayer, and
b. RD where property is located.
4. Advertisement of the time and place of sale.
5. Sale at public auction to the highest bidder.
6. Disposition of proceeds of sale.
NOTE: The excess shall be turned over to owner.
Redemption of property sold or forfeited
a. Person entitled: Taxpayer or anyone for him
b. Time to redeem: one year from date of sale or forfeiture
- Begins from registration of the deed of sale or declaration of forfeiture.
- Cannot be extended by the courts.
c. Possession pending redemption: owner not deprived of possession
d. Price: Amount of taxes, penalties and interest thereon from date of delinquency to
the date of sale together with interest on said purchase price at 15% per annum from
date of purchase to date of redemption.

Difference between Distraint and Levy

Distraint Levy
personal property real property
forfeiture by forfeiture by
government, not government authorized
provided where there is no bidder
or the highest bid is not
sufficient to pay the
taxes, penalties and
costs.
Taxpayer no given the Taxpayer can redeem
right of redemption properties levied upon
and sold/forfeited to the
government.

1. Both are summary remedies for collection of taxes.

2. Both cannot be availed of where amount involved is not more than P100.

NOTE:
 1. It is the duty of the Register of Deeds concerned upon registration of the declaration
of forfeiture, to transfer the title to the property with out of an order from a
competent court
2. The remedy of distraint or levy may be repeated if necessary until the full amount,
including all expenses, is collected.

C. GARNISHMENT
Bank Accounts garnishment
1. Serve warrant upon taxpayer and president, manager, treasurer or responsible officer of
the bank.
2. Bank shall turn over to CIR so much of the bank accounts as may be sufficient.

E. JUDICIAL REMEDIES IN DETAIL (SEC 220, NIRC)

1. Period within which the action may be filed

Civil and Criminal Actions:

1. Brought in the name of the Government of the Philippines.
2. Conducted by Legal Officer of BIR
3. Must be with the approval of the CIR, in case of action, for recovery of taxes,
or enforcement of a fine, penalty or forfeiture.

A. CIVIL CASES (SECS 203,222,NIRC)

Three (3)years from the following, whichever comes later:
3. The last day prescribed by law for filing the return
4. The day when the return was actually filed
Ten (10) years after the discovery of the falsity, fraud or omission in case of:
3. False or fraudulent return with intent to evade tax, or
4. Failure to file a return
Within the period agreed upon, when both the TP and the Commissioner have
agreed in writing, before the expiration of the period in Sec. 203 for the
assessment of the tax.

Where to File
1) Court of Tax Appeals- where the principal amount of taxes and fees exclusive of charges
and penalties claimed is one million pesos and above
2) RTC, Mun. TC, Metro TC- where the principal amount of taxes and fees, exclusive of
charges and penalties claimed is less thanP1,000,000.00 (Sec 7[c], RA 9282)
The approval of the CIR is essential in civil cases (Sec. 220). However under
Sec. 7 of
NIRC, the Commissioner may delegate suchpower to a Regional Director.

Actions instituted by the government to collect internal revenue taxes in regular

courts (RTC or MTCs, depending on the amount involved). It includes filing by the
government with the probate court claims against the deceased taxpayer.
Resorted to when the tax liability becomes final and unappealable, or when the
decision of the
Commissioner becomes final or executory. When:

A tax is assessed and the assessment becomes final and unappealable because the
taxpayer
fails to file an administrative protest with the BIR within 30 days from the receipt of
the assessment.
 When an administrative protest filed by the taxpayer against the assessment is
denied, in whole and in part or Is not acted upon within 180 days from submission of
the documents, and
The taxpayer adversely affected by the decision or inaction fails to file an appeal with
the CTA within 30 days from receipt of said decision or from the lapse of the180 day
period.

B. CRIMINAL CASES ( TITLE X, NIRC; SEC. 281, NIRC)

All violations of any provision of the tax code shall prescribe after five (5) years.

NOTE:
When should it commence: The five (5) year prescriptive period shall begin to run
from the
a. If known, day of the commission of the violation.
b. If not known, from the time of discovery and the institution of judicial proceeding
for its investigation and punishment.
When is it interrupted:
a. When a proceeding is instituted against the guilty person
b. When the offender is absent from the Philippines.
When should it run again: When the proceeding is dismissed for reason not
constituting jeopardy.

Where to file
1) Court of Tax Appeals- on criminal offenses arising from violations of the NIRC or TCC and
other laws administered by the BIR and the BOC, where the principal amount of taxes and
fees, exclusive of charges and penalties claimed is P1,000,000.00 and above.
2) RTC, Mun. TC, Metro TC- on criminal offenses arising from violations of the NIRC or TCC
and
other laws administered by the BIR and the BOC, where the principal amount of taxes and
fess
exclusive of charges and penalties claimed is less than P1,000,000.00 or where there is no
specified amount claimed (Sec 7[b], RA 9282)

CASES:
REPUBLIC V. HIZON, DEC. 13, 1999 (re: approval of filing of civil and criminal actions)
Revenue Adm. Order No. 10-95 specifically authorizes the Litigation and Prosecution
section of the Legal Division of regional district offices to institute the necessary civil
and criminal actions for tax collection. As the complaint filed in this case was signed
by the BIRs Chief of Legal Division for Region 4 and verified by the Regional Director,
there was, therefore, compliance with the law.
Sec. 7 of NIRC, authorizes the BIR Commissioner to delegate the powers vested in
him under the pertinent provision of the Code to any subordinate official with the
rank equivalent to a division chief or higher.

CIR V. LA SUERTE CIGAR, JULY 04, 1992 (re: participation of the Office of the Solicitor
General)
The institution or commencement before a proper court of civil and criminal actions
and proceedings arising under the Tax Reform Act which "shall be conducted by legal
officers of the Bureau of Internal Revenue" is not in dispute. An appeal from such
court, however, is not a matter of right. Section 220 of the Tax Reform Act must not
be understood as overturning the long established procedure before this Court in
requiring the Solicitor General to represent the interest of the Republic. This Court
 continues to maintain that it is the Solicitor General who has the primary
responsibility to appear for the government in appellate proceedings.

PNOC V. CA, APRIL 26, 2005

LIM V. CA, OCT. 18, 1990 ( re: prescription of criminal actions, Sec, 281, NIRC)

should be filed 5 years from the (1) day of the commission of the violation of the law,
and if the same shall be not known, from the (2) discovery thereof and the institution
of the judicial proceedings for its investigation and punishment.

MARCOS II V. CA, JUNE 5, 1997 (re: enforcement of tax liability during pendency of probate
proceedings)
The BIR is authorized to collect estate tax deficiency through the summary remedy of
the levying upon and sale of properties of a decedent, without the cognition and
authority of the court sitting in probate over the supposed will of the deceased,
because the collection of estate tax is executive in character. As such the estate tax
is exempted from the application of the statute of the non claims, and this is
justified by the necessity of the government finding, immortalized in the maxim that
taxes are the lifeblood of the government

E. EFFECTS OF FAILURE TO PAY THE TAX ON TIME: ADDITIONS TO THE TAX

(CHAPTER I, TITLE X, NIRC)

1. SURCHARGES- a civil penalty imposed by law as an addition to the main tax

required to be paid. It is not a criminal penalty but a civil administrative sanction
provided primarily as safeguard for the protection of the State revenue and to
reimburse the government for the expenses of investigation and the loss resulting from the
taxpayers fraud. A surcharge added to the main tax is subject to interest.

a. ORDINARY (SEC. 248A, NIRC)

Penalty: 25% of the amount due, in addition to the tax required to be paid

a. Failure to file any return and to pay the tax due thereon as required by the
NIRC or rules.
b. Filing a return with an internal revenue officer other than those with whom the
return is required to be fired. Not authorized officer.
c. Failure to pay the deficiency tax within the time prescribed for its payment in
the notice of assessment.
d. Failure to pay the full or part of the amount of tax shown on any return, or the
full amount of tax due for which no return is required to be filed, on or before
the date prescribed for its payment.

b. FRAUD PENALTY (SEC. 248B, NIRC)

Penalty: 50% of the amount due, in addition to the tax required to be paid

a. In case of willful neglect to file the return within the period prescribed by the
NIRC or rule.
b. In case a false or fraudulent return is willfully made.

CASE: CIR V. JAVIER, JULY 31, 1991

 There was no actual intentional fraud in filing the return. Private respondents
notation on the tax return was at most an error or mistake of fact or law not
constituting fraud, an invitation for investigation and private respondent had
literally laid his cards on the table.

2. INTEREST- This is an increment on any unpaid amount of tax assessed at the rate
of 20% per annum or such higher rate as may be prescribed by the regulations from the
date prescribed for payment until the amount is fully paid.

Classes of interest

1. Deficiency interest
2. Delinquency interest
3. Interest on extended payment

Deficiency interest

Any deficiency in the tax due shall be subject to the interest of 20% per annum which
shall be assessed and collected from the date prescribed for its payment until the full
payment thereof.

When delinquency interest imposed?

Delinquency interest is imposed in case of failure to pay:

1. The amount of the tax due on any return required to be filed; or
2. The amount of tax due for which no return is required; or
3. A deficiency tax or any surcharge or interest thereon on the issue date appearing
in the notice and demand of the Commissioner.

Rate is 20% per annum until the amount is fully paid which interest shall form part of
the tax.

Interest on Extended Payment.

1) any person who is qualified and elects to pay the tax on installment but fails to pay the
tax, or any installment, or any part on or before the date prescribed; or
2) where the Commissioner has authorized an extension of time within which to pay a tax or
a deficiency tax or any part thereof,
3) from the date of notice and demand until it is paid.

Compromise Penalty
1. It is a certain amount of money which the taxpayer pays to compromise a tax
violation.
2. It is pain in lieu of a criminal prosecution.
3. Since it is voluntary in character, the same may be collected only if the taxpayer is
willing to pay them.

Failure to File Certain Information Returns (Sec. 250, NIRC)

A) Penalty: P 1,000 for each failure
B) The aggregate amount for all such failure shall not exceed P 25,000 during a calendar
year
C) Upon notice and demand by the Commissioner
D) Unless it is shown that such failure is due to reasonable cause and not to willful neglect.
In the case of each failure to file:
1) information return;
2) statement or list;
3) keep any record;
4) supply any information
E) required by this Code or by the Commissioner on the date prescribed thereof.

LOCAL TAXATION

A. Local Taxation: General Concepts

1. Nature of Local Taxing Power

a. Constitutional Provision (Section 5, Article X)

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

b. Delegated Power
i. City of San Pablo Laguna vs. Reyes, March 25, 1999

The power to tax is primarily vested in Congress. However, in our

jurisdiction, it may be exercised by local legislative bodies, no longer merely
by virtue of a valid delegation as before, but pursuant to direct authority
conferred by Section 5, Article X of the Constitution. The important legal
effect of Section 5 is that henceforth, in interpreting statutory provisions on
municipal fiscal powers, doubts will have to resolved in favor of municipal
corporations.

ii. Meralco vs. Province of Laguna, May 5, 1999

Prefatorily, it might be well to recall that local governments do not have the
inherent power to tax except to the extent that such power might be
delegated to them either by the basic law or by statute. Presently, under
Article X of the 1987 Constitution, a general delegation of that power has
been given in favor of local government units. The 1987 Constitution has a
counterpart provision in the 1973 Constitution, which did come out with a
similar delegation of revenue making powers to local governments. Under the
regime of the 1935 Constitution no similar delegation of tax powers was
provided, and local government units instead derived their tax powers under a
limited statutory authority. Whereas, then, the delegation of tax powers
granted at that time by statute to local governments was confined and
defined (outside of which the power was deemed withheld), the present
constitutional rule (starting with the 1973 Constitution), however, would
broadly confer such tax powers subject only to specific exceptions that the law
might prescribe. Under the now prevailing Constitution, where there is neither
a grant nor a prohibition by statute, the tax power must be deemed to exist
although Congress may provide statutory limitations and guidelines. The
basic rationale for the current rule is to safeguard the viability and self-
sufficiency of local government units by directly granting them general and
broad tax powers. Nevertheless, the fundamental law did not intend the
delegation to be absolute and unconditional; the constitutional objective
obviously is to ensure that, while the local government units are being
strengthened and made more autonomous, the legislature must still see to it
that (a) the taxpayer will not be over-burdened or saddled with multiple and
 unreasonable impositions; (b) each local government unit will have its fair
share of available resources, (c) the resources of the national government will
not be unduly disturbed; and (d) local taxation will be fair, uniform, and just.

iii. Mactan Cebu International Airport Authority vs. Marcos, September 11, 1996

The taxing powers of local government units cannot extend to the levy of,
inter alia, taxes, fees and charges of any kind on the National Government,
its agencies and instrumentalities, and local government units; however,
pursuant to Section 232, provinces, cities, and municipalities in the
Metropolitan Manila Area may impose the real property tax except on, inter
alia, real property owned by the Republic of the Philippines or any of its
political subdivisions except when the beneficial use thereof has been
granted, for consideration or otherwise, to a taxable person, as provided in
item (a) of the first paragraph of Section 234.

iv. NAPOCOR vs. City of Cabanatuan, April 9, 2003

In recent years, the increasing social challenges of the times expanded the
scope of state activity, and taxation has become a tool to realize social justice
and the equitable distribution of wealth, economic progress and the protection
of local industries as well as public welfare and similar objectives. Taxation
assumes even greater significance with the ratification of the 1987
Constitution. Thenceforth, the power to tax is no longer vested exclusively on
Congress; local legislative bodies are now given direct authority to levy taxes,
fees and other charges pursuant to Article X, section 5 of the 1987
Constitution.

This paradigm shift results from the realization that genuine development can
be achieved only by strengthening local autonomy and promoting
decentralization of governance. For a long time, the countrys highly
centralized government structure has bred a culture of dependence among
local government leaders upon the national leadership. It has also dampened
the spirit of initiative, innovation and imaginative resilience in matters of local
development on the part of local government leaders. The only way to
shatter this culture of dependence is to give the LGUs a wider role in the
delivery of basic services, and confer them sufficient powers to generate their
own sources for the purpose. To achieve this goal, section 3 of Article X of the
1987 Constitution mandates Congress to enact a local government code that
will, consistent with the basic policy of local autonomy, set the guidelines and
limitations to this grant of taxing powers.

- Extent of the Power of Congress in Local Taxation

- City Govt. of Quezon City vs. Bayantel, March 6, 2006

The power to tax is primarily vested in the Congress; however, in our jurisdiction,
it may be exercised by local legislative bodies, no longer merely be virtue of a
valid delegation as before, but pursuant to direct authority conferred by Section
5, Article X of the Constitution. Under the latter, the exercise of the power may be
subject to such guidelines and limitations as the Congress may provide which,
however, must be consistent with the basic policy of local autonomy.

Clearly then, while a new slant on the subject of local taxation now prevails in the
sense that the former doctrine of local government units delegated power to tax
 had been effectively modified with Article X, Section 5 of the 1987 Constitution
now in place, .the basic doctrine on local taxation remains essentially the same.
For as the Court stressed in Mactan, "the power to tax is [still] primarily vested in
the Congress."

In net effect, the controversy presently before the Court involves, at bottom, a
clash between the inherent taxing power of the legislature, which necessarily
includes the power to exempt, and the local governments delegated power to tax
under the aegis of the 1987 Constitution.

2. Fundamental Principles in the exercise of Local Taxing Power (Sec. 130, LGC)

3. Exercise of Local Taxing Power

B. Common Limitations on the Exercise of Local Taxing Power

1. The Principle of Preemption / Exclusionary Rule (Sec. 133, LGC)

- If the national government elects to tax a particular subject within a Local
Government Unit, it is impliedly withholding the power of LGU to tax the same.
- Adopted in the Philippines despite non-prohibition of double taxation unless
expressly allowed by Congress.

2. Cases:
a. Province of Bulacan vs. CA, November 27, 1998
A province may not levy excise taxes on articles already taxed by the National
Internal Revenue Code. It is clearly apparent from Section 151 of the National
Internal Revenue Code levies a tax on all quarry resources, regardless of origin,
whether extracted from public or private land. Thus, a province may not
ordinarily impose taxes on stones, sand, gravel, earth and other quarry resources,
as the same are already taxed under the National Internal Revenue Code. The
province can, however, impose a tax on stones, sand, gravel, earth and other
quarry resources extracted from public land because it is expressly empowered to
do so under the Local Government Code. As to stones, sand, gravel, earth and
other quarry resources extracted from private land, however, it may not do so,
because of the limitation provided by Section 133 of the Code in relation to
Section 151 of the National Internal Revenue Code.

b. First Philippine Industrial Corp. vs. CA, December 9, 1998 (Section 133j; Local Tax
on Common Carriers)

There is no doubt that petitioner is a "common carrier" and, therefore, exempt

from the business tax as provided for in Section 133 (j), of the Local Government
Code, to wit:

"Section 133. Common Limitations on the Taxing Powers of Local Government

Units.
Unless otherwise provided herein, the exercise of the taxing powers of provinces,
cities, municipalities, and barangays shall not extend to the levy of the following :

xxx xxx xxx

(j) Taxes on the gross receipts of transportation contractors and persons engaged
in the transportation of passengers or freight by hire and common carriers by air,
land or water, except as provided in this Code."
 It is clear that the legislative intent in excluding from the taxing power of the local
government unit the imposition of business tax against common carriers is to
prevent a duplication of the so-called "common carrier's tax."

Petitioner is already paying three (3%) percent common carrier's tax on its gross
sales/earnings under the National Internal Revenue Code.[19] To tax petitioner
again on its gross receipts in its transportation of petroleum business would
defeat the purpose of the Local Government Code.

c. Palma Development Corp. vs. Municipality of Malangas, October 16, 2003 (Sec.
133e)

By express language of Sections 153 and 155 of RA No. 7160, local government
units, through their Sanggunian, may prescribe the terms and conditions for the
imposition of toll fees or charges for the use of any public road, pier or wharf
funded and constructed by them. A service fee imposed on vehicles using
municipal roads leading to the wharf is thus valid. However, Section 133(e) of RA
No. 7160 prohibits the imposition, in the guise of wharfage, of fees -- as well as all
other taxes or charges in any form whatsoever -- on goods or merchandise. It is
therefore irrelevant if the fees imposed are actually for police surveillance on the
goods, because any other form of imposition on goods passing through the
territorial jurisdiction of the municipality is clearly prohibited by Section 133(e).
d. Batangas Power Corp. vs. Batangas City, April 28, 2004 (Section 133g)

Sec. 133 (g) of the LGC, which proscribes local government units (LGUs) from
levying taxes on BOI-certified pioneer enterprises for a period of six years from
the date of registration, applies specifically to taxes imposed by the local
government, like the business tax imposed by Batangas City on BPC in the case
at bar. Reliance of BPC on the provision of Executive Order No. 226,[18]
specifically Section 1, Article 39, Title III, is clearly misplaced as the six-year tax
holiday provided therein which commences from the date of commercial
operation refers to income taxes imposed by the national government on BOI-
registered pioneer firms. Clearly, it is the provision of the Local Government Code
that should apply to the tax claim of Batangas City against the BPC. The 6-year
tax exemption of BPC should thus commence from the date of BPCs registration
with the BOI on July 16, 1993 and end on July 15, 1999.

3. Local Taxing Power cannot extend to:

- Those already covered by the National Internal Revenue Code, i.e. Income tax,
Transfer tax, VAT, percentage tax, Excise Tax, Documentary Stamp Tax;

- Those already covered by the Tariff and Customs Code;

- Duties upon products about to be exported and goods passing
through territorial jurisdiction cannot be taxed by LGUs.

- Taxation of the National Government, including its agencies and

instrumentalities as we as local government units;

- Those subjects not within the ambit of real taxation by reason of public policy,
i.e. Cooperatives registered under RA 6938 (CDA);

- Those enjoying privileges as granted by the Board of Investments

(Investments Priorities Plan);
 - Both pioneer and non-pioneer enterprises enjoy such kind of
privileges under the Omnibus Investments Code.

- Taxes on agricultural or aquatic products sold by marginal enterprises;

- Taxes, fees, or charges for the registration of motor vehicles and for the
issuance of all kinds of licenses or permits for the driving thereof, except
tricycles.

- LTO vs. Butuan Congress has no intention to delegate issuance of permits to

LGUs. The intention of the law is to centralize issuance of permits to drive
motor vehicles including tricycles is to monitor the operation of the same.
Section 133(l) is only for franchise where to grant the same is within the
discretion of LGUs. The permit to drive is issued by LTO.

4. Time of Payment (Section 167, LGC)

Unless otherwise provided in LGC, all local taxes, fees, and charges shall be paid
within the first twenty (20) days of January or of each subsequent quarter, as the
case may be. The Sanggunian concerned may, for a justifiable reason or cause,
extend the time for payment of such taxes, fees, or charges without surcharges or
penalties, but only for a period not exceeding six (6) months.

5. Surcharges, Interests and Penalties

C. Residual Power to Tax (Sec. 186)

- The power of LGU to tax even of not expressly granted by the LGC provided that
there is no express prohibition.

D. Specific Taxing Units

1. Provinces may tax:
i. Transfer of Real Property ownership
- Onerous or gratuitous
- Preemption rule is not applicable
- of 1%

ii. Printing and Publication

iii. Franchise Tax

- Government franchise, whether primary or secondary, i.e. public utility
companies
- If the franchise grants tax exemption and the same was executed prior to 1991
LGC, it is deemed revoked by reason of the laws blanket revocation.
- At a rate not exceeding of 1% of the Gross Amount receipt of the preceding
calendar year

iv. Professional Tax

- Those who have passed government licensure examinations are the ones liable
- Amount not exceeding Php 300.00
- Imposed by the city or province where the taxpayers principal office is located
- With employer-employee relationship liability to PTR depends on the extent of
services provided. If services provided is exclusive to the employer, PTR is not
necessary, otherwise, the employee is liable.
 v. Sand and Gravel Tax
- Imposed on extraction of sand, gravel and other quarry resources
- Not more than 10% of the FMV of what was extracted
- Case: Province of Bulacan vs. CA

vi. Amusement Tax

- As high as 30%
- Applies to theaters, cinemas, concert halls, boxing stadiums, circuses and other
places of amusements.

vii. Taxes on Delivery trucks

2. Cities may tax those that may be taxed by a province and a municipality. They may
impose a tax rate which is 50% higher than the rates being imposed by provinces
and municipalities.

3. Municipalities
i. Business permit
ii. Community Taxes
iii. May levy taxes, fees, and charges not otherwise levied by provinces (Sec. 142)

REMEDIES IN LOCAL TAXATION

A. REMEDIES OF THE GOVERNMENT

a. ADMINISTRATIVE

1) Local Governments Lien (Sec 173, LGC)

2) Assessment by the Local Treasurer

3) Distraint of goods, chattels or effect and other personal properties of

whatever character (Sec. 174 and 175, LGC)

a. Seizure

b. Accounting of distrained goods

c. Publication

d. Release of distrained property upon payment prior to sale

e. Procedure of sale

f. Disposition of proceeds

4) Levy (Sec. 174 and 176,. LGC)

Contents of assessment:
1. Meralco vs. Barlis (Feb. 1, 2002) - A notice of assessment as provided for in the
Real Property Tax Code should effectively inform the taxpayer of the value of a
specific property, or proportion thereof subject to tax, including the discovery,
listing, classification, and appraisal of properties. The petitioner is also correct in
pointing out that the last paragraph of the said notices that inform the taxpayer
that in case payment has already been made, the notices may be disregarded is
an indication that it is in fact a notice of collection. It could only qualify as a notice
of collection if there is an unmistakable demand for payment of back taxes.

Who is entitled to the notice of assessment

1. Talusan vs. Tayag, (April 04, 2001) - Cases involving an auction sale of land for
the collection of delinquent taxes are in personam. Thus, notice by publication,
though sufficient in proceedings in rem, does not as a rule satisfy the requirement
of proceedings in personam. As such, mere publication of the notice of
delinquency would not suffice, considering that the procedure in tax sales is in
personam. It was, therefore, still incumbent upon the city treasurer to send the
notice of tax delinquency directly to the taxpayer in order to protect the interests
of the latter.

In the present case, the notice of delinquency was sent by registered mail
to the permanent address of the registered owner in Manila. In that notice, the city
treasurer of Baguio City directed him to settle the charges immediately and to
protect his interest in the property. Under the circumstances, we hold that the
notice sent by registered mail adequately protected the rights of the taxpayer,
who was the registered owner of the condominium unit.
For purposes of the real property tax, the registered owner of the property
is deemed the taxpayer. Hence, only the registered owner is entitled to a notice of
tax delinquency and other proceedings relative to the tax sale. Not being
registered owners of the property, petitioners cannot claim to have been deprived
of such notice. In fact, they were not entitled to it.

b. JUDICIAL (Sec. 174, LGC)

1) Civil Action in the court

2) Filed by Local Treasurer

3) Within 5 years from the date the taxes, fees or charges became due

Period within which to collect within 5 years from the date of

assessment by administrative or judicial action

c. OTHER PROVISIONS

Accrual of the tax (Sec. 166, LGC)

- General rule: All local taxes, fees, and charges shall accrue on the 1 st day of
January of each year.
 - Except:

i. Unless otherwise provided in the LGC,

ii. New taxes, fees or charges, or changes in the rates thereof, shall accrue on the 1 st
day of the quarter next following the effectivity of the ordinance imposing such
new levies or rates

Time of payment (Sec. 167, LGC)

- General Rule: All local taxes, fees and charges shall be paid within the first 20
days of January or of each subsequent quarter, as the case may be.

- Except:

i. Unless otherwise provided by the LGC

ii. The Sanggunian concerned may, for a justifiable reason or cause, extend the time
for payment of such taxes, fees, or charges or penalties, but only for a period not
exceeding 6 months.

Surcharges, Interests and Penalties (Sec. 168, LGC)

- Sanggunian may impose:

i. Surcharge not exceeding 25% of the amount of taxes, fees or charges not paid
on time and

ii. Interest not exceeding 2% per month of the unpaid taxes, fees or charges,
including surcharges, until such amount is fully paid, BUT in no case shall the total
interest on the unpaid amount or portion thereof exceed 36 months.

B. REMEDIES OF THE TAXPAYER

a. ADMINISTRATIVE

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

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

1. Drilon vs. Lim, (August 4, 1994) - Section 187 authorizes the Secretary of
Justice to review only the constitutionality or legality of the tax ordinance
and, if warranted, to revoke it on either or both of these grounds. When he
alters or modifies or sets aside a tax ordinance, he is not also permitted to
substitute his own judgment for the judgment of the local government that
enacted the measure. Secretary Drilon did set aside the Manila Revenue
Code, but he did not replace it with his own version of what the Code should
be. He did not pronounce the ordinance unwise or unreasonable as a basis for
its annulment. He did not say that in his judgment it was a bad law. What he
found only was that it was illegal. All he did in reviewing the said measure
was determine if the petitioners were performing their functions is
accordance with law, that is, with the prescribed procedure for the enactment
of tax ordinances and the grant of powers to the city government under the
Local Government Code. As we see it, that was an act not of control but of
mere supervision.
2. Hagonoy Market Vednors Assn. vs. Municipality of Hagonoy. Bulacan,
(February 6, 2002) - Sec. 187, LGC requires that an appeal of a tax ordinance
or revenue measure should be made to the Secretary of Justice within 30
days from effectivity of the ordinance and even during its pendency, the
effectivity of the assailed ordinance shall not be suspended. In the case at
bar, Municipal Ordinance No. 28 took effect in October 1996. Petitioner filed
its appeal only in December 1997, more than a year after the effectivity of
the ordinance in 1996. Clearly, the Secretary of Justice correctly dismissed it
for being time-barred. At this point, it is apropos to state that the timeframe
fixed by law for parties to avail of their legal remedies before competent
court is not a "mere technicality" that can be easily brushed aside. The
periods stated in the section are mandatory. Ordinance No. 28 is a revenue
measure adopted by the municipality of Hagonoy to fix and collect public
market stall rentals. Being its lifeblood, collection of revenues by the
government is of paramount importance. The funds for the operation of its
agencies and provision of basic services to its inhabitants are largely derived
from its revenues and collections. Thus, it is essential that the validity of
revenue measures is not left uncertain for a considerable length of time.
Hence, the law provided a time limit for an aggrieved party to assail the
legality of revenue measures and tax ordinances.

3. Ty vs. Trampe, (December 1, 1995) Petitioners failed to appeal the

assessment of their properties to the Board of Assessment Appeal within
sixty (60) days from the date of receipt of the written Notice of Assessment,
and if it is true that petitioner, as alleged in their pleadings, was not afforded
the opportunity to appeal to the board of assessment appeal, then they could
have availed of the provisions of Section 252, of the same R.A. 7160 by
paying the real estate tax under protest. Because of petitioners failure to
avail of either Sections 226 or 252 of R.A. 7160, they failed to exhaust
administrative remedies provided for by law before bringing the case to
Court. Therefore the filing of this case before this Court is premature, the
same not falling under the exception because the issue involved is not a
question of law but of fact.

Appeal to the Board of Assessment Appeals (Secs. 226 and 252,

LGC)

- Sec. 226, LGC Any owner or person who is not satisfied with the action of
the provincial, city or municipal assessor in the assessment of his property;
Within 60 days from receipt of the written notice of assessment; Appeal to
the BAA of the province or city by filing a petition under oath and copies of
the tax declarations and affidavits or documents in support of appeal.

- Sec. 252 (d), LGC In the event that the protest is denied or upon the lapse
of the 60-day period to decide, the taxpayer may appeal to the BAA.

Protest of the assessment (Sec. 226 and 252, LGC)

- Pay under protest and such shall be annotated in the tax receipt

- Protest in writing must be filed within 30 days from payment of the tax to the
provincial, city or municipal treasurer, who shall decide the protest within 60
days from receipt.

- The tax or a portion thereof paid under protest shall be held in trust by the
treasurer concerned.
 - Protest decided in favor of taxpayer the amount or portion of the tax
protested shall be refunded to the protestant or applied as tax credit against
his existing or future tax liability.

- Protest denied or upon lapse of the period to decide - appeal to the BAA.

Claim for refund (Sec. 253, LGC)

- When an assessment of basic real property tax, or any other tax levied is
found to be illegal or erroneous and the tax is accordingly reduced or
adjusted,

- The taxpayer may file a written claim for refund or credit of taxes and
interests

- With the provincial or city treasurer

- Within 2 years from the date the taxpayer is entitled to such reduction or
adjustment.

- The provincial or city treasurer shall decide the claim for refund or credit
within 60 days from receipt

- In case the claim is denied, the taxpayer may appeal to the BAA.

Remedies from a denial of the protest and refund

- It should not only be the written claim before the treasurer that must be filed
in 2 years but the taxpayer must also be able to file a case in court before
the expiration of the 2 year period.

- There is no appellate remedy from the denial of the treasurer before the
regular court but an independent and original action for refund.

b. JUDICIAL

Questioning Tax Sale

REAL PROPERTY TAXATION

Real Property Tax, defined

A direct tax on ownership of lands and buildings or other improvements thereon
Payable regardless of whether the property is used or not,
although the value may vary in accordance with such factor.

A. Governing Law
Historical Background:
1. Commonwealth Act No. 470 Old Assessment Law
- since 1920
2. Real Property Tax Code (Presidential Decree No. 464, as
amended)
- June 1, 1974
3. Local Government Code (Republic Act No. 7160)
- January 1, 1992
 - The changes however were only on the tax rate ceilings and assessment
levels.

The Local Government Code covers the administration, appraisal, assessment,

levy and collection of Real Property Tax, i.e. tax on land and building and other
structures and improvements on it, including machineries. (Subject to the definition
given by Art. 415 of the New Civil Code)

B. Nature of Real Property Tax National or Local?

Hybrid of national and local tax
Provisions of LGC are applied nationwide but rates imposed are different per
LGU ordinance

The real property tax has been considered and held to be national, despite the fact
that in practice it is local in its imposition and utilization.

Justice Vitug points out that: The real property tax has been considered and held to
be a national, not a local tax in Meralco Securities Industrial Corp v. CBAA, 114 SCRA 260.
The Court said that realty tax has always been imposed by the national law-making body.
The real estate tax is enforced throughout the Philippines and not in a particular political
subdivision, although the bulk of the tax proceeds accrue to the various local government
units where the property is located. Under the Local Government Code, local government
units are mandated to fix a uniform rate of basic real property tax applicable to their
respective localities, the proceeds of which exclusively accrue to them. (See Secs. 233 and
271, LGC), [Page 479, Tax Law and Jurisprudence, 2000 Edition by Justice Vitug and Judge
Acosta].

CHARACTERISTIC OF REAL PROPERTY TAX:

1. Direct tax on the ownership of real property
2. Ad Valorem tax. The value is based on the tax base
3. Proportion - the tax is calculated on the basis of a certain percentage of the value
assessed
4. Indivisible single obligation
5. Local Tax

C. Fundamental Principles Governing Appraisal and Assessment of Real Property

(Section 198, LGC)
1. Real property shall be appraised at its current and fair market value.
2. Real property shall be classified for assessment purposes on the basis of its
actual use.
3. Real property shall be assessed on the basis of a uniform standard within each
local government unit.
4. The appraisal, assessment, and collection of real property tax shall not be let
to any private person; and
5. The appraisal and assessment of real property shall be equitable.

D. Properties Covered (Sec. 232, LGC)

1. Land,
2. Buildings
3. Machinery and
4. Other improvements not otherwise exempted under said code (Sec 232, LGC)

Machinery embraces machines, equipment, mechanical contrivances,

instruments, appliances or apparatus which may or may not be attached,
 permanently or temporarily, to the real property. It includes the physical facilities for
production, the installations and appurtenant service facilities, those which are
mobile, selfpowered or self-propelled, and those not permanently attached to the real
property which are actually, directly, and exclusively used to meet the needs of the
particular industry, business or activity and which by their very nature and purpose
are designed for, or necessary to its manufacturing, mining, logging, commercial,
industrial or agricultural purposes. (Sec. 199 [o], LGC)

Machinery which are of general purpose use including but not limited to office
equipment, typewriters, telephone equipment, breakable or easily damaged
containers (glass or cartons), microcomputers, facsimile machines, telex machine,
cash dispensers, furnitures and fixtures, freezers, refrigerators, display cases or
racks, fruit juice or beverage automatic dispensing machines which are not
directly and exclusively used to meet the needs of a particular industry,
business or activity shall not be considered within the definition of machinery.
(Sec. 290 [o], IRR of RA 7160)

Improvements include valuable additions made to a property or an amelioration in

its condition, amounting to more than a mere repair or replacement of parts involving
capital expenditures and labor, which is intended to enhance its value, beauty or
utility or to adopt it for new or further purposes.

Note: Although the term real property has not been expressly defined in the LGC,
early decisions of the Supreme Court in Mindanao Bus Co. v City Assessor of Cagayan de
Oro, 6 SCRA `97; Board of Assessment Appeals v Meralco, 119 PHIL 328; Manila
Electric Co. v Board of Assessment Appeals,10 SCRA 68) seem to suggest that Art.
415 of the Civil Code could also be controlling, to wit:.

Art. 415. The following are immovable property:

(1) Land, buildings, roads and constructions of all kinds adhered to the soil;

(2) Trees, plants, and growing fruits, while they are attached to the land or form an
integral part of an immovable;

(3) Everything attached to an immovable in a fixed manner, in such a way that it

cannot be separated therefrom without breaking the material or deterioration of the
object;

(4) Statues, reliefs, paintings or other objects for use or ornamentation, placed in
buildings or on lands by the owner of the immovable in such a manner that it reveals
the intention to attach them permanently to the tenements;

(5) Machinery, receptacles, instruments or implements intended by the owner of the

tenement for an industry or works which may be carried on in a building or on a piece
of land, and which tend directly to meet the needs of the said industry or works;

(6) Animal houses, pigeon-houses, beehives, fish ponds or breeding places of similar
nature, in case their owner has placed them or preserves them with the intention to
have them permanently attached to the land, and forming a permanent part of it; the
animals in these places are included;

(7) Fertilizer actually used on a piece of land;

 (8) Mines, quarries, and slag dumps, while the matter thereof forms part of the bed,
and waters either running or stagnant;

(9) Docks and structures which, though floating, are intended by their nature and
object to remain at a fixed place on a river, lake, or coast;

(10) Contracts for public works, and servitudes and other real rights over immovable
property.

In Caltex vs. CBAA, May 31, 1982:

Machinery and equipment, consisting of underground tanks, elevated tanks,

water tanks, gasoline pumps, computing pumps, water pumps, car washer, car and
truck hoists, air compressors and similar articles, installed by Caltex (Philippines) Inc.
in its gasoline stations, located on leased land, have been held to be real property
subject to the tax. (real properties which have characteristics of permanency, the
lease is for a long period of time)

2001 BAR QUESTION: Under Article 415 of the Civil Code, in order for
machinery and equipment to be considered real property, they must be placed
by the owner of the land and, in addition, must tend to directly meet the needs
of the industry or works carried on by the owner. Oil companies, such as Caltex
and Shell, install underground tanks in the gasoline stations located in land
leased by the oil companies from others. Are those underground tanks, which
were not placed there by the owner of the land but by the lessee, considered
real property for purposes of real property taxation under the LGC?
SUGGESTED ANSWER FROM UP LAW CENTER: Yes. The underground tanks
although installed by the lessee, Shell and Caltex, are considered as real
property for purposes of the imposition of real property taxes. It is only for
purposes of executing a final judgment that these machinery and equipment,
installed by the lessee on a leased land, would not be considered as real
property. But in the imposition of real property tax, the underground tanks are
taxable as necessary fixtures of the gasoline station without which the gasoline
station would not be operational. (Caltex v. CBAA, 114 SCRA 296).

SPECIAL CLASSES OF REAL PROPERTY (Sec. 216, LGC)

1. HOSPITALS
2. CULTURAL and SCIENTIFIC purposes
3. owned and used by LOCAL WATER DISTRICTS
4. GOCCs rendering essential public services in the supply and distribution of
water and/or generation or transmission of electric power.

E. Properties Exempt
1. Section 234, LGC
a. Real property owned by the Republic of the Philippines or any of its
political subdivisions except when the beneficial use thereof has been
granted, for consideration or otherwise, to a taxable person;
- except: when beneficial use thereof is granted to a taxable person
- cases of MIAA and MCAA: GOCCs are not automatically exempt from
real property tax, depending on its charter giving it exemption
- charter enacted after LGC so that the exemption is not revoked
 b. Charitable institutions, churches, parsonages, or convents appurtenant
thereto, mosques, non profit or religious cemeteries, and all lands,
buildings, and improvements actually, directly and exclusively used for
religious, charitable, or educational purposes.
- traditional exemptees

c. All pieces of machinery and equipment that are actually, directly, and
exclusively used by local water districts, and government owned or
controlled corporations engaged in the supply and distribution of water and/or
generation and transmission of electric power.

d. All real property owned by duly registered cooperatives as provided for

under RA 6938, and
e. Machinery and equipment used for pollution control and environmental
protection.

2. Section 238, LGC

Idle Lands Exempt From Tax:
By reason of:
a. force majeure
b. civil disturbance
c. natural calamity
d. any cause which legally/physically prevents the owner of the
property or person having legal interest therein from
improving, utilizing, or cultivating the same

What Are Considered as Idle Lands: (Sec. 237, LGC)

1. Agricultural lands More than 1 hectare if more than of which remain
uncultivated or unimproved by the owner of the property or person having legal interest
therein.

Not Idle Lands:

Agricultural lands planted to permanent or perennial crops with at least 50 trees to
a hectare
Lands actually used for grazing purposes

2. Non-Agricultural Lands More than 1,000 sq. m. in area if more than of

which remain uncultivated or unimproved by the owner of the property or person having
legal interest therein.

Proof of Tax Exemption:

Every person by or for whom real property is declared who shall claim the exemption
shall file with the provincial, city or municipal assessor within 30 days from date of
declaration of real property sufficient documentary evidence in support of such claim
(i.e. corporate charters, title of ownership,articles of incorporation, contracts,
affidavits, etc.)

3. Constitutional Exemptions
- actually, directly, exclusively used for religious, educational and charitable
purposes are exempt from real property tax

Query: To where does the exemption attach? To the property or to the entity?
 Case: X owns a parcel of land, leased by church. May X claim exemption from Real
Property Taxation? Yes, exemption attaches on property as long as exclusively used
for religious purchases.

Case: School - not subject to Real Property Tax if directly used for educational
purposes.
A. Has a mansion near the school where the president of the school resides
and where guests may be accommodated - incidental, president has to live near
school

B. Near the school is a hospital where medical students are trained - incidental
to operation of the school (Herrera vs. CBAA use as trainee students)

C. Near the school is a mens dorm, a student center

exempt, incidental to operation of the school

D. Near the school is another school building with 2 floors used as classrooms
while 2 floors are for commercial stores.
- incidental to operation of school (Bishop of Neva Segovia Case vegetable
garden near convent is incidental to convent operation)
- that part not used for educational purpose is subject to real property tax
- As to the land, pro-rate according to use, one-half taxed pursuant to Abra
Valley College Case

Note:
Incidental exemptions promulgated prior to 1987 Constitution
meant, primarily used for the purposes even if not solely.

CASES:
1. In MIAA v. Paranaque, July 20, 2006, the Court declared the Airport
Lands and Buildings of the Manila International Airport Authority exempt from
the real estate tax imposed by the City of Paraaque. The Court declared void
all the real estate tax assessments issued by the City of Paraaque on the
Airport Lands and Buildings of the MIAA, except for the portions that the MIAA
has leased to private parties. The Court based its ruling under Section 2(10)
and (13) of the Introductory Provisions of the Administrative Code, which
governs the legal relation and status of government units, agencies and
offices within the entire government machinery, under which MIAA is a
government instrumentality and not a government-owned or controlled
corporation. Under Section 133(o) of the Local Government Code, MIAA as a
government instrumentality is not a taxable person because it is not subject
to "[t]axes, fees or charges of any kind" by local governments. The only
exception is when MIAA leases its real property to a "taxable person" as
provided in Section 234(a) of the Local Government Code, in which case the
specific real property leased becomes subject to real estate tax. Thus, only
portions of the Airport Lands and Buildings leased to taxable persons like
private parties are subject to real estate tax by the City of Paraaque.

Under Article 420 of the Civil Code, the Airport Lands and Buildings of
MIAA, being devoted to public use, are properties of public dominion and thus
owned by the State or the Republic of the Philippines. Article 420 specifically
mentions "ports x x x constructed by the State," which includes public airports
and seaports, as properties of public dominion and owned by the Republic. As
properties of public dominion owned by the Republic, there is no doubt that
the Airport Lands and Buildings are expressly exempt from real estate tax
under Section 234(a) of the Local Government Code.

Furthermore, the Court made a distinction between a GOCC and an

instrumentality. Thus:

Government-owned or controlled corporation refers to any agency organized

as a stock or non-stock corporation, vested with functions relating to public
needs whether governmental or proprietary in nature, and owned by the
Government directly or through its instrumentalities either wholly, or, where
applicable as in the case of stock corporations, to the extent of at least fifty-
one (51) percent of its capital stock: x x x

A government-owned or controlled corporation must be "organized as a stock

or non-stock corporation." MIAA is not organized as a stock or non-stock
corporation. MIAA is not a stock corporation because it has no capital stock
divided into shares. MIAA has no stockholders or voting shares.

MIAA is also not a non-stock corporation because it has no members.

Since MIAA is neither a stock nor a non-stock corporation, MIAA does not
qualify as a government-owned or controlled corporation.

Thus, for an entity to be considered as a GOCC, it must either be organized as

a stock or non-stock corporation. Two requisites must concur before one may
be classified as a stock corporation, namely: (1) that it has capital stock
divided into shares, and (2) that it is authorized to distribute dividends and
allotments of surplus and profits to its stockholders. If only one requisite is
present, it cannot be properly classified as a stock corporation. As for non-
stock corporations, they must have members and must not distribute any part
of their income to said members.

2. In Lung Center of the Philippines vs. Quezon City, June 29, 2004, the
Court held that Lung Center of the Philipines, a charitable institution does not
lose its character as such and its exemption from taxes simply because it
derives income from paying patients, whether out-patient, or confined in the
hospital, or receives subsidies from the government, so long as the money
received is devoted or used altogether to the charitable object which it is
intended to achieve; and no money inures to the private benefit of the
persons managing or operating the institution. However, those portions of its
real property that are leased to private entities are not exempt from real
property taxes as these are not actually, directly and exclusively used for
charitable purposes.

Under the 1973 and 1987 Constitutions and Rep. Act No. 7160 in
order to be entitled to the exemption, the petitioner is burdened to prove, by
clear and unequivocal proof, that (a) it is a charitable institution; and (b) its
real properties are ACTUALLY, DIRECTLY and EXCLUSIVELY used for
charitable purposes. "Exclusive" is defined as possessed and enjoyed to the
exclusion of others; debarred from participation or enjoyment; and
"exclusively" is defined, "in a manner to exclude; as enjoying a privilege
 exclusively." If real property is used for one or more commercial purposes, it is
not exclusively used for the exempted purposes but is subject to taxation. The
words "dominant use" or "principal use" cannot be substituted for the words
"used exclusively" without doing violence to the Constitutions and the law.
Solely is synonymous with exclusively.

What is meant by actual, direct and exclusive use of the property for
charitable purposes is the direct and immediate and actual application of the
property itself to the purposes for which the charitable institution is organized.
It is not the use of the income from the real property that is determinative of
whether the property is used for tax-exempt purposes.

The petitioner failed to discharge its burden to prove that the entirety
of its real property is actually, directly and exclusively used for charitable
purposes. While portions of the hospital are used for the treatment of patients
and the dispensation of medical services to them, whether paying or non-
paying, other portions thereof are being leased to private individuals for their
clinics and a canteen. Further, a portion of the land is being leased to a
private individual for her business enterprise under the business name
"Elliptical Orchids and Garden Center."

Accordingly, the Court held that the portions of the land leased to
private entities as well as those parts of the hospital leased to private
individuals are not exempt from such taxes. On the other hand, the portions of
the land occupied by the hospital and portions of the hospital used for its
patients, whether paying or non-paying, are exempt from real property taxes.

Analysis:
Is Lung Center liable for Real Property Tax?
Yes.
a. exclusively used means solely used for charitable purposes
b. exemption in its charter revoked by new LGC
c. incidental exemption no longer recognized
d. taxed on orchidarium, canteen, private clinics

Query: are the older cases now not applicable so that they are
now taxable?
- not clear as to the extent of Lung Center case as to areas which
used to be considered as real property tax exempted as
incidental
- If city decides to tax SLU on its hospital, parking lot, etc., use as
ground that they should be exempt due to necessity, do not use
the word incidental

3. In LRTA vs. CBAA, October 12, 2000, though the creation of the LRTA was
impelled by public service to provide mass transportation in MM- its
operations undeniably partakes of ordinary business. . . Given that it is
engage in a service-oriented commercial endeavour, its carriage ways and
terminal stations are patrimonial property subject to tax, notwithstanding its
claim of being a GOCC.

Under its charter, LRT is not exempt from real property tax. Taxation is
the rule and exemption is the exception.
 4. In DIGITEL vs. Province of Pangasinan, February 23, 2007, the Court ruled
that in view of the unequivocal intent of Congress to exempt from real
property tax those real properties actually, directly and exclusively used by
petitioner DIGITEL in the pursuit of its franchise, respondent Province of
Pangasinan can only levy real property tax on the remaining real properties of
the grantee located within its territorial jurisdiction not part of the above-
stated classification. Said exemption, however, merely applies from the time
of the effectivity of petitioner DIGITELs legislative franchise and not a
moment sooner.

5. In Philippine Fisheries Development Authority vs. Court of Appeals, July 31,

2007, the Court reversed the Court of Appeals decision which held that
petitioner Philippine Fisheries Development Authority is liable to pay real
property taxes on the land and buildings of the Iloilo Fishing Port Complex
which are owned by the Republic of the Philippines but operated and governed
by the Authority.

The Court ruled that the Authority is not a GOCC but an instrumentality
of the national government which is generally exempt from payment of real
property tax. However, said exemption does not apply to the portions of the
IFPC which the Authority leased to private entities. With respect to these
properties, the Authority is liable to pay real property tax.

The Authority should be classified as an instrumentality of the national

government. As such, it is generally exempt from payment of real property
tax, except those portions which have been leased to private entities.

F. May LGUs grant exemption? Yes

Power to Grant Local Exemptions (Sec. 192 LGC)

- LGUs, may through ordinances duly approved, grant tax exemptions, incentives or reliefs
under such terms and conditions, as they may deem necessary.

- Although powerless to grant RPT exemption, LGU in MM can exempt the 5% ad valorem
tax on idle lands.

- LGUs (within and outside MM) may also grant condonation which actually partake of
exemption.

G. Who are liable for the Real Property Taxes

1. Ownership vs. Use

Doctrine of Ownership
- owner is liable

Doctrine of Use
- property is exempt due to Use (REC-religious, educational, charitable)

Actual Use of Property as Basis for Assessment (Sec. 217, LGC)

Real property shall be classified, valued and assessed on the basis of actual
use regardless of where located, whoever owns it, and whoever uses it.

Beneficial User May Be Liable if:

* he leased property from the government
 * he leased property from an exempt owner
* use is not exempt from real property tax

2. In Testate Estate of Concordia Lim vs. Manila, February 21, 1990, GSIS
foreclosed the property mortgaged by Lim and for failure to redeem, owned by GSIS
for the years 1977 to 1978. In 1979, heirs of Lim repurchased the property. Manila
sought to levy real property tax on heirs for back taxes covering 1977 and 1978.

Who is lible for the back taxes?

a. not the heirs because they were not the owners nor beneficial owners at the time
b. not GSIS because at the time it was exempt
c. beneficial users or those using the property for commercial use must pay
however not made liable since not impleaded

H. Procedure in Real Property Taxation

In Lopez vs. City of Manila, February 19, 1999, the Court discussed the steps to be
followed for the mandatory conduct of General Revision of Real Property assessments,
pursuant to the provision of Sec. 219, of R.A. No. 7160 which are as follows:

1. The preparation of Schedule of Fair Market Values.

2. The enactment of Ordinances:
a) levying an annual "ad valorem" tax on real property and an additional tax
accruing to the SEF.
b) fixing the assessment levels to be applied to the market values of real
properties;
c) providing necessary appropriation to defray expenses incident to general
revision of real property assessments; and
d) adopting the Schedule of Fair Market Values prepared by the assessors.

The preparation of fair market values as a preliminary step in the conduct of general revision
was set forth in Section 212 of R.A. 7160, to wit: (1) The city or municipal assessor shall
prepare a schedule of fair market values for the different classes of real property situated in
their respective Local Government Units for the enactment of an ordinance by the
sanggunian concerned. (2) The schedule of fair market values shall be published in a
newspaper of general circulation in the province, city or municipality concerned or the
posting in the provincial capitol or other places as required by law.

The Court also laid down the procedure in computing the real property tax. With the
introduction of assessment levels, tax rates could be maintained, although tax payments
can be made either higher or lower depending on their percentage (assessment level)
applied to the fair market value of property to derive its assessed value which is subject to
tax. Moreover, classes and values of real properties can be given proper consideration, like
assigning lower assessment levels to residential properties and higher levels to properties
used in business. The procedural steps in computing the real property tax are as follows:

1) Ascertain the assessment level of the property

2) Multiply the market value by the applicable assessment level of the property
3) Find the tax rate which corresponds to the class (use) of the property and multiply
the assessed value by the applicable tax rates.
The computation of real property tax is cited below:

Market Value Pxxx

Multiplied by Assessment Level (x %)

Assessed Value Pxxx

Multiplied by Rate of Tax (x %)

Real Property Tax Pxx

1. Declaration of Real Properties whose duty?

DECLARATION OF REAL PROPERTY

It shall be the responsibility of the owner, administrator or their representatives

to declare, under oath, the true value of real property, taxable or exempt,
within 60 days after the acquisition. The sworn declaration shall be filed once
every 3 years before June 30 th of the year commencing 1992. The failure or
refusal to make that declaration within the prescribed period would authorize
the provincial or city assessor to declare the property in the name of the
defaulting owner, if known, or against an unknown owner as the case may be,
and to assess the property for taxation. (Secs. 201-204 LGC).

In the case of Testate Estate of Concordia Lim V. City of Manila, February 21,
1990, it was held that the unpaid tax attaches to the property and is chargeable
against the person who had actual or beneficial use and possession of it regardless of
whether or not he is the owner. To impose the real property tax on the subsequent owner
who was neither the owner nor the beneficial user of the property during the
designated periods would not only be contrary to law but also unjust.

a. Owner or Administrator (Secs. 202-203, LGC)

When: once every 3 years during the period from January 1 to June 30
What: file a sworn declaration with the assessor with description of the
property
IF newly acquired property -
a. files with assessor within 60 DAYS from date of transfer a
b. SWORN statement containing FMV and description of property
IF improvement on real property
a. file w/in 60 DAYS upon completion or occupation (whichever is
earlier)
b. SWORN statement containing FMV and description of property

b. Provincial / City / Municipal Assessor (Sec. 204)

WHEN only when the person under Sec 202 refuses or fails to make the
declaration within the prescribed time. No oath by assessor is required
NOTE: IF FILING FOR EXEMPTION (Sec. 206)
 WHAT person claiming exemptions must file with assessor sufficient
documentary evidence to support claim
WHEN within 30 days from the date of DECLARATION of property
IF required evidence is not submittedwithin 30 days, the property will be listed as
taxable in the roll
IF proven to be tax-exempt, property will be dropped from the roll

NOTE: IF PROPERTY DECLARED FOR THE FIRST TIME (Sec. 222)

If declared for 1st time, real property shall be assessed for back taxes
a) for not more than ten (10) years prior to the date of initial assessment
b) taxes shall be computed on the basis of applicable schedule of values
in force during the corresponding periods
*Assessor will compare the entry on file with the Registry of Deeds and the
assessment roll in his office.

c. building officials
Prior to construction of building, as required in procuring building permit.
Permit transmitted by building officials to Registry of Deeds.

d. Geodetic engineers - For lands surveyed

e. Notaries Public - For document notarization, must furnish the assessors a
copy

2. Valuation by Assessors

Assessment
- the act or process of determining the value of a property, or proportion thereof subject to
tax, including the discovery, listing, classification, and appraisal of properties.

Appraisal
- the act or process of determining the value of property as of a specific date for a specific
purpose.

LISTING OF REAL PROPERTY IN THE ASSESSMENT ROLLS

(Secs. 205, 207)

Listing of all Real Property whether taxable or exempt within the jurisdiction of LGU in the
assessment roll.
o Undivided real property in the name of the estate or heirs or devisees
o Corporation, partnership and association same as individuals
o Owned by the Republic of the Philippines, its instrumentalities, political
subdivisions, beneficial use is transferred to a taxable person in the name of the
possessor

All declarations shall be kept and filed under a uniform classification system to be
established by the provincial, city or municipal assessor.

Steps in assessment of Real Property :

1. Listing of all properties subject to the tax; and
2. The valuation of such properties.

In Callanta vs. Ombudsman, January 30, 1998, where the issue was whether officials
and employees of the Office of the City Assessor may reduce the new assessed values of
real properties upon requests of the affected property owners, the Court ruled that forestall
the practice of initially setting unreasonably high reassessment values only to eventually
change them to unreasonably lower values upon "requests" of property owners, the law
gives no such authority to the city assessor or his subalterns.. . Thus, petitioners'
unauthorized reduction of the assessed values ineluctably resulted in the local government's
deprivation of the corresponding revenues. Lost or reduced revenues undeniably translate
into damages or injury within the contemplation of the law. The city government of Cebu,
therefore, had every legal right to feel aggrieved and to institute the proceeding against
petitioners.

3. Preparation of Schedule of Fair Market Values

APPRAISAL AND VALUATION OF REAL PROPERTY

(Sec 212-214, 224-225)

How to determine Fair Market Value:

For Land
1. Assessor of the province/city or municipality may summon the owners of the properties to
be affected and may take depositions concerning the property, its ownership amount, nature
and value. (sec. 213,LGC)
2. Assessor prepares a schedule of FMV for different classes of properties.
3. Sanggunian enacts an ordinance.
4. The schedule of FMV is published in a newspaper of general circulation in the province city
or municipality concerned or in the absence thereof shall be posted in the provincial capitol
city or municipal hall places therein (Sec. 212, LGC)

Classification of Land for purposes of assessment - Sec 218, LGC

1. Commercial land devoted principally for the object of profit and is not classified as
agricultural, industrial, mineral, timber, or residential land
2. Agricultural land devoted principally to the planting of trees, raising of crops,
livestock and poultry, dairying, salt making, inland fishing and similar aquacultural
activities, and other agricultural activities
3. Residential land principally devoted to habitation
4.Mineral- lands which minerals, metallic or non-metallic, exist in sufficient quantity or
grade to justify the necessary expenditures to extract and utilize such materials
5. Industrial-land devoted principally to industrial activity as capital investment and is not
classified as agricultural, commercial, timber, mineral or residential land
6. Timberland
7. Special
- Classification of lands made by respective sanggunian in accordance with zoning
ordinances.
-It is based on actual use. Actual use refers to the purpose for which the property is
principally or predominantly utilized by the person in possession thereof.

For Machinery
1. For Brand New machinery : FMV is acquisition cost
2. In all other cases:
FMV = Remaining economic life x Replacement cost

DETERMINE ASSESSED VALUE (Sec. 218)

Procedure
1. take the schedule of FMV (Fair Market Value)
2. Assessed value = FMV x Assessment level
3. Real Property Tax = Assessed value x Allowable Real Property Tax rate

4.Enactment of a Real Property Tax Ordinance

Barangays cannot impose realty taxes.
Municipalities cannot fix real estate tax rates.

Procedure:
a.hearing and modification of prepared schedule
b.publication
c.adoption of the schedule
d.adoption of real property ordinance with assessment levels

Coverage / Types of Real Property Tax:

1. Basic real property tax / Annual Ad Valorem Tax
For real property not specifically exempted
a.Provinces not more than 1% of assessed value;
b.Cities, Municipalities in MM not more than 2% of assessed value

2. Special levies:
a. Special Education Fund (SEF)
- 1% additional real estate tax to finance the SEF (Sec.236) within MM area only

b. Additional Ad Valorem on the Lands

not exceeding 5% of the assessed value of the property (Sec. 236, LGC)

c. Special Assessments/ For Public Works

- on lands specially benefited by public works, projects or improvements funded by
the LGU
- May be imposed even by municipalities outside MM provided:
- Special levy shall not exceed 60% of the actual cost of such projects and
improvements, including the costs of acquiring land and such other real property in
connection therewith not apply to lands exempt from basic real property tax and the
remainder of the land have been donated to the local government unit concerned for the
construction of said projects. (Sec. 240, LGC).

Special Levy
Requirements for validity:
1. infrastructure project financed by government whereby real property owners
benefit from it
2. not more than 60% of actual cost of project
3. not less than five but not more than ten years
4. thru an ordinance
a. nature of project
b. extent of project
c. cost spent
d. metes and bounds

What may be done:

i. levy ad valorem taxes (see above)
ii. Fix Assessment levels
Assessment level is the percentage applied to the fair market value to determine
the taxable or taxation value of the property.

In City Assessor of Cebu City vs. Association of Benevola de Cebu, June 8, 2007,
applying Secs. 215-216, of LGC, in line with City Tax Ordinance LXX of Cebu City, the 10%
special assessment should be imposed for the Chong Hua Hospital Medical Arts Center
(CHHMAC) building which should be classified as special. Sec. 216, LGC states that:

SEC. 216. Special Classes of Real Property.All lands, buildings, and

other improvements thereon actually, directly and exclusively used for
hospitals, cultural or scientific purposes, and those owned and used by
local water districts, and government-owned or controlled corporations
rendering essential public services in the supply and distribution of
water and/or generation and transmission of electric power shall be
classified as special.

iii. Provide for appropriations

iv. Adopt Schedule of Fair Market Values

Fair Market Value and Assessed Value Whats the difference?

Fair Market Value (FMV)
- price at which a property may be sold by a seller who is not compelled to sell
and bought by a buyer who is not compelled to buy

Assessed Value or Assessment Value (AV)

- fair market value of the real property multiplied by the assessment level. It is
synonymous with taxable value.

Payment of Tax

When: January 1 of every year (Sec 246)

The tax shall constitute as superior lien (Sec. 246)

How:
a. basic real prop tax in 4 equal installments (Mar 31,Jun 30,Sep 30, Dec 31)
b. special levy - governed by ordinance

Interest for Late Payment

- two percent (2%) each month on unpaid amount until the delinquent amt is paid.
- provided in no case shall the total interest exceed thirty-six (36) months

Advance and Prompt Payment

a) advance payment - discount not exceeding 20% of annual tax (Sec 251, LGC)
b) prompt payment - discount not exceeding 10% of annual tax due(Art 342 IRR)

Collection of Tax (Sec.247, LGC)

The collection of the real property tax with interest thereon and related expenses and
the enforcement of the remedies provided by the LGC or any applicable laws shall be the
responsibility of the city or municipal treasurer concerned.
The city or municipal treasurer my deputize the barangay treasurer to collect all
taxes on real property located in the barangay provided the barangay treasurer is properly
bonded.

Who Collects:
The provincial, city, municipal or barangay treasurer

Period Within Which To Collect (Sec 270):

Within five (5) yrs from the date they become due within ten (10) yrs. from discovery of
fraud, in case there is fraud or intent to evade
Period of prescription shall be SUSPENDED when: (Sec 270, LGC)
1. local treasurer is legally prevented to collect tax
2. the owner of prop requests for reinvestigation and writes a waiver before
expiration of period to collect
3. the owner of the property is out of the country or cannot be located