1.
State briefly and concisely the nature
How to use the BAR STAR NOTES. The
BAR STAR NOTES in the form of questions and
answers as well as textual discussion were specially
prepared by Prof. Domondon for the exclusive use of
Bar Reviewees who attended his 2010 Lectures on
TAXATION held at the University of the Philippines.
Included in the presentation are doctrines contained in
Supreme Court decisions up to April 2010.
The purpose of the BAR STAR NOTES is to
provide the Bar Reviewee with a handy review material
which serves as memory-joggers for the September 12,
2010 Bar Examinations in Taxation. The author tries to
second guess what would be included in the Bar Exams
using statistical analysis. The actual Bar questions may
not be formulated in the same manner as the BAR STAR
NOTES. However, the doctrines tested in the Bar would
in all probability be included in these Notes.
If pressed for time, the author suggests that the
reader should focus his attention on the following:
Nice to know
Should know
Must know and master
It is further suggested that the reader should
merely browse those without stars.
WARNING:
These materials are copyrighted and/or based on
the writers books on Taxation and future revisions. It is
prohibited to reproduce any part of these Notes in any
form or any means, electronic or mechanical, including
photocopying without the written permission of the author.
Unauthorized users shall not be prosecuted but SHALL
BE SUBJECT TO THE LAW OF KARMA SUCH THAT
THEY WILL NEVER PASS THE BAR OR WOULD BE
UNHAPPY IN LIFE for stealing the intellectual property
of the author.
THE BEST OF LUCK AND
ADVANCE
CONGRATULATIONS
TAXATION
GENERAL PRINCIPLES OF
TAXATION
TAXATION, IN GENERAL
of taxation. Alternatively, define taxation.
SUGGESTED ANSWER: The inherent power of the
sovereign exercised through the legislature to impose
burdens upon subjects and objects within its jurisdiction
for the purpose of raising revenues to carry out the
legitimate objects of government.
2. What is the nature of the States
power to tax ? Explain briefly.
SUGGESTED ANSWER: The nature of the states
power to tax is two-fold. It is both an inherent power and
a legislative power. It is inherent in nature
being an attribute of sovereignty. This is so, because
without the taxes, the states existence would be
imperiled. There is thus, no need for a constitutional grant
for the state to exercise this power.
It is
a legislative power because it involves the promulgation
of rules. Taxation is a set of rules, how much is the tax to
be paid, who pays the tax, to whom it should be paid, and
when the tax should be paid.
3. What is the underlying theory of
taxation ? Explain briefly.
SUGGESTED ANSWER: Taxes are the lifeblood
of the nation. Without revenue raised from taxation,
the government will not survive, resulting in detriment to
society. Without taxes, the government would be
paralyzed for lack of motive power to activate and operate
it. (Commissioner of Internal Revenue v. Algue, Inc. et al., 158
SCRA 8, 16-17)
4. Marshall said that, the power to tax
involves the power to destroy. On the other
hand, Holmes stated that the power to tax is
not the power to destroy while the court sits.
Reconcile the statements.
In the alternative, what are
the implications that flow from the above
statements ?
SUGGESTED ANSWERS: Marshalls view refers
to a valid tax while the Holmes view refers to an invalid
tax. a. The imposition of
a valid tax could not be judicially restrained merely
because it would prejudice taxpayers property.
b. An illegal tax could be judicially
declared invalid and should not work to prejudice a
taxpayers property.
5. Discuss briefly the basis/bases, or
rationale of taxation.
SUGGESTED ANSWER: a.
Reciprocal duties of protection and support
between the state and its citizens and residents. Also
called symbiotic relation between the state and its
citizens.
b. Jurisdiction by the state over persons
and property within its territory.
 2
6. Discuss briefly but comprehensively
the objectives or purposes of taxation. 9. Explain the sumptuary purpose of
SUGGESTED ANSWER: The purposes or taxation.
objectives of taxation are the following: SUGGESTED ANSWER: The sumptuary purpose
a. The of taxation is to promote the general welfare and to protect
primary purpose: the health, safety or morals of the inhabitants. It is in the
1) Revenue purpose. joint exercise of the power of taxation and police power
b. The secondary where regulatory taxes are collected.
purposes Taxation may be made the implement of the states
1) Sumptuary or regulatory purpose. police power. The motivation behind many taxation
2) Compensatory purpose. measures is the implementation of police power goals.
3) To [Southern Cross Cement Corporation v. Cement Manufacturers
implement the power of eminent domain. Association of the Philippines, et al., G. R. No. 158540, August 3,
2005) The reader should note that the August 3, 2005
Southern Cross case is the decision on the motion for
7. Distinguish a tax from a license fee. reconsideration of the July 8, 2004 Southern Cross
SUGGESTED ANSWER: The following are decision.
the distinctions: a. Purpose: Tax imposed The so-called sin taxes on alcohol and tobacco
for revenue while license fee for regulation. Tax for manufacturers help dissuade the consumers from
general public purposes while license fee for regulatory excessive intake of these potentially harmful products.
purposes only. (Southern Cross Cement Corporation v. Cement Manufacturers
b. Basis: Tax imposed under Association of the Philippines, et al., G. R. No. 158540, August 3,
power of taxation while license fee under police power. 2005)

c. Amount: In taxation, no limit as to amount 10. Taxation distinguished from police

while license fee limited to cost of the license and the
expenses of police surveillance and regulation.
d. Time of payment: Taxes normally
paid after commencement of business while license fee
before. e. Effect of
payment: Failure to pay a tax does not make the
business illegal while failure to pay license fee makes
business illegal. f. Surrender: Taxes,
being the lifeblood of the state, cannot be surrendered
except for lawful consideration while a license fee may be
surrendered with or without consideration. (Cooley on
Taxation, pp. 1137-1138; Pacific Commercial Company v.
Romualdez, et al., 49 Phil. 924)
8. How may the power to tax be utilized
to carry out the social justice program of our
government ? SUGGESTED
ANSWER: The compensatory purpose of taxation is to
implement the social justice provisions of the constitution
through the progressive system of taxation, which would
result to equal distribution of wealth, etc.
Progressive income taxes alleviate the margin
between rich and poor. (Southern Cross Cement Corporation
v. Cement Manufacturers Association of the Philippines, et al., G.
R. No. 158540, August 3, 2005)
In recent years, the increasing social challenges of
the times expanded the scope of the 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. (Batangas Power
Corporation v. Batangas City, et al., G. R. No. 152675, and
companion case, April 28, 2004 citing National Power
Corporation v. City of Cabanatuan, G. R. No. 149110, April 9,
2003)
power. Taxation is distinguishable from police power as
to the means employed to implement these public goals.
Those doctrines that are unique to taxation arose from
peculiar considerations such as those especially punitive
effects (Southern Cross Cement Corporation v. Cement
Manufacturers Association of the Philippines, et al., G. R.
No. 158540, August 3, 2005) as the power to tax involves
the power to destroy and the belief that taxes are lifeblood
of the state. (Ibid.) taxes being the lifeblood of the
government, their prompt and certain availability is of the
essence.
These considerations necessitated the evolution of
taxation as a distinct legal concept from police power.
(Ibid.)
11. How the power of taxation may be
used to implement power of eminent domain. Tax
measures are but enforced contributions exacted on pain
of penal sanctions and clearly imposed for public
purpose. In most recent years, the power to tax has
indeed become a most effective tool to realize social
justice, public welfare, and the equitable distribution of
wealth. (Commissioner of Internal Revenue v. Central Luzon
Drug Corporation, G.R. No. 159647, April 16, 2005)
Establishments granting the 20% senior citizens
discount may claim the discounts granted to senior
citizens as tax deduction based on the net cost of the
goods sold or services rendered: Provided, That the cost
of the discount shall be allowed as deduction from gross
income for the same taxable year that the discount is
granted. Provided, further, That the total amount of the
claimed tax deduction net of value added tax if applicable,
shall be included in their gross sales receipts for tax
purposes and shall be subject to proper documentation
and to the provisions of the National Internal Revenue
 3
Code, as amended. [M.E. Holding Corporation v. Court of 16. What are the kinds of taxes
Appeals, et al., G.R. No. 160193, March 3, 2008 citing Expanded classified as to who bears the burden ? Explain
Senior Citizens Act of 2003, Sec. 4 (a)]
each briefly. SUGGESTED
ANSWER: Based on the possibility of shifting the
12. What are the three basic principles incidence of taxation, or as to who shall bear the burden
of a sound tax system? Explain each briefly. of taxation, taxes may be classified into:
SUGGESTED ANSWER: The a. Direct taxes. Those that are extracted from
canons of a sound tax system, also known as the the very person who, it is intended or desired, should pay
characteristics or, principles of a sound tax system, are them (Commissioner of Internal Revenue v. Philippine Long
used as a criteria in order to determine whether a tax Distance Telephone Company, G. R. No. 140230, December
system is able to meet the purposes or objectives of 15, 2005); they are impositions for which a taxpayer is
taxation. They are: directly liable on the transaction or business he is
a. Fiscal adequacy. engaged in, (Commissioner of Internal Revenue v. Philippine
b. Administrative feasibility. Long Distance Telephone Company, supra) which liability
c. Theoretical justice. cannot be shifted or transferred to another. Example
income tax, estate tax, donors tax, etc.
13. What are the elements or b. Indirect taxes are those that are demanded
characteristics of a tax ? SUGGESTED in the first instance, from, or are paid by, one person in
the expectation and intention that he can shift the burden
ANSWER: a.
to (Commissioner of Internal Revenue v. Philippine Long
Enforced contribution.
Distance Telephone Company, supra) to someone else not
b. Generally payable in money.
as a tax but as part of the purchase price.
c. Proportionate in character.
(Commissioner, of Internal Revenue v. American Express
d. Levied on persons, property or exercise of a
International, Inc. (Philippine Branch), G. R. No. 152609,
right or privilege.
June 29, 2005 citing various cases and authorities)
e. Levied by the state having jurisdiction.
Example value added tax (VAT), documentary stamp
f. Levied by the legislature.
tax, excise tax, percentage tax, etc.
g. Levied for a public purpose.
h. Paid at regular periods or intervals.
17. Silkair (Singapore) PTE, Ltd., an
international carrier, purchased aviation gas
14. State the requisites of a valid tax. from Petron Corporation, which it uses for its
SUGGESTED ANSWER: operations. It now claims for refund or tax credit
a. A valid tax should be
for the excise taxes it paid claiming that it is
within the jurisdiction of the taxing authority.
exempt from the payment of excise taxes under
b. That the assessment and collection of
certain kinds (The same as the inherent limitations of the
the provisions of Sec. 135 of the NIRC of 1997
power of taxation) should be for a public purpose. which provides that petroleum products are
c. The rule of taxation should be uniform. exempt from excise taxes when sold to Exempt
d. That either the person or property of entities or agencies covered by tax treaties, conventions, and
other international agreements for their use and consumption:
taxes guarantees against injustice to individuals,
Provided, however, That the country of said foreign international
especially by way or notice and opportunity for hearing be carrier or exempt entities or agencies exempts from similar taxes
provided. petroleum products sold to Philippine carriers, entities or
e. The tax must not impinge on the inherent agencies
and Constitutional limitations on the power of taxation. Silkair further anchors its claim on Article
4(2) of the Air Transport Agreement between the
Government of the Republic of the Philippines
15. What are the classes or kinds of and the Government of the Republic of Singapore
taxes according to the subject matter or object ? (Air Transport Agreement between RP and
SUGGESTED
Singapore) which reads: Fuel, lubricants, spare parts,
ANSWER: a.
regular equipment and aircraft stores introduced into, or taken on
Personal, poll or capitalization imposed on all board aircraft in the territory of one Contracting party by, or on
residents, whether citizen or not. Example Community behalf of, a designated airline of the other Contracting Party and
Tax. intended solely for use in the operation of the agreed services
shall, with the exception of charges corresponding to the service
b. Property - Imposed on property. Example
performed, be exempt from the same customs duties, inspection
Real property tax. fees and other duties or taxes imposed in the territories of the
c. first Contracting Party , even when these supplies are to be used
Excise imposed upon the performance of an on the parts of the journey performed over the territory of the
act, the enjoyment of a privilege or the engaging in an Contracting Party in which they are introduced into or taken on
occupation. Example income tax, estate tax.
 4
board. The materials referred to above may be required to be
kept under customs supervision and control.
Silkair likewise argues that it is exempt from
indirect taxes because the Air Transport
Agreement between RP and Singapore grants
exemption from the same customs duties,
inspection fees and other duties or taxes
imposed in the territory of the first Contracting
Party. It invokes Maceda v. Macaraig, Jr., G.R.
No. 88291, May 31, 1991, 197 SCRA 771.which
upheld the claim for tax credit or refund by the
National Power Corporation (NPC) on the ground
that the NPC is exempt even from the payment of
indirect taxes.
Is Silkair entitled to the tax refund or credit
it seeks ? Reason out your answer.
SUGGESTED ANSWER: Silkair is not entitled to
tax refund or credit for the following reasons:
a. The excise tax on aviation fuel is an indirect
tax. The proper party to question, or seek a refund of, an
indirect tax is the statutory taxpayer, the person on whom
the tax is imposed by law and who paid the same even if
he shifts the burden thereof to another. (Philippine
Geothermal, Inc. v. Commissioner of Internal Revenue, G.R. No.
154028, July 29, 2005, 465 SCRA 308, 317-318) The NIRC
provides that the excise tax should be paid by the
manufacturer or producer before removal of domestic
products from place of production. Thus, Petron
Corporation, not Silkair, is the statutory taxpayer which is
entitled to claim a refund based on Section 135 of the
NIRC of 1997 and Article 4(2) of the Air Transport
Agreement between RP and Singapore.
Even if Petron Corporation passed on to Silkair the
burden of the tax, the additional amount billed to Silkair for
jet fuel is not a tax but part of the price which Silkair had to
pay as a purchaser. [Philippine Acetylene Co., Inc. v.
Commissioner of Internal Revenue, 127 Phil. 461, 470 (1967)]
b. Silkair could not seek refuge under Maceda
v. Macaraig, Jr., G.R. No. 88291, May 31, 1991, 197 SCRA
771.which upheld the claim for tax credit or refund by the
National Power Corporation (NPC) on the ground that the
NPC is exempt even from the payment of indirect taxes.
In Commissioner of Internal Revenue v. Philippine
Long Distance Telephone Company, G.R. No. 140230,
December 15, 2005, 478 SCRA 61 the Supreme Court
clarified the ruling in Maceda v. Macaraig, Jr., viz: It may
be so that in Maceda vs. Macaraig, Jr., the Court held that
an exemption from all taxes granted to the National
Power Corporation (NPC) under its charter includes both
direct and indirect taxes.
An exemption from all taxes excludes indirect
taxes, unless the exempting statute, like NPCs charter, is
so couched as to include indirect tax from the exemption.
The amendment under Republic Act No. 6395 enumerated
the details covered by NPCs exemption. Subsequently,
P.D. 380, made even more specific the details of the
exemption of NPC to cover, among others, both direct and
indirect taxes on all petroleum products used in its
operation. Presidential Decree No. 938 [NPCs amended
charter] amended the tax exemption by simplifying the
same law in general terms. It succinctly exempts NPC
from all forms of taxes, duties, fees The use of the
phrase all forms of taxes demonstrates the intention of
the law to give NPC all the tax exemptions it has been
enjoying before.
The exemption granted under Section 135 (b) of
the NIRC of 1997 and Article 4(2) of the Air Transport
Agreement between RP and Singapore cannot, without a
clear showing of legislative intent, be construed as
including indirect taxes. Statutes granting tax exemptions
must be construed in strictissimi juris against the taxpayer
and liberally in favor of the taxing authority, and if an
exemption is found to exist, it must not be enlarged by
construction. (Silkair (Singapore) PTE, Ltd., v. Commissioner of
Internal Revenue, G.R. No. 173594, February 6, 2008)
18. What are the
different kinds of taxes classified as to purpose ?
SUGGESTED ANSWER:
a. General, fiscal or revenue
imposed for the purpose of raising public funds for the
service of the government. b.
Special or regulatory imposed primarily for the
regulation of useful or non-useful occupation or
enterprises and secondarily only for the raising of public
funds.
LIMITATIONS OR RESTRICTIONS ON THE
POWER
1. Purpose for the limitations on the
power of taxation.
The inherent and constitutional limitations to the power of
taxation are safeguards which would prevent abuse in the
exercise of this otherwise unlimited and plenary power.
The limitations also serve as a standard to measure
the validity of a tax law or the act of a taxing authority. A
violation of the limitations serves to invalidate a tax law or
act in the exercise of the power to tax.
INHERENT LIMITATIONS
1. What are the inherent limitations on
the power of taxation ?
SUGGESTED ANSWERS:
a. Public purpose. The revenues collected from
taxation should be devoted to a public purpose.
b. No improper delegation of legislative
authority to tax. Only the legislature can exercise the
power of taxes unless the same is delegated to some other
governmental body by the constitution or through a law
which does not violate any provision of the constitution.
c. Territoriality. The taxing power should be
exercised only within territorial boundaries of the taxing
authority.
d. Recognition of government exemptions; and
 5
e. Observance of the principle of comity. Some of the manufacturers of coconut oil
Comity is the respect accorded by nations to each other challenge the validity of the law, contending that
because they are equals. On the other hand taxation is an the tax is to be used for a private purpose, and
act of sovereign. Thus, the power should be imposed upon therefore, the law violates the rule that public
equals out of respect.
revenues shall not be appropriated for anything
Some authorities include no double taxation.
but a public purpose. Decide with reason.
SUGGESTED ANSWER: The levy is for a public
2. What are the principles to
purpose. It cannot be denied that the coconut industry is
consider in the determination of whether tax one of the major industries supporting the national
revenues are devoted for a public purpose ? economy. It is, therefore, the states concern to make it
SUGGESTED ANSWER: a strong and secure source not only of the livelihood of
a. The tax revenues are for a public purpose if the significant segment of the population, but also of
utilized for the benefit of the community in general. An export earnings, the sustained growth of which is one of
alternative meaning is that tax proceeds should be the imperatives of economic growth. (Philippine Coconut
utilized only to attain the objectives of government. Producers Federation, Inc. (Cocofed v. Presidential
b. Inequalities resulting from the singling out of Commission on Good Government, 178 SCRA 236, 252)
one particular class for taxation or exemption infringe no
constitutional limitation. 4. Requisites for taxpayers,
REASON: It is inherent in the power to tax that the concerned citizens, voters or legislators to have
legislature is free to select the subjects of taxation.
locus standi to sue.
BASIS: The lifeblood theory.
a.In general, the case should involve constitutional
c. An individual taxpayer need not derive direct
issues. (David, et al., v. President Gloria Macapagal-Arroyo,
benefits from the tax. etc., et al., G. R. No. 171396, May 3, 2006)
REASON: The paramount consideration is the b. For taxpayers, there must be a showing:
welfare of the greater portion of the population. 1) That tax money is being extracted
d. A tax may be imposed, not so much for and spent in violation of specific constitutional protections
revenue purposes, but under police power for the general against abuses of legislative power. (Flast v.
welfare of the community. This would still be for a public Cohen, 392 U.S. 83)
purpose. 2) That public money is being deflected
e. Public purpose continually expanding. to any improper purpose (Pascual v. Secretary of Public
Areas formerly left to private initiative now lose their Works, 110 Phil. 33) or a claim of illegal
boundaries and may be undertaken by the government if disbursement of public funds or that the tax
it is to meet the increasing social challenges of the times. measure is unconstitutional. (David, supra)
f. Tax revenue must not be used for purely 3) A taxpayer is allowed to sue where
private purposes or for the exclusive benefit of private there is a claim that public funds are illegally
persons. disbursed, or that public money is being deflected to
g. Private persons may be benefited but such any improper purpose, or that there is a wastage of
benefit should be merely incidental as its main object is public funds through the enforcement of an
the benefit of the community in general. invalid or unconstitutional law. (Abaya v. Ebdane, G.
h. Determined at the time of enactment of tax R. No. 167919, February 14, 2007; Garcia v.
law and not at the time of implementation. Enriquez, Jr. G.R. No. 112655 December 9, 1993,
i. There is a presumption of public purpose Minute Resolution)
even if the tax law does not specifically provide for its A taxpayers suit is properly brought only
purpose. (Santos & Co., v. Municipality of Meycauayan, et al., when there is an exercise of the spending or taxing
94 Phil. 1047) power of Congress. (Automotive Industry Workers
j. Public use is no longer confined to the Alliance (AIWA),etc., et al., v. Romulo, etc. ,et al., G. R. No.
traditional notion of use by the public but held 157509, January 18, 2005 citing Gonzales v.
synonymous with public interest, public benefit, public Narvasa, G. R. No. 140835, August 14, 2000, 337 SCRA
welfare, and public convenience. (Commissioner of Internal 733, 741)
Revenue v. Central Luzon Drug Corporation, G.R. No. 159647, c. For voters, there must be a showing of
April 16, 2005) obvious interest in the validity of the election law in
question.
3. A law was enacted imposing a tax on d. For concerned citizens, there must be a
manufacturers of coconut oil, the proceeds of showing that the issues raised are of transcendental
which are to be used exclusively for the importance which must be settled early.
protection and promotion of the coconut e. For legislators, there must be a claim that
industry, namely, to improve the working the official action complained of infringes upon their
conditions in coconut mills and to conduct prerogatives as legislators. (David, et al., v. President
Gloria Macapagal-Arroyo, etc., et al., G. R. No. 171396,
research on the use of coconut oil for motor fuel.
May 3, 2006)
 6
5. Only those directly affected have
locus standi to impugn the alleged
encroachment by the executive department into
the legislative domain of Congress.
a. Only those who shall be directly affected by
such executive encroachment, such as for example
employees who would find themselves subject to
disciplinary powers that may be imposed under the
questioned Executive Order as they have a direct and
specific interest in raising the substantive issue therein
(Automotive Industry Workers Alliance (AIWA),etc., et al.,
v. Romulo, etc. ,et al., G. R. No. 157509, January 18,
2005) or employees who are going to be demoted,
transferred or otherwise affected by any personnel action
subject o the rule on exhaustion of administrative
remedies.
b. Moreover, and if at all, only Congress, can
claim any injury from the alleged executive encroachment
of the legislative function to amend, modify and/or repeal
laws. (Automotive Industry Workers Alliance (AIWA),etc.,
et al., supra, citing Gonzales v. Narvasa, G. R. No.
140835, August 14,2000, 337 SCRA 733, 741)
6. Locus standi being merely a matter of
procedure, have been waived in certain instances
where a party who is not personally injured may
be allowed to bring suit. The following are examples
of instances where suits have been brought by parties who
have not have been personally injured by the operation of
a law or any other government act but by concerned
citizens, taxpayers or voters who actually sue in the public
interest:
a. Taxpayers suits to question contracts
entered into by the national government or government-
owned or controlled corporations allegedly in contravention
of the law.
b. A taxpayer is allowed to sue where there is a
claim that public funds are illegally disbursed, or that public
money is being deflected to any improper purpose, or that
there is a wastage of public funds through the enforcement
of an invalid or unconstitutional law. (Abaya v. Ebdane, G.
R. No. 167919, February 14, 2007)
7. The VAT law provides that, the
President, upon the recommendation of the
Secretary of Finance, shall, effective January 1,
2006, raise the rate of value-added tax to twelve
percent (12%) after any of the following
conditions have been satisfied. (i) value-added
tax collection as a percentage of Gross Domestic
Product (GDP) of the previous year exceeds two
and four-fifth percent (2 4/5%) or (ii) national
government deficit as a percentage of GDP of the
previous year exceeds one and one-half percent
(1 %).
Was there an invalid delegation of
legislative power ?
SUGGESTED ANSWER: No. There is no undue
delegation of legislative power but only of the discretion as
to the execution of the law. This is constitutionally
permissible.
Congress does not abdicate its functions or unduly
delegate power when it describes what job must be done,
who must do it, and what is the scope of his authority. In
the above case the Secretary of Finance becomes merely
the agent of the legislative department, to determine and
declare the even upon which its expressed will takes place.
The President cannot set aside the findings of the
Secretary of Finance, who is not under the conditions
acting as the execute alter ego or subordinate. . [Abakada
Guro Party List (etc.) v. Ermita, etc., et al., G. R. No.
168056, September 1, 2005 and companion cases citing
various cases]]
8. Instances of proper delegation: When
taxing power could be delegated: Exceptions to
the rule on non-delegation:
a. Delegation of tariff powers by Congress to the
President under the flexible tariff clause, Section 28 (2),
Article VI of the Constitution.
b. Delegation of emergency powers to the
President under Section 23 (2) of Article VI of the
Constitution.
c. The delegation to the President of the
Philippines to enter into executive agreements, and to
ratify treaties which may contain tax exemption provisions
subject to the concurrence by the Senate in the ratification
made by the President.
d. Delegation to the people at large.
e. Delegation to administrative bodies [Abakada
Guro Party List (Formerly AASJS), etc., v, Ermita, et al.,
G. R. No.168056, September 1, 2005], which is referred
to as subordinate legislation.
In this instance, there is a requirement that the law
is complete in all aspects so what is delegated is merely
the implementation of the law or there exists sufficiently
determinate standards to guide the delegate and prevent
a total transference of the taxing power.
9. Paradigm shift from exclusive
Congressional power to direct grant of taxing
power to local legislative bodies. 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. (Batangas Power Corporation v.
Batangas City, et al. G. R. No. 152675, and companion case, April
28, 2004 citing National Power Corporation v. City of Cabanatuan,
G. R. No. 149110, April 9, 2003)
Local government legislation, is not regarded as a
transfer of general legislative power, but rather as the
grant of authority to prescribe local regulations, according
to immemorial practice, subject, of course, to the
interposition of the superior in cases of necessity.
(People v. Vera, 65 Phil. 56)
 7
10. Taxing power of the local government
is limited. The taxing power of local governments is
limited in the sense that Congress can enact legislation
granting tax exemptions.
While the system of local government taxation has
changed with the onset of the 1987 Constitution, the
power of local government units to tax is still limited.
While the power to tax by local governments 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 basic doctrine on local taxation remains
essentially the same, the power to tax is [still] primarily
vested in the Congress. (Quezon City, et al., v. ABS-CBN
Broadcasting Corporation, G. R. No. 166408, October 6, 2008
citing City Government of Quezon City, et al. v. Bayan
Telecommunications, Inc., G.R. No. 162015, March 6, 2006,
484 SCRA 169 in turn referring to Mactan Cebu International
Airport Authority, v. Marcos, G.R. No. 120082, September 11,
1996, 261 SCRA 667, 680)
11. Further amplification by Bernas of
the local governments power to tax. What is the
effect of Section 5 on the fiscal position of municipal
corporations? Section 5 does not change the doctrine
that municipal corporations do not possess inherent
powers of taxation. What it does is to confer municipal
corporations a general power to levy taxes and otherwise
create sources of revenue. They no longer have to wait
for a statutory grant of these powers. The power of the
legislative authority relative to the fiscal powers of local
governments has been reduced to the authority to impose
limitations on municipal powers. Moreover, these
limitations must be consistent with the basic policy of
local autonomy. The important legal effect of Section 5
is thus to reverse the principle that doubts are resolved
against municipal corporations. Henceforth, in
interpreting statutory provisions on municipal fiscal
powers, doubts will be resolved in favor of municipal
corporations. It is understood, however, that taxes
imposed by local government must be for a public
purpose, uniform within a locality, must not be
confiscatory, and must be within the jurisdiction of the
local unit to pass. (Quezon City, et al., v. ABS-CBN
Broadcasting Corporation, G. R. No. 166408, October 6, 2008
citing City Government of Quezon City, et al. v. Bayan
Telecommunications, Inc., G.R. No. 162015, March 6, 2006,
484 SCRA 169)
12. Reconciliation of the local
governments authority to tax and the
Congressional general taxing power. Congress
has the inherent power to tax, which includes the power
to grant tax exemptions. On the other hand, the power of
local governments, such as provinces and cities for
example Quezon City, to tax is prescribed by Section 151
in relation to Section 137 of the LGC which expressly
provides that notwithstanding any exemption granted by
any law or other special law, the City or a province may
impose a franchise tax. It must be noted that Section 137
of the LGC does not prohibit grant of future exemptions.
The Supreme Court in a series of cases has
sustained the power of Congress to grant tax exemptions
over and above the power of the local governments
delegated power to tax. (Quezon City, et al., v. ABS-CBN
Broadcasting Corporation, G. R. No. 166408, October 6, 2008
citing City Government of Quezon City, et al. v. Bayan
Telecommunications, Inc., G.R. No. 162015, March 6, 2006,
484 SCRA 16)
Indeed, the grant of taxing powers to local
government units under the Constitution and the LGC
does not affect the power of Congress to grant
exemptions to certain persons, pursuant to a declared
national policy. The legal effect of the constitutional grant
to local governments simply means that in interpreting
statutory provisions on municipal taxing powers, doubts
must be resolved in favor of municipal corporations. [Ibid.,
referring to Philippine Long Distance Telephone Company, Inc.
(PLDT) vs. City of Davao]
13. General principles of income
taxation in the Philippines or the source rule of
income taxation as provided in the NIRC of 1997.
a. A citizen of the Philippines residing therein is
taxable on all income derived from sources within and
without the Philippines;
b. A nonresident citizen is taxable only on
income derived from sources within the Philippines;
c. An individual citizen of the Philippines who
is working and deriving income abroad as an overseas
contract worker is taxable only on income from sources
within the Philippines: Provided, That a seaman who is
a citizen of the Philippines and who receives
compensation for services rendered abroad as a member
of the complement of a vessel engaged exclusively in
international trade shall be treated as an overseas
contract worker;
d. An alien individual, whether a resident or
not of the Philippines, is taxable only on income derived
from sources within the Philippines;
e. A domestic corporation is taxable on all income
derived from sources within and without the Philippines;
and
f. A foreign corporation, whether engaged or not
in trade or business in the Philippines, is taxable only on
income derived from sources within the Philippines.
(Sec. 23, NIRC of 1997, emphasis supplied)
14. Juliane a non-resident alien
appointed as a commission agent by a domestic
corporation with a sales commission of 10% all
sales actually concluded and collected through
her efforts. The local company withheld the
amount of P107,000 from her sales commission
and remitted the same to the BIR.
She filed a claim for refund alleging that her
sales commission is not taxable because the
same was a compensation for her services
 8
rendered in Germany and therefore considered as
income from sources outside the Philippines.
Is her contention correct ?
SUGGESTED ANSWER: Yes. The important
factor which determines the source of income of personal
services is not the residence of the payor, or the place
where the contract for service is entered into, or the place
of payment, but the place where the services were actually
performed.
Since the activity of securing the sales were in
Germany, then the income did not originate from sources
from within the Philippines. (Commissioner of Internal
Revenue v. Baier-Nickel, G. R. No. 153793, August 29, 2006)
15. Ensite, Ltd.. is a Canadian
corporation not doing business in the
Philippines. It holds 40% of the shares of
Philippine Stamping Plant, Inc.,., a Philippine
company while the 60% is owned by Fred
Corporation, a Filipino-owned Philippine
corporation. Ensite Co. also owns 100% of the
shares of Susanto Co., an Indonesian company
which has a duly licensed Philippine branch. Due
to worldwide restructuring of the Ensite Ltd.,.
group, Ensite Ltd.,. decided to sell all its shares
in Philippine Stamping Plant, Inc. and Susanto
Co. The negotiations for the buy-out and the
signing of the Agreement of Sale were all done
in the Philippines. The Agreement provides that
the purchase price will be paid to Ensite Ltds
bank account in the U.S. and that title to the
Philippine Stamping Plant, Inc. and Susanto Co.
shall be transferred to General Co., in Toronto
Canada where stock certificates will be
delivered. General Co. seeks your advice as to
whether or not it will subject the payments of the
purchase price to withholding tax. Explain your
advice. SUGGESTED ANSWER: The
payments of the purchase price will be subject to
withholding tax. Considering that all the activities (sales)
occurred within the Philippines, the income is considered
as income from within, subject to Philippine income
taxation. Ensite, Ltd. being a foreign corporation is to be
taxed on its income derived from sources within the
Philippines.
16.
Ensite, Ltd. is a Canadian corporation,
which has a duly licensed Philippine branch
engage in trading activities in the Philippines.
Ensite, Ltd.. also invested directly in 40% of the
shares of stock of Philippine Stamping Plant,
Inc.., a Philippine corporation. These shares are
booked in the Head Office of Ensite, Ltd.. and are
not reflected as assets of the Philippine branch.
In 2009, Philippine Stamping Plant, Inc.. declared
dividends to its stockholders. Before remitting
the dividends to Ensite Ltd.,., Philippine
Stamping Plant, Inc. Co. seeks your advice as to
whether it will subject the remittance to
withholding tax. There is no need to discuss WT
rates, if applicable. Focus your discussion on
what is the issue.
SUGGESTED ANSWER: Philippine Stamping
Plant, Inc.. should subject the remittance to withholding
tax.. Since Philippine Stamping Plant. is a Philippine
corporation, its shares of stock have obtained a business
situs in the Philippines, hence the dividends are
considered as income from within. Ensite. Ltd., being a
foreign corporation, should be subject to tax on its income
from within.
17. Philippine Stamping Plant, Inc.,
a Philippine corporation, has an executive Larry
who is a Filipino citizen. Philippine Stamping
Plant, Inc,. has a subsidiary in Malaysia (Kuala
Lumpur Manufacturing, Inc.) and will assign
Larry for an indefinite period to work full time for
Kuala Lumpur Manufacturing, Inc.. Larry will
bring his family to reside in Malaysia and will
lease out his residence in the Philippines. The
salary of Larry will be shouldered 50% by
Philippine Stamping Plant, Inc.. while the other
50% plus housing, cost of living and educational
allowances of Larrys dependents will be
shouldered by Kuala Lumpur Manufacturing,
Inc.. Philippine Stamping Plant, Inc.. will credit
the 50% of Larrys salary to his Philippine bank
account. Larry will sign the contract of
employment in the Philippines. He will also be
receiving rental income for the lease of his
Philippine residence.
Are these salaries,
allowances and rentals subject to Philippine
income tax? Explain briefly.
SUGGESTED ANSWER: The salaries and
allowances of Larry, being derived from labor or personal
services rendered outside of the Philippines is considered
as income from without. Since Larry is an OCW, then he
is to be taxed only on his income derived from within the
Philippines such as the rentals on his Philippine
residence, and not on his income from without.
18. Obama Airlines, Inc., a foreign
airline company which does not maintain any
flight to and from the Philippines sold air tickets
in the Philippines, through a general sales agent,
relating to the carriage of passengers and cargo
between two points, both outside the Philippines.
a. Is Obama, Inc., subject to income
taxes on the sale of the tickets ?
SUGGESTED ANSWER: Yes. The source of
income which is taxable is that activity which produced
 9
the income. The sale of tickets in the Philippines is the The place of sale is irrelevant; as long as the
activity that determines whether such income is taxable in uplifts of passengers and cargo occur from the
the Philippines. Philippines, income is included in GPB. (South African
The tickets exchanged hands here and payments Airways v. Commissioner of Internal Revenue, G.R. No.
for fares were also made here in Philippine currency. The 180356, February 16, 2010)
situs of the source of payments is the Philippines. the flow
of wealth proceeded from and occurred, within the 19. No improper delegation of legislative
Philippine territory, enjoying the protection accorded by the authority to tax. The power to tax is inherent in the
Philippine Government. In consideration of such protection, State, such power being inherently legislative, based on
the flow of wealth should share the burden of supporting the principle that taxes are a grant of the people who are
the government. [Commissioner of Internal Revenue v. taxed, and the grant must be made by the immediate
British Overseas Airways Corporation (BOAC), 149 SCRA representatives of the people; and where the people have
395] laid the power, there it must remain and be exercised.
Off-line air carriers having general sales agents in (Commissioner of Internal Revenue v. Fortune Tobacco
the Philippines are engaged in or doing business in the Corporation, G. R. Nos. 167274-75, July 21, 2008)
Philippines and their income from sales of passage
documents here is income from within the Philippines. CONSTITUTIONAL LIMITATIONS
Thus, the off-line air carrier liable for the 32% (now 30%)
tax on its taxable income. [South African Airways v. 1. Constitutional limitations on the
Commissioner of Internal Revenue, G.R. No. 180356, February power of taxation . The general or indirect constitutional
16, 2010 citing Commissioner of Internal Revenue v. British limitations as well as the specific or direct constitutional
Overseas Airways Corporation (British Overseas Airways), No.
L-65773-74, April 30, 1987, 149 SCRA 395]
limitations.
b. Supposing that Obama, Inc., sells
2. The general or indirect constitutional
tickets outside of the Philippines for passengers
limitations on the power of taxation are:
it carry from Gold City, South Africa to the
a. Due process clause;
Philippines but returns to South Africa without b. Equal protection clause;
any cargo or passengers. Would it then be c. Freedom of the press;
subject to any Philippine tax on such sales ? d. Religious freedom;
SUGGESTED ANSWER: It would not be subject to e. No taking of private property without just
any tax. It is not subject to any income tax because the compensation;
activity which generated the income (the sale of the tickets) f. Non-impairment clause;
was performed outside of the Philippines. g. Law-making process:
It is not subject to the carriers tax based on gross 1) Bill should embrace only one subject
Philippine billings because there were no lifts that expressed in the title thereof;
originated from the Philippines. Gross Philippine Billings 2) Three (3) readings on three separate
refers to the amount of gross revenue derived from days;
carriage of persons, excess baggage, cargo and mail 3) Printed copies in final form distributed
originating from the Philippines in a continuous and three (3) days before passage.
uninterrupted flight, irrespective of the place of sale or h. Presidential power to grant reprieves,
issue and the place of payment of the ticket or passage commutations and pardons and remittal of fines and
document. [NIRC of 1997, Sec. 28(A)(3)(a)] forfeiture after conviction by final judgment.
c. Would your answer be the same if
Obama, Inc. sold tickets outside of the 3. The specific or direct constitutional
Philippines for travelers who are going to picked limitation.
up by Obama, Inc., planes from the Diosdado a. No imprisonment for non-payment of a poll
Macapagal Intl. Airport at Clark, Angeles, tax;
Pampanga, bound for Nairobi, Kenya ? Reason b. Taxation shall be uniform and equitable;
out your answer. c. Congress shall evolve a progressive system
SUGGESTED ANSWER: No more. This time of taxation;
Obama, Inc., would be subject to the carriers tax based on d. All appropriation, revenue or tariff bills shall
Gross Philippine Billings. (GPB). originate exclusively in the House of Representatives, but
Gross Philippine Billings refers to the amount of the Senate may propose and concur with amendments;
gross revenue derived from carriage of persons, excess e. The President shall have the power to veto any
baggage, cargo and mail originating from the Philippines particular item or items in an appropriation, revenue, or
in a continuous and uninterrupted flight, irrespective of the tariff bill, but the veto shall not affect the item or items to
place of sale or issue and the place of payment of the which he does not object;
ticket or passage document. [NIRC of 1997, Sec. f. Delegated power of the President to impose
28(A)(3)(a)] tariff rates, import and export quotas, tonnage and
wharfage dues:
 10
1) Delegation by Congress
2) through a law
3) subject to Congressional limits and
restrictions
4) within the framework of national
development program.
g. Tax exemption of charitable institutions,
churches, parsonages and convents appurtenant thereto,
mosques, and all lands, buildings and improvements of all
kinds actually, directly and exclusively used for religious,
charitable or educational purposes;
h. No tax exemption without the concurrence of
majority vote of all members of Congress;
i. No use of public money or property for
religious purposes except if priest is assigned to the armed
forces, penal institutions, government orphanage or
leprosarium;
j. Money collected on tax levied for a special
purpose to be used only for such purpose, balance if any,
to general funds;
k. The Supreme Court's power to review
judgments or orders of lower courts in all cases involving
the legality of any tax, impose, assessment or toll or the
legality of any penalty imposed in relation to the above;
l. Authority of local government units to create
their own sources of revenue, to levy taxes, fees and other
charges subject to guidelines and limitations imposed by
Congress consistent with the basic policy of local
autonomy;
m. Automatic release of local government's just
share in national taxes;
n. Tax exemption of all revenues and assets of
non-stock, non-profit educational institutions used actually,
directly and exclusively for educational purposes;
o. Tax exemption of all revenues and assets of
proprietary or cooperative educational institutions subject
to limitations provided by law including restrictions on
dividends and provisions for reinvestment of profits;
p. Tax exemption of grants, endowments,
donations or contributions used actually, directly and
exclusively for educational purposes subject to conditions
prescribed by law.
5. Equal protection of the law clause is
subject to reasonable classification. If the
groupings are characterized by substantial distinctions that
make real differences, one class may be treated and
regulated differently from another. The classification must
also be germane to the purpose of the law and must apply
to all those belonging to the same class. (Tiu, et al., v. Court
of Appeals, et al., G.R. No. 127410, January 20, 1999)
6. Requisites for valid
classification. All that is required of a valid
classification is that it be reasonable, which means that
a. the classification should be based on
substantial distinctions which make for real differences,
b. that it must be germane to the purpose of the
law;
c. that it must not be limited to existing
conditions only; and
d. that it must apply equally to each member of
the class.
The standard is satisfied if the classification or
distinction is based on a reasonable foundation or rational
basis and is not palpably arbitrary. [ABAKADA Guro Party
List, etc., v. Purisima, etc., et al., G. R. No. 166715, August 14,
2008]
7. Equal protection does not demand
absolute equality. It merely requires that all persons
shall be treated alike, under like circumstances and
conditions, both as to the privileges conferred and
liabilities enforced. (Santos v. People, et al, G. R. No. 173176,
August 26, 2008)
It is imperative to duly establish that the one
invoking equal protection and the person to which she is
being compared were indeed similarly situated, i.e., that
they committed identical acts for which they were charged
with the violation of the same provisions of the NIRC; and
that they presented similar arguments and evidence in
their defense - yet, they were treated differently. (Santos,
supra)
8. Tests to determine validity of
classification. The United States Supreme Court
has established different tests to determine the validity of
a classification and compliance with the equal protection
clause. The recognized tests are:
a. The traditional (or rational basis) test.
b. The strict scrutiny (or compelling interest)
test.
c. The intermediate level of scrutiny (or quasi-
suspect class) test.
9. The traditional (or rational basis) test
used in order to determine the validity of
classification. The classification is valid if it is rationally
related to a constitutionally permissible state interest.
The complainant must prove that the classification
is invidous, wholly arbitrary, or capricious, otherwise
the classification is presumed to be valid. (Lindsley v.
Natural Carboinic Gas Co., 220 U.S. 61; McGowan v. Maryland,
366 U.S. 420; United States Railroad Retirement Board v. Fritz,
449 U.S. 166)
10. The strict scrutiny (or compelling
interest) test used in order to determine the
validity of the classification. Government regulation
that intentionally discriminates against a suspect class
such as racial or ethnic minorities, is subject to strict
scrutiny and considered to violate the equal protection
clause unless found necessary to promote a compelling
state interest.
A classification is necessary when it is narrowly
drawn so that no alternative, less burdensome means is
available to accomplish the state interest.
Thus, it was held that denial of free public
education to the children of illegal aliens imposes an
enormous and lasting burden based on a status over
 11
which the children have no control is violative of equal
protection because there is no showing that such denial
furthers a substantial state goal. (Plyler v. Doe, 457 U.S.
202)
11. The intermediate level of scrutiny (or
quasi-suspect class) test used in order to
determine the validity of he classification.
Classification based on gender or legitimacy are not
suspect, but neither are they judged by the traditional or
rational basis test.
Intentional discriminations against members of a
quasi-suspect class violate equal protection unless they
are substantially related to important government
objectives. (Craig v. Boren, 429 U.S. 190)
Thus, a state law granting a property tax exemption
to widows, but not widowers, has been held valid for it
furthers the state policy of cushioning the financial impact
of spousal loss upon the sex for whom that loss usually
imposes a heavier burden. (Kahn v. Shevin, 416 U.S.
351)
12. Equality and uniformity of taxation
may mean the same as equal protection. In such a
case, the terms would mean that all subjects and objects
of taxation which are similarly situated shall be subject to
the same burdens and granted the same privileges without
any discrimination whatsoever.
13. It is inherent in the power to tax that
the State be free to select the subjects of taxation,
and it has been repeatedly held that, "inequalities which
result from a singling out of one particular class of taxation,
or exemption, infringe no constitutional limitation."
(Commissioner of Internal Revenue, et al., v. Santos, et al.,
277 SCRA 617)
9. Benjie is a law-abiding citizen
who pays his real estate taxes promptly. Due to
a series of typhoons and adverse economic
conditions, an ordinance is passed by Soliman
City granting a 50% discount for payment of
unpaid real estate taxes for the preceding year
and the condonation of all penalties on fines
resulting from the late payment.
Arguing that the ordinance rewards
delinquent tax payers and discriminates against
prompt ones, Benjie demands that he be
refunded an amount equivalent to one-half of the
real property taxes he paid. The municipal
attorney rendered an opinion that Benjie cannot
be reimbursed because the ordinance did not
provide for such reimbursement. Benjie files suit
to declare the ordinance void on the ground that
it is a class legislation. Will his suit prosper ?
Explain your answer briefly.
SUGGESTED ANSWER: No. There is no class
legislation because there is no violation of the equal
protection suit. There is a valid classification between
those who already paid their taxes and those who have
not. Furthermore, the taxing authority has the prerogative
to select the subjects and objects of taxation, including
granting a 50% discount in the payment of unpaid real
estate taxes, and the condonation of all penalties on fines
resulting from late payment.
10. The rewards law to tax collectors
does not violate equal protection. The equal
protection clause recognizes a valid classification, that is,
a classification that has a reasonable foundation or
rational basis and not arbitrary. With respect to RA 9335,
its expressed public policy is the optimization of the
revenue-generation capability and collection of the BIR
and the BOC. Since the subject of the law is the revenue-
generation capability and collection of the BIR and the
BOC, the incentives and/or sanctions provided in the law
should logically pertain to the said agencies. Moreover,
the law concerns only the BIR and the BOC because they
have the common distinct primary function of generating
revenues for the national government through the
collection of taxes, customs duties, fees and charges.
Indubitably, such substantial distinction is germane
and intimately related to the purpose of the law. Hence,
the classification and treatment accorded to the BIR and
the BOC under RA 9335 fully satisfy the demands of
equal protection. (ABAKADA Guro Party List, etc., v.
Purisima, etc., et al., G. R. No. 166715, August 14, 2008)
11. The prosecution of one guilty person
while others equally guilty are not prosecuted,
however, is not, by itself, a denial of the equal
protection of the laws. Where the official action
purports to be in conformity to the statutory classification,
an erroneous or mistaken performance of the statutory
duty, although a violation of the statute, is not without
more a denial of the equal protection of the laws.
The unlawful administration by officers of a statute
fair on its face, resulting in its unequal application to those
who are entitled to be treated alike, is not a denial of equal
protection unless there is shown to be present in it an
element of intentional or purposeful discrimination. This
may appear on the face of the action taken with respect
to a particular class or person, or it may only be shown by
extrinsic evidence showing a discriminatory design over
another not to be inferred from the action itself.
(Santos v. People, et al, G. R. No. 173176, August 26, 2008)
12. Equal protection should not be used
to protect commission of crime. While all persons
accused of crime are to be treated on a basis of equality
before the law, it does not follow that they are to be
protected in the commission of crime. It would be
unconscionable, for instance, to excuse a defendant guilty
of murder because others have murdered with impunity.
Likewise, if the failure of prosecutors to enforce the
criminal laws as to some persons should be converted
into a defense for others charged with crime, the result
would be that the trial of the district attorney for
nonfeasance would become an issue in the trial of many
 12
persons charged with heinous crimes and the
enforcement of law would suffer a complete breakdown.
(Santos v. People, et al, G. R. No. 173176, August 26, 2008)
13. Illustration of double taxation in
local taxation. there is indeed double taxation if Coca-
Cola is subjected to the taxes under both Sections 14 and
21 of Tax Ordinance No. 7794, since these are being
imposed: (1) on the same subject matter the privilege of
doing business in the City of Manila; (2) for the same
purpose to make persons conducting business within
the City of Manila contribute to city revenues; (3) by the
same taxing authority City of Manila; (4) within the same
taxing jurisdiction within the territorial jurisdiction of the
City of Manila; (5) for the same taxing periods per
calendar year; and (6) of the same kind or character a
local business tax imposed on gross sales or receipts of
the business. (The City of Manila, et al., v. Coca-Cola Bottlers
Philippines, Inc., G. R. No. 181845, August 4, 2009)
14. A lawful tax on a new subject, or an
increased tax on an old one, does not interfere
with a contract or impairs its obligation, within the
meaning of the constitution. (Tolentino v. Secretary of
Finance, et al., and companion cases, 235 SCRA 630)
15. The withdrawal of a tax exemption
should not be construed as prohibiting future
grants of exemption from all taxes. (Philippine Long
Distance Telephone Company, Inc., v. City of Davao, et al., etc.,
G. R. No. 143867, August 22, 2001)
16. Tax exemptions in franchises are
always subject to withdrawal. A legislative franchise
is granted with the express condition that it is subject to
amendment, alteration, or repeal. (1987 Constitution, Art.
XII, Sec. 11)
It is enough to say that the parties to a contract
cannot, through the exercise of prophetic discernment,
fetter the exercise of the taxing power of the State. For not
only are existing laws read into contracts in order to fix
obligations as between parties, but the reservation of
essential attributes of sovereign power is also read into
contracts as a basic postulate of the legal order. The
policy of protecting contracts against impairment
presupposes the maintenance of a government which
retains adequate authority to secure the peace and good
order of society. (Smart Communications, Inc. v. The City of
Davao, etc., et al., G. R. No. 155491, September 16, 2008)
NOTES AND COMMENTS: Philippine Long Distance
Telephone Company, Inc., v. City of Davao, et al., etc., G. R. No.
143867, August 22, 2001 made the observation that since Smarts
franchise was granted after the effectivity of the Local
Government Code that its tax exemption privilege was reinstated.
However, Smart Communications, Inc. v. The City of Davao,
etc., et al., G. R. No. 155491, September 16, 2008 is explicit in
its holding that Smart is not entitled to a tax exemption.
17. When withdrawal of a tax
exemption impairs the obligation of contracts.
The Contract Clause has never been thought as a
limitation on the exercise of the States power of taxation
save only where a tax exemption has been granted for a
valid consideration. (Smart Communications, Inc. v. The City
of Davao, etc., et al., G. R. No. 155491, September 16, 2008)
citing Tolentino v. Secretary of Finance, G. R. No. 115455,
August 25, 1994, 235 SCRA 630, 685) The author opines
that since practically all franchises granted to
telecommunications companies are similarly worded that
the above doctrine finds application to the others)
18. The primary reason for the withdrawal
of tax exemption privileges granted to
government owned and controlled corporations
and all other units of government was that such privilege
resulted to serious tax base erosion and distortions in the
tax treatment of similarly situated enterprises, hence
resulting in the need for these entities to share in the
requirements of development, fiscal or otherwise, by
paying the taxes and other charges due them. (Philippine
Ports Authority v. City of Iloilo, G. R. No. 109791, July 14, 2003)
19. National Power Corporation (NPC) is
of the insistence that it is not subject to the
payment of franchises taxes imposed by the
Province of Isabela because all of its shares are
owned by the Republic of the Philippines. It is
thus, an instrumentality of the National
Government which is exempt from local taxation.
As such it is not a private corporation engaged in
business enjoying franchise
Is such contention meritorious ?
SUGGESTED ANSWER: No. Philippine Long
Distance Telephone Company, Inc., v. City of Davao, et al.,
etc., G. R. No. 143867, August 22, 2001, upheld the
authority of the City of Davao, a local government unit, to
impose and collect a local franchise tax because the Local
Government Code has withdrawn all tax exemptions
previously enjoyed by all persons and authorized local
government units to impose a tax on business enjoying a
franchise tax notwithstanding the grant of tax exemption to
them.
20. In lieu of all taxes in the franchise
of ABS-CBN does not exempt it from local
franchise taxes. It does not expressly provide what
kind of taxes ABS-CBN is exempted from. It is not clear
whether the exemption would include both local, whether
municipal, city or provincial, and national tax. Whether the
in lieu of all taxes provision would include exemption
from local tax is not unequivocal.
The right to exemption from local franchise tax
must be clearly established and cannot be made out of
inference or implications but must be laid beyond
reasonable doubt. Verily, the uncertainty in the in lieu of
all taxes provision should be construed against ABS-
CBN. ABS-CBN has the burden to prove that it is in fact
covered by the exemption so claimed but has failed to do
 13
so. (Quezon City, et al., v. ABS-CBN Broadcasting Corporation,
G. R. No. 166408, October 6, 2008)
NOTES AND COMMENTS: This is practically the
same holding in an earlier case involving another
telecommunications company Smart Communications, Inc. v.
The City of Davao, etc., et al., G. R. No. 155491, September 16,
2008. The author opines that since practically all franchises
granted to telecommunications companies are similarly worded
that the above doctrine finds application to the others.)
21. In lieu of all taxes refers to
national internal revenue taxes and not to local
taxes. The in lieu of all taxes clause applies only to
national internal revenue taxes and not to local taxes. As
appropriately pointed out in the separate opinion of
Justice Antonio T. Carpio in a similar case involving a
demand for exemption from local franchise taxes:
[T]he "in lieu of all taxes" clause in Smart's
franchise refers only to taxes, other than income tax,
imposed under the National Internal Revenue Code. The
"in lieu of all taxes" clause does not apply to local taxes.
The proviso in the first paragraph of Section 9 of Smart's
franchise states that the grantee shall "continue to be
liable for income taxes payable under Title II of the
National Internal Revenue Code." Also, the second
paragraph of Section 9 speaks of tax returns filed and
taxes paid to the "Commissioner of Internal Revenue or
his duly authorized representative in accordance with the
National Internal Revenue Code." Moreover, the same
paragraph declares that the tax returns "shall be subject
to audit by the Bureau of Internal Revenue." Nothing is
mentioned in Section 9 about local taxes. The clear intent
is for the "in lieu of all taxes" clause to apply only to taxes
under the National Internal Revenue Code and not to local
taxes. Even with respect to national internal revenue
taxes, the "in lieu of all taxes" clause does not apply to
income tax.
If Congress intended the "in lieu of all taxes" clause
in Smart's franchise to also apply to local taxes, Congress
would have expressly mentioned the exemption from
municipal and provincial taxes. Congress could have
used the language in Section 9(b) of Clavecilla's old
franchise, as follows:
x x x in lieu of any and all taxes of any kind, nature
or description levied, established or collected by any
authority whatsoever, municipal, provincial or national,
from which the grantee is hereby expressly exempted, x
x x. (Emphasis supplied).
However, Congress did not expressly exempt
Smart from local taxes. Congress used the "in lieu of all
taxes" clause only in reference to national internal
revenue taxes. The only interpretation, under the rule on
strict construction of tax exemptions, is that the "in lieu of
all taxes" clause in Smart's franchise refers only to
national and not to local taxes. [Smart Communications,
Inc. v. The City of Davao, etc., et al., G. R. No. 155491,
September 16, 2008 citing Philippine Long Distance Telephone
Company, Inc. v. City of Davao, 447 Phil. 571, 594 (2003)]
NOTES AND COMMENTS: The author opines that
the above finds application to all telecommunications
companies.
22. The in lieu of all taxes clause in the
franchise of ABS-CBN has become functus
officio with the abolition of the franchise tax on
broadcasting companies with yearly gross
receipts exceeding Ten Million Pesos. The clause
in lieu of all taxes does not pertain to VAT or any other
tax. It cannot apply when what is paid is a tax other than
a franchise tax. Since the franchise tax on the
broadcasting companies with yearly gross receipts
exceeding ten million pesos has been abolished, the in
lieu of all taxes clause has now become functus officio,
rendered inoperative. (Quezon City, et al., v. ABS-CBN
Broadcasting Corporation, G. R. No. 166408, October 6, 2008)
NOTES AND COMMENTS: This is practically the
same holding in an earlier case involving another
telecommunications company. Smart Communications, Inc. v.
The City of Davao, etc., et al., G. R. No. 155491, September 16,
2008. The author opines that since practically all franchises
granted to telecommunications companies are similarly worded
that the above doctrine finds application to the others.)
23. Double taxation in its generic
sense, this means taxing the same subject or
object twice during the same taxable period. In its
particular sense, it may mean direct duplicate taxation,
which is prohibited under the constitution because it
violates the concept of equal protection, uniformity and
equitableness of taxation. Indirect duplicate taxation is not
anathematized by the above constitutional limitations.
24. Elements of direct duplicate
taxation:
a. Same
1) Subject or object is taxed twice
2) by the same taxing authority
3) for the same taxing purpose
4) during the same taxable period
b. Taxing all of the subjects or objects for the
first time without taxing all of them for the second time.
If any of the elements are absent then there is
indirect duplicate taxation which is not prohibited by the
constitution.
NOTES AND COMMENTS:
a. Presence of the 2nd element violates the equal
protection clause. If only the 1st element is present, taxing the
same subject or object twice, by the same taxing authority, etc.,
there is no violation of the equal protection clause because all
subjects and objects that are similarly situated are subject to the
same burdens and granted the same privileges without any
discrimination whatsoever,
The presence of the 2nd element, taxing all of the subjects
and objects for the first time, without taxing all for the second time,
results to discrimination among subjects and objects that are
similarly situated, hence violative of the equal protection clause.
25. Double taxation a valid defense against
the legality of a tax measure if the double taxation
is direct duplicate taxation, because it would violate
the equal protection clause of the constitution.
 14
26. When an item of income is taxed in the
Philippines and the same income is taxed in
another country, this would be known as
international juridical double taxation which is the
imposition of comparable taxes in two or more states on
the same taxpayer in respect of the same subject matter
and for identical grounds. (Commissioner of Internal Revenue
v. S.C. Johnson and Son, Inc., et al., G.R. No. 127105, June 25,
1999)
27. Methods for avoiding double
taxation (indirect duplicate taxation).
a. Tax treaties which exempts foreign nationals
from local taxation and local nationals from foreign taxation
under the principle of reciprocity.
b. Tax credits where foreign taxes are allowed
as deductions from local taxes that are due to be paid.
c. Allowing foreign taxes as a deduction from
gross income.
28. Tax credit generally refers to an amount
that is subtracted directly from ones total tax liability, an
allowance against the tax itself, or a deduction from what is
owned.
A tax credit reduces the tax due, including
whenever applicable the income tax that is determined
after applying the corresponding tax rates to taxable
income. (Commissioner of Internal Revenue v. Central Luzon
Drug Corporation, G. R. No. 159647, April 15, 2005)
29. A tax deduction is defined as a subtraction
fro income for tax purposes, or an amount that is allowed
by law to reduce income prior to the application of the tax
rate to compute the amount of tax which is due.
A tax deduction reduces the income that is subject
to tax in order to arrive at taxable income. (Commissioner of
Internal Revenue v. Central Luzon Drug Corporation, G. R. No.
159647, April 15, 2005)
30. The petitioners allege that the R-
VAT law is constitutional because the Bicameral
Conference Committed has exceeded its
authority in including provisions which were
never included in the versions of both the House
and Senate such as inserting the stand-by
authority to the President to increase the VAT
from 10% to 12%; deleting entirely the no pass-on
provisions found in both the House and Senate
Bills; inserting the provision imposing a 70% limit
on the amount of input tax to be credited against
the output tax; and including the amendments
introduced only by Senate Bill No. 1950 regarding
other kinds of taxes in addition to the value-added
tax. Thus, there was a violation of the
constitutional mandate that revenue bills shall
originate exclusively from the House of
Representatives.
Are the contentions of such weight as to
constitute grave abuse of discretion which may
invalidate the law ? Explain briefly.
SUGGESTED ANSWER: No. There was no grave
abuse of discretion because all the changes and
modifications made by the Bicameral Conference
Committee were germane to subjects of the provisions
referred to it for reconciliation.
The Bicameral Conference Committee merely
exercised the judicially recognized long-standing legislative
practice of giving said conference committee ample latitude
for compromising differences between the Senate and the
House. [Abakada Guro Party List (etc.) v. Ermita, etc., et al., G.
R. No. 168056, September 1, 2005 and companion cases]
31. The VAT while regressive is NOT
violative of the mandate to evolve a progressive
system of taxation. Do you agree ? The mandate
to Congress is not to prescribe but to evolve a progressive
system of taxation. Otherwise, sales taxes which perhaps
are the oldest form of indirect taxes, would have been
prohibited with the proclamation of the constitutional
provision. Sales taxes are also regressive. . [Abakada Guro
Party List (etc.) v. Ermita, etc., et al., G. R. No. 168056,
September 1, 2005 and companion cases citing Tolentino v.
Secretary of Finance, et al., G. R. No. 115455, August 25, 1994,
235 SCRA 630]
32. All revenues and assets of non-stock,
non-profit educational institutions that are
actually, directly and exclusively used for
educational purposes shall be exempt from
taxation.
33. Revenues and assets of proprietary
educational institutions, including those which
are cooperatively owned, may be entitled to
exemptions subject to limitations provided by law
including restrictions on dividends and
provisions for reinvestments. There is no law at the
present which grants exemptions, other the exemptions
granted to cooperatives.
OTHER CONCEPTS
1. Distinguish tax from debt.
TAX DEBT
Basis based on law based on
contract or
judgment
Failure to Pay may result in no imprisonment
imprisonment
Mode of generally payable in
Payment payable in money, property
money or service
 15
Assignability not assignable assignable well as fully liquidated. Compensation takes place by
operation of law under Art. 1200 in relation to Arts. 1279
Payment unless it may be a subject and 1290 all of the Civil Code. (Domingo v. Garlitos, 8 SCRA
becomes a debt 443) b. Compensation
is not subject to takes place by operation of law, where the government
compensation or and the taxpayer are in their own right reciprocally debtors
set-off and creditors of each other, and that the debts are both
Interest does not draw draws interest if due and demandable. This is in consequence of Article
interest unless stipulated or 1278 and 1279 of the Civil Code. (Domingo v. Garlitos, 8
delinquent delayed SCRA 443) c.
,The Supreme Court upheld the validity of a set-off
Authority imposed by can be imposed between the taxpayer and the government. In both cases,
public authority by private the claims of the taxpayers therein were certain and
individuals liquidated. The claims were certain since there were no
Prescription Prescriptive debt under the doubts or disputes as to their refundability. In fact, the
periods for tax Civil Code government admitted the fact of over-payment.
under NIRC (Commissioner of Internal Revenue v. Esso Standard
Eastern, Inc., 172 SCRA 364) d. In
case of a tax overpayment, the BIRs obligation to refund
WARNING: Do not use the above arrangement in or off-set arises from the moment the tax was paid.
answering Bar questions. REASON: Solutio indebeti. (Commissioner of Internal
Revenue v. Esso Standard Eastern, Inc 172 SCRA 364)
2. Compensation takes place by operation of
law, where the local government and the taxpayer are in e. While judgment should be
their own right reciprocally debtors and creditors of each rendered in favor of Republic for unpaid taxes, judgment
other, and that the debts are both due and demandable, in ought at the same time to issue for Sampaguita Pictures
consequence of Articles 1278 and 1279 of the Civil Code. commanding payment to the latter by the Republic of the
(Domingo v. Garlitos, 8 SCRA 443) value of the backpay certificates which the Republic
received. (Republic v. Ericta, 172 SCRA 623)
3. May there be compensation or set-
5. Gilbert obtained a judgment
off between a national tax and a debt ? Reason
for a sum of money against the municipality of
out your answer.
SUGGESTED ANSWER: As a general rule, there
Camiling. The judgment has become final
could be no compensation or set-off between a tax and a although execution has not issued. Upon
debt for the following reasons: receiving an assessment for municipal sales
a. taxes from the Municipal Treasurer, Gilbert
Lifeblood theory. executed a partial assignment of his judgment
b. Taxes are not contractual sufficient to cover the assessment in favor of the
obligations but arise out of a duty to, and are the positive Municipality. May the Municipal Treasurer
acts of government, to the making and enforcing of which validly accept the assignment? Why?
the personal consent of the individual taxpayer is not SUGGESTED ANSWER: Yes. The parties in this
required. (Republic v. Mambulao Lumber Co., 4 SCRA 622) case are mutually debtors and creditors of each other,
c. Taxes cannot be and since both of the claims became overdue,
the subject of compensation because the government and demandable and fully liquidated, compensation takes
taxpayer are not mutually creditors and debtors of each place by operation of law. Such was the holding in
other and a claim for taxes is not such a debt, demand, Domingo v. Garlitos, 8 SCRA 443, a case decided by the
contract or judgment as is allowed to be set-off. Supreme Court whose factual antecedents are similar to
Thus, it is correct to say that the offsetting of a the problem.
taxpayers tax refund with its alleged tax deficiency is
unavailing under Art. 1279 of the Civil Code. (South African 6. In case of doubt, tax laws
Airways v. Commissioner of Internal Revenue, G.R. No.
180356, February 16, 2010 reiterating Caltex Philippines, Inc.
must be construed strictly against the State and
v. Commission on Audit, which applied Francia v. liberally in favor of the taxpayer because taxes, as
Intermediate Appellate Court) burdens which must be endured by the taxpayer, should
not be presumed to go beyond what the law expressly and
clearly declares. (Lincoln Philippine Life Insurance Company,
4. Exceptions: When set-off or Inc., etc., v. Court of Appeals, et al., 293 SCRA 92, 99)
compensation allowed for local taxes.
7. Interpretation in the imposition of
a. Where
both claims already become overdue and demandable as taxes, is not the similar doctrine as that applied
to tax exemptions. The rule in the interpretation of tax
 16
laws is that a statute will not be construed as imposing a
tax unless it does so clearly, expressly, and
unambiguously. A tax cannot be imposed without clear
and express words for that purpose. Accordingly, the
general rule of requiring adherence to the letter in
construing statutes applies with peculiar strictness to tax
laws and the provisions of a taxing act are not to be
extended by implication. In answering the question of who
is subject to tax statutes, it is basic that in case of doubt,
such statutes are to be construed most strongly against
the government and in favor of the subjects or citizens
because burdens are not to be imposed nor presumed to
be imposed beyond what statutes expressly and clearly
import. [Commissioner of Internal Revenue v. Fortune Tobacco
Corporation, G. R. Nos. 167274-75, July 21, 2008 citing CIR v.
Court of Appeals, 338 Phil. 322, 330-331 (1997)] As burdens,
taxes should not be unduly exacted nor assumed beyond
the plain meaning of the tax laws. (Ibid., citing CIR v.
Philippine American Accident Insurance Company, Inc., G.R.
No. 141658, March 18, 2005, 453 SCRA 668)
8. Strict interpretation of tax exemption
laws. Taxes are what civilized people pay for civilized
society. They are the lifeblood of the nation. Thus,
statutes granting tax exemptions are construed stricissimi
juris against the taxpayer and liberally in favor of the
taxing authority. A claim of tax exemption must be clearly
shown and based on language in law too plain to be
mistaken. Otherwise stated, taxation is the rule,
exemption is the exception. (Quezon City, et al., v. ABS-CBN
Broadcasting Corporation, G. R. No. 166408, October 6, 2008
citing Mactan Cebu International Airport Authority v. Marcos,
G.R. No. 120082, September 11, 1996, 261 SCRA 667, 680)
The burden of proof rests upon the party claiming the
exemption to prove that it is in fact covered by the
exemption so claimed. (Quezon City, supra citing Agpalo,
R.E., Statutory Construction, 2003 ed., p. 301)
9. Rationale for strict interpretation of
tax exemption laws. The basis for the rule on strict
construction to statutory provisions granting tax
exemptions or deductions is to minimize differential
treatment and foster impartiality, fairness and equality of
treatment among taxpayers. (Quezon City, et al., v. ABS-
CBN Broadcasting Corporation, G. R. No. 166408, October 6,
2008) He who claims an exemption from his share of
common burden must justify his claim that the legislature
intended to exempt him by unmistakable terms. For
exemptions from taxation are not favored in law, nor are
they presumed. They must be expressed in the clearest
and most unambiguous language and not left to mere
implications. It has been held that exemptions are never
presumed the burden is on the claimant to establish
clearly his right to exemption and cannot be made out of
inference or implications but must be laid beyond
reasonable doubt. In other words, since taxation is the
rule and exemption the exception, the intention to make
an exemption ought to be expressed in clear and
unambiguous terms. (Quezon City, supra citing Agpalo, R.E.,
Statutory Construction, 2003 ed., p. 302)
10. Why are tax exemptions are strictly
construed against the taxpayer and liberally in
favor of the State ?
SUGGESTED ANSWER: Taxes are necessary for
the continued existence of the State.
11. In case of a tax overpayment, where
the BIRs obligation to refund or set-off arises
from the moment the tax was paid under the
principle of solutio indebeti. (Commissioner of Internal
Revenue v. Esso Standard Eastern, Inc, 172 SRCA 364)
12. But note Nestle Phil. v. Court of
Appeals, et al., G.R. No. 134114, July 6, 2001 which
held that in order for the rule on solutio indebeti to apply it
is an essential condition that the petitioner must first show
that its payment of the customs duties was in excess of
what was required by the law at the time the subject 16
importations of milk and milk products were made. Unless
shown otherwise, the disputable presumption of regularity
of performance of duty lies in favor of the Collector of
Customs.
13. Strict interpretation of a tax refund
that partakes of the nature of a tax does not
apply to tax refund based on erroneous payment
or where there is no law that authorizes
collection of the tax. There is parity between tax
refund and tax exemption only when the former is based
either on a tax exemption statute or a tax refund statute.
(Commissioner of Internal Revenue v. Fortune Tobacco
Corporation, G. R. Nos. 167274-75, July 21, 2008)
Tax refunds (or tax credits), on the other hand, are
not founded principally on legislative grace but on the
legal principle which underlies all quasi-contracts
abhorring a persons unjust enrichment at the expense of
another. [Commissioner, supra citing Ramie Textiles, Inc. v.
Hon. Mathay, Sr., 178 Phil. 482 (1979); Puyat & Sons v. City of
Manila, et al., 117 Phil. 985 (1963)]
The dynamic of erroneous payment of tax fits to a
tee the prototypic quasi-contract, solutio indebiti, which
covers not only mistake in fact but also mistake in law.
(Commissioner, supra citing CIVIL CODE, Arts. 2142, 2154 and
2155)
The Government is not exempt from the
application of solutio indebiti. (Commissioner, supra citing
Commissioner of Internal Revenue v. Firemans Fund
Insurance Co., G.R. No. L-30644, 9 March 1987, 148 SCRA
315, 324-325; Ramie Textiles, Inc. v. Mathay, supra; Gonzales
Puyat & Sons v. City of Manila, supra)
Indeed, the taxpayer expects fair dealing from the
Government, and the latter has the duty to refund without
any unreasonable delay what it has erroneously collected.
(Commissioner, supra citing Commissioner of Internal Revenue
v. Tokyo Shipping Co., supra at 338) If the State expects its
taxpayers to observe fairness and honesty in paying their
taxes, it must hold itself against the same standard in
refunding excess (or erroneous) payments of such taxes.
It should not unjustly enrich itself at the expense of
taxpayers. [Commissioner, supra citing AB Leasing and
Finance Corporation v. Commissioner of Internal Revenue, 453
 17
Phil. 297 in turn citing BPI-Family Savings Bank, Inc. v. Court of
Appeals, 330 SCRA 507, 510, 518 (2000)] And so, given its
essence, a claim for tax refund necessitates only
preponderance of evidence for its approbation like in any
other ordinary civil case. (Commissioner, supra)
14. Tax refunds premised upon a tax
exemption strictly construed, Tax exemption is a
result of legislative grace. And he who claims an
exemption from the burden of taxation must justify his
claim by showing that the legislature intended to exempt
him by words too plain to be mistaken. [Commissioner of
Internal Revenue v. Fortune Tobacco Corporation, G. R. Nos.
167274-75, July 21, 2008 citing Surigao Consolidated Mining
Co. Inc. v. Commissioner of Internal Revenue and Court of Tax
Appeals, 119 Phil. 33, 37 (1963)]
The rule is that tax exemptions must be strictly
construed such that the exemption will not be held to be
conferred unless the terms under which it is granted
clearly and distinctly show that such was the intention.
[Commissioner, supra citing Phil. Acetylene Co. v. Commission
of Internal Revenue, et al., 127 Phil. 461, 472 (1967); Manila
Electric Company v. Vera, G.R. No. L-29987, 22 October 1975,
67 SCRA 351, 357-358; Surigao Consolidated Mining Co. Inc.
v. Commissioner of Internal Revenue, supra]
A claim for tax refund may be based on statutes
granting tax exemption or tax refund. In such case, the
rule of strict interpretation against the taxpayer is
applicable as the claim for refund partakes of the nature
of an exemption, a legislative grace, which cannot be
allowed unless granted in the most explicit and
categorical language. The taxpayer must show that the
legislature intended to exempt him from the tax by words
too plain to be mistaken. [Commissioner, supra with a note to
see Surigao Consolidated Mining Co. Inc. v. CIR, supra at 732-
733; Philex Mining Corp. v. Commissioner of Internal Revenue,
365 Phil. 572, 579 (1999); Davao Gulf Lumber Corp. v.
Commissioner of Internal Revenue, 354 Phil. 891-892 (1998); .
Commissioner of Internal Revenue v. Tokyo Shipping Co., Ltd.,
314 Phil. 220, 228 (1995)]
15. Effect of a BIR reversal of a previous
ruling interpreting a law as exempting a taxpayer.
A reversal of a BIR ruling favorable to a taxpayer would not
necessarily create a perpetual exemption in his favor, for
after all the government is never estopped from collecting
taxes because of mistakes or errors on the part of its
agents. (Lincoln Philippine Life Insurance Company, Inc., etc., v.
Court of Appeals, et al., 293 SCRA 92, 99)
16. A tax amnesty is a general pardon or
intentional overlooking by the State of its authority to
impose penalties on persons otherwise guilty of evasion or
violation of a revenue or a tax law.
It partakes of an absolute waiver by the
government of its right to collect what is due it and to give
tax evaders who wish to relent a chance to start with a
clean slate. A tax amnesty, much like a tax exemption, is
never favored nor presumed in law. The grant of a tax
amnesty, similar to a tax exemption, must be construed
strictly against the taxpayer and liberally in favor of the
taxing authority. (Philippine Banking Corporation, etc., v.
Commissioner of Internal Revenue, G. R. No. 170574, January
30, 2009)
17.The purpose of tax amnesty is to
a. give tax evaders who wish to relent a chance to
start a clean slate, and to
b. give the government a chance to collect
uncollected tax from tax evaders without
having to go through the tedious process of a tax case.
(Banas, Jr. v. Court of Appeals, et al., G.R. No. 102967,
February 10, 2000)
18. Tax amnesty distinguished from tax
exemption.
a. Tax amnesty is an immunity from all criminal,
civil and administrative liabilities arising from nonpayment
of taxes (People v. Castaneda, G.R. No. L-46881,
September 15, 1988) WHILE a tax exemption is an
immunity from civil liability only. It is an immunity or
privilege, a freedom from a charge or burden to which
others are subjected. (Florer v. Sheridan, 137 Ind. 28, 36
NE 365)
b. Tax amnesty applies only to past tax periods,
hence of retroactive application (Castaneda, supra) WHILE
tax exemption has prospective application.
19. Tax avoidance is the use of legally
permissible means to reduce the tax while tax evasion is
the use of illegal means to escape the payment of taxes.
20. Tax evasion connotes the integration
of three factors:
a. The end to be achieved, i.e., the payment of
less than that known by the taxpayer to be legally due, or
the non-payment of tax when it is shown that a tax is due;
b. an accompanying state of mind which is
described as being evil on bad faith, willful, or
deliberate and not accidental; and
c. a course of action or failure of action which is
unlawful. (Commissioner of Internal Revenue v. The Estate of
Benigno P. Toda, Jr., , etc., G. R. No. 147188, September 14,
2004)
21. Tax avoidance distinguished
from tax evasion.
a. Tax avoidance is legal while tax evasion is
illegal.
b. The objective of tax avoidance in most
instances is merely to reduce the tax that is due while is tax
evasion the object is to entirely escape the payment of
taxes.
c. Tax evasion warrants the imposition of civil,
administrative and criminal penalties while tax avoidance
does not.
22. Tax sparing is a provision in some tax
treaties which provides that the state of residence allows
as credit the amount that would have been paid, as if no
 18
reduction has been made. (Vogel, Klaus on Double Taxation
Conventions, Third Edition, p.1255 cited in Segarra, Venice H,
Tax Treaties: Trick or treat ?, Philippine Daily Inquirer,
December 6, 2002, p. C5)
There may be instances where a particular income
is exempt from taxation in order to encourage foreign
investments which may lead to economic development. If
the tax credit method is used, there would be no more tax
to credit since there is no more tax to credit as a result of
the tax exemption. Consequently, when the tax method
credit method is applied to these items of income, such
incentives are siphoned off since, in effect, the tax
benefits are cancelled out. (Ibid.) Thus, the need for the
tax sparing provision.
NATIONAL INTERNAL REVENUE
CODE
ORGANIZATION AND FUNCTIONS OF THE
BUREAU OF INTERNAL REVENUE
1. Rep. Act No. 1405, the Bank Deposits
Secrecy Law prohibits inquiry into bank deposits.
As exceptions to Rep. Act No. 1405, the
Commissioner of Internal Revenue is only
authorized to inquire into the bank deposits of:
a. a decedent to determine his gross estate; and
b. any taxpayer who has filed an application for
compromise of his tax liability by reason of financial
incapacity to pay his tax liability. [Sec. 5 (F), NIRC of 1997]
c. A taxpayer who authorizes the Commissioner
to inquire into his bank deposits.
2. Purpose of the NIRC of 1997.
Revenue generation has undoubtedly been a
major consideration in the passage of the Tax
Code. (Commissioner of Internal Revenue v. Fortune Tobacco
Corporation, G. R. Nos. 167274-75, July 21, 2008)
3.
Purpose of shift from ad valorem system to
specific tax system in taxation of cigarettes. The
shift from the ad valorem system to the specific tax
system is likewise meant to promote fair competition
among the players in the industries concerned, to
ensure an equitable distribution of the tax burden and to
simplify tax administration by classifying cigarettes,
among others, into high, medium and low-priced based
on their net retail price and accordingly graduating tax
rates. (Commissioner of Internal Revenue v. Fortune Tobacco
Corporation, G. R. Nos. 167274-75, July 21, 2008)
TAX ON INCOME
1. The Tax Code has included under the
term corporation partnerships, no matter how
created or organized, joint-stock companies, joint
accounts (cuentas en participacion), associations, or
insurance companies. [Sec. 24 now Sec. 24 (B) of the
NIRC of 1997]
2. In Evangelista v. Collector, 102 Phil. 140, the
Supreme Court held citing Mertens that the term
partnership includes a syndicate, group, pool, joint
venture or other unincorporated organization, through or by
means of which any business, financial operation, or
venture is carried on.
3. Certain business organizations do not
fall under the category of corporations under
the Tax Code, and therefore not subject to tax as
corporations, include:
a. General professional partnerships;
b. Joint venture or consortium formed for the
purpose of undertaking construction projects engaging in
petroleum, coal, geothermal, and other energy operations,
pursuant to an operation or consortium agreement under a
service contract with the Government. [1st sentence, Sec.
22 (B), BIRC of 1997]
4. Co-heirs who own inherited
properties which produce income should not
automatically be considered as partners of an
unregistered corporation subject to income tax
for the following reasons:
a. The sharing of gross returns does not of itself
establish a partnership, whether or not the persons sharing
them have a joint or common right or interest in any
property from which the returns are derived. There must
be an unmistakable intention to form a partnership or joint
venture. (Obillos, Jr. v. Commissioner of Internal Revenue, 139
SCRA 436)
b. There is no contribution or investment of
additional capital to increase or expand the inherited
properties, merely continuing the dedication of the property
to the use to which it had been put by their forebears. (Ibid.)
c. Persons who contribute property or funds to
a common enterprise and agree to share the gross returns
of that enterprise in proportion to their contribution, but who
severally retain the title to their respective contribution, are
not thereby rendered partners. They have no common
stock capital, and no community of interest as principal
proprietors in the business itself from which the proceeds
were derived. (Elements of the Law of Partnership by Floyd R.
Mechem, 2nd Ed., Sec. 83, p. 74 cited in Pascual v. Commissioner
of Internal Revenue, 166 SCRA 560)
5. The common ownership of property
does not itself create a partnership between the
owners, though they may use it for purpose of making
gains, and they may, without becoming partners, are
among themselves as to the management and use of such
property and the application of the proceeds therefrom..
(Spurlock v,. Wilson, 142 S.W. 363, 160 No. App. 14, cited
in Pascual v. Commissioner of Internal Revenue, 166
SCRA 560)
 19
6. The income from the rental of the
house, bought from the earnings of co-owned
properties, shall be treated as the income of an
unregistered partnership to be taxable as a
corporation because of the clear intention of the brothers to
join together in a venture for making money out of rentals.
7. Income is gain derived and severed from
capital, from labor or from both combined. For example, to
tax a stock dividend would be to tax a capital increase
rather than the income. (Commissioner of Internal
Revenue v. Court of Appeals, et al., G.R. No. 108576,
January 20, 1999)
8. The term taxable income means the
pertinent items of gross income specified in the Tax Code,
less the deductions and/or personal and additional
exemptions, if any, authorized for such types of income by
the Tax Code or other special laws. (Sec. 31, NIRC of
1997)
9. The cancellation and forgiveness of
indebtedness may amount to (a) payment of income; (b)
gift; or to a (c) capital transaction depending upon the
circumstances.
10. If an individual performs services for a
creditor who, in consideration thereof, cancels
the debt, it is income to the extent of the amount
realized by the debtor as compensation for his services.
11. An insolvent debtor does not realize
taxable income from the cancellation or
forgiveness. (Commissioner v. Simmons Gin Co., 43 Fd
327 CCA 10th)
12. The insolvent debtor realizes income
resulting from the cancellation or forgiveness of
indebtedness when he becomes solvent.
(Lakeland Grocery Co., v. Commissioner 36 BTA (F) 289)
13. If a creditor merely desires to benefit a
debtor and without any consideration therefor
cancels the amount of the debt it is a gift from the
creditor to the debtor and need not be included in
the latters income.
14. If a corporation to which a
stockholder is indebted forgives the debt, the
transaction has the effect of payment of a
dividend. (Sec. 50, Rev. Regs. No. 2)
15. Members of cooperatives not subject to
tax on the interest earned from their deposits with
the cooperative. No less than our Constitution guarantees
the protection of cooperatives. Section 15, Article XII of the
Constitution considers cooperatives as instruments for social
justice and economic development. At the same time, Section
10 of Article II of the Constitution declares that it is a policy of
the State to promote social justice in all phases of national
development. In relation thereto, Section 2 of Article XIII of the
Constitution states that the promotion of social justice shall
include the commitment to create economic opportunities
based on freedom of initiative and self-reliance. Bearing in
mind the foregoing provisions, we find that an interpretation
exempting the members of cooperatives from the imposition of
the final tax under Section 24(B)(1) of the NIRC (tax on interest
earned by deposits) is more in keeping with the letter and spirit
of our Constitution. (Dumaguete Cathedral Credit Coopertive
[DCCC)] etc., v. Commissioner of Internal Revenue, G. R. No.
182722, January 22, 2010)
In closing, cooperatives, including their members,
deserve a preferential tax treatment because of the vital role
they play in the attainment of economic development and social
justice. Thus, although taxes are the lifeblood of the
government, the States power to tax must give way to foster
the creation and growth of cooperatives. To borrow the words
of Justice Isagani A. Cruz: The power of taxation, while
indispensable, is not absolute and may be subordinated to the
demands of social justice. (Ibid., citing Commissioner of Internal
Revenue v. American Express International, Inc. (Philippine
Branch), 500 Phil. 586 (2005).
16. The Global system of income taxation
is a system employed where the tax system views
indifferently the tax base and generally treats in common
all categories of taxable income of the individual. (Tan v. del
Rosario, Jr., 237 SCRA 324, 331)
17. The Schedular system of income
taxation is a system employed where the income tax
treatment varies and is made to depend on the kind or
category of taxable income of the taxpayer. (Tan v. del
Rosario, Jr., 237 SCRA 324, 331)
18. Under the National Internal Revenue
Code the global system is applicable to taxable
corporations and the schedular to individuals.
19. Compensation income is considered
as having been earned in the place where the
service was rendered and not considered as sourced
from the place of origin of the money.
20. Payment for services, other than
compensation income, is considered as having
been earned at the place where the activity or
service was performed.
21. A non-resident alien, who has stayed
in the Philippines for an aggregate period of more
than 180 days during any calendar year, shall be
considered as a non-resident alien doing
business in the Philippines. Consequently, he shall
be subject to income tax on his income derived from
sources from within the Philippines. [Sec. 25 (A) (1), NIRC]
 20
He is allowed to avail of the itemized deductions
including the personal and additional exemptions subject to
the rule on reciprocity.
22. What are considered as de
minimis benefits not subject to withholding tax on
compensation income of both managerial and
rank and file employees ?
SUGGESTED ANSWER:
a. Monetized unused vacation leave credits of
employees not exceeding ten (10) days during the year;
b. Medical cash allowance to dependents of
employees not exceeding P750.00 per employee per
semester or P125 per month;
c. Rice subsidy of P1,000.00 or one (1) sack of
50-kg. rice per month amounting to not more than
P1,000.00;
d. Uniforms and clothing allowance not exceeding
P3,000.00 per annum;
e. Actual yearly medical benefits not exceeding
P10,000.00 per annum;
f. Laundry allowance not exceeding P300 per
month;
g. Employees achievement awards, e.g. for
length of service or safety achievement, which must be in
the form of a tangible persona property other than cash or
gift certificate, with an annual monetary value not
exceeding P10,000.00 received by an employee under an
established written plan which does not discriminate in
favor of highly paid employees;
h. Gifts given during Christmas and major
anniversary celebrations not exceeding P5,000 per
employee per annum;
i. Flowers, fruits, books, or similar items given
to employees under special circumstances, e.g. on account
of illness, marriage, birth of a baby, etc.; and
j. Daily meal allowance for overtime work not
exceeding twenty five percent (25%) of the basic minimum
wage.
The amount of de minimis benefits conforming to
the ceiling herein prescribed shall not be considered in
determining the P30,000 ceiling of other benefits provided
under Section 32 (B)(7)(e) of the Code. However, if the
employer pays more than the ceiling prescribed by these
regulations, the excess shall be taxable to the employee
receiving the benefits only if such excess is beyond the
P30,000.00 ceiling, provided, further, that any amount
given by the employer as benefits to its employees,
whether classified as de minimis benefits or fringe benefits,
shall constitute as deductible expense upon such
employer. [Sec. 2.78.1 (A) (3), Rev. Regs. 2-98 as
amended by Rev. Regs. No. 8-2000]
23. Income subject to final tax refers to
an income collected through the withholding tax
system. The payor of the income withholds the tax and
remits it to the government as a final settlement of the
income tax as a final settlement of the income tax due on
said income. The recipient is no longer required to include
the income subjected to a final tax as part of his gross
income in his income tax return.
24. Distinguish exclusions from
deductions.
SUGGESTED ANSWER:
a. Exclusions from gross income refer to a flow
of wealth to the taxpayer which are not treated as part of
gross income for purposes of computing the taxpayers
taxable income, due to the following reasons: (1) It is
exempted by the fundamental law; (2) It is exempted by
statute; and (3) It does not come within the definition of
income (Sec. 61, Rev. Regs. No. 2) WHILE deductions are
the amounts which the law allows to be subtracted from
gross income in order to arrive at net income.
b. Exclusions pertain to the computation of
gross income WHILE deductions pertain to the
computation of net income.
c. Exclusions are something received or earned
by the taxpayer which do not form part of gross income
WHILE deductions are something spent or paid in earning
gross income.
An example of an exclusion from gross income are
life insurance proceeds, and an example of a deduction are
losses.
25. What are excluded from gross
income ?
SUGGESTED ANSWER:
a. Proceeds of life insurance policies paid to the
heirs or beneficiaries upon the death of the insured whether
in a single sum or otherwise.
b. Amounts received by the insured as a return
of premiums paid by him under life insurance, endowment
or annuity contracts either during the term, or at maturity of
the term mentioned in the contract, or upon surrender of
the contract.
c. Value of property acquired by gift, bequest,
devise, or descent.
d. Amounts received, through accident or health
insurance or Workmens Compensation Acts as
compensation for personal injuries or sickness, plus the
amounts of any damages received on whether by suit or
agreement on account of such injuries or sickness.
e. Income of any kind to the extent required by
any treaty obligation binding upon the Government of the
Philippines.
f. Retirement benefits received under Republic
Act No. 7641. Retirement received from reasonable
private benefit plan after compliance with certain
conditions. Amounts received for beyond control
separation. Foreign social security, retirement gratuities,
pensions, etc. USVA benefits, SSS benefits and GSIS
benefits.
26. What are the conditions for
excluding retirement benefits from gross income,
hence tax-exempt ?
SUGGESTED ANSWER:
 21
a. Retirement benefits received under Republic
Act No. 7641 and those received by officials and
employees of private firms, whether individual or corporate,
in accordance with the employers reasonable private
benefit plan approved by the BIR.
b. Retiring official or employee
1) In the service of the same employer for
at least ten (10) years;
2) Not less than fifty (50) years of age at
time of retirement;
3) Availed of the benefit of exclusion only
once. [Sec. 32 (B) (6) (a), NIRC of 1997] The retiring
official or employee should not have previously
availed of the privilege under the retirement plan of
the same or another employer. [1st par., Sec. 2.78
(B) (1), Rev. Regs. No. 2-98]
27. What kind of separation
(retirement) pay is excluded from gross income,
hence tax-exempt ?
SUGGESTED ANSWER:
a. Any amount received by an official, employee
or by his heirs,
b. From the employer
c. As a consequence of separation of such
official or employee from the service of the employer
because of
1) Death, sickness or other physical
disability; or
2) For any cause beyond the control of
said official or employee [Sec. 32 (B) (6) (b), NIRC
of 1997], such as retrenchment, redundancy and
cessation of business. [1st par., Sec. 2.78 (B), (1)
(b), Rev. Regs. No. 2-98]
28. What are the Itemized deductions
from gross income and who may avail of them ?
a. Ordinary and necessary trade, business or
professional expenses.
b. The amount of interest paid or incurred
within a taxable year on indebtedness in connection with
the taxpayers profession, trade or business.
Resident citizens, resident alien individuals and
nonresident alien individuals who are engaged in trade and
business, on their gross incomes other from compensation
income are allowed to deduct these expenses. Domestic
corporations, estates and trusts may also deduct this
expense. Nonresident citizens and foreign corporations on
their gross incomes from within may also deduct this
expense.
Nonresident alien individuals not engaged in trade
or business in the Philippines are not allowed to deduct this
expense.
c. Taxes paid or incurred within the taxable year
in connection with the taxpayers profession.
Resident citizens, resident alien individuals and
nonresident alien individuals who are engaged in trade and
business, on their gross incomes other from compensation
income are allowed to deduct these expenses. Domestic
corporations, estates and trusts may also deduct this
expense. Nonresident citizens and foreign corporations on
their gross incomes from within may also deduct this
expense.
Nonresident alien individuals not engaged in trade
or business in the Philippines are not allowed to deduct this
expense.
d. Ordinary losses, losses from casualty,
theft or embezzlement; and net operating losses.
Resident citizens, resident alien individuals and
nonresident alien individuals who are engaged in trade and
business, on their gross incomes other from compensation
income are allowed to deduct these expenses. Domestic
corporations, estates and trusts may also deduct this
expense. Nonresident citizens and foreign corporations on
their gross incomes from within may also deduct this
expense.
Nonresident alien individuals not engaged in trade
or business in the Philippines are not allowed to deduct this
expense.
e. Bad debts due to the taxpayer,
actually ascertained to be worthless and charged off within
the taxable year, connected with profession, trade or
business, not sustained between related parties.
Resident citizens, resident alien individuals and
nonresident alien individuals who are engaged in trade and
business, on their gross incomes other from compensation
income are allowed to deduct these expenses. Domestic
corporations, estates and trusts may also deduct this
expense. Nonresident citizens and foreign corporations on
their gross incomes from within may also deduct this
expense.
Nonresident alien individuals not engaged in trade
or business in the Philippines are not allowed to deduct this
expense.
f. Depreciation or a reasonable allowance for
the exhaustion, wear and tear (including reasonable
allowance for obsolescence) of property used in trade or
business.
Resident citizens, resident alien individuals and
nonresident alien individuals who are engaged in trade and
business, on their gross incomes other from compensation
income are allowed to deduct these expenses. Domestic
corporations, estates and trusts may also deduct this
expense. Nonresident citizens and foreign corporations on
their gross incomes from within may also deduct this
expense.
Nonresident alien individuals not engaged in trade
or business in the Philippines are not allowed to deduct this
expense.
g. Depletion or deduction arising from the
exhaustion of a non-replaceable asset, usually a natural
resource.
Resident citizens, resident alien individuals and
nonresident alien individuals who are engaged in trade and
business, on their gross incomes other from compensation
income are allowed to deduct these expenses. Domestic
corporations, estates and trusts may also deduct this
expense. Nonresident citizens and foreign corporations on
 22
their gross incomes from within may also deduct this
expense.
Nonresident alien individuals not engaged in trade
or business in the Philippines are not allowed to deduct this
expense.
h. Charitable and other contributions.
Resident citizens, resident alien individuals and
nonresident alien individuals who are engaged in trade and
business, on their gross incomes other from compensation
income are allowed to deduct these expenses. Domestic
corporations, estates and trusts may also deduct this
expense. Nonresident citizens and foreign corporations on
their gross incomes from within may also deduct this
expense.
Nonresident alien individuals not engaged in trade
or business in the Philippines are not allowed to deduct this
expense.
i. Research and development expenditures
treated as deferred expenses paid or incurred by the
taxpayer in connection with his trade, business or
profession, not deducted as expenses and chargeable to
capital account but not chargeable to property of a
character which is subject to depreciation or depletion.
Resident citizens, resident alien individuals and
nonresident alien individuals who are engaged in trade and
business, on their gross incomes other from compensation
income are allowed to deduct these expenses. Domestic
corporations, estates and trusts may also deduct this
expense. Nonresident citizens and foreign corporations on
their gross incomes from within may also deduct this
expense.
Nonresident alien individuals not engaged in trade
or business in the Philippines are not allowed to deduct this
expense.
j. Contributions to pension trusts. Resident
citizens, resident alien individuals and nonresident alien
individuals who are engaged in trade and business, on
their gross incomes other from compensation income are
allowed to deduct these expenses. Domestic corporations,
estates and trusts may also deduct this expense.
Nonresident citizens and foreign corporations on their
gross incomes from within may also deduct this expense.
Nonresident alien individuals not engaged in trade
or business in the Philippines are not allowed to deduct this
expense.
k. Insurance premiums for health and
hospitalization. Resident citizens, resident alien individuals
and nonresident alien individuals who are engaged in trade
and business, on their gross incomes other from
compensation income are allowed to deduct these
expenses. Nonresident citizens and nonresident alien
individual engaged in trade or business in the Philippine on
their gross incomes from within may also deduct these
premiums.
Nonresident alien individuals not engaged in trade
or business in the Philippines are not allowed to deduct
these premiums.
l. Personal and additional exemptions.
Resident citizens, and resident alien on their gross
incomes and from compensation income are allowed to
deduct these premiums. Nonresident citizens on their
gross incomes from within may also deduct this expense.
Nonresident alien individuals engaged in trade or business
in the Philippines are allowed to deduct these exemptions
under reciprocity.
Nonresident alien individuals not engaged in trade
or business in the Philippines are not allowed to deduct this
expense.
29. Distinguish ordinary expenses
from capital expenditures.
SUGGESTED ANSWER: Ordinary expenses are
those which are common to incur in the trade or business
of the taxpayer WHILE capital expenditures are those
incurred to improve assets and benefits for more than one
taxable year. Ordinary expenses are usually incurred
during a taxable year and benefits such taxable year.
Necessary expenses are those which are appropriate or
helpful to the business.
30. What are the requisites for the
deductibility of business expenses ?
SUGGESTED ANSWER: The following are the
requisites for deductibility of business expenses:
a. Compliance with the business test:
1) Must be ordinary and necessary;
2) Must be paid or incurred within the
taxable year;
3) Must be paid or incurred in carrying on
a trade or business.
4) Must not be bribes, kickbacks or other
illegal expenditures
b. Compliance with the substantiation test. Proof by
evidence or records of the deductions allowed by law
including compliance with the business test.
31. What are the requisites for the
deductibility of ordinary and necessary trade,
business, or professional expenses, like
expenses paid for legal and auditing services ?
SUGGESTED ANSWER:
a. the expense must be ordinary and necessary;
b. it must have been paid or incurred during the
taxable year dependent upon the method of accounting
upon the basis of which the net income is computed.
c. it must be supported by receipts, records or
other pertinent papers. (Commissioner of Internal
Revenue v, Isabela cultural Corporation, G. R. No. 172231,
February 12, 2007)
32. TMG Corporation is issuing the
accrual method of accounting. In 2005 XYZ Law
Firm and ABC Auditing Firm rendered various
services which were billed by these firms only
during the following year 2006. Since the bills for
legal and auditing services were received only in
2006 and paid in the same year, TMG deducted
 23
the same from its 2006 gross income. The BIR
disallowed the deduction ?
Who is correct, TMG or BIR ? Explain.
SUGGESTED ANSWER: The BIR is correct. TMG
should have deducted the professional and legal fees in
the year they were incurred in 2005 and not in 2006
because at the time the services were rendered in 2005,
there was already an obligation to pay them.
(Commissioner of Internal Revenue v, Isabela Cultural
Corporation, G. R. No. 172231, February 12, 2007)
NOTES AND COMMENTS:
a. Accounting methods for tax purposes
comprise a set of rules for determining when and how to
report income and deductions. (Commissioner of Internal
Revenue v, Isabela cultural Corporation, G. R. No. 172231,
February 12, 2007)
The two (2) principal accounting methods for
recognition of income are the (a) accrual method; and the
(b) cash method.
b. Recognition of income and expenses
under the accrual method of accounting. Amounts of
income accrue where the right to receive them becomes
fixed, where there is created an enforceable liability.
Liabilities, are incurred when fixed and determinable in
nature without regard to indeterminacy merely of time of
payment.. (Commissioner of Internal Revenue v, Isabela
cultural Corporation, G. R. No. 172231, February 12, 2007)
The accrual of income and expense is permitted
when the all-events test has been met. (Ibid.)
c. All-events test. This test requires:
1) fixing of a right to income or liability to
pay; and
2) the availability of the reasonable
accurate determination of such income or liability.
The test does not demand that the amount of such
income or liability be known absolutely, only that a taxpayer
has at his disposal the information necessary to compute
the amount with reasonable accuracy.
The all-events test is satisfied where computation
remains uncertain; if its basis is unchangeable, the test is
satisfied where a computation may be unknown, but is not
as much as unknowable, within the taxable year. The
amount of liability does not have to be determined exactly,;
it must be determined with reasonable accuracy implies
something less than an exact or completely accurate
amount.
The propriety of an accrual must be judged by the
fact that a taxpayer knew, or could reasonably be expected
to have known, at the closing of its books for the taxable
year. Accrual method of accounting presents largely a
question of fact; such that the taxpayer bears the burden of
proof of establishing the accrual of an item of income or
deduction. (Commissioner of Internal Revenue v, Isabela
cultural Corporation, G. R. No. 172231, February 12, 2007)
d. Under the cash method income is to be
construed as income for tax purposes only upon actual
receipt of the cash payment. It is also referred to as the
cash receipts and disbursements method because both
the receipt and disbursements are considered. Thus,
income is recognized only upon actual receipt of the cash
payment but no deductions are allowed from the cash
income unless actually disbursed through an actual
payment in cash.
33. The fringe benefits tax is a final withholding
tax imposed on the grossed-up monetary value of fringe
benefits furnished, granted or paid by the employer to the
employee, except rank and file employees. [1st par., Sec.
2.33 (A), Rev. Regs. No. 3-98]
34. What is meant by fringe benefit
for purposes of taxation ?
SUGGESTED ANSWER: For purposes of taxation,
fringe benefit means any good, service, or other benefit
furnished or granted in cash or in kind by an employer to
an individual employee (except rank and file employees),
such as but not limited to:
a. Housing;
b. Expense account;
c. Vehicle of any kind;
d. Household personnel, such as maid, driver
and others;
e. Interest on loan at less than market rate to the
extent of the difference between the market rate and actual
rate granted;
f. Membership fees, dues and other expenses
borne by the employer for the employee in social and
athletic clubs or other similar organizations;
g. Expenses for foreign travel;
h. Holiday and vacation expenses;
i. Educational assistance to the employee or
his dependents; and
j. Life or health insurance and other non-life
insurance premiums or similar amounts in excess of what
the law allows. [Sec. 33 (B), NIRC of 1997; 1st par., Sec. 2.33
(B), Rev. Regs. No. 3-98]
35. Fringe benefits that are not subject to
the fringe benefits tax:
a. When the fringe benefit is required by the
nature of, or necessary to the trade, business or profession
of the employer; or
b. When the fringe benefit is for the convenience
or advantage of the employer. [Sec. 32(A), NIRC of 1997;
1st par., Sec. 2.33 (A), Rev. Regs. No. 3-98]
c. Fringe benefits which are authorized and
exempted from income tax under the Tax Code or under
any special law;
d. Contributions of the employer for the benefit
of the employee to retirement, insurance and
hospitalization benefit plans;
e. Benefits given to the rank and file employees,
whether granted under a collective bargaining agreement
or not; and
f. De minimis benefits as defined in the rules
and regulations to be promulgated by the Secretary of
Finance upon recommendation of the Commissioner of
Internal Revenue. [1st par., Sec. 32 (C), NIRC of 1997; Sec.
2.33 (C), Rev. Regs. No. 3-98]
 24
36. De minimis benefits are facilities
and privileges (such as entertainment, medical services,
or so-called courtesy discounts on purchases), furnished
or offered by an employer to his employees. They are not
considered as compensation subject to income tax and
consequently to withholding tax, if such facilities are offered
or furnished by the employer merely as a means of
promoting the health, goodwill, contentment, or efficiency
of his employees. [Sec. 2.78,1 (A) (3), Rev. Regs. 2-98 as
amended by Rev. Regs. No. 8-2000]
37. Preferred shares are considered
capital regardless of the conditions under which
such shares are issued and dividends or
interests paid thereon are not allowed as
deductions from the gross income of
corporations. (Revenue Memorandum Circular No. 17-71)
38. Bad debts are those which result from
the worthlessness or uncollectibility, in whole or in part, of
amounts due the taxpayer by others, arising from money
lent or from uncollectible amounts of income from goods
sold or services rendered. (Sec. 2.a, Rev. Regs. 5-99)
39. Who are related parties ?
SUGGESTED ANSWER: The following are related
parties:
a. Members of the same family. The family of
an individual shall include only his brothers and sisters
(whether by the whole or half-blood), spouse, ancestors,
and lineal descendants;
b. An individual and a corporation more than fifty
percent (50%) in value of the outstanding stock of which is
owned, directly or indirectly, by or for such individual;
c. Two corporations more than fifty percent
(50%) in value of the outstanding stock of which is owned,
directly or indirectly, by or for the same individual;
d. A grantor and a fiduciary of any trust; or
e. The fiduciary of a trust and the fiduciary of
another trust if the same person is a grantor with respect to
each trust; or
f. A fiduciary of a trust and a beneficiary of such.
[Sec. 36 (B), NIRC of 1997]
40. What are the requisites for valid
deduction of bad debts from gross income ?
SUGGESTED ANSWER:
a. There must be an existing indebtedness due to
the taxpayer which must be valid and legally demandable;
b. The same must be connected with the taxpayers
trade, business or practice of profession;
c. The same must not be sustained in a transaction
entered into between related parties;
d. The same must be actually charged off the books
of accounts of the taxpayer as of the end of the taxable
year; and
e. The debt must be actually ascertained to be
worthless and uncollectible during the taxable year;
f. The debts are uncollectible despite diligent effort
exerted by the taxpayer. [Sec. 34 (E) (1), NIRC of 1997;
Sec. 3, Rev. Regs. No. 5-99 reiterated in Rev. Regs. No.
25-2002; Philippine Refining Corporation v. Court of
Appeals, et al., 256 SCRA 667]
g. Must have been reported as receivables in the
income tax return of the current or prior years. (Sec. 103,
Rev. Regs. No. 2)
:
41. What is the tax benefit rule ?
SUGGESTED ANSWER: The tax benefit rule
posits that the recovery of bad debts previously allowed as
deduction in the preceding year or years shall be included
as part of the taxpayers gross income in the year of such
recovery to the extent of the income tax benefit of said
deduction.
NOTES AND COMMENTS:
a. If in the year the taxpayer claimed deduction
of bad debts written-off, he realized a reduction of the
income tax due from him on account of the said deduction,
his subsequent recovery thereof from his debtor shall be
treated as a receipt of realized taxable income. (Sec. 4, Rev.
Regs. 5-99)
b. If the said taxpayer did not benefit from the
deduction of the said bad debt written-off because it did not
result to any reduction of his income tax in the year of such
deduction (i.e. where the result of his business operation
was a net loss even without deduction of the bad debts
written-off), then his subsequent recovery thereof shall be
treated as a mere recovery or a return of capital, hence, not
treated as receipt of realized taxable income. (Sec. 4, Rev.
Regs. 5-99)
42. Depreciation is the gradual diminution in
the useful value of tangible property resulting from ordinary
wear and tear and from normal obsolescence. The term is
also applied to amortization of the value of intangible
assets the use of which in the trade or business is definitely
limited in duration.
43. The methods of depreciation are the
following:
a. Straight line method;
b. Declining balance method;
c. Sum of years digits method; and
d. Any other method prescribed by the
Secretary of Finance upon the recommendation of the
Commissioner of Internal Revenue:
1) Apportionment to units of production;
2) Hours of productive use;
3) Revaluation method; and
4) Sinking fund method.
44. What are personal and additional
exemptions ?
SUGGESTED ANSWER: These are the theoretical
persona, living and family expenses of an individual
allowed to be deducted from the gross or net income of an
individual taxpayer.
 25
These are arbitrary amounts which have been
calculated by our lawmakers to be roughly equivalent to the
minimum of subsistence, taking into account the personal
status and additional qualified dependents of the taxpayer.
They are fixed amounts in the sense that the amounts have
been predetermined by our lawmakers and until our
lawmakers make new adjustments on these personal
exemptions, the amounts allowed to be deducted by a
taxpayer are fixed as predetermined by Congress.
[Pansacola v. Commissioner of Internal Revenue, G. R. No.
159991, November 16, 2006 citing Madrigal and Paterno v.
Rafferty and Concepcion, 38 Phil. 414, 418 (1918)]
45. What is the amount allowed as
basic personal exemption ?
SUGGESTED ANSWER: There shall be allowed a
basic personal exemption amounting to Fifty thousand
pesos (P50,000) for each individual taxpayer.
In the case of married individuals where only one
of the spouse is deriving gross income, only such spouse
shall be allowed the personal exemption. [Sec. 35 (A),
NIRC of 1997 as amended by Rep. Act No. 9504; Sec. 2.79 (I)
(1) (a), Rev. Regs. No. 2-98 as amended by Rev. Regs. No. 10-
2008]
NOTES AND COMMENTS: It is clear from Rep.
Act No. 9504 that each of the spouses may claim the
P50,000.00. Thus, the total familial basic personal
exemption for spouses is P100,000.00.
Furthermore, the distinctions between the
concepts of single, married and head of the family for
purpose of availing of the basic personal exemption has
already been eliminated by Rep. Act No. 9504.
45. What are the amounts of additional
exemptions ?
SUGGESTED ANSWER: An individual,
a. whether single or married,
b. shall be allowed an additional exemption of
Twenty-Five Thousand Pesos (P25,000.00)
c. for each qualified dependent child,
d. provided that the total number of
dependents for which additional exemptions may be
claimed
1) shall not exceed four (4) dependents.
[1st par., Sec. 2.79 (I) (1) (b), Rev. Regs. No. 2-98 as
amended by Rev. Regs. No. 10-2008, arrangement and
numbering supplied; Sec. 35 (B), NIRC of 1997 as
amended by Rep. Act No. 9504]
NOTES AND COMMENTS:
a. It is clear that under the amendment, single
individuals may now claim for the additional exemptions.
Furthermore, the concept of head of a family does not find
application anymore.
b. A dependent means
a. a legitimate, illegitimate or legally adopted
child
b. chiefly dependent upon and living with the
taxpayer
c. if such dependent is
1) not more than twenty-one (21) years
of age,
2) unmarried and
3) not gainfully employed or
d. if such dependent,
1) regardless of age
2) is incapable of self-support
3) because of mental or physical defect.
[2nd par., Sec. 2.79 (I) (1) (b), Rev. Regs. No. 2-98 as
amended by Rev. Regs. No. 10-2008, arrangement and
numbering supplied; Sec. 35 (b), NIRC of 1997, as
amended by Rep. Act No. 9504]
c. It is to be noted that under the NIRC of 1997,
as amended by Rep. Act No. 9504, only qualified
dependent children are considered for additional
exemptions. Grandparents, parents, as well, as brothers
or sisters, and other collateral relatives are not qualified
dependents to be claimed as additional exemptions.
However, if they are senior citizens they may
qualify as additional exemptions under the Senior
Citizens Law but not under the NIRC of 1997, as
amended by Rep. Act No. 9504.
Senior citizen shall be treated as dependents
provided for in the National Internal Revenue Code, as
amended, and as such, individual taxpayers caring for
them, be they relatives or not shall be accorded the
privileges granted by the Code insofar as having
dependents are concerned. [last par. Sec. 5 (a), Rep. Act No.
7432, as amended by Rep. Act 9257, The Expanded Senior
Citizens Act of 2003]
47. Capital assets shall refer to all real
properties held by a taxpayer, whether or not connected
with his trade or business, and which are not included
among the real properties considered as ordinary assets.
(Sec. 2.a, Rev. Regs. No. 7-2003)
The term capital assets means property held by
the taxpayer (whether or not connected with his trade or
business), BUT DOES NOT INCLUDE:
a. Stock in trade of the taxpayer, or
b. Other property of a kind which would properly
be included in the inventory of the taxpayer if on hand at
the close of the taxable year, or
c. Property held by the taxpayer primarily for sale
to customers in the ordinary course of his trade or
business, or
d. Property used in the trade or business, of a character
which is subject to the allowance for depreciation; or real
property used in the trade or business of the taxpayer. [Sec.
39 (A) (1), NIRC of 1997, capitalized words, numbering and
arrangement supplied; Sec. 2.a, Rev. Regs. No. 7-2003]
48. Examples of capital assets:
a. Stock and securities held by taxpayers other
than dealers in securities;
b. Jewelry not used for trade and business;
c. Residential houses and lands owned and
used as such;
d. Automobiles not used in trade and business;
e. Paintings, sculptures, stamp collections,
objects of arts which are not used in trade or business;
f. Inherited large tracts of agricultural land
which were subdivided pursuant to the government
 26
mandate under land reform, then sold to tenants. (Roxas
v. Court of Tax Appeals, etc. L-25043, April 26, 1968)
g. Real property used by an exempt
corporation in its exempt operations, such as a corporation
included in the enumeration of Section 30 of the Code, shall
not be considered used for business purposes, and
therefore considered as capital asset. (last sentence, 3rd
par., Sec. 3.b, Rev. Regs. No. 7-2003)
h. Real property, whether single detached,
townhouse, or condominium unit, not used in trade or
business as evidenced by a certification from the Barangay
Chairman or from the head of administration, in case of
condominium unit, townhouse or apartment, and as
validated from the existing available records of the Bureau
of Internal Revenue, owned by an individual engaged in
business, shall be treated as capital asset. (last par., Sec.
3.b., Rev. Regs. No. 7-2003)
49. Ordinary assets shall refer to all real
properties specifically excluded from the
definition of capital assets, namely:
a. Stock in trade of a taxpayer or other real property
of a kind which would properly be included in the inventory
of a taxpayer if on hand at the close of the taxable year; or
b. Real property held by the taxpayer primarily for
sale to customers in the ordinary course of his trade or
business; or
c. Real property used in trade or business (i.e.
buildings and/or improvements), of a character which is
subject to the allowance for depreciation; or
d. Real property used in trade or business of the
taxpayer. (Sec. 2. b, Rev. Regs. No. 7-2003)
50.. Examples of ordinary assets
hence not capital assets:
a. The machinery and equipment of a
manufacturing concern subject to depreciation;
b. The tractors, trailers and trucks of a hauling
company;
c. The condominium building owned by a realty
company the units of which are for rent or for sale;
d. The wood, paint, varnish, nails, glue, etc.
which are the raw materials of a furniture factory;
e. Inherited parcels of land of substantial areas
located in the heart of Metro Manila, which were subdivided
into smaller lots then sold on installment basis after
introducing comparatively valuable improvements not for
the purpose of simply liquidating the estate but to make
them more saleable ; the employment of an attorney-in-fact
for the purpose of developing, managing, administering
and selling the lots; sales made with frequency and
continuity; annual sales income from the sales was
considerable; and the heir was not a stranger to the real
estate business. (Tuazon, Jr. v. Lingad, 58 SCRA 170)
f. Inherited agricultural property improved by
introduction of good roads, concrete gutters, drainage and
lighting systems converts the property to an ordinary asset.
The property forms part of the stock in trade of the owner,
hence an ordinary asset. This is so, as the owner is now
engaged in the business of subdividing real estate.
(Calasanz v. Commissioner of Internal Revenue, 144 SCRA at p.
672)
51. Tax treatment of real properties that
have been transferred. Real properties classified as
capital or ordinary asset in the hands of the seller/transferor
may change their character in the hands of the
buyer/transferee. The classification of such property in the
hands of the buyer/transferee shall be determined in
accordance with the following rules:
a. Real property transferred through succession
or donation to the heir or donee who is not engaged in the
real estate business with respect to the real property
inherited or donated, and who does not subsequently use
such property in trade or business, shall be considered as
a capital asset in the hands of the heir or donee.
b. Real property received as dividend by
stockholders who are not engaged in the real estate
business and who not subsequently use such real property
in trade or business shall be treated as capital assets in the
hands of the recipient even if the corporation which
declared the real property dividend is engaged in real
estate business.
c. The real property received in an exchange shall
be treated as ordinary asset in the hands of the transferee
in the case of a tax-free exchange by taxpayer not engaged
in real estate business to a taxpayer who is engaged in real
estate business, or to a taxpayer who, even if not engaged
in real estate business, will use in business the property
received in the exchange. (Sec. 3.f., Rev. Regs. No. 7-2003)
52. The tax is imposed upon capital
gains presumed to have been realized from the
sale, exchange, or other disposition of real
property located in the Philippines, classified as
capital assets. [Sec. 24 (D) (1`), NIRC of 1997] Revenue
Regulations No. 7-2003 has defined real property as
having the same meaning attributed to that term under
Article 415 of Republic Act No. 386, otherwise known as
the Civil Code of the Philippines. (Sec. 2.c, Rev. Regs. No.
7-2003)
53. Transactions covered by the
presumed capital gains tax on real property:
a. sale,
b. exchange,
c. or other disposition, including pacto de retro
sales and other forms of conditional sales. [Sec. 24 (D)
(1), NIRC of 1997, numbering and arrangement supplied]
d. Sale, exchange, or other disposition includes
taking by the government through condemnation
proceedings. (Gutierrez v. Court of Tax Appeals, et al., 101 Phil.
713; Gonzales v. Court of Tax Appeals, et al., 121 Phil. 861)
54. In case the mortgagor exercises his
right of redemption within one (1) year from the
issuance of the certificate of sale, in a foreclosure of
mortgage sale of real property, no capital gains tax shall be
imposed because no capital gains has been derived by the
 27
mortgagor and no sale or transfer of real property was
realized. [Sec. 3 (1), Rev. Regs. No. 4-99]
55. In case of non-redemption of the
property sold upon a foreclosure of mortgage sale, the
presumed capital gains tax shall be imposed, based on the
bid price of the highest bidder but only upon the expiration
of the one year period of redemption provided for under
Sec. 6 of Act No. 3135, as amended by Act No. 4118, and
shall be paid within thirty (30) days from the expiration of
the said one-year redemption period. [Sec. 3 (2), Rev. Regs.
No. 4-99]
56. The basis for the final presumed
capital gains tax of six per cent (6%) is whichever
is the higher of the
a. gross selling price, or
b. the current fair market value as determined
below:
1) the fair market value or real properties
located in each zone or area as determined by the
Commissioner of Internal Revenue after
consultation with competent appraisers both from
the private and public sectors; or
2) the fair market value as shown in the
schedule of values of the Provincial and City
Assessors. [Sec. 24 (D) (1) in relation to Sec. 6 (E),
both of the NIRC of 1997]
It does not matter whether there was an actual gain
or loss because the tax is a presumed capital gains tax.
It is the transaction that is taxed not the gain.
57. Holding period not applied to the taxation
of the presumed capital gains derived from the sale of real
property considered as capital assets.
58. The tax liability, of individual
taxpayers (not corporate), if any, on gains from
sales or other dispositions of real property,
classified as capital assets, to the government or
any of its political subdivisions or agencies or to
government owned or controlled corporations shall be
determined, at the option of the taxpayer, by including the
proceeds as part of gross income to be subjected to the
allowable deductions and/or personal and additional
exemptions, then to the schedular tax [Sec. 24 (D) (1), in
relation to Sec. 24 (A) (1), both of the NIRC of 1997] or the
final presumed capital gains tax of six percent (6%). [Sec.
24 (D) (1) in relation to Sec. 6 (E), both of the NIRC of
1997]
59. The seller of the real property, classified
as a capital asset, pays the presumed capital
gains tax whether:
a. an individual [Sec. 24 (D) (1), NIRC of 1997];
1) Citizen, whether resident or not [Ibid.];
2) Resident alien [Ibid.];
3) Nonresident alien engaged in trade or
business in the Philippines [Sec. 25 (A) (3) in
relation to Sec. 24 (D) (1), both of the NIRC of
1997];
4) Nonresident alien not engaged in trade
or business in the Philippines [Sec. 25 (B) in
relation to Sec. 24 (D) (1), both of the NIRC of
1997];
b. an estate or trust (Ibid.);
c. a domestic corporation. [Sec. 27 (D) (5), NIRC of
1997]
60. Excepted from the payment of the
presumed capital gains tax are those presumed
to have been realized from the disposition by
natural persons of their principal place of
residence
a. the proceeds of which is fully utilized in
acquiring or constructing a new principal residence;
b. within eighteen (18) calendar months from
the date of sale or disposition
c. the BIR Commissioner shall have been duly
notified by the taxpayer within thirty (30) days from the date
of sale or disposition through a prescribed return of his
intention to avail of the tax exemption; and
d. the said tax exemption can only be availed of
once every ten (10) years. [Sec. 24 (D) (2), NIRC of 1997]
61. MBC was incorporated in 1961 and
engaged in commercial banking operations since
1987. On May 22, 1987, it ceased operations that
year by reason of insolvency and its assets and
liabilities were placed under the charge of a
government-appointed receiver. On June 23,
1999, the BSP authorized MBC to operate as a
thrift bank.
In 2000, It filed its tax return for the year
1999 paying the amount of P33 million computed
in accordance with the minimum corporate
income tax (MCIT). It sought the BIRs ruling on
whether it is entitled to the four (4) year grace
period for paying on the basis of MCIT reckoned
from 1999. BIR then ruled that cessation of
business activities as a result of being placed
under involuntary receivership may be an
economic reason for suspending the imposition
of the MCIT.
As a result of the ruling MBC filed an
application for refund of the P33 million. Due to
the BIRs inaction, MBC filed a petition for review
with the CTA.
The CTA denied the petition on the ground
that MBC is not a newly organized corporation. In
a volte facie the BIR now maintains that MBC
should pay the MCIT beginning January 1, 1998
as it did not close its business operations in 1987
but merely suspended the same. Even if placed
under receivership, the corporate existence was
 28
never affected. Thus, it falls under the category Corporation v. Commissioner of Internal Revenue, G. R.
of an existing corporation recommencing its No. 168118, August 26, 2006)
banking operations.
Should the refund be granted ? ESTATE TAXES
SUGGESTED ANSWER: Yes. The MCIT shall be
imposed beginning in the fourth taxable year immediately 1. In determining the gross estate of
following the year in which the corporation commenced its a decedent, are his properties abroad to be
business operations. [Sec. 27 (E) (1), NIRC of 1997] included, and more particularly, what
The date of commencement of operations of a thrift constitutes gross estate ?
bank is the date it was registered with the SEC or the date SUGGESTED ANSWER: Yes, if the decedent is a
when the Certificate of Authority to Operate was issued to Filipino citizen or a resident alien.
it by the Monetary Board, whichever comes later. (Sec. 6, The gross estate of a Filipino citizen or a resident
Rev. Regs. No. 4-95) alien comprises all his real property, wherever situated;
Clearly then. MBC is entitled to the grace period of all his personal property, tangible, intangible or mixed,
four years from June 23, 1999 when it was authorized by wherever situated, to the extent of his interest existing
the BSP to operate as a thrift bank before the MCIT should therein at the time of his death.
be applied to it. (Manila Banking Corporation v. The gross estate of a non-resident alien comprises
Commissioner of Internal Revenue, G. R. No. 168118, all his real property, situated in the Philippines; all his
August 26, 2006) personal property, tangible, intangible or mixed, situated
NOTES AND COMMENTS: in the Philippines, to the extent of his interest existing
a. The MCIT and when should be imposed therein at the time of his death.
and the four (4) year grace period. A minimum
corporate income tax of two percent (2%) of the gross 2. William Smith, an American
income as of the end of the taxable year, as defined herein, citizen, was a permanent resident of the
is hereby imposed on a corporation taxable under this Title,
Philippines. He died in San Francisco,
beginning on the fourth taxable year immediately following
the year in which such corporation commenced its California. He left 10,000 shares of San Miguel
business operations, when the minimum corporate income Corporation, a condominium unit at the Twin
tax is greater than the tax computed under Subsection (A) Towers Building at Pasig, Metro Manila and a
of this section for the taxable year. [Sec. 27 (E) (1), NIRC house and lot in Miami, Florida.
of 1997] What assets shall be included in the Estate
b. Period when a corporation becomes Tax Return to be filed with the BIR ?
subject to the MCIT. (5) Specific rules for determining SUGGESTED ANSWER: All of the assets should be
the period when a corporation becomes subject to the included in the Estate Tax Return to be filed with the BIR.
MCIT (minimum corporate income tax) - Smith, an American citizen and a permanent resident
For purposes of the MCIT, the taxable year in which of the Philippines is considered, for Philippine estate tax
business operations commenced shall be the year in which purposes, a resident alien. Consequently, the assets to
the domestic corporation registered with the Bureau of be included in the Estate Tax Return to be filed with the
Internal Revenue (BIR). BIR should be all property, real or personal, tangible,
Firms which were registered with BIR in 1994 and intangible or mixed, wherever situated, to the extent of the
earlier years shall be covered by the MCIT beginning interest that Smith has at the time of his death. Thus, all
January 1, 1998. x x x (Rev. Regs. No. 9-98) of the properties enumerated in the problem irrespective
Manila Banking Corporation v. Commissioner of of where they are situated are includible in the gross
Internal Revenue, G. R. No. 168118, August 26, 2006 did estate of Smith.
not apply Rev. Regs. No. 9-98 because Rev. Regs. No. 4-
95 specifically refers to thrift banks.) 3. Proceeds of life insurance
c. Purpose of the four (4) year grace period. includible in a decedents gross estate.
The intent of Congress relative to the MCIT is to grant a a. The decedent takes the insurance policy on
four (43) year suspension of tax payment to newly his own life
organized corporations. Corporations still starting their 1) The amounts are receivable by
business operations have to stabilize their venture in order a) the decedents estate,
to obtain a stronghold in the industry. It does not come as b) his executor, or
a surprise then when many companies reported losses in c) administrator irrespective of
their initial years of operations. whether or not the insured retained the
Thus, in order to allow new corporations to grow and power of revocation, OR
develop at the initial stages of their operations, the 2) The amounts are receivable by any
lawmaking body saw the need to provide a grace period of beneficiary designated in the policy of
four years from their registration before they pay their insurance as revocable beneficiary. [Sec.
minimum corporate income tax. (Manila Banking 85 (E), NIRC of 1997]
 29
b. One, other than the decedent takes the 7. Vanishing deduction (property
insurance policy on the life of the decedent previously taxed) allowed as a deduction from
1) The amounts are receivable by the gross estate of a Filipino citizen, whether
a) the decedents estate, resident or not, of a resident alien decedent, or
b) his executor, or
of a nonresident alien decedent.
c) administrator
a. An amount equal to the value specified
2) irrespective of whether or not the
below of
insured retained the power of revocation.
b. Any property forming a part of the gross
estate situated in the Philippines
4. Proceeds of life insurance NOT c Of any person who died within five years
included in a decedents gross estate. prior to the death of the decedent, or transferred to the
a. The decedent takes the insurance policy on decedent by gift within five years prior to his death,
his own life, and d. Where such property can be identified as
b. the proceeds are receivable by a beneficiary having been received by the decedent from the donor by
designated as irrevocable. [Sec. 85 (E), NIRC of 1997) gift, or from such prior decedent by gift, bequest, devise,
NOTES AND COMMENTS: The beneficiary must not be or inheritance, or
the decedents estate, executor or administrator, because the
proceeds are includible as part of gross estate whether or not
e. Which can be identified as having been
the decedent retained the power of revocation. (Ibid.) acquired in exchange for property so received:
c. Where the insurance was NOT taken by the 100% of the value if the prior decedent died within
decedent upon his own life and the beneficiary is not the one year prior to the death of the decedent, or if the
decedents estate, his executor or administrator. property was transferred to him by gift within the same
period prior to his death;
4. Items deductible from the gross estate 80% of the value if the prior decedent died more
than one year but not more than two years prior to the
of a resident or nonresident Filipino decedent or
death of the decedent, or if the property was transferred
resident alien decedent: to him by gift within the same period prior to his death;
a. Expenses, losses, claims, indebtedness and 60% of the value if the prior decedent died more
taxes; than two years but not more than three years prior to the
b. Property previously taxed; death of the decedent, or if the property was transferred
c. Transfers for public use; to him by gift within the same period prior to his death;
d. The Family Home up to a value not exceeding 40% of the value if the prior decedent died more
P1 million; than three years but not more than four years prior to the
e. Standard deduction of P1 million; death of the decedent, or if the property was transferred
f. Medical expenses not exceeding to him by gift within the same period prior to his death;
P500,000.00; and
g. Amount of exempt retirement received by the 20% of the value if the prior decedent died more
heirs under Rep. Act Mo. 4917; than four years but not more than five years prior to the
h. Net share of the surviving spouse in the death of the decedent, or if the property was transferred
conjugal partnership. to him by gift within the same period prior to his death.
[Sec. 86 (A) (2) and (B) (2), NIRC of 1997, numbering,
5. There is no transfer in contemplation arrangement and underlining supplied]
of death if there is no showing that the transferor
retained for his life or for any period which does not in fact 8. The approval of the court sitting
end before his death: (1) the possession or enjoyment of, in probate, or as a settlement tribunal over the
or the right to the income from the property, or (2) the right, estate of the deceased is not a mandatory
either alone or in conjunction with any person, to designate requirement for the collection of the estate. The
the person who shall possess or enjoy the property or the probate court is determining issues which are not against
income therefrom. [Sec. 85 (B), NIRC of 1997] the property of the decedent, or a claim against the estate
as such, but is against the interest or property right which
6. Vanishing deduction (deduction for the heir, legatee, devisee, etc. has in the property formerly
property previously taxed), defined. The deduction held by the decedent.
allowed from the gross estates of citizens, resident The notices of levy were regularly issued within the
aliens and nonresident estates for properties which were prescriptive period.
previously subject to donors or estate taxes. The The tax assessment having become final, executory
deduction is called a vanishing deduction because the and enforceable, the same can no longer be contested by
deduction allowed diminishes over a period of five (5) means of a disguised protest. (Marcos, II v. Court of
years. Appeals, et al., 273 SCRA 47)
It is also known as a deduction for property
previously taxed. DONORS TAXES
 30
1. What is the donors tax rate if the
donee is a stranger ?
SUGGESTED ANSWER: When the donee
or beneficiary is a stranger, the tax payable by the donor
shall be 30% of the net gifts.
2. For purposes of the donors tax
who is a stranger ?
SUGGESTED ANSWER: A stranger is a is person
who is not a:
a. Brother, sister (whether by whole or half-
blood), spouse, ancestor and lineal descendant; or
b. Relative by consanguinity in the collateral line
within the fourth degree of relationship. [Sec. 99 (B), NIRC
of 1997]
NOTES AND COMMENTS: All relatives by affinity,
irrespective of the degree, are considered as strangers.
3. What is the tax base for donations ?
SUGGESTED ANSWER: The net gifts made during
the calendar year. [Sec. 99 (A), NIRC of 1997]
4. For purposes of the donors tax, what
is meant by net gifts ?
SUGGESTED ANSWER: The net economic
benefit from the transfer that accrues to the donee.
Accordingly, if a mortgaged property is transferred as a
gift, but imposing upon the donee the obligation to pay the
mortgage liability, then the net gift is measured by
deducting from the fair market value of the property the
amount of the mortgage assumed. (last par., Sec. 11, Rev.
Regs.No.2-2003)
5. How are gifts of personal property to
be valued for donors tax purposes ?
SUGGESTED ANSWER: The market value of the
personal property at the time of the gift shall be considered
the amount of the gift. (Sec. 102, NIRC of 1997)
6. What is the valuation of donated real
property for donors tax purposes ?
SUGGESTED ANSWER: The real property shall be
appraised at its fair market value as of the time of the gift.
However, the appraised value of the real property at
the time of the gift shall be whichever is the higher of:
a. the fair market value as determined by the
Commissioner of Internal Revenue (zonal valuation) or
b. the fair market value as shown in the
schedule of values fixed by the Provincial and City
Assessors. [Sec. 102, in relation to Sec. 88 (B) both of the NIRC
of 1997]
7. A died leaving as his only heirs, his
surviving spouse B, and three minor children, X,
Y and Z. Since B does not want to participate in
the distribution of the estate, she renounced her
hereditary share in the estate.
a. Is the renunciation subject to donors
tax ? Explain.
SUGGESTED ANSWER: No. The general
renunciation by an heir, including the surviving spouse, as
in the case B, of her share in the hereditary estate left by
the decedent is not subject to donors tax. (4th par., Sec.
11, Rev. Regs. No. 2-2003)
This is so because the general renunciation by B
was not specifically and categorically done in favor of
identified heir/s to the exclusion or disadvantage of the
other co-heirs in the hereditary estate.
b. Supposing that instead of a general
renunciation, B renounced her hereditary share
in As estate to X who is a special child, would
your answer be the same ? Explain.
SUGGESTED ANSWER: My answer would be
different. The renunciation in favor of X would be subject
to donors tax.
This is so because the renunciation was
specifically and categorically done in favor of X and
identified heir to the exclusion or disadvantage of Y and
Z, the other co-heirs in the hereditary estate. (4th par., Sec.
11, Rev. Regs. No. 2-2003)
8. Give some donations that are
exempt from donors tax.
SUGGESTED ANSWER:
a. The first P100,000.00 net donation during a
calendar year is exempt from donors tax [Sec. 99 (A),
NIRC of 1997] made by a resident or non resident;
b. The donation by a resident or non-resident of
a prize to an athlete in an international sports tournament
held abroad and sanctioned by the national sports
association is exempt from donors tax (Sec. 1, Rep. Act
No. 7549)
c. Political contributions made by a resident or
non-resident individual if registered with the COMELEC
irrespective of whether donated to a political party or
individual.
However, the Corporation Code prohibits
corporations from making political contributions. (Corp.
Code, Title IV, Sec. 36.9)
d. Dowries or gifts made on account of
marriage and before its celebration or within one year
thereafter by residents who are parents to each of their
legitimate, recognized natural, or adopted children to the
extent of the first ten thousand pesos (P10,000.00);
e. Gifts made by residents or non-residents to
or for the use of the National Government or any entity
created by any of its agencies which is not conducted
for profit, or to any political subdivisions of the said
Government;
f. Gifts made by residents or non residents in
favor of an educational and/or charitable, religious,
cultural or social welfare corporation, institution,
foundation, trust or philanthropic organization or research
institution or organization: Provided, however, That not
more than thirty percent (30%) of said gifts shall be used
 31
by such donee for administration purposes. [Sec. 101 (A),
NIRC of 1997, numbering and arrangement supplied]
g. Gifts made by non-resident aliens outside of
the Philippines to Philippine residents are exempt from
donors taxes because taxation is basically territorial. The
transaction, which should have been subject to tax was
made by non-resident aliens and took place outside of the
Philippines.
9. What is the concept of donation or
gift splitting ? Illustrate.
SUGGESTED ANSWER: Donation or gift splitting
is spreading the gift over numerous calendar years in
order to avail of lower donors taxes.
In 2008 Leon was thinking of donating a
P200,000.00 to Miklos, his first cousin. The P200,000.00
is the totality of the net gifts for 2008. If he donated the
P200,000.00 in 2008 the first P100,000 would be exempt
and the remaining P50,000.00 would be subject to
donors tax
If Leon spreads the P200,000 donation over two (2)
calendar years, donating P100,000.00 on December 30,
2008 and the remaining P100,000.00 on January 1, 2009
the transaction would be exempt from donors tax. This
is so even if the donation is separated only by two days
because the basis is the calendar year. Leon would be
enjoying the exemption for the first P100,000.00 net gifts
for each calendar year.
10. A, who is engaged in the car
buy and sell business sold to B P7 million
Jaguar for only P4 million. The proper VAT on the
sale was paid. If you are the BIR examiner
assigned to review the sale, would you issue a tax
assessment on the transaction ? Explain your
answer briefly.
SUGGESTED ANSWER: Donors taxes would be
due on the insufficiency of consideration.
Where property, other than real property that has
been subjected to the final capital gains tax, is transferred
for less than an adequate and full consideration in money
or moneys worth, then the amount by which the fair
market value of the property at the time of the execution
of the Contract to Sell or execution of the Deed of Sale
which is not preceded by a Contract to Sell exceeded the
value of the agreed or actual consideration or selling price
shall be deemed a gift, and shall be included in computing
the amount of gifts made during the calendar year. (5th
par., Sec. 11, Rev. Regs. No. 2-2003)
VALUE-ADDED TAXES (VAT)
WARNING !!! Approximately 10% of the total
questions asked in the Bar Examination are sourced from
VAT and its concepts. This area is probably the most
difficult area to forecast because there are no statistically
perceived patterns. The author has retained the Stars
System for VAT. Considering the limited period of time, the
reader is advised to focus on areas marked with stars and
just browse the unmarked areas.
1. Value-added tax (VAT) is a tax
which is imposed only on the increase in the worth, merit
or importance of goods, properties or services, and not on
the total value of the goods or services being sold or
rendered.
2. Nature of VAT. VAT is an indirect
tax that may be shifted or passed on to the buyer,
transferee or lessee of the goods, properties or services.
As such, it should be understood not in the context of the
person or entity that is primarily, directly liable for its
payment, but in terms of its nature as a tax on
consumption. [Commissioner of Internal Revenue v. Seagate
Technology (Philippines), G. R. No. 153866, February 11, 2005
citing various authorities}
VAT is a percentage tax imposed on any person
whether or not a franchise grantee, who in the course of
trade or business, sells, barters, exchanges, leases,
goods or properties, renders services. It is also levied on
every importation of goods whether or not in the course of
trade or business. The tax base of the VAT is limited only
to the value added to such goods, properties, or services
by the seller, transferor or lessor. Further, the VAT is an
indirect tax and can be passed on to the buyer. (Quezon
City, et al., v. ABS-CBN Broadcasting Corporation, G. R. No.
166408, October 6, 2008)
3. Effect of exemptions from VAT
which is an indirect tax. If a special law merely
exempts a party as a seller from its direct liability for
payment of the VAT, but does not relieve the same party
as a purchaser from its indirect burden of the VAT shifted
to it by its VAT-registered suppliers, the purchase
transaction is not exempt.
REASON: The VAT is a tax on consumption, the
amount of which may be shifted or passed on by the seller
to the purchaser of the goods, properties or services.
[Commissioner of Internal Revenue v. Seagate Technology
(Philippines), G. R. No. 153866, February 11, 2005)
4. Illustration of effects of exemptions
from VAT which is an indirect tax. A VAT exempt
seller sells to a non-VAT exempt purchaser. The
purchaser is subject to VAT because the VAT is merely
added as part of the purchase price and not as a tax
because the burden is merely shifted. The seller is still
exempt because it could pass on the burden of paying the
tax to the purchaser.
5. The VAT is a tax on consumption.
Meaning of consumption as used under the VAT
system. Consumption is "the use of a thing in a way
that thereby exhausts it."
Applied to services, the term means the
performance or "successful completion of a contractual
duty, usually resulting in the performer's release from any
past or future liability x x x" Unlike goods, services cannot
 32
be physically used in or bound for a specific place when
their destination is determined. Instead, there can only be
a "predetermined end of a course" when determining the
service "location or position x x x for legal purposes."
[Commissioner of Internal Revenue v. Placer Dome Technical
Services (Phils.), Inc. G. R. No. 164365, June 8, 2007]
6. Illustration of the meaning of
consumption as used under the VAT system. For
example the services rendered by a local firm to its foreign
client are performed or successfully completed upon its
sending to a foreign client the drafts and bills it has
gathered from service establishments here. Its services,
having been performed in the Philippines, are therefore
also consumed in the Philippines. Such facilitation
service has no physical existence, yet takes place upon
rendition, and therefore upon consumption, in the
Philippines. [Commissioner of Internal Revenue v. Placer
Dome Technical Services (Phils.), Inc. G. R. No. 164365, June
8, 2007]
7. Who are liable for the value-
added tax.
a. Any person who, in the course of his trade or
business,
1) Sells, barters, exchanges or leases
goods or properties, or
2) renders services, and
b. any person who imports goods xxx
However, in the case of importation of taxable
goods, the importer, whether an individual or corporation
and whether or not made in the course of his trade or
business, shall be liable to VAT xxx . (Rev. Regs. No. 16-
2005,Sec. 4.105-1, paraphrasing supplied)
8. Various VAT methods and
systems.
a. Cost deduction method. This is a single-
stage tax which is payable only by the original sellers.
(Abakada Guro Party List (etc.) v. Ermita, etc., et al., G.
R. No. 168056, September 1, 2005 and companion cases) This
was subsequently modified and a mixture of cost
deduction method and tax credit method was used to
determine the value-added tax payable. (Ibid.)
b. Tax credit method. This method relies on
invoices, an entity can credit against or subtract from the
VAT charged on its sales or outputs the VAT paid on its
purchases, inputs and imports. [Commissioner of Internal
Revenue v. Seagate Technology (Philippines), G. R. No.
153866, February 11, 2005]
If at the end of a taxable period, the output taxes
charged by a seller are equal to the input taxes passed on
by the suppliers, no payment is required. It is when the
output taxes exceed the input taxes that the excess has
to be paid.
If however, the input taxes exceed the output taxes,
the excess shall be carried over to the succeeding quarter
or quarters. Should the input taxes result from zero-rated
or effectively zero-rated transactions or from acquisition
of capital goods, any excess over the output taxes shall
instead be refunded to the taxpayer or credited against
other internal revenue taxes. (Ibid.)
9. How the VAT is imposed on the
increase in worth, merit or improvement of the
goods or services. The VAT utilizes the concept of
the output and input taxes.
Output VAT less Input VAT = VAT due on the
increase in worth, merit or improvement f the goods or
services.
10. The right to credit the input tax be
limited by legislation because it is a mere
creation of law. Prior to the enactment of multi-stage
sales taxation, the sales taxes paid at every level of
distribution are not recoverable from the taxes
payable. With the advent of Executive Order No. 273
imposing a 10% multi-stage tax on all sales, it was only
then that the crediting of the input tax paid on purchase or
importation of goods and services by VAT-registered
persons against the output tax
established. This continued with the Expanded VAT Law
was
(R.A. No. 7716), and The Tax Reform Act of 1997 (R.A.
No. 8424). The right to credit input tax as against the
output tax is clearly a privilege created by law, a privilege
that also the law can limit. It should be stressed that a
person has no vested right in statutory privileges.
(ABAKADA Guro Party List, etc. et al. vs. Ermita, G.R. No.
168207, October 15, 2005, and companion cases, on the motion
for reconsideration)
11. Output tax is the value-added tax
due on the sale or lease or taxable goods, properties or
services by any VAT-registered person.
12. Input tax is the value-added tax due
on or paid by a VAT-registered person on importation of
good or local purchases of goods or services, including
lease or use of properties, in the course of his trade or
business. (Rev. Regs. No. 4.110-1, 1st par.)
13. Included in the input tax.
a. the transitional input tax and
b. the presumptive input tax xxx.
It includes
c. input taxes which can be directly attributed
to transactions subject to the VAT plus a ratable portion
of any input tax which cannot be directly attributed to
either the taxable or exempt activity. (Rev. Regs. No.
4.110-1, 1st par., 2nd sentence,. And 2nd par.,
paraphrasing, arrangement and numbering supplied )
14. Concept of transitional input tax
credits on beginning inventories. Taxpayers who
become VAT-registered persons upon exceeding the
minimum turnover of P1,500,000.00 in any 12-month
period, or who voluntarily register even if their turnover
does not exceed P1,500,000.00 (except franchise
grantees of radio and television broadcasting whose
threshold is P10,000,000.00) shall be entitled to a
 33
transitional input tax on the inventory on hand as of the
effectivity of their VAT registration, on the following:
a. goods purchased for resale in their present
condition;
b. materials purchased for further processing,
but which have not yet undergone processing;
c. goods which have been manufactured by
the taxpayer;
d. goods in process for sale; or
e. goods and supplies for use in the course of
the taxpayers trade or business as a VAT-registered
person. [Rev. Regs. No. 16-2005, Sec.4.111-1, (a), 1st par.,
arrangement and numbering supplied]
15. Concept of presumptive input tax
credits. Persons or firms engaged in the processing of
sardines, mackerel, and milk, and in manufacturing
refined sugar, cooking oil and packed noodle-based
instant meals, shall be allowed a presumptive input tax,
creditable against the output tax, equivalent to four
percent (4%) of the gross value in money of their
purchases of primary agricultural products which are used
as inputs to their production.
As used in this paragraph, the term processing
shall mean pasteurization, canning and activities which
through physical or chemical process alter the exterior
texture or form or inner substance of a product in such a
manner as to prepare it for special use to which it could
not have been put in its original form or condition. [Rev.
Regs. No. 16-2005, Sec.4.111-1, (b)]
16. The VAT registration fee does NOT
violate religious freedom. The VAT registration fee
imposed on non-VAT enterprises which includes among
others, religious sects which sells and distributes religious
literature is not violative of religious freedom, although a
fixed amount is not imposed for the exercise of a privilege
but only for the purpose of defraying part of the cost of
registration.
The registration fee is thus more of an
administrative fee, one not imposed on the exercise of a
privilege, much less a constitutional right. (Tolentino v.
Secretary of Finance, et al., and companion cases, 235 SCRA
630)
17. Interpretation of the term In the
Course of Trade or Business as used in the VAT
system. The term "doing business" or course of
business conveys the idea of business being done, not
from time to time, but all the time. It does not include
isolated transactions. (Commissioner of Internal
Revenue v. Magsaysay Lines, Inc., et al., G. R. No. 146984, July
28, 2006)
18. Pursuant to a government
program of privatization, NDC, a VAT-registered
entity created for the purpose of selling real
property, decided to sell to private enterprise all
of its shares in its wholly-owned subsidiary the
National Marine Corporation (NMC). The NDC
decided to sell in one lot its NMC shares and five
(5) of its ships, which are 3,700 DWT Tween-
Decker, "Kloeckner" type vessels. The vessels
were constructed for the NDC between 1981 and
1984, then initially leased to Luzon Stevedoring
Company, also its wholly-owned subsidiary.
Subsequently, the vessels were transferred and
leased, on a bareboat basis, to the NMC. The
NMC shares and the vessels were offered for
public bidding. Among the stipulated terms and
conditions for the public auction was that the
winning bidder was to pay "a value added tax of
10% on the value of the vessels." Magsaysay
Lines, Inc., offered to buy the shares and the
vessels for P168,000,000.00. The bid was made
by Magsaysay Lines, purportedly for a new
company still to be formed composed of itself,
Baliwag Navigation, Inc., and FIM Limited of the
Marden Group based in Hongkong . The bid was
approved by the Committee on Privatization, and
a Notice of Award was issued to Magsaysay
Lines. Is the sale
subject to VAT ?
SUGGESTED ANSWER: No. The term "carrying
on business" does not mean the performance of a single
disconnected act, but means conducting, prosecuting and
continuing business by performing progressively all the
acts normally incident thereof; while "doing business"
conveys the idea of business being done, not from time to
time, but all the time. "Course of business" is what is
usually done in the management of trade or business.
"Course of business" or "doing business" connotes
regularity of activity. In the instant case, the sale was an
isolated transaction.
The sale which was involuntary
and made pursuant to the declared policy of Government
for privatization could no longer be repeated or carried on
with regularity. It should be emphasized that the normal
VAT-registered activity of NDC is leasing personal
property. This finding is confirmed by the
Revised Charter of the NDC which bears no indication
that the NDC was created for the primary purpose of
selling real property. (Commissioner of Internal Revenue v.
Magsaysay Lines, Inc., et al., G. R. No. 146984, July 28, 2006)
19. Under the Value Added Tax
(VAT), the tax is imposed on sales, barter, or
exchange or goods and services. The VAT is
also imposed on certain transactions deemed
sales which include:
a. Transfer, use or
consumption not in the course of business or properties
originally intended for sale or for use in the course of
business. xxx
 34
b. Distribution or transfer to:
1) Shareholders or investors as share in
the profits of the VAT- registered person; xxx or
2) Creditors in payment of debt or
obligation
c. Consignment of goods if actual sale is not
made within sixty (60) days following the date such goods
were consigned. Consigned goods returned by the
consignee within the 60-day period are not deemed sold.
d. Retirement from or cessation of business,
with respect to all goods on hand,
1) whether capital goods, stock-in-trade,
supplies or materials as of the date of such
retirement, or cessation,
2) whether or not the business is
continued by the new owner or successor. xxx
[Rev. Regs. No. 16-2005, Sec. 4.106-7, paraphrasing,
arrangement and numbering supplied]
20. Transactions considered retirement
or cessation of business deemed sale subject
to VAT.
a. Change of ownership of the business. There
is change in the ownership of the business where a single
proprietorship incorporates; or
1) the proprietor of a single
proprietorship sells his entire business.
b. Dissolution of a partnership and creation of
a new partnership which takes over the business. [Rev.
Regs. No. 16-2005, Sec. 4.106-7 (a), (4) paraphrasing,
arrangement and numbering supplied]
21. Sale of or lease of real properties
subject to VAT. Sale of real properties primarily for sale
to customers or held for lease in the ordinary course of
trade or business of the seller shall be subject to VAT.
(Rev. Regs. No. 16-2005, Sec. 4.106-3, 1st par.)
Thus, capital transactions of individuals are not
subject to VAT. Only real estate dealers are subject to
VAT.
22. On September 4,
2009, XYZ, Inc., a domestic corporation engaged
in the real estate business, sold a building for
P10,000,000.00. Is the sale subject to the value-
added tax (VAT)? If so, how much? Explain.
SUGGESTED ANSWER: Yes. 12% on the gross
selling price because the sale was made in the ordinary
course of trade of business of X, a domestic corporation
engaged in the real estate business.
23. The following sales of real
properties are exempt from VAT, namely:
a. Sale of real properties not primarily held for
sale to customers or held for lease in the ordinary course
of trade or business;
b. Sale of real properties utilized for low-cost
housing as defined by RA No. 7279, otherwise known as
the Urban and Development Housing Act of 1992 and
other related laws, such as RA No. 7835 and RA No.
8763.
xxx xxx xxx
c. Sale of real properties utilized for socialized
housing as defined under RA No. 7279, and other related
laws wherein the price ceiling per unit is P225,000.00 or
as may from time to time be determined by the HUDCC
and the NEDA and other related laws.
xxx xxx xxx
d. Sale of residential lot valued at One Million
Five Hundred Thousand Pesos (P1,500,000.00) and
below, or house & lot and other residential dwellings
valued at Two Million Give Hundred Thousand Pesos
(P2,500,000.00) and below where the instrument of
sale/transfer/disposition was executed on or after
November 1, 2005, provided, That not later than January
31, 2009 and every three (3) years thereafter, the
amounts stated herein shall be adjusted to its present
value using the Consumer Price Index, as published by
the National Statistics Office (NSO); provided, further, that
such adjustment shall be published through revenue
regulations to be issued not later than March 31 of each
year.
If two or more adjacent residential lots are sold or
disposed in favor of one buyer, for the purpose of utilizing
the lots as one residential lot, the sale shall be exempt
from VAT only if the aggregate value of the lots do not
exceed P1,500,000.00. Adjacent residential lots,
although covered by separate titles and/or separate tax
declarations, when sold or disposed of to one and the
same buyer, whether covered by one or separate Deed of
Conveyance, shall be presumed as a sale of one
residential lot. [Rev. Regs. No. 4.109-1 (B), (p),
paraphrasing and numbering supplied]
24. VAT on services and lease of
properties.
a. There shall be levied, assessed, and
collected,
b. a value-added tax equivalent to twelve
percent (12%) of gross receipts
c. derived from the sale or exchange of
services,
1) including the use or lease of
properties. [NIRC of 1997, Sec. 108 (A), as amended
by R.A. No. 9337, arrangement and numbering
supplied]
25. Sale or exchange of services,
defined. The term sale or exchange of services
means the performance of all kinds of services in the
Philippines for others for a fee, remuneration or
consideration, whether in kind or in cash, including those
performed or rendered by the following:
a.
construction and service contractors;
b. stock, real estate, commercial,
customs and immigration brokers;
c.
lessors of property, whether personal or real;
 35
d. persons engaged in
warehousing services e.
lessors or distributors of cinematographic films;
f. persons engaged in milling,
processing, manufacturing or repacking goods for others;
g.
proprietors, operators or keepers of hotels, motels,
rest-houses, pension houses, inns, resorts; theaters, and
movie houses; h. proprietors or
operators of restaurants, refreshment parlors, cafes and
other eating places, including clubs and caterers;
i. dealers in securities;
j. lending investors;
k.
transportation contractors on their transport of goods
or cargoes, including persons who transport goods or
cargoes for hire and other domestic common carriers by
land relative to their transport of goods or cargoes;
l. common carriers by air and sea relative to their
transport of passengers, goods or cargoes from one place
in the Philippines to another place in the Philippines;
m.
sales of electricity by generation companies,
transmission, and/or distribution companies;
n. franchise
grantees of electric utilities, telephone and telegraph,
radio and television broadcasting and all other franchise
grantees except franchise grantees of radio and/or
television broadcasting whose annual gross receipts of
the preceding year do not exceed Ten Million Pesos
(P10,000,000.00), and franchise grantees of gas and
water utilities;
o. non-life
insurance companies (except their crop insurances),
including surety, fidelity, indemnity and bonding
companies; and
p. similar services regardless of whether or not the
performance thereof calls for the exercise or use of the
physical or mental faculties. [NIRC of 1997, Sec. 108 (A), as
amended by R.A. No. 9337; Rev. Regs. No. 16-2005, Sec.
4,108-2, 1st par., arrangement and numbering supplied]
26. Also included in the phrase sale or
exchange of services.
a. The lease or the use of or the right or
privilege to use any copyright, patent, design or model,
plan, secret formula or process, goodwill, trademark,
trade brand or other like property or right;
b. The lease or the use of, or the right to use
any industrial, commercial or scientific equipment;
c. The supply of scientific, technical, industrial
or commercial knowledge or information;
d. The supply of any assistance that is
ancillary and subsidiary to and is furnished as a means of
enabling the application or enjoyment of any such
property, or right as is mentioned in subparagraph (2)
hereof or any such knowledge or information as is
mentioned in subparagraph (3) hereof; or
e. The supply of services by a non-resident
person or his employee in connection with the use of
property or rights belonging to, or the installation or
operation of any brand, machinery or other apparatus
purchased from such non-resident person;
f. The supply of technical advice, assistance
or services rendered in connection with technical
management or administration of any scientific, industrial
or commercial undertaking, venture, project of scheme;
g. The lease of motion picture films, film tapes
and discs;
h. The lease or the use of or the right to use
radio, television, satellite transmission and cable
television time. (Rev. Regs. No. 16-2005, Sec. 4.108-2, 2nd
par.)
27. Zero-rated Sales of Goods or
Properties. A zero-rated sale of goods or properties by
a sale by a VAT-registered person is a taxable transaction
for VAT purposes but the sale does not result in any
output tax.
However, the input tax on the purchases of goods,
properties or services related to such zero-rated sale shall
be available as tax credit or refund in accordance with
Rev. Regulations No. 16-2005. (Rev. Regs. No. 16-2005,
1st par.)
28. Concept of VAT zero-rating. The
tax rate is set at zero. When applied to the tax base, such
rate obviously results in no tax chargeable against the
purchaser. The seller of such transactions charges no
output tax, but can claim a refund or a tax credit certificate
for the VAT previously charged by suppliers.
[Commissioner of Internal Revenue v. Seagate
Technology (Philippines), G. R. No. 153866, February 11,
2005]
Under a zero-rating scheme, the sale or exchange
of a particular service is completely freed from the VAT,
because the seller is entitled to recover, by way of a
refund or as an input tax credit, the tax that is included in
the cost of purchases attributable to the sale or exchange.
The tax paid or withheld is not deducted from the tax base.
(Commissioner, of Internal Revenue v. American Express
International, Inc. (Philippine Branch), G. R. No. 152609, June
29, 2005 citing various cases)
29. Situs of taxation of zero-rated VAT
services such as facilitating the collection of
receivables from credit card members situated
in the Philippines and payment to service
establishments in the Philippines. The place
where the service is rendered determines the jurisdiction
to impose the VAT
Performed in the Philippines, the service is
necessarily subject to its jurisdiction for the State
necessarily has to have a substantial connection to it in
order to enforce a zero rate. The place of payment is
immaterial much less is the place where the output of the
service will be further or ultimately used.
 36
This is so because the law neither makes a
qualification nor adds a condition in determining the tax
situs of a zero-rated service. (Commissioner of Internal
Revenue v. American Express International, Inc. (Philipppine
Branch), G. R. No. 152609, June 29, 2005)
30. Destination principle
under the VAT System. As a general rule, the VAT
system uses the destination principle as a basis for the
jurisdictional reach of the tax.
Goods and services are taxed only in the country
where they are consumed. Thus, exports are zero-rated,
while imports are taxed.
This is also known as the Cross Border
Doctrine.
31. Exception to the
destination principle. The law clearly provides for an
exception to the destination principle; that is, for a zero
percent VAT rate for services that are performed in the
Philippines, "paid for in acceptable foreign currency and
accounted for in accordance with the rules and
regulations of the [BSP]."
32. Rationale for zero-rating of
exports. The Philippine VAT system adheres to the
Cross Border Doctrine, according to which, no VAT shall
be imposed to form part of the cost of goods destined for
consumption outside of the territorial border of the taxing
authority. [Commissioner of Internal Revenue v. Toshiba
Information Equipment (Phils.), Inc., G. R.. No. 150154, August
9, 2005] The Cross Border Doctrine is also known as the
destination principle.
Hence, actual or constructive export of
goods and services from the Philippines to a foreign
country must be zero-rated for VAT; while, those destined
for use or consumption within the Philippines shall be
imposed the twelve percent (12%) VAT.
33. Zero-rated sale distinguished
from exempt transactions:
a. A zero-rated sale is a taxable transaction but
does not result in an output tax WHILE an exempt
transaction is not subject to the output tax.
b. The input tax on the purchases of a VAT
registered person who has zero-rated sales may be
allowed as tax credits or refunded WHILE the seller in an
exempt transaction is not entitled to any input tax on his
purchases despite the issuance of a VAT invoice or
receipt.
c. Persons engaged in transactions which are
zero rated being subject to VAT are required to register
WHILE registration is optional for VAT-exempt persons.
34. Zero-rated sales by VAT-
registered persons. The following sales by VAT-
registered persons shall be subject to zero percent (0%)
rate:
a. Export sales;
b. Considered export sales under Executive
Order No. 224;
c. Foreign currency denominated sale; and
d. Sales to persons or entities deemed tax-
exempt under special law or international agreement.
(Rev. Regs. No. 16-2005, Sec. 4.106-5, 2nd par., paraphrasing
supplied)
35. Sale of gold to the Central Bank
considered as export sales. As export sales, the
sale of gold to the Central Bank is zero-rated, hence, no
tax is chargeable to it as purchaser. Zero rating is
primarily intended to be enjoyed by the seller, which
charges no output VAT but can claim a refund of or a tax
credit certificate for the input VAT previously charged to
it by suppliers. (Commissioner of Internal Revenue v. Manila
Mining Corporation, G.R. No. 153204, August 31, 2005)
36. Sales to ecozone, such as PEZA,
considered export-sale. Notably, while an ecozone
is geographically within the Philippines, it is deemed a
separate customs territory and is regarded in law as
foreign soil. Sales by suppliers from outside the borders
of the ecozone to this separate customs territory are
deemed as exports and treated as export sales. These
sales are zero-rated or subject to a tax rate of zero
percent. (Commissioner of Internal Revenue v. Sekisui Jushi
Philippines, Inc., G. R. No. 149671, July 21, 2006 citing various
authorities)
37. Ecozone, defined. An ECOZONE or a
Special Economic Zone has been described as
[S]elected areas with highly developed or which
have the potential to be developed into agro-industrial,
industrial, tourist, recreational, commercial, banking,
investment and financial centers whose metes and
bounds are fixed or delimited by Presidential
Proclamations. An ECOZONE may contain any or all of
the following: industrial estates (IEs), export processing
zones (EPZs), free trade zones and tourist/recreational
centers. The national territory of the Philippines
outside of the proclaimed borders of the ECOZONE shall
be referred to as the Customs Territory. [Commissioner of
Internal Revenue v. Toshiba Information Equipment (Phils.),
Inc., G. R.. No. 150154, August 9, 2005]
38. Zero-rated sale of service,
defined. A zero-rated sale of service (by a VAT-
registered person) is a taxable transaction for VAT
purposes, but shall not result in any output tax. However,
the input tax on purchases of goods, properties or
services related to such zero-rated sale shall be available
as tax credit or refund in accordance with Rev. Regs. No.
16-2005. [Rev. Regs. No. 16-2005, Sec. Sec. 4.108-5 (a),
words in italics supplied)
39. Service performed by American
Express in facilitating the collection of
receivables from credit card members situated
 37
in the Philippines and payment to service
establishments in the Philippines in behalf of its
Hong-Kong based client is subject to VAT but
zero-rated. This is so because it meets all the
requirements for VAT imposition, as follows:
a. It regularly renders in the Philippines the
service of facilitating the collection and payment of
receivables belonging to a foreign company that is a
clearly separate and distinct entity.
b. Such service is commercial in nature;
carried on over a sustained period of time; on a significant
scale with a reasonable degree of frequency; and not at
random, fortuitous, or attenuated.
c. For this service, it definitely receives
consideration in foreign currency that is accounted for in
conformity with law.
d. It is not an entity exempt under any of our
laws or international agreements. (Commissioner, of
Internal Revenue v. American Express International, Inc.
(Philippine Branch), G. R. No. 152609, June 29, 2005)
40. While the service performed by
American Express is subject to VAT it is zero-
rated, and BIR Revenue Regulations that alter
the legal requirements for zero-rating are ultra
vires and invalid. The VAT system uses the
destination principle which posits that the goods and
services are taxed only in the country where they are
consumed,
However, the law itself provides for clear
exceptions under which the supply of services shall be
zero-rated, among which are the following:
a. The service is performed in the Philippines;
b. The services are within the categories
provided for under the Tax Code; and
c. It is paid for in acceptable foreign currency
of the Bangko Sentral ng Pilipinas.
American Express renders assistance to its foreign
clients by receiving the bills of service establishments
located in the country and forwarding them to their clients
abroad. The services are performed or successfully
completed upon send to its foreign clients the drafts and
bills it has gathered from service establishments here, Its
services, having been performed in the Philippines are
therefore also consumed in the Philippines. Thus, its
services are exempt from the destination principle and are
zero-rated.
The BIR could not change the law. [Commissioner,
of Internal Revenue v. American Express International, Inc.
(Philippine Branch), G. R. No. 152609, June 29, 2005]
41. A foreign Consortium
composed of BWSC-Denmark, Mitsui
Engineering and Shipbuilding Ltd., and Mitsui
and Co., Ltd., which entered into a contract with
NAPOCOR for the operation and maintenance of
two power barges appointed BWSC-Denmark as
its coordination manager. BWSCMI was
established as the subcontractor to perform the
actual work in the Philippines. The Consortium
paid BWSCMI in acceptable foreign exchange
and accounted for in accordance with the rules
and regulations of the BSP.
Through a February 14, 1995 ruling the BIR
declared that BWSCMI may choose to register as
a VAT persons subject to VAT at zero rate. For
1996, it filed the proper VAT returns showing
zero rating. On December 29, 1997, believing
that it is covered by Rev. Regs. 5-96, dated
February 20, 1996, BWSCMI paid 10% output
VAT for the period April-December 1996, through
the Voluntary Assessment Program (VAP).
On January 7, 1999, BWSCMI was able to
obtain a Ruling from the BIR reconfirming that it
is subject to VAT at zero-rating. On this basis,
BWSCMI applied for a refund of the output VAT
it paid.
a. Is BWSCMI subject to the 10% VAT or
is it zero rated ?
SUGGESTED ANSWER: Yes. BWSCMI is not
zero rated and is subject to the 10% VAT. It is rendering
service for the Consortium which is not doing business in
the Philippines. Zero-rating finds application only where
the recipient of the services are other persons doing
business outside of the Philippines. BWSCMI provides
services to the Consortium which by virtue of its contract
with NAPOCOR is doing business within the Philippines.
(Commissioner of Internal Revenue v. Burmeister and Wain
Scandinavian Contractor Mindanao, Inc., G. R. No. 153205,
January 22, 2007)
b. Could it obtain a refund of the VAT it
paid through the VAP ? Explain.
SUGGESTED ANSWER: Yes. BWSCMI is entitled
to refund of the 10% output VAT it paid the based on the
non-retroactivity of the prejudicial revocation of the BIR
Rulings which held that its services are subject to 0%
VAT and which BWSCMI invoked in applying for refund of
the output VAT. (Commissioner of Internal Revenue v.
Burmeister and Wain Scandinavian Contractor Mindanao,
Inc., supra)
NOTES AND COMMENTS:
a. Do not confuse the BWSCMI case
with the American Express case. American
Express International, Inc. (Philippine Branch)] is a VAT-
registered person that facilitates the collection and
payment of receivables belonging to its non-resident
foreign client [American Express International, Inc.
(Hongkong Branch)], for which it gets paid in acceptable
foreign currency inwardly remitted and accounted for in
accordance with BSP rules and regulations.
(Commissioner of Internal Revenue v. Burmeister and
Wain Scandinavian Contractor Mindanao, Inc., G. R. No.
153205, January 22, 2007)
42. What are VAT-Exempt transactions ?
SUGGESTED ANSWER: The sale of goods or
 38
properties and/or services and the use or lease of
properties that is
b. not subject to VAT (output tax) and
c. the seller is not allowed any tax credit on
VAT (input tax) purchases.
The person making the exempt sale of goods,
properties or services shall not bill any output tax to his
customers because the said transaction is not subject to
VAT. [Rev. Regs. No. 16-2005, Sec. 4.109-1 (A), arrangement
and numbering supplied]
43. VAT-exempt transactions
distinguished from VAT-exempt entities.
a.
An exempt transaction, on the one hand, involves
goods or services which, by their nature, are specifically
listed in and expressly exempted from the VAT under the
Tax Code, without regard to the tax status VAT-exempt
or not of the party to the transaction.
An exempt party, on the other hand, is a person or
entity granted VAT exemption under the Tax Code, a
special law or an international agreement to which the
Philippines is a signatory, and by virtue of which its
taxable transactions become exempt from VAT.
[Commissioner of Internal Revenue v. Toshiba Information
Equipment (Phils.), Inc., G. R. No. 150154, August 9, 2005]
b. An exempt transaction shall not be the
subject of any billing for output VAT but it shall not also be
allowed any input tax credits WHILE an exempt party
being zero-rated is allowed to claim input tax credits.
44. Transactions are exempt from VAT.
(Subject to the election by a VAT-registered person not to
be subject to the value-added tax), the following shall be
exempt from VAT:
(A) Sale or importation of agricultural and marine
food products in their original state, livestock and poultry
of a kind generally used as, or yielding or producing foods
for human consumption; and breeding stock and genetic
materials therefor.
Livestock shall include cows, bulls and calves,
pigs, sheep, goats and rabbits. Poultry shall include
fowls, ducks, geese and turkey, Livestock or poultry does
not include fighting cocks, race horses, zoo animals and
other animals generally considered as pets.
Marine food products shall include fish and
crustaceans, such as, but not limited to, eels, trout,
lobster, shrimps, prawns, oysters, mussels and clams.
Meat, fruit, fish, vegetables and other agricultural
and marine food Products classified under this paragraph
shall be considered in their original state even if they have
undergone the simple processes of preparation or
preservation for the market, such as freezing, drying,
salting, broiling, roasting, smoking or stripping, including
those using advanced technological means of packaging,
such as shrink wrapping in plastics, vacuum packing,
tetra-pack, and other similar packaging methods.
Polished and/or husked rice, corn grits, raw cane sugar
and molasses, ordinary salt, and copra shall be
considered in their original state.
Sugar whose content of sucrose by weight, in the
dry state, has a polarimeter reading of 99.5o and above
are presumed to be refined sugar.
Cane sugar produced from the following shall be
presumed, for internal revenue purposes, to be refined
sugar:
(1) product of a refining process,
(2) products of a sugar refinery, or
(3) product of a production line of a sugar mill
accredited by the BIR to be producing sugar with
polarimeter reading of 99.5o and above, and for which the
quedanissued therefor, and verified by the Sugar
Regulatory Administration, identifies the same to be of a
polarimeter reading of 99.5o and above.
Bagasse is not included in the exemption provided
for under this section.
(B) Sale or importation of fertilizers; seeds,
seedlings and fingerlings; fish, prawn, livestock and
poultry feeds, including ingredients, whether locally
produced or imported, used in the manufacture of finished
feeds (except specialty feeds for race horses, fighting
cocks, aquarium fish, zoo animals and other animals
generally considered as pets);
Specialty feeds refers to non-agricultural feeds or
food for race horses, fighting cocks, aquarium fish, zoo
animals and other animals generally considered as pets.
(C) Importation of personal and household
effects belonging to the residents of the Philippines
returning from abroad and nonresident citizens coming to
resettle in the Philippines: Provided, That such goods are
exempt from customs duties under the Tariff and Customs
Code of the Philippines;
(D) Importation of professional instruments and
implements, wearing apparel, domestic animals, and
personal household effects (except any vehicle, vessel,
aircraft, machinery, other goods for use in the
manufacture and merchandise of any kind in commercial
quantity) belonging to persons coming to settle in the
Philippines, for their own use and not for sale, barter or
exchange, accompanying such persons, or arriving within
ninety (90) days before or after their arrival, upon the
production of evidence satisfactory to the Commissioner
of Internal Revenue, that such persons are actually
coming to settle in the Philippines and that the change of
residence is bona fide;
(E) Services subject to percentage tax under Title
V of the Tax Code, as enumerated below:
(1) Sale or lease of goods or properties
or the performance of services of non-VAT-
registered persons, other than the transactions
mentioned in paragraphs (A) to (U) of Sec. 109
(1) of the Tax Code, the annual sales and/or
receipts of which does not exceed the amount of
One Million Five Hundred thousand Pesos
(P1,500,000.00), Provided, That not later than
January 31, 2009 and every three (3) years
thereafter, the amount herein stated shall be
adjusted to its present value using the Consumer
Price Index, as published by the National
Statistics Office (NSO). (Sec. 116, Tax Code)
 39
(2) Services rendered by domestic
common carriers by land for the transport of
passengers and keepers of garages. (Sec. 117)
(3) Services rendered by international
air/shipping carriers. (Sec. 118)
(4) Service rendered by franchise
grantees of radio and/or television broadcasting
whose annual gross receipts of the preceding
year do not exceed Ten Million Pesos
(P10,000,000.00) and by franchises of gas and
water utilities. (Sec. 119)
(5) Service rendered for overseas
dispatch message or conversation originating
from the Philippines. (Sc. 120)
(6) Services rendered by any person,
company or corporation (except purely
cooperative companies or associations ) doing
life insurance business of any sort in the
Philippines. (Sec. 123)
(7) Services rendered by fire, marine or
miscellaneous insurance agents of foreign
insurance companies. (Sec. 124)
(8) Services of proprietors, lessees or
operators of cockpits, cabarets, night or day
clubs, boxing exhibitions professional basketball
games, jai-Alai and race tracks. (Sec. 125). and
(9) Receipts on sale, barter or exchange
of shares of stock listed and traded through the
local stock exchange or through initial public
offering. (Sec. 127)
(F) Services by agricultural contract growers
and milling for others of palay into rice, corn into grits and
sugar cane into raw sugar;
Agricultural contract growers refers to those
persons producing for others poultry, livestock or other
agricultural and marine food products in their original
state.
(G) Medical, dental, hospital and veterinary
services except those rendered by professionals;
Laboratory services are exempted. If the hospital
or clinic operates a pharmacy or drug store, the sale of
drugs and medicine is subject to VAT.
(H) Educational services rendered by private
educational institutions, duly accredited by the
Department of Education (DEPED), the Commission on
Higher Education (CHED), the Technical Education And
Skills Development Authority (TESDA) and those
rendered by government educational institutions;
Educational services shall refer to academic,
technical or vocational education provided by private
educational institutions duly accredited by the DepED, the
CHED and TESDA and those rendered by government
educational institutions and it does not include seminars,
in-service training, review classes and other similar
services rendered by persons who are not accredited by
the DepED, the CHED and/or the TESDA.
(I) Services rendered by individuals pursuant to
an employer-employee relationship;
(J) Services rendered by regional or area
headquarters established in the Philippines by
multinational corporations which act as supervisory,
communications and coordinating centers for their
affiliates, subsidiaries or branches in the Asia-Pacific
Region and do not earn or derive income from the
Philippines;
(K) Transactions which are exempt under
international agreements to which the Philippines is a
signatory or under special laws, except those under
Presidential Decree No. 529 Petroleum Exploration
Concessionaires under the Petroleum Act of 1949; and;
(L) Sales by agricultural cooperatives duly
registered with the Cooperative Development Authority
(CDA) to their members as well as sale of their produce,
whether in its original state or processed form, to non-
members; their importation of direct farm inputs,
machineries and equipment, including spare parts
thereof, to be used directly and exclusively in the
production and/or processing of their produce;
(M) Gross receipts from lending activities by
credit or multi-purpose cooperatives duly registered and
in good standing with the Cooperative Development
Authority;
(N) Sales by non-agricultural, non-electric and
non-credit cooperatives duly registered with the
Cooperative Development Authority: Provided, That the
share capital contribution of each member does not
exceed Fifteen thousand pesos (P15,000) and regardless
of the aggregate capital and net surplus ratably distributed
among the members;
Importation by non-agricultural, non-electric and
non-credit cooperatives of machineries and equipment,
including spare parts thereof, to be used by them are
subject to VAT.
(O) Export sales by persons who are not VAT-
registered;
(P) Sale of real properties not primarily held for
sale to customers or held for lease in the ordinary course
of trade or business, or real property utilized for low-cost
and socialized housing as defined by Republic Act No.
7279, otherwise known as the Urban Development and
Housing Act of 1992, and other related laws, such as RA
No. 7835 and RA No. 8765, residential lot valued at One
million five hundred thousand pesos (P 1,500,000) and
below, house and lot, and other residential dwellings
valued at Two million five hundred thousand pesos (P
2,500,000) and below: Provided, That not later than
January 31, 2009 and every three (3) years thereafter, the
amounts herein stated shall be adjusted to their present
values using the Consumer Price Index, as published by
the National Statistics Office (NSO);
(Q) Lease of a residential unit with a monthly
rental not exceeding Ten thousand pesos (P 10,000)
Provided, That not later than January 31, 2009 and every
three (3) years thereafter, the amount herein stated shall
be adjusted to its present value using the Consumer Price
Index as published by the National Statistics Office
(NSO);
(R) Sale, importation, printing or publication of
books and any newspaper, magazine, review or bulletin
which appears at regular intervals with fixed prices for
 40
subscription and sale and which is not devoted principally
to the publication of paid advertisements;
(S) Sale, importation or lease of passenger or
cargo vessels and aircraft, including engine, equipment
and spare parts thereof for domestic or international
transport operations; Provided, that the exemption from
VAT on the importation and local purchase of passenger
and/or cargo vessels shall be limited to those of one
hundred fifty (150) tons and above, including engine and
spare parts of said vessels; Provided, further, that the
vessels be imported shall comply with the age limit
requirement, at the time of acquisition counted from the
date of the vessels original commissioning, as follows: (i)
for passenger and/or cargo vessels, the age limit is fifteen
years (15) years old, (ii) for tankers, the age limit is ten
(10) years old, and (iii) For high-speed passenger cars,
the age limit is five (5) years old, Provided, finally, that
exemption shall be subject to the provisions of section 4
of Republic Act No. 9295, otherwise known as The
Domestic Shipping Development Act of 2004.
(T) Importation of fuel, goods and supplies by
persons engaged in international shipping or air transport
operations; Provided, that the said fuel, goods and
supplies shall be used exclusively or shall pertain to the
transport of goods and/or passenger from a port in the
Philippines directly to a foreign port without stopping at
any other port in the Philippines; provided, further, that if
any portion of such fuel, goods or supplies is used for
purposes other than that mentioned in this paragraph,
such portion of fuel, goods and supplies shall be subject
to 10% VAT (now 12%);
(U) Services of banks, non-bank financial
intermediaries performing quasi-banking functions, and
other non-bank financial intermediaries; and
(V) Sale or lease of goods or properties
or the performance of services other than the transactions
mentioned in the preceding paragraphs, the gross annual
sales and/or receipts do not exceed the amount of One
million five hundred thousand pesos (P1,500,000):
Provided, That not later than January 31, 2009 and every
three (3) years thereafter, the amount herein stated shall
be adjusted to its present value using the Consumer Price
Index as published by the National Statistics Office
(NSO).
For purposes of the threshold of P1,500,000.00,
the husband and wife shall be cnsidered separate
taxpayers. However, the aggregation rule for each
taxpayer shall apply. For instance, if a profesional, aside
from the practice ofhis profession, also derives revenue
from other lines of business which are otherwise subject
to VAT, the same shall be combined for purposes of
determining whether the threshold has been exceeded.
Thus, the VAT-exempt sales shall to be icluded in
determining the threshold. [NIRC of 1997, Sec. 109 (1), as
amended by R. A. No. 9337; words in italics from Rev. Regs.
No. 16-2005, Sec. 4.109-1 (B), words in parentheses supplied]
45. Tax to be paid by persons
exempt from VAT.
a. Any person, whose sales or receipts are
exempt under Sec. 109 (1) (V) of the Tax Code,
(V) Sale or lease of goods or properties or
the performance of services other than the
transactions mentioned in the preceding
paragraphs, the gross annual sales and/or
receipts do not exceed the amount of One million
five hundred thousand pesos (P1,500,000):
Provided, That not later than January 31, 2009
and every three (3) years thereafter, the amount
herein stated shall be adjusted to its present
value using the Consumer Price Index as
published by the National Statistics Office (NSO),
from the payment of VAT and
b. who is not a VAT-registered person
c. shall pay a tax equivalent to three percent
(3%) of his gross monthly sales or receipts;
Provided, that cooperatives shall be exempt from
the three (3%) gross receipts tax herein imposed. (Rev.
Regs. No. 16-2005, Sec. 4.116-1, arrangement, numbering and
words in italics supplied)
RETURNS AND WITHHOLDING
1. Income tax returns being public
documents, until controverted by competent evidence,
are competent evidence, are prima facie correct with
respect to the entries therein. (Ropali Trading v. NLRC, et al.,
296 SCRA 309, 317)
2. Individuals required to file an income
tax return.
a. Every Filipino citizen residing in the
Philippines;
b. Every Filipino citizen residing outside the
Philippines on his income from sources within the
Philippines;
c. Every alien residing in the Philippines on
income derived from sources within the Philippines; and
d. Every nonresident alien engaged in trade or
business or in the exercise of profession in the Philippines.
[Sec. 51 (A) (1), NIRC of 1997]
3. Married individuals who are earning
purely compensation income allowed to file
separate returns.
4. Married individuals, whether citizens,
resident or non-resident aliens, who do not derive
income purely from compensation shall file a
consolidated return for the taxable year to include
the income of both spouses, but where it is
impracticable for the spouses to file one return, each
spouse may file a separate return of income but the returns
so filed shall be consolidated by the Bureau for purposes
of verification. [Section 51 (D) of the NIRC of 1997]
5. Computation of income tax for
married individuals whether citizens, resident or
 41
non-resident aliens, who do not derive income
purely from compensation required file a
consolidated return for the taxable year but could
not do so. For married individuals, the husband and
wife, subject to no. 2, supra,, shall compute separately
their individual income tax based on their respective total
taxable income: Provided, that if any income cannot be
definitely attributed to or identified as income exclusively
earned or realized by either of the spouses, the same
shall be divided equally between the spouses for the
purpose of determining their respective taxable income.
[2nd to the last par., Sec. 24 (A) (2), NIRC of 1997 as amended
by Rep. Act No. 9504]
6. Individuals who are not required to file
an income tax return.
a. An individual whose gross income does not
exceed his total personal and additional exemptions for
dependents, Provided, That a citizen of the Philippines and
any alien individual engaged in business or practice of
profession within the Philippines shall file an income tax
return regardless of the amount of gross income [Sec. 51
(A) (2), NIRC of 1997]
b. An individual with respect to pure
compensation income, derived from such sources within
the Philippines, the income tax on which has been
correctly withheld: Provided, That an individual deriving
compensation concurrently from two or more employers
at any time during the taxable year shall file an income tax
return [Sec. 51 (A) (2), NIRC of 1997, as amended by Rep. Act
No. 9504, paraphrasing supplied]
c. An individual whose sole income has been
subject to final withholding tax;
d. A minimum wage earner (is a worker in the
private sector paid the statutory minimum wage, or is an
employee in the public sector with compensation income
of not more than the statutory minimum wage in the non-
agricultural sector where he/she is assigned), an
individual who is exempt from income tax pursuant to the
provisions of the Tax Code and other laws, general or
special. [Sec. 51 (A) (2), NIRC of 1997 in relation to Sec. 22
(HH), both as amended by Rep. Act. 9504]
7. Minimum wage earners are exempt
from income taxation. That minimum wage earners
(is a worker in the private sector paid the statutory
minimum wage, or is an employee in the public sector with
compensation income of not more than the statutory
minimum wage in the non-agricultural sector where
he/she is assigned) shall be exempt from the payment of
income tax on their taxable income: Provided, further,
That the holiday pay, overtime pay, night shift differential
pay and hazard pay received by such minimum wage
earners shall likewise be exempt from income tax. [Sec. 51
(A) (2), NIRC of 1997 in relation to Sec. 22 (HH), both as amended
by Rep. Act. 9504]
8. An individual who is not required to
file an income tax return may nevertheless be
required to file an information return. [Sec. 51 (A)
(3), NIRC of 1997]
9. A corporation files its income tax
return and pays its income tax four (4) times
during a single taxable year. Quarterly returns are
required to be filed for the first three quarters, then a final
adjustment return is filed covering the total taxable income
for the whole taxable year, be it calendar or fiscal.
10. An individual earning from the
practice of his profession or who engages in
trade or business files his income tax return and
pays his income tax four (4) times during a single
taxable year. Quarterly returns are required to be filed
for the first three quarters, then an annual income tax return
is filed covering the total taxable income for the whole of
the previous calendar year.
11. The purpose of the above four (4)
times a year requirement is to make available
sufficient funds to meet the budgetary
requirements, on a quarterly basis thereby increasing
government liquidity. It also eases hardships on the part of
individuals who are required to make this four time return.
Thus, the taxpayer does not have to raise large sums of
money in order to pay the tax.
12. An individual earning purely
compensation income files only one annual
income tax return covering the total taxable
compensation income for the whole of the previous
calendar year.
13. Under the withholding tax system,
taxes imposed or prescribed by the NIRC of 1997
are to be deducted and withheld by the payors
from payments made to payees for the former to
pay directly to the Bureau of Internal Revenue. It
is also known as collection of the tax at source.
14. A withholding agent is explicitly made
personally liable under the Tax Code for the
payment of the tax required to be withheld, in order
to compel the withholding agent to withhold the tax under
any and all circumstances. In effect, the responsibility for
the collection of the tax as well as the payment thereof is
concentrated upon the person over whom the Government
has jurisdiction. (Filipinas Synthetic Fiber Corporation v. Court
of Appeals, et al., G.R. Nos. 118498 & 124377, October 12, 1999)
The system facilitates tax collection and reduces tax
evasion.
15. The two (2) types of withholding at
source are the 1) final withholding tax; and 2)
creditable withholding tax.
 42
16. Under the final withholding tax system
the amount of income tax withheld by the
withholding agent is constituted as a full and final
payment of the income due from the payee on the
said income. [1st sentence, 1st par., Sec. 2.57 (A), Rev. Regs.
No. 2-98]
The liability for payment of the tax rests primarily on
the payor or the withholding agent.. Thus, in case of his
failure to withhold the tax or in case of under withholding,
the deficiency tax shall be collected from the payor
withholding agent. The payee is not required to file an
income tax return for the particular income.
17. Under the creditable withholding tax
system, taxes withheld on certain income
payments are intended to equal or at least
approximate the tax due from the payee on the
said income. The income recipient is still required to file
an income tax return and/or pay the difference between the
tax withheld and the tax due on the income. [1st and 2nd
sentences, Sec. 257(B), Rev. Regs. No. 2-98]
18. The two kinds of creditable
withholding taxes are (a) taxes withheld on income
payments covered by the expanded withholding tax; and
(b) taxes withheld on compensation income.
19. Payments to the following are exempt
from the requirement of withholding or when no
withholding taxes required:
a. National Government and its
instrumentalities including provincial, city, or municipal
governments;
b. Persons enjoying exemption from payment of
income taxes pursuant to the provisions of any law, general
or special, such as but not limited to the following:
1) Sales of real property by a corporation
which is registered with and certified by the HLURB
or HUDCC as engaged in socialized housing project
where the selling price of the house and lot or only
the lot does not exceed P180,000.00 in Metro
Manila and other highly urbanized areas and
P150,000.00 in other areas or such adjusted
amount of selling price for socialized housing as
may later be determined and adopted by the
HLURB;
2) Corporations registered with the Board of
Investments and enjoying exemptions from income
under the Omnibus Investment Code of 1997;
3) Corporations exempt from income tax
under Sec. 30, of the Tax Code, like the SSS, GSIS,
the PCSO, etc. However, income payments arising
from any activity which is conducted for profit or
income derived from real or personal property shall
be subject to a withholding tax. (Sec. 57.5, Rev.
Regs. No. 2-98)
20. For tax amnesty purposes, the
withholding agent is not a taxpayer. He is made to
pay the tax where he fails to withhold as a penalty and not
because the tax is due from him. (Commissioner of Internal
Revenue v. Court of Appeals, et al., G.R. No. 108576, January
20, 1999, the Anscor case)
PENALTIES, INTERESTS AND
SURCHARGES
1. Surtaxes or surcharges, also known as the
civil penalties, are the amounts imposed in addition to the
tax required.
They are in the nature of penalties and shall be
collected at the same time, in the same manner, and as
part of the tax. [Sec.248 (A), NIRC of 1997]
2. What are the two (2) kinds of civil
penalties ?
SUGGESTED ANSWER:
a. the 25% surcharge for late filing or late
payment [Sec. 248 (A), NIRC of 1997] (also known as the
delinquency surcharge), and
b. the 50% willful neglect or fraud surcharge.
[Sec. 248 (B), Ibid.]
3. Define deficiency income tax.
SUGGESTED ANSWER: Deficiency income tax is
the amount by which the tax imposed under the NIRC of
1997 exceeds the amount shown as the tax due by the
taxpayer upon his return. [Sec. 56 (B) (1), NIRC of 1997]
4. Deficiency interest, defined. The
interest assessed and collected on any unpaid amount of
tax at the rate of 20% per annum or such higher rate as
may be prescribed by regulations, from the date prescribed
for payment until the amount is fully paid. [Sec. 249 (A) (B),
NIRC of 1997]
5. Delinquency interest, defined. The
interest assessed and collected on the unpaid amount until
fully paid where there is failure on the part of the taxpayer
to pay the amount die on any return required to be filed; or
the amount of the tax due for which no return is required;
or a deficiency tax, or any surcharge or interest thereon, on
the date appearing in the notice and demand by the
Commissioner of Internal Revenue. [Sec.249 (c), NIRC of
1997]
6. After resolving the issues the BIR
Commissioner reduced the assessment. Was it
proper to impose delinquency interest despite the
reduction of the assessment ? Why ?
SUGGESTED ANSWER: Yes. The intention of the
law is to discourage delay in the payment of taxes due to
the State and in this sense the surcharge and interest
charged are not penal but compensatory in nature they
are compensation to the State for the delay in payment, or
for the concomitant tuse of the funds by the taxpayer
beyond the date he is supposed to have paid them to the
 43
State. (Bank of the Philippine Islands v. Commissioner of Internal
Revenue, G. R. No. 137002, July 27, 2006)
7. Compromise penalty is the amount
agreed upon between the taxpayer and the Government to
be paid as a penalty in cases of a compromise.
8. As a result of divergent rulings on
whether it is subject to tax or not, the taxpayer
was not able to pay his taxes on time. Imposed
surcharges and interests for such delay, the
taxpayer not invokes good faith with the BIR
countering by saying that good faith is not a valid
defense for violation of a special law.
Furthermore, the BIR further raises the defense
that the government is not bound by the errors of
its agents. Who is correct ?
SUGGESTED ANSWER: The taxpayer is correct.
The settled rule is that good faith and honest belief that one
is not subject to tax on the basis of previous interpretation
of government agencies tasked to implement the tax, are
sufficient justification to delete the imposition of
surcharges. (Michel J. Lhuillier Pawnshop, Inc. v.
Commissioner of Internal Revenue, G. R. No. 166786, September
11, 2006)
REPUBLIC ACT NO. 1125, CREATING
THE COURT OF TAX APPEALS
INCLUDING JURISDICTION OF THE
CTA, AS AMENDED
COURT OF TAX APPEALS, IN GENERAL
1. Discuss the role of the judiciary in
taxation. SUGGESTED ANSWER: The role of the
judiciary is to be the sympathetic or vigilant court which
would check injustices or abuses of the legislative and
administrative agents of the State in their exercise of the
power of taxation.
2. What is the nature and composition of
the Court of Tax Appeals ?
SUGGESTED ANSWER: The
Court of Tax Appeals is the special tax court created under
Republic Act No. 1125, as amended, and is composed of
a Presiding Justice and eight (8) Associate Justices,
organized into three (3) divisions.
3. What are the purposes for the
creation of the Court of Tax Appeals ?
SUGGESTED
ANSWER:
a. To prevent delay in the disposition of tax
cases by the then Courts of First Instance (now RTCs), in
view of the backlog of civil, criminal, and cadastral cases
accumulating in the dockets of such courts; and
b. To have a body with special knowledge which
ordinary Judges of the then Courts of First Instance (now
RTCs), are not likely to possess, thus providing for an
adequate remedy for a speedy determination of tax cases.
(Ursal v. Court of Tax Appeals, et al., 101 Phil. 209)
4. Jurisdiction of the Court of Tax
Appeals.
a. Exclusive appellate jurisdiction to review
by appeal, as herein provided:
1. Decisions of the Commissioner of Internal
Revenue in cases involving disputed assessments,
refunds of internal revenue taxes, fees or other charges,
penalties, in relation thereto, or other matters arising under
the National Internal Revenue Code or other laws
administered by the Bureau of Internal Revenue;
(DIVISION)
2. Inaction by the Commissioner of Internal
Revenue in cases involving disputed assessments,
refunds or internal revenue taxes, fees or other charges,
penalties in relation thereto, or other matter arising under
the National Internal Revenue Code or other laws
administered by the Bureau of Internal Revenue, where the
National Internal Revenue Code provides a specific period
of action, in which case the inaction shall be deemed a
denial; (The inaction on refunds in two years from the time
tax was paid. Thus, if the prescriptive period of two years
is about to expire, the taxpayer should interpose a petition
for review with the CTA DIVISION)
3. Decisions, orders or resolutions of the
Regional Trial Courts in local tax cases originally decided
or resolved by them in the exercise of their original or
appellate jurisdiction; (If original DIVISION; if appellate EN
BANC)
4. Decisions of the Commissioner of Customs in
cases involving liability for customs duties, fees or other
money charges, seizure, detention or release of property
affected, fines, forfeitures or other penalties in relation
thereto, or other matters arising under the Customs Law or
other laws administered by the Bureau of Customs;
(DIVISION)
5. Decisions of the Central Board of
Assessment Appeals in the exercise of its appellate
jurisdiction over cases involving the assessment and
taxation of real property originally decided by the provincial
or city board of assessment appeals; (EN BANC)
6. Decisions of the Secretary of Finance on
customs cases elevated to him automatically for review
from decisions of the Commissioner of Customs which are
adverse to the Government under Section 2315 of the
Tariff and Customs Code; (This has reference to forfeiture
cases where the decision is to release the seized articles
DIVISION)
7. Decisions of the Secretary of Trade and
Industry, in case of nonagricultural product, commodity or
article, and the Secretary of Agriculture in the case of
agricultural product, commodity or article, involving
dumping and countervailing duties under Section 301 and
302, respectively, of the Tariff and Customs Code, and
safeguard measures under Republic Act No. 8800, where
 44
either party may appeal the decision to impose or not to
impose said duties. (DIVISION)
b. Jurisdiction over cases involving criminal
offenses as herein provided:
1. Exclusive original jurisdiction over all
criminal cases arising from violations of the National
Internal Revenue Code or Tariff and Customs Code and
other laws administered by the Bureau of Internal Revenue
or the Bureau of Customs: Provided, however, That
offenses or felonies mentioned in this paragraph where the
principal amount of taxes and fees, exclusive of charges
and penalties claimed, is less than One million pesos
(P1,000,000.00) or where there is no specified amount
claimed shall be tried by the regular Courts and the
jurisdiction of the CTA shall be appellate. Any provision of
law or the Rules of Court to the contrary notwithstanding,
the criminal action and the corresponding civil action for the
recovery of civil liability for taxes and penalties shall at all
times be simultaneously instituted with, and jointly
determined in the same proceeding by the CTA, the filing
of the criminal action being deemed to necessarily carry
with it the filing of the civil action, and no right to reserve
the filing of such civil action separately from the civil action
will be recognized.
2. Exclusive appellate jurisdiction in
criminal offenses:
a) Over appeals from the judgments,
resolutions or orders of the Regional Trial Courts in
tax cases originally decided by them, in their respective
territorial jurisdiction.
b) Over petitions for review of the
judgments, resolutions or orders of the Regional Trial
Courts in the exercise of their appellate jurisdiction over
tax cases originally decided by the Metropolitan Trial
Courts, Municipal Trial Courts and Municipal Circuit
Trial Courts in their respective jurisdiction.
c. Jurisdiction over tax collection cases:
1. Exclusive original jurisdiction in tax collection
cases involving final and executory assessments for taxes,
fees, charges and penalties: Provided, however, That
collection cases where the principal amount of taxes and
fees, exclusive of charges and penalties, claimed is less
than One million pesos (P1,000,000) shall be tried by the
proper Municipal Trial Court, Metropolitan Trial Court and
Regional Trial Court.
2. Exclusive appellate jurisdiction in tax
collection cases:
a) Over appeals from judgments,
resolutions, or orders of the Regional Trial Courts in tax
collection cases originally decided by them, in their
respective territorial jurisdiction.
b) Over petitions for review of the
judgments, resolutions or orders of the Regional Trial
Courts in the exercise of their appellate jurisdiction over
tax collection cases originally decided by the
Metropolitan Trial Courts, Municipal Trial Courts and
Municipal Circuit Trial Courts, in their respective
jurisdiction. (Sec. 7, R. A. No. 1125, as amended by R.
A. No. 9282, emphasis and words in parentheses supplied)
The petition for review to be filed with the
CTA en banc as the mode for appealing a
decision, resolution, or order of the CTA
Division, under Section 18 of Republic Act No.
1125, as amended, is not a totally new remedy,
unique to the CTA, with a special application or
use therein. To the contrary, the CTA merely adopts
the procedure for petitions for review and appeals long
established and practiced in other Philippine courts.
Accordingly, doctrines, principles, rules, and precedents
laid down in jurisprudence by this Court as regards
petitions for review and appeals in courts of general
jurisdiction should likewise bind the CTA, and it cannot
depart therefrom. (Santos v. People, et al, G. R. No. 173176,
August 26, 2008)
5. It is the Regional Trial Court that
has jurisdiction to rule upon the constitutionality
of a tax law or a regulation issued by the taxing
authorities. Where what is assailed is the validity
or constitutionality of a law, or a rule or regulation issued
by the administrative agency in the performance of its
quasi-legislative function, the regular courts have
jurisdiction to pass upon the same. The determination of
whether a specific rule or set of rules issued by an
administrative agency contravenes the law or the
constitution is within the jurisdiction of the regular courts.
Indeed, the Constitution vests the power of
judicial review or the power to declare a law, treaty,
international or executive agreement, presidential decree,
order, instruction, ordinance, or regulation in the courts,
including the regional trial courts. This is within the scope
of judicial power, which includes the authority of the courts
to determine in an appropriate action the validity of the
acts of the political departments. Judicial power includes
the duty of the courts of justice to settle actual
controversies involving rights which are legally
demandable and enforceable, and to determine whether
or not there has been a grave abuse of discretion
amounting to lack or excess of jurisdiction on the part of
any branch or instrumentality of the Government. (British
American Tobacco v. Camacho et al., G. R. No. 163583, August
20, 2008 with an intervenor)
NOTES AND COMMENTS: The above doctrine
supersedes Asia International Auctioneers, Inc., etc et al.,
.v. Parayno, Jr., etc.,, et al., G. R. No. 103445, December
18, 2007 which ruled that it is the Court of Tax Appeals that
has jurisdiction relative to matters involving the
constitutionality of regulations issued by the BIR. The
reason was that this falls under the concept of decisions of
the BIR Commissioner on other matter arising under the
provisions of laws administered by the Commission.
Issuance of revenue regulations are authorized under the
NIRC.
British American Tobacco reversed Asia
International Auctioneers upon the concept of the
judiciarys expanded power.
 45
6. Instances where the Court of Tax
Appeals would have jurisdiction even if there is
no decision of the Commissioner of Customs:
a. Decisions of the Secretary of Trade and
Industry or the Secretary of Agriculture in anti-dumping and
countervailing duty cases are appealable to the Court of
Tax Appeals within thirty (30) days from receipt of such
decisions.
b. In case of automatic review by the Secretary of
Finance in seizure or forfeiture cases where the value of
the importation exceeds P5 million or where the decision of
the Collector of Customs which fully or partially releases
the shipment seized is affirmed by the Commissioner of
Customs.
c. In case of automatic review by the Secretary of
Finance of a decision of a Collector of Customs acting
favorably upon a customs protest.
ASSESSMENT OF INTERNAL REVENUE
TAXES
1. Outline of tax remedies of a taxpayer
and the government relative to ASSESSMENT of
internal revenue taxes.
a. The taxpayer files his tax return.
b. A Letter of Authority is issued authorizing BIR
examiner to audit or examine the tax return and determines
whether the full and complete taxes have been paid.
c. If the examiner is satisfied that the tax return
is truly reflective of the taxable transaction and all taxes
have been paid, the process ends. However, if the
examiner is not satisfied that the tax return is truly reflective
of the taxable transaction and that the taxes have not been
fully paid, a Notice of Informal Conference is issued inviting
the taxpayer to explain why he should not be subject to
additional taxes.
d. If the taxpayer attends the informal
conference and the examiner is satisfied with the
explanation of the taxpayer, the process is again ended.
If the taxpayer ignores the invitation to the informal
conference, or if the examiner is not satisfied with
taxpayers explanation,, and he believes that proper taxes
should be assessed, the Commissioner of Internal
Revenue or his duly authorized representative shall then
notify the taxpayer of the findings in the form of a pre-
assessment notice. The pre-assessment notice requires
the taxpayer to explain within fifteen (15) days from receipt
why no notice of assessment and letter of demand for
additional taxes should be directed to him.
e. If the Commissioner is satisfied with the
explanation of the taxpayer, then the process is again
ended.
If the taxpayer ignores the pre-assessment notice
by not responding or his explanations are not accepted by
the Commissioner, then a notice of assessment and a letter
of demand is issued.
The notice of assessment must be issued by the
Commissioner to the taxpayer within a period of three (3)
years from the time the tax return was filed or should have
been filed whichever is the later of the two events. Where
the taxpayer did not file a tax return or where the tax return
filed is false or fraudulent, then the Commissioner has a
period of ten (10) years from discovery of the failure to file
a tax return or from discovery of the fraud within which to
issue an assessment notice. The running of the above
prescriptive periods may however be suspended under
certain instances.
The notice of assessment must be issued within
the prescriptive period and must contain the facts, law and
jurisprudence relied upon by the Commissioner. Otherwise
it would not be valid.
f. The taxpayer should then file an
administrative protest by filing a request for reconsideration
or reinvestigation within thirty (30) days from receipt of the
assessment notice.
The taxpayer could not immediately interpose an
appeal to the Court of Tax Appeals because there is no
decision yet of the Commissioner that could be the subject
of a review.
To be valid the administrative protest must be filed
within the prescriptive period, must show the error of the
Bureau of Internal Revenue and the correct computations
supported by a statement of facts, and the law and
jurisprudence relied upon by the taxpayer. There is no
need to pay under protest. If the protest was not
seasonably filed the assessment becomes final and
collectible and the Bureau of Internal Revenue could use
its administrative and judicial remedies in collecting the tax.
g. Within sixty (60) days from filing of the
protest, all relevant supporting documents shall be
submitted, otherwise the assessment shall become final
and collectible and the BIR could use its administrative and
judicial remedies to collect the tax.
Once an assessment has become final and
collectible, not even the BIR Commissioner could change
the same. Thus, the taxpayer could not pay the tax, then
apply for a refund, and if denied appeal the same to the
Court of Tax Appeals.
h. If the protest is denied in whole or in part, or
is not acted upon within one hundred eighty (180) days
from the submission of documents, the taxpayer adversely
affected by the decision or inaction may appeal to the Court
of Tax Appeals within thirty (30) days from receipt of the
adverse decision, or from the lapse of the one hundred
eighty (180-) day period, with an application for the
issuance of a writ of preliminary injunction to enjoin the BIR
from collecting the tax subject of the appeal.
If the taxpayer fails to so appeal, the denial of the
Commissioner or the inaction of the Commissioner would
result to the notice of assessment becoming final and
collectible and the BIR could then utilize its administrative
and judicial remedies to collect the tax.
i. A decision of a division of the Court of Tax
Appeals adverse to the taxpayer or the government may
be the subject of a motion for reconsideration or new trial,
a denial of which is appealable to the Court of Tax Appeals
en banc by means of a petition for review.
 46
The Court of Tax Appeals, has a period of twelve
(12) months from submission of the case for decision within
which to decide.
j. If the decision of the Court of Tax Appeals en
banc affirms the denial of the protest by the Commissioner
or the assessment in case of failure by the Commissioner
to decide the taxpayer must file a petition for review on
certiorari with the Supreme Court within fifteen (15) days
from notice of the judgment on questions of law. An
extension of thirty (30) days may for justifiable reasons be
granted. If the taxpayer does not so appeal, the decision
of the Court of Tax Appeals would become final and this
has the effect of making the assessment also final and
collectible. The BIR could then use its administrative and
judicial remedies to collect the tax.
2. The word assessment when used in
connection with taxation, may have more than
one meaning. More commonly the word assessment
means the official valuation of a taxpayers property for
purpose of taxation. The above definition of assessment
finds application under tariff and customs taxation as well
as local government taxation.
For real property taxation, there may be a special
meaning to the burdens that are imposed upon real
properties that have been benefited by a public works
expenditure of a local government. It is sometimes
called a special assessment or a special levy.
(Commissioner of Internal Revenue v. Pascor Realty and
Development Corporation, et al., G.R. No. 128315, June 29,
1999)
For internal revenue taxation assessment as
laying a tax. The ultimate purpose of an assessment to
such a connection is to ascertain the amount that each
taxpayer is to pay. (Ibid.)
3. An assessment is a notice duly sent to
the taxpayer which is deemed made only when
the BIR releases, mails or sends such notice to
the taxpayer. (Commissioner of Internal Revenue v. Pascor
Realty and Development Corporation, et al., G.R. No. 128315,
June 29, 1999)
4. Self-assessed tax, defined. A tax that
the taxpayer himself assesses or computes and pays to the
taxing authority. It is a tax that self-assessed by the
taxpayer without the intervention of an assessment by the
tax authority to create the tax liability.
The Tax Code follows the pay-as-you-file system of
taxation under which the taxpayer computes his own tax
liability, prepares the return, and pays the tax as he files the
return. The pay-as-you-file system is a self-assessing tax
return.
Internal revenue taxes are self-assessing. (Dissent
of J. Carpio in Philippine National Oil Company v. Court of
Appeals, et al., G. R. No. 109976, April 26, 2005 and companion
case)
A clear example of a self-assessed tax is the annual
income tax, which the taxpayer himself computes and pays
without the intervention of any assessment by the BIR. The
annual income tax becomes due and payable without need
of any prior assessment by the BIR. The BIR may or may
not investigate or audit the annual income tax return filed
by the taxpayer. The taxpayers liability for the income tax
does not depend on whether or not the BIR conducts such
subsequent investigation or audit.
However, if the taxing authority is first required to
investigate, and after such investigation to issue the tax
assessment that creates the tax liability, then the tax is no
longer self-assessed. (Ibid.)
5. Sec. 6 (B) of the NIRC of 1997 allows
the BIR to make or amend a tax return from his
own knowledge or obtained through testimony or
otherwise. Thus, the Commissioner of Internal Revenue
investigates any circumstance which led him to believe
that the taxpayer had taxable income larger than that
reported. Necessarily, this inquiry would have to be outside
of the books because they supported the return as filed.
He may take the sworn testimony of the taxpayer, he may
take the testimony of third parties; he may examine and
subpoena, if necessary, traders and brokers accounts and
books and the taxpayers books of accounts. The
Commissioner is not bound to follow any set of patterns.
The existence of unreported income may be shown by any
particular proof that is available in the circumstances of the
particular situation. (Commissioner of Internal Revenue v.
Hantex Trading Co., Inc. G. R. No. 136975, March 31, 2005)
6. General rule: When the Commissioner
of Internal Revenue may rely on estimates. The
rule is that in the absence of accounting records of a
taxpayer, his tax liability may be determined by estimation.
The petitioner (Commissioner of Internal Revenue) is not
required to compute such tax liabilities with mathematical
exactness. Approximation in the calculation of taxes due
is justified. To hold otherwise would be tantamount to
holding that skillful concealment is an invincible barrier to
proof. (Commissioner of Internal Revenue v. Hantex Trading
Co., Inc. G. R. No. 136975, March 31, 2005)
However, the rule does not apply where the
estimation is arrived at arbitrarily and capriciously. (Ibid.)
7. Meaning of "best evidence obtainable"
under Sec. 6 (B), NIRC of 1997. This means that the
original documents must be produced. If it could not be
produced, secondary evidence must be adduced. (Hantex
Trading Co., Inc. v. Commissioner of Internal Revenue, CA - G.R.
SP No. 47172, September 30, 1998)
8. The following are the general methods
developed by the Bureau of Internal Revenue for
reconstructing a taxpayers income where the
records do not show the true income or where no return
was filed or what was filed was a false and fraudulent return
(a) Percentage method;
(b) Net worth method.;
(c) Bank deposit method;
(d) Cash expenditure method;
(e) Unit and value method;
 47
(f) Third party information or access to records
method;
(g) Surveillance and assessment method.
(Chapter XIII. Indirect Approach to Investigation, Handbook
on Audit Procedures and Techniques Volume I, pp. 68-
74)
9. Third party information or access to
records method. The BIR may require third parties,
public or private to supply information to the BIR, and thus,
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 or
multinational companies, joint accounts, associations, joint
ventures or consortia and registered partnerships, and their
members; xxx [Sec. 5 (B), NIRC of 1997)
10. A pre-assessment notice is a letter sent
by the Bureau of Internal Revenue to a taxpayer asking him
to explain within a period of fifteen (15) days from receipt
why he should not be the subject of an assessment notice.
It is part of the due process rights of a taxpayer.
As a general rule, the BIR could not issue an
assessment notice without first issuing a pre-assessment
notice because it is part of the due process rights of a
taxpayer to be given notice in the form of a pre-assessment
notice, and for him to explain why he should not be the
subject of an assessment notice.
11. Instances where a pre-assessment
notice is not required before a notice of
assessment is sent to the taxpayer.
a. When the finding for any deficiency tax is the
result of mathematical error in the computation of the tax
as appearing on the face of the return; or
b. When a discrepancy has been determined
between the tax withheld and the amount actually remitted
by the withholding agent; or
c. When a taxpayer 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 table year; or
d. When the excess tax due on excisable articles
has not been paid; or
e. When an article locally purchased or imported by
an exempt person, such as, but not limited to vehicles,
capital equipment, machineries and spare parts, has been
sold, trade or transferred to non-exempt persons. (Sec. 228,
NIRC of 1997)
12. Prescriptive periods for making
assessments of internal revenue taxes.
a. Three (3) years from the last day within which
to file a return or when the return was actually filed,
whichever is later (Sec. 203, NIRC of 1997). The CIR has
three (3) years from the date of actual filing of the tax
return to assess a national internal revenue tax or to
commence court proceedings for the collection thereof
without an assessment. [Bank of Philippine Islands (Formerly
Far East Bank and Trust Company) v. Commissioner of Internal
Revenue, G. R. No. 174942, March 7, 2008]
b. ten years from discovery of the failure to file
the tax return or discovery of falsity or fraud in the return
[Sec. 222 (a), NIRC of 1997[ ; or
c. within the period agreed upon between the
government and the taxpayer where there is a waiver of the
prescriptive period for assessment (Sec. 222 (b), NIRC of
1997).
13. Purpose of period of limitations in
taxation. 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. [Commissioner of Internal Revenue v.
B.F. Goodrich Phils, Inc., (now Sime Darby International Tire Co.,
Inc.), et al., G.R. No. 104171, February 24, 1999, 303 SCRA 546;
Philippine Journalists, Inc. v. Commissioner of Internal Revenue,
G. R. No. 162852, December 16, 2004], as well as their
assessments.
The law prescribing a limitation of actions for the
collection of the income tax is beneficial both to the
Government and to its citizens; to the Government
because tax officers would be obliged to act promptly in the
making of assessment, and to citizens because after the
lapse of the period of prescription citizens would have a
feeling of security against unscrupulous tax agents who will
always find an excuse to inspect the books of taxpayers,
not to determine the latters real liability, but to take
advantage of every opportunity to molest peaceful, law-
abiding citizens. Without such a legal defense taxpayers
would furthermore be under obligation to always keep their
books and keep them open for inspection subject to
harassment by unscrupulous tax agents. The law on
prescription being a remedial measure should be
interpreted in a way conducive to bringing about the
beneficent purpose of affording protection to the taxpayer
within the contemplation of the Commission which
recommend the approval of the law. [Bank of Philippine
Islands (Formerly Far East Bank and Trust Company) v.
Commissioner of Internal Revenue, G. R. No. 174942, March 7,
2008]
This mandate governs the question of prescription
of the governments right to assess internal revenue taxes
primarily to safeguard the interests of taxpayers from
unreasonable investigation. Accordingly, the government
must assess internal revenue taxes on time so as not to
extend indefinitely the period of assessment and deprive
the taxpayer of the assurance that it will no longer be
subjected to further investigation for taxes after the
expiration of reasonable period of time. (Commissioner of
Internal Revenue v. FMF Development Corporation, G. R. No.
 48
167765, June 30, 2008 citing Philippine Journalists, Inc. v.
Commissioner of Internal Revenue G.R. No. 162852, December
16, 2004, 447 SCRA 214, 225)
14. Unreasonable investigation
contemplates cases where the period for
assessment extends indefinitely because this
deprives the taxpayer of the assurance that it will not longer
be subjected to further investigation for taxes after the
expiration of a reasonable period of time. (Philippine
Journalists, Inc. v. Commissioner of Internal Revenue, G. R. No.
162852, December 16, 2004 with note to see Republic v. Ablaza,
108 Phil. 1105. 1108)
Laws on prescription should be liberally construed in
favor of the taxpayer. Reason: for the purpose of
safeguarding taxpayers from an unreasonable
examination, investigation or assessment, our tax laws
provide a statute of limitation on the collection of taxes.
Thus, the law on 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.
[Philippine Journalists, Inc. v. Commissioner of Internal Revenue,
G. R. No. 162852, December 16, 2004 citing Commissioner of
Internal Revenue v. B.F. Goodrich Phils, Inc (now Sime Darby
International Tire Co., Inc.),., et al., G.R. No. 104171, February
24, 1999, 303 SCRA 546]
The prescriptive period was precisely intended to
give the taxpayers peace of mind. (Commissioner of Internal
Revenue v. B.F. Goodrich Phils., Inc., et al., G.R. No. 104171,
February 24, 1999)
15. A jeopardy assessment is a
delinquency tax assessment which was assessed without
the benefit of complete or partial audit by an authorized
revenue officer, who has reason to believe that the
assessment and collection of a deficiency tax will be
jeopardized by delay because of the taxpayers failure to
comply with the audit and investigation requirements to
present his books of accounts and/or pertinent records, or
to substantiate all or any of the deductions, exemptions, or
credits claimed in his return. [Sec. 3.1 (a), Rev. Regs. No.
6-2000)
Jeopardy assessment is an indication of the doubtful
validity of the assessment, hence it may be subject to a
compromise. [Sec. 3.1 (a), Rev. Regs. No. 6-2000]
16.Requisites for Formal Letter of
Demand and Assessment Notice. The formal letter
of demand and assessment notice shall be issued by the
Commissioner or his duly authorized representative. The
letter of demand calling for payment of the taxpayers
deficiency tax or taxes shall state the facts, the law, rules
and regulations, or jurisprudence on which the
assessment is based, otherwise, the formal letter of
demand and assessment notice shall be void. The same
shall be sent to the taxpayer only by registered mail or by
personal delivery.
17. What are the requirements for the
validity of a formal letter of demand and
assessment notice ?
SUGGESTED ANSWER:
a. There must have been previously issued a pre-
assessment notice until excepted;
b. It must have been issued prior to the
prescriptive period; and
c. The letter of demand calling for payment of the
taxpayers deficiency tax or taxes shall state the facts, the
law, rules and regulations, or jurisprudence on which the
assessment is based, otherwise, the formal letter of
demand and assessment notice shall be void. (Sec. 3.1.4,
Rev. Regs. No. 12-99)
18. What are the reasons for presumption
of correctness of assessments ?
SUGGESTED ANSWER:
a. Lifeblood theory
b. Presumption of regularity (Commissioner of
Internal Revenue v. Hantex Trading Co., Inc., G, R. No. 136975,
March 31, 2005) in the performance of public functions.
(Commissioner of Internal Revenue v. Tuazon, Inc., 173 SCRA
397)
c. The likelihood that the taxpayer will have
access to the relevant information [Commissioner of Internal
Revenue, supra citing United States v. Rexach, 482 F.2d 10
(1973). The certiorari was denied by the United States Supreme
Court on November 19, 1973]
d. The desirability of bolstering the record-
keeping requirements of the NIRC. (Ibid.)
19. Give instances where prima facie
correctness of a tax assessment does not apply.
SUGGESTED ANSWER: The prima facie
correctness of a tax assessment does not apply upon proof
that an assessment is utterly without foundation, meaning
it is arbitrary and capricious. Where the BIR has come out
with a naked assessment i.e., without any foundation
character, the determination of the tax due is without
rational basis. [Commissioner of Internal Revenue v. Hantex
Trading Co., Inc., G, R. No. 136975, March 31, 2005 citing United
States v. Janis, 49 L. Ed. 2d 1046 (1976); 428 US 433 (1976)] In
such a situation, the determination of the Commissioner
contained in a deficiency notice disappears. [Commissioner
of Internal Revenue, supra citing a U.S. Court of Appeals ruling,
in Clark and Clark v. Commissioner of Internal Revenue, 266 F.
2d 698 (1959)] Hence, the determination by the CTA must
rest on all the evidence introduced and its ultimate
determination must find support in credible evidence.
[Commissioner of Internal Revenue, supra]
20. What are the instances that
suspends the running of the prescriptive periods
(Statute of Limitations) within which to make an
assessment and the beginning of distraint or levy
or of a proceeding in court for the collection, in
respect of any tax deficiencies?
SUGGESTED ANSWER:
 49
a. When the Commissioner is prohibited from waiver must be executed in three (3) copies, the
making the assessment, or beginning distraint, or levy or original copy to be attached to the docket of the case, the
proceeding in court and for sixty (60) days thereafter; second copy for the taxpayer and the third copy for the
b. When the taxpayer requests for and is Office accepting the waiver. The fact of receipt by the
granted a reinvestigation by the commissioner; taxpayer of his/her file copy shall be indicated in the
c. When the taxpayer could not be located in the original copy.
address given by him in the return filed upon which the tax d. The foregoing procedures shall be
is being assessed or collected; strictly followed. Any revenue official found not to have
d. When the warrant of distraint and levy is duly complied with this Order resulting in prescription of the
served upon the taxpayer, his authorized representative, or right to assess/collect shall be administratively dealt with.
a member of his household with sufficient discretion, and (Renumbering and emphasis supplied.)
no property could be located; and If the above are not followed there is no valid waiver
e. When the taxpayer is out of the Philippines. and prescription would run. (Commissioner of Internal
NOTES AND COMMENTS: Revenue v. FMF Development Corporation, G. R. No. 167765,
The holding in Commissioner of Internal Revenue v. June 30, 2008 citing Philippine Journalists, Inc. v. Commissioner
Court of Appeals, et al., G.R. No. 115712, February 25, of Internal Revenue G.R. No. 162852, December 16, 2004, 447
1999 (Carnation case) that the waiver of the period for SCRA 214, 228-229)
assessment must be in writing and have the written
consent of the BIR Commissioner is still doctrinal because 22. The procedures in RMO No. 20-
of the provisions of Sec. 223, NIRC of 1997 which provides 90 are NOT merely directory and that the
for the suspension of the prescriptive period: execution of a waiver is a renunciation of a
taxpayers right to invoke prescription. RMO No.
20-90 must be strictly followed. A waiver of the
statute of limitations under the NIRC, to a certain extent
21. Under RMO No. 20-90, which being a derogation of the taxpayers right to security
implements Sections 203 and 222 (b), the against prolonged and unscrupulous investigations, must
following procedures should be followed for a be carefully and strictly construed. The waiver of the
valid waiver of the prescriptive period for an statute of limitations does not mean that the taxpayer
relinquishes the right to invoke prescription unequivocally,
assessment:
particularly where the language of the document is
a. The waiver must be in
equivocal.
the proper form; b. The
Thus a waiver becomes unlimited in time, and
waiver shall be signed by the taxpayer himself or his duly
invalid, because it did not specify a definite date, agreed
authorized representative. In the case of a corporation,
upon between the BIR and the taxpayer, within which the
the waiver must be signed by any of its responsible
former may assess and collect taxes. It also would have
officials. Soon after the waiver is
no binding effect on the taxpayer if there was no consent
signed by the taxpayer, the Commissioner of Internal
by the Commissioner. On this basis, no implied consent
Revenue or the revenue official authorized by him, as
can be presumed, nor can it be contended that the
hereinafter provided, shall sign the waiver indicating that
concurrence to such waiver is a mere formality.
the Bureau has accepted and agreed to the waiver. The
(Commissioner of Internal Revenue v. FMF Development
date of such acceptance by the Bureau should be Corporation, G. R. No. 167765, June 30, 2008 citing Philippine
indicated. Both the date of execution by the taxpayer Journalists, Inc. v. Commissioner of Internal Revenue G.R. No.
and date of acceptance by the Bureau should be before 162852, December 16, 2004, 447 SCRA 214, 229 in turn citing
the expiration of the period of prescription or before the Id. at 229, citing Commissioner of Internal Revenue v. Court of
lapse of the period agreed upon in case a subsequent Appeals, G.R. No. 115712, February 25, 1999, 303 SCRA 614,
agreement is executed. c. The 620-622.)
following revenue officials are authorized to sign the
waiver. 23. BIR cannot rely on its invocation of
A. In the National the rule that the government cannot be estopped
Office by the mistakes of its revenue officers in the
xxxx enforcement of RMO No. 20-90 because the law on
3. Commissioner prescription should be interpreted in a way conducive to
For bringing about the beneficent purpose of affording protection
tax cases involving more than P1M B. to the taxpayer within the contemplation of the Commission
In the Regional Offices which recommended the approval of the law. To the
1. The Revenue District Government, its tax officers are obliged to act promptly in the
Officer with respect to tax cases still making of assessment so that taxpayers, after the lapse of
pending investigation and the period to assess is the period of prescription, would have a feeling of security
about to prescribe regardless of amount. against unscrupulous tax agents who will always try to find
xxxx an excuse to inspect the books of taxpayers, not to
d. The
 50
determine the latters real liability, but to take advantage of a
possible opportunity to harass even law-abiding
businessmen. Without such legal defense, taxpayers would
be open season to harassment by unscrupulous tax agents.
[Commissioner of Internal Revenue v. FMF Development
Corporation, G. R. No. 167765, June 30, 2008 citing Republic of
the Phils. v. Ablaza, 108 Phil. 1105, 1108 (1960)]
24. The signatures of both the
Commissioner and the taxpayer, are required for
a waiver of the prescriptive period, thus a unilateral
waiver on the part of the taxpayer does not suspend the
prescriptive period. [Commissioner of Internal Revenue v.
Court of Appeals, et al., G.R. No. 115712, February 25, 1999
(Carnation case)]
47. The act of requesting a reinvestigation
alone does not suspend the running of the
prescriptive period. The request for
reinvestigation must be granted by the CIR. The
Supreme Court declared that the burden of proof that the
request for reinvestigation had been actually granted shall
be on the Commissioner of Internal Revenue. Such grant
may be expressed in its communications with the
taxpayer or implied from the action of the Commissioner
or his authorized representative in response to the
request for reinvestigation. [Bank of Philippine Islands
(Formerly Far East Bank and Trust Company) v. Commissioner
of Internal Revenue, G. R. No. 174942, March 7, 2008]
PROTESTING INTERNAL REVENUE TAX
ASSESSMENTS
1. What is the presumption that flows from a
taxpayers failure to protest an assessment ?
SUGGESTED ANSWER: 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 Bureau of Internal
Revenue examiner and approved by his superior officers
will not be disturbed. All presumptions are in favor of the
correctness of tax assessments. (Commissioner of Internal
Revenue v. Bank of Philippine Islands., G, R. No. 134062, April
17, 2007 citing Sy Po v. Court of Appeals, G. R. No. L-81446, 18
August 1988, 164 SCRA 524, 530, citations omitted)
2. What are the two ways of
protesting an assessment notice for an internal
revenue tax ? Alternatively, what are the two
types of protests ? Explain briefly.
SUGGESTED ANSWER:
a. Request for reconsideration which refers to a
plea for re-evaluation of an assessment on the basis of
existing records without need of additional evidence. It
may involve both a question of fact or of law or both.
b. Request for reinvestigation which refers to a
plea for re-evaluation of an assessment on the basis of
newly-discovered evidence or additional evidence that a
taxpayer intends to present in the investigation. It may also
involve a question of fact or law or both. (Commissioner of
Internal Revenue v. Philippine Global Communication, Inc., G. R.
No. 167146, October 31, 2006 citing Rev. Regs. No. 12-85)
3. What is that type of protest that
suspends the running of the statute of limitations
for the beginning of distraint or levy or a
proceeding in court for collection ? Why ?
SUGGESTED ANSWER: It is that type of protest
when the taxpayer requests for a reinvestigation which is
granted by the Commissioner (Sec. 223, NIRC of 1997),
that suspends the running of the statute of limitations for
collection of the tax. (Commissioner of Internal Revenue v.
Philippine Global Communication, Inc., G. R. No. 167146,
October 31, 2006 citing Sec. 271, now Sec. 223, NIRC of 1997)
When a taxpayer demands a reinvestigation, the time
employed in reinvestigation should be deducted from the
total period of limitation. [Commissioner of Internal Revenue,
supra citing Republic v. Lopez, 117 Phil. 575, 578; 7 SCRA 566,
568-569 (1963)]
Undoubtedly, a reinvestigation, which entails the
reception and evaluation of additional evidence, will take
more time than a reconsideration of a tax assessment
which will be limited to the evidence already at hand; this
justifies why the former can suspend the running of the
statute of limitations on collection of the assessed tax, while
the latter cannot. (Commissioner of Internal Revenue v.
Philippine Global Communication, Inc., G. R. No. 167146,
October 31, 2006 citing Bank of Philippine Islands v.
Commissioner of Internal Revenue, G. R. No. 139736, 17 October
2005, 473 SCRA 205, 230-231)
4. What are the requirements for
the validity of a taxpayers protest ?
SUGGESTED ANSWER:
a. It must be filed within the reglementary period
of thirty (30) days from receipt of the notice of assessment.
b. The taxpayer must not only show the errors
of the Bureau of Internal Revenue but also the correct
computation through
1) A statement of the facts, the applicable
law, rules and regulations, or jurisprudence on which
the taxpayers protest is based,
2) If there are several issues involved in
the disputed assessment and the taxpayer fails to
state the facts, the applicable law, rules and
regulations, or jurisprudence in support of his protest
against some of the several issues on which the
assessment is based, the same shall be considered
undisputed issue or issues, in which case, the
taxpayer shall be required to pay the corresponding
deficiency tax or taxes attributable thereto. (Sec.
3.1.5, Rev. Regs. 12-99)
c. Within sixty (60) days from filing of the
protest, the taxpayer shall submit all relevant supporting
documents. [4th par., Sec. 228 (e), NIRC of 1997]
5. Relevant supporting documents,
defined. The term relevant supporting documents
 51
should be understood as those documents necessary to
support the legal basis in disputing a tax assessment as
determined by the taxpayer. The BIR can only inform the
taxpayer to submit additional documents.
The BIR cannot demand what type of supporting
documents should be submitted. Otherwise, a taxpayer
will be at the mercy of the BIR, which may require the
production of documents that a taxpayer cannot submit.
(Commissioner of Internal Revenue v. First Express Pawnshop
Company, Inc., G. R. 172045-46, June 16, 2009)
JUDICIAL REMEDIES INVOLVING
PROTESTED ASSESSMENTS
1. Acts of BIR Commissioner that
may be considered as denial of a protest which
serve as basis for appeal to the Court of Tax
Appeals.
a. Filing by the BIR of a civil suit for collection of
the deficiency tax is considered a denial of the request for
reconsideration. (Commissioner of Internal Revenue v. Union
Shipping Corporation, 185 SCRA 547)
b. An indication to the taxpayer by the
Commissioner in clear and unequivocal language of his
final denial not the issuance of the warrant of distraint and
levy. What is the subject of the appeal is the final decision
not the warrant of distraint. (Ibid.)
c. A BIR demand letter sent to the taxpayer after
his protest of the assessment notice is considered as the
final decision of the Commissioner on the protest. (Surigao
Electric Co., Inc. v. Court of Tax Appeals, et al., 57 SCRA 523)
d. A letter of the BIR Commissioner reiterating
to a taxpayer his previous demand to pay an assessment
is considered a denial of the request for reconsideration or
protest and is appealable to the Court of Tax Appeals.
(Commissioner v. Ayala Securities Corporation, 70 SCRA 204)
e. Final notice before seizure considered as
commissioners decision of taxpayers request for
reconsideration who received no other response.
Commissioner of Internal Revenue v. Isabela Cultural
Corporation, G.R. No. 135210, July 11, 2001 held that not
only is the Notice the only response received: its content
and tenor supports the theory that it was the CIRs final act
regarding the request for reconsideration. The very title
expressly indicated that it was a final notice prior to seizure
of property. The letter itself clearly stated that the taxpayer
was being given this LAST OPPORTUNITY to pay;
otherwise, its properties would be subjected to distraint and
levy.
2. The taxpayer seasonably protested the
assessment issued by the Commissioner of
Internal Revenue. During the pendency of the
protest the CIR issued a warrant of distraint and
levy to collect the taxes subject of the protest.
As counsel what advice shall you give the
taxpayer. Explain briefly your answer.
SUGGESTED ANSWER: The taxpayer should
appeal, by way of a petition for review, to the Court of Tax
Appeals not on the ground of the denial of the protest but
on other matter arising under the provisions of the National
Internal Revenue Code. The actual issuance of a warrant
of distraint and levy in certain cases cannot be considered
a final decision on a disputed assessment.
To be a valid decision on a disputed assessment,
the decision of the Commissioner or his duly authorized
representative shall (a) state the facts, the applicable law,
rules and regulations, or jurisprudence on which such
decision is based, otherwise, the decision shall be void, in
which case the same shall not be considered a decision on
the disputed assessment; and (b) that the same is his final
decision. (Sec. 3.1.6, Rev. Regs. 12-99) These conditions
are not complied with by the mere issuance of a warrant of
distraint and levy. (Commissioner of Internal Revenue v. Union
Shipping Corp., 185 SCRA 547)
Furthermore, a motion for the suspension of the
collection of the tax may be filed together with the petition
for review (Sec. 3, Rule 10, RRCTA effective December 15,
2005) because the collection of the tax may jeopardize the
interest of the taxpayer.
3. As a general rule, there must always
be a decision of the Commissioner of Internal
Revenue or Commissioner of Customs before the
Court of Tax Appeals, would have jurisdiction. If
there is no such decision, the petition would be dismissed
for lack of jurisdiction unless the case falls under any of the
following exceptions.
4. Instances where the Court of Tax
Appeals would have jurisdiction even if there is
no decision yet by the Commissioner of Internal
Revenue:
a. Where the Commissioner has not acted on the
disputed assessment after a period of 180 days from
submission of complete supporting documents, the
taxpayer has a period of 30 days from the expiration of the
180 day period within which to appeal to the Court of Tax
Appeals. (last par., Sec. 228 (e), NIRC of 1997; Commissioner
of Internal Revenue v. Isabela Cultural Corporation, G.R. No.
135210, July 11, 2001)
b. Where the Commissioner has not acted on an
application for refund or credit and the two year period from
the time of payment is about to expire, the taxpayer has to
file his appeal with the Court of Tax Appeals before the
expiration of two years from the time the tax was paid.
It is disheartening enough to a taxpayer to be kept
waiting for an indefinite period for the ruling,. It would make
matters more exasperating for the taxpayer if the doors of
justice would be closed for such a relief until after the
Commissioner, would have, at his personal convenience,
given his go signal. (Commissioner of Customs, et al, v. Court
of Tax Appeals, et al., G.R. No. 82618, March 16, 1989, unrep.)
5. The characteristic of a BIR
denial of a protest such as would enable the
taxpayer to appeal the same to the Court of Tax
Appeals. The Commissioner of Internal Revenue should
 52
always indicate to the taxpayer in clear and unequivocal
language whenever his action on an assessment
questioned by a taxpayer constitutes his final determination
on the disputed assessment.
On the basis of his statement indubitably showing
that the Commissioners communicated action is his final
decision on the contested assessment, the aggrieved
taxpayer would then be able to take recourse to the tax
court at the opportune time. Without needless difficulty, the
taxpayer would be able to determine when his right to
appeal to the tax court accrues. (Commissioner of Internal
Revenue v. Bank of the Philippines Islands, G. R. No. 134062,
April 17, 2007)
COLLECTION OF INTERNAL REVENUE
TAXES
1. General rule: Collection of taxes is
imprescriptible. While this may be so, statutes may
provide for periods of prescription,
2. Why is the collection of taxes
imprescriptible ?
SUGGESTED ANSWER:
a. As a general rule, revenue laws are not
intended to be liberally construed, and exemptions are not
given retroactive application, considering that taxes are the
lifeblood of the government and in Holmes memorable
metaphor, the price we pay for civilization, tax laws must
be faithfully and strictly implemented. (Commissioner of
Internal Revenue v. Acosta, etc.,G. R. No. 154068, August 3,
2007) However, statutes may provide for prescriptive periods for
the collection of particular kinds of taxes.
b. Tax laws, unlike remedial laws, are not to be
applied retroactively. Revenue laws are substantive laws
and their application must not be equated with remedial
laws. (Acosta, supra)
3. What is the prescriptive period for
collecting internal revenue taxes ?
SUGGESTED ANSWER: There are four (4)
prescriptive periods for the collection of an internal revenue
tax:
a. Collection upon a false or fraudulent return or
no return without assessment. In case of a false or
fraudulent return with the intent to evade tax or of failure to
file a return, a proceeding in court for the collection of such
tax may be filed without assessment, at any time within ten
(10) years after the discovery of the falsity, fraud or
omission. [Sec. 222 (a), NIRC of 1997]
b. Collection upon a false or fraudulent return or
no return with assessment. Any internal revenue tax which
has been assessed (because the return is false or
fraudulent with intent to evade tax or of failure to fail a
return), within a period of ten (10) years from discovery of
the falsity, fraud or omission may be collected by
distraint or levy or by a proceeding in court within five
(5) years following the assessment of the tax. [Sec. 222
(c), in relation to Sec. 222 (a) NIRC of 1997, emphasis supplied]
c. Collection upon an extended assessment.
Where a tax has been assessed with the period agreed
upon between the Commissioner and the taxpayer in
writing (which should initially be within three (3) years from
the time the return was filed or should have been filed), or
any extensions before the expiration of the period agreed
upon, the tax may be collected by distraint or levy or
by a proceeding in court within the period agreed upon
in writing before the expiration of the five (5) year
period. The period so agreed upon may be extended by
subsequent written agreements made before the expiration
of the period previously agreed upon. [Sec. 222 (d), in
relation to Secs. 222 (b) and 203, NIRC of 1997, emphasis
supplied]
d. Collection upon a return that is not false or
fraudulent, or where the assessment is not an extended
assessment. Except as provided in Section 222, internal
revenue taxes shall be assessed within three (3) years after
the last day prescribed by law for the filing of the return,
and no proceeding in court without assessment for the
collection of such taxes shall be begun after the
expiration of such period; Provided, That in case where
a return is filed beyond the period prescribed by law, the
three (3) year period shall be computed from the day the
return was filed. For purposes of this Section, a return filed
before the last day prescribed by law for the filing thereof
shall be considered filed on such last day. (Sec. 203, NIRC
of 1997, emphasis supplied)
When the BIR validly issues an assessment within
the three (3)-year period, it has another three (3) years
within which to collect the tax due by distraint, levy, or
court proceeding. The assessment of the tax is deemed
made and the three (3)-year period for collection of the
assessed tax begins to run on the date the assessment
notice had been released, mailed or sent to the taxpayer.
[Bank of Philippine Islands (Formerly Far East Bank and Trust
Company) v. Commissioner of Internal Revenue, G. R. No.
174942, March 7, 2008 citing BPI v. Commissioner of Internal
Revenue, G.R. No. 139736, 17 October 2005, 473 SCRA 205,
222-223]
NOTES AND COMMENTS:
a. Both the former Sec. 269, NIRC of 1977
and Sec.222 of NIRC of 1997 do not refer to a regular
return. It is clear that in enacting Sec. 222, entitled
Exceptions as to the period of limitation of assessment and
collection of taxes, the NIRC of 1997 has eliminated sub-
paragraph c of the former Sec. 269 of the NIRC, also
entitled Exceptions as to the period of limitation of
assessment and collection of taxes. Said Sec. 269 (c),
reads Any internal revenue tax which has been assessed
within the period of limitation above-prescribed may be
collected by distraint or levy or by a proceeding in court
within three years following the assessment of the tax.
A perusal of Sec. 222 of the NIRC is clear that it
covers only three scenarios only. 1) No assessment was
made upon a false or fraudulent return or omission to file a
return; 2) an assessment was made upon a false or
fraudulent return or omission to file a return; and 3) an
extended assessment issued within a period agreed upon
by the Commissioner and the taxpayer. The same
scenarios are those referred to in the former Sec. 269
 53
which provided for a prescriptive period for collection of
three (3) years.
It is clear therefore that neither Sec. 222 nor the
former Sec. 269 provide for an instance where the
assessment was made upon a regular return or one that
is not false or fraudulent, or that there was an agreement
to extend the period for assessment.
Resort should therefore be made to the three (3)
year period referred to in Sec. 203 of the NIRC of 1997
which reads, Except as provided in Section 222, internal
revenue taxes shall be assessed within three (3) years after
the last day prescribed by law for the filing of the return,
and no proceeding in court without assessment for the
collection of such taxes x x x (paraphrasing and
emphasis supplied)
4. What is a compromise ?
SUGGESTED ANSWER: A compromise is a
contract whereby the parties, by making reciprocal
concessions, avoid a litigation or put an end to one already
commenced. (Art. 2028, Civil Code)
A compromise penalty could not be imposed by
the BIR, if the taxpayer did not agree. A compromise being,
by its nature, mutual in essence requires agreement. The
payment made under protest could only signify that there
was no agreement that had effectively been reached
between the parties. (Vda. de San Agustin, et al., v.
Commissioner of Internal Revenue, G. R. No. 138485, September
10, 2001)
5. What tax cases may be the subject
of a compromise ?
SUGGESTED ANSWER: The following cases
may, upon taxpayers compliance with the basis for
compromise, be the subject matter of compromise
settlement:
a. Delinquent accounts;
b. Cases under administrative protest after
issuance of the Final Assessment Notice to the taxpayer
which are still pending in the Regional Offices, Revenue
District Offices, Legal Service, Large Taxpayer Service
(LTS), Collection Service, Enforcement Service and other
offices in the National Office;
c. Civil tax cases being disputed before the
courts;
d. Collection cases filed in courts;
e. Criminal violations, other than those already
filed in court, or those involving criminal tax fraud. (Sec. 2,
Rev. Regs. No. 30-2002)
6. What tax cases could not be the
subject of compromise ?
SUGGESTED ANSWER:
a. Withholding tax cases unless the applicant-
taxpayer invokes provisions of law that cast doubt on the
taxpayers obligation to withhold.;
b. Criminal tax fraud cases, confirmed as such by
the Commissioner of Internal Revenue or his duly
authorized representative;
c. Criminal violations already filed in court;
d. Delinquent accounts with duly approved
schedule of installment payments;
e. Cases where final reports of reinvestigation
or reconsideration have been issued resulting to reduction
in the original assessment and the taxpayer is agreeable to
such decision by signing the required agreement form for
the purpose. On the other hand, other protested cases
shall be handled by the Regional Evaluation Board (REB)
or the National Evaluation Board (NEB) on a case to case
basis;
f. Cases which become final and executory
after final judgment of a court where compromise is
requested on the ground of doubtful validity of the
assessment; and
g. Estate tax cases where compromise is
requested on the ground of financial incapacity of the
taxpayer. (Sec. 2, Rev. Regs. No. 30-2002)
7. When may the Commissioner of
Internal Revenue compromise the payment of any
internal revenue tax ? Alternatively, what are the
grounds for a compromise, and what are the
amounts for which a compromise may be entered
into ?
SUGGESTED ANSWER:
a. A reasonable doubt as to the validity of the
claim against the taxpayer exists provided that the
minimum compromise entered into is equivalent to forty
percent (40%) of the basic tax; or
b. The financial position of the taxpayer
demonstrates a clear inability to pay the assessed tax
provided that the minimum compromise entered into is
equivalent to ten percent (10%) of the basic assessed tax
In the above instances the Commissioner is allowed
to enter into a compromise only if the basic tax involved
does not exceed One million pesos (P1,000,000.00), and
the settlement offered is not less than the prescribed
percentages. [Sec. 204 (A), NIRC of 1997]
In instances where the Commissioner is not
authorized, the compromise shall be subject to the
approval of the Evaluation Board composed of the
Commissioner and the four (4) Deputy Commissioners.
8. When is the Commissioner of
Internal Revenue authorized to abate or cancel a
tax liability ?:
SUGGESTED ANSWER:
a. The tax or any portion thereof appears to be
unjustly or excessively assessed; or
b. The administration and collection costs involved
do not justify the collection of the amount due. [Sec. 204 (B),
NIRC of 1997]
9. The collection of a tax may not be
suspended. Only the Court of Tax Appeals may issue
an order suspending the collection of a tax.
10. As a general rule, No court shall
have the authority to grant an injunction to
 54
restrain the collection of any national internal
revenue tax, fee or charge. (Sec. 218, NIRC)
No appeal taken to the CTA from the decision of the
Commissioner of Internal Revenue or the Commissioner of
Customs or the Regional Trial Court, provincial, city or
municipal treasurer or the Secretary of Finance, the
Secretary of Trade and Industry and Secretary of
Agriculture, as the case may be shall suspend the
payment, levy, distraint, and/or sale of any property of the
taxpayer for the satisfaction of his tax liability as provided
by existing law: Provided, however, That when in the
opinion of the Court the collection by the aforementioned
government agencies may jeopardize the interest of the
Government and/or the taxpayer the Court at any stage of
the proceeding may suspend the said collection and
require the taxpayer either to deposit the amount claimed
or to file a surety bond for not more than double the amount
with the Court. (Sec. 11, Rep. Act No. 1125, as amended by
Sec. 9, Rep. Act No. 9282 )
The Supreme Court may enjoin the collection of
taxes under its general judicial power but it should be
apparent that the source of the power is not statutory but
constitutional.
11. What is the procedure for
suspension of collection of taxes ?
SUGGESTED ANSWER: Where the collection of
the amount of the taxpayers liability, sought by means of
a demand for payment, by levy, distraint or sale of
property of the taxpayer, or by whatever means, as
provided under existing laws, may jeopardize the interest
of the government or the taxpayer, an interested party
may file a motion for the suspension of the collection of
the tax liability (Sec. 1, Rule 10, RRCTA effective December
15, 2005) with the Court of Tax Appeals.
The motion for suspension of the collection of the
tax may be filed together with the petition for review or
with the answer, or in a separate motion filed by the
interested party at any stage of the proceedings. (Sec. 3,
Rule 10, RRCTA effective December 15, 2005)
REFUND OF INTERNAL REVENUE TAXES
1. What are the grounds for refund
or credit of internal revenue taxes ?
SUGGESTED ANSWER: The grounds for refund or
credit or internal revenue taxes are the following:
a. The tax was illegally collected. There is no
law that authorizes the collection of the tax.
b. The tax was excessively collected. There is
a law that authorizes the collection of a tax but the tax
collected was more than what the law allows.
c. The tax was paid through a mistaken belief
that the taxpayer should pay the tax (solution indebeti)
2. What are the three (3) conditions
for the grant of a claim for refund of creditable
withholding tax ?
SUGGESTED ANSWER:
a. The claim is filed with the Commissioner of
Internal Revenue within the two-year period from the date
of the payment of the tax.
b. It is shown on the return of the recipient that
the income payment received was declared as part of the
gross income; and
c. The fact of withholding is established by a
copy of a statement duly issued by the payee showing the
amount paid and the amount of tax withheld therefrom.
(Banco Filipino Savings and Mortgage Bank v. Court of Appeals,
et al., G. R. No. 155682, March 27, 2007)
NOTES AND COMMENTS:
a. Proof of fact of withholding. Sec. 10.
Claim for tax credit or refund. (a) Claims for Tax Credit
or Refund of Income tax deducted and withheld on income
payments shall be given due course only when it is shown
on the return that the income payment received has been
declared as part of the gross income and the fact of
withholding is established by a copy of the Withholding Tax
Statement duly issued by the payor to the payee showing
the amount paid and the amount of the tax withheld
therefrom xxx (Rev. Regs. No. 6-85, as amended)
The document which may be accepted as evidence
of the third condition, that is, the fact of withholding, must
emanate from the payor itself, and not merely from the
payee, and must indicate the name of the payor, the
income payment basis of the tax withheld, the amount of
the tax withheld and the nature of the tax paid. (Banco
Filipino Savings and Mortgage Bank v. Court of Appeals, et al., G.
R. No. 155682, March 27, 2007)
3. What should be established by a
taxpayer for the grant of a tax refund ? Why ?
SUGGESTED ANSWER: A taxpayer needs to
establish not only that the refund is justified under the law,
but also the correct amount that should be refunded.
If the latter requisite cannot be ascertained with
particularity, there is cause to deny the refund, or allow it
only to the extent of the sum that is actually proven as due.
Tax refunds partake of the nature of tax exemptions
and are thus construed strictissimi juris against the person
claiming the exemption. The burden in proving the claim
for refund necessarily falls on the taxpayer. (Far East Bank
Trust and Company, etc., v. Commissioner of Internal Revenue,
et al., G. R. No. 138919, May 2, 2006)
4. What is The legal remedy under
the NIRC of 1997 at the judicial level with respect
to refund or recovery of tax erroneously or
illegally collected ?
SUGGESTED ANSWER: Filing of a suit or
proceeding with the Court of Tax Appeals
a. before the expiration of two (2) years from the
date of payment of the tax regardless of any supervening
cause that may arise after payment (2nd par., Sec. 229, NIRC
of 1997), or
b. within thirty (30) days from receipt of the
denial by the Commissioner of the application for refund or
credit. (Sec. 11, R.A. No. 1125)
 55
5. The two (2) year period and the
thirty (30) day period should be applied on a
whichever comes first basis. Thus, if the 30 days is
within the 2 years, the 30 days applies, if the 2 year period
is about to lapse but there is no decision yet by the
Commissioner which would trigger the 30-day period, the
taxpayer should file an appeal, despite the absence of a
decision. (Commissioners, etc. v. Court of Tax Appeals, et al.,
G. R. No. 82618, March 16, 1989, unrep.)

6. Where the taxpayer is a

corporation the two year prescriptive period from
date of payment for refund of income taxes
should be the date when the corporation filed its
final adjustment return not on the date when the taxes
were paid on a quarterly basis. (Philippine Bank of
Communications v. Commissioner of Internal Revenue, et al.,
G.R. No. 112024, January 28, 1999)
It is only when the return, covering the whole year,
is filed that the taxpayer will be able to ascertain whether a
a. a. To
tax is still due or refund can be claimed based on the
afford the Commissioner an opportunity to correct his
adjusted and audited figures. (Bank of the Philippine Islands
errors or that of subordinate officers. (Gonzales v. Court of
v. Commissioner of Internal Revenue, G.R. No. 144653, August
Tax Appeals, et al., 14
28, 2001)
SCRA79)

7. What is solutio indebeti as

applied to tax cases ?
SUGGESTED ANSWER: Under the principle of
solutio indebiti provided in Art. 2154, Civil Code, If
something is received when there is no right to demand it,
and it was unduly delivered through mistake, the
obligation to return it arises. The BIR received something
when there [was] no right to demand it, and thus, it has
the obligation to return it. [State Land Investment
Corporation v. Commissioner of Internal Revenue, G. R.
No. 171956, January 18, 2008citing Citibank, N. A. v.
Court of Appeals and Commissioner of Internal Revenue,
G.R. No. 107434, October 10, 1997, 280 SCRA 459, in
turn citing Ramie Textiles, Inc. v. Mathay, Sr., 89 SCRA
586 (1979)]. It is an ancient principle that no one, not even
the state, shall enrich oneself at the expense of another.
Indeed, simple justice requires the speedy refund of the
wrongly held taxes. (Ibid.)

b. To notify the Government that such taxes have

been questioned and the notice should be borne in mind in
estimating the revenue available for
expenditures.

56. What are the reasons for requiring the

filing of an administrative application for refund or
credit with the BSUGGESTED 8.
Why is it necessary to file an administrative claim
for refund with the BIR, before filing a case with
the Court of Tax Appeals ?
 56
9.
As a general rule the filing of an application for
refund or credit with the Bureau of Internal
Revenue is an administrative precondition before
a suit may be filed with the Court of Tax Appeals
? of Internal Revenue, 4 SCRA 279) NOTE: Reconciliation
SUGGESTED ANSWER:
SUGGESTED ANSWER: Yes. The failure to first file a
written claim for refund or credit is not fatal to a petition for
review involving a disputed assessment where an
assessment was disputed but the protest
was
denied by the Bureau of Internal Revenue. To
hold that the taxpayer has now lost the right to appeal from
the ruling on the disputed assessment and require him to
file a claim for a refund of the taxes paid as a condition
precedent to his right to appeal, would in effect require of
him to go through a useless and needless ceremony that
would only delay the disposition of the case, for the
Commissioner would certainly disallow the claim for refund
in the same way as he disallowed the protest against the
assessment. The law, should not be interpreted as to
result in absurdities. (vda. de San Agustin., etc., v.
Commissioner of Internal Revenue, G.R. No. 138485, September
10, 2001 citing Roman Catholic Archbishop of Cebu v. Collector
between above two numbers (8 and 9). An application
for refund or credit under Sec. 229 of the NIRC of 1997 is
required where the case filed before the CTA is a refund
case, which is not premised upon a disputed assessment.
There is no need for a prior application for refund or credit,
if the refund is merely a consequence of the resolution of
the BIRs denial of a protested
assessment.
Who could apply for a tax refund or credit
?
10. Who could apply for a refund or
credit ?

SUGGESTED ANSWER: The person who paid
the tax may apply for a refund or credit.
A withholding tax agent may also apply for a
refund. In a sense, he is also a taxpayer because the tax
may be collected from him if he does not withhold.
11. What is the nature of the taxpayers
remedy of either to ask for a refund of excess tax
payments or to apply the same in payment of
succeeding taxable periods taxes ?
SUGGESTED ANSWER: Sec. 69 of the 1977
NIRC (now Sec. 76 of the NIRC of 1997) provides that any
excess of the total quarterly payments over the actual
income tax computed in the adjustment or final corporate
income tax return, shall either (a) be refunded to the
corporation, or (b) may be credited against the estimated
quarterly income tax liabilities for the quarters of the
succeeding taxable year. To ease the administration of tax
collection, these remedies are in the alternative and the
choice of one precludes the other. Since the Bank has
chosen the tax credit approach it cannot anymore avail of
the tax refund. (Philippine Bank of Communications v.
Commissioner of Internal Revenue, et al., G.R. No.
112024, January 28, 1999)
NOTES AND COMMENTS:
a. The choice, is given to the taxpayer,
whether to claim for refund under Sec. 76 or have its
excess taxes applied as tax credit for the succeeding
taxable year, such election is not final. Prior verification
and approval by the Commissioner of Internal Revenue is
required. The availment of the remedy of tax credit is not
absolute and mandatory. It does not confer an absolute
right on the part of the taxpayer to avail of the tax credit
scheme if it so chooses. Neither does it impose a duty on
the part of the government to sit back and allow an
important facet of tax collection to be at the sole control and
discretion of the taxpayer. (Paseo Realty & Development
Corporation v. Court of Appeals, et al., G. R. No. 119286,
October 13, 2004)
12. What is the irrevocability rule
in claims for refund and what is the rationale
behind this ?
SUGGESTED ANSWER: A corporation entitled to
a tax credit or refund of the excess estimated quarterly
income taxes paid has two options: (1) to carry over the
excess credit or (2) to apply for the issuance of a tax credit
certificate or to claim a cash refund. If the option to carry
over the excess credit is exercised, the same shall be
irrevocable for that taxable period.
In exercising its option, the corporation must signify
in its annual corporate adjustment return (by marking the
option box provided in the BIR form) its intention either to
carry over the excess credit or to claim a refund. To
facilitate tax collection, these remedies are in the
alternative and the choice of one precludes the other.
[Systra Philippines, Inc., v. Commissioner of Internal Revenue,
G. R. No. 176290, September 21, 2007 citing Philippine Bank of
Communications v. Commissioner of Internal Revenue, 361
Phil. 916 (1999)]
57
This is known as the irrevocability rule and is
embodied in the last sentence of Section 76 of the Tax
Code. The phrase such option shall be considered
irrevocable for that taxable period means that the option
to carry over the excess tax credits of a particular taxable
year can no longer be revoked.
The rule prevents a taxpayer from claiming twice
the excess quarterly taxes paid: (1) as automatic credit
against taxes for the taxable quarters of the succeeding
years for which no tax credit certificate has been issued
and (2) as a tax credit either for which a tax credit
certificate will be issued or which will be claimed for cash
refund. (Systra Philippines, Inc., supra citing De Leon, Hector,
THE NATIONAL INTERNAL REVENUE CODE, Seventh
Edition, 2000, p. 430)
13. In the year 2000 Systra derived
excess tax credits and exercised the option to
carry them over as tax credits for the next
taxable year. However, the tax due for the next
taxable year is lower than excess tax credits. It
now applies for a refund of the unapplied tax
credits. May its refund be granted ? If the refund
is denied, does Systra lose the unapplied tax
credits ? Explain briefly your answer.
SUGGESTED ANSWER: Systras claim for
refund should be denied. Once the carry over option was
made, actually or constructively, it became forever
irrevocable regardless of whether the excess tax credits
were actually or fully utilized Under Section 76 of the Tax
Code, a claim for refund of such excess credits can no
longer be made. The excess credits will only be applied
against income tax due for the taxable quarters of the
succeeding taxable years.
Despite the denial of its claim for refund, Systra
does not lose the unapplied tax credits. The amount will
not be forfeited in favor of the government but will remain
in the taxpayers account. Petitioner may claim and carry
it over in the succeeding taxable years, creditable against
future income tax liabilities until fully utilized. (Systra
Philippines, Inc., v. Commissioner of Internal Revenue, G. R.
No. 176290, September 21, 2007 citing Philam Asset
Management, Inc. v. Commissioner of Internal Revenue, G.R.
Nos. 156637/162004, 14 December 2005, 477 SCRA 761)
Supposing in the above problem that Systra
permanent ceased operations, what happens to the
unapplied credits ?
SUGGESTED ANSWER: Where, the corporation
permanently ceases its operations before full utilization of
the tax credits it opted to carry over, it may then be
allowed to claim the refund of the remaining tax credits. In
such a case, the remaining tax credits can no longer be
carried over and the irrevocability rule ceases to apply.
Cessante ratione legis, cessat ipse lex. (Footnote no. 23,
Systra Philippines, Inc., v. Commissioner of Internal
Revenue, G. R. No. 176290, September 21, 2007)
NOTES AND COMMENTS: The holding in State
Land Investment Corporation v. Commissioner of Internal
Revenue, G. R. No. 171956, January 18, 2008 that the
taxpayer is entitled to a refund because during the
 58
succeeding year there was no tax due against which the
excess tax credits may be applied is not doctrinal. This is
so because it interpreted the provisions of then Sec. 69 of
the NIRC, which did not provide for the irrevocability rule
now contained in Sec. 76 of the NIRC of 1997.
14. A simultaneous filing of the
application with the BIR for refund/credit and the
institution of the court suit with the CTA is
allowed. There is no need to wait for a BIR denial.
REASONS:
a. The positive requirement of Section 230 NIRC
(now Sec. 229, NIRC of 1997);
b. The doctrine that delay of the Commissioner in
rendering decision does not extend the peremptory period
fixed by the statute;
c. The law fixed the same period two years for
filing a claim for refund with the Commissioner under Sec.
204, par. 3, NIRC (now Sec. 204 [C], NIRC of 1997), and
for filing suit in court under Sec. 230, NIRC (now Sec. 229,
NIRC of 1997), unlike in protests of assessments under
Sec. 229 (now Sec. 228, NIRC of 1997), which fixed the
period (thirty days from receipt of decision) for appealing to
the court, thus clearly implying that the prior decision of the
Commissioner is necessary to take cognizance of the case.
(Commissioner of Internal Revenue v. Bank of Philippine Islands,
etc. et al., CA-G.R. SP No. 34102, September 9, 1994; Gibbs v.
Collector of Internal Revenue, et al., 107 Phil, 232; Johnston
Lumber Co. v. CTA, 101 Phil. 151)
15. The grant of a refund is founded on
the assumption that the tax return is valid, i.e. that
the facts stated therein are true and correct.
(Commissioner of Internal Revenue v. Court of Tax
Appeals, G. R. No. 106611, July 21, 1994, 234 SCRA 348)
Without the tax return it would be virtually impossible to
determine whether the proper taxes have been assessed
and paid. After all, it is axiomatic that a claimant has the
burden of proof to establish the factual basis of his or her
claim for tax credit or refund. Tax refunds, like tax
exemptions, are construed strictly against the taxpayer.
(Paseo Realty & Development Corporation v. Court of Appeals, et
al., G. R. No. 119286, October 13, 2004)
However, in BPI-Family Savings Bank v. Court of
Appeals, 386 Phil. 719; 326 SCRA 641 (2000), refund was
granted, despite the failure to present the tax return,
because other evidence was presented to prove that the
overpaid taxes were not applied. (Ibid.)
16. Discuss the difference between tax
refund and tax credit..
SUGGESTED ANSWER: There are unmistakable
formal and practical differences between the two modes.
Formally, a tax refund requires a physical return of the sum
erroneously paid by the taxpayer, while a tax credit involves
the application of the reimbursable amount against any
sum that may be due and collectible from the taxpayer.
On the practical side, the taxpayer to whom the tax
is refunded would have the option, among others, to invest
for profit the returned sum, an option not proximately
available if the taxpayer chooses instead to receive a tax
credit. (Commissioner of Customs v. Philippine Phosphate
Fertilizer Corporation, G. R. No. 144440, September 1, 2004)
NOTES AND COMMENTS: It may be that there is
no essential difference between a tax refund and a tax
credit since both are moves of recovering taxes
erroneously or illegally paid to the government.
(Commissioner of Customs v. Philippine Phosphate Fertilizer
Corporation, G. R. No. 144440, September 1, 2004)
17. A bank-trustee of employee trusts
filed an application for the refund of taxes
withheld on the interest incomes of the
investments made of the funds of the
employees trusts. Instead of presenting
separate accounts for interest incomes made of
these investments, the bank-trustee instead
presented witness to establish that it would next
to impossible to single out the specific
transactions involving the employees trust
funds from the totality of all interest income from
its total investments. On the above basis will the
application for refund prosper ?
SUGGESTED ANSWER: No. The application for
refund will not prosper.
The bank-trustee needs to establish not only that
the refund is justified under the law (which is so because
incomes of employees trusts are tax exempt), but also
the correct amount that should be refunded.
Tax refunds partake of the nature of tax
exemptions and are thus construed strictissimi juris
against the person or entity claiming the exemption. The
burden in proving the amount to be refunded necessarily
falls on the bank-trustee, and there is an apparent failure
to do so.
A necessary consequence of the special
exemption enjoyed alone by employees trusts would be
a necessary segregation in the accounting of such
income, interest or otherwise, earned from those trusts
from that earned by the other clients of the bank-trustee.
(Far East Bank and Trust Company, etc., v.
Commissioner, etc., et al., G.R. No. 138919, May 2, 2006)
The amounts that are the exempt earnings of the
employees trust has not been shown as they have been
commingled with the interest income of the other clients
of the bank-trustee.
18. CTA Circular No. 1-95 clearly requires
that photocopies of the receipts or invoices must
be pre-marked and submitted to the CTA to
verify the correctness of the summary listing
and the CPA certification. CTA Circular No. 1-95,
issued on 25 January 1995, reads:
1. The party who desires to introduce as
evidence such voluminous documents must present: (a)
Summary containing the total amount/s of the tax account
or tax paid for the period involved and a chronological or
numerical list of the numbers, dates and amounts covered
by the invoices or receipts; and (b) a Certification of an
 59
independent Certified Public Accountant attesting to the
correctness of the contents of the summary after making
an examination and evaluation of the voluminous receipts
and invoices. Such summary and certification must
properly be identified by a competent witness from the
accounting firm.
2. The method of individual presentation of each
and every receipt or invoice or other documents for
marking, identification and comparison with the originals
thereof need not be done before the Court or the
Commissioner anymore after the introduction of the
summary and CPA certification. It is enough that the
receipts, invoices and other documents covering the
said accounts or payments must be pre-marked by
the party concerned and submitted to the Court in
order to be made accessible to the adverse party
whenever he/she desires to check and verify the
correctness of the summary and CPA certification.
However, the originals of the said receipts, invoices or
documents should be ready for verification and
comparison in case doubt on the authenticity of the
particular documents presented is raised during the
hearing of the case. (Emphasis supplied)
19. Manila Electric Company a grantee of
a legislative franchise under Act No. 484, as
amended by Republic Act No. 4159 and
Presidential Decree No. 551,1[3] had been paying
a 2% franchise tax based on its gross receipts,
in lieu of all other taxes and assessments of
whatever nature. Upon the effectivity of
Executive Order No. 72 on February 10, 1987,
however, respondent became subject to the
payment of regular corporate income tax.
For the last quarter ending December 31,
1987, respondent filed on April 15, 1988 its
tentative income tax reflecting a refundable
amount of P101,897,741, but only P77,931,812
was applied as tax credit for the succeeding
taxable year 1988.
Acting on a yearly routinary Letter of
Authority No. 0018064 NA dated June 27, 1988
issued by petitioner, directing the investigation
of tax liabilities of respondent for taxable year
1987, an investigation was conducted by
Revenue Officer Frederick Capitan which
showed that respondent was liable for 1.
deficiency income tax in the amount of
P2,340,902.52; and 2. deficiency franchise tax in
the amount of P2,838,335.84.
On April 17, 1989, respondent filed an
amended final corporate Income Tax Return
ending December 31, 1988 reflecting a
refundable amount of P107,649,729.
Respondent thus filed on March 30, 1990 a
letter-claim for refund or credit in the amount of
P107,649,729 representing overpaid income
taxes for the years 1987 and 1988.
Petitioner not having acted on its request,
respondent filed on April 6, 1990 a judicial claim
for refund or credit with the Court of Tax
Appeals.
It is gathered that respondent paid the
deficiency franchise tax in the amount of
P2,838,335.84. It protested the payment of the
alleged deficiency income tax and claimed as an
alternative remedy the deduction thereof from its
claim for refund or credit.
The Court of Tax Appeals granted the
P107,649,729 claim for refund, or in the
alternative for the BIR to issue a tax credit. Is the
Court of Tax Appeals correct ?
SUGGESTED ANSWER: Yes. Section 69 of the
National Internal Revenue Code of 1986, now Sec. 76
provides, if the sum of the quarterly tax payments made
during a taxable year is not equal to the total tax due on
the entire taxable income of that year as shown in its final
adjustment return, the corporation has the option to either:
(a) pay the excess tax still due, or (b) be refunded the
excess amount paid. The returns submitted are merely
pre-audited which consist mainly of checking
mathematical accuracy of the figures in the return. After
such checking, the purpose of which being to insure
prompt action on corporate annual income tax returns
showing refundable amounts arising from overpaid
quarterly income taxes, (Revenue Memorandum Order
No. 32-76 dated June 11, 1976) the refund or tax credit is
granted. (Commissioner of Internal Revenue v. Manila
Electric Company, G. R. No. 121666, October 10, 2007)
TARIFF AND CUSTOMS LAWS
ORGANIZATION AND FUNCTIONS OF THE
BUREAU OF INTERNAL REVENUE
TARIFF AND CUSTOMS CODE
1. When does importation begin, and
why is it important to know whether importation
has already begun or not ?
SUGGESTED ANSWER: Importation begins when
the conveying vessel or aircraft enters the jurisdiction of
the Philippines with intention to unlade therein. (Sec. 1202,
TCCP)
The jurisdiction of the Bureau of Customs to enforce
the provisions of the TCCP including seizure and forfeiture
also begins from the beginning of importation. Thus, the
Bureau of Customs obtains jurisdiction over imported
articles only after importation has begun.
 60
2. When is importation deemed
terminated and why is it important to know
whether importation has already ended?
SUGGESTED ANSWER: Importation is deemed
terminated upon payment of the duties, taxes and other
charges due upon the agencies, or secured to be paid, at
the port of entry and the legal permit for withdrawal shall
have been granted.
In case the articles are free of duties, taxes and
other charges, until they have legally left the jurisdiction of
the customs. (Sec. 1202, TCCP) The Bureau of Customs
loses jurisdiction to enforce the TCCP and to make
seizures and forfeitures after importation is deemed
terminated.
3. The flexible tariff clause is a
provision in the Tariff and Customs Code, which
implements the constitutionally delegated power to the
Congress to further delegate to the President of the
Philippines, in the interest of national economy, general
welfare and/or national security upon recommendation of
the NEDA (a) to increase, reduce or remove existing
protective rates of import duty, provided that, the increase
should not be higher than 100% ad valorem; (b) to
establish import quota or to ban imports of any commodity,
and (c) to impose additional duty on all imports not
exceeding 10% ad valorem, among others.
4. Customs duties defined. Customs
duties is the name given to taxes on the importation and
exportation of commodities, the tariff or tax assessed upon
merchandise imported from, or exported to, a foreign
country. (Nestle Phils. v. Court of Appeals, et al., G.R. No.
134114, July 6, 2001)
5. Special customs duties are additional
import duties imposed on specific kinds of
imported articles under certain conditions. The
special customs duties under the Tariff and Customs Code
(TCCP) are the anti-dumping duty, the countervailing duty,
the discriminatory duty, and the marking duty, and under
the Safeguard Measures Act (SMA) additional tariffs as
safeguard measures.
6. The special customs duties are imposed
for the protection of consumers and
manufacturers, as well as Philippine products.
7. Dumping duty is an additional
special duty amounting to the difference between
the export price and the normal value of such
product, commodity or article (Sec. 301 (s) (1), TCC,
as amended by Rep. Act No. 8752, Anti-Dumping Act of 1999.)
imposed on the importation of a product, commodity or
article of commerce into the Philippines at less than its
normal value when destined for domestic consumption in
the exporting country which is causing or is threatening to
cause material injury to a domestic industry, or materially
retarding the establishment of a domestic industry
producing the like product. [Sec. 301 (s) (5), TCC, as
amended by Rep. Act No. 8752, Anti-Dumping Act of 1999]
8. When is the anti-dumping duty
imposed ?
SUGGESTED ANSWER: The anti-dumping duty is
imposed
a. Where a product, commodity or article of
commerce is exported into the Philippines at a price less
than its normal value when destined for domestic
consumption in the exporting country,
b. and such exportation is causing or is threatening
to cause material injury to a domestic industry, or materially
retards the establishment of a domestic industry producing
the like product. [Sec. 301 (a), TCC, as amended by Rep. Act
No. 8752, Anti-Dumping Act of 1999]
9. Normal value for purposes of
imposing the anti-dumping duty is the comparable
price at the date of sale of like product, commodity, or
article in the ordinary course of trade when destined for
consumption in the country of export. [Sec. 301 (s) (3 ),
TCC, as amended by Rep. Act No. 8752, Anti-Dumping
Act of 1999]
10. The imposing authority for the anti-
dumping duty is the Secretary of Trade and
Industry in the case of non-agricultural product,
commodity, or article or the Secretary of
Agriculture, in the case of agricultural product,
commodity or article, after formal investigation and
affirmative finding of the Tariff Commission. [Sec. 301 (a),
TCC, as amended by Rep. Act No. 8752, Anti-Dumping Act of
1999]
11. Even when all the requirements for the
imposition have been fulfilled, the decision on
whether or not to impose a definitive anti-
dumping duty remains the prerogative of the
Tariff Commission. [Sec. 301 (a), TCC, as amended by
Rep. Act No. 8752, Anti-Dumping Act of 1999] Thus, the
cabinet secretaries could not contravene the
recommendation of the Tariff Commission. They could not
impose the anti-dumping duty or any special customs duty
without the favorable recommendation of the Tariff
Commission.
12. In the determination of whether to
impose the anti-dumping duty, the Tariff
Commission, may consider among others, the
effect of imposing an anti-dumping duty on the
welfare of the consumers and/or the general
public, and other related local industries. (Sec. 301
(a), TCC, as amended by Rep. Act No. 8752, Anti-Dumping Act
of 1999)
 61
13. The amount of anti-dumping duty that
may be imposed is the difference between the
export price and the normal value of such
product, commodity or article. (Sec. 301 (s) (1), TCC,
as amended by Rep. Act No. 8752, Anti-Dumping Act of 1999)
The anti-dumping duty shall be equal to the margin
of dumping on such product, commodity or article
thereafter imported to the Philippines under similar
circumstances, in addition to ordinary duties, taxes and
charges imposed by law on the imported product,
commodity or article.
14. What are countervailing duties and
when are they imposed ?
SUGGESTED ANSWER: Countervailing duties are
additional customs duties imposed on any product,
commodity or article of commerce which is granted directly
or indirectly by the government in the country of origin or
exportation, any kind or form of specific subsidy upon the
production, manufacture or exportation of such product
commodity or article, and the importation of such
subsidized product, commodity, or article has caused or
threatens to cause material injury to a domestic industry or
has materially retarded the growth or prevents the
establishment of a domestic industry. (Sec. 302, TCCP as
amended by Section 1, R.A. No. 8751)
15. The imposing authority for the
countervailing duties is the Secretary of Trade
and Industry in the case of non-agricultural
product, commodity, or article or the Secretary of
Agriculture, in the case of agricultural product,
commodity or article, after formal investigation and
affirmative finding of the Tariff Commission.
Even when all the requirements for the imposition
have been fulfilled, the decision on whether or not to
impose a definitive anti-dumping duty remains the
prerogative of the Tariff Commission. (Sec. 301 (a), TCC, as
amended by Rep. Act No. 8752, Anti-Dumping Act of 1999)
16. The countervailing duty is equivalent to
the value of the specific subsidy.
17. Marking duties are the additional
customs duties imposed on foreign articles (or its
containers if the article itself cannot be marked), not
marked in any official language in the Philippines, in a
conspicuous place as legibly, indelibly and permanently in
such manner as to indicate to an ultimate purchaser in the
Philippines the name of the country of origin.
18. The Commissioner of Customs
imposes the marking duty.
19. The marking duty is equivalent to five
percent (5%) ad valorem.
20. A discriminatory duty is a new and
additional customs duty imposed upon articles wholly or in
part the growth or product of, or imported in a vessel, of any
foreign country which imposes, directly or indirectly, upon
the disposition or transportation in transit through or re-
exportation from such country of any article wholly or in part
the growth or product of the Philippines, any unreasonable
charge, exaction, regulation or limitation which is not
equally enforced upon like articles of every foreign country,
or discriminates against the commerce of the Philippines,
directly or indirectly, by law or administrative regulation or
practice, by or in respect to any customs, tonnage, or port
duty, fee, charge, exaction, classification, regulation,
condition, restriction or prohibition, in such manner as to
place the commerce of the Philippines at a disadvantage
compared with the commerce of any foreign country.
21. The President of the Philippines
imposes the discriminatory duties.
22. Safeguard measures are emergency
measures, including tariffs, to protect domestic industries
and producers from increased imports which inflict or could
inflict serious injury on them.
The CTA is vested with jurisdiction to review
decisions of the Secretary of Trade and Industry imposing
safeguard measures as provided under Rep. Act No. 8800
the Safeguard Measures Act (SMA). (Southern Cross
Cement Corporation v. The Philippine Cement Manufacturers
Corp., et al., G. R. No. 158540, July 8, 2004)
The DTI Secretary cannot impose the safeguard
measures if the Tariff Commission does not favorably
recommend its imposition.
23. Imposing authority for safeguard
measures. The imposing authority for the
countervailing duties is the Secretary of Trade
and Industry in the case of non-agricultural
product, commodity, or article or the Secretary of
Agriculture, in the case of agricultural product,
commodity or article, after formal investigation and
affirmative finding of the Tariff Commission.
24. Safeguards measures that may be
imposed. Additional tariffs, import quotas or banning of
imports.
25. The basis of dutiable value of
merchandise that is subject to ad valorem
customs duties is the transaction value, which shall
be the price actually paid or payable for the goods when
sold for export to the Philippines, adjusted by adding
certain cost elements to the extent that they are incurred
by the buyer but are not included in the price actually paid
or payable for the imported goods, and may include the
following:
a. Cost of containers and packing,
b. Insurance, and
 62
c. Freight. (Sec. 201, TCC as amended by Sec.
1, Rep. Act No. 9135)
26. The above transaction value is the
primary method of determining dutiable value. If
the transaction value of the imported article could
not be determined using the above, the following
alternative methods should be used one after the
other:
a. Transaction value of identical goods
b. Transaction value of similar goods
c. Deductive method
d. Computed method
e. Fallback method
27. How and to whom should claims for
refund of customs duties be made ?
SUGGESTED ANSWER: All claims for refund of
duties shall be made in writing and forwarded to the
Collector of Customs to whom such duties are paid, who
upon receipt of such claim, shall verify the same by the
records of his Office, and if found to be correct and in
accordance with law, shall certify the same to the
Commissioner of Customs with his recommendation
together with all necessary papers and documents. Upon
receipt by the Commissioner of such certified claim he shall
cause the same to be paid if found correct. (Sec. 1708, TCC)
28. What is mean by the term entry in
Customs Law ?
SUGGESTED ANSWER: It has a triple meaning.
a. the documents filed at the Customs house;
b. the submission and acceptance of the
documents; and
c. Customs declaration forms or customs entry
forms required to be accomplished by passengers of
incoming vessels or passenger planes as envisaged
under Sec. 2505 of the TCCP (Failure to declare
baggage). (Jardeleza v. People, G.R. No. 165265,
February 6, 2006)
29. A flight stewardess arrived from
Singapore. Upon her arrival she was asked
whether she has anything to declare. She
answered none, and she submitted her Customs
Baggage Declaration Form which she
accomplished and signed with nothing or written
on the space for items to be declared. When her
hanger bag was examined some pieces of jewelry
were found concealed within the lining of said
bag.
She was then convicted of violating of Sec.
3601 of the Tariff and Customs Code for unlawful
importation which penalizes any person who
shall fraudulently import or bring into the
Philippines any article contrary to law.
She now appeals claiming that lower court
erred n convicting her under Sec. 3601 when the
facts alleged both in the information and those
shown by the prosecution constitute the offense
under Sec. 2505 Failure to Declare Baggage, of
which she was acquitted. Is she correct ?
SUGGESTED ANSWER: No. Sec. 3601 does not
define a crime. It merely provides, inter alia, the
administrative remedies which can be resorted to by the
Bureau of Customs when seizing dutiable articles found
the baggage of any person arriving in the Philippines which
is not included in the accomplished baggage declaration
submitted to the customs authorities, and the
administrative penalties that such person must pay for the
release of such goods if not imported contrary to law.
Such administrative penalties are independent of
the criminal liability for smuggling that may be imposed
under Sec. 3601, and other provisions of the TCC which
can only be determined after the appropriate criminal
proceedings, prescinding from the outcome in any
administrative case that may have been filed and disposed
of by the customs authorities.
Indeed the second paragraph of Sec. 2505 provides
that nothing shall prevent the bringing of a criminal action
against the offender for smuggling under Section 3601.
(Jardeleza v. People, G. R. No. 165265, February 6, 2006)
30. Payment is not a defense in smuggling.
When upon trial for violation of this section, the defendant
is shown to have possession of the article in question,
possession shall be deemed sufficient evidence to
authorize conviction, unless the defendant shall explain the
possession to the satisfaction of the court: Provided,
however, That payment of the tax due after apprehension
shall not constitute a valid defense in any prosecution
under this section. (last par., Sec. 3601, TCC)
31. How is smuggling committed ?
SUGGESTED ANSWER: Smuggling is committed
by any person who:
a. fraudulently imports or brings into the
country any article contrary to law;
b. assists in so doing any article contrary to
law; or
c. receives, conceals, buys, sells or in any
manner facilitates the transportation, concealment or sale
of such goods after importation, knowing the same to
have been imported contrary to law. (Jardeleza v.
People, G.R. No. 165265, February 6, 2006 citing
Rodriguez v. Court of Appeals, G. R. No. 115218,
September 18, 1995, 248 SCRA 288, 296)
NOTES AND COMMENTS:
a. Importation consists of bringing an article
into the country from the outside. Importation begins
when the conveying vessel or aircraft enters the
jurisdiction of the Philippines with intention to unload
therein.
b. When unlawful importation is complete.
In the absence of a bona fide intent to make entry and pay
 63
duties when the prohibited article enters the Philippine
territory. Importation is complete when the taxable,
dutiable commodity is brought within the limits of the port
of entry. Entry through a custom house is not the essence
of the act. (Jardeleza v. People, G.R. No. 165265,
February 6, 2006)
32. The Collector of Customs sitting
in seizure and forfeiture proceedings has
exclusive jurisdiction to hear and determine all
questions touching on the seizure and forfeiture
of dutiable goods. RTCs are precluded from
assuming cognizance over such matters even
through petitions of certiorari, prohibition or
mandamus. (The Bureau of Customs, et al., v. Ogario,
et al., G.R. No. 138081, March 20, 2000)
What is the rationale for this doctrine ?
SUGGESTED ANSWER:
a. Regional Trial Courts have no jurisdiction to
replevin a property which is subject to seizure and forfeiture
proceedings for violation of the Tariff and Customs Code
otherwise, actions for forfeiture of property for violation of
the Customs laws could easily be undermined by the
simple device of replevin. (De la Fuente v. De Veyra, et al.,
120 SCRA 455)
b. The doctrine of exclusive customs jurisdiction
over customs cases to the exclusion of the RTCs is
anchored upon the policy of placing no unnecessary
hindrance on the governments drive, not only to prevent
smuggling and other frauds upon Customs,
c. but more importantly, to render effective and
efficient the collection of import and export duties due the
State, which enables the government to carry out the
functions it has been instituted to perform. (Jao, et al., v.
Court of Appeals, et al., and companion case, 249 SCRA
35, 43)
d. The issuance by regular courts of writs of
preliminary injunction in seizure and forfeiture proceedings
before the Bureau of Customs may arouse suspicion that
the issuance or grant was for consideration other than the
strict merits of the case. (Zuno v. Cabredo, 402 SCRA 75
[2003])
e. Under the doctrine of primary jurisdiction, the
Bureau of Customs has exclusive administrative
jurisdiction to conduct searches, seizures and forfeitures of
contraband without interference from the courts. It could
conduct searches and seizures without need of a judicial
warrant except if the search is to be conducted in a dwelling
place.
Where an administrative office has obtained a
technical expertise in a specific subject, even the courts
must defer to this expertise.
NOTES AND COMMENTS: The Bureau of
Customs could search and seize articles without need of a
judicial warrant unless the place to be searched is a
dwelling place. In such a case customs requires a judicial
warrant.
33. A claiming to be the owner of a
vessel which is the subject of customs warrant
of seizure and detention sought the intercession
of the RTC to restrain the Bureau of Customs
from interfering with his property rights over the
vessel. Would the suit prosper?
SUGGESTED ANSWER: No. His remedy was not
with the RTC but with the CTA, as issues of ownership of
goods in the custody of customs officials are within the
power of the CTA to determine.
The Collector of Customs has exclusive jurisdiction
over seizure and forfeiture proceedings and trial courts
are precluded from assuming cognizance over such
matters even through petitions for certiorari, prohibition or
mandamus. (Commissioner of Customs v. Court of
Appeals, et al., G. R. Nos. 111202-05, January 31, 2006)
34. The customs authorities do not have
to prove to the satisfaction of the court that the
articles on board a vessel were imported from
abroad or are intended to be shipped abroad
before they may exercise the power to effect
customs searches, seizures, or arrests provided
by law and continue with the administrative
hearings. (The Bureau of Customs, et al., v. Ogario, et
al., G.R. No. 138081, March 20, 2000)
35. The Tariff and Customs Code allows the
Bureau of Customs to resort to the administrative
remedy of seizure, such as by enforcing the tax
lien on the imported article when the imported
articles could be found and be subject to seizure
and forfeiture.
36. The Tariff and Customs Code allows the
Bureau of Customs to resort to the judicial remedy
of filing an action in court when the imported
articles could not anymore be found.
37. Section 2301 of the TCCP states
that seized articles may not be released under
bond if there is prima facie evidence of fraud in
their importation. Commissioner of Customs v. Court
of Tax Appeals, et al., G. R. No. 171516-17, February 13,
2009
Section 2301. Warrant for Detention of Property-
Cash Bond. Upon making any seizure, the
Commissioner shall issue a warrant for the detention of
the property; and if the owner or importer desires to
secure the release of the property for legitimate use, the
Collector shall, with the approval of the Commissioner of
Customs, surrender it upon the filing of a cash bond, in an
amount fixed by him, conditioned upon the payment of the
appraised value of the article and/or any fine, expenses
and costs which may be adjudged in the case: Provided,
That such importation shall not be released under any
bond when there is prima facie evidence of fraud in

the importation of the article: Provided, further, That
articles the importation of which is prohibited by law shall
not be released under any circumstances whatsoever:
Provided, finally, That nothing in this section shall be
construed as relieving the owner or importer from any
criminal liability which may arise from any violation of law
committed in connection with the importation of the article.
(emphasis supplied)
38. Instances where there is no right of
redemption of seized and forfeited articles:
a. There is fraud;
b. The importation is absolutely prohibited, or
c. The release of the property would be contrary
to law. (Transglobe International, Inc. v. Court of Appeals, et al.,
G.R. No. 126634, January 25, 1999)
39. In Aznar v. Court of Tax Appeals, 58 SCRA
519, reiterated in Farolan, Jr. v. Court of Tax appeals, et
al., 217 SCRA 298, the Supreme Court clarified that the
fraud contemplated by law must be actual and not
constructive. It must be intentional, consisting of
deception, willfully and deliberately done or resorted to in
order to induce another to give up some right.
40. Requisites for forfeiture
imported goods:
a. Wrongful making by the owner, importer,
exporter or consignee of any declaration or affidavit, or the
wrongful making or delivery by the same person of any
invoice, letter or paper all touching on the importation or
exportation of merchandise.
b. the falsity of such declaration, affidavit,
invoice, letter or paper; and
c. an intention on the part of the
importer/consignee to evade the payment of the duties
due. (Republic, etc., v. The Court of Appeals, et al., G.R.
No. 139050, October 2, 2001)
41. On January 7, 1989, the vessel M/V
Star Ace, coming from Singapore laden with
cargo, entered the Port of San Fernando, La
Union for needed repairs. When the Bureau of
Customs later became suspicious that the
vessels real purpose in docking was to smuggle
cargo into the country, seizure proceedings were
instituted and subsequently two Warrants of
Seizure and Detention were issued for the vessel
and its cargo.
Cesar does not own the vessel or any of its
cargo but claimed a preferred maritime lien.
Cesar then brought several cases in the RTC to
enforce his lien. Would these suits prosper ?
SUGGESTED ANSWER: No. The Bureau of
Customs having first obtained possession of the vessel
and its goods has obtained jurisdiction to the exclusion of
the trial courts.
64
When Cesar has impleaded the vessel as a
defendant to enforce his alleged maritime lien, in the RTC,
he brought an action in rem under the Code of Commerce
under which the vessel may be attached and sold.
However, the basic operative fact is the actual or
constructive possession of the res by the tribunal
empowered by law to conduct the proceedings. This
means that to acquire jurisdiction over the vessel, as a
defendant, the trial court must have obtained either actual
or constructive possession over it. Neither was
accomplished by the RTC as the vessel was already in the
possession of the Bureau of Customs. (Commissioner of
Customs v. Court of Appeals, et al., G. R. Nos. 111202-05,
January 31, 2006)
NOTES AND COMMENTS:
a. Forfeiture of seized goods in the Bureau
of Customs is in the nature of a proceeding in rem, i.e.
directed against the res or imported goods and entails a
determination of the legality of their importation. In this
proceeding, it is in legal contemplation the property itself
which commits the violation and is treated as the offender,
without reference whatsoever to the character or conduct
of the owner.
The issue is limited to whether the imported goods
should be forfeited and disposed of in accordance with law
for violation of the Tariff and Customs Code. .(Transglobe
of International, Inc. v. Court of Appeals, et al., G.R. No.
126634, January 25, 1999)
Forfeiture of seized goods in the Bureau of Customs
is a proceeding against the goods and not against the
owner. (Asian Terminals, Inc. v. Bautista-Ricafort, G .R.
No. 166901, October 27, 2006 citing Transglobe)
42. The Collector of Customs upon
probable cause that the articles are imported or
exported, or are attempted to be imported or
exported, in violation of the tariff and customs
laws shall issue a warrant of seizure. (Sec. 6, Title
III, CAO No. 9-93)
If the search and seizure is to be conducted in a
dwelling place, then a search warrant should be issued by
the regular courts not the Bureau of Customs.
There may be instances where no warrants issued
by the Bureau of Customs or the regular courts is required,
as in search and seizures of motor vehicles and vessels.
43. Smuggled goods seized by virtue of a
court warrant should be surrendered to the court
that issued the warrant and not to the Bureau of
Customs because the goods are in custodia legis.
44. Decisions of the Commissioner
of Customs in cases involving liability for
customs duties, fees or other money charges
that must be appealed to the Court of Tax
Appeals Division within thirty (30) days from
receipt specifically refer to his decisions on
administrative tax protest cases, as stated in Section
 65
2402 of the Tariff and Customs Code of the Philippines
(TCCP):
Section 2402. Review by Court
of Tax Appeals. The party aggrieved
by a ruling of the Commissioner in any
matter brought before him upon
protest or by his action or ruling in any
case of seizure may appeal to the Court
of Tax Appeals, in the manner and
within the period prescribed by law and
regulations.
Unless an appeal is made to the Court of Tax
Appeals in the manner and within the period prescribed
by laws and regulations, the action or ruling of the
Commissioner shall be final and conclusive.
[Emphasis supplied.] (Pilipinas Shell Petroleum Corporation
v. Commissioner of Customs, G. R. No. 176380, June 18, 2009)
45. Administrative tax protest under
the Tariff and Customs Code (TCCP). A tax protest
case, under the TCCP, involves a protest of the liquidation
of import entries. (Pilipinas Shell Petroleum Corporation v.
Commissioner of Customs, G. R. No. 176380, June 18, 2009)
46. Liquidation, defined. A liquidation is the
final computation and ascertainment by the collector of
the duties on imported merchandise, based on official
reports as to the quantity, character, and value thereof,
and the collectors own finding as to the applicable rate of
duty; it is akin to an assessment of internal revenue taxes
under the National Internal Revenue Code where the tax
liability of the taxpayer is definitely determined. (Pilipinas
Shell Petroleum Corporation v. Commissioner of Customs, G.
R. No. 176380, June 18, 2009)
47. The following letters of demand
can not be considered as a liquidation or an
assessment of Shells import tax liabilities that
can be the subject of an administrative tax
protest proceeding before the Commissioner of
Customs whose decision is appealable to the
Court of Tax Appeals:
a. the One Stop Shop Inter-Agency Tax Credit
and Duty Drawback Center (the Center) November 3
letter, signed by the Secretary of Finance, informing it of
the cancellation of the Tax Credit Certificates (TCCs);
b. the Commissioner of Customs November
19 letter requiring Shell to replace the amount equivalent
to the amount of the cancelled TCCs used by Shell; and
c. the Commissioner of Customs collection
letters, issued through Deputy Commissioner Atty.
Valera, formally demanding the amount covered by the
cancelled TCCs.
None of these letters, however, can be considered
as a liquidation or an assessment of Shells import tax
liabilities that can be the subject of an administrative tax
protest proceeding before the respondent whose decision
is appealable to the CTA. Shells import tax liabilities had
long been computed and ascertained in the original
assessments, and Shell paid these liabilities using the
TCCs transferred to it as payment.
It is even an error to consider the letters as a
reassessment because they refer to the same tax
liabilities on the same importations covered by the original
assessments. The letters merely reissued the original
assessments that were previously settled by Shell with
the use of the TCCs. However, on account of the
cancellation of the TCCs, the tax liabilities of Shell under
the original assessments were considered unpaid; hence,
the letters and the actions for collection.
When Shell went to the CTA, the issues it raised in
its petition were all related to the fact and efficacy of the
payments made, specifically the genuineness of the
TCCs; the absence of due process in the enforcement of
the decision to cancel the TCCs; the facts surrounding the
fraud in originally securing the TCCs; and the application
of estoppel. These are payment and collection issues, not
tax protest issues within the CTAs jurisdiction to rule
upon.
Shell never protested the original assessments of
its tax liabilities and in fact settled them using the TCCs.
These original assessments, therefore, have become
final, incontestable, and beyond any subsequent protest
proceeding, administrative or judicial, to rule upon.
To be very precise, Shells petition before the
CTA principally questioned the validity of the cancellation
of the TCCs a decision that was made not by the
Commissioner of Customs, but by the Center. As the
CTA has no jurisdiction over decisions of the Center,
Shells remedy against the cancellation should have been
a certiorari petition before the regular courts, not a tax
protest case before the CTA. Records do not show that
Shell ever availed of this remedy.
Alternatively, as held in Shell v. Republic of the
Philippines, G.R. No. 161953, March 6, 2008, 547 SCRA
701, the appropriate forum for Shell under the
circumstances of this case should be at the collection
cases before the RTC where Shell can put up the fact of
its payment as a defense. (Pilipinas Shell Petroleum
Corporation v. Commissioner of Customs, G. R. No.
176380, June 18, 2009)
48. A case becomes ripe for filing
with the Regional Trial Court (RTC), as a
collection matter after the finality of the
Commissioner of Customs assessment. (Pilipinas
Shell Petroleum Corporation v. Commissioner of Customs, G.
R. No. 176380, June 18, 2009 citing Shell v. Republic of the
Philippines, G.R. No. 161953, March 6, 2008, 547 SCRA 701)
The assessment has long been final, and this
recognition of finality removes all perceived hindrances,
based on this case, to the continuation of the collection
suits.
A suit for the collection of internal revenue taxes,
where the assessment has already become final and
executory, the action to collect is akin to an action to
 66
enforce the judgment. No inquiry can be made therein as
to the merits of the
In light of the conclusion that the present case
does not involve a decision of the Commissioner of
Customs on a matter brought to him as a tax protest, Atty.
Valeras lack of authority to issue the collection letters and
to institute the collection suits is irrelevant. For this same
reason, the injunction against Atty. Valera cannot be
invoked to enjoin the collection of unpaid taxes due from
Shell. (Pilipinas Shell Petroleum Corporation v.
Commissioner of Customs, supra)
LOCAL GOVERNMENT TAXATION
1. The fundamental principles of local
taxation are:
a. Uniformity;
b. Taxes, fees, charges and other impositions
shall be equitable and based on ability to pay, for public
purposes, not unjust, excessive, oppressive or
confiscatory, not contrary to law, public policy, national
economic policy or in restraint of trade;
c. The levy and collection shall not be let to any
private person;
d. Inures solely to the local government unit
levying the tax;
e. The progressivity principle must be observed.
2. A law which deprives local
government units of their power to tax would be
unconstitutional. The constitution has delegated to
local governments the power to levy taxes, fees and other
charges. This constitutional delegation may only be
removed by a constitutional amendment.
3. Under the now prevailing Constitution,
where there is neither a grant nor prohibition by
statute, the taxing power of local governments
must be deemed to exist although Congress may
provide statutory limitations and guidelines in
order to safeguard the viability and self-sufficiency of local
government units by directly granting them general and
broad tax powers. (City Government of San Pablo, Laguna,
et al., v. Reyes, et al., G.R. No. 127708, March 25, 1999)
4. The Local Government Code explicitly
authorizes provinces and cities, notwithstanding
any exemption granted by any law or other
special law to impose a tax on businesses
enjoying a franchise. Indicative of the legislative intent
to carry out the constitutional mandate of vesting broad tax
powers to local government units, the Local Government
Code has withdrawn tax exemptions or incentives
theretofore enjoyed by certain entities. (City Government of
San Pablo, Laguna, et al., v. Reyes, et al., G.R. No.
127708, March 25, 1999)
5. Philippine Long Distance Telephone
Company, Inc., v. City of Davao, et al., etc., G. R.
No. 143867, August 22, 2001, upheld the authority of
the City of Davao, a local government unit, to impose and
collect a local franchise tax because the Local Government
has withdrawn all tax exemptions previously enjoyed by all
persons and authorized local government units to impose
a tax on business enjoying a franchise tax notwithstanding
the grant of tax exemption to them.
6. Explain the concept of the
paradigm shift in local government taxation.
SUGGESTED ANSWER: Paradigm shift from
exclusive Congressional power to direct grant of taxing
power to local legislative bodies. 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. (Batangas Power Corporation v.
Batangas City, et al. G. R. No. 152675, and companion
case, April 28, 2004 citing National Power Corporation v.
City of Cabanatuan, G. R. No. 149110, April 9, 2003)
7. The fundamental law did not intend the
direct grant to local government units to be
absolute and unconditional, the constitutional
objective obviously is to ensure that, while 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
be unduly disturbed; and
d. local taxation will be fair, uniform and just.
(Manila Electric Company v. Province of Laguna, et al.,
G.R. No. 131359, May 5, 1999)
8. Taxing power of the local government
is limited. The taxing power of local governments is
limited in the sense that Congress can enact legislation
granting tax exemptions.
While the system of local government taxation has
changed with the onset of the 1987 Constitution, the
power of local government units to tax is still limited.
While the power to tax by local governments 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, the basic doctrine on local taxation remains
essentially the same, the power to tax is [still] primarily
vested in the Congress. (Quezon City, et al., v. ABS-CBN
Broadcasting Corporation, G. R. No. 166408, October 6, 2008
citing City Government of Quezon City, et al. v. Bayan
Telecommunications, Inc., G.R. No. 162015, March 6, 2006,
484 SCRA 169 in turn referring to Mactan Cebu International
Airport Authority, v. Marcos, G.R. No. 120082, September 11,
1996, 261 SCRA 667, 680)
 67
9. Further amplification by Bernas of
the local governments power to tax. What is the
effect of Section 5 on the fiscal position of municipal
corporations? Section 5 does not change the doctrine
that municipal corporations do not possess inherent
powers of taxation. What it does is to confer municipal
corporations a general power to levy taxes and otherwise
create sources of revenue. They no longer have to wait
for a statutory grant of these powers. The power of the
legislative authority relative to the fiscal powers of local
governments has been reduced to the authority to impose
limitations on municipal powers. Moreover, these
limitations must be consistent with the basic policy of
local autonomy. The important legal effect of Section 5
is thus to reverse the principle that doubts are resolved
against municipal corporations. Henceforth, in
interpreting statutory provisions on municipal fiscal
powers, doubts will be resolved in favor of municipal
corporations. It is understood, however, that taxes
imposed by local government must be for a public
purpose, uniform within a locality, must not be
confiscatory, and must be within the jurisdiction of the
local unit to pass. (Quezon City, et al., v. ABS-CBN
Broadcasting Corporation, G. R. No. 166408, October 6, 2008
citing City Government of Quezon City, et al. v. Bayan
Telecommunications, Inc., G.R. No. 162015, March 6, 2006,
484 SCRA 169)
10. Reconciliation of the local
governments authority to tax and the
Congressional general taxing power. Congress has
the inherent power to tax, which includes the power to grant tax
exemptions. On the other hand, the power of local
governments, such as provinces and cities for example Quezon
City, to tax is prescribed by Section 151 in relation to Section
137 of the LGC which expressly provides that notwithstanding
any exemption granted by any law or other special law, the City
or a province may impose a franchise tax. It must be noted that
Section 137 of the LGC does not prohibit grant of future
exemptions.
The Supreme Court in a series of cases has
sustained the power of Congress to grant tax exemptions
over and above the power of the local governments
delegated power to tax. (Quezon City, et al., v. ABS-CBN
Broadcasting Corporation, G. R. No. 166408, October 6, 2008
citing City Government of Quezon City, et al. v. Bayan
Telecommunications, Inc., G.R. No. 162015, March 6, 2006,
484 SCRA 16)
Indeed, the grant of taxing powers to local
government units under the Constitution and the LGC
does not affect the power of Congress to grant
exemptions to certain persons, pursuant to a declared
national policy. The legal effect of the constitutional grant
to local governments simply means that in interpreting
statutory provisions on municipal taxing powers, doubts
must be resolved in favor of municipal corporations.
[Ibid., referring to Philippine Long Distance Telephone
Company, Inc. (PLDT) vs. City of Davao]
11. Professional tax may be
imposed by a province or city but not by a
municipality or barangay.
a. Transaction taxed: Exercise or practice of
profession requiring government licensure examination.
b. Tax rate: In Accordance with a taxing
ordinance which should not exceed P300.00.
c. Tax base: Reasonable classification by the
sanggunian.
d. Exception: Payment to one province or city
no longer subject to any other national or local tax, license
or fee for the practice of such profession in any part of the
Philippine professionals exclusively employed in the
government.
e. Date of payment: or on before January 31 or
engaging in the profession.
f. Place of payment: Province or city where the
professional practices his profession or where he maintains
his principal office in case he practices his profession in
several places.
12. Requirements: Any individual or
corporation employing a person subject to professional tax
shall require payment by that person of the tax on his
profession before employment and annually thereafter.
Any person subject to the professional tax shall write
in deeds, receipts, prescriptions, reports, books of account,
plans and designs, surveys and maps, as the case may be,
the number of the official receipt issued to him.
Exemption: Professionals exclusively employed in
the government shall be exempt from payment. (Sec.
139, LGC)
NOTE: For the purpose of collecting the tax, the
provincial or city treasurer or his duly authorized
representative shall require from such professionals their
current annual registration cards issued by competent
authority before accepting payment of their professional tax
for the current year. The PRC shall likewise require the
professionals presentation of proof of payment before
registration of professionals or renewal of their licenses.
(last par., Art. 228, Rules and Regulations Implementing
the Local Government Code of 1991)
13. Who are the professionals who, if
they are in practice of their profession, are
subject to professional tax ?
SUGGESTED ANSWER: The professionals
subject to the professional tax are only those who have
passed the bar examinations, or any board or other
examinations conducted by the Professional Regulation
Commission (PRC). for example, a lawyer who is also a
Certified Public Accountant (CPA) must pay the
professional tax imposed on lawyers and that fixed for
CPAs, if he is to practice both professions. [Sec. 238 (f),
Rule XXX, Rules and Regulations Implementing the Local
Government Code of 1991]
14. X City issued a notice of
assessment against ABC Condominium
 68
Corporation for unpaid business taxes. The
Condominium Corporation is a duly constituted
condominium corporation in accordance with the
Condominium Act which owns and holds title to
the common and limited common areas of the
condominium. Its membership comprises the
unit owners and is authorized under its By-Laws
to collect regular assessments from its members
for operating expenses, capital expenditures on
the common areas and other special
assessments as provided for in the Master Deed
with ?Declaration of Restrictions of the
Condominium.
ABC Condominium Corporation insists that
the X City Revenue Code and the Local
Government Code do not contain provisions
upon which the assessment could be based.
Resolve the controversy.
SUGGESTED ANSWER: ABC is correct.
Condominium corporations are generally exempt from
local business taxation under the Local Government Code,
irrespective of any local ordinance that seeks to declare
otherwise.
X City, is authorized under the Local Government
Code, to impose a tax on business, which is defined under
the Code as trade or commercial activity regularly
engaged in as a means of livelihood or with a view to profit.
By its very nature a condominium corporation is not
engaged in business, and any profit that it derives is merely
incidental, hence it may not be subject to business taxes.
(Yamane , etc. v. BA Lepanto Condominium Corporation,
G. R. No. 154993, October 25, 2005)
15. Authority of Local Government
Units (LGUs) such as the City of Manila to
impose business taxes. Section 143 of the LGC, is
the very source of the power of municipalities and cities
to impose a local business tax, and to which any local
business tax imposed by cities or municipalities such as
the City of Manila must conform. It is apparent from a
perusal thereof that when a municipality or city has
already imposed a business tax on manufacturers, etc. of
liquors, distilled spirits, wines, and any other article of
commerce, pursuant to Section 143(a) of the LGC, said
municipality or city may no longer subject the same
manufacturers, etc. to a business tax under Section
143(h) of the same Code. Section 143(h) may be
imposed only on businesses that are subject to excise tax,
VAT, or percentage tax under the NIRC, and that are not
otherwise specified in preceding paragraphs. In the
same way, businesses such as respondents, already
subject to a local business tax under Section 14 of Tax
Ordinance No. 7794 [which is based on Section 143(a) of
the LGC], can no longer be made liable for local business
tax under Section 21 of the same Tax Ordinance [which
is based on Section 143(h) of the LGC]. (The City of
Manila, et al., v. Coca-Cola Bottlers Philippines, Inc., G.
R. No. 181845, August 4, 2009)
REAL PROPERTY TAXATION
1. The fundamental principles of real
property taxation are:
a. Appraisal at current and fair market value;
b. Classification for assessment on the basis of
actual use;
c. Assessment on the basis of uniform
classification;
d. Appraisal, assessment, levy and collection
shall not be let to a private person;
e. Appraisal and assessment shall be equitable.
NOTES AND COMMENTS: Real properties shall
be appraised at the current and fair market value prevailing
in the locality where the property is situated and classified
for assessment purposes on the basis of its actual use.
(Allied Banking Corporation, etc., v. Quezon City Government, et
al., G. R. No. 154126, October 11, 2005)
2. The reasonable market value is
determined by the assessor in the form of a
schedule of fair market values.
The schedule is then enacted by the local
sanggunian.
3. Fair market value is the 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, taking into consideration all uses
to which the property is adopted and might in reason be
applied.
The criterion established by the statute
contemplates a hypothetical sale. Hence, the buyers need
not be actual and existing purchasers. (Allied Banking
Corporation, etc., v. Quezon City Government, et al., G. R.
No. 154126, October 11, 2005 )
NOTES AND COMMENTS: In fixing the value of
real property, assessors have to consider all the
circumstances and elements of value and must exercise
prudent discretion in reaching conclusions. (Allied Banking
Corporation, etc., v. Quezon City Government, et al., G. R.
No. 154126, October 11, 2005)
Preparation of fair market values:
a. 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; and
b. 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.
(Lopez v. City of Manila, et al., G.R. No. 127139, February
19, 1999)
Proposed fair market values of real property in a
local government unit as well as the ordinance
containing the schedule must be published in full for
 69
three (3) consecutive days in a newspaper of local
circulation, where available, within ten (10) days of its
approval, and posted in at lease two (2) prominent places
in the provincial capitol, city, municipal or barangay hall for
a minimum of three (3) consecutive weeks. (Figuerres v.
Court of Appeals, et al,. G.R. No. 119172, March 25, 1999)
4. Approaches in estimating the fair
market value of real property for real property tax
purposes ?
a. Sales Analysis Approach. The sales price
paid in actual market transactions is considered by taking
into account valid sales data accumulated from among the
Registrar of Deeds, notaries public, appraisers, brokers,
dealers, bank officials, and various sources stated under
the Local Government Code.
b. Income Capitalization Approach. The value
of an income-producing property is no more than the return
derived from it. An analysis of the income produced is
necessary in order to estimate the sum which might be
invested in the purchase of the property.
c. Reproduction cost approach is a formal
approach used exclusively n appraising man-made
improvements such as buildings and other structures,
based on such data as materials and labor costs to
reproduce a new replica of the improvement.
The assessor uses any or all of these approaches in
analyzing the data gathered to arrive at the estimated fair
market value to be included in the ordinance containing the
schedule of fair market values. (Allied Banking
Corporation, etc., v. Quezon City Government, et al., G. R.
No. 154126, October 11, 2005 citing Local Assessment
Regulations No. 1-92)
5. An ordinance whereby the parcels
of land sold, ceded, transferred and conveyed for
remuneratory consideration after the effectivity of
this revision shall be subject to real estate tax
based on the actual amount reflected in the deed
of conveyance or the current approved zonal
valuation of the Bureau of Internal Revenue
prevailing at the time of sale, cession, transfer
and conveyance, whichever is higher, as
evidenced by the certificate of payment of the
capital gains tax issued therefore is INVALID
being contrary to public policy and for restraining trade for
the following reasons:
a. It mandates an exclusive rule in determining
the fair market value and departs from the established
procedures such as the sales analysis approach, the
income capitalization approach and the reproduction
approach provided under the rules implementing the
statute. It unduly interferes with the duties statutorily
placed upon the local assessor by completely dispensing
with his analysis and discretion which the Local
Government Code and the regulations require to be
exercised. An ordinance that contravenes any statute is
ultra vires and void.
b. The consideration approach in the
ordinance is illegal since the appraisal, assessment, levy
and collection of real property tax shall not be let to any
private person, it will also completely destroy the
fundamental principle in real property taxation that real
property shall be classified, valued and assessed on the
basis of its actual use regardless of where located,
whoever owns it, and whoever uses it. Allowing the parties
to a private sale to dictate the fair market value of the
property will dispense with the distinctions of actual use
stated in the Local Government Code and in the
regulations.
c. The invalidity is not cured by the prhase
whichever is higher because an integral part of that
system still permits valuing real property in disregard of its
actual use.
d. The ordinance would result to real property
assessments more than once every three (3) years and
that is not the congressional intent as shown in the
provisions of the Local Government Code and the
regulations. Consequently, the real property tax burden
should not be interpreted to include those beyond what the
Code or the regulations expressly clearly state.
e. The proviso would provide a chilling effect on
real property owners or administrators to enter freely into
contracts reflecting the increasing value of real properties
in accordance with prevailing market conditions.
While the Local Government Code provides that the
assessment of real property shall not be increased once
every three (3) years, the questioned proviso subjects the
property to a higher assessment every time a sales
transaction is made. Real property owners would therefore
postpone sales until after the lapse of the three (3) year
period, or if they do so within the said period they shall be
compelled to dispose of the property at a price not
exceeding the last prior conveyance in order to avoid a
higher tax assessment.
In the above two scenarios real property owners are
effectively prevented from obtaining the best price possible
for their properties and unduly hampers the equitable
distribution of wealth. (Allied Banking Corporation, etc., v.
Quezon City Government, et al., G. R. No. 154126, October 11,
2005)
6. Examples of personal property
under the civil law that may be considered as real
property for purposes of taxes. Personal property
under the civil law may be considered as real property for
purposes of taxes where the property is essential to the
conduct of the business.
a. Underground tanks are essential to the
conduct of the business of a gasoline station without which
it would not be operational. (Caltex Phils., Inc. v. Central Board
of Assessment Appeals, et al., 114 SCRA 296)
b. Light Rail Transit (LRT) improvements such as
buildings, carriageways, passenger terminals stations, and
similar structures do not form part of the public roads since
the former are constructed over the latter in such a way that
the flow of vehicular traffic would not be impaired. The
carriageways and terminals serve a function different from
 70
the public roads. Furthermore, they are not open to use by
the general public hence not exempt from real property
taxes. Even granting that the national government owns
the carriageways and terminal stations, the property is not
exempt because their beneficial use has been granted to
LRTA a taxable entity. (Light Rail Transit Authority v. Central
Board of Assessment Appeals, et al., G. R. No. 127316, October
12, 2000)
c. Barges on which were mounted gas turbine
power plants designated to generate electrical power, the
fuel oil barges which supplied fuel oil to the power plant
barges, and the accessory equipment mounted on the
barges were subject to real property taxes.
Moreover, Article 415(9) of the Civil Code provides
that [d]ocks and structures which, though floating, are
intended by their nature and object to remain at a fixed
place on a river, lake or coast are considered immovable
property by destination being intended by the owner for an
industry or work which may be carried on in a building or
on a piece of land and which tend directly to meet the
needs of said industry or work. (FELS Energy, Inc., v.
Province of Batangas, G. R. No. 168557, February 16, 2007 and
companion case)
7. Unpaid realty taxes attach 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
which was neither the owner not the beneficial user of the
property during the designated periods would not only be
contrary to law but also unjust.
Consequently, MERALCO the former owner/user
of the property was required to pay the tax instead of the
new owner NAPOCOR. (Manila Electric Company v. Barlis,
G.R. No. 114231, May 18, 2001)
NOTES AND COMMENTS: The above May 18,
2001 decision was set aside by the Supreme Court when it
granted the petitioners second motion for reconsideration
on June 29, 2004. The author submits that the above ruling
in the May 18, 2001 decision is still valid, not on the basis
of the May 18, 2001 decision but in the light of
pronouncements of the Supreme Court in other cases.
Thus, do not cite the doctrine as emanating from the May
18, 2001 decision.
8. Secretary of Justice can take
cognizance of a case involving the
constitutionality or legality of tax ordinances
where there are factual issues involved. (Figuerres
v. Court of Appeals, et al., G.R. No. 119172, March 25, 1999)
Taxpayer files appeal to the Secretary of
Justice, within 30 days from effectivity thereof. In
case the Secretary decides the appeal, a period also of 30
days is allowed for an aggrieved party to go to court. But if
the Secretary does not act thereon, after the lapse of 60
days, a party could already seek relief in court within 30
days from the lapse of the 60 day period.
These three separate periods are clearly given for
compliance as a prerequisite before seeking redress in a
competent court. Such statutory periods are set to prevent
delays as well as enhance the orderly and speedy
discharge of judicial functions. For this reason the courts
construe these provisions of statutes as mandatory.
(Reyes, et al., v. Court of Appeals, et al., G.R. No. 118233,
December 10, 1999)
9. Public hearings are mandatory prior
to approval of tax ordinance, but this still requires the
taxpayer to adduce evidence to show that no public
hearings ever took place. (Reyes, et al., v. Court of Appeals, et
al., G.R. No. 118233, December 10, 1999) Public hearings are
required to be conducted prior to the enactment of an
ordinance imposing real property taxes. (Figuerres v. Court
of Appeals, et al., G.R. No. 119172, March 25, 1999)
10. The concurrent and simultaneous
remedies afforded local government units in
enforcing collection of real property taxes:
a. Distraint of personal property;
b. Sale of delinquent real property, and
c. Collection of real property tax through
ordinary court action.
11. Notice and publication, as well as the
legal requirements for a tax delinquency sale, are
mandatory, and the failure to comply therewith can
invalidate the sale. The prescribed notices must be sent to
comply with the requirements of due process. (De Knecht,
et al,. v. Court of Appeals; De Knecht, et al., v. Honorable Sayo,
290 SCRA 223,236)
12. The reason behind the notice
requirement is that tax sales are administrative
proceedings which are in personam in nature.
(Puzon v. Abellera, 169 SCRA 789, 795; De Asis v. I.A.C., 169
SCRA 314)
13. FELS Energy, Inc., had a
contract to supply NPC with the electricity
generated by FELS power barges. The contract
also stated that NPC shall be responsible for all
real estate taxes and assessments. FELS then
received an assessment of real property taxes on
its power barges from the Provincial Assessor of
Batangas. If filed a motion for reconsideration
with the Provincial Assessor.
a. Upon denial, FELS elevated the matter
to the Local Board of Assessment Appeals
(LBAA), where it raised the following issues:
1) Since NPC is tax-exempt then
FELs should also be tax-exempt because of
its contract with NPC.
2) The power barges are not real
property subject to real property taxes.
b. Upon the other hand the Local
Treasurer insists that the assessment has
 71
attained a state of finality hence the appeal to the
LBAA should be dismissed.
Rule on the conflicting contentions.
SUGGESTED ANSWER:
a. All the contentions of FELS are without merit:
1) NPC is not the owner of the power
barges nor the operator of the power barges. The
tax exemption privilege granted to NPC cannot be
extended to FELS. the covenant is between NPC
and FELs and does not bind a third person not privy
to the contract such as the Province of Batangas.
2) The Supreme Court of New York in
Consolidated Edison Company of New York, Inc., et
al., v. The City of New York, et al., 80 Misc. 2d 1065
(1975) cited in FELS Energy, Inc., v. Province of
Batangas, G. R. No. 168557, February 16, 2007 and
companion case, held that barges on which were
mounted gas turbine power plants designated to
generate electrical power, the fuel oil barges which
supplied fuel oil to the power plant barges, and the
accessory equipment mounted on the barges were
subject to real property taxes.
Moreover, Article 415(9) of the Civil Code
provides that [d]ocks and structures which, though
floating, are intended by their nature and object to
remain at a fixed place on a river, lake or coast are
considered immovable property by destination being
intended by the owner for an industry or work which
may be carried on in a building or on a piece of land
and which tend directly to meet the needs of said
industry or work.
b. The Treasurer is correct. The procedure do
not allow a motion for reconsideration to be filed with the
Provincial Assessor.
To allow the procedure would indeed invite
corruption in the system of appraisal and assessment. it
conveniently courts a graft-prone situation where values of
real property ay be initially set unreasonably high, and then
subsequently reduced upon the request of a property
owner. In the latter instance, allusions of possible cover,
illicit trade-off cannot be avoided, and in fact can
conveniently take place. Such occasion for mischief must
be prevented and excised from our system. (FELS Energy,
Inc., v. Province of Batangas, G. R. No. 168557, February 16,
2007 and companion case)
14. A special levy or special assessment
is an imposition by a province, a city, a
municipality within the Metropolitan Manila Area,
a municipality or a barangay upon real property
specially benefited by a public works expenditure of the
LGU to recover not more than 60% of such expenditure.
15. If the ground for the protest is validity
of the real property tax ordinance and not the
unreasonableness of the amount collected the tax must be
paid under protest, and the issue of legality may be raised
to the proper courts on certiorari without need of exhausting
administrative remedies.
16. If the ground for the protest is
unreasonableness of the amounts collected there
is need to pay under protest and administrative
remedies must be resorted to before recourse to the proper
courts.
17. Procedure for refund of real property
taxes based on unreasonableness or
excessiveness of amounts collected.
a. Payment under protest at the time of payment
or within thirty (30) days thereafter, protest being lodged to
the provincial, city or in the case of a municipality within the
Metro Manila Area the municipal treasurer.
b. The treasurer has a period of sixty (60) days
from receipt of the protest within to decide.
c. Within thirty (30) days from receipt of
treasurers decision or if the treasurer does not decide,
within thirty (30) days from the expiration of the sixty (60)
period for the treasurer to decide, the taxpayer should file
an appeal with the Local Board of Assessment Appeals.
d. The Local Board of Assessment Appeals has
120 days from receipt of the appeal within which to decide.
e. The adverse decision of the Local Board of
Assessment Appeals should be appealed within thirty (30)
days from receipt to the Central Board of Assessment
Appeals.
f. The adverse decision of the Central Board of
Assessment Appeals shall be appealed to the Court of Tax
Appeals (En Banc) by means of a petition for review within
thirty (30) days from receipt of the adverse decision.
g. The decision of the CTA may be the subject
of a motion for reconsideration or new trial after which an
appeal may be interposed by means of a petition for review
on certiorari directed to the Supreme Court on pure
questions of law within a period of fifteen (15) days from
receipt extendible for a period of thirty (30) days.
18. The entitlement to a tax refund does
not necessarily call for the automatic payment of
the sum claimed. The amount of the claim being a
factual matter, it must still be proven in the normal course
and in accordance with the administrative procedure for
obtaining a refund of real property taxes, as provided under
the Local Government Code. (Allied Banking Corporation,
etc., v. Quezon City Government, et al., G. R. No. 154126,
September 15, 2006)
NOTES AND COMMENTS: In the above Allied
Banking case, the Supreme Court provided for the starting
date of computing the two-year prescriptive period within
which to file the claim with the Treasurer, which is from
finality of the Decision. The procedure to be followed is that
shown below.
19. Procedure for refund of real property
taxes based on validity of the tax measure or
solutio indebeti.
a. Payment under protest not required, claim
must be directed to the local treasurer, within two (2) years
 72
from the date the taxpayer is entitled to such reduction or
readjustment, who must decide within sixty (60) days from
receipt.
b. The denial by the local treasurer of the protest
would fall within the Regional Trial Courts original
jurisdiction, the review being the initial judicial cognizance
of the matter. Despite the language of Section 195 of the
Local Government Code which states that the remedy of
the taxpayer whose protest is denied by the local treasurer
is to appeal with the court of competent jurisdiction,
labeling the said review as an exercise of appellate
jurisdiction is inappropriate since the denial of the protest is
not the judgment or order of a lower court, but of a local
government official. (Yamane , etc. v. BA Lepanto
Condominium Corporation, G. R. No. 154993, October 25,
2005)
c. The decision of the Regional Trial Court
should be appealed by means of a petition for review
directed to the Court of Tax Appeals (Division).
d. The decision of the Court of Tax Appeals
(Division) may be the subject of a review by the Court of
Tax Appeals (en banc).
e. The decision of the Court of Tax Appeals (en
banc) may be the subject of a petition for review on
certiorari on pure questions of law directed to the Supreme
Court.
20. Charitable institutions,
churches and parsonages or convents
appurtenant thereto, mosques, non-profit
cemeteries, and all lands, buildings and
improvements that are actually, directly and
exclusively used for religious, charitable or
educational purposes are exempt from taxation.
[Sec.28 (3) Article VI, 1987 Constitution]
21. The constitutional tax
exemptions refer only to real property that are
actually, directly and exclusively used for religious,
charitable or educational purposes, and that the only
constitutionally recognized exemption from taxation of
revenues are those earned by non-profit, non-stock
educational institutions which are actually, directly and
exclusively used for educational purposes. (Commissioner
of Internal Revenue v. Court of Appeals, et al., 298 SCRA
83)
The constitutional tax exemption covers property
taxes only. What is exempted is not the institution itself,
those exempted from real estate taxes are lands, buildings
and improvements actually, directly and exclusively used
for religious, charitable or educational purposes. (Lung
Center of the Philippines v. Quezon City, et al., etc., G. R.
No. 144104, June 29, 2004)
22. The 1935 Constitution stated that the
lands, buildings, and improvements are used
exclusively but the present Constitution
requires that the lands, buildings and
improvements are actually, directly and
exclusively used. The change should not be ignored.
Reliance on past decisions would have sufficed were the
words actually as well as :directly are not added. There
must be proof therefore of the actual and direct use to be
exempt from taxation. (Lung Center of the Philippines v.
Quezon City, et al., etc., G. R. No. 144104, June 29, 2004)
23. The 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.
If real property is used for one or more commercial
purposes, it is not exclusively used for the exempted
purpose 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
Constitution and the law. Solely is synonymous with
exclusively. (Lung Center of the Philippines v. Quezon City, et
al., etc., G. R. No. 144104, June 29, 2004)
24. Portions of the land of a charitable
institution, such as a hospital, leased to private
entities as well as those parts of the hospital
leased to private individuals are not exempt from
real property taxes. On the other hand, the portion 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. (Lung Center
of the Philippines v. Quezon City, et al., etc., G. R. No.
144104, June 29, 2004)
25. As a general principle, 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. (Lung Center of the
Philippines v. Quezon City, et al., etc., G. R. No. 144104, June 29,
2004)
26. Property that are exempt from
the payment of real property tax under the Local
Government Code.
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 to a taxable
person for a consideration or otherwise;
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 and educational purposes;
 73
c. Machineries and equipment, actually, directly
and exclusively used by local water districts; and
government owned and controlled corporations engaged in
the supply and distribution of water and generation and
transmission of electric power;
d. Real property owned by duly registered
cooperatives;
e. Machinery and equipment used for pollution
control and environmental protection.
27. Manila International Airport
Authority (MIAA) it is not a government owned or
controlled corporation but an instrumentality of
the government that is exempt from taxation.
It is not a stock corporation because its capital is
not divided into shares, neither is it a non-stock
corporation because there are no members. It is instead
an instrumentality of the government upon which the local
governments are not allowed to levy taxes, fees or other
charges.
An instrumentality refers to any agency of the
National Government, not integrated within the
department framework vested with special functions or
jurisdiction by law, endowed with some if not all corporate
powers, administering special funds, and enjoying
operational autonomy, usually through a charter. This
term includes regulatory agencies chartered institutions
and government-owned or controlled corporations. [Sec.
2 (10), Introductory Provisions, Administrative Code of
1987] It is an instrumentality exercising not only
governmental but also corporate powers. It exercises
governmental powers of eminent domain, police power
authority, and levying of fees and charges.
Finally, the airport lands and buildings are
property owned by the government that are devoted to
public use and are properties of the public domain.
(Manila International Airport Authority v. City of Pasay, et al., G.
R. No. 163072, April 2, 2009)
28. A telecommunications company was
granted by Congress on July 20, 1992, after the
effectivity of the Local Government Code on
January 1, 1992, a legislative franchise with tax
exemption privileges which partly reads, The
grantee, its successors or assigns shall be liable
to pay the same taxes on their real estate,
buildings and personal property, exclusive of this
franchise, as other persons or corporations are
now or hereafter may be required by law to pay.
This provision existed in the companys
franchise prior to the effectivity of the Local
Government Code. A City then enacted an
ordinance in 1993 imposing a real property on all
real properties located within the city limits, and
withdrawing all tax exemptions previously
granted. Among properties covered are those
owned by the company from which the City is
now collecting P43 million. The properties of the
company were then scheduled by the City for
sale at public auction.
The company then filed a petition for the
issuance of a writ of prohibition claiming
exemption under its legislative franchise. The
City defended its position raising the following:
a. There was no exhaustion of
administrative remedies because the matter
should have first been filed before the Local
Board of Assessment Appeals;
b. The companys properties are
exempt from tax under its franchise.
Resolve the issues raised.
SUGGESTED ANSWERS:
a. There is no need to exhaust administrative
remedies as the appeal to the LBAA is not a speedy and
adequate remedy within the law. This is so because the
properties are already scheduled for auction sale.
Furthermore one of the recognized exceptions to
the rule on exhaustion is that if the issue is purely legal in
character which is so in this case.
b. The properties are exempt from taxation.
The grant of taxing powers to local governments under
the Constitution and the Local Government Code does
not affect the power of Congress to grant tax exemptions.
The term exclusive of this franchise is interpreted
to mean properties actually, directly and exclusively used
in the radio or telecommunications business. The
subsequent piece of legislation which reiterated the
phrase exclusive of this franchise found in the previous
tax exemption grant to the company is an express and
real intention on the part of Congress to once against
remove from the LGCs delegated taxing power, all of the
companys properties that are actually, directly and
exclusively used in the pursuit of its franchise. (The City
Government of Quezon City, et al., v. Bayan
Telecommunications, Inc., G. R. No. 162015, March 6,
2006)
29. The owner operator of a BOT
and not the ultimate owner is subject to real
property taxes. Consistent with the BOT concept and
as implemented, BPPC the owner-manager-operator of
the project is the actual user of its machineries and
equipment. BPPCs ownership and use of the
machineries and equipment are actual, direct, and
immediate, while NAPOCORs is contingent and, at this
stage of the BOT Agreement, not sufficient to support its
claim for tax exemption. (National Power Corporation v.
Central Board of Assessment Appeals, et al., G, R. No. 171470,
January 30, 2009)