Tax I Memory Aid-Beda.pdf

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San eda College of Law 1  MEMORY AID IN TAXATION LAW TAXATION LAW COMMITTEE CHAIRPERSON: Charmaine Torres ASST. CHAIRPERSON: Rhohail Castro EDP: Rachelle Saya SUBJECT HEADS: Jemina Sy, Casiano Ilagan, Jr., Ryan Co, Edwin Torres :MEMBERS: Marita Lourdes Azur, Edizer Enriquez, Christian Cabrera, Jhundee Guillermo TAXATION LAW I. GENERAL PRINCIPLES POWER OF TAXATION TAXATION  power by which the sovereign through its law-making body raises revenue to defray the necessary expenses of government from among those who in some measure are privileged to enjoy its benefits and must bear its burdens. Two Fold Nature of the Power of Taxation 1. It is an inherent  attribute of sovereignty 2. It is legislative in character Extent of Taxing Power Subject to constitutional and inherent restrictions, the power of taxation is regarded as comprehensive, unlimited, plenary and supreme. SCOPE OF LEGISLATIVE TAXING POWER  1. Amount or rate of tax 2. Apportionment of the tax 3. Kind of tax 4. Method of collection 5. Purpose/s of its levy,  provided  it is for public purpose 6. Subject to be taxed,  provided it is within its jurisdiction 7. Situs of taxation TAXES  enforced proportional contributions from the persons and property levied by the law-making body of the State by virtue of its sovereignty in support of government and for public needs. CHARACTERISTICS OF TAXES 1. forced charge; 2. pecuniary burden payable in money; 3. levied by the legislature; 4. assessed with some reasonable rule of apportionment; (see theoretical justice) 5. imposed by the State within its jurisdiction; 6. levied for a public purpose. R EQUISITES OF A VALID TAX 1. should be for a public purpose 2. the rule of taxation shall be uniform 3. that either the person or property taxed be within the jurisdiction of the taxing authority 4. that the assessment and collection of certain kinds of taxes guarantees against injustice to individuals, especially by way of notice and opportunity for hear ing be provided 5. the tax must not impinge on the inherent and Constitutional limitations on the power of taxation THEORIES AND BASES OF TAXATION 1. Lifeblood Theory Taxes are what we pay for civilized society. Without taxes, the government would be paralyzed for lack of the motive power to activate and operate it. Hence, despite the natural reluctance to surrender part of one's hard-earned income to the taxing authorities, every person who is able to must contribute his share in the running of the government. (CIR v. Algue, Inc.) 2. Necessity Theory The power to tax is an attribute of sovereignty emanating from necessity. It is a necessary burden to preserve the State's sovereignty and a means to give the citizenry an army to resist an aggression, a navy to defend its shores from invasion, a corps of civil servants to serve, public improvements designed for the enjoyment of the citizenry and those which come within the State's territory, and facilities and protection which a government is supposed to provide. (Phil. Guaranty Co., Inc. v. CIR) 3. Benefits-Protection / Reciprocity Theory Taxation is described as a symbiotic relationship whereby in exchange of the benefits and protection that the citizens get from the Government, taxes are paid. (CIR v. Algue, Inc.)

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San eda College of Law 1 

MEMORY AID IN TAXATION LAW 

TAXATION LAW COMMITTEE CHAIRPERSON: Charmaine Torres  ASST. CHAIRPERSON: Rhohail Castro  EDP: Rachelle Saya SUBJECT HEADS: Jemina Sy, Casiano Ilagan,

Jr., Ryan Co, Edwin Torres :MEMBERS: Marita Lourdes Azur, Edizer Enriquez, Christian Cabrera, Jhundee

Guillermo

TAXATION LAW 

I. GENERAL PRINCIPLES 

POWER OF TAXATIONTAXATION –  power by which thesovereign through its law-making bodyraises revenue to defray the necessaryexpenses of government from amongthose who in some measure areprivileged to enjoy its benefits and mustbear its burdens.

Two Fold Nature of the Power of

Taxation1. It is an inherent  attribute of

sovereignty2. It is legislative in character

Extent of Taxing PowerSubject to constitutional and

inherent restrictions, the power oftaxation is regarded as comprehensive,unlimited, plenary and supreme. 

SCOPE OF LEGISLATIVE TAXING POWER  1.  Amount or rate of tax

2.  Apportionment of the tax3.  Kind of tax4.  Method of collection5.  Purpose/s of its levy,  provided   it is

for public purpose6.  Subject to be taxed,  provided it is

within its jurisdiction7.  Situs of taxation

TAXES –  enforced proportionalcontributions from the persons andproperty levied by the law-making bodyof the State by virtue of its sovereignty

in support of government and for publicneeds.

CHARACTERISTICS OF TAXES 1.  forced charge;2.  pecuniary burden payable in money;3.  levied by the legislature;4.  assessed with some reasonable rule

of apportionment; (see theoreticaljustice)

5.  imposed by the State within itsjurisdiction;

6.  levied for a public purpose.

R EQUISITES OF A VALID TAX 1.  should be for a public purpose2.  the rule of taxation shall be uniform3.  that either the person or property

taxed be within the jurisdiction ofthe taxing authority

4.  that the assessment and collectionof certain kinds of taxes guaranteesagainst injustice to individuals,especially by way of notice andopportunity for hearing be provided

5.  the tax must not impinge on theinherent and Constitutionallimitations on the power of taxation

THEORIES AND BASES OF TAXATION 1.  Lifeblood Theory

Taxes are what we pay for civilizedsociety. Without taxes, the governmentwould be paralyzed for lack of themotive power to activate and operate it.Hence, despite the natural reluctance tosurrender part of one's hard-earnedincome to the taxing authorities, every

person who is able to must contributehis share in the running of thegovernment. (CIR v. Algue, Inc.)

2.  Necessity TheoryThe power to tax is an attribute of

sovereignty emanating from necessity. Itis a necessary burden to preserve theState's sovereignty and a means to givethe citizenry an army to resist anaggression, a navy to defend its shoresfrom invasion, a corps of civil servants toserve, public improvements designed for

the enjoyment of the citizenry and thosewhich come within the State's territory,and facilities and protection which agovernment is supposed to provide.(Phil. Guaranty Co., Inc. v. CIR)

3.  Benefits-Protection / ReciprocityTheoryTaxation is described as a symbiotic

relationship whereby in exchange of thebenefits and protection that the citizensget from the Government, taxes arepaid. (CIR v. Algue, Inc.)

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San eda College of Law 2 

MEMORY AID IN TAXATION LAW 

TAXATION LAW COMMITTEE CHAIRPERSON: Charmaine Torres  ASST. CHAIRPERSON: Rhohail Castro EDP: Rachelle Saya SUBJECT HEADS: Jemina Sy, Casiano Ilagan,

Jr., Ryan Co, Edwin Torres:MEMBERS: Marita Lourdes Azur, Edizer Enriquez, Christian Cabrera, Jhundee

Guillermo

Note:  While taxes are intended forgeneral benefits, special benefits totaxpayers are not required. TheGovernment renders no special or

commensurate benefit to any particularperson or property.

IS THE POWER TO TAX THE POWER TO

DESTROY?1.  “Power to tax is the power todestroy” (Marshall Dictum) –  refers tothe unlimitedness and the degree orvigor with which the taxing power maybe employed to raise revenue.- the financial needs of the State mayoutrun any human calculation, so thepower to meet those needs by taxation

must not be limited even though taxesbecome burdensome or confiscatory.

2. “Power to tax is not the power todestroy while the Supreme Court sits”(Holmes Dictum)  –  the power to taxknows no limit except those expresslystated in the Constitution.

Marshall and Holmes Dictum ReconciledAlthough the power to tax is almost

unlimited, it must not be exercised in anarbitrary manner. If the abuse is so

great so as to destroy the natural andfundamental rights of people, it is theduty of the judiciary to hold such an actunconstitutional.

PURPOSES AND OBJECTIVES OF TAXATION 1.  Revenue – basically, the purpose of

taxation is to provide funds orproperty with which the Statepromotes the general welfare andprotection of its citizens.

2. Non-Revenue (Key: PR 2EP)a.  Promotion of general welfare b.  R egulationc.  R eduction of social inequalityd.  Encourage economic growthe.  Protectionism

POWER OF JUDICIAL R EVIEW IN TAXATION As long as the legislature, in

imposing a tax, does not violateapplicable constitutional limitations orrestrictions, it is not within the provinceof the courts to inquire into the wisdomor policy of the exaction, the motivesbehind it, the amount to be raised or the

persons, property or other privileges tobe taxed.

The court‘s power in taxation islimited   only to the application and

interpretation of the law.

Note:  The  principle of judicial non-interference extends to theadministrative realm.

ASPECTS OF TAXATION 1.  Levy or imposition of the tax (tax

legislation)2.  Enforcement or tax administration

(tax administration) 

BASIC PRINCIPLES OF A SOUND TAX SYSTEM

(K EY: FAT)1.  Fiscal Adequacy –  sufficiency to

meet government expenditures andother public needs.

2.  Administrative Feasibility/Convenience –  capability of beingeffectively enforced.

3.  Theoretical Justice –  based on thetaxpayer‘s ability to pay; must beprogressive. (Ability to Pay Theory)

TAXATIONPOLICEPOWER

EMINENTDOMAIN

1. Purpose To raiserevenue 

To promotepublicpurposethroughregulations

To facilitatethe State‘sneed ofproperty forpublic use

2.   Amount of Exaction No limit Limited to

the cost ofregulation,issuance ofthe license orsurveillance 

No exaction;but privateproperty istaken by theState forpublicpurpose

3.  Benefits Received

No specialor directbenefit isreceived bythetaxpayer;merelygeneralbenefit ofprotection

No directbenefit isreceived; ahealthyeconomicstandard ofsociety isattained

A directbenefitresults in theform of justcompensationto thepropertyowner

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San eda College of Law 3 

MEMORY AID IN TAXATION LAW 

TAXATION LAW COMMITTEE CHAIRPERSON: Charmaine Torres  ASST. CHAIRPERSON: Rhohail Castro EDP: Rachelle Saya SUBJECT HEADS: Jemina Sy, Casiano Ilagan,

Jr., Ryan Co, Edwin Torres:MEMBERS: Marita Lourdes Azur, Edizer Enriquez, Christian Cabrera, Jhundee

Guillermo

4. Non-impairment of ContractsContractsmay not beimpaired

Contractsmay beimpaired

Contracts maybe impaired

5. Transfer of Property RightsTaxes paidbecome partof publicfunds

No transferbut onlyrestraint inits exercise

Transfer iseffected infavor of theState

6. Scope 

All persons,property andexcises

All persons,property,rights andprivileges

Only  upon aparticularproperty

SYSTEMS OF TAXATION Global System Schedular System

A systememployed wherethe tax systemviewsindifferently thetax base andgenerally treats incommon allcategories oftaxable income ofthe individual.

A system employedwhere the income taxtreatment varies andis made to depend onthe kind or categoryof taxable income ofthe taxpayer.

A system whichtaxes allcategories of

income exceptcertain passiveincomes andcapital gains. Itprescribes aunitary butprogressive ratefor the taxableaggregate incomesand flat rates forcertain passiveincomes derivedby individuals.

A system whichitemizes the differentincomes and provides

for varied percentagesof taxes, to beapplied thereto.

EXAMPLES OF TAXES LEVIED WITH A R EGULATORY PURPOSE,  OR COMBINED

EXERCISE OF POLICE POWER AND THE POWER

OF TAXATION. 

a.  Motor vehicle registration feesare now considered revenue or taxmeasures.(Pal v. Edu, G.R No. L-41383,

 August 15,1988)This case reversed the doctrine

previously held in Republic v. PhilippineRabbit Bus Lines, Inc., 32 SCRA 211, tothe effect that motor vehicle

registration fees are regulatoryexactions and not revenue measures.

b.  The tax imposed on videogram

establishments is not only regulatory buta revenue measure because the earningsof such establishments have not beensubject to tax depriving the governmentof an additional source of income. (Tiov. Videogram Regulatory Board, 151SCRA 208)

c.  The ―coconut levy funds‖ wereall raised under the state‘s taxing andpolice powers.

The state‘s concern to make it astrong and secure source not only in the

livelihood of the significant segment ofthe population, but also of exportearnings, the sustained growth of whichis one of the imperatives of theeconomic growth.‖ Philippine CoconutProducers Federation, Inc. Cocofed v.Presidential Commission on GoodGovernment (178 SCRA 236, 252)

CONSTRUCTION OF TAX LAWS 1.  Public purpose is always presumed.2.  If the law is clear, apply the law in

accordance to its plain and simple

tenor.3.  A statute will not  be construed as

imposing a tax unless  it does soclearly, expressly andunambiguously.

4.  In case of doubt, it is construed moststrongly against the Government,and liberally in favor of thetaxpayer.

5.  Provisions of a taxing act are not tobe extended by implication.

6.  Tax laws operate prospectivelyunless the purpose of the legislature

to give retrospective effect isexpressly declared or may beimplied from the language used.

7.  Tax laws are special laws andprevail over a general law.

NATURE OF TAX LAWS 1.  Not political in character2.  Civil in nature, not subject to ex

post facto law prohibitions3.  Not penal in character

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San eda College of Law 4 

MEMORY AID IN TAXATION LAW 

TAXATION LAW COMMITTEE CHAIRPERSON: Charmaine Torres  ASST. CHAIRPERSON: Rhohail Castro EDP: Rachelle Saya SUBJECT HEADS: Jemina Sy, Casiano Ilagan,

Jr., Ryan Co, Edwin Torres:MEMBERS: Marita Lourdes Azur, Edizer Enriquez, Christian Cabrera, Jhundee

Guillermo

TAXES ARE PERSONAL TO THE TAXPAYER  1.  A corporation‘s tax delinquency

cannot  be enforced against itsstockholders. (Corporate Entity

Doctrine)Exception: Stockholders may beheld liable for unpaid taxes of adissolved corporation:a.  if it appears that the corporate

assets have passed into theirhands or

b.  when the stockholders haveunpaid subscriptions to thecapital of the corporation

2.  Estate taxes are obligations thatmust be paid by the executor or

administrator out of the net assetsand cannot  be assessed against theheirs.Exception:  If  prior to the paymentof the estate tax due, the propertiesof the deceased are distributed tothe heirs, then the latter issubsidiary liable for the payment ofsuch portion of the estate tax as hisdistributive share bears to the totalvalue of the net estate. (Sec. 9,Rev. Regs. No. 2-2003; see CIR vs.Pineda G.R. No. L-22734.

September 15, 1967)) 

CLASSIFICATION OF TAXES 1.  As to subject matter:

a.  Personal Tax – taxes are of fixedamount upon all persons of acertain class within thejurisdiction without regard toproperty, occupation or businessin which they may be engaged.

b.  Property Tax –  assessed onproperty of a certain class

c.  Excise Tax –  imposed on the

exercise of a privileged.  Customs Duties – duties charged

upon the commodities on theirbeing imported into or exportedfrom a country.

2.  As to burden:a.  Direct Tax – both the incidence

of or liability for the payment ofthe tax as well as the impact orburden of the tax falls on thesame person.

b.  Indirect Tax - The incidence ofor liability for the payment of

the tax falls on one person butthe burden thereof can beshifted or passed on to another.

3.  As to purpose:

a.  General Tax –  levied for thegeneral or ordinary purposes ofthe Government

b.  Special Tax –  levied for specialpurposes

4.  As to manner of computation:a.  Specific Tax –  the computation

of the tax or the rates of the taxis already provided for by law.

b.   Ad Valorem Tax –  tax upon thevalue of the article or thingsubject to taxation; theintervention of another party is

needed for the computation ofthe tax.

5.  As to taxing authority:a.  National Tax –  levied by the

National Governmentb.  Local Tax –  levied by the local

government6.  As to rate:

a.  Progressive Tax –  rate oramount of tax increases as theamount of the income or earningto be taxed increases.

b.  Regressive Tax –  tax rate

decreases as the amount ofincome to be taxed increases.

c.  Proportionate Tax – based on afixed proportion of the value ofthe property assessed.

IMPOSITIONS NOT STRICTLY CONSIDERED AS

TAXES 1.  Toll –  amount charged for the cost

and maintenance of the propertyused.

2.  Penalty –  punishment for thecommission of a crime.

3.  Compromise Penalty –  amountcollected in lieu of criminalprosecution in cases of taxviolations.

4.  Special Assessment – levied only onland based wholly on benefitaccruing thereon as a result ofimprovements or public worksundertaken by government withinthe vicinity.

5.  License or Fee –  regulatoryimposition in the exercise of thepolice power.

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San eda College of Law 5 

MEMORY AID IN TAXATION LAW 

TAXATION LAW COMMITTEE CHAIRPERSON: Charmaine Torres  ASST. CHAIRPERSON: Rhohail Castro EDP: Rachelle Saya SUBJECT HEADS: Jemina Sy, Casiano Ilagan,

Jr., Ryan Co, Edwin Torres:MEMBERS: Marita Lourdes Azur, Edizer Enriquez, Christian Cabrera, Jhundee

Guillermo

6.  Margin Fee –  exaction designed tostabilize the currency.

7.  Debt –  a sum of money due uponcontract or one which is evidenced

by judgment.8.  Subsidy –  a legislative grant ofmoney in aid of a private enterprisedeemed to promote the publicwelfare.

9.  Customs duties and fees –  dutiescharged upon commodities on theirbeing transported into or exportedfrom a country.

10.  Revenue –  a broad term thatincludes taxes and income fromother sources as well.

11.  Impost –  in its general sense, it

signifies any tax, tribute or duty. Inits limited sense, it means a duty onimported goods and merchandise.

Tax SpecialAssessment 

Imposed on persons,property and excises

Levied only on land

Personal liabilityattaches on theperson assessed incase of non-payment

Cannot be made apersonal liability ofthe person assessed

Not based on anyspecial or directbenefit

Based wholly onbenefit

Levied and paidannually

Exceptional both asto time and locality

Exemption grantedis applicable (Art.VI, Sec. 28(3) 1987Constitution) 

Exemption does notapply.N.B. If property isexempt from RealProperty Tax, it isalso exempt from

Special Assessment.

Tax License Fee

Based on the powerof taxation

Emanates frompolice power

To generaterevenue

Regulatory

Amount is unlimited Amount is limitedto the cost of (1)issuing the license,and (2) inspection

and surveillance

Normally paid afterthe start of abusiness

Normally paidbeforecommencement ofbusiness

Taxes, being thelifeblood of theState, cannot besurrendered exceptfor lawfulconsideration

License fee may bewith or withoutconsideration

Non-payment doesnot make thebusiness illegal butmaybe a ground forcriminalprosecution

Non-paymentmakes the businessillegal

TEST IN DETERMINING IF THE IMPOSITION IS A

TAX OR A LICENSE FEE If the purpose is primarily revenue

or if revenue is, at least, one of the realand substantial purposes, then theexaction is a tax. If the purpose isregulatory in nature, it is a license.(PAL v. Edu)

Tax Debt

An obligation

imposed by law

Created by contract

Due to thegovernment in itssovereign capacity

May be due to thegovernment but inits corporatecapacity

Payable in money Payable in money,property or services

Does not drawinterest except incase of delinquency

Draws interest ifstipulated ordelayed

Not assignable Assignable

Not subject tocompensation orset-off

Subject tocompensation orset-off

Non-payment ispunished byimprisonmentexcept in poll tax

No  imprisonment incase of non-payment (Art. III,Sec. 20 1987Constitution) 

Imposed only bypublic authority

Can be imposed byprivate individual

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San eda College of Law 6 

MEMORY AID IN TAXATION LAW 

TAXATION LAW COMMITTEE CHAIRPERSON: Charmaine Torres  ASST. CHAIRPERSON: Rhohail Castro EDP: Rachelle Saya SUBJECT HEADS: Jemina Sy, Casiano Ilagan,

Jr., Ryan Co, Edwin Torres:MEMBERS: Marita Lourdes Azur, Edizer Enriquez, Christian Cabrera, Jhundee

Guillermo

TEST IN DETERMINING IF THE IMPOSITION IS A

TAX OR A LICENSE FEE If the purpose is primarily revenue or

if revenue is, at least, one of the real

and substantial purposes, then theexaction is a tax. If the purpose isregulatory in nature, it is a license.(PAL v. Edu)

Tax Debt

An obligationimposed by law

Created by contract

Due to thegovernment in itssovereign capacity

May be due to thegovernment but inits corporatecapacity

Payable in money Payable in money,property or services

Does not drawinterest except incase of delinquency

Draws interest ifstipulated ordelayed

Not assignable Assignable

Not subject tocompensation orset-off

Subject tocompensation orset-off

Non-payment ispunished byimprisonmentexcept in poll tax

No imprisonment incase of non-payment (Art. III,Sec. 20 1987Constitution) 

Imposed only bypublic authority

Can be imposed byprivate individual

COMPENSATION OR SET-OFF General Rule:  Taxes cannot be thesubject of compensation or set-off.

Reasons:

1.  lifeblood theory2.  taxes are not contractual

obligation but arise out of dutyto the government

3.  the government and thetaxpayer are not mutuallycreditors and debtors of eachother. (Francia v. IAC) 

Exception:  When both obligations aredue and demandable as well as fullyliquidated and all the requisites for avalid compensation are present,

compensation takes place by operationof law. (Domingo v. Garlitos)

DOCTRINE OF EQUITABLE R ECOUPMENT NOT

FOLLOWED IN THE PHILIPPINES A tax presently being assessedagainst a taxpayer which has prescribedmay not be recouped or set-off againstan overpaid tax the refund of which isalso barred by prescription. It is againstpublic policy since both parties areguilty of negligence.

Tax Toll

Enforcedproportionalcontributions frompersons and property

A sum of money forthe use ofsomething, aconsideration whichis paid for the use ofa property which isof a public nature;e.g. road, bridge

A demand ofsovereignty

A demand ofproprietorship

No limit as to theamount of tax

Amount of tolldepends upon thecost of constructionor maintenance ofthe publicimprovement used

Imposed only by theState

May be imposed by:(1)  Government(2)  Private

individuals orentities

Tax Penalty

Enforcedproportionalcontributions frompersons andproperty

Sanction imposed asa punishment forviolation of a lawor acts deemedinjurious; violation

of tax laws may giverise to imposition ofpenalty

Intended to raiserevenue

Designed to regulateconduct

May be imposedonly by thegovernment

May be imposed by:(1) Government(2) Privateindividuals orentities

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San eda College of Law 7 

MEMORY AID IN TAXATION LAW 

TAXATION LAW COMMITTEE CHAIRPERSON: Charmaine Torres  ASST. CHAIRPERSON: Rhohail Castro EDP: Rachelle Saya SUBJECT HEADS: Jemina Sy, Casiano Ilagan,

Jr., Ryan Co, Edwin Torres:MEMBERS: Marita Lourdes Azur, Edizer Enriquez, Christian Cabrera, Jhundee

Guillermo

Tax Tariff

All embracing termto include variouskinds of enforcedcontributions uponpersons for theattainment ofpublic purposes

A kind of taximposed on articleswhich are tradedinternationally

TAXPAYERS’ SUIT A case where the act complained of

directly involves the illegal disbursementof public funds derive from taxation(Justice Melo, dissenting in Kilosbayan,Inc vs Guingona, Jr.)

TAXPAYERS AND PUBLIC OFFCIALS HAVE LOCUS

STANDI  R EQUISITES FOR TAXPAYERS’ SUIT

a.  The tax money is being extractedand spent in violation of specificconstitutional protections againstabuses of legislative power. 

b.  That public money is being deflectedto any improper purpose (Pascual vsSecretary of Public Works) 

c.  That the petitioner seeks to restrainrespondents from wasting publicfunds through the enforcement of aninvalid or unconstitutional law 

LIMITATIONS ON THE TAXINGPOWER

A.  INHERENT LIMITATIONS (K EY: SPINE)1.  Territoriality or Situs of taxation2.  Public purpose of taxes3.  International comity4.  Non-delegability of the taxing

power5.  Tax Exemption of the government

(1)  TESTS IN DETERMINING PUBLIC PURPOSE a.  Duty Test – whether the thing to be

furthered by the appropriation ofpublic revenue is something, whichis the duty of the State, as agovernment, to provide.

b.  Promotion of General Welfare Test–  whether the proceeds of the taxwill directly promote the welfare ofthe community in equal measure.

(2)  NON-DELEGABILITY OF THE TAXING POWER  

General Rule:  The power of taxation ispeculiarly and exclusively exercised bythe legislature. (See Scope ofLegislative Taxing Power, supra)

- refers to tax legislationExceptions to Non-delegability:1.  Flexible Tariff Clause: Authority of

the President to fix tariff rates,import and export quotas, tonnageand wharfage dues, and other dutiesor imposts. (Art. VI, Sec.28(2), 1987Constitution) 

2.  Power of local government units tolevy taxes, fees, and charges. (Art.

 X, Sec. 5, 1987 Constitution) 3.  Delegation to administrative

agencies for implementation and

collection.-  merely refers to tax administration

or implementation

(3)  SITUS OR TERRITORIALITY OF TAXATION The power to tax is limited only to

persons, property or businesses within the jurisdiction or territory of the taxingpower.

FACTORS THAT DETERMINE THE SITUS:a.  Kind or classification of the tax being

levied

b.  Situs of the thing or property taxedc.  Citizenship of the taxpayerd.  Residence of the taxpayere.  Source of the income taxedf.  Situs of the excise, privilege,

business or occupation being taxed

APPLICATION OF SITUS OF TAXATION Kind of Tax Situs

Personal orCommunity tax

Residence ordomicile of thetaxpayer

Real property tax Location of property(Lex rei sitae) 

Personal propertytax

-tangible: where itis physically locatedor permanently kept(Lex rei sitae) -intangible: subjectto Sec. 104 of theNIRC and theprinciple of mobiliasequuntur personam

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San eda College of Law 8 

MEMORY AID IN TAXATION LAW 

TAXATION LAW COMMITTEE CHAIRPERSON: Charmaine Torres  ASST. CHAIRPERSON: Rhohail Castro EDP: Rachelle Saya SUBJECT HEADS: Jemina Sy, Casiano Ilagan,

Jr., Ryan Co, Edwin Torres:MEMBERS: Marita Lourdes Azur, Edizer Enriquez, Christian Cabrera, Jhundee

Guillermo

Business tax Place of business

Excise or Privilegetax

Where the act isperformed or where

occupation ispursued

Sales tax Where the sale isconsummated

Income Tax Consider(1) citizenship,(2) residence, and(3) source of income(Sec. 42, 1997 NIRC) 

Transfer tax Residence orcitizenship of the

taxpayer or locationof property

Franchise Tax State which grantedthe franchise

SITUS OF TAXATION OF INTANGIBLE PERSONAL

PROPERTY General Rule:  Domicile of the ownerpursuant to the principle of the mobiliasequuntur personam or movables followthe person.Exceptions:

1.  When the property has acquired abusiness situs in another jurisdiction;

2.  When an express provision of thestatute provide for another rule.Illustration: For purposes of estateand donor‘s taxes, the followingintangible properties are deemedwith a situs in the Philippines:(1)  franchise which must be

exercised in the Philippines;(2)  shares, obligations or bonds

issued by any corporationorganized or constituted in the

Philippines in accordance withits laws;

(3)  shares, obligations or bonds byany foreign corporation eighty-five percent (85%) of thebusiness of which is located inthe Philippines;

(4)  shares, obligations or bondsissued by any foreign corporationif such shares, obligations orbonds have acquired a businesssitus in the Philippines; and

(5)  shares or rights in anypartnership, business or industryestablished in the Philippines.(Sec. 104, 1997 NIRC). 

(4)  EXEMPTION OF THE GOVERNMENT As a matter of public policy,

property of the State and of itsmunicipal subdivisions devoted togovernment uses and purposes isdeemed to be exempt from taxationalthough no express provision in the lawis made therefor.

General Rule:  The Government is taxexempt.- However, it can also tax itself.

R ULES:1.  Administrative Agencies

a.  Governmental function - taxexempt unless when the lawexpressly provides for tax. (Sec.32 B7)

b.  Proprietary function –  taxable unless  exempted by law. (Sec.27C) 

2.  GOCCsGeneral Rule: Income is taxable atthe rate imposed upon corporations

or associations engaged in a similarbusiness, industry, or activity.Exception: GSIS, SSS, PHIC, PCSOand PAGCOR. (Sec. 27(C), NIRC)

3.  Government Educational Institutionsa.  Property or real estate tax – 

property actually, directly andexclusively used for educationalpurposes –  exempt but  incomeof whatever kind and characterfrom any of their properties,real or personal, regardless ofthe disposition, is taxable. (Sec.

30, last par., NIRC) b.  Income received by them as such

are exempt from taxes.However, their income from anyof their activities conducted forprofit regardless of thedisposition, is taxable. (Sec. 30,last par., NIRC) 

4.  Income derived from any publicutility or from the exercise of anyessential governmental functionaccruing to the Government of thePhilippines or to any political

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San eda College of Law 9 

MEMORY AID IN TAXATION LAW 

TAXATION LAW COMMITTEE CHAIRPERSON: Charmaine Torres  ASST. CHAIRPERSON: Rhohail Castro EDP: Rachelle Saya SUBJECT HEADS: Jemina Sy, Casiano Ilagan,

Jr., Ryan Co, Edwin Torres:MEMBERS: Marita Lourdes Azur, Edizer Enriquez, Christian Cabrera, Jhundee

Guillermo

subdivision thereof is not included ingross income and exempt fromtaxation. (Sec. 32(B)(7)(b), NIRC) 

5.  Donations in favor of governmental

institutions are considered as incomeon the part of the donee. However,it is not  considered as taxableincome because it is an exclusion from the computation of grossincome. (Sec.32 (B)(3), NIRC) 

6.  The amount of all bequests,legacies, devises or transfers to orfor the use of the Government orany political subdivision forexclusively public purposes isdeductible  from the gross estate.(Sec.86 (A)(3), NIRC) 

7.  Gifts made to or for the use of theNational Government or any entitycreated by any of its agencies whichis not conducted for profit, or to anypolitical subdivision of the saidGovernment are exempt  fromdonor‘s tax. (Sec. 101(A)(2), NIRC) 

8.  Local government units areexpressly prohibited  by the LGCfrom levying tax upon NationalGovernment, its agencies, andinstrumentalities, and localgovernment units. [Sec. 133 (o),

LGC]9.  Unless otherwise provided in the

Local Government Code (LGC), taxexemptions granted to all persons,whether natural or juridical,including GOCC, except local waterdistricts, cooperatives dulyregistered under RA No. 6938, non-stock and non-profit institutions, arewithdrawn  upon effectivity of theLGC. (Sec. 193, LGC) 

10. Real property owned  by theRepublic of the Philippines or any of

its political subdivisions except whenthe beneficial use thereof has beengranted, for consideration orotherwise, to a taxable person shallbe exempt  from payment of realproperty tax. (Sec. 234, LGC)

(5)  INTERNATIONAL COMITY These principles limit the authority

of the government to effectively imposetaxes on a sovereign state and itsinstrumentalities, as well as on itsproperty held and activities undertaken

in that capacity. Even where one entersthe territory of another, there is animplied understanding that the formerdoes not thereby submit itself to the

authority and jurisdiction of the other.

B.  CONSTITUTIONAL LIMITATIONS A. GENERAL OR  INDIRECT 

CONSTITUTIONAL  LIMITATIONS

1.  Due Process Clause (Art. III, Sec. 1,1987 Constitution) Requisites:

a. The interests of the public asdistinguished from those of aparticular class require theintervention of the State.

(Substantive limitation) b. The means employed must be

reasonably necessary to theaccomplishment of the purposeand not unduly oppressive.(Procedural limitation) 

The constitutionality of a legislativetaxing act questioned on the ground ofdenial of due process requires theexistence of an actual case orcontroversy.

2.  Equal Protection Clause ( Art. III,

Sec. 1, 1987 Constitution Requisites of a Valid Classification:

a.  based upon substantialdistinctions

b.  germane to the purposes of thelaw

c.  not limited to existing conditionsonly

d.  apply equally to all members ofthe class

3.  Freedom Of Speech And Of ThePress (Art. III, Sec. 4, 1987Constitution) 

There is curtailment of pressfreedom and freedom of thought andexpression if a tax is levied in orderto suppress this basic right andimpose a prior restraint. (Tolentinovs. Secretary of Finance, GR No.115455, August 25, 1994) 

4.  Non-Infringement Of ReligiousFreedom And Worship ( Art. III, Sec.5, 1987 Constitution) 

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San eda College of Law 10 

MEMORY AID IN TAXATION LAW 

TAXATION LAW COMMITTEE CHAIRPERSON: Charmaine Torres  ASST. CHAIRPERSON: Rhohail Castro EDP: Rachelle Saya SUBJECT HEADS: Jemina Sy, Casiano Ilagan,

Jr., Ryan Co, Edwin Torres:MEMBERS: Marita Lourdes Azur, Edizer Enriquez, Christian Cabrera, Jhundee

Guillermo

A license tax or fee constitutes acurtailment of religious freedom ifimposed as a condition for itsexercise. (American Bible Society vs.

City of Manila, GR No. L-9637, April30, 1957)

5.  Non-Impairment Of Contracts ( Art.III, Sec. 10, 1987 Constitution) 

No law impairing the obligationof contract shall be passed. (Sec. 10,

 Art. III, 1987 Constitution)The rule, however, does not

apply to public utility franchises orright since they are subject toamendment, alteration or repeal bythe Congress when the public

interest so requires. (CagayanElectric & Light Co., Inc. v.Commissioner, GR No. 60216,September 25, 1985)

R ULES:a.  When the exemption is bilaterally

agreed upon between thegovernment and the taxpayer –  itcannot be withdrawn without violating the non-impairmentclause.

b.  When it is unilaterally   granted by

law, and the same is withdrawn byvirtue of another law – no violation.

c.  When the exemption is grantedunder a franchise –  it may bewithdrawn at any time thus, not aviolation of the non-impairment ofcontracts

6.  Presidential power to grantreprieves, commutations andpardons and remit fines andforfeitures after conviction ( ART.VII, SEC. 19, 1987 CONSTITUTION) Due

ProcessEqual

ProtectionUniformity

Taxpayermay notbedeprivedof life,liberty orpropertywithoutdueprocess oflaw.Notice

Taxpayersshall betreated alikeunder likecircumstancesand conditionsboth in theprivilegesconferred andliabilitiesimposed.

Taxablearticles, orkinds ofproperty ofthe sameclass, shallbe taxed atthe samerate. Thereshouldtherefore,be no direct

must,therefore, be givenin case offailure to

pay taxes

doubletaxation

B. SPECIFIC OR DIRECTCONSTITUTIONAL LIMITATIONS

1. Non-Imprisonment For Debt Or Non-Payment Of Poll Tax ( Art. III, Sec.20, 1987 Constitution)

2. Rule Requiring That Appropriations,Revenue And Tariff Bills ShallOriginate Exclusively From The

House Of Representatives ( Art. VI,Sec. 24, 1987 Constitution) 

3.  Uniformity, Equitability AndProgressivity Of Taxation (Art. VI,Sec. 28(1), 1987 Constitution) Uniformity –  all taxable articles orkinds of property of the same classare taxed at the same rate.Equitability –  the burden falls tothose who are more capable to pay.Progressivity –  rate increases as thetax base increases.

Q: Is a tax law adopting a regressivesystem of taxation valid?

A: Yes. The Constitution does notreally prohibit the imposition of indirecttaxes which, like the VAT, areregressive. The Constitutional provisionmeans simply that indirect taxes shall beminimized. The mandate to Congress isnot to prescribe, but to evolve, aprogressive tax system. (EVAT En BancResolution, Tolentino, et al vs Secretaryof Finance, October 30, 1995)

4.  Limitations On The CongressionalPower To Delegate To ThePresident The Authority To FixTariff Rates, Import And ExportQuotas, Etc. (Art. VI, Sec. 28(2),1987 Constitution) 

5.  Tax Exemption Of PropertiesActually, Directly And ExclusivelyUsed For Religious, Charitable AndEducational Purposes. (Art. VI, Sec.28(3) 7, 1987 Constitution) 

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San eda College of Law 11 

MEMORY AID IN TAXATION LAW 

TAXATION LAW COMMITTEE CHAIRPERSON: Charmaine Torres  ASST. CHAIRPERSON: Rhohail Castro EDP: Rachelle Saya SUBJECT HEADS: Jemina Sy, Casiano Ilagan,

Jr., Ryan Co, Edwin Torres:MEMBERS: Marita Lourdes Azur, Edizer Enriquez, Christian Cabrera, Jhundee

Guillermo

The constitutional provision(above cited) which grants taxexemption applies only to propertyor realty taxes assessed on such

properties used actually, directlyexclusively for religious, charitableand educational purposes. (Lladocvs. Commissioner, GR No. L-19201,

 June 16, 1965)The present Constitution

required that for the exemption of―lands, buildings andimprovements‖, they should not onlybe ―exclusively‖ but also ―actually‖and ―directly‖ used for religious andcharitable purposes. (Province of

 Abra vs. Hernando, GR No. L-49336,

 August 31, 1981)The test of exemption from

taxation is the use of the propertyfor the purposes mentioned in theConstitution. (Abra Valley CollegeInc. vs. Aquino, GR No. L-39086,

 June 15, 1988)

EXCLUSIVE BUT NOT ABSOLUTE USE The term ― exclusively used‖ does

not necessarily mean total or absoluteuse for religious, charitable andeducational purposes. If the property is

incidentally used for said purposes, thetax exemption may still subsist.  (AbraValley College Inc. vs. Aquino, Gr No. L-39086, June 15, 1988)

Corollarily, if a property, althoughactually owned by a religious, charitableand educational institution is used for anon- exempt purpose, the exemptionfrom tax shall not attach

ART. XIV,SEC 4(3)

ART. VI,SEC 28(3)

Grantee Non- stock,

non profiteducationalinstitution

Religious,

educational,charitableinstitutions

Taxescovered

Income taxCustomDutiesProperty tax(DECS OrderNo. 137-187) 

Property tax

6.  Voting Requirement In ConnectionWith The Legislative Grant Of TaxExemption (Art. VI, Sec. 28(4),

1987 Constitution) 

7.  Non-Impairment Of TheJurisdiction Of The Supreme CourtIn Tax Cases (Art. VIII, Sec. 2 And5(2)(B), 1987 Constitution) 

8.  Exemption From Taxes Of TheRevenues And Assets OfEducational Institutions, IncludingGrants, Endowments, DonationsAnd Contributions. (Art. XIV, Sec.4(3) And (4), 1987 Constitution) 

OTHER SPECIFIC TAX PROVISIONS INTHE CONSTITUTION1.  Power of the President to veto any

particular item or items in anappropriation, revenue, or tariff bill.

(Art VI, Sec. 27(2), 1987Constitution) 

2.  Necessity of an appropriation beforemoney may be paid out of the publictreasury. (Art. VI, Sec. 29 (1), 1987Constitution) 

3.  Non-appropriation of public moneyor property for the use, benefit, orsupport of any sect, church, orsystem of religion. (Art. VI, Sec. 29(2), 1987 Constitution) 

4.  Treatment of taxes levied for aspecial purpose. (Art. VI, Sec. 29

(3), 1987 Constitution) 5.  Internal revenue allotments to local

government units. (Art. X, Sec. 6,1987 Constitution) 

DOUBLE TAXATION

DOUBLE TAXATION  –  taxing the sameproperty twice when it should be taxedbut once.

IS DOUBLE TAXATION PROHIBITED IN THE

PHILIPPINES?No.  There is no constitutional

prohibition against double taxation. It isnot favored but permissible. (Pepsi ColaBottling Co. v. City of Butuan, 1968). 

K INDS OF DOUBLE TAXATION (1)  Direct Duplicate Taxation /

Obnoxious –  double taxation in theobjectionable or prohibited sense.This constitutes a violation ofsubstantive due process.

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San eda College of Law 12 

MEMORY AID IN TAXATION LAW 

TAXATION LAW COMMITTEE CHAIRPERSON: Charmaine Torres  ASST. CHAIRPERSON: Rhohail Castro EDP: Rachelle Saya SUBJECT HEADS: Jemina Sy, Casiano Ilagan,

Jr., Ryan Co, Edwin Torres:MEMBERS: Marita Lourdes Azur, Edizer Enriquez, Christian Cabrera, Jhundee

Guillermo

Elements:a.  the same property or subject matter

is taxed twice when it should betaxed only once.

b.  both taxes are levied for the samepurposec.  imposed by the same taxing

authorityd.  within the same jurisdictione.  during the same taxing periodf.  covering the same kind or character

of tax.(Villanueva vs. City of Iloilo)

(2)  Indirect Duplicate Taxation –  notlegally objectionable. The absenceof one or more of the above-

mentioned elements makes thedouble taxation indirect. 

(3)  Domestic- this arises when the taxesare imposed by the local or nationalgovernment (within the same state)

(4)  International- refers to theimposition of comparable taxes intwo or more states on the sametaxpayer in respect of the samesubject matter and for identicalperiods.

R EMEDIES OF DOUBLE TAXATION 1.  Tax Sparing Rule  –  same dividend

earned by a NRFC within the Phil. isreduced by imposing a lower rate of15% (in lieu of the 35%), on thecondition that the country to whichthe NRFC is domiliced shall allow acredit against the tax due from theNRFC, taxes deemed to have beenpaid in the Phil. (Sec.28 B 5b) (CIRvs Procter & Gamble)  (GR No.66838, Dec. 2, 1991)

2.  Tax deductionsExample: vanishing deduction underSection 86(A)(2), NIRC

3.  Tax creditsInstances under the NIRC:

  For VAT purposes, the tax oninputs or items that go into themanufacture of finished products(which are eventually sold) may becredited against or deducted fromthe output tax or tax on the finishedproduct.

  Foreign income taxes  may be

credited against the Phil. Income

tax, subject to certain limitations,by citizens, including members ofgeneral professional partnerships orbeneficiaries of estates or trusts

( pro rata), as well as domesticcorporations.

  A tax credit is granted for estatetaxes  paid to a foreign country onthe estate of citizens and residentaliens subject to certain limitations.

  The donor’s tax   imposed upon acitizen or a resident shall becredited with the amount of anydonor‘s tax imposed by the authorityof a foreign country, subject to

certain limitations. 4.  Tax Exemptions5.  Principle of Reciprocity6.  Treaties with other states

METHODS R ESORTED TO BY A TAX TREATY INORDER TO ELIMINATE DOUBLE TAXATION 

FIRST METHOD: The tax treaty sets outthe respective rights to tax by the stateof source or situs and by the state ofresidence with regard to certain classesof income or capital. In some cases, anexclusive right to tax is conferred in one

of the contracting states; however, forother items of income or capital, bothstates are given the right to tax althoughthe amount of tax that may be imposedby the state of source is limited.SECOND METHOD: The state of source isgiven a full or limited right to taxtogether with the state of residence. Inthis case, the treaty makes it incumbentupon the state of residence to allowrelief in order to avoid double taxation.

TWO METHODS OF RELIEF ARE USED UNDER THE

SECOND METHOD:

1.  The exemption method- the incomeor capital which is taxable in the stateof source or situs is exempted in thestate of residence, although in someinstances it may be taken into accountin determining the rate of tax applicableto the tax payer‘s remaining income orcapital.(This may be done using the taxdeduction method which allows foreignincome taxes to be deducted from gross

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San eda College of Law 13 

MEMORY AID IN TAXATION LAW 

TAXATION LAW COMMITTEE CHAIRPERSON: Charmaine Torres  ASST. CHAIRPERSON: Rhohail Castro EDP: Rachelle Saya SUBJECT HEADS: Jemina Sy, Casiano Ilagan,

Jr., Ryan Co, Edwin Torres:MEMBERS: Marita Lourdes Azur, Edizer Enriquez, Christian Cabrera, Jhundee

Guillermo

income, in effect exempting thepayment from being further taxed.)2.  The credit method- although theincome or capital which is taxed in the

state of source is still taxable in thestate of residence. The tax paid in theformer is credited against the tax, leviedin the latter.(Commissioner of InternalRevenue v. S.C Johnson and Son, Inc. etal., G.R No. 127105, June 25, 1999)

ExemptionMethod

Credit Method

Focus is on theincome or capitalitself

Focus is on the tax

NOTE : Computational illustrationbetween a tax deduction and a taxcredit:

Tax deduction methodGross incomeLess: allowable deductionsincluding foreign taxes paidIncome subject to taxMultiplied by rateIncome tax due

Tax credit methodGross incomeLess: allowable deductionsexcludingforeign taxes paidIncome subject to taxMultiplied by rateIncome tax dueLess: foreign taxes paidNet income tax due

FORMS OF ESCAPEFROM TAXATION

(1)  SHIFTING –  the process by which thetax burden is transferred from thestatutory taxpayer (impact of taxation)to another (incident of taxation) withoutviolating the law.

IMPACT OF TAXATION – point on which tax isoriginally imposed.

INCIDENCE OF TAXATION  –  point on whichthe tax burden finally rests or settlesdown. Illustration: Value added tax. The

seller is required by law to pay tax, butthe burden is actually shifted or passedon to the buyer.

KINDS OF SHIFTING

a.  Forward shifting- when burden oftax is transferred from a factor ofproduction through the factors ofdistribution until it finally settles onthe ultimate purchaser or consumer

b.  Backward shifting-  when burden istransferred from consumer throughfactors of distribution to the factors

of productionc.  Onward shifting-  when the tax is

shifted 2 or more times eitherforward or backward

(2)  CAPITALIZATION –  a mere increase inthe value of the property is not incomebut merely an unrealized increase incapital. No income until after the actualsale or other disposition of the propertyin excess of its original cost.EXCEPT:  if by reason of appraisal, thecost basis of property increased and the

resultant basis is used as the new taxbase for purposes of computing theallowable depreciation expense, the netdifference between the original costbasis and new basis is taxable under theeconomic benefit principle. (BIR RulingNo. 029, March 19, 1998)

(3)  TRANSFORMATION –  the manufactureror producer upon whom the tax has beenimposed, fearing the loss of his market ifhe should add the tax to the price, paysthe tax and endeavors to recoup himself

by improving his process of production,thereby turning out his units at a lowercost.

(4)  TAX AVOIDANCE –  the exploitation bythe taxpayer of legally permissiblealternative tax rates or methods ofassessing taxable property or income, inorder to avoid or reduce tax liability. Example: ―estate planning‖(conveyance of property to a familycorporation for shares) (Delpher TradesCorp. vs. IAC, 157 SCRA 349) 

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San eda College of Law 14 

MEMORY AID IN TAXATION LAW 

TAXATION LAW COMMITTEE CHAIRPERSON: Charmaine Torres  ASST. CHAIRPERSON: Rhohail Castro EDP: Rachelle Saya SUBJECT HEADS: Jemina Sy, Casiano Ilagan,

Jr., Ryan Co, Edwin Torres:MEMBERS: Marita Lourdes Azur, Edizer Enriquez, Christian Cabrera, Jhundee

Guillermo

(5)  TAX EVASION – use by the taxpayer ofillegal or fraudulent means to defeat orlessen the payment of the tax. 

FACTORS IN TAX EVASION 1.  the end to be achieved, i.e. paymentof less than that known by the taxpayerto be legally due, or paying no tax whenit is shown that the tax is due;2.  an accompanying state of mindwhich is described as being evil, in badfaith, willful, or deliberate and not coincidental; and3.  a course of action which is unlawful.

INDICIA OF FRAUD IN TAX EVASION 1.  Failure to declare for taxation

purposes true and actual income derivedfrom business for 2 consecutive years(Republic vs Gonzales, L-17962) 2.  Substantial under-declaration ofincome tax returns of the taxpayer for 4consecutive years coupled withintentional overstatement of deductions(CIR vs Reyes, 104 PHIL 1061) 

TAXAVOIDANCE

TAXEVASION

Validity Legal and not

subject tocriminal penalty

Illegal and

subject tocriminalpenalty

Effect Minimization oftaxes

Almostalwaysresults inabsence oftax payments

(6)  TAX EXEMPTION – a grant of immunityto particular persons or corporationsfrom the obligation to pay taxes. 

LEGAL  BASIS:  No law granting any taxexemption shall be passed without theconcurrence of a majority of all themembers of Congress ( ART VI. SEC 28(4) OF

THE 1987  CONSTITUTION )

K INDS OF TAX EXEMPTION 1.  As to source 

a.  Constitutional – immunities fromtaxation that originate from theconstitution.

b.  Statutory – those which emanatefrom legislation 

Examples of Statutory ExemptionsSec. 27, NIRCSec. 105 Tariff and Customs

Code

Sec. 234 Local Government CodeSpecial Laws, such as theOmnibus Investment Code of 1987(EO 226), Philippine OverseasShipping Act (RA 1407 as amended),Fertilizer Industry Act (RA 3050, asamended), Mineral ResourcesDevelopment Decree of 1974 (PD 463as amended), Cottage Industry Act(RA 318, as amended) andexemptions in ―Housing for LowIncome Group‖ (PD 1205, asamended)

c.  Contractual- agreed to by thetaxing authority in contractslawfully entered into by themunder enabling laws

d.  Treatye.  Licensing Ordinance

2.  As to form(1)  Express –  expressly granted by

organic or statute law(2)  Implied –  when particular

persons, property or excises aredeemed exempt as they falloutside the scope of the taxing

provision itself.3.  As to extent

(1)  Total – absolute immunity(2)  Partial – one where a collection

of a part of the tax is dispensedwith

4.  As to object(1)  Personal –  granted directly in

favor of certain persons(2)  Impersonal – granted directly in

favor of a certain class ofproperty

PRINCIPLES GOVERNING TAX EXEMPTION a.  Exemptions from taxation are

highly disfavored in law and arenot presumed.

b.  He who claims as exemption mustbe able to justify his claim by theclearest grant of organic or statutelaw by words too plain to bemistaken. If ambiguous, there is noexemption.

c.  He who claims exemption shouldprove by convincing proof   that heis exempted.

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San eda College of Law 15 

MEMORY AID IN TAXATION LAW 

TAXATION LAW COMMITTEE CHAIRPERSON: Charmaine Torres  ASST. CHAIRPERSON: Rhohail Castro EDP: Rachelle Saya SUBJECT HEADS: Jemina Sy, Casiano Ilagan,

Jr., Ryan Co, Edwin Torres:MEMBERS: Marita Lourdes Azur, Edizer Enriquez, Christian Cabrera, Jhundee

Guillermo

d.  Taxation is the rule; tax exemptionis the exception.

e.  Tax exemption must be strictlyconstrued against the taxpayer and

liberally in favor of the taxingauthority.f.  Tax exemptions are not presumed.g.  Constitutional grants of tax

exemption are self-executing.h.  Tax exemptions are personal.

THE FOLLOWING PARTAKE THE NATURE OF

TAX EXEMPTION

1.  Deductions for income tax purposes2.  Claims for refund3.  Tax amnesty4.  Condonation of unpaid tax liabilities

NOTE: must be strictly construedagainst the taxpayer

WHEN EXEMPTIONS ARE CONSTRUED LIBERALLY

IN FAVOR OF GRANTEE 1.  When the law so provides for such

liberal construction.2.  Exemptions from certain taxes,

granted under special circumstancesto special classes of persons.

3.  Exemptions in favor of thegovernment, its political subdivisionsor instrumentalities.

4.  Exemptions to traditionalexemptees, such as those in favor ofreligious and charitable institutions.

5.  If exemptions refer to the publicproperty

Q: May a tax exemption be revoked?A:  Yes. It is an act of liberality whichcould be taken back by the governmentunless there are restrictions. Sincetaxation is the rule and exemptiontherefrom is the exception, theexemption may be withdrawn by the

taxing authority. (Mactan CebuInternational Airport Authority vs.Marcos, 261 SCRA 667) 

R ESTRICTIONS ON R EVOCATION OF TAX

EXEMPTIONS a.  Non impairment clause. Where the

exemption was granted to privateparties based on materialconsideration of a mutual nature,which then becomes contractual andis covered by the non-impairmentclause of the Constitution. 

b.  Adherence to form- if the taxexemption is granted by theConstitution, its revocation may beeffected through Constitutional

amendment only c.  Where the tax exemption grant is inthe form of a special law and not bya general law even if the terms ofthe general act are broad enough toinclude the codes in the general lawunless there is manifest intent torepeal or alter the special law(Province of Misamis Oriental vsCagayan Electric Power and LightCo. Inc)

NATURE OF TAX AMNESTY 

1. General or intentional overlooking bythe state of its authority to imposepenalties on persons otherwise guiltyof evasion or violation of a revenueor tax law.

2. Partakes of an absolute forgiveness ofwaiver of the government of its rightto collect.

3. To give tax evaders, who wish torelent and are willing to reform achance to do so.

RULES ON TAX AMNESTY

1. Tax amnestya) like tax exemption, it is never

favored nor presumedb) construed strictly against the

taxpayer (must show completecompliance with the law)

2.Government not estopped fromquestioning the tax liability even ifamnesty tax payments were alreadyreceived.Reason: Erroneous application andenforcement of the law by public

officers do not block subsequentcorrect application of the statute. Thegovernment is never estopped bymistakes or errors of its agents.Basis: Lifeblood Theory

3.Defense of tax amnesty, like insanity,is a personal defense.Reason: Relates to the circumstancesof a particular accused and not thecharacter of the acts charged in theinformation.

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San eda College of Law 16 

MEMORY AID IN TAXATION LAW 

TAXATION LAW COMMITTEE CHAIRPERSON: Charmaine Torres  ASST. CHAIRPERSON: Rhohail Castro EDP: Rachelle Saya SUBJECT HEADS: Jemina Sy, Casiano Ilagan,

Jr., Ryan Co, Edwin Torres:MEMBERS: Marita Lourdes Azur, Edizer Enriquez, Christian Cabrera, Jhundee

Guillermo

Tax amnesty Tax exemption

Immunity from allcriminal, civil andadministrativeliabilities arisingfrom non paymentof taxes

Immunity from civilliability only

Applies only to pasttax periods, henceretroactiveapplication

Prospectiveapplication

DOCTRINE OF IMPRESCRIPTIBILTY As a rule, taxes are imprescriptible

as they are the lifeblood of the

government. However, tax statutes mayprovide for statute of limitations.The rules that have been adopted

are as follows:a.)  National Internal Revenue Code 

The statute of limitation forassessment of tax if a return is filed iswithin three (3) years from the last dayprescribed by law for the filling of thereturn or if filed after the last day,within three years from date of actualfilling. If no return is filed or the returnfiled is false or fraudulent, the period to

assess is within ten years from discoveryof the omission, fraud or falsity.

The period to collect tax is withinthree years from date of assessment. Inthe case, however, of omission to file orif the return filed is false or fraudulent,the period to collect is within ten yearsfrom discovery without need of anassessment.

b.)  Tariff and customs codeIt does not express any general

statute of limitation; it provided,

however, that ‗‘ when articles haveentered and passed free of duty or finaladjustment of duties made, withsubsequent delivery, such entry and

 passage free of duty or settlement ofduties will, after the expiration of one(1) year , from the date of the final

 payment of duties, in the absence of fraud or protest, be final and conclusiveupon all parties, unless the liquidationof import entry was merely tentative.”(Sec 1603,TCC) 

c.)  Local Government Code Local Taxes, fees, or charges shall

be assessed within  five (5) years  fromthe date they became due. In case of

 fraud or intent to evade the payment oftaxes, fees or charges the same may beassessed within ten (10) years  fromdiscovery of the fraud or intent toevade payment. They shall also becollected either by administrative or

 judicial action within  five (5) years from date of assessment (Sec. 194. LGC) 

TAX ENFORCEMENT ANDADMINISTRATION 

SOURCES OF TAX LAWS (Key:  SPEC2TRA 

BLT)1.  Statutes2.  Presidential Decrees3.  Executive Orders4.  Constitution5.  Court Decisions6.  Tax Codes7.  R evenue Regulations8.  Administrative Issuances9.  BIR Rulings10. Local Tax Ordinance11. Tax Treaties and Conventions

R EQUISITES OF TAX R EGULATIONS 1.  Reasonable2.  Within the authority conferred3.  Not contrary to law4.  Must be published

NOTE: Administrative regulations mustalways be in harmony with theprovisions of the law. In case ofdiscrepancy between the basic law andthe implementing rule or regulation, theformer prevails.

NON-R ETROACTIVITY OF BIR  R ULINGS General Rule: Rulings are notretroactive if they are prejudicial to thetaxpayer. (Sec. 246, NIRC) Exceptions:1.  Where the taxpayer deliberately

misstates or omits material factsfrom his return or any documentrequired of him by the BIR.

2.  Where the facts subsequentlygathered by the BIR is materially

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MEMORY AID IN TAXATION LAW 

TAXATION LAW COMMITTEE CHAIRPERSON: Charmaine Torres  ASST. CHAIRPERSON: Rhohail Castro EDP: Rachelle Saya SUBJECT HEADS: Jemina Sy, Casiano Ilagan,

Jr., Ryan Co, Edwin Torres:MEMBERS: Marita Lourdes Azur, Edizer Enriquez, Christian Cabrera, Jhundee

Guillermo

different from the facts on whichthe ruling is based.

3.  Where the taxpayer acted in badfaith.

PRINCIPLE OF LEGISLATIVE APPROVAL OF AN

ADMINISTRATIVE INTERPRETATION THROUGH

R EENACTMENT Where a statute is susceptible of the

meaning placed upon it by a ruling ofthe government agency charged with itsenforcement and the legislaturethereafter reenacts the provisionwithout substantial change, such actionis to some extent confirmatory that theruling carries out the legislative purpose.

R ULE OF NO ESTOPPEL AGAINST THEGOVERNMENT General Rule:  The Government is notestopped by the mistakes or errors of itsagents; erroneous application andenforcement of law by public officers donot  bar the subsequent correctapplication of statutes. (E. Rodriguez,Inc. vs. Collector, L-23041, July 31,1969)Exception: In the interest of justice andfair play, as where injustice will resultto the taxpayer. (see CIR vs. CA, GR No.

117982, Feb. 6, 1997; CIR vs. CA, GR No.107135, Feb. 3, 1999)

AGENCIES INVOLVED IN TAX ADMINISTRATION 1.  Bureau of Internal Revenue

– internal revenue taxes Agents of the CIRa. Commissioner of Customs withrespect to taxes on imported goodsb. head of the appropriategovernment office with respect toenergy taxc. banks duly accredited by the CIR

(Sec. 12, 1997 NIRC)2.  Bureau of Customs –  customs law

enforcement3.  Provincial, city and municipal

assessors and treasurers –  local andreal property taxes

ORGANIZATION AND FUNCTION OF THE BUREAU OF INTERNAL R EVENUE (BIR)

BIR shall be under the supervisionand control of the Dept. of Finance (Sec.2, NIRC)

POWERS AND DUTIES OF THE BIR  Assessment and collection of all

national internal revenue taxes, fees,and charges

1.  Enforcement of all forfeitures,penalties, and fines connectedtherewith

2.  Execution of judgments in all casesdecided in its favor by the Court ofTax Appeals (CTA) and the ordinarycourts

3.  Give effect to and administer thesupervisory and police powersconferred to it by the Code or otherlaws

ASSESSMENT –  a finding by the taxing

authority that the taxpayer has not paidthe correct taxes. It is also a writtennotice to a taxpayer to the effect thatthe amount stated therein is due as atax and containing a demand for thepayment thereof.General rule: Taxes are self-assessingand thus, do not require the issuance ofan assessment notice in order toestablish the tax liability of a taxpayer.

Exceptions: 

1.  Tax period of a taxpayer is

terminated [Sec. 6(D), NIRC]  2.  Deficiency tax liability arising from a

tax audit conducted by the BIR [Sec.56(B), NIRC]  

3.  Tax lien [Sec. 219, NIRC]  4.  Dissolving corporation [Sec. 52(c),

NIRC]  

SIGNIFICANCE OF ASSESSMENT a.  In the proper pursuit of judicial and

extrajudicial remedies to enforcetaxpayer liabilities and certainmatters that relate to it, such as theimposition of surcharges andinterests,

b.  In the application of statute oflimitations,

c.  In the establishment of tax liens,and

d.  In estimating the revenues that maybe collected by government in thecoming year. (Mamalateo,Victorino. Reviewer on Taxation,2004) 

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MEMORY AID IN TAXATION LAW 

TAXATION LAW COMMITTEE CHAIRPERSON: Charmaine Torres  ASST. CHAIRPERSON: Rhohail Castro EDP: Rachelle Saya SUBJECT HEADS: Jemina Sy, Casiano Ilagan,

Jr., Ryan Co, Edwin Torres:MEMBERS: Marita Lourdes Azur, Edizer Enriquez, Christian Cabrera, Jhundee

Guillermo

K INDS 1.  SELF-  ASSESSMENT-  one in which the

tax is assessed by the taxpayerhimself

2.  DEFICIENCY ASSESSMENT-  made by thetax assessor himself whereby thecorrect amount of the tax isdetermined after an examination orinvestigation is conducted. Theliability is determined and assessedfor the following reason:a. amount ascertained exceeds that

which is shown as the tax by thetaxpayer in his return

b. no amount of tax is shown in thereturn

c. taxpayer did not file any return

at all3.  ILLEGAL AND VOID ASSESSMENT- 

assessment wherein tax assessor hasno power to assess at all

4.  ERRONEOUS ASSESSMENT- assessor haspower to assess but errs in theexercise thereof

BURDEN OF PROOF IN PRE-ASSESSMENT

PROCEEDINGS There is a  presumption  of

correctness and good faith on the part ofthe CIR; thus, the burden lies on the

taxpayer. Otherwise, the finding of theCIR will be conclusive and he will assessthe taxpayer. The same is true even ifthe CIR is wrong, if the taxpayer doesnot controvert. (Cagayan Robina SugarMilling Co. vs. Court of Appeals, GR. No.122451, October 12, 2000) Reasons: a. lifeblood theory

b. presumption of regularity inperformance of publicfunctions

NOTE: Assessments by the BIR must haveon its face the law and facts upon which

the presumption is made.

PRINCIPLES GOVERNING TAX ASSESSMENTS

1.  Assessments are prima faciepresumed correct and made in goodfaith.

2.  It should be based on actual facts.3.  It is discretionary on the part of the

Commissioner.

4.  The authority of the Commissionerto assess taxes may be delegated,except the power to make finalassessments.

5.  It must be directed to the rightparty.

Authority of a Revenue Officer  -pursuant to a Letter of Authority issuedby the Regional Director

a. To examine taxpayers within thejurisdiction of the district in orderto collect the correct amount oftax;

b. To recommend the assessment ofany deficiency tax due in the samemanner that the said acts could

have been performed by theRevenue Regional Director.

General Rule:  income tax returns areconfidential.Exception:  inquiry into income taxreturns may be authorized-

1.  inspection is authorized uponwritten order of the President of thePhilippines;

2.  inspection is authorized underFinance Regulations No. 33 of theSecretary of Finance;

3.  production of the tax return ismaterial evidence in a criminal casewherein the government isinterested in the result; or

4.  production or inspection thereof isauthorized by the taxpayer himself.

Networth Method- inventory method ofincome tax verification.

  Applies the accounting principle:assets – liabilities = networth

Condition for its use:

1.  taxpayer‘s books do not clearlyreflect his income or the taxpayerhas no books, or if he has books, herefuses to produce them;

2.  there is evidence of possible sourceor sources of income to account forincreases in networth;

3.  there is a fixed starting point oropening networth; and

4.  there must be proper adjustments toconform with the income tax laws.

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San eda College of Law 19 

MEMORY AID IN TAXATION LAW 

TAXATION LAW COMMITTEE CHAIRPERSON: Charmaine Torres  ASST. CHAIRPERSON: Rhohail Castro EDP: Rachelle Saya SUBJECT HEADS: Jemina Sy, Casiano Ilagan,

Jr., Ryan Co, Edwin Torres:MEMBERS: Marita Lourdes Azur, Edizer Enriquez, Christian Cabrera, Jhundee

Guillermo

POWERS AND DUTIES OF THE COMMISSIONER

I. SECTION 4  (power to interpret tax lawand decide tax cases)

1. Interpret provisions of this Code andother tax laws subject to review of theSecretary of Finance(Quasi-legislative)

2. Decide: (Quasi-judicial)a) disputed assessmentb) refunds of internal revenue taxes,

fees and chargesc) penalties imposed in relation

theretod) other matters arising from this

Code or other laws or portionsthereof administered by the BIR

subject to the exclusive appellatejurisdiction of the CTA (Sec. 4) 

II. SECTION 5  (power to obtaininformation, summon, examine and taketestimony of persons)

3.  For the Commissioner to ascertain:(a) correctness of any return or in

making a return where none hasbeen made

(b) liability of any person for anyinternal revenue tax or in

correcting such liability(c) tax compliance

The Commissioner is authorized:1. to Examine any relevant Book, paper,

record or other data2. to Obtain any information (costs,

volume of production, receipts, sales,gross income, etc), on a regular basisfrom:i. any person other than the person

under investigation orii. any office or officer of the

national/local government, gov‘tagencies and instrumentalities(Bangko Sentral, gov‘t owned andcontrolled corporations) (e.g. LTO,Register of Deeds)

3. to Summoni. the person liable for tax or

required to file a return orii. any officer or employee of such

person oriii. any person having in his

possession/custody/care-- the books of accounts,

-- accounting records of entriesrelating to the business of theperson liable for tax or any otherperson

-- to produce such books,papers, records, and other dataand to give testimony

4. to take the Testimony of the personconcerned, under oath as may berelevant to the inquiry

5. to cause revenue officers andemployees to make a Canvass of anyrevenue district or region

Nothing in Section 5 shall beconstrued as granting the Commissionerthe authority to inquire into bank

deposits other than as provided forunder sec. 6 (F) of the Code.

III. SECTION 6  (power to makeassessments, prescribe additionalrequirements for tax administrationand enforcement) 

4.  Examination of returns anddetermination of tax dueA.  After a return has been filed the

Commissioner or hisrepresentative may authorize

i.  the Examination of anytaxpayer and

ii.  the Assessment of thecorrect amount of tax;

B.  Failure to file a return shall notprevent the commissioner fromauthorizing the examination ofany taxpayer;* Any tax or deficiency tax so

assessed shall be paid uponnotice and demand from theCommissioner or hisrepresentative

* Any return, statement ordeclaration  filed   in anyauthorized office shall not bewithdrawn; but within threeyears  from date of filing, thesame may be modified,changed or amended;provided that no notice foraudit or investigation of suchreturn, has in the meantime,been actually served upon thetaxpayer.

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MEMORY AID IN TAXATION LAW 

TAXATION LAW COMMITTEE CHAIRPERSON: Charmaine Torres  ASST. CHAIRPERSON: Rhohail Castro EDP: Rachelle Saya SUBJECT HEADS: Jemina Sy, Casiano Ilagan,

Jr., Ryan Co, Edwin Torres:MEMBERS: Marita Lourdes Azur, Edizer Enriquez, Christian Cabrera, Jhundee

Guillermo

5.  Failure to submit required returnsand other documents

If a personi. fails to file a required return or

report at the time prescribed orii. willfully or otherwise files afalse or fraudulent return,

The Commissioner shall Make orAmend the return from

i.  his own knowledge orii. from such information as he can

obtain through testimony orotherwise which shall be primafacie correct and sufficient forall legal purposes

6.  Inventory-taking, Surveillance,

Presumptive Gross SalesA. Commissioner may, at any timeduring the taxable year(a)  order the inventory taking of

goods of any taxpayer or(b)  may place the business

operations of any person(natural/juridical) underobservation or Surveillance,

if there is reason tobelieve that such is notdeclaring his correct income,sales or receipts for tax

purposes.The findings may be used

as basis for assessing thetaxes and shall be deemedprima facie correct.

B. Commissioner may prescribe aMinimum amount of grossreceipts, sales and taxable base(taking into account the sales andincome of other persons engagedin similar business):i.  When a person has failed to

issue receipts as required bysec.113 (Invoice requirementsfor VAT-registered persons)and Sec. 237 (Issuance ofReceipts or CommercialInvoices) or

ii.  When the books of accountsor records do not correctlyreflect the declarations madeor required to be made in areturn,Such minimum amount shallbe considered correct.

7.  Terminate taxable periodCommissioner shall declare the tax

period of a taxpayer Terminated andsend notice to the taxpayer of such

decision with a request for immediatepayment of the tax when it has come tothe knowledge of the Commissioner:

a)  that a taxpayer is retiring frombusiness subject to tax or

b)  is intending to leave the Phils.or

c)  to remove his propertytherefrom or

d)  to hide or conceal his propertyor

e)  is performing any act tending toobstruct the proceedings for

the collection of tax

8.  Prescribe Real Property ValuesThe Commissioner is authorized to:a. Divide the Phils. into different

zones or areas andb. Determine the fair market value

of real properties located in eachzone or area

For tax purposes, the value ofthe property shall be whichever ishigher of:

a)  Fair market value as determinedby the Commissioner; or

b)  Fair market value as shown inthe schedule of values of the

 provincial and city assessors.

9.  Authority to Inquire into BankDeposit

Notwithstanding R.A. 1405 (BankSecrecy Law) the Commissioner isauthorized to inquire into the Bankdeposits of:(a) a decedent to determine his gross

estate(b) a taxpayer who has filed an

application to compromisepayment of tax liability by reasonof financial incapacity

The taxpayer’s application forcompromise shall not be consideredunless he waives in writing his

 privilege under RA 1405 and other general or special laws. Such waivershall authorize the Commissioner toinquire into his bank deposits.

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San eda College of Law 21 

MEMORY AID IN TAXATION LAW 

TAXATION LAW COMMITTEE CHAIRPERSON: Charmaine Torres  ASST. CHAIRPERSON: Rhohail Castro EDP: Rachelle Saya SUBJECT HEADS: Jemina Sy, Casiano Ilagan,

Jr., Ryan Co, Edwin Torres:MEMBERS: Marita Lourdes Azur, Edizer Enriquez, Christian Cabrera, Jhundee

Guillermo

10. Authority to Register tax agents(a) The Commissioner shall accredit

and Register, individuals andgeneral professional partnerships

and their rep. who prepare andfile tax returns and other papersor who appear before the BIR

(b) The Commissioner shall createnational and regionalaccreditation boards.

Those who are deniedaccreditation may appeal the sameto the Sec. Of Finance who shall ruleon the appeal within 60 days fromreceipt of such appeal. Failure to doso within the prescribed period shall

be deemed as approval foraccreditation.

11.  Authority to Prescribe AdditionalRequirements

The Commissioner may prescribethe manner of compliance with anydocumentary or proceduralRequirement for the submission orpreparation of financial statementsaccompanying tax returns.

IV. SECTION  7  (Authority to Delegate

Power )12. The Commissioner may delegate the

powers vested in him to- subordinate officials with rank

equivalent to Division Chief orhigher, subject tolimitations/restrictions imposedunder the rules and regulations

EXCEPT, (the following powersshall NOT be delegated)a)  power to Recommend the

promulgation of rules andregulations by the Sec. of

Financeb)  power to Issue rulings of first

impression or to Reverse, revokemodify any existing rule of theBIR

c)  power to Compromise or Abateany tax liability

 provided however that  theregional evaluation board maycompromise:1.  assessments issued by

regional offices involvingdeficiency taxes of P500,000or less and

2.  minor criminal violations asmay be determined by therules and regulations

3.  discovered by regional anddistrict officials

Regional Evaluation Board iscomposed of :i. Regional Director as Chairmanii. Asst. Regional Director

iii. Heads of the Legal, Assessmentand Collection Div.

iv. Revenue District Officer havingjurisdiction over the taxpayer

d)  power to Assign or reassigninternal revenue officers toestablishments wherearticles subject to excise taxare kept.

V.  SECTIONS 8,  14,  15,  16,  17  (OtherPowers) 

13.  Duty to ensure the provision anddistribution of forms, receipts,certificates, and appliances, andthe acknowledgment of payment oftaxes (Sec. 8) 

14.  Authority to administer oaths and totake testimony (Sec. 14) 

15.  Authority to make arrests  andseizures (Sec. 15) 

16.  Authority to employ, assign  or

reassign internal revenue officersinvolved in excise tax functions toestablishments where articlessubject to excise tax are producedor kept (Sec. 16) 

17.  Authority to assign  or reassigninternal revenue officers andemployees of the BIR to other orspecial duties connected with theenforcement or administration ofthe revenue laws (Sec. 17) 

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San eda College of Law 22 

MEMORY AID IN TAXATION LAW 

TAXATION LAW COMMITTEE CHAIRPERSON: Charmaine Torres  ASST. CHAIRPERSON: Rhohail Castro EDP: Rachelle Saya SUBJECT HEADS: Jemina Sy, Casiano Ilagan,

Jr., Ryan Co, Edwin Torres:MEMBERS: Marita Lourdes Azur, Edizer Enriquez, Christian Cabrera, Jhundee

Guillermo

ARE LEGAL OFFICERS OF THE BIR   AUTHORIZED

TO INSTITUTE APPEAL PROCEEDINGS WITHOUT

THE PARTICIPATION OF THE SOLICITOR

GENERAL?

NO. The institution orcommencement before a proper court ofcivil and criminal actions andproceedings arising under the TaxReform Act which shall be conducted bylegal officers of the BIR is not in dispute.An appeal  from such court, however, isnot a matter of right. It is still theSolicitor General who has the primaryresponsibility to appear for thegovernment in appellate proceedings.(Commissioner vs. La Suerte Cigar andCigarette Factory, GR No. 144942, July

4, 2002)

SOURCES OF R EVENUE The following taxes, fees and

charges are deemed to be nationalinternal revenue taxes. (Sec. 21, NIRC) 1.  Income tax2.  Estate and donor's taxes3.  Value-added tax4.  Other percentage taxes5.  Excise taxes6.  Documentary stamp taxes7.  Such other taxes as are or hereafter

may be imposed and collected bythe Bureau of Internal Revenue.

II.  NATIONAL TAXATION

A. INCOME TAXATION

DEFINITIONS INCOME TAX  –  tax on all yearly profits

arising from property, possessions,trade or business, or as a tax on a

person‘s income, emoluments,profits and the like (61 CJS 1559)

–  tax on income,whether gross or net. (27 Am. Jur.308) 

INCOME – all wealth, which flows into thetaxpayer other than as a merereturn of capital.

CAPITAL  –  resource of person, which canbe used in producing goods andservices.

Income Capital

All wealth, whichflows into the

taxpayer other thanas a mere return ofcapital.

Fund or propertywhich can be used

in producing goodsor services

Flow of Wealth Fund or property

Source of wealth Wealth

R EQUISITES FOR INCOME TO BE TAXABLE 1.  There must be a gain or profit.2.  The gain must be realized or

received.3.  The gain must not be excluded by

law or treaty from taxation.

TESTS ON TAXABILITY OF INCOME

1.  Flow of Wealth Test  –  Thedetermining factor for theimposition of income tax iswhether any gain was derivedfrom the transaction.

2.  Realization Test - unless the incomeis deemed "realized," there is notaxable income.

3.  Economic-Benefit Principle Test -flow of wealth realized is

taxable only to the extent thatthe taxpayer is economicallybenefited.

CRITERIA IN IMPOSING INCOME TAX 1. Citizenship  Principle  –  A citizen ofthe Philippines is subject to Philippineincome tax (a.) on his worldwideincome, if he resides in the Philippines,or (b.) only on his income from sourceswithin the Philippines, if he qualifies asnonresident citizen.2. Residence Principle  –  resident alien

is liable to pay income tax on his incomefrom sources within the Philippines butexempt from tax on his income fromsources outside the Philippines.3. Source Principle – An alien is subjectto Philippine income tax because hederives income from sources within thePhilippines. Thus, a nonresident alien isliable to pay Philippine income tax onhis income from sources within thePhilippines such as dividend, interest,rent, or royalty, despite the fact that hehas not set foot in the Philippines.

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MEMORY AID IN TAXATION LAW 

TAXATION LAW COMMITTEE CHAIRPERSON: Charmaine Torres  ASST. CHAIRPERSON: Rhohail Castro EDP: Rachelle Saya SUBJECT HEADS: Jemina Sy, Casiano Ilagan,

Jr., Ryan Co, Edwin Torres:MEMBERS: Marita Lourdes Azur, Edizer Enriquez, Christian Cabrera, Jhundee

Guillermo

CLASSIFICATION OF TAXPAYERS

Individualsa.  citizens

(1)  resident citizens (RC) (2)  non-resident citizens (NRC) 

b.  aliens(1)  resident aliens (RA)(2)  non-resident aliens (NRA)

(a) engaged in trade orbusiness within thePhils. (NRAETB) 

(b) not engaged in trade orbusiness within thePhilippines (NRANETB) 

Corporations

a.  Domestic (DC) b.  Foreign

(1)  resident foreign corporation(RFC) 

(2)  non-resident foreigncorporation (NRFC) 

EstatesTrustsPartnerships

A.  INDIVIDUALS

WHO

ARE

TAXABLE

?1.  Resident Citizen2.  Non-resident Citizen

A non-resident citizen means, aFilipino citizen:a.  who establishes to the

satisfaction of the Commissionerthe fact of his physical presenceabroad with a definite intentionto reside therein;

b.  who leaves the Philippinesduring the taxable year to resideabroad, either as an immigrant

or for employment on apermanent basis;c.  who works and derives income

from abroad and whoseemployment thereat requireshim to be physically presentabroad most of the time duringthe taxable year;

d.  who is previously considered as anon-resident and who arrives inthe Philippines at anytime duringthe taxable year to residethereat permanently shall be

considered non-resident for thetaxable year in which he arrivesin the Philippines with respect tohis income derived from sources

abroad until the date of hisarrival [Sec.22 (E), NIRC]

NOTE: An overseas contract worker(OCW)  is taxable only on incomederived from sources within thePhilippines. [Sec. 23 (B)(C)]

A seaman  is considered as anOCW provided the followingrequirements are met:

1.  receives compensation for servicesrendered abroad as a member ofthe complement of a vessel; and

2.  such vessel is engaged exclusivelyin international trade.

Based on the above provisions,there are three (3) types ofnonresident citizens, namely: (1)immigrants; (2) employees of a foreignentity on a permanent basis; and(3) overseas contract workers.Immigrants and employees of a foreignentity on a permanent basis aretreated as nonresident citizens fromthe time they depart from the

Philippines. However, overseascontract workers must be physicallypresent abroad most of the timeduring the calendar year to qualify asnonresident citizens.

3.  Resident alien - means an individualwhose residence is within thePhilippines and who is not a citizenthereof. [Sec.22 (F, NIRC)]  

4.  Non-resident alien engaged intrade or business within thePhilippines.  (NRAETB)

A non-resident alien  means an

individual whose residence is notwithin the Philippines and who is nota citizen thereof. [Sec.22 (G)]

The term trade or business includes the performance of thefunctions of a public office. [Sec. 22(S)]

The term  trade, business or profession  shall not includeperformance of services by thetaxpayer as an employee. [Sec. 22(CC)]

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San eda College of Law 24 

MEMORY AID IN TAXATION LAW 

TAXATION LAW COMMITTEE CHAIRPERSON: Charmaine Torres  ASST. CHAIRPERSON: Rhohail Castro EDP: Rachelle Saya SUBJECT HEADS: Jemina Sy, Casiano Ilagan,

Jr., Ryan Co, Edwin Torres:MEMBERS: Marita Lourdes Azur, Edizer Enriquez, Christian Cabrera, Jhundee

Guillermo

A non-resident alien  individualwho shall come to the Philippinesand stay therein for an aggregateperiod of more than 180 days during

any calendar year shall be deemed anon-resident alien doing business inthe Philippines  Section 22(G)notwithstanding [Sec. 25(A)(1)]

5.  Non-resident alien not engaged intrade or business within thePhilippines. (NRANETB)

ONLY RESIDENT CITIZENS  are taxablefor income derived from sources withinand without  the Philippines. All otherindividual income taxpayers are taxableonly for income derived from sources

within the Philippines.

  Tax Rates: Please refer to Annex A.

B.  CORPORATIONS

WHO ARE TAXABLE?1.  Domestic Corporation  –  created or

organized in the Phils. or under itslaw [Sec. 22(C), NIRC]

2.  Resident Foreign Corporation  – engaged in trade or business withinthe Philippines [Sec. 22(H), NIRC]

3.  Non-resident Foreign Corporation – not engaged in trade or businesswithin the Philippines [Sec. 22(I),NIRC]

A Corporation Includes:1.  Partnerships, no matter how created

or organized;2.  Joint-stock companies;3.  Joint accounts (cuentas en

participacion)4.  Associations; or5.  Insurance companies [Sec. 22(B),

NIRC]. 

Excludes:1.  General professional partnerships;2.  Joint venture or consortium formed

for the purpose of undertakingconstruction projects or engaging inpetroleum, coal, geothermal andother energy operations pursuant toan operating or consortiumagreement under a service contractwith the Government.

CORPORATIONS EXEMPT FROM INCOME

TAXATION (FOR INCOME R EALIZED AS SUCH) UNDER NIRC 1.  Those enumerated under Sec. 30.

Exempt corporations are subjectto income tax on their income fromany of their properties, real orpersonal, or from any other activitiesconducted for profit, regardless ofthe disposition made of such income.

2.  With respect to GOCCs, the generalrule is that these corporations aretaxable as any other corporationexcept: 

a.  GSISb.  SSSc.  PHIC

d.  PCSOe.  PAGCOR [Sec. 27 (C)]  

3.  Regional or Area Headquartersunder Sec. 22 (DD) – not subject toincome tax

Regional operating headquartersunder Sec. 22(EE)  shall pay a tax of10% of their taxable income.

ONLY DOMESTIC CORPORATIONS  aretaxable for income derived from sourceswithin and without the Philippines. All

other corporate income taxpayers aretaxable only for income derived fromsources within the Philippines.

  Tax Rates: Please refer to Annex B. 

C.  ESTATES AND TRUSTS

ESTATE – refers to the mass of propertiesleft by a deceased person.

R ULES ON TAXABILITY OF ESTATE When a person who owns property

dies, the following taxes are payableunder the provisions of the income taxlaw :1.  Income tax for individual under Sec.

24 and 25 (to cover the periodbeginning January to the time ofdeath);

2.  Estate income tax under Sec. 60 ifthe estate is under administration orjudicial settlement.

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San eda College of Law 25 

MEMORY AID IN TAXATION LAW 

TAXATION LAW COMMITTEE CHAIRPERSON: Charmaine Torres  ASST. CHAIRPERSON: Rhohail Castro EDP: Rachelle Saya SUBJECT HEADS: Jemina Sy, Casiano Ilagan,

Jr., Ryan Co, Edwin Torres:MEMBERS: Marita Lourdes Azur, Edizer Enriquez, Christian Cabrera, Jhundee

Guillermo

ESTATES UNDER JUDICIAL SETTLEMENT A. During the Pendency of the

SettlementGeneral Rule:  An estate under

judicial settlement is subject toincome tax in the same manner asindividuals. Its status is the same asthe status of the decedent prior tohis death.Exceptions:1.  The entitlement to personal

exemption is limited only toP20,000.

2.  No additional exemption isallowed.

3.  The distribution to the heirsduring the taxable year of estate

income is deductible from thetaxable income of the estate.Such distributed income shallform part of the respectiveheirs‘ taxable income. 

Where no suchdistribution to the heirs is madeduring the taxable year that theincome is earned, and suchincome is subjected to incometax payment by the estate, thesubsequent distribution thereofis no longer taxable on the part

of the recipient.

B. TERMINATION OF THE JUDICIAL

SETTLEMENT (WHERE THE HEIRS STILL DO

NOT DIVIDE THE PROPERTY)1.  If the heirs contribute to the

estate money, property, orindustry with intention to dividethe profits between/amongthemselves, an unregisteredpartnership is created and theestate becomes liable for thepayment of corporate income

tax. (Evangelista vs. Collector,GR No. L-9996, October 15,1957; Oña vs. Commissioner, GRNo. L-19342, May 25, 1972)

2.  If the heirs, without contributingmoney, property or industry toimprove the estate, simplydivide the fruits thereofbetween/among themselves, aco-ownership is created, andindividual income tax is imposedon the income received by eachof the heirs, payable in their

separate and individualcapacity. (Pascual vs.Commissioner, GR No. L-78133,October 18, 1988; Obillos vs.

Commissioner, GR No. L-68118,October 29, 1985)

ESTATES N OT  UNDER JUDICIAL SETTLEMENT Pending the extrajudicial

settlement, either of the followingsituations may arise:1.  If the heirs contribute money,

property, or industry to the estatewith the intention of dividing theprofits between/among themselves,an unregistered partnership iscreated and the estate becomes

liable for the payment of corporateincome tax; or

2.  If the heirs, without contributingmoney, property or industry to theestate, simply divide the fruitsthereof between/among themselves,a co-ownership is created andincome tax is imposed on the incomereceived by each of the heirs,payable in their separate andindividual capacity.

TRUST – A right to the property, whether

real or personal, held by one person forthe benefit of another.

WHEN TRUSTS ARE TAXABLE ENTITIES 1. A trust, the income of which is to be

accumulated2. A trust in which the fiduciary may, at

his discretion, either distribute oraccumulate the income.

R ULES ON TAXABILITY OF THE INCOME OF A 

TRUST 

1.  The income of the trust for thetaxable year which is to bedistributed to the beneficiaries – 

 filing and payment of tax lie on thebeneficiaries. 

2.  The income of the trust which is tobe accumulated or held  for futuredistribution whether consisting ofordinary income or gain from thesale of assets included in the"corpus" of the estate –   filing ofreturn and payment of tax become

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San eda College of Law 26 

MEMORY AID IN TAXATION LAW 

TAXATION LAW COMMITTEE CHAIRPERSON: Charmaine Torres  ASST. CHAIRPERSON: Rhohail Castro EDP: Rachelle Saya SUBJECT HEADS: Jemina Sy, Casiano Ilagan,

Jr., Ryan Co, Edwin Torres:MEMBERS: Marita Lourdes Azur, Edizer Enriquez, Christian Cabrera, Jhundee

Guillermo

the burden of the trustee or fiduciary. Exceptions:a.  In the case of a revocable trust,

the income of the trust will bereturned by the grantor.b.  In a trust where the income is

held for the benefit of thegrantor, the income of the trustbecomes income to the grantor.

c.  In the case of trust administeredin a foreign country, the incomeof the trust; undiminished byany amount distributed to thebeneficiaries shall be taxed tothe trustee.

IRREVOCABLE TRUSTS  (irrevocable both asto corpus and as to income) – 

Trust itself, through the trustee orfiduciary, is liable for the payment ofincome tax. Taxed exactly in the sameway as estates under judicial settlementand its status as an individual is that ofthe trustor. It is entitled to theminimum personal exemption (P20,000)and distribution of trust income duringthe taxable year to the beneficiaries isdeductible from the trust‘s taxable

income.

R EVOCABLE TRUSTS  –  the trustor, not thetrust itself, is subject to the payment ofincome tax on the trust income.

EXEMPTION OF EMPLOYEES’ TRUST Provided: 1.  the employee‘s trust must be part of

a pension, stock bonus or profitsharing plan of the employer for thebenefit of some or all of hisemployees;

2.  contributions are made to the trustby such employer, or suchemployees, or both;

3.  such contributions are made for thepurpose of distributing to suchemployees both the earnings andprincipal of the fund accumulated bythe trust, and

4.  that the trust instrument makes itimpossible for any part of the trustcorpus or income to be used for, ordiverted to, purposes other than the

exclusive benefit of such employees.(Sec. 60B, NIRC) 

Tax exemption is likewise to be

enjoyed by the income of the pensiontrust; otherwise, taxation of thoseearnings would result in a diminution ofaccumulated income and reducewhatever the trust beneficiaries wouldreceive out of the trust fund.(Commissioner vs. Court of Appeals,Court of Tax Appeals and GCLRetirement Plans, GR No. 95022, March23, 1992)

D.  PARTNERSHIPS

K INDS OF PARTNERSHIP FOR TAX PURPOSES

UNDER THE NIRC1.  General Professional Partnerships

(GPP) - formed by persons for:a.  the sole purpose of exercising a

common profession andb.  no part of the income of which is

derived from engaging in anytrade or business. [Sec. 22(B),NIRC]. 

2.  Taxable or Business Partnership – All other partnerships except

general professional partnerships no

matter, how created or organized.It includes unregistered jointventures and business partnerships.

However, joint ventures are nottaxables as corporations when it is;(a) undertaking construction projects(b) engaged in petroleum, coal andother energy operation under aservice contract with thegovernment

General co-partnerships (GCP)are partnerships, which are by lawassimilated to be within the contextof, and so legally contemplated as,corporations. The partnership itselfis subject to corporate taxation. Theindividual partners are consideredstockholders and, therefore, profitsdistributed to them by thepartnership are taxable as dividends.

The taxable income for a taxableyear, after deducting the corporateincome tax imposed therein, shall bedeemed to have been actually orconstructively received   by the

partners in the same taxable year

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San eda College of Law 27 

MEMORY AID IN TAXATION LAW 

TAXATION LAW COMMITTEE CHAIRPERSON: Charmaine Torres  ASST. CHAIRPERSON: Rhohail Castro EDP: Rachelle Saya SUBJECT HEADS: Jemina Sy, Casiano Ilagan,

Jr., Ryan Co, Edwin Torres:MEMBERS: Marita Lourdes Azur, Edizer Enriquez, Christian Cabrera, Jhundee

Guillermo

and shall be taxed to them in theirindividual capacity whether actuallydistributed or not. [Sec. 73(D),NIRC]

LIABILITY OF A PARTNERSHIP 1.  General Professional Partnership  .-

They are not subject to income tax ,but are required to file returns oftheir income for the purpose offurnishing information as to theshare of each partner in the net gainor profit, which each partner shallinclude in his individual return. Thepartnership shall act as thewithholding agent.

The net income (income for

distribution) shall be computed inthe same manner as a corporation.Date of filing of the return is April 15of each year.

2.  Taxable or Business Partnership  -The income tax of this type ofPartnership is computed and taxedlike that of a corporation. This kindof partnership, like a regularcorporation, is also required to file aquarterly corporate income taxreturn. Filing and payment ofquarterly return is within 60 days

after the end of each quarter whilethe annual return is on or beforeApril 15 of the following year.

LIABILITY OF A PARTNER  Rules:1.  Share of a partner in general

professional Partnershipa.  Each partner shall report as

 gross income  (business income)his distributed share actually orconstructively received in thenet income of the partnership.

(Sec. 26, NIRC)  [The same shareshall be subject to creditablewithholding tax of 10%.] Theyare liable in their separate andindividual capacity .

b.  Share of a partner in the loss ofa general professionalpartnership may be taken by theindividual partner in his returnof income.

c.  Each partner in a generalprofessional partnership shall,report as  gross income hisdistributed share in the net

income of the GPP, based on hisagreed ratio, whether he,  availsof itemized or optional standarddeduction.

d.  Payments made to a partner of aGPP for services rendered shallbe considered as ordinarybusiness income subject to Sec.24A (Effective January 1, 1982)

2.  Share of a partner in Taxable orBusiness partnership

a.  Share of a partner in the netincome of a taxable or businesspartnership (dividend) shall besubject to a final tax as follows.

  Resident Citizen, Non-resident Citizen andResident Alien (2000 andonward) – 10% (Sec. 24B2) 

  Non-resident Alien engagedin trade or business –  20%(Sec. 25 A2)

  Non-resident alien notengaged in trade or business

– 25% (Sec. 25B) b.  Share of a partner in the loss of

a taxable or business partnershipmaybe taken by the individualpartner in his return of income.

c.  Payments made to a partner of abusiness or taxable partnershipfor services rendered shall beconsidered as compensationincome subject to sec. 24A.

KINDS OF INCOME TAXES

UNDER THE NIRC

1.  Net Income Tax2.  Optional Corporate Income tax3.  Minimum Corporate Income Tax4.  Improperly Accumulated Earnings

Tax5.  Preferential Rates or Special Rates

of Income Tax6.  Gross Income Tax7.  Final Income Tax8.  Fringe Benefits Tax9.  Capital Gains Tax

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San eda College of Law 28 

MEMORY AID IN TAXATION LAW 

TAXATION LAW COMMITTEE CHAIRPERSON: Charmaine Torres  ASST. CHAIRPERSON: Rhohail Castro EDP: Rachelle Saya SUBJECT HEADS: Jemina Sy, Casiano Ilagan,

Jr., Ryan Co, Edwin Torres:MEMBERS: Marita Lourdes Azur, Edizer Enriquez, Christian Cabrera, Jhundee

Guillermo

(1) NET INCOME TAX

DEFINITION: Means gross income lessdeductions and/or personal and

additional exemptions (Sec. 31, NIRC)

NET INCOME TAX FORMULA Entire IncomeLess:  Exclusions and Income subject

to Final Tax (e.g. PassiveIncome)

Gross IncomeLess:  Deductions (and/or additional

exemptions, if applicable)Net Taxable IncomeMultiply by: Tax Rate (%)

Net Income Tax DueLess: Tax Credit, if any

Tax Still due, if any

GROSS INCOME

DEFINITION:  Means all income derivedfrom whatever source, including but notlimited to the following (Sec. 32)a.  Compensation;b.  Gross income from profession, trade

or business;c.  Gains form dealings in property;

d.  Interests;e.  Rents;f.  Royalties;g.  Dividends;h.  Annuities;i.  Prizes and winnings;j.  Pensions;k.  Partner‘s share in the net income of

the general professional partnership

  See Annex D for detailed discussionof items.

K INDS OF DIVIDENDS 1.  Cash and Property Dividends

Individual Taxpayera.  From Domestic Corporations

  RC, NRC, RA –  10%  (Sec.24A)

  NRAETB – 20% (Sec. 25A2) 

  NRANETB –  25%  on grossincome (Sec. 25B) 

b.  From Foreign Corporations

  RC, NRC, RA, NRAETB –  5-32% (Sec. 24, 25A1)

  NRANETB –  25%  on grossincome (Sec. 25B)

Corporate Taxpayer

a. Foreign to Domestic Corp. – 32% (Sec. 32A)

b. Domestic to Domestic Corp. – Exempt; intercorporatedividends (Sec. 27D)

c. Domestic to Foreign Corp. -

  Resident Foreign Corp. – Exempt (Sec. 28 [A] 7d)

  Nonresident Foreign Corp. – 15% subject to the conditionstated in Sec. 28 [B] 5.Otherwise, it shall be taxedat 32%.  (See Commissioner

vs. Procter and Gamble, GRNo. 66838, December 2,1991)

2.  Stock DividendsGeneral rule: Not  subject to taxbecause it does not constituteincome; it represents transfer ofsurplus to capital account. (Sec.73B, 1997 NIRC)Exceptions:a.  Sec. 73B, 1997 NIRC

(1)  there is redemption or

cancellation(2)  the transaction involves

stock dividends, and(3)  the ―time and manner‖ of

the transaction makes it―essentially equivalent to adistribution of taxabledividends‖. (seeCommissioner vs. Court of

 Appeals, Court of Tax Appeals & ANSCOR, GR No.108576, Jan. 30, 1999) 

b.  the recipient is other than theshareholder (Bachrach vs.Seifert, GR No. L-2659, October12, 1950) 

c.  change in the stockholder‘sequity results by virtue of thestock dividend issuance.

3.  Liquidating Dividends –  When acorporation distributes all of itsassets in complete liquidation ordissolution, the gain realized orloss sustained by the

stockholder, whether individual

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San eda College of Law 29 

MEMORY AID IN TAXATION LAW 

TAXATION LAW COMMITTEE CHAIRPERSON: Charmaine Torres  ASST. CHAIRPERSON: Rhohail Castro EDP: Rachelle Saya SUBJECT HEADS: Jemina Sy, Casiano Ilagan,

Jr., Ryan Co, Edwin Torres:MEMBERS: Marita Lourdes Azur, Edizer Enriquez, Christian Cabrera, Jhundee

Guillermo

or corporation, is taxableincome or deductible loss, as thecase may be. (Sec. 73A) 

A liquidating dividend is not

a dividend income. Thetransaction is considered a saleor exchange of propertybetween the corporation and thestockholder.

EXCLUSIONS FROM GROSS INCOME NOTE :  Under the 1997 Tax Code, theterm ―exclusions‖ refers to items thatare not included in the determination ofgross income either because:

(a) they represent return of capitalor are not income, gain or profit; or

(b) they are subject to another kindof internal revenue tax; or

(c) they are income, gain or profitthat are expressly exempt form incometax under the constitution, tax treaty,Tax Code, or a general or special law.

1. Proceeds of life insurance  paid byreason of the death of the insured tohis estate or to any beneficiary(individual, partnership, orcorporation, but not a transferee fora valuable consideration), directly or

in trust. NOTE : if the proceeds are

retained by the insurer, the interestthereon is taxable;

2. Return of insurance premium;NOTE : if such amounts (when addedto amounts already received beforethe taxable year under suchcontracts) exceed the aggregatepremiums or considerations paid(whether or not paid during thetaxable year), then the excess shallbe included in the gross income.However, in the case of a transfer fora valuable consideration, byassignment or otherwise, of a lifeinsurance, endowment or annuitycontract, or any interest therein,only the actual value of suchconsideration and the amount of thepremiums and other sumssubsequently paid by the transfereeare exempt from taxation. No loss isrealized on surrender of a life

insurance policy for its surrendervalue.

3. Gift, bequest or devise

Gifts, bequests, and devises(which are subject to estate or gifttaxes) are excluded, but not theincome from such property. If theamount received is on account ofservices rendered, whetherconstituting a demandable debt ornot, or the use of the opportunity touse of capital, the receipt is income(Pirovano vs. Commissioner, 14 SCRA832)

4. Compensation for personal injuries

or sickness, whether by suit oragreementNOTE : The phrase ―personalinjuries‖ should be given arestrictive meaning to refer only tophysical injuries. The theory for thisis that recoupment on account ofsuch losses is not income, since it isnot derived from capital, from laboror from both combined. And thefact that the payment ofcompensation for such loss wasvoluntary does not change its

exempt status. It was in factcompensation for a loss, whichimpaired petitioner‘s capital. 

5. Income exempt under Treaty;

6. Retirement benefits, pension,gratuities, etc.a.  those derived under R.A. 7641

(pertains to private firmswithout retirement trust fund);

b.  those received by officials and

employees of private employersin accordance with a reasonableprivate benefit plan;Requisites:(1)  in the service of the same

employer for at least 10years;

(2)  at least 50 years old;(3)  must be availed of only once(4)  plan approved by the BIR

(R.R.2-98);c.  separation pay because of

death, sickness, or other

physical disability or for any

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San eda College of Law 30 

MEMORY AID IN TAXATION LAW 

TAXATION LAW COMMITTEE CHAIRPERSON: Charmaine Torres  ASST. CHAIRPERSON: Rhohail Castro EDP: Rachelle Saya SUBJECT HEADS: Jemina Sy, Casiano Ilagan,

Jr., Ryan Co, Edwin Torres:MEMBERS: Marita Lourdes Azur, Edizer Enriquez, Christian Cabrera, Jhundee

Guillermo

cause beyond the control of theofficial or employee (e.g.retrenchment, redundancy orcessation of business);

“for any cause beyond thecontrol of said official oremployee”  –  connotesinvoluntariness on the part ofthe official or employee;separation must not be asked orinitiated by the official oremployee.

d.  social security benefits,retirement gratuities, pensionsand other similar benefitsreceived by citizens and alienswho come to reside permanently

here from foreign sourcesprivate or public;

e.  benefits due to residents underthe laws of the U.S.administered by the U.S.Veterans Administration

f.  SSS benefits; andg.  GSIS benefits.

7. Miscellaneous itemsa.  Passive income derived in the

Philippines by:(1)  Foreign governments;

(2)  Financing institutionsowned, controlled orenjoying refinancing fromforeign governments

(3)  International or regionalfinancial institutionsestablished by foreigngovernments

b.  Income derived from any publicutility or from the exercise ofany governmental function;

c.  Prizes and awards madeprimarily in recognition ofreligious, charitable, scientific,educational, artistic, literary, orcivic achievementRequisites:

(1)  recipient was selectedwithout any action on hispart; and

(2)  recipient is not required torender substantial futureservices.

d.  Prizes and awards granted toathletes in sports competitions

and sanctioned by their nationalsports association ;

e.  13th  month pay and otherbenefits up to P30,000.00;

f.  GSIS,SSS, Medicare and uniondues of individuals;g.  Gains derived from debt

securities with a maturity ofmore than 5 years;

h.  Gains from redemption of sharesin Mutual Fund.

EXCLUSIONS VS. DEDUCTIONS 

Exclusions[Sec. 32(B)]

Deductions[Sec. 34]

Refer to flow ofwealth which are nottreated as part ofgross incomebecause:(1) exempted by thefundamental law; (2)exempted by statute;(3) do not comewithin the definitionof income

Refer to theamounts which thelaw allows to besubtracted fromgross income inorder to arrive atnet income

Pertain to thecomputation of gross

income

Pertain to thecomputation of the

net income

Something earned orreceived by thetaxpayer which donot form part of grossincome

Something spent orpaid in earning ofgross income

DEDUCTIONS 

DEFINITION: Items or amounts which thelaw allows to be deducted from gross

income in order to arrive at the taxableincome.

BASIC PRINCIPLES GOVERNING DEDUCTIONS a.  The taxpayer seeking a deduction

must point to some specificprovisions of the statute authorizingthe deduction; and

b.  He must be able to prove that he isentitled to the deduction authorizedor allowed. (Atlas ConsolidatedMining & Dev. Corp. vs.

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San eda College of Law 31 

MEMORY AID IN TAXATION LAW 

TAXATION LAW COMMITTEE CHAIRPERSON: Charmaine Torres  ASST. CHAIRPERSON: Rhohail Castro EDP: Rachelle Saya SUBJECT HEADS: Jemina Sy, Casiano Ilagan,

Jr., Ryan Co, Edwin Torres:MEMBERS: Marita Lourdes Azur, Edizer Enriquez, Christian Cabrera, Jhundee

Guillermo

Commissioner, GR No. L-26911, January 21, 1981)

c.  Any amount paid or payable which isotherwise deductible from, or taken

into account in computing grossincome or for which depreciation oramortization may be allowed, shallbe allowed as deduction only if it isshown that the tax required to bededucted and withheld therefromhas been paid to the BIR. [Sec.34(K), NIRC]  

NOTE:  Deductions for income taxpurposes partake of the nature of taxexemptions; hence, if tax exemptionsare to be strictly construed, then it

follows that deductions must also bestrictly construed.

TAXPAYERS WHO CANNOT AVAIL OF

DEDUCTIONS FROM GROSS INCOME 1.  Citizens and resident aliens whose

income is purely compensationincome (except for premiumpayments on health and/orhospitalization insurance);

2.  Non-resident aliens not engaged intrade or business in the Philippines;and

3.  Non-resident foreign corporation

CLASSES OF DEDUCTIONS 1.  Individuals

a.  with gross compensation incomefrom employer-employeerelationship only(1)  premium payments on health

and/or hospitalizationinsurance

(2)  personal additionalexemptions

b.  gross income from business or

practice of profession(1)  Optional Standard Deduction

(OSD)(2)  Itemized deductions(3)  premium payments on health

and/or hospitalizationinsurance

(4)  personal additionalexemptions

2. Corporations  Itemized Deductions

K INDS OF DEDUCTIONS a.  Optional standard deductions (OSD)

–10% of the gross income. The OSD may be availed of

only by individuals (exceptnonresident alien) who are not purely compensation incomeearners.

b.  Personal and additional exemptionsAvailable only to individuals

(business income and compensationincome earners).

NRAETB may be entitled topersonal exemptions (only) subjectto reciprocity, i.e.,a.  the country of which he is a

subject or citizen has an incometax law; and

b.  the income tax law of hiscountry allows personalexemption to citizens of thePhilippines not residing therein,but deriving income therefromand not to exceed the amountallowed in NIRC.

The personal exemption shall beequal to that allowed by the incometax law of his country to a citizen of

the Philippines not residing therein,or the amount provided in the NIRC,whichever is lower.

Individuals not entitled to theseexemptions:a.  Non-resident Alien not engaged

in trade or businessb.  Alien individual employed by

Regional or Area Headquarters ofMultinational Companies

c.  Alien individual employed byOffshore Banking Units

d.  Alien individual employed byPetroleum Service Contractorand Subcontractor

c.  Itemized deductionsa.  ordinary and   necessary

expensesb.  interestsc.  taxesd.  lossese.  bad debtsf.  depreciation of property;

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San eda College of Law 32 

MEMORY AID IN TAXATION LAW 

TAXATION LAW COMMITTEE CHAIRPERSON: Charmaine Torres  ASST. CHAIRPERSON: Rhohail Castro EDP: Rachelle Saya SUBJECT HEADS: Jemina Sy, Casiano Ilagan,

Jr., Ryan Co, Edwin Torres:MEMBERS: Marita Lourdes Azur, Edizer Enriquez, Christian Cabrera, Jhundee

Guillermo

g.  depletion of oil and gas wellsand mines;

h.  charitable and othercontributions;

i.  research and development;j.  pension trust contributions ofemployees; and

k.  premium payments on healthand/or hospitalization insurance.(This is the only deduction whicha compensation income earnermay claim as a deduction.)

d.  Special deductionsa. private proprietary educational

institutions and hospitals thatare non-profit (Sec. 34 A, 2) 

b. insurance companies (Sec. 37) c. estates and trusts (Sec. 61) 

PERSONAL EXEMPTIONS 

A. Amounts of Personal Exemptions[Sec. 35, NIRC] 1.  P 20,000  –  Single individual or

married individual judiciallydecreed legally separatedwithout qualified dependentchildren.

2.  P 25,000 – Head of the family or

married individual judiciallydecreed legally separatedwith qualified dependentchildren.

3.  P 32,000  –  For each  legallymarried individual.

Head of the Family1.  Unmarried or legally separated

person with one or both parents,or one or more brothers orsisters, or one or morelegitimate, recognized natural orlegally adopted children livingwith and dependent upon thetaxpayer for their chief support;and“Chief support”  means morethan one-half of therequirements for support.

2.  Where such brother / sister orchildren are not more than 21years of age, unmarried and notgainfully employed, or wheresuch dependents regardless of

age, are incapable of self – 

support because of mental orphysical defect.

Parents, brothers, sisters and senior

citizen with the tax payer, whetherrelative or not, may qualify thetaxpayer, to the personal exemption ofP25,000 as head of the family but not tothe additional exemption of P8,000 .

B. Additional Exemption forDependents [Sec. 35, NIRC]P 8,000 –  For each of the qualified

dependent children notexceeding four (4) innumber.

The additional exemption refers

only to qualified dependent childrensuch as legitimate, recognized natural,illegitimate and legally adopted.

The proper claimant of theadditional exemption is the husbandbeing the head of the family exceptunder the following cases:

1.  Husband is unemployed2.  Husband is working abroad like

an OFW or a seaman3.  Husband explicitly waived his

right of the exemption in favorof his wife in the withholding

exemption certificate.

A Senior Citizen is:1.  any resident citizen of the

Philippines2.  at least sixty 60 years old,

including those who have retiredfrom both government officesand private enterprises, and

3.  has an income of not more thanSixty thousand pesos (60,000)per annum subject to the reviewof the National Economic

Development Authority (NEDA)every three years.

Parents and dependents qualifythe taxpayer, to the personalexemption of P25,000 as head of thefamily but not to the additionalexemption of P8,000 .

NOTE: NRAETB may deduct personalexemption (not additionalexemption), but only to the extentallowed by his country to Filipinos

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San eda College of Law 33 

MEMORY AID IN TAXATION LAW 

TAXATION LAW COMMITTEE CHAIRPERSON: Charmaine Torres  ASST. CHAIRPERSON: Rhohail Castro EDP: Rachelle Saya SUBJECT HEADS: Jemina Sy, Casiano Ilagan,

Jr., Ryan Co, Edwin Torres:MEMBERS: Marita Lourdes Azur, Edizer Enriquez, Christian Cabrera, Jhundee

Guillermo

not residing therein, and shall notexceed the aforementionedamounts.  NRANETB cannot claimany personal or additional

exemptions.

C. Change of Status [Sec. 35, NIRC] 1.  If the taxpayer should marry or

should have additionaldependents during the taxableyear, he may claim thecorresponding exemptions in fullfor such year.

2.  If the taxpayer should die duringthe taxable year, his estate mayclaim the correspondingexemptions as if he died at the

close of such year.3.  If the spouse or any dependent

should die or any dependentshould marry or become twenty-one years old during the year, orshould become gainfullyemployed, the taxpayer mayclaim the exemptions as if thespouse or dependent died or asif such dependent married,became twenty one years old orbecame gainfully employed atthe close of such year.

4.  For any other event and forwhich there are no specific rulesapplicable from the above-mentioned, the status of thetaxpayer at the end of the yearshall determine his exemptions.(strictly construed against thetaxpayer)Examples:

  became legally separated – can only claim P 20,000

  25 years old child becameincapacitated – cannot claimadditional exemption

ITEMIZED DEDUCTIONS 

A.  ORDINARY AND NECESSARYEXPENSES

NECESSARY EXPENSE  –  appropriate andhelpful in the development of taxpayer'sbusiness and are intended to minimizelosses or to increase profits. These arethe day-to-day expenses.

ORDINARY EXPENSE  –  normal or usual inrelation to the taxpayer‘s business andthe surrounding circumstance.

R EQUISITES OF BUSINESS EXPENSE TO BEDEDUCTIBLE 1.  ordinary and necessary;2.  paid or incurred w/in the taxable

year;3.  paid or incurred in carrying on a

trade or business;4.  substantiated with official receipts

or other adequate records.5.  if subject to withholding taxes proof

of payment to the Bureau of InternalRevenue must be shown.

6.  must be reasonable (when the

expense is not lavish, extravagant orexcessive under the circumstances)

7. must not be contrary to law, publicpolicy or morals.

NOTE:  While illegal income will formpart of income of the taxpayer,expenses which constitute bribe,kickback and other similar payment,being against law and public policy arenot deductible from gross income.(Subsec. A, 1, c)

CAPITAL EXPENDITURE  –  An expenditurethat benefits not only the current periodbut also future periods. It is notdeductible but depreciable, except, ifthe taxpayer is a non-profit proprietaryeducational institution which may electeither to deduct the capital expense ordepreciate it.

  See Annex E –  Business Expenses 

  See Annex F – Ceiling on―Entertainment, Amusement and

Recreational Expenses‖ 

B.  INTEREST

INTEREST – shall refer to the payment forthe use or forbearance or detention ofmoney, regardless of the name it iscalled or denominated. It includes theamount paid for the borrower's use of,money during the term of the loan, aswell as for his detention of money afterthe due date for its repayment.

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San eda College of Law 34 

MEMORY AID IN TAXATION LAW 

TAXATION LAW COMMITTEE CHAIRPERSON: Charmaine Torres  ASST. CHAIRPERSON: Rhohail Castro EDP: Rachelle Saya SUBJECT HEADS: Jemina Sy, Casiano Ilagan,

Jr., Ryan Co, Edwin Torres:MEMBERS: Marita Lourdes Azur, Edizer Enriquez, Christian Cabrera, Jhundee

Guillermo

R EQUISITES FOR DEDUCTIBILITY (REV.  REG. NO. 13-2000)1.  There must be an indebtedness;2.  There should be an interest

expense paid or incurred uponsuch indebtedness;3.  The indebtedness must be that of

the taxpayer;4.  The indebtedness must be connected

with the taxpayer's trade, businessor exercise of profession;

5.  The interest expense must have beenpaid or incurred during the taxableyear;

6.  The interest must have beenstipulated in writing;

7.  The interest must be legally due;

8.  The interest arrangement must notbe between related taxpayers;

9.  The interest must not be incurred tofinance petroleum operations; and

10.  In case of interest incurred toacquire property used in trade,business or exercise of profession,the same, was not treated as acapital expenditure.

11. The interest is not expresslydisallowed by law to be deductedfrom gross income of the taxpayer.

R ULES ON DEDUCTIBILITY OF INTEREST

EXPENSE General Rule - In general, the amount ofinterest expense paid or incurred withina taxable year of indebtedness inconnection with the taxpayer's tradebusiness or exercise of profession, shallbe allowed as a deduction from thetaxpayer's gross income.

Limitation  - The amount of interestexpense paid incurred by a taxpayer inconnection with his trade, business or

exercise of a profession from an existingindebtedness shall be reduced by anamount equal the following percentagesof interest income earned which hadbeen subjected to final withholdingdepending on the year when the interestincome earned, viz:

38% - beginning January 1, 2000 andthereafter

Aim of Limitation:  To discourage so-called ―back-to-back‖ loans where ataxpayer secures a loan from a bank,

turns around and invests the loanproceeds in money market placements.By imposing a limit as to the amount ofinterest expense that can be deducted

from gross income, the previous practiceof tax arbitrage was absolutely nullified.

Tax Arbitrage  –  is a method ofborrowing without entering into adebtor/creditor relationship, often toresolve financing and exchange controlproblems. In tax cases, back-to-backloan is used to take advantage of the lower of tax on interest income and ahigher rate of tax on interest expensededuction.

Illustration:On June 1, 2000 Company X has:

1.  Obtained a loan from ABC FinancingCorporation in connection with theoperation of its business and itsinterest expense on the loanamounted to P 120,000.

2.  Deposit account in DEF Bank andderived interest income thereofamounting to P200,000 on which thefinal tax of P40,000 has beenwithheld.

Assume that Company X‘s net

income before the deduction ofinterest expense is P500,000.

The deductible expense shall becomputed as follows:

Year 2000

Net Income beforeinterest expense P500,000Less:  Interest Expense P120,000

Less: 38% of interestincome from deposit

(38% x P200,000) 76,000Deductible InterestExpense 44,000Taxable Income P456,000

Deductible Interest Expense 1.  Interest on taxes, such as those paid

for deficiency or delinquency, sincetaxes are considered indebtedness(provided that the tax is adeductible tax, except in the case ofincome tax). However, fines,

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San eda College of Law 35 

MEMORY AID IN TAXATION LAW 

TAXATION LAW COMMITTEE CHAIRPERSON: Charmaine Torres  ASST. CHAIRPERSON: Rhohail Castro EDP: Rachelle Saya SUBJECT HEADS: Jemina Sy, Casiano Ilagan,

Jr., Ryan Co, Edwin Torres:MEMBERS: Marita Lourdes Azur, Edizer Enriquez, Christian Cabrera, Jhundee

Guillermo

penalties, and surcharges on accountof taxes are not deductible. Theinterest on unpaid business tax shallnot be subjected to the limitation

on deduction. 2.  Interest paid by a corporation onscrip dividends

3.  Interest-on deposits paid byauthorized banks of the BangkoSentral ng Pilipinas to depositors,if it is shown that the tax on suchinterest was withheld.

4.  Interest paid by a corporate taxpayerwho is liable on a mortgage upon realproperty of which the saidcorporation is the legal or equitableowner, even though it is not directly

liable for the indebtedness.

N ON -DEDUCTIBLE INTEREST EXPENSE 1.   An individual taxpayer reporting

income on the cash basis incurs anindebtedness on which an interest ispaid in advance through discount orotherwise:

  allowed as a deduction in theyear the indebtedness is paid

  if the indebtedness is payable periodic amortization  on, theamount of interest which

corresponds to the amount ofthe principal amortized or paidduring the year shall be allowedas deduction in such taxableyear.

2.  Interest paid on indebtednessbetween related taxpayer

3.  If the indebtedness is incurred tofinance petroleum exploration

4.  Interest on preferred stock, whichin reality is dividend

5.  Interest on unpaid salaries andbonuses

6.  Interest calculated for cost keepingon account of capital or surplusinvested in business which does notrepresent charges arising underinterest-bearing obligation.

7.  Interest paid when there is nostipulation for the payment thereof.

OPTIONAL TREATMENT OF INTEREST EXPENSE At the option of the taxpayer,

interest incurred to acquire propertyused in trade or business  may be

allowed as a deduction or treated as

capital expenditure.  [Sec 34 (B)(3),NIRC]  

C.  TAXES

Taxes mean TAXES PROPER,  andtherefore no deductions are allowed for:1.  interest2.  surcharges3.  penalties or fines incident to

delinquency (Sec. 80, Rev. Reg. 2)

R EQUISITES FOR DEDUCTIBILITY 1.  must be in connection with

taxpayer‘s business; 2.  tax must be imposed by law on, and

payable by taxpayer (direct tax);

and3.  paid or incurred during the taxable

year.

TAXES N OT  DEDUCTIBLE 1.  income tax;2.  estate and donor‘s tax; 3.  special assessments;4.  excess electric consumption tax;5.  foreign income tax, war profits and

excess profits tax, if the taxpayermakes use of tax credit; and

6.  final taxes, being in the nature of

income tax.

NOTE:  Taxes allowed as deductions,when refunded or credited, shall beincluded as part of gross income in theyear of receipt to the extent of theincome tax benefit of said deduction.(Tax Benefit Rule)

For NRAETB and RFC, taxes paid orincurred are allowed as deductions onlyif and to the extent that they areconnected from income within thePhilippines.

EXCEPTIONS  to requirement that onlysuch persons on whom the tax is imposedby law can claim deduction thereof:1.  Taxes of shareholder upon his

interest as such and paid by thecorporation without reimbursementfrom him, can be claimed by thecorporation as deduction.

2.  A corporation paying the tax for theholder its bonds or other obligation

containing a tax-free covenant

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San eda College of Law 36 

MEMORY AID IN TAXATION LAW 

TAXATION LAW COMMITTEE CHAIRPERSON: Charmaine Torres  ASST. CHAIRPERSON: Rhohail Castro EDP: Rachelle Saya SUBJECT HEADS: Jemina Sy, Casiano Ilagan,

Jr., Ryan Co, Edwin Torres:MEMBERS: Marita Lourdes Azur, Edizer Enriquez, Christian Cabrera, Jhundee

Guillermo

clause cannot claim deduction forsuch taxes paid by it pursuant tosuch covenant.

TAX CREDIT

DEFINITION:  right of an income taxpayerto deduct from income tax payable theforeign income tax he has paid to hisforeign country subject to limitation.

WHO CAN CLAIM TAX CREDIT 1.  resident citizens of the Philippines2.  resident aliens under the principle of

reciprocity3.  domestic corporations which include

partnerships except general

professional partnership4.  beneficiaries of estates and trusts5.  members of beneficiaries of local

partnerships

WHO ARE N OT  ENTITLED TO TAX CREDIT 1.  non-resident citizens2.  resident aliens, if without

reciprocity3.  resident aliens whose income is

derived solely from sources withinthe Philippines

4.  foreign corporations (resident and

non-resident)

FORMULA FOR COMPUTING LIMITATION 1.  Per country limitation

Taxableincome fromforeign country X Phil. = Tax Credit

Taxable income income tax Limitfrom all sources

2.  Over-all limitationTaxable

income from

outside sources X Phil. = Tax CreditTaxable income income tax Limitfrom all sources

The allowable tax credit is the “loweramount” between the tax creditcomputed under No. 1 and No. 2.

WHEN CREDIT FOR TAXES MAY BE TAKEN The credit for taxes provided by

Section 30(C)(3) to (9) may ordinarily betaken either in the return for the year inwhich the taxes accrued or on which the

taxes were paid, dependent upon

whether the accounts of the taxpayerare kept and his returns filed upon theaccrual basis or upon cash receipts anddisbursements basis.

LIMITATIONS ON CREDIT FOR FOREIGN TAXES 1)  The amount of credit in respect to

the taxes paid or accrued to anycountry shall not exceed the sameproportion of the tax against whichsuch credit is taken, which thetaxpayer‘s net income from sourceswithin such country taxable underTitle II (income Tax) bears to hisentire net income for the sametaxable year; and

2)  The total amount of the credit shall

not exceed the same proportion ofthe tax against which such credit istaken, which the taxpayer‘s netincome from sources without thePhilippines taxable under Title II(Income Tax) bears to his entire netincome for the same taxable year.

D.  LOSSES

LOSSES  –  refer to such losses which donot come under the category of baddebts, inventory losses, depreciation,

etc., and which arise in taxpayer'sprofession, trade or business.

R EQUISITES FOR DEDUCTIBILITY 1.  Actually sustained during the taxable

year2.  Connected with the trade, business

or profession3.  Evidenced by a close and completed

transaction4.  Not compensated for by insurance or

other form of indemnity5.  Not claimed as a deduction for

estate tax purposes6.  Notice of loss must be filed with the

Bureau of Internal Revenue within45  days from the date of discovery  of the casualty or robbery, theft orembezzlement.

NOTE:  The taxpayer‘s failure to recordin his books the alleged loss proves thatthe loss had not been suffered, hence,not deductible. (City Lumber vs.Domingo and Court of Tax Appeals, GR

No. L-18611, January 30, 1964)

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San eda College of Law 37 

MEMORY AID IN TAXATION LAW 

TAXATION LAW COMMITTEE CHAIRPERSON: Charmaine Torres  ASST. CHAIRPERSON: Rhohail Castro EDP: Rachelle Saya SUBJECT HEADS: Jemina Sy, Casiano Ilagan,

Jr., Ryan Co, Edwin Torres:MEMBERS: Marita Lourdes Azur, Edizer Enriquez, Christian Cabrera, Jhundee

Guillermo

CATEGORY AND TYPES OF LOSSES 1.  ORDINARY LOSSES 

a.  Incurred in trade or business, orpractice of profession

  Net operating loss carry-over  (NOLCO)

  Refers to the excess of allowabledeductions over gross income ofthe business for any taxableyear, which had not beenpreviously offset as deductionfrom gross income.

  Can be carried over as adeduction from gross income forthe next 3 consecutive yearsimmediately following the yearof such loss.

  For mines, other that oil and gaswell, net operating loss incurredin any of the first ten years ofoperation may be carried overfor the next 5 years.

  Requirements: (1)  The taxpayer was not

exempt from income tax inthe year of such netoperating loss;

(2)  The loss was not incurred in

a taxable year during thetaxpayer was exempt fromincome tax; and

(3)  There has been nosubstantial change in theownership of the business orenterprise.There is no substantialchange in the ownership ofthe business when:(a) not less than 75% in

nominal value of theoutstanding issued shares

is held by or on behalf ofthe same persons; or

(b) not less than 75% of thepaid up capital is held byor on behalf of the sameperson.

NOTE:  The 3 year period shallcontinue to run notwithstandingthat the corporation paid its taxesunder MCIT, or that the individualavailed the 10% OSD.

  See Annex S for illustration.

b.  Of property connected, with thetrade, business or profession, if

the loss arises from fires,storms, shipwreck or othercasualties, or from robbery,theft, or embezzlement.(1)  Total destruction

The replacement  cost torestore the property to itsnormal operating condition,but in no case shall thedeductible loss be more thanthe net book value of theproperty as a whole,immediately before

casualty.(2)  Partial Destruction

The excess over the netbook value immediatelybefore the casualty shouldbe capitalized, subject todepreciation over theremaining useful life of theproperty.

2.  CAPITAL LOSSES (LOSSES ARE DEDUCTIBLE

ONLY TO THE EXTENT OF CAPITAL GAINS)a.  Losses from sale or exchange of

capital assetsb.  Losses resulting from securities

becoming worthless and whichare capital assets.

c.  Losses from short sales ofproperty.

d.  Losses due to failure to exerciseprivilege or option to buy or sellproperty.

3.  SPECIAL K INDS OF LOSSES a.  Wagering losses - deductible only to

the extent of gain or winnings. [Sec.

34 (D)(6)]; deemed to apply only toindividuals

b.  Losses on wash sales of stocks - notdeductible because these areconsidered to be artificial loss.

Wash sales  –  a sale or otherdisposition of stock or securitieswhere substantially identicalsecurities are acquired or purchasedwithin 61-day period, beginning 30days before the sale and ending 30days after the sale. [Sec. 38]  

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San eda College of Law 38 

MEMORY AID IN TAXATION LAW 

TAXATION LAW COMMITTEE CHAIRPERSON: Charmaine Torres  ASST. CHAIRPERSON: Rhohail Castro EDP: Rachelle Saya SUBJECT HEADS: Jemina Sy, Casiano Ilagan,

Jr., Ryan Co, Edwin Torres:MEMBERS: Marita Lourdes Azur, Edizer Enriquez, Christian Cabrera, Jhundee

Guillermo

General rule: Losses from wash salesare not deductible.Exception: When the sale is made by

a dealer   in stock or securities andwith respect to a transaction made inthe ordinary course of the business ofsuch dealer, losses from such sale isdeductible.Elements of Wash Sales:(1)  The sale or other disposition of

stock resulted to a loss;(2)  There was an acquisition or

contract or option for acquisitionof stock or securities within 30days before the sale or 30 daysafter the sale; and

(3)  The stock or securities sold weresubstantially the same as thoseacquired within the 61-dayperiod.

c.  Abandonment losses  in petroleumoperation and producing well.(1)  In case a contract area where

petroleum operations areundertaken is partially or whollyabandoned, all accumulatedexploration and developmentexpenditures pertaining thereto

shall be allowed as a deduction.(2)  In case a producing well is

abandoned, the unamortized costthereof, as well as theundepreciated cost of equipmentdirectly used therein, shall beallowed as deduction in the yearthe well, equipment or facility isabandoned.

d. Losses due to voluntary removal of  building  incident to renewal orreplacements - deductible expense

from gross income.

e. Loss of useful value of capitalassets  due to charges in businessconditions - deductible expense onlyto the extent of actual loss sustained(after adjustment for improvement,depreciation and salvage value)

f. Losses from sales or exchanges of   property between relatedtaxpayers -losses of this nature is notdeductible but gains are taxable.

g. Losses of farmers - if incurred in theoperation of farm business, it isdeductible.

h. Loss in shrinkage in value of stock – if the stock of the corporation becomesworthless, the cost or other basis may bededucted by the owner in the taxableyear in which the stock of itsworthlessness is made. Any amountclaimed as a loss on account of shrinkagein value of the stock through fluctuation

in the market or otherwise cannot bededucted from gross income.

E.  BAD DEBTS

BAD DEBTS  –  shall refer to those debtsresulting from the worthlessness oruncollectibility, in whole or in part, ofamounts due the taxpayer by others,arising from money lent or fromuncollectible amounts of income fromgoods sold or services rendered.

R EQUISITES FOR DEDUCTIBILITY 1.  Existing indebtedness due to the

taxpayer which must be valid andlegally demandable;

2.  Connected with the taxpayer'strade, business or practice ofprofession;

3.  Must not be sustained in atransaction entered into betweenrelated parties;

4.  Actually ascertained to be worthlessand uncollectible as of the end ofthe taxable year.; and

5.  Actually charged off in the books ofaccounts of the taxpayer as of theend of the taxable year.

EQUITABLE DOCTRINE OF TAX BENEFIT

A recovery of bad debts previouslydeducted from gross income constitutestaxable income if in the year theaccount was written off, the deductionresulted in a tax benefit. (Tax BenefitRule) 

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San eda College of Law 39 

MEMORY AID IN TAXATION LAW 

TAXATION LAW COMMITTEE CHAIRPERSON: Charmaine Torres  ASST. CHAIRPERSON: Rhohail Castro EDP: Rachelle Saya SUBJECT HEADS: Jemina Sy, Casiano Ilagan,

Jr., Ryan Co, Edwin Torres:MEMBERS: Marita Lourdes Azur, Edizer Enriquez, Christian Cabrera, Jhundee

Guillermo

Illustration:Case A Case B Case C

Netincome(loss)

beforewrite offfor baddebts

P10,000 (P 9,000) P 5,000

Less:Accountswritten offas baddebts 3,000 2,000 6,000Final NetIncome(Loss) P 7,000 (P11,000) (P1,000)Bad debtsrecoveryin a subse-quent year 3,000 2, 000 6, 000

TAXABLEINCOMEupon thebad debtrecovery P3,000 P - 0 - P5,000

ASCERTAINMENT OF WORTHLESSNESS

  Proof of Two Facts:1.  taxpayer did in fact ascertain the

debt to be worthless, in the yearfor which deduction is sought,

2.  that in so doing, he acted in goodfaith. (Collector vs. GoodrichInternational Rubber, GR No. L-22265, Dec. 22, 1967)

  Depends upon the particular facts andthe circumstances of the case. 

  Good faith does not require that thetaxpayer be an ―incorrigible optimist‖but on the other hand, he may not beunduly pessimistic.

F.  DEPRECIATION

DEPRECIATION  –  the gradual diminution inthe service or useful value of tangible

property due from exhaustion, wear andtear and normal obsolescence.

The term also applies toamortization of intangible assets, theuse of which in trade or business is oflimited duration.

R EQUISITES FOR DEDUCTIBILITY 1.  The allowance for depreciation

must be reasonable.2.  It must be for property use or

employment in trade or business or

out of its not being usedtemporarily during the year.

3.  The allowance must be charged offwithin the taxable, year.

4.  Schedule on the allowance must beattached to the return.

PROPERTY HELD BY ONE PERSON FOR LIFE

WITH THE R EMAINDER TO ANOTHER PERSON The deduction shall be computed as

if the life tenant was the absolute ownerof the property and, as such the expenseshall accrue to him.

PROPERTY HELD IN TRUST Allowable deduction shall be

apportioned between the income

beneficiaries, and the trustees in 

accordance with the pertinent provisionsof the instrument creating or in theabsence of such provisions, on the basisof the trust income allowable to each.

METHODS OF DEPRECIATION The term "reasonable allowance"

shall include (but not limited to) anallowance computed in accordance,with the regulations prescribed by theDepartment of Finance, under any of thefollowing methods.

1.  Straight-line method2.  Declining-balance method3.  Sum of the years-digit method4.  Any other method which may be

prescribed by the Department ofFinance upon recommendation ofthe Commissioner of InternalRevenue.

METHODS OF DEPRECIATION 

Kind Formula1)Straight-line cost- salvage value

estimated life

2)Decliningbalance

cost – depreciation x Rateestimated life

3)Sum of the yearsdigits (SYD)

nth period x cost- salvageSYD

Illustration:  A machine is used in themanufacturing department ofCorporation A, compute the depreciationper annum with the following facts:Cost = P15,000 Salvage

Value= P5,000

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San eda College of Law 40 

MEMORY AID IN TAXATION LAW 

TAXATION LAW COMMITTEE CHAIRPERSON: Charmaine Torres  ASST. CHAIRPERSON: Rhohail Castro EDP: Rachelle Saya SUBJECT HEADS: Jemina Sy, Casiano Ilagan,

Jr., Ryan Co, Edwin Torres:MEMBERS: Marita Lourdes Azur, Edizer Enriquez, Christian Cabrera, Jhundee

Guillermo

1.  Straight Line Method  with estimatedlife = 5 years15,000 – 5,000 = P2,000

5 years

2.  Declining balance with rate of 200%Year 1: 15,000 – 0 x 200% = P6,000

5Year 2:15,000–6,000 x 200% =P3,600

5

3.  Sum of the years digitsSYD for 5 years = 5+4+3+2+1 or 15Year 1: 5/15 x (15,000 – 5,000)

= P3,333.33Year 2: 4/15 x (15,000 – 5,000)

= P2,666.67

AGREEMENT AS TO USEFUL LIFE ON WHICH

DEPRECIATION R ATE IS BASED The Bureau of Internal Revenue and

the taxpayer may agree in writing on theuseful life of the property to bedepreciated. The agreed rate may bemodified if justified by facts orcircumstances. The change shall not beeffective before the taxable year onwhich notice in writing by certified mailor registered mail is served by the partyinitiating.

SPECIAL TYPES OF DEPRECIATION 1.  Petroleum Operations

  Depreciation of all propertiesdirectly related to production ofpetroleum shall be allowedunder straight-line (SL) ordeclining balance (DB) method

  May shift from DB to SL method

  Useful life: 10 years or shorterlife as allowed by theCommissioner

  Useful life of property not

directly related to production: 5years under straight line method2.  Mining Operations

  Depreciation on all properties inmining operations other thanpetroleum operations at thenormal rate if expected life isless than 10 years.

  If expected life is more than 10years, depreciation shall be anynumber of years between 5years and the expected life.

3.  Depreciation deductible by non-resident aliens engaged intrade/business or non-residentcorporation

a.  Only when such property islocated in the Philippines.

G.  DEPLETION OF OIL AND GASWELLS AND MINES

DEPLETION  - exhaustion of naturalresources as in mines, oil, and gas wells.The natural resources are called―wasting assets‖. As the physical unitsrepresenting such resources areextracted and sold, such assets movetowards exhaustion.

Known as cost of depletionallowance for mines, oil gas wells andother natural deposits starting calendaryear 1976 and fiscal year beginning July1,1975

TO WHOM ALLOWED Only mining entities owning

economic interest in mineral deposits.Economic interest means interest in

minerals in place investment therein orsecured by operating or contractagreement for which income is derived,and return of capital expected, from theextraction of mineral.

Mere economic or pecuniaryadvantage to be derived by productionby one who has no capital investment inthe mineral deposit does not amount toeconomic interest.

FEATURES 1.  Intangible Exploration and

development drilling cost in

petroleum exploration shall betreated either as:a.  revenue expenditures; orb.  capital expenditures

2.  The total amount deductible forexploration and developmentexpenditures shall not exceed 50% ofnet income from mining operation.The excess shall be carried forwardto the succeeding year until fullydeducted.

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San eda College of Law 41 

MEMORY AID IN TAXATION LAW 

TAXATION LAW COMMITTEE CHAIRPERSON: Charmaine Torres  ASST. CHAIRPERSON: Rhohail Castro EDP: Rachelle Saya SUBJECT HEADS: Jemina Sy, Casiano Ilagan,

Jr., Ryan Co, Edwin Torres:MEMBERS: Marita Lourdes Azur, Edizer Enriquez, Christian Cabrera, Jhundee

Guillermo

H.  CHARITABLE AND OTHERCONTRIBUTIONS

TAX TREATMENT 

A. DeductibleIn Full

B. DeductibleSubject To Limitation

1)  Recipient is:(a) Government of

thePhilippines;

(b) Any of itsagencies orpoliticalsubdivisions;or

(c)  Any fully-

ownedgovernmentcorporation

For priority activity in:

1.  Science;2.  Education3.  Culture4.  Health5.  Economic

Development6.  Human

Settlement

7. Youth andSportsDevelopment

1)  Recipient is:(a)  Government of

the Philippines;(b)  Any of its

agencies orpoliticalsubdivisions

For a non-priorityactivity in any of the

areas mentioned in A,and exclusively for apublic purpose.

2)  Recipient is aforeign orinternationalorganization withan agreementwith thePhilippineGovernment ondeductibility, orin accordance

with special law.

2) Non-governmentorganizations

3)  Recipient is anaccredited non-governmentorganization,organized/ operatedfor (purposes):

3)  Recipient is anaccredited domesticcorporation orassociationorganized/operatedfor (purposes):

(a)  Scientific;(b)  Educational;(c)  Cultural;(d)  Character

building/youthand sportsdevelopment

(e)  Charitable(f)  Social welfare(g)  Health(h)  Research

And satisfying thefollowingconditions:

1.  The donationmust be utilizednot later than

the 15th day ofthe 3rd monthfollowing theclose of itstaxable year.

2.  Theadministrativeexpense must notexceed 30% oftotal expenses.

3.  Upon dissolution,assets must bedistributed toanother non-

profit domesticcorporation or tothe state.

(a)  Scientific(b)  Educational;(c)  Cultural;(d)  Youth and

sportsdevelopment

(e)  Charitable(f)  Social welfare(g)  Religious (h)  Rehabilitation

of Veterans 

If the conditionsin Table A is notcomplied with:

Subject tolimitation:

(a)  Individual -10% taxableincomefrom tradebusiness orprofessionbeforecontribution

(b)  Corporation- 5% taxableincomefrom tradebusiness orprofession

beforecontribution

R EQUISITES FOR DEDUCTIBILITY 1.  The contribution or gift must be

actually paid.2.  It must be given to the organizations

specified in the code.3.  The net income of the institution

must not inure to the benefit of anyprivate stockholder or individual.

VALUATION Charitable contribution of  property  

other than money shall be based on theacquisition cost of said property.

I.  RESEARCH AND DEVELOPMENT(R&D)

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San eda College of Law 42 

MEMORY AID IN TAXATION LAW 

TAXATION LAW COMMITTEE CHAIRPERSON: Charmaine Torres  ASST. CHAIRPERSON: Rhohail Castro EDP: Rachelle Saya SUBJECT HEADS: Jemina Sy, Casiano Ilagan,

Jr., Ryan Co, Edwin Torres:MEMBERS: Marita Lourdes Azur, Edizer Enriquez, Christian Cabrera, Jhundee

Guillermo

TAX TREATMENT

Either as:1.  Revenue Expenditures

Requisites:

a.  Paid or incurred during thetaxable yearb.  Ordinary and necessary expenses

in connection with tradebusiness or profession

c.  Not chargeable to capitalaccount

2.  Deferred ExpensesRequisites:a.  Paid or incurred in connection

with trade, business, orprofession

b.  Not treated as expense

c.  Chargeable to capital accountbut not chargeable to propertysubject to depreciation ordepletion.

Amount deductible:

Amount ratably distributed over 

a period of 60 months beginning withthe month taxpayer realizedbenefits from such expenditures.

EXCLUSION FROM R ESEARCH AND

DEVELOPMENT EXPENDITURES 

1.  Any expenditure for the acquisitionor improvement of land or for theimprovement of property to be usedin connection with research anddevelopment subject to depreciationand depletion.

2.  Any expenditure paid or incurred forthe purpose of ascertaining theexistence, location, extent orquality of any deposit of ore or othermineral including oil or gas.

J.  PENSION TRUST CONTRIBUTIONS

PENSION TRUST CONTRIBUTIONS  –  adeduction applicable only to theemployer on account of its contributionto a private pension plan for the benefitof its employee. This deduction is purelybusiness in character.

R EQUISITES FOR DEDUCTIBILITY 1.  The employer must have established

a pension or retirement plan to

provide for the payment ofreasonable pensions to hisemployees;

2.  The pension plan is reasonable and

actuarially sound;3.  It must be funded by the employer;4.  The amount contributed must be no

longer subject to the control anddisposition of the employer;

5.  The payment has not yet beenallowed as a deduction; and

6.  The deduction is apportioned inequal parts over a period of 10consecutive years beginning with theyear in which the transfer orpayment is made.

SUMMARY OF R ULES ON R ETIREMENT BENEFITSPLAN / PENSION TRUST 1.  Exempt from Income Tax – 

employees‘ trust under Sec. 60(B) 2.  Exclusion from Gross Income – 

amount received by the employeefrom the fund upon compliance ofcertain conditions under Sec.32(B)(6) 

3.  Deduction from Gross Income – a.  Amounts contributed by the

employer during the taxableyear into the pension plan to

cover the pension liabilityaccruing during the year – considered as ordinary andnecessary expenses under Sec.34(A)(1) 

b.  1/10 of the reasonable amountpaid by the employer to coverpension liability applicable tothe years prior to the taxableyear, or so paid to place thetrust in a sound financial basis – deductible under Sec. 34(J) 

K.  PREMIUM PAYMENTSON HEALTH AND/OR

HOSPITALIZATION INSURANCE

DEFINITION:  It is an amount of premiumon health and/or hospitalization paid byan individual taxpayer (head of family ormarried), for himself and members of hisfamily during the taxable year.

R EQUISITES FOR DEDUCTIBILITY 1.  Insurance must have actually been

taken

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San eda College of Law 43 

MEMORY AID IN TAXATION LAW 

TAXATION LAW COMMITTEE CHAIRPERSON: Charmaine Torres  ASST. CHAIRPERSON: Rhohail Castro EDP: Rachelle Saya SUBJECT HEADS: Jemina Sy, Casiano Ilagan,

Jr., Ryan Co, Edwin Torres:MEMBERS: Marita Lourdes Azur, Edizer Enriquez, Christian Cabrera, Jhundee

Guillermo

2.  The amount of premium deductibledoes not exceed P2,400 per familyor P200 per month during thetaxable ear.

3.  That said family has a gross incomeof not more than P250,000 for thetaxable year.

4.  In case of married individual, onlythe spouse claiming additionalexemption shall be entitled to this -deduction.

WHO MAY AVAIL OF THE DEDUCTION 1.  Individual taxpayers earning purely

compensation income during theyear.

2.  Individual taxpayer earning business

income or in practice of hisprofession whether availing ofitemized or optional standarddeductions during the year.

3.  Individual taxpayer earning bothcompensation, and business orpractice of profession during theyear.

NON-DEDUCTIBLE EXPENSES

R EASONS FOR NON-DEDUCTIBILITY 1.  Personal expenses

2.  Capital expenditures3.  Items not normally subject to

income tax and therefore are notdeductible.

4.  Items taken advantage of by thetaxpayer to avoid payment ofincome tax.

SPECIFIC ITEMS (SECTION 36)1.  Personal, living or family expenses;2.  Amount paid out for new buildings or

for permanent improvements, orbetterment made to increase thevalue of any property or estate,

Except  that intangible drillingand development cost incurred inpetroleum operations aredeductible;

3.  Amount expended in restoringproperty or in making good theexhaustion thereof for which anallowance has been made;

4.  Premiums paid on any life insurancepolicy covering the life of any officeror employee, or of any person

financially interested in any trade or

business carried on by the taxpayer,individual or corporate, when thetaxpayer is directly or indirectly abeneficiary under such policy. [Sec.

36]5.  Losses from sales or exchanges ofproperty between related taxpayers.[S ec. 36]

TRANSACTIONS BETWEEN R ELATED PARTIES 1.  Between members of the family;

“Family”  includes only thebrothers, sisters (whether by thewhole or half blood), spouse,ancestors, and linealdescendants of the taxpayer.

2.  Except in the case of distributions in

liquidation:a.  between an individual and a

corporation more than 50% invalue of the outstanding stock ofwhich is owned, directly orindirectly, by or for suchindividual;

b.  between two corporations morethan 50% in value of theoutstanding stock of each ofwhich is owned, directly orindirectly, by or for the sameindividual, if either one of such

corporations, with respect to thetaxable year of the corporationpreceding the date of the sale ofexchange was a personal holdingcompany or a foreign personalholding company; or

3.  Between the grantor and a fiduciaryof any trust;

4.  Between the fiduciary of a trust andthe fiduciary of another trust if thesame person is a grantor withrespect to each trust;

5.  Between a fiduciary of a trust and a

beneficiary of such trust.

TAX CONSEQUENCES The following are not deductible:

1.  Interest expense [Sec. 34 (B)(2)]2.  Bad debts [Sec. 34 (E)(1)]3.  Losses from sales or exchanges of

property [Sec 36 (B)]

(2) OPTIONAL CORPORATEINCOME TAX

SECTION 27 (A)

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San eda College of Law 44 

MEMORY AID IN TAXATION LAW 

TAXATION LAW COMMITTEE CHAIRPERSON: Charmaine Torres  ASST. CHAIRPERSON: Rhohail Castro EDP: Rachelle Saya SUBJECT HEADS: Jemina Sy, Casiano Ilagan,

Jr., Ryan Co, Edwin Torres:MEMBERS: Marita Lourdes Azur, Edizer Enriquez, Christian Cabrera, Jhundee

Guillermo

APPLIES TO:1.  Domestic corporations (DC)2.  Resident foreign corporations (RFC)

R ATE OF TAX AND DATE OF EFFECTIVITY 15% of the Gross Income effectiveJanuary 1, 2000

CONDITIONS OR R EQUIREMENTS 1.  A tax effort ratio of 20% of Gross

National Product2.  A ratio of 40% income tax collection

to total tax revenues3.  A VAT tax effort of 4% of GNP4.  A 0.9% ratio of Consolidated Public

Sector Financial Position (CPSFP) toGNP

OTHER FEATURES 1.  Available only to firms whose

ratio of:

Cost of sales

<=55% Gross sales or receipts from all

sources

2. The election shall be irrevocable for three (3) consecutive years

MEANING OF GROSS INCOME General concept – Gross salesLess:

(1)  Sales Return;(2)  Discount and allowances(3)  Cost of goods sold - means

all business expensesdirectly incurred to producethe merchandise to bringthem to their presentlocation and use.

(3) MINIMUM CORPORATEINCOME TAX (MCIT)

SECTION 27 (E)

WHO ARE COVERED?MCIT is imposed on domestic and

resident foreign corporations1.  Whenever such corporation has zero

or negative taxable income; or2.  Whenever the amount of MCIT is

greater than the normal income taxdue from such corporation

determined under Section 27[A].

LIMITATIONS

1.  The MCIT shall apply only to

domestic and resident foreigncorporations subject to the normalcorporate income tax (income taxrates under Sec 27[A] of the CTRP).

2.  In the case of a domesticcorporation whose operations oractivities are partly covered by theregular income tax system and partlycovered under a special income taxsystem,  the MCIT shall apply onoperations covered by the regularcorporate income tax system.

3.  In computing for the MCIT due from

a resident foreign corporation, onlythe gross income from sources withinthe Philippines shall be consideredfor such purpose.

WHEN DOES A CORPORATION BECOMELIABLE UNDER THE MCIT?

MCIT is imposed beginning onthe fourth taxable year immediatelyfollowing the year in which suchcorporation commenced its business.The taxable year in which the business

operations commenced shall be the yearwhen the corporation registers with theBIR.

CARRY FORWARD OF THE EXCESSMINIMUM TAX

  Any excess of MCIT over the normalincome tax can be carried forwardon an annual basis.

  The excess can be credited againstthe normal income tax due in thenext 3 immediately succeedingtaxable years.

  Any amount of the excess MCITwhich cannot be credited against thenormal income tax due in the next 3-year period shall be forfeited.

RELIEF FROM MCIT

The Secretary of Finance isauthorized to suspend the imposition ofthe MCIT on any corporation which

suffers losses because of:

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San eda College of Law 45 

MEMORY AID IN TAXATION LAW 

TAXATION LAW COMMITTEE CHAIRPERSON: Charmaine Torres  ASST. CHAIRPERSON: Rhohail Castro EDP: Rachelle Saya SUBJECT HEADS: Jemina Sy, Casiano Ilagan,

Jr., Ryan Co, Edwin Torres:MEMBERS: Marita Lourdes Azur, Edizer Enriquez, Christian Cabrera, Jhundee

Guillermo

a.  prolonged labor dispute;b.  force majeure; orc.  legitimate business reverses.

―Substantial losses from a prolongedlabor dispute" means losses arising from astrike staged by the employees whichlasted for more than six (6) months withina taxable period and which has causedthe temporary shutdown of businessoperations.

―Force majeure" means a cause dueto an irresistible force as by "Act of God"like lightning, earthquake, storm, floodand the like. This term shall alsoinclude armed conflicts like war andinsurgency.

―Legitimate business reverses" shallinclude substantial losses sustained dueto fire, robbery, theft, orembezzlement, or for other economicreason as determined by the Secretaryof Finance.

TAX RATE: 2% of gross income  ortaxable base pertinent to atrading/merchandising concern or aservice entity 

TAX BASE: Gross Income

MEANING OF GROSS INOME

General concept - gross income means:Gross salesLess:

(1)  Sales Return;(2)  Discount and allowances(3)  Cost of goods sold - means

all business expensesdirectly incurred to producethe merchandise to bringthem to their presentlocation and use.

KINDS OF BUSINESS

A. Trading or Merchandising ConcernGross Income  =gross sales/receipts less salesreturns, discountsand allowances andcost of goods sold  

Cost of Sales =1. Invoice cost of the

goods sold;2. import duties;3. freight in

transporting thegoods to the placewhere the goods

are actually sold;

4. insurance whilethe goods are intransit.

B. Manufacturing

Gross Income(Same)

Cost of Sales = All

cost of production offinished goods, suchas1. raw materials

used;2. direct labor;3. manufacturing

overhead;4. freight cost;5. insurance

premiums;6. other costs

incurred to bring

the raw materialsto the factory orwarehouse.

C. ServicesGross Income =Gross receipts lesssales returns,allowances,discounts and costsof services 

Cost of Services = Alldirect costs andexpenses necessarilyincurred to providethe services requiredby the customers andclients including:a. Salaries and

employee benefitsof personnel,

consultants andspecialists directlyrendering theservice;

b. Cost of facilitiesdirectly utilized inproviding theservice.

It shall notinclude interest

expense except forbanks and other

 financialinstitutions. 

  Gross income excludes  passiveincome subject to final tax.

  Other income and ExtraordinaryIncome are included   since RR 9-98provides that gross sales includesales contributory to income taxableunder the regular corporate tax.

  See Annex T for interplay of normaltax, optional corporate income tax

and MCIT.

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San eda College of Law 46 

MEMORY AID IN TAXATION LAW 

TAXATION LAW COMMITTEE CHAIRPERSON: Charmaine Torres  ASST. CHAIRPERSON: Rhohail Castro EDP: Rachelle Saya SUBJECT HEADS: Jemina Sy, Casiano Ilagan,

Jr., Ryan Co, Edwin Torres:MEMBERS: Marita Lourdes Azur, Edizer Enriquez, Christian Cabrera, Jhundee

Guillermo

(4) IMPROPERLY ACCUMULATEDEARNINGS (IAE) TAX

SECTION 29

(REVENUE REGULATIONS NO. 2 – 2001)

DEFINITION:  “Improperly accumulatedearnings (IAE)”  are the profits of acorporation that are permitted toaccumulate instead of being distributedby a corporation to its shareholders forthe purpose of avoiding the income tax  with respect to its shareholders or theshareholders of another corporation.

TAX RATE: 10%  of the ImproperlyAccumulated Taxable Income (inaddition to other taxes).

Rationale behind IAETIf the earnings and profits were

distributed, the shareholders would thenbe liable to income tax thereon,whereas if the distribution were notmade to them, they would incur no taxin respect to the undistributed earningsand profits of the corporation. Thus, atax is being imposed;

a.  in the nature of a penalty to thecorporation for the improperaccumulation of its earnings, and

 b.  as a form of deterrent to theavoidance of tax uponshareholders who are supposedto pay dividends tax on theearnings distributed to them bythe corporation. 

“IMPROPERLY ACCUMULATED TAXABLEINCOME”

Taxable income for the yearAdd:Income exempt from tax;Income excluded from gross income;Income subject to final tax;Net operating loss carry-over (NOLCO)

TotalLess:Income tax paid/payable for the taxableyearDividends actually or constructivelypaid/issued from the applicable year‘s

taxable income

Amount reserved for the reasonableneeds of the business as defined in theRegulations

Tax base of improperly accumulated

earnings tax

EXCLUSIONS

  For corporations using the calendarbasis the accumulated earnings taxshall not apply on IAE as of Dec. 31,1997.

  For fiscal year basis, the tax shallnot apply to the 12-month period offiscal year 1997-1998.

IAE as of the end of a calendar

or fiscal year period on or after Dec.31, 1998 shall be subject to the 10%tax.

WHO ARE COVERED?

General Rule: The IAE tax shall apply toevery corporation formed or availedfor the purpose of avoiding theincome tax with respect to itsshareholders or the shareholders ofany other corporation, by permittingearnings and profits to accumulate

instead of being divided ordistributed. These are:1.  Domestic corporations  as

defined under the Tax Code;2.  Corporations which are classified

as closely-held corporations.

•  those corporations at leastfifty percent (50%) in valueof the outstanding capitalstock or at least fiftypercent (50%) of the totalcombined voting power of all

classes of stock entitled tovote is owned directly orindirectly by or for not morethan twenty (20) individuals.

  Domestic corporations notfalling under the aforesaiddefinition are, therefore,publicly-held corporations.

Exception:  The said tax shall not applyto:1.  Publicly held corporations (Sec. 29) 

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San eda College of Law 47 

MEMORY AID IN TAXATION LAW 

TAXATION LAW COMMITTEE CHAIRPERSON: Charmaine Torres  ASST. CHAIRPERSON: Rhohail Castro EDP: Rachelle Saya SUBJECT HEADS: Jemina Sy, Casiano Ilagan,

Jr., Ryan Co, Edwin Torres:MEMBERS: Marita Lourdes Azur, Edizer Enriquez, Christian Cabrera, Jhundee

Guillermo

2.  Banks and other non-banks Financialintermediaries (Sec. 29) 

3.  Insurance companies (Sec. 29) 4.  Taxable partnerships (deemed to

have actually or constructivelyreceived the taxable income underSec. 73D) 

5.  General professional partnerships(exempt; taxable against the

 partners) 6.  Non- taxable joint ventures and7.  Enterprises duly registered with the

Philippine Economic Zone Authority(PEZA) under R.A. 7916, andenterprises registered pursuant tothe Bases Conversion andDevelopment Act of 1992 under R.A.

7227, as well as other enterprisesduly registered under specialeconomic zones declared by lawwhich enjoy payment of special taxrate on their registered operationsor activities in lieu of other taxes,national or local.

8.  Foreign corporations [RR No. 02-2001]  

EVIDENCE OF PURPOSE TO AVOIDINCOME TAX

1.  The fact that any corporation is amere holding company or investmentcompany shall be  prima facie evidence of a purpose to avoid thetax upon its shareholders ormembers.

Instances indicative of purpose toavoid income tax uponshareholders:

a.  Investment of substantialearnings and profits of thecorporation in unrelated  business or in stock orsecurities of unrelatedbusiness;

b.  Investment in bonds and otherlong-term securities;

c.  Accumulation of earnings inexcess of 100% of paid-upcapital, not otherwiseintended for the reasonableneeds of the business asdefined in these Regulations.

2.  The fact that the earnings or profitsof a corporation are permitted toaccumulate beyond the reasonableneeds of the business  shall be

determinative of the purpose toavoid the tax upon its shareholdersor members unless the corporation,by the clear preponderance ofevidence, shall prove the contrary.

“Reasonable needs of thebusiness”  includes the reasonablyanticipated needs of the businesssuch as: a.  Allowance for the increase in the

accumulation of earnings up to100% of the paid-up capital of

the corporation as of BalanceSheet date, inclusive ofaccumulations taken from otheryears;

b.  Earnings reserved for definitecorporate expansion projects orprograms as approved by theBoard of Directors or equivalentbody;

c.  Reserved for building, plants orequipment acquisition asapproved by the Board ofDirectors or equivalent body;

d.  Reserved for compliance withany loan covenant or pre-existing obligation establishedunder a legitimate businessagreement;

e.  Earnings required by law orapplicable regulations to beretained by the corporation or inrespect of which there is legalprohibition against itsdistribution;

f.  In the case of subsidiaries offoreign corporations in the

Philippines, all undistributedearnings intended or reservedfor investments within thePhilippines as can be proven bycorporate records and/orrelevant documentary evidence.

The controlling intention of thetaxpayer   is that which is manifested atthe time of accumulation, notsubsequently declared intentions, whichare merely the product of afterthought.

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San eda College of Law 48 

MEMORY AID IN TAXATION LAW 

TAXATION LAW COMMITTEE CHAIRPERSON: Charmaine Torres  ASST. CHAIRPERSON: Rhohail Castro EDP: Rachelle Saya SUBJECT HEADS: Jemina Sy, Casiano Ilagan,

Jr., Ryan Co, Edwin Torres:MEMBERS: Marita Lourdes Azur, Edizer Enriquez, Christian Cabrera, Jhundee

Guillermo

A speculative and indefinite purpose willnot suffice.

Definiteness of plan/s coupled withaction/s taken towards its

consummation is essential.

PERIOD FOR PAYMENT OF DIVIDEND/PAYMENT OF IAET

Dividends must be declared and paidor issued not later than one yearfollowing the close of the taxable year,otherwise, the IAET, if any, should bepaid within fifteen (15) days thereafter.

(5) INCOME SUBJECT TOPREFERENTIAL OR SPECIAL

RATES

Pertains to income derived by aparticular individual or corporationbelonging to a class of income taxpayerthat is subject to either a preferential orspecial rate.

  Tax Rates: Please refer to Annex C.

(6) GROSS INCOME TAX (GIT)

GROSS INCOME TAX (GIT) FORMULA

Entire IncomeLess:  Exclusions and Income subject

to Final Tax (e.g. PassiveIncome)

Gross IncomeMultiply by: Tax Rates (%)

Net Income Tax Due

GIT APPLIES TO

1.  Non-resident alien not engaged intrade or business (25%); and

2.  Non-resident foreign corporation.(32%)

  Tax Rates: Please refer to Annex A and B.

(7) FINAL INCOME TAX

GENERAL PRINCIPLES

1.  It is constituted as a full and finalpayment of the income tax due fromthe payee on a particular type ofincome subject to final withholding

tax (FWT). The finality of the withholdingtax is limited only to the payee‘sincome tax liability and does notextend to other taxes that may beimposed on said income.

2.  The income subjected to finalincome tax is no longer subject tothe net income tax; otherwise, therewould be a violation of prohibiteddouble taxation.

3.  The liability for the payment of thetax rests primarily on the payor as

withholding agent.4.  The payee is not required to file an

income tax return for the particularincome subjected to FWT. It is thewithholding agent who files thereturn.

5.  The rate of the final tax ismultiplied to the gross income.Thus, deductions and/or personaland additional exemptions are notallowed.

(8) FRINGE BENEFIT TAX (FBT) 

FRINGE BENEFIT TAX  is a  final incometax   on the employee which shall bewithheld and paid by the employer on aquarterly basis.

FRINGE BENEFIT  means any good,service, or other benefit furnished orgranted by an employer, in cash or inkind, in addition to basic salaries, to anindividual employee (except rank andfile employees) such as, but not limitedto the following:1.  Housing2.  Expense Account3.  Vehicle of any kind4.  Household personnel, such as maid,

driver and others5.  Interest on loan at less than market

rate to the extent of the differencebetween the market rate and actualrate granted.

6.  Membership fees, dues and otherexpenses borne by the employer forthe employee in social and athletic

clubs and similar organizations

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San eda College of Law 49 

MEMORY AID IN TAXATION LAW 

TAXATION LAW COMMITTEE CHAIRPERSON: Charmaine Torres  ASST. CHAIRPERSON: Rhohail Castro EDP: Rachelle Saya SUBJECT HEADS: Jemina Sy, Casiano Ilagan,

Jr., Ryan Co, Edwin Torres:MEMBERS: Marita Lourdes Azur, Edizer Enriquez, Christian Cabrera, Jhundee

Guillermo

7.  Expenses for foreign travel8.  Holiday and vacation expenses9.  Educational assistance to the

employee or his dependents; and

10. Life or health insurance and othernon-lire insurance premiums orsimilar amounts on excess of whatthe law allows.

PERSONS LIABLE

The EMPLOYER   (as a withholdingagent), whether individual, professionalpartnership or a corporation, regardlessof whether the corporation is taxable ornot, or the government and itsinstrumentalities

TAX RATE: 32%  (from January 1, 2000onwards) of the Grossed up MonetaryValue (GMV) of fringe benefits.

In the case of aliens, the tax rates tobe applied on fringe benefit shall be asfollows:

1.  NRANEBT 25%2.  Aliens employed by regional HO

15 %3.  Aliens employed by OBU 15%4.  Aliens employed by Petroleum

Service Contractors and

Subcontractors 15%

“GMV” OF THE FRINGE BENEFITREPRESENTS

1.  The whole amount of incomerealized by the employee whichincludes the net amount of money ornet monetary value of propertywhich has been received; plus

2.  The amount of fringe benefit taxthereon otherwise due from theemployee but paid by the employer

for and in behalf of the employee.

―GMV‖ of the fringe benefit shallbe determined by dividing the monetaryvalue of the fringe benefit by theGrossed up divisor. The Grossed updivisor is the difference between 100%and the applicable rates.

YEARGROSSED UP

DIVISORRATE

1998 66% 34% FWT

1999 67% 33% FWT

2000onwards

68% 32% FWT

FRINGE BENEFITS NOT  SUBJECT TO FBT

1.  Fringe benefits not  considered as gross income – a.  if it is required or necessary to

the business of employerb.  if it is for the convenience or

advantage of employer2.  Fringe Benefit that is not taxable

under Sec. 32 (B) –  Exclusions fromGross Income

3.  Fringe benefits not taxable underSec. 33 Fringe Benefit Tax:a.  Fringe Benefits which are

authorized and exempted underspecial laws, such as the 13thmonth Pay and Other Benefitswith the ceiling of P30,000.

b.  Contributions of the employerfor the benefit of the employeeto retirement, insurance andhospitalization benefit plans;

c.  Benefits given to the Rank andFile Employees, whether grantedunder a collective bargainingagreement or not; and

d.  The De minimis  benefits – 

benefits which are relativelysmall in value offered by theemployer as a means ofpromoting goodwill,contentment, efficiency ofEmployees

The term ―Rank and FileEmployees‖  shall mean allemployees who are holdingneither managerial norsupervisory position as definedin the Labor Code

In the case of rank and fileemployees, fringe benefits otherthan those excluded from grossincome under the Tax Code andother special laws, are taxableunder the individual normal taxrate.

DEDUCTIBILITY TO THE TAXABLEINCOME OF THE EMPLOYER

General Rule: The amount of taxablefringe benefit and the fringe benefits taxshall constitute allowable deductions

from gross income of the employer.

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San eda College of Law 50 

MEMORY AID IN TAXATION LAW 

TAXATION LAW COMMITTEE CHAIRPERSON: Charmaine Torres  ASST. CHAIRPERSON: Rhohail Castro EDP: Rachelle Saya SUBJECT HEADS: Jemina Sy, Casiano Ilagan,

Jr., Ryan Co, Edwin Torres:MEMBERS: Marita Lourdes Azur, Edizer Enriquez, Christian Cabrera, Jhundee

Guillermo

Exception: If the basis for computation of the

fringe benefits tax is the depreciationvalue, the zonal value or the fair market

value, only the actual fringe benefits taxpaid shall constitute a deductibleexpense for the employer. The value ofthe fringe benefit shall not bedeductible and shall be presumed tohave been tacked on or actually claimedas depreciation expense by theemployer. Provided, however, that if theaforesaid zonal value or fair marketvalue of the said property is greater thanits cost subject to depreciation, theexcess amount shall be allowed as adeduction from the employer's gross

income as fringe benefit expense. (Sec.2.33[D], Rev. Reg. No. 3-98)

EXAMPLE OF DE MINIMIS BENEFITS NOTSUBJECT TO FBT (RR NO. 8-2000 AND10-2000)

1.  Monetized unused vacation leavecredits of PRIVATE employees notexceeding (10) days during the yearand the monetized value of leavecredits paid to government officialsand employees

2.  Medical cash allowance todependents of employees notexceeding P750.00 per employee persemester or P125 per month;

3.  Rice subsidy of P1,000.00 or one (1)sack of 50kg. rice per monthamounting to not more thanP1,000:00,

4.  Uniform and clothing allowance notexceeding P3,000 per annum;

5.  Actual yearly medical benefits notexceeding P10,000 per annum;

6.  Laundry allowance not exceeding

P300 per month;7.  Employees achievement awards e. g.

for length of service or safetyachievement, which must be in theform of a tangible personal propertyother than cash or gift certificate,with an annual monetary value ofnot exceeding P10,000 received bythe employee under an establishedwritten plan which does notdiscriminate  in favor paidemployees;

8.  Gifts given during Christmas andmajor anniversary celebrations notexceeding P3, 000 per employee perannum;

9.  Flowers, fruits, books or similaritems given to employees underspecial circumstances

10. Daily meal allowance for overtimework not exceeding 25% of the basicminimum wage.

Time for filing of quarterly remittancereturn of final income taxes withheld

The tax imposed under Sec. 33 shallbe treated as a final income tax on theemployee that shall be withheld andpaid by the employer, whether a large

taxpayer or non-large taxpayer, on orbefore the 10th  day of the month following the calendar quarter in whichthe fringe benefits were granted (RR 04-2002). 

  For Additional Rules on FringeBenefits, refer to Annex H.

(9) CAPITAL GAINS TAX

SUMMARY OF TAX RATES

1. Individualsa.  On sale of shares of stock of a

domestic corporation not listedand traded thru a local stockexchange, held as capital asset

On the Net Capital GainNot over P100,000 –  FT

of 5%Amount in excess of P100,000 –  FT

of 10%

b.  On sale of real property in thePhilippines held as capital asset

On the gross selling price, or the

current fair market value  at thetime of sale, whichever is higher – FT of 6%

2. Corporationsa.  On sale of shares of stock of a

domestic corporation not listedand traded thru a local stockexchange, held as capital asset

On the Net Capital Gain – Not over P100,000 –  FT of5%Amount in excessof P100,000 – FT of 10% 

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San eda College of Law 51 

MEMORY AID IN TAXATION LAW 

TAXATION LAW COMMITTEE CHAIRPERSON: Charmaine Torres  ASST. CHAIRPERSON: Rhohail Castro EDP: Rachelle Saya SUBJECT HEADS: Jemina Sy, Casiano Ilagan,

Jr., Ryan Co, Edwin Torres:MEMBERS: Marita Lourdes Azur, Edizer Enriquez, Christian Cabrera, Jhundee

Guillermo

b.  On sale of land/building held ascapital asset

On the gross selling price, or thecurrent fair market value  at thetime of sale, whichever is higher–  FT of 6%

(Reyes, Virgilio. Income Tax Law and Accounting – A New Approach, 2002)

CAPITAL GAINS AND LOSSES – IN GENERAL

CONCEPT OF CAPITAL ASSETS

Under the tax code, there is nodefinition for the term "capital assets".What it gives is the meaning of ordinary

assets:a.  Ordinary assets (Sec. 39, NIRC) 

a.  Stock in trade of the taxpayer orother properties of a kind whichwould properly be included inthe inventory of the taxpayer;

b.  Property held by the taxpayerprimarily for sale to customers inthe ordinary course of business;

c.  Property used in trade orbusiness and subject todepreciation; and

d.  Real property used in trade orbusiness.

b.  Capital Assets  include all propertyheld by the taxpayer whether or notconnected in trade or business butnot including those enumeratedabove (#1) as ordinary assets.

CAPITAL GAIN CAPITAL LOSS

The gain derivedfrom the sale orexchange of capitalassets.

The loss incurredfrom the sale orexchange of capitalassets.

NET CAPITALGAIN

NET CAPITALLOSS

The excess of thegains from sales/exchanges of capitalassets over the

gains from suchsales/ exchanges.

The excess of thelosses from sales orexchanges of capitalassets over the gains

from such sales orexchanges.

  TRANSACTION R ESULTING IN TAXABLE

GAINS BUT NON-R ECOGNITION OF LOSSES a.  Sale or exchange between

related parties;b.  Wash sales by non-dealers of

securities and when not subjectto the stock transfer tax;

c.  Exchanges not solely in kind in

merger and consolidation; andd.  Sales or exchanges that are notat arms length.

REQUISITES FOR RECOGNITION OFCAPITAL GAIN/LOSS

1.  The transaction must involveproperty classified as capitalasset; and

2.  The transaction must be a saleor exchange or one considered as

equivalent to a sale or exchange.

RULES ON THE RECOGNITION OFCAPITAL GAINS OR LOSSES

INDIVIDUAL CORPORATION

 Holding PeriodThe percentages

of gain or loss to betaken into accountshall be the

following:a. 100% - if the

capital assets hasbeen held for 12mos. or less; and

b. 50% - if thecapital asset hasbeen held formore than 12mos.

Capital gains andlosses arerecognized to theextent of 100%.(There is no

holding period)

  Non-deductibility of

  Capital lossesare allowed only

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San eda College of Law 52 

MEMORY AID IN TAXATION LAW 

TAXATION LAW COMMITTEE CHAIRPERSON: Charmaine Torres  ASST. CHAIRPERSON: Rhohail Castro EDP: Rachelle Saya SUBJECT HEADS: Jemina Sy, Casiano Ilagan,

Jr., Ryan Co, Edwin Torres:MEMBERS: Marita Lourdes Azur, Edizer Enriquez, Christian Cabrera, Jhundee

Guillermo

Net Capitallosses

  Capital lossesare allowed onlyto extent of thecapital gains;hence, the netcapital loss isnot deductible.

to extent of thecapital gains;hence, the netcapital loss isnot deductible.

Exception: If anydomestic bank ortrust company, asubstantial part ofwhose business isthe receipt ofdeposits, sells anybond, debenture,note or certificateor other evidenceof indebtednessissued by anycorporation(including one

issued by agovernment orpoliticalsubdivision)

  Net Capital LossCarry –Over

  AllowedThe net capital loss

(in an amount not inexcess of the taxableincome beforepersonal exemption forsuch year) shall be

treated in thesucceeding year (butnot beyond 12 months)as a deduction asshort-term capital loss(at 100%) from the netcapital gains.

  Not allowed

  See Annex U for illustration.

SALE OR EXCHANGE OF CAPITAL ASSETS

The following are considered as saleor exchange of capital assets:1.  Retirement of bonds2.  Short sales of property3.  Failure to exercise privilege or

option to buy or sell property4.  Securities becoming worthless5.  Distribution in liquidation of

corporations6.  Readjustment of interest in a

general professional partnership.TAX FREE EXCHANGES 

Sales or exchanges resulting in non-

recognition of gains or losses: 

1.  Exchange solely in kind  in legitimatemergers and consolidation;includes:a.  Between the corporations which

are parties to the merger orconsolidation (property forstocks);

b.  Between a stockholder of acorporation party to a merger orconsolidation and the otherparty corporation (stock forstock);

c.  Between a security holder of acorporation party to a merger orconsolidation and the otherparty corporation (securities forsecurities)

2.  Transfer to a controlled corporation –  exchange of property for stocksresulting in acquisition of corporatecontrol by a person, alone ortogether with others not exceedingfour.

“Control”  means ownership ofstocks in a corporation amounting toat least 51% of the total votingpower of all classes of stocksentitled to vote.

SALE OR EXCHANGE OF ORDINARY ASSETS

General rules of income taxationapply to both gain and loss.

  See Annex D  (Gross Income – Gainsfrom dealings in property)

SUMMARY OF TAX TREATMENT OFGAINS/LOSSES IN THE EXCHANGE OFPROPERTIES

General Rule:  Upon the sale or

exchange of property, the entire gain orloss, as the case may be, shall berecognized. [Sec. 40 (C, 1)]

Exceptions:1.  Transactions where gains and losses

are not recognized – a.  Exchange solely in kind in

legitimate mergers andconsolidation

b.  Transfer to a controlledcorporation [Sec. 40(C, 2)]

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San eda College of Law 53 

MEMORY AID IN TAXATION LAW 

TAXATION LAW COMMITTEE CHAIRPERSON: Charmaine Torres  ASST. CHAIRPERSON: Rhohail Castro EDP: Rachelle Saya SUBJECT HEADS: Jemina Sy, Casiano Ilagan,

Jr., Ryan Co, Edwin Torres:MEMBERS: Marita Lourdes Azur, Edizer Enriquez, Christian Cabrera, Jhundee

Guillermo

2.  Transactions where gain isrecognized but not the loss – 

a.  Transactions between relatedtaxpayers [Sec. 36]

b.  Illegal transactions [Sec. 96,Rev. Reg. 2]c.  Exchanges of property, not

solely in kind, in pursuance ofcorporate mergers andconsolidations [Sec. 40, (C, 3)]

IMPORTANT DISTINCTIONIf it is an ordinary asset, the

ordinary gains and losses are consideredin determining income or loss fromtrade, business or profession. (See Secs.32A, 34D)

If it is a capital asset, determinefurther whether or not it is a realproperty located in the Philippines. If itis, then it is subject to capital gains tax.(See Secs. 24D, 27D5) (See also Sec s.24C, 27D2)  If not, the capital gains andlosses are considered in determining thetaxable income. (Sec. 39)

CAPITAL GAINS AND LOSSES – SHARES OF STOCK

The taxation of shares of stock

whether or not listed and traded in thestock exchange is subject to final tax .

WHO ARE LIABLE TO THE TAX 1.  Individual taxpayer, citizen or alien2.  Corporate taxpayer, domestic or

foreign3.  Other taxpayers such as estate,

trust, trust funds and pension amongothers.

R ATES OF TAX 

1.  Shares of stock not traded througha local stock exchange – Net capitalgains derived during the taxableyear from sale, exchange, ortransfer shall be taxed as follows (ona per transaction basis):

Not over P 100,000 - 5%Over P 100,000 - 10%

2.  Shares of stock listed through alocal stock exchange  –  ½ of 1% ofthe gross selling price of the stock.

EXCEPTIONS TO THE TAX 

1.  Gains derived by dealers insecurities.

2.  All other gains which are specificallyexempt from income tax under

existing investment incentives andother special laws.

BASIS FOR COMPUTING GAIN OR LOSS (BIR  R ULING 146-98) 

  The fair market value (FMV) of thesale of shares not traded but listedin the stock exchange is the highestclosing price on the day the shareswere sold, transferred or exchanged.

  When no sale is made in the stockexchange, the FMV shall be the

highest selling price on the daynearest to the day of sale, transferor exchange.

  For shares not listed in theexchange, the FMV shall be the bookvalue nearest the valuation date

The above rules shall be used incomputing for the net capital gain/lossfor disposition of shares.

IMPORTANT FEATURES 

1.  Sale of shares of stock of a domesticcorporation listed and traded in alocal stock exchange and that ofinitial public offering shall be subjectto Percentage tax (Business Tax)

2.  Capital losses sustained during theyear (not listed and traded in a localstock exchange) shall be allowed asa capital loss deductible on the sametaxable year only (no carry-over)

3.  The entire amount of capital gainand capital loss (not listed andtraded in a local stock exchange)shall be considered without takinginto account holding periodirrespective of who is the taxpayer(all 100%)

4.  Non-deductibility of losses on washsales.

FILING AND PAYMENT OF TAX 

1.  Listed and Traded in the StockExchange  - The stockbroker shallturn over the tax collected to the

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San eda College of Law 54 

MEMORY AID IN TAXATION LAW 

TAXATION LAW COMMITTEE CHAIRPERSON: Charmaine Torres  ASST. CHAIRPERSON: Rhohail Castro EDP: Rachelle Saya SUBJECT HEADS: Jemina Sy, Casiano Ilagan,

Jr., Ryan Co, Edwin Torres:MEMBERS: Marita Lourdes Azur, Edizer Enriquez, Christian Cabrera, Jhundee

Guillermo

B.I.R. within  five (5) banking daysfrom the date of collection.

2.  Not traded through the stock exchange 

- It shall be paid by the seller on a pertransaction basis upon filing of therequired return within 30 days following each sale or otherdisposition of shares of stock.

CAPITAL GAINS AND LOSSES(REAL PROPERTY)

PERSONS LIABLE AND TRANSACTIONS AFFECTED 

1.  Individual taxpayers, estates andtrusts

Sale or exchange or otherdisposition of real propertyconsidered as capital assets.

The said sale shall include "pactode retro sale" and other conditionalsale.

2.  Domestic CorporationSale or exchange or disposition

of lands and/or building which arenot actually used in business and aretreated as capital asset.

  EXCEPTIONS TO THE TAX 1. Gains derived by dealers in realestate

R ATE AND BASIS OF TAX A final tax of 6% is based on the

 gross selling price or  fair market value or zonal value whichever is higher .

Note:  Gain or loss is immaterial,there being a conclusive presumption ofgain.

  See Annex G  –  Guidelines in

Determining Whether a RealProperty is a Capital or an OrdinaryAsset.

EXEMPTION OF CERTAIN INDIVIDUALS FROM THE

CAPITAL GAINS TAX ON THE SALE OR

DISPOSITION OF A PRINCIPAL R ESIDENCE

Conditions: a.  Sale or disposition of the old

principal residence;b.  By natural persons - citizens or aliens

 provided   that they are residents

taxable under Sec. 24 of the Code(does not include an estate or atrust);

c.  The proceeds of which is fully

utilized in (a) acquiring or (b)constructing a new principalresidence within eighteen (18)calendar months from date of sale ordisposition;

d.  Notify the Commissioner withinthirty (30) days from the date of saleor disposition through a prescribedreturn of his intention to avail thetax exemption;

e.  Can only be availed of only  onceevery ten (10) years;

f.  The historical cost or adjusted basis

of his old principal residence sold,exchanged or disposed shall becarried over to the cost basis of hisnew principal residence

g.  If there is no full utilization, theportion of the gains presumed tohave been realized shall be subjectto capital gains tax.

GROSS INCOME FROM DIFFERENT SOURCES

(SEC. 42)  Please refer to Annex I. 

ACCOUNTNG PERIODS AND METHODS OF

ACCOUNTING 

I.  ACCOUNTING PERIODS A.  General rule (Sec. 43)

Taxable income is computedupon the basis of taxpayer‘sannual accounting period (fiscal orcalendar year) in accordance withthe method of accountingemployed.

  If no method of accountingemployed or method does notclearly reflect the income,computation shall be made inaccordance w/ such method asthe opinion of the Commissionerclearly reflects the income.

  Taxable income is computedbased on calendar year  if:1.  accounting period is other

than a fiscal year2.  taxpayer has no accounting

period3.  taxpayer does not keep

books

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San eda College of Law 55 

MEMORY AID IN TAXATION LAW 

TAXATION LAW COMMITTEE CHAIRPERSON: Charmaine Torres  ASST. CHAIRPERSON: Rhohail Castro EDP: Rachelle Saya SUBJECT HEADS: Jemina Sy, Casiano Ilagan,

Jr., Ryan Co, Edwin Torres:MEMBERS: Marita Lourdes Azur, Edizer Enriquez, Christian Cabrera, Jhundee

Guillermo

4.  taxpayer is an individual

  Fiscal year: accounting period of12 months ending on the last dayof any month other than

December  Calendar year: accounting period

from January 1 to December 31

B.  Periods in which items of grossincome included (Sec. 44)

  Amount of all items of grossincome shall be included in thegross income for the taxableyear in which received by thetaxpayer, unless, any suchamounts are to be properlyaccounted for in a different

period under methods ofaccounting permitted

  In case of death of taxpayer:include for the taxable year inwhich falls the date of his death,all amounts which accrued up tothe date of his death; if nototherwise properly includible inrespect of such period or a priorperiod

C.  Period for which deduction andcredits taken (Sec. 45)

  Deductions provided in this Titleshall be taken for the taxableyear in which ‗paid or incurred,dependent upon the method ofaccounting upon the basis ofwhich the net income iscomputed, unless, in order toreflect the income, deductionsshould be taken as of a differentperiod.

  In case of death of taxpayer:deductions allowed for the

taxable period in which falls thedate of his death, amountsaccrued up to the date of hisdeath if not otherwise properlyallowable in respect of suchperiod or a prior period.

D.  Change of accounting period(Sec.46)

  Kinds of changes:- from fiscal year to calendar

year

-  from calendar year to fiscalyear

-  from one fiscal year toanother

  Effect of change: Net income,shall, with the approval of theCommissioner, be computed onthe basis of the new accountingperiod, subject to Sec. 47.

E.  Final or adjustment returns for aperiod of less than 12 months(1) Returns for short period

resulting from change ofaccounting period

  taxpayer is other than anindividual

  with the approval of theCommissioner

  If change is from fiscal year tocalendar year:-  separate final or adjustment

return be made for theperiod between the close ofthe last fiscal year for whichreturn was made and thefollowing December 31

  If change is from calendar yearto fiscal year:-  separate final or adjustment

return be made for theperiod between the close ofthe last calendar for whichreturn was made and thedate designated as the closeof the fiscal year

  If change is from one fiscal yearto another:-  separate final or adjustment

return be made for theperiod between the close ofthe former fiscal year and

the date designated as theclose of the new fiscal year(2) Income computed on basis of

short period

  In what cases?a.  Where a separate final or

adjustment return is madeon account of a change inaccounting period

b.  In all other cases where aseparate final oradjustment return isrequire or permitted by

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San eda College of Law 56 

MEMORY AID IN TAXATION LAW 

TAXATION LAW COMMITTEE CHAIRPERSON: Charmaine Torres  ASST. CHAIRPERSON: Rhohail Castro EDP: Rachelle Saya SUBJECT HEADS: Jemina Sy, Casiano Ilagan,

Jr., Ryan Co, Edwin Torres:MEMBERS: Marita Lourdes Azur, Edizer Enriquez, Christian Cabrera, Jhundee

Guillermo

R&R prescribed by Sec. ofFinance. uponrecommendation ofCommissioner

  Both shall be made for afractional part of a year.

  Then income is computed on thebasis of the short period forwhich separate final oradjustment return is made.

II.  METHODS OF ACCOUNTING 

A.  Cash methodRecognition of income

and expense dependent oninflow or outflow of cash.

B.  Accrual methodMethod under which

income, gains and profits areincluded in gross income whenearned whether received or not,and expenses are allowed asdeductions when incurred:although not yet paid. It is theright to receive and not theactual receipt that determinesthe inclusion of the amount ingross income

  Examples:1.  interest or rent income

earned but not yetreceived

2.  rent expense accruedbut not yet paid

3.  wages due to workersbut remaining unpaid

C.  Accounting for long-termcontracts  Long-term contracts:

building, installation orconstruction contractscovering a period in excessof 1 yr

  Persons whose gross incomeis derived in whole or in partfrom such contracts shallreport such income upon thebasis of  percentage ofcompletion 

  The return is accompaniedby a return certificate ofarchitects or engineers

showing the percentage ofcompletion during thetaxable year of the entirework performed under the

contract  Deductions from gross

income: all expendituresmade during the taxableyear on account of thecontract: account beingtaken of the material andsupplies on hand at thebeginning and end of thetaxable period for use inconnection with the workunder the contract but notyet so applied.

  Amended return may bepermitted /required by theCommissioner: if uponcompletion of contract,taxable income has not beenclearly reflected for anyyear(s).

D.  Installment basis(1)  Sales of dealers in personal

propertyUnder rules and

regulations prescribed by the

Sec. of Finance, a personwho regularly sells orotherwise disposes ofpersonal property on theinstallment plan may returnas income there from in anytaxable year that proportionof the installment paymentsactually received in thatyear, which the gross profitrealized or to be realizedwhen payment is completed,bears to the contract price.

Example: Sale in 2000Contract price (CP)(installmentsreceivable) P200, 000Cost 150,000Gross profit (GP) 50,000

Installments payable in 2equal annual installments

GP/CP ratio= 50,000/200,000 = 25%

Collections in 2000=P100,000

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San eda College of Law 57 

MEMORY AID IN TAXATION LAW 

TAXATION LAW COMMITTEE CHAIRPERSON: Charmaine Torres  ASST. CHAIRPERSON: Rhohail Castro EDP: Rachelle Saya SUBJECT HEADS: Jemina Sy, Casiano Ilagan,

Jr., Ryan Co, Edwin Torres:MEMBERS: Marita Lourdes Azur, Edizer Enriquez, Christian Cabrera, Jhundee

Guillermo

Income for 2000= P100,000 x 25% = P25,000

(2)  Sales of realty and casual

sales of  Personalty  In cases of:

a.  casual sale or othercasual disposition ofpersonal property(other thaninventory on hand ofthe taxpayer at theclose of the taxableyear) for a price >P1,000, or

b.  sale or otherdisposition of real

property, if in eithercase the initialpayments do notexceed 25% of theselling price

  How may income bereturned : same as insales of dealer inpersonal property above

  Initial payments: payments received incash or property otherthan evidences of

indebtedness of thepurchaser during thetaxable period in whichthe sale or otherdisposition is made.

(3)  Sales of real propertyconsidered as capital assetby individuals

  Individual who sells ofdisposes of realproperty, considered as

capital asset and isotherwise qualified toreport the gain under (2)above may pay thecapital gains tax ininstallments under rulesand regulations to bepromulgated by the Sec.of Finance.

(4)  Change from accrual toinstallment basis

  taxpayer must beentitled to benefitsunder (1) hereof sales ofdealers in personal

property  in computing income for

the year of change orany subsequent year:amounts actuallyreceived during any suchyear on account of salesor other dispositions ofproperty made in anyprior year shall not beexcluded.

E.  Allocation of income and

deductions  Applicable to: cases of 2 or

more organizations, tradesor businesses (incorporatedand organized within thePhilippines) owned orcontrolled directly/indirectly by the sameinterest

  Commissioner is authorizedto distribute, apportion orallocate gross income ordeductions between oramong such organization,trade or business, if hedetermines that suchdistribution, apportionmentor allocation is necessary inorder to prevent evasion oftaxes or to clearly reflectthe income of any suchorganization, trade orbusiness.

FILING OF TAX R ETURN AND PAYMENT OF TAX 

TAX R ETURN  –  This is a report made bythe taxpayer to the BIR of all grossincome received during the taxableyear, the allowable deductions includingexemptions, the net taxable income, theincome tax rate, the income tax due,the income tax withheld, if any, and theincome tax still to be paid orrefundable.

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San eda College of Law 58 

MEMORY AID IN TAXATION LAW 

TAXATION LAW COMMITTEE CHAIRPERSON: Charmaine Torres  ASST. CHAIRPERSON: Rhohail Castro EDP: Rachelle Saya SUBJECT HEADS: Jemina Sy, Casiano Ilagan,

Jr., Ryan Co, Edwin Torres:MEMBERS: Marita Lourdes Azur, Edizer Enriquez, Christian Cabrera, Jhundee

Guillermo

PERSONS R EQUIRED TO FILE INCOME TAX

R ETURN 

a.  Individual

1.  Resident citizen;2.  Non-resident citizen on incomefrom within the Phil.;

3.  Resident alien on income fromwithin the Phil.;

4.  NRAETB on income from withinthe Phil.

5.  An individual (citizens / aliens)engaged in business or practiceof a profession within the Phil.regardless of the amount ofgross income;

6.  Individual deriving compensation

income concurrently from two ormore employers at any timeduring the taxable year;

7.  Individual whose purecompensation income derivedfrom sources within the Phil.exceeds P60,000.

b.  Taxable Estate and Trustc.  General Professional Partnershipd.  Corporation

1.  Not exempt from income tax;2.  Exempt from income tax under

Sec. 30 of NIRC but has not

shown proof of exemption.

INDIVIDUALS EXEMPT FROM FILING INCOME TAX

R ETURN 

1.  Individual whose gross income doesnot exceed total personal andadditional exemptions;

2.  Individual with respect to purecompensation income derived fromsources within the Philippines, theincome tax on which has beencorrectly withheld;

3.  Individual whose sole income hasbeen subjected to final withholdingincome tax;

4.  Individual who is exempt fromincome tax.

SUBSTITUTED FILING  –  is when theemployer‘s annual return may beconsidered as the ―substitute‖ IncomeTax Return (ITR) of employee inasmuchas the information provided in hisincome tax return would exactly be the

same information contained in theemployer‘s annual return. 

HOW IS “SUBSTITUTED FILING”  DIFFERENT

FROM “NON-FILING”? 

  Substituted Filing –  an individualtaxpayer although requiredunder the law to file his incometax return, will no longer haveto personally file his own incometax return.

–  but instead theemployer’s annual informationreturn  filed is the considered―substitute‖ income tax  returnof the employee inasmuch as the

information in the employer‘sreturn is exactly the sameinformation  contained in theemployee‘s return. 

  Non-filing  –  applicable to certaintypes of individual taxpayerswho are not required under thelaw to file an income tax return.

Example: employee whosepure compensation income doesnot exceed P60,000 and has onlyone employer for the taxable

year and whose tax withheld isequivalent to his tax due.

SUBSTITUTED FILING OF INCOME TAX R ETURNS

BY EMPLOYEES R ECEIVING PURELY

COMPENSATION INCOME.  [SECTION 4,  RR   3-2002; RMC 01-03] 

Requisites: 1.  The employee receives  purely

compensation income  (regardless ofamount) during the taxable year.

2.  The employee receives the incomeonly from one employer   during thetaxable year.

3.  The amount of tax due  from theemployee at the end of the yearequals  the amount of tax withheldby the employer .

4.  The employee's spouse also complieswith all three (3) conditions statedabove.

5.  The employer files the annualinformation return (BIR Form No.1604-CF)

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San eda College of Law 59 

MEMORY AID IN TAXATION LAW 

TAXATION LAW COMMITTEE CHAIRPERSON: Charmaine Torres  ASST. CHAIRPERSON: Rhohail Castro EDP: Rachelle Saya SUBJECT HEADS: Jemina Sy, Casiano Ilagan,

Jr., Ryan Co, Edwin Torres:MEMBERS: Marita Lourdes Azur, Edizer Enriquez, Christian Cabrera, Jhundee

Guillermo

6.  The employer issues BIR Form 2316(Oct 2002 ENCS) version to eachemployee

INDIVIDUALS NOT Q UALIFIED FOR SUBSTITUTEDFILING (STILL R EQUIRED TO FILE)

1.  Individuals deriving compensationfrom two or more employersconcurrently or successively duringthe taxable year.

2.  Employees deriving compensationincome, regardless of the amount,whether from a single or severalemployers during the calendar year,the income tax of which has notbeen withheld correctly (i.e. tax due

is not equal to the tax withheld)resulting to collectible or refundablereturn.

3.  Employees whose monthly grosscompensation income does notexceed P5,000 or the statutoryminimum wage, whichever is higher,and opted for non-withholding of taxon said income.

4.  Individuals deriving other non-business, non-profession-relatedincome in addition to compensationincome not otherwise subject to

final tax.5.  Individuals receiving purely

compensation income from a singleemployer although the income tax ofwhich has been correctly withheld,but whose spouse falls under 1 to 4above.

6.  Non-resident aliens engaged in tradeor business in the Philippinesderiving purely compensationincome, or compensation incomeand other non-business, non-profession-related income.

NOTE:  Non-filing of ITR, for employeeswho are qualified for the substitutedfiling shall be OPTIONAL for the taxableyear 2001, the returns for which shall befiled on or before April 15, 2002.Thereafter, substituted filing whereapplicable shall be MANDATORY. [Sec 5RR 3-2002) 

R EQUIREMENT OF BANKS FOR SUBMISSION OF

AN ITR FOR LOAN OR CREDIT CARD

APPLICATIONS

Banks may require the submission ofBIR Form No. 1700 (for employees notentitled to substituted filing of ITR).However, for employees entitled tosubstituted filing of ITR, the submissionof the Joint Certification will suffice.

JOINT CERTIFICATION  - It is a swornstatement made by the employer andemployee, which serve the followingpurposes:1.  It contains the employee's consent

that BIR Form No. 1604CF may be

considered his substituted return, inlieu of BIR Form No. 1700, which theemployee no longer filed.

2.  It contains the employer'scertification that he has reportedthe employee's income to the BIRand that he has remitted the taxeson the employee's income, asindicated in BIR Form No. 1604-CF.

3.  It serves as proof of financialcapacity in case the employeedecides to apply for a bank loan or acredit-card, or for any other

purpose, as if he had in fact filed aBIR Form No. 1700.

INDIVIDUALS R EQUIRED TO FILE AN

INFORMATION R ETURN 

Individuals not required to file anincome tax return may nevertheless berequired to  file an information returnpursuant to rules and, regulationsprescribed by the Secretary of Financeupon recommendation of theCommissioner.

PLACE OF FILING 

1.  Legal residence - authorized agentbank; Revenue District Officer;Collection agent or duly authorizedtreasurer

2.  Principal place of business3.  With the Office of the Commissioner

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San eda College of Law 60 

MEMORY AID IN TAXATION LAW 

TAXATION LAW COMMITTEE CHAIRPERSON: Charmaine Torres  ASST. CHAIRPERSON: Rhohail Castro EDP: Rachelle Saya SUBJECT HEADS: Jemina Sy, Casiano Ilagan,

Jr., Ryan Co, Edwin Torres:MEMBERS: Marita Lourdes Azur, Edizer Enriquez, Christian Cabrera, Jhundee

Guillermo

TIME FOR FILING (PAY AS YOU FILE SYSTEM)

 April 15  –  for those earning solecompensation income or solely business,

practice of profession or combination ofbusiness and compensation.

R ETURN AND PAYMENT OF ESTIMATED INCOME

TAX BY INDIVIDUAL (SELF-EMPLOYED OR

PRACTICE OF PROFESSION)

1. First quarter - April 15 of current year2. Second quarter -August 15 of currentyear3. Third quarter – November 15 of currentyear4. Final quarter - April 15 of the following

year.

Note: When the tax due is in excess of P2,000 - the taxpayer may elect to pay in two(2) equal installments:

1st installment - April 152nd installment - on or before July 15

EXTENSION OF TIME TO FILE R ETURN 

The Commissioner may onmeritorious cases grant a reasonableextension of time for filing income tax

return and may subject the imposition oftwenty (20) percent interest per annumfrom the original due date.

R ETURN OF HUSBAND AND WIFE 

  File one (1) return  for the taxpayeryear if following requisitescomplied;a.  Married individuals (citizens,

resident or nonresident aliens)b.  Do not derived income purely

from compensation.

  If impracticable to file one return:each spouse file a separate return ofincome but the return so filed shallbe consolidated by the Bureau forthe purposes of verification for theyear.

UNMARRIED MINOR  

  Income of unmarried minors derivedfrom property received by the living

parent shall be included in thereturn of the parent, except:a.  when donor‘s tax has been paid

on such property, or

b.  when transfer of such property isexempt from donor‘s tax 

PERSONS UNDER DISABILITY 

If a taxpayer is unable to make hisown return, it may be made by his1.  duly authorized agents;2.  representative;3.  by guardian;4.  other person charged with the care

of his person or property;

  who will assume the responsibility of

making the return and incurringpenalties provided for erroneous,false or fraudulent return.

R ETURN OF ESTATE, TRUST AND PARTNESHIP 

Estate and Trust with gross incomeof P20,000 or more and partnership(whether professional or business) shallfile their income tax return on or beforeApril 15.

TAX R ETURNS OF GENERAL PROFESSIONAL

PARTNERSHIPS (GPP)

  Each GPP shall file in duplicate, areturn of its income (except thoseincome exempt)

  Shall set forth:a.  items of gross income and

deductions allowedb.  names of partnersc.  TINd.  address and share of each

partner

TAX R ETURN OF A CORPORATIONThose required to file:1.  Corporation subject to tax having

existed during the taxable year,whether with income or not.

2.  Corporation in the process ofliquidation or receivership.

3.  Insurance company doing business inthe Philippines or deriving incometherein

4.  Foreign corporation having incomefrom within the Philippines

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San eda College of Law 61 

MEMORY AID IN TAXATION LAW 

TAXATION LAW COMMITTEE CHAIRPERSON: Charmaine Torres  ASST. CHAIRPERSON: Rhohail Castro EDP: Rachelle Saya SUBJECT HEADS: Jemina Sy, Casiano Ilagan,

Jr., Ryan Co, Edwin Torres:MEMBERS: Marita Lourdes Azur, Edizer Enriquez, Christian Cabrera, Jhundee

Guillermo

FILING OF RETURN (PAY AS YOU FILE SYSTEM)Quarterly returns for the first three

(3) quarters on a strictly sixty (60) daybasis and the final or adjusted return on

the 15th day of the fourth (4th) monthfollowing the close of either a-fiscal oncalendar year.

  See Annex V for Illustration.

WHO SHALL FILE?The return shall be filed by the

president, vice-president, or otherprincipal officer, and shall be sworn to bysuch officer and by the treasurer orassistant treasurer.

WITHHOLDING TAXES

WITHHOLDING TAXES Kinds: 1.  Withholding Tax at Source:

a.  Final Withholding Taxb.  Creditable Withholding Tax

(Expanded withholding tax)2.  Withholding Tax on Compensation

(Wages)3.  Withholding Tax on Creditable

Value-Added Tax4.  Withholding of Percentage Tax

FINALWITHHOLDINGTAX SYSTEM

CREDITABLEWITHHOLDINGTAX SYSTEM

The amount ofincome tax withheldby the withholdingagent is constitutedas a full and finalpayment of theincome due from thepayee on the said

income. [Sec. 2.57(a), Rev. Reg. 2-98]

Taxes withheld oncertain incomepayments areintended to equal orat least approximatethe tax due from thepayee on the saidincome. 

The liability forpayment of the taxrests primarily onthe payor or thewithholding agent.The payee is notrequired to file anincome tax returnfor the particularincome.

The incomerecipient is stillrequired to file anincome tax returnand/or pay thedifference betweenthe tax withheld andthe tax due on theincome. [Sec.2.57(B), Rev. Regs.2-98]

TIME TO WITHHOLD TAX AT SOURCE

- arises at the time an income is paidor payable, whichever comes first. The

term ―payable‖ refers to the date theobligation becomes due, demandable orlegally enforceable. (Sec. 2.54.4 Rev.Regs. 2.98)

NATURE OF WITHHOLDING AGENT’S LIABILITY The withholding agent is directly

and independently liable for the correctamount of the tax that should bewithheld from the dividend remittance.(Commissioner vs. Procter and Gamble,GR No. 66838, December 2, 1991)

CONSEQUENCES FOR FAILURE TO WITHHOLD:1.  liable for surcharges and

penalties;2.  liable upon conviction to a penalty

equal to the total amount of thetax not withheld, or not accountedfor and remitted. (Sec. 251, 1997NIRC)

3.  any income payment which isotherwise deductible from thepayor‘s gross income will not beallowed as a deduction if it isshown that the income tax

required to be withheld is not paidto the BIR. (Sec. 2.58.5, Rev. Reg.2-98)

WITHHOLDING TAX ON COMPENSATION Every employer must withhold

from compensation paid, an amountcomputed in accordance with theregulations.

Exception:Where such compensation

income of an individual:

1.  Does not exceed the statutoryminimum wages; or

2.  Five thousand (P5,000) monthly(P60,000 a year)

  whichever is higher .

ELEMENTS OF WITHHOLDING ON COMPENSATION 1.  There must be an employer-

employee relationship2.  There must be payment of

compensation or wages for servicesrendered

3.  There must be a payroll period.

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San eda College of Law 62 

MEMORY AID IN TAXATION LAW 

TAXATION LAW COMMITTEE CHAIRPERSON: Charmaine Torres  ASST. CHAIRPERSON: Rhohail Castro EDP: Rachelle Saya SUBJECT HEADS: Jemina Sy, Casiano Ilagan,

Jr., Ryan Co, Edwin Torres:MEMBERS: Marita Lourdes Azur, Edizer Enriquez, Christian Cabrera, Jhundee

Guillermo

COMPENSATION EXEMPTED 

1.  Remunerations received as anincident of employment

2.  Remunerations paid for agriculturelabor3.  Remunerations paid for domestic

services4.  Remunerations for casual not in the

course of an employer's trade orbusiness.

5.  Compensation for services of acitizen, resident of the Philippines,for a foreign government or aninternational organization

6.  Damages7.  Life insurance

8.  Amount received by the insured asreturn of premium

9.  Compensation for injuries andsickness

10.  Income exempt under treaty11. Thirteenth (13th) month pay and

other benefits12. GSIS; SSS; Philhealth and other

contributions,

TAX-FREE COVENANT BOND [SEC. 57(C)] 

COVENANT BONDS  –  bonds, mortgages,

deeds of trust and other similarobligations of domestic/resident foreigncorporation, which contain acontract/provision by which the obligoragrees;1.  to pay any portion of the tax

imposed upon the obligee;2.  to reimburse the obligee for any

portion of the tax; or

3.  to pay the interest withoutdeduction for any tax which theobligor may be required/permittedto pay or to retain therefrom. 

  Obligor shall deduct and withhold atax = 30% of the interest and otherpayments whether interest or otherpayments are payable annually or ata shorter period; whether bonds,securities, obligations had been/willbe issued/ marketed and theinterest and other payments paidwithin and without the Philippines ifthe interest or other payment ispayable to a non-resident alien or a

citizen or resident of the Philippines 

INCOME OF R ECIPIENT [SEC. 58 ( D )]

  Income which any creditable tax isrequired to be withheld at source

shall be included in the return of itsrecipient.

  The excess  of the amount of taxwithheld over the tax due on hisreturn shall be refunded to him,subject to Section 204 (abatement,refund/credit taxes).

  If amount withheld at source is lessthan  the tax due on his return, thedifference is paid in accordance withSection 56 (payment and assessmentof income tax).

  All taxes withheld shall be

considered as trust funds andmaintained in a separate accountand not commingled with any otherfunds of the withholding agent.

B. TRANSFER TAXES

TRANSFER TAX INCOME TAX 

Tax on transfer ofproperty.

Tax on income

Rates are lower--5% to 20% -estate tax-- 2% to 15 % or30% - donor‘stax

Rates are higher-- 5% to 32%

Lesser exemptions More exemptions

(1) ESTATE TAXES

DEFINITION: an excise tax on the right oftransmitting property at the time ofdeath and on the privilege that a personis given in controlling to a certain extentthe disposition of his property to takeeffect upon death.

ESTATE TAX FORMULA 

Gross Estate (Sec. 85)Less:  (1) Deductions (Sec. 86)

(2)Net share of the SS in the CPP

Net Taxable Estate

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San eda College of Law 63 

MEMORY AID IN TAXATION LAW 

TAXATION LAW COMMITTEE CHAIRPERSON: Charmaine Torres  ASST. CHAIRPERSON: Rhohail Castro EDP: Rachelle Saya SUBJECT HEADS: Jemina Sy, Casiano Ilagan,

Jr., Ryan Co, Edwin Torres:MEMBERS: Marita Lourdes Azur, Edizer Enriquez, Christian Cabrera, Jhundee

Guillermo

Multiply by: Tax rate (Sec. 84)

Estate Tax dueLess:  Tax Credit [if any] (Sec. 86[E] or110[B]  

Estate Tax Due, if any

GROSS ESTATE

A  DECEDENT’S GROSS ESTATE INCLUDES (SEC. 85)

RESIDENT & NON-RESIDENT CITIZEN,

RESIDENT ALIENDECEDENT

NON-RESIDENTALIEN DECEDENT

1. Real propertywherever situated

1. Real propertysituated in thePhilippines. 

2. Personal propertywherever  situateda)  Tangible, andb)  Intangible

2. Personalproperty

a) Tangiblepropertysituated inthePhilippines

b) Intangiblepersonalproperty

with a situsin thePhilippines unlessexemptedon the basisofreciprocity.

THE LAW THAT GOVERNS THE IMPOSITION OF

ESTATE TAX 

The statute in force at the time of

death of the decedent  shall governestate taxation.

INTANGIBLE PERSONAL PROPERTIES WITH A

SITUS IN THE PHIL.  (SEC. 104, 1997  NIRC)

1.  Franchise which must be exercisedin the Philippines;

2.  Shares, obligations or bonds issuedby any corporation or sociedadanonima organized or constituted inthe Philippines in accordance withits laws;

3.  Shares, obligations or bonds issuedby any foreign corporation eighty-five per centum (85%) of thebusiness of which is located in the

Philippines;4.  Shares, obligations or bonds issuedby any foreign corporation, if suchshares, obligations or bonds haveacquired a business situs in thePhilippines;

5.  Shares or rights in any partnership,business or industry established inthe Philippines.

INTANGIBLE PERSONAL PROPERTY, WITH A SITUS

IN THE PHILIPPINES,  OF A DECEDENT WHO IS A

NON-RESIDENT ALIEN SHALL NOT FORM PART OFTHE GROSS ESTATE IF (RECIPROCITY CLAUSE) (SEC. 104)

1.  the decedent at the time of hisdeath was a citizen and resident of aforeign country which at the time ofhis deatha.  did not impose a transfer tax or

death tax of any characterb.  in respect of intangible personal

property of citizens of thePhilippines not residing in that

foreign country; or2.  the laws of the foreign country of

which the decedent was a citizenand resident at the time of his deatha.  allow a similar exemption  from

transfer taxes or death taxes ofevery character

b.  in respect of intangible personalproperty owned by citizens ofthe Philippines not residing inthat foreign country(Reciprocity). 

VALUATION OF THE GROSS ESTATE 

The properties comprising the grossestate shall be valued based on their fairmarket value as of the time of death.

PROPERTY VALUATION

1) Real Property - fair market valuea)  as determined by the

Commissioner orb) as shown in the

schedule of values

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San eda College of Law 64 

MEMORY AID IN TAXATION LAW 

TAXATION LAW COMMITTEE CHAIRPERSON: Charmaine Torres  ASST. CHAIRPERSON: Rhohail Castro EDP: Rachelle Saya SUBJECT HEADS: Jemina Sy, Casiano Ilagan,

Jr., Ryan Co, Edwin Torres:MEMBERS: Marita Lourdes Azur, Edizer Enriquez, Christian Cabrera, Jhundee

Guillermo

fixed by theprovincial and cityassessors

WHICHEVER IS HIGHER 

2) Shares of StockUnlisted

Common SharesPreferredShares

Listed

-book value-par value-arithmetic meanbetween the highest andlowest quotation at adate nearest the date ofdeath, if none isavailable on the date ofdeath itself. 

3)Right tousufruct, use or

habitation, aswell as that ofannuity

- shall be taken intoaccount the probable

life of the beneficiary inaccordance with thelatest basic standardmortality table, to beapproved by theSecretary of Finance,upon recommendationof the InsuranceCommissioner. 

4) Personalproperty

- whether tangible orintangible, appraised atFMV. ―Sentimentalvalue‖ is practically

disregarded. 

INCLUSIONS IN THE GROSS ESTATE (SEC. 85) 

1. DECEDENT’S INTERESTTo the extent of the interest in

property of the decedent at the time ofhis death.

2. TRANSFER IN CONTEMPLATION OFDEATH1.  A transfer motivated by the thought

of impending death although deathmay not be imminent; or

2.  A transfer by which the decedentretained for his life or for any periodwhich does not in fact end before hisdeath:a.  the possession or enjoyment of,

or the right to the income fromthe property, or

b.  the right, either alone or inconjunction with any person, to

designate the person who shall

possess or enjoy the property orthe income therefrom.

Exception:  bona fide sale for an

adequate and full consideration inmoney or money‘s worth. 

3. REVOCABLE TRANSFERA transfer whereby the terms of

enjoyment of the property may bealtered, amended, revoked orterminated  by the decedent alone or inconjunction with any other person, orwhere any such power is relinquished incontemplation of the decedent‘s death.It is enough that the decedent had thepower to alter, amend or revoke though

he did not exercise such power.

Exception:  bona fide sale for anadequate and full consideration inmoney or money‘s worth. 

4. TRANSFER UNDER GENERAL POWEROF APPOINTMENT

A power of appointment is the rightto designate the person or persons whowill succeed to the property of the priordecedent.

The general power of appointment

may be exercised by the decedent:1.  by will; or2.  by deed executed in contemplation

of his death; or3.  by deed under which he has retained

for his life or for any period notascertainable without reference tohis death or for any period whichdoes not in fact end before hisdeath:a.  the possession or enjoyment of,

or the right to the income fromthe property; or

b.  the right, either alone or inconjunction with any person, todesignate the persons who shallpossess or enjoy the property orthe income therefrom.

Exception:  bona fide sale for anadequate and full consideration inmoney or money‘s worth. 

5. PROCEEDS OF LIFE INSURANCEProceeds of life insurance taken by

the decedent on his own life shall be

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San eda College of Law 65 

MEMORY AID IN TAXATION LAW 

TAXATION LAW COMMITTEE CHAIRPERSON: Charmaine Torres  ASST. CHAIRPERSON: Rhohail Castro EDP: Rachelle Saya SUBJECT HEADS: Jemina Sy, Casiano Ilagan,

Jr., Ryan Co, Edwin Torres:MEMBERS: Marita Lourdes Azur, Edizer Enriquez, Christian Cabrera, Jhundee

Guillermo

included in the gross estate if thebeneficiary is:a.  the estate  of the decedent, his

executor   or administrator  

(regardless whether the designationis revocable or irrevocable); orb.  a third person other than the estate,

executor or administrator where thedesignation of the beneficiary isrevocable. 

6. TRANSFERS FOR INSUFFICIENTCONSIDERATION

The value to be included in the grossestate is the excess  of the fair marketvalue of the property at the time of thedecedent‘s death over the consideration

received. This is applicable in cases oftransfer in contemplation of death,revocable transfer and transfer undergeneral power of appointment made fora consideration but is not a bona fidesale for an adequate and fullconsideration in money or money‘sworth.

7. PRIOR INTERESTSAll transfers, trusts, estates,

interests, rights, powers andrelinquishment of powers made,

created, arising, existing, exercised orrelinquished before or after theeffectivity of the NIRC.

PROPERTY RELATIONS BETWEEN HUSBAND AND

WIFE The property relations between the

spouses shall be governed by contract(marriage settlement) executed beforethe marriage.

In the absence of such contract, or ifthe contract is void:

On marriages contracted before August3, 1988, the system of conjugalpartnership of gains shall govern;

On marriages contracted on or afterAugust 3, 1988 (effectivity of theFamily Code of the Philippines), thesystem of absolute community ofproperty shall govern.

EXEMPT TRANSMISSIONS (SEC. 87)1.  The merger of usufruct in the owner

of the naked title;2.  Fideicommisary substitution;

3.  The transmission from the first heir,legatee or donee in favor of anotherbeneficiary, in accordance with thewill of the predecessor; and

All bequests, devices, legacies ortransfers to social welfare, cultural andcharitable institutions no part of the netincome of which inures to the benefit ofany individual; Provided, that not morethan 30% of the said bequests, legaciesor transfers shall be used by suchinstitutions for administration purposes.

DEDUCTIONS ON GROSS ESTATE

APPLICABLE TO

RESIDENT ALIENS AND CITIZENS (REVENUE REGULATIONS 2-2003)

The following are deductible fromthe gross estate of citizens and residentaliens:1.  Expenses, losses, indebtedness,

taxes, etc. (ordinary deductions) 2.  Transfer for public use3.  Vanishing deduction4.  Family home5.  Standard deduction equivalent to

one million pesos (P1,000,000)6.  Medical expenses7.  Amounts received by heirs under RA

4917 (Retirement Benefits)8.  Net share of the surviving spouse in

the conjugal or community property

1.  ORDINARY DEDUCTIONS

A. FUNERAL EXPENSES The amount deductible is the lowest

among the following:1.  actual funeral expenses2.  5% of the gross estate3.  P200,000.

It includes the following:1.  Mourning apparel of the surviving

spouse and unmarried minor childrenof the deceased, bought and used inthe occasion of the burial.

2.  Expenses of the wake preceding theburial including food and drinks.

3.  Publication charges for deathnotices.

4.  Telecommunication expenses ininforming relatives of the deceased.

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San eda College of Law 66 

MEMORY AID IN TAXATION LAW 

TAXATION LAW COMMITTEE CHAIRPERSON: Charmaine Torres  ASST. CHAIRPERSON: Rhohail Castro EDP: Rachelle Saya SUBJECT HEADS: Jemina Sy, Casiano Ilagan,

Jr., Ryan Co, Edwin Torres:MEMBERS: Marita Lourdes Azur, Edizer Enriquez, Christian Cabrera, Jhundee

Guillermo

5.  Cost of burial plot. Tombstonemonument or mausoleum but nottheir upkeep. In case deceasedowns a family estate or several

burial lots, only the valuecorresponding to the plot where heis buried is deductible.

6.  Interment fees and charges.7.  All other expenses incurred for the

performance of the ritual andceremonies incident to theinterment.Expenses incurred after   the

interment, such as for prayers, masses,entertainment, or the like are notdeductible.

Any portion of the funeral and burial

expenses borne or defrayed by relativesand friends  of the deceased are notdeductible.

B.  JUDICIAL EXPENSES OF THE

TESTAMENTARY OR INTESTATE

PROCEEDINGS Expenses allowed as deduction under

this category are those:1.  incurred in the inventory-taking

of assets comprising the grossestate,

2.  administration,

3.  payment of debts of the estate,as well as the distribution of the

estate among the heirs.In short, these deductible items are

expenses incurred during the settlementof the estate but not beyond the last dayprescribed by law, or the extensionthereof, for the filing of the estate taxreturn.

C.  CLAIMS AGAINST THE ESTATE The word "claims" is generally

construed to mean debts or demands of

a  pecuniary nature  which could havebeen enforced against the deceased inhis lifetime and could have beenreduced to simple money judgments.

Claims against the estate orindebtedness in respect of property mayarise out of:

1. Contract;2. Tort; or3. Operation of Law.

Requisites:1.  The liability represents a

personal obligation of thedeceased existing at the time of

his death except unpaidobligations incurred incident tohis death such as unpaid funeralexpenses (i.e., expensesincurred up to the time ofinterment) and unpaid medicalexpenses which are classifiedunder a different category ofdeductions;

2.  The liability was contracted ingood faith and for adequate andfull consideration in money ormoney's worth;

3.  The claim must be a debt orclaim which is valid in law andenforceable in court;

4.  The indebtedness must not havebeen condoned by the creditoror the action to collect from thedecedent must not haveprescribed.

D.  CLAIMS AGAINST INSOLVENT PERSONS 

Requisites:1.  The amount thereof has been

initially included as part of his grossestate (for otherwise they wouldconstitute double deductions if theywere to be deducted)

2.  The incapacity of the debtors to paytheir obligation is proven.

C.  UNPAID MORTGAGE 

  In case unpaid mortgage payable isbeing claimed by the estate,verification must be made as to whowas the beneficiary of the loanproceeds.

  If the loan is found to be merely anaccommodation loan where the loanproceeds went to another person,the value of the unpaid loan must beincluded as a receivable of theestate.

  If there is a legal impediment torecognize the same as receivable ofthe estate, said unpaid obligation/mortgage payable shall not beallowed as a deduction from thegross estate.

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San eda College of Law 67 

MEMORY AID IN TAXATION LAW 

TAXATION LAW COMMITTEE CHAIRPERSON: Charmaine Torres  ASST. CHAIRPERSON: Rhohail Castro EDP: Rachelle Saya SUBJECT HEADS: Jemina Sy, Casiano Ilagan,

Jr., Ryan Co, Edwin Torres:MEMBERS: Marita Lourdes Azur, Edizer Enriquez, Christian Cabrera, Jhundee

Guillermo

  In all instances, the mortgagedproperty, to the extent of thedecedent's interest therein, should  always form part of the gross

taxable estate.

F.  TAXES Taxes which have accrued as of the

death of the decedent which wereunpaid as of the time of death. 

The following are not deductible:1.  income tax on income received

after death2.  property taxes not accrued

before death3.  estate tax

G.  LOSSES Requisites:

1.  It should arise from fire, storm,shipwreck, or other casualty,robbery, theft or embezzlement;

2.  Not compensated by insuranceor otherwise;

3.  Not claimed as deduction in anincome tax return of the taxableestate;

4.  Occurring during the settlementof the estate; and

5.  Occurring before the last day forthe payment of the estate tax(last day to pay: six months afterthe decedent‘s death). 

2.  TRANSFER FOR PUBLIC USE

Requisites:1.  The disposition is in a last will and

testament2.  To take effect after death3.  In favor of the government of the

Phil., or any political subdivisionthereof

4.  For exclusive public purposes.

Note: This should also include bequests,devices, or transfers to social welfare,cultural and charitable institutions.

3. VANISHING DEDUCTION

DEFINITION: The deduction allowed fromthe gross estate for properties that weresubject to donor‘s or estate taxes. It is

called vanishing deduction because the

deduction allowed diminishes over aperiod of five years. The rate ofdeduction depends on the period fromthe date of transfer to the death of the

decedent, as follows:

PERIOD DEDUCTION

  1 year or less 100%

  1 year – 2 years 80%

  2 years – 3 years 60%

  3 years – 4 years 40%

  4 years – 5 years 20%

Requisites:1.  the present decedent died within 5

years from transfer of the property

from a prior decedent or donor.2.  The property must be located in the

Phils.3.  The property formed part of the

taxable estate of the prior decedent,or of the taxable gift of the donor.

4.  The estate tax or donor‘s tax on thegift must have been finallydetermined and paid.

5.  The property must be identified asthe one received from the priordecedent, or something acquired inexchange therefor.

6.  No vanishing deduction on theproperty was allowable to the estateof the prior decedent.

4. FAMILY HOME

Conditions:1.  The family home must be the actual 

residential home of the decedentand his family at the time of hisdeath, as certified by the BarangayCaptain  of the locality where thefamily home is situated;

2.  The total value of the family homemust be included as part of the grossestate of the decedent; and

3.  Allowable deduction must be in anamount equivalent to

  the current fair market value ofthe family home as declared orincluded in the gross estate, or

  the extent of the decedent'sinterest (whetherconjugal/community or exclusiveproperty), whichever is lower,

but not exceeding P1,000,000

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San eda College of Law 68 

MEMORY AID IN TAXATION LAW 

TAXATION LAW COMMITTEE CHAIRPERSON: Charmaine Torres  ASST. CHAIRPERSON: Rhohail Castro EDP: Rachelle Saya SUBJECT HEADS: Jemina Sy, Casiano Ilagan,

Jr., Ryan Co, Edwin Torres:MEMBERS: Marita Lourdes Azur, Edizer Enriquez, Christian Cabrera, Jhundee

Guillermo

5. STANDARD DEDUCTION

A deduction in the amount of OneMillion Pesos (P1,000,000) shall be

allowed as an additional deductionwithout need of substantiation.

The full amount of P1,000,000 shallbe allowed as deduction for the benefitof the decedent.

6. MEDICAL EXPENSES

  Any amount of medical expensesincurred within one year from deathin excess of Five Hundred ThousandPesos (P500,000) shall no longer beallowed   as a deduction under thissubsection.

  Neither can any unpaid amountthereof in excess of the P500,000threshold nor any unpaid amount formedical expenses incurred prior tothe one-year period from date ofdeath be allowed to be deductedfrom the gross estate as claimagainst the estate.

7.  AMOUNT RECEIVED BY HEIRSUNDER REPUBLIC ACT NO.

4917

Any amount received by the heirsfrom the decedent's employer as aconsequence of the death of thedecedent-employee  in accordance withRepublic Act No. 4917 is allowed as adeduction provided that the amount ofthe separation benefit is included aspart of the gross estate of the decedent.

8.  NET SHARE OF THE

SURVIVING SPOUSE IN THECONJUGAL PARTNERSHIP ORCOMMUNITY PROPERTY

After deducting the allowabledeductions (only the ordinarydeductions) appertaining to the conjugalor community properties included in thegross estate, the share of the survivingspouse must be removed to ensure thatonly the decedent's interest in theestate is taxed.

DEDUCTIONS ON GROSS

ESTATE APPLICABLE TO

N ON -RESIDENT ALIENS 

The following are deductible from the grossestate of non-resident aliens:

1.  Expenses, losses, indebtedness andtaxes (ELIT) (ordinary deductions) 

Formula:Tax =  Phil. Gross

Credit Estate  X World Limit  World Gross ELIT

Estate

2.  Transfer for public use

3.  Vanishing deduction on property inthe Philippines.

4.  Conjugal share of the survivingspouse

ESTATE TAX CREDIT 

A tax credit is granted for estatetaxes paid to a foreign country on theestate of citizens and resident alienssubject to the following limitations

1.  One foreign country onlyThe tax credit is whichever is

lower between:4.  Estate tax paid to the foreign

country5.  Tax Credit Limit =

NTE, foreign country X Phil. estateNTE, world Tax

( NTE  - Net Taxable Estate)

2. More than one foreign countryThe credit shall be that which isthe lower amount between Limit Aand Limit B.

Limit A. Whichever is lowerbetween:

  Estate tax paid to a foreigncountry

  Tax Credit Limit =NTE, foreign country X Phil. estate

NTE, world  Tax

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San eda College of Law 69 

MEMORY AID IN TAXATION LAW 

TAXATION LAW COMMITTEE CHAIRPERSON: Charmaine Torres  ASST. CHAIRPERSON: Rhohail Castro EDP: Rachelle Saya SUBJECT HEADS: Jemina Sy, Casiano Ilagan,

Jr., Ryan Co, Edwin Torres:MEMBERS: Marita Lourdes Azur, Edizer Enriquez, Christian Cabrera, Jhundee

Guillermo

Limit B. Whichever is lowerbetween:

  Total of estate taxes paid to allforeign countries

  Tax Credit Limit =NTE outside Phil. X Phil. estate

 NTE, world  Tax

SETTLEMENT OF THEESTATE TAX

A. FILING

NOTICE OF DEATH TO BE FILED In all cases of transfers subject to

tax, or where, though exempt from tax,the gross value of the estate exceedsP20,000 , the executor, administrator orany of the legal heirs, within twomonths  after the decedent‘s death, orwithin a like period after qualifying assuch executor or administrator, shallgive a written notice thereof to theCommissioner. (Sec. 89)

AN ESTATE TAX R ETURN IS R EQUIRED TO BE

FILED 1. when the estate is subject to estate

tax; or2. when the estate is not subject to

estate tax but the gross estateexceeds P 200,000; or

3. regardless of the amount of thegross estate, where the gross estateconsists of registered or registrableproperty such as motor vehicle orshares of stock or other similarproperty for which clearance fromthe BIR is required as a conditionprecedent for the transfer ofownership thereof in the name of

the transferee.

TIME FOR FILING OF THE ESTATE TAX RETURN The estate tax return shall be filed

within six (6) months after the death ofthe decedent.

Extension:  The BIR may, in meritoriouscases, grant an extension of notexceeding thirty (30) days for the filingof the estate tax return.

WHEN THE GROSS ESTATE EXCEEDS

P2,000,000,  THE ESTATE TAX R ETURN

SHALL BE ACCOMPANIED BY A  STATEMENT

WHICH IS CERTIFIED BY AN INDEPENDENT

CERTIFIED PUBLIC ACCOUNTANT STATING 1. the itemized assets of the decedentwith its corresponding gross value atthe time of his death, or in the caseof a non-resident, not citizen of thePhilippines, that part of his grossestate situated in the Philippines;

2. the itemized deductions from thegross estate;

3. the amount of tax due, whether paidor still due and outstanding.

PLACE WHERE TO FILE THE ESTATE TAX

R ETURN 

1.  Resident Citizen- with the Accredited Agent Bank

(AAB), Revenue District Officer,Collection Officer or duly authorizedTreasurer of the city or municipalitywhere the decedent was domiciled atthe time of his death.

2.  Non-resident (citizen or alien)a. has registered executor oradministrator

- with the Revenue DistrictOffice where such executor oradministrator is registered

b.  executor or administrator is notregistered

- with the Revenue DistrictOffice having jurisdiction overthe executor‘ or administrator‘sresidence

c.  no executor or administrator- with the Office of the

Commissioner (Sec. 9C, Rev. Reg.2-2003)

B. PAYMENT

PAYMENT OF THE ESTATE TAX DUE The estate tax due shall paid at the

time when the estate tax return is filed.When the Commissioner finds that

the payment of the estate tax on thedue date would impose undue hardshipsupon the estate or any heir:

a.  the payment of the estate taxmay be extended for a period

not to exceed five (5) years if

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San eda College of Law 70 

MEMORY AID IN TAXATION LAW 

TAXATION LAW COMMITTEE CHAIRPERSON: Charmaine Torres  ASST. CHAIRPERSON: Rhohail Castro EDP: Rachelle Saya SUBJECT HEADS: Jemina Sy, Casiano Ilagan,

Jr., Ryan Co, Edwin Torres:MEMBERS: Marita Lourdes Azur, Edizer Enriquez, Christian Cabrera, Jhundee

Guillermo

there is a judicial settlement ofthe estate; or

b.  the payment of the estate taxmay be extended for a period

not to exceed two (2) years ifthere is an extra-judicialsettlement of the estate.

NOTE:  In case the available cash is notsufficient to pay its total estate taxliability, the estate may be allowed to

 pay tax by installment.  (Sec. 9F, Rev.Reg. 2-2003)

LIABILITY FOR PAYMENT The estate tax shall be paid by the

executor or administrator before deliveryto any beneficiary of his distributive share

of the estate. Such beneficiary to the extent of his

distributive share of the estate shall besubsidiarily liable for the payment ofsuch portion of the estate tax as hisdistributive share bears to the value ofthe total net estate. (Sec. 9G, Rev. Reg.2-2003)

No judge shall authorize thedistribution of the estate unless acertification from the Commissioner thattax has been paid is shown. (Sec. 94)

No shares or other forms of securities

shall be transferred in the books of anycorporation, partnership, business orindustry organized in the Philippines,unless a similar certification by theCommissioner is shown. (Sec. 97)

When a bank has knowledge of thedeath of a person who maintained ajoint account, it shall not allow anywithdrawal by the surviving depositorwithout the above certification. (Sec.97)

Provided: that the administrator ofthe estate or any one (1) of the heirs of

the decedent may, upon authorizationby the Commissioner, withdraw anamount not exceeding twenty thousandpesos (P20,000)  without the saidcertification.

There is nothing in the Tax Code andin the pertinent remedial law thatimplies the necessity of the probatecourt or estate settlement of court‘s

approval of the State‘s claim for estatetaxes before the same can be enforcedand collected by the BIR. On thecontrary, under Section 94, it is theprobate or settlement court which isbidden not to authorize the delivery ofthe distributive share to any interestedparty without a certification from theCIR showing the payment of the estatetax. (Marcos II vs. Court of Appeals, GRNo. 120880, June 5, 1997) 

COLLECTION OF TAX FROM THE HEIRS 

An estate or inheritance tax,whether assessed before or after thedeath of the deceased, can be collectedfrom the heirs even after thedistribution of the properties of thedecedent. (Palanca vs. Commissioner ofInternal Revenue, GR No. 16661,

 January 31, 1962)

The Government has two ways ofcollecting taxes due from the estate.

a.  By going after all the heirs andcollecting from each one of

them the amount of the taxproportionate to the inheritancereceived, or

b.  Pursuant to the lien created bySection 219 of the Tax Codeupon all property and rights toproperty belonging to thetaxpayer for unpaid income tax,is by subjecting said property ofthe estate which is in the handsof an heir or transferee to thepayment of the tax due theestate. (Commissioner of

Internal Revenue vs. Pineda, GRNo. L –22734, September 15,1967)

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San eda College of Law 71 

MEMORY AID IN TAXATION LAW 

TAXATION LAW COMMITTEE CHAIRPERSON: Charmaine Torres  ASST. CHAIRPERSON: Rhohail Castro EDP: Rachelle Saya SUBJECT HEADS: Jemina Sy, Casiano Ilagan,

Jr., Ryan Co, Edwin Torres:MEMBERS: Marita Lourdes Azur, Edizer Enriquez, Christian Cabrera, Jhundee

Guillermo

(2) DONOR’S TAXES 

DEFINITION:  A tax on the privilege oftransmitting one‘s property or property

rights to another or others withoutadequate and full valuableconsideration.

COVERAGE OF THE TAX (SEC. 104)

RESIDENT & NON-RESIDENT CITIZEN,

RESIDENT ALIENDONOR

NON-RESIDENTALIEN DONOR

1. Real propertywherever situated

1. Real propertysituated in the

Philippines. 

2. Personal propertywherever  situated

a.  Tangible, andIntangible

2. Personal propertya. Tangible property

situated in thePhilippines 

b. Intangiblepersonal propertywith a situs in thePhilippines unlessexempted on thebasis ofreciprocity.

R EQUISITES

1.  Capacity of the donor2.  Donative Intent3.  Delivery, whether actual or

constructive, of the subject gift4.  Acceptance by the donee

LAW THAT GOVERNS THE IMPOSITION OF

DONOR ’S TAX 

The donor‘s tax shall not applyunless and until there is a completed

gift. The transfer is  perfected  from themoment the donor knows of theacceptance by the donee; it iscompleted   by the deliver, eitheractually or constructively, of thedonated property to the donee. Thus,the law in force at the time of the

 perfection/completion of the donation shall govern the imposition of thedonor‘s tax.

A gift that is incomplete because ofreserved powers, becomes completewhen either:1. the donor renounces the power; or

2. his right to exercise the reservedpower ceases because of thehappening of some event orcontingency or the fulfillment ofsome condition, other than becauseof the donor's death.

  Renunciation by the survivingspouse of his/her share in theconjugal partnership or absolutecommunity after the dissolutionof the marriage  in favor of theheirs of the deceased spouse orany other person/s is subject to

donor's tax.  Whereas  general renunciation 

by an heir, including thesurviving spouse, of his/hershare in the hereditary estateleft by the decedent is notsubject to donor's tax, unlessspecifically and categoricallydone in favor of identified heir/sto the exclusion or disadvantageof the other co-heirs in thehereditary estate. (Sec. 11, Rev.Reg. 2-2003)

STRANGER - a person who is not a brother,sister, spouse, ancestor and linealdescendant, or of a relative byconsanguinity in the collateral within the4th civil degree.

  A legally adopted child is entitled toall the rights and obligations

 provided by law to legitimatechildren, and therefore, donation tohim shall not be considered asdonation made to stranger.

  Donation made between businessorganizations and those madebetween an individual and a businessorganization shall be considered asdonation made to a stranger.

VALUATION OF GIFTS OF PROPERTY The fair market value of the

property given at the time of the giftshall be the value of the gift.

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San eda College of Law 72 

MEMORY AID IN TAXATION LAW 

TAXATION LAW COMMITTEE CHAIRPERSON: Charmaine Torres  ASST. CHAIRPERSON: Rhohail Castro EDP: Rachelle Saya SUBJECT HEADS: Jemina Sy, Casiano Ilagan,

Jr., Ryan Co, Edwin Torres:MEMBERS: Marita Lourdes Azur, Edizer Enriquez, Christian Cabrera, Jhundee

Guillermo

INTANGIBLE PERSONAL PROPERTIES WITH A

SITUS IN THE PHIL.  (SAME AS IN ESTATE TAX

SUBJECT TO THE RECIPROCITY RULE)  (SEC. 104) 

Formula: (On a cumulative basis over a period of one calendar year)

1.  On the 1st donation of a year

Gross gifts xxx

Less:  Deductions from grossgifts

xxx

Net giftsMultiply by:  Tax Rate

xxxxxx

Donor‘s tax on the net gifts  xxx

2.  On donation of a subsequentdate during the year

Gross gifts made on this date XXLess: Deductions from gross gifts XX

Net gifts XX Add : All prior net gifts within theyear

XX

Aggregate net giftsMultiply by : Tax Rate

XXXX

Donor‘s tax on aggregate net gifts  XXLess:  Donor‘s tax on all prior net

gifts

XX

Donor‘s tax on the net gifts on thisdate

XX

EXEMPTION OF CERTAIN GIFTS 

1.  Gifts made by a residenta. Dowries or gifts made on

account of marriage and beforeits celebration or within oneyear thereafter by parents toeach of their legitimate,illegitimate or adopted children

to the extent of the first P10,000.

b. Gifts made to or for the use ofthe National Government or anyentity created by any of itsagencies which is not conductedfor profit, or to any politicalsubdivision of the saidgovernment.

c. Gifts in favor of educational,charitable, religious, cultural orsocial welfare corporation,institutions, foundations, trust

or philanthropic organization,research institution ororganization, accredited non-government organization (NGO).

Provided, that no more than 30%of said gifts shall be used bysuch donee for administrationpurposes.

2.  Gifts made by a non-resident nota citizen of the Phil.

a.  same as (b)b.  same as (c) except accredited

non-government organization(NGO)

A  NON-PROFIT EDUCATIONAL AND/OR

CHARITABLE CORPORATION,  INSTITUTION, 

ACCREDITED NON-GOVERNMENT ORGANIZATION, TRUST OR PHILANTROPHIC ORGANIZATION, RESEARCH INSTITUTION OR ORGANIZATION IS 

1.  one incorporated as a non-stockentity

2.  paying no dividends3.  governed by trustees who receive no

compensation, and4.  devoting all its income whether

students‘ fees or gifts, donations,subsidies or other forms ofphilantrophy to the accomplishment

and promotion of the purposesenumerated in its Articles ofIncorporation.

TAX CREDIT FOR DONOR ’S TAXES PAID TO A

FOREIGN COUNTRY 

1.  Donor was a Filipino citizen orresident alien

2.  At time of foreign donation3.  Donor‘s taxes of any character and

description4.  Are imposed and paid by the

authority of a foreign country.

LIMITATIONS ON TAX CREDIT 

1.  The amount of the credit in respectto the tax paid to any country shallnot exceed the same proportion ofthe tax against which such credit istaken, which the decedent‘s netgifts situated within such countrytaxable under the NIRC bears to hisentire net gift; and

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San eda College of Law 73 

MEMORY AID IN TAXATION LAW 

TAXATION LAW COMMITTEE CHAIRPERSON: Charmaine Torres  ASST. CHAIRPERSON: Rhohail Castro EDP: Rachelle Saya SUBJECT HEADS: Jemina Sy, Casiano Ilagan,

Jr., Ryan Co, Edwin Torres:MEMBERS: Marita Lourdes Azur, Edizer Enriquez, Christian Cabrera, Jhundee

Guillermo

2.  The total amount of the credit shallnot exceed the same proportion ofthe tax against which such credit istaken, which the decedent‘s net gift

situated outside the Philippinestaxable under the NIRC bears to hisentire net gift.

FORMULA OF TAX CREDIT LIMIT 

1.  For donor’s taxes paid to oneforeign country

NG situated Taxin a foreign country X PDT = CreditEntire net gift Limit

(NG - Net Gifts; PDT - Phil. Donor's Tax)

2.  For donor’s taxes paid to two ormore foreign country

NG outside the Phil. X PDT = TaxEntire net gifts Credit

Limit

The allowable tax credit is thelower amount between the tax creditlimit under (a) and (b).

SETTLEMENT OF THE DONOR’S TAX

TIME FOR FILING OF R ETURN AND PAYMENT OF

THE DONOR ’S TAX The donor‘s tax return is filed and

the donor‘s tax due is paid within thirty(30) days after the date the gift is made.

The return shall be under oath induplicate setting forth:1.  Each gift made during the calendar

year which is to be included incomputing net gifts;

2.  The deductions claimed andallowable;

3.  Any previous net gifts made duringthe same calendar year;

4.  The name of the donee;5.  Relationship of the donor to the

donee; and6.  Such further information as may be

required by rules and regulationsmade pursuant to law.

NOTE:  The filing of a notice of donationis not required,  unlike in estate taxwhere notice of death is required.

PLACE FOR FILING OF R ETURN AND PAYMENT OFTHE DONOR ’S TAX 

1. Resident

 With an authorized agent bank, theRevenue District Officer, RevenueCollection Officer or dulyauthorized Treasurer of the city ormunicipality where the donor wasdomiciled   at the time of thetransfer, or if there be no legalresidence in the Philippines, withthe Office of the Commissioner . 

2. Non-resident Filed with the Philippine Embassy

or Consulate  in the country wherehe is domiciled at the time of thetransfer, or directly with theOffice of the Commissioner .

TAX RATE 

If the donee is a stranger, the rate oftax shall be 30% of the net gifts.

If the donee is not a stranger,the rate shall be from 2% to 15% of the

net gifts.

  See Annex W - Donor‘s Tax 

C. TAX REMEDIESUNDER THE NIRC

I.  TAX REMEDIES OF THEGOVERNMENT

IMPORTANCE 

1.  They enhance and support thegovernment‘s tax collection.

2.  They are safeguards of taxpayer‘srights against arbitrary action.

TAX COLLECTION CANNOT BE RESTRAINED BY

COURT INJUNCTION (SEC. 218, 1997  NIRC) 

Justification: Lifeblood Theory

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San eda College of Law 74 

MEMORY AID IN TAXATION LAW 

TAXATION LAW COMMITTEE CHAIRPERSON: Charmaine Torres  ASST. CHAIRPERSON: Rhohail Castro EDP: Rachelle Saya SUBJECT HEADS: Jemina Sy, Casiano Ilagan,

Jr., Ryan Co, Edwin Torres:MEMBERS: Marita Lourdes Azur, Edizer Enriquez, Christian Cabrera, Jhundee

Guillermo

Exception:  Injunction may be issued bythe CTA in aid of its appellatejurisdiction under RA 1125 (as amendedby RA 9282).

Conditions for the Issuance of anInjunction by the Court of Tax Appeals

The CTA may enjoin collection oftaxes:a. If in its opinion the same mayjeopardize the interest of thegovernment and/or the taxpayer.b. In this instance, the court mayrequire the taxpayer either to depositthe amount claimed or file a surety bondfor not more than double the amountwith the court.

* Before enforcement of remedies,assessment is necessary to trigger theprocess. If no return is filed, theCommissioner is empowered to obtaininformation, and to summon/examine,and take testimony of persons todetermine the amount of tax due. (Sec.5, 1997 NIRC)

TAX R EMEDIES UNDER THE 1997 TAX CODE:

1. Summary –  remedies at the

administrative level or regulation thatare executed without ceremony ordelay; short or concise2. Substantive –  remedies provided forby law or regulation; an essential part orconstituent or relating to what isessential3. Procedural – remedies involving law ofpleading, evidence, jurisdiction, etc.4. Administrative – remedies available atthe administration (BIR) level5.  Judicial –  remedies that are

enforced through judicial action,

which may be civil or criminal

TAX REMEDIES OF THE GOVERNMENT TO EFFECT

COLLECTION OF TAXES 

1.  Compromise (Sec. 204) 2.  Distraint (Actual and Constructive)

(Secs. 205-208) 3.  Levy (Sec. 207B) 4.  Tax Lien (Sec. 219) 5.  Civil Action (Sec. 221) 6.  Criminal Action (Secs. 221, and 222) 

7.  Forfeiture of Property (Sec.224-225) 

8.  Suspension of businessoperations in violation of VAT

(Sec. 115) 9.  Enforcement of AdministrativeFine

The remedies of distraint and levy aswell as collection by civil and criminalactions may, in the discretion of theCommissioner, be pursued singly orindependently of each other, or all ofthem simultaneously.

(1) COMPROMISE 

DEFINITION:  A contract whereby theparties, by reciprocal concessions, avoidlitigation or put an end to one alreadycommenced (Art. 2028, New Civil Code).

R EQUISITES

1.  The taxpayer must have a taxliability.

2.  There must be an offer (by thetaxpayer of an amount to be paid bythe taxpayer)

3.  There must be an acceptance (by

the Commissioner or taxpayer as thecase may be) of the offer in thesettlement of the original claim.

OFFICERS AUTHORIZED TO COMPROMISE 

1.  The Commissioner of Internal

Revenue  (CIR) with respect tocriminal and civil cases arising fromviolations of the Tax Code [Secs. 7(C)and 204, 1997 NIRC] . This power ofthe CIR is discretionary and onceexercised by him cannot be reviewedor interfered with by the Courts.(Koppel, Philippines vs.Commissioner, GR No. L-1977,September 21, 1950) 

2.  By the  Regional Evaluation Board composed of:a. the Regional Director as

Chairman,b. Assistant Regional Director,

the heads of the Legal,Assessment and CollectionDivisions, and

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San eda College of Law 75 

MEMORY AID IN TAXATION LAW 

TAXATION LAW COMMITTEE CHAIRPERSON: Charmaine Torres  ASST. CHAIRPERSON: Rhohail Castro EDP: Rachelle Saya SUBJECT HEADS: Jemina Sy, Casiano Ilagan,

Jr., Ryan Co, Edwin Torres:MEMBERS: Marita Lourdes Azur, Edizer Enriquez, Christian Cabrera, Jhundee

Guillermo

c. the Revenue District Officerhaving jurisdiction over thetaxpayer, as members;

  on assessments issued by the

regional offices involving basictaxes of P500,000 or less, andminor criminal violations.

CASES WHICH MAY BE COMPROMISED 

1.  Delinquent accounts2.  Cases under administrative protests3.  Civil tax cases being disputed before

the courts4.  Collection cases filed in courts5.  Criminal violations, other than those

already filed in court or those

involving criminal tax fraud; and,6.  Cases covered by pre-assessment

notices but taxpayer is not agreeableto the findings of the audit office asconfirmed by the review office.(Sec.2, Rev. Reg. 7-2001) 

EXCEPTIONS 

1.  Withholding tax cases;2.  Criminal tax fraud cases;3.  Criminal violations already filed in

court;

4.  Delinquent accounts with dulyapproved schedule of installmentpayments;

5.  Cases where final reports ofreinvestigation or reconsiderationhave been issued resulting toreduction in the original assessmentand the taxpayer is agreeable tosuch decision.

6.  Cases which become final andexecutory after final judgment of acourt, where compromise isrequested on the ground of doubtful

validity of the assessment (RR. 30 –2002);

7.  Estate tax cases where compromiseis requested on the ground offinancial incapacity of the taxpayer.(RR. 30 –2002) 

COMMISSIONER MAY COMPROMISE THE PAYMENT

OF ANY INTERNAL REVENUE TAX WHEN

1.  A reasonable doubt as to thevalidity of the claim against the

taxpayer exists; or

a. The delinquent account ordisputed assessment is oneresulting from a jeopardyassessment.

b.  The assessment seems to bearbitrary in nature, appearingto be based on presumptions,and there is reason to believethat its is lacking in legaland/or factual basis; or

c.  The taxpayer failed to file anadministrative protest onaccount of the alleged failureto receive notice of assessmentor preliminary assessment andthere is reason to believe thatits is lacking in legal and/or

factual basis; ord.  The taxpayer failed to file a

request forreinvestigation/reconsiderationwithin 30 days from receipt offinal assessment notice andthere is reason to believe thatits is lacking in legal and/orfactual basis; or

e.  The taxpayer failed to elevateto the CTA an adverse decisionof the Commissioner, or hisauthorized representative, in

some cases, within 30 days fromreceipt thereof and there isreason to believe that its islacking in legal and/or factualbasis; or

f.  The assessment were issued onor after Jan. 1, 1998, where thedemand notice allegedly failedto comply with the formalitiesprescribed under Sec. 228 ofthe 1997 NIRC; or

g.  Assessments made based on the―Best Evidence Obtainable

Rule‖ and there is reason tobelieve that the same can bedisputed by sufficient andcompetent evidence.

h.  The assessment was issuedwithin the prescriptive periodfor assessment as extended bythe taxpayer's execution ofWaiver of the Statute ofLimitations the validity orauthenticity of which is beingquestioned or at issue and thereis strong reason to believe and

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San eda College of Law 76 

MEMORY AID IN TAXATION LAW 

TAXATION LAW COMMITTEE CHAIRPERSON: Charmaine Torres  ASST. CHAIRPERSON: Rhohail Castro EDP: Rachelle Saya SUBJECT HEADS: Jemina Sy, Casiano Ilagan,

Jr., Ryan Co, Edwin Torres:MEMBERS: Marita Lourdes Azur, Edizer Enriquez, Christian Cabrera, Jhundee

Guillermo

evidence to prove that it is notauthentic. (RR. 30 – 2002) 

i.  The assessment is based on anissue where a court of

competent jurisdiction made anadverse decision against theBureau, but for which theSupreme Court has not decidedupon with finality. (RR. 08-2004).

2.  The financial position of thetaxpayer demonstrates a clearinability to pay  the assessed tax[Sec. 204(A), 1997 NIRC).  In suchcase, the taxpayer should waive theconfidentiality privilege on bank

deposits under RA No. 1405 [Sec.6(F)(2), NIRC].

Financial Incapacity. — The offerto compromise based on financialincapacity may be accepted uponshowing that:a. The corporation ceased operation

or is already dissolved. Provided,that tax liabilities correspondingto the Subscription Receivable orAssets distributed/distributable tothe stockholders representingreturn of capital at the time of

cessation of operation ordissolution of business shall not beconsidered for compromise; or

b. The taxpayer, as reflected in itslatest Balance Sheet supposed tobe filed with the Bureau ofInternal Revenue, is suffering fromsurplus or earnings deficitresulting to impairment in theoriginal capital by at least 50%,provided that amounts payable ordue to stockholders other than

business-related transactionswhich are properly includible inthe regular "accounts payable" areby fiction of law considered aspart of capital and not liability,and provided further that thetaxpayer has no sufficient liquidasset to satisfy the tax liability; or

c. The taxpayer is suffering from anetworth deficit (total liabilitiesexceed total assets) computed bydeducting total liabilities (net of

deferred credits and amountspayable to stockholders/ownersreflected as liabilities, exceptbusiness-related transactions)from total assets (net of prepaidexpenses, deferred charges, pre-operating expenses, as well asappraisal increases in fixedassets), taken from the latestaudited financial statements,provided that in the case of anindividual taxpayer, he has noother leviable properties under

the law other than his familyhome; (Sec. 3, RR. 30 –2002). 

c. The taxpayer is a compensationearner with no other source ofincome and the family‘s grossmonthly compensation does notexceed (P10,500/month if single;P21,000/month if married), andthat it appears that the taxpayerpossesses no other leviable/distrainable assets, other than hisfamily home; or

d. The taxpayer has been granted bythe SEC or by any competenttribunal a moratorium orsuspension of payments tocreditors, or otherwise declaredbankrupt or insolvent. (Sec. 3, RR.07-2001) 

The Congressional OversightCommittee, under Section 290 of the1997 NIRC is empowered to require theBIR:

1.  The submission of all pertinentinformation, including but notlimited to industry audits,collection performance data,status reports on criminalactions initiated againstpersons; and

2.  The submission of taxpayerreturns.

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San eda College of Law 77 

MEMORY AID IN TAXATION LAW 

TAXATION LAW COMMITTEE CHAIRPERSON: Charmaine Torres  ASST. CHAIRPERSON: Rhohail Castro EDP: Rachelle Saya SUBJECT HEADS: Jemina Sy, Casiano Ilagan,

Jr., Ryan Co, Edwin Torres:MEMBERS: Marita Lourdes Azur, Edizer Enriquez, Christian Cabrera, Jhundee

Guillermo

MINIMUM COMPROMISE R ATES (MCR)  OF ANY

TAX LIABILITY a.  In case of financial incapacity:

MCR = 10% of the basic assessed tax

b.  Other cases:MCR = 40% of the basic assessed tax[Sec. 204(A), 1997 NIRC]  

APPROVAL OF THE COMPROMISE BY THE

EVALUATION BOARD IS REQUIRED WHEN a.  the basic tax involved exceeds

P1,000,000.00, orb.  the settlement offered is less than

the MCR.

NOTE: The MCR may be less than theprescribed rates of 10% or 40%, as the

case may be, provided it is approved bythe Evaluation Board (composed of theBIR Commissioner and the four BIRDeputy Commissioners).

COMPROMISE OF CRIMINAL VIOLATIONS General Rule: All criminal violationsunder the CTRP may be compromised.

Exceptions:1.  Those already filed in court2.  Those involving fraud [Sec. 204(B),

1997 NIRC].

EXTENT OF THE COMMISSIONER ’S DISCRETION

TO COMPROMISE CRIMINAL VIOLATIONS 

1.  Before the complaint is filed withthe Prosecutor’s Office:  The CIRhas full discretion to compromiseexcept those involving fraud.

2.  After the complaint is filed withthe Prosecutor’s Office but beforethe information is filed with thecourt: The CIR can still compromise

provided the prosecutor must giveconsent.

3.   After information is filed with thecourt:  The CIR is no longerpermitted to compromise with orwithout the consent of theProsecutor. (People vs. Magdaluyo,GR No. L-16235, April 20, 1961) 

This is more so, when the courthas rendered a final judgment. As amere agent of the Government, theCommissioner is not authorized to

accept anything less than what isadjudicated in favor of theGovernment. By virtue of such finaljudgment, the Government has

already acquired a vested right.

NATURE OF A COMPROMISE IN EXTRAJUDICIAL

SETTLEMENT OF THE TAXPAYER ’S CRIMINAL

LIABILITY FOR HIS VIOLATION

It is consensual in character, hence,may not be imposed on the taxpayerwithout his consent. The BIR may onlysuggest settlement of his tax liabilitythrough a compromise. The extra-judicial settlement and the amount ofthe suggested compromise penalty

should conform with the schedule ofcompromise penalties provided underthe relevant BIR regulations or orders.

R EMEDY IN CASE THE TAXPAYER REFUSES OR

FAILS TO ABIDE THE TAX COMPROMISE 

1.  Enforce the compromisea.  If it is a judicial compromise, it

can be enforced by mereexecution. A judicial compromiseis one where a decision based onthe compromise agreement is

rendered by the court on requestof the parties.

b. Any other compromise isextrajudicial and like any othercontract can only be enforced bycourt action.

2.  Regard it as rescinded and insistupon original demand (Art. 2041,Civil Code).

COMPROMISE PENALTY 

It is an amount of money that the

taxpayer pays to compromise a taxviolation. This is paid in lieu of criminalprosecution. A taxpayer cannot becompelled to pay a compromise penalty.If he does not want to pay, the CIR mustinstitute a criminal action.

COMPROMISE VS. ABATEMENT

Compromise  involves a reduction ofthe taxpayer‘s liability, while abatement means that the entire tax liability of thetaxpayer is cancelled.

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San eda College of Law 78 

MEMORY AID IN TAXATION LAW 

TAXATION LAW COMMITTEE CHAIRPERSON: Charmaine Torres  ASST. CHAIRPERSON: Rhohail Castro EDP: Rachelle Saya SUBJECT HEADS: Jemina Sy, Casiano Ilagan,

Jr., Ryan Co, Edwin Torres:MEMBERS: Marita Lourdes Azur, Edizer Enriquez, Christian Cabrera, Jhundee

Guillermo

ABATEMENT

THE COMMISSIONER MAY ABATE OR CANCEL A

TAX LIABILITY WHEN 

1.  The tax or any portion thereofappears to be unjustly orexcessively assessed; [Sec. 204(B),1997 NIRC]. a. When the filing of the

return/payment is made at thewrong venue;

b. When the taxpayer‘s mistake inpayment of his tax is due toerroneous written official adviceof a revenue officer;

c. When the taxpayer fails to file the

return and pay the tax on timedue to substantial losses fromprolonged labor dispute, forcemajeure, legitimate businessreverses, provided, however, theabatement shall only cover thesurcharge and the compromisepenalty and not the interestimposed under Sec. 249 of theCode;

d. When the assessment is broughtabout or the result of taxpayer‘snon-compliance with the law due

to a difficult interpretation of saidlaw.

e. When the taxpayer fails to file thereturn and pay the correct tax ontime due to circumstances beyondhis control, provided, however,the abatement shall only coverthe surcharge and the compromisepenalty and not the interestimposed under Sec. 249 of theCode;

f. Late payment of the tax undermeritorious circumstances (ex.Failure to beat bank cut-off time,surcharge erroneously imposed,etc.) (Sec. 2, Rev. Reg. 13-2001) 

2.  The administration and collectioncosts involved do not justify thecollection  of the amount due [Sec.204(B), 1997 NIRC]. a. Abatement of penalties on

assessment confirmed by thelower court but appealed by thetaxpayer to a higher court

b. Abatement of penalties onwithholding tax assessment undermeritorious circumstances

c. Abatement of penalties on

delayed installment paymentunder meritorious circumstancesd. Abatement of penalties on

assessment reduced afterreinvestigation but taxpayer isstill contesting reducedassessment; and

e. Such other circumstances whichthe Commissioner may deemanalogous to the enumerationabove. (Sec. 3, Rev. Reg. 13-2001) 

3.  The Commissioner   may also, even

without a claim  therefor, refund orcredit any tax where on the face ofthe return upon which payment wasmade such payment appears clearlyto have been erroneously paid (Sec. 229, 1997 NIRC)). 

(2)  DISTRAINT

DEFINITION: It is the seizure by thegovernment of personal property,tangible or intangible, to enforce the

payment of taxes. The property may beoffered in a public sale, if taxes are notvoluntarily paid. It is a summary remedy.

NATURE OF THE WARRANT OF DISTRAINT OR

LEVY 

The warrant is a summary procedure―forcing‖ the taxpayer  to pay. Thereceipt of a warrant may or may notpartake the character of a final decision.If it is an indication of a final decision,the taxpayer may appeal to the CTAwithin 30 days from service of thewarrant.

Duties of the officer serving thewarrant of distraint:

1.  Make an account of the personalproperties distrained;

2.  Sign the list of personalproperties distrained to whichshall be added, a statement ofthe sum demanded and note ofthe time and place of sale;

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San eda College of Law 79 

MEMORY AID IN TAXATION LAW 

TAXATION LAW COMMITTEE CHAIRPERSON: Charmaine Torres  ASST. CHAIRPERSON: Rhohail Castro EDP: Rachelle Saya SUBJECT HEADS: Jemina Sy, Casiano Ilagan,

Jr., Ryan Co, Edwin Torres:MEMBERS: Marita Lourdes Azur, Edizer Enriquez, Christian Cabrera, Jhundee

Guillermo

3.  Leave either with the owner orperson from whose possessionsuch personal properties weretaken, or at the dwelling or

place of business of such personwith someone of suitable ageand discretion (Sec. 208, CTRP)

TWO TYPES OF DISTRAINT 

1.  Actual: there is taking ofpossession of the personalproperty from the taxpayer bythe government. Physicaltransfer of possession is notalways required. This is true inthe case of intangible property

such as stocks and credits.2.  Constructive: the owner is

merely prohibited from disposingof his property. 

ACTUAL VS. CONSTRUCTIVE DISTRAINT 

ACTUALDISTRAINT

CONSTRUCTIVEDISTRAINT

Made only on theproperty of adelinquent taxpayer

Made on the propertyof any taxpayer,whether delinquent

or not

There is taking ofpossession

The taxpayer ismerely prohibitedfrom disposing of hisproperty

Effected by leaving alist of distrainedproperty or byservice of a warrantof distraint orgarnishment

Effected by requiringthe taxpayer to signa receipt of theproperty or by therevenue officerpreparing andleaving a list of such

property

An immediate stepfor collection oftaxes

Not necessarily so

ACTUALDISTRAINT

CONSTRUCTIVEDISTRAINT

BothAre summary remedies for the collection oftaxes;NOTE : Refer only to personal property; andcannot be availed of where the amount ofthe tax involved is not more than P100

R EQUISITES FOR THE EXERCISE OF THE REMEDY

OF DISTRAINT 

1.  The taxpayer must be delinquent(except in constructive distraint) inthe payment of tax;

2.  There must be a subsequent demand for its payment (assessment);

3.  The taxpayer must fail to pay the taxat the time required; and

4.  The period within which to assess orcollect the tax has not yet

prescribed.

PERSONS WHO SHALL SEIZE AND DISTRAINT

PERSONAL PROPERTY (ACTUAL DISTRAINT)

1.  Amount of delinquent tax is morethan P1,000,000 –  Commissioner or

his duly authorized representatives.2.  Amount of delinquent tax isP1,000,000 or less – Revenue DistrictOfficer. (Sec. 207(A), 1997 NIRC)

AUTHORITY OF THE COMMISSIONER TO INQUIRE

INTO BANK DEPOSIT ACCOUNTS 

Distraint includes garnishment ofmoney even in bank deposits because RA1405 (Bank Secrecy Law) covers onlydivulging of information of deposits. Noinquiry is made on garnishment for it

only earmarks a portion of the deposits.Notwithstanding any contraryprovision of RA 1405, the Commissioneris authorized to inquire into the bankdeposits of:1. a decedent to determine his grossestate2. a taxpayer who waives his right byreason of financial incapacity to pay histax liability (Sec.5, NIRC)

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San eda College of Law 80 

MEMORY AID IN TAXATION LAW 

TAXATION LAW COMMITTEE CHAIRPERSON: Charmaine Torres  ASST. CHAIRPERSON: Rhohail Castro EDP: Rachelle Saya SUBJECT HEADS: Jemina Sy, Casiano Ilagan,

Jr., Ryan Co, Edwin Torres:MEMBERS: Marita Lourdes Azur, Edizer Enriquez, Christian Cabrera, Jhundee

Guillermo

PROCEDURES FOR THE ACTUAL DISTRAINT OR

GARNISHMENT

Either by the CIR or his duly authorizedrepresentative; or by the RevenueDistrict Officer

With respect to:1. Personal property – 

(a) upon the owner of the goods,chattels, or other personalproperty; or

(b) upon the person from whosepossession such properties aretaken.

2. Stocks and other securities

(a)  upon the taxpayer; and(b) upon the president, manager,

treasurer or other responsibleofficer of the corporation,company or association whichissued the said stock andsecurities.

3. Bank accounts shall be garnished byserving a warrant of distraint – (a)  upon the taxpayer; and(b) upon the president, manager,

treasurer, or other responsibleofficer of the bank.

Note:  Upon receipt of the warrant ofdistraint, the bank shall turn over to theCommissioner so much of the bankaccounts as may be sufficient to satisfythe claim of the government.4. Debts and credits – 

(a)  persons owing or having in hispossession the debts;

(b) or under his control such credits;or

(c)  upon his agent.

Note:  The warrant of distraint shall besufficient authority to the person owingthe debts or having in his possession orunder his control any credits belonging

to the taxpayer to pay to theCommissioner the amount of such debtsor credits.

Notice specifying the time and placeof sale and the articles distrained. Theposting shall be made in not less thantwo (2) public places in the city or muni-cipality where the distraint is made.One place for posting of such notice is atthe Office of the Mayor of such city or

municipality.

THE TAXPAYER ’S PROPERTY MAY BE PLACED

UNDER CONSTRUCTIVE DISTRAINT WHEN HE 

1.  is retiring  from any business subjectto tax;

2.  is intending to – a. leave the Philippines,b. remove his property therefrom,c. hide or conceal his property,

3.  is performing any act tending toobstruct the proceeding forcollecting the tax due or which maybe due from him (Sec. 223, 1997NIRC).

IIIPosting of NoticeSec. 209 NIRC  

Taxpayer must sign

receipt

II 

Service of Warrant of Distraint(Sec. 208) 

I

Commencement of distraintroceedin s

IVSale of Property Distrained

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San eda College of Law 81 

MEMORY AID IN TAXATION LAW 

TAXATION LAW COMMITTEE CHAIRPERSON: Charmaine Torres  ASST. CHAIRPERSON: Rhohail Castro EDP: Rachelle Saya SUBJECT HEADS: Jemina Sy, Casiano Ilagan,

Jr., Ryan Co, Edwin Torres:MEMBERS: Marita Lourdes Azur, Edizer Enriquez, Christian Cabrera, Jhundee

Guillermo

PROCEDURE FOR THE CONSTRUCTIVE DISTRAINT

OF PERSONAL PROPERTY 

CIR shall require the taxpayer or anyperson having possession or control ofsuch property to(a) sign a receipt covering the propertydistrained and(b) obligate himself to

1. preserve the same intact andunaltered and

2. not to dispose of the same in anymanner whatsoever without theexpress authority of theCommissioner of InternalRevenue.

If the taxpayer or person in possession ofthe property refuses or fails to sign the

receipt referred to, the revenue officereffecting the constructive distraint shall(a) proceed to prepare a list of suchproperty and(b) in the presence of two (2) witnessesleave a copy thereof in the premiseswhere the property distrained is located,after which the said property shall bedeemed to have been placed underconstructive distraint.

(3) LEVY

DEFINITION: It refers to the act of seizureof real property  in order to enforce thepayment of taxes. The property may beoffered in a public sale, if after seizure,the taxes are not voluntarily paid.

R EQUISITES FOR THE EXERCISE OF THE R EMEDY

OF LEVY 

Same as in the remedy of distraint.

WHEN MAY LEVY BE EFFECTED?

Real property may be levied uponbefore, simultaneously, or after the

distraint of personal property belongingto the delinquent [Sec. 207(B), 1997 NIRC] ; and the remedy by distraint and levymay be repeated if necessary until thefull amount, including all expenses, iscollected (Sec. 217, 1997 NIRC).

PROCEDURE OF LEVY ON R EAL PROPERTY

IPreparation of a duly authen-ticatedcertificate containing:(a) description of the property levied;(b) name of the taxpayer, and(c) the amounts of tax and penalty due

from him. This certificate shalloperate with the force of a legalexecution throughout the Philippines(Sec. 207B, 1997 NIRC). 

Service of written notice to:(a) the delinquent taxpayer; or(b) if he is absent from the Philippines,to his agent or manager of the businessin respect to which the liability arose; orc.  to the occupant of the property.d.  the proper Register of Deeds shallalso be notified of the levy (Sec. 207B,

1997 NIRC). 

The advertisement shall contain:1.  the amount of tax and penalties due;2.  name of the taxpayer against whom

taxes are levied;

III Advertisement of the Time and

Place of Sale

Taxpayer’s obligation to preserve 

IPre are Certificate of Lev

II

Service of Notice

Remedy when taxpayer didn’t sign

receipt

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San eda College of Law 82 

MEMORY AID IN TAXATION LAW 

TAXATION LAW COMMITTEE CHAIRPERSON: Charmaine Torres  ASST. CHAIRPERSON: Rhohail Castro EDP: Rachelle Saya SUBJECT HEADS: Jemina Sy, Casiano Ilagan,

Jr., Ryan Co, Edwin Torres:MEMBERS: Marita Lourdes Azur, Edizer Enriquez, Christian Cabrera, Jhundee

Guillermo

3. short description the property to besold.

The advertisement shall be made

within 20 days after the levy, and thesame shall be for a period of at least 30days. It shall be effectuated by:a. posting a notice at the main entrance

of the municipal building or city halland in a public and conspicuousplace in the barrio or district in whichthe real property lies; and

b. by publication once a week for 3weeks in a newspaper of generalcirculation in the municipality or citywhere the property is located (Sec.213, CTRP). 

DISTRAINT VS. LEVY 

DISTRAINT LEVY

Refers to personalproperty

Refers to realproperty

Forfeiture by thegovernment is notprovided

Forfeiture isauthorized

The taxpayer is notgiven the right ofredemption withrespect to distrainedpersonal property.

The right ofredemption isgranted in case ofreal property leviedupon and sold, orforfeited to the

government.

Both  Are summary remedies for the collection of

taxes; and

  Cannot be availed of where the amount ofthe tax involved is not more than P100

R EDEMPTION OF PROPERTY SOLD 

Within 1 year from the date of sale, the property may be redeemed by thedelinquent taxpayer or anyone from him,

upon payment of the taxes, penalties

and interest thereon from the date ofdelinquency to the date of sale,together with interest on purchase priceat 15% per annum from the date of sale

to the date of redemption. (Sec. 214,NIRC). 

FORFEITURE TO THE GOVERNMENT 

If there is no bidder in the publicsale or if the amount of the highest bidis insufficient to pay the taxes, penaltiesand costs, the real property shall beforfeited to the Government.

FURTHER DISTRAINT AND LEVY 

The remedy of distraint and levy maybe repeated if necessary until the fullamount of the tax delinquency dueincluding all expenses is collected fromthe taxpayer. Otherwise, a clevertaxpayer who is able to conceal most ofthe valuable part of his property wouldescape payment of his tax liability bysacrificing an insignificant portion of hisholdings.

(4) TAX LIEN

DEFINITION:  It is a legal claim or chargeon property, either real or personal,established by law as a security indefault of the payment of taxes (51

 AmJur 881).  Generally, it attaches tothe property irrespective of ownershipor transfer thereof.

EXTENT AND NATURE 

The tax, together with interests,penalties, and costs that may accrue inaddition thereto is a lien upon all

 property and rights to propertybelonging to the taxpayer . 

The lien shall not be valid againstany mortgagee, purchaser, or judgmentcreditor until notice of such lien shall befiled by the Commissioner of InternalRevenue in the Office of the Register ofDeeds of the province or city where theproperty of the taxpayer is situated orlocated (Sec. 219, 1997 NIRC).

IV

Sale

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San eda College of Law 83 

MEMORY AID IN TAXATION LAW 

TAXATION LAW COMMITTEE CHAIRPERSON: Charmaine Torres  ASST. CHAIRPERSON: Rhohail Castro EDP: Rachelle Saya SUBJECT HEADS: Jemina Sy, Casiano Ilagan,

Jr., Ryan Co, Edwin Torres:MEMBERS: Marita Lourdes Azur, Edizer Enriquez, Christian Cabrera, Jhundee

Guillermo

WHEN DOES IT ATTACH?

Not only from the service of thewarrant of distraint but from the time

tax became due and payable.

LIEN VS. DISTRAINT 

LIEN DISTRAINT

Directed againstthe propertysubject to the tax

Need not bedirected against theproperty subject totax

Regardless of theowner of theproperty

Property seizedmust be owned bythe taxpayer

(5)  CIVIL ACTIONS

DEFINITION:  For tax remedy purposes,these are actions instituted by thegovernment to collect internal revenuetaxes. It includes filing by thegovernment with the probate courtclaims against the deceased taxpayer.

WHEN RESORTED TO?

1.  When a tax is assessed but theassessment becomes final andunappealable because the taxpayerfails to file an administrativeprotest with the CIR within 30 daysfrom receipt; or

2.  When a protest against assessment isfiled and a decision of the CIR wasrendered but the said decisionbecomes final, executory, anddemandable for failure of thetaxpayer to appeal the decision to

the CTA within 30 days fromreceipt of the decision. 

NOTE:  Judicial action may be resortedto even before assessment  althoughimpractical, as stated in Sec. 203, 1997NIRC, ―… and no proceeding in courtwithout assessment for the collection ofsuch taxes shall be begun after   theexpiration of such (3year) period.‖ 

It should be noted that no civilor criminal action for the recovery of

taxes shall be filed in court without theapproval of the Commissioner.

WHERE TO FILE 

1. Court of Tax Appeals  –  where theprincipal amount of taxes and fees,exclusive of charges and penaltiesclaimed is One million pesos andabove.

2. Regional Trial Court, MunicipalTrial Court, Metropolitan TrialCourt  – where the principal amountof taxes and fees, exclusive ofcharges and penalties claimed is lessthan One million pesos. (Sec. 7, RANo. 9282)

THE APPROVAL OF THE CIR   IS ESSENTIAL IN

CIVIL CASES.  However, under Sec. 7, 1997NIRC, the Commissioner may delegatesuch power to a Regional Director.

DEFENSES WHICH ARE PRECLUDED BY FINAL AND

EXECUTORY ASSESSMENTS 

1.  Invalidity or illegality of theassessment; and

2.  Prescription of the government‘sright to assess.

(6)  CRIMINAL ACTIONS

The judgment in the criminal caseshall not only impose the penalty butshall also order the payment of taxessubject of the criminal case as finallydecided by the Commissioner (Sec. 205,NIRC). 

WHERE TO FILE 

1. Court of Tax Appeals  –  on criminaloffenses arising from violations ofthe NIRC or TCC and other lawsadministered by the BIR and theBOC, where the principal amount oftaxes and fees, exclusive of chargesand penalties claimed is One million

 pesos and above.2.  Regional Trial Court, Municipal

Trial Court, Metropolitan TrialCourt  –  on criminal offenses arisingfrom violations of the NIRC or TCCand other laws administered by the

BIR and the BOC, where the principal

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San eda College of Law 84 

MEMORY AID IN TAXATION LAW 

TAXATION LAW COMMITTEE CHAIRPERSON: Charmaine Torres  ASST. CHAIRPERSON: Rhohail Castro EDP: Rachelle Saya SUBJECT HEADS: Jemina Sy, Casiano Ilagan,

Jr., Ryan Co, Edwin Torres:MEMBERS: Marita Lourdes Azur, Edizer Enriquez, Christian Cabrera, Jhundee

Guillermo

amount of taxes and fees, exclusiveof charges and penalties claimed isless than One million pesos or wherethere is no specified amount

claimed. (Sec. 7, RA No. 9282) 

IMPORTANT CONSIDERATIONS

11. No criminal action shall be begunwithout the approval of theCommissioner. (Sec. 220, 1997 NIRC) 

12.  It shall be brought in the name ofthe Government and shall beconducted by the legal officers ofthe BIR.

EFFECT OF ACQUITTAL OF THE

TAXPAYER IN A CRIMINAL ACTION

It does not necessarily result in theexoneration of said taxpayer from hiscivil liability to pay taxes.Rationale:  The duty to pay tax isimposed by statute prior to andindependent of  any attempt on the partof the taxpayer to evade payment. It isnot a mere consequence of the feloniousacts charged, nor is it a mere civilliability derived from a crime. (Republicvs. Patanao, GR No. L-14142, May 30,

1961) 

EFFECT OF SUBSEQUENT SATISFACTIONOF CIVIL LIABILITY

The subsequent satisfaction of civilliability by payment or prescription doesnot extinguish  the taxpayer‘s criminalliability.

NO SUBSIDIARY IMPRISONMENT

In case of insolvency   on the part of

the taxpayer, subsidiary imprisonmentcannot be imposed as regards the  taxwhich he is sentenced to pay.

However, it may be imposed in casesof failure to pay the fine imposed. (Sec.280, 1997 NIRC)

CRIMINAL ACTION MAY BE FILEDDURING THE PENDENCY OF ANADMINISTRATIVE PROTEST IN THE BIR

It is not a requirement for thefiling thereof that there be a precisecomputation and assessment of the tax,since what is involved in the criminalaction is not the collection of tax but acriminal prosecution for the violationof the NIRC. Provided, however, thatthere is a prima facie  showing of awillful attempt  to evade taxes. (SeeUngab vs. Cusi, GR Nos. L-41919-24, May30, 1980 in relation to Commissioner vs.Court of Appeals, GR No. 119322, June4, 1996)

(7) FORFEITURE

DEFINITION:  divestiture of propertywithout compensation, in consequenceof a default or offense.

ENFORCEMENT OF THE REMEDY OFFORFEITURE

a. In case of personal property –  Theforfeiture of chattels and removablefixtures of any sort is enforced by

seizure and sale or destruction  ofthe specific forfeited property.

b. In case of real property –  Theforfeiture of real property isenforced by a  judgment ofcondemnation and sale  in a legalaction or proceeding, civil orcriminal, as the case may require.

c. In case of distilled spirits, liquors,cigars, cigarettes manufactured,products of tobacco and apparatusused for their production –  Uponforfeiture, may be destroyed byorder of the Commissioner where thesale may be injurious to publichealth or prejudicial to lawenforcement.

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San eda College of Law 85 

MEMORY AID IN TAXATION LAW 

TAXATION LAW COMMITTEE CHAIRPERSON: Charmaine Torres  ASST. CHAIRPERSON: Rhohail Castro EDP: Rachelle Saya SUBJECT HEADS: Jemina Sy, Casiano Ilagan,

Jr., Ryan Co, Edwin Torres:MEMBERS: Marita Lourdes Azur, Edizer Enriquez, Christian Cabrera, Jhundee

Guillermo

d. Other articles subject to excise taxwhich have been manufactured orremoved in violation of the Code,dies for printing or making fake

revenue stamps and labels –  Uponforfeiture may be sold or destroyedat the discretion of theCommissioner. Forfeited propertyshall not be destroyed until at least20 days from seizure.

EFFECT OF THE FORFEITURE OFPROPERTY

The effect is to transfer the title tothe specific thing from the owner to thegovernment. All the proceeds in case of

a sale go to the coffers of thegovernment (U.S. vs. Surla, GR No.6536, September 2, 1911).  In seizure forthe enforcement of a tax lien, theresidue, after deducting the tax liabilityand expenses will go to the taxpayer(Bank of the Phil. Island vs. Trinidad, GRNo. 16014, October 4, 1941).

INFORMER’S REWARD (Sec 282) A. For violations of the NIRC, a reward

of 10% of the revenues, surcharges,or fees recovered and/or fine or

penalty imposed and collected or P 1M per case, whichever is lower shallbe given to:1.  any person who voluntarily gives

definite and sworn informationnot yet in the possession of theBIR leading to the discovery offraud upon the Internal RevenueLaws and/or any violations thereof

2.  an informer where the offenderhas offered to compromise theviolation of law comiited by himand his offer has been accepted

and collected  by the CIR . Thisexcludes an Internal RevenueOfficer/employee or other publicofficial/employee, or his relativewithin the sixth degree

* This shall not refer to a case alreadypending or examined by the CIR

B. For the discovery and seizure ofsmuggled goods

- a reward of 10% of the FMV of thesmuggled and confiscated goods or

P 1 M per case, whichever islower, shall be given to personsinstrumental in the discovery andseizure of such smuggled goods.

* This does not apply to all publicofficials whether incumbent or retired,who acquired the information in thecourse of performance of their dutiesduring their incumbency.

PRESCRIPTIVE PERIODS FORTHE ASSESSMENT ANDCOLLECTION OF TAXES

RATIONALE OF PRESCRIPTIVE PERIODS

Such periods are designated tosecure the taxpayers againstunreasonable investigation after thelapse of the period prescribed. They arealso beneficial to the governmentbecause tax officers will be obliged toact promptly.

RULES ON PRESCRIPTION

1.  When the tax law itself is silenton prescription, the tax isimprescriptible;

2.  When no return is required, taxis imprescriptible;

Note: Remedy of taxpayer is to file areturn.3.  Defense of prescription is

waivable;

WHAT CONSTITUTES ASSESSMENT?

An assessment contains not onlya computation of tax liabilities but alsoa demand for payment within aprescribed period.

PRESCRIPTIVE PERIOD FOR THEASSESSMENT OF TAXES

General Rule:Three (3) years after the date

the return is due or filed, whichever islater (Sec. 203, 1997 NIRC).

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San eda College of Law 86 

MEMORY AID IN TAXATION LAW 

TAXATION LAW COMMITTEE CHAIRPERSON: Charmaine Torres  ASST. CHAIRPERSON: Rhohail Castro EDP: Rachelle Saya SUBJECT HEADS: Jemina Sy, Casiano Ilagan,

Jr., Ryan Co, Edwin Torres:MEMBERS: Marita Lourdes Azur, Edizer Enriquez, Christian Cabrera, Jhundee

Guillermo

Exceptions:1.  Failure to file a return: ten (10)

years from the date of thediscovery of the omission to file

the return (Sec.222[A]);2.  False or fraudulent return withintention to evade the tax: ten(10) years  from the date of thediscovery of the falsity or fraud(Sec.222 [A]);

Note:  Nothing in Section 222(A)shall be construed to authorize theexamination and investigation orinquiry into any tax return filed inaccordance with the provisions ofany tax amnesty law or decree.

  Fraud must be alleged and proved as a fact. It must be theproduct of a deliberate intent toevade taxes. It may beestablished by the:a.  Intentional and substantial

understatement of taxliability by the taxpayer;

b.  Intentional and substantialoverstatement of deductionsof exemptions; and/or

c.  Recurrence of the abovecircumstances

  Falsity constitutes a deviationfrom the truth due to mistake,carelessness or ignorance.

There is fraud in the following decidedcases:1. Fraud must be the product of a

deliberate intent to evade taxes( Jalandoni vs. Republic)

2. Simple statement that return filedwas not fraudulent does not disproveexistence of fraud (Tayengco vs.Collector )

3. Substantial under-declarations ofincome for six consecutive five yearsdemonstrate fraudulence of return(Perez vs. CTA)

4. Presence of fictitious expenses, withno evidence presented, provesexistence of fraud (Tan Guan vs.Commissioner )

However, the courts did not considerthe tax returns filed as false orfraudulent with intent to evade payment

of tax in the following cases:

a.  Mere understatement in the taxreturn will not necessarily implyfraud (Jalandoni vs. Republic) 

b.  Sale of a real property for a price

less than its fair market value isnot necessarily a false return(Commissioner vs. AyalaSecurities) 

c.  Fraud is a question of fact and thecircumstances constituting fraudmust be alleged and proved in thetrial court (Commissioner vs.

 Ayala Securities) d.  Fraud is never imputed and the

courts never sustain findings offraud upon circumstances thatonly create suspicion

(Commissioner vs. Javier) e.  Mistakes of revenue officers on

three different occasions removeelement of fraud ( Aznar vs. CTAand Collector) 

3.  Agreement in writing to theextension of the period to assessbetween the CIR and thetaxpayer before the expirationof the 3-year period. NB: Theextended period agreed uponcan further be extended by a

subsequent written agreementmade before the expiration ofthe extended period previouslyagreed upon (Sec. 222[b]). 

4.  Written waiver of renunciation of the original three (3) yearlimitation, signed by thetaxpayer (Sambrano vs. Court ofTax Appeals, GR No. L-8652,March 30, 1957).

Note:  Notice of the assessment isreleased, mailed or sent to the taxpayer

also within the 3 year period. It is notrequired that the notice be received bythe taxpayer within the prescribed

 period.  But the sending of the noticemust clearly be proven. (Basilan Estate,Inc. vs. Commissioner, GR No. L-22492,September 5, 1967)

AMENDMENT OF RETURN

If the amended return issubstantially different from the originalreturn, the prescriptive period shall be

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San eda College of Law 87 

MEMORY AID IN TAXATION LAW 

TAXATION LAW COMMITTEE CHAIRPERSON: Charmaine Torres  ASST. CHAIRPERSON: Rhohail Castro EDP: Rachelle Saya SUBJECT HEADS: Jemina Sy, Casiano Ilagan,

Jr., Ryan Co, Edwin Torres:MEMBERS: Marita Lourdes Azur, Edizer Enriquez, Christian Cabrera, Jhundee

Guillermo

counted from the filing of the amendedreturn.  But the said period shall runfrom the  filing of the original return  ifthe same is sufficiently complete  to

enable the Commissioner to make aproper assessment. (Commissioner vs.Phoenix Assurance Co., GR No. L-19727,May 20, 1965)

When Substantive:a.  substantial under declaration

(exceeding 30% of that declared) of taxable sales, receipts orincome,

b.  or a substantial overstatement(exceeding 30% of deductions)(Sec. 248)

PRESCRIPTIVE PERIOD FOR THECOLLECTION OF TAXES

General Periods:Five (5) years – from assessment

or within period for collection agreedupon in writing before expiration of the5-year period (Sec. 222, 1997 NIRC).

Ten (10) years  –  withoutassessment in case of false or fraudulentreturn with intent to evade or failure tofile return (Sec. 222, 1997 NIRC).

WHAT IS THE PRESCRIPTIVE PERIODWHERE THE GOVERNMENT’S ACTION ISON A BOND WHICH THE TAXPAYEREXECUTES IN ORDER TO SECURE THEPAYMENT OF HIS TAX OBLIGATION?

Ten (10) years under Art.1144(1) of the Civil Code and not three(3) years under the NIRC. In this case,the Government proceeds by courtaction to forfeit a bond. The action isfor the enforcement of a contractualobligation. (Republic vs. Araneta, GR

No. L-14142, May 30, 1961) 

GROUNDS FOR SUSPENSION OF THERUNNING OF THE STATUTE OFLIMITATIONS

a.  When the CIR is prohibited frommaking the assessment orbeginning the distraint or levy ora proceeding in court, and forsixty (60) days thereafter;

b.  When the taxpayer requests fora reconsideration which isgranted by the CIR;

c.  When the taxpayer cannot be

located in the address given byhim in the return, unless heinforms the CIR of any change inhis address.

d.  When the warrant of distraint orlevy is duly served, and noproperty is located; and

e.  When the taxpayer is out of thePhilippines (Sec. 223, 1997NIRC). 

A TAX RETURN IS CONSIDERED FILEDFOR PURPOSES OF STARTING THE

RUNNING OF THE PERIOD OFLIMITATIONS IF

a.  The return is valid – it has compliedsubstantially with the requirementsof the law; and

b. The return is appropriate –  it is areturn for the particular tax requiredby law.

Note:  A defective tax return is thesame as if no return was filed at all.

PRESCRIPTIVE PERIOD FOR THEVIOLATION OF ANY PROVISION OF THETAX CODE (SEC. 281, 1997 NIRC) 

1.  Should be filed within  five (5) years from the (a) day of the commissionof the violation  of the law, and ifthe same be not known, from the (b)discovery thereof and the institutionof the judicial proceedings  for itsinvestigation and punishment.

2.  Illustrative case: (Lim vs. Court of Appeals GR Nos. 48134-37, Ocober18 , 1990)a.  charge is failure or refusal to

pay  deficiency income tax – committed only after the finalityof the assessment coupled withthe taxpayer‘s willful refusal topay the taxes within the allottedperiod. (i.e. cannot becommitted upon filing thereturn)

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MEMORY AID IN TAXATION LAW 

TAXATION LAW COMMITTEE CHAIRPERSON: Charmaine Torres  ASST. CHAIRPERSON: Rhohail Castro EDP: Rachelle Saya SUBJECT HEADS: Jemina Sy, Casiano Ilagan,

Jr., Ryan Co, Edwin Torres:MEMBERS: Marita Lourdes Azur, Edizer Enriquez, Christian Cabrera, Jhundee

Guillermo

b.  charge is filing of false orfraudulent return with intentto evade  the assessment –  inaddition to the fact of discovery,

there must be a judicialproceeding for the investigationand punishment of the taxoffense before the 5 yearprescriptive period begins torun.

II. TAX REMEDIES OF THETAXPAYER

GENERAL R EMEDIES 

A. ADMINISTRATIVEBefore Payment

a.  Protest – filing a petition forreconsideration orreinvestigation within 30days from receipt ofassessment Within 60 daysfrom filing of protest, allrelevant supportingdocuments should have beensubmitted, otherwise, the

assessment shall become final  –  cannot be appealed(Sec. 228, 1997 NIRC). 

Note:  Submission of documentswithin the 60 day period isoptional to the taxpayer .

"That the relevantsupporting documentsmentioned in the law refersto such documents which thetaxpayer feels would be

necessary to support hisprotest and not what theCommissioner feels shouldbe submitted, otherwise,taxpayer would always be atthe mercy of the BIR whichmay require production ofsuch documents whichtaxpayer could not produce."(Standard Chartered Bankvs. CIR, CTA Case No. 5696,

 August 16, 2001)

A protest is a vitaldocument which is a formaldeclaration of resistance ofthe taxpayer. It is a

repository of all arguments.It can be used in court incase administrative remedieshave been exhausted. It isalso the formal act of thetaxpayer questioning theofficial actuation of the CIR.This is equivalent to apleading.

b.  Entering into a compromise(Sec. 204, 1997 NIRC). 

After PaymentFiling of claim for refund

or tax credit within 2 years fromdate of payment regardless ofany supervening cause (Sec. 229,1997 NIRC).

B. JUDICIALCivil Actiona. Appeal to the Court of Tax

Appeals –  within 30 days fromreceipt of decision on the protestor from the lapse of 180 days dueto inaction of the Commissioner(Sec. 228, 1997 NIRC). 

b. Action to contest forfeiture ofchattel, at any time  before thesale  or destruction  thereof, torecover the same, and upon givingproper bond, enjoin the sale; orafter the sale  and within 6months, an action to recover thenet proceeds realized at the sale(Sec. 231, 1997 NIRC); and 

c. Action for damages against arevenue officer by reason of anyact done in the performance ofofficial duty  (Sec. 227, 1997

NIRC). Criminal Actiona. Filing of criminal complaint

against erring BIR officials andemployees.

b. Injunction –  when the CTA in itsopinion, the collection by the BIRmay jeopardize taxpayer.

Note: With the enactment of the newCTA law (RA No. 9282) amending RA No.1125, CTA now has jurisdiction over

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San eda College of Law 89 

MEMORY AID IN TAXATION LAW 

TAXATION LAW COMMITTEE CHAIRPERSON: Charmaine Torres  ASST. CHAIRPERSON: Rhohail Castro EDP: Rachelle Saya SUBJECT HEADS: Jemina Sy, Casiano Ilagan,

Jr., Ryan Co, Edwin Torres:MEMBERS: Marita Lourdes Azur, Edizer Enriquez, Christian Cabrera, Jhundee

Guillermo

criminal cases.  (See Chapter VI - Courtof Tax Appeals.)

Substantive Remedies

1. Questioning the constitutionality orvalidity of tax statutes or regulations2. Non-retroactivity of rulings (Sec.246,

NIRC)3. Failure to inform the taxpayer in

writing of the legal and factual basesof assessment makes it void (Sec.228, NIRC) 

4. Preservation of books of accounts andonce a year examination (Sec. 235,NIRC)

ASSESSMENT AND PROTEST

   Assessment General rule:  Taxes are self assessingand thus, do not require the issuance ofan assessment notice in order toestablish the tax liability of a taxpayer.Exceptions:

1. Tax period of a taxpayer isterminated (Sec. 6(D), NIRC)

2. Deficiency tax liability arisingfrom a tax audit conducted bythe BIR (Sec. 56(B), NIRC) 

3. Tax lien (Sec. 219, NIRC)4. Dissolving Corporation (Sec.

52(c), NIRC)

  Protest 1. Direct denial of protest

 Admnistrative decision on a disputedassessment - The decision of theCommissioner or his duly authorizedrepresentative shall (a) state the facts,the applicable law, rules and regulationor jurisprudence on which such decisionis based otherwise, the decision shall bevoid, in which case the same shall not beconsidered a decision a disputed

assessment and (b) that the same is hisfinal decision (Sec. 3.1.5, Rev. Regs. No.12-99)

2. Indirect denial of protesta. Commissioner did not rule on the

taxpayer‘s motion forreconsideration of theassessment –  it was only whenrespondent received thesummons on

the civil action for the collectionof deficiency income tax thatthe period to appealcommenced to run

(Commissioner vs. UnionShipping Corp.)b. Referral by the Commissioner of

request for reinvestigation tothe Solicitor General (Republicvs Lim Tian Teng Sons)

c. Reiterating the demand forimmediate payment of thedeficiency tax due to taxpayer‘scontinued refusal to executewaiver (Commissioner vs. AyalaSecurities Corp.)

d. Preliminary collection letter may

serve as assessment notice(United International Picturesvs. Commissioner)

ACTS OF BIR COMMISSIONERCONSIDERED AS DENIAL OF PROTESTWHICH SERVE AS A BASIS FOR APPEALTO THE COURT OF TAX APPEALS

1.  filing by the BIR of a civil suit forcollection of the deficiency tax(Commissioner vs. Union ShippingCorporation, GR No. 66160, May 21,

1990) 2.  indication to the taxpayer by the

Commissioner ―in clear andunequivocal language‖ of his finaldenial. (Commissioner vs. UnionShipping Corporation, GR No. 66160,May 21, 1990) 

3.  BIR demand letter reiterating hisprevious demand to pay, sent to thetaxpayer after his protest of theassessment. (Surigao Electric Co.,Inc. vs. CTA, GR No. L-25289, June28, 1974; Commissioner vs. Ayala

Securities Corporation, GR No. L-29485, March 31, 1976) 

4.  The actual issuance of a warrant ofdistraint and levy in certain casescannot be considered a final decisionon a disputed settlement.(Commissioner vs. Union ShippingCorporation, GR No. 66160, May 21,1990) 

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San eda College of Law 90 

MEMORY AID IN TAXATION LAW 

TAXATION LAW COMMITTEE CHAIRPERSON: Charmaine Torres  ASST. CHAIRPERSON: Rhohail Castro EDP: Rachelle Saya SUBJECT HEADS: Jemina Sy, Casiano Ilagan,

Jr., Ryan Co, Edwin Torres:MEMBERS: Marita Lourdes Azur, Edizer Enriquez, Christian Cabrera, Jhundee

Guillermo

FILING OF CLAIM FORTAX REFUND OR TAX CREDIT

GROUNDS FOR FILING A CLAIM FOR TAX

REFUND OR TAX CREDIT

1.  Tax is collected erroneously orillegally.

2.  Penalty is collected withoutauthority.

3.  Sum collected is excessive.

TAX REFUND VS. TAX CREDIT 

TAX REFUND TAX CREDIT

The taxpayer asks for

restitution of themoney paid as tax

The taxpayer asks

that the money sopaid be applied tohis existing taxliability

Two-year period tofile claim with theCIR starts after thepayment of the taxor penalty

Two-year periodstarts from the datesuch credit wasallowed (in casecredit is wronglymade).

REQUISITES OF TAX REFUND OR TAXCREDIT

1.  Claim must be in writing;2.  It must be filed with the

Commissioner within two (2) yearsafter the payment of the tax orpenalty.Note:  No suit or proceeding shall bebegun after the expiration of thesaid two (2) years regardless of anysupervening cause that may ariseafter payment.

3.  Show proof of payment.

COMMENCEMENT OF THE TWO (2) YEARPERIOD (JURISPRUDENCE)

1.  Tax sought to be refunded isillegally or erroneously collected- from the date the tax was paid.(Commissioner vs. Victorias Milling,GR No. L-24108, January 31, 1968) 

2.  Tax is paid only in installments oronly in part- from the date the last or finalinstallment or payment because for

tax purposes, there is no paymentuntil the whole or entire tax liabilityis fully paid. (Collector vs. Prieto,GR No. L-11976, August 29, 1961)

3.  Taxpayer merely made a deposit- counted from the conversion of

the deposit to payment (UnionGarment vs. Collector, CTA Case No.416, November 17, 1958) 

- Merely making a deposit is notequivalent to payment until theamount is actually applied to thespecific purpose for which it wasdeposited.

4.  Tax has been withheld from source(through the withholding taxsystem)

- counted from the date it falls dueat the end of the taxable year- A taxpayer who contributes to thewithholding tax system does notreally deposit an amount to thegovernment, but in truth, performsand extinguishes his tax obligationfor the year concerned. (Gibbs vs.Commissioner, GR No. L-17406,November 29, 1965) 

5.  End of taxable year vs. date of thefiling of the final adjusted return- from the date when the final

adjusted return was filed.- the rationale in computing thisperiod is the fact that it is only thenthe corporation can ascertainwhether it made profits or incurredlosses in its business operations.(ACCRA Investments vs. Court of

 Appeals, GR No. 96322, December20, 1991) 

6.  Date when quarterly income taxwas paid vs. date when finaladjusted return was filed- from the date when final adjustedreturn was filed- The filing of the quarterly incometax return (Sec. 68) and payment ofquarterly income tax should only beconsidered mere installments of theannual tax due. (Commissioner vs.TMX Sales, GR No. 83736, January15, 1992) 

7.  Date when the final adjustment

return was actually filed (ex. Apr.2)  vs. Last day when theadjustment return could still be

filed (ex. Apr. 15)

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San eda College of Law 91 

MEMORY AID IN TAXATION LAW 

TAXATION LAW COMMITTEE CHAIRPERSON: Charmaine Torres  ASST. CHAIRPERSON: Rhohail Castro EDP: Rachelle Saya SUBJECT HEADS: Jemina Sy, Casiano Ilagan,

Jr., Ryan Co, Edwin Torres:MEMBERS: Marita Lourdes Azur, Edizer Enriquez, Christian Cabrera, Jhundee

Guillermo

- from the date the final adjustmentreturn was actually filed.(Commissioner vs. Court of Appeals,GR No 117254, January 21, 1999)

8.  Tax was not erroneously or illegallypaid but the taxpayer becameentitled to refund because ofsupervening circumstances- from the date the taxpayerbecomes entitled to refund and notfrom the date of payment.(Commissioner vs. Don Pedro Central

 Azucarera, GR No. L-28467, Feb. 28,1973)

PAYMENT UNDER PROTEST IS NOTNECESSARY UNDER NIRC

A suit or proceeding for tax refundmay be maintained ―whether or not suchtax, penalty or sum has been paid underprotest or duress‖ (Sec. 229, NIRC). 

Note:  Similarly, payment under protestis not necessary   in refund for localtaxes. (See Sec. 196, LGC). 

However, payment under protest isnecessary in claim for refund for realproperty taxes (Sec. 252, LGC) and forcustoms duties (Sec. 2308, TCC).

SUSPENSION OF THE TWO-YEARPRESCRIPTIVE PERIOD

1.  There is a pending litigationbetween the Government and thetaxpayer; and

2.  CIR in that litigated case agreed toabide by the decision of the SC as tothe collection of taxes relativethereto (Panay Electric Co. vs.Collector, GR No. L-10574, May 28,1958). 

INTEREST ON TAX REFUNDS

General Rule:Government cannot be required

to pay interest on taxes refunded to thetaxpayer in the absence of a statutoryprovision clearly or expressly directingor authorizing such payment.(Commissioner vs. Sweeney, GR No. L-12178, August 29, 1959)

Exceptions:1. When the CIR acted with patent

arbitrariness. Arbitrarinesspresupposes inexcusable or obstinate

disregard of legal provisions.(Commissioner vs. Victorias Milling,GR No. L-19667, Nov. 29, 1966)

2. Under Sec. 79(C)(2) with respect toincome taxes withheld on the wagesof the employees.

TAX CREDIT CERTIFICATE

1.  May be applied against any internalrevenue tax except  withholdingtaxes,

2.  Original copy is surrendered to the

revenue office,3.  No tax refund will be given resulting

from availment of incentives grantedby law where no actual payment wasmade (Sec. 204C, 1997 NIRC).

FORFEITURE OF CASH REFUND/TAXCREDIT

1.  Forfeiture of refund in favor of thegovernment when a refund check orwarrant remains unclaimed oruncashed within five (5) years from

date of mailing or delivery.2.  Forfeiture of Tax Credit –  a tax

credit certificate which remainsunutilized after five (5) years fromdate of issue, shall be invalid, unlessrevalidated (Sec. 230, 1997 NIRC).

REGLEMENTARY PERIODSIN INCOME TAX IMPOSED

BY LAW UPON THE TAXPAYER(PURSUANT TO REV. REG. NO. 12-99,

SEC. 228 OF THE 1997 NIRC, AND RANO. 1125 AS AMENDED BY RA NO.

9282)

BIR makes a tax assessment 

 If taxpayer is not satisfied with the

assessment file a protest within 30 days from receipt thereof

 

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San eda College of Law 92 

MEMORY AID IN TAXATION LAW 

TAXATION LAW COMMITTEE CHAIRPERSON: Charmaine Torres  ASST. CHAIRPERSON: Rhohail Castro EDP: Rachelle Saya SUBJECT HEADS: Jemina Sy, Casiano Ilagan,

Jr., Ryan Co, Edwin Torres:MEMBERS: Marita Lourdes Azur, Edizer Enriquez, Christian Cabrera, Jhundee

Guillermo

Submit supporting documents within60 days from date of the filing of the

protest

 

If protest is denied, elevate the matter to the Commissioner of Internal Revenue(CIR) within 30 days from receipt of the

decision of the CIR‘s duly authorizedrepresentative officer

 Appeal to the Division of the Court ofTax Appeals (CTA) within 30 days from

receipt of final decision of CIR or hisduly authorized representative (thetaxpayer has the option to appeal

straight to the CTA upon receipt of the

decision of the CIR‘s duly authorizedrepresentative)

 If the CIR or his duly authorized

representative fails to act on theprotest within 180 days from date ofsubmission by taxpayer, the latter may

appeal within 30 days from lapse of the180-day period with the CTA Division

 

The Party adversely affected by the CTADivision‘s decision may file one motionfor reconsideration/new trial within 15days from receipt of decision. If the MRis denied file a petition for review with

the CTA en banc

 Appeal to the Supreme Court within 15

days from receipt of the CTA en bancdecision under Rule 45 of the Rules of

Court

PRE-ASSESSMENT NOTICE,  WHEN NOT

R EQUIRED (SEC. 228, NIRC)

1.  When the finding for anydeficiency tax is the result ofmathematical error in thecomputation of the tax asappearing on the face of thereturn; or

2.  When a discrepancy has beendetermined between the taxwithheld and the amountactually remitted by thewithholding agent; or

3.  When a taxpayer who opted toclaim a refund or tax credit of

excess creditable withholdingtax for a taxable period wasdetermined to have carried overand automatically applied the

same amount claimed againstthe estimated tax liabilities forthe taxable quarter or quartersof the succeeding taxable year;or

4.  When the excise tax due onexcisable articles has not beenpaid;

5.  When an article locallypurchased or imported by anexempt person, such as, but notlimited to, vehicles, capitalequipment, machineries and

spare parts, has been sold,traded or transferred to non-exempt persons.

Notes:

  As a general rule, paymentunder protest is not requiredunder the NIRC, except whenpartial payment ofuncontroverted taxes isrequired under RR 12-99.The Commissioner may, evenwithout a written claim

therefor, refund or creditany tax, where on the faceof the return upon whichpayment was made, suchpayment appears clearly tohave been erroneously paid.

  In case of the CIR‘s finaldenial of the claim forrefund, the 30-day period toappeal with the CTA must bewithin the 2-year peremptoryperiod for instituting judicialaction.

  See Annex N –  AssessmentProcess and Appeal

ADDITIONS TO THE TAX(SECS. 247-252 NIRC)

DEFINITION:  increments to the basic taxincident due to the taxpayer‘s non-compliance with certain legalrequirements.

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San eda College of Law 93 

MEMORY AID IN TAXATION LAW 

TAXATION LAW COMMITTEE CHAIRPERSON: Charmaine Torres  ASST. CHAIRPERSON: Rhohail Castro EDP: Rachelle Saya SUBJECT HEADS: Jemina Sy, Casiano Ilagan,

Jr., Ryan Co, Edwin Torres:MEMBERS: Marita Lourdes Azur, Edizer Enriquez, Christian Cabrera, Jhundee

Guillermo

1.  CIVIL PENALTY / SURCHARGE1.  25% surcharge

a.  Failure to file any return andpay the tax due thereon as

required under theprovisions of this Code orrules and regulations on thedate prescribed; or

b.  Unless otherwise authorizedby the Commissioner, filing areturn with an internalrevenue officer other thanthose with whom the returnis required to be filed; or

c.  Failure to pay the deficiencytax within the timeprescribed for its payment in

the notice of assessment; ord.  Failure to pay the full or

part of the amount of taxshown on any returnrequired to be filed underthe provisions of this Codeor rules and regulations, orthe full amount of tax duefor which no return isrequired to be filed, on orbefore the date prescribedfor its payment. (Sec. 248) 

2.  50% surcharge

a.  in case of willful neglect tofile the return within theperiod prescribed by theCode, or

  will not apply in case ataxpayer, without noticefrom the Commissioner,or his duly authorizedrepresentative,voluntarily files the saidreturn (only 25% shall beimposed)

  50% surcharge shall beimposed in case thetaxpayer files the returnonly after prior notice inwriting from theCommissioner or his dulyauthorized representa-tive (Sec. 4.2, Rev. Reg.12-99)

b.  in case a false or fraudulentreturn is willfully made

Prima Facie evidence

  substantial underdeclaration

(exceeding 30% of thatdeclared)  of taxable sales,receipts or income,

  or a substantialoverstatement (exceeding30% of actual deductions) ofdeductions (Sec. 248)

2.  INTEREST- 20% per annum or such higher rateas may be prescribed by the rulesand regulations

a.  Deficiency interest (Sec. 249B) b.  Delinquency interest (Sec. 249C) c.  Interest on Extended Payment 

(Sec. 249D) 

3.  OTHER CIVIL PENALTIES ORADMINISTRATIVE FINES

a.  Failure to file certaininformation returns (Sec. 250) 

b.  Failure of a withholding agent tocollect and remit tax (Sec. 251) 

c.  Failure of a withholding agent of

refund excess withholding tax(Sec. 252) 

III.  LOCAL TAXATION

POWERS AND LIMITATIONS 

NATURE AND SOURCE OF LOCALTAXING POWER (SEE. SEC 5, ART. X,1987 CONSTITUTION AND SEC. 129,LGC)

The Local Government Unit has thepower:

a.  to create its own sources ofrevenue and

b.  to levy taxes, fees and charges.

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San eda College of Law 94 

MEMORY AID IN TAXATION LAW 

TAXATION LAW COMMITTEE CHAIRPERSON: Charmaine Torres  ASST. CHAIRPERSON: Rhohail Castro EDP: Rachelle Saya SUBJECT HEADS: Jemina Sy, Casiano Ilagan,

Jr., Ryan Co, Edwin Torres:MEMBERS: Marita Lourdes Azur, Edizer Enriquez, Christian Cabrera, Jhundee

Guillermo

Congress cannot enact lawsdepriving LGU from exercising suchpower to tax but it may set guidelinesand limitations for the exercise.

Such taxes, fees, and chargesshall accrue exclusively to the localgovernment units.

NATURE OF THE TAXING POWER

a. Not inherent;b. Exercised only if delegated to

them by law or Constitution;c.  Not absolute; subject to

limitations provided for by law.

Under the present constitutionalrule, ―where there is neither a grant nor

a prohibition by statute, the tax powermust be deemed to exist althoughCongress may provide statutorylimitations and guidelines. The basicrationale for the current rule is tosafeguard the viability and self-sufficiency of local government units bydirectly granting them general and broadtax powers.‖ (Manila Electric Co. vs.Province of Laguna, G.R. No. 131359 )

ASPECTS OF LOCAL TAXING POWER

a. local taxation

b. real property taxation

FUNDAMENTAL PRINCIPLES GOVERNING LOCAL

TAXATION (SEC. 130, LGC)a.  Shall be uniform in each local

sub-unitb.  Shall be equitable and based as

much as possible on thetaxpayer‘s ability to pay

c.  Levied for public purposesd.  Shall not be unjust, excessive,

oppressive, or confiscatorye.  Shall not be contrary to law,

public policy, nationaleconomic policy, or in restraintof trade

f.  Collection of local taxes andother impositions shall not belet to any person

g.  The revenues collected underthe Code shall inure solely tothe benefit of, and subject todisposition by, the LGU levyingthe tax or other impositionunless otherwise specificallyprovided therein

h.  Each LGU shall, as far aspracticable, evolve aprogressive system of taxation.

LOCAL TAXING AUTHORITY (SEC. 132, LGC) Shall be exercised by the Sanggunianof the LGU concerned through anappropriate ordinance.

POWER TO PRESCRIBE PENALTIES FOR TAX

VIOLATIONS AND LIMITATIONS THEREON (SEC. 516, LGC)1.  The Sanggunian is authorized to

prescribe fines or other penaltiesfor violations of tax ordinances.a. in no case shall fines be less

than P1,000 nor more than

P5,000b. nor shall the imprisonment be

less than one (1) month normore than six (6) month.

2.  Such fine or other penalty shall beimposed at the discretion of thecourt.

3.  The Sangguniang Barangay mayprescribe a fine of not less thanP100 nor more than P1,000.

POWER TO ADJUST LOCAL TAX R ATE (SEC. 191, LGC)

Adjustment of the tax rates asprescribed herein should not be oftenerthan once every five (5) years, and in nocase shall such adjustment exceed tenpercent (10%) of the rates fixed underthe LGC.

POWER TO GRANT LOCAL TAX EXEMPTIONS

(SEC. 192, LGC)Local government units may,

through ordinances duly approved,grant tax exemptions, incentives orreliefs under such terms and conditions,

as they may deem necessary.

TAX EXEMPTIONS EXISTING BEFORE THE

EFFECTIVITY OF THE LGC HAS BEEN ABOLISHED

(SEC. 193, LGC)Unless otherwise provided in this

Code, tax exemptions or incentivesgranted to, or presently enjoyed by allpersons, whether natural or juridical,including government-owned orcontrolled corporations are herebywithdrawn upon the effectively of the

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San eda College of Law 95 

MEMORY AID IN TAXATION LAW 

TAXATION LAW COMMITTEE CHAIRPERSON: Charmaine Torres  ASST. CHAIRPERSON: Rhohail Castro EDP: Rachelle Saya SUBJECT HEADS: Jemina Sy, Casiano Ilagan,

Jr., Ryan Co, Edwin Torres:MEMBERS: Marita Lourdes Azur, Edizer Enriquez, Christian Cabrera, Jhundee

Guillermo

LGCexcept the following:8.  local water districts,9.  cooperatives duly registered under

R.A. No. 6938, non-stock and non-profit hospitals and10. educational institutions.

The power to grant tax exemptions,tax incentives and tax reliefs shall notapply to regulatory fees  which arelevied under the police power of theLGU.

Tax exemptions shall be conferredthrough the issuance of a non-transferable tax exemption certificate.

GUIDELINES FOR THE GRANTING OF TAXEXEMPTIONS, TAX INCENTIVES AND TAX R ELIEFS

(ART .  282[B],  RULES AND REGULATIONS

I  MPLEMENTING THE LGC )

1.  On the grant of tax exemptions ortax reliefs:a. the same may be granted in

cases of natural calamities, civildisturbance, general failure ofcrops, or adverse economicconditions such as substantialdecrease in prices of agricultural

or agri-based products.b. The grant shall be through an

ordinance.c. Any exemption or relief granted

to a type or kind of business shallapply to all business similarlysituated.

d.  The same shall take effect onlyduring the next calendar year fora period not exceeding 12months as may be provided inthe ordinance.

e.  In the case of shared revenues,

the exemption or relief shall onlyextend to the LGU granting suchexemption or relief.

2.  On the grant of tax incentives:a.  The same shall be granted only

to new investments in thelocality and the ordinance shallprescribe the terms andconditions therefore.

b.  The grant shall be for a definiteperiod of not exceeding 1calendar year.

c.  The grant shall be by ordinancepassed prior to the 1st  day ofJanuary of any year.

d.  Any grant to a type or kind of

business shall apply to allbusinesses similarly situated.

LEVYING OF LOCAL TAXES (LOCAL TAXORDINANCE)Requisites:1. The procedure applicable to local

government ordinances in generalshould be observed (Sec. 187, LGC)

2. Procedural details (Secs. 54, 55, and59, LGC):a. necessity of a quorumb. submission for approval by the

local chief executivec. he matter of veto and overriding

the samed. the publication and affectivity

3.  Public hearings are required beforeany local tax ordinance is enacted(Sec.187, LGC) 

4.  Within 10 days after their approval,publication in full for 3 consecutivedays in a newspaper of generalcirculation. In absence of suchnewspaper in the province, city ormunicipality, then the ordinances

may be posted in at least 2conspicuous and publicly accessibleplaces (Sec. 189, LGC) 

R ESIDUAL TAXING POWERS OF THE LOCAL

GOVERNMENT UNITS (SEC. 186, LGC)To levy taxes, fees or charges on any

base or subject NOT:1.  Specifically enumerated in LGC2.  Taxed under the provisions of

the NIRC, as amended, and3.  Other applicable laws

Conditions:1. That the taxes, fees, or charges shall

not be unjust, excessive, oppressive,confiscatory or contrary to declarednational policy

2. The ordinance levying such taxes,fees or charges shall not be enactedwithout any prior public hearingconducted for the purpose.

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San eda College of Law 96 

MEMORY AID IN TAXATION LAW 

TAXATION LAW COMMITTEE CHAIRPERSON: Charmaine Torres  ASST. CHAIRPERSON: Rhohail Castro EDP: Rachelle Saya SUBJECT HEADS: Jemina Sy, Casiano Ilagan,

Jr., Ryan Co, Edwin Torres:MEMBERS: Marita Lourdes Azur, Edizer Enriquez, Christian Cabrera, Jhundee

Guillermo

LIMITATIONS OF THE RESIDUAL POWER1.  Constitutional limitations on

taxing power2.  Common limitations prescribed

in Sec. 133 of the LGC3.  Fundamental principlesgoverning the exercise of thetaxing power of the LGUsprescribed under Sec. 130 ofthe LGC

4.  The ordinance levying suchresidual taxes shall not beenacted without any priorpublic hearing conducted forthe purpose and

5.  The principle of preemption.

PRINCIPLE OF PREEMPTION OR EXCLUSIONARYDOCTRINE 

Where the National Governmentelects to tax a particular area, itimpliedly withholds from the localgovernment the delegated power to taxthe same field. This doctrine principallyrests on the intention of the Congress.

Excluded impositions (pursuant to thedoctrine of preemption): 

a.  Taxes which are levied under theNIRC, unless otherwise provided

by LGC of 1991;b.  Taxes, fees, etc. which are

imposed under the Tariffs andCustoms Code;

c.  Taxes, fees, etc., the impositionof which contravenes existinggovernmental policies or whichviolates the fundamentalprinciples of taxation;

d.  Taxes, fees and other chargesimposed under special law.

COMMON LIMITATIONS ON LOCALTAXING POWER (SEC. 133, LGC)

Local government units cannot levy:1.  Income tax, except on banks and

other financial institutions;2.  Documentary stamp tax;3.  Estate tax, inheritance, gifts,

legacies and other acquisitionsmortis causa  except asotherwise provided

4.  Customs duties, registration feesof vessels and wharfage onwharves, tonnage dues and allother kinds of customs fees,

charges and dues exceptwharfage on wharvesconstructed and maintained bythe local government unit

concerned;5.  Taxes, fees, charges and otherimpositions upon goods carriedinto or out of, or passingthrough, the territorialjurisdictions of local governmentunits in the guise of charges forwharfage, tolls for bridges orotherwise.

6.  Taxes, fees or charges onagricultural and aquatic productswhen sold by marginal farmersor fishermen;

7.  Taxes on business enterprisescertified by the Board ofInvestments as pioneer ornon-pioneer for a period of 6and 4 years, respectively, fromthe date of registration;

8.  Excise taxes on articlesenumerated under the NIRC, asamended, and taxes, fees orcharges on petroleum products;

9.  Percentage or value-added tax(VAT) on sales, barters orexchanges or similar transactions

on goods or services except asotherwise provided herein;

10. Taxes on the gross receipts oftransportation contractors andpersons engaged in thetransportation of passengers orfreight by hire and commoncarriers by air, land or water,except as provided in the Code;

11. Taxes on premiums paid by wayof Reinsurance or retrocession;

12. Taxes, fees or charges for theregistration of motor vehicles

and for the issuance of all kindsof licenses or permits for thedriving thereof, except tricycle;

13. Taxes, fees or other charges onPhilippine products actuallyexported, except as otherwiseprovided in the Code;

14. Taxes, fees or charges onCountryside and barangaybusiness enterprises andcooperatives  duly registeredunder R.A. 6810 and R.A. 6938,

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San eda College of Law 97 

MEMORY AID IN TAXATION LAW 

TAXATION LAW COMMITTEE CHAIRPERSON: Charmaine Torres  ASST. CHAIRPERSON: Rhohail Castro EDP: Rachelle Saya SUBJECT HEADS: Jemina Sy, Casiano Ilagan,

Jr., Ryan Co, Edwin Torres:MEMBERS: Marita Lourdes Azur, Edizer Enriquez, Christian Cabrera, Jhundee

Guillermo

(Cooperatives Code of thePhilippines) ; and

15. Taxes, fees or charges of anykind on the National

Government, its agencies andinstrumentalities, and localgovernment units.

CLASSIFICATION OF COMMONLIMITATIONS1.  Taxes which are levied under the

NIRC unless otherwise provided bythe LGC

  Numbers 1, 2, 3, 8, 9, 10 2.  Taxes, fees, etc. which are imposed

under the Tariffs and Customs Code

  Number 4

3.  Taxes, fees and charges where theimposition of which contravenesexisting governmental policies orwhich are violative of thefundamental principles of taxation

  Numbers 5, 6, 7, 11, 13, 14, 15 4.  Taxes, fees, and charges imposed

under special laws.

  Number 12 

TAXES  AND  OTHER   IMPOSITIONS  THAT 

THE LOCAL GOVERNMENT MAY LEVY

(A) PROVINCES(SECS. 134-141, LGC) 

1.  Tax on Transfer of Real Property2.  Tax on Business of Printing and

Publication3.  Franchise Tax4.  Tax on Sand, Gravel and other

Quarry Resources extracted fromPublic Land

5.  Professional Tax6.  Amusement Tax7.  Annual Fixed Tax for every

Delivery Truck or Van ofManufacturers or Producers,Wholesalers of, Dealers, orRetailers in, certain products

  See Annex J for the rates anddetails.

(B) MUNICIPALITIES(SEC. 143, LGC) 

1. Municipal Taxes- taxes on the

businesses of  the following:a.  On manufacturers, assemblers,repackers, processors, brewers,distillers, rectifiers, andcompounders of liquors, distilledspirits, and wines ormanufacturers of any article ofcommerce of whatever kind or

b.  On wholesalers, distributors, ordealers in any article ofcommerce of whatever kind or

c.  On exporters, and onmanufacturers, millers,

producers, wholesalers,distributors, dealers or retailersof essential commodities

d.  On retailerse.  On contractors and other

independentf.  On banks and other financialg.  On peddlers engaged in the sale

of any merchandise or article ofcommerce

h.  On any business, not otherwisespecified in the precedingparagraphs, which the

sanggunian concerned may deemproper to tax.

2. Municipal non-revenue fees andcharges

The municipality may imposeand collect such reasonable fees andcharges on business and occupationexcept professional taxes reserved forprovinces. (Sec. 147. LGC)

R ATES OF TAX WITHIN THE METROPOLITAN

MANILA AREA (SEC. 144, LGC)

- Not to exceed by 50% themaximum rates prescribed in thepreceding Section.

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San eda College of Law 98 

MEMORY AID IN TAXATION LAW 

TAXATION LAW COMMITTEE CHAIRPERSON: Charmaine Torres  ASST. CHAIRPERSON: Rhohail Castro EDP: Rachelle Saya SUBJECT HEADS: Jemina Sy, Casiano Ilagan,

Jr., Ryan Co, Edwin Torres:MEMBERS: Marita Lourdes Azur, Edizer Enriquez, Christian Cabrera, Jhundee

Guillermo

PAYMENT OF BUSINESS TAXES a.  It shall be payable for every

separate or distinctestablishment or place where

business subject to the tax isconducted and one line ofbusiness does not becomeexempt by being conducted withsome other business for whichsuch tax has been paid.

b.  The tax on a business must bepaid by the person conductingthe same.

c.  In cases where a personconducts or operates 2 or moreof the businesses mentioned inSection 143 of LGC

- which are subject to thesame rate of tax , the tax shall becomputed on the combined totalgross sales or receipts of the said 2or more related businesses.

- which are subject todifferent rates of tax , the grosssales or receipts of each businessshall be separately reported for thepurpose of computing the tax duefrom each business.

  See Annex K   for the rates and

details.

(C)  CITIES(SEC. 151, LGC) 

  The city may levy the taxes, fees,and charges which the province ormunicipality may impose.

  The tax rates that the city may levymay exceed   the maximum ratesallowed for the province ormunicipality by not more than 50%except the rates of professional andamusement taxes.

(D)  BARANGAYS(SEC. 152, LGC) 

Barangays may levy the following taxes,fees, and charges which shall accrueexclusively to them:

a.  Taxes –  On stores or retailerswith fixed businessestablishments with the gross

sales or receipts for thepreceding calendar year ofP50,000 or less (for barangays inthe cities) and P30,000 or less

(for barangays in municipalities)b.  Rate = not exceeding 1% of suchgross sales or receipts.

c.  Service Fees or Charges  –  Forservices rendered in connectionwith the regulation or the use ofbarangay-owned properties orservice facilities such as palay,copra or tobacco dryers

d.  Barangay Clearance – No city ormunicipality may issue anylicense or permit fee for anybusiness or activity unless a

clearance is first obtained fromthe barangay where suchbusiness or activity is located orconducted.

e.  Other Fees and Charges  –  Thebarangay may levy reasonablefees and charges:1.  On Commercial breeding of

fighting cocks, cockfightsand cockpits;

2.  On places of Recreationwhich charge admission fees;and

3.  On Billboards, signboards,neon signs and outdooradvertisements.

SITUS OF LOCAL TAXATION

A. Situs According to the CasesWith respect to excise tax, the

tax is upon the performance of an act,enjoyment of a privilege or the engagingin an occupation. The power to levy suchtax is not dependent on the domicile ofthe taxpayer, but on the place in which

the act is performed or the occupation isengaged in; not upon the location of theoffice, but the place where the sale isperfected. ( Allied Thread Co., Inc. v.City Mayor of Manila, L-40296)

With respect to sale, it is theplace of the consummation of the sale,associated with the delivery of thethings which are the subject matter ofthe contract that determines the situs ofthe contract for purposes of taxation,and not merely the place of the

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San eda College of Law 99 

MEMORY AID IN TAXATION LAW 

TAXATION LAW COMMITTEE CHAIRPERSON: Charmaine Torres  ASST. CHAIRPERSON: Rhohail Castro EDP: Rachelle Saya SUBJECT HEADS: Jemina Sy, Casiano Ilagan,

Jr., Ryan Co, Edwin Torres:MEMBERS: Marita Lourdes Azur, Edizer Enriquez, Christian Cabrera, Jhundee

Guillermo

perfection of the contract. (Shell Co.,Inc. v. Municipality of Sipocot,Camarines Sur 105 Phil 1263)

B. Situs According to Sec. 150, LGC

Branch or sales office – a fixed place inthe locality which conducts theoperation of the business as an extensionof the principal office

Principal office- the head or the mainoffice of the business; the city or themunicipality specifically mentioned inthe Articles of Incorporation or officialregistration papers as being the officialaddress of said principal office shall be

considered the situs thereof.

1. Place of sale (with branch or salesoutlet therein):

  Municipality or city where thebranch or outlet is located.

2. Place of sale (no branch or salesoutlet):

  Municipality or city of principaloffice (not in the place of sale)

3. If manufacturer, assembler,contractor, producer, or exporter(MACPE) with factory, project office,

plant or plantation (FPPP)4. 30% of recorded sales in the principal

office: city or municipality wherethe principal office is located

5.  70% of recorded sales in theprincipal office: city or municipalitywhere the FPPP is located

  pro rata if FPPP are located indifferent municipalities or citiesin proportion to their respectivevolumes of production.

6.  If plantation is located in some otherplace than where the factory islocated, the foregoing 70% shall besubdivided as follows:

  60% to the city or municipalitywhere the factory is located

  40% to the city or municipalitywhere the plantation is located.

COMMON REVENUE-RAISING POWERS OFLGUs (SEC. 153 TO 155) 1.  Service fees and charges for services

rendered2.  Public Utility Charges for the

operation of public utilities owned,

operated and maintained by LGUswithin their jurisdiction.

3.  Toll fees or charges for the use ofany public road, pier or wharf,

waterway, bridge, ferry ortelecommunication system fundedand constructed by the localgovernment unit concernedExceptions:a.  Officers and enlisted men of the

AFP and PNP;b.  Post office personnel delivering

mail; andc.  Physically handicapped and

disabled citizens who aresixty-five (65) years orolder.(Sec. 152, LGC)

When public safety and welfare sorequires, the sanggunian concerned maydiscontinue the collection of the tolls,and thereafter the said facility shall befree and open for public use.

COMMUNITY TAXCities or municipalities may levy a

community tax.

A.  Individuals Liable (Sec. 157) a.  every inhabitant of the

Philippines;b.  eighteen (18) years of age or

over;c.  under any of the following

instances:d.  who has been regularly

employed on a wage or salarybasis for at least thirty (30)consecutive working days during any calendar year; or

e.  who is engaged in business oroccupation; or

f.  who owns real property with

an aggregate assessed valueof P1,000 or more; or

g.  who is required by law to filean income tax return

Tax Rate  = P5.00 and an annualadditional tax of P1.00 for everyP1,000 of income regardless ofwhether from business, exercise ofprofession or from property which inno case shall exceed P5,000.

In case of husband and wife,the additional tax herein imposed

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San eda College of Law 100 

MEMORY AID IN TAXATION LAW 

TAXATION LAW COMMITTEE CHAIRPERSON: Charmaine Torres  ASST. CHAIRPERSON: Rhohail Castro EDP: Rachelle Saya SUBJECT HEADS: Jemina Sy, Casiano Ilagan,

Jr., Ryan Co, Edwin Torres:MEMBERS: Marita Lourdes Azur, Edizer Enriquez, Christian Cabrera, Jhundee

Guillermo

shall be based upon the totalproperty owned by them and thetotal gross receipts or earningsderived by them.

B.  Juridical Persons (Sec. 158) Every corporation no matter how

created or organized, whetherdomestic or resident foreign,engaged in or doing business in thePhilippines shall pay an annualcommunity tax.

Tax Rate  = P500 and an annualadditional tax which in no case shallexceed P10,000 in accordance with thefollowing schedule:

1.  For every P5,000 worth of real property  owned by it during thepreceding year based on thevaluation used for the paymentof the real property tax - P2.00;and

2.  For every P5,000 of grossreceipts or earnings  derived byit from its business in thePhilippines during the precedingyear - P2.00.

The dividends received by a

corporation shall, for the purpose of theadditional tax, be considered as part ofthe gross receipts or earnings of saidcorporation.

THE FOLLOWING ARE EXEMPT FROMTHE COMMUNITY TAX (SEC. 159) 1.  Diplomatic and consular

representatives; and2.  Transient visitors when their stay in

the Philippines does not exceedthree (3) months.

PLACE OF PAYMENT: place of residenceof the individual, or in the place wherethe principal office of the juridicalentity is located.

TIME OF PAYMENT:  accrues on the 1st day of January of each year which shallbe paid not later than the last day ofFebruary of each year.

PENALTIES FOR DELINQUENCY:  aninterest of 24% per annum from the due

date until it is paid shall be added to theamount due.

A community tax certificate may

also be issued to any person orcorporation not subject to thecommunity tax upon payment of P1.00(Sec. 162, LGC).

PRESENTATION OF COMMUNITY TAX

CERTIFICATE ON CERTAIN OCCASIONS –  (SEC. 163) 

A. Individual1.  When an individual subject to

the community taxacknowledges any documentbefore a notary public;

2.  takes the oath of office uponelection or appointment toany position in thegovernment service;

3.  receives any license,certificate or permit from anypublic authority; pays any taxor fee;

4.  receives any money from anypublic fund;

5.  transacts other officialbusiness; or

6.  receives any salary or wage

from any person orcorporation.

The presentation of the community taxcertificate shall not be required inconnection with the registration of avoter.

B.  Corporation1.  receives any license,

certificate or permit from anypublic authority;

2.  pays any tax or fee;3.  receives money from public

funds; or4.  transacts other official

business.The city of municipal treasurer

deputizes the barangay treasurer tocollect the community tax in theirrespective jurisdictions. (Sec. 164, LCG) 

The proceeds of the community taxactually and directly collected by thecity or municipal treasurer shall accrueentirely to the general fund of the city ormunicipality concerned.

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San eda College of Law 101 

MEMORY AID IN TAXATION LAW 

TAXATION LAW COMMITTEE CHAIRPERSON: Charmaine Torres  ASST. CHAIRPERSON: Rhohail Castro EDP: Rachelle Saya SUBJECT HEADS: Jemina Sy, Casiano Ilagan,

Jr., Ryan Co, Edwin Torres:MEMBERS: Marita Lourdes Azur, Edizer Enriquez, Christian Cabrera, Jhundee

Guillermo

Proceeds of the community taxcollected through the barangaytreasurers  shall be apportioned asfollows:

  50% accrues to the general fundof the city or municipalityconcerned; and

  50% accrues to the barangaywhere the tax is collected.

COLLECTION OF LOCAL TAXES 

Tax Period and Manner of Payment – (Sec. 165, LGC) 

Unless otherwise provided, thetax period shall be the calendaryear .

Such taxes, fees, and chargesmay be paid in quarterlyinstallments.

Accrual of Tax –  (Sec. 166, LGC) Unless otherwise provided, shall

accrue on the first day of January ofeach year.

However, new taxes, fees orcharges, or changes in the ratesthereof, shall accrue on the first dayof the quarter next following  theeffectivity of the ordinance imposing

such new levies or rates.

Time of Payment – (Sec. 167, LGC) Unless otherwise provided shall

be paid within the first twenty (20)days of January   or of eachsubsequent quarter as the case maybe.

May, for a justifiable reason orcause, be extended withoutsurcharges or penalties, but only fora period not exceeding six (6)months.

Surcharges and Penalties on UnpaidTaxes, Fees or Charges –  (Sec. 168,LGC) 

Surcharge not exceeding 25% ofthe amount of taxes, fees or chargesincluding surcharges, until suchamount is fully paid.

But in no case shall the totalinterest on the unpaid amount orportion thereof exceed thirty-six(36) months.

Interests on Other Unpaid Revenues – (Sec. 169, LGC) 

An interest thereon at the ratenot exceeding 2% per month from the

date it is due until it is paid, but in nocase shall the total interest on theunpaid amount or portion thereofexceed thirty-six (36) months.

COLLECTION OF LOCAL R EVENUES BY THE

TREASURER –  (SEC. 170 LGC) All local taxes, fees and charges

shall be collected by the provincial, city,municipal or barangay treasurer, or theirduly authorized deputies.

The provincial, city or municipaltreasurer may designate the barangay

treasurer or his deputy to collect localtaxes, fees or charges.

In case a bond is required for thepurpose, the provincial, city ormunicipal government shall pay thepremiums thereon in addition to thepremiums of the bond that may berequired under the Code.

LOCAL TAX REMEDIESUNDER THE LGC

1.  TAX REMEDIES OF THELOCAL GOVERNMENT UNITS (LGUs)

CIVIL R EMEDIES OF THE LOCAL GOVERNMENT

UNITS (LGU)  TO EFFECT COLLECTION OF

TAXES (1) Local Government’s Lien – Localtaxes, fees, charges and otherrevenues constitute a lien, superiorto all liens, charges orencumbrances in favor of any

person, enforceable by anyappropriate administrative orjudicial action.

(2) Civil Remedies

(a) by administrative action throughdistraint of personal propertyand by levy upon real property

(b) by judicial action

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San eda College of Law 102 

MEMORY AID IN TAXATION LAW 

TAXATION LAW COMMITTEE CHAIRPERSON: Charmaine Torres  ASST. CHAIRPERSON: Rhohail Castro EDP: Rachelle Saya SUBJECT HEADS: Jemina Sy, Casiano Ilagan,

Jr., Ryan Co, Edwin Torres:MEMBERS: Marita Lourdes Azur, Edizer Enriquez, Christian Cabrera, Jhundee

Guillermo

Either of these remedies or all maybe pursued concurrently orsimultaneously at the discretion of theLGU concerned.

JURISDICTION OF COURTS OVER LOCALTAXATION CASES

a.  With the amendment brought byRA No. 9282, the Court of TaxAppeals now has appellatejurisdiction over local taxationcases decided by the RegionalTrial Court in the exercise of itsappellate or original jurisdiction. 

b.  Regular judicial courts are notprohibited from enjoining the

collection of local taxes, subjectto Rule 58 (PreliminaryInjunction) of the Rules of Court. 

Note:  Unlike the NIRC, the Local TaxCode does not contain any specificprovision prohibiting courts fromenjoining the collection of local taxes.Such statutory lapse or intent may haveallowed preliminary injunction wherelocal taxes are involved. But it cannotnegate the procedural rules andrequirements under Rule 58 of the Rulesof Courts. (Valley Trading Co. vs. CFI ofIsabela, GR No. 49529, March 31, 1989)

PRESCRIPTIVE PERIODS FOR  THE ASSESSMENT

AND COLLECTION

OF LOCAL TAXES PRESCRIPTIVE PERIODS OF ASSESSMENT1.  Local taxes, fees, or charges  –  five

(5) years from the date they becamedue. (Sec. 194, LGC). 

2.  When there is fraud or intent to

evade the payment of taxes, feesor charges  –  ten (10) years  fromdiscovery   of the fraud or intent toevade the payment (Sec. 194, LGC). 

PRESCRIPTIVE PERIOD OF COLLECTIONLocal taxes, fees, or charges

may be collected within five (5) yearsfrom the date of assessment byadministrative or judicial action. Nosuch action shall be instituted after theexpiration of such period (Sec. 194,LGC).

GROUNDS FOR THE SUSPENSION OFTHE RUNNING OF THE PRESCRIPTIVEPERIODS

a.  The treasurer is legally

prevented from the assessmentor collection of the tax;b.  The taxpayer requests for a

reinvestigation and executes awaiver in writing before theexpiration of the period withinwhich to assess or collect; and

c.  The taxpayer is out of thecountry or otherwise cannot belocated (Sec. 194, LGC). 

2.  TAX REMEDIES OFTHE TAXPAYER

R EMEDIES OF THE TAXPAYER IN LOCAL

TAXATION 

A.  ADMINISTRATIVEBefore assessment a.  Appeal  –  any question on

constitutionality or legality of taxordinance within 30 days fromeffectivity thereof to Secretary ofJustice (Sec. 187 LGC) 

b.  Declaratory relief   wheneverapplicable. 

 After assessment a.  Protest – within 60 days from receipt

of assessment (Sec. 195 LGC). Payment under protest is notnecessary. 

b.  Payment & subsequent refund ortax credit –  within 2 years frompayment of tax to local treasurer(Sec. 196 LGC).  It is to be notedthat, unlike in internal revenue

taxes, the supervening cause appliesin local taxation because the periodfor the filing of claims for refund orcredit of local taxes is counted notnecessarily from the date ofpayment but from the date thetaxpayer is entitled to a refund orcredit. 

c.  Right of redemption  –  1 year fromthe date of sale or from the date offorfeiture (Sec. 179, LGC). 

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San eda College of Law 103 

MEMORY AID IN TAXATION LAW 

TAXATION LAW COMMITTEE CHAIRPERSON: Charmaine Torres  ASST. CHAIRPERSON: Rhohail Castro EDP: Rachelle Saya SUBJECT HEADS: Jemina Sy, Casiano Ilagan,

Jr., Ryan Co, Edwin Torres:MEMBERS: Marita Lourdes Azur, Edizer Enriquez, Christian Cabrera, Jhundee

Guillermo

B.  JUDICIAL1.  Court action

  within 30 days after receipt ofdecision or lapse of 60 days of

Secretary of Justice‘s inaction(Sec. 187 LGC)

  within 30 days from receiptwhen protest of assessment isdenied (Sec. 195 LGC)

  if no action is taken by thetreasurer in refund cases and thetwo year period is about to lapse(Sec. 195 LGC)

  if remedies available does notprovide plain, speedy andadequate remedy.

2.  Action for declaratory relief

3.  Injunction  –  if irreparable damagewould be caused to the taxpayer andno adequate remedy is available. 

IV.  REAL PROPERTYTAXATION

DEFINITIONS: REAL PROPERTY TAXATION –  A direct

tax on ownership of lands and

buildings or other improvementsthereon payable regardless ofwhether the property is used ornot, although the value may varyin accordance with such factor.

Under the LGC, it coversthe administration, appraisal,assessment, levy and collectionof Real Property Tax, i.e. tax onland and building and otherstructures and improvements onit, including machineries.

REAL PROPERTY  –  subject to thedefinition given by  Art. 415 ofthe Civil Code.

IMPROVEMENT – valuable addition madeto a property or amelioration inits condition amounting to morethan a mere replacement ofparts involving capitalexpenditures and labor.

NATURE AND CLASSES

CHARACTERISTICS OF REAL PROPERTYTAX

1.  Direct tax on the Ownership ofreal property

2.   Ad valorem  tax. The value isbased on the tax base.

3.  Proportionate –  the tax iscalculated on the basis of acertain percentage of the valueassessed.

4.  Indivisible single obligation5.  Local tax

TAXING AUTHORITIES (SEC. 233, LGC)

LGURate of Basic Real

Property Tax

1. Province not exceeding  1% ofassessed value

2. City not exceeding  2%

3. Municipalitywithin MetroManila

not exceeding 2%.

FUNDAMENTAL PRINCIPLES GOVERNINGREAL PROPERTY TAXATION (SEC. 198,LGC)1.  Real property shall be appraised at

its current and Fair market value;2.  Real property shall be classified for

assessment purposes on the basis ofactual Use.

3.  Real property shall be assessed onthe basis of Uniform classificationwithin each LGU

4.  The appraisal, assessment, levy andcollection of RP Tax shall not be let

to any Private person5.  The appraisal and assessment of real

property shall be Equitable.

EXTENT OF THE POWER TO LEVY

  Basic real property tax;

  1% additional real estate tax tofinance the Special EducationFund; (Sec. 236) 

  5% additional ad valorem tax onIdle lands; (Sec. 236, LGC) and

  Special levy or special

assessments (may be imposed

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San eda College of Law 104 

MEMORY AID IN TAXATION LAW 

TAXATION LAW COMMITTEE CHAIRPERSON: Charmaine Torres  ASST. CHAIRPERSON: Rhohail Castro EDP: Rachelle Saya SUBJECT HEADS: Jemina Sy, Casiano Ilagan,

Jr., Ryan Co, Edwin Torres:MEMBERS: Marita Lourdes Azur, Edizer Enriquez, Christian Cabrera, Jhundee

Guillermo

even by municipalities outsideMetro Manila) on lands comprisedwithin its territorial jurisdictionspecially benefited by public

works, projects or improvementsfunded by the local governmentunit concerned.Provided:  Special levy shall not exceed

60% of the actual cost ofsuch projects andimprovements, including thecosts of acquiring land andsuch other real property inconnection therewith

  not apply to lands exemptfrom basic real property tax

and the remainder of theland have been donated tothe local government unitconcerned for theconstruction of saidprojects. (Sec. 240, LGC). 

FOR PURPOSES OF REAL PROPERTYTAXATION IDLE LANDS SHALL INCLUDE:(SEC. 237, LGC) 1.  Agricultural lands more than one

hectare  in area one-half of which

remain uncultivated or unimproved by

the owner of the property or personhaving legal interest therein.

Agricultural lands planted topermanent or perennial crops withat least 50 trees to a hectare shallnot be considered idle lands.

Lands actually used for grazingpurposes shall likewise not beconsidered idle lands; and

2.  Lands other than agricultural located in a city or municipalitymore than one thousand square meters in area one-half of which remain

unutilized or unimproved  by theowner of the property or personhaving legal interest therein.

IDLE LANDS EXEMPT FROM TAX (SEC.238, LGC)

By reason of:1.   force majeure2.  civil disturbance3.  natural calamity4.  or any cause which physically or

legally prevents the owner of

the property or person havinglegal interest therein fromimproving, utilizing orcultivating the same.

CLASSIFICATION OF LANDS FORPURPOSES OF ASSESSMENT SEC. 218(A) 

a.  Commercialb.  Agriculturalc.  Residentiald.  Minerale.  Industrialf.  Timberlandg.  Special

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

1.  Hospitals2.  Cultural and Scientific purposes3.  owned and used by Local water

districts4.  GOCCs rendering essential public

services in the supply anddistribution of water and/orgeneration or transmission ofelectric power.

PROPERTIES EXEMPT FROM REALPROPERTY TAX (SEC. 234, LGC)Exemption is limited only to thefollowing:

1.  Real property owned  by thegovernment except  when thebeneficial use thereof has beengranted to a taxable person;

2.  Charitable institutions,churches, personages orconvents appurtenant thereto,mosques, non-profit or religiouscemeteries and all lands,

buildings and improvementsactually, directly andexclusively used  for religious,charitable or educationalpurposes (Art. VI, Sec. 28,Constitution);

3.  Machineries and equipment thatare actually, directly andexclusively used  by local waterutilities and GOCC‘s engaged inthe supply and distribution ofwater and/or electric power;

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San eda College of Law 105 

MEMORY AID IN TAXATION LAW 

TAXATION LAW COMMITTEE CHAIRPERSON: Charmaine Torres  ASST. CHAIRPERSON: Rhohail Castro EDP: Rachelle Saya SUBJECT HEADS: Jemina Sy, Casiano Ilagan,

Jr., Ryan Co, Edwin Torres:MEMBERS: Marita Lourdes Azur, Edizer Enriquez, Christian Cabrera, Jhundee

Guillermo

4.  Real property owned  by dulyregistered cooperatives asprovided for in RA 6938; and

5.  Machinery and equipment used 

for pollution control andenvironmental protection.

ACTUAL USE OF PROPERTY AS BASISFOR ASSESSMENT (SEC. 217 LGC)

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

Unpaid realty taxes attach to theproperty and is chargeable against the

person who had actual or beneficial useand possession of it regardless ofwhether or not he is the owner. Toimpose the real property tax on thesubsequent owner which was neither theowner nor the beneficial user of theproperty during the designated periodswould not only be contrary to law butalso unjust.  (Estate of Lim vs. City ofManila, GR No. 90639, February 21,1990)

PROCEDURE

STEP 1:  DECLARATION OF REALPROPERTY

DECLARATION BY OWNER OR ADMINISTRATOR  

(SEC. 202-203)  File a sworn declaration with the

assessor- once every 3 years during

the period from January 1to June 30.

  For newly acquired property  – 

WHEN: Must file with the assessor within60 days from date of transferWHAT: Sworn statement containing thefair market value and description of theproperty.   For improvement on propertyWHEN: Must file within 60 days uponcompletion or occupation (whichevercomes earlier)WHAT: Sworn statement containing thefair market value and description of theproperty.

DECLARATION BY PROVINCIAL / CITY / MUNICIPAL ASSESSOR  (SEC. 204)

WHEN: Only when the person under Sec.

202 refuses or fails  to make adeclaration within the prescribed time.

No oath by the assessor is required.

Notes:  Proof of Exemption of RealProperty from Taxation - (Sec. 206)

WHO:  By any person or for whom realproperty is declared.

  Claim for exemption must be filedwith the assessor together with

sufficient documentary evidence tosupport claim

WHEN:  within 30 days from the date ofdeclaration of property.

IF PROPERTY IS DECLARED FOR THE FIRST TIME

– (SEC.222) If Declared for the first time, real

property shall be assessed for backtaxes:

For not more than 10 years  prior todate of initial assessment

Taxes shall be computed on the basisof applicable schedule of values in forceduring the corresponding period.

STEP 2: LISTING OF REALPROPERTY IN THE ASSESSMENT

ROLLS (SECS. 205, 207) 

  All declarations shall be kept andfiled under a uniformclassification system to beestablished by the provincial, city

or municipal assessor. 

STEP 3: APPRAISAL ANDVALUATION OF REAL PROPERTY

(SECS. 212-214, 224-225) 

DETERMINATION OF FAIR MARKET VALUE (FMV) For land

  Assessor of the province/city ormunicipality may summon  theowners of the properties to beaffected and may take depositions concerning the property, its

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San eda College of Law 106 

MEMORY AID IN TAXATION LAW 

TAXATION LAW COMMITTEE CHAIRPERSON: Charmaine Torres  ASST. CHAIRPERSON: Rhohail Castro EDP: Rachelle Saya SUBJECT HEADS: Jemina Sy, Casiano Ilagan,

Jr., Ryan Co, Edwin Torres:MEMBERS: Marita Lourdes Azur, Edizer Enriquez, Christian Cabrera, Jhundee

Guillermo

ownership, amount, nature andvalue (Sec. 213, LGC)

  Assessor prepares a schedule ofFMV for different classes of

properties.  Sanggunian enacts an ordinance  The schedule of FMV is

published in a newspaper ofgeneral circulation in theprovince, city or municipalityconcerned or in the absencethereof, shall be posted in theprovincial capitol, city ormunicipal hall and in two otherconspicuous public placestherein (Sec. 212, LGC) 

For machinery1.  For Brand new machinery: FMV is the

acquisition cost2.  In all other cases: FMV

= Remaining eco. life X Replacement Estimated Eco.Life Cost 

STEP 4: DETERMINE ASSESSEDVALUE (SEC. 218)

Determine Assessed Value Procedure1.  Take the schedule of FMV2.  Assessed Value  =  FMV x

Assessment level3.  Tax = Assessed value x Tax rate

STEP 5: PAYMENT AND COLLECTIONOF TAX

(a) Accrual of Tax:  January of everyyear and such will constitute asa superior lien. (Sec. 246)

(b) Time and Manner of Payment:  (Sec.

250)1. basic real property tax in 4 equal

installments (March 31, June 30,September 30, December 30)

2. special levy –  governed byordinance

(c) Interest for Late Payment (Sec. 255)1.  two percent (2%) for each month

on unpaid amount until thedelinquent amount is paid

2.  provided in no case shall thetotal interest exceed thirty-six(36) months.

(d) For Advance and Prompt Payment 1.  Advance payment –  discount notexceeding 20% of annual tax (Sec.251, LCG)

2.  Prompt payment –  discount notexceeding 10% of annual tax due(Art 342 IRR)

COLLECTION OF TAX (SEC. 247)It shall be the responsibility of the

city or municipal treasurer concerned.The city or municipal treasurer may

deputize the barangay treasurer tocollect all taxes on real property located

in the barangay; provided, the barangaytreasurer is properly bonded.

PERIOD TO COLLECT (SEC. 270)1.  within five (5) years from the

date they become due2.  within ten (10) years from

discovery of fraud, in case thereis fraud or intent to evade

SUSPENSION OF PRESCRIPTIVE PERIOD (SEC. 270)

1. local treasurer is legallyprevented to collect tax.

2. the owner or property requestsfor reinvestigation and writes awaiver  before expiration ofperiod to collect.

3. the owner of property is out ofthe country or cannot belocated.

REAL PROPERTY TAXREMEDIES UNDER THE LGC

1. TAX REMEDIES OF THE LOCAL 

GOVERNMENT TO EFFECT 

COLLECTION OF TAXES

A. ADMINISTRATIVE1.  Real Property tax lien (Secs. 257,

LGC)  –  superior to all liens, chargesor encumbrances;

2.  Distraint (Sec. 254[B], LGC); 3.  Levy (Sec. 254[A], 258 LGC); 4.  Purchase of property by local

treasurer for want of bidder (Sec.

263, LGC). 

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San eda College of Law 107 

MEMORY AID IN TAXATION LAW 

TAXATION LAW COMMITTEE CHAIRPERSON: Charmaine Torres  ASST. CHAIRPERSON: Rhohail Castro EDP: Rachelle Saya SUBJECT HEADS: Jemina Sy, Casiano Ilagan,

Jr., Ryan Co, Edwin Torres:MEMBERS: Marita Lourdes Azur, Edizer Enriquez, Christian Cabrera, Jhundee

Guillermo

B.  JUDICIALCivil Action ( Sec. 266, 270 LGC)

PRESCRIPTIVE PERIODS FOR THE

COLLECTION OF REALPROPERTY TAXES

1.  Basic real property tax and anyother tax levied under the title onReal Property Taxation–  five (5)years from the date they becamedue. (Sec. 270, LGC). 

2.  When there is fraud or intent toevade the payment of taxes –  ten(10) years from discovery of thefraud or intent to evade thepayment (Sec. 270, LGC). 

GROUNDS FOR THE SUSPENSION OFTHE RUNNING OF THE PRESCRIPTIVEPERIODS

1.  The treasurer is legally preventedfrom the assessment or collection ofthe tax;

2.  The taxpayer requests for areinvestigation and executes awaiver in writing before theexpiration of the period within

which to assess or collect; and3.  The taxpayer is out of the country or

otherwise cannot be located (Sec.270, LGC).

2.  TAX REMEDIES OF THETAXPAYER

A.  ADMINISTRATIVE

Protest –  payment under protest isrequired within 30 days to provincial,city, or municipal treasurer.  No protest

shall be entertained unless the tax isfirst paid. (Sec. 252 LGC)

Claim for Tax Refund or Credit (Sec.253) 

a)  the taxpayer may file a writtenclaim for refund or credit withthe provincial or city treasurerwithin two years from the datethe taxpayer is entitled to suchreduction or adjustment.

b)  in case of denial of refund orcredit, appeal to LBAA as inprotest case.

Redemption of real property  (Sec. 261LGC) 

Remedy against the Assessment/Appeal1st:  within 60 days from notice of

assessment of provincial, city ormunicipal assessor to LBAA (Sec. 226LGC)

2nd : within 30 days from receipt ofdecision of LBAA to CBAA (Sec. 230LGC)

3rd :  within 30 days from receipt ofdecision of CBAA to Court of Tax

Appeals en banc4th:  within 15 days from receipt of

decision of Court of Tax Appeals enbanc to the Supreme Court

APPEALS IN REAL PROPERTYTAXATION

within 60 days

Owner/Person with legal interestmust file:1) Written Petition under Oath2) With Supporting Documents

within 30 days

within 30 days

within 15 days

LOCAL BOARD OF ASSESSMENT APPEALS(LBAA should decide within 120 days

from receipt of petition)

CENTRAL BOARD OF ASSESSMENTAPPEALS

COURT OF TAX APPEALS (EN BANC)

SUPREME COURT

PROVINCIAL, CITY OR MUNICIPAL

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San eda College of Law 108 

MEMORY AID IN TAXATION LAW 

TAXATION LAW COMMITTEE CHAIRPERSON: Charmaine Torres  ASST. CHAIRPERSON: Rhohail Castro EDP: Rachelle Saya SUBJECT HEADS: Jemina Sy, Casiano Ilagan,

Jr., Ryan Co, Edwin Torres:MEMBERS: Marita Lourdes Azur, Edizer Enriquez, Christian Cabrera, Jhundee

Guillermo

B.  JUDICIAL1.  Court Action –  appeal of CBAA‘s

decision to Court of Tax Appeals enbanc. 

2.  Suit assailing validity of tax;recovery of refund of taxes paid(Sec. 64 PD 464). 

3.  Suit to declare invalidity of tax dueto irregularity in assessment andcollection (Sec. 64 PD 464) 

4.  Suit assailing the validity of tax sale(Sec. 83 PD 464) (Sec. 267 LGC) 

CONDONATION OF R EAL PROPERTY TAXES 1. By the Sanggunian

Real property taxes may becondoned wholly or partially in a

given local government unit when:a.  There is general failure of crops;

 b.  There is substantial decrease inthe price of agricultural or agri-based products; or

c.  There is calamity.2. By the President of the Philippines

  when public interest so requires. 

V.  TARIFF ANDCUSTOMS CODE 

DEFINITIONS TARIFF: Customs duties, toll or tributepayable upon merchandise to theGovernment.

CUSTOM DUTIES: Tax assessed uponmerchandise from or exported to, aforeign country. (Garcia v. ExecutiveSec., GR No. 101273, July3, 1992)) 

Note: Customs and tariffs are

synonymous with one another. Theyboth refer to the taxes imposed onimported or exported wares, articles, ormerchandise. 

OTHER TYPES OF FEES CHARGED BY THE

BUREAU OF CUSTOMS 

  Arrastre charge

  Wharfage due –  counterpart oflicense, charged not for the use ofany wharf but for a special fundknown as the Port Works Fund. 

  Berthing fee

  Harbor fee

  Tonnage due

MEANING AND SCOPE OF THE TARIFF AND

CUSTOMS LAWS Include not only the provisions of the

Tariff and Customs Code (TCC) andregulations pursuant thereto, but allother laws and regulations that aresubject to the Bureau of Customs (BOC)or otherwise within its jurisdiction.

As to its scope, therefore, tariff andcustoms laws extend not only to theprovisions of the TCC but to all otherlaws as well, the enforcement of whichis entrusted to the BOC.

THE BUREAU OF CUSTOMS

FUNCTIONS OF THE BUREAU OFCUSTOMS

1.  Assessment and collection ofrevenues from imported articles andall other impositions under the tariffand customs laws;

2.  Control smuggling and relatedfrauds;

3.  Supervision and control over theentrance and clearance of vesselsand aircraft engaged in foreigncommerce;

4.  Enforcement of TCC and relatedlaws;

5.  Supervision and control over thehandling of foreign mails arriving inthe Philippines;

6.  Supervise and control all import andexport cargoes for the protection ofgovernment revenue;

7.  Exclusive original jurisdiction over

seizure and forfeiture cases underthe tariff and customs laws.

JURISDICTION OF COLLECTOR OFCUSTOMS OVER IMPORTATION OFARTICLES1.  Cause all articles for importation to

be entered in the customhouse,2.  Cause all such articles to be

appraised and classified,3.  Assess and collect the duties, taxes

and other charges thereon, and

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San eda College of Law 109 

MEMORY AID IN TAXATION LAW 

TAXATION LAW COMMITTEE CHAIRPERSON: Charmaine Torres  ASST. CHAIRPERSON: Rhohail Castro EDP: Rachelle Saya SUBJECT HEADS: Jemina Sy, Casiano Ilagan,

Jr., Ryan Co, Edwin Torres:MEMBERS: Marita Lourdes Azur, Edizer Enriquez, Christian Cabrera, Jhundee

Guillermo

4.  Hold possession of all importedarticles until the duties, taxes andother charges are paid thereon.(Sec. 1206, TCC) 

TERRITORIAL JURISDICTION OF THEBOC1.  All seas within the jurisdiction of the

Philippines2.  All coasts, ports, airports, harbors,

bays, rivers and inland waterswhether navigable or not from thesea. (1st par, Sec. 603, TCC)

CUSTOMS DUTIES

WHEN TARIFF AND CUSTOMS APPLIEDOnly after importation has begun but

before importation is terminated.

Importation begins: 1)  when the conveying vessel or

aircraft2)  enters the jurisdiction of the

Phil.3)  with intention to unload therein

Importation is deemed terminated:

(a) upon payment of the duties, taxesand other charges due upon the articles.

(b) and legal permit for withdrawalshall have been granted.

  In case the articles are free ofduties, taxes and other charges, untilthey have legally left the jurisdiction ofthe customs (Sec. 1202, TCC) 

INTENTION TO UNLOADEven if not yet unloaded, and there is

unmanifested cargo, forfeiture may takeplace because importation has alreadybegun. 

ARTICLES UNDER TCCMay either be:1.  Subject to duty – a. Live animals and animal

products;b.  Vegetable products;c.  Animal or vegetable fats; oils

and their cleavage products;

prepared edible fats; animal orvegetable waxes;

d.  Prepared foodstuffs; beverages,spirits and vinegar; tobacco and

manufactured tobaccosubstitutes;e.  Mineral products;f.  Products of chemical or allied

industries;g.  Plastics and articles thereof;

rubber and articles thereof;h.  Raw hides and skins; leather,

etc.;i.  Wood and articles of wood, etc.;j.  Pulp of wood, etc.;k.  Textiles and textile articles;l.  Articles of stone; plaster,

cement, etc.;m. Footwear, headgear, etc.;n.  Natural or cultured pearls

precious/semi-precious stones;o.  Base metals and articles of base

metals;p.  Machinery and mechanical

appliances; electric equipment;sound recorders, etc;

q.  Vehicles, aircraft, vessels andassociated transport equipment;

r.  Optical, photographic, medical,surgical instruments, etc.;

s.  Arms, ammunition, parts andaccessories;

t.  Miscellaneous manufacturedarticles; and

u.  Works of art, collector's piecesarid antiques (Sec. 104, Title 1,TCC). 

2.  Prohibited from being imported (Prohibited importation)a.  Absolutely prohibited   such as:

weapons of war; gamblingdevices; narcotics or prohibited

drugs; immoral, obscene orinsidious articles; and thoseprohibited under special laws(Sec.102, TCC). 

b.  Qualifiedly prohibitedWhere such conditions as to

warrant a lawful importation donot exist, the legal effects of theimportation of qualifiedlyprohibited articles are the sameas those of absolutely prohibitedarticles. (Auyong Hian vs. CTA,

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San eda College of Law 110 

MEMORY AID IN TAXATION LAW 

TAXATION LAW COMMITTEE CHAIRPERSON: Charmaine Torres  ASST. CHAIRPERSON: Rhohail Castro EDP: Rachelle Saya SUBJECT HEADS: Jemina Sy, Casiano Ilagan,

Jr., Ryan Co, Edwin Torres:MEMBERS: Marita Lourdes Azur, Edizer Enriquez, Christian Cabrera, Jhundee

Guillermo

GR No. L-28782, September 12,1974)

3.  Conditionally-free from tariff and

customs duties  (conditionally-freeimportation)

  Those provided in Sec. 105, TCC;

  Those granted to governmentagencies, GOCCs withagreements with foreigncountries;

  Those given to internationalinstitutions entitled toexemption by agreement orspecial laws; and

  Those that may be granted bythe President upon NEDA‘s

recommendation.

4.  Free from TC duties (duty-free)Imported goods must be

entered in a customhouse at theirport of entry otherwise they shall beconsidered as contraband and theimporter is liable for smuggling (SeeSec. 101, TCC).

All articles when imported fromany country into the Philippines shallbe subject to duty upon eachimportation, even though previouslyexported from the Philippines,except as otherwise specificallyprovided for in the TCC or otherlaws.

LIABILITY FOR CUSTOMS DUTIES General Rule: All importations /exportations of goods are subject tocustoms duties (Sec. 105, TCC).

Exceptions:(1)  Exemptions under the TCC;

(2)  Exemptions granted togovernment agencies,instrumentalities or GOCCs withexisting contracts,commitments, agreements, orobligations with foreigncountries;

(3)  Exemptions of internationalorganizations pursuant toagreements or special laws; and

(4)  Exemptions granted by the Pres.of the Phil. uponrecommendation of NEDA (Sec.

105, TCC). 

LIABILITY OF IMPORTER FOR CUSTOM DUTIES 

  A  personal debt  which can bedischarged only by payment infull thereof;

  A lien upon the imported articleswhile they are in custody orsubject to the control of thegovernment. (Sec. 1204, TCC).

EXTENT OF IMPORTER ’S LIABILITY

The liability of an importer islimited to the value of the importedmerchandise. In case of forfeiture ofthe seized material, the maximum civilpenalty is the forfeiture itself.(Mendoza vs. David, GR No. L-9452,March 27, 1961) 

DRAWBACK  A device resorted to for enabling a

commodity affected by taxes to beexported and sold in foreign marketsupon the same terms as if it had notbeen taxed at all. (Uy Chaco Sons vs.Collector of Customs, GR No. 7618,March 27, 1913) 

IMPORT ENTRY It is a declaration to the BOC

showing particulars of the imported

article that will enable the customsauthorities to determine the correctduties. An importer is required to file animport entry. It must be accomplishedfrom disembarking of last cargo fromvessel.

TRANSACTION VALUE UNDER RA NO. 8181It is the invoice value of the

goods plus freight, insurance, costs,expenses and other necessary expenses.This replaces the Home ConsumptionValue as basis of valuation of goods.

CLASSIFICATION OF CUSTOM DUTIESA.  Regular Duties  –  those which are

imposed and collected merely as asource of revenue. 1.  Ad valorem duty: This is a duty

based on the value of theimported article.

2.  Specific duty: This is a dutybased on the dutiable weight ofgoods (either the gross weight,legal weight, or net weight).

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San eda College of Law 111 

MEMORY AID IN TAXATION LAW 

TAXATION LAW COMMITTEE CHAIRPERSON: Charmaine Torres  ASST. CHAIRPERSON: Rhohail Castro EDP: Rachelle Saya SUBJECT HEADS: Jemina Sy, Casiano Ilagan,

Jr., Ryan Co, Edwin Torres:MEMBERS: Marita Lourdes Azur, Edizer Enriquez, Christian Cabrera, Jhundee

Guillermo

3.  Alternating duties: This is aduty which alternates advalorem and specific. 

4.  Compound Duty: This is a duty

consisting of ad valorem andspecific duties.

B.  Special duties –  those which areimposed and collected in addition tothe ordinary customs duties usuallyto protect local industries againstforeign competition. 

1.  Dumping duty2.  Countervailing duty

3.  Marking duty4.  Discriminatory duty

NATURE OF SPECIAL CUSTOMS DUTIES 

Special customs duties areadditional import duties imposed onspecific kinds of imported articles undercertain conditions.

PURPOSE OF SPECIAL CUSTOMS DUTIES The special customs duties are

imposed for the protection of consumersand manufacturers, as well as Phil.products from undue competition posedby foreign-made products.

SPECIAL DUTIES COMPARED 

DUMPING DUTY COUNTERVAILING DUTY MARKING DUTYDISCRIMINATORY

DUTY

1.  Nature Imposed uponforeign productswith value lowerthan their fairmarket value to thedetriment of localproducts.

Imposed upon foreigngoods enjoying subsidythus allowing them tosell at lower prices tothe detriment of localproducts similarlysituated.

Imposed uponthose notproperly markedas to place oforigin of thegoods.

Imposed upongoods comingfrom countriesthat discriminateagainst Philippineproducts.

2.  Amount/Rate Difference betweenthe actual priceand the normalvalue of the article.

Equivalent to thebounty, subsidy, orsubvention.

5% ad valoremof articles

Any amount notexceeding 100%ad valorem of thesubject articles

3.  Imposing Authority  Special committeeon Anti-Dumping(composed of theSecretary of Financeas Chairman;Members: theSecretary of DTI,and either the

Secretary ofAgriculture if articlein question isagricultural productor the Secretary oflabor if non-agricultural product

Secretary of Finance Commissioner ofCustoms

President of thePhilippines

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MEMORY AID IN TAXATION LAW 

TAXATION LAW COMMITTEE CHAIRPERSON: Charmaine Torres  ASST. CHAIRPERSON: Rhohail Castro EDP: Rachelle Saya SUBJECT HEADS: Jemina Sy, Casiano Ilagan,

Jr., Ryan Co, Edwin Torres:MEMBERS: Marita Lourdes Azur, Edizer Enriquez, Christian Cabrera, Jhundee

Guillermo

FLEXIBLE TARIFF CLAUSEThe President may fix tariff rates,

import and export quotas, etc. underTCC (See Sec. 28, Art. VI, Constitution

and Sec. 401, TCC)1.  to increase, reduce or removeexisting protective rates of importduty (including any necessary changein classification).

The existing rates may beincreased or decreased to any level,on one or several stages but in nocase shall the increased rate ofimport duty be higher than amaximum of one hundred (100%) percent ad valorem

2.  to establish import quota or to ban

imports of any commodity, as maybe necessary; and

3.  to impose an additional duty on allimports not exceeding ten (10%) percent ad valorem whenevernecessary:

LIMITATIONS IMPOSED REGARDING THEFLEXIBLE TARIFF CLAUSE

a.  Conduct by the Tariff Commission ofan investigation in a public hearing.

The Commission shall also hear

the views and recommendations ofany  government office, agency orinstrumentality concerned.

The Commission shall submittheir findings and recommendationsto the NEDA within thirty (30) daysafter the termination of the publichearings.

The NEDA thereafter submits itsrecommendation to the President.

b.  The power of the President toincrease or decrease the rates ofimport duty within the

abovementioned limits fixed in theCode shall include the modificationin the form of duty .

In such a case the correspondingad valorem or specific equivalents ofthe duty with respect to the importsfrom the principal competing foreigncountry for the most recentrepresentative period shall be usedas bases (Sec. 401, TCC).

THE TARIFF COMMISSION (TC)

FUNCTIONS OF THE TARIFFCOMMISSION

1.  Investigative Powers (Sec. 505,TCC)a.  the administration of and the

fiscal and industrial effects ofthe tariff and customs laws ofthis country now in force  orwhich may hereafter be enacted;

b.  the relations between the ratesof duty on raw materials and thefinished or partly finishedproducts;

c.  the effects of ad valorem andspecific duties and of compound

specific and ad valorem duties;d.  all questions relative to the

arrangement of schedules andclassification of articles in theseveral schedules of the tarifflaw;

e.  the tariff relations between thePhilippines and  foreigncountries, commercial treaties,preferential provisions,economic alliances, the effect ofexport bounties and preferentialtransportation rates;

f.  the volume of importations,compared with domestic pro-duction and consumption;

g.  conditions, causes, and effectsrelating to competition offoreign industries with those ofthe Philippines, includingdumping and cost of production;and

h.  in general, to investigate theoperation of customs and tarifflaws, including their relation tothe national revenues, theireffect upon the industries andlabor of the country and tosubmit reports of itsinvestigation as provided.

2.  Administrative Assistance to thePresident and Congress (Sec. 506,TCC)

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MEMORY AID IN TAXATION LAW 

TAXATION LAW COMMITTEE CHAIRPERSON: Charmaine Torres  ASST. CHAIRPERSON: Rhohail Castro EDP: Rachelle Saya SUBJECT HEADS: Jemina Sy, Casiano Ilagan,

Jr., Ryan Co, Edwin Torres:MEMBERS: Marita Lourdes Azur, Edizer Enriquez, Christian Cabrera, Jhundee

Guillermo

TAX REMEDIES UNDER THETARIFF AND CUSTOMS CODE

(TCC)

TAX REMEDIES OF THEGOVERNMENT

A. ADMINISTRATIVE1.  Tax Lien (Sec. 1204 TCC)

  attaches on the goods,regardless of ownership, whilestill in the custody or controlof the Government

  availed of when theimportation is neitherprohibited nor improperly

made2.  Administrative Fines and

Forfeitures

  applied when theimportation is unlawful,

  and it may be exercised evenwhere the articles are not orno longer in Custom‘scustody- unless  the importation ismerely attempted in whichcase it may be effected onlywhile the goods are stillwithin the Customsjurisdiction or in the handsof a person who is awarethereof (Sec. 2531 & 2530,TCC)

  under Sec. 2530(a) of theTCC, in order to warrantforfeiture, it is not necessarythat the vessel or aircraftmust itself carry thecontraband. Thecomplementary if collateral

use of the Cessna plane forsmuggling operation issufficient for it to bedeemed to have been used insmuggling.  (Llamado vs.Commissioner of Customs,GR No. L-28809, May 16,1983)

3.  Reduction of customs duties /compromise

  subject to approval of Sec.of Finance (Sec. 709, 2316TCC)

4.  Seizure, Search, Arrest (Sec.2205, 2210, 2211 TC C) 

B. JUDICIAL

1.  this remedy is normallyavailed of when the tax lienis lost by the release of thegoods  Civil Action (Sec. 1204,

TCC)

  Criminal Action

TAX REMEDIES OF THE TAXPAYER

A. ADMINISTRATIVE1.  Protest

a.  Any importer or interested

party if dissatisfied withpublished value within 15days from date ofpublication, or within 5 daysfrom the date the importeris entitled to refund ifpayment is renderederroneous or illegal byevents occurring after thepayment.

b.  Taxpayer –  within 15 daysfrom assessment. Paymentunder protest is necessary.(Sec. 2308, 2210 TCC) 

2.  Refunda.  A written claim for refund

may be submitted by theimporter in abatement caseson missing packages,deficiencies in the contentsof packages or shortagesbefore arrival of the goods inthe Philippines, articles lostor destroyed after sucharrival, dead or injured

animals, and for manifestclerical errors; andb.  Drawback cases where the

goods are re-exported (Sec.1701-1708 TCC).

3.  Settlement of any seizure bypayment of fine or redemption

  But this shall not be allowedin any case whereimportation is absolutelyprohibited, or the releasewould be contrary to law, orwhen there is an actual and

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MEMORY AID IN TAXATION LAW 

TAXATION LAW COMMITTEE CHAIRPERSON: Charmaine Torres  ASST. CHAIRPERSON: Rhohail Castro EDP: Rachelle Saya SUBJECT HEADS: Jemina Sy, Casiano Ilagan,

Jr., Ryan Co, Edwin Torres:MEMBERS: Marita Lourdes Azur, Edizer Enriquez, Christian Cabrera, Jhundee

Guillermo

intentional fraud (Sec. 2307TCC). 

4.  Appeal

  Within 15 days to theCommissioner afternotification by  Collector ofhis decision (Sec. 2313TCC). 

B. JUDICIAL1.  Appeal

  Within 30 days from receiptof decision of theCommissioner or Secretary ofFinance to the division of theCTA (Sec. 2403 TCC, Sec. 7

RA 1125, as amended by Sec.9 RA 9282)

  Since Sec.11 of RA 1125 asamended by RA 9282empowers the Tax Court toissue injunctions, it wouldappear that an importer mayappeal without first payingthe duties, such as inseizure, but not in protestcases. 

2.  Action to question the legalityof seizure

3.  Abandonment (Sec. 1801 TCC) a.  expressly (Sec. 1801 TCC) b.  impliedly – 

c.  failure to file an importentry within 30 daysfrom the discharge ofgoods or

d.  having filed an entryfails to claim within 15days but it shall not beso effective until sodeclared by thecollector. (Sec. 1801, asamended by RA 7651) 

TWO KINDS OF PROCEEDINGS INTHE BUREAU OF CUSTOMS (BOC)

A. CUSTOMS PROTEST CASES

DEFINITION:  These are cases which dealsolely with liability for customs duties,fees, and other charges.

Note: Before filing a protest, theremust first be a payment under protest.

WHEN CUSTOMS PROTEST APPLICABLE 

The customs protest is required to befiled only in case the liability of thetaxpayer for duties, taxes, fees andother charges is determined and thetaxpayer disputes said liability.

WHEN CUSTOMS PROTEST NOT  REQUIRED 

Where there is no dispute, but theclaim for refund arises by reason of thehappening of supervening events such aswhen the raw material imported is

utilized in the production of finishedproducts subsequently exported and aduty drawback is claimed.

R EQUIREMENTS FOR MAKING A PROTEST 

1.  Must be in writing2.  Must point out the particular

decision or ruling of the Collector ofCustoms to which exception is takenor objection made;

3.  Must state the grounds relied uponfor relief;

4.  Must be limited to the subjectmatter of a single adjustment;

5.  Must be filed when the amountclaimed is paid or within 15 daysafter the payment;

6.  Protestant must furnish samples ofgoods under protest when required.

PROCEDURE IN CUSTOMS PROTESTCASES

The Collector acting within hisjurisdiction shall cause the imported

goods to be entered at the customhouse

 The Collector shall assess, liquidate, andcollect the duties thereon, or detain the

said goods if the party liable does notpay the same

 The party adversely affected (the

protestant) may file a written protest onhis foregoing liability with the Collector

within 15 days after paying the

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MEMORY AID IN TAXATION LAW 

TAXATION LAW COMMITTEE CHAIRPERSON: Charmaine Torres  ASST. CHAIRPERSON: Rhohail Castro EDP: Rachelle Saya SUBJECT HEADS: Jemina Sy, Casiano Ilagan,

Jr., Ryan Co, Edwin Torres:MEMBERS: Marita Lourdes Azur, Edizer Enriquez, Christian Cabrera, Jhundee

Guillermo

liquidated amount (the payment underprotest rule applies)

 Hearing within 15 days from receipt of

the duly presented protest. Upontermination of the hearing, the Collectorshall decide on the same within 30 days

   

If decision is adverse tothe protestant

If decision is adverse tothe government

   

Appeal with theCommissioner within15 days from notice

Automatic Review bythe Commissioner

 

 Appeal with the Courtof Tax Appeals Division

within 30 days fromnotice

Automatic review bythe Secretary of

Finance

 

 Appeal with the

CTA en banc

 Appeal by certiorariwith the Supreme

Court within 15 daysfrom notice

If decision ofCommissioner or

Secretary of Finance isadverse to the

protestant, he mayappeal to the CTA and

SC under the same

procedure on the left.

R EASONS FOR THE AUTOMATIC REVIEW OF

DECISIONS ADVERSE TO THE GOVERNMENT 

1.  To protect the interest of theGovernment

2.  A favorable decision will not beappealed by the taxpayer and

certainly a Collector will notappeal his own decision.

3.  Lifeblood Theory

B. SEIZURE AND FORFEITURE CASES

DEFINITION: These refer to mattersinvolving smuggling. It is administrativeand civil in nature and is  directedagainst the res or imported articles andentails a determination of the legality oftheir importation. These are actions inrem. 

Thus, It is of no defense that theowner of the vessel sought to beforfeited had no actual knowledge thathis property was used illegally. The

absence or lack of actual knowledge ofsuch use is a defense personal to theowner himself, which cannot in any wayabsolve the vessel from the liability offorfeiture. (Commissioner of Customsvs. Manila Star Ferry, Inc., GR Nos.31776-78, October 21, 1993)

SMUGGLING1.  An act of any person who shall:

a.  Fraudulently import any articlecontrary to law, or

 b.  Assist in so doing, or

c.  Receive, conceal, buy, sell,facilitate, transport, conceal orsell such article knowing itsillegal importation (Sec. 3601,TCC) 

d.  Export contrary to law. (Sec.3514, TCC) 

2. The Philippines is divided intovarious ports of entry –  entry otherthan port of entry, will beSMUGGLING.

PORT OF ENTRY A domestic port open to both

foreign and coastwise trade including―airport of entry‖. (Sec. 3514, TCC)

ALL articles imported into thePhilippines whether subject to duty ornot shall be entered through acustomshouse at a port of entry.

ENTRY: in Customs law means-1.  the documents filed at the

Customs house2.  the submission and

acceptance of thedocuments

3.  the procedure of passinggoods through the customshouse (Rodriguez vs. Courtof Appeals, GR No. 115218,September 18, 1995)

CONTRABAND: Articles of prohibitedimportations or exportations. (Sec. 3514,TCC)

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San eda College of Law 116 

MEMORY AID IN TAXATION LAW 

TAXATION LAW COMMITTEE CHAIRPERSON: Charmaine Torres  ASST. CHAIRPERSON: Rhohail Castro EDP: Rachelle Saya SUBJECT HEADS: Jemina Sy, Casiano Ilagan,

Jr., Ryan Co, Edwin Torres:MEMBERS: Marita Lourdes Azur, Edizer Enriquez, Christian Cabrera, Jhundee

Guillermo

EVIDENCE FOR CONVICTION INSMUGGLING CASES

Mere possession of the article inquestion - unless  defendant could

explain that his possession is lawful tothe satisfaction of the court (Sec. 3601,TCC).  Payment of the tax due afterapprehension is not a valid defense(Rodriguez vs. Court of Appeals, GR No.115218, September 18, 1995)

THINGS SUBJECT TO CONFISCATION INSMUGGLING CASES 

Anything that was used forsmuggling is subject to confiscation, likethe vessel, plane, etc. (Llamado vs.Commissioner of Customs, GR No. L-

28809, May 16, 1983).

Exception:  Common carriers that arenot privately chartered cannot beconfiscated.

RIGHT OF CUSTOMS OFFICERS TOEFFECT SEIZURE & ARREST (SEC. 2205) 1. May seize any vessel, aircraft, cargo,

article, animal or other movableproperty when the same is subject toforfeiture or liable for any time asimposed under tariff and customs

laws, rules & regulations2. May exercise such powers only in

conformity with the laws andprovisions of the TCC

COMMON CARRIERS; FORFEITURE1.  Common carriers are generally not

subject to forfeiture although if theowner has knowledge of its use insmuggling and was a consentingparty, it may also be forfeited.

2.  If a motor vehicle is hired to carrysmuggled goods but it has noCertificate of Public Convenience(CPC), it is not a common carrier. Itis thus subject to forfeiture, andlack of personal knowledge of theowner or the carrier is not a defenseto forfeiture.

PROPERTIES NOT SUBJECT TOFORFEITURE IN THE ABSENCE OF PRIMAFACIE EVIDENCE

The forfeiture of the vehicle, vesselor aircraft shall not be effected if it is

established that the owner thereof or his

agent in charge of the means ofconveyance used as aforesaid has noknowledge of or participation in theunlawful act:

Provided , however, that a primafacie presumption shall exist against thevessel, vehicle or aircraft under any ofthe following circumstances:

1.  If the conveyance has been usedfor smuggling at least twicebefore;

2.  If the owner is not in thebusiness for which theconveyance is generally used;and

3.  If the owner is financially not ina position to own such

conveyance.

DOCTRINE OF HOT PURSUITRequisites:1.  Over Vessels

a.  An act is done in Phil. Waterswhich constitutes a violation ofthe tariff and customs laws

b.  a pursuit of such vessel beganwithin the jurisdictional waterswhich(i)  may continue beyond the

maritime zone, and

(ii)  the vessel may be seized onthe high seas.

2.  Over Imported Articlesa.  There is a violation of the tariff

and customs lawsb.  As a consequence they may be

pursued in the Phil.c.  With jurisdiction over them at

any place therein for theenforcement of the law. (2nd  

 par. Sec. 603, TCC)

REGIONAL TRIAL COURTS (RTC)VS.

BUREAU OF CUSTOMS (BOC)

  The RTCs do not have jurisdictionover seizure and forfeitureproceedings conducted by the BOCand to interfere with theseproceedings. The Collector ofCustoms has exclusive jurisdictionover all questions touching on the

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MEMORY AID IN TAXATION LAW 

TAXATION LAW COMMITTEE CHAIRPERSON: Charmaine Torres  ASST. CHAIRPERSON: Rhohail Castro EDP: Rachelle Saya SUBJECT HEADS: Jemina Sy, Casiano Ilagan,

Jr., Ryan Co, Edwin Torres:MEMBERS: Marita Lourdes Azur, Edizer Enriquez, Christian Cabrera, Jhundee

Guillermo

seizure and forfeiture of dutiablegoods.

  No petitions for certiorari,prohibition or mandamus filed with

the RTC will lie because these are inreality attempts to review the Commissioner's actuations. Neitherreplevin filed with the RTC willissue. Rationale:  Doctrine of  Primary Jurisdiction. 

  Even if a Customs seizure is illegal,exclusive jurisdiction (to theexclusion of regular courts) stillbelongs to the Bureau of Customs(Jao v. Court of Appeals, GR No.104604, October 6, 1995).

GOODS IN CUSTOM’S CUSTODY BEYONDREACH OF ATTACHMENT 

Goods in the custom‘s custodypending payment of customs duties arebeyond the reach of attachment. As longas the importation has not beenterminated, the imported goods remainunder the jurisdiction of the Bureau ofCustoms. (Viduya vs. Berdiago, GR No.L-29218, October 29, 1976)

ADMINISTRATIVE AND JUDICIALPROCEDURES RELATIVE TO CUSTOMSSEIZURES AND FORFEITURES

Determination of probable cause andissuance of warrant

 Actual seizure of the articles

 Listing of description, appraisal and

classification of seized property

 Report of seizure to the Comm. of

Customs and the Chairman, Comm.on Audit

 Issuance by the Collector of a

warrant of detention

 Notification to owner or importer

 Formal hearing

 District collector renders his

decisions

   If decision is notfavorable to the

aggrieved owner orimporter

If decision is notfavorable to the

government

   

Appeal by theaggrieved owner or

importer

Automatic Reviewby the

Commissioner

PERSONS HAVING POLICE AUTHORITYTO ENFORCE THE TARIFF & CUSTOMSLAWS AND EFFECT SEARCHES,SEIZURES AND ARRESTS (SEC. 2203,

TCC) 1)  officials of the BOC, districtcollectors, police officers, agents,inspectors, and guests of the BOC;2)  officers of the Phil. Navy and othermembers of the AFP and national lawenforcement agencies when authorizedby the Commissioner of Customs3)  officials of the BIR on all cases fallingwithin the regular performances of theirduties, when the payment of internaltaxes are involved;4)  officers generally empowered by law

to effect arrests and execute processesof courts, when acting under thedirection of the Collector.

REQUIREMENTS FOR CUSTOMSFORFEITURE 1.  The wrongful making by the owner,

importer, exporter or consignee ofany declaration or affidavit, or thewrongful making or delivery by thesame persons of any invoice, letteror paper - all touching on theimportation or exportation of

merchandise.; and2.  That such declaration, affidavit,

invoice, letter or paper is false.(Farolan, Jr. vs. Court of Tax

 Appeals, GR No. 42204, January 21,1993)

PLACES WHERE SEARCHES & SEIZURESMAY BE CONDUCTED

(a)  enclosures(b) dwelling house (there must be

search warrant issued by a judge)

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MEMORY AID IN TAXATION LAW 

TAXATION LAW COMMITTEE CHAIRPERSON: Charmaine Torres  ASST. CHAIRPERSON: Rhohail Castro EDP: Rachelle Saya SUBJECT HEADS: Jemina Sy, Casiano Ilagan,

Jr., Ryan Co, Edwin Torres:MEMBERS: Marita Lourdes Azur, Edizer Enriquez, Christian Cabrera, Jhundee

Guillermo

(c)  vessels or aircrafts and personsor articles conveyed therein

(d) vehicles, beasts and persons(e)  persons arriving from foreign

countries.

Note:  Burden of proof in seizure orforfeiture is on the claimant. (Sec.2535, TCC)

REQUIREMENTS FOR MANIFESTA manifest in coastwise trade for

cargo and passengers transported fromone place or port in the Philippines toanother is required when one or both ofsuch places is a port of entry (Sec. 906,TCC).  Manifests are also required of

vessel from a foreign port (Sec. 1005,TCC).

IS MANIFEST REQUIRED ONLY FORIMPORTED GOODS?

NO. Articles subject to seizuredo not have to be imported goods.Manifests are also required for articlesfound on vessels or aircraft engaged incoastwise trade. (Rigor vs. Rosales, GRNo. L-33756, October 23, 1982)

UNMANIFESTED CARGO IS SUBJECT TOFORFEITURE  whether the act ofsmuggling is established or not under theprinciple of res ipsa loquitur . It isenough that the cargo was unmanifestedand that there was no showing thatpayment of duties thereon had beenmade for it to be subject to forfeiture.

SETTLEMENT OF FORFEITURE CASESGeneral Rule:  Settlement of cases  bypayment of fine or redemption offorfeited property is allowed.

Exceptions:1.  the importation is absolutely

prohibited or2.  the surrender of the property to

the person offering to redeemwould be contrary to law, or

3.  when there is fraud. (Sec. 2307,TCC) 

ACQUITTAL IN CRIMINAL CHARGE NOTRES JUDICATA IN SEIZURE ORFORFEITURE PROCEEDINGSReasons:

1)  Criminal proceedings are actions in personam while seizure or forfeitureproceedings are actions in rem.

2)  Customs compromise does notextinguish criminal liability. (Peoplevs. Desiderio, GR No. L-208005,November 26, 1965)

Note:  At any time prior to the sale, thedelinquent importer may settle hisobligations with the Bureau of Customs,in which case the aforesaid articles maybe delivered upon payment of the

corresponding duties and taxes andcompliance with all other legalrequirements (Sec. 1508, TCC)

ABATEMENTThe reduction or non-imposition of

customs duties on certain importedmaterials as a result of:

1)  Damage incurred during voyage;2)  Deficiency in contents packages3)  Loss or destruction of articles

after arrival4)  Death or injury of animals

FRAUDULENT PRACTICES CONSIDEREDAS CRIMINAL OFFENSES AGAINSTCUSTOMS REVENUE LAWS1)  Unlawful importation;2)  Entry of imported or exported article

by means of any false or fraudulentpractices,  invoice, declaration,affidavit, or other documents;

3)  Entry of goods at less than their trueweights or measures or upon aclassification as to quality or value;

4)  Payment of less than the amount

due;5)  Filing any false or fraudulent claim

for the payment of drawback orrefund of duties upon theexportation of merchandise; or

6)  Filing any affidavit, certificate orother document to secure to himselfor others the payment of anydrawback, allowance or refund ofduties on the exportation of mdse.greater than that legally duethereon. (Sec. 3602, TCC) 

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MEMORY AID IN TAXATION LAW 

TAXATION LAW COMMITTEE CHAIRPERSON: Charmaine Torres  ASST. CHAIRPERSON: Rhohail Castro EDP: Rachelle Saya SUBJECT HEADS: Jemina Sy, Casiano Ilagan,

Jr., Ryan Co, Edwin Torres:MEMBERS: Marita Lourdes Azur, Edizer Enriquez, Christian Cabrera, Jhundee

Guillermo

VI.  COURT OFTAX APPEALS

(RA 1125 as amendedby RA 9282)

  See ANNEX O for comparison of CTAas created by RA No. 1125 and theamendments made by RA No. 9282.

NATURE AND POWERS

ELEVATION OF RANKshall be of the same level as the

Court of Appeals, possessing all theinherent powers of a Court of Justice

COMPOSITION

  Consists of a Presiding Justice andfive (5) Associate Justices

  May sit en banc or in two (2)Divisions, each Division consisting ofthree (3) Justices. The PresidingJustice and the most SeniorAssociate Justice shall serve aschairmen of the two divisions

QUORUM 

  Four (4) Justices shall constitute aquorum for sessions EN BANC.

  Two (2) Justices for sessions of aDIVISION .

PROVIDED:  in case the required quorumcannot be had due to any vacancy,disqualification, inhibition, disability, orany other lawful cause, the Presiding

 Justice shall designate any Justice ofother Divisions of the Court to sittemporarily therein.

POWERS1.  to administer oaths;2.  to receive evidence;3.  to summon witnesses by

subpoena;4.  to require production or papers

or documents by subpoena ducestecum;

5.  to punish contempt;6.  to promulgate rules and

regulations for the conduct of itsbusiness;

7.  to assess damage againstappellant if appeal to CTA isfound to be frivolous or dilatory;

8.  to suspend the collection of the

tax pending appeal; and9.  to render decisions on casesbrought before it

10. to issue order authorizingdistraint of personal propertyand levy of real property

DISTRAINT OF PERSONAL PROPERTYAND LEVY OF REAL PROPERTY 

Upon the issuance of any ruling,order or decision by the CTA favorable tothe national government, the CTA shallissue an order authorizing the BIR,

through the Commissioner:

1.  to seize and distraint any goods,chattels, or effects and the personalproperty, including stocks and othersecurities, debts, credits, bankaccounts, and interests in and rightsto personal property and/or

2.  levy the real property of suchpersons in sufficient quantity tosatisfy the tax or charge togetherwith any increment thereto incidentto delinquency.

This remedy shall not be exclusiveand shall not preclude the Court fromavailing of other means under the Rulesof Court.

JURISDICTION

I. EXCLUSIVE APPELLATE JURISDICTIONTO REVIEW BY APPEAL

(a)  Decisions of the Commissionerof Internal Revenue 1.  in cases involving disputed

assessments, refunds ofinternal revenue taxes, feesor other charges, penaltiesin relation thereto,

2.  or other matters arisingunder the NIRC or other lawsadministered by the BIR;

(b)  Inaction by the Commissioner ofInternal Revenue 1.  in cases involving disputed

assessments, refunds of

internal revenue taxes, fees

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MEMORY AID IN TAXATION LAW 

TAXATION LAW COMMITTEE CHAIRPERSON: Charmaine Torres  ASST. CHAIRPERSON: Rhohail Castro EDP: Rachelle Saya SUBJECT HEADS: Jemina Sy, Casiano Ilagan,

Jr., Ryan Co, Edwin Torres:MEMBERS: Marita Lourdes Azur, Edizer Enriquez, Christian Cabrera, Jhundee

Guillermo

or other charges, penaltiesin relation thereto,

2.  or other matters arisingunder the NIRC or other laws

administered by the BIR,where the NIRC provides aspecific period for action, inwhich case the inaction shallbe deemed a denial;

(c)  Decisions, orders or resolutionsof the RTC –  in local tax cases originallydecided or resolved by them inthe exercise of their original orappellate jurisdiction;

(d)  Decisions of the Commissionerof Customs 

1.  in cases involving liabilityfor customs duties, fees orother money charges,seizure, detention or releaseof property affected, fines,forfeitures or otherpenalties in relationthereto,

2.  or other matters arisingunder the Customs Law orother laws administered bythe Bureau of Customs;

(e)  Decisions of the Central Board

of Assessment Appeals – in the exercise of its appellatejurisdiction over cases involvingthe assessment and taxation ofreal property originally decidedby the provincial or city board ofassessment appeals;

(f)  Decisions of the Secretary ofFinance –  on customs cases elevated tohim automatically for reviewfrom decisions of theCommissioner of Customs which

are adverse to the Governmentunder Section 2315 of the Tariffand Customs Code;

(g)  Decisions of the Secretary ofTrade and   Industry   in the caseof nonagricultural product,commodity or article, and theSecretary of Agriculture  in thecase of agricultural product,commodity or article,–  involving dumping andcountervailing duties under Secs.301and 302, respectively, of the

Tariff and Customs Code, andsafeguard measures under RANo, 8800, where either partymay appeal the decision to

impose or not to impose saidduties.

II. JURISDICTION OVER CASESINVOLVING CRIMINAL CASES

(a) Exclusive original jurisdiction over all criminal cases arising fromviolations of the NIRC or Tariff andCustoms Code and other lawsadministered by the BIR or theBureau of Customs

  Provided however, w here the

principal amount of taxes andfees, exclusive of charges andpenalties claimed is less thanone million pesos (P1, 000, 000.00) or where there is nospecified amount claimed - theoffenses or penalties shall betried by the regular courts  andthe jurisdiction of the CTA shallbe appellate.

  Any provision of law or the Rulesof Court to the contrarynotwithstanding, the criminal

action and the correspondingcivil action for the recovery ofcivil liability for taxes andpenalties shall at all times besimultaneously instituted with,and jointly determined in thesame proceeding by the CTA,the filing of the criminal actionbeing deemed to necessarilycarry with it the filing of thecivil action, and no right toreserve the filing of such civilaction separately from thecriminal action will berecognized.

(b) Exclusive appellate jurisdiction in criminal offenses

  Over appeals from thejudgments, resolutions or ordersof the RTC in tax cases originallydecided by them, in theirrespective territorialjurisdiction.

  Over petitions for review of the

judgments, resolutions, or

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MEMORY AID IN TAXATION LAW 

TAXATION LAW COMMITTEE CHAIRPERSON: Charmaine Torres  ASST. CHAIRPERSON: Rhohail Castro EDP: Rachelle Saya SUBJECT HEADS: Jemina Sy, Casiano Ilagan,

Jr., Ryan Co, Edwin Torres:MEMBERS: Marita Lourdes Azur, Edizer Enriquez, Christian Cabrera, Jhundee

Guillermo

orders of the RTC in the exerciseof their appellate jurisdictionover tax cases originally decidedby the Metropolitan Trial Courts,

Municipal Trial Courts, andMunicipal Circuit Trial Courts intheir respective jurisdiction.

III. JURISDICTION OVER TAXCOLLECTION CASES(a) Exclusive original jurisdiction 

in tax collection cases involvingfinal and executory assessmentsfor taxes, fees, charges andpenalties.

  In collection cases where theprincipal amount of taxes and

fees, exclusive of charges andpenalties, claimed is less thanone million pesos (P 1, 000, 000.00) – shall be tried by the properMunicipal Trial Court,Metropolitan Trial Court, andRegional Trial Court.

(b) Exclusive appellate jurisdiction in tax collection cases

  Over appeals from thejudgments, resolutions or ordersof RTC in tax collection cases

originally decided by them, intheir respective territorialjurisdiction.

  Over petitions for review of thejudgements, resolutions ororders of the RTC in the exerciseof their appellate jurisdictionover tax collection casesoriginally decided by theMetropolitan Trial Courts,Municipal Trial Courts andMunicipal Circuit Trial Courts, intheir respective jurisdiction.

  In criminal and collection cases, theGovernment may directly file thesaid cases with the CTA coveringamounts within its exclusive andoriginal jurisdiction.

  See ANNEX P  –  ComparativeDiagrams on CTA jurisdiction.

“OTHER MATTERS” Those controversies which can be

considered within the scope of thefunction of the BIR / BOC under ejusdem

generis rule (e.g. action for the nullity ofdistraint and levy; questioning thepropriety of the assessment; collectionof compromise penalties).

APPEAL

WHEN Within 30 days after the receipt of

such decision or ruling or after theexpiration of the period fixed by law foraction.

MODES OF APPEAL (1)  By filing a petition for review under

a procedure analogous to thatprovided for under Rule 42 of 1997Rules on Civil Procedure

  decision, ruling, or inaction ofthe Commissioner of InternalRevenue, Commissioner ofCustoms, the Secretary ofFinance, the Secretary of Tradeand Industry  or the Secretary of

 Agriculture or the Regional Trial

Courts   this appeal shall be heard by a

Division of the CTA(2)  By filing a petition for review under

a procedure analogous to thatprovided for under Rule 43 of 1997Rules on Civil Procedure

  decisions or rulings of theCentral Board of Assessments

 Appeals  and the Regional TrialCourts in the exercise of itsa ppellate jurisdiction

  this appeal shall be heard by the

CTA en banc.

PROCEDURE A. Any party adversely affected by a

ruling, order or decision of a Divisionof the CTA may file a motion forreconsideration or new trial beforethe same Division within 15 daysfrom notice

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MEMORY AID IN TAXATION LAW 

TAXATION LAW COMMITTEE CHAIRPERSON: Charmaine Torres  ASST. CHAIRPERSON: Rhohail Castro EDP: Rachelle Saya SUBJECT HEADS: Jemina Sy, Casiano Ilagan,

Jr., Ryan Co, Edwin Torres:MEMBERS: Marita Lourdes Azur, Edizer Enriquez, Christian Cabrera, Jhundee

Guillermo

B.  Any party adversely affected by aresolution of a Division of the CTA ona motion for reconsideration or newtrial may file a petition for review

with the CTA en banc.

C.  Any party adversely affected by adecision or ruling of the CTA en bancmay file with the Supreme Court averified petition for review oncertiorari pursuant to Rule 45 of the1997 Rules on Civil Procedure.

THIRTY (30)  DAY PRESCRIPTIVE PERIOD FOR

APPEAL Starts to run from the date the

taxpayer receives the appealable

decision. If the taxpayer‘s request forreconsideration (i.e., the protest isdenied or the original assessment ismaintained, the appealable decision isthe decision denying the request forreconsideration.

The said period is  jurisdictional andnon-extendible. Requests or motions forreconsideration, however, operate tosuspend the running of the period toappeal. A pro forma request forreconsideration or one which is directedto the Secretary of Finance does not

suspend the running of the 30-dayreglementary period.

ONLY A  FINAL DECISION IS APPEALABLE TO

THE COURT OF TAX APPEALS 

Preliminary collection letters, postreporting notices and pre-assessmentnotices are not appealable, becausethey are not the final decision of theCommissioner.

An assessment can be appealed iftaxpayer does not seek areconsideration.At times there is an exchange ofcommunications between taxpayerand Commissioner states that hisaction is final, then, period forappeal begins to run.

Commissioner must state that hisdecision is final, for period of appealto run.

Final decision cannot be impliedfrom issuance of warrant of distraintand levy, unless it is issued after a

request for reconsideration.

GENERAL RULE: New issues cannot beraised for the first time on appeal.

EXCEPTIONS:

a.  Defense of prescriptionReason: This is a statutory right.(Visayan Land Transportation vs.Collector)

b.  Errors of administrative officialsReason: State can never be inestoppel and lifeblood theory.(Commissioner vs. Procter andGamble Phils. Mfg. Corp, GR No.66838, April 15, 1988)

NOTE: However, this was reversed inSupreme Court‘s subsequent resolution

wherein it was held that ―in the absenceof explicit statutory provisions to thecontrary, the Government must followthe same rules of procedure which bindprivate parties.‖ (Commissioner vs.Procter and Gamble, GR No. 66838,December 2, 1991, Resolution)

TAX COLLECTION NOT SUSPENDED DURING

APPEAL 

General Rule:  No appeal taken to theCTA shall suspend the payment, levy or

distraint, and/or sale of any property ofthe taxpayer.

Exception:  The CTA is empowered tosuspend the collection of internalrevenue taxes and custom duties onlywhen there was a – 

c)  showing that collection of the taxmay jeopardize the interest of thegovernment and / or the taxpayer;

d)  deposit of the amount claimed orfile a surety bond for not morethan double the amount of tax

with the Court when required; ande)  showing by taxpayer that appeal is

not frivolous nor dilatory.

CAN THE CTA ENJOIN COLLECTION OF TAXES?

  Sec. 11 of RA No. 1125 as amendedby Sec. 9 of RA No. 9282 grants CTApower to suspend collection of tax ifsuch collection works to seriousprejudice of either taxpayer orgovernment.

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MEMORY AID IN TAXATION LAW 

TAXATION LAW COMMITTEE CHAIRPERSON: Charmaine Torres  ASST. CHAIRPERSON: Rhohail Castro EDP: Rachelle Saya SUBJECT HEADS: Jemina Sy, Casiano Ilagan,

Jr., Ryan Co, Edwin Torres:MEMBERS: Marita Lourdes Azur, Edizer Enriquez, Christian Cabrera, Jhundee

Guillermo

  However, Sec. 218 of the Tax Codeprovides no court may grantinjunction to restrain collection ofany tax, fee or charge imposed by

Tax Code.  The provision in Tax Code refers to

courts other than the CTA. (Blaqueravs. Rodriguez, GR No. L-11295,March 29, 1958) 

  Appeal to the CTA does notautomatically suspend collectionunless CTA issues suspension order atany stage of proceedings.

SIMULTANEOUS FILING OF AN APPLICATION FOR

REFUND OR CREDIT AND INSTITUTION OF A CASE

BEFORE THE CTA ALLOWED 

The law fixes the same period oftwo (2) years for filing a claim for refundwith the Commissioner and for filing acase with the CTA. The two-year periodfor both starts from the date after thepayment of the tax or penalty, or fromthe approval of the application forcredit.

Observation:  If we are not going toallow the taxpayer to file a refundbefore the CTA and let him wait for the

CIR‘s decision, and the latter failed torender a decision within the 2-yearperiod, the said taxpayer can no longerfile a refund before the CTA because hisright to appeal has prescribed.

WEIGHT OF DECISION OF CTA

  Decisions of Tax Court havepersuasive effect and may serve asjudicial guides. They have morepersuasive value than BIR Rulings.

  CTA‘s findings of fact are entitled tothe highest respect. (Raymundo vs.de Joya, GR No. L-27733, December3, 1980)

  The Supreme Court will not set asideconclusions reached by Tax Courtwhich by the very nature of itsfunction, is dedicated exclusively tothe consideration of tax problemsand has developed an expertise onthe subject, unless there has beenan abuse or an improvident exerciseof authority on its part.

(Commissioner vs. Court of Appeals

& Atlas Consolidated, GR No. 86785,November 21, 1991)

VII.VALUE–ADDED TAX(VAT)

TITLE IV OF NIRC

DEFINITION:  The value-added tax is anindirect tax and the amount of tax maybe shifted or passed on to the buyer,transferee or lessee of the goods,properties or services. This rule shalllikewise apply to existing contracts ofsale or lease of goods, properties orservices at the time of the effectivity ofRepublic Act No. 7716.

VAT replaced Sales Tax as imposed byprevious Tax Laws.

HISTORY:a.  Executive Order No. 273b.  Republic Act No. 7716c.  Republic Act No. 8241d.  Republic Act No. 8424 (took

effect on 1 January 1998)

TRANSACTIONS COVERED BY VAT:1.  Sale of Commodities or Goods (in

the course of trade or businessonly)

2.  Sale of Services (in the course oftrade or business only)

3.  Exportation (in the course oftrade or business only)

4.  Importation (whether or not  inthe course of trade or business)

PERSONS LIABLE FOR VAT Any person who, in the course of

trade or business, sells barters,

exchanges, leases goods or properties,renders services, and any person whoimports goods shall be subject to thevalue-added tax (VAT) imposed inSections 106 to 108 of the NationalInternal Revenue Code.

“IN   THE   COURSE   OF   TRADE   OR 

BUSINE SS” The regular conduct or pursuit of a

commercial or an economic activity,including transactions incidentalthereto, by any person regardless of

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MEMORY AID IN TAXATION LAW 

TAXATION LAW COMMITTEE CHAIRPERSON: Charmaine Torres  ASST. CHAIRPERSON: Rhohail Castro EDP: Rachelle Saya SUBJECT HEADS: Jemina Sy, Casiano Ilagan,

Jr., Ryan Co, Edwin Torres:MEMBERS: Marita Lourdes Azur, Edizer Enriquez, Christian Cabrera, Jhundee

Guillermo

whether or not the person engagedtherein is a non-stock, nonprofit privateorganization (irrespective of thedisposition of its net income and

whether or not it sells exclusively tomembers or their guests), or governmententity.

Therefore if the disposition of goodsor services is NOT in the course of tradeor business then it is not subject to VAT;with the exception of importation ofcourse.

The rule of regularity, to thecontrary notwithstanding, services asdefined in this Code rendered in thePhilippines by non-resident foreign

persons shall be considered as beingcourse of trade or business.

Importation is subject to VATregardless of whether or not it is in thecourse of trade or business 

The reason for the rule is to protectour local or domestic goods or articlesand to regulate the entry or introductionof foreign articles to our local market.Regulation is one of the purposes ofTaxation.

Tax Rates:1.  10% - the rate used in sale of

commodities and goods, sale ofservices, and importation.

2.  Zero-rated (0%) - the rate used inexportation.

MANNER OF COMPUTING THE VAT: A. 10% rate of Tax

1.  In sale of commodities and goods,10% is multiplied with the GrossSelling Price.

2.  In sale of services, 10% is multipliedwith the Gross Receipts.

3.  In importation, 10% is multipliedwith the rates used by the Bureau ofCustoms in imposing  tariff andcustoms duties plus customs duties,excise taxes, if any, and othercharges, such tax to be paid by theimporter prior to the release of suchgoods from customs custody:Provided, That where the customs

duties are determined on the basis

of the quantity or volume of thegoods, the value-added tax shall bebased on the landed cost plus excisetaxes, If any. customs duties.

B. Zero-rated (0%) rate of tax

1.  Export Sales as provided in Section106(A)(2)(a)

2.  Foreign Currency Denominated Saleas provided in Section 106 (A)(2)(b)

3.  Sale to persons or entities which isVAT exempt under special laws orinternational agreements to whichthe Philippines is a signatory asprovided in Section 106 (A)(2)(c)

4.  Transactions subject to zero-rated

(0%) as provided in Section 108(B)

REGISTRATION UNDER THE VAT SYSTEM(SECTION 236 OF THE NIRC)

General Rule:  Failure to register issubject to temporary closure of theestablishment for 5 days as provided inSection 115(b).

Exception:  It does not apply to anexporter who fails to register. The effectis, instead of treating the transaction as

zero-rated (0%), it is treated as anexempt transaction.

What is the difference?  In zero-rated(0%) transactions, tax credit is available.However, in exempt transactions, taxcredit is not available. 

EXEMPT TRANSACTIONS (SECTION 109):1. In Section 109(a) and (c), food and

non-food products are VAT-exemptas long as these products are in its

original state. The simple process ofpreparation or preservation for themarket such as freezing, drying,salting, broiling, roasting, smoking,or stripping does not  remove theproduct from its category of being inits original state.

  However, even if the products wereno longer in its original state, it canstill be VAT-exempt under Section109(r), if sold by agriculturalcooperatives duly registered by

Cooperative Development Authority.

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MEMORY AID IN TAXATION LAW 

TAXATION LAW COMMITTEE CHAIRPERSON: Charmaine Torres  ASST. CHAIRPERSON: Rhohail Castro EDP: Rachelle Saya SUBJECT HEADS: Jemina Sy, Casiano Ilagan,

Jr., Ryan Co, Edwin Torres:MEMBERS: Marita Lourdes Azur, Edizer Enriquez, Christian Cabrera, Jhundee

Guillermo

2. Under Section 109(m), privateeducational institutions are exemptfrom VAT if duly accredited by theDECS or by the CHED. In case of

government educational institution,no accreditation is required.

3. Transactions in the field of Arts areVAT-exempt only, as provided inSection 109(n), if the seller is theartist himself or the artist‘s servicesperformed for the production ofsuch works.

4. Section 109(p) makes Regional orArea Headquarters exempt fromVAT.

5. Under Section 109(w) in order forthe sale or lease of real property tobe exempted from VAT, thetransaction must NOT be conductedin the ordinary course of trade orbusiness. It complements Section106(A)(1)(a) where it states that inorder for the sale or lease of realproperty to be covered by VAT, itmust be made in the ordinary courseof trade or business.

6. Revenue Regulations No. 6-97 adds arequirement in order for the lease ofresidential units with a monthlyrental of not more than P8,000.00,as provided in Section 109(x), to beVAT exempt, that the annual grossreceipts must not exceedP550,000.00.

7. Section 109(z) provides that the saleor lease of goods or performances ofservices other than those mentionedin the preceding paragraphs are VAT

exempt if the Gross Annual Receiptsdo not exceed P550,000.00.However, the limitation ofP550,000.00 does apply for thosetransactions from Section 109(a) to(y), except (x) because RevenueRegulations No. 6-97 imposes aP550,000.00 limitation.

  In cases of tax-free importation ofgoods into the Philippines bypersons, entities or agencies exempt

from tax where such goods are

subsequently sold, transferred orexchanged in the Philippines to non-exempt persons or entities, thepurchasers, transferees or recipients

shall be considered the importersthereof, who shall be liable for anyinternal revenue tax on suchimportation. The tax due on suchimportation shall constitute a lien onthe goods superior to all charges orliens on the goods, irrespective ofthe possessor thereof.

TRANSACTIONS DEEMED SALE:

The following transactions shall bedeemed sale therefore making them

covered by VAT:

(1)  Transfer, use or consumption not inthe course of business of goods orproperties originally intended for sale orfor use in the course of business;(2) Distribution or transfer to:

(a) Shareholders or investors asshare in the profits of the VAT-registeredpersons; or

(b) Creditors in payment of debt;(3) Consignment of goods if actual sale isnot made within sixty (60) days following

the date such goods were consigned; and(4) Retirement from or cessation ofbusiness, with respect to inventories oftaxable goods existing as of suchretirement or cessation.

How to determine the VAT:  The taxshall be computed by multiplying thetotal amount indicated in the invoice byone-eleventh (1/11).

Example:  the total amount indicated inthe invoice is P110. P110/11 = P10. P10

is the amount of VAT.

TAX CREDIT AND REFUND

Formula for Tax Credit:OutputLess: InputVAT due.

  If Input is greater than Output, TaxCredit is available.

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MEMORY AID IN TAXATION LAW 

TAXATION LAW COMMITTEE CHAIRPERSON: Charmaine Torres  ASST. CHAIRPERSON: Rhohail Castro EDP: Rachelle Saya SUBJECT HEADS: Jemina Sy, Casiano Ilagan,

Jr., Ryan Co, Edwin Torres:MEMBERS: Marita Lourdes Azur, Edizer Enriquez, Christian Cabrera, Jhundee

Guillermo

"INPUT TAX"  means the value-added taxdue from or paid by a VAT-registeredperson in the course of his trade orbusiness on importation of goods or local

purchase of goods or services, includinglease or use of property, from a VAT-registered person. It shall also includethe transitional input tax determined inaccordance with Section 111 of the NIRC.

"OUTPUT TAX"   means the value-addedtax due on the sale or lease of taxablegoods or properties or services by anyperson registered or required to registerunder Section 236 of the NIRC. 

  If at the end of any taxable quarter

the output tax exceeds the inputtax, the excess shall be paid by theVAT-registered person. If the inputtax exceeds the output tax, theexcess shall be carried over to thesucceeding quarter or quarters. Anyinput tax attributable to thepurchase of capital goods or to zero-rated sales by a VAT-registeredperson may at his option berefunded or credited against otherinternal revenue taxes, subject tothe provisions of Section 112.

OPTIONS OF A TAXPAYER AS PROVIDEDIN SECTION 112:1.  to claim for tax credit; or2.  to claim for refund

The claim, which must be in writing,for both cases, must be filed within 2years after the close of the taxablequarter when the sales were made for:a) the issuance of a tax creditcertificate; b) refund of creditable inputtax due or paid attributable to suchsales.

HOW TO DETERMINE CREDITABLE INPUTTAX 

The sum of the excess input taxcarried over from the preceding monthor quarter and the input tax creditableto a VAT-registered person during thetaxable month or quarter shall bereduced 

reduced by the amount of claim forrefund or tax credit for value-added taxand other adjustments, such as purchasereturns or allowances and input tax

attributable to exempt sale.

The claim for tax credit referred toin the foregoing paragraph shall includenot only those filed with the Bureau ofInternal Revenue but also those filedwith other government agencies, such asthe Board of Investments or the Bureauof Customs.

The Commissioner within 120 days,in proper cases, from the date ofsubmission of complete documents insupport of the application shall grant arefund or issue the tax credit certificatefor creditable input taxes.

Remedy in case of full, or partialdenial, or failure on the part of theCommissioner to act upon theapplication for tax credit or refund: thetaxpayer affected may, within thirty (30)days from the receipt of the decisiondenying the claim or after the expirationof the one hundred twenty day-period,

appeal the decision or the unacted claimwith the Court of Tax Appeals.

RETURN AND PAYMENT OF VAT 

Every person liable to pay the value-added tax shall file a quarterly return ofthe amount of his gross sales or receiptswithin 25 days following the close ofeach taxable quarter prescribed for eachtaxpayer: Provided, however, That VAT-registered persons shall pay the value-added tax on a monthly basis.

Any person, whose registration hasbeen cancelled in accordance withSection 236, shall file a return and paythe tax due thereon within 25 days fromthe date of cancellation of registration:Provided, That only one consolidatedreturn shall be filed by the taxpayer forhis principal place of business or headoffice and all branches.

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