“PRiMUS CUT AND PASTE:
The BAR STAR NOTES”
in
TAXATI0N
With selected Supreme Court decisions
up to May 10, 2009
VER: 09.05.12
by
ABELARDO T. DOMONDON
How to use the Notes: These Notes in the form of
textual materials and representative review questions
were specially prepared by Prof. Domondon for the
exclusive use of Bar Candidates who attended his
2009 lectures on Taxation, and others he has personally
authorized.
The purpose of these Notes is to test the
candidate’s ability to answer probable questions that may
be asked in the September 33, 2009 Bar Examinations in
Taxation. The last version to be released is Ver. 09.08.17
which may substantially alter the contents of this Ver.
09.05.12 Be sure to secure the last version to replace
this version.
DO NOT MEMORIZE the suggested answers.
Some of the answers were purposely made to be lengthy
in order to serve as explanatory devices. This is so
because you do not have time anymore to refer back to
your review materials.
The materials are arranged in accordance with the
bar examination coverage. The actual bar questions may
not be so arranged. Likewise, these Notes are only
indicative of the areas from where Bar questions may be
sourced. The questions shown in these Notes may or
may not be exactly worded in the actual Bar questions.
The reader is advised to take note of the areas
marked with stars:
If pressed for time, the reader should read only the
items marked  and . These areas represent
80% to 90% of the sources of questions that would
probably be given in the 2009 Bar exams. The reader
should merely browse the areas marked  and the
unmarked areas because they represent only 10% to 20%
of the areas from where questions may probably be
sourced this year.
GENERAL PRINCIPLES OF TAXATION
TAXATION, IN GENERAL
ââ1. Why are tax laws construed strictly against
the State and liberally in favor of the State ?
SUGGESTED ANSWER: In case of doubt, tax laws must
be construed strictly against the State and liberally in favor of the
taxpayer because taxes, as 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, Inc., etc., v. Court of Appeals, et al., 293 SCRA 92, 99)
2. 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.
 2
3. 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)
4. 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)
5. What is the effect of a BIR reversal of a
previous ruling interpreting a law as exempting a
taxpayer ?
SUGGESTED ANSWER: 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)
6. Why is the right to collect 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)
7. It is said that taxes are the lifeblood of the
government and any delay in its collection would
impair the rendition of government services. May the
collection of taxes be restrained by a court ?
SUGGESTED ANSWER: As a general rule, “No court
shall have the authority to grant an injunction to restrain the
collection of any national internal revenue tax, fee or charge.”
(Sec. 218, NIRC)
However, the Court of Tax Appeals is empowered to enjoin
the collection of taxes through administrative remedies when
collection could jeopardize the interest of the government or
taxpayer. (Sec. 11, Rep. Act No. 1125)
ââ8. What are the grounds and procedure
for suspension of collection of taxes ?
SUGGESTED ANSWER: Where the collection of the
amount of the taxpayer’s 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.
 3
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)
9. Explain the sumptuary purpose of taxation.
SUGGESTED ANSWER: The sumptuary purpose of
taxation is to promote the general welfare and to protect the
health, safety or morals of the inhabitants. It is in the joint exercise
of the power of taxation and police power where regulatory taxes
are collected.
Taxation may be made the implement of the state’s police
power. The motivation behind many taxation measures is the
implementation of police power goals. [Southern Cross Cement
Corporation v. Cement Manufacturers Association of the
Philippines, et al., G. R. No. 158540, August 3, 2005 citing Lutz v.
Araneta, 98 Phil. 148, 152 (1955); in turn citing Great Atl. & Pac.
Tea Co. v. Grosjean, 302 U.S. 412; U.S. v. Biutler, 297 U.S. 1;
McCulloch v. Maryland, 4 Wheaton 316] The reader should note
that the August 3, 2005 Southern Cross case is the decision on
the motion for reconsideration of the July 8, 2004 Southern Cross
decision.
The so-called “sin taxes” on alcohol and tobacco
manufacturers help dissuade the consumers from excessive
intake of these potentially harmful products. (Southern Cross
Cement Corporation v. Cement Manufacturers Association of the
Philippines, et al., G. R. No. 158540, August 3, 2005)
10. Explain the compensatory purpose of
taxation. 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)
11. What are the distinctions between a tax and
a license fee ?
SUGGESTED ANSWER: The following are the
distinctions between a tax and a license fee:
a. PURPOSE: A tax is imposed for revenue purposes
WHILE a license fee is imposed for regulatory purposes. (Unless
it is a joint exercise of both the police power and the power of
taxation)
b. BASIS: A tax is imposed under the power of taxation
WHILE a license fee is imposed under police power.
c. AMOUNT: There is no limit as to the amount of a
tax WHILE the amount of license fee that could be collected is
limited to the cost of the license and the expenses of police
surveillance and regulation.
d. TIME OF PAYMENT: Taxes are normally paid after
the start of a business WHILE a license fee before the
commencement of business.
e. EFFECT OF NON-PAYMENT: Failure to pay a tax
does not make the business illegal WHILE failure to pay a
license fee makes the 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.
12. Distinguish taxation from police power.
SUGGESTED ANSSWER: 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 citing U. S. Chief Marshall who once
said, the power to tax involves the power to destroy, McCulloch v.
Maryland, 4 Wheaton 316, cited in Sison v. Ancheta, G. R. No. L
– 59431, July 25, 130 SCRA 654) and the belief that taxes are
lifeblood of the state. (Southern Cross Cement Corporation v.
Cement Manufacturers Association of the Philippines, et al., G. R.
No. 158540, August 3, 2005 citing “[T]axes being the lifeblood of
the government, their prompt and certain availability is of the
essence.” Sison v. Ancheta, id., citing Vera v. Fernandez, G. R.
No. L-31364, March 30, 1979, 89 SCRA 199]
These considerations necessitated the evolution of taxation
as a distinct legal concept from police power. (Southern Cross
Cement Corporation, supra)
If the question asks for an enumeration of the distinctions
between the power of taxation and police power, the candidate
should reformulate no. 17 above.
 4
â13. What is the purpose of the Sugar
Adjustment Act ?
SUGGESTED ANSWER: The Sugar Adjustment Act
which increased existing taxes on sugar was enacted to stabilize
the sugar industry to prepare it for the loss of its quota in the U.S.
market was levied for a regulatory purpose to protect and
promote the sugar industry which is also for a public purpose.
(Lutz v. Araneta, 98 Phil. 148)
The Philsugin fund, an imposition on sugar, to raise funds
to conduct research for the improvement of the sugar industry, is
for the purpose of stabilizing the sugar industry which one of the
pillars of the Philippine economy which affects the welfare of the
State. The levy is not so much an exercise of the power of
taxation, nor the imposition of a special levy, but the exercise of
police power which is for the general welfare of the entire country,
therefore for a public purpose. (Republic v. Bacolod-Murcia Co.,
et al., G.R. No. L-19824, July 9, 1966)
14. Section 40 (g) of the Public Service Act
authorizes the collection of “x x x fees as
reimbursement of its expenses in the authorization,
supervision and/or regulation of the public services: x
x x g) For each permit, authorizing the increase in
equipment, the installation of new units or authorizing
the increase of capacity, or the extension of means or
general extensions in the services, twenty centavos for
each one hundred pesos or fraction of the additional
capital necessary to carry out the permit.”
(paraphrasing supplied)
Is the imposition a tax measure ? Explain.
SUGGESTED ANSWER: No. It is not a tax measure but
a simple regulatory provision for the collection of fees imposed
pursuant to the exercise of the State’s police power. A tax is
imposed under the taxing power of government principally for the
purpose of raising revenues. The law in question, however,
merely authorizes and requires the collection of fees for the
reimbursement of the Commission’s expenses in the
authorization, supervision and/or regulation of public services.
(Republic, etc., v. International Communications Corporation
(ICC), G. R. No. 141667, July 17, 2006)
15. How may the power of taxation also be
used to implement power of eminent domain ?
SUGGESTED ANSWER: 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 Code, as
amended. [M.E. Holding Corporation v. Court of Appeals, et al.,
G.R. No. 160193, March 3, 2008 citing Expanded Senior Citizens
Act of 2003, Sec. 4 (a)]
16. What is purpose for the limitations on the
power of taxation ?
SUGGESTED ANSWER: 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
âââ 1. What are the inherent limitations on
the power of taxation ?
SUGGESTED ANSWER: The inherent limitations are
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
 5
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
e. Observance of the principle of comity. Comity is the
respect accorded by nations to each other because they are
equals. On the other hand taxation is an act of sovereign. Thus,
the power should be imposed upon equals out of respect.
Some authorities include no double taxation.
ââ2. When are taxes considered as being for a
public purpose ?
SUGGESTED ANSWER: The tax revenues are for a
public purpose if utilized for the benefit of the community in
general. An alternative meaning is that tax proceeds should be
utilized only to attain the objectives of government.
Public use is no longer confined to the traditional notion of
use by the public but held synonymous with public interest, public
benefit, public welfare, and public convenience. (Commissioner of
Internal Revenue v. Central Luzon Drug Corporation, G.R. No.
159647, April 16, 2005)
3. Define a taxpayer’s suit.
SUGGESTED ANSWER: Taxpayers’ suit is a case where
the act complained of directly involves the illegal disbursement of
public funds derived from taxation. (Justice Melo, dissenting in
Kilosbayan, Inc. v. Guingona, Jr., 232 SCRA 110)
4. What is locus standi ?
SUGGESTED ANSWER: Locus standi is “a right of
appearance in a court of justice on a given question. (Abaya v.
Ebdane, G. R. No. 167919, February 14, 2007)
It is a party’s personal and substantial interest in the case,
such that the party has sustained or will sustain (Ibid.)direct injury
as a result of the government act being challenged. It calls for
more than just a generalized grievance.
A party need not be a party to the contract to challenge its
validity. (Ibid.)
5. What is meant by the term “material
interest” ? SUGGESTED ANSWER: The term “interest”
means a material interest, an interest in issue affected by the
decree, as distinguished from mere interest in the question
involved, or a mere incidental interest. (Abaya v. Ebdane, G. R.
No. 167919, February 14, 2007)
6. What is the rationale for locus standi ?
SUGGESTED ANSWER: The rationale for requiring a
party who challenges the constitutionality of a statute to allege
such a personal stake in the outcome of the controversy is “to
ensure that a concrete adverseness which sharpens the
presentation of issues upon which the court so largely depends
for illumination of different constitutional questions.” (Abaya v.
Ebdane, G. R. No. 167919, February 14, 2007)
7. When may locus standi be brushed aside ?
SUGGESTED ANSWER: In cases of paramount
importance where serious constitutional questions are involved,
the standing requirements may be relaxed and a suit may be
allowed to prosper even where there is no direct injury to the party
claiming the right of judicial review. [Coconut Oil Refiners
Association, Inc., etc., et al., vs. Torres, etc., et al., G. R. No.
132527, July 29, 2005 citing Bayan (Bagong Alyansang
Makabayan) v. Zamora, G. R. No. 138570, October 10, 2000,
342 SCRA 449, in turn citing Kilosbayan, Inc. v. Guingona, Jr., G.
R. No. 113375, May 5, 1994, 232 SCRA 110]
âââ 8. What are the requirements that
must be met before taxpayers, concerned citizens
and legislators may be accorded standing to sue ?
SUGGESTED ANSWER:
a. The case should involve constitutional issues;
b. For taxpayers, there must be a claim of illegal
disbursement of public funds or that the tax measure is
unconstitutional.
c. For voters, there must be a showing of obvious
interest in the validity of the election law in question.
d. For concerned citizens, there must be a showing
that the issues raised are of transcendental importance which
must be settled early.
e. For legislators, there must be a claim that the
official action complained of infringes upon their prerogatives as
legislators. (David, et al., v. President Gloria Macapagal-Arroyo,
etc., et al., G. R. No. 171396, May 3, 2006)
 6
ââ9. What are the requisites for
challenging constitutionality of law including a tax
law ?
SUGGESTED ANSWER: The party bringing suit must
show “not only that the law or act is invalid, but also that he has
sustained or is in immediate, or imminent danger of sustaining
some direct injury as a result of its enforcement and not merely
that he suffers thereby in some indefinite way.” (Soriano III v.
Lista, et al., G. R. No. 153881, March 24, 2003)
ââ10. 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. Give some examples.
SUGGESTED ANSWER: 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. Taxpayer’s 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)
11. The petitioners impugn the validity of the
establishment of tax and duty-free shops within the
Subic Special Economic Zone (SSEZ) and the removal
of consumer goods and items from the zones without
payment of corresponding duties and taxes for the
reason that this constitute executive legislation in
violation of the rule on separation of powers, that only
“raw material, capital and equipment” should be
allowed the privilege. Rule on the objections and
reason out your answer briefly.
SUGGESTED ANSWER: The objections should not be
given credence. It is legal to setup duly authorized duty-free
shops in the SSEZ to sell tax and duty-free consumer items in the
Secured Area. This is in line with the policy enunciated in the law
that “the Subic Special Economic Zone shall be developed into a
self-sustaining, industrial, commercial, financial and investment
center to generate employment opportunities in and around the
zone and to attract and promote productive foreign investments.”
While it is true that Section 12 (b) of Rep. Act No. 7227
mentions only raw materials, capital and equipment, this does not
necessarily mean that the tax and duty free buying privilege is
limited to these types of articles to the exclusion of consumer
goods.
It must be remembered that in construing statutes, the
proper course is to start out and follow the true intent of the
Legislature and to adopt that sense which harmonizes best with
the context and promotes to the fullest manner the policy and
objects of the Legislature.
The concept of inclusio unius est exclusio alterius does not
find application because the phrase “tax and duty-free
importations of raw materials, capital and equipment” was merely
cited as an example of incentives that the SSEZ is authorized to
grant, in line with its being a free port zone. Thus, the legislative
intent is that consumer goods entering the SSEZ which satisfy the
needs of the zone and are consumed there are not subject to
duties and taxes in accordance with Philippine law. (Coconut Oil
Refiners Association, Inc., etc., et al., v. Torres, etc., et al., G. R.
No. 132527, July 29, 2005)
` Would your answer be the same if a Presidential
Proclamation allowed for the limited withdrawal from
the Clark Special Economic Zone or the John Hay
Economic Zone of consumer goods tax and duty-free ?
SUGGESTED ANSWER: The answer would not be the
same. This time the Presidential Proclamation would be invalid
as the statutory tax exempt privilege was granted only to the
Subic Special Economic Zone and not to John Hay or Clark. This
is so because the Constitution mandates that no law granting tax
exemption shall be passed without the concurrence of a majority
of all the members of Congress. (Coconut Oil Refiners
Association, Inc., etc., et al., v. Torres, etc., et al., G. R. No.
132527, July 29, 2005 citing John Hay People’s Alternative
Coalition, et al., v. Lim, etc., et al., G.R. No. 119775, October 24,
2003, 414 SCRA 356)
Furthermore, the law is very clear that the “exportation or
removal of goods from the territory of the Subic Special Economic
Zone to other parts of the Philippine territory shall be subject to
 7
customs duties and taxes under the Customs and Tariff Code
and other relevant tax laws of the Philippines.” (Ibid.)
11-A. Nature of actual case or controversy. An
actual case or controversy involves a conflict of legal rights, an
assertion of opposite legal claims susceptible of judicial
adjudication. (ABAKADA Guro Party List, etc., v. Purisima, etc.,
et al., G. R. No. 166715, August 14, 2008 citing Cruz, Isagani,
PHILIPPINE CONSTITUTIONAL LAW, 1995 edition, p. 23)
11-B. Criteria of being ripe for judicial
determination. A closely related requirement is ripeness, that
is, the question must be ripe for adjudication. And a
constitutional question is ripe for adjudication when the
governmental act being challenged has a direct adverse effect
on the individual challenging it. (ABAKADA Guro Party List, etc., v.
Purisima, etc., et al., G. R. No. 166715, August 14, 2008 citing
Bernas, Joaquin, THE 1987 CONSTITUTION OF THE
REPUBLIC OF THE PHILIPPINES: A COMMENTARY, 1996 edition,
pp. 848-849) Thus, to be ripe for judicial adjudication, the
petitioner must show a personal stake in the outcome of the
case or an injury to himself that can be redressed by a favorable
decision of the Court. [ABAKADA Guro Party List, etc., supra, v.
Purisima, etc., citing Cruz v. Secretary of Environment and Natural
Resources, 400 Phil. 904 (2000), Vitug, J., separate opinion]
11-C. Personal injury must be shown for judicial
controversy to be ripe for judicial determination. In
this case, aside from the general claim that the dispute has
ripened into a judicial controversy by the mere enactment of the
law even without any further overt act. (ABAKADA Guro Party List,
etc., v. Purisima, etc., et al., G. R. No. 166715, August 14, 2008 citing
La Bugal-B’Laan Tribal Association, Inc. v. Ramos, G.R. No. 127882,
01 December 2004, 445 SCRA 1)
Thus, where petitioners fail either to assert any specific
and concrete legal claim or to demonstrate any direct adverse
effect of the law on them or are unable to show a personal stake
in the outcome of this case or an injury to themselves their
petition is procedurally infirm. (ABAKADA Guro Party List, etc.,
supra)
11-D. Constitutionality of law is exception to the
doctrine of “ripe for judicial determination”. This
notwithstanding, public interest requires the resolution of the
constitutional issues raised by petitioners. The grave nature of
their allegations tends to cast a cloud on the presumption of
constitutionality in favor of the law. And where an action of the
legislative branch is alleged to have infringed the Constitution, it
becomes not only the right but in fact the duty of the judiciary to
settle the dispute. [ABAKADA Guro Party List, etc., v. Purisima, etc.,
et al., G. R. No. 166715, August 14, 2008 citing Tañada v. Angara,
338 Phil. 546 (1997)]
ââ12. 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
½%).”
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]]
13. The power to tax should be exercised only
within the territorial boundaries of the taxing authority. In
theory, it is only within a state’s territorial boundaries that a state
could give protection, hence it is only within that territory that it
could demand support in the form of taxes.
 8
14. Situs of taxation is the place or the authority that
has the power to collect taxes. It is premised upon the
symbiotic relation between the taxpayer and the State.
15. The place that gives protection is the place that
has the right to demand that it be supported in the form of
taxes so it could continually give protection.
16. The situs of real property taxes is the place
where the property is located because it is that place that
gives protection. The applicable concept is lex situs or lex
rei sitae.
17. The situs of taxation of tangible personal
property is the place where the owner is located because it is
that place that gives protection to the owner which protection
extends to the tangible personal property. The applicable
concept is mobilia sequuntur personam.
18. Intangible personal property may have obtained
a business situs in a particular place even if located
elsewhere. Thus, the dividends earned from domestic
corporations are considered as income from within, irrespective
where the shares of stock of such domestic corporation is
located.
19. The situs of income taxation is determined by
the nationality, residence of the taxpayer and source of
income. Please refer to general principles of income taxation
under income taxation.
20. The situs of excise taxes is the place where the
privilege is exercised because it is that place that gives
protection.
21. The situs of transfer taxes, such as estate and
donor’s taxes, is determined by the nationality and residence
of the taxpayer and the place where the property is located.
Please refer to estate and donor’s taxes.
ââ22. 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 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)
NOTE AND COMMENTS: In the above case, the
Supreme Court reiterated the rule that “source of income”
relates to the property, activity or service that produced the
income. With respect to rendition of labor or personal service, it
is the place where the labor or service was performed that
determines the source of the income.
The above Baier-Nickel case discussed the import of the
landmark cases (Howden and BOAC) involving sources of
income for tax purposes both of which may be dangerous for Bar
purposes:
23. A domestic insurance company decided to
reinsure with a foreign reinsurer the risks it has
undertaken with its local clients. The foreign reinsurer
does not have an office, neither does it do business in
the Philippines. Are the reinsurance premiums subject
to Philippine income taxation ?
SUGGESTED ANSWER: Yes because the undertaking of
the foreign insurance company to indemnify the local insurance
company is the activity that produced the income.
The reinsurance premiums remitted to the foreign reinsurer
had for their source the undertaking to indemnify the local insurer
against liability. Said undertaking is the activity that produced
there insurance premiums, and the same took place in the
Philippines. The reinsured, the liabilities insured and the risk
 9
originally undertaken by the local insurance company, upon which
the reinsurance premiums and indemnity were based, were all
situated in the Philippines. (Alexander Howden & Co., Ltd. v.
Collector of Internal Revenue, 121 Phil. 579; 13 SCRA 601 (1965)
cited in Baier-Nickel)
âââ24. BOAC, 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.
Is BOAC 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 the income. The
”sale of tickets” in the Philippines is the activity that determines
whether such income is taxable in the Philippines.
The tickets exchanged hands here and payments for fares
were also made here in Philippine currency. The situs of the
source of payments is the Philippines. the flow of wealth
proceeded from and occurred, within the Philippine territory,
enjoying the protection accorded by the Philippine Government. In
consideration of such protection, the flow of wealth should share
the burden of supporting the government. (Commissioner of
Internal Revenue v. British Overseas Airways Corporation
(BOAC), 149 SCRA 395 cited in Bauer-Nickel)
NOTES AND COMMENTS: The concept of imposition of
the gross Philippine billings that taxes only flights that originate
from the Philippines apply only to resident foreign corporations
doing business in the Philippines [Sec. 28 (A) (3) (a), NIRC of
1997] AND NOT TO incomes of non-resident foreign
corporations that are taxed on the gross income. [Sec. 28 (B) (1)]
25. No improper delegation of legislative
authority to tax. The power to tax is inherent in the State,
such power being inherently legislative, based on the principle
that taxes are a grant of the people who are taxed, and the grant
must be made by the immediate representatives of the people;
and where the people have laid the power, there it must remain
and be exercised. (Commissioner of Internal Revenue v. Fortune
Tobacco Corporation, G. R. Nos. 167274-75, July 21, 2008 citing
COOLEY TAXATION, 3rd Ed., p. 43 cited in DIMAAMPAO, TAX
PRINCIPLE AND REMEDIES, p. 13)
26. Instances where the national revenue
officers had ventured in the area of unauthorized
administrative legislation.
a. By adding the qualification that the tax due after the
12% increase becomes effective shall not be lower than the tax
actually paid prior to 1 January 2000, Revenue Regulation No.
17-99 effectively imposes a tax which is the higher amount
between the ad valorem tax being paid at the end of the three
(3)-year transition period and the specific tax under paragraph
C, sub-paragraph (1)-(4), as increased by 12%—a situation not
supported by the plain wording of Section 145 of the Tax Code.
(Commissioner of Internal Revenue v. Fortune Tobacco Corporation,
G. R. Nos. 167274-75, July 21, 2008)
b. Respondent was not informed in writing of the law
and the facts on which the assessment of estate taxes was
made pursuant to Section 228 of the 1997 Tax Code, as
amended by Republic Act (R.A.) No. 8424. She was merely
notified of the findings by the Commissioner, who had simply
relied upon the old provisions of the law and Revenue
Regulation No. 12-85 which was based on the old provision of
the law. The Court held that in case of discrepancy between the
law as amended and the implementing regulation based on the
old law, the former necessarily prevails. The law must still be
followed, even though the existing tax regulation at that time
provided for a different procedure. (Ibid., Commissioner of Internal
Revenue v. Reyes, G.R. No. 159694, 27 January 2006, 480 SCRA
382 in turn citing Philippine Petroleum Corp. v. Municipality of Pililla,
Rizal, 198 SCRA 82, 88, 3 June 1991, likewise citing Shell Philippines,
Inc. v. Central Bank of the Philippines, 162 SCRA 628, 634, 27 June
1988)
c. The tax authorities gave the term “tax credit” in
Sections 2(i) and 4 of Revenue Regulation 2-94 a meaning
utterly disparate from what R.A. No. 7432 provides. Their
interpretation muddled up the intent of Congress to grant a mere
discount privilege and not a sales discount. The Court, striking
down the revenue regulation, held that an administrative agency
issuing regulations may not enlarge, alter or restrict the
provisions of the law it administers, and it cannot engraft
additional requirements not contemplated by the legislature.
(Ibid., Commissioner of Internal Revenue v. Central Luzon Drug
Corporation, G.R. No. 159647, 15 April 2005, 456 SCRA 414)
d. Commissioner Jose Ong issued Revenue
Memorandum Order (RMO) No. 15-91, as well as the
clarificatory Revenue Memorandum Circular (RMC) 43-91,
imposing a 5% lending investor’s tax under the 1977 Tax Code,
 10
as amended by Executive Order (E.O.) No. 273, on pawnshops. or restrict the provisions of the law it administers, and it cannot
The Commissioner anchored the imposition on the definition of engraft additional requirements not contemplated by the
lending investors provided in the 1977 Tax Code which, legislature. (Ibid., Commissioner of Internal Revenue v. Central
according to him, was broad enough to include pawnshop Luzon Drug Corporation, G.R. No. 159647, 15 April 2005, 456
operators. However, the Court noted that pawnshops and SCRA 414)
lending investors were subjected to different tax treatments The “plain meaning rule” or verba legis in statutory
under the Tax Code prior to its amendment by the executive construction should be applied such that where the words of a
order; that Congress never intended to treat pawnshops in the statute are clear, plain and free from ambiguity, it must be given
same way as lending investors; and that the particularly involved its literal meaning and applied without attempted interpretation.
section of the Tax Code explicitly subjected lending investors (Ibid.)
and dealers in securities only to percentage tax. And so the b. Administrative regulations must always be in
Court affirmed the invalidity of the challenged circulars, stressing harmony with the provisions of the law because any resulting
that “administrative issuances must not override, supplant or discrepancy between the two will always be resolved in favor of
modify the law, but must remain consistent with the law they the basic law. [Commissioner of Internal Revenue v. Fortune
intend to carry out.” (Ibid., citing Commissioner of Internal Revenue Tobacco Corporation, G. R. Nos. 167274-75, July 21, 2008 citing
v. Michel J. Lhuillier Pawnshop, Inc., 453 Phil. 1043 (2003), at 1052 in Landbank of the Philippines v. Court of Appeals, 327 Phil. 1047, 1052
turn citing Commissioner of Internal Revenue v. Court of Appeals, G.R. (1996)]
No. 108358, 20 January 1995, 240 SCRA 368, 372; Romulo, Mabanta,
Buenaventura, Sayoc & De los Angeles v. Home Development Mutual CONSTITUTIONAL LIMITATIONS
Fund, G.R. No. 131082, 19 June 2000; 333 SCRA 777, 786)
e. The then acting Commissioner issued RMC 7-85, 1. What are the constitutional limitations on the
changing the prescriptive period of two years to ten years for power of taxation ?
claims of excess quarterly income tax payments, thereby SUGGESTED ANSWER: The general or indirect
creating a clear inconsistency with the provision of Section 230 constitutional limitations as well as the specific or direct
of the 1977 Tax Code. The Court nullified the circular, ruling constitutional limitations.
that the BIR did not simply interpret the law; rather it legislated
guidelines contrary to the statute passed by Congress. [Ibid.,
Philippine Bank of Communications v. Commissioner of Internal ââ2. What are the general or indirect
Revenue, 361 Phil. 916 (1999)] constitutional limitations on the power of taxation ?
f. The Supreme Court ruled as invalid RMO 4-87 SUGGESTED ANSWER: The general or indirect
which had construed the amnesty coverage under E.O. No. 41 constitutional limitations are the following:
(1986) to include only assessments issued by the BIR after the a. Due process clause;
promulgation of the executive order on 22 August 1986 and not b. Equal protection clause;
assessments made to that date. The Supreme Court resolved c. Freedom of the press;
in the negative. [Ibid., Commissioner of Internal Revenue v. CA, et d. Religious freedom;
al., 310 Phil. 392 (1995)] e. No taking of private property without just
compensation;
27. The rule-making power must be confined to f. Non-impairment clause;
details for regulating the mode or proceedings in order to g. Law-making process:
carry into effect the law as it has been enacted. 1) Bill should embrace only one subject
a. It cannot be extended to amend or expand the expressed in the title thereof;
statutory requirements or to embrace matters not covered by the 2) Three (3) readings on three separate days;
statute. [Commissioner of Internal Revenue v. Fortune Tobacco 3) Printed copies in final form distributed three
Corporation, G. R. Nos. 167274-75, July 21, 2008 citing Landbank of (3) days before passage.
the Philippines v. Court of Appeals, 327 Phil. 1047, 1052 (1996)] An
administrative agency issuing regulations may not enlarge, alter
 11
h. Presidential power to grant reprieves, commutations subject to guidelines and limitations imposed by Congress
and pardons and remittal of fines and forfeiture after conviction by consistent with the basic policy of local autonomy;
final judgment. m. Automatic release of local government's just share
in national taxes;
ââ3. What are the specific or direct n. Tax exemption of all revenues and assets of non-
constitutional limitation ? stock, non-profit educational institutions used actually, directly and
exclusively for educational purposes;
SUGGESTED ANSWER:
o. Tax exemption of all revenues and assets of proprietary
a. No imprisonment for non-payment of a poll tax;
or cooperative educational institutions subject to limitations
b. Taxation shall be uniform and equitable;
provided by law including restrictions on dividends and provisions
c. Congress shall evolve a progressive system of
for reinvestment of profits;
taxation;
p. Tax exemption of grants, endowments, donations or
d. All appropriation, revenue or tariff bills shall originate
contributions used actually, directly and exclusively for
exclusively in the House of Representatives, but the Senate may
educational purposes subject to conditions prescribed by law.
propose and concur with amendments;
e. The President shall have the power to veto any
particular item or items in an appropriation, revenue, or tariff bill, 3-A. No denial of due process when the
but the veto shall not affect the item or items to which he does not respondent is given the opportunity to file affidavits
object; and other pleadings during the preliminary
f. Delegated power of the President to impose tariff investigation. A respondent cannot claim denial of due
rates, import and export quotas, tonnage and wharfage dues: process when she was given the opportunity to file her affidavits
1) Delegation by Congress and other pleadings and submit evidence before the DOJ during
2) through a law the preliminary investigation of her case and before the
3) subject to Congressional limits and Information was filed against her.
restrictions Due process is merely an opportunity to be heard. In
4) within the framework of national development addition, preliminary investigation conducted by the DOJ is
program. merely inquisitorial. It is not a trial of the case on the merits. Its
g. Tax exemption of charitable institutions, churches, sole purpose is to determine whether a crime has been
parsonages and convents appurtenant thereto, mosques, and all committed and whether the respondent therein is probably guilty
lands, buildings and improvements of all kinds actually, directly of the crime. It is not the occasion for the full and exhaustive
and exclusively used for religious, charitable or educational display of the parties’ evidence. Hence, if the investigating
purposes; prosecutor is already satisfied that he can reasonably determine
h. No tax exemption without the concurrence of the existence of probable cause based on the parties’ evidence
majority vote of all members of Congress; thus presented, he may terminate the proceedings and resolve
i. No use of public money or property for religious the case. (Santos v. People, et al, G. R. No. 173176, August 26,
purposes except if priest is assigned to the armed forces, penal 2008 citing De Ocampo v. Secretary of Justice, G.R. No. G.R. No.
institutions, government orphanage or leprosarium; 147932, 25 January 2006, 480 SCRA 71, 81-82)
j. Money collected on tax levied for a special purpose
to be used only for such purpose, balance if any, to general funds; 4. Equal protection of the law clause is subject to
k. The Supreme Court's power to review judgments or reasonable classification. If the groupings are characterized by
orders of lower courts in all cases involving the legality of any tax, substantial distinctions that make real differences, one class may
impose, assessment or toll or the legality of any penalty imposed be treated and regulated differently from another. The
in relation to the above; classification must also be germane to the purpose of the law and
l. Authority of local government units to create their must apply to all those belonging to the same class. (Tiu, et al.,
own sources of revenue, to levy taxes, fees and other charges v. Court of Appeals, et al., G.R. No. 127410, January 20, 1999)
 12
4-A. The equal protection of the laws clause of
the Constitution allows classification. Classification in
law, as in the other departments of knowledge or practice, is the
grouping of things in speculation or practice because they agree
with one another in certain particulars. A law is not invalid
because of simple inequality. The very idea of classification is
that of inequality, so that it goes without saying that the mere
fact of inequality in no manner determines the matter of
constitutionality.
All that is required of a valid classification is that it be
reasonable, which means that the classification should be based
on substantial distinctions which make for real differences, that it
must be germane to the purpose of the law; that it must not be
limited to existing conditions only; and that it must apply equally
to each member of the class. This Court has held that 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]
4-B. State has discretion to make the
classification. In the exercise of its power to make
classifications for the purpose of enacting laws over matters
within its jurisdiction, the state is recognized as enjoying a wide
range of discretion. It is not necessary that the classification be
based on scientific or marked differences of things or in their
relation. Neither is it necessary that the classification be made
with mathematical nicety. Hence, legislative classification may in
many cases properly rest on narrow distinctions, for the equal
protection guaranty does not preclude the legislature from
recognizing degrees of evil or harm, and legislation is addressed
to evils as they may appear. [ABAKADA Guro Party List, etc., v.
Purisima, etc., et al., G. R. No. 166715, August 14, 2008]
4-C. Equal protection does not demand
absolute equality. The equal protection clause exists to
prevent undue favor or privilege. It is intended to eliminate
discrimination and oppression based on inequality. Recognizing
the existence of real differences among men, the equal
protection clause 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 citing Himagan v. People, G.R. No.
113811, 7 October 1994, 237 SCRA 538, 551.
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)
ââ5. What are the requisites for the validity
of a classification ?
SUGGESTED ANSWER: Classification, to be valid, must
(a) rest on substantial distinctions,
(b) be germane to the purpose of the law,
(c) not be limited to existing conditions only, and
(d) apply equally to all members of the same class.
(Tiu, et al., v. Court of Appeals, et al., G.R. No. 127410, January
20, 1999)
ââ 6. The law grant of tax and duty-free
status under Rep. Act No. 7227, to retailers inside the
SSEZ without granting the same to those outside the
SSEZ. Is there a violation of the equal protection
clause ?
SUGGESTED ANSWER: There is no violation of equal
protection because there exists a valid classification as shown
below:
a. Significant distinctions exist between the two groups.
Those outside of the SSEZ maintain their business within
Philippine customs territory while those within the SSEZ operate
within the so-called “separate customs territory.” To grant the
same privileges would clearly defeat the statue’s intent to carve a
territory out of the military reservations in Subic Bay where free
flow of goods and capital is maintained.
b. The classification is germane to the purpose of Rep.
Act No. 7227. As held in Tiu, the real concern of the law is to
convert the lands formerly occupied by the US military bases into
economic or industrial areas. In furtherance of such objective,
Congress deemed it necessary to extend economic incentives, in
terms of a complete package of tax incentives and other benefits,
to the establishments within the zone to attract and encourage
foreign and local investors.
c. The classification is not limited to the existing
conditions when the law was promulgated but to future conditions
as well, inasmuch as the law envisioned the former military
 13
reservation to ultimately develop into a self-sustaining investment
center.
d. The classification applies equally to all retailers
found within the “secured area.” As ruled in Tiu, the individuals
and businesses within the “secured area,” being in like
circumstances or contributing directly to the achievement of the
end purposes of the law, are not categorized further. They are all
similarly treated, both in privileges granted and in obligations
required. (Coconut Oil Refiners Association, Inc., etc., et al., v.
Torres, etc., et al., G. R. No. 132527, July 29, 2005 citing Tiu, et
al., v. Court of Appeals, et al., G.R. No. 127410, January 20,
1999, 301 SCRA 278)
âââ 7. Is the statutory grant of tax and duty-
free importation into the Subic Special Economic Zone
violative the “preferential use” concept of the
Constitution ?
SUGGESTED ANSWER: No. The mere fact that the law
authorizes the importation and trade of foreign goods does not
suffice to declare it unconstitutional on this ground.
While the Constitution does not encourage the unlimited
entry of foreign goods, services and investments into the country,
it does not prohibit them either. In fact, it allows an exchange on
the basis of equality and reciprocity, frowning only in foreign
competition that is unfair. (Coconut Oil Refiners Association, Inc.,
etc., et al., v. Torres, etc., et al., G. R. No. 132527, July 29, 2005
citing Tanada v. Angara, G. R. No. 118295, May 2, 1997, 272
SCRA 18)
8. 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.
9. Uniformity may have a restrictive meaning
different from equality and equal protection. It would mean
then that the same rate shall be imposed for the same subjects
and objects within the territorial boundaries of a taxing authority.
10. 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)
10-A. The law providing financial rewards to tax
collectors is constitutional. Public service is its own
reward. Nevertheless, public officers may by law be rewarded
for exemplary and exceptional performance. A system of
incentives for exceeding the set expectations of a public office is
not anathema to the concept of public accountability. In fact, it
recognizes and reinforces dedication to duty, industry, efficiency
and loyalty to public service of deserving government personnel.
The U.S. Supreme Court validated a law which awards to
officers of the customs as well as other parties an amount not
exceeding one-half of the net proceeds of forfeitures in violation
of the laws against smuggling. [ABAKADA Guro Party List, etc., v.
Purisima, etc., et al., G. R. No. 166715, August 14, 2008 citing United
States v. Matthews, 173 U.S. 381 (1899)]
The offer of a portion of such penalties to the collectors is
to stimulate and reward their zeal and industry in detecting
fraudulent attempts to evade payment of duties and taxes.
[ABAKADA Guro Party List, etc., supra citing Dorsheimer v. United
States, 74 U.S. 166 (1868)]
In the same vein, employees of the BIR and the BOC may
by law be entitled to a reward when, as a consequence of their
zeal in the enforcement of tax and customs laws, they exceed
their revenue targets. Public service is its own reward.
Nevertheless, public officers may by law be rewarded for
exemplary and exceptional performance. A system of incentives
for exceeding the set expectations of a public office is not
anathema to the concept of public accountability. In fact, it
recognizes and reinforces dedication to duty, industry, efficiency
and loyalty to public service of deserving government personnel.
(ABAKADA Guro Party List, etc., supra)
10-B. Rewards law establishes safeguards to
ensure that the reward system will not create “bounty
hunters.” The Attrition Act of 2005 RA 9335 establishes
safeguards to ensure that the reward will not be claimed if it will
be either the fruit of “bounty hunting or mercenary activity” or the
product of the irregular performance of official duties. One of
these precautionary measures is embodied in Section 8 of the
law:
SEC. 8. Liability of Officials, Examiners and
Employees of the BIR and the BOC. – The officials,
examiners, and employees of the [BIR] and the [BOC] who
 14
violate this Act or who are guilty of negligence, abuses or acts
of malfeasance or misfeasance or fail to exercise
extraordinary diligence in the performance of their duties shall
be held liable for any loss or injury suffered by any business
establishment or taxpayer as a result of such violation,
negligence, abuse, malfeasance, misfeasance or failure to
exercise extraordinary diligence. (ABAKADA Guro Party List,
etc., v. Purisima, etc., et al., G. R. No. 166715, August 14, 2008)
10-C. The rewards law to tax collectors does not
violate equal protection. Equality guaranteed under the
equal protection clause is equality under the same conditions
and among persons similarly situated; it is equality among
equals, not similarity of treatment of persons who are classified
based on substantial differences in relation to the object to be
accomplished. When things or persons are different in fact or
circumstance, they may be treated in law differently.
The guaranty of equal protection of the laws is not a
guaranty of equality in the application of the laws upon all
citizens of the [S]tate. It is not, therefore, a requirement, in order
to avoid the constitutional prohibition against inequality, that
every man, woman and child should be affected alike by a
statute. Equality of operation of statutes does not mean
indiscriminate operation on persons merely as such, but on
persons according to the circumstances surrounding them. It
guarantees equality, not identity of rights.
The Constitution does not require that things which are
different in fact be treated in law as though they were the same.
The equal protection clause does not forbid discrimination as to
things that are different. It does not prohibit legislation which is
limited either in the object to which it is directed or by the
territory within which it is to operate. [ABAKADA Guro Party List,
etc., v. Purisima, etc., et al., G. R. No. 166715, August 14, 2008]
The equal protection clause recognizes a valid
classification, that is, a classification that has a reasonable
foundation or rational basis and not arbitrary. 1[22] 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
1
through the collection of taxes, customs duties, fees and
charges.
Both the BIR and the BOC are bureaus under the DOF.
They principally perform the special function of being the
instrumentalities through which the State exercises one of its
great inherent functions – taxation. 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. supra)]
10-D. 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.
But a discriminatory purpose is not presumed, there must
be a showing of “clear and intentional discrimination. [Santos v.
People, et al, G. R. No. 173176, August 26, 2008 citing People v.
Dela Piedra, 403 Phil. 31, 54-56 (2001)]
10-E. There is no denial of equal protection
where the prosecution exercises its discretion in
determining probable cause. The discretion of who to
prosecute depends on the prosecution’s sound assessment
whether the evidence before it can justify a reasonable belief
that a person has committed an offense. The presumption is
that the prosecuting officers regularly performed their duties,
and this presumption can be overcome only by proof to the
contrary, not by mere speculation. There must be evidence to
overcome this presumption. The mere allegation a Cebuana,
was charged with the commission of a crime, while a
Zamboangueña, was not, is insufficient to support a conclusion
 15
that the prosecution officers acted in denial of the equal
protection of the laws. (Santos v. People, et al, G. R. No. 173176,
August 26, 2008)
10-F. 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. The remedy for unequal enforcement of the law in
such instances does not lie in the exoneration of the guilty at the
expense of society x x x. Protection of the law will be extended
to all persons equally in the pursuit of their lawful occupations,
but no person has the right to demand protection of the law in
the commission of a crime.
Likewise, [i]f 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 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)
11. A fixed annual license fee on those engaged in
the business of general enterprise was also imposed on the
sale of bibles by a religious sect. Is this valid or violative of
the constitutionally guaranteed freedom of religion ?
SUGGESTED ANSWER: It is not valid because it violates
the constitutionally guaranteed freedom of religion. As a license
fee is fixed in amount and unrelated to the receipts of the
taxpayer, such a license fee, when applied to a religious sect is
actually imposed as a condition for the free exercise of religion. A
license fee “restrains in advance those constitutional liberties of
press and religion and inevitably tends to suppress their exercise.”
12. 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.
Even though such taxation may affect particular contracts, as it
may increase the debt of one person and lessen the security of
another, or may impose additional burdens upon one class and
release the burdens of another, still the tax must be paid unless
prohibited by the constitution, nor can it be said that it impairs the
obligations of any existing contract in its true and legal sense.
(Tolentino v. Secretary of Finance, et al., and companion cases,
235 SCRA 630)
13. 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)
13-A. Franchise tax is a direct tax. The franchise
tax is a percentage tax imposed only on franchise
holders. It is imposed under Section 119 of the Tax Code
and is a direct liability of the franchise grantee. (Quezon
City, et al., v. ABS-CBN Broadcasting Corporation, G. R.
No. 166408, October 6, 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.)
14. 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)
15. 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.
 16
ââ 16. 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)
17. 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)
17-A. 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,
SCRA 667, 680)
September 11, 1996, 261
17-B. Further amplification by Bernas of the
local government’s power to tax. “What is the effect of
Section 5 on the fiscal position of municipal corporations?
Section 5 does not change the 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)
17-C. Reconciliation of the local government’s
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 government’s 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)
 17
“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]
18. The withdrawal of a tax exemption should not be
construed as prohibiting future grants of exemption from all
taxes. Indeed, the grant of taxing powers to local government
units under the Local Government Code 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.
(Philippine Long Distance Telephone Company, Inc., v. City of
Davao, et al., etc., G. R. No. 143867, August 22, 2001)
18-A. Tax exemptions in franchises are always
subject to withdrawal. Moreover, Smart’s franchise was
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.
In truth, the Contract Clause has never been thought as a
limitation on the exercise of the State’s 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)
19. When Congress approved a provision that, “Any
advantage, favor, privilege, exemption, or immunity granted under
existing franchises, or may hereafter be granted, shall ipso facto
become part of previously granted telecommunications franchises
and shall be accorded immediately and unconditionally to the
grantees of such franchises: Provided, however, That the
foregoing shall neither apply to nor affect provisions of
telecommunications franchises concerning territory covered by
the franchise, the life span of the franchise, or the type of service
authorized by the franchise.” (Underscoring supplied) there was
no intention for it to operate as a blanket tax exemption to all
telecommunications entities. Applying the rule of strict
construction of laws granting tax exemptions and the rule that
doubts should be resolved in favor of municipal corporations in
interpreting statutory provisions on municipal taxation, it was held
that said provisions cannot be considered as extending its
application to franchises such as that of PLDT. (Philippine Long
Distance Telephone Company, Inc., v. City of Davao, et al., etc.,
G. R. No. 143867, August 22, 2001)
19-A. “In lieu of all taxes in the franchise of ABS-
CBN does not exempt it from local franchise taxes.”
The “in lieu of all taxes” provision in the franchise of ABS-CBN
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 so. (Quezon City, et al., v. ABS-CBN Broadcasting
Corporation, G. R. No. 166408, October 6, 2008. 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.)
 18
19-B. “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)]
19-C. 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. 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.)
19-D. Historical background on why ABS-CBN is
subject to VAT and not to the franchise tax. At the time
of the enactment of its franchise on May 3, 1995, ABS-CBN was
subject to 3% franchise tax under Section 117(b) of the 1977
National Internal Revenue Code (NIRC), as amended.
On January 1, 1996, R.A. No. 7716, otherwise known as the
Expanded Value Added Tax Law, took effect and subjected to
VAT those services rendered by radio and/or broadcasting
stations.
Notably, under the same law, “telephone and/or telegraph
systems, broadcasting stations and other franchise grantees”
were omitted from the list of entities subject to franchise tax.
The impression was that these entities were subject to 10% VAT
but not to franchise tax. Subsequently, R.A. No. 8241 took effect
on January 1, 1997 containing more amendments to the NIRC.
Radio and/or television companies whose annual gross receipts
do not exceed P10,000,000.00 were granted the option to
choose between paying 3% national franchise tax or 10% VAT
On the other hand, radio and/or television companies with
yearly gross receipts exceeding P10,000,000.00 were subject
to 10% VAT, pursuant to Section 102 of the NIRC.
On January 1, 1998, R.A. No. 8424 was passed
confirming the 10% VAT liability of radio and/or television
companies with yearly gross receipts exceeding
P10,000,000.00.
 19
R.A. No. 9337 was subsequently enacted and became effective
on July 1, 2005. The said law further amended the NIRC by
increasing the rate of VAT to 12%. The effectivity of the
imposition of the 12% VAT was later moved from January 1,
2006 to February 1, 2006.
In consonance with the above survey of pertinent laws on the
matter, ABS-CBN is subject to the payment of VAT. It does not
have the option to choose between the payment of franchise tax
or VAT since it is a broadcasting company with yearly gross
receipts exceeding Ten Million Pesos (P10,000,000.00).
(Quezon City, et al., v. ABS-CBN Broadcasting Corporation, G.
R. No. 166408, October 6, 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.)
20. 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.
ââ 21. What are the elements of direct
duplicate taxation ?
SUGGESTED ANSWER:
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.
22. 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.
23. 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)
ââ 24.What are the methods for avoiding
double taxation (indirect duplicate taxation) ?
SUGGESTED ANSWER: The following are the methods
of avoiding double 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.
25. Tax credit generally refers to an amount that is
subtracted directly from one’s 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)
26. A tax deduction is defined as a subtraction fro
income for tax purposes, or an amount that is allowed by law to
 20
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)
â 27. 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 citing Philippine
Judges Association v. Pardo, G. R. No. 105371, November 11,
1993, 227 SCRA 703; Tolentino v. Secretary of Finance, et al., G.
R. No. 115455, August 25, 1994, 235SCRA 630]
â 28. The VAT is assailed as being regressive
and therefore violative of the mandate to evolve a
progressive system of taxation. Do you agree ?
Explain your answer.
SUGGESTED ANSWER: No. The VAT does not violate
the progressive system of taxation. 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]
29. 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.
30. 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. What is a tax amnesty ?
SUGGESTED ANSWER: 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 citing Commissioner of Internal Revenue v. Marubeni
Corp., 423 Phil. 862, 874 (2001).
 21
1-A. 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)
2. Distinguish tax amnesty from tax exemption.
SUGGESTED ANSWER:
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.
3. Define tax avoidance and tax evasion.
SUGGESTED ANSWER: 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.
NOTES AND COMMENTS:
a. Tax evasion connotes the integration of three
factors:
1) 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;
2) an accompanying state of mind which is
described as being “evil” on “bad faith,” “willful,” or
”deliberate and not accidental”; and
3) 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)
ââ 4. Distinguish between the tax
avoidance and tax evasion.
SUGGESTED ANSWER:
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.
5. What are the reasons why national taxes cannot
be the subject of compensation and set-off with debts ?
SUGGESTED ANSWER:
a. The lifeblood theory;
b. Taxes are not contractual obligations but arise out of
a duty to, and are the positive acts of government, to the making
and enforcing of which the personal consent of the individual
taxpayer is not required. (Republic v. Mambulao Lumber Co., 4
SCRA 622)
c. The government and the taxpayer are not mutually
creditors and debtors of each other and a claim for taxes is no
such debt, demand, contract or judgment as is allowed to be set-
off. (Caltex Philippines, Inc. v. Commission on Audit, 208 SCRA
726, 756)
6. Compensation takes place by operation of law,
where the local government and the taxpayer are in their own
right reciprocally debtors and creditors of each other, and that the
debts are both due and demandable, in consequence of Articles
1278 and 1279 of the Civil Code. (Domingo v. Garlitos, 8 SCRA
443)
7. In case of a tax overpayment, where the BIR’s
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)
â8. 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.
 22
9. A direct tax is a tax for which a taxpayer is
directly liable on the transaction or business it engages in,
without transferring the burden to someone else. Examples
are individual and corporate income taxes, transfer taxes, and
residence taxes. (Abakada Guro Party List (etc.) v. Ermita, etc.,
et al., G. R. No. 168056, September 1, 2005 and companion
cases, citing Maceda v. Macaraig, Jr., G.R. No. 88291, June 8,
1993, 223 SCRA 217)
10. The main difference between direct taxes and
indirect taxes is that the burden of direct taxes could not be
shifted by the taxpayer to another while the burden of indirect
taxes could be shifted to another person, such the burden value-
added taxes being shifted or transferred by the taxpayer, the
seller, to the buyer.
11. Acesite is the owner and operator of restaurant
which caters to the patrons of a casino operated by PAGCOR
within its premises. it billed PAGCOR for the cost of the
food and beverages consumed by the PAGCOR’s patrons as
well as the lease of the premises plus the VAT on these
items. PAGCOR paid Acesite minus the VAT claiming
exemption while Acesite, in order to avoid legal implications,
paid the P30 million tax and applied for a refund on the
ground of solutio indebeti.
Acesite cites the tax exemption grant in PAGCOR’s
franchise as follows: “The exemptions herein granted for
earnings derived from the operations conducted under the
franchise specifically from the payment of any tax, income, or
otherwise, as well as any form of charges, fees or levies, shall
inure to the benefit of and extend to corporation(s),
association (s), agency (cies), or individual(s) with whom the
Corporation or operator has any contractual relationship in
connection with the operations of the casino (s) authorized
to be conducted under this Franchise and to those receiving
compensation or other remuneration from the Corporation or
operator as a result of essential facilities furnished and/or
technical services rendered to the Corporation or operator.”
(emphasis supplied)
The BIR denied the claim on the ground that PAGCOR
is exempt only from direct taxes and not from indirect taxes
so Acesite may not avail of the exemption. Is this correct ?
SUGGESTED ANSWER: No. As the law is worded the
exemption flows to Acesite. The law is clear that the exemption
extends the exemption to entities or individuals dealing with
PAGCOR. (Commissioner of Internal Revenue v. Acesite
(Philippines) Hotel Corporation, G. R. No. 147295, February 16,
2007)
NOTES AND COMMENTS:
a. The above holding should be differentiated from
Philippine Acetylene Co. v. Commissioner of Internal Revenue, 20
SCRA 1056, where the tax exemption did not flow to private
entities. (cited in Abaya v. Ebdane, G. R. No. 167919, February
14, 2007), and in the following case of Silkair (Singapore) PTE,
Ltd., v. Commissioner of Internal Revenue, G.R. No. 173594,
February 6, 2008.
b. So also, the tax exemption of PAGCOR has already
been withdrawn by Rep. Act No. 9337.
ââ 12. Silkair (Singapore) PTE, Ltd., an
international carrier, purchased aviation gas from
Petron Corporation, which it uses for its operations. It
now claims for refund or tax credit for the excise taxes
it paid claiming that it is exempt from the payment of
excise taxes under the provisions of Sec. 135 of the
NIRC of 1997.
Silkair further anchors its claim on Article 4(2) of
the Air Transport Agreement between the Government
of the Republic of the Philippines and the Government
of the Republic of Singapore (Air Transport Agreement
between RP and Singapore).
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.
 23
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 NPC’s charter, is so couched
as to include indirect tax from the exemption. The amendment
under Republic Act No. 6395 enumerated the details covered by
NPC’s 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 [NPC’s
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)
NATIONAL INTERNAL REVENUE CODE
ORGANIZATION AND FUNCTIONS OF THE BUREAU OF
INTERNAL REVENUE
ââ 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 citing Record
of the Senate, pp. 224-225)
 24
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]
ââ4. 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)
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)
 25
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 latter’s 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. 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)
16. 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)
17. Under the National Internal Revenue Code the global
system is applicable to taxable corporations and the schedular to
individuals.
âââ18. What are general principles of
income taxation in the Philippines OR the situs of
income taxation in the Philippines OR the source rule
of income taxation as applied in the Philippines ?
SUGGESTED ANSWER:
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 from 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 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.
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)
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]
He is allowed to avail of the itemized deductions including
the personal and additional exemptions subject to the rule on
reciprocity.
ââ 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;
 26
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.
ââ 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 taxpayer’s 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.
ââ 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 Workmen’s 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.
âââ 26. What are the conditions for
excluding retirement benefits from gross income,
hence tax-exempt ?
SUGGESTED ANSWER:
 27
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
employer’s 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]
ââ 27. What kind of separation (retirement)
pay is excluded from gross income, hence tax-exempt
? âââ d. Ordinary losses, losses from casualty, theft
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 taxpayer’s
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 taxpayer’s 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.
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.
âââ 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.
 28
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 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.
âââ 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.
ââ 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
 29
benefits such taxable year. Necessary expenses are those which
are appropriate or helpful to the business.
ââ 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.
ââ 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)
âââ 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 the same from its
2006 gross income. The BIR disallowed the deduction
? that the taxpayer bears the burden of proof of establishing the
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
accrual of an item of income or deduction. (Commissioner of
 30
Internal Revenue v, Isabela cultural Corporation, G. R. No. 35. Fringe benefits that are not subject to the fringe
172231, February 12, 2007) benefits tax:
d. Under the cash method income is to be construed a. When the fringe benefit is required by the nature of,
as income for tax purposes only upon actual receipt of the cash or necessary to the trade, business or profession of the employer;
payment. It is also referred to as the “cash receipts and or
disbursements method” because both the receipt and b. When the fringe benefit is for the convenience or
disbursements are considered. Thus, income is recognized only advantage of the employer. [Sec. 32(A), NIRC of 1997; 1 st par.,
upon actual receipt of the cash payment but no deductions are Sec. 2.33 (A), Rev. Regs. No. 3-98]
allowed from the cash income unless actually disbursed through c. Fringe benefits which are authorized and exempted
an actual payment in cash. from income tax under the Tax Code or under any special law;
d. Contributions of the employer for the benefit of the
33. The fringe benefits tax is a final withholding tax employee to retirement, insurance and hospitalization benefit
imposed on the grossed-up monetary value of fringe benefits plans;
furnished, granted or paid by the employer to the employee, e. Benefits given to the rank and file employees,
except rank and file employees. [1st par., Sec. 2.33 (A), Rev. whether granted under a collective bargaining agreement or not;
Regs. No. 3-98] and
f. De minimis benefits as defined in the rules and
ââ 34. What is meant by “fringe benefit” for regulations to be promulgated by the Secretary of Finance upon
recommendation of the Commissioner of Internal Revenue. [1st
purposes of taxation ? par., Sec. 32 (C), NIRC of 1997; Sec. 2.33 (C), Rev. Regs. No. 3-
SUGGESTED ANSWER: For purposes of taxation, fringe 98]
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 ââ36. De minimis benefits are facilities and
limited to: privileges (such as entertainment, medical services, or so-
a. Housing; called “courtesy discounts” on purchases), furnished or offered by
b. Expense account; an employer to his employees. They are not considered as
c. Vehicle of any kind; compensation subject to income tax and consequently to
d. Household personnel, such as maid, driver and withholding tax, if such facilities are offered or furnished by the
others; employer merely as a means of promoting the health, goodwill,
e. Interest on loan at less than market rate to the contentment, or efficiency of his employees. [Sec. 2.78,1 (A) (3),
extent of the difference between the market rate and actual rate Rev. Regs. 2-98 as amended by Rev. Regs. No. 8-2000]
granted;
f. Membership fees, dues and other expenses borne â37. Preferred shares are considered capital
by the employer for the employee in social and athletic clubs or regardless of the conditions under which such shares are
other similar organizations; issued and dividends or “interests” paid thereon are not
g. Expenses for foreign travel; allowed as deductions from the gross income of
h. Holiday and vacation expenses; corporations. (Revenue Memorandum Circular No. 17-71)
i. Educational assistance to the employee or his
dependents; and 38. Bad debts are those which result from the
j. Life or health insurance and other non-life insurance worthlessness or uncollectibility, in whole or in part, of amounts
premiums or similar amounts in excess of what the law allows. due the taxpayer by others, arising from money lent or from
[Sec. 33 (B), NIRC of 1997; 1st par., Sec. 2.33 (B), Rev. Regs. No. uncollectible amounts of income from goods sold or services
3-98] rendered. (Sec. 2.a, Rev. Regs. 5-99)
 31
ââ 39. Who are related parties ? preceding year or years shall be included as part of the taxpayer’s
SUGGESTED ANSWER: The following are related gross income in the year of such recovery to the extent of the
parties: income tax benefit of said deduction.
a. Members of the same family. The family of an
individual shall include only his brothers and sisters (whether by 42. If in the year the taxpayer claimed deduction of bad
the whole or half-blood), spouse, ancestors, and lineal debts written-off, he realized a reduction of the income tax due
descendants; from him on account of the said deduction, his subsequent
b. An individual and a corporation more than fifty recovery thereof from his debtor shall be treated as a receipt of
percent (50%) in value of the outstanding stock of which is realized taxable income. (Sec. 4, Rev. Regs. 5-99)
owned, directly or indirectly, by or for such individual;
c. Two corporations more than fifty percent (50%) in 43. If the said taxpayer did not benefit from the
value of the outstanding stock of which is owned, directly or deduction of the said bad debt written-off because it did not result
indirectly, by or for the same individual; to any reduction of his income tax in the year of such deduction
d. A grantor and a fiduciary of any trust; or (i.e. where the result of his business operation was a net loss
e. The fiduciary of a trust and the fiduciary of another even without deduction of the bad debts written-off), then his
trust if the same person is a grantor with respect to each trust; or subsequent recovery thereof shall be treated as a mere recovery
f. A fiduciary of a trust and a beneficiary of such. [Sec. or a return of capital, hence, not treated as receipt of realized
36 (B), NIRC of 1997] taxable income. (Sec. 4, Rev. Regs. 5-99)

44. Depreciation is the gradual diminution in the useful

ââ 40. What are the requisites for valid
value of tangible property resulting from ordinary wear and tear
deduction of bad debts from gross income ? and from normal obsolescence. The term is also applied to
SUGGESTED ANSWER: amortization of the value of intangible assets the use of which in
a. There must be an existing indebtedness due to the the trade or business is definitely limited in duration.
taxpayer which must be valid and legally demandable;
b. The same must be connected with the taxpayer’s trade, 45. The methods of depreciation are the following:
business or practice of profession; a. Straight line method;
c. The same must not be sustained in a transaction b. Declining balance method;
entered into between related parties; c. Sum of years digits method; and
d. The same must be actually charged off the books of d. Any other method prescribed by the Secretary of
accounts of the taxpayer as of the end of the taxable year; and Finance upon the recommendation of the Commissioner of
e. The debt must be actually ascertained to be Internal Revenue:
worthless and uncollectible during the taxable year; 1) Apportionment to units of production;
f. The debts are uncollectible despite diligent effort 2) Hours of productive use;
exerted by the taxpayer. [Sec. 34 (E) (1), NIRC of 1997; Sec. 3, 3) Revaluation method; and
Rev. Regs. No. 5-99 reiterated in Rev. Regs. No. 25-2002; 4) Sinking fund method.
Philippine Refining Corporation v. Court of Appeals, et al., 256
SCRA 667] 46. What are personal and additional exemptions ?
g. Must have been reported as receivables in the income SUGGESTED ANSWER: These are the theoretical
tax return of the current or prior years. (Sec. 103, Rev. Regs. No. persona, living and family expenses of an individual allowed to be
2) deducted from the gross or net income of an individual taxpayer.
: These are arbitrary amounts which have been calculated
ââ 41. What is the “tax benefit” rule ? by our lawmakers to be roughly equivalent to the minimum of
SUGGESTED ANSWER: The “tax benefit rule” posits that subsistence, taking into account the personal status and
the recovery of bad debts previously allowed as deduction in the additional qualified dependents of the taxpayer. They are fixed
 32
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)]
ââ47. 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]
ââ47-A. 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 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)
ââ48. 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)
ââ 49.. 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
 33
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)
ââ50. 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)
ââ 51. 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)
ââ 52. 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)
53. 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 mortgagor and no sale or transfer
of real property was realized. [Sec. 3 (1), Rev. Regs. No. 4-99]
54. 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]
ââ 55. 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.
 34
56. Holding period not applied to the taxation of the
presumed capital gains derived from the sale of real property
considered as capital assets.
ââ 57. 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 governm ent 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]
58. 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]
ââ 59. 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]
60. A final withholding tax (FWT) of 20% on passive
income is collected from the interest income of banks. It
likewise has to pay a 5% gross receipts tax (GRT) on gross
receipts which includes their passive income. XYZ Bank
now claims that the GRT should be computed after
deducting the 20% passive income tax on the ground that
the monies or receipts that do not redound to the benefit of
the taxpayer are not part of its gross receipts. To impose the
GRT without deducting the 20% would be double taxation. It
also contends that since the 20% was withheld at source and
is paid directly to the government, then the bank has not
received the same. Thus, it should not be included in the
gross receipts subject to tax.
Resolve the issue of whether the 20% FWT on the
bank’s passive income form part of the taxable gross
receipts for the purpose of computing the 5% GRT.
SUGGESTED ANSWER: No. The word “gross” must be
used in its plain and ordinary meaning. It is defined as “whole,
entire, total, without deduction.” Thus, the 20% should not be
deducted for purposes of computing the 5% gross receipts tax.
Receipt may either be actual or constructive. There is prior
to the withholding a constructive receipt of the interest, otherwise
there would be no interest from where the 20% tax may be
withheld from.
There is no double taxation because there are two kinds of
taxes, the 20% FWT which is an income tax and the 5% GRT
which is a percentage tax. (Commissioner of Internal Revenue v.
Citytrust Investment Phils., Inc., G. R. No. 139786, September 27,
2006 and companion case)
NOTES AND COMMENTS:
a. Commissioner of Internal Revenue v. Manila
Jockey Club, 108 Phil. 821 (1960) is different from
Commissioner of Internal Revenue v. Citytrust Investment
Phils., Inc., G. R. No. 139786, September 27, 2006 and
companion case. Manila Jockey Club paid amusement taxes on
its commission in the total amount of bets called wager funds and
did not include the 5½% of the fund which went to the Board on
Races and to the owners of horses and jockeys. The Supreme
Court rules that the gross receipts of Manila Jockey Club should
 35
not include the 5½% because although delivered to the Club,
such money has been especially earmarked by law or regulation
for other persons.
Manila Jockey does not apply because what happened
there was earmarking and not withholding. Earmarking is not the
same as withholding. Amounts earmarked do not form part of
gross receipts because these are by law or regulation reserved
for some person other than the taxpayer, although delivered or
received. On the contrary, amounts withheld form part of gross
receipts because there are in constructive possession and not
subject to any reservation, the withholding agent being merely a
conduit in the collection process. (Commissioner of Internal
Revenue v. Citytrust Investment Phils., Inc., G. R. No. 139786,
September 27, 2006 and companion case)
b. There are distinctions between the 20% FWT on
interest income and the 5% GRT on banks. Since the two are
different there is no double taxation.
1) FWT is an income tax under Title II of the
Code (Tax on Income) while GRT is a percentage tax
under Title V of the Tax Code.
2) Percentage tax is a national tax measured by
a certain percentage of the gross selling price or gross
value in money of goods sold, bartered or imported; or of
the gross receipts or earnings derived by any person
engaged in the sale of services while an income tax is a
national tax imposed on the net or gross income realized in
a taxable year.
3) Income tax is subject to withholding while
percentage is not. (Commissioner of Internal Revenue v.
Citytrust Investment Phils., Inc., G. R. No. 139786,
September 27, 2006 and companion case)
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 BIR’s
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 BIR’s 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 never affected.
Thus, it falls under the category of an existing corporation
recommencing its banking operations.
Should the refund be granted ?
SUGGESTED ANSWER: Yes. The MCIT shall be
imposed beginning in the fourth taxable year immediately
following the year in which the corporation commenced its
business operations. [Sec. 27 (E) (1), NIRC of 1997]
The date of commencement of operations of a thrift bank is
the date it was registered with the SEC or the date when the
Certificate of Authority to Operate was issued to it by the
Monetary Board, whichever comes later. (Sec. 6, Rev. Regs. No.
4-95)
Clearly then. MBC is entitled to the grace period of four
years from June 23, 1999 when it was authorized by the BSP to
operate as a thrift bank before the MCIT should be applied to it.
(Manila Banking Corporation v. Commissioner of Internal
Revenue, G. R. No. 168118, August 26, 2006)
NOTES AND COMMENTS:
a. The MCIT and when should be imposed and the
four (4) year grace period. “A minimum corporate income tax of
two percent (2%) of the gross income as of the end of the taxable
year, as defined herein, is hereby imposed on a corporation
taxable under this Title, beginning on the fourth taxable year
immediately following the year in which such corporation
commenced its business operations, when the minimum
corporate income tax is greater than the tax computed under
Subsection (A) of this section for the taxable year.” [Sec. 27 (E)
(1), NIRC of 1997]
b. Period when a corporation becomes subject to
the MCIT. “(5) Specific rules for determining the period when a
corporation becomes subject to the MCIT (minimum corporate
income tax) -
 36
For purposes of the MCIT, the taxable year in which
business operations commenced shall be the year in which the
domestic corporation registered with the Bureau of Internal
Revenue (BIR).
Firms which were registered with BIR in 1994 and earlier
years shall be covered by the MCIT beginning January 1, 1998. x
x x” (Rev. Regs. No. 9-98)
Manila Banking Corporation v. Commissioner of Internal
Revenue, G. R. No. 168118, August 26, 2006 did not apply Rev.
Regs. No. 9-98 because Rev. Regs. No. 4-95 specifically refers to
thrift banks.)
c. Purpose of the four (4) year grace period. The
intent of Congress relative to the MCIT is to grant a four (43) –
year suspension of tax payment to newly organized corporations.
Corporations still starting their business operations have to
stabilize their venture in order to obtain a stronghold in the
industry. It does not come as a surprise then when many
companies reported losses in their initial years of operations.
Thus, in order to allow new corporations to grow and
develop at the initial stages of their operations, the lawmaking
body saw the need to provide a grace period of four years from
their registration before they pay their minimum corporate income
tax. (Manila Banking Corporation v. Commissioner of Internal
Revenue, G. R. No. 168118, August 26, 2006)
ESTATE TAXES
ââ 1. The gross estate for purposes of
estate taxation of Filipino citizens, whether residents
or nonresidents and resident alien includes the value at
the time of his death of all his real property, wherever situated,
personal property, whether tangible, intangible or mixed, wherever
situated, to the extent of the interest existing therein of the
decedent at the time of his death.
ââ 2. The gross estate for purposes of
estate taxation of non-resident aliens includes the value at
the time of his death of all the real property situated in the
Philippines, personal property whether tangible, intangible or
mixed, situated in the Philippines, to the extent of the interest
therein of the decedent at the time of his death.
3. Items deductible from the gross estate of a
resident or nonresident Filipino decedent or resident alien
decedent:
a. Expenses, losses, claims, indebtedness and taxes;
b. Property previously taxed;
c. Transfers for public use;
d. The Family Home up to a value not exceeding P1
million;
e. Standard deduction of P1 million;
f. Medical expenses not exceeding P500,000.00;
g. Amount of exempt retirement received by the heirs
under Rep. Act Mo. 4917;
h. Net share of the surviving spouse in the conjugal
partnership.
4. Not every inter-vivos transfer in anticipation of death
is considered “transfer in contemplation of death” for purposes of
determining the property to be included in the gross estate of a
decedent.
5. To be considered a “transfer in contemplation of
death” “the decedent has at any time made a transfer, by trust or
otherwise, in contemplation of or intended to take effect in
possession or enjoyment at or after death” [Sec. 85 (B), NIRC of
1997]. It is clear that the properties are not transferred in
contemplation of or intended to take effect in possession or
enjoyment at or after death.
6. There is no transfer in contemplation of death if
there is no showing the transferor “retained for his life or for any
period which does not in fact end before his death: (1) the
possession or enjoyment of, or the right to the income from the
property, or (2) the right, either alone or in conjunction with any
person, to designate the person who shall possess or enjoy the
property or the income therefrom.” [Sec. 85 (B), NIRC of 1997]
ââ 7. The approval of the court sitting in
probate, or as a settlement tribunal over the estate of
the deceased is not a mandatory requirement for the
collection of the estate. The probate court is determining
issues which are not against the property of the decedent, or a
claim against the estate as such, but is against the interest or
property right which the heir, legatee, devisee, etc. has in the
property formerly held by the decedent.
 37
The notices of levy were regularly issued within the 5. How are gifts of personal property to be
prescriptive period. valued for donor’s tax purposes ?
The tax assessment having become final, executory and SUGGESTED ANSWER: The market value of the
enforceable, the same can no longer be contested by means of a personal property at the time of the gift shall be considered the
disguised protest. (Marcos, II v. Court of Appeals, et al., 273 amount of the gift. (Sec. 102, NIRC of 1997)
SCRA 47)
6. What is the valuation of donated real
DONOR’S TAXES property for donor’s tax purposes ?
SUGGESTED ANSWER: The real property shall be
ââ 1. What is the donor’s tax rate if the appraised at its fair market value as of the time of the gift.
donee is a stranger ? However, the appraised value of the real property at the
SUGGESTED ANSWER: When the donee or time of the gift shall be whichever is the higher of:
beneficiary is a stranger, the tax payable by the donor shall be a. the fair market value as determined by the
30% of the net gifts. Commissioner of Internal Revenue (zonal valuation) or
b. the fair market value as shown in the schedule of
ââ 2. For purposes of the donor’s tax who values fixed by the Provincial and City Assessors. [Sec. 102, in
relation to Sec. 88 (B) both of the NIRC of 1997]
is a stranger ?
SUGGESTED ANSWER: A stranger is a is person who is
not a: â 7. A died leaving as his only heirs, his
a. Brother, sister (whether by whole or half-blood), surviving spouse B, and three minor children, X, Y and
spouse, ancestor and lineal descendant; or Z. Since B does not want to participate in the
b. Relative by consanguinity in the collateral line within distribution of the estate, she renounced her
the fourth degree of relationship.” [Sec. 99 (B), NIRC of 1997] hereditary share in the estate.
NOTES AND COMMENTS: All relatives by affinity,
irrespective of the degree, are considered as strangers. a. Is the renunciation subject to donor’s tax ?
Explain.
3. What is the tax base for donations ? SUGGESTED ANSWER: No. The general renunciation
SUGGESTED ANSWER: The net gifts made during the by an heir, including the surviving spouse, as in the case B, of
calendar year. [Sec. 99 (A), NIRC of 1997] her share in the hereditary estate left by the decedent is not
subject to donor’s tax. (4th par., Sec. 11, Rev. Regs. No. 2-2003)
This is so because the general renunciation by B was not
4. For purposes of the donor’s tax, what is
specifically and categorically done in favor of identified heir/s to
meant by “net gifts ?” the exclusion or disadvantage of the other co-heirs in the
SUGGESTED ANSWER: The net economic benefit hereditary estate.
from the transfer that accrues to the donee. Accordingly, b. Supposing that instead of a general
if a mortgaged property is transferred as a gift, but renunciation, B renounced her hereditary share in A’s
imposing upon the donee the obligation to pay the estate to X who is a special child, would your answer
mortgage liability, then the net gift is measured by be the same ? Explain.
deducting from the fair market value of the property the SUGGESTED ANSWER: My answer would be different.
amount of the mortgage assumed. (last par., Sec. 11, Rev. The renunciation in favor of X would be subject to donor’s tax.
Regs.No.2-2003) 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)
 38
âââ 8. Give some donations that are exempt
from donor’s tax.
SUGGESTED ANSWER:
a. The first P100,000.00 net donation during a
calendar year is exempt from donor’s tax [Sec. 99 (A), NIRC of
1997] made by a resident or non resident;
b. The donation by a resident or non-resident of a prize
to an athlete in an international sports tournament held abroad
and sanctioned by the national sports association is exempt from
donor’s 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 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 donor’s 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.
ââ 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 donor’s 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 donor’s 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 donor’s 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.
ââ10. A sold to B and 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: Donor’s 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 money’s
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)
â1. Define value-added tax (VAT).
SUGGESTED ANSWER: 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. What is the nature of VAT ?
SUGGESTED ANSWSER: 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
 39
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}
As an indirect tax on services, its main object is the
transaction itself or, more concretely, the performance of all
kinds of services conducted in the course of trade or business in
the Philippines. These services must be regularly conducted in
this country, undertaken in “pursuit of a commercial or an
economic activity,” for a valuable consideration, and not exempt
under the Tax Code, other special laws, or any international
agreement. (Commissioner, of Internal Revenue v. American
Express International, Inc. (Philipppine Branch), G. R. No.
152609, June 29, 2005 citing various cases and 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)
ââ3. What is the effect on exemptions of
VAT being an indirect tax ? Reason out and illustrate
your answer.
SUGGESTED ANSWER: 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)
Illustration: 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.
4. The VAT is a tax on consumption. Explain
the meaning of consumption as used under the VAT
system. Give an example.
SUGGESTED ANSWER: 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 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."
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.
American Express G.R. No. 152609, 29 June 2005, 462 SCRA
197 cited in Commissioner of Internal Revenue v. Placer Dome
Technical Services (Phils.), Inc. G. R. No. 164365, June 8,
2007]
â5. Who are liable for the value-added tax ?
SUGGESTED ANSWER:
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)
6. What are the various VAT methods and
systems ?
SUGGESTED ANSWER:
 40
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 citing Deoferio, Jr. V.
A. and Mamalateo, V.C., The Value Added Tax in the
Philippines (First Edition 2000)] 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 citing various cases and authorities; Abakada Guro
Party List (etc.) v. Ermita, etc., et al., G. R. No. 168056,
September 1, 2005 and companion cases)
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.
[Commissioner of Internal Revenue v. Seagate Technology
(Philippines), G. R. No. 153866, February 11, 2005 citing
various cases and authorities]
7. The VAT being imposed on the increase in
worth merit or improvement of the goods or services.
How is this done ?
SUGGESTED ANSWER: The VAT utilizes the concept
of the output and input taxes.
8. Define output tax.
SUGGESTED ANSWER: The value-added tax due on
the sale or lease or taxable goods, properties or services by any
VAT-registered person.
9. Define input tax.
SUGGESTED ANSWER: The VAT 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.)
10. What are included in the input tax.
SUGGESTED ANSWER: It shall also include:
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, 1 st par., 2nd
sentence,. And 2nd par., paraphrasing, arrangement and
numbering supplied )
11. May the right to credit the input tax be
limited by legislation ?
SUGGESTED ANSWER: Yes 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 was established.
This continued with the Expanded VAT Law (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)
12. What is the concept of transitional input
tax credits on beginning inventories ?
SUGGESTED ANSWER: 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
 41
whose threshold is P10,000,000.00) shall be entitled to a
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
taxpayer’s trade or business as a VAT-registered person. [Rev.
Regs. No. 16-2005, Sec.4.111-1, (a), 1 st par., arrangement and
numbering supplied]
14. What is the concept of presumptive input
tax credits ?
SUGGESTED ANSWER: 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)]
15. Does the VAT registration fee violate
religious freedom ?
SUGGESTED ANSWSER: 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)
16. Explain the proper interpretation of
the term “In the Course of Trade or Business.
SUGGESTED ANSWSER: VAT is not a
singular-minded tax on every transactional level. Its
assessment bears direct relevance to the taxpayer’s role or link
in the production chain. Hence, as affirmed by Section 99 of the
Tax Code and its subsequent incarnations, the tax is levied only
on the sale, barter or exchange of goods or services by persons
who engage in such activities, in the course of trade or
business. These transactions outside the course of trade or
business may invariably contribute to the production chain, but
they do so only as a matter of accident or incident. As the sales
of goods or services do not occur within the course of trade or
business, the providers of such goods or services would hardly,
if at all, have the opportunity to appropriately credit any VAT
liability as against their own accumulated VAT collections since
the accumulation of output VAT arises in the first place only
through the ordinary course of trade or business.
(Commissioner of Internal Revenue v. Magsaysay Lines, Inc., et
al., G. R. No. 146984, July 28, 2006)
16-A. 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
 42
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 sale is not subject to VAT. In Imperial v. Collector of
Internal Revenue, G.R. No. L-7924, September 30, 1955 (97
Phil. 992), 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. [J. Aranas, UPDATED NATIONAL
INTERNAL REVENUE CODE (WITH ANNOTATIONS), p. 608-9
(1988)]. "Course of business" is what is usually done in the
management of trade or business. [Idmi v. Weeks & Russel,
99 So. 761, 764, 135 Miss. 65, cited in Words & Phrases, Vol.
10, (1984)]. What is clear therefore, based on the aforecited
jurisprudence, is that "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)
17. 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.” What are these so-
called transactions “deemed sales “ ?
SUGGESTED ANSWER:
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
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]
18. What transactions considered retirement
or cessation of business “deemed sale” subject to
VAT ?
SUGGESTED ANSWER:
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]
19. What sale of or lease of real properties
subject to VAT ?
SUGGESTED ANSWER: 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.
20. On Jan. 10, 2008, X, a
 43
domestic corporation engaged in the real estate separate titles and/or separate tax declarations, when sold or
business, sold a building for P10,000,000.00. Is the disposed of to one and the same buyer, whether covered by one
or separate Deed of Conveyance, shall be presumed as a sale
sale subject to the value-added tax (VAT)? If so, how
of one residential lot. [Rev. Regs. No. 4.109-1 (B), (p),
much? Explain. paraphrasing and numbering supplied]
SUGGESTED ANSWER: Yes. 12% on the gross selling
price because the sale was made in the ordinary course of trade
22. What is the VAT on services and lease of
of business of X, a domestic corporation engaged in the real
estate business. properties ?
SUGGESTED ANSWER:
a. There shall be levied, assessed, and collected,
21. What sale of real property exempt from b. a value-added tax equivalent to ten percent (10%)
VAT ? of gross receipts
SUGGESTED ANSWER: The following sales of real c. derived from the sale or exchange of services,
properties are exempt from VAT, namely: 1) including the use or lease of properties.
a. Sale of real properties not primarily held for sale d. Provided, That the President, upon the
to customers or held for lease in the ordinary course of trade or recommendation of the Secretary of Finance, shall, effective
business; January 1, 2006, raise the rate of value-added tax to twelve
b. Sale of real properties utilized for low-cost percent (12%), after any of the following conditions has been
housing as defined by RA No. 7279, otherwise known as the satisfied:
“Urban and Development Housing Act of 1992” and other 1) Value-added tax collection as a percentage
related laws, such as RA No. 7835 and RA No. 8763. of Gross Domestic product (GDP) of the previous year
xxx xxx xxx exceeds two and four-fifth percent (2 4/5%); or
c. Sale of real properties utilized for socialized 2) National government deficit as a percentage
housing as defined under RA No. 7279, and other related laws of GDP of the previous year exceeds one and one-half
wherein the price ceiling per unit is P225,000.00 or as may from percent (1 1/2%). [NIRC of 1997, Sec. 108 (A), as
time to time be determined by the HUDCC and the NEDA and amended by R.A. No. 9337, arrangement and
other related laws. numbering supplied]
xxx xxx xxx
d. Sale of residential lot valued at One Million Five
Hundred Thousand Pesos (P1,500,000.00) and below, or house 23. “Sale or exchange of services”,
& lot and other residential dwellings valued at Two Million Give defined. The term “sale or exchange of services” means the
Hundred Thousand Pesos (P2,500,000.00) and below where the performance of all kinds of services in the Philippines for others
instrument of sale/transfer/disposition was executed on or after for a fee, remuneration or consideration, whether in kind or in
November 1, 2005, provided, That not later than January 31, cash, including those performed or rendered by the following:
2009 and every three (3) years thereafter, the amounts stated a. construction and service
herein shall be adjusted to its present value using the Consumer contractors; b. stock, real estate,
Price Index, as published by the National Statistics Office commercial, customs and immigration brokers;
(NSO); provided, further, that such adjustment shall be c. lessors of
published through revenue regulations to be issued not later property, whether personal or real; d.
than March 31 of each year. persons engaged in warehousing services
If two or more adjacent residential lots are sold or e. lessors or distributors of cinematographic films;
disposed in favor of one buyer, for the purpose of utilizing the f. persons engaged in milling, processing,
lots as one residential lot, the sale shall be exempt from VAT manufacturing or repacking goods for others;
only if the aggregate value of the lots do not exceed g. proprietors, operators or
P1,500,000.00. Adjacent residential lots, although covered by keepers of hotels, motels, rest-houses, pension houses, inns,
 44
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]
24. X Corporation rendered technical
services through its “work engineers” to PNB and
SSS in the construction of their buildings. The “work
engineers” acted as overseers of X Corporation,
rendering their professional services as employees of
X corporation. Should X Corporation be subjected to
VAT or should it be subjected to tax on the
professional services of those employees
themselves? Decide the case with reason.
SUGGESTED ANSWER: X Corporation is subject to
VAT.
25. 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.)
26. 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.)
27. 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
 45
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)
28. 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 (Commissioner of Internal Revenue
v. American Express International, Inc. (Philipppine Branch), G.
R. No. 152609, June 29, 2005 citing “[N]o state may tax
anything not within its jurisdiction without violating the due
process clause of the [C]constitution.” Manila Gas Corp. v.
Collector of Internal Revenue, 62 Phil. 895, 900, January 17,
1936, per Malcolm, J.) to impose the VAT [Commissioner, supra
citing Deoferio, Jr. and Mamalateo, The Value Added Tax in the
Philippines (2000), p. 93]
Performed in the Philippines, the service is necessarily
subject to its jurisdiction [Commissioner, supra citing Alejandro,
The Law on Taxation (1966 rev. ed.) p. 33], for the State
necessarily has to have a “substantial connection”
[Commissioner, supra citing Garner (ed. in chief), Black’s Law
Dictionary (8th ed., 1999), p. 1503] to it in order to enforce a zero
rate. [Commissioner, supra citing De Leon, The Fundamentals
of Taxation (12th ed., 1998), p. 3] The place of payment is
immaterial [Commissioner, supra citing Deoferio, Jr. and
Mamalateo, The Value Added Tax in the Philippines (2000), p.
93], much less is the place where the output of the service will
be further or ultimately used.
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, supra)
29. What is the destination principle
the VAT ?
SUGGESTED ANSWER: 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.
30. Is there any exception to the
destination principle ?
SUGGESTED ANSWER: Yes. 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]."
31. 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.
32. 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.
 46
33. 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 demed tax-exempt
under special law or international agreement. (Rev. Regs. No.
16-2005, Sec. 4.106-5, 2nd par., paraphrasing supplied)
34. 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)
35. 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)
36. “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]
37. 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)
38. Service performed by American
Express in facilitating the collection of receivables
from credit card members situated 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. (Philipppine Branch), G.
R. No. 152609, June 29, 2005)
39. 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,
 47
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.
(Philipppine Branch), G. R. No. 152609, June 29, 2005)
40. A foreign Consortium composed of
BWSC-Denmark, Mitsui Engineering and Shipbuilding
Ltd., and Misui 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 it’s 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)
41. VAT-Exempt transactions, defined.
a. The sale of goods or 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.
 48
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]
42. 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.
43. What transactions are from VAT ?
SUGGESTED ANSWER: (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
 49
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)
(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;
 50
(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 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 vessel’s 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]
 51
44. X is engaged in the importation and sale of
books and magazines. Is the importation of books
and magazines subject to the 10% VAT? Explain.
SUGGESTED ANSWER: No. Sale, importation, printing
or publication of books and any newspaper, magazine, review or
bulletin which appears at regular intervals with fixed prices for
subscription and sale and which is not devoted principally to the
publication of paid advertisements;
45. Is there any tax to be paid by persons
exempt from VAT ?
SUGGESTED ANSWER: Yes.
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. “Married individuals, whether citizens, resident
or non-resident aliens, who do not derive income purely
from compensation shall file a 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]
3. 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]
4. 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;
b. An individual with respect to pure compensation
income for services in whatever form paid, including, but not
limited to fees, salaries, wages, commissions, and similar items,
derived from 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:
Provided, further, That an individual whose pure compensation
income derived from sources within the Philippines exceeds Sixty
thousand pesos (P60,000.00), shall also file an income tax return;
c. An individual whose sole income has been subject
to final withholding tax;
d. An individual who is exempt from income tax
pursuant to the provisions of the NIRC of 1997, and other laws,
general or special. [Sec. 51 (A) (2), NIRC of 1997]
NOTES AND COMMENTS: Amendments under Rep. Act
No. 9504 are not incouded.
5. 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]
 52
6. 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.
7. 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.
8. 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.
9. 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.
10. 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.
11. 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.
12. The two (2) types of withholding at source are the 1)
final withholding tax; and 2) creditable withholding tax.
13. 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.
14. 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. [1 st and 2nd sentences,
Sec. 257(B), Rev. Regs. No. 2-98]
15. 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.
16. 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;
 53
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)
17. “A’ erroneously withheld the amount of 15% from
the selling price of books authored by “W” when the correct
rate should have been 10% only. Since “W” is out of the
country, “A” applied for a refund of the excess withholding
of 5%. May “A” properly apply for the refund ? Explain.
SUGGESTED ANSWER: Yes. In applications for refund,
the withholding agent is a taxpayer because if he does not pay the
tax shall be collected from him. (Commissioner of Internal
Revenue v. Procter & Gamble Philippine Manufacturing
Corporation, 204 SCRA 377, 383-386),
NOTES AND COMMENTS:
a. For tax amnesty purposes, the withholding
agent is not a taxpayer because he is made to pay the tax
where he fails to withhold as a penalty and not that 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. What are surtaxes or surcharges ?
SUGGESTED ANSWER: 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 State. (Bank of the Philippine Islands v. Commissioner of
Internal Revenue, G. R. No. 137002, July 27, 2006)
7. Compromise penalty, defined. 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
 54
raises the defense that the government is not bound by the
errors of its agents. Who is correct ?
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
1. 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.
2. Why was the Court of Tax Appeals created ?
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; Lacsamana, et al., etc., v. CTA, et
al., 102 Phil. 931)
3. The legal remedies under the NIRC of 1997 and
other laws available to an aggrieved taxpayer may be classified
into the tax remedies with respect to:
a. assessment;
b. collection, and
c. refund of internal revenue taxes.
The remedies may also be classified into the administrative
or the judicial remedies.
4. The legal remedies under the NIRC of 1997
available to an aggrieved taxpayer at the administrative level
with respect to assessment of internal revenue taxes are the
following:
a. Upon receipt of a pre-assessment notice, the
taxpayer shall respond to the same within fifteen (15) days from
receipt which is the period provided for by implementing rules and
regulations. [3rd par., Sec. 228 (e), NIRC of 1997]
b. Upon the issuance of an assessment notice, the
taxpayer shall protest administratively by filing a request for
reconsideration or reinvestigation within thirty (30) days from
receipt of the assessment in such form and manner as may be
prescribed by implementing rules and regulations.
c. Within sixty (60) days from the filing of the protest, all
relevant supporting documents shall be submitted; otherwise the
assessment shall become final. (4th par., Ibid.)
5. The legal remedies under the NIRC of 1997
available to an aggrieved taxpayer at the judicial level with
respect to assessment of internal revenue taxes:
a. If the protest is denied in whole or in part, or
b. is not acted upon within one hundred eighty (180) days
from submission of documents,
c. 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 said decision, or from the lapse of the
one hundred eighty (180) – day period; otherwise, the decision
shall become final, executory and demandable. [last par., Sec.
228 (e), NIRC of 1997]
d. On appeal, the taxpayer should apply for the issuance
of a writ of preliminary injunction to enjoin the BIR from collecting
the tax subject of the appeal.
e. 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.
f. A decision of the Court of Tax Appeals en banc
adverse to the taxpayer or the government may be appealed to
the Supreme Court through a petition for review on certiorari filed
with fifteen (15) days from notice, and extendible for justifiable
reasons for thirty (30) days only.
 55
6. The legal remedy under the NIRC of 1997 available
to an aggrieved taxpayer at the administrative level with
respect to refund or recovery of tax erroneously or illegally
collected, is to file a claim for refund or credit with the
Commissioner of Internal Revenue. (1st par., Sec. 229, NIRC of
1997)
7. 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. The legal remedy under the
NIRC of 1997 at the judicial level with respect to refund or
recovery of tax erroneously or illegally collected, is the 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)
8. 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.)
9. 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)
Generally speaking it is the Final Adjustment Return, in
which amounts of the gross receipts and deductions have been
audited and adjusted, which is reflective of the results of the
operations of a business enterprise. It is only when the return,
covering the whole year, is filed that the taxpayer will be able to
ascertain whether a tax is still due or refund can be claimed
based on the adjusted and audited figures. (Bank of the
Philippine Islands v. Commissioner of Internal Revenue, G.R. No.
144653, August 28, 2001)
 10. 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 taxpayer’s
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.
 56
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. .
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.
 11. 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 taxpayer’s 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.
11-A.. What is the burden of taxpayers seeking tax
refunds or credits ?
SUGGESTED ANSWER: It has always been the rule that
those seeking tax refunds or credits bear the burden of proving
the factual basis of their claims and of showing, by words too
plain to be mistaken, that the legislature intended to entitle them
to such claims. (Atlas Consolidated Mining and Development
Corporation v. Commissioner of Internal Revenue, G. R. No.
145526, March 16, 2007, See Commissioner of Internal Revenue
v. Seagate Technology (Philippines) G. R. No. 153866, 11
February 2005, 451 SCRA 132)
12. What is the nature of proceedings before the
Court of Tax Appeals ?
SUGGESTED ANSWER:
First, a judicial claim for refund or tax credit in the CTA is
by no means an original action, but rather an appeal by way of
petition for review of a previous, unsuccessful administrative
claim.
 57
Therefore, as in every appeal or petition for review, a
petitioner has to convince the appellate court that the quasi-
judicial agency a quo did not have any reason to deny its claims.
Second, cases filed in the CTA are litigated de novo.
Thus, a petitioner should prove every minute aspect of its case by
presenting, formally offering and submitting its evidence to the
CTA.
Since it is crucial for a petitioner in a judicial claim for
refund or tax credit to show that its administrative claim should
have been granted in the first place, part of the evidence to be
submitted to the CTA must necessarily include whatever is
required for the successful prosecution of an administrative claim.
(Atlas Consolidated Mining and Development Corporation v.
Commissioner of Internal Revenue, G. R. No. 145526, March
116, 2007)
13. What is the jurisdiction of the Court of
Tax Appeals ?
SUGGESTED ANSWER:
“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 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
 58
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)
13-A. General rule: The denial of a motion
to quash is an interlocutory order which is not the
proper subject of an appeal or a petition for
certiorari. According to Section 1, Rule 41 of the Revised
Rules of Court, governing appeals from the Regional Trial
Courts (RTCs) to the Court of Appeals, an appeal may be
taken only from a judgment or final order that completely
disposes of the case or of a matter therein when declared
by the Rules to be appealable. Said provision, thus,
explicitly states that no appeal may be taken from an
interlocutory order. (Santos v. People, et al, G. R. No. 173176,
August 26, 2008)
14. Applicability of Proton Pilipinas Corporation vs.
Republic, etc., G. R. No. 165027, October 16, 2006. The case
was decided on factual antecedents before R. A. No. 9282 which
grants criminal jurisdiction to the Court of Tax Appeals if the value
of the tax is P1 million or more.
Interpreting the provisions of Republic Act No. 8249, which
provides that the civil action for recovery of civil liability should be
jointly determined in the criminal proceeding by the
Sandiganbayan or appropriate courts, the prohibition of
reservation of the criminal aspect, the Supreme Court said that
tax collection cases may be tried separately, and not before the
Sandiganbayan in Rep. Act No. 3019 cases. This is so because,
Rep. Act No. 3019 is silent on the definition of civil liability and the
application of Art. 104 of the Revised Penal Code does not cover
taxes. Consequently, the Supreme Court ruled that on the tax
collection case the RTC would have jurisdiction.
Interpretation by the author in the light of Rep. Act.
9282. If it is a criminal case cognizable by the Sandiganbayan,
 59
then this court retains jurisdiction, with the civil jurisdiction being
cognizable by the CTA or the lower courts depending on the
amount.
If the issue is a purely tax case, even if it involves cases
cognizable by the Sandiganbayan, then jurisdiction vests upon the
CTA or the lower courts depending on the amount of the tax.
ââ 15. On January 24, 1995, the then Secretary
of Finance, through the recommendation of the then
Commissioner of Internal Revenue issued Revenue
Regulations [Rev. Reg.] No. 1-95, providing the “Rules and
Regulations to Implement the Tax Incentives Provisions
Under Paragraphs (b) and (c) of Section 12, [R.A.] No. 7227,
[o]therwise known as the Bases Conversion and
Development Act of 1992.” Subsequently, Rev. Reg. No. 12-
97 was issued providing for the “Regulations Implementing
Sections 12(c) and 15 of [R.A.] No. 7227 and Sections 24(b)
and (c) of [R.A.] No. 7916 Allocating Two Percent (2%) of
the Gross Income Earned by All Businesses and
Enterprises Within the Subic, Clark, John Hay, Poro Point
Special Economic Zones and other Special Economic
Zones under PEZA.” On September 27, 1999, Rev. Reg. No.
16-99 was issued “Amending [RR] No. 1-95, as amended,
and other related Rules and Regulations to Implement the
Provisions of paragraphs (b) and (c) of Section 12 of [R.A.]
No. 7227, otherwise known as the ‘Bases Conversion and
Development Act of 1992’ Relative to the Tax Incentives
Granted to Enterprises Registered in the Subic Special
Economic and Freeport Zone.”
On June 3, 2003, the Commissioner of Internal
Revenue issued Revenue Memorandum Circular (RMC) No.
31-2003 setting the “Uniform Guidelines on the Taxation of
Imported Motor Vehicles through the Subic Free Port Zone
and Other Freeport Zones that are Sold at Public Auction,”
which provided for the tax treatments on the transactions
involved in the importation of motor vehicles through the
SSEFZ and other legislated Freeport zones and subsequent
sale thereof through public auction. This was later
amended by RMC No. 32-2003.
Asia International Auctioneers and others filed a
complaint before the RTC of Olongapo City, to declare
Void, Ultra Vires, and Unconstitutional [RMC] No. 31-2003
dated June 3, 2003 and [RMC] No. 32-2003 dated June 5,
2003, Rev. Reg. Nos. 1-95, 12-97 and 16-99 dated January
24, 1995, August 7, 1997 and September 27, 1999,
respectively,
They contended that jurisdiction over the case at
bar properly pertains to the regular courts as this is “an
action to declare as unconstitutional, void and against the
provisions of [R.A. No.] 7227” the RMCs issued by the CIR.
They do “do not challenge the rate, structure or figures of
the imposed taxes, rather they challenge the authority of
the respondent Commissioner to impose and collect the
said taxes.” They also claim that the challenge on the
authority of the CIR to issue the RMCs does not fall within
the jurisdiction of the Court of Tax Appeals (CTA).
Does the RTC have jurisdiction ?
SUGGESTED ANSWER: No. It is the Court of Tax
Appeals that has exclusive jurisdiction.
In the case at bar, the assailed revenue regulations and
revenue memorandum circulars are actually rulings or opinions
of the CIR on the tax treatment of motor vehicles sold at public
auction within the SSEZ to implement Section 12 of R.A. No.
7227 which provides that “exportation or removal of goods from
the territory of the [SSEZ] to the other parts of the Philippine
territory shall be subject to customs duties and taxes under the
Customs and Tariff Code and other relevant tax laws of the
Philippines.” They were issued pursuant to the power of the CIR
under Section 4 of the National Internal Revenue Code, viz:
Section 4. Power of the Commissioner to Interpret Tax
Laws and to Decide Tax Cases.-- The power to interpret the
provisions of this Code and other tax laws shall be under the
exclusive and original jurisdiction of the Commissioner, subject
to review by the Secretary of Finance.
The power to decide disputed assessments, refunds of internal
revenue taxes, fees or other charges, penalties imposed in
relation thereto, or other matters arising under this Code or
other laws or portions thereof administered by the Bureau of
Internal Revenue is vested in the Commissioner, subject to the
exclusive appellate jurisdiction of the Court of Tax Appeals. (as
amended by the NIRC of 1997, emphases supplied, Asia
International Auctioneers, Inc., etc et al., .v. Parayno, Jr., etc.,, et
al., G. R. No. 103445, December 18, 2007)
NOTES AND COMMENTS: The author disputes this
doctrine. The decisions of the Commission under “other matter”
refers to the quasi-judicial decisions and not to the quasi-
legislative powers of the Commissioner.
 60
16. What is 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 ?
SUGGESTED ANSWER: The Commissioner of Internal
Revenue should 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
Commissioner’s 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 citing Oceanic Wireless
Network, Inc. v. Commissioner of Internal Revenue, G. R. No.
148380, 9 December 2005, 477 SCRA 205, 211-212, citing
Surigao Electric Co., Inc. v. Court of Tax Appeals, G. R. No. L-
254289, 28 June 1974, 57 SCRA 523)
NOTES AND COMMENTS:
a. Reasons for the rule requiring CIR’s
unequivocal language on his action on the protest.
1) It would obviate all desire and opportunity on
the part of the taxpayer to continually delay the finality of
the assessment – and, consequently, the collection of the
amount demanded as taxes – by repeated requests for
recomputation and reconsideration.
2) On the part of the Commissioner of Internal
Revenue, this would encourage his office to conduct a
careful and thorough study of every questioned
assessment and render a correct and define decision
thereon in the first instance.
3) This would also deter the Commissioner of
Internal Revenue from unfairly making the taxpayer grope
in the dark and speculate as to which action constitutes the
decision appealable to the tax court.
4) Of greater import, this rule of conduct would
meet a pressing need for fair play, regularity, and
orderliness in administrative action. . (Commissioner of
Internal Revenue v. Bank of the Philippines Islands, G. R.
No. 134062, April 17, 2007 citing Oceanic Wireless
Network, Inc. v. Commissioner of Internal Revenue, G. R.
No. 148380, 9 December 2005, 477 SCRA 205, 211-212,
citing Surigao Electric Co., Inc. v. Court of Tax Appeals, G.
R. No. L-254289, 28 June 1974, 57 SCRA 523)
ââ 17. Cite 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.
SUGGESTED ANSWER:
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.
(Commissioner of Internal Revenue v. Union Shipping
Corporation, 185 SCRA 547)
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
commissioner’s decision of taxpayer’s 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
CIR’s 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.
ââ 18. 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.
 61
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.
18-A. 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.
ââ19. 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.)
ââ 20. 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.
ââ 21. As a general rule, “No court shall have
the authority to grant an injunction to 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
 62
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.
The Supreme Court did not grant the provisional remedy
prayed for in Southern Cross Cement Corporation v. The
Philippine Cement Manufacturers Corp., et al., G. R. No. 158540,
July 8, 2004 for it would be tantamount to enjoining the collection
of taxes, a peremptory judicial act which is traditionally frowned
upon unless there is a clear statutory basis for it. Evident is the
clear legislative intent that the imposition of safeguard measures,
despite the availability of judicial review, should not be enjoined
notwithstanding any timely appeal of the imposition. This so
because the Safeguard Measures Act states that the filing of a
petition for review before the CTA does not stop, suspend, or
otherwise toll the imposition or collection of the appropriate tariff
duties or the adoption of other appropriate safeguard measures.
22. General rule: “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 citing United States v. Johnson,
319 U.S. 1233 (1943)] “However, the rule does not apply where
the estimation is arrived at arbitrarily and capriciously.”
[Commissioner of Internal Revenue v. Hantex Trading Co., Inc.,
citing United States v. Rindskopf, 105 U.S.418 (1881)]
23. 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)
NOTES AND COMMENTS:
a. The secondary evidence referred to are those that
may be adduced using the general methods for reconstructing a
taxpayer’s income or the indirect approach to tax investigation.
The “best evidence” envisaged in Section 16 of the 1977
NIRC [now Sec. 6 (B),NIRC of 1997] “includes the corporate and
accounting records of the taxpayer who is the subject of the
assessment process, the accounting records of other taxpayers
engaged in the same line of business, including their gross profit
and net profit sales.” (Commissioner of Internal Revenue v.
Hantex Trading Co., Inc. G. R. No. 136975, March 31, 2005 citing
De Leon, The National Internal Revenue Code Annotated, p. 37)
“Such evidence also includes data, record, paper,
document or any evidence gathered by internal revenue officers
from other taxpayers who had personal transactions or from
whom the subject taxpayer received any income; and record,
data, document and information secured from government offices
or agencies, such as the SEC, the Central Bank of the
Philippines, the Bureau of Customs, and the “Tariff and Customs
Commission.” (sic, Commissioner v. Hantex Trading Co., Inc.,
supra) “The law
allows the BIR access to all relevant or material records or data in
the person of the taxpayer. It places no limit or condition on the
type or form of the medium by which the record subject of the
order of the BIR is kept.” (Ibid.) Purpose of
the “best evidence obtainable” rule under Sec, 6 (B), NIRC of
1997. “The purpose of the law is to enable the BIR to get at the
taxpayer’s records in whatever form they may be kept.”
(Commissioner of Internal Revenue v. Hantex Trading Co., Inc.
G. R. No. 136975, March 31, 2005)
24. 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 taxpayer’s 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. citing Campbell, Jr., v. Guetersloh, 287 F.2d 878 (1961)]
Citing its ruling in a previous case, a “U.S. appellate court
declared that where the records of the taxpayer are manifestly
inaccurate and incomplete, the Commissioner may look to other
sources of information to establish income made by the taxpayer
 63
during the years in question. (Ibid., in turn citing Kenney v.
Commissioner, 111 F.2d 374)
25. The following are the general methods developed by
the Bureau of Internal Revenue for reconstructing a
taxpayer’s 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;
(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)
26. 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)
27. 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.
ââ 28. 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)
29. 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
taxpayer’s 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.
(Commissioner of Internal Revenue v. Pascor Realty and
Development Corporation, et al., G.R. No. 128315, June 29,
1999)
ââ 30. An assessment is a notice duly sent to
the taxpayer which is deemed made only when the BIR
 64
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)
31. What is a self-assessed tax ?
SUGGESTED ANSWER: 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 citing
Tupaz v. Ulep, 316 SCRA 118 (1999) in turn citing Vitug and
Acosta, Tax Law and Jurisprudence, 1st edition, 1997, p. 267]
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 taxpayer’s 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. (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)
32. On October 28, 1988 taxpayer bank received a
notice of assessment from the BIR informing it that
deficiency taxes are due from the said taxpayer bank without
any findings of law or fact but supported only with a
computation. On December 10, 1988, the taxpayer bank
counsel filed a letter that “as soon as this is explained and
clarified in a proper notice of assessment, we shall inform
you of the taxpayer’s decision on whether to pay or protest
the assessment.” The taxpayer bank insists that the
assessment was not valid. Of course, BIR took the opposite
view contending further that there was no seasonable
protest, hence the tax is sue and collectible. Who is
correct ?
SUGGESTED ANSWER: The BIR is correct. Under the
old law Sec. 270, it is enough merely that the BIR Commissioner
shall “notify the taxpayer of his findings
The taxpayer bank counsel’s December 10, 1988 letter is
not a seasonable protest because it was filed thirty (30) days after
receipt of the assessment on October 28, 1988. (Commissioner
of Internal Revenue v. Bank of Philippine Islands, G. R. No.
134062, April 17, 2007)
NOTES AND COMMENTS: The statement, “The taxpayer
shall be informed in writing of the law and the facts on which the
assessment is made; otherwise the assessment shall be void” is
an amendment to Sec. 270 (now renumbered to Sec. 228) which
took effect only on January 1, 1998 upon the effectivity of the Tax
Reform Act of 1997.
33. What are the prescriptive periods for making
assessments of internal revenue taxes ?
SUGGESTED ANSWER:
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).
ââ 34. 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,
 65
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 latter’s 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. [Republic of the Philippines
v. Ablaza, 108 Phil. 1105, 1108, cited in Bank of Philippine
Islands (Formerly Far East Bank and Trust Company) v.
Commissioner of Internal Revenue, G. R. No. 174942, March 7,
2008]
35. 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)
36. 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 taxpayer’s 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]
37. During Juliana’s lifetime, her business affairs were
managed by the Philippine Trust Company (Philtrust). She
died on April 3, 2001.Two days after her death, Philtrust,
through its Trust Officer, filed her Income Tax Return for
2000, without indicating that Juliana died.
On May 22, 2001, Philtrust filed a verified petition with
the RTC for appointment as Special Administrator. This was
denied by the court who appointed one of the heirs as
Special Administrator. Philtrust’s motion for reconsideration
was denied.
After an investigation by the BIR of the decedent’s
income tax liability, it sent, on November 18, 2003, a demand
letter and a Notice of Assessment to Juliana c/o Philtrust at
the latter’s address which was stated in the 1998 Income Tax
Return. No response was made neither was the BIR advised
that Juliana already died.
On June 18, 2005, the BIR Commissioner issued
warrants of distraint and levy to enforce collection of the
deficiency income tax liability which was served on Juliana’s
heir. On November 22, 2005, the BIR filed with the estate
court a motion for allowance of claim. The heir claimed that
there was no proper service of the notice of assessment and
that the filing of the motion was time-barred. On the other
hand the BIR made the submission that both the issuance of
the assessment notice and the motion were all properly
made on Philtrust. Furthermore the lapse of the 30-day
 66
period within which to protest made the assessment final,
executory and uncontestable and not time barred.
Rule on the conflicting claims of the parties.
SUGGESTED ANSWER: I would rule in favor of the heir.
There was no proper service of the notice of assessment
because the death of Juliana automatically severed the legal
relationship of principal and agent between her and Philtrust. The
severed relationship could not be revived on the mere fact that
Philtrust filed her Tax Return two days after her death.
Philtrust’s failure to file a notice of death subjects it to penal
sanctions which do not include the indefinite tolling of the
prescriptive period for making deficiency tax assessments, or the
waiver of the notice requirement for such assessments. (Estate of
the late Juliana Diez Vda. de Gabriel v. Commissioner of Internal
Revenue, G.R. No. 155541, January 27, 2004)
ââ 38. 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
taxpayer’s 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)
39. What is the presumption that flows from a
taxpayer’s 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)
40. 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.)
â 41. 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]
ââ 42. 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:
 67
a. When the Commissioner is prohibited from making the
assessment, or beginning distraint, or levy or proceeding in court
and for sixty (60) days thereafter;
b. When the taxpayer requests for and is granted a
reinvestigation by the commissioner;
c. When the taxpayer could not be located in the address
given by him in the return filed upon which the tax is being
assessed or collected;
d. When the warrant of distraint and levy is duly served
upon the taxpayer, his authorized representative, or a member of
his household with sufficient discretion, and no property could be
located; and
e. When the taxpayer is out of the Philippines.
NOTES AND COMMENTS:
The holding in Commissioner of Internal Revenue v. Court
of Appeals, et al., G.R. No. 115712, February 25, 1999 (Carnation
case) that the waiver of the period for assessment must be in
writing and have the written consent of the BIR Commissioner is
still doctrinal because of the provisions of Sec. 223, NIRC of
1997 which provides for the suspension of the prescriptive period:
ââ 43. 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)]
44. 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]
45. Philippine Journalists, Inc. (PJI) filed its Annual
Income Tax Return for the calendar year ended December 31,
1994 which showed a net income of P30 million and the tax
due as P10 million. An examination of PJI’s books of
account and other accounting records for the period January
1, 1994 to December 31, 1994 showed deficiency VAT,
Income Tax and Withholding Tax in the total amount of P1`27
million. During the September 22, 1997 informal conference
with the Revenue District Officer, PJI’s Comptroller executed
a waiver of statute of limitations provided for under sections
223 and 224 of the NIRC. On October 5, 1998, the BIR issued
a Pre-Assessment Notice which was followed by
Assessment/Demand No.33-1-000757-94 stating a total
deficiency taxes in the amount of P111 million for income
tax, VAT and expanded withholding taxes, inclusive of
interest and compromise penalty.
On March 16, 1999, the BIR sent to PJI a Preliminary
Collection Letter to pay the assessment within 10 days from
receipt. On November 10,1999, a Final Notice Before Seizure
was issued giving PJI 10 days from receipt within which to
pay. PJI received the final notice on November 24, 1999 and
on November 26, 1999 PJI asked that it be clarified on how
the tax liability of P111 million was arrived at and requested
for an extension of 30 days from receipt of the clarification
within which to reply. PJI, through a follow-up letter,
asserted it never received Assessment/Demand No. 33-1-
000757-94. On March 28, 2000 PJI received a Warrant of
Distraint and/or Levy. PJI then appealed to the CTA.
The following issues are for resolution in the appeal:
a. Does the CTA have jurisdiction over the
appeal ?
b. Was the Waiver of the Statute of Limitations
valid ?
c. Were the Assessment/Demand and the Warrant
of Distraint and/or Levy valid ?
Will the appeal prosper? Explain briefly your answer.
SUGGESTED ANSWER: Yes, it will prosper.
a. The CTA has jurisdiction to determine if the warrant
of distraint and levy issued by the BIR is valid and to rule if the
Waiver of the Statute of Limitations was validly effected. This is
so because the CTA has exclusive appellate jurisdiction to review
by appeal decisions of the Commissioner of Internal Revenue in
cases involving “other matters arising under the National Internal
Revenue Code or other laws administered by the Bureau of
Internal Revenue.” [Sec. 7 (a) (1). R. A. No. 1125, as amended
by R. A. No. 9282) Thus it was previously ruled that the CTA had
jurisdiction to act on a petition to invalidate and annul the distraint
 68
orders of the Commissioner. [Ynares-Santiago, J. Philippine
Journalists, Inc. v. Commissioner of Internal Revenue, G. R. No.
162852, December 16, 2004 citing Panrtoja v. David, 111 Phil.
197; 1 SCRA 608 (1961)] Likewise upheld by the Supreme Court
was the decision of the CTA declaring several waivers executed
by the taxpayer as null and void, thus invalidating the
assessments issued by the BIR. (Ibid., citing Commissioner of
Internal Revenue v. Court of Appeals, G. R. No. 115712, 25
February 1999, 303 SCRA 614)
b. The Waiver of the Statute of Limitations is not valid
because it did not specify a definite agreed date between the BIR
and PJI, within which the former may assess and collect revenue
taxes. Furthermore, the waiver is also defective from the
government side because it was signed only by a revenue district
officer, and not the Commissioner, as so required. Finally, PJI
was not furnished a copy of the waiver.
c. The waiver document is incomplete and defective
and thus the three-year prescriptive period within which to assess
was not tolled or extended and continued to run until April 17,
1998. Consequently, Assessment/Demand No. 33-1-000757-94
issued on December 9, 1998 was invalid because it was issued
beyond the three (3) year period. In the same manner, the
Warrant of Distraint and/or Levy which PJI received on March 28,
2000 is also null and void for having been issued pursuant to an
invalid assessment. (Philippine Journalists, Inc. v. Commissioner
of Internal Revenue, G. R. No. 162852, December 16, 2004)
ââ 46. 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)
ââ 47. 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)
ââ 48. What are the requirements for the
validity of a taxpayer’s 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
taxpayer’s 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
 69
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]
49. What is the procedure for suspension of
collection of taxes ?
SUGGESTED ANSWER: Where the collection of the
amount of the taxpayer’s 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)
ââ 50. 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)
ââ 50-A. What tax cases may be the subject
of a compromise ?
SUGGESTED ANSWER: The following cases may,
upon taxpayer’s 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)
ââ 51. 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 taxpayer’s
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)
ââ 52. The Commissioner may compromise
the payment of any internal revenue tax when:
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
 70
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.
ââ 53. The Commissioner of Internal Revenue
is authorized to abate or cancel a tax liability, when:
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]
54. 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
 71
within a period agreed upon by the Commissioner and the
taxpayer. The same scenarios are those referred to in the
former Sec. 269 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)
55. What is solutio indebeti as applied to tax
cases ?
SUGGESTED ANSWER: This is erroneous payment of
taxes and occurs when the taxpayer pays under a mistake of fact,
as for the instance in a case where he is not aware of an existing
exemption in his favor at the time the payment was made. Such
payment is held to be not voluntary and therefore, can be
recovered or refunded. (Commissioner of Internal Revenue v.
Acesite (Philippines) Hotel Corporation, G. R. No. 147295,
February 16, 2007)
NOTES AND COMMENTS: Technicalities and legalisms,
however exalted, should not be misused by the government to
keep money not belonging to it, thereby enriching itself at the
expense of its law-abiding citizens. State Land Investment
Corporation v. Commissioner of Internal Revenue, G. R. No.
171956, January 18, 2008 citing BPI-Family Savings Bank, Inc.
v. Court of Appeals, G.R. No. 122480, April 12, 2000, 330 SCRA
507.
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 supra citing 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.)
56. What are the reasons for requiring the filing of
an administrative application for refund or credit with the
BSUGGESTED
ââ 56. The filing of an administrative claim
for refund with the BIR, before filing a case with the
Court of Tax Appeals, is necessary for the following
reasons:
a. To afford the Commissioner an opportunity to correct
his errors or that of subordinate officers. (Gonzales v. Court of
Tax Appeals, et al., 14 SCRA 79)
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. (Bermejo v. Collector,
G.R. No. L-3028, July 28, 1950)
ââ57. 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. Is there any
exception ?
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
 72
useless and needless ceremony that would only delay the
disposition of the case, for the Commissioner would certainly
disallow the claim for refund in the same way as he disallowed the
protest against the assessment. The law, should not be
interpreted as to result in absurdities. (vda. de San Agustin., etc.,
v. Commissioner of Internal Revenue, G.R. No. 138485,
September 10, 2001 citing Roman Catholic Archbishop of Cebu
v. Collector of Internal Revenue, 4 SCRA 279)
NOTE: Reconciliation between above two numbers
(56 and 57). An application for refund or credit under Sec. 229 of
the NIRC of 1997 is required where the case filed before the CTA
is a refund case, which is not premised upon a disputed
assessment. There is no need for a prior application for refund or
credit, if the refund is merely a consequence of the resolution of
the BIR’s denial of a protested assessment.
58. What is the nature of the taxpayer’s 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)
ââ59. 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)]
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)
60. 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: Systra’s claim for refund
should be denied. Once the carry over option was made,
actually or constructively, it became forever irrevocable
 73
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 taxpayer’s
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 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.
60-A. In early April 1999 XYZ Bank advanced the
amount of P180 million to the BIR its income tax payment for
the bank’s 1999 operations in response for the government’s
call to generate more revenues for national development. In
separate letters dated April 19 and 29, 1999 and May 14, 1999
XYZ requested for the issuance of a Tax Credit Certificate
(TCC) to be utilized against future tax obligations of the
bank.
By the end of 1999, a credit balance in the amount of
P73 million remain which was carried over for the years 2000
to 2004 but was not availed of because XYZ incurred losses
during the period. On July 28, 2005 PNB reiterated its
request for the issuance of a TCC for the P73 million
balance. The BIR rejected the request on the ground of
among others prescription having been applied for beyond
the two-year reglementary period for filing claims for refund
as set forth in Sec. 229 of the NIRC of 1997.
Has the claim prescribed ? Explain briefly your
answer.
SUGGESTED ANSWER: The claim has not prescribed.
Sec. 229 of the Tax Code, as couched, particularly its statute of
limitations component, is in context intended to apply to suits for
any national internal revenue tax “alleged to have been
erroneously or illegally assessed or collected, or of any penalty
claimed to have been collected without authority, or of any sum
alleged to have excessively or in any manner wrongfully
collected.”
Analyzing the underlying reason behind the advance
payment (to help the government) made by XYZ it would be
improper to treat the same as erroneous, wrongful or illegal
payment of tax within the meaning of Sec. 229 of the NIRC of
1997.
An availment of tax credit due for reasons other than the
erroneous or wrongful collection of taxes may have a different
prescriptive period. (Commissioner of Internal Revenue v.
Philippine National Bank, G.R. No. 161997, October 25, 2005
citing Commissioner of Internal Revenue v. The Philippine Life
Insurance Co., et al. G.R. No. 105208, May 29, 1995) Absent
any specific provision in the Tax Code or special laws, that period
would be ten (10) years under Article 1144 of the Civil Code.
(Commissioner of Internal Revenue v. Philippine National Bank,
supra)
61. ABC Bank filed with the BIR an application for a
tax credit/refund for alleged excess payments of its gross
receipts tax (GRT) for the 3rd and 4th quarters of 2003 and the
entire 2004 amounting to P14 million. Since no action was
taken by the Commissioner on its claim, ABC filed a case
with the CTA on October 18, 2005 to comply with the two-
year reglementary period and avoid the prescription of its
action. Only July 30, 2007, the CTA rendered a decision
 74
denying the claim for ABC’s failure to file its formal offer of
evidence in the CTA.
ABC Bank now seeks refuge in Onate v. Court of
Appeals, 320 Phil. 344; 250 SCRA 283 (1995) where the
Supreme Court allowed evidence, not formally offered, to be
considered on condition that: (1) evidence must have been
identified by testimony duly recorded and (2) it must have
been incorporated in the records of the case.
Is ABC correct ?
SUGGESTED ANSWER: No. A tax refund s in the nature
of a tax exemption which must be construed strictissimi juris
against the taxpayer. The taxpayer must present convincing
evidence to substantiate a claim for refund. Without any
documentary evidenced on record, ABC failed to discharge the
burden of proving its right to a tax credit/tax refund. (Far East
Bank & Trust Company v. Commissioner of Internal Revenue, G.
R. No. 149589, September 15, 2006)
62. 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)
63. 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.)
ââ64. 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)
ââ 65. 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
 75
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)
65-A. 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)
ââ 66. What are the requisites for the refund
of illegally deducted taxes from the income of an
employees’ trust fund ?
SUGGESTED ANSWER: What has to be established, as
a matter of evidence, is that the amount sought to be refunded to
the bank-trustee corresponds to the tax withheld on the interest
income earned from the exempt employees’ trust. The need to
be determinate is important, specially if the bank trustee, in the
ordinary course of its banking business, earns interest income not
only from its investments of employees’ trusts, but on a whole
range of accounts which do not enjoy the same broad exemption
as employees’ trusts. (Far East Bank Trust and Company, etc.,
v. Commissioner of Internal Revenue, et al., G. R. No. 138919,
May 2, 2006)
NOTES AND COMMENTS:
a. Employees’ trust fund, defined. An employees’
trust fund is a trust established by an employer to provide
retirement, pension, or other benefits to employees - it is a
separate taxable entity established for the exclusive benefit of the
employees. (Development Bank of the Philippines v.
Commission on Audit, 422 SCRA 459)
b. Income of employees’ trust is tax exempt. “Any
provision of law to the contrary notwithstanding, the retirement
benefits received by official and employees of private firms,
whether individual or corporate, in accordance with a reasonable
private benefit plan maintained by the employer shall be exempt
from all taxes and shall not be liable to amendment, levy or
seizure by or under any legal or equitable process whatsoever
except to pay a debt of the official or employee concerned to the
private benefit plan or that arising from liability imposed in a
criminal action’ x x x “ (Sec. 1, Rep. Act 4917)
A tax-exempt employees’ trust fund is referred to under the
NIRC of 1997 as a “reasonable private retirement plan, which
means “a pension, gratuity, stock bonus or profit-sharing plan
maintained by an employer for the benefit of some or all of his
officials or employees, wherein contributions are made by such
employer for the officials or employees, or both, for the purpose of
distributing to such officials and employees the earnings and
principal of the fund thus accumulated, and wherein it is provided
in said plan that at no time shall any part of the corpus or income
of the fund be used for, or be diverted to, any purpose other than
for the exclusive benefit of the said officials or employees.” [Sec.
32 (B) (6 ) (a), NIRC of 1997]
c. Extent of exemption. The tax exemption enjoyed
by employees’ trust is absolute irrespective of the nature of the
tax. It does not apply only to the tax on interest income from
money market placements, bank deposits, other deposit
substitute instruments and government security, because the
source of the interest income does not have any effect on the
exemption enjoyed by employee’s trusts. (Far East Bank Trust
 76
and Company, etc., v. Commissioner of Internal Revenue, et al.,
G. R. No. 138919, May 2, 2006)
67. 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
employee’s trust has not been shown as they have been
commingled with the interest income of the other clients of the
bank-trustee.
68. 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 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)
69. 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, 2[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.”
2 [3]
Id. at 11.
 77
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
ââ 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.
ââ 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.
ââ 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)
 78
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.
ââ 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”]
ââ 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”)
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.
ââ14. 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
 79
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.
ââ 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.
ââ 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.
ââ 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.
ââ 25. The basis of dutiable value of merchandise
that is subject to ad valorem customs duties 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
 80
c. Freight. (Sec. 201, TCC as amended by Sec. 1,
Rep. Act No. 9135)
ââ 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)
29-A. 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)
30. 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
 81
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 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)
âââ 31. 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 government’s
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.
32. “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)
33. 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)
34. The Tariff and Customs Code allows the Bureau of
Customs to resort to the administrative remedy of seizure,
 82
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.
35. 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.
36. 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)
37. 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.
ââ 38. Requisites for forfeiture of 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)
39. 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
vessel’s 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.
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 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)
40. 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)
 83
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.
41. 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.
LOCAL GOVERNMENT TAXATION
LOCAL GOVERNMENT TAXATION, IN GENERAL
ââ1. 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.
âââ2. 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.
â3. 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)
â4. 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.
ââ5. 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.
ââ6. 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.
 84
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)
ââ7. 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]
â8. X City issued a notice of assessment against
ABC Condominium 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)
REAL PROPERTY TAXATION
ââ1. What are the fundamental principles
of real property taxation ?
SUGGESTED ANSWER: 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)
â2. Who determines the fair market value of
properties ? SUGGESTED ANSWER: 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.
â3. What is the fair market value of properties ?
ANSWER: 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.
 85
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
citing Army and Navy Club, Manila v. Trinidad, 44 Phil. 383 )
NOTE: 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 citing Reyes v. Almanzor, 196
SCRA 322, 327 (1991)])
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 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)
â4. What are the approaches in estimating the fair
market value of real property for real property tax purposes ?
ANSWER:
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)
ââ5. Quezon City passed 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 the proviso for the basis in determining the value for
real property tax purposes valid ?
SUGGESTED ANSWER: No. The proviso being contrary
to public policy and for restraining trade is not valid 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
 86
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. What is the nature of a tax declaration ?
SUGGESTED ANSWER: As a rule, tax declarations or
realty tax payments of property are not conclusive evidence of
ownership, nevertheless, they are good indicia of possession in
the concept of owner, for no one in his right mind would be paying
taxes for a property that is not in his actual or constructive
possession. They constitute at least proof that the holder has a
claim of title over the property.
The voluntary declaration of a piece of property for taxation
purposes manifests not only one’s sincere and honest desire to
obtain title to the property and announces his adverse claim
against the State and all other interested parties, but also the
intention to contribute needed revenues to the government. Such
an act strengthens one’s bona fide claim of acquisition of
ownership. (Buenaventura, et al., v. Republic, G. R. No.
166865, March 2, 2007 citing Heirs of Simplicio Santiago v. Heirs
of Mariano E. Santiago, G. R. No. 151440, 17 June 2003, 404
SCRA 193, 199 – 200)
âââ7. Give examples of personal property under
the civil law that may be considered as real property for
purposes of taxes.
SUGGESTED ANSWER: 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 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. 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.
 87
8. The restriction upon the power of courts to
impeach tax assessment without a prior payment, under
protest, of the taxes assessed is consistent with the doctrine
that taxes are the lifeblood of the nation, and as such their
collection cannot be curtailed by injunction or any like action;
otherwise, the state or, in this case, the local government unit,
shall be crippled in dispensing the needed services to the people,
and its machinery gravely disabled. (Manila Electric Company v.
Barlis, G.R. No. 114231, May 18, 2001)
Thus, the trial court has no jurisdiction to entertain a
petition for prohibition absent payment under protest of the tax
assessed. (Ibid.)
NOTES AND COMMENTS: While the above May 18,
2001 decision was set aside by the Supreme Court when it
granted the petitioner’s second motion for reconsideration on
June 29, 2004, the author submits that the above doctrine in the
May 18, 2001 decision is still valid, because what was reversed in
the second motion for reconsideration was the garnishment of
Meralco’s assets. The remand to the lower court was for the
resolution of whether or not an assessment was issued to
Meralco.
ââ9. 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)
NOTE: The above May 18, 2001 decision was set aside
by the Supreme Court when it granted the petitioner’s 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.
â10. 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)
11. 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)
12. 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.
13. The remedy of levy can be pursued by putting
up for sale the real property subject of tax, i.e., the delinquent
property upon which the tax lien attaches, regardless of the
present owner or possessor thereof. However this remedy is only
one of the other remedies. (Manila Electric Company v. Barlis,
G.R. No. 114231, May 18, 2001)
NOTE: The above May 18, 2001 decision was set aside
by the Supreme Court when it granted the petitioner’s 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, in the light of
 88
pronouncements of the Supreme Court in other cases. Thus, do
not cite the doctrine as emanating from the May 18, 2001
decision.
14. The LGU could also avail of the remedy of
distraint and levy of personal property subjecting any
personal property of the taxpayer to execution. thus, the
issuance of the warrants of garnishment over MERALCO’s bank
deposits was not improper or irregular. (Manila Electric Company
v. Barlis, et al., G.R. No. 114231, May 18, 2001)
NOTE: The above May 18, 2001 decision was set aside
by the Supreme Court when it granted the petitioner’s 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, 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.
ââ58. 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)
16. 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)
â17. 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 FEL’s
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 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
 89
prevented and excised from our system. (FELS Energy, Inc., v.
Province of Batangas, G. R. No. 168557, February 16, 2007 and
companion case, citing Callanta v. Office of the Ombudsman. G.
R. Nos. 115253-74, January 30, 1998, 285 SCRA 648)
18. 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.
19. 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.
20. 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.
21. 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 treasurer’s
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.
22. A City Ordinance adopting a method of
assessment was nullified by the Supreme Court. A taxpayer
who has paid his real property taxes on the basis of the
nullified ordinance now posits that the return of the real
property tax erroneously collected and paid is a necessary
consequence of the Supreme Court’s nullification of the
ordinance and there is no need to claim for a refund. Is this
correct ?
SUGGESTED ANSWER: No. 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)
NOTE: 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.
23. 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 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 Court’s 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
 90
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.
âââ24. 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]
âââ25. 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 citing Justice Davide)
âââ31. 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 citing Province of Abra v. Hernando, 107
SCRA 105)
âââ26. What is meant by “actual, direct and
exclusive use” of the property for charitable purposes is the
direct and immediate and actual application of the property
itself to the purposes for which the charitable institution is
organized. It is not the use of the income from the real property
that is determinative of whether the property is used for tax-
exempt purposes.
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)
27. 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)
28. 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)
âââ29. What property are exempt from the
payment of real property tax under the Local Government
Code ?
SUGGESTED ANSWER:
a. Real property owned by the Republic of the
Philippines or any of its political subdivisions except when the
 91
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;
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.
ââ30. The Manila International Airport Authority
(MIAA) was subject to real property taxes by the
municipality of Paranaque on its airport lands, and
buildings on the ground that the Local Government Code
has withdrawn exemptions previously enjoyed by
government-owned and controlled corporations. MIAA
contends otherwise as it claims it is not a government
owned or controlled corporation. Who is correct.
SUGGESTED ANSWER: MIAA is correct because 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
citing Manila International Airport Authority v. Court of Appeals,
et al., G. R. No. 155650, July 20, 2006)
31. 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
company’s 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 company’s 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
 92

ADVANCE
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 CONGRATULATIONS AND SEE
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
YOU IN COURT
company is an express and real intention on the part of
Congress to once against remove from the LGC’s delegated
taxing power, all of the company’s properties that are actually,
directly and exclusively used in the pursuit of its franchise. (The
City Government of Quezon City, et al., v. Bayan
Telecommunications, Inc., G. R. No. 162015, March 6, 2006)
NOTES AND COMMENTS:
a. Note the confusion in the decision. It cited
Mactan Cebu which stated that the taxing power of local
government units is “no longer merely by virtue of a valid
delegation as before, but pursuant to direct authority” but in the
concluding portion referred to it as “the LGC’s delegated taxing
power.” Which is which, delegated or direct grant ? The author
submits that the weight of jurisprudence shows that it is a direct
grant not a delegated power. If a question is asked then state it
is a direct grant.

32. The owner operator of a BOT and not the

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