TAXATION NOTES

Syllabus for the 2011 Bar Examinations

TAXATION II Batch 2010-2011

Xavier University College of Law
Judge Gil Bollozos
I. GENERAL PRINCIPLES OF AND CONCEPTS TAXATION

A. )DEFINED TAXATION

Taxation is defined as:

1. A process or act of imposing a charged by governmental authority on property,

individuals or transactions to raise money for public purposes.
2. A power by which an independent state through its lawmaking body, raises and
accumulates revenue from its inhabitants to pay the necessary expenses of the
government.
3. A means by which the Sovereign (independent state) through demands for revenue in
order to support its existence and carry out its legitimate objectives.

As a power, it refers to the inherent power of a state, co- extensive with sovereignty,
to demand contributions for public purposes to support the government.

As a process, it passes a legislative undertaking through the enactment of tax laws

which will be implemented by the Executive Branch of the government to raise income
from inhabitants in order to pay the necessary expenses of the government. It is a way of
apportioning the cost of government among those who are privileged to enjoy its benefits.

Concept of Taxation

Taxation refers to the power of imposing enforced proportional contribution from

persons and property by the sovereign to accumulate revenue in order to support its
existence and carry out its legitimate objectives.

B. )THE NATURE OF TAXATION

The power to tax is an attribute of sovereignty qualities which are:

1. Inherent Power of Sovereignty

Taxation is as old as government itself. Its existence commences concurrently with

the four elements of state- people, territory, sovereignty and government. Starting from
the moment a state is born, the government having sovereignty can enforce contributions
upon its citizens even without specific provision in the Constitution authorizing it. It is
because the State has the supreme power to command and enforce obedience to its will
from the people within its jurisdiction.

Hence, tax power is existing inseparably with the State. The government can
exercise the power to tax even though the fundamental law of the land (Constitution)

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does not previously mention about it because taxation is essentially for the existence of
the government.

Any provision in the Constitution regarding taxation does not create rights for the
sovereignty to have the power to tax but merely constitute limitations upon the
supremacy of tax power.

Notice that only the national government exercises the inherent power of taxation of
the state. Local government units or its political subdivisions do not possess the inherent
power.

In order for these government units or political subdivision to have the power to tax,
there must be an expressed constitutional provision granting them the power to tax. In the
absence of constitutional provision, at least there must be valid delegation of tax power
through the statute from the national legislature granting local government units or
political subdivisions to exercise such power.

2. Essentially a Legislative function

The law-making body of the government and its political subdivision exercises the
power of taxation. The power to enact laws and ordinances, and to impose and collect
taxes are given to the Congress (law-making body). The Congress is utilized by the
government in making of rules as to how much, for whom, when and from whom must
the money be collected

In its strict sense, the power to make tax laws cannot, in any way, be delegated to
other branches of the government. The power to tax is peculiarly and exclusively
legislative in nature and cannot be exercised by the executive or judicial branch.

Therefore, when the power to tax is delegated to the local government units (LGU),
only the legislative branch of the LGU government can exercise the power. Also, if
delegated to the President, it is limited to administrative discretion subject to valid
standards.

3. For Public Purpose

The power of taxation flows forth from the legitimate objective of supporting the
services of the government. Since public taxes are public money, they must be used to
finance recognized public needs- constructions and maintenance of roads to facilitate
mobility; providing health care; education; security; promotion of science, commerce,
industry, and others for the welfare of the general public.

Thus, in order to consider appropriation of taxes valid, it must be for the common good
of the people. No individual or particular person shall primarily be enriched or benefited
by the public funds.

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It has been held that tax has been utilized for public purpose if the welfare of the nation
or the greater portion of its population has benefited for its use.

4. Strongest of all the inherent Powers of the Government.

In the absence of limitations provided by the Constitution, the power of taxation is

unlimited, complete (plenary), with wide extent of application ( comprehensive) and with
highest degree (supreme)and if there is any limitation at all, it is the sense of
responsibility by the members of the law making body to the people to restricts its
exercise.

Taxation power is the strongest of all inherent powers of the government because,
without money, the government can neither survive nor disperse any of its other powers
and functions effectively.

5. Territorial in Operation

As a rule, the power to tax can only be exercised within the territorial jurisdiction of
a taxing authority except when there exists a privity of relationship between the taxing
State and the object of tax.

The taxing authority determines whether it has the right of power to tax or it has the
proper jurisdiction over the object of taxation. This topic is discussed extensively in the
principle of situs of taxation.

6. Subject to Constitutional and Inherent Limitations

Although our Constitutional assumes the existence of taxation, it provides some

provisions to limit its exercise. Its main purpose is to protect the objects of taxation
against its abusive implementation. When a tax law under question fails to abide by the
commands of Constitution, such law shall be declared null.

As an inherent power, its very purpose and nature restrict taxation. Tax power should
be exercised for its very nature, purpose and jurisdiction.

A violation of these inherent limitations is tantamount of taking a property without

due process of law. Any tax law that contradicts the limitation of taxation is also
unconstitutional.

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C.) CHARATERISTIC OF TAXATION

a. It is an enforced contribution

A tax is not a voluntary payment or donation and its imposition is no way dependent
upon the will or assents open or implied, of the person taxed.

To be sure, taxation without representation or without the consenting some form of

those who are to be taxed, is contrary to the fundamental principles of good government.
The principle of representation, however, applies only to political communities, as such,
and not to individuals. It is satisfied by their adequate representation in the legislative
body which votes the tax.

b. It is proportionate in character

A tax is laid by some rule of appointment according to which persons share the public
burden. It is ordinarily based on ability to pay. Thus, in practice, some people pay very
high taxes; others, very small amounts or none at all.

c. It is generally payable in money

Unless qualified by law the term taxes or tax is usually understood to be a

pecuniary burden- an exaction to be discharged alone in the form of money which must
be in legal tender.

d. It is levied on persons or property

A tax may also be imposed on acts, transactions, rights or privileges. In each case,
however, it is only a person who pays the tax. The property is resorted to for the purpose
of ascertaining the amount tax that must be paid and enforcing payment in case of default
of the taxpayer. But not all who pay a tax shoulder the burden of the tax.

e. It is levied by the state which has jurisdiction over the person or property
The object to be taxed must be subject to the jurisdiction of the taxing state. This is
necessary in order that the tax can be enforced. Although a state cab tax all persons
subject to its jurisdiction for all their property left by them within its jurisdiction, yet its
taxing power necessarily stops at the state boundary lines. I t cannot reach over into
another jurisdiction to seize upon person or property for purpose of taxation.

f. It is levied by the law-making body of the state.

The power to tax is legislative power under which the Constitution only Congress can
exercise through the enactment of tax statutes. Accordingly, the obligation of a tax is a
statutory liability

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 The power to tax is no longer vested exclusively on Congress. Local legislative bodies
are now given direct authority to levy taxes, fees, and other charges pursuant to the
constitution subject to such guidelines and limitations as may be provided by law.

g. It is levied for public purpose or purposes.

Taxation involves, and a tax constitutes, a charged or burden imposed to provide

income for public purposes- the support of the government, the administration of the law,
or the payment of public expenses. For this reason, revenues derived from taxes cannot
be used for purely private purposes or for the exclusive benefit of private persons.

D.) POWER OF TAXATION COMPARED WITH OTHERS POWERS

Taxation as distinguished from eminent domain and police power

1. As to concept

Taxation refers to the power of imposing enforced proportional contribution from

persons and property by the sovereign to accumulate revenue in order to support its
existence and carry out its legitimate objectives.

While in Eminent domain refers to the power of the state to tae private property for
public use upon payment of just compensation ascertained by law. It is sometimes called
expropriation. To exercise the power of eminent domain, the Constitution provides for
the following conditions. First, the taking of property should be for public use; second
there must be a just compensation for the property, and the third, there must be
observance of due process in the taking.

While Police power is the power of the state make and implement laws in relation to
persons or property to promote public health, public morals, public safety and the general
welfare of the people.

2. As to scope

Police Power is broader in application because it is general power to make and

implement laws on taxation is the power to raise money for the use and support of the
government and eminent domain is merely the power to take private property for public
use upon payment of just compensation.

3. As to Authority

The power of eminent domain may be granted by the law to public service or public
utility companies while the power of taxation and police power are both to be exercised
only by the government or its political subdivisions.

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4. As to Purpose

In Taxation, the property is generally in the form of money which is taken for the
support of the government while in police power, the property is taken or destroyed to
promote general welfare. On the other hand, in Eminent Domain, the private property is
taken for public use.

5. As to Necessity of Delegation

The exercise of the power of eminent domain and police power can be expressedly
delegated to the local government units by the law making.

On the other hand, Congress cannot delegate the power of taxation.

6. As to Person Affected

In Eminent Domain, its power operates on the particular private property of an

individual.
However, Taxation and Police Power operate on the community or class of
individual.

7. As to Benefits

In Taxation, an individual receives a benefit in the form of protection afforded by

the government.
For Eminent Domain, the benefit received by the individual concerned is the market
value of the specific property taken from him.

Through Police Power, an individual receives indirect benefits through a healthy

economic standard of society.

8. As to Amount of Imposition

Taxation has generally no limit on the amount of tax which may be imposed.

In Eminent Domain, there is no imposition because the owner of the private property
taken is paid at its market value.

The amount imposed under Police Power should only be sufficient to cover the cost
of the regulation, issuance of the license and the necessary expenses of police
surveillance.

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9. As to Importance

Taxation is an indispensable function of existence of the government. Without it, there

shall be no revenue to effect and permanently exercise the Eminent Domain and Police
Power.

10. As to Relationship to the Constitution

The power to tax is subject to certain constitutional constraints and inherent

limitations. It is INFERIOR to the Non-impairment Clause in the sense that taxation
should not violate the impairment clause of obligations and contracts.

Police Power is relatively free from constitutional limitations. It is SUPERIOR to

Non-impairment clause in the sense that it may override the said clause.

Eminent Domain is generally SUPERIOR to may override the Constitutional

impairment provision because the welfare of the state is superior to any private contract.
As an exception, eminent domain is inferior to the impairment provision because the
government cannot expropriate a property that has previously bound itself to be
purchased from the other contracting parties.

Police Power and Eminent Domain ca defeat the constitutional rights of a person
because these inherent powers subordinate the constitutional provisions except those
directly affecting them.

11. As to Property Taken

In taxation, there is no specific property being taken by the government for it is

generally payable in the form of money.

In Eminent Domain, there is a specific private property being taken by the

government.
In Police Power, there is a restriction in the use of property.

12.As to Limitation

Police power is limited by the demand for public interest and requirement of due
process, Eminent Domain is bounded by public purpose and just compensation.

Taxation is under constraints of the inherent limitations and constitutional

restrictions.

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E.) PURPOSE OF TAXATION

Revenue Purpose

The primary purpose of taxation is to raise revenue by collecting funds of property for
the support of the government in promoting the general welfare and protecting its
inhabitants. The fiscal policy of the government expenditures. The significant portion of
the requires receipts is raised on taxation

Non revenue objectives of Taxation

Is often employed as device for regulation by means of which certain effects or

conditions envisioned by the government may be achieved .Thus:

1. Taxation can strengthen anemic enterprises or provide incentive to greater

production through grant of tax exemptions or the creation of conditions conducive to
their growth.

2. Taxes on imports may be increased to protect local industries against foreign

competition or decreased to encourage foreign trade.
3. Taxes on imported goods may also be used as a bargaining tool by a country by setting
tariff rates first at a relatively high level before trade negotiations are entered into with
another country to enhance its bargaining power.
3. Taxes may be increased in periods of prosperity to curb spending power and halt
inflation or lowered in peri.ods of slump to expand business off depression.

4. Taxes may be levied to reduce inequalities in wealth and incomes, as for instance,
the estate, donors and income taxes, their payers being the recipients of unearned wealth
or mostly in the higher income brackets.

5. Taxes may be levied to promote science and invention or to finance educational

activities or to improve the efficiency of local police forces in the maintenance of peace
and order through grant of subsidy.

6. Taxation may be made as an implement of the police power (infra) to promote the
general welfare.

7. Tax provisions may be enacted so that low income individuals pay little or no
income taxes through a system of exclusions exemptions, deductions, and tax credits.

8. Tax provision may provide incentives or certain desirable activities to encourage

investments in productive assets or facilities that will lead to increased employment of a
particularly low-and-middle-income workers; or are designed to discourage certain
socially undesirable practices. (e.g., smoking).

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Regulatory Purpose

Regulatory (also known as Sumptuary) is a secondary objective of imposing tax. This

objective is accomplished (1) to regulate inflation, (2) to achieve economic and social
stability, and (3) to serve as key instrument for social control.

The amount taxes may be increased to curve spending power and minimize inflation
in times of prosperity. It may be reduced to expand business and ward off depression in
times of declining economic condition.

Taxes may be imposed to encourage economic growth by granting tax exemptions,

tax relief and incentives to attract investment that will create employment.

It is an instrument to encourage foreign trade by providing tax incentives or protect

local industries against foreign competition.

By imposing additional taxes on imported goods. Likewise, it can strengthen weak

enterprises or provide incentive to greater production through grant of tax exemption, or
the creation of conditions conducive to their growth.

It may be implemented to serve the general welfare of the people in the promotion of
science and invention or in financial educational activities or in improving the efficiency
of local police forces in the maintenance of peace and order through grant of subsidy.

Compensatory purpose

Taxation is a way of giving back to the inhabitants the expected economic and social
benefits in the following:

1. Taxes may be imposed for the equitable distribution of wealth and income in
society.

In income taxation, higher taxes are collected from those who earn more and use the
funds collected for the welfare of the people in general.
In estate taxation, the estate tax reduces the property received by the successor
through the portion of the for the benefit of the public or to defray the expenses of the
government.

2. Taxes may be used as a tool and weapon in international relations.

Higher custom duties and tariff could be imposed to support embargo against foreign
countries. For example, if the Philippines would like to restrict trade relations with some
foreign countries, it can impose higher custom and tariff rates to imported products. On
the other hand, if the Philippines would like to open trade relations with other countries,
it can reduce taxes on importation.

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 F.) PRINCIPLES OF SOUND TAX SYSTEM

1. Fiscal Adequacy

The principle of fiscal adequacy states that the sources of revenue of the government
should be sufficient to meet the demand of public expenditures regardless of business
condition. The revenue of the government should be capable of expanding or contracting
annually in response to variations in public expenditures.

2. Administrative Feasibility

Tax laws must be capable of convenient, just and effective administration- free from
confusion and uncertainty, their exercise should be convenient as to the place, time and
mode of payment, and not burdensome or discouraging to business. They must be
enforced uniformly by competent to public officials.

Applications of administrative feasibility are:

a. Collection of taxes at source (withholding tax)

b. Assigning of duly authorized banks to collect taxes
c. Quarterly filing and payment of income taxes

3. Theoretical Justice

This principle states that the tax burden must be proportionate to the taxpayers
ability to pay.
It is based on the philosophy that he who received more should give more. The
contribution of each individual to the government should be fair enough according to his
earnings and wealth. Under Art. Vl . Section 28 of the Philippine Constitution, the
application of taxation should be equitable.

G.)THEORY AND BASIS OF TAXATION

1. Lifeblood Theory

The existence of government is a necessity, it cannot exist nor endure without the
means to pay its expenses; and for those means, the government has the right to compel
all its citizens and property within its limits to contribute in the form of taxes.

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2. Necessity Theory

Based on the principle of necessity, the government has a right to compel all its
citizens, residents and property within its territory to compel all its citizens, residents and
property within its territory to contribute money. It is because the government cannot
exist without any means to pay its expenses. Taxation is the lifeblood or the bread and
butter of the government and every citizen must pay his taxes. Taxation is exercised to
raise revenue for the very existence of the government to serve the people for whose
benefit taxes are collected.

3. Benefits-Protection Theory (Symbiotic Relationship)

Under the benefits- received principlethe government collect taxes from the
subjects of taxation in order that it may be able to perform its functions. The citizen, on
the other hand, pay taxes to support the government in order that he may continuously be
sustained with security and benefits of an organized society.
The symbiotic relationship between the taxing authority and the subject of taxation is
enough to justify the imposition of tax power.

4. Jurisdiction over subject and objects

The tax laws of a State are effective and enforceable only within its territorial
limits. Hence, it cannot tax property wholly and exclusively within the jurisdiction of
another state since it does not afford protection on property beyond its territorial
boundaries for which tax is supposed to be compensation.

The right to tax should only be confined to its subjects to avoid great harm to subjects
that are beyond its scope.

Although the power of taxation is plenary and comprehensive in application, it is limited

to subjects within the territorial jurisdiction of the state over which it can exercise
dominion. Consequently, the State has no power to imposed privilege tax on business
transaction undertaken abroad unless there is privity or relationship between the taxing
state and the object of the tax ( e.g. citizenship in case of income tax).

Where privity of relationship exists, the state can still exercise its taxing powers over its
citizen outside its territory. It is because the fundamental basis of the right to tax is the
capacity of the government to provide benefits and protection to the object of the tax.

Hence, a citizens income may be taxed even if he resides abroad as the personal
jurisdiction of his government over him still remains. This conforms to the principle of
equity provided by the Constitution.

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 H.) DOCTRINE IN TAXATION

1. Prospectivity of Tax Laws

The principle of prospectivity of tax laws states that a tax bill must only be
applicable and operative after becoming a law. Thus, the affectivity of the tax law
commences upon its approval and its scope would only cover the present and future
transactions.

The retroactive application of tax laws shall not be applied unless there is a clear
intent of the legislature that such law shall also be imposed on past transactions.

Consequently, the rule of ex-facto is not applicable for tax purposes. However,
when it comes to civil penalties like fines and forfeiture (not including interest), tax laws
may be applied retroactively unless it produces harsh and oppressive consequences which
violate the taxpayers constitutional rights regarding equity and due process.

2. Imprescriptibility of Taxes.
The rule on tax imprescriptibility states that unless otherwise provided by law
itself, taxes in general are not cancelable.

Although the National Internal Revenue Codes provides for the limitation in the
assessment and collection of taxes imposed such prescriptive period will only be
applicable to those taxes that were returnable. The prescriptive period shall start from the
time the taxpayer files the tax return and declares his tax liability.
The court held that there is no time on the right of the BIR Commissioner to assess taxes
on unreasonable accumulated earnings of the corporation.

3. Double Taxation

Double Taxation means an act of the sovereign by taxing twice for the same purpose
in the same year upon the same property or activity of the same person, when it should be
taxed once, for the same purpose and with the same kind of character of tax.

a. Strict sense

It is prohibited because it comprises imposition of the same tax on the same property
for the same purpose by the same state during the same taxing period.
This kind of double taxation violates the constitutional provision of uniformity and
equal protection, as well as the principle that tax must not be excessive, unreasonable and
inequitable. Therefore, such taxation should, whenever and wherever possible, be
avoided to prevent injustice or unfairness.

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b. Broad Sense

It extends to all cases in which there is a burden of two or more pecuniary

impositions. It is usually allowed as long as there is no violation of the equal protection
and uniformity clauses of the constitution.

c. Constitutionality of double Taxation

The Supreme Court held that there is no constitutional prohibition against double
taxation in the Philippines therefore; it is not valid defense against the validity of tax
measure. This decision, however, springs valid constitutional defense against oppression
and inequality in the implementation of tax power. Therefore, to avoid injustice and
unfairness, doubts as to whether double taxation has been imposed should be resolved in
favor of the taxpayer.

d. Modes of eliminating double taxation

1. Application of the Principle of Reciprocity

2. Application of Tax Credit ( Input tax against output tax in Value Added Tax)
3. Applications of Tax Exemptions
4. Application of Allowance for Deductions such as vanishing deduction in Estate
Tax
5. Tax benefit agreement with foreign countries

4. Escape of Taxation

a. Shifting of tax burden

It is the transfer of tax burden to another. The imposition of tax is
transferred from the statutory taxpayer to another without violating the law. This
is best exemplified by indirect taxes like value-added tax.

1. Ways of shifting of tax burden

a. Forward shifting is the transfer of tax burden from the producer to distributor
until it finally reaches the ultimate purchasers or consumers. (Example: Tax is
included in the final price of the product to be paid by the customer. Price,
therefore, is increases.

b. Backward shifting is the reverse of forward shifting. For

example, the manufacture has agreed to buy the suppliers
product only if the price is reduced by the amount of the tax. Price,
therefore, decreases.

c. Onward shifting the tax burden is shifted twice or more either

forward or backward.

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2. Taxes that can be shifted- where the tax is Indirect. What is transferred is not the
payment of the tax but the burden of the tax. The person on whom the tax is imposed
might not be the person who actually shoulders the burden of the tax. Like capitalization,
shifting is possible only when there is an exchange of commodities.
A tax cannot be shifted when it is purely personal-when it has no relation to any
business dealings of the taxpayer, like estate tax and community tax.

3. Meaning of impact and incidence of taxation

Impact of Taxation- is that point on which tax is originally imposed. In so far as

the law is concerned, the taxpayer is the person who must pay the tax to the government.
He is also termed as statutory taxpayer- the one on whom the tax is formally assessed. He
is the subject of the tax.

Incidence of Taxation- is that point on which the tax burden finally rests or settles
down. It takes place when shifting has been effected from the statutory taxpayer to
another or someone else who cannot pass on the burden further. But there may be
incidence without shifting, as in transformation.

b. Tax Avoidance

Tax Avoidance happens when the taxpayer minimizes his tax liability by taking
advantage of legally available tax planning opportunities. This is otherwise known as tax
minimization, others call it tax planning. It is the process of controlling ones actions so
as to avoid undesirable tax consequences, Tax avoidance is completely legal activity. Just
as the penalties of criminal law can be avoided by not committing a crime, taxes can be
avoided by not engaging in those activities that are taxed. The law is not violated in any
way. Rather, tax savings are achieved by arranging ones affairs, and thereby controlling
those facts, so as to avoid the application of those rules of law that would otherwise
trigger a larger liability.

c. Tax Evasion

Tax evasion occurs when the taxpayer resorts to unlawful means to lessen or to get
away with his tax liability. This is also known as tax dodging. Examples of tax evasion
are under declaration of sales, overstatement of expenses and backdating an important
document

While the dividing line may sometimes become hazy in practice, the basic notions
of tax avoidance and tax evasion are conceptually distinct. Both avoidance and evasion
seek the same objective, namely saving fees. But the means by which that goal is sought
are different. Avoidance is legal process of not conducting taxable transactions. On the
other hand, tax evasion is illegal process of not complying with applicable provisions of
the law once the transactions already exist.

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5. Exemption from taxation

a. meaning of exemption of taxation

- denotes a grant of immunity, expressed or implied, to a particular person,
corporation, or to persons or corporations of a particular class, from a tax upon property
or an exercise which persons and corporation generally within the same taxing district are
obliged to pay.
It is an immunity or privilege, it is freedom from financial charged or burden to
which others are subjected.
b.Nature of tax exemption

1. An exemption from taxation is a mere personal privilege of the grantee. Thus, an

exemption granted to a corporation does not apply to its stockholders, the former being
considered a legal entity with a personality separate and distinct from the latter. Being
personal in nature, a tax exemption cannot be assigned or transferred by the person to
whom it is granted without the consent of the legislature.

The legislative consent to the transfer may be given either in the original act granting the
exemption or in a subsequent law.

1. It is generally revocable by the government unless the exemption is founded on a

contract which is protected from impairment, but the contract, such as, for
example a valid cause of consideration. A legislative franchise in the nature of
contract. An exemption provided for in a franchise, however maybe repealed or
amended pursuant to the constitution.
Incidentally, a franchise is a particular right or privilege granted by law to a
person or corporation, such as the franchise for the operation of street railways,
electric light, and power and telephone lines.
2. It implies a waiver on the part of the Government of its right to collect what
otherwise would be due to it, and, in this sense, is prejudicial thereto. Hence, it
exist only by virtue of an express grant and must be strictly construed.
3. It is not necessarily discriminatory so long as the exemption has a reasonable
foundation or rational basis. Where, however, no valid distinction exist, the
exemption may be challenged as violative of the equal protection guarantee or the
uniformity rule.

c. Kinds of tax exemption

1. Express
- When certain persons, property, or transactions are, by express
provision, exempted from all or certain taxes, either or in part. This exemption
may be made by provisions of the Constitution, statutes, treaties, ordinances,
franchises, or contracts.

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 2. Implied

This occurs when tax is levied on certain classes of persons, properties, or

transactions, without mentioning other classes. Every tax statute, in a very real
sense, makes exemptions since all those not mentioned are deemed exempted.
The omission may be either accidental or intentional.

3. Contractual

Contractual tax exemptions are those lawfully entered into the government
in contracts under existing laws. These exemptions must not be confused with the
tax exemptions granted under franchises, which are not contracts within the
context of the non-impairment clause of the Constitution.

d. Rationale grounds for exemption

1. Tax exemption may be based on contract in which case the public represented by
the government is supposed to receive a full equivalent therefor. Ordinarily, the
provisions of a contract of exemption from taxation are contained in the charter of
the corporation (law under which is organized) to which the exemption is granted.
2. It may be based on some ground of public policy.(supra), such as, for example to
encourage new and necessary industries, or to poster charitable and other
benevolent institutions; or such as, at least makes the public at large interested in
encouraging or favoring the class or interest in whose behalf the exemption is
made. In this case, the government need not receive any consideration in return
for tax exemption.
3. It may be created in a treaty on grounds of reciprocity, or to
4. lessen the rigors of international double or multiple taxation which occurs where
there are many taxing jurisdictions, as in the taxation of income and intangible
personal property.
5. States that taxes are not subject to set-off or legal compensation because the
government and the taxpayer are not mutual creditor and debtor of each other.
6. A person cannot refuse to pay tax on the basis that the government owes him an
amount equal to or greater than the tax being collected. The collection of tax
cannot await the results of a lawsuit against the government.
7. An exception to this rule is where both claims of the government and the
taxpayer against each other have already become due, demandable and fully
liquidated.

e. Revocation of tax exemption

a. Forfeiture of Refund- A refund check or warrant issued in accordance with the
pertinent provisions of this Code, which shall remain unclaimed or uncashed
within 5 (five) years from the date the said warrant or check was mailed or

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 delivered, shall be forfeited in favor of the Government and the amount thereof
shall revert to the general fund.

b. A tax credit Certificate issued in accordance with the pertinent provisions of

the Tax Code, which shall remain unutilized after five 5 years from the date of
issuance, shall unless revalidated, be considered invalid, and shall not be allowed
as payment for internal revenue tax liabilities of the taxpayer and the amount
covered y the certificate shall revert to the general fund.

6. COMPENSATION AND SET-OFF

This doctrine states that all taxes are not subject to set-off or the legal compensation
because the government and the taxpayer are not mutual creditor and debtor of each
other.
A person cannot refuse to pay taxes on the basis that the government owes him an
amount of equal to or greater that the tax being collected. The collection of tax cannot
wait the results of a lawsuit against the government.
An exception to this rule is where both the claims of the government and the taxpayer
against each other have already become due and demandable and fully liquidated.

7. COMPROMISE

This doctrine provides that compromises are generally allowed and enforceable when
the subject matter thereof is not prohibited from being compromise is duly authorized to
do so.

The law allows the following persons to do compromise in behalf of the

government.
1. Only the BIR Commissioner is expressly authorized by the Tax Code to enter into
compromise for both civil and criminal liabilities subject to certain conditions.
2. The Collector of Customs is given the power to compromise legitimate authority
is specifically granted such as in the remission of duties.
3. The customs Commissioner, subject to approval by the Secretary of Finance, has
the power to compromise cases involving the imposition of fines, surcharges and
forfeitures.
4. The Local Government Code has no provision regarding compromise, however
tax (not criminal) liability is not prohibited from being compromised.

There is no specific authority, however, given to any public official to execute the
compromise so as to render it effective.

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8. TAX AMNESTY

a. Definition

- Tax amnesty is the general pardon or intentional overlooking by the State of its
authority to impose penalties on persons otherwise guilty of tax evasion or violation of
revenue or tax law. It partakes of an absolute forgiveness or waiver by the government of
its right to collect what is due it and to give tax evaders who wish to relent a chance to
start with a clean slate. As it is much like a tax exemption, it is never favored nor
presumed in law. If granted by the statute, the terms of the amnesty must be construed
strictly against the taxpayer and liberally in favor of the government.

b. Distinguished from tax exemption

Exemption from taxation denotes grant immunity, expressed or implied, to a particular

person, corporation, or to persons or corporations of a particular class, from tax upon
property or an exercise which persons and corporation generally within the same taxing
district are obliged to pay. It is not being imposed
a financial burden to which others have to pay. Tax exemptions are generally granted in
the basis of (a.) reciprocity, (b) public policy and (c) contracts. Tax exemptions,
including its equivalent provisions such as deductions, tax amnesty, and tax condonations
shall be governed with the following principles:

1. They are not presumed.

2. When granted, they are strictly construed against the taxpayer
3. They are highly disfavored and may almost be said to be directly contrary to the
intention of tax laws.

In the exercise of its inherent power to tax, the state through its law-making body has
full power to exempt any person, corporation or class of property from taxation.

Tax exemption as a privilege is personal and in any way cannot be transferred or

assigned but the person to whom it is given without the consent of the state.

9. CONSTRUCTION AND INTERPRETATION OF:

A. Tax laws

The Supreme Court has the exclusive power of constructing and interpreting tax
laws. As a rule, tax laws must be construed with the view of carrying out their purpose
and intent.

The well-settled doctrine of strict interpretation in the imposition of taxes and

other burdens shall be followed in the application of tax laws.

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 Specifically, the following rules are generally followed for the interpretation and
application of various tax laws.

1. Doubts should be resolved liberally in favor of the tax payer.

When the primary consideration is the legislative intent, but doubts exist in
determining such intent, the doubts must be resolved liberally in favor of taxpayers, and
strictly against the taxing authority.

2. Imposition of tax burden is not presumed

Tax burden shall neither be imposed and presumed to be imposed beyond what the
statute expressly and clearly states because tax statues should be construed strictly against
the government.

B. Tax exemptions and exclusion

Tax exemptions, tax amnesty, tax donations and their equivalent provisions are not
presumed and, when granted, are strictly construed against the taxpayer because such
provisions are highly disfavored by the government.

There is no way to dispute the cardinal doctrine in the taxation that exemptions
therefrom are highly disfavored in law and he who claims tax exemptions must be able to
justify his it claim right.

Therefore, tax exemptions cannot be established by mere implications but it must be

clearly expressed by the law.

C. Tax rules and regulations

Denotes a grant of immunity, expressed or implied, to a particular person, corporation,

or to persons or corporations of a particular class, from a tax upon the property or an
exercise which persons and corporations generally within the same taxing district are
obliged to pay.

In other words, it is privilege of not being imposed a financial burden to which others
have to pay. Tax exemptions are generally granted in the basis of (a) reciprocity, (b)
public policy and, (c) contracts.

Tax exemptions including its equivalent provisions such as deductions, tax

amnesty, and tax condonations shall be governed with the following principles:
1. They are not presumed
2. When granted, they are strictly construed against the taxpayer.

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 3. They are highly disfavored and may almost be said to be directly contrary to the
intention of tax laws.

Hence, he who claims tax exemptions must be able to justify his claim or right. In
the exercise of its inherent power to tax, the state through its law-making body has full
power to exempt any person, corporation or class of property from taxation.

Tax exemption as a privilege is personal and in any way cannot be t or transferred or

assigned by the person to whom it is given without consent of the state.

The Supreme Court has the exclusive power of constructing and interpreting tax laws.
As a rule, tax laws must be construed with the view of carrying out their purpose and
intent.

The well-settled doctrine of strict interpretation in the imposition of taxes and

other burdens shall be followed in the application of tax laws.

Specifically, the following rules are generally followed for the interpretation and
application of various tax laws.

1. Doubts should be resolved liberally in favor of the tax payer.

When the primary consideration is the legislative intent, but doubts exist in
determining such intent, the doubts must be resolved liberally in favor of taxpayers, and
strictly against the taxing authority.

2. Imposition of tax burden is not presumed

Tax burden shall neither be imposed and presumed to be imposed beyond what the
statute expressly and clearly states because tax statues should be construed strictly against
the government.

3. Tax exemptions are strictly construed and against the taxpayer

Tax exemptions, tax amnesty, tax donations and their equivalent provisions are not
presumed and, when granted, are strictly construed against the taxpayer because such
provisions are highly disfavored by the government.

There is no way to dispute the cardinal doctrine in the taxation that exemptions
therefrom are highly disfavored in law and he who claims tax exemptions must be able to
justify his it claim right.

Therefore, tax exemptions cannot be established by mere implications but it must be

clearly expressed by the law.

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d. Penal provisions of tax laws

Any person convicted of crime penalized by this Code shall, in addition to being liable
for the payment of the tax, be subject to the penalties imposed herein as follows:

1. If the offender is not a citizen of the Philippines, he shall be deported immediately

after serving the sentence without further proceedings of deportation.
2. If the offender is a public officer or employee, the maximum penalty prescribed
for the offense shall be imposed and, in addition, he shall be dismissed from the
public service and perpetually disqualified from holding any public office.
3. If the offender is Certified Public Accountant, his CPA certificate shall be
automatically revoked or cancelled upon the conviction.
4. In the case of associations, partnerships or corporations, the penalty shall be
imposed on the partner, president, general manager, branch manager, treasurer,
officer in-charge, and employees responsible for the violation.

Amount of Penalty

The fines to be imposed for any violation of the provision of this Code shall not be
lower than the fines imposed therein or twice the amount of taxes, interest and surcharges
due from the taxpayer, whichever is higher.

Any person who willfully attempts in any manner to evade or defeat any tax imposed
under this Code or the payment thereof, shall, in addition to other penalties provided by
the law, upon conviction thereof, be punished by a fine not less than P30,000.00 but
more than P100,000.00 and suffers imprisonment of not less than two (2) years but not
more than (4) years; provided that the conviction or acquittal obtained shall not be bar to
the filling of a civil suit for the collection of taxes.

Any person required under this Code or by rules and regulations promulgated
thereunder to pay any tax, make a return, keep any record, or supply correct and accurate
information, who willfully fails to pay such tax, make such return, keep such record, or
supply such correct and accurate information, or withhold or remit taxes withheld on
compensation, at the time/times required by law, upon conviction thereof, be punished by
a fine of not less than P10,000.00 and suffer imprisonment of not less than 10 years.

Any person who attempts to make it appear for any reason that he or another has in
fact filed a return or statement and subsequently withdraws the same return or statement
after securing the official receiving seal or stamp or receipt of an internal revenue office
wherein the same was actually filed shall upon conviction thereof, be punished by a fine
of not less than P 10,000.00 but not more that P20, 000.00 and suffer imprisonment of not
less than 1 year but not more than 3 years.

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 Unlawful pursuit of Corporation

Any corporation, association or general co-partnership liable for any acts or

omissions penalized under this code. In addition to the penalties imposed therein upon
responsible corporate officers, partners, or employee, shall upon conviction for each act
or omission be punished by a fine of not less than P 5,000.00 but not more than
P20,000.00 and suffer imprisonment of not less than 6 months but not more than 2 years.

In the case of a person engaged in the business of distilling. Rectifying, re-packing,

compounding or manufacturing any article subject to excise tax, he shall upon conviction
for each act or omission, be punished by a fine of not less than P30,000.00 but not more
than P50,000.00 and suffer imprisonment of not less than 2 years but not more than 4
years.

Violation for Printing and Issuance of Receipts, Sales or Commercial Invoices.

Upon conviction, a fine of not less than P1,000.00 and not more than P50,000.00 and
suffer imprisonment of not less than 2 years but not more than 4 years for the following
violations;

1. Refusal to issue the required receipts, sales or commercial invoice;

2. Issuance of receipts, sales or commercial invoices which do not reflect or contain
all the information required to be shown therein;
3. Using multiple or double receipts, sales or commercial invoices;
4. Printing of receipts or sales or commercial invoices without authority from BIR;
5. Printing of multiple sets of receipts, sales or commercial invoices;
6. Printing of unnumbered receipt, sales or commercial invoices, not bearing the
name, business style, TIN, and business address of the person or entity.
7. Failure to Obey Summons

A fine of not less than P 5,000.00 but not more than P10,000.00 and suffer
imprisonment of not less than one (1) year but not more than 2 years shall be imposed
upon conviction of the persons who failed to obey BIR summons and failed to produce
required records by the BIR.

e. Non-retroactive application to taxpayers

A tax statute must be applicable and operative only upon becoming a law. Tax
laws are given retroactive effect only if there is clear legislative intent in that regard.

Whenever a tax on property does not apply to all property within the jurisdiction of
the taxing authorities. The property not taxed is said to be exempted.

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 The grant of immunity expressed implied to a particular persons or corporations of
a particular class, from a tax upon property or an excise tax which persons or
corporations generally within the same taxing districts are obliged to pay.

I. Scope and Limitation of Taxation

1. Inherent Limitations
These are limitations which exist despite the absence of an express constitutional
provision thereon.

a. Public Purpose
The right of taxation can only be used in aid of a public object, an object
which is within the purpose for which government established. It cannot
be exercised in aid of enterprises strictly private, for the benefit of
individuals, though in a remote or collateral way, the public may be
benefited thereby.

The purposes to be accomplished by taxation need not be exclusively

public. Although private individuals are directly benefited, the tax would
still be valid provided such benefit is only incidental.

The test is not as to who receives the money, but the character of the
purpose for which it is expended; not the immediate result of the
expenditure but rather the ultimate.

Test in determining Public Purposes in tax:

a. Duty Test whether the thing to be threatened by the appropriation of
public revenue is something which is the duty of the State, as a
government.
b. Promotion of General Welfare Test whether the law providing the tax
directly promotes the welfare of the community in equal measure.

b. Inherently Legislative

1) General Rule
Taxation is purely a legislative matter and the Congress cannot
delegate the power to others.

2) Exceptions
a) Delegation to local governments
It has been held that the general principle against the
delegation of legislative powers as a consequence of the
theory of separation of powers is subject to one well-
established exception, namely, that legislative power may

Page | 23
 be delegated to local governments. The theory of non-
delegation of legislative powers does not apply in matters
of local concern.

b) Delegation to the President

The power granted to Congress under this constitutional
provision to authorize the President to fix within specified
limits and subject to such limitations and restrictions as it
may impose, tariff rates and other duties and imposts
include tariffs rates even for revenue purposes only.
Customs duties which are assessed at the prescribed tariff
rates are very much like taxes which are frequently
imposed for both revenue-raising and regulatory purposes

c) Delegation to administrative agencies

c. Territorial
The taxing power should be exercised only within the territorial
boundaries of the taxing authority.
1) Situs of Taxation
a) Meaning
Situs of Taxation meansplace of taxation depending on
the nature of taxes being imposed. It is an inherent mandate
that taxation shall only be exercised on persons, properties,
and excise within the territory of the taxing power
because:1) Tax laws do not operate beyond a countrys
territorial limit; 2) Property which is wholly and
exclusively within the jurisdiction of another state receives
none of the protection for which a tax is supposed to be
compensation.

However, the fundamental basis of the right to tax is the

capacity of the government to provide benefits and
protection to the object of the tax. A person may be taxed,
even if he is outside the taxing state, where there is between
him and the taxing state, a privity of relationship justifying
the levy.

b) Situs of Income Tax

The situs is where the income is derived. Income tax is
properly exacted from persons who are residents or citizens
in the taxing jurisdiction and even those who are neither
residents nor citizens provided the income is derived from
sources within the taxing state.

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Theories:
1. Domicilliary theory - The location where the income
earner resides is the situs of taxation. This is where he is
given protection, hence, he must support it.
2. Nationality theory - The country of citizenship is
the situs of taxation. This is so because a citizen is given
protection by his country no matter where he is found or no
matter where he earns his income.
3. Source law - The country which is the source of the
income or where the activity that produced the income is
the situs of taxation.

(1) From sources within the Philippines

Interests: Residence of Debtor
Dividends from domestic corporation:
Income within
Services (Compensation for labor/personal
services): Place of performance of service
Rentals: Location of the property/interest in
such property
Royalties: Place of use or location of
intangibles (such as patents trademarks, etc.)
giving rise to royalties
Gain on sale of Real property: Location of
property
Gain on sale of Personal Property other than
shares of stock in a domestic corporation
purchased in one country and sold in
another: Place of Sale
Gain on sale of shares of stock in a domestic
corporation: Philippines regardless of where
sold

(2) From sources without the Philippines

(3) Income partly within and partly without the

Philippines

Gain from sale of personal property produced in

whole or in part in one country and sold in another
country, where one of the countries is the
Philippines is income derived from sources partly
within and partly outside the Philippines.

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Gains from the purchase of personal property
within and sold without the Philippines or the
purchase of personal property without and its sale
within the Philippines shall be treated as derived
entirely from sources within the country in which it
was sold.

c) Situs of Property Taxes

(1) Taxes on Real Property
It is subject to taxation in the State in which it is
located whether the owner is a resident or non-
resident, and is taxable only there. This is so
because the taxing authority has control over the
property which is of a fixed and stationary
character.

(2) Taxes on Personal Property

In case of tangible personal property, it is taxable in
the state where it has actual situs where it is
physically located, although the owner resides in
another jurisdiction.

In case of intangible property, the situs or the

domicile of the owner, in accordance with the
principle mobilia sequuntur persnam. This
principle, however, is not controlling when it is
inconsistent with express provisions of statute or
when justice demands that it should be, as where the
property has in fact a situs elsewhere.

Intangible properties which are considered by law

as situated in the Philippines:
1. Franchise which must be exercised in the
Philippines
2. Obligations or bonds issued by any
corporation or sociedad anonima organized or
constituted in the Philippines
3. Shares, obligations or bonds issued by any
foreign corporation 85% of the business of
which is located in the Philippines
4. Shares, obligations or bonds issued by any
foreign corporation if such shares, obligations or
bonds have acquired a business situs in the
Philippines
5. Shares or rights in any partnership, business
or industry established in the Philippines

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 d) Situs of Excise Tax
The transmission of property from donor to donee, or from
a decedent to his heirs may be subject to taxation in the
state where the transferor was a citizen or resident, or
where the property is located.
(1) Estate Tax
(2) Donors Tax

e) Situs of Business Tax

The power to levy an excise tax depends upon the place
where the business is done. It is the place of the
consummation of the sale, associated with the delivery of
the things which are the subject matter of the contract that
determines the situs of the contract for purposes of taxation,
and not merely the place of the perfection of the contract.

(1) Sale of Real Property

(2) Sale of Personal Property
(3) VAT

d. International Comity
Comity is the respect accorded by nations to each other because they are
equals. As such, the property of a foreign state or government may not be
taxed by another.

The grounds for the above rule are:

1) sovereign equality among states
2) usage among states that when one enter into the territory of
another, there is an implied understanding that the power does not
intend to degrade its dignity by placing itself under the jurisdiction
of the latter
3) foreign government may not be sued without its consent so that
it is useless to assess the tax since it cannot be collected
4) reciprocity among states

e. Exemption of Government Entities, Agencies, and Instrumentalities

To levy tax upon public property would render necessary new taxes on
other public property for the payment of the tax so laid and thus, the
government would be taxing itself to raise money to pay over to itself;

a.2) In order that the functions of the government shall not be unduly
impede;and a.3) To reduce the amount of money that has to be handed by
the government in the course of its operations.

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 Unless otherwise provided by law, the exemption applies only to
government entities through which the government immediately and
directly exercises its sovereign powers

Notwithstanding the immunity, the government may tax itself in the

absence of any constitutional limitations.

Government-owned or controlled corporations, when performing

proprietary functions are generally subject to tax in the absence of tax
exemption provisions in their charters or law creating them.

2. Constitutional Limitations
These are limitations are expressly provided for in the constitution.

a. Provisions Directly Affecting Taxation

1) Prohibition against imprisonment for non-payment of poll
tax
No person shall be imprisoned for debt or non-payment of poll
tax.(Sec. 20, Art. III, 1987 Constitution)

The only penalty for delinquency in payment is the payment of

surcharge in the form of interest at the rate of 24% per annum
which shall be added to the unpaid amount from due date until it is
paid. (Sec. 161, LGC)

The prohibition is againstimprisonment for non-payment of poll

tax. Thus, a person is subject to imprisonment for violation of the
community tax law other than for non-payment of the tax and for
non-payment of other taxes as prescribed by law.

2) Uniformity and equality of taxation

The rule on uniformity and equality in taxation requires that all
subjects or objects of taxation, similarly situated must be treated
alike and must not be classified in an arbitrary manner.

3) Grant by Congress of authority to the President to impose

tariff rates
The Congress may, by law, authorize the President to fix within
specified limits, and subject to such limitations and restrictions as
it may impose, tariff rates, import and export quotas, tonnage and
wharfage dues, and other duties or imposts within the framework
of the national development program of the Government. (Sec.
28(2), Art. VI, 1987 Constitution)

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4) Prohibition against taxation of religious, charitable entities,
and educational entities
Charitable institutions, churches and parsonages or convents
appurtenant thereto, mosques, non-profit cemeteries, and all lands,
building, and improvements actually, directly and exclusively used
for religious, charitable or educational purposes shall be exempt
from taxation. (Sec. 28(3) Art. VI, 1987 Constitution)

Lest of the tax exemption: the use and not ownership of the
property
To be tax-exempt, the property must be actually, directly and
exclusively used for the purposes mentioned.

The word exclusively meanprimarily.

The exemption is not limited to property actually indispensable but
extends to facilities which are incidental to and reasonably
necessary for the accomplishment of said purposes. The
constitutional exemption applies only to property tax.

However, it would seem that under existing law, gifts made in

favor or religious charitable and educational organizations would
nevertheless qualify for donors gift tax exemption. (Sec.
101(9)(3), NIRC)

5) Prohibition against taxation of non-stock, non-profit

institutions
Subject to the conditions prescribed by law, all grants,
endowments, donations or contributions used actually, directly and
exclusively for educational purposes shall be exempt from tax.(
Sec. 4(4) Art. XIV, 1987 Constitution)

The exemption granted to non-stock, nonprofit educational

institution covers income, property, and donors taxes, and custom
duties. To be exempt from tax or duty, the revenue, assets,
property or donation must be used actually, directly and
exclusively for educational purpose. In the case or religious and
charitable entities and non-profit cemeteries, the exemption is
limited to property tax.

The said constitutional provision granting tax exemption to non-

stock, non-profit educational institution is self-executing. Tax
exemptions, however, of proprietary (for profit) educational
institutions require prior legislative implementation. Their tax
exemption is not self-executing.

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Lands, Buildings, and improvements actually, directly, and
exclusively used for educational purposed are exempt from
property tax, whether the educational institution is proprietary or
non-profit.

6) Majority vote of Congress for grant of tax exemption

No law granting any tax exemption shall be passed without the
concurrence of a majority of all the members of the Congress.
(Sec. 28(4) Art. VI, 1987 Constitution)

7) Prohibition on use of tax levied for special purpose

All money collected or any tax levied for a special purpose shall be
treated as a special fund and paid out for such purpose only. It the
purpose for which a special fund was created has been fulfilled or
abandoned the balance, if any, shall be transferred to the general
funds of the government. (Sec. 29(3), Art. VI, 1987 Constitution)

8) Presidents veto power on appropriation, revenue, tariff bills

The President shall have the power to veto any particular item or
items in an Appropriation, Revenue or Tariff bill but the veto shall
not affect the item or items to which he does not object. (Sec.
27(2), Art. VI, 1987 Constitution)

9) Non-impairment of jurisdiction of the Supreme Court

The Congress shall have the power to define, prescribe, and
apportion the jurisdiction of the various courts but may not deprive
the Supreme Court of its jurisdiction over cases enumerated in Sec.
5 hereof. (Sec. 5 (2) Art. VIII, 1987 Constitution)

The Supreme Court shall have the following powers: xxx (2)
Review, revise, modify or affirm on appeal or certiorari xxx final
judgments and orders of lower courts in xxx all cases involving the
legality of any tax, impost, assessment, or toll or any penalty
imposed in relation thereto. (Sec. 5 (2b) Art. VIII, 1987
Constitution)

10) Grant of power to the local government units to create its

own sources of revenue
Local Government units shall have a just share, as determined by
law, in the national taxes which shall be automatically released to
them. (Sec. 6, Art. X, 1987 Constitution)

11) Flexible tariff clause

The Congress may, by law, authorize the President to fix within
specified limits, and subject to such limitations and restrictions as
it may impose, tariff rates, import and export quotas, tonnage and

Page | 30
 wharfage dues, and other duties or imposts within the framework
of the national development program of the government.( Sec.
28(2) Art. VI, 1987 Constitution)

12) Exemption from real property taxes

13) No appropriation or use of public money for religious

purposes
No public money or property shall be appropriated, applied, paid
or employed, directly or indirectly for the use, benefit, support of
any sect, church, denomination, sectarian institution, or system of
religion or of any priest, preacher, minister, or other religious
teacher or dignitary as such except when such priest, preacher,
minister or dignitary is assigned to the armed forces or to any penal
institution, or government orphanage or leprosarium. (Sec. 29(2),
Art. VI, 1987Constitution)

b. Provisions Indirectly Affecting Taxation

1) Due process
No person shall be deprived of life, liberty or property without due
process of law x x x. (Sec. 1, Art. III, 1987 Constitution)

Requisites :
1. The interest of the public generally as distinguished from those
of a
particular class require the intervention of the state;
2. The means employed must be reasonably necessary to the
accomplishment for the purpose and not unduly oppressive;
3. The deprivation was done under the authority of a valid law or
of the constitution; and
4. The deprivation was done after compliance with fair and
reasonable method of procedure prescribed by law.

In order that due process of law must not be done in an arbitrary,

despotic, capricious, or whimsical manner.

2) Equal protection
xxx Nor shall any person be denied the equal protection of the
laws.(Sec. 1, Article III, 1987 Constitution)

Equal protection of the laws signifies that all persons subject to

legislation shall be treated alike, under like circumstances and
conditions both in privileges conferred and liabilities imposed.
This doctrine prohibits class legislation which discriminates
against some and favors others.

Page | 31
Requisites for a Valid Classification:
1. Must not be arbitrary
2. Must not be based upon substantial distinctions which
make fore real differences
3. Must be germane to the purpose of law.
4. Must not be limited to existing conditions only; and
5. Must play equally to all members of a class.

3) Religious freedom
The free exercise and enjoyment of religious profession and
worship, without discrimination or preference shall forever be
allowed. (Sec. 5, Art. III, 1987 Constitution)

Religious activities, which are simply and purely for propagation

of faith, are exempt from taxation. Thus, income even of religious
organizations from any activity conducted for profit or from any of
their property, real or personal, regardless of disposition of such
income, is taxable.

License fees/taxes would constitute a restraint on the freedom of

worship as they are actually in the nature of a condition or permit
of the exercise of the right. However, the Constitution or the Free
Exercise of Religion clause does not prohibit imposing a generally
applicable sales and use tax
on the sale of religious materials by a religious organization.

4) Non-impairment of obligations of contracts

No law impairing the obligation of contract shall be passed. (Sec.
10, Article III, 1987 Constitution)

The power of taxation cannot be exercised in a manner that would

impair the obligation of contracts. What is prohibited is that a
statute be passed that would alter the relative rights of the parties
with each other. The mere fact that a tax makes the conduct of a
business more expensive or the activity more difficult does not
result in the impairment of the obligation of contracts. Contract is
impaired only if the relative position of the parties to a contract is
disturbed by the operation of a taxing statute.

Rules
(a) When government is party to contract, granting exemption
cannot be withdrawn without violating non impairment clause
(b) When exemption generally granted by law, withdrawal does
not violate

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 (c) When exemption granted under a franchise, may be revoked;
Consti provides that franchise is subject to amendment, alteration,
or repeal by Congress.

J. STAGES OF TAXATION

1. Levy

Levy is the act of imposition by the legislature , such as by enactment of the law.
The term is understood to include not only the mandate on when and how the tax is
imposed, but also, whenever it my be appropriate, to grant tax exemptions, tax amnesties
or tax donations.

2. Assessment and Collection

The terms refer to the act of administration and implementation of the tax laws by
the executive, through its administrative agencies. The term assessment, which here
means notice and demand of for payment of a tax liability, should not be confused with
the assessment relative to real property taxation, which refers to the listing and
valuation of taxable real property.

3. Payment

This is the act of compliance by the taxpayer, including such options, schemes or
remedies as may be legally open or available to him.

4. Refund

This refers to the recovery of tax erroneously or illegally assessed or collected.

K. DEFINITION, NATURE AND CHARACTERISTICS OF TAXES

Tax refers to the burden of enforced contribution imposed upon persons,

properties and right to provide public revenues for its use and support. Taxes can be
imposed even without notification and prior approval from the taxpayer. It creates civil
liability and sometimes, criminal liability. Taxes are purely legislative in nature, created
by the House of Representatives and the Senate through tax laws. These tax laws are for
public purpose. They are paid in money or amount of property in case of forfeiture of
properties to cover the unpaid obligations.

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The essential characteristics of taxes are the following:
1. a type of enforced contribution;
2. legislative in nature;
3. imposed for public purpose;
4. proportionate in character;
5. generally paid in money;
6. imposed upon persons, properties or rights and obligations;
7. imposed to raise government revenues;
8. imposed by the state within its jurisdiction;
9. paid in regular intervals.

L. REQUISITES OF A VALID TAX

Taxes are the lifeblood of the government and should be collected without
unnecessary hindrance. However, their collection should not be tainted with arbitrariness.

The following are the requisites of a valid tax:

1) It should be for a public purpose;

2) The rule of taxation should be uniform;
3) That either the person or property taxed be within the jurisdiction of the
taxing authority;
4) That the assessment and collection be in consonance with the due
process clause;
5) The tax must not infringe the inherent and constitutional limitations of
the power of taxation.

M. TAX AS DISTINGUISHED FROM OTHER FORMS OF EXACTIONS

Tariff or Customs Duties

Tariff or Customs Duties are taxes imposed on the import or export of goods.
These are necessary to be paid for the entry of goods into a country.

Tax Tariff
imposed on persons,properties or imposed on articles and properties
rights; imported and exported;

covers customs duties a component or part of taxation

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Toll

Toll refers to the amount charged by the owner for the use of his/her property
and/or its improvements and to sustain the necessary operating expenses of the property.
The owner also expects returns from the investment. The best examples of tolling
agencies are the NLEX, the South Diversion Road, and the Skyway.

Tax Toll
imposed by the government as a imposed by the owner of the
sovereign state; property;

used as public funds for used by the owner to recover

government expenditures. the cost of the property.

License Fee

License fee is a fee imposed by the government to regulate peoples activities for
the general welfare of its citizens.

Tax License Fee

imposed by the government to raise imposed by the government for
revenues for the public funds; purposes of regulation;

imposed by the use of power of imposed by the use of the police

taxation of the state; power of the state;

Failure to pay the tax does not Failure to pay renders the business
make the business illegal; the or occupation illegal;
taxpayer is only subject to penalty Ex: mayors permit and licenses
and fines;
It is national in scope; it covers the It is generally local in scope. (Power
entire Philippines such that a is delegated by the national
Filipino citizen, if not exempted is government.)
subject to income tax.

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Special Assessment

Special Assessment refers to the assessment in value of real property because of

improvements done by the local government in the place or locality.

Tax Special Assessment

Imposed on persons, properties and Imposed on land and its betterments
rights; and improvements;
Imposed by the national or local Imposed by the local government;
government;
Enforced or mandated Imposed to recover the cost of
contributions; public improvements or betterments;
A regular or recurring imposition by Situational and not a regular
the government. collection.

Debt
Debt refers to a contractual obligation of the creditor to impose interest on the
debtor for the use of his or her money for a period of time. Usually, banks and other
financial institutions lend money on interest for business and/or personal use of the
debtor. The primary source of income of the banks is interest income.

Tax Debt
It is based on law; It is based on contract between
parties;
It cannot be assigned to just any It can be assigned to any third
third person due to its being person as long as both parties permit
personal in nature and has penalty it; nonpayment of the debt requires
for imprisonment for non-payment; no imprisonment and there is no
criminal liability therefor, unless
there is employment of deceit;
It is generally payable in money; It is payable in terms of money
and/or property;

N. KINDS OF TAXES

1. As to Object
a. Personal, Capitation or Poll Tax

This refers to that fixed amount imposed upon a certain class of persons,
or upon persons residing within the territorial jurisdiction of the state regardless of
their property, profession or occupation, such as Community Tax.

Page | 36
 b. Property Tax

This refers to that imposed by upon property, real or personal, within the
territorial jurisdiction of the state in proportion to its value or some other
reasonable method of apportionment.

c. Privilege Tax or Excise Tax

This refers to that imposed on the taxpayers exercise of right or privilege

to perform an act or engage in occupation. All taxes that do not fall under the
personal or property tax shall be deemed as excise tax, i.e. donors tax.

2. As to Burden or incidence

a. Direct

That which is imposed upon persons directly bound to pay the tax, which
cannot be passed on or shifted to other persons for payment. (Ex: individual
income tax and community tax)

b. Indirect

That which is imposed upon persons liable to pay said taxes, but which are
permitted by law to be shifted or transferred to other persons for payment. (Ex:
Value-Added Tax)

3. As to Tax Rates

a. Specific
Refers to that imposed upon properties and rights, whose amount is
determined based on weight or volume capacity or any physical unit of
measurement. (Ex: excise tax on wines and liquor)

b. Ad Valorem
Refers to that imposed upon properties and rights, whose amount is
determined based on the sale price of other specified values of properties. (Ex:
value Added Tax)

c. Mixed

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4. As to Purpose

a. General or Fiscal

Imposed for general purposes, the proceeds of which go to the national

funds.
(Ex: Estate Tax, Income Tax and Value-Added Tax)

b. Special, Regulatory or Sumptuary

Imposed for special purposes, the proceeds of which go to certain special

funds.
(Ex: Travel Tax and Immigration Tax)

5. As to Authority to Impose

a. National

Refers to that imposed by the national government and which is enforced

and collected by the Bureau of Internal Revenue or Bureau of Customs. (Ex:
Income Tax, Percentage Tax, Excise Tax and Documentary Stamp Tax)

b. Local Real Property Tax, Municipal tax

Refers to that imposed by the local governments such as barangays, cities,

municipalities and provinces. (ex: Community Tax, Real Property Tax, Business
Tax, Professional Tax and barangay clearance imposed on new businesses.)

6. As to Graduation

a. Progressive

Refers to that imposed upon persons, properties and rights the amount of
which increases as the bracket increases. (Ex: Donors Tax, Estate Tax, Income
Tax)

b. Regressive

Refers to that imposed upon persons, the amount of which may decrease
as the tax base or bracket increases. (Ex: Real Property Tax)

c. Proportionate

The tax rate is based on a fixed percentage of the amount of property,

income or other basis to be taxed.

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II. NATIONAL INTERNAL REVENUE CODE F 1997 AS AMENDED (NIRC)

A. INCOME TAXATION

1. Income Tax Systems

a) Global Tax System Under the global tax system, the total allowable
deductions as well as personal and additional exemptions, in the case of
qualified individuals, of the total allowable deductions only, in the case of
corporations, are deducted from the gross income to arrive at the net taxable
income subject to the graduated income tax rate, in the case of corporations.
b) Schedular Tax System Different types of incomes are subject to different
sets of graduated or flat income tax rates. The applicable tax rate will depend
on the classification of the taxable income and the basis could be gross
income.
c) Semi-Schedular or Semi-Global Tax System The compensation income,
business or professional income, capital gain and passive income not subject
to the final withholding income tax, and other income are added together to
arrive at the gross income, and after deducting the sum of allowable
deductions from business or professional income, capital gain and passive
income and other income not subject to final tax, in the case of corporations,
as well as personal and additional exemptions, in the case of individual
taxpayers, the taxable income is subjected to one set of graduated tax rates or
normal corporate income tax rate. With respect to the incomes not subject to
final withholding tax, the computation of income tax is global.

2. Features of the Philippine Income Tax Law

a) Direct Tax Income tax is direct tax because the burden is borne by the
income recipient upon whom the tax is imposed.
b) Progressive Tax Income tax is progressive since the tax base increases as the
tax rate increases. It is founded on the ability pay principle and is consistent
with the constitutional principle that Congress shall evolve a progressive
system of taxation.
c) Comprehensive The Philippines has adopted the most comprehensive
system of imposing income tax by adopting the citizenship principle, the
residence principle, and the source principle.
d) Semi-Schedular or Semi-Global Tax System Same is adopted in the
Philippines although certain passive investment incomes and capital gains
from sale of capital asset, namely: (a) shares of stocks of domestic

Page | 39
 corporations; and (b) are real property are subject to final taxes at preferential
tax rates.

3. Criteria in Imposing Philippine Income Tax

a) Citizenship Principle A citizen of the Philippines is subject to income tax (a)

on his worldwide income from within and without the Philippine, if he resides
in the Philippines, or (b) only on his income from within the Philippines, if he
qualifies as a non-resident citizen; hence the income of a non-resident citizen
from sources outside the Philippines shall be exempt from Philippine income
tax.
b) Residence Principle An alien is subject to Philippine income tax on his
worldwide income because of his residence in the Philippines. Thus, a
resident alien is now liable to pay Philippine income tax only on his income
from sources outside the Philippines.
c) Source Principle An alien is subject to Philippine income tax because he
derives income from sources within the Philippines. Thus, a non-resident alien
is liable to pay Philippine income tax on his income from sources within the
Philippines, such as dividend, interest, rent, or royalty, despite the fact that he
has not set foot in the Philippines.

4. Types of Philippine Income tax

a) Capital Gains Tax is a tax imposed on the gains presumed to have been
realized by the seller from the sale, exchange, or other disposition of capital
assets located in the Philippines, including pacto de retro sales and other
forms of conditional sale.
b) Documentary Stamp Tax is a tax on documents, instruments, loan agreements
and papers evidencing the acceptance, assignment, sale or transfer of an
obligation, rights, or property incident thereto.
c) Donors Tax is a tax on a donation or gift, and is imposed on the gratuitous
transfer of property between two or more persons who are living at the time of
the transfer.
d) Estate Tax is a tax on the right of the deceased person to transmit his/her
estate to his/her lawful heirs and beneficiaries at the time of death and on
certain transfers which are made by law as equivalent to testamentary
disposition.
e) Income Tax is a tax on all yearly profits arising from property, profession,
trades or offices or as a tax on a persons income, emoluments, profits and the
like.

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 f) Percentage Tax is a business tax imposed on persons or entities who sell or
lease goods, properties or services in the course of trade or business whose
gross annual sales or receipts do not exceed P550,000 and are not VAT-
registered.
g) Value-Added Tax is a business tax imposed and collected from the seller in
the course of trade or business on every sale of properties (real or personal)
lease of goods or properties (real or personal) or vendors of services. It is an
indirect tax, thus, it can be passed on to the buyer.
h) Withholding Tax on Compensation is the tax withheld from individuals
receiving purely compensation income.
Expanded Withholding Tax is a kind of withholding tax which is
prescribed only for certain payors and is creditable against the income tax
of the payee for the taxable year.
Final Withholding Tax is a kind of withholding tax which is prescribed
only for certain payors and is creditable against the income of the payee
for the taxable year.
Withholding Tax on Government Money Payments is the withholding tax
withheld by government offices and instrumentalities, including
government-owned or -controlled corporations and local government
units, before making any payments to private individuals, corporations,
partnerships and/or associations.

5. Taxable Period

a) Calendar Period Period from January to December.

b) Fiscal Period Fiscal Year is always referred to by the date, on which the
accounting period ends, not on when it begins. A fiscal year can begin on any
month but always ends on the twelfth month.
c) Short Period - Income Computed on Basis of Short Period. - Where a separate
final or adjustment return is made under Subsection (A) on account of a
change in the accounting period, and in all other cases where a separate final
or adjustment return is required or permitted by rules and regulations
prescribed by the Secretary of Finance, upon recommendation of the
Commissioner, to be made for a fractional part of a year, then the income shall
be computed on the basis of the period for which separate final or adjustment
return is made.

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6. Kinds Of Tax Payers

a) Individual Tax payers

Citizens
a. Resident Citizen Taxable on his worldwide income.
b. Non-resident Citizen Taxable only on his income from sources within
the Philippines and exempt on his income from sources outside the
Philippines.
Aliens
a. Resident Aliens An alien actually present in the Philippines who is not a
mere transient or sojourner is a resident of the Philippines for income tax
purposes.
b. Non-resident Alien Further classified into engaged or not engaged in
trade or business in the Philippines.
Engaged in Trade or Business - If his aggregate stay in the
Philippines is more than 180 days during any calendar year, he shall
be deemed a non-resident alien doing business in the Philippines,
Sec. 22 (G) of the 1997 Tax Code notwithstanding.
Not Engaged in Trade or Business - - If his aggregate stay in the
Philippines does not exceed 180 days during any calendar year, he
shall be deemed a non-resident alien not doing business in the
Philippines.
Special Class of Individual Employees
a. Minimum Wage Earner - (A) Requirement of Withholding. - Every
employer making payment of wages shall deduct and withhold upon such
wages a tax determined in accordance with the rules and regulations to be
prescribed by the Secretary of Finance, upon recommendation of the
Commissioner: Provided, however, That no withholding of a tax shall be
required where the total compensation income of an individual does not
exceed the statutory minimum wage, or five thousand pesos (P5,000.00)
per month, whichever is higher. (Sec. 79, NIRC)

b) Corporations

Domestic Corporation When applied to corporation means created or

organized in the Philippines or under its laws. (Sec. 22 [C])
Foreign Corporations
a. Resident Foreign Corporation is one engaged in Trade or business in
the Philippines.
b. Non-Resident Foreign Corporation is a foereign corporation not
engaged in Trade or Business in the Philippines.
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 c) Partnerships Except for a general professional partnership and an unincorporated
joint venture or consortium engaged in construction or energy related projects, which
in reality are also partnerships, the Tax Code considers any other type of partnership
as a corporation subject to income tax.

d) General Professional Partnership A partnership formed by persons for the sole

purpose of exercising their common profession, no part of the income of which is
derived from engaging in any trade or business.

e) Estates and Trusts Taxable estates and trusts are taxed in the same manner and on
the same basis as in the case of an individual, except that the amount of income for
the year which is to be distributed currently by the fiduciary to the beneficiaries, and
the mount of the income collected by a guardian of an infant which is to be held or
distributed as the court may direct, shall be allowed as deduction in computing
taxable income of the estate or trust, but the amount so allowed as deduction shall
included in computing the taxable income of the beneficiaries, whether distributed to
them or not.

f) Co-ownership There is co-ownership when the undivided ownership of an

undivided thing or right belongs to different persons. For tax purposes, the individual
co-owners report their share of the income from the property owned in common by
them in their individual tax returns of the year, and the co-ownership is not
considered as a separate taxable entity.

7. Income Taxation

a) Gross Income Means income, gain or profit subject to tax. It

includes compensation for personal and professional services,
business income, profits and income derived from any source,
legal or illegal, unless exempt from tax under the constitution, tax
treaty or statute.
b) Net Income Means gross income less statutory deductions and
exemptions. It is referred to as taxable income under sec. 31 of
the tax code.

8. Income

a) Income means an amount of money coming to a person or corporation within a

specified time, whether as payment for services, interest or profit from investment.

Page | 43
b) It is a flow or service rendered by capital by the payment of money from it or any other
benefit rendered by a fund of capital in relation to such fund through a period of time.

c) When income is taxable Under Philippine tax system, compensation income, business
and professional income, capital gains and passive income not subject to final income
tax, and other income are added together to arrive at the amount of gross income of an
individual, and after deducting the allowable deductions from business and professional
income, capital gains and passive income not subject to final income tax, and other
income as well as personal and additional exemptions, if qualified, the graduated income
tax rates ranging from 5% to 32% are applied on the resulting net taxable income to
arrive at the income tax due and payable.

d) Tests to determine whether income is earned for tax purposes

Realization Test There is no taxable income until there is a separation

from capital of something of exchangeable value, thereby supplying the
realization or transmutation which would result in the result of income.
Claim of Right Doctrine A taxable gain is conditioned upon the presence
of a claim of right to the alleged gain and the absence of a definite
unconditional obligation to return or repay that which would otherwise
constitute a gain.
Economic Benefit test Any economic benefit to the employee that
increases his networth, whatever may have been the mode by which it is
effected, is taxable.
Income from Whatever Source All income not expressly excluded or
exempted from the class of taxable income, irrespective of the voluntary or
involuntary action of the taxpayer in producing the income, regardless of
the source of the income, is taxable.

9. Gross Income
a. Definition
gross income means all income derived from whatever means from legal or
illegal sources
b. Concept of income from whatever source derived
means all income derived from whatever source, including (but not limited to) the
following items:
(1) Compensation for services in whatever form paid, including, but not limited
to fees, salaries, wages, commissions, and similar items;
(2) Gross income derived from the conduct of trade or business or the exercise of

Page | 44
 a profession;
(3) Gains derived from dealings in property;
(4) Interests;
(5) Rents;
(6) Royalties;
(7) Dividends;
(8) Annuities;
(9) Prizes and winnings;
(10) Pensions; and
(11) Partner's distributive share from the net income of the general professional
partnership.
c. Gross Income vis--vis Net Income vis--vis Taxable Income
Gross income - all income derived from whatever source means from legal or
illegal sources before taxes and deductions
Net Income - Total revenue in an accounting period less all expenses during the
same period
Taxable Income - means Gross Income, less deductions and/or personal and
additional exemptions.
d. Classification of Income as to Source

1) Gross income and taxable income from sources within the Philippines
The following items of gross income shall be treated as gross income from
sources within the Philippines:
(1) Interests. - Interests derived from sources within the Philippines, and interests
on bonds, notes or other interest-bearing obligation of residents, corporate or
otherwise;
(2) Dividends. - The amount received as dividends:
(a) from a domestic corporation; and
(b) from a foreign corporation, unless less than fifty percent (50%) of the
gross income of such foreign corporation for the three-year period ending
with the close of its taxable year preceding the declaration of such
dividends or for such part of such period as the corporation has been in
existence) was derived from sources within the Philippines as determined
under the provisions of this Section; but only in an amount which bears the
same ration to such dividends as the gross income of the corporation for
such period derived from sources within the Philippines bears to its gross
income from all sources.
(3) Services. - Compensation for labor or personal services performed in the
Philippines;

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 (4) Rentals and Royalties. - Rentals and royalties from property located in the
Philippines or from any interest in such property, including rentals or royalties for
-
(a) The use of or the right or privilege to use in the Philippines any
copyright, patent, design or model, plan, secret formula or process,
goodwill, trademark, trade brand or other like property or right;
(b) The use of, or the right to use in the Philippines any industrial,
commercial or scientific equipment;
(c) The supply of scientific, technical, industrial or commercial knowledge
or information;
(d) The supply of any assistance that is ancillary and subsidiary to, and is
furnished as a means of enabling the application or enjoyment of, any such
property or right as is mentioned in paragraph (a), any such equipment as
is mentioned in paragraph (b) or any such knowledge or information as is
mentioned in paragraph (c);
(e) The supply of services by a nonresident person or his employee in
connection with the use of property or rights belonging to, or the
installation or operation of any brand, machinery or other apparatus
purchased from such nonresident person;
(f) Technical advice, assistance or services rendered in connection with
technical management or administration of any scientific, industrial or
commercial undertaking, venture, project or scheme; and
(g) The use of or the right to use:
(i) Motion picture films;
(ii) Films or video tapes for use in connection with television; and
(iii) Tapes for use in connection with radio broadcasting.
(5) Sale of Real Property. - Gains, profits and income from the sale of real
property located in the Philippines; and
(6) Sale of Personal Property. - Gains; profits and income from the sale of
personal property, as determined in Subsection (E) of this Section.

2) Gross income and taxable income from sources without the Philippines
1) Interests (other than those derived from sources within the Philippines)
2) Dividends (other than those derived from sources within the Philippines)
3) Compensation for labor or personal services performed w/o the Philippines
4) Rentals or royalties from property located w/o the Philippines or from any
interest in such property including rentals/royalties for the use of or for the
privilege of using w/o
the Philippines, patents, copyrights, secret processes & formulas, goodwill,
trademarks, trade brands, franchises & other like properties

Page | 46
 5) Gains, profits & income from the sale of real property located w/o the
Philippines

3) Income partly within or partly without the Philippines

These are:
1. Income from services rendered partly within and partly without;
2. Income from sale of personal property produced (in whole or in part) within
and sold without the Philippines; and
3. Income from sale of personal property produced (in whole or in part) without
and sold within the Philippines.
d. Sources of income subject to tax
1) Compensation Income
Compensation for services in whatever form paid, including, but not
limited to fees, salaries, wages, commissions, and similar items
2) Fringe Benefits
this tax is imposed to the employee but payable by the employer under the
withholding tax system.
Rank and file employees are exempt from Fringe Benefit Tax (FBT)
Only supervisory or managerial employee are liable to pay FBT, except if:
The FB is required by the nature of the employment;
Necessary to the trade, business or profession of the employer;
FB is for the convenience and advantage of the employer.

a) Special treatment of fringe benefits

Imposition of Tax.- A final tax of thirty-four percent (34%)
effective January 1, 1998; thirty-three percent (33%) effective
January 1, 1999; and thirty-two percent (32%) effective January 1,
2000 and thereafter, is hereby imposed on the grossed-up monetary
value of fringe benefit furnished or granted to the employee (except
rank and file employees as defined herein) by the employer,
whether an individual or a corporation (unless the fringe benefit is
required by the nature of, or necessary to the trade, business or
profession of the employer, or when the fringe benefit is for the
convenience or advantage of the employer). The tax herein
imposed is payable by the employer which tax shall be paid in the
same manner as provided for under Section 57 (A) of this Code.
The grossed-up monetary value of the fringe benefit shall be
determined by dividing the actual monetary value of the fringe
benefit by sixty-six percent (66%) effective January 1, 1998; sixty-
seven percent (67%) effective January 1, 1999; and sixty-eight
percent (68%) effective January 1, 2000 and thereafter: Provided,
however, That fringe benefit furnished to employees and taxable
under Subsections (B), (C), (D) and (E) of Section 25 shall be taxed
Page | 47
 at the applicable rates imposed thereat: Provided, further, That the
grossed -Up value of the fringe benefit shall be determined by
dividing the actual monetary value of the fringe benefit by the
difference between one hundred percent (100%) and the applicable
rates of income tax under Subsections (B), (C), (D), and (E) of
Section 25
b) Definition
means any good, service or other benefit furnished or granted in
cash or in kind by an employer to an individual employee (except
rank and file employees as defined herein) such as, but not limited
to, the following:
(1) Housing;
(2) Expense account;
(3) Vehicle of any kind;
(4) Household personnel, such as maid, driver and others;
(5) Interest on loan at less than market rate to the extent of the
difference between the market rate and actual rate granted;
(6) Membership fees, dues and other expenses borne by the
employer for the employee in social and athletic clubs or other
similar organizations;
(7) Expenses for foreign travel;
(8) Holiday and vacation expenses;
(9) Educational assistance to the employee or his dependents; and
(10) Life or health insurance and other non-life insurance
premiums or similar amounts in excess of what the law allows

c) Taxable and non-taxable fringe benefits

Fringe Benefits Not Taxable. - The following fringe benefits are
not taxable under this Section:
(1) fringe benefits which are authorized and exempted from tax
under special laws;
(2) Contributions of the employer for the benefit of the employee
to retirement, insurance and hospitalization benefit plans;
(3) Benefits given to the rank and file employees, whether granted
under a collective bargaining agreement or not; and
(4) De minimis benefits as defined in the rules and regulations to
be promulgated by the Secretary of Finance, upon recommendation
of the Commissioner
Fringe Benefits Taxable such as, but not limited to, the
following:
(1) Housing;
(2) Expense account;
(3) Vehicle of any kind;

Page | 48
 (4) Household personnel, such as maid, driver and others;
(5) Interest on loan at less than market rate to the extent of the difference
between the market rate and actual rate granted;
(6) Membership fees, dues and other expenses borne by the employer for
the employee in social and athletic clubs or other similar organizations;
(7) Expenses for foreign travel;
(8) Holiday and vacation expenses;
(9) Educational assistance to the employee or his dependents; and
(10) Life or health insurance and other non-life insurance premiums or
similar amounts in excess of what the law allows

3) Professional Income
income derived from the the exercise of a profession
4) Income from Business
income derived from conduct of trade or business
5) Income from Dealings in Property
Gains derived from dealings in property
a) Types of Properties
(1) Ordinary assets - Ordinary asset refers to all properties
specifically excluded from the definition of capital assets
under Sec. 39 (A)(1) of the NIRC these are:
(a) stock in trade of taxpayer
(b) property which would properly be included in an
inventory of the taxpayer, if on hand
(c) merchandise inventory
(d) depreciable assets used in the trade/business
(e) real property used in trade/business

(2) Capital assets - Capital asset means property held by

the taxpayer (whether or not connected with his trade or
business), but does not include :
(a) stock in trade of taxpayer
(b) property which would properly be included in an
inventory of the taxpayer, if on hand
(c) merchandise inventory
(d) depreciable assets used in the trade/business
(e) real property used in trade/business

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 b) Types of Gains from dealings in property
(1) Ordinary income vis--vis Capital gain
Ordinary income- includes any gain from the sale or
exchange of property which is not a capital asset or
property.
Capital gain - means the excess of the gains from sales or
exchanges of capital assets over the losses from such sales
or exchanges.
(2) Actual gain vis--vis Presumed gain
Actual gain - gains actually realized from the sale,
exchange, or other disposition of real property located in the
Philippines, classified as capital assets, including pacto de
retro sales and other forms of conditional sales, by
individuals, including estates and trusts.
Presumed gain - gains presumed to have been realized from
the sale, exchange, or other disposition of real property
located in the Philippines, classified as capital assets,
including pacto de retro sales and other forms of conditional
sales, by individuals, including estates and trusts.
(3) Long term capital gain vis--vis Short term capital
gain
Long term capital gain - Gain on the sale of a capital asset
held for more than one year.
Short term capital gain - Gain on the sale of a capital asset
held for one year or less.
(4) Net capital gain, Net capital loss
Net capital gain - means the excess of the gains from sales
or exchanges of capital assets over the losses from such
sales or exchanges.
Net Capital Loss - means the excess of the losses from sales
or exchanges of capital assets over the gains from such sales
or exchanges.
(5) Computation of the amount of gain or loss
(a) Cost or basis of the property sold
The basis of property shall be -
(1) The cost thereof in the case of property acquired on or after March 1, 1913, if
such property was acquired by purchase; or

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(2) The fair market price or value as of the date of acquisition, if the same was
acquired by inheritance; or
(3) If the property was acquired by gift, the basis shall be the same as if it would
be in the hands of the donor or the last preceding owner by whom it was not
acquired by gift, except that if such basis is greater than the fair market value of
the property at the time of the gift then, for the purpose of determining loss, the
basis shall be such fair market value; or
(4) If the property was acquired for less than an adequate consideration in money
or money's worth, the basis of such property is the amount paid by the transferee
for the property; or
(5) The basis as defined in paragraph (C)(5) of Section 40 of NIRC, if the
property was acquired in a transaction where gain or loss is not recognized under
paragraph (C)(2) of Section 40 NIRC.

(b) Cost or basis of the property exchanged in corporate

readjustment- , the entire amount of the gain or loss, as the case may be,
shall be recognize except:.
[1] Merger
No gain or loss shall be recognized if in pursuance of a plan of merger or
consolidation -

(a) A corporation, which is a party to a merger or consolidation, exchanges

property solely for stock in a corporation, which is a party to the merger or
consolidation; or
(b) A shareholder exchanges stock in a corporation, which is a party to the merger
or consolidation, solely for the stock of another corporation also a party to the
merger or consolidation; or
(c) A security holder of a corporation, which is a party to the merger or
consolidation, exchanges his securities in such corporation, solely for stock or
securities in such corporation, a party to the merger or consolidation.
No gain or loss shall also be recognized if property is transferred to a corporation
by a person in exchange for stock or unit of participation in such a corporation of
which as a result of such exchange said person, alone or together with others, not
exceeding four (4) persons, gains control of said corporation: Provided, That
stocks issued for services shall not be considered as issued in return for property.

[2] Consolidation
No gain or loss shall be recognized if in pursuance of a plan of merger or
consolidation -

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(a) A corporation, which is a party to a merger or consolidation, exchanges
property solely for stock in a corporation, which is a party to the merger or
consolidation; or
(b) A shareholder exchanges stock in a corporation, which is a party to the merger
or consolidation, solely for the stock of another corporation also a party to the
merger or consolidation; or
(c) A security holder of a corporation, which is a party to the merger or
consolidation, exchanges his securities in such corporation, solely for stock or
securities in such corporation, a party to the merger or consolidation.
No gain or loss shall also be recognized if property is transferred to a corporation
by a person in exchange for stock or unit of participation in such a corporation of
which as a result of such exchange said person, alone or together with others, not
exceeding four (4) persons, gains control of said corporation: Provided, That
stocks issued for services shall not be considered as issued in return for property.

[3] Transfer to a controlled corporation (tax-free exchanges)

are not subject to Income Tax under relevant provisions of
the same Code.
no gain or loss shall be recognized if property is transferred
to a corporation by a person in exchange for stock or unit of
participation in such corporation of which as a result of such
exchange said person, alone or together with others, not exceeding
four persons, gains control of said corporation

(c) Recognition of gain or loss in exchange of property

The gain from the sale or other disposition of property
shall be the excess of the amount realized therefrom over the basis
or adjusted basis for determining gain, and the loss shall be the
excess of the basis or adjusted basis for determining loss over the
amount realized. The amount realized from the sale or other
disposition of property shall be the sum of money received plus the
fair market value of the property (other than money) received;

[1] General rule

Except as provided in NIRC, upon the sale or exchange or
property, the entire amount of the gain or loss, as the case may be,
shall be recognized

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 [a] Where no gain or loss shall be recognized
No gain or loss shall be recognized if in pursuance of a plan
of merger or consolidation -
[2] Exceptions
[a] Meaning of merger, consolidation, control securities
The term 'merger' or 'consolidation', when used in this
Section, shall be understood to mean: (i) the ordinary merger or
consolidation, or (ii) the acquisition by one corporation of all or
substantially all the properties of another corporation solely for
stock: Provided, That for a transaction to be regarded as a merger
or consolidation within the purview of this Section, it must be
undertaken for a bona fide business purpose and not solely for the
purpose of escaping the burden of taxation: Provided, further, That
in determining whether a bona fide business purpose exists, each
and every step of the transaction shall be considered and the whole
transaction or series of transaction shall be treated as a single unit:
Provided, finally , That in determining whether the property
transferred constitutes a substantial portion of the property of the
transferor, the term 'property' shall be taken to include the cash
assets of the transferor.
[b] Transfer of a controlled corporation
The term 'control', when used in this Section, shall mean
ownership of stocks in a corporation possessing at least fifty-one
percent (51%) of the total voting power of all classes of stocks
entitled to vote.

(6) Income tax treatment of capital loss

(a) Capital loss limitation rule (applicable to both corporations and

individuals)
Losses from sales or exchanges of capital assets shall be allowed only to
the extent of the gains from such sales or exchanges. If a bank or trust
company incorporated under the laws of the Philippines, a substantial part
of whose business is the receipt of deposits, sells any bond, debenture,
note, or certificate or other evidence of indebtedness issued by any
corporation (including one issued by a government or political subdivision
thereof), with interest coupons or in registered form, any loss resulting
from such sale shall not be subject to the foregoing limitation and shall not
be included in determining the applicability of such limitation to other
losses.

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 (b) Net loss carry-over rule (applicable only to individuals)
if any taxpayer, other than a corporation, sustains in any taxable year a net
capital loss, such loss (in an amount not in excess of the net income for
such year) shall be treated in the succeeding taxable year as a loss from the
sale or exchange of a capital asset held for not more than twelve (12)
months.

(7) Dealings in real property situated in the Philippines

The provisions of Section 39(B of NIRC notwithstanding, a final tax of six
percent (6%) based on the gross selling price or current fair market value
as determined in accordance with Section 6(E) of this Code, whichever is
higher, is hereby imposed upon capital gains presumed to have been
realized from the sale, exchange, or other disposition of real property
located in the Philippines, classified as capital assets, including pacto de
retro sales and other forms of conditional sales, by individuals, including
estates and trusts: Provided, That the tax liability, if any, on gains from
sales or other dispositions of real property to the government or any of its
political subdivisions or agencies or to government-owned or controlled
corporations shall be determined either under Section 24 (A) or under this
Subsection, at the option of the taxpayer.

(8) Dealings in shares of stock of Philippine corporations

(a) Shares listed and traded in the stock exchange
There shall be levied, assessed and collected on every sale, barter,
exchange, or other disposition of shares of stock listed and traded through
the local stock exchange other than the sale by a dealer in securities, a tax
at the rate of one-half of one percent (1/2 of 1%) of the gross selling price
or gross value in money of the shares of stock sold, bartered, exchanged or
otherwise disposed which shall be paid by the seller or transferor.
(b) Shares not listed and traded in the stock exchange
There shall be levied, assessed and collected on every sale, barter,
exchange or other disposition through initial public offering of shares of
stock in closely held corporations, as defined herein, a tax at the rates
provided hereunder based on the gross selling price or gross value in
money of the shares of stock sold, bartered, exchanged or otherwise
disposed in accordance with the proportion of shares of stock sold,
bartered, exchanged or otherwise disposed to the total outstanding shares
of stock after the listing in the local stock exchange:

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 (9) Sale of principal residence
from the sale or disposition of their principal residence by natural
persons, the proceeds of which is fully utilized in acquiring or constructing
a new principal residence within eighteen (18) calendar months from the
date of sale or disposition, shall be exempt from the capital gains tax
imposed under this Subsection: Provided, That the historical cost or
adjusted basis of the real property sold or disposed shall be carried over to
the new principal residence built or acquired: Provided, further, That the
Commissioner shall have been duly notified by the taxpayer within thirty
(30) days from the date of sale or disposition through a prescribed return
of his intention to avail of the tax exemption herein mentioned: Provided,
still further, That the said tax exemption can only be availed of once every
ten (10) years: Provided, finally, that if there is no full utilization of the
proceeds of sale or disposition, the portion of the gain presumed to have
been realized from the sale or disposition shall be subject to capital gains
tax. For this purpose, the gross selling price or fair market value at the
time of sale, whichever is higher, shall be multiplied by a fraction which
the unutilized amount bears to the gross selling price in order to determine
the taxable portion and the tax prescribed under paragraph (1) of this
Subsection shall be imposed thereon.

6) Passive Investment Income

a) Interest Income

Interest from any currency bank deposit and yield or any other monetary
benefit from deposit substitutes and from trust funds and similar
arrangements 20%

Interest income derived by a resident individual or domestic corporation

(Note: non-resident citizen not included) from a depository bank under the
expanded foreign currency deposit system 7.5%
Interest income from long-term deposit or investment evidenced by
certificates prescribed by BSP
a. Exempt if investment is held for more than five years
b. If investment is pre-terminated, interest income on such
investment shall be subject to the following rates:
20% - if pre-terminated in less than 3 years
12% - if pre-terminated after 3 years to less than 4
years
5% - if pre-terminated after 4 years to less than 5
years

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b) Dividend Income

Dividends means any distribution made by a corporation to its

shareholders out of its earnings on profits and payable to its shareholders,
whether in money or in other property.

(1) Cash dividend

Ten percent (10%) final tax on Cash dividend actually or

constructively received from a domestic corporation or from a joint
stock company, insurance or mutual fund companies and regional
operating headquarters of multinational companies.

(2) Stock dividend

A stock dividend representing the transfer of surplus to capital

account shall not be subject to tax. It shall be taxable only if
subsequently cancelled and redeemed by the corporation. It is also
taxable if it leads to a substantial alteration in the proportion of tax
ownership in a corporation.

(3) Property dividend

Ten percent (10%) final tax on Property dividend actually or

constructively received from a domestic corporation or from a joint
stock company, insurance or mutual fund companies and regional
operating headquarters of multinational companies.

(4) Liquidating dividend

Where a corporation distributes all its assets in complete

liquidation or dissolution, the gain realized or loss sustained by the
stockholder, whether individual or corporation, is a taxable income
or deductible loss, whichever is applicable.

c) Royalty Income

Royalties, except on books, as well as other literary works and musical

compositions 20%

Royalties on books, literary works and musical compositions 10%

Page | 56
d) Rental Income

An operating lease is a contract under which the asset is not wholly

amortized during the primary period of the lease, and where the lessor
does not rely solely on the rentals during the primary period for his profits,
but looks for the recovery of the balance of his costs and for the rests of
his profits from the sale or re-lease of the returned assets at the end of the
primary lease period.

Finance lease, also called full payout lease is a contract involving

payment over an obligatory period (also called primary or basic period) of
specified rental amounts for the use of a lessors property, sufficient in
total to amortize the capital outlay of the lessor and to provide for the
lessors borrowing costs and profits.

(1) Lease of personal property

(2) Lease of real property

(3) Tax treatment of

(a) Leasehold improvements by lessee

(b) VAT added to rental/paid by the lessee

VAT on rental for the use or lease of properties in the

Philippines shall be based on the contract price agreed upon
by the lessor and the lessee.

(c) Advance rental/long term lease

Advance payment can be in the form of:

i. A loan to the lessor from the lessee; or

ii. An option money for the property; or
iii. A security deposit to insure the faithful
performance of certain obligations of the lessee
to the lessor; or
iv. Pre-paid rental.

If the advance payment is for the faithful

performance of certain obligations of the
lessee, it is not subject to VAT

Page | 57
 A security deposit that is applied to
rental shall be subject to VAT at the time
of its application.

If the advance payment constitutes a

prepaid rental, then such payment is
taxable to the lessor in the month when
received, irrespective of the accounting
method employed by the lessor.

7) Annuities, Proceeds from life insurance or other types of insurance

8) Prizes and awards

Prizes over P10,000.00 20%

Note: Prizes less than P10,000.00 are included in the income tax of the
individual subject to the schedular rate of 5% up to P125,000 + 32% of
excess over P500,000.00)
Other winnings, except PCSO and lotto, derived from sources within the
Philippines 20%

9) Pensions, retirement benefit, or separation pay

Excluded from the computation of Gross Income are the following:

Retirement benefits under RA No. 7641 or a reasonable private

benefit plan;

Amount received by an official or employee or by his heirs from

the employer due to separation from the service because of death,
sickness or other physical disability or for any cause beyond the
control of the official or employee;

Social security benefits, retirement gratuities, pensions and other

similar benefits received by resident or non-resident citizens or
resident aliens from foreign government agencies and other
institutions, private or public;

Payment of benefits to a resident person under the United States

Veterans Administration;

Benefits received from or enjoyed under the Social Security

System;

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 Benefits received from the Government Service Insurance System,
including retirement gratuity received by government officials and
employees.

Requisites for exclusion of retirement benefits

1. It must be received under RA 7641 or in accordance with a reasonable

private benefit plan maintained by the employer.

2. Retiring employee or official has been in the service of the same employer
for at least ten (10) years and is not less than fifty (50) years of age at the
time of his retirement.

3. Benefits granted under the provision shall be availed of by an official or

employee only once.

Reasonable private benefit plan

It means a pension, gratuity, stock bonus or profit sharing plan maintained

by an employer for the benefit of some or all of his officials or employees,
or both, for the purpose of distributing to such officials and employees the
earnings and principal of the fund thus accumulated, and wherein it is
provided in said plan that at no time shall any part of the corpus or income
of the fund be used for, or be diverted to, any purpose other than for the
exclusive benefit of the said officials and employees.

Separation pay and amounts received due to involuntary separation

Any amount received by an official or employee or by his heirs from the

employer due to death, sickness or other physical disability or for any
cause beyond the control of the said official or employee is excluded from
gross income.

Cause beyond the control of the employee

The phrase for any cause beyond the control of the said official or
employee connotes involuntariness on the part of the official or
employee. The separation from the service of the official or employee
must not be asked for or initiated by him. [Section 2.78.1, Revenue

Page | 59
 Regulation 2-98] The separation was not of his own making and therefore
involuntary.

Terminal leave pay

Commutation of leave credits or terminal leave pay are given not only at
the same time but also for the same policy considerations governing
retirement benefits. Thus, not being part of the gross salary or income but
a retirement benefit, terminal pay is not subject to income tax.
[Commissioner v. Court of Appeals, 203 SCRA 72] Terminal leave pay is
exempt from income tax. [Zialcita case, 190 SCRA 851]

10) Income from any source whatever

a) Forgiveness of indebtedness

The cancellation and forgiveness of indebtedness may, dependent upon the

circumstances, amount to:

1. a payment of income;
2. a gift; or
3. a capital transaction.

If, for example, an individual performs services for a

creditor who, in consideration thereof cancels the debt,
income to that amount is realized by the debtor as
compensation for his service.

If, however, a creditor merely desires to benefit a debtor

and without any consideration thereof cancels the debt, the
amount of the debt is a gift from the creditor to the debtor
and need not be included in the latters gross income.

If a corporation to which a stockholder is indebted forgives

the debt, the transaction has the effect of payment of a
dividend. [Section 50, Revenue Regulations 2]

b) Recovery of accounts previously written off

Recovery or collection of accounts previously written of shall be

considered as income.

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 c) Receipt of tax refunds or credit

Taxes previously allowed as deductions, when refunded or credited, shall

be included as part of gross income in the year of receipt to the extent of
the income tax benefit of said deduction.

d) Income from any source whatever

Recovery of damages (compensation for injury, from tortious acts) Not

Taxable
Return of Capital Taxable
Income derived from Illegal business - Taxable
Recovery of lost earnings - Taxable

e. Source rules in determining income from within and without

1) Interests - residence of the debtor

2) Dividends -
a) From a domestic corporation deemed income from within
the Philippines
b) From a foreign corporation deemed income from without
provided more than 50% of the corporations worldwide
income is not derived from Philippine sources.

3) Services Place of Performance

4) Rentals Location of Property

5) Royalties Place of use or location of intangibles (such as patents,

trademarks, etc.) giving rise to royalties;

6) Sale of real property Location of Property

7) Sale of personal property Place of sale

8) Shares of stock of domestic corporation Philippine source

f. Situs of Income Taxation (See page 2 under Inherent Limitations, Territorial)

Situs of Taxation is the place or authority that has the right to impose and collect
taxes. The state where the subject to be taxed has a situs may rightfully levy and

Page | 61
 collect the tax. The situs is necessarily in the state which has jurisdiction or which
exercises dominion over the subject in question.

g. Exclusions from Gross Income

1) Rationale for the exclusions

Exclusion refers to income received or earned but is not taxable as income

because it is exempted by law or by treaty. Such tax-free income is not to
be included in the income tax return unless information regarding it is
specifically called for.

2) Taxpayers who may avail of the exclusions

3) Exclusions distinguished from deductions and tax credit

Deduction is an amount allowed by law to be subtracted from gross

income to arrive at taxable income. Exclusion refers to income received or
earned but is not taxable as income because exempted by law or by treaty.
Such tax-free income is not to be included in the income tax return unless
information regarding it is specifically called for. [Section 61, Revenue
Regulation 2]

Tax credit refers to the taxpayers right to deduct from the income tax due
the amount of tax he has paid to a foreign country subject to limitations.

4) Under the Constitution

a) Income derived by the government or its political subdivisions from the
exercise of any essential governmental function.

Income derived from any public utility or from the exercise of any
essential governmental function accruing to the Government or to any
political subdivision thereof shall be excluded from the computation of
Gross Income.

5) Under the Tax Code

a) Proceeds of life insurance policies

Proceeds of life insurance policies paid to the heirs/beneficiaries

upon the death of the insured:

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 If such amounts are held by the insurer under an agreement
to pay interest, the interest payments shall be included in
the Gross Income;
Insured must die to avail of total exemption. If he survives,
there/s only partial exemption to the extent that the
proceeds constitute return of capital (total amount of
premiums paid)

b) Return of premium paid

Amount Received by Insured as Return of Premium under life

insurance, endowment, or annuity contracts, received either during
the term or at the maturity of the terms or upon surrender of the
contract.

c) Amounts received under life insurance, endowment or annuity

contracts

Amount Received by Insured as Return of Premium under life

insurance, endowment, or annuity contracts, received either during
the term or at the maturity of the terms or upon surrender of the
contract.

d) Value of property acquired by gift, bequest, devise or descent

But, income from such property shall be included in Gross Income;

Must be characterized by disinterested generosity and pure
liberality;
Difficult to establish gift situations if there is an Employer-
Employee relationship (A bonus/assistance as recognition of
service rendered is not exempt);
If given under a) constraining force of any moral or legal duty or
b) from the incentive of an anticipated benefit of an economic
nature or c) where it is a return for services rendered, proceeds
cannot qualify as a gift;
Most critical consideration is the givers intention or motive.
Can be a gift if given on account of filial relationship.

e) Amount received through accident or health insurance

Compensation for Injuries or Sickness:

Received through Accident/Health Insurance or
Workmens Compensation Act, as compensation for
personal injuries/sickness plus amount of damages
received on account of such injuries/sickness;

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 Damages will be exempt only if they arise together with
personal injury; however, if damages only amount to
return of capital, it is exempt (Ex. Damages from car
accident exempt only if claim includes compensation
for personal injury. If no personal injury, damages for
car wreckage will only be exempt to the extent of the
amount of the actual damage.)

Must be physical injury, not injury to rights.

f) Income exempt under tax treaty

Income Exempt under Treaty shall be exempt to the extent

required by any treaty.

g) Retirement benefits, pensions, gratuities, etc.

h) Winnings, prizes, and awards, including those in sports competition

Prizes and awards in recognition of religious, charitable,

scientific, educational, artistic, literary or civic achievement

1. Made primarily in recognition of religious, charitable,

scientific, educational, artistic, literary or civic
achievement.

2. The recipient was selected without any action on his part to

enter the contest or proceeding.

3. The recipient is not required to render substantial future

services as a condition to receiving the prize or award.

Prizes and awards in sports competitions

1. Prizes and awards must be granted to athletes in local and

international sports competitions and tournaments.

2. Sports competition or tournament held either in the

Philippines or abroad.

3. Sports competition or tournament must be sanctioned by

their natural sports associations.

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 6) Under a Tax Treaty

7) Under Special Laws

a) 13th month pay & other benefits (i.e. productivity incentives & Christmas
bonus), provided that total exclusion shall not be more than P30,000.00;

b) GSIS, SSS, Medicare, Pag-ibig contributions & union dues of individuals;

c) Gains form the sale of bonds, debentures or other certificates of

indebtedness with a maturity of more than 5 years;

d) Gains from redemption of shares in mutual fund.

(f) Depreciation

Depreciation is the gradual diminution in the service or useful value of tangible

property due from exhaustion, wear and tear and normal obsolescence. It also applies to
amortization of intangible assets, the use of which in trade or business is of limited
duration. Depreciation commences with the acquisition of the property or with its
erection.

(i) Requisites
1. The allowance for depreciation must be reasonable.
2. It must be for property used for employment in trade or business or out
of its not being used temporarily during the year.
3. The allowance must be charged off.
4. Schedule on the allowance must be attached to the return.

(ii) Methods

[1] Straight-line Method

COST SALVAGE VALUE

Estimated Life

example:
cost=50,000
Salvage Value=10,000
estimated life=10 years

50,000 - 10,000 = 4,000

10 years

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[2] Declining- balance method

cost - accumulated depreciation x rate

estimated life

example:
rate= 200%

year 1 -- 50,000 - 0 x 200% = 10,000

10

year 2 -- 50,000 10,000 x 200% = 8,000

10

[3] Sum-of-the-years-digit method

nth period x (cost - salvage value)

sum of the years digits

example:

Sum of the years digit is 5+4+3+2+1 = 15

year 1 -- 5 x (50,000 - 10,000) = 13,333.33

15

year 2 -- 4 x (50,000 - 10,000) = 10,666.66

15

(g) Charitable and other Contributions

(i) Requisites 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 any
private stockholder or individual.

(ii) Amount that may be Deducted

Contributions or gifts actually paid or made within the taxable year to:
1. Or for the use of the Government of the Philippines or any of its
agency or any political subdivision thereof exclusively for public
purposes,

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 2. Accredited domestic corporations or associations organized and
operated exclusively for religious, charitable, scientific, youth and
sports development, cultural or educational purposes or for the
rehabilitation of veterans, or to social welfare institutions, or to
NGOs,

No part of the net income of which inures to the benefit of any private
stockholder or individual in an amount not in excess of 10% in the case of
an individual, and 5% in the case of a corporation, of the taxpayers
taxable income derived from trade, business or profession as computed
without the benefit of the following subparagraphs. The contribution is
given to a juridical person, full or with limitation.

Contributions deductible in Full:

1. Donations to the Government
2. Donations to Certain Foreign Institutions or International
Organizations
3. Donations to Accredited Non-Government Organizations

(h) Contributions to pension trusts

i. Requisites for Deductibility

1. The employer must have established a pension or retirement plan to
provide for the payment of reasonable pensions to his employees;
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 and
disposition of the employer;
5. The payment has not yet been allowed as a deduction; and
6. The deduction is apportioned in equal parts over a period of 10
consecutive years beginning with the year in which the transfer of
payment is made.

(4) Optional Standard Deduction (OSD)

a. Individuals, except non-resident aliens

An individual subject to tax under Section 24, other than a nonresident

alien, may elect a standard deduction in an amount not exceeding forty
percent (40%) of his gross sales or gross receipts, as the case may be.

b. Corporation, except non-resident foreign corporation

A corporation subject to tax, may elect a standard deduction in an amount

not exceeding forty percent (40%)of its gross income.

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 An election of an OSD, when made in the return, shall be irrevocable for the
taxable year for which the return is made: Provided, that an individual who is entitled to
and claimed for the OSD shall not be required to submit with his tax return such financial
statements otherwise required in this Code.

(5) Personal and additional exemptions (RA No. 9504 Minimum Wage Earner Law)

(a) Basic Personal Exemptions

Individuals have personal exemptions only on their taxable income. The

basic exemption is P50,000 regardless of status.

(b) Additional exemptions for taxpayers with dependents

A dependent means a legitimate, illegitimate or legally adopted

child chiefly dependent upon and living with the taxpayer if such
dependent is not more than 21 years of age, unmarried and not gainfully
employed or if such dependent, regardless of age, is incapable of self-
support because of mental or physical defect.

There shall be allowed an additional exemption of P25,000 for

each dependent not exceeding four (4).

The additional exemption for dependents shall be claimed by only

one of the spouses in the case of married individuals. In the case of
legally separated spouses, additional exemptions may be claimed only by
the spouse who has custody of the child or children. Provided, that the
total amount of additional exemptions that may be claimed by both shall
not exceed the maximum additional exemptions allowed.

(c) Status at the end of the year Rule

If the taxpayer marries or should have additional dependents as

defined above during the taxable year, the taxpayer may claim the
corresponding additional exemption, as the case may be, in full for such a
year.

If the taxpayer dies during the taxable year, his estate may still
claim the personal and additional exemptions for himself and his
dependents as if he died at the close of the year.

If the spouse or any of the dependents dies or if any of such

dependents marries, or becomes 21 years old or becomes gainfully
employed during the taxable year, the taxpayer may still claim the same
exemptions as if the spouse or any of the dependents died, or married, or

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 became 21 years old or became gainfully employed at the close of such
year.

(6) Items not deductible

(a) General Rules

In computing net income, no deduction shall in any case be allowed in respect

to -

(1) Personal, living or family expenses;

(2) Any amount paid out for new buildings or for permanent improvements, or
betterments made to increase the value of any property or estate;

This Subsection shall not apply to intangible drilling and development costs
incurred in petroleum operations which are deductible under Subsection (G)
(1) of Section 34 of this Code.

(3) Any amount expended in restoring property or in making good the

exhaustion thereof for which an allowance is or has been made; or

(4) Premiums paid on any life insurance policy covering the life of any officer
or employee, or of any person financially interested in any trade or business
carried on by the taxpayer, individual or corporate, when the taxpayer is
directly or indirectly a beneficiary under such policy.

(b) Losses from sales or Exchange of Property

In computing net income, no deductions shall in any case be allowed in respect of

losses from sales or exchanges of property directly or indirectly -
(1) Between members of a family. For purposes of this paragraph, the family
of an individual shall include only his brothers and sisters (whether by the
whole or half-blood), spouse, ancestors, and lineal descendants; or

(2) Except in the case of distributions in liquidation, between an individual and

corporation more than fifty percent (50%) in value of the outstanding stock of
which is owned, directly or indirectly, by or for such individual; or

(3) Except in the case of distributions in liquidation, between two corporations

more than fifty percent (50%) in value of the outstanding stock of which is
owned, directly or indirectly, by or for the same individual if either one of such
corporations, with respect to the taxable year of the corporation preceding the
date of the sale of exchange was under the law applicable to such taxable year,
a personal holding company or a foreign personal holding company;

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(4) Between the grantor and a fiduciary of any trust;

(5) Between the fiduciary of and the fiduciary of a trust and the fiduciary of
another trust if the same person is a grantor with respect to each trust; or

(6) Between a fiduciary of a trust and beneficiary of such trust.

(c) Non-deductible Interest

(1) interest paid in advance through discount or otherwise(in case of cash basis
taxpayer) is allowed as deduction in the year the debt is paid. if indebtedness is
payable in periodic amortizations, interest is deducted in proportion of the amount
of the principal paid.

(2) payments made:

1. between members of a family (include only brothers & sisters, spouse,

ancestors, & lineal descendants)

2. between an individual & a corporation more than 50% in value of

outstanding stock is owned by such individual (except in case of
distributions in liquidation)

3. between 2 corps. more than 50% in value of outstanding stock owned

by same individual, if either one is a personal holding company or a
foreign holding company during the taxable year preceding the date of
sale/exchange

4. between grantor & fiduciary of any trust

5. between Fiduciary of a trust & the fiduciary of another if same person is

a grantor to each trust

6. between Fiduciary & a beneficiary of a trust

7. indebtedness is incurred by a service contractor to finance petroleum

corporation

8. interest on preferred stock which in reality is dividend

9. interest on unpaid salaries and bonuses

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 10. interest calculated for cost keeping on account of capital or surplus
invested in business which does not represent charges arising under
interest-bearing obligation

11. interest paid when there is no stipulation for the payment thereof

(d) Non-deductible Taxes

(1) Philippine income tax (but FBT can be deducted from gross income RR 8-
98)

(2) income tax imposed by authority of any foreign country (except when the
taxpayer signifies his desire to avail of the tax credit for taxes of foreign
countries)

(3) estate & donors taxes

(4) taxes assessed against local benefits of a kind tending to increase the value
of the property assessed

(5) final taxes, being in the nature of income tax

(6) special assessments

(e) Losses from Wash Sales of Stock or Securities

Wash Sale is a taxpayer scheme to recognize a deductible loss in his tax

return by
selling shares at a loss when the shares sold are substantially identical stock or
securities of that which were purchased or acquired beginning 30 days before the
date of sale and ending 30 days after the sale. Wash sales losses are not
deductible from gains derived from wash sales transactions.

Non-deduction of wash sales does not apply if the dealers transaction of stocks
and securities is made in the ordinary course of business.

J. Exempt Corporations

(A) Labor, agricultural or horticultural organization not organized principally for

profit;

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(B) Mutual savings bank not having a capital stock represented by shares, and
cooperative bank without capital stock organized and operated for mutual
purposes and without profit;

(C) A beneficiary society, order or association, operating fort he exclusive benefit

of the members such as a fraternal organization operating under the lodge system,
or mutual aid association or a nonstock corporation organized by employees
providing for the payment of life, sickness, accident, or other benefits exclusively
to the members of such society, order, or association, or nonstock corporation or
their dependents;

(D) Cemetery company owned and operated exclusively for the benefit of its
members;

(E) Nonstock corporation or association organized and operated exclusively for

religious, charitable, scientific, athletic, or cultural purposes, or for the
rehabilitation of veterans, no part of its net income or asset shall belong to or
inures to the benefit of any member, organizer, officer or any specific person;

(F) Business league chamber of commerce, or board of trade, not organized for
profit and no part of the net income of which inures to the benefit of any private
stock-holder, or individual;

(G) Civic league or organization not organized for profit but operated exclusively
for the promotion of social welfare;

(H) A nonstock and nonprofit educational institution;

(I) Government educational institution;

(J) Farmers' or other mutual typhoon or fire insurance company, mutual ditch or
irrigation company, mutual or cooperative telephone company, or like
organization of a purely local character, the income of which consists solely of
assessments, dues, and fees collected from members for the sole purpose of
meeting its expenses; and

(K) Farmers', fruit growers', or like association organized and operated as a sales
agent for the purpose of marketing the products of its members and turning back
to them the proceeds of sales, less the necessary selling expenses on the basis of
the quantity of produce finished by them;

Notwithstanding the provisions in the preceding paragraphs, the income of

whatever kind and character of the foregoing organizations from any of their
properties, real or personal, or from any of their activities conducted for profit
regardless of the disposition made of such income, shall be subject to tax imposed
under this Code.

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10. Taxation of Resident Citizens, Non-resident Citizens, and Resident Aliens

a. General Rule: Resident Citizens Taxable on Income from all Sources

within and without the Philippines

A citizen of the Philippines residing therein is taxable on all income

derived from sources within and without the Philippines.

b. Taxation on Compensation Income

(1) Inclusions

(a) Monetary Compensation

(i) Regular salary/wage

The tax shall be computed in accordance with and at the rates

established in the following schedule:

Not over P10,000....5%

Over P10,000 but not over P30,000P500+10% of
the excess over P10,000
Over P30,000 but not over P70,000P2,500+15% of
the excess over P30,000
Over P70,000 but not over P140,000..P8,500+20% of
the excess over P70,000
Over P140,000 but not over P250,000P22,500+25% of
the excess over P140,000
Over P250,000 but not over P500,000P50,000+30% of
the excess over P250,000
Over P500,000 ..... P125,000+34% of the
excess over P500,000 in 1998.

For married individuals, the husband and wife, subject to the

provision of Section 51 (D) hereof, shall compute separately their
individual income tax based on their respective total taxable income:
Provided, That if any income cannot be definitely attributed to or
identified as income exclusively earned or realized by either of the
spouses, the same shall be divided equally between the spouses for the
purpose of determining their respective taxable income.

Provided, that minimum wage earners shall be exempt from the

payment of income tax on their taxable income: Provided, further, that
the holiday pay, overtime pay, night shift differential pay and hazard

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 pay received by such minimum wage earners shall likewise be exempt
from income tax.

(ii) Separation pay/retirement benefit not otherwise exempt

Retirement under a Collective Bargaining Agreement is taxable

for being voluntary. If the company has no BIR approved retirement
plan, an employee who is separated against his will but who signed a
CBA, the retirement benefits under the CBA is taxable because by
signing the CBA, it makes his separation voluntary.

(iii) Bonuses, 13th month pay, and other benefits not exempt

These are gross benefits received by officials and employees of

public and private entities; Provided, that the total exclusion under this
subparagraph shall not exceed P30,000.

(b) Non-monetary compensation

(i) Fringe Benefit not Subject to Tax

Fringe benefits are goods, services or other benefit furnished or

granted or furnished in cash or in kind by an employer to an individual
employee.

Fringe Benefit Tax is imposed to the employee but payable by

the employer under the withholding tax system. Rank and file
employees are exempt from Fringe Benefit Tax. Only supervisory or
managerial employees are liable to pay Fringe Benefit Tax.

Fringe benefits which are authorized and exempted from tax

under special laws, Contributions of the employer for the benefit of the
employee to retirement, insurance and hospitalization benefit plans are
also non-taxable Fringe Benefits.

(2) Exclusions

(a) Fringe Benefit Subject to Tax

Only supervisory or managerial employees are liable to pay Fringe

Benefit Tax, except if:

1. The Fringe benefit is required by the nature of the employment;

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 2. It is necessary to the trade, business or profession of the
employer;
3. It is for the convenience and advantage of the employer.

Fringe benefit given to employees which are non-residents alien

individual not engaged in trade or business within the Philippines
including special alien individuals shall not be subject to Fringe Benefit
Tax but regular rates under section 25, Tax on Nonresident Alien
Individuals.

If the Fringe Benefit is already subjected to Fringe benefit tax, it is

no longer subject to tax as compensation income. Moreover, if it is
exempted from Fringe Benefit Tax, it would still be subject to
compensation income tax, unless the employee is also exempted from the
income tax.

(b) De minimis benefits

De minimis benefits mean benefits of small value, such as laundry

allowance, medical benefits, and uniform allowance. These benefits are
exmpted both from Fringe benefit and compensation income tax.

(c) 13th Month Pay and other Benefits and payments specifically
excluded from taxable compensation income

Thirteenth month pay are exempted if received by public or private

entities. The first P30,000 would be exempted, the excess would be
subjected to income tax. The term other benefits includes Christmas
bonus, monthly bonus, quarterly bonus, and all other such as the different
MWSS bonus.

(3) Deductions

(a) Personal exemptions and additional exemptions

Previously discussed.

(b) Health and hospitalization Insurance

Health and hospitalization insurance is the amount of

premium on health and or hospitalization paid by an individual
taxpayer (head of family or married), for himself and members of
his family during the taxable year.

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Requisites for Deductibility:

a. Insurance must have actually been taken;

b. The amount of premium deductible from gross income does not
exceed P2400 per family or P200 per month during the taxable
year;
c. That said family had a gross income of not more than P250,000
for the taxable year;
d. In case of married individuals, only the spouse claiming
additional exemption shall be entitled to this deduction.

Who may Avail of this deduction:

1. Individual taxpayers earning purely compensation income

during the year.
2. Individual taxpayers earning business income or in practice of
his profession whether availing of itemized or optional standard
deductions during the year.

(c) Taxation of compensation income of a minimum wage

earner

(i) Statutory Minimum Wage

The term 'statutory minimum wage' shall refer to rate

fixed by the Regional Tripartite Wage and Productivity Board,
as defined by the Bureau of Labor and Employment Statistics
(BLES) of the Department of Labor and Employment (DOLE)

(ii) Minimum Wage Earner

The term 'minimum wage earner' shall refer to a

worker in the private sector paid the statutory minimum wage,
or to an employee in the public sector with compensation
income of not more than the statutory minimum wage in the
non-agricultural sector where he/she is assigned.

(iii) Income also Subject to Tax Exemption: Holiday

pay, Overtime pay, Night shift Differential, and
Hazard pay

Minimum wage shall be exempt from the payment of

income tax on their taxable income: Provided, further, That the
holiday pay, overtime pay, night shift differential pay and hazard

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 pay received by such minimum wage earners shall likewise be
exempt from income tax.

c. Taxation of Business Income/ Income from Practice of Profession

d. Taxation of Passive Income

(1) Passive income subject to final tax

(a) Interest Income

In general, interest received or credited to the account of the

depositing or investor are included in their gross income, unless they are
exempt from tax or subject to final tax at preferential rate under the 1997
Tax Code or under the applicable tax treaty.

Interest income has to be examined closely to determine whether it

is taxable in the Philippines, and if so, what kind of income tax and what
rate of tax shall apply to it.

(c) Royalties

Royalty is a valuable property that can be developed and sold on a

regular basis for a consideration; in which case, any gain derived
therefrom is considered as an active business income subject to the normal
corporate income tax. Where a person pays royalty to another for the use
of its intellectual property, such royalty is a passive income of the owner
thereof subject to final withholding tax.

(c) Dividends from Domestic Corporation

Dividends issued by domestic corporation are always considered
as income derived from sources within the Philippines. There is no further
requirement. As long as the issuing corporation is a domestic corporation,
the dividends are taxable.

a. Dividend is paid by a domestic corporation

Recipient is a citizen or resident alien

Up to Dec. 31, 1997, cash dividend or property dividend paid by a

domestic corporation was exempt from income tax pursuant to the
provisions of the 1977 Tax Code, as amended.

Beginning Januar 1, 1998, cash dividend or property dividend paid

by a domestic corporation or a joint stock company, insurance or mutual
fund company, or on the share of a individual in the distributable net
income after tax of a partnership (except a general professional

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 partnership) of which he is a partner, or on the share of an individual in the
net income after tax of a association, joint account, or joint venture or
consortium taxable as a corporation of which he is a member or co-
venturer, out of its earning or profits in 1998 or succeeding years, is
generally subject to the ff final withholding tax rates:

6% - beginning January 1, 1998; or

8% - beginning January 1, 1999; or
10%- beginning January 1, 2000.

The appropriate tax rate to be deducted and withheld on the cash

dividend by teh paying corporation shall be the rate prescribed in the year
of receipt of such dividend (not the rate in the year of declaration of such
dividend.

Recipient is a non-resident alien engaged in trade or business in teh Philippines

Cash and/or property dividends shall be subject to 20% final withholding tax.

Recipient is a non-resident alien not engaged in trade or business in the Philippines

Cash and/or property dividends shall be subject to the final withholding tax rate of
2%
(d) Prizes and other winnings
Prizes (except prizes amounting to P10,000 or less) and other
winnings (except PSCO and lotto winnings) from sources within the
Philippines shall be subject to 20% final withholding tax, if received by a
citizen, resident alien or non-resident alien engaged in trade or business in
the Philippines. However, if the recipient is a non-resident alien not
engage in trade or business in the Philippines, the prizes and other
winnings shall be subject to 25% final withholding tax. And if the
recipient is a corporation (domestic or foreign), the prizes and other
winnings are added to the corporations operating income and the net
income is subject to 35% corporate income tax.

(2) Passive income not subject to final tax

e. Taxation of capital gains

(1) Income from sale of shares of stock of a Philippine corporation

(a) Shares traded and listed in the stock exchange

The transaction is subject to a final percentage tax of of 1% of the gross

selling price. The tax is imposed regardless of whether a gain is derived or
not.

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 (b) Shares not listed and traded in the stock exchange

The net capital gain is subject to a final capital gains tax of 5%-10%. The
transaction shall only be subject to tax if it results into a gain.
(2) Income from the sale, exchange, or other disposition of other capital
assets

A final income tax of 6% is imposed on the gain presumed to have been

realized on the sale, exchange or disposition of land and/or buildings which are
classified as capital assets, based on the gross selling price or FMV, whichever is
higher. The rules on individuals taxpayers with respect to sale of real property
which is a capital asset located in the Philippines is also applicable to domestic
corporations, however, the real properties which can be subject under this
provision are only land and/or buildings, unlike in the case of individuals which
includes all the immovable properties enumerated in Art 415 of the civil code.

11. Taxation of Non-resident Aliens Engaged in Trade or Business

a. General Rules
A non-resident alien individual engaged in trade or business in the
Philippines shall be subject to an income tax in the same manner as an individual
citizen and a resident alien individual, on taxable income received from all
sources within the Philippines.

A non-resident alien engage in trade or business in the Philippines is a

foreigner not residing but: (1) engaged in trade or business therein; (2) engaged in
the exercise of profession therein; or (3) comes and stays therein for an aggregate
period of one hundred eighty days (180) during one calendar year.

b. Cash and /or property dividends

Cash and/or property dividends from a domestic corporation or Joint stock

company, or Insurance or Mutual Fund Co. Or Regional Operating Headquarters
of Multinational company, or Share in the Distributable Net Income of a
Partnership (except a General Professional Partnership), Joint Account, Joint
Venture Taxable as a Corporation or Association, Interests, Royalties, Prizes, and
other Winnings shall be subject to an income tax of 20% on the total amount
thereof

c. Capital Gains

Capital gains realized from sale, barter or exchange of shares of stock in

domestic corporations not traded through the local stock exchange, and real
properties shall be subject to the tax prescribed under Subsections (C) and (D) of
Section 24.

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12. Exclude Non-resident Aliens Not Engaged in Trade or Business

13. Individual Taxpayers Exempt from Income Tax

a. Tax Payable

(1) Regular Tax

(2) Minimum Corporate Income Tax (MCIT)

(a) Imposition of MCIT

A minimum corporate income tax of two percent (2%0 of the gross
income as of the end of the taxable year, as defined herein, is hereby
imposed on a corporation taxable under this Title, beginning on the fourth
taxable year immediately following the year in which such corporation
commenced its business operations, when the minimum income tax is
greater than the tax computed under Subsection (A) of this Section for the
taxable year

(b) Carry forward of excess minimum tax

Any excess of the MCIT over the net income tax shall be carried
forward and credited against the net income tax for the three (3)
immediately succeeding taxable years.

(c) Relief from the MCIT under certain conditions

The Secretary of Finance is authorized to suspend the imposition

of the minimum corporate income tax of 2% on any corporation which
suffers losses on account of:

1. prolonged labor dispute

2. force majeure
3. legitimate business reverses.

The Secretary of Finance is hereby authorized to promulgate, upon

recommendation of the Commissioner, the necessary rules and regulation
that shall define the terms and conditions under which he may suspend the
imposition of the minimum corporate income tax in a meritorious case

(d) Corporations exempt from the MCIT

The following domestic corporations are exempt from the

imposition of the MCIT:

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 1. Proprietary educational institutions;

2. Non-profit hospitals;

3. Depository banks under the expanded foreign currency deposit

system (foreign Currency Deposit Units); and

4. Domestic corporation enjoying special tax privileges under the

Bases Conversion Development Act and Republic Acts 7916
and 7227 otherwise known as the PEZA law.

The following resident foreign corporatons are likewise exempt from the
imposition of the MCIT:

1. International air and shipping carriers;

2. Offshore Banking Units (OBUs);

3. Regional operating headquarters of resident foreign

corporations; and

4. Resident foreign corporations enjoying special tax privileges

under the Bases Conversion Development Act and Republic
Acts 7916 and 7227 otherwise known as the PEZA law.

All non resident foreign corporations are not subject to MCIT.

(e) Applicability of the MCIT where a corporation is governed both

under the regular tax system and a special income tax system

b. Allowable deductions

(1) Itemized deductions

It is a means of claiming deductible expenses wherein the specific
types of expenses are listed down and substantiated by receipts and other
evidences. There is, likewise, no limit to the amount that may be claimed.
Itemized deduction may be availed by the following taxpayers:

1. resident citizens;

2. non resident citizens;

3. resident aliens;

4. non-resident aliens engaged in trade or business in the Philippines;

5. partnerships and corporations; and

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 6. estates and trusts.

However, a non-resident alien not engaged in trade or business in the

Philippines may not claim the itemized deduction.

(2) Optional standard deduction

It is a means of claiming deductible expenses wherein ten percent

(10%) of the gross income may be deducted. There is no limit to the amount
that may be claimed. Furthermore, there is no need to substantiate the
expenses by way of receipts and other evidences. Optional standard
deduction may be availed by the following taxpayers:

1. resident citizens;

2. non resident citizens;

3. resident aliens; and

4. estates and trusts.

However, the following taxpayers may not avail of the optional standard
deduction:

1. Non-resident aliens, regardless whether or not they are engaged in

trade or business in the Philippines; and

2. Partnerships and corporations

c. Taxation of Passive Income

(1) Passive income subject to tax

(a) Interest from deposits and yield or any other monetary benefit
from deposit substitutes and from trust funds and similar
arrangement and royalties

Under this provision, there are two passive incomes mentioned: (1)
Bank interest; and (2) royalties.

With respect to bank interest, to be considered passive, it must be

derived from sources within the Philippines. It will be considered derived
from sources within the Philippines if the bank from which the interest is
earned is located in the Philippines.

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 Unlike the final income tax of individuals, a domestic corporation is
not exempt from final income tax for long-term deposits.

As regards royalties, the lower rate of ten percent (10%) which is

applicable to individual taxpayers, does not apply to domestic corporations,
all royalties derived by domestic corporation from sources within the
Philippines are subject to a final income tax rate of twenty percent (20%)

(b) Capital gains from the sale of shares of stock not traded in the Stock
exchange

The rules on individuals are also applicable to domestic

corporations. The capital gains from the sale of shares of stock not traded
in the stock exchange shall be subject to final income tax provided the
elements are present: (1) the shares are shares in a domestic corporation;
(2) classified as capital assets; and (3) the shares are not listed and traded in
the local stock exchange.

(c) Income derived under the expanded foreign currency deposit

system

The rules on domestic corporations are applicable to resident

foreign corporations. The only difference is that under Section 28 (A)
(7)(b), the income earner is a resident foreign corporation depository bank
under the expanded foreign currency deposit system.

(c) Intercorporate dividends

Under this provision, the resident foreign corporation is a

stockholder of a domestic corporation. The income received by the former
from the latter in the form of dividends shall be exempt from income tax.

(e) Capital gains realized from the sale, exchange, or disposition of

lands and/or buildings.

A final income tax of six percent (6%) based on the gross selling
price or fair market value, whichever is higher, shall be imposed on capital
gains presumed to have been realized from the sale, exchange or other
disposition of real property located in the Philippines, classified as capital
asset. (Section 24 (D) (1). Based on the foregoing, the following elements
must be present for final income tax to apply: (1) the property sold is real
property; (2) located in the Philippines; and (3) classified as a capital
asset.

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 (2) Passive income not subject to tax

Capital gains presumed to have been realized from the sale or disposition
of the principal residence by natural persons shall be exempt from final income
tax, provided, the following elements are present; (1) the property sold or
otherwise disposed of is the principal residence of the taxpayer; (2) the proceeds
of which is fully utilized in acquiring or constructing a new principal residence;
(3) the acquisition or construction of the new residence is within eighteen (18)
months from the date of sale or disposition; (4) the historical cost or adjusted
basis of the real property sold or disposed shall be carried over to the new
principal residence built or acquired; (5)the taxpayer should inform the BIR of his
intention to avail of the exemption within 30 days from the sale or disposition;
and (6) the tax exemption can only be availed of once every ten years.

d. Taxation of Capital Gains

(1) Income from sale of shares of stock
(2) Income from the sale of real property situated in the Philippine
(3) Income from the sale, exchange, or other disposition of other capital
assets

e. Tax on propriety educational institutions and hospitals

The net income tax rate imposed on domestic corporation is 35%.

By way of exception, propriety educational institutions and hospitals are liable for
net income tax at a rate of only ten percent (10%). However, the following requisites
should concur:

1. it must be a stock and non-profit institution

2. it must be a private educational institution or hospital
3. their gross income from unrelated trade, business or other activity, if
any, does not exceed fifty percent (50%) of their gross income from all
sources; and
4. must have been issued a permit to operate from DECS, or CHED, or
the TESDA.
f. Tax on government-owned or controlled corporations, agencies or
instrumentalities

` The tax imposed by section 27 (A) is applicable to all corporations, agencies, or

instrumentalities owned or controlled by the Government except the following:
1. The Social Security System
2. The Philippine health Insurance Commission
3. The Philippine Charity Sweepstakes office; and
4. GSIS.

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 The corporations enumerated herein are exempt from income tax without any
condition or qualification.

15. Taxation of Resident Foreign Corporations

a. General Rule: 35% of the taxable income from all sources within the
Philippines.
Effective January 1, 2009, the rate shall be 30%.
b. With respect to their income from sources within the Philippines:
32% (2000-2005)
35% (2006-2008)
30% (2009 onwards)
c. Minimum Corporate Income Tax: 2% of the gross income.
d. Tax on certain income:
1. Interest from deposits and yield or any other monetary benefit from the
deposit substitutes, trust funds, and similar arrangements and royalties -
final income tax at the rate of 20% of such interest.

Exception: Interest income from a depositary under the expanded foreign

currency deposit system - 7.5%.
2. Income derived under the Expanded Foreign Currency Deposit System :

if with nonresidents, offshore banking units in the Philippines,

local commercial banks including branches of foreign banks that
may be authorized by the BSP - exempt from all taxes, except net
income from such transactions as may be specified by the
Secretary of Finance, upon recommendation by the Monetary
Board.

Exception: interest income from foreign currency loans by

such depositary banks other than offshore banking units in
the Philippines or other depositary banks under the
expanded system - 10%
3. Capital gain from sale of shares of stock not traded in the stock exchange -
Not over PhP 100,000.00 5%
On any amount in excess of PhP 100,000.00 10%

4. Intercorporate dividends - not subject to tax.

16. Taxation of Non-Resident Foreign Corporations

a. General Rule: Gross income from all sources within the Philippines
(except Capital Gains on sale of domestic shares subject to final tax).
32% (2000-2005)
35% (2006-2008)
30% (2009 onwards)

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 b. Tax on Certain Income
1. Interest on Foreign Loans - 20% on the amount of interest on foreign
loans contracted on or after August 1, 1986.

2. Intercorpoarate Dividends - 15% on the amount on cash and/or property

dividends received from a domestic corporation

3. Capital gain from sale of shares of stock not traded in the stock exchange -
Not over PhP 100,000.00 5%
On any amount in excess of PhP 100,000.00 10%

17. Improperly Accumulated Earnings of Corporations

General Rule: 10%of the improperly accumulated taxable income of domestic
and closely-held corporations

Exceptions: (a) Publicly-held corporations;

(b) Banks and other non-bank financial intermediaries; and
(c) Insurance companies.

18. Exemptions from tax on Corporations

The following organizations shall not be taxed in respect to income received by

them as such:
(A) Labor, agricultural or horticultural organization not organized principally for
profit;
(B) Mutual savings bank not having a capital stock represented by shares, and
cooperative bank without capital stock organized and operated for mutual
purposes and without profit;
(C) A beneficiary society, order or association, operating for the exclusive benefit
of the members such as fraternal organization operating under the lodge system,
or a mutual aid association, or a mutual aid association or a non-stock corporation
organized by employees providing for the payment of life, sickness,
accident, or other benefits exclusively to the members of such society, order, or
association, or non-stock corporation or their dependents;
(D) Cemetery company owned and operated exclusively for the benefit of its
members;
(E) Non-stock corporation or association organized and operated exclusively for
religious, charitable, scientific, athletic, or cultural purposes, or for the
rehabilitation of veterans, no part of its net income or asset shall belong to or
inure to the benefit of any member, organizer, officer or any specific person;
(F) Business league, chamber of commerce, or board of trade, not organized for
profit and n part of the net income of which inured to the benefit of private
stockholder or individual;
(G) Civic league or organization not organized for profit but operated exclusively
for the promotion of social welfare;

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 (H) A non-stock and non-profit educational institution;
(I) Government educational institution;
(J) Farmers' of other mutual typhoon or fire insurance company, mutual ditch or
irrigation company, mutual or cooperative telephone company, or like
organization of a purely local character, the income of which consists solely of
assessments, dues, fees collected from the members for the sole purpose of
meeting its expenses;
(K) Farmers'. fruit growers', or like association organized and operated as a sales
agent for the purpose of marketing the products of its members and turning back
to them the proceeds of sales, less the necessary selling expenses on the basis of
the quantity of produce finished by them.

Exception: the income of whatever kind and character from any of their properties,
real or personal, or from any of their activities conducted for profit regardless of the
disposition made of such income.

19. Taxation of Partnerships

taxable as an entity - ordinary corporate income tax.

all other partnerships no matter how created or organized.

includes unregistered joint ventures and business partnerships.

partners are considered as stockholders; their distributive share is taxed as

dividends.

joint ventures are not taxable as corporations when its purpose is either:
a. undertaking construction projects;

b. engaged in petroleum, coal and other energy operation under a service

contract with the government.

20. Taxation of General Professional Partnerships

established solely for purpose of exercising common profession and not part of
income derived from engaging in trade or business.

as an entity, it is not subject to income tax. Partners are liable for income tax on
their distributive share and report it as part of his gross income.

21. Taxation on Estates and Trust

a. Application of tax:
1. Income accumulated in trust

a. for the benefit of unborn or unascertained person or persons

with contingent interests, and

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 b. income accumulated or held for future distribution under
the terms of the will or trust;

2. Income:
a. to be distributed currently by the fiduciary to the
beneficiaries, and

b. collected by a guardian of an infant which is to be held or

distributed as the court may direct;

3. Income received by estates of deceased persons during the period of

administration or settlement of the estate; and
4. Income which, in the discretion of the fiduciary, may be either
distributed to the beneficiaries or accumulated.
b. Exception: Employee's trust which forms part of the pension, stock bonus, or
profit-sharing plan of an employer for the benefit of some or all of his
employees

1. if contributions are made to the trust by such employer, or employees,

or both for the purpose of distributing to such employees the earnings and
principal of the fund accumulated by the trust in accordance with
such plan, and
2. if under the trust instrument, it is impossible, at any time prior to the
satisfaction of all liabilities with respect to employees under the trust, for
any part of the corpus or income to be (within the taxable year or
thereafter) used for, or diverted to, purposes other than for the exclusive
benefit of the employees.
c. Determination of Tax
1. Consolidation of Income of Two or More Trusts

Requisites:

Two or more trusts exist;

Creator of the trust in each instance is the same person; and

Beneficiary in each instance is the same.

Tax computed on such consolidated income

proportion of each tax shall be assessed and collected from each

truste

2. Taxable Income

Computed in the same manner and on the same basis as in the case

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 of an individual,

Except:
a. Deduction allowed: amount of income of the estate/trust
for the taxable year which is to be distributed currently by
the fiduciary to the beneficiaries and the amount of the
income collected by the guardian of an infant which is to be
held or distributed as the court may direct

i. Amount allowed as deduction is included as

taxable income of the beneficiaries whether
distributed or not

ii. Amount allowed as deduction under this

subsection will not be allowed as deduction under
(b) hereof

b. Additional deduction: amount of the income of the

estate/trust for its taxable year, properly paid or credited
during such year to any legatee, heir or beneficiary applies
to cases of:

i. Income received by estate of deceased person

during the period of administration or settlement of
the estate

ii. Income which, in the discretion of the fiduciary,

may be either distributed to the beneficiary or
accumulated

iii. Amount deducted is included in taxable income of

the legatee, heir or beneficiary

For trust administered in a foreign country: deduction in (a) and

(b) are not allowed provided, the amount of income included in the
return of said trust shall not be included in computing the income
of the beneficiaries.

3. Revocable trusts

Requisites: the power to re-vest in the grantor title to any part of

the corpus of the trust is vested:

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 a. In the grantor either alone or in conjunction with any
person not having substantial adverse interest in the
disposition of such part of the corpus/income therefrom.

b. In any person not having a substantial adverse interest

in the disposition of such part of the corpus/income
therefrom.

Effect: the income of such trust shall be included in computing the

taxable income of the grantor.

4. Income for benefit of grantor

Requisites: where any part of the income of a trust is, or in the

discretion of the grantor or any person not having a substantial
adverse interest in the disposition of such part of the income

i. May be held or accumulated for future distribution of the

grantor

ii. May be distributed to the grantor

iii. May be applied to the payment of premiums upon policies

of insurance on the life of the grantor

Effect: such part of the income will be included in computing the

taxable income of the grantor.

5. Meaning of in the discretion of the grantor

means in the discretion of the grantor, either alone or in

conjunction with any person not having substantial adverse interest
in the disposition of the part of the income in question.

22. Withholding tax

a. Concept
Withholding Tax on Compensation is the tax withheld from income
payments to individuals arising from an employer-employee relationship.

Expanded Withholding Tax is a kind of withholding tax which is

prescribed on certain income payments and is creditable against the
income tax due of the payee for the taxable quarter/year in which the
particular income was earned.

Final Withholding Tax is a kind of withholding tax which is prescribed on

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 certain income payments and is not creditable against the income tax due
of the payee on other income subject to regular rates of tax for the taxable
year. Income Tax withheld constitutes the full and final payment of the
Income Tax due from the payee on the particular income subjected to final
withholding tax.

Withholding Tax on Government Money Payments (GMP) - Percentage

Taxes - is the tax withheld by National Government Agencies
(NGAs) and instrumentalities, including government-owned and
controlled corporations (GOCCs) and local government units (LGUs),
before making any payments to non-VAT registered
taxpayers/suppliers/payees

Withholding Tax on GMP - Value Added Taxes (GVAT) - is the tax

withheld by NationalGovernment Agencies (NGAs) and
instrumentalities, including government-owned and controlled
corporations (GOCCs) and local government units (LGUs), before making
any payments to VAT registered taxpayers/suppliers/payees on account of
their purchases of goods and services.

b. Kinds

1. Withholding of final tax on certain incomes

The filing of income tax return by certain income payees shall be
withheld by payor-corporation and/or person.

2. Withholding of creditable tax at source

The withholding of a tax on the items of income payable to natural or
juridical persons, residing in the Philippines, by the payor-
corporations/persons as provided for by law, at the rate of not less than
(1%) but not more than (32%) thereof.

c. Withholding on wages
1. Requirement of withholding
Except in the case of a minimum wage earner, every employer making
payment of wages shall deduct and withhold upon such a tax determined
by the rules and regulations to be prescribed by the Secretary of Finance
upon recommendation by the Commissioner.

2. Tax paid by recipient

If the employer fails to deduct and withhold the tax as required herein
and thereafter the tax against which such tax may be credited is paid, the
tax so required to be deducted and withheld shall not be collected from the
employer, but shall in no case relieve the employer from liability for any
penalty or addition to the tax.

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 3. Refunds or credits
i. Employer shall be made to the employer only to the extent that
the amount of such overpayment was not deducted and withheld
by the employer.

ii. Employees any excess of the taxes withheld over the tax due
from taxpayer shall be returned or credited within (3) months
from the 15th of April. Refunds or credits made after such time
shall earn interest al 6% per annum; starting from the lapse of the
threemonth period to the date of refund of credit is made.

4. Year-end adjustment
On or before the end of the calendar year but prior to the payment of
the compensation for the last payroll period, the employer shall determine
the tax due from each employee on taxable compensation income for the
entire taxable year. The difference between the tax due from the
employee for the entire year and the sum of taxes withheld from January
to November shall either be withheld from his salary in December of the
current calendar year or refunded to the employee not later than January
25 of the succeeding year.

5. Liability for tax

i. Employer

a. liable for withholding and remittance of the correct amount of

tax
b. if failed to withhold and remit, employer is liable for the tax
plus penalties and additions to the tax.
ii. Employee

a. if fails to file withholding exemption certificate or supplies

inaccurate/false information, the tax shall be collected from him
plus penalties and additions to the tax.
b. Excess taxes withheld by the employer shall not be refunded if
due to:
1. failure or refusal to file the withholding exemption certificate
2. false and inaccurate information

d. Withholding of VAT

The government or any of its political subdivisions, instrumentalities or

agencies including GOCCs shall, before making payment on account of each
purchase of goods and/or services taxed at 12% VAT, deduct and withhold a
final due at the rate of 5% of the gross payment thereof.

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 e. Filing of return and payment of taxes withheld

1. Taxes deducted and withheld by the employer shall be covered by a

return and paid to an authorized agent bank, Collection Agent, or the
duly authorized treasurer of the city or municipality where the
employer has his legal residence or principal place of business, or in
case of a corporation, where the principal office is located.

The return shall be filed and the payment made within 25 days
from the close of each calendar quarter.

2. Statement and returns

A. Every employer required to deduct and withhold a tax shall furnish

to each such employee in respect of his employment during the
calendar year, on or before January 31 of the succeeding year, or if
his employment is terminated before the close of such calendar
year, on the same day of which the last payment of wages is made,
a written statement confirming the wages paid by the employer,
and the amount of taxes withheld.

B. Annual information returns

Every employer required to deduct and withhold the taxes in

respect of wages of his employees shall, on or before January31 of
the succeeding year, submit to the Commissioner an annual
information return containing:
a. a list of employees,
b. the total amount of compensation income of each
employee,
c. the total amount of taxes withheld therefrom during the
year,
d. copies of the statement in (A), and
e. such other information as may be deemed necessary.
C. Extension of time

The commissioner m ay grant to any employer a reasonable

extension of time to furnish and submit the abovementioned
statements and returns.

f. Final withholding tax at source

The amount of income tax withheld by the withholding agent is constituted as a

full and final payment of the income tax due from the payee on the said income.
The liability for payment of the tax rests primarily on the payor as a withholding

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agent. Thus, in case of his failure to withhold the tax or in case of
underwithholding, the deficiency tax shall be collected from the
payor/withholding agent. The payee is not required to file an income tax return
for the particular income (Sec. 2.57 (A) of RR 2-98).

g. Creditable withholding tax

Taxes withheld on certain income payments are intended to equal to or at least

approximate the tax due of the payee on said income. The income recipient is still
required to file an income tax return, to report the income and/or the difference
between the tax withheld and the tax due on the income.
1. Withholding tax on compensation
Every employer must withhold from compensation paid, an amount computed
in accordance with the regulations.

Exception: where such compensation income on an individual:

i. does not exceed the statutory minimum wages; or
ii. 5,000 pesos monthly or 60,000 a year
whichever is higher
h. Fringe benefit tax

The FBT is a final withholding tax on the grossed-up monetary value of

the fringe benefit granted by the employer to an employee who holds a
managerial or supervisory position. This tax is effective regardless of whether
the employer is an individual, professional partnership or a corporation
(regardless of whether the corporation is taxable or not).

The FBT is imposed on the Grossed-up Monetary Value of fringe

benefits at the following rates:
Effective January 1, 1999 33%
Effective January 1, 2000 32%
(FBT = Grossed-up Monetary Value x 33% or 32%, depending on time frame)

The grossed-up monetary value of the fringe benefit is determined by dividing

the monetary value of the fringe benefit by the following percentages:

Effective January 1, 1999 67%

Effective January 1, 2000 68%
(Grossed-up Monetary Value = Monetary Value / 67% or 68%, depending on
time frame)

How is the monetary value of a fringe benefit computed?

In general, the computation of the fringe benefits tax is done by:

a) evaluating the benefit granted; and

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 b) determining the proportion or percentage of the benefit which is
subject to the FBT.
The valuation of fringe benefits is as follows:
a) If the fringe benefit is granted in money, then the value is the
amount granted.
b) If the fringe benefit is granted by in property and ownership is
transferred to the employee, then the value of the fringe benefit is the
fair market value of the property.
c) If the fringe benefit is granted or furnished by the employer in
property but ownership is not transferred to the employee, the value
of the fringe benefit is equal to the depreciation value of the property.

B. ESTATE TAX

1. Basic Principles

Transfer taxes are taxes imposed upon the gratuitous disposition of private
property. They are not taxes on property as such because their imposition does not rest
upon general ownership but on the passing of the property.

Under the Tax Code, the transfer taxes are the estate tax and the donors tax.

2. Definition

Estate tax is the tax on the right to transmit property at death and on certain
transfer which are made by the statute, the equivalent of testamentary disposition.

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

4. Purpose or Object

a.) They are imposed at high rates to help reduce undue concentration of wealth in
society to which the receipt of inheritance is a contributing factor.
b.) Their imposition is also justified on the ground that it clearly conforms to the
widely accepted principle of ability to pay since the beneficiaries receive assets
which are in the nature of unearned wealth or windfall, thereby creating an ability
to pay the tax.
c.) An excise tax the object of which is to tax the shifting of economic benefits
and enjoyment of property from the dead to the living.

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5. Time and Transfer of Properties

Estate tax is the tax on the right to transmit property at death and on certain
transfer which are made by the statute, the equivalent of testamentary disposition.

6. Classification of decedent

a.) Resident citizen decedent

b.) Resident alien decedent
c.) Non-resident citizen decedent
d.) Non-resident alien decedent

7. Gross estate vis--vis Net estate

a.) Gross estate is the total value of all property, whether real or personal, tangible
or intangible, belonging to the decedent at he time of his death, situated within or
outside of the Philippines, where such decedent was a resident or citizen of the
Philippines.

In the case of a non-resident alien decedent, it shall include only property

situated in the Philippines.

b.) Net estate means gross estate less allowable deductions and specific
exemptions.

8. Determination of gross estate and net estate

a.) The value of the gross estate of the decedent shall be determined by including
the value at the time of his death of all property, real or personal, tangible or
intangible, wherever situated: Provided, however, that in case of a nonresident
who at the time of his death was not a citizen of the Philippines, only that part of
the entire gross estate which is situated in the Philippines shall be included in his
taxable estate.

To determine the value of the right of usufruct, use or habitation, as well

as that of annuity, there shall be taken into account the probable life of the
beneficiary in accordance with the latest Basic Standard Mortality Table, to be
approved by the Secretary of Finance, upon recommendation of the Insurance
Commissioner.

The estate shall be appraised at its fair market value as of the time of
death. However, the appraised value of real property as of the time of death shall
be, whichever is the higher of: the fair market value as determined by the
Commissioner, or the fair market value as shown in the schedule of values fixed
by the Provincial and City Assessors.

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 b.) The value of the net estate shall be determined:

In the case of a citizen or resident of the Philippines, by deducting from

the value of the gross estate the expenses, losses, indebtedness, and taxes.

9. Composition of gross estate

a.) Decedents interest

b.) Transfers in contemplation of death
c.) Revocable transfers
d.) Property passing under general power of appointment
e.) Proceeds of life insurance
f.) Prior interests
g.) Transfers for insufficient consideration
h.) Capital of the surviving spouse

10. Items to be included in the gross estate

a.) Citizen and resident alien decedent:

1.) Real property wherever situated;
2.) Tangible personal property wherever situated;
3.) Intangible personal property wherever situated.
b.) Non-resident alien decedent:
1.) Real property situated in the Philippines;
2.) Tangible personal property situated in the Philippines;
3.) Intangible personal property with a situs in the Philippines, unless
exempted on the basis of reciprocity

11. Deductions from estate

The allowable deductions consist of the amounts permitted by law to be deducted

from the value of the gross estate. They include:

1.) Ordinary deductionsthey refer to such amounts for:

a.) Funeral expenses;

b.) Judicial expenses of proceedings
c.) Claims against the estate
d.) Claims against insolvent persons
e.) Unpaid mortgages
f.) Unpaid taxes; and
g.) Casualty losses

2.) Special deductionsthey are the other deductions provided in the law:

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 a.) The so called vanishing deduction (property previously taxed);
b.) Transfers for public use
c.) Family home
d.) Standard deduction equivalent to P1,000,000;
e.) Medical expenses; and
f.) Retirement benefits received by the heirs under R.A. No. 4917.

3.) Share of the surviving spouse

12. Exclusions from estate

Specific exemptions are those which are declared by law as expressly exempt
from the tax. Examples are: merger of the usufruct in the owner of the naked title,
payment of war damage (R.A. No. 227), benefits received by beneficiaries residing in the
Philippines under laws administered by the U.S. Veterans Administration (R.A. No. 360),
insurance proceeds from the GSIS (P.D. No. 1146) and bequests, legacies or donations
mortis causa to social welfare, cultural or charitable organizations or institutions (P.D.
No. 507).

Properties or transfers which are exempt by law from estate tax are not taken into
account in the computation of the gross estate.

13. Tax credit for estate taxes paid in a foreign country

1.) In General, the tax imposed shall be credited with the amounts of any estate
tax imposed by the authority of a foreign country.

2.) Limitations on credit:

a.) The amount of the credit in respect to the tax paid to any country shall not
exceed the same proportion of the tax against which such credit is taken,
which the decedents net estate situated within such country bears to his
entire net estate; and
b.) The total amount of the credit shall not exceed the same proportion of the
tax against which such credit is taken, which the decedents net estate
situated outside the Philippines bears to his entire net estate.

14. Exemption of certain acquisitions and transmissions

The following shall not be taxed:

a.) The merger of usufruct in the owner of the naked title;

b.) The transmission or the delivery of the inheritance or legacy by the fiduciary
heir or legatee to the fideicommissary;

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 c.) The transmission from the first heir, legatee or done in favor of another
beneficiary, in accordance with the desire of the predecessor; and
d.) All bequests, devises, legacies or transfers to social welfare, cultural and
charitable institutions, no part of the net income of which inures to the benefit
of any individual: Provided, however, That no more than 30% of the said
bequests, devises, legacies or transfers shall be used by such institutions for
administration purposes.

15. Filing of notice of death

The executor, administrator, or any of the legal heirs, as the case may be, is
required to give a written notice of death to the Commissioner within 2 months after the
decedents death or after qualifying as such executor or administrator.

16. Estate tax return

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

a.) Where the gross value of the estate exceeds P200,000, though exempt from
the estate tax; or
b.) Regardless of the gross value of the estate, where the said estate consists of
registered or registerable real property, such as real property, motor vehicle
shares of stock or other similar property for which a clearance from the
Bureau of Internal Revenue is required as a condition precedent for the
transfer of ownership thereof in the name of the transferee.

2.) When The return shall be filed within 6 months from the decedents death.
3.) Where Except in cases where the Commissioner of Internal Revenue
otherwise permits, the return shall be filed with an authorized or Accredited
Agent Bank or the Revenue District Officer, Revenue Collection Officer, or
duly authorized treasurer of the city or municipality where the decedent was
domiciled at the time of his death, or if there be no legal residence in the
Philippines, with the Office of the Commissioner of Internal Revenue.

C. DONORS TAX

1. Basic principles
Donation is an act of liberality whereby a person disposes gratuitously of a thing
or right in favor of another who accepts it. There is also a donation when a person gives
to another a thing or right on account of the latters merits or of the services rendered by
him to the donor provided they do not constitute a demandable debt or when the gift
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imposes upon the done a burden which is less than the value of the thing given. It extends
to sales or exchanges for less than adequate and full consideration in money or moneys
worth.

2. Definition

Donors tax is a tax levied on the act of giving; it supplements the estate tax. It is
not a property tax but an excise tax imposed on the privilege of the owner to give. It is
not a tax on property as such because the imposition does not rest upon general
ownership.

3. Nature

1.) It is an excise tax; it is not a tax on property as such because the imposition
does not rest upon general ownership.
2.) The tax is imposed without reference to the death of the donor unlike in the
case of estate tax.

4. Purpose or object

1.) The donors tax was enacted originally to supplement the estate tax by
preventing their avoidance by those who give away property and money in
anticipation of death, through the taxation of gifts inter vivos without which, the
property would be subjected to the said taxes.

2.)The donors tax is also intended to prevent the avoidance of income tax
through the device of splitting income among numerous donees with the donor
thereby escaping the effect of the progressive rates of income taxation.

5. Requisites of valid donation

1.) Capacity of the donor to make the donation;

2.) Donative intent or intent on the part of the donor to make a gift;
3.) Delivery, whether actual or constructive, of the gift; and
4.) Acceptance of the gift by the done.

6. Transfers which may be constituted as donation

a.) Sale, exchange or transfer of property for insufficient consideration

b.) Condonation or remission of debt

7. Transfer for less than adequate and full consideration

Where property, other than real property classified as capital asset is transferred
for less than an adequate and full consideration in money or moneys worth, then the

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amount by which the fair market value of the property exceeded the value of the
consideration shall be deemed a gift, and shall be included in computing the amount of
gifts made during the calendar year.

8. Classification of donor

a.) Resident citizen

b.) Resident alien
c.) Non-resident citizen
d.) Non-resident alien

9. Determination of gross gift

The tax for each calendar year shall be computed on the basis of the total net gifts
made during the calendar year in accordance with the schedule of tax rates prescribed in
the law. If the gift is made in property, the fair market value thereof at the time of the gift
shall be considered the amount of the gift. The provisions of Section 88 applicable to the
determination of the value of the gross estate, shall apply to the valuation of gifts made in
real property.

10. Composition of gross gift

Donations, and sales or exchanges for less than adequate and full consideration in
money or moneys worth made during the calendar year.

11. Valuation of gifts made in property

If the gift is made in property, the fair market value thereof at the time of the gift
shall be considered the amount of the gift. The provisions of Section 88 applicable to the
determination of the value of the gross estate, shall apply to the valuation of gifts made in
real property.

12. Tax credit for donors taxes paid in a foreign country

1.) In General, the tax imposed upon a donor who was a citizen or a resident at the
time of the donation shall be credited with the amount of any donors taxes of any
character and description imposed by the authority of a foreign country.

2.)Limitations on credit:

a.) The amount of the credit in respect to the tax paid to any country shall not
exceed the same proportion of the tax against which such credit is taken,
which the net gifts situated within such country bears to his entire net
gifts; and

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 b.)The total amount of the credit shall not exceed the same proportion of the
tax against which such credit is taken, which the donors net gifts situated
outside the Philippines bears to his entire net gifts.

13. Exemptions of gifts from donors tax

The following gifts or donations shall be exempt from donors tax:

A.)In the case of gifts made by a resident:

1.) Dowries or gifts made on account of marriage and before its celebration or within
one year thereafter by parents to each of their legitimate, recognized natural, or
adopted children to the extent of the first P10,000.
2.) Gifts made to or for the use of the National Government or any entity created by
any of its agencies which is not conducted for profit, or to any political
subdivision of the said government; and
3.) Gifts in favor of an educational or charitable, religious, cultural or social welfare
corporation, institution, accredited non-government organization, trust or
philanthropic organization or research institution or organization: Provided,
however, That not more than 30% of said gifts shall be used by such done for
administration purposes.

B.) In the case of gifts made by a non-resident alien

1.) Gifts made to or for the use of the National Government or any entity created by
any of its agencies which is not conducted for profit, or to any political
subdivision of the said government; and
2.) Gifts in favor of an educational or charitable, religious, cultural or social welfare
corporation, institution, accredited non-government organization, trust or
philanthropic organization or research institution or organization: Provided,
however, That not more than 30% of said gifts shall be used by such done for
administration purposes.

14. Persons liable

An individual who makes any transfer by gift (except those which are exempt
from the tax) shall for the purpose of the said tax, make a return under oath in duplicate.

15. Tax basis

The tax for each calendar year shall be computed on the basis of the total net gifts
made during the calendar year.

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 D. VALUE ADDED TAX (VAT)
1. Concept

Value-Added tax (VAT) is a uniform tax (0% or 10%) imposed on each sale,
barter, exchange, or lease of goods, properties, or services in the course of trade or
business as they pass along the production and distribution chain, the tax being limited
only to the value added to such goods, properties, or services by the seller, transferor or
lessor.

It is also levied on every importation of goods, whether or not in the course of

trade or business.

2. Characteristics

1.) It is a tax on value added of a taxpayer.

2.) It is collected through the tax credit method.
3.) It is a transparent form of sales tax.
4.) It is a broad-based tax on consumption of goods, properties or services in the
Philippines.
5.) It is an indirect tax.
6.) The Philippines adopted the tax-inclusive method.
7.) There is no cascading in the value-added tax system.

3. Impact of tax

This refers to the burden of taxation. Although the seller is the person legally
liable to pay the tax, the seller shifts the burden of the tax to the intermediate buyers who
successively pass on the tax to their buyers until the goods, property or service reaches the
final consumer.

4. Incidence of tax

The person statutorily liable to pay the tax.

5. Tax credit method

This refers to the manner by which the value added tax of a taxpayer is computed.
The input taxes shifted by the sellers to the buyer are credited against the buyers output
taxes when he in turn sells the taxable goods, properties or services. The tax is shifted
when the buyer of goods, properties or services used in the production or distribution
process passes the input tax forward to his buyer, or backward to his supplier.

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6. Destination principle

The destination of the goods determines taxation or exemption from tax. Some
rulings referred to the destination principle as cross-border doctrine. Export sales of
goods are subject to 0% rate, while imports of goods are subject to 12% value added tax.

7. Persons liable

Generally, any person (individual or entity) who, in the course of trade or

business, sells, barters, or exchanges goods or properties, or renders services or engages
in similar transactions, and any person who imports goods, whether for business or non-
business purposes, is subject to the value-added tax.

Thus, the tax is paid by the seller, transferor, person or firm rendering the service,
lessor or importer.

8. VAT on sale of goods or properties

a. Requisites of taxability of goods or properties

1.) The sale of goods must be an actual or deemed sale of goods or properties for
a valuable consideration;
2.)undertaken in the course of trade or business;
3.) for the use or consumption in the Philippines; and
4.) not exempt from value-added tax under the Tax Code, special law or
international agreement.

With respect to sale or exchange of real property, all of the following

requirements must be met:

1.) The seller executes a deed of sale, barter or exchange, assignment or

conveyance, or contract to sell, of real property;
2.) The real property is located within the Philippines;
3.) The seller or transferor is engaged in real estate business either as real estate
dealer, developer or lessor;
4.) The real property is held primarily for sale or for lease in the ordinary course
of his trade or business; and
5.) The sale is not exempt from value-added tax under Section 109 of the Tax
Code, special law or international agreement binding upon the government of
the Philippines.

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9. Zero-rated sales of goods or properties, and effectively zero-rated sales of goods
or properties
Automatic zero-rating:
1.) There is no need to file an application form and to secure BIR approval
thereof; and
2.) The word ZERO-RATED is not required to be stamped on the face of
the VAT invoice or receipt to be issued by the seller of goods or services.
The reason for this requirement is that the buyer, as shown by his address
in the sales invoice and shipping documents, is located outside the
Philippines.

Effectively zero-rated transactions

1.) An application for zero-rating must be filed and the BIR approval is
necessary before the transactions may be considered as effectively zero-
rated;
2.) The word ZERO-RATED must be stamped on the face of the VAT
invoice or receipt to be issued by the seller of goods or services. The
reason for this requirement is that the buyer of the goods or services is
located within the Philippines, or he is located outside the Philippines
merely by fiction of law.

10. Transactions deemed sale

a. Transfer, use or consumption not in the course of business of goods or
properties originally intended for sale or use in the course of business
b. Distribution or transfer to shareholders, investors or creditors
c. Consignment of goods if actual sale not made within 60 days from date
of consignment
d. Retirement from or cessation of business with respect to inventories on
hand

The tax base for transactions deemed sale mentioned in a, b and c is the market
value of such goods as of the occurrence of the transaction deemed sale. However, in the
case of retirement or cessation of business, the tax base shall be the acquisition cost or the
current market price of the goods, whichever is lower.

11. Change or cessation of status as VAT-registered person

a. Subject to VAT (Output Tax)

(1) Change of business activity from VAT- taxable status to VAT-exempt

status

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 An example is a VAT-registered person engaged in importing luxury
cars, which is a taxable activity but discontinues the same and is now
engaged in selling or importing fertilizers.

(2) Approval of request for cancellation of a registration due to reversion to

exempt status.

(3) Approval of request for cancellation of registration due to desire to

revert to exempt status after lapse of 3 consecutive years.
This is from the time of the registration by a person who voluntarily
registered despite being exempt under Sec. 109(2) of the Tax Code.
(4) Approval of a request for cancellation of registration of one who
commenced business with the expectation of gross sales or receipts
exceeding P1.5 M but who failed to exceed this amount during the first
12 months of operation.

b. Not subject to Output VAT

(1) Change of control of a corporation

This is due to acquisition of the controlling interest of such corporation by

another stockholder or group of stockholders. The goods or properties
used in business or those comprising the stock-in trade of the corporation,
having a change in corporate control, will not be considered sold, bartered,
or exchange despite the change in the ownership interest in the said
corporation.

(2) Change in the trade or corporate name

(3) Merger or consolidation of corporations

The unused input tax of the dissolved corporation, as of the date of merger
or consolidation, shall be absorbed by the surviving or new corporation.

12. VAT on importation of goods

a. Transfer of goods by tax-exempt persons

In the case of goods imported into the Philippines by VAT-exempt

persons, entities or agencies which are subsequently sold, transferred or
exchanged in the Philippines to non-exempt persons, entities, the
purchasers, transferees or recipients shall be considered IMPORTER, who
shall be liable for any internal revenue tax on such importation. Sec. 107
(b), NIRC

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13. VAT on sale of service and use or lease of properties

Sale of exchange of services, as well as the use or lease of properties, as defined

in Section 108 (A) of NIRC shall be subject to VAT of 12% of the gross
receipts(excluding VAT) starting February 1, 2006.

a. Requisites for taxability

To be subject to VAT on sale or exchange of service, the following
requisites must be met;
1. there is a sale or exchange of service or lease of property enumerated
in the law or other similar services,
2. the service is performed or to be performed in the Philippines
3. the service is performed or to be performed in the course of the
taxpayers trade or business or profession,
4. the service is performed or to be performed for a valuable
consideration actually or constructively received; and
5. the service in not exempt under the Tax Code, special law or
international agreement

Note: Absent one of the requisites, such transaction is exempt from

VAT but it may be subject to Other Percentage Tax

A. Sale or exchange of services means the performance of all kind of services in

the Philippines for others for a fee, remuneration or consideration, whether in
cash or in kind

i. Construction and service contract

ii. Stock, real estate, commercial, customs and immigration
brokers
iii. Lessors of property, whether personal or real
iv. Persons engaged in warehouse services
v. Lessors or distributors of cinematographic film
vi. Persons engaged in milling, processing, manufacturing or
repacking goods for others
vii. Proprietors, operators, or keepers of hotels, motels, rest houses,
pension houses, inns, resorts, theatres, and movie houses
viii. Proprietors or operators of restaurants, refreshment parlors,
cafes and other eating places, including clubs and caterers
ix. Dealers in securities
x. Lending investor
xi. Transportation contractors on their transport of goods or
cargoes, including persons who transport goods or cargoes for
hire and other domestic common carriers by land relative to
their transport of goods or cargoes

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 xii. Common carriers by air and sea relative to their transport of
passenger, goods, or cargoes from one place in the Philippines
to another place in the Philippines
xiii. Sales of electricity by generation, transmission and/or
distribution companies
xiv. Franchise grantees of electric utilities, telephone and telegraph,
radio and/or television and all other franchise grantees of radio
and/or television broadcasting whose annual gross receipt of
the preceding year do not exceed P 1, 000, 000.00 and
franchise grantees of gas and water utilities.
xv. Non life insurance companies (except crop insurances),
including surety, fidelity, indemnity and bonding companies
xvi. Similar services regardless of whether or not the performance
calls for the exercise or use of the physical or mental faculties
14. Zero-rated sale of services

The VAT system generally uses the destination principle which holds that
the goods and services are taxed only in the country where they are
consumed.

However, the destination principle has well-recognized exceptions, under

which the supply of services shall be zero rated.

Such zero-rated transactions are taxable transactions for VAT purposes

but the seller is not liable to pay output tax. Under this concept, the sale or
exchange of particular service is completely freed from the VAT, because
the seller is entitled to recover, by way of refund or as an input tax credit,
the tax that is included in the cost of purchases attributable to the sale or
exchange. (CIR vs. American Express G.R. No. 152609, June 29, 2005).

To be exempt from the destination principle, the following must concur:

b. The service is performed in the Philippines
c. The recipient of the service performed in the Philippines must be a
person doing business outside of the Philippines
d. The services are within the categories provided for under the Tax
Code.
e. It is paid in acceptable foreign currency to the BSP.
The following services by VAT registered persons are subject to 0% rate;

i. Processing, manufacturing or repacking goods for other

persons doing business outside the Philippines which goods are
subsequently exported, where the services are paid for in
acceptable foreign currency and accounted for in accordance
with the rules and regulations of the Bangko Sentral ng
Pilipinas.

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 ii. Services other than processing, manufacturing or repacking
rendered to a person engaged in business conducted outside the
Philippines or to a non resident person not engaged in
business who is outside of the Philippines when the services
are performed, the consideration for which is paid for in
acceptable foreign currency and accounted for accordance with
the rules and regulations of the BSP
iii. Services rendered to persons or entities whose exemption under
special laws or international agreements to which the
Philippines is a signatory effectively subjects the supply of
such services to 0% rate.
iv. Services rendered to persons engaged in international shipping
or international air transport operations, including leases of
property for use thereof. The services referred to shall not
apply to those already made to common carriers by air and sea
relative to their transport of passengers, goods or cargoes from
one place in the Philippines, the same subject to regular VAT
under Sec. 108 of the Tax Code.
v. Services performed by subcontractors and/or contractors in
processing, converting, or manufacturing goods for an
enterprise whose export sales exceeds 70% of total annual
production
vi. Transport of passengers and cargo by domestic air or sea
carriers from the Philippines to a foreign country. Gross
receipts of international air carriers doing business and
international sea carriers doing business in the Philippines are
still liable to a percentage tax of 3% based on their gross
receipts as provided for in Sec. 118 of the Tax Code, but shall
not be liable to VAT.
vii. Sale of power or fuel generated through renewable sources of
energy, such as, but not limited to, biomass, solar, wind,
hydropower, geothermal and steam, ocean energy, and other
emerging sources suing technologies such as fuel cells and
hydrogen fuels. But zero-rating shall not apply strictly to the
sale of power or fuel generated through renewable sources of
energy, and shall not extend to the sale of services related to
the maintenance or operation of plants generating said power.
15. VAT-exempt transactions

a. VAT-exempt transactions, in general

In the case of CIR vs. Seagate Technology Phils., G.R. No. 153866, February
11, 2005, the Supreme Court define exempt transaction as one involving
goods or services which, by their nature, are specifically listed in and
expressly exempted from VAT, under the Tax Code, without regard to the tax
status of the party in transaction.

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b. Exempt transactions, enumerated

i. Sale or importation of agricultural and marine food products in

their original state, livestock and poultry of or kind generally used
as, or yielding or producing foods for human consumption; and
breeding stock and genetic materials thereof.
Products classified under this paragraph shall be considered in
their original state even if they have undergone the simple
processes of preparation or preservation for the market, such as
freezing, drying, salting, broiling, roasting, smoking or stripping.
Polished and/or husked rice, corn grits, raw cane sugar and
molasses, and ordinary salt shall be considered in their original
state;
ii. Sale or importation of fertilizers; seeds, seedlings and fingerlings;
fish, prawn, livestock and poultry feeds, including ingredients,
whether locally produced or imported, used in the manufacture of
finished foods (except specialty feeds for race horses, fighting
cocks, aquarium fish, zoo animals and other animals generally
considered as pets);
iii. Importation of personal and household effects belonging to the
residents of the Philippines returning from abroad and non-resident
citizens coming to resettle in the Philippines: Provided such goods
are exempt from customs duties under the Tariff and Customs Code
of the Philippines;
iv. Importation of professional instruments and implements, wearing
apparel, domestic animals, and personal household effects (except
any vehicle, vessel, aircraft, machinery other goods for use in the
manufacture and merchandise of any kind in commercial quantity)
belonging to persons coming to settle in the Philippines, for their
own use and not for sale, barter, or exchange, accompanying such
persons, or arriving within 90 days before or after their arrival, upon
the production of evidence satisfactory to the Commissioner, that
such persons are actually coming to settle in the Philippines, and
that the change of residence is bona fide;
v. Services subject to percentage tax under Title V,
vi. Services by agricultural contract growers and milling for others of
palay into rice, corn grits and sugar cane into raw sugar;
vii. Medical, dental, hospital and veterinary services except those
rendered by professionals,
viii. Educational services rendered by private educational institutions
duly accredited by the Department of Education and TESDA and
those rendered by government educational institutions;
ix. Services rendered by individuals pursuant to an employer-employee
relationship;
x. Services rendered by regional or area headquarters established in
the Philippines by multinational corporations which act as

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 supervisory, communications and coordinating centers for their
affiliates, subsidiaries or branches in the Asia-Pacific region and do
not earn or derive income from the Philippines;
xi. Transactions which are exempt under international agreements to
which the Philippines is a signatory or under special laws, except
those under PD 529;
xii. Sale by agricultural cooperatives duly registered with CDA to their
members as well as sale of their produce, whether in its original
state or processed form, to non-members; their importation of direct
form inputs, machineries and equipment, including spare parts
thereof, to be used directly and exclusively in the production and /or
processing of their produce;
xiii. Gross receipts from lending activities by credit or multi-purpose
cooperatives duly registered with CDA;
xiv. Sale by non-agricultural, non-electric and non-credit cooperatives
duly registered with the CDA: Provided, that the share capital
contribution of each member does not exceed P 15, 000.00 and
regardless of the aggregate capital and net surplus ratably
distributed among the members;
xv. Export sales by persons who are not VAT-registered;
xvi. Sale of real properties not primarily held for sale to customers or
held for lease in the ordinary course of trade or business or real
property utilized for low cost and socialized housing as defined
under RA 7279 otherwise known as Urban Development and
Housing Act of 1992 and other related laws, residential lot valued at
One Million Five Hundred Thousand Pesos (P 1, 500, 000.00) and
below, house and lot and other residential dwellings valued at Two
Million Five Hundred Thousand Pesos (P 2, 500, 000.00) and
below: Provided, that not later than January 31, 2009 and every 3
years thereafter, the amount herein stated shall be adjusted to their
present values using the Consumer Price Index, as published by
NSO;
xvii. Lease of residential unit with a monthly rental of P 10, 000.00;
Provided, That not later than January 31, 2009 and every 3 years
thereafter, the amount herein stated shall be adjusted to their present
values using the Consumer Price Index, as published by NSO;
xviii. Sale, importation, printing or publication of books and any
newspaper, magazine review or bulletin which appears at regular
intervals with fixed prices for subscription and sale and which is not
devoted principally to the publication of paid advertisements;
xix. Sale, importation or lease of passenger or cargo vessels and aircraft,
including engine, equipment and spare parts thereof for domestic or
international transport operations;
xx. Importation of fuel, goods and supplies by persons engaged in
international shipping or air transport operations;

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 xxi. Services of banks, non-bank financial intermediaries performing
quasi-banking functions, and other non-bank financial
intermediaries;
xxii. Sale or lease of goods or properties or the performance of services
other than the transactions mentioned in the preceding paragraphs,
the gross annual sales and /or receipts do not exceed One Million
Five Hundred Thousand Pesos (P 1, 500, 000.00): Provided that not
later than January 31, 2009 and every 3 years thereafter, the amount
herein stated shall be adjusted to their present values using the
Consumer Price Index, as published by the NSO.
16. Input tax and output tax, defined

Input tax VAT due from or paid by a VAT-registered person in the course of
his trade or business on importation of goods, properties or local purchases of
goods or services including use or lease of property from a VAT-registered
person. It includes the tax paid on raw materials, supplies and equipment. Sec.
110(A), NIRC

Output tax VAT due on the sale or lease of taxable goods, properties or
services by a VAT-registered person or person required to register under the law.
Sec. 110 of NIRC.

17. Sources of input tax

Input taxes passed on by the sellers of goods, services or properties may

arise from any of the following;
a. Purchase or importation of goods

i. For sale; or
ii. For conversion into or intended to form part of a finished product for
sale including packaging materials; or
iii. For use as supplies in the course of business; or
iv. For use as materials supplied in the sale of service;
v. For use in trade or business for which deduction for depreciation or
amortization allowed under the Tax Code

b. Purchase of real properties for which a VAT has actually been paid

c. Purchase of services in which VAT has actually been paid

d. Transactions deemed sale

A type of sale wherein the seller is also the buyer and no valuable
consideration is thus paid. The principle behind this type of sale is to capture
the VAT that was claimed as input tax at the time of the purchase.

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 The following are considered deemed sales:

i. Transfer, use or consumption not in the course of business of

goods or properties originally intended for sale or use in the
course of the business;
ii. Distribution or transfer to shareholders or investors as share in
the profits of the VAT-registered persons or to creditors in
payment of debt;
iii. Consignment of goods if actual sale is not made within 60 days
following the date such goods were consigned; and
iv. Retirement from or cessation of business, with respect to
inventories of taxable goods existing as of such retirement or
cessation.

The output tax on nos. 1-3 above shall be based on the market
value of the goods deemed sold as of the time of sale. In no. 4
above, the tax base shall be the acquisition cost or the current
market price of the goods or properties, whichever is lower.

e. Transitional input tax

There are three (3) situations where a person may claim transitional input tax
on his beginning inventories of goods, materials and supplies:

i. When he becomes liable to VAT for the first time under a new
legislation or when his taxable transactions exceed the VAT
registration threshold.
ii. When he elects to register as a VAT-registered person, provided he
is eligible.
iii. If he is already a VAT-registered person and also deals in goods or
properties, the sale of which is exempt, but it becomes a taxable
transaction under a new or amendatory law.

f. Presumptive input tax

Persons or firms engaged in the processing of sardines, mackerel and milk, and
in manufacturing refined sugar, cooking oil, and packed noodle-based instant
meals, shall be allowed a presumptive input tax, creditable against the output
tax, equivalent to 4% of the gross value in money of their purchases of primary
agricultural products which are used as inputs to their production.

Process -means pasteurization, canning and activities which through physical

or chemical process alter the exterior texture or form or inner substance of a
product in such a manner as to prepare it for special use to which it could not
have been put in its original form or condition.

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 g. Transitional input tax credits allowed under the transitory and other provisions
of the regulations

i. For goods, materials, or supplies not for sale but purchased for use
in business in their present condition, which are not intended for
further processing and are on hand, as of the last day immediately
preceding the effectivity of RA 9337, a transitional input tax
equivalent to 2% of the value of the beginning inventory on hand
or actual VAT paid on such goods, materials or supplies,
whichever is higher, shall be allowed.
ii. For goods purchased with the object of resale in their present
condition, the tax is 2% of the value of such goods unsold or actual
VAT paid thereon, whichever is higher.

18. Persons who can avail of the input tax credit

The input tax on importation of goods or local purchases of goods, properties or

services by a VAT-registered person shall be creditable:
i. To the importer upon payment of VAT prior to release of goods from
customs custody
ii. To the purchaser of the domestic goods or properties upon
consummation of sale; or
iii. To the purchaser of services or the lessee or licensee upon payment of
the compensation, rental, royalty or fee
19. Determination of output/input tax: VAT payable: Excess input tax credits

a. Determination of output tax

In sale of goods or properties, the output tax is computed by multiplying the

gross selling price by the regular rate of VAT.

For sellers of services, the output tax is computed by multiplying the gross
receipts by the regular rate of VAT

b. Determination of input tax creditable

The amount of input taxes creditable during a month or quarter shall be

determined by adding all creditable input taxes arising from the transactions
enumerated under Secs. 113 and 237 which are evidenced by VAT invoice or
OR issued by a VAT-registered person during a month or quarter plus any
amount of input tax carried-over from the preceding month or quarter, reduced
by the amount of claim for VAT refund or tax credit certificate and other
adjustments, such as purchases returns or allowances, input tax attributable to
exempt sales and input tax attributable to sales subject to final VAT
withholding.

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 c. Allocation of input tax on mixed transactions

A VAT-registered person who is also engaged in transactions not subject to

VAT shall be allowed to recognize input tax credit on transactions subject to
VAT as follows;

i. All the input taxes that can be directly attributed to transactions

subject to VAT may be recognized for input tax credit; Provided, that
input taxes that can be directly attributable to VAT taxable sales of
goods and services to the Government, or any of its political
subdivisions, instrumentalities or agencies, including GOCCs shall not
be credited against output taxes arising from sales to non-government
entities, and

Claims for VAT refund/tax credit certificate with the BIR, BOI, and
One Stop Shop and Drawback Center of the Department of Finance
should be deducted from the allowable input tax that are attributable to
zero-rated sales:
ii. If any input tax cannot be directly attributed to either a VAT
taxable or VAT-exempt transaction, the input tax shall prorated to
the VAT taxable and only the ratable portion pertaining to transactions
subject to VAT maybe recognized for input tax credit.

d. Determination of the output tax and VAT payable

Computation of Output Tax

1. Goods or properties: Gross Selling Price x VAT Rate

2. Sellers of service: Gross Receipts x VAT rate
Computation of VAT Payable
Output Tax less Input Tax

20. Substantiation of input tax credits

a. Input taxes for the importation of goods or the domestic purchase of goods,
properties or services is made in the course of trade or business, whether such
input taxes shall be credited against zero-rated sale, non-zero-rated sales, or
subjected to the 5% Final Withholding VAT, must be substantiated and supported
by the following documents, and must be reported in the information returns
required to be submitted to the BIR:

i. For the importation of goods-import entry or other equivalent

document showing actual payment of VAT on the imported goods.
ii. For the domestic purchase of goods and properties-invoice showing
the information required Secs. 113 and 237 of the Tax Code.

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 iii. For the purchase of real property-public instrument i.e., deed of
absolute sale, deed of conditional sale, contract/agreement to sell,
etc., together with VAT invoice issued by the seller.
iv. For the purchase of services-official receipt showing the information
required under Secs. 113 and 237 of the Tax Code.
A cash register machine tape issued to a registered buyer shall constitute valid
proof of substantiation of tax credit only if it shows the information required
under Secs. 113 and 237 of the Tax Code.
c. Transitional input tax shall be supported by an inventory of goods as shown in
a detailed list to be submitted to BIR.
d. Input tax on deemed sale transactions shall be substantiated with invoice
e. Input tax from payments made to non-residents shall be supported by a copy
of the Monthly Remittance of Return VAT Withheld filed by the resident
payor in behalf of the non-resident evidencing remittance of VAT due.
f. Advance VAT on sugar shall be supported by the Payment Order showing
payment of the advance VAT.

21. Refund or tax credit of excess input tax

Under RA 9337, there are only 2 kinds of VAT-registered taxpayers who may
apply for the issuance of a tax credit certificate or refund of input taxes namely;
those with Zero-rated and Effectively Zero-rated sales, and those who would be
cancelling their VAT registration.

In zero-rated or effectively zero-rated transactions, a taxpayer may apply for a

refund or issuance of a tax credit certificate for input taxes attributable to such
sales upon compliance with the following requisites;
i. The taxpayer is engaged in sales which are zero-rated (like export
sales) or effectively zero-rated;
ii. The taxpayer is VAT-registered;
iii. The claim must be filed within 2 years after the close of the taxable
quarter when such sales were made,
iv. The creditable input tax due or paid must be attributable to such
sales, except the transitional input tax, to the extent that such input
tax has not been applied against the output tax and
v. In case of zero-rated sales, the acceptable foreign currency
exchange proceeds had been duly accounted for in accordance with
the rules and regulations of Bangko Sentral ng Pilipinas.
Note: Input taxes derived from importation or local purchases of capital goods to
the extent that such input taxes have not been applied against output taxes

a. Who may claim for refund/apply for issuance of tax credit certificate

Under RA 9337, there are only 2 kinds of VAT-registered taxpayers who may
apply for the issuance of a tax credit certificate or refund of input taxes

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 namely; those with Zero-rated and Effectively Zero-rated sales, and those who
would be cancelling their VAT registration.

b. Period to file claim for issuance of TCC

The CIR shall grant a Tax Credit Certificate/refund for creditable input taxes
within 120 days from the date of submission of complete documents in
support of the application.

Taxpayer may appeal to the CTA within 30 days from receipt of whole or
partial denial.

If no action on the claim for refund has been taken by the CIR after the 120
day period from date of submission of the application, taxpayer may appeal to
CTA within 30 days from lapse of 120 day period.

c. Manner of giving refund

Refund shall be made upon warrants drawn by the CIR or duly authorized
representative and provided that refunds be post-audited by COA

d. Destination principle or cross border doctrine

Destination principle: VAT is imposed in the country in which the products or
services are actually consumed or used. Ex. Export sales, imports taxable

Cross Border Doctrine: No VAT shall be imposed to form part of the cost of
goods sold destined for consumption outside of the territorial border of the
taxing authority.

22. Invoicing Requirements

a. Invoicing requirements in general

A VAT-registered person shall issue:

VAT invoice for every sale, barter or exchange of goods or properties;
and
VAT official receipt for every lease of goods or properties, and for
every sale, barter or exchange of services
Only VAT-registered persons are required to print their TIN followed by word
VAT in their invoice or official receipts.
All purchases covered by invoices/receipts other than VAT Invoice/VAT
Official Receipt shall not give rise to any input tax.
VAT invoice/official receipt shall be prepared at least in duplicate, the
original to be given to the buyer and the duplicate to be retained by the seller
as part of his accounting records.

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b. Invoicing and recording deemed sale transactions

In case of transfer, use or consumption not in the course of business of goods

or properties originally intended for sale or use in the business, a
memorandum entry in the subsidiary sales journal to record withdrawal of
goods for personal use is required.
If transaction is the distribution or transfer to shareholders or investors as
share in the profits of the VAT-registered persons or to creditors in payment
of debt and the Consignment of goods if actual sale is not made within 60
days following the date such goods were consigned, an invoice must be
prepared at the time of the occurrence of the transaction which should include
all the information required such as TIN followed by word VAT.

It must be recorded in the subsidiary sales journal.

The total amount of deemed sale shall be included in the return to be filed for
the month or quarter.

In case of retirement from or cessation of business, an inventory must be

prepared and submitted to RDO who has jurisdiction over the taxpayers
principal place of business not later than 30 days after retirement or cessation
of business.

An invoice must be prepared for the entire inventory which shall be the basis
of the entry in the subsidiary sales journal. It need not enumerate the specific
items but must show total amount.
c. Consequences of issuing erroneous VAT invoice or VAT official receipt

A. Issuance of a VAT invoice or VAT Official Receipt by a Non-VAT

Person:
If a person who is not VAT- registered issues an invoice or receipt showing
his TIN, followed by word VAT, the erroneous issuance shall result to the ff:
i. The non-VAT person shall be liable to:
Percentage taxes applicable to his transactions;
VAT due on transactions under Sec. 106 or 108 of
the Tax Code, without the benefit of any input tax
credit; and
50% surcharge under Sec. 248(B) of the Tax Code;
ii.VAT shall be recognized as an input tax credit to the
purchaser under Sec. 110 of the Tax Code
Issuance of a VAT Invoice or VAT Official Receipt on an exempt transaction
by a VAT-registered person:

If a vat registered person issues a VAT invoice or receipt for a

VAT-exempt transaction, but fails to display prominently on the

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 invoice or receipt the words VAT-exempt sale, the
transaction shall be:
Taxable transaction and the issuer shall be liable
to pay VAT thereon
Purchaser shall be entitled to claim an input tax
credit on the purchase.

23. Filing of return and payment

A. Filing of Return

Every person liable to pay VAT shall file a quarterly return of the amount of
his quarterly gross sales or receipt within 25 days following the close of the
taxable quarter.

Taxable quarter quarter that is synchronized to the income tax

quarter
of the taxpayer

Amounts reflected in the monthly VAT declarations for the first 2 months of
the quarter shall still be included in the quarterly VAT return which reflects
the cumulative figures for the taxable quarter.

Payment in the monthly VAT declarations shall, however, be credited in the

quarterly VAT return to arrive at the net VAT payable or excess input
tax/overpayment as of the end of a quarter.

24. Withholding of final VAT on sales to government

A. The government or any of its political subdivisions, instrumentalities or

agencies, including GOCCs, shall before making payment on account of each
purchase of goods and /or services taxed at 12% VAT pursuant to Sec. 106
and 108 of the Tax Code and withhold a final VAT due at the rate of 5% of
the gross payment thereof.
The 5% final VAT withholding rate shall represent the net VAT payable of
the seller. The remaining 7% effectively accounts for the standard input VAT
for sales of goods or services to the government, in lieu of the actual input
VAT directly attributable or ratably apportioned to such sales.

Should actual input VAT attributable to sale to government exceeds 7% of

gross payments, the excess may form part of the sellers expense or cost.

On the other hand, if actual input VAT attributable to sale to government is

less than 7% of gross payment, the difference must be closed to expense or
cost.

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 B. The government or any of its political subdivisions, instrumentalities or
agencies, including GOCCs, as well as private corporations, individuals,
estates and trusts, whether large or non-large taxpayers, shall withhold 12%
VAT, starting February 1, 2006, with respect to the following payments.

Lease or use of properties or property rights owned by

non-residents; and
Other services rendered in the Philippines by non-
residents
E. Compliance Requirements (Internal Revenue Taxes)

1. Administrative requirements
a. Registration Requirements
Every person subject to any internal revenue tax shall register once with
appropriate RDO:
* within 10 days from date of employment
* on or before the commencement of the business
* before payment of any tax due
* upon filing of a return, statement or declaration as required
in the Tax Code
The registration shall contain the taxpayers name, style, residence or
other information as CIR may require.

(1)Annual registration fee

P 500.00 before the start of the business and every year thereafter
on or before the 31st day of January.

(2) Registration of each type of internal revenue tax

Every person required to register with BIR shall register each type
of internal revenue tax he is obligated to file, shall file a return and
pay taxes.

(3) Transfer of registration

In case of a registered person who decides to transfer his place of

business or his head office or branches, it shall be his duty to
update his registration status by filing an application for
registration update.

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 (4) Other updates

Any registered person shall, whenever applicable, update his

registration information with the RDO where he is registered,
specifying any change in tax type and other details.

(5) Cancellation of registration

General Rule:
The registration of any person who ceases to be liable to a tax type
shall be cancelled upon filing with the RDO where he is registered.

Instances of cancellation of VAT tax registration:

Makes written application and can demonstrate the
CIRs satisfaction that his gross sales or receipts for
the following 12 mos., other than those that are
exempt under Sec.109 (A) to (U), will not exceed P
1.5 M or,
Has ceased to carry on his trade or business, and
does not expect to recommence any trade or
business within the next 12 mos.
(6) Power of the Commissioner to suspend the business operations of any
person who fails to register

In the case of a VAT-registered persons-

Failure to issue receipts or invoices
Failure to file a VAT return required under Sec. 114
Understatement of taxable sales or receipts by 30% or
more of his correct taxable sales or receipts for the
taxable quarter
Failure of any person to register as required under Sec. 236.
The temporary closure shall be for a period of not less than 5 days and
shall be lifted upon compliance with the requirements prescribed by the
CIR.

b. Persons required to register for VAT

Any person, who, in the course of trade or business, sells, barters or

exchanges goods or properties, or engages in the sale or exchange of
services, shall be liable to register for VAT if;

His gross sales or receipts for the past 12 mos., other

than those that are exempt under Sec. 109 (A) to (U),
have exceeded P 1.5M; or

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 There are reasonable grounds to believe that his gross
sales or receipts for the past 12 mos., other than those
that are exempt under Sec. 109 (A) to (U), will exceed
P1.5M.

(1) Optional registration for VAT exempt persons

Any person who not required to register for VAT may
elect to register with the RDO that has jurisdiction over
the head office of that person, and paying the annual
registration fee.
Any person who elects to register shall not be entitled
to cancel his registration for the next 3 years.

Except: Franchise grantees of radio and or television

broadcasting whose annual gross receipts of the
preceding year do not exceed P 10M derived from the
business covered by law granting the franchise, if it opt
to register for VAT, once exercise shall be
IRREVOCABLE.

(2) Cancellation of VAT registration

Makes written application and can demonstrate the

CIRs satisfaction that his gross sales or receipts for
the following 12 mos., other than those that are
exempt under Sec.109 (A) to (U), will not exceed P
1.5 M or,
Has ceased to carry on his trade or business, and
does not expect to recommence any trade or
business within the next 12 mos.
A change in ownership, in case of single
proprietorship;
Dissolution of a partnership or corporation;
Merger or consolidation with respect to the
dissolved corporation;
A person who has registered prior to planned
business commencement, but failed to actually start
a business
Some instances where a taxpayer will update his registration:
A persons business has become exempt
A change in the nature of the business itself
from sale of taxable goods and/or services to
exempt sales and/or services
A person whose transactions are exempt from
VAT who voluntarily registered under VAT
system, who after the lapse of 3 years after his

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 registration, applies for cancellation of his
registration
A VAT-registered person whose gross sales or
receipts for 3 consecutive years did not exceed P
1.5M beginning July 1, 2005, which amount
shall be adjusted to its present value every 3
years using the Consumer Price Index, as
published by NSO.

(3) Changes in or cessation of status of a VAT-registered person

Subject to VAT (Output Tax)

a. Change of business activity from VAT- taxable status to VAT-

exempt status

An example is a VAT-registered person engaged in importing

luxury cars, which is a taxable activity but discontinues the same
and is now engaged in selling or importing fertilizers.

b. Approval of request for cancellation of a registration due to

reversion to exempt status.

c. Approval of request for cancellation of registration due to desire to

revert to exempt status after lapse of 3 consecutive years.
This is from the time of the registration by a person who
voluntarily registered despite being exempt under Sec. 109(2) of
the Tax Code.
d. Approval of a request for cancellation of registration of one who
commenced business with the expectation of gross sales or receipts
exceeding P1.5 M but who failed to exceed this amount during the
first 12 months of operation.

Not subject to Output VAT

e. Change of control of a corporation

This is due to acquisition of the controlling interest of such

corporation by another stockholder or group of stockholders. The
goods or properties used in business or those comprising the stock-
in trade of the corporation, having a change in corporate control,
will not be considered sold, bartered, or exchange despite the
change in the ownership interest in the said corporation.

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 f. Change in the trade or corporate name

g. Merger or consolidation of corporations

The unused input tax of the dissolved corporation, as of the date of
merger or consolidation, shall be absorbed by the surviving or new
corporation.

c. Supplying Taxpayer Identification Number

Any person required to make, render, or file a return or other document

shall be supplied or assigned with a TIN which he shall indicate in such
return or documents submitted to the BIR for proper identification and
shall indicate in certain documents like:

Sugar quedans, refined sugar release order or similar instruments

Documents to be registered with the Register of Deeds
Registration certificate of transportation equipment by land, sea or air
Documents to be registered with the Securities and Exchange
Commission
Building construction permits
Application for loan with banks, financial institutions, and other
financial intermediaries
Application for mayors permit
Application for business license with the DTI
Such other document which may be required by the Secretary of
Finance, as recommended by the CIR
If registered taxpayer dies, his/her administrator or executor shall register
the estate of the decedent.
In case of a non-resident decedent, his/her administrator or executor shall
register the estate with the RDO where he is registered
Only 1 TIN shall be assigned to a taxpayer, otherwise he shall be
criminally liable under Sec. 275 of NIRC.

d. Issuance of receipts or sales or commercial invoices

All persons subject to an internal revenue tax shall,

i. For each sale or transfer of merchandise or
ii. For services rendered valued at P 25.00 or more,
Issue duly registered receipts or sales or commercial invoices,
prepared at least in duplicate, showing the date of transaction,
quantity, unit cost or description of merchandise or nature of
service.

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Where receipt is issued to cover payment made as rentals,
commissions, compensations, or fees, receipts or invoices, shall be
issued which shall show the name, business style, if any, address
of purchaser, customer or client.

If issued by a VAT-registered person, the receipt/invoice must also

indicate the TIN of the purchaser.

Original of receipt/invoice must be issued at the time of the

transaction.

If engaged in business or profession, must keep said

receipt/invoice, the original and duplicate shall be kept and
preserved in his place of business/profession for 3 yrs.

(1) Printing of receipts or sales or commercial invoices

All persons who are engaged in business shall secure from the
BIR an Authority to Print receipts, or sales or commercial
invoices before a printer can print the same.

No authority to print shall be granted unless the

receipts/invoices to be printed are serially numbered and shall
show the name, business style, TIN and business address of
person/entity to use the same.

All persons who print receipt or sales or commercial invoices

shall maintain a logbook of taxpayers who availed of their
printing services and it shall contain;
Names, TIN of persons/entities for whom
the receipts/invoices were printed
Number of booklets, set per booklet, number
of copies/set and serial numbers of
receipts/invoices

(2) Invoicing requirements for VAT

A VAT-registered person shall issue;

VAT invoice for every sale, barter or
exchange of goods or properties; and
VAT official receipt for every lease of
goods or properties, and for every sale,
barter or exchange of services

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 (a) Information contained in the VAT invoice or VAT or
Official Receipt

i. A statement that the seller is a VAT-registered person,

followed by TIN
ii. The total amount which the purchaser pays or is obligated to
pay to the seller with the indication that such amount includes
the VAT; provided that,
Amount of the tax shall be shown as a
separate item
If sale is exempt from VAT, the term VAT-
exempt sale shall be written or printed
prominently on the invoice or receipt
If the sale is subject to 0% VAT, the term
Zero-rated sale shall be written or printed
prominently on the invoice or receipt;
the sale involves goods, properties or
services some of which are subject to and
some of which are VAT zero-rated or VAT-
exempt, the invoice or receipt shall clearly
indicate the breakdown of the sale price
between its taxable, exempt and zero-rated
components, and the calculation of the VAT
on each portion of the sale shall be shown
on the invoice or receipt. The seller has the
option to issue separate invoices or receipts
for the taxable, exempt, and zero-rated
components of the sale.
iii. In the case of sales in the amount of One Thousand Pesos (P 1,
000.00) or more where the sale or transfer is made to a VAT-
registered person, the name, business style, if any, address and
TIN of the purchaser, customer or client, shall be indicated in
addition to the information

(b) Consequences of issuing erroneous VAT invoice of official

receipts

Issuance of a VAT invoice or VAT Official Receipt by a Non-VAT

Person:
If a person who is not VAT- registered issues an invoice or receipt
showing his TIN, followed by word VAT, the erroneous issuance shall
result to the ff:
The non-VAT person shall be liable to:
Percentage taxes applicable to his transactions;

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 VAT due on transactions under Sec. 106 or 108 of
the Tax Code, without the benefit of any input tax
credit; and
50% surcharge under Sec. 248(B) of the Tax Code;
VAT shall be recognized as an input tax credit to the purchaser under Sec.
110 of the Tax Code.
Issuance of a VAT Invoice or VAT Official Receipt on an exempt
transaction by a VAT-registered person:
If a vat registered person issues a VAT invoice or receipt for a VAT-
exempt transaction, but fails to display prominently on the invoice or
receipt the words VAT-exempt sale, the transaction shall be:
Taxable transaction and the issuer shall be liable
to pay VAT thereon
Purchaser shall be entitled to claim an input tax
credit on the purchase.

e. Exhibition of certificate of payment at place of business

The certificate or receipts showing payment of taxes issued to a person

engaged in a business subject to annual registration fee shall be kept
conspicuously exhibited in plain view in or at the place where the business
is conducted; and in case of a peddler or other persons not having a fixed
place of business, shall be kept in the possession of the holder thereof,
subject to production upon demand of any internal revenue officer.

f. Continuation of business of deceased person

When any individual who has paid the annual registration fee dies, and the
same business is continued by the person or persons interested in his
estate, no additional payment shall be required for the residue of the term
of which the tax was paid: Provided however, That the person or persons
interested in the estate should, within 30 days from the death of the
decedent, submit to the Bureau of Internal Revenue or the Regional or
Revenue District Office inventories of goods or stocks had at the time of
such death.

g. Removal of business to other location

Any business for which the annual registration fee has been paid may,
subject to the rules and regulations prescribed by the Secretary of Finance,
upon recommendation of the Commissioner, be removed and continued in
any other place without the payment of additional tax during the term for
which the payment was made.

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TAX RETURNS
A. Income Tax Returns

Except when otherwise provided in this Code:

Individual Taxable on income:
1. Resident citizen -within and without the Philippines
2. Non-resident -income derived from sources
within the Philippines
3. Individual citizen of the Philippines -income from sources within
working or deriving income from abroad the Philippines
as overseas contract worker
4. Alien individual, resident or not -only on income derived from
sources
within the Philippines
5. Domestic Corporation -within and without the Philippines
6. Foreign Corporation, whether -only on income derived from
sources
engaged in trade or business within the Philippines
in Philippines

I. Individual Tax Return

The following are required to file an income tax returns:
a. Every Filipino citizen residing in the Philippines;
b. Every Filipino citizen residing outside the Philippines, on his income from
sources within the Philippines;
c. Every alien residing in the Philippines, on income derived from sources within
the Philippines;
d. Every nonresident alien engaged in trade or business or in the exercise of
profession in the Philippines.

II. Return of Husband and wife

-shall compute separately their individual income tax based on their respective
total taxable income. Provided, that if any income cannot be definitely attributed
to or identified as income exclusively earned or realized by either of the spouses,
the same shall be divided EQUALLY between the spouses for the purpose of
determining their respective taxable income.

III. Return of Parent to Include Income of Children

-the income of unmarried minor derived from property received from a living
parent shall be included in the return of the parent, except:
1. when the donors tax has been paid on such property
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 2. when the transfer of such property is exempt from donors tax.
IV. Return of Persons under Disability
-If taxpayer unable to make his own return, the return maybe made by:
1. duly authorized agent
2. authorized representative
3. guardian
4. other person charged with the care of his property or person.
-They shall assume responsibility for erroneous, false, or fraudulent returns.
V. Who are not required to file a return?
a. An individual whose gross income does not exceed his total personal and
additional exemptions for dependents under Sec. 35. Provided, a citizen and
any alien individual engaged in business or practice profession within the
Philippines shall file an income tax return, regardless of the amount of gross
income;
b. An individual with respect to pure compensation income, derived from
sources within the Philippines. Provided, that an individual deriving
compensation concurrently from two or more employers at any time during
the taxable year shall file an income tax return;
c. An individual whose sole income has been subjected to withholding tax;
d. A minimum wage earner or exempt from income tax pursuant to law,general
or special;

VI. Where to file:

a. Authorized agent bank
b. Revenue District Officer
c. Collection Agent
d. Duly Authorized Treasurer of the City or Municipality which such person has
legal residence or principal place of business;
e. Office of the Commissioner, in the absence of legal residence

VII. When to File

1. Return of individual: on or before 15th day of April of each year covering
income for the preceding taxable year.
2. Individuals subject to tax on capital gains:
a. From the sale or exchange of shares of stocks not traded thru a local stock
exchange: within 30 days after each transaction and a final consolidated
return on or before April 15 of each year.
b. From the sale or disposition of real property: within 30 days following
each sale or disposition.

VIII. Payment of Capital Gains Tax

1. Capital gains from Sale of Shares of Stock not Traded in the Stock Exchange

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 -a final tax at the rate of 5% if not over 100,000 and 10% on the amount in
excess of 100,000 is imposed upon the net capital gains realized during the
taxable year from the sale, exchange, or other disposition of shares of stock in
domestic corporation, except shares sold or disposed through the stock
exchange.
2. Capital Gains from Sale of Real Property
-final tax of 6% based on the gross selling price or current fair market value,
whichever is higher presumed to have been realized from sale, exchange or other
disposition of real property located in the Philippines. It includes a. pactro de retro sales
b.other forms of conditional sales, including estates and trusts.
EXCEPTION:
1. capital gains realized from sale or disposition of their principal residence by
natural persons;
2. the proceeds of which is fully utilized in acquiring or constructing new
principal residence within 18 calendar months from sale or disposition;
3. Historical cost or adjusted basis of real property carried over to new principal
residence built;
4. Commissioner notified by taxpayer within 30 days from the date of sale
through prescribed return of his intention to avail of exemption;
5. Said exemption can be availed only once every 10 years;
6. If no full utilization of proceeds, the portion of gain presumed, subject to
capital gain tax

B. CORPORATE RETURNS

I. Requirements
- Ever corporation subject to tax shall render in duplicate a true and accurate
quarterly income tax return and final or adjustment return.
- The return shall be filed by the President, Vice President or other principal
officer, and shall be sworn to by such officer and by the treasurer or assistant treasurer.

II. Quarterly Corporate Income Tax

1. Place of filing
-except in cases where the Commissioner otherwise permits:
a. authorized agent banks
b. Revenue district Officer
c. Collection Agent
d. duly authorized Treasurer of the city or municipality having jurisdiction
over the location of the principal office of the corporation.

2. Time of filing the Income Tax return

-the corporate quarterly declaration shall be filed within 60 days following the
close of each of the first 3 quarters of the taxable year.

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 -the final adjustment return shall be filed on or before the 15th day of April, or on
or before the 15th day of the 4th month following the close of the fiscal year, as the
case may be.

3. Time of Payment of Income Tax

-It shall be paid at the time the declaration or return is filed in the manner
prescribed by the Commissioner.

III. Final Adjustment Return

-If a taxpayer, other than an individual, with approval of the Commissioner,

changes the basis of computing net income from fiscal to calendar year, a separate final
or adjustment return shall be made for the period between the close of the last fiscal year
for which the return was made and the following December 31
-If the change is from calendar to fiscal year, return shall be made for the period
between the close of the last calendar year for which the return was made and the date
designated as the close of the fiscal year.
-If the change is from one fiscal year to another fiscal year, a return shall be made
for the period between the close of the former fiscal year and the date designated as the
close of the new fiscal year.

IV. Taxable Year of Corporation

-A corporation may employ either CALENDAR year or FISCAL year as basis for
filing its annual income tax return. Provided, the corporation shall not change the
accounting period employed without prior approval from the Commissioner.

V. Extension of Time to File the Return

-The Commissioner may, in meritorious cases, grant a reasonable extension of
time for filing returns of income or final and adjustment returns in cases of corporation in
accordance with Section 56 of this Code.

VI. Return of Corporation Contemplating Dissolution or Reorganization

-Every corporation shall within 30 days after:
1. the adoption by the corporation of a resolution or plan for its dissolution; or
2. for the liquidation of the whole or any part of its capital stock, including a
corporation which has been notified of possible dissolution by the SEC;or
3. for its reorganization

Render a correct return to the Commissioner, verified under oath, setting forth the
terms of such resolution or plan and such other information as the Secretary of Finance,
upon recommendation of the Commissioner, shall, by rules and regulations, prescribe.
Note: The dissolving or reorganizing corporation shall, prior to the issuance by the SEC
of the Certificate of Dissolution and Reorganization, secure a certificate of tax clearance
from the BIR which shall be submitted to the SEC.

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VII. Return on Capital Gains Realized from the Sale of Shares of Stocks not
Traded in the Local Stock Exchange

-It shall file a return within 30 days after the transaction and a final consolidated
return of all transactions during the taxable year on or before the 15th day of the 4th month
following the close of the taxable year.

VIII. Returns of Receivers, Trustees in Bankruptcy or Assignees

-Such Receivers, trustees, assignees shall make returns of the net income as and
for such corporation, in the same manner and form as such organization is hereinbefore
required to make returns. Any tax due shall be collected and assessed in the same
manner as if assessed directly against organizations of whose businesses or properties
they have custody or control.

IX. Returns of General Partnership

-It shall in duplicate, a return of its income, except income exempt under Sec. 32
(B).
-It shall set forth:
a. the items of gross income
b. deductions allowed
c. the names, taxpayer TIN
d. addresses and shares of each of the partner

X. Fiduciary Returns
-All persons or corporations, acting in any fiduciary capacity, shall render, in
duplicate, a return of the income of the person, trust or estate for whom or which they act,
and shall be subject to all provisions of Title II, which apply to individuals in case such
person, estate or trust has a gross income of 20,000 or over during the taxable year.
Who has fiduciary capacity?
a. Guardians
b. Trustees
c. Executors
d. Administrators
e. Receivers
f. Conservators

-Such fiduciary or person filing the return shall take oath that he has sufficient
knowledge of the affairs of the person, trust or estate; that to the best of his
knowledge and belief the return is true and correct

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C. ESTATE TAX RETURNS

I. 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 exceeds 20,000, the executor, administrator, or any of the legal
heirs, as the case maybe, within two months after the decedents death, or within a like
period after qualifying as such executor or administrator, shall give a written notice
thereof to the Commissioner.

II. Estate Tax Returns

a. Requirements
-In all cases of transfers subject to tax, or though exempt, the gross value
exceeds 20,000 or regardless of the gross estate, where the estate consists of
registered or registrable property such as real property, motor vehicle, shares
of stocks or other similar property for which a clearance from the BIR is
required as a condition precedent for the transfer of ownership shall file a
return, under oath in duplicate, setting forth:

1. the value of the gross estate of the decedent at the time of his death, or in
case of nonresident alien, of that part of his gross estate situated in the
Philippines;
2. the deductions allowed from the gross estate;
3. such information as may at the time be ascertainable necessary to
establish correct taxes.

However, if the gross value of estate tax returns exceeds 2million, it shall be
supported with a statement duly certified by a CPA.
b. Time for filing and extension of time
-The estate tax returns shall be filed within 6 months from the decedents
death. The Commissioner shall have the authority to grant, in meritorious
cases, a reasonable extension not exceeding 30 days for filing the return.
c. Place of filing
-Except in cases permitted by the Commissioner, the return shall be filed
with:
1. authorized agent bank;
2. Revenue district Officer
3. collection officer
4. authorized treasurer of the city or municipality which the decedent was
domiciled
5. Office of the Commissioner

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III. Liability for Payment

-The estate tax imposed shall be paid by the executor or administrator before
delivery to any beneficiary of his distributive share. Such beneficiary shall, to the extent
of his distributive share of the estate, be subsidiarily liable for the payment of such
portion of the estate tax as his distributive share bears to the value of the total net estate.

IV. Discharge of Executor or Administrator from Personal Liability

-If the executor or administrator makes a written application to the Commissioner
for the determination of the amount of the estate tax and discharge from personal
liability, the Commissioner shall notify the executor or administrator of the amount of tax
within 1 year from the making of such application, or if application is made before the
return is filed, within 1 year after the return is filed.
-The executor or administrator, upon payment of the amount of which he is
notified shall be discharged from personal liability for any deficiency in the tax thereafter
found to be due and shall be entitled to the receipt or writing showing such discharge.

V. Meaning of Deficiency
a.) The amount by which the tax imposed by this Chapter exceeds the
amount shown by the executor, administrator or any of his heirs upon his
return;
b.) If no amount is shown in the tax by the executor, administrator or any of
his heirs upon his return, or if no return is made by the executor,
administrator, or any heir, then the amount by which the tax exceeds the
amount previously assessed.

VI. Payment of Tax Antecedent to the Transfer of Shares, Bonds or Rights

-A certification from the Commissioner that the taxes fixed have been paid must
be issued before a transfer to any new owner in the books of corporation, sociedad
anonima, partnership, business, or industry organized or established in the Philippines
any share, obligation, bond or right by way of gift inter vivos or mortis causa, legacy or
inheritance.

VII. Duties of Certain Officers and Debtors

-Any document transferring real property or real rights therein or any chattel
mortgage, by way of gifts inter vivos or mortis causa, legacy or inheritance shall not be
registered in the Registry of Property unless a certification from the Commissioner that
the tax fixed and actually due thereon has been paid.
-They shall immediately notify the Commissioner, Regional Director, Revenue
District Officer or Revenue Collection Officer or Treasurer of the City or municipality
where their offices are located, of the non payment of taxes discovered by them.
-Any lawyer, notary public, or government officer who intervenes in the
preparation of documents regarding partition or disposal of donation inter vivos or
mortis causa, legacy or inheritance by reason of their office shall have the duty of
furnishing the Commissioner, Regional Director, Revenue District Officer with copies of
such documents and any information which may facilitate the collection of tax.

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 -Debtor of the deceased shall not pay his debts to heirs, legatee, executor or
administrator unless there is a certification that the tax due has been paid.
Exception: he may pay without the certification if included in the inventory of the
estate of the decedent.

VIII. Restitution of Tax Upon Satisfaction of Outstanding Obligations

-If after the payment of the estate tax, new obligation of the decedent shall
appear and the persons interested shall have satisfied them by order of the court,
they shall have the right to the restitution of the proportional part of the tax paid.

D. DONORS TAX RETURN

I. Requirements
-Any individual who makes any transfer by gift, except those who are exempt,
shall make a return under oath in duplicate. The return shall set forth:
1. each gift made during the calendar year which is to be included in computing
net gifts;
2. the deductions claimed and allowable
3. any previous net gifts made during the same calendar year
4. name of the done
5. such further information as maybe required by rules and regulations

II. Time and Place of Filing

-The return of the donor shall be filed within 30 days after the date of the gift is
made and the tax due thereon shall be paid at the time of the filing. The return shall be
filed and the tax paid to an authorized bank, revenue district officer, duly authorized
treasurer where donor was domiciled or in the office of the Commissioner. In case of
nonresident, the return maybe filed with the Philippine Embassy or Consulate in the
country where he is domiciled at the time of the transfer or directly with the
Commissioner.

E. VAT RETURNS
I. In General
-Every person liable to pay the VAT shall file a quarterly return of the amount of
his gross sales or receipts within 25 days following the close of each taxable quarter
prescribed for each taxpayer: Provided, VAT registered person shall pay the VAT on a
monthly basis.
-Any person whose registration has been cancelled shall file a return and pay the
tax due thereon within 25 days from the date of cancellation of registration: Provided,
that only one consolidated return shall be filed by the taxpayer for his principal place of
business or head office and all branches.

II. Where to File the Return and Pay the Tax

-The return shall be filed with and the tax paid to an authorized agent bank,
revenue collection officer, or duly authorized city or municipal treasurer in the

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Philippines located within the revenue district where the taxpayer is registered ore
required to register.

F. WITHHOLDING TAX RETURNS

I. Quarterly Returns and Payments of Taxes Withheld

1. Place of filing
-except in cases where the Commissioner otherwise permits:
a. an authorized agent bank
b. Revenue district Officer
c. Collection Agent
d. duly authorized Treasurer of the city or municipality where
withholding agent resides

2. Time of filing
-the return for final withholding tax shall be filed and the payment made within 25
days from the close of the calendar quarter.
-the return for creditable withholding taxes shall be filed and the payment not
later than the last day of the month following the close of the quarter during
which withholding was made.

Provided, that the Commissioner, with the approval of the Secretary of Finance,
may require these withholding agents to pay or deposit the taxes deducted or withheld at
more frequent intervals when necessary to protect the interest of the government.

Note: The taxes withheld and deducted by the withholding agent shall be held as special
fund in trust for the government until paid to the collecting officers.

II. Annual Information Return

-Every withholding agent required to deduct and withhold taxes shall submit to
the Commissioner an annual information return containing:
1. list of payees ad income payments,
2. amount of taxes withheld from each payee
3. such other information required by Commissioner

III. Time of filing Return

-For final withholding tax, It shall be filed on or before January 31 of the
succeeding year.
-For creditable withholding taxes, not later than March 1 of the following year for
which annual report is submitted.
The Commissioner may, by rules and regulations, grant to any withholding agent a
reasonable extension of time to furnish and submit the return required

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f. Tax Remedies under the NIRC

1. Taxpayers Remedies
A. Assessment
Tax assessment

General Rule

Assessment shall be made within three (3) years after the last day prescribed by
law for the filing of the return or from the day the return was filed in case the
return was filed beyond the period prescribed by law.

Exceptions

1. Assessment may be made within ten (10) years after the discovery of the falsity,
fraud or omission in the following cases:

a. in case of a false or fraudulent return with intent to evade tax; or

b. failure to file a return.

2. In case the Commissioner and the taxpayer agree in writing to a different period
before the expiration of the original prescriptive period. The period so agreed
upon may be extended by subsequent written agreement before the expiration of
the period previously agreed upon.

An assessment is the official action of an administrative officer in determining the

amount of tax due from a taxpayer, or it may be a notice to the effect that the
amount therein stated is due from a taxpayer as a tax with a demand for payment
of the tax or deficiency stated therein.

An assessment is a finding by the taxing agency that the taxpayer has not paid his
current taxes. It is also a notice to the effect that the amount stated therein is due
as tax and is a demand for payment thereof.

The Local Government Code defines assessment as the act or process of

determining the value of a property or portion thereof subject to tax, including the
discovery, listing, classification, and appraisal of properties.

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 The BIR assessment is usually embodied in a demand letter or in a BIR form
known as the assessment notice.

Requisites of a valid assessment

1. Post-reporting notice or notice for an informal conference after the tax audit.
2. Pre-assessment notice sent to the taxpayer, except in several instances.
3. The taxpayers shall be informed in writing of the law and the facts upon which
the assessment is made.
4. Assessment must be made within the prescriptive period.

Issue jeopardy assessments and terminate the taxable period

A jeopardy assessment is one issued by the Commissioner if he believes that the
collection of the tax is in jeopardy due to delay and other causes.
The Commissioner may issue a jeopardy assessment when it comes to his
knowledge that a taxpayer is:
1. retiring from business subject to tax; or
2. intending
a. to leave the Philippines; or
b. to remove his property therefrom; or
c. to hide or conceal his property; or
3. performing any act tending to obstruct the proceedings for the collection
of the tax for the past or current quarter or year or to render the same totally or
partly ineffective.
In such cases, the Commissioner may assess and collect the tax immediately
without the usual formalities. Among others, the Commissioner shall:

1. declare the tax period of such taxpayer terminated any time; and
2. send the taxpayer a notice of such decision together with a request for the
immediate payment of the tax for the period so declared terminated and
the tax for the preceding year or quarter, or such portion thereof as may be
unpaid.

Said taxes shall be due and payable immediately and shall be subject to all the
penalties prescribed by law, unless paid within the time fixed in the demand made
by the Commissioner.

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Deficiency v. delinquency

Deficiency is the amount by which the tax due exceeds the sum of the amount of
the tax shown on a taxpayers return plus amounts previously assessed or
collected as deficiency, less any credits, refunds, or other payments due the
taxpayer, i.e. the amount a taxpayer is deficient in his tax payments.

Delinquency is the state of a person upon whom the personal obligation to pay the
tax has been fixed by lawful assessment and he thereafter fails to pay the tax
within the time prescribed by law.

Power of the Commissioner to make assessments and prescribe additional

requirements for tax administration and enforcement

1. Examination of returns and determination of the tax due.

2. Assess the proper tax on the best evidence obtainable.
3. Conduct inventory-taking, surveillance and to prescribe presumptive gross sales
and receipts
4. Issue jeopardy assessments and terminate the taxable period.
5. Prescribe real property values.
6. Inquire into bank deposit accounts.
7. Accredit and register tax agents.
8. Prescribe additional procedural or documentary requirements.

When is assessment deemed made?

It is not the issue date of the demand and/or notice that is the reckoning point in
prescription but rather it is the date when the demand letter is released, mailed or
sent to the taxpayer that constitutes an actual assessment.

The Supreme Court held in a case that so long as the release thereof is effected
before prescription sets in, the assessment is deemed made on time even though
the same is actually received by the taxpayer after the expiration of the
prescription period. [Basilan Estates, Inc. v. Commissioner, 21 SCRA 17] The
law does not require that the demand or notice be received within the prescriptive
period.

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What are the additions to the tax?

1. Civil penalty or surcharge

2. Interest
3. Other civil penalties and administrative fines

Civil penalty or surcharge

The civil penalty or surcharge may either be 25% or 50% of the tax depending on
the nature of the violation.

The payment of the surcharge is mandatory and the Commissioner is not vested
with any authority to waive or dispense with the collection thereof.

An extension of time to pay taxes granted by the Commissioner does not excuse
payment of the surcharge.

The 50% surcharge is not a criminal penalty but a civil or administrative sanction
provided primarily as a safeguard for the protection of the State revenue and to
reimburse the government for the heavy expense of investigation and the loss
resulting from the taxpayers fraud.

Interest

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

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

Deficiency interest

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

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When delinquency interest imposed?

Delinquency interest is imposed in case of failure to pay:

1. The amount of the tax due on any return required to be filed; or

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

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

Interest on extended payment

This is imposed when taxpayer has opted to pay by installment but he fails to pay
the tax or any installment on the prescribed date for payment.
It is also imposed where Commissioner has authorized the extension of the time
for payment of the tax.

Assessment Process

1. Notice of Assessment

When the local treasurer or his duly authorized representative finds that correct taxes,
fees, or charges have not been paid, he shall issue a notice of assessment stating the
nature of the tax, fee, or charge, the amount of deficiency, the surcharges, interests
and penalties. [Section 195, Local Government Code]

2. Written protest

Within sixty (60) days from the receipt of the notice of assessment, the taxpayer may
file a written protest with the local treasurer contesting the assessment; otherwise, the
assessment shall become final and executory. [Section 195, Local Government Code]

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3. Decision

The local treasurer shall decide the protest within sixty (60) days from the time of its
filing. If the treasurer fins the protest to be wholly or partly meritorious, he shall issue
a notice canceling wholly or partially the assessment. However, if the local treasurer
finds the assessment to be wholly or partly correct, he shall deny the protest wholly or
partly with notice to the taxpayer. [Section 195, Local Government Code]

4. Appeal

The taxpayer shall have thirty (30) days from the receipt of the denial of the protest or
from the lapse of the sixty-day period prescribed within which to appeal with the
court of competent jurisdiction; otherwise, the assessment becomes conclusive and
unappealable. [Section 195, Local Government Code]

Protest of Assessment

Procedure

Taxpayer may protest administratively the assessment by filing a request for

reconsideration or reinvestigation within thirty (30) days from receipt of the
assessment.
Within sixty (60) days from the filing of the protest, taxpayer shall submit all
relevant supporting documents, otherwise the assessment becomes final.
If the protest is denied in whole or in part, or is not acted upon within one hundred
eighty (180) days from submission of documents, the taxpayer adversely affected
by the decision or inaction may appeal to the Court of Tax Appeals within thirty
(30) days from receipt of the decision or from the lapse of the one hundred eighty
(180)-day period; otherwise, the decision shall become final, executory and
demandable. [Section 228, NIRC]
Decision of the Court of Tax Appeals may be appealed to the Court of Appeals
through a verified petition for review within fifteen (15) days from receipt of
decision of the CTA. This may be extended for another fifteen (15) days upon
proper motion and the payment of the full amount of the docket fee before the
expiration of the reglementary period. No further extension shall be granted
except for the most compelling reason and in no case to exceed 15 days. [Section
4, Rule 43, Rules of Court]

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 Decision of the Court of Appeals is appealable to the Supreme Court through a
petition for review by certiorari within fifteen (15) days from receipt of the CA
decision.

Remedies of taxpayer

a. Remedy before payment of tax: Protest of assessment

b. Remedy after payment of tax: Claim for tax refund or credit

Effect of failure of the taxpayer to file an administrative protest or to appeal the

Commissioners decision to the Court of Tax Appeals

The assessment becomes final and unappealable. As such, it makes the assessed
tax collectible.

Collection

General Rule

Collection may be instituted within five (5) years following the assessment of the
tax. [Section 222]

Exception

A proceeding in court for collection, without assessment, may be instituted within

ten (10) years after the discovery of falsity, fraud, or omission in the case of a
false or fraudulent return with intent to evade tax or failure to file a return.
[Section 222(a), NIRC]

When does the three-year prescriptive period start to run?

The period of limitation to collect is counted from the assessment of the tax.
Assessment is deemed made at the time the demand or assessment notice has been
sent, released or mailed to the taxpayer.
The actual sending or release to the taxpayer of the assessment notice or demand
is, therefore, necessary in order to determine the actual date when the tax being
collected was assessed.

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When is the tax deemed collected for purposes of the prescriptive period?

Collection through summary remedies is effectuated by summary methods when

the government avails of the distraint and levy procedure.
If collection is to be effected through judicial remedies, the collection of the tax is
begun by the filing of the complaint with the proper court.
However, if the decision of the Commissioner on a protested assessment is
appealed to the Court of Tax Appeals, the collection of the tax is considered
begun when the government files its answer to the taxpayers petition for review.

May there be a judicial action to collect a tax liability even if there is no previous
assessment?

Yes. A proceeding in court for collection without assessment may be

instituted within ten years after the discovery of falsity, fraud, or omission in the
case of a false or fraudulent return with intent to evade tax or failure to file a
return. [Section 222(a), NIRC]
Prescription of the governments right to recover an erroneously refunded tax
Same as the three-year prescriptive period for making assessments. [Guagua
Electric Co., Inc. v. Commissioner, 19 SCRA 790]

Suspension of the running of the Statute of Limitations

The running of the Statute of Limitations provided in Sections 203 and 222 on the
making of assessment and the beginning of distraint or levy or a proceeding in
court for collection, in respect of any deficiency, shall be suspended under any of
the following circumstances:

1. When the Commissioner is prohibited from making the assessment or

beginning the distraint or levy or proceeding in court and for sixty (60)
days thereafter;
2. When the taxpayer requests for a reinvestigation which is granted by the
Commissioner;
3. When the taxpayer cannot be located in the address given by him in the
return filed upon which a tax is being assessed or collected, unless the
taxpayer has informed the Commissioner of any change in address;
4. When the warrant of distraint or levy is duly served upon the taxpayer, his
authorized representative, or a member of his household with sufficient
discretion, and no property could be located; and
5. When the taxpayer is out of the Philippines.
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Examples when the Commissioner is prohibited from assessing or collecting the tax

1. The filing of a petition for review in the Court of Tax Appeals from the decision
of the Commissioner on a protested assessment interrupts the running of the
prescriptive period for collection. [Republic v. Ker & Co., Ltd., 18 SCRA 207]
2. When the Court of Tax Appeals enjoins the collection of the tax under Section 11
of RA 1125.

Request for reinvestigation which should be granted or acted upon by the

Commissioner

It should be emphasized that a mere request for reinvestigation without any

corresponding action on the part of the Commissioner does not interrupt the
running of the prescriptive period.

Will an extrajudicial demand on the taxpayer interrupt prescription?

No. Section 22 of the NIRC enumerates the instances when prescription is

interrupted. The serving of an extrajudicial demand is not one of them.

(5) Forfeiture to government for want of bidder

In case there is no bidder for real property exposed for sale or if the
highest bid for an amount insufficient to pay the taxes, penalties and costs, the
internal revenue officer conducting the sale shall declare the property forfeited to
the government for the satisfaction of the claim in question.

The forfeiture need not be for the whole tax liability which will merely be
for the amount equivalent to the fair market value of the property.
Within one year from the date of such forfeiture, the taxpayer, or any one
for him may redeem the property. He must pay the full amount of taxes and
penalties, together with the interest thereon and the cost of sale. If the property is
not redeemed, the forfeiture shall become absolute.

The BIR Commissioner shall be in charge of the real state taken subject to
taxes. He also may, upon giving of not less than 20 days notice, sell and dispose
the property through a public auction or a private sale with the approval of the
Secretary of Finance.

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 (a) Remedy of enforcement of forfeitures

i. Action to contest forfeitures of chattel

In case of seizure of personal property under claim for forfeiture,

the owner deciding to contest the validity of the forfeiture may, at any
time: (1) before sale or destruction of the property, bring an action against
the person seizing the property or having possession to recover the same
and upon giving proper bond may enjoin the sale; or (2) after the sale and
within six (6) months he may an action to recover the net proceeds
realized at the sale. (Sec. 231, NIRC)

The action referred to is an ordinary action for recovery of

personal property (See Rule 60, Rules of Court) or the net proceeds of its
sale which must be brought in the ordinary courts and not in the Court of
Tax Appeals.

(d) Resale of real estate taken for taxes

The Commissioner of Internal Revenue shall have charge of any

real estate obtained by the government in payment or satisfaction of taxes,
penalties, or costs arising upon nder the Tax Code or in compromise or
adjustment of any claim therefor:

(1) He may upon giving of not less than 20 days notice, sell and dispose of
the same at public auction or, with the approval of the Secretary of
Finance, may dispose of the same at the private sale.

(2) In either case, the proceeds of the sale shall be deposited in the
National Treasury, and an account of the same shall be rendered to the
Commission on Audit.

(c) When property to be sold or destroyed

The sales of chattels of removable fixtures which are forfeited shall be

effected as far as practicable in the same manner and conditions as the public
notice and the time and manner of sale as are prescribed for sales of personal
property distrained for the failure to pay taxes.

The Commissioner may order that upon forfeiture distilled spirits, liquors,
cigars, cigarettes, other manufactured products of tobacco be destroyed when the
sale of the same for consumption or use would be injurious to public health and
prejudicial to the enforcement of law.

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 The following may, upon forfeiture, be sold or destroyed in the discretion
of the Commissioner: all other articles subject to excise tax which have been
manufactured or removed in violation of the NIRC, dies for printing or making of
internal revenue stamps or labels which are in imitation or purport to be lawful
stamps or labels.

Forfeited property shall not be destroyed until at least twenty (20) days
after seizure.

(d) Disposition of funds recovered in legal proceedings or obtained from

forfeiture

All judgments and monies obtained and received for taxes, costs,
forfeitures, fines and penalties shall be paid to the Commissioner or his authorized
deputies as the taxes themselves are required to be paid, and shall be accounted
for and dealt within the same manner, except as especially provided.

6. Further distraint or levy

The remedy by distraint of personal property and levy on realty may be repeated
if necessary until the full amount due, including all expenses, is collected.

7. Tax Lien

Tax lien is the legal claim or charge on property, either real or personal,
established by law as a security in default in payment of taxes.

A tax lien does not arise from implication from the mere power to tax. Unless
expressly made so by statute, a tax is not a lien even upon a property against which it is
assessed. Tax liens created by statutes are strictly construed, and are not to be given a
retrospective operation unless plainly required by its terms.

There is no tax lien where there is no obligation to pay a tax. The tax, together with
interest, penalties, and costs that may accrue in addition thereto, is lien upon all property
and rights to property belonging to the taxpayer. Generally, lien attaches to the property
irrespective of ownership or transfer thereof.

The lien shall not be valid against any mortgagee, purchaser, or judgment
creditor until notice of such lien shall be filed by the CIR in the Office of the Register of
Deeds in the province or city where the property of the taxpayer is located.
A lien is a charge on the property and gives right to resort to the property for
payment of the tax. The lien secures only the payment of the tax.

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 The lien attaches when the taxpayer neglects or refuses to pay the tax after
demand but relates back from the time the assessment was made by the CIR or from the
time the tax became due and payable.

(8) Compromise

Compromise is a contract whereby the parties, by reciprocal concessions, avoid a

litigation or put an end to one already commenced.
The following may be considered as requirements to a compromise of taxes:
(1) The taxpayer must have a tax liability;
(2) There must be an offer (by the taxpayer or the Commissioner) of an amount
to be paid by the taxpayer, and
(3) There must be an acceptance (by the taxpayer or the Commissioner) of the
offer in settlement of the original claim.

(a) Authority of the Commissioner to compromise and abate taxes

Under the law, the power to compromise civil and criminal cases arising
from violations of the Tax Code is vested solely upon the CIR. The power is
purely discretionary. As a rule, courts have no power to compel him to exercise
his discretion one way or the other.

Subordinate officials may preliminarily enter into a compromise which is

not final and may be reviewed by the CIR. But the subordinates rejection of an
offer of compromise is final and binding unless revoked or set aside by the
Commissioner.

The Tax Code prohibits the Commissioner to delegate to any of his

subordinate officials the power to compromise or abate (reduce or lessen) any tax
liability. However, tax assessments issued by the Regional Offices involving the
basic deficiency taxes of P500,000 or less, and minor criminal violations (as
determined by the rules and regulations) discovered by regional and district
officials may be compromised by Regional Evaluation Board.

9. Civil and criminal actions

(a) Suit to recover tax based on false or fraudulent returns

When an assessment is made in case of any list, statement or return, which
in the opinion of the Commissioner was false or fraudulent or contained any
statement or undervaluation, no tax collected under such assessment shall be
recovered by any suit unless it is proved that the said list, statement or return was
not false nor fraudulent and did not contain any understatement or undervaluation.
However, this does not apply to statements or returns made or to be made in good
faith with respect to annual depreciation of oil or gas wells and mines.

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c. Refund
(1) Grounds and requisites for refund
(1) The claim for refund or credit must be in writing;
(2) It must be filed with the CIR within two years after the payment of tax
or penalty;
(3) It (a) should clearly state the amount being claimed and the ground/s
relied upon and should be accompanied with all pertinent papers

(2) Requirements for refund as laid down by cases

(a) Necessity of proof of written claim for refund
It is necessary to require the filing of the written claim for refund
of tax prior to recourse to a court in order to afford the Commissioner of
Internal Revenue the opportunity to correct the action of the subordinate
officers and to notify the government that such taxes have been
questioned, and the notice should be then borne in mind in estimating the
revenue available for expenditure. (Bermejo vs CIR, L-3228)

(b) Claim containing a categorical demand for reimbursement

In Bermejo vs. Commissioner of Internal Revenue, the claim for
refund must be a categorical demand for reimbursement.
(c) Filing of administrative claim for refund and the suit/proceeding
before the CTA within two years from date of payment regardless of
any supervening cause
The two year period is mandatory. If the CIR denied the claim for
refund, the taxpayer can appeal to the Court of Tax Appeals within thirty
(30) days after receipt of the decision of the refund. If the CIR fails to act
on the refund and the two year period is about to lapse, the taxpayer
should institute an appeal with the CTA, without waiting for the decision
of the Commissioner. The delay of the Commissioner in rendering the
decision does not extend the peremptory period fixed by law. (Gibbs vs.
CIR, L-13453)

The following are special circumstances that may suspend the

running of the two year period:
(1) If the CIR made the taxpayer asking for a refund believe that he
would be credited for the overpayment;
(2) If there is an agreement between the taxpayer and the agent of
the Commissioner that they would wait for a decision by the Supreme
Court to guide them in the settlement of the question/s involved in the
refund. (Panay Electric Co., Inc. vs.CIR, L-10574)

(3) Legal basis of tax refunds

No suit shall be maintained in any court for the recovery of any national
internal revenue tax hereafter alleged to have been erroneously or illegally
assessed or collected, or of any penalty claimed to have been collected without
authority, or of any sum alleged to have been excessively or in any manner

Page | 149
wrongfully collected, until a claim for a refund or credit has been duly filed with
the Commissioner; but such suit or proceeding may be maintained, whether or not
such tax, penalty, or sum has been paid under protest or duress.
In any case, no such suit or proceeding shall be filed after the expiration of
two (2) years from the date of payment of the tax or penalty regardless of any
supervening event; Provided, however, That the Commissioner may, even without
a written claim therefor, refund or credit any tax, where on the face of the return
upon which payment was made, such payment appears clearly to have been
erroneously paid. (Section 229, NIRC)

(4) Statutory basis for tax refunds under the Tax Code
(a) Scope of claims for refunds
Section 229 applies to all internal revenue taxes in the Tax Code. It
will be noted that the section uses the term any internal revenue tax.
Section 229 does not apply to tax assessed under a city or municipal
ordinance.

(b) Necessity of proof for claim of refund

The reasons for requiring the filing of a claim for refund of tax
before recourse to court is had are the following:
(1) To afford the CIR the opportunity to correct the action of
subordinate officers; and
(2) To notify the government that such taxes have been questioned,
and the notice should then be borne in mind in estimating the revenue
available for expenditure.

(c) Burden of proof for claim of refund

The burden of proving the claim of refund falls on the taxpayer. He

who claims a refund or exemption from taxes has the burden of justifying
by words too plain to be mistaken and too categorical to be misinterpreted.

(d) Nature of erroneously paid tax/illegally assessed collected

Refunds are in the nature of tax exemptions and are construed
strictly against the person claiming the same.

(e) Tax refund vis--vis tax credit

A tax credit is a claim for the issuance of tax credit certificate,
showing an amount owing from the government to the taxpayer which the
latter is legally authorized to credit or offset against the national internal
taxes payable by him except withholding taxes.

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 On the other hand, a refund is claim for the payment of cash for
taxes erroneously or illegally paid by the taxpayer to the government.

(f) Essential requisites for claim of refund

The authority of CIR to refund or credit taxes erroneously or

illegally received or penalties imposed without authority can only be
exercised upon compliance by the taxpayer with the following conditions
prescribed by law:
(1) The claim for refund or credit must be in writing;
(2) It must be filed with the CIR within two years after payment of
the tax or penalty;
(3) It should (a) should state clearly the amount being claimed and
the ground /s relied upon; and (b) should be accompanied with all
the pertinent papers.

(5) Who may claim/apply for tax refund/tax credit

(a) Taxpayer/withholding agents of non-resident foreign corporation
The proper person to claim refund or tax credit is the person on
whom the tax is imposed by the statute.
The taxpayer in order to claim a refund or tax credit must comply
with the procedures in claiming a refund of, or a tax credit for, taxes and
penalties which he alleges to have been erroneously or illegally or
excessively assessed or collected.

A withholding agent of a non-resident foreign corporation should

be allowed to claim for tax refund, because under the law, said agent is the
one who is held liable for any violation of the withholding tax law should
such violation occur.

(6) Prescriptive period for recovery of tax erroneously or illegally collected

No suit in any court for the recovery of any national revenue tax
erroneously or illegally collected shall be begun after the expiration of two years
from the date of payment of tax or penalty, regardless of any supervening cause
that may arise after the payment.

The two year period under Section 306 is counted from the date of
payment. If the tax is paid in installments, the two year period is counted from the
date of final payment.

(7) Other considerations affecting tax refunds

The Court of Tax Appeals cannot order the payment of interest on refund
or tax claimed to be illegally or erroneously collected. However, when the
improper collection of the tax was characterized by arbitrariness, the government
must pay interest on the refundable amount.

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 If the taxpayer had already lost his right to appeal, he could not avail of
Section 306 (now Section 229) by paying the tax and then asking for refund.

The taxpayers willingness to pay the tax is not a waiver to raise defenses
against the taxs legality.

2. Government Remedies

a. Administrative remedies

(1) Tax lien

A tax lien is a legal claim granted to the government to secure the
proper payment of tax, surcharges, interest and costs on all property
subject to levy or distraint.
A tax lien is directed to the property subject to tax regardless of the
owner of the property, irrespective of who is the possessor thereof. It is
enforced by (a) seizure of the property, and (b) by a sale of the property.
By seizure, the proceeds of the property sold are applied to satisfy
the tax liability and the excess thereof shall be returned to the taxpayer. By
forfeiture, no part of the proceeds goes to the taxpayer because the
property is confiscated in favor of the government.
This lien is not valid against any mortgage, purchaser or judgment
creditor until notice of such lien shall be filed by the Commissioner in the
office of the Register of Deeds of the province or city where the property
of the taxpayer is located.

(2) Levy and sale of real property

Levy is the remedy whereby the collection of delinquent taxes is
imposed upon the real property belonging to the delinquent taxpayer. Levy
shall be effected by writing upon an authenticated certificate showing the
name of the taxpayer and the amount of tax and penalty, a description of
the property upon which levy is made. At the same time, written notice of
the levy shall be mailed to and served upon the Register of Deeds of the
province or city where the property is located and upon the delinquent
taxpayer, or if he is absent from the Philippines, to his agent or the
manager of his business in respect to which the liability arose, or if there
be none, to the occupant to the property in question.

(3) Forfeiture of real property to the government for want of bidder

In case there is no bidder for real property exposed for sale or if the
highest bid is for an amount insufficient to pay the taxes, penalties and
costs, the Internal Revenue conducting the sale shall declare the property
forfeited to the government in satisfaction of the claim in question.

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 The forfeiture need not be for the whole tax liability which will
merely be for the amount equivalent to the fair market value of the
property.
Within one year of such forfeiture, the taxpayer or any one for him,
may redeem said property. He must pay the full amount of taxes and
penalties, together with the interest thereon, and the costs of sale. If the
property is not redeemed, the forfeiture shall become absolute.

(4) Further distraint or levy

The remedy by distraint of personal property and levy on realty
may be repeated if necessary until the full amount due, including all
expenses, is collected.

(5) Suspension of business operation

Under the NIRC, the Commissioner or his authorized
representative is empowered to suspend the business operations and
temporarily close the business establishment of any person for any of the
following violations:
(a) In case of VAT-registered person
(1) Failure to issue receipts or invoices;
(2) Failure to file value-added tax return as required under Section
114; or
(3) Understatement of taxable sales or receipts by thirty percent or
more of his correct taxable sales or receipts for the taxable quarter.
(b) Failure of any person to register as required under Section 236

The temporary closure of the establishment shall be for the
duration of not less than five (5) days and shall be lifted only upon
compliance with whatever requirements prescribed by the
Commissioner in the closure order.

(6) Non-availability of injunction to restrain collection of tax

No court shall have the authority to grant an injunction to
restrain the collection of any national internal revenue tax, fee, or
charge imposed by the NIRC.
However, the courts, in the exercise of their equity
jurisdiction may enjoin the enforcement of an invalid tax
regulation where irreparable injury to property rights would result
or where persons would be subject to a multiplicity of suits
incurred by reason of the penalty attached to a recurring act or
omission.

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 b. Judicial remedies

3. Statutory Offenses and Penalties

a. Civil penalties
(1) Surcharge
Surcharge is the amount imposed by law as an addition to the main
tax in case of delinquency. The CIR shall impose surcharges on the
amount due as follows:
(a) False or fraudulent returns willfully made 50%of the tax or
delinquency tax where payment has been made on the basis of such return
before the discovery of the falsity or fraud. It is not enough that the return
is false to justify the 50% surcharge. It must appear that the taxpayer had
the intention to evade the payment of tax in filing the false return.
(b) Willful neglect to file return 50% of the tax. The BIR cn
onsiders the failure to file return as due to willful neglect in case it is
discovered before the taxpayer could voluntarily file such return even
without notice from the BIR. If the taxpayer, without notice from the
Commissioner or his duly authorized representative, voluntarily files such
return, only 25% surcharge shall be imposed for late filing and late
payment of tax.
(c) Neglect to file return and pay tax not willful in case of failure:
(1) to file return and pay tax as required on the date prescribed
(2) to pay deficiency tax within the time prescribed for its payment
in the notice of assessment, or
(3) to pay the full or part of the amount of tax shown on any return
required to be filed or the full amount of tax due which no return is
required to be filed on or before the prescribed for its payment, not due
to willful neglect 25% of the amount due
(d) Return filed not with the officer designated by law 25% of
the amount due
(e) A substantial under declaration of taxable sales, receipts or
income (exceeding 30% of that declared), or a substantial overstatement of
deductions (exceeding 30% of actual deductions), as determined by the
Commissioner shall constitute prima facie evidence of a false or
fraudulent return deficiency tax and a 50% surcharge

(2) Interest
(a) In general
The taxpayer is still liable to pay interest at the rate of 20%
per annum or such higher rate as may be prescribed by rules and
regulations from the date prescribed for payment until the amount
is fully paid.

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 (b) Deficiency interest.
Any deficiency in the tax due, as the term is defined in the
Tax Code, shall be subject to interest which shall be assessed and
collected from the date prescribed by law for its payment until the
full payment thereof

(c) Delinquency interest

In case of failure to pay:
(1) the amount of the tax due on any return to be filed; or
(2) the amount of the tax due for which no return is
required; or
(3) a deficiency tax, or any surcharge or interest thereon
on the due date appearing in the notice and demand of the
Commissioner, there shall be assessed and collected
interest on the unpaid amount until it is fully paid which
interest shall form part of the tax.

If the deficiency tax is paid within the due date

appearing in the notice and demand, the interest is based on
the amount of the deficiency tax. No surcharge or penalty is
due.

(d) Interest on extended payment

Where a tax is payable on installment and the tax or any
installment thereof is not paid on or before the date prescribed by
law for its payment, or where the Commissioner has authorized an
extension time within which to pay the tax which is not paid on the
date of notice and demand, there shall be assessed and collected
interest from such date until it is paid.

4. Compromise and abatement of taxes

a. Compromise
Compromise is a contract whereby the parties, by reciprocal concessions,
avoid litigation or put an end to one already commenced.

The Commissioner may compromise any national internal revenue tax

when (a) a reasonable doubt as to the validity of the claim against the taxpayer
exists, or (b) the financial position of the taxpayer demonstrates a clear inability to
pay the assessed tax.

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

following minimum amounts:
(1) for cases of financial incapacity 10% of the basic tax assessed
(2) for other cases 40% of the basic tax assessed

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 Where the basic tax involved exceeds P 1,000,000.00 or where the
settlement offered is less than the prescribed minimum rates, the compromise
shall be subject to the approval of the Evaluation Board.

b. Abatement
When the tax or any portion thereof appears to be unjustly or excessively
assessed, or when the administration and collection costs involved do not justify
the collection of the amount due, the tax may be abated; i.e., the entire tax liability
of the taxpayer is cancelled.

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

Commissioner, except in the following cases: (a) assessments issued by regional
offices involving basic taxes of P500,000.00 or less, and (b) minor criminal
violations. These cases may be compromised by a regional evaluation board.

G. Organization and Functions of the Bureau of Internal Revenue

1. Rule-making authority of the Secretary of Finance
a. Authority of the Secretary of Finance to promulgate rules and
regulations

The Secretary of Finance may promulgate, upon recommendation

of the Commissioner, all needful rules and regulations for the effective
enforcement of the Code. These rules and regulations must be:
(1) Consistent and in harmony with law;
(2) Reasonable;
(3) Useful and necessary;
(4) Published in the Official Gazette

The authority of the Secretary of Finance, in conjunction with the

CIR, to promulgate all needful rules and regulations for the effective
enforcement of the internal revenue laws cannot be controverted. Neither
can it be disputed that such rules and regulations as well as administrative
rulings and opinions, ordinarily should deserve weight and respect by the
court.

b. Specific provisions to be contained in the rules and regulations

The rules and regulations of BIR shall among other things contain
provisions prescribing or defining:
(a) The time and manner in which Revenue Regional Directors
shall canvass their respective Revenue Region for the purpose of
discovering persons and property liable to national internal revenue taxes
and the manner in which their lists and records of taxable persons and
taxable objects shall be made and kept;
(b) The forms of labels, brands or marks to be required on goods
subject to excise tax, and the manner in which the labeling, branding or
marking shall be effected;

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 (c) The condition under which the manner in which goods intended
for export, which if not exported would be subject to an excise tax, shall
be labeled, branded or marked;
(d) The conditions to be observed by revenue officers respecting
the institutions and conduct of legal actions and proceedings;
(e) The conditions under which goods intended for storage in
bonded warehouses shall be conveyed thither, their manner of storage and
the method of keeping the entries and records in connection therewith,
also the books to be kept by Revenue Inspectors and the reports to be
made by them in connection with their supervision of such houses;
(f) The conditions under which denatured alcohol may be removed
and dealt in, the character and quantity of the denaturing material to be
used, the manner in which the process of denaturing is effected, so as to
render the alcohol suitably denatured and unfit for oral intake, the bonds to
be given, the books and records to be kept, the entries to be made therein,
the reports to be made to the Commissioner, and the signs to be displayed
in the business or by the person for whom such denaturing is done or by
whom, such alcohol is dealt in;
(g) The manner in which revenue shall be collected and paid, the
instrument, document or objects to which revenue stamps shall be affixed,
the mode of cancellation of the same, the manner in which the proper
books, records, invoices and other papers shall be kept and entries therein
made by the person subject to tax, as well as the manner in which licenses
and stamps shall be gathered up and returned after serving their purposes;
(h) The conditions to be observed by the revenue officers
respecting the enforcement of Title III imposing a tax on the estate of a
decedent, and other transfers mortis causa, as well as on gifts and such
other rules and regulations which the Commissioner may consider suitable
for the enforcement of the said Title III;
(i) The manner in which tax returns, information and reports shall
be prepared and reported and the tax collected and paid, as well as the
conditions under which evidence of payment shall be furnished the
taxpayer, and the preparation and publication of tax statistics;
(j) The manner in which internal revenue taxes, such as income
tax, including withholding tax, estate and donors taxes, value added tax,
other percentage taxes, excise taxes, and documentary stamp taxes shall be
paid through the collection officers of the BIR or through duly authorized
agent banks which are hereby deputized to receive payments of such taxes
and the returns, papers and statements that may be filed by the taxpayers
in connection with the payment of the tax: Provided, however, That
notwithstanding the other provisions of this Code prescribing the place of
filing the returns and payment of taxes, the Commissioner my, by rules
and regulations, require that the tax returns, papers and statements and
taxes of large taxpayers be filed and paid, respectively, through collection
officers or through duly authorized agent banks: Providded, further, That
the Commissioner shall exercise this power within six (6) years from the

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 approval of Republic Act No. 7646 or the completion of its comprehensive
computerization program, whichever comes earlier: Provided, finally, That
separate venues for the Luzon, Visayas and Mindanao areas may be
designated for the filing of tax returns and payment of taxes by said large
taxpayers.

c. Non-retroactivity of rulings
Any revocation, modification or reversal of such rules and
regulations, including rulings and circulars of the Commissioner, shall not
be given retroactive effect if the same would be prejudicial to a taxpayer,
except in the case of rulings:
(a) where the taxpayer deliberately misstates or omits material
facts,
(b) where the facts subsequently gathered by the BIR are
materially different from the facts on which the ruling was based,
or
(c) where the taxpayer acted in bad faith.

2. Power of the Commissioner to suspend the business operation of a

taxpayer
The Commissioner or his authorized representative is empowered
under the NIRC to suspend the business operations and temporarily close
the business establishments of any person for any of the following
violations:
(a) In case of VAT registered person
(1) Failure to issue receipts or invoices;
(2) Failure to file a value added tax return as required under section
114; or
(3) Understatement of taxable sales or receipts by thirty percent or
more his correct taxable sales or receipts for the taxable quarter.
(b) Failure of any person to register as required Section 236
The temporary closure of the establishment will be for the duration
of not less than five (5) days and shall be lifted only upon compliance with
whatever requirements prescribed by the Commissioner in the closure
order.

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III. LOCAL GOVERNMENT CODE OF 1991, as amended

A. Local Government Taxation

1. Fundamental Principles
a. Taxation shall be uniform in each local government unit;
b. Taxes, fees, charges and other impositions shall:
o Be equitable and based as far as practicable on the taxpayers
ability to pay;
o Be levied and collected only for public purposes;
o Not be unjust, excessive, oppressive, or confiscatory;
o Not be contrary to law, public policy, national economic
policy, or on restraint of trade;
c. The collection of local taxes, fees, charges and other impositions shall
in no case be let to any private person;
d. The revenue collected pursuant to the provisions of this Code shall
inure solely to the benefit of, and subject to disposition by, the local
government unit levying the tax, fee, charge or other imposition unless
otherwise specifically provided herein; and
e. Each local government unit shall, as far as practicable, evolve a
progressive system of taxation.

2. Nature and source of taxing power

The power to levy taxes is not inherent in municipal corporations.

Taxation is a sovereign state governmental power not possessed by the
municipalities or municipal divisions unless delegated to them. In other words,
municipalities have no implied power of taxation and must look to the statutory
grant for such authority as they possess in the imposition of taxes (Reyes v
Cornista, 92Phil 838).

a. Grant of Local Taxing Power under the Local Government Code

Each local government unit shall exercise its power to create its own
sources of revenues and to levy taxes, fees, and charges subject to the
provisions herein, consistent with the basic policy of local autonomy. Such
taxes, fees, and charges shall accrue exclusively to the local government
units (Sec. 129, LGC).

b. Authority to prescribe penalties for tax violations

A local government unit has authority to prescribe fines or penalties
for violation of tax ordinances.

SECTION 516. Penalties for Violation of Tax ordinances. - The Sanggunian

of a local government unit is authorized to prescribe fines or other penalties for
violation of tax ordinances but in no case shall such fines be less than One
thousand pesos (Php1,000.00) nor more than Five thousand pesos (Php5000.00),

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 nor shall imprisonment be less than one (1) month nor more than six (6) months.
Such fine or other penalty, or both, shall be imposed at the discretion of the
court. The Sangguniang Barangay may prescribe a fine of not less than One
hundred pesos (Php100.00) nor more than One thousand pesos (Php1,000.00).

A local government unit has authority to impose surcharges and

penalties on unpaid taxes, fees, or charges.

SECTION 168. Surcharges and Penalties on unpaid Taxes, fees, or

Charges. - The Sanggunian may impose a surcharge not exceeding twenty-five
percent (25%) of the amount of taxes, fees or charges not paid on time and an
interest at the rate not exceeding two percent (2%) per month of the unpaid
taxes, fees or charges including surcharges, until such amount is fully paid but in
no case shall the total interest on the unpaid amount or portion thereof exceed
thirty-six (36) months.

c. Authority to grant local tax exemptions

SECTION 192. Authority to Grant Tax Exemption Privileges. - Local

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

d. Withdrawal of exemptions

SECTION 193. Withdrawal of Tax Exemption Privileges. - Unless otherwise

provided in this Code, tax exemptions or incentives granted to, or presently
enjoyed by all persons, whether natural or juridical, including government-
owned or -controlled corporations, except local water districts, cooperatives
duly registered under R.A. No. 6938, non-stock and non-profit hospitals and
educational institutions, are hereby withdrawn upon the effectivity of this Code.

SECTION 234. Exemptions from Real Property Tax. - The following are
exempted from payment of the real property tax:
(a) Real property owned by the Republic of the Philippines or any of its political
subdivisions except when the beneficial use thereof has been granted, for
consideration or otherwise, to a taxable person;
(b) Charitable institutions, churches, parsonages or convents appurtenant
thereto, mosques, nonprofit or religious cemeteries and all lands, buildings, and
improvements actually, directly, and exclusively used for religious, charitable or
educational purposes;
(c) All machineries and equipment that are actually, directly and exclusively
used by local water districts and government-owned or -controlled corporations
engaged in the supply and distribution of water and/or generation and
transmission of electric power;
(d) All real property owned by duly registered cooperatives as provided for
under R. A. No. 6938; and
(e) Machinery and equipment used for pollution control and environmental
protection. Except as provided herein, any exemption from payment of real
property tax previously granted to, or presently enjoyed by, all persons, whether
natural or juridical, including all government-owned or -controlled corporations
are hereby withdrawn upon the effectivity of this Code.

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 e. Authority to adjust local tax rates

SECTION 191. Authority of Local Government Units to Adjust Rates of

Tax ordinances. - Local units shall have the authority to adjust the tax rates as
prescribed herein not oftener than once every five (5) years, but in no case shall
such adjustment exceed ten percent (10%) of the rates fixed under this Code.

f. Residual Taxing power of local governments

Local government units may exercise the power to levy taxes,
fees or charges on any base or subject not otherwise specifically
enumerated herein or taxed under the provisions of the National
Internal Revenue Code, as amended, or other applicable laws (Sec.
186, LGC).

This constitutes residual local taxing power.

Of course, said power is subject to limitation that said taxes,

fees, or charges shall not be unjust, excessive, oppressive, confiscatory
or contrary to declared national policy and that the ordinance levying
such taxes, fees or charges shall not be enacted without any prior
public hearing conducted for the purpose (Sec. 186, LGC).

g. Authority to issue local tax ordinances

The power to impose and collect a tax or other revenue is vested in
the local government through the Sanggunian thereof.

SECTION 132. Local Taxing Authority - The power to impose a tax, fee, or
charge or to generate revenue under this Code shall be exercised by the
Sanggunian of the local government unit concerned through an appropriate
ordinance.

SECTION 48. Local Legislative Power. - Local legislative power shall be

exercised by the Sangguniang Panlalawigan for the province; the Sangguniang
Panlungsod for the city; the Sangguniang bayan for the municipality; and the
Sangguniang Barangay for the Barangay.

3. Local taxing authority

a. Authority to issue local tax ordinances

As a rule, the enactment of tax ordinances, unlike ordinary local
tax ordinances or resolutions, requires conduct of public hearings prioe
to their enactments.

SECTION 187. Procedure for Approval and Effectivity of Tax ordinances

and Revenue Measures; Mandatory Public Hearings. - The procedure for
approval of local tax ordinances and revenue measures shall be in accordance

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 with the provisions of this Code: Provided, That public hearings shall be
conducted for the purpose prior to the enactment thereof: Provided, further, That
any question on the constitutionality or legality of tax ordinances or revenue
measures may be raised on appeal within thirty (30) days from the effectivity
thereof to the Secretary of Justice who shall render a decision within sixty (60)
days from the date of receipt of the appeal: Provided, however, That such appeal
shall not have the effect of suspending the effectivity of the ordinance and the
accrual and payment of the tax, fee, or charge levied therein: Provided, finally,
That within thirty (30) days after receipt of the decision or the lapse of the sixty-
day period without the Secretary of Justice acting upon the appeal, the aggrieved
party may file appropriate proceedings with a court of competent jurisdiction.

b. Procedure for approval and effectivity of tax ordinances

i. Passage

SECTION 132. Local Taxing Authority - The power to impose a tax, fee, or
charge or to generate revenue under this Code shall be exercised by the
Sanggunian of the local government unit concerned through an appropriate
ordinance.

ii. Public hearing

SECTION 186. Power To Levy Other Taxes, Fees or Charges. - Local
government units may exercise the power to levy taxes, fees or charges on any
base or subject not otherwise specifically enumerated herein or taxed under the
provisions of the National Internal Revenue Code, as amended, or other
applicable laws: Provided, That the taxes, fees, or charges shall not be unjust,
excessive, oppressive, confiscatory or contrary to declared national policy:
Provided, further, That the ordinance levying such taxes, fees or charges shall
not be enacted without any prior public hearing conducted for the purpose.
SECTION 187. Procedure for Approval and Effectivity of Tax ordinances
and Revenue Measures; Mandatory Public Hearings. - The procedure for
approval of local tax ordinances and revenue measures shall be in accordance
with the provisions of this Code: Provided, That public hearings shall be
conducted for the purpose prior to the enactment

iii. Approval

SECTION 54. Approval of Ordinances. - (a) Every ordinance enacted by the

Sangguniang Panlalawigan, Sangguniang Panlungsod, or Sangguniang bayan
shall be presented to the provincial governor or city or municipal mayor, as the
case may be. If the local chief executive concerned approves the same, he shall
affix his signature on each and every page thereof; otherwise, he shall veto it
and return the same with his objections to the Sanggunian, which may proceed
to reconsider the same. The Sanggunian concerned may override the veto of the
local chief executive by two-thirds (2/3) vote of all its members, thereby making
the ordinance or resolution effective for all legal intents and purposes.
(b) The veto shall be communicated by the local chief executive concerned to
the Sanggunian within fifteen (15) days in the case of a province, and ten (10)
days in the case of a city or a municipality; otherwise, the ordinance shall be
deemed approved as if he had signed it.
(c) ordinances enacted by the Sangguniang Barangay shall, upon approval by the
majority of all its members, be signed by the Punong Barangay.

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 iv. Review/Question of Constitutionality

SECTION 187. Procedure for Approval and Effectivity of Tax ordinances

and Revenue Measures; Mandatory Public Hearings. - The procedure for
approval of local tax ordinances and revenue measures shall be in accordance
with the provisions of this Code: Provided, That public hearings shall be
conducted for the purpose prior to the enactment thereof: Provided, further, That
any question on the constitutionality or legality of tax ordinances or revenue
measures may be raised on appeal within thirty (30) days from the effectivity
thereof to the Secretary of Justice who shall render a decision within sixty (60)
days from the date of receipt of the appeal: Provided, however, That such appeal
shall not have the effect of suspending the effectivity of the ordinance and the
accrual and payment of the tax, fee, or charge levied therein: Provided, finally,
That within thirty (30) days after receipt of the decision or the lapse of the sixty-
day period without the Secretary of Justice acting upon the appeal, the aggrieved
party may file appropriate proceedings with a court of competent jurisdiction.

v. Effectivity
SECTION 59. Effectivity of Ordinances or Resolutions.
(a) Unless otherwise stated in the ordinance or the resolution approving the local
development plan and public investment program, the same shall take effect
after ten (10) days from the date a copy thereof is posted in a bulletin board at
the entrance of the provincial capitol or city, municipal, or Barangay hall, as the
case may be, and in at least two (2) other conspicuous places in the local
government unit concerned.
(b) The secretary to the Sanggunian concerned shall cause the posting of an
ordinance or resolution in the bulletin board at the entrance of the provincial
capitol and the city, municipal, or Barangay hall in at least two (2) conspicuous
places in the local government unit concerned not later than five (5) days after
approval thereof.
The text of the ordinance or resolution shall be disseminated and posted in
Filipino or English and in the language or dialect
understood by the majority of the people in the local government unit
concerned, and the secretary to the Sanggunian shall record such fact in a book
kept for the purpose, stating the dates of approval and posting.
(c) The gist of all ordinances with penal sanctions shall be published in a
newspaper of general circulation within the province where the local legislative
body concerned belongs. In the absence of any newspaper of general circulation
within the province, posting of such ordinances shall be made in all
municipalities and cities of the province where the Sanggunian of origin is
situated.
(d) In the case of highly urbanized cities, the main features of the ordinance or
resolution duly enacted or adopted shall, in addition to being posted, be
published once in a local newspaper of general circulation within the city:
Provided, That in the absence thereof the ordinance or resolution shall be
published in any newspaper of general circulation.

4. Scope of taxing power

SECTION 129. Power to Create Source of Revenue - Each local government

unit shall exercise its power to create its own sources of revenue and to levy
taxes, fees, and charges subject to the provisions herein, consistent with the

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 basic policy of local autonomy. Such taxes, fees, and charges shall accrue
exclusively to the local government units.

SECTION 186. Power To Levy Other Taxes, Fees or Charges. - Local

government units may exercise the power to levy taxes, fees or charges on any
base or subject not otherwise specifically enumerated herein or taxed under the
provisions of the National Internal Revenue Code, as amended, or other
applicable laws: Provided, That the taxes, fees, or charges shall not be unjust,
excessive, oppressive, confiscatory or contrary to declared national policy:
Provided, further, That the ordinance levying such taxes, fees or charges shall
not be enacted without any prior public hearing conducted for the purpose.

SECTION 187. Procedure for Approval and Effectivity of Tax ordinances

and Revenue Measures; Mandatory Public Hearings. - The procedure for
approval of local tax ordinances and revenue measures shall be in accordance
with the provisions of this Code: Provided, That public hearings shall be
conducted for the purpose prior to the enactment thereof: Provided, further, That
any question on the constitutionality or legality of tax ordinances or revenue
measures may be raised on appeal within thirty (30) days from the effectivity
thereof to the Secretary of Justice who shall render a decision within sixty (60)
days from the date of receipt of the appeal: Provided, however, That such appeal
shall not have the effect of suspending the effectivity of the ordinance and the
accrual and payment of the tax, fee, or charge levied therein: Provided, finally,
That within thirty (30) days after receipt of the decision or the lapse of the sixty-
day period without the Secretary of Justice acting upon the appeal, the aggrieved
party may file appropriate proceedings with a court of competent jurisdiction.

SECTION 188. Publication of Tax ordinances and Revenue Measures. -

Within ten (10) days after their approval, certified true copies of all provincial,
city, and municipal tax ordinances or revenue shall be published in full for three
(3) consecutive days in a newspaper of local circulation: Provided, however,
That in provinces, cities and municipalities where there are no newspapers of
local circulation, the same may be posted in at least two (2) conspicuous and
publicly accessible places.

5. Specific Taxing Power of local government units

a. Taxing power of provinces

i. Tax on transfer of real property ownership

SECTION 135. Tax on Transfer of Real Property Ownership. - (a) The

province may impose a tax on the sale, donation, barter, or on any other mode of
transferring ownership or title of real property at the rate of not more than fifty
percent (50%) of one percent (1%) of the total consideration involved in the
acquisition of the property or of the fair market value in case the monetary
consideration involved in the transfer is not substantial, whichever is higher. The
sale, transfer or other disposition of real property pursuant to R.A. No. 6657
shall be exempt from this tax.
(b) For this purpose, the Register of Deeds of the province concerned shall,
before registering any deed, require the presentation of the evidence of payment
of this tax. The provincial assessor shall likewise make the same requirement
before canceling an old tax declaration and issuing a new one in place thereof.
Notaries public shall furnish the provincial treasures with a copy of any deed

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 transferring ownership or title to any real property within thirty (30) days from
the date of notarization.
It shall be the duty of the seller, donor, transferor, executor or administrator to
pay the tax herein imposed within sixty (60) days from the date of the execution
of the deed or from the date of the decedent's death.

ii. Tax on business of printing and publication

SECTION 136. Tax on Business of Printing and Publication. - The Province

may impose a tax on the business of persons engaged in the printing and/or
publication of books, cards, posters, leaflets, handbills, certificates, receipts,
pamphlets, and other of similar nature, at a rate not exceeding fifty percent
(50%) of one percent (1%) of the gross annual receipts for the preceding
calendar year.
In the case of a newly started business, the tax shall not exceed one-twentieth
(1/20) of one percent (1%) of the capital investment. In the succeeding calendar
year, regardless of when the business started to operate, the tax shall be based on
the gross receipts for the preceding calendar year, or any fraction thereof, as
provided herein. The receipts from the printing and/or publishing of books or
other reading materials prescribed by the Department of Education, Culture and
Sports as school texts or reference shall be exempt from the tax herein imposed.

iii. Franchise tax

SECTION 137. Franchise Tax - Notwithstanding any exemption granted by

any law or other special laws, the province may impose a tax on business
enjoying a franchise, at a rate exceeding fifty percent (50%) of one percent (1%)
of the gross annual receipts for the preceding calendar year based on the
incoming receipt, or realized, within its territorial jurisdiction.
In the case of a newly started business, the tax shall not exceed one-twentieth
(1/20) of one percent (1%) of the capital investment. In the succeeding calendar
year, regardless of when the business started to operate, the tax shall be based on
the gross receipts for the preceding calendar year, or any fraction thereof, as
provided herein.

iv. Tax on sand, gravel and other quarry services

SECTION 138. Tax on Sand, Gravel and Other Quarry Resources - The
province may levy and collect not more than ten percent (10%) of fair market
value in the locality per cubic meter of ordinary stones, sand, gravel, earth, and
other quarry resources, as defined under the National Internal Revenue Code, as
amended, extracted from public lands or from the beds of seas, lakes, rivers,
streams, creeks, and other public waters within its territorial jurisdiction.
The permit to extract sand, gravel and other quarry resources shall be issued
exclusively by the provincial governor, pursuant to the ordinance of the
Sangguniang Panlalawigan.
The proceeds of the tax on sand, gravel and other quarry resources shall be
distributed as follows:
(4) Province - Thirty percent (30%);
(5) Component City or Municipality where the sand, gravel, and other quarry
resources are extracted - Thirty percent (30%); and

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 (6) Barangay where the sand, gravel, and other quarry resources are extracted -
Forty percent (40%).

v. Professional tax

SECTION 139. Professional Tax - (a) The province may levy an annual
professional tax on each person engaged in the exercise or practice of his
profession requiring government examination as such amount and reasonable
classification as the Sangguniang Panlalawigan may determine but shall in no
case exceed Three hundred pesos (P300.00)
(b) Every person legally authorized to practice his profession shall pay the
professional tax to the province where he practices his profession or where he
maintains his principal office in case he practices his profession in several
places: Provided, however, That such person who has paid the corresponding
professional tax shall be entitled to practice his profession in any part of the
Philippines without being subjected to any other national or local tax, license, or
free for the practice of such profession.
(1) Any individual or corporation employing a person subject to professional tax
shall require payment by that person of the tax on his profession before
employment and annually thereafter.
(2) The professional tax shall be payable annually on or before the thirty first
(31st) day of January must, however, pay the full tax before engaging therein. A
line of profession does not become exempt even if conducted with some other
profession for which the tax has been paid. Professionals exclusively employed
in the government shall be exempt from the payment of this tax.
(3) Any person subject to the professional tax shall write in deeds, receipts,
prescriptions, reports, books of account, plans and designs, surveys and maps, as
the case may be, the number of the official receipt issued to him.

vi. Amusement tax

SECTION 140. Amusement Tax - (a) The province may levy an amusement
tax to be collected from the proprietors, lessees, or operators of theaters,
cinemas, concert halls, circuses, boxing stadia, and other places of amusement at
a rate of not more than thirty percent (30%) of the gross receipts from admission
fees.
In the case of theaters of cinemas, the tax shall first be deducted and withheld by
their proprietors, lessees, or operators and paid to the provincial treasurer before
the gross receipts are divided between said proprietors, lessees, or operators and
the distributors of the cinematographic films.
The holding of operas, concerts, dramas, recitals, painting and art exhibitions,
flower shows, musical programs, literary and oratorical presentations, except
pop, rock, or similar concerts shall be exempt from the payment of the tax herein
imposed.

The Sangguniang Panlalawigan may prescribe the time, manner, terms and
conditions for the payment of tax. In case of fraud or failure to pay the tax, the
Sangguniang Panlalawigan may impose such surcharges, interests and penalties.

The proceeds from the amusement tax shall be shared equally by the province
and the municipality where such amusement places are located.

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 vii. Tax on delivery truck/van

SECTION 141. Annual Fixed Tax For Every Delivery Truck or Van of
Manufacturers or Producers, Wholesalers of, Dealers, or Retailers in,
Certain Products. - (a) The province may levy an annual fixed tax for every
truck, van or any vehicle used by manufacturers, producers, wholesalers, dealers
or retailers in the delivery or distribution of distilled spirits, fermented liquors,
soft drinks, cigars and cigarettes, and other products as may be determined by
the Sangguniang Panlalawigan, to sales outlets, consumers, whether directly or
indirectly, within the province in an amount not exceeding Five hundred pesos
(P500.00).
The manufacturers, producers, wholesalers, dealers, and retailers referred to in
the immediately foregoing paragraph shall be exempt from the tax on peddlers
prescribed elsewhere in this Code.

b. Taxing power of cities

Except as otherwise provided in this Code, the city, may

levy the taxes, fees, and charges which the province or
municipality may impose at rates of taxes that the city may levy
may exceed the maximum rates allowed for the province or
municipality by not more than fifty percent (50%) except the rates
of professional and amusement taxes (Sec. 151, LGC).
Note: That the taxes, fees and charges levied and collected by highly
urbanized and independent component cities shall accrue to
them and distributed in accordance with the provisions of this
code.

c. Taxing power of municipalities

Except as otherwise provided in this Code, municipalities may levy

taxes, fees, and charges not otherwise levied by provinces (Sec. 142,
LGC).

i. Tax on various types of businesses

o On manufacturers, assemblers, repackers, processors, brewers,

distillers, rectifiers, and compounders of liquors, distilled
spirits, and wines or manufacturers of any article of commerce
of whatever kind at fixed annual tax ranging from a minimum
of P 165.00 to a maximum of 37.5% of 1% based on the gross
sales or receipts for the preceding calendar year.

o On wholesalers, distributors, or dealers in any article of

commerce of whatever kind or nature at fixed annual tax
ranging from a minimum of P 18.00 to a maximum of 50% of
1% based on the gross sales or receipts for the preceding
calendar year.

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o On exporters, and on manufacturers, millers, producers,
wholesalers, distributors, dealers or retailers of essential
commodities ( Rice and corn; Wheat or cassava flour, meat,
dairy products, locally manufactured, processed or preserved
food, sugar, salt and other agricultural, marine, and fresh water
products, whether in their original state or not; Cooking oil and
cooking gas; Laundry soap, detergents, and medicine;
Agricultural implements, equipment and post harvest facilities,
fertilizers, pesticides, insecticides, herbicides and other farm
inputs; Poultry feeds and other animal feeds; School supplies;
and Cement ) at a rate not exceeding one-half (1/2) of the rates
prescribed under subsections (a), (b) and (d) of this Section.

o On retailers at fixed annual tax of 1% or 2% of the gross sales

or receipts for the preceding calendar year.
Provided, however, That Barangays shall have the
exclusive power to levy taxes, as provided under Section 152
hereof, on gross sales or receipts of the preceding calendar year
of Fifty thousand pesos (P50,000.00) or less in the case of
municipalities.

o On contractors and other independent contractors at fixed

annual tax ranging from a minimum of P 27.50 to a maximum
of 50% of 1% based on the gross receipts for the preceding
calendar year.

o On banks and other financial institutions, at a rate not

exceeding fifty percent (50% of one percent (1) on the gross
receipts of the preceding calendar year derived from interest,
commissions and discounts from lending activities, income
from financial leasing, dividends, rentals on property and profit
from ex change or sale of property, insurance premium.

o On peddlers engaged in the sale of any merchandise or article

or commerce, at a rate not exceeding Fifty pesos (P50.00) per
peddler annually.

o On any business, not otherwise specified in the preceding

paragraphs, which the Sanggunian concerned may deem proper
to tax at the rate of tax shall not exceed two percent (2%) of
gross sales or receipts of the preceding calendar year.
Provided, That on any business subject to the excise, value-
added or percentage tax under the National Internal Revenue
Code, as amended (Sec. 143, LGC).

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ii. Ceiling on business tax impossible on municipalities within Metro
Manila
The municipalities within the Metropolitan Manila Area may
levy taxes at rates which shall not exceed by fifty percent (50%) the
maximum rates prescribed in the Section 143 (Sec. 144, LGC).

iii. Tax on retirement on business

A business subject to tax pursuant to the preceding sections

shall, upon termination thereof, submit a sworn statement of its gross
sales or receipts for the current year. . If the tax paid during the year
be less than the tax due on said gross sales or receipts of the current
year, the difference shall be paid before the business is considered
officially retired (Sec.145, LGC).

iv. Rules on payment of business tax

(a) The taxes imposed under Section 143 shall be payable for every
separate or distinct establishment or place where business subject
to the tax is conducted and one line of business does not become
exempt by being conducted with some other business for which
such tax has been paid. The tax on a business must be paid by the
person conducting the same.

(b) In cases where a person conducts or operates two (2) or more

of the businesses mentioned in Section 143 of this Code which are
subject to the same rate of tax, the tax shall be computed on the
combined total gross sales or receipts of the said two (2) or more
related businesses.
(c) In cases where a person conducts or operates two (2) or
more businesses mentioned in Section 143 of this Code which are
subject to different rates of tax, the gross sales or receipts of each
business shall be separately reported for the purpose of computing
the tax due from each business (Sec.146, LGC).

v. Fees and charges for regulation and licensing

The municipality may impose and collect such reasonable
fees and charges on business and occupation and, except as reserved
to the province in Section 139 of this Code, on the practice of any
profession or calling, commensurate with the cost of regulation,
inspection and licensing before any person may engage in such
business or occupation, or practice such profession or calling.
(Sec.147, LGC).

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Fees for Sealing and Licensing of Weights and Measures.

(a) The municipality may levy fees for the sealing and licensing of
weights and measures at such reasonable rates as shall be
prescribed by the Sangguniang Bayan.
(b)The Sangguniang bayan shall prescribe the necessary
regulations for the use of such weights and measures, subject to
such guidelines as shall be prescribed by the Department of
Science and Technology. The Sanggunian concerned shall, by
appropriate ordinance, penalize fraudulent practices and unlawful
possession or use of instruments of weights and measures and
prescribe the criminal penalty therefore in accordance with the
provisions of this Code. Provided, however, That the Sanggunian
concerned may authorize the municipal treasurer to settle an
offense not involving the commission of fraud before a case
therefore is files in court, upon payment of a compromise penalty
of not less than Two hundred pesos (P200.00) (Sec.148, LGC).

vi. Situs of tax collected

(a) For purposes of collection of the taxes under Section 143

of this Code, manufacturers, assemblers, repackers, brewers,
distillers, rectifiers and compounders of liquor, distilled
spirits and wines, millers, producers, exporters, wholesalers,
distributors, dealers, contractors, banks and other financial
institutions, and other businesses, maintaining or operating
branch or sales outlet elsewhere shall record the sale in the
branch or sales outlet making the sale or transaction, and the
tax thereon shall accrue and shall be paid to the municipality
where such branch or sales outlet is located. In cases where
there is no such branch or sales outlet in the city or
municipality where the sale or transaction is made, the sale
shall be duly recorded in the principal office and the taxes
due shall accrue and shall be paid to such city or
municipality.

(b) The following sales allocation shall apply to

manufacturers, assemblers, contractors, producers, and
exporters with factories, project offices, plants, and
plantations in the pursuit of their business:
Thirty percent (30%) of all sales recorded in the
principal office shall be taxable by the city or
municipality where the principal office is located; and

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 Seventy percent (70%) of all sales recorded in the
principal office shall be taxable by the city or
municipality where the factory, project office, plant,
or plantation is located.
(c) In case of a plantation located at a place other than the
place where the factory is located, said seventy percent
(70%) mentioned in subparagraph (b) of subsection (2) above
shall be divided as follows:
Sixty percent (60%) to the city or municipality where the
factory is located; and
Forty percent (40%) to the city or municipality where the
plantation is located.

(d) In case where a manufacturer, assembler, producer,

exporter or contractor has two (2) or more factories, project
offices, plants, or plantations located in different localities,
the seventy percent (70%) mentioned in subparagraph (b) of
subsection (2) above shall be prorated among the localities
where the factories, project offices, plants, and plantations
are located in proportion to their respective volume or
production during the period for which the tax is due.

(e) The foregoing sales allocation shall be applied

irrespective of whether or not sales are made in the locality
where the factory, project office, plant or plan is located.

d. Taxing power of barangay

The Barangays may levy taxes, fees, and charges, as provided in

this Article, which shall exclusively accrue to them.

o Taxes - On stores or retailers with fixed business

establishments with gross sales or receipts of the preceding
calendar year of Fifty Thousand pesos (P50,000.00) or less, in
the case of cities and Thirty thousand pesos (P30,000.00) or
less, in the case of municipalities, at a rate not exceeding one
percent (1%) on such gross sales or receipts.

o Service Fees or Charges - Barangays may collect reasonable

fees or charges for services rendered in connectioin with the
regulation or the use of Barangay-owned properties or service
facilities such as palay, copra, or tobacco dryers.

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 o Barangay Clearance - No city or municipality may issue any
license or permit for any business or activity unless a clearance
is first obtained from the Barangay where such business or
activity is located or conducted. For such clearance, the
Sangguniang Barangay may impose a reasonable fee. The
application for clearance shall be acted upon within seven (7)
working days from the filing thereof. In the event that the
clearance is not issued within the said period, the city or
municipality may issue the said license or permit.

o Other Fees and Charges - The Barangay may levy reasonable

fees and charges:
(1) On commercial breeding of fighting cocks, cockfighting
and cockpits;
(2) On places of recreation which charge admission fees;
and
(3) On billboards, signboards, neon signs, and outdoor
advertisements (Sec. 152, LGU).

e. Common revenue-raising powers

i. Service fees and charges

Local government units may impose and collect such

reasonable fees and charges for services rendered.

ii. Public utility charges/ Toll fees and charges

The Sanggunian concerned may prescribe the terms and

conditions and fix the rates for the imposition of toll fees or
charges for the use of any public road, pier or wharf, waterway,
bridge, ferry or telecommunication system funded and constructed
by the local government unit concerned.
Provided, That no such toll fees or charges shall be
collected from officers and enlisted men of the Armed Forces of
the Philippines and members of the Philippine National Police on
mission, post office personnel delivering mail, physically-
handicapped, and disabled citizens who are sixty-five (65) years or
older.
When public safety and welfare so requires, the Sanggunian
concerned may discontinue the collection of the tolls, and
thereafter the said facility shall be free and open for public
use(Sec. 155, LGC).

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f. Community tax

Cities or municipalities may levy a community tax in

accordance with the provisions of this Article (Sec. 156, LGC).

i. Individuals Liable to Community Tax

Every inhabitant of the Philippines eighteen (18) years of age

or over who:
o has been regularly employed on a wage or salary
basis for at least thirty (30) consecutive working days
during any calendar year; or
o is engaged in business or occupation, or who owns
real property with an aggregate assessed value of One
thousand pesos (P1,000.00) or more; or
o is required by law to file an income tax return
shall pay an annual community tax of Five pesos (P5.00) and an
annual additional tax of One peso (P1.00_ for every One thousand
pesos (P1,000.00) of income regardless of whether from business,
exercise of profession or from property which in no case shall
exceed Five thousand pesos (P5,000.00).
In the case of husband and wife, the additional tax herein imposed
shall be based upon the total property owned by them and the total
gross receipts or earnings derived by them (Sec. 157, LGC).

ii. Juridical Persons Liable to Community Tax

Every corporation no matter how created or organized,

whether domestic or resident foreign, engaged in or doing business
in the Philippines shall pay an annual community tax of Five
hundred pesos (P500.00) and an annual additional tax, which, on no
case, shall exceed Ten thousand pesos (P10,000.00) in accordance
with the following schedule:
(1) For every Five thousand pesos (P5,000.00) worth of real
property in the Philippines owned by it during the preceding
year based on the valuation used for the payment of the real
property tax under existing laws, found in the assessment
rolls of the city or municipality where the real property is
situated - Two pesos (P2.00); and
(2) For every Five thousand pesos (P5,000.00) of gross
receipts or earnings derived by it from its business in the
Philippines during the preceding year - Two pesos (P2.00).
The dividends received by a corporation from another corporation
however shall, for the purpose of the additional tax, be considered
as part of the gross receipts or earnings of said corporation (Sec.
158, LGC).

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 iii. Exemptions

The following are exempt from the community tax:

(1) Diplomatic and consular representatives; and
(2) Transient visitors when their stay in the Philippines
does not exceed three (3) months (Sec. 159, LGC).

6. Common Limitations on the taxing powers of LGUs

The exercise of the taxing powers of provinces, cities, municipalities, and

Barangays shall not extend to the levy of the following:

(1) Income tax, except when levied on banks and other financial
institutions;

(2) Documentary stamp tax;

(3) Taxes on estates, inheritance, gifts, legacies and other acquisitions

mortis causa, except as otherwise provided herein;

(4) Customs duties, registration fees vessels and wharfage on wharves,

tonnage dues, and all other kinds of customs fees, charges and dues except
wharfage on wharves constructed and maintained by the local government
unit concerned;

(5) Taxes, fee and charges and other impositions upon goods carried into
or out of, or passing through, the territorial jurisdictions of local
government units in the guise of charges for wharfage, tolls for bridges or
otherwise, or other taxes, fees or charges in any form whatsoever upon
such goods or merchandise;

(6) Taxes, fees, or charges on agricultural and aquatic products when sold
by marginal farmers or fishermen;

(7) Taxes on business enterprises certified to by the Board of Investments

as pioneer or non-pioneer for a period of six (6) and (4) four years,
respectively from the date of registration;

(8) Excise taxes on articles enumerated under the National Internal

Revenue Code, as amended, and taxes, fees or charges on petroleum
products;

(9) Percentage or value added tax (VAT) on sales, barters or exchanges or

similar transactions on goods or services except as otherwise provided
herein;

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 (10) Taxes on the gross receipts of transaction contractors and persons
engaged in the transportation of passengers or freight by hire and common
carriers by air, land or water, except as provided in this Code;

(11) Taxes on premium paid by way or reinsurance or retrocession;

(12) Taxes, fees or charges for the registration of motor vehicle and for the
issuance of all kinds of licenses or permits for the driving thereof, except
tricycles;

(13) Taxes, fees or charges on Philippine products actually exported,

except as otherwise provided herein;

(14) Taxes, fees, or charges, on Countryside and Barangay Business

Enterprises and cooperatives duly registered under R.A. No. 6810 and
Republic Act Numbered Sixty-nine hundred thirty-eight (R.A. No. 6938)
otherwise known as the "Cooperatives Code of the Philippines"
respectively; and

(15) Taxes, fees or charges, of any kind on the National Government, its
agencies and instrumentalities, and local government units (Sec. 133,
LGC).

7. Collection of business tax

a. Tax period and manner of payment

Unless otherwise provided in this Code, the tax period of all local
taxes, fees and charges shall be the calendar year. Such taxes, fees and
charges may be paid in quarterly installments (Sec. 165, LGC).

b. Accrual of tax
Unless otherwise provided in this Code, all local taxes, fees, and
charges shall accrue on the first (1st) day of January of each year.
However, new taxes, fees or charges, or changes in the rates thereof, shall
accrue on the first (1st) day of the quarter next following the effectivity of
the ordinance imposing such new levies or rates (Sec. 166, LGC).

c. Time of payment
Unless otherwise provided in this Code, all local taxes, fees, and
charges shall be paid within the first twenty (20) days of January or of
each subsequent quarter, as the case may be. The Sanggunian concerned
may, for a justifiable reason or cause, extend the time of payment of such
taxes, fees, or charges without surcharges or penalties, but only for a
period not exceeding six (6) months (Sec. 167, LGC).

Page | 175
 d. Penalties on unpaid taxes, fees and charges
The Sanggunian may impose a surcharge not exceeding twenty-
five percent (25%) of the amount of taxes, fees or charges not paid on time
and an interest at the rate not exceeding two percent (2%) per month of the
unpaid taxes, fees or charges including surcharges, until such amount is
fully paid but in no case shall the total interest on the unpaid amount or
portion thereof exceed thirty-six (36) months (Sec. 168, LGC).

e. Authority of treasurer in collection and inspection of book

The provincial, city, municipal or Barangay treasurer may, by
himself or through any of his municipal or Barangay treasurer may, by
himself or through any of his deputies duly authorized in writing, examine
the books, accounts, and other pertinent records of nay person,
partnership, corporation, or association subject to local taxes, fees and
charges in order to ascertain, assess, and collect the correct amount of the
tax, fee, or charge. Such examination shall be made during regular
business hours, only once for every tax period, and shall be certified to by
the examining official. Such certificate shall be made of record in the
books of accounts of the taxpayer examined.
In case the examination herein authorized is made by a duly authorized deputy of
the local treasurer, the written authority of the deputy concerned shall specifically
state the name, address, and business of the taxpayers whose books, accounts, and
pertinent records are to be examined, the date and place of such examination, and
the procedure to be followed in conducting the same.
For this purpose, the records of the revenue district office of the Bureau of
Internal Revenue shall be made available to the local treasurer, his deputy or duly
authorized representative (Sec. 171, LGC).

8. Taxpayers Remedies

a. Periods of assessment and collection of local taxes, fees or charges

i. Assessment
Local taxes, fees, or charges shall be assessed within five (5)
years from the date they became due. No action for the collection of
such taxes, fees, or charges, whether administrative or judicial, shall
be instituted after the expiration of such period: Provided, That,
taxes, fees or charges which have accrued before the effectivity of
this Code may be assessed within a period of three (3) years from the
date they became due.
In case of fraud or intent to evade the payment of taxes, fees,
or charges, the same may be assessed within ten (10) years from
discovery of the fraud or intent to evade payment (Sec. 194. LGC).

Page | 176
 ii. Collection
Local taxes, fees, or charges may be collected within five (5)
years from the date of by or judicial action. No such action shall be
instituted after the expiration of said period: Provided, however,
That, taxes, fees or charges assessed before the effectivity of this
Code may be collected within a period of three (3) years from the
date of assessment.

iii. Suspension of payments

The running of the periods of prescription provided in the

preceding paragraphs shall be for the time during which:

(1) The treasurer is legally prevented from making the

assessment of collection;
(2) The taxpayer requests for a reinvestigation and executes a
waiver in writing before expiration of the period within
which to assess or collect; and
(3) The taxpayer is out of the country or otherwise cannot be
located (Sec. 194. LGC).

b. Protest of assessment
Within sixty (60) days from the receipt of the notice of
assessment form the treasurer, the taxpayer may file a written protest
with the local local treasurer contesting the assessment; otherwise, the
assessment shall become final and executory.
The local treasurer shall decide the protest within sixty (60)
days from the time of its filing. If the local treasurer finds the protest
to be wholly or partly meritorious, he shall issue a notice canceling
wholly or partially the assessment. However, if the local treasurer
finds the assessment to be wholly or partly correct, he shall deny the
protest wholly or partly with notice to the taxpayer.
The taxpayer shall have thirty (30) days from the receipt of the
denial of the protest or from the lapse of the sixty (60) day period
prescribed herein within which to appeal with the court of competent
jurisdiction otherwise the assessment becomes conclusive and
unappealable (Sec. 195. LGC).

c. Claim for refund or tax credit for erroneously or illegally collected tax,
fee or charge

No case or proceeding shall be maintained in any court for the

recovery of any tax, fee, or charge erroneously or illegally collected
until a written claim for refund or credit has been filed with the local
treasurer. No case or proceeding shall be entertained in any court after

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 the expiration of two (2) years from the date of the payment of such
tax, fee, or charge, or from the date the taxpayer is entitled to a refund
or credit (Sec. 196. LGC).

9. Civil remedies by the LGUs for collection of revenues

a. Local governments lien for delinquent taxes, fees or charges

Local Government's Lien - a lien on any unpaid local taxes, fees,

charges and other revenue which shall superior to all liens, charges or
encumbrances in favor of any person, enforceable by appropriate
administrative or judicial action, not only upon any property or rights
therein which may be subject to the lien but also upon property used in
business, occupation, practice of profession or calling, or exercise of
privilege with respect tot which the lien is imposed.
The lien may only be extinguished upon full payment of the
delinquent local taxes fees and charges including related surcharges and
interest (Sec. 173).

b. Civil remedies, in general

The Local Government Code provides for the civil remedies for
the collection of local taxes, fees, or and surcharges and interest resulting
from delinquency.

i. Administrative action

By administrative action thru distraint of goods, chattels, or

effects, and other personal of whatever character, including stocks
and other securities, debts, credits, bank accounts, and interest in and
rights to personal property, and by levy upon real property and
interest in or rights to real property;

ii. Judicial action

By judicial action - either of these remedies or all may be

pursued concurrently or at the discretion of the local government unit
concerned (Sec. 174, LGC).

c. Procedure for administrative action

i. Distraint of personal property

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The remedy by distraint shall proceed as follows:

(a) Seizure
Upon failure of the person owing any local tax, fee, or
charge to pay the same at the time required, the local treasurer or
his deputy may, upon written notice, seize or confiscate any
personal property belonging to that person or any personal
property subject to the lien in sufficient quantity to satisfy the tax,
fee, or charge in question, together with any increment thereto
incident to delinquency and the expenses of seizure. In such case,
the local treasurer or his deputy shall issue a duly authenticated
certificate based upon the records of his office showing the fact of
delinquency and the amounts of the tax, fee, or charge and penalty
due. Such certificate shall serve as sufficient warrant for the
distraint of personal property aforementioned, subject to the
taxpayer's right to claim exemption under the provisions of
existing laws. Distrained personal property shall be sold at public
auction in the manner herein provided for (Sec. 175, LGC).

(b) Accounting of distrained goods

The officer executing the distraint shall make or cause to be
made an account of the goods, chattels or effects distrained, a copy
of which signed by himself shall be either with the owner or person
from whose possession the goods, chattels or effects are taken, or
at the dwelling or place of business of that person and with
someone of suitable age and discretion, to which list shall be added
a statement of the sum demanded and a note of the time and place
of sale (Sec. 175, LGC).

(c) Publication
The officer shall forthwith cause a notification to be
exhibited in not less than (3) public and conspicuous places in the
territory of the local government unit where the distraint is made,
specifying the time and place of sale, and the articles distrained.
The time of sale shall not be less than twenty (20) days after notice
to the owner or possessor of the property as above specified and
the publication or posting of the notice. One place for the posting
of the notice shall be at the office of the chief executive of the local
government unit in which the property is distrained (Sec. 175,
LGC).

(d) Release of distrained property upon payment prior to sale

Page | 179
 If at any time prior to the sale, all the proper charges are
paid to the officer conducting the sale, the goods or effects
distrained shall be restored to the owner (Sec. 175, LGC).

(e) Procedure of sale

At the time and place fixed in the notice, the officer
conducting the sale sell the goods or effects so distrained at public
auction to the highest bidder for cash. Within five (5) days after the
sale, the local treasurer shall make a report of the proceedings in
writing to the local chief executive concerned.
Should the property distrained be not disposed of within
one hundred and twenty (120) days from the date of distraint, the
same shall be considered as sold to the local government unit
concerned for the amount of the assessment made thereon by the
Committee on Appraisal and to the extent of the same amount, the
tax delinquencies shall be cancelled.
Said Committee on Appraisal shall be composed of the city
or municipal treasurer as chairman, with a representative of the
Commission on Audit and the city or municipal assessor as
members (Sec. 175, LGC).

(f) Disposition of proceeds

The proceeds of the sale shall be applied to satisfy the tax,
including the surcharges, interest, and other penalties incident to
delinquency, and the expenses of the distraint and sale. The balance
over and above what is required to pay the entire claim shall be
returned to the owner of the property sold. The expenses chargeable
upon the seizure and sale shall embrace only the actual expenses of
seizure and preservation of the property pending the sale, and no
charge shall be imposed for the services of the local officer or his
deputy. Where the proceeds of the sale are insufficient to satisfy the
claim, other property may, in like manner, be distrained until the full
amount due, including all expenses, collected (Sec. 175, LGC).

ii. Levy of real property, procedure

(a) Levy

Real property may be levied after the expiration of the time

required to pay the tax, fee, or charge.
It may be pursued before, simultaneously, or after the
distraint of personal property belonging to the delinquent
taxpayer.

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 The provincial, city or municipal treasurer, as the case may
be, shall prepare a duly authenticated certificate showing
the name of the taxpayer and the amount of the tax, fee, or
charge, and penalty due from him. Said certificate shall
operate with the force of a legal execution throughout the
Philippines.
Levy shall be effected by writing upon said certificate the
description of the property upon which levy is made.
Written notice of the levy shall be mailed to or served upon
the assessor and the Registrar of Deeds of the province or
city where the property is located who shall annotate the
levy on the tax declaration and certificate of title of the
property, respectively, and the delinquent taxpayer or, if he
be absent from the Philippines, to his agent or the manager
of the business in respect to which the liability arose, or if
there be none, to the occupant of the property in question.
In case the levy on real property is not issued before or
simultaneously with the warrant of distraint on personal
property, and the personal property of the taxpayer is not
sufficient to satisfy his delinquency, the provincial, city or
municipal treasurer, as the case may be, shall within thirty
(30) days after execution of the distraint, proceed with the
levy on the taxpayer's real property.
A report on any levy shall, within ten (10) days after receipt
of the warrant, be submitted by the levying officer to the
Sanggunian concerned (Sec. 176, LGC).

(b) Publication
Within thirty (30) days after levy, the local treasurer proceed
to publicly advertise for sale or auction the property or a usable
portion thereof as may be necessary to satisfy the claim and cost of
sale; and such advertisement shall cover a period of at least thirty
(30) days. It shall be effected by posting a notice at the main
entrance of the municipal building or city hall, and in a public and
conspicuous place in the Barangay where the real property is located,
and by publication once a week for three (3) weeks in a newspaper
of general circulation in the province, city or municipality where the
property is located. The advertisement shall contain the amount of
taxes, fees or charges, and penalties due thereon, and the time and
place of sale, the name of the taxpayer against whom the taxes, fees,
or charges are levied, and a short description of the property to be
sold.

(c) Stay of sale

At any time before the date fixed for the sale, the taxpayer
may stay the proceedings by paying the taxes, fees, charges,

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 penalties and interests. If he fails to do so, the sale shall proceed and
shall be held either at the main entrance of the provincial, city or
municipal building, or on the property to be sold, or at any other
place as determined by the local treasurer conducting the sale and
specified in the notice of sale.

(d) Sale
If the delinquent taxpayer fails to settle his obligations in
full, the sale shall proceed and shall be held either at the main
entrance of the provincial, city or municipal building, or on the
property to be sold, or at any other place as determined by the local
treasurer conducting the sale and specified in the notice of sale.
Within thirty (30) days after the sale, the local treasurer or his
deputy shall make a report of the sale to the Sanggunian concerned,
and which shall form part of his records. After consultation with the
Sanggunian, the local treasurer shall make and deliver to the
purchaser a certificate of sale, showing the proceedings of the sale,
describing the property sold, stating the name of the purchaser and
setting out the exact amount of all taxes, fees, charges, and related
surcharges, interests, or penalties: Provided, however, That any
excess in the proceeds of the sale over the claim and cost of sales
shall be turned over to the owner of the property.
The local treasurer may, by ordinance duly approved,
advance an amount sufficient to defray the costs of collection by
means of the remedies provided for in this Title, including the
preservation or transportation in case of personal property, and the
advertisement and subsequent sale, in cases of personal and real
property including improvements thereon.

iii. Further distraint or levy

The remedies by distraint and levy may be repeated if

necessary until the full amount due, including all expenses, is
collected (Sec. 184, LGC).

iv. Exemption of personal property from distraint or levy

The following property shall be exempt from distraint and the

levy, attachment or execution thereof for delinquency in the payment
of any local tax, fee or charge, including the related surcharge and
interest:

(a) Tools and the implements necessarily used by the delinquent

taxpayer in his trade or employment;

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 (b) One (1) horse, cow, carabao, or other beast of burden, such as
the delinquent taxpayer may select, and necessarily used by him in
his ordinary occupation;
(c) His necessary clothing, and that of all his family;
(d) Household furniture and utensils necessary for housekeeping
and used for that purpose by the delinquent taxpayer, such as he
may select, of a value not exceeding Ten thousand pesos
(Php10,000.00);
(e) Provisions, including crops, actually provided for individual or
family use sufficient for four (4) months;
(f) The professional libraries of doctors, engineers, lawyers and
judges;
(g) One fishing boat and net, not exceeding the total value of Ten
thousand pesos (Php10,000.00), by the lawful use of which a
fisherman earns his livelihood; and
(h) Any material or article forming part of a house or improvement
of any real property (Sec. 185, LGC).

v. Penalty on local treasurer for failure to issue and execute warrant

of distraint or levy

Without prejudice to criminal under the Revised Penal Code

and other applicable laws, any local treasurer who fails to issue or
execute the warrant of distraint or levy after the expiration of the
time prescribed, or who is found guilty of abusing the exercise
thereof by competent authority shall be automatically dismissed
from the service after due notice and hearing (Sec. 177, LGC).

d. Procedure for judicial action

The local government unit concerned may enforce the

collection of delinquent taxes, fees, charges or other revenues by civil
action in any court of competent jurisdiction. The civil action shall be
filed by the local treasurer within the period prescribed in Section 194
of this Code (Sec. 183, LGC).

B. Real Property Taxation

1. Fundamental principles

The appraisal and assessment of real property for taxation purposes shall be
guided by the following fundamental principles:

(1) Real property shall be appraised at its current fair market value;

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

2. Nature of real property tax

The real property tax is a tax on property. It has been considered as a national, not
a local, tax. It has always been imposed by the national lawmaking body. It is enforced
throughout the Philippines and not in a particular political subdivision, although the bulk
of the tax proceeds accrue to the various local government units where the property is
located (Secs. 233 and 271, LGC).

In the Philippines, the real property tax is an annual ad valorem tax imposed by
local government units on the basis of a fixed proportion of the value of the property.

3. Imposition of real property tax

a. Power to levy real property tax

A province or city or a municipality within the Metropolitan Manila Area

may levy an annual ad valorem tax on real property such as land, building,
machinery, and other improvement not specifically exempted by the Local
Government Code (Sec. 232, LGC).

b. Exemption from real property tax

The following are exempted from payment of the real property tax:

(1) Real property owned by the Republic of the Philippines or any of its
political subdivisions except when the beneficial use thereof has been
granted, for consideration or otherwise, to a taxable person;
(2) Charitable institutions, churches, parsonages or convents appurtenant
thereto, mosques, nonprofit or religious cemeteries and all lands,
buildings, and improvements actually, directly, and exclusively used
for religious, charitable or educational purposes;
(3) All machineries and equipment that are actually, directly and
exclusively used by local water districts and government-owned or -
controlled corporations engaged in the supply and distribution of water
and/or generation and transmission of electric power;
(4) All real property owned by duly registered cooperatives as provided
for under R. A. No. 6938; and

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 (5) Machinery and equipment used for pollution control and
environmental protection.

Except as provided herein, any exemption from payment of real

property tax previously granted to, or presently enjoyed by, all persons,
whether natural or juridical, including all government-owned or -
controlled corporations are hereby withdrawn upon the effectivity of this
Code (Sec. 234, LGC).

4. Appraisal and assessment of real property tax

a. Rule on appraisal of real property at fair market value

All real property, whether taxable or exempt, shall be appraised at the

current and fair market value prevailing in the locality where the property is
situated (Sec 201, LGC.)

b. Declaration of real property

(1) By the owner or administrator

It shall be the duty of all persons, natural or juridical, owning or

administering real property, including the improvements therein, within a
city or municipality, or their duly authorized representative, to prepare, or
cause to be prepared, and file with the provincial, city or municipal
assessor, a sworn statement declaring the true value of their property,
whether previously declared or undeclared, taxable or exempt, which shall
be the current and fair market value of the property, as determined by the
declarant. Such declaration shall contain a description of the property
sufficient in detail to enable the assessor or his deputy to identify the same
for assessment purposes. The sworn declaration of real property herein
referred to shall be filed with the assessor concerned once every three (3)
years during the period from January first (1st) to June thirtieth (30th)
commencing with the calendar year 1992 (Sec 202, LGC).

It shall also be the duty of any person, or his authorized

representative, acquiring at any time real property in any municipality or
city or making any improvement on real property, to prepare, or cause to
be prepared, and file with the provincial, city or municipal assessor, a
sworn statement declaring the true value of subject property, within sixty
(60) days after the acquisition of such property or upon completion or
occupancy of the improvement, whichever comes earlier (Sec 203, LGC).

(2) By the Assessor

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 When any person, natural or juridical, by whom real property is
required to be declared under Section 202, refuses or fails for any reason
to make such declaration within the time prescribed, the provincial, city or
municipal assessor shall himself declare the property in the name of the
defaulting owner, if known, or against an unknown owner, as the case may
be, and shall assess the property for taxation. No oath shall be required of
a declaration thus made by the provincial, city or municipal assessor (Sec.
204, LCG).

c. Listing of real property in assessment rolls

In every province and city including the municipalities within the

Metropolitan Manila Area, the provincial, city or municipal assessor shall prepare
and maintain an assessment roll wherein shall be listed all real property, whether
taxable or exempt, located within the territorial jurisdiction of the local
government unit concerned.

Real property shall be listed, valued and assessed as follows:

(1) In the case of an individual: In the name of the owner or administrator, or

anyone having legal interest in the property.
(2) In the case of an undivided property of a deceased person: In the name of
the estate or of the heir and devisees without designating them
individually
(3) In the case of an undivided property other than that owned by a deceased:
In the name of one or more co-owners.
Provided, however, That in (2) and (3), such heir, devisees, or co-owner shall
be liable severally and proportionately for all the obligations imposed and the
payment of real property tax with respect to the undivided property.
(4) In the case of a corporation, partnership, or association: In the same
manner as that of an individual.
(5) In the case of real property owned by the Republic of the Philippines, its
instrumentalities and political subdivisions, the beneficial use of which
has been granted for consideration or otherwise, to a taxable person: In
the name of the possessor, grantee or of the public entity if such property
has been acquired or held for resale or lease (Sec 205, LGC).

d. Preparation of schedules of fair market value

Before any revision of property assessment is made, the provincial, city

and municipal assessors of the municipalities within the Metropolitan Manila
Area shall prepare a schedule of fair market values for the different classes of real
property situated in their respective local government units for enactment by
ordinance of the sanggunian concerned.

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 The schedule of fair market values shall be published in a newspaper of
general circulation in the province, city or municipality concerned, or in the
absence thereof, shall be posted in the provincial capital, city or municipal hall
and in two other conspicuous public places therein (Sec. 212, LGC).

(1) Authority of assessor to take evidence

For the purpose of obtaining information on which to base the

market value of any real property, the assessor of the province, city or
municipality or his deputy may summon the owners of the properties to be
affected or persons having legal interest therein and witnesses, administer
oaths, and take deposition concerning the property, its ownership, amount,
nature, and value (Sec. 213, LGC).

(2) Amendment of schedule of fair market value

The provincial, city or municipal assessor may recommend to the

sanggunian concerned amendments to correct errors in valuation in the
schedule of fair market values. The sanggunian concerned shall, by
ordinance, act upon the recommendation within ninety (90) days from
receipt thereof (Sec. 214, LGC).

e. Classes of real property

For purposes of assessment, Section 215 of the Local Government Code

provides the following classes of real property:

a. Residential
b. Agricultural
c. Commercial
d. Industrial
e. Mineral
f. Timberland
g. Special refers to all lands, buildings, and other improvements thereon
actually, directly and exclusively used for hospitals, cultural, or scientific
purposes, and those owned and used by local water districts, and
government-owned or -controlled corporations rendering essential public
services in the supply and distribution of water and/or generation and
transmission of electric power (Sec. 216, LGC).

The city or municipality within the Metropolitan Manila Area, through

their respective sanggunian, shall have the power to classify lands as residential,
agricultural, commercial, industrial, mineral, timberland, or special in accordance
with their zoning ordinances (Sec 215, LGC).

f. Actual use of property as basis of assessment

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 Real property shall be classified, valued and assessed on the basis of its
actual use regardless of where located, whoever owns it and whoever uses it (Sec.
217, LGC).

g. Assessment of real property

(1) Assessment levels

The assessment levels to be applied to the fair market value of real

property to determine its assessed value shall be fixed by ordinances of the
sangguniang panlalawigan, sangguniang panlungsod or sangguniang
bayan of a municipality within the Metropolitan Manila Area, at the rates
not exceeding the following:

(a) On Lands:

CLASS ASSESSMENT LEVELS

Residential 20%
Agricultural 40%
Commercial 50%
Industrial 50%
Mineral 50%
Timberland 20%

(b) On Buildings and Other Structures:

(1) Residential
Fair market Value
Over Not Over Assessment
Levels
P175,000.00 0%
P175,000.00 300,000.00 10%
300,000.00 500,000.00 20%
500,000.00 750,000.00 25%
750,000.00 1,000,000.00 30%
1,000,000.00 2,000,000.00 35%
2,000,000.00 5,000,000.00 40%

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 5,000,000.00 10,000,000.00 50%
10,000,000.00 60%

(2) Agricultural

Fair Market Value

Over Not Over Assessment
Levels
P300,000.00 25%
P300,000.00 500,000.00 30%
500,000.00 750,000.00 35%
750,000.00 1,000,000.00 40%
1,000,000.00 2,000,000.00 45%
2,000,000.00 50%

(3) Commercial / Industrial

Fair Market Value

Over Not Over Assessment
Levels
P300,000.00 30%
P300,000.00 500,000.00 35%
500,000.00 750,000.00 40%
750,000.00 1,000,000.00 50%
1,000,000.00 2,000,000.00 60%
2,000,000.00 5,000,000.00 70%
5,000,000.00 10,000,000.00 75%
10,000,000.00 80%

(4) Timberland

Fair Market Value

Over Not Over Assessment
Levels

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 P300,000.00 45%
P300,000.00 500,000.00 50%
500,000.00 750,000.00 55%
750,000.00 1,000,000.00 60%
5,000,000.00 2,000,000.00 65%
2,000,000.00 70%

(c) On Machineries
Class Assessment Levels
Agricultural 40%
Residential 50%
Commercial 80%
Industrial 80%

(d) On Special Classes: The assessment levels for all lands

buildings, machineries and other improvements;

Actual Use Assessment

Level
Cultural 15%
Scientific 15%
Hospital 15%
Local water districts 10%
Government-owned or 10%
controlled corporations
engaged in the supply and
distribution of water and/or
generation and transmission
of electric power (Sec. 218,
LGC).

(2) General revisions of assessments and property classification

The provincial, city or municipal assessor shall undertake a general

revision of real property assessments within two (2) years after the
effectivity of this Code and every three (3) years thereafter (Sec. 219,
LGC).

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 (3) Date of effectivity of assessment of reassessment

All assessments or reassessments made after the first (1st) day of

January of any year shall take effect on the first (1st) day of January of the
succeeding year: Provided, however, That the reassessment of real
property due to:
a. its partial or total destruction, or
b. to a major change in its actual use, or
c. to any great and sudden inflation or deflation of real property values,
or
d. to the gross illegality of the assessment when made or
e. to any other abnormal cause,
shall be made within ninety (90) days from the date any such cause or
causes occurred, and shall take effect at the beginning of the quarter next
following the reassessment (Sec. 221, LGC).

(4) Assessment of property subject to back taxes

Real property declared for the first time shall be assessed for taxes
for the period during which it would have been liable but in no case for
more than ten (10) years prior to the date of initial assessment: Provided,
however, That such taxes shall be computed on the basis of the applicable
schedule of values in force during the corresponding period. If such taxes
are paid on or before the end of the quarter following the date the notice of
assessment was received by the owner or his representative, no interest for
delinquency shall be imposed thereon; otherwise, such taxes shall be
subject to an interest at the rate of two percent (2%) per month or a
fraction thereof from the date of the receipt of the assessment until such
taxes are fully paid (Sec. 222, LGC).

(5) Notification of new or revised assessment

When real property is assessed for the first time or when an

existing assessment is increased or decreased, the provincial, city or
municipal assessor shall within thirty (30) days give written notice of such
new or revised assessment to the person in whose name the property is
declared. The notice may be delivered personally or by registered mail or
through the assistance of the punong barangay to the last known address of
the person to be served (Sec. 223, LGC).

h. Appraisal and assessment of machinery

(a) Fair market value of machinery:

(1) Brand-new machinery - shall be the acquisition cost.

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 (2) In all other cases - shall be determined by dividing the remaining
economic life of the machinery by its estimated economic life and
multiplied by the replacement or reproduction cost.

(b) If the machinery is imported, the acquisition cost includes freight, insurance,
bank and other charges, brokerage, arrastre and handling, duties and taxes, plus
cost of inland transportation, handling, and installation charges at the present site.
The cost in foreign currency of imported machinery shall be converted to peso
cost on the basis of foreign currency exchange rates as fixed by the Central Bank
(Sec. 224, LGC).

5. Collection of real property tax

a. Date of accrual of real property tax

The real property tax for any year shall accrue on the first day of January
and from that date it shall constitute a lien on the property which shall be superior
to any other lien, mortgage, or encumbrance of any kind whatsoever, and shall be
extinguished only upon the payment of the delinquent tax (Sec. 246, LGC).

b. Collection of tax

(1) Collecting authority

The collection of the real property tax with interest thereon and
related expenses, and the enforcement of the remedies or any applicable
laws, shall be the responsibility of the city or municipal treasurer
concerned.

The city or municipal treasurer may deputize the barangay

treasurer to collect all taxes on real property located in the barangay:
Provided, That the barangay treasurer is properly bonded for the purpose:
Provided, further, That the premium on the bond shall be paid by the city
or municipal government concerned Sec. 247, LGC).

(2) Duty of assessor to furnish local treasurer with assessment rolls

The provincial, city or municipal assessor shall prepare and submit

to the treasurer of the local government unit, on or before the thirty-first
(31st) day of December each year, an assessment roll containing a list of
all persons whose real properties have been newly assessed or reassessed
and the values of such properties (Sec 248, LGC).

(3) Notice of time for collection of tax

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 The city or municipal treasurer shall, on or before the thirty-first
(31st) day of January each year, in the case of the basic real property tax
and the additional tax for the Special Education Fund (SEF) or any other
date to be prescribed by the sanggunian concerned in the case of any other
tax levied under this title, post the notice of the dates when the tax may be
paid without interest at a conspicuous and publicly accessible place at the
city or municipal hall. Said notice shall likewise be published in a
newspaper of general circulation in the locality once a week for two (2)
consecutive weeks (Sec 249, LGC).

c. Periods within which to collect real property tax

The basic real property tax and any other tax levied under this Title shall
be collected within five (5) years from the date they become due. No action for
the collection of the tax, whether administrative or judicial, shall be instituted
after the expiration of such period. In case of fraud or intent to evade payment of
the tax, such action may be instituted for the collection of the same within ten (10)
years from the discovery of such fraud or intent to evade payment.

The period of prescription within which to collect shall be suspended for

the time during which:

(1) The local treasurer is legally prevented from collecting the tax;

(2) The owner of the property or the person having legal interest therein
requests for reinvestigation and executes a waiver in writing before the
expiration of the period within which to collect; and

(3) The owner of the property or the person having legal interest therein is
out of the country or otherwise cannot be located (Sec. 270, LGC).

d. Special rules on payment

(1) Payment of real property tax in installments

The owner of the real property or the person having legal interest
therein may pay the basic real property tax and the additional tax for
Special Education Fund (SEF) due thereon without interest in four (4)
equal installments; the first installment to be due and payable on or before
March Thirty-first (31st); the second installment, on or before June Thirty
(30); the third installment, on or before September Thirty (30); and the last
installment on or before December Thirty-first (31st), except the special
levy the payment of which shall be governed by ordinance of the
sanggunian concerned.

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 The date for the payment of any other tax imposed under this Title
without interest shall be prescribed by the sanggunian concerned.

Payments of real property taxes shall first be applied to prior years

delinquencies, interests, and penalties, if any, and only after said
delinquencies are settled may tax payments be credited for the current
period (Sec. 250, LGC).

(2) Interests on unpaid real property tax

In case of failure to pay the basic real property tax or any other tax
levied under this Title upon the expiration of the periods as provided in
Section 250, or when due, as the case may be, shall subject the taxpayer to
the payment of interest at the rate of two percent (2%) per month on the
unpaid amount or a fraction thereof, until the delinquent tax shall have
been fully paid: Provided, however, That in no case shall the total interest
on the unpaid tax or portion thereof exceed thirty-six (36) months (Sec.
255, LGC).

(3) Condonation of real property tax

In case of a general failure of crops or substantial decrease in the

price of agricultural or agribased products, or calamity in any province,
city or municipality, the sanggunian concerned, by ordinance passed prior
to the first (1st) day of January of any year and upon recommendation of
the Local Disaster Coordinating Council, may condone or reduce, wholly
or partially, the taxes and interest thereon for the succeeding year or years
in the city or municipality affected by the calamity (Sec. 276, LGC).

The President of the Philippines may, when public interest so

requires, condone or reduce the real property tax and interest for any year
in any province or city or a municipality within the Metropolitan Manila
Area (Sec. 278, LGC).

e. Remedies of LGUs for collection of real property tax

(1) Issuance of notice of delinquency for real property tax payment

When the real property tax or any other tax imposed under this
Title becomes delinquent, the provincial, city or municipal treasurer shall
immediately cause a notice of the delinquency to be posted at the main
hall and in a publicly accessible and conspicuous place in each barangay
of the local government unit concerned. The notice of delinquency shall
also be published once a week for two (2) consecutive weeks, in a
newspaper of general circulation in the province, city, or municipality.

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 Such notice shall specify the date upon which the tax became
delinquent and shall state that personal property may be distrained to
effect payment. It shall likewise state that any time before the distraint of
personal property, payment of the tax with surcharges, interests and
penalties may be made, and unless the tax, surcharges and penalties are
paid before the expiration of the year for which the tax is due except when
the notice of assessment or special levy is contested administratively or
judicially, the delinquent real property will be sold at public auction, and
the title to the property will be vested in the purchaser, subject, however,
to the right of the delinquent owner of the property or any person having
legal interest therein to redeem the property within one (1) year from the
date of sale (Sec. 254, LGC).

(2) Local governments lien

The basic real property tax and any other tax levied under this Title
constitutes a lien on the property subject to tax, superior to all liens,
charges or encumbrances in favor of any person, irrespective of the owner
or possessor thereof, enforceable by administrative or judicial action, and
may only be extinguished upon payment of the tax and the related interests
and expenses (Sec. 257, LGC).

(3) Remedies in general

For the collection of the basic real property tax and any other tax
levied under this Title, the local government unit concerned may avail of
the remedies by administrative action thru levy on real property or by
judicial action (Sec. 256, LGC).

(4) Resale of real estate taken for taxes, fees or charges

The sanggunian concerned may, by ordinance duly approved, and

upon notice of not less than twenty (20) days, sell and dispose of, at public
auction, real property acquired through purchase by the local government
unit for want of bidder. The proceeds of the sale shall accrue to the general
fund of the local government unit concerned (Sec 264, LGC).

(5) Further levy until full payment of amount due

Levy may be repeated if necessary until the full amount due,

including all expenses, is collected (Sec. 265, LGC).

6. Refund or credit of real property tax

a. Payment under protest

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 No protest shall be entertained unless the taxpayer first pays the tax. There
shall be annotated on the tax receipts the words "paid under protest". The protest
in writing must be filed within thirty (30) days from payment of the tax to the
provincial, city treasurer or municipal treasurer, in the case of a municipality
within Metropolitan Manila Area, who shall decide the protest within sixty (60)
days from receipt.

The tax or a portion thereof paid under protest shall be held in trust by the
treasurer concerned. In the event that the protest is finally decided in favor of the
taxpayer, the amount or portion of the tax protested shall be refunded to the
protestant, or applied as tax credit against his existing or future tax liability. In the
event that the protest is denied or upon the lapse of the sixty day period prescribed
in subparagraph (a), the taxpayer may avail of the remedies as provided for in
Chapter 3, Title II, Book II of the Local Government Code (Sec. 252, LGC)

b. Repayment of excessive collections

When an assessment of basic real property tax, or any other tax levied
under this Title, is found to be illegal or erroneous and the tax is accordingly
reduced or adjusted, the taxpayer may file a written claim for refund or credit for
taxes and interests with the provincial or city treasurer within two (2) years from
the date the taxpayer is entitled to such reduction or adjustment.

The provincial or city treasurer shall decide the claim for tax refund or
credit within sixty (60) days from receipt thereof. In case the claim for tax refund
or credit is denied, the taxpayer may avail of the remedies as provided in Chapter
3, Title II, Book II of the Local Government Code (Sec 253, LGC).

7. Taxpayers Remedies

a) Contesting an assessment of value of real property

1. Appeal to the Local Board of Assessment Appeals (LBAA)

Any owner or person having legal interest in the property who is
not satisfied with the action of the provincial, city or municipal assessor in
the assessment of his property may, within sixty (60) days from the date of
receipt of the written notice of assessment, appeal to the Board of
Assessment appeals of the province or city by filing a petition under oath
in the form prescribed for the purpose, together with copies of the tax
declarations and such affidavits or documents submitted in support of the
appeal (Sec. 226, LGC).
The Board shall decide the appeal within one hundred twenty (120) days
from the date of receipt of such appeal. The Board, after hearing, shall
render its decision based on substantial evidence or such relevant evidence

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 on record as a reasonable mind might accept as adequate to support the
conclusion (Sec. 229, LGC).

2. Appeal to the Central Board of Assessment Appeals (CBAA)

In case the provincial or city assessor concurs in the revision or the
assessment, it shall be his duty to notify the owner of the property or the
person having legal interest therein of such fact using the form prescribed
for the purpose. The owner of the property or the person having legal
interest therein or the assessor who is not satisfied with the decision of the
Board, may, within thirty (30) days after receipt of the decision of said
Board, appeal to the Central Board of Assessment appeals, as herein
provided. The decision of the Central Board shall be final and executory
(Sec. 229, LGC).

3. Effect of appeal on payment of tax

Appeal on of real property made under the provisions of this Code shall, in
no case, suspend the collection of the corresponding realty taxes on the
property involved as assessed by the provincial or city assessor, without
prejudice to subsequent adjustment depending upon the final outcome of the
appeal (Sec. 231, LGC).

b) Contesting an assessment of value of real property

1. File protest with the local treasurer

(a) No protest shall be entertained unless the taxpayer first pays the
tax. There shall be annotated on the tax receipts the words "paid under
protest". The protest in writing must be filed within thirty (30) days from
payment of the tax to the provincial, city treasurer or municipal treasurer,
in the case of a municipality within Metropolitan Manila Area, who shall
decide the protest within sixty (60) days from receipt.
(b) The tax or a portion thereof paid under protest, shall be held in
trust by the treasurer concerned.
(c) In the event that the protest is finally decided in favor of the
taxpayer, the amount or portion of the tax protested shall be refunded to
the protestant, or applied as tax credit against his existing or future tax
liability.

2. Appeal to the LBAA

In the event that the protest is denied or upon the lapse of the
prescribed sixty day period, the taxpayer may appeal to the Local Board
of Assessment Appeals (LBAA) (Sec. 252, LGC).

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3. Appeal to the CBAA
In the event that the protest is denied or upon the lapse of the
prescribed sixty day period, the taxpayer may appeal to the Central Board
of Assessment Appeals (CBAA)(Sec. 252, LGC).

4. Appeal to the Court of Tax Appeals

A special civil action of certiorari would be available as a remedy to
question the decision of the Central Board of Assessment Appeals
(CBAA). This is in line with the recognized rule of the underlying power
in courts to scrutinize the acts of administrative agencies exercising quasi-
judicial power on questions of law and jurisdiction.

5. Appeal to the Supreme Court

A special civil action of certiorari would be available as a remedy to
question the decision of the Court of Tax Appeals.

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IV. TARIFF and CUSTOMS CODE of 1978, as amended (TCC)

A. Tariff and Duties defined

Tariff may refer to two things: first, as a book of rates which lists down different
kinds of articles or merchandise along with the duties imposed upon the same.
Second, as the duties payable on articles or merchandise imported or exported.
The second definition is synonymous with custom duties.

B. General Rule:

All imported articles are subject to duty.

All articles, when imported from any foreign country into the Philippines, shall be
subject to duty upon each importation, even though previously exported from the
Philippines, except as otherwise specifically provided for in this Code in other
laws. Sec.100 TCC

Importation by the government taxable.

Except as otherwise specifically provided, all importations by the government for

its own use or that of its subordinate branches on instrumentalities, or
corporations, agencies or instrumentalities owned or controlled by the
government, shall be subject to the duties, taxes, fees and other charges provided
for in this Code: Provided, however, That upon certification of the head of the
department or political subdivision concerned, with the approval of the Auditor
General, that the imported article is actually being used by the government or any
of its political subdivision concerned, the amount of duty, tax, fee or charge shall
be refunded to the government or the political subdivision which paid it

C. Purpose of Imposition

The assessment and collection of the lawful revenues from imported articles and
all other dues, fees, charges, fines and penalties accruing under the tariff and
customs laws.

The prevention and suppression of smuggling and other frauds upon the customs.

The enforcement of tariff and customs laws and all other laws, rules and
regulations relating to the tariff and customs administration.

D. Flexible Tariff Clause

The authority given to the President to adjust the tariff rates under Sec.401 of the
Tariff and Custom Code, which is the enabling law that made effective the
delegation of the taxing power to the President under the Constitution.

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Sec.401 Flexible Clause

a. In the interest of national economy, general welfare and/or national security,

and subject to the limitations herein prescribed, the President, upon
recommendation of the National Economic and Development Authority
(hereinafter referred to as NEDA), is hereby empowered: (1) to increase, reduce
or remove existing protective rates of import duty (including any necessary
change in classification). The existing rates may be increased or decreased to any
level, in one or several stages but in no case shall the increased rate of import duty
be higher than a maximum of one hundred (100) per cent ad valorem; (2) to
establish import quota or to ban imports of any commodity, as may be necessary;
and (3) to impose an additional duty on all imports not exceeding ten (10%) per
cent ad valorem whenever necessary; Provided, That upon periodic investigations
by the Tariff Commission and recommendation of the NEDA, the President may
cause a gradual reduction of protection levels granted in Section One Hundred
and Four of this Code, including those subsequently granted pursuant to this
section.

b. Before any recommendation is submitted to the President by the NEDA

pursuant to the provisions of this section, except in the imposition of an additional
duty not exceeding ten (10) per cent ad valorem, the Commission shall conduct an
investigation in the course of which they shall hold public hearings wherein
interested parties shall be afforded reasonable opportunity to be present, produce
evidence and to be heard. The Commission shall also hear the views and
recommendations of any government office, agency or instrumentality
concerned. The Commission shall submit their findings and recommendations to
the NEDA within thirty (30) days after the termination of the public hearings.

c. The power of the President to increase or decrease rates of import duty within
the limits fixed in subsection "a" shall include the authority to modify the form of
duty. In modifying the form of duty, the corresponding ad valorem or specific
equivalents of the duty with respect to imports from the principal competing
foreign country for the most recent representative period shall be used as bases.

d. The Commissioner of Customs shall regularly furnish the Commission a copy

of all customs import entries as filed in the Bureau of Customs. The Commission
or its duly authorized representatives shall have access to, and the right to copy all
liquidated customs import entries and other documents appended thereto as finally
filed in the Commission on Audit.

e. The NEDA shall promulgate rules and regulations necessary to carry out the
provisions of this section.

f. Any Order issued by the President pursuant to the provisions of this section
shall take effect thirty (3) days after promulgation, except in the imposition of

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 additional duty not exceeding ten (10) per cent ad valorem which shall take effect
at the discretion of the President.

E. Requirements of Importation

1. Beginning and ending of importation

Importation begins when the carrying vessel or aircraft enters the jurisdiction
of the Philippines with the intention to unload therein. Importation is deemed
ended upon the payment of the duties, taxes and other charges due upon the
articles and the granting of the legal permit for withdrawal of the same.

2. Obligations of importer

a. Cargo manifest

Sec. 1005. Manifest Required of Vessel From Foreign Port. Every

vessel from a foreign port must have on board a complete manifest of all
its cargo.

All of the cargo intended to be landed at a port in the Philippines must be

described in separate manifests for each port of call therein. Each manifest
shall include the port of departure and the port of delivery with the marks,
numbers, quantity and description of the packages and the names of the
consignees thereof. Every vessel from a foreign port must have on board
complete manifests of passengers and their baggage, in the prescribed
form, setting forth their destination and all particulars required by the
immigration laws; and every such vessel shall have prepared for
presentation to the proper customs official upon arrival in ports of the
Philippines a complete list of all sea stores then on board. If the vessel
does not carry cargo or passengers the manifest must show that no cargo
or passenger, as the case may be, is carried from the port of departure to
the port of destination in the Philippines.

A cargo manifest shall in no case be changed or altered after entry of the

vessel, except by means of an amendment by the master, consignee or agent
thereof, under oath, and attached to the original manifest:Provided,
however, That after the invoice and/or entry covering an importation have
been received and recorded in the office of the appraiser, no amendment of
the manifest shall be allowed, except when it is obvious that a clerical error
or any other discrepancy has been committed in the preparation of the
manifest, without any fraudulent intent, discovery of which could not have
been made until after examination of the importation has been
completed. Prior to release of the cargo, the veracity of the amendment shall
be examined by the Commissioner of Customs for the purpose of invoking
penal provision under Sections 2503 and 3602 of this Act.

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b. Import entry

Sec. 1302. Import Entries. All imported articles, except importations

admitted free of duty under Subsection "k", Sec. one hundred and five of
this Code, shall be subject to a formal or informal entry. Articles of a
commercial nature intended for sale, barter or hire, the dutiable value of
which is Two thousand pesos (P2,000.00) or less, land personal and
household effects or articles, not in commercial quantity, imported in
passenger's baggage, mail or otherwise, for personal use, shall be cleared
on an informal entry whenever duty, tax or other charges are collectible.

The Commissioner may, upon instruction of the Secretary of Finance, for

the protection of domestic industry or of the revenue, require a formal
entry, regardless of value, whatever be the purpose and nature of the
importation.

A formal entry may be for immediate consumption, or under irrevocable

domestic letter of credit, bank guarantee or bond for:

(a) Placing the article in customs bonded warehouse;

(b) Constructive warehousing and immediate transportation to other port

of the Philippines upon proper examination and appraisal; or

(c) Constructive warehousing and immediate exportation.

Import entries under irrevocable domestic letter of credit, bank guarantee

or bond shall be subject to the provisions of Title V, Book II of this Code.

All importations entered under formal entry shall be covered by a letter of

credit or any other verifiable document evidencing payment.

Sec. 1304. Declaration of the Import Entry. Except in case of informal

entry, no entry of imported article shall be effected until there shall have
been submitted to the Collector a written declaration, in such form as shall
be prescribed by the Commissioner, containing statements of substance as
follows:
a. That the entry delivered to the Collector contains a full and true
statement of all the articles which are the subject of the entry.

b. That the invoice and entry contain a just and faithful account of the
actual cost of said articles, including and specifying the value of all
containers or coverings, and that nothing has been omitted therefrom or
concealed whereby the Government of the Republic of the Philippines
might be defrauded of any part of the duties lawfully due on the articles.

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 c. That, to the best of declarant's information and belief, the invoice and
all bills of lading relating to the articles are the only ones in existence
relating to the importation in question and that they are in the state in
which they were actually received by him; and, furthermore,

That, to the best of the declarant's information and belief, the entry,
invoice and bill of lading, and the declaration thereon are in all respects
genuine and true, and were made by the person by whom the same purport
to have been made, respectively.

Sec. 1305. By Whom to be Signed. The declaration shall be signed by

the importer, consignee or holder of the bill, by or for whom the entry is
effected, if such person is an individual, or in case of a corporation, firm
or association, by its manager, or by a licensed customs broker duly
authorized to act for either of them. When it is impracticable to obtain a
declaration thus signed, the Collector may allow it to be signed by some
person in interest having first and best knowledge of the facts. A Collector
may also, in his discretion, require that the declaration shall be sworn to
by the person signing the same.

Sec. 1306. Form and Contents of Import Entry. Import entries shall be
in the required number of copies in such form as prescribed by
regulations. They shall be signed by the person making the entry of the
articles, and shall contain the names of the importing vessel and master,
port of departure and date of arrival, the number and marks of packages,
or the quantity, if in bulk, and the nature of the articles contained therein,
and its value as set forth in a proper invoice to be presented in duplicate
with the entry.

Sec. 1307. Description of Articles. The description of the articles in the

import entry shall be in customary terms or communal designation, or, if
feasible and practical, in tariff terms, and in the currency of the invoice;
and the values of the several classes of articles shall be separately declared
according to their respective rates of duty, and the totals of each class duly
shown.

c. Liquidation of duties

Sec. 1601. Liquidation and Record of Entries. If the Collector shall

approve the returns of the appraiser and the report of the weights, gauge or
quantity, the liquidation shall be made on the face of the entry showing the
particulars thereof, initiated by the liquidating clerk, approved by the chief
liquidator, and recorded in the record of liquidations.

A daily record of all entries liquidated shall be posted in the public

corridor of the customhouse, stating the name of the vessel or aircraft, the

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 port from which she arrived, the date of her arrival, the name of the
importer, and the serial number and date of the entry. A daily record must
also be kept by the Collector of all additional duties, taxes and other
charges found upon liquidation, and notice shall promptly be sent to the
interested parties.

Sec. 1602. Tentative Liquidation. If to determine the exact amount due

under the law in whole or in part some future action is required, the
liquidation shall be deemed to be tentative as to the item or items affected
and shall to that extent be subject to future and final readjustment and
settlement. The entry in such case shall be stamped "Tentative
liquidation".

Sec. 1603. Finality of Liquidation. When articles have been entered and
passed free of duty or final adjustment of duties made, with subsequent
delivery, such entry and passage free of duty or settlement of duties will,
after the expiration of one year, from the date of the final payment of
duties, in the absence of fraud or protest, be final and conclusive upon all
parties, unless the liquidation of the import entry was merely tentative.

Sec. 1604. Treatment of Fractions in the Liquidation. In determining

the total amount of duties, taxes, surcharges, wharfage and/or other
charges to be paid on entries, a fraction of a peso less than fifty centavos
shall be disregarded, and a fraction of a peso amounting to fifty centavos
or more shall be considered as one peso. In case of overpayment or
underpayment of duties, taxes, surcharges, wharfage and/or other charges
paid on entries, where the amount involved is less than five pesos, no
refund or collection shall be made.

d. Keeping of records

Requirement to Keep Records. - All importers are required to keep at their

principal place of business, in the manner prescribed by regulations to be
issued by the Commissioner of Customs and for a period three (3) years
from the date of importation, all the records of their importations and/or
books of accounts, business and computer systems and all customs
commercial data including payment records relevant for the verification of
the accuracy of the transaction value declared by the importers/customs
brokers on the import entry.

All brokers are required to keep at their principal place of business, in the
manner prescribed by regulations to be issued by the Commissioner of
Customs and for a period of three (3) years from the date of importation
copies of the above mentioned records covering transactions that they
handle."

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F. Importation in violation of TCC

1. Smuggling

Smuggling is the illegal transport of goods, especially across borderlines.

Smuggling is engaged in to avoid taxation or to obtain goods which are
prohibited in a certain region. Items that are often involved in smuggling
include alcohol, tobacco, illegal drugs, arms, and even immigrants.

Kinds of Smuggling:

1.Outright smuggling-There are no documents involved, no import entries

are seenall you see are the goods:scooters, bags of rice, second hand
vehicles, garments, shoes, vegetables,etc. being sold at dirt cheap prices as
they did not pay any corresponding duties at all. They are simply sneaked
in through the coastlines of the country.With a coastline longer than
the United States, truly, the Philippines can be a haven for outright
smugglers.

2.Technical smuggling-There are import documents but the mischief

happens through undervaluation, underdeclaration of the volume shipped,
diversion of cargo and misclassification.

2. Other fraudulent practices

a. For sailing or operating without proper certificate of inspection and special

permit, fifty pesos for each offense;

b. For sailing or operating with expired license or permit, one hundred pesos for
each offense;

c. For engaging in the business of transporting passengers in the coastwise trade

without license or permit, one hundred pesos for each offense;

d. For navigating without sufficient life preservers, belts or rafts required by

customs regulations, one hundred pesos for each offense;

e. For navigating without fire-fighting apparatus and/or medical supplies required

by customs regulations, fifty pesos for each offense;

f. For sailing with excess passengers, twenty pesos for each passenger in excess of
the authorized number, but in no case less than the fare payable by each passenger
to his place of destination;

g. For sailing with overloaded cargo, fifty pesos for each offense in case of
vessels of fifty tons gross or less; one hundred pesos in case of vessels of not less

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 than fifty tons nor more than one hundred tons gross; and not less than two
hundred pesos nor more than five hundred pesos in case of vessels of one hundred
tons gross or more;

h. A vessel shall be fined in an amount hereafter fixed for:

(1) Anchoring at any dock, pier, wharf, quay or bulkhead without rat guards, fifty
pesos for coastwise vessels, and two hundred pesos for overseas vessels;

(2) Dumping garbage or slops over the side in port, one hundred pesos;

(3) Dumping or causing to spread crude oil, kerosene or gasoline in the bay or at
the piers while in port, two hundred pesos for each offense;

(4) Loading gasoline at a place other than that designated by the regulations, four
hundred pesos for each offense.

G. Classification of goods

1. Taxable importation

Articles, although previously exported from the Philippines, become

dutiable from the entry of the vessel or aircraft into the Philippine jurisdiction
until the payment of duties, taxes and other charges and the issuance of the permit
for the withdrawal of said goods from the customhouse.

The collector shall cause all articles entering the jurisdiction of his district,
and destined for importation through his port, to be entered at the customhouse,
shall cause all such articles to be appraised and classified and shall assess and
collect the duties, taxes, charges thereof.

2. Prohibited importation

Sec. 102. Prohibited Importations. The importation into the Philippines of

the following articles is prohibited:
a. Dynamite, gunpowder, ammunitions and other explosives, firearm and
weapons of war, and detached parts thereof, except when authorized by law.

b. Written or printed article in any form containing any matter advocating or

inciting treason, rebellion, insurrection or sedition against the Government of
the Philippines, of forcible resistance to any law of the Philippines, or
containing any threat to take the life of or inflict bodily harm upon any person
in the Philippines.

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 c. Written or printed articles, photographs, engravings, lithographs, objects,
paintings, drawings or other representation of an obscene or immoral
character.

d. Articles, instruments, drugs and substances designed, intended or adapted

for preventing human conception or producing unlawful abortion, or any
printed matter which advertises or describes or gives directly or indirectly
information where, how or by whom human conception is prevented or
unlawful abortion produced.

e. Roulette wheels, gambling outfits, loaded dice, marked cards, machines,

apparatus or mechanical devices used in gambling, or in the distribution of
money, cigars, cigarettes or other articles when such distribution is dependent
upon chance, including jackpot and pinball machines or similar contrivances.

f. Lottery and sweepstakes tickets except those authorized by the Philippine

Government, advertisements thereof and lists of drawings therein.

g. Any article manufactured in whole or in part of gold silver or other precious

metal, or alloys thereof, the stamps brands or marks of which do not indicate
the actual fineness or quality of said metals or alloys.

h. Any adulterated or misbranded article of food or any adulterated or

misbranded drug in violation of the provisions of the "Food and Drugs Act."

i. Marihuana, opium poppies, coca leaves, or any other narcotics or synthetic

drugs which are or may hereafter be declared habit forming by the President
of the Philippines, any compound, manufactured salt, derivative, or
preparation thereof, except when imported by the Government of the
Philippines or any person duly authorized by the Collector of Internal
Revenue, for medicinal purposes only.

j. Opium pipes and parts thereof, of whatever material.

k. All other articles the importation of which is prohibited by law.

3. Conditionally-free importation

Sec. 105. Conditionally Free Importations. The following articles shall be

exempt from the payment of import duties upon compliance with the
formalities prescribed in, or with the regulations which shall be promulgated
by the Commissioner of Customs with the approval of the department head:
a. Animals and plants for scientific, experimental, propagation, botanical,
breeding, zoological and national defense purposes: Provided, That no live
trees, shoots, plants and moss, and bulbs, tubers and seeds for propagation
purposes may be imported under this section, except by order of the

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Government of the Philippines or other duly authorized institutions: Provided,
further, That the free entry of animals for breeding purposes shall be restricted
to animals of a recognized breed, duly registered in the book of record
established for that breed: AndProvided, finally, That certificate of such
record, and pedigree of such animal duly authenticated by the proper
custodian of such book of record, shall be produced and submitted to the
Collector of Customs, together with affidavit of the owner or importer, that
such animal is the identical animal described in said certificate of record and
pedigree.

b. Aquatic products (e.g., fish, crustaceans, mollusks, marine animals,

seaweed, fish oil, roe), including preparations or manufactures thereof, caught
or gathered by vessels of Philippine registry: Provided, That they are imported
in such vessels or in crafts attached thereto: AndProvided, further, That they
have not been landed in any foreign territory or, if so landed, they have been
landed solely for transshipment without having been advanced in condition.

c. Samples of the kind, in such quantity and of such dimensions or

construction as to render them unsalable or of no appreciable commercial
value, models not adapted for practical use and samples of medicine properly
marked "physicians' samples not for sale".

Commercial samples, except those that are not readily and easily identifiable
(e.g., precious and semi-precious stones, cut or uncut, and jewelry set with
precious or semi-precious stones), the value of any single importation of
which does not exceed ten thousand pesos, upon the giving of a bond in an
amount equal to one and one-half times the ascertained duties, taxes and other
charges thereon, conditioned for the exportation of said samples within six
months from the date of the acceptance of the import entry, or in default
thereof, the payment of the corresponding duties, taxes and other charges. If
the value of any single consignment of such commercial samples exceeds ten
thousand pesos, the importer thereof may select any portion of same not
exceeding in value ten thousand pesos for entry under the provisions of this
subsection, and the excess of the consignment may be entered in bond, or for
consumption, as the importer may elect.

d. Articles, including binnacles, propellers, and the like, the character of

which, as imported, prevents their use for other purposes than the
construction, equipment, or repair of vessels and aircraft, and life-preservers
and life buoys, related equipment and parts and accessories thereof, which are
necessary for the take-off and landing and for the safe navigation of vessels
and aircraft.

e. Equipment for use in the salvage of vessels or aircraft, upon identification

and the giving of a bond in an amount equal to one and one-half times the
ascertained duties, taxes and other charges thereon, conditioned for the

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exportation thereof or payment of the corresponding duties, taxes and other
charges within six months from the date of acceptance of the import entry:
Provided, That the Collector of Customs may extend the time for exportation
or payment of duties, taxes and other charges for a term not exceeding six
months from the expiration of the original period.

f . Cost of repairs made in foreign countries upon vessels or aircraft

documented, registered or licensed in the Philippines, upon proof satisfactory
to the Collector of Customs (1) that adequate facilities for such repairs are not
afforded in the Philippines, or (2) that such vessels or aircraft, while in the
regular course of her voyage or flight was compelled by stress of weather or
other casualty to put into a foreign port to make such repairs in order to secure
the safety seaworthiness or airworthiness of the vessel or aircraft to enable her
to reach her port of destination.

g. Articles brought into the Philippines for repair, processing or reconditioning

to be re-exported upon completion of the repair, processing or
reconditioning: Provided, That the Collector of Customs may, in his
discretion, require the giving of a bond in an amount equal to one and one-half
times the ascertained duties, taxes and other charges thereon, conditioned for
the exportation thereof or payment of the corresponding duties, taxes and
other charges within six months from the date of acceptance of the import
entry.

h. Medals, badges, cups and other small articles bestowed as trophies or

prizes, or those received or accepted as honorary distinctions.

i. Wearing apparel and household effects, including those articles provided for
under subsections "j" and "k", and belonging to residents of the Philippines
returning from abroad, which were exported from the Philippines by such
returning residents upon their departure therefrom or during their absence
abroad, upon the identity of such articles being established to the satisfaction
of the Collector of Customs; personal and household effects brought into the
Philippines by returning residents, the export value of which does not exceed
five hundred pesos, solely for personal or household use but not imported for
the account of any other person nor intended for barter, sale or hire: Provided,
That such returning residents have not received the benefit of any exemption
hereunder within one hundred and eighty days from and after the date of the
last exemption granted: And Provided, further, That in the event the total
export value of the imported article or articles exceeds the amount of five
hundred pesos, such article or articles shall be subject to duty only on the
amount in excess of five hundred pesos; articles of the same kind and class
purchased in foreign countries by residents of the Philippines during their
absence abroad and accompanying them upon their return to the Philippines,
or arriving within a reasonable time which in no case shall exceed ninety (90)
days before or after the owner's return, upon proof satisfactory to the Collector

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of Customs that same have been in their use abroad for more than one year;
articles in any single shipment consigned to any single person when the total
export value of such shipment does not exceed one hundred
pesos:Provided, finally, That when the export value exceeds the amount of
one hundred pesos, only the amount in excess of one hundred pesos shall be
subject to duty.

j. Wearing apparel, articles of personal adornment, toilet articles, portable tolls

and instruments, theatrical costumes, and similar personal effects,
accompanying travelers or tourists in their baggage or arriving within a
reasonable time, in the discretion of the Collector of Customs, before or after
the owners, in use of and necessary and appropriate for the wear or use of
such persons according to their profession or position for the immediate
purposes of their journey and their present comfort and
convenience: Provided, That this exemption shall not be held to apply to
articles intended for other persons or for barter, sale or hire: Provided,
further, That the Collector of Customs may, in his discretion, require a bond
in an amount equal to one and one-half times the ascertained duties, taxes and
other charges upon articles classified under this subsection, conditioned for
the exportation thereof or payment of the corresponding duties, taxes and
other charges, within six months from the date of acceptance of the import
entry: And Provided, finally, That the Collector of Customs may extend the
time for exportation or payment of duties, taxes and other charges for a term
not exceeding six months from the expiration of the original period.

k. Vehicles, horses, harness, bed and table linen, table service, furniture,
musical instruments and personal effects of like character, owned and
imported by travelers or tourists for their convenience and comfort, upon
identification and the giving of a bond in an amount equal to one and one-half
times the ascertained duties, taxes and other charges thereon, conditioned for
the exportation thereof or payment of the corresponding duties, taxes and
other charges within six months from the date of acceptance of the import
entry: Provided, That the Collector of Customs may extend the time for
exportation or payment of duties, taxes and other charges for a term not
exceeding six months from the expiration of the original period.

l. Professional instruments and implements, tools of trade, occupation or

employment, wearing apparel, domestic animals, and personal and household
effects, including those of the kind and class provided for under subsections
"j" and "k" and belonging to persons coming to settle in the Philippines, in
quantities and of the class suitable to the profession, rank or position of the
person importing them, for their own use and not for barter or sale,
accompanying such persons, or arriving within a reasonable time, in the
discretion of the Collector of Customs, before or after the arrival of their
owners, upon the production of evidence satisfactory to the Collector of

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Customs that such persons are actually coming to settle in the Philippines, that
the articles are brought from their former place of abode, that change of
residence is bona fide, and that the privilege of free entry under this
subsection has never been previously granted to them: Provided, That neither
merchandise of any kind, nor machinery or other articles for use in
manufacture, shall be classified under this subsection.

m. Animals, vehicles, portable theaters, circus and theatrical equipment,

including musical instruments, sceneries, panoramas, properties, saddlery,
wax figures and similar objects for public entertainment, and other articles for
display in public expositions, or for exhibition or competition for prizes, and
devices for projecting pictures and parts and appurtenances therefor, upon
identification and the giving of a bond in an amount equal to one and one-half
times the ascertained duties, taxes and other charges thereon, conditioned for
exportation thereof or payment of the corresponding duties, taxes and other
charges within six months from the date of acceptance of the import
entry: Provided, That the Collector of Customs may extend the time for
exportation or payment of duties, taxes and other charges for a term not
exceeding six months from the expiration of the original period; and technical
and scientific films when imported by technical, cultural and scientific
institutions, and not to be exhibited for profit: Provided, That if any of the said
films is exhibited for profit, the proceeds therefrom shall be subject to
confiscation, in addition to the penalty provided under section three thousand
six hundred and ten of this Code.

n. Articles (e.g., photographic, sound recording, electrical and other

equipment, vehicles, animals, costumes, apparel, properties, supplies,
unexposed motion picture films) brought by foreign producers for making or
recording motion pictures on location in the Philippines, upon identification
and the giving of a bond in an amount equal to one and one-half times the
ascertained duties, taxes and other charges thereon, conditioned for
exportation thereof or payment of the corresponding duties, taxes and charges
within six months from the date of acceptance of the import entry. Unexposed
motion picture films allowed free entry under bond for exportation falling
within this subsection and subsequently exposed, whether or not developed,
may be reexported free of import duties, taxes and other charges.

Negative films, undeveloped, exposed outside the Philippines by resident

Filipino citizens or by producing companies of Philippine registry where the
principal actors and artists employed for the production are Filipinos, upon
affidavit by the importer that such exposed films are the same films previously
exported from the Philippines. As used in this paragraph, the
terms "actors" and "artists" include the persons working the photographic
camera or other photographic and sound recording apparatus by means of
which the film is made.

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o. Costumes, regalia and other articles, including office supplies and
equipment, imported for the official use of members and attaches of foreign
embassies, legations, consular officers and other representatives of foreign
government: Provided, That the country which any such person represents
accords like privileges to corresponding officials of the Philippines.

Articles imported for the personal or family use of the members and attaches
of foreign embassies, legations, consular officers and other representatives of
foreign governments: Provided, That such privilege shall be accorded under
special agreements between the Philippines and the countries which they
represent: And Provided, further, That the privilege may be granted only upon
specific instructions of the Department of Finance in each instance which will
be issued only upon request of the Department of Foreign Affairs.

p. Regalia, gems, statuary, specimens or casts of sculptures imported for the

bona fide use and by the order of any society incorporated or established
solely for religious, philosophical, educational, scientific or literary purposes,
or for the encouragement of the fine arts, or for the use and by the order of any
institution of learning, public library, museum, orphan asylum or hospital, and
not for barter, sale or hire:Provided, That the term "regalia" shall be held to
embrace only such insignia of rank or office or emblems as may be worn upon
the person or borne in the hand during public exercises or ceremonies of the
society or institution, and shall not include articles of furniture or fixtures, or
ordinary wearing apparel, nor personal property of individuals.

q. Musical organs imported for the bona fide use and by the owner of any
society incorporated or established for religious or educational purposes, or,
expressly for presentation thereto.

r. Scientific apparatus, instruments and utensils specially imported for the

bona fide use and by the order of any society or institution incorporated or
established solely for educational, scientific, or charitable purposes, or for the
encouragement of the fine arts, or for the bona fide use and by the order of
any institution of learning in the Philippines, and not for barter, sale or hire.

s. Philosophical, historical, economic, scientific, technical and vocational

books specially imported for the bona fide use and by the order of any society
or institution, incorporated or established solely for philosophical,
educational, scientific, charitable or literary purposes, or for the
encouragement of the fine arts, or for the bona fide use of and by the order of
any institution of learning in the Philippines: Provided, That the provisions of
this subsection shall apply to books not exceeding two copies of any one work
when imported by any individual for his own use, and not for barter, sale or
hire.

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Bibles, missals, prayerbooks, koran, ahadith and other religious books of
similar nature and extracts therefrom, hymnal and hymns for religious uses,
specially prepared books, music and other instrumental aids for the deaf, mute
or blind, and textbooks prescribed for use in any school in the
Philippines: Provided, That complete books published in parts in periodical
form shall not be classified herein.

t. Newsprint, whenever imported by or for publishers for the exclusive use in

the publication of newspapers.

u. Articles donated to public or private institutions established solely for

educational, scientific, cultural, charitable, health, relief, philanthropic or
religious purposes, for free distribution among, or exclusive use of, the needy.

v. Food, clothing, house-building and sanitary-construction materials, and

medical, surgical and other supplies for use in emergency relief work, when
imported by or directly for the account of any victim, sufferer, refugee,
survivor or any other person affected thereby, or by or for the account of any
relief organization, not operated for profit, for distribution among the
distressed individuals, whenever the President shall, by proclamation, declare
an emergency to exist by reason of a state of war, pestilence, cholera, plague,
famine, drought, typhoon, earthquake, fire, flood and similar
conditions: Provided, That the importation free of duty of articles described in
this herein subsection shall continue only during the existence of such
emergency, or within such limits and subject to such conditions as the
President may, by his proclamation, deem necessary to meet the emergency.

w. Philippine articles previously exported from the Philippines and returned

without having been advanced in value or improved in condition by any
process of manufacture or other means, and upon which no drawback or
bounty has been allowed, and foreign articles when returned after having been
loaned and exported for use temporarily abroad solely for exhibition,
examination or experimentation, for scientific or educational purposes, and
foreign containers packed with exported Philippine articles and returned
empty if imported by or for the account of the person or institution who
exported them from the Philippines and not for sale, subject to
identification: Provided, That any Philippine article falling under this
subsection upon which drawback or bounty has been allowed shall, upon re-
importation thereof, be subject to a duty under this subsection equal to the
amount of such drawback or bounty.

x. Large containers (e.g., demijohns, cylinders, drums, casks and other similar
receptacles of metal, glass or other material) which are, in the opinion of the
Collector of Customs, of such a character as to be readily identifiable may be
delivered to the importer thereof upon identification and the giving of a bond
in an amount equal to one and one-half times the ascertained duties, taxes and

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 other charges thereon, conditioned for the exportation thereof on payment of
the corresponding duties, taxes and other charges within one year from the
date of acceptance of the import entry.

y. Supplies or ship stores listed as such for the use of the vessel; supplies
which are intended for the reasonable requirements of the vessel in her voyage
outside the Philippines, including such articles transferred from a bonded
warehouse in any collection district to any vessel engaged in foreign trade, for
use or consumption of the passengers or its crew on board such vessel as sea
stores; or articles purchased abroad for sale on board a vessel as saloon stores
or supplies: Provided, That any surplus or excess of such ship, sea or saloon
stores arriving from foreign ports shall be dutiable according to the
corresponding heading or subheading.

z. Articles and salvage from vessels recovered after the period of two years
from the date of filing the marine protest or the time when the vessel was
wrecked or abandoned as determined by the Collector of Customs, or such
part of Philippine vessel or her equipment, wrecked or abandoned in
Philippine waters or elsewhere: Provided, That articles and salvage recovered
within the said period of two years shall be dutiable according to the
corresponding heading or subheading.

aa. Articles of easy identification exported from the Philippines for repairs
abroad and subsequently reimported: Provided, That the cost of the repairs
made to any such article shall pay a rate of duty of twenty-five per cent ad
valorem.
bb. Coffins or urns containing human remains, bones or ashes, and all articles
for ornamenting said coffins or urns and accompanying same; used personal
and household effects, not merchandise, of deceased persons, upon
identification as such, satisfactory to the Collector of Customs.

H. Classification of duties

1. Ordinary/Regular duties

Refers to those that ,as a matter of course, are imposed on dutiable articles.

a. Ad valorem; Methods of valuation

(1) Method One. Transaction Value. - The dutiable value of an

imported article subject to an ad valorem rate of duty shall be the
transaction value, which shall be the price actually paid or payable for
the goods when sold for export to the Philippines, adjusted by adding:

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(1) The following to the extent that they are incurred by the buyer but
are not included in the price actually paid or payable for the imported
goods:

(a) Commissions and brokerage fees (except buying commissions);

(b) Cost of containers;

(c) The cost of packing, whether for labour or materials;

(d) The value, apportioned as appropriate, of the following goods and

services: materials, components, parts and similar items incorporated
in the imported goods; tools; dies; moulds and similar items used in
the production of imported goods; materials consumed in the
production of the imported goods; and engineering, development,
artwork, design work and plans and sketches undertaken elsewhere
than in the Philippines and necessary for the production of imported
goods, where such goods and services are supplied directly or
indirectly by the buyer free of charge or at a reduced cost for use in
connection with the production and sale for export of the imported
goods;

(e) The amount of royalties and license fees related to the goods being
valued that the buyer must pay, either directly or indirectly, as a
condition of sale of the goods to the buyer;

(2) The value of any part of the proceeds of any subsequent resale,
disposal or use of the imported goods that accrues directly or indirectly
to the seller;

(3) The cost of transport of the imported goods from the port of
exportation to the port of entry in the Philippines;

(4) Loading, unloading and handling charges associated with the

transport of the imported goods from the country of exportation to the
port of entry in the Philippines; and

(5) The cost of insurance.

All additions to the price actually paid or payable shall be made only
on the basis of objective and quantifiable data.

No additions shall be made to the price actually paid or payable in

determining the customs value except as provided in this Sec.
: Provided, That Method One shall not be used in determining the
dutiable value of imported goods if:

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(a) There are restrictions as to the disposition or use of the goods by
the buyer other than restrictions which:

(i) Are imposed or required by law or by Philippine authorities;

(ii) Limit the geographical area in which the goods may be resold; or

(iii) Do not substantially affect the value of the goods.

(b) The sale or price is subject to some condition or consideration for

which a value cannot be determined with respect to the goods being
valued;

(c) Part of the proceeds of any subsequent resale, disposal or use of the
goods by the buyer will accrue directly or indirectly to the seller,
unless an appropriate adjustment can be made in accordance with the
provisions hereof; or

(d) The buyer and the seller are related to one another, and such
relationship influenced the price of the goods. Such persons shall be
deemed related if:

(i) They are officers or directors of one another's businesses;

(ii) They are legally recognized partners in business;

(iii) There exists an employer-employee relationship between them;

(iv) Any person directly or indirectly owns, controls or holds five

percent (5%) or more of the outstanding voting stock or shares of both
seller and buyer;

(v) One of them directly or indirectly controls the other;

(vi) Both of them are directly or indirectly controlled by a third person;

(vii) Together they directly or indirectly control a third person; or

(viii) They are members of the same family, including those related by
affinity or consanguinity up to the fourth civil degree.

Persons who are associated in business with one another in that one is
the sole agent, sole distributor or sole concessionaire, however
described, of the other shall be deemed to be related for the purposes
of this Act if they fall within any of the eight (8) cases above.

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(2) Method Two. Transaction Value of Identical Goods. Where the
dutiable value cannot be determined under method one, the dutiable
value shall be the transaction value of identical goods sold for export
to the Philippines and exported at or about the same time as the goods
being valued. "Identical goods" shall mean goods which are the same
in all respects, including physical characteristics, quality and
reputation. Minor differences in appearances shall not preclude goods
otherwise conforming to the definition from being regarded as
identical.

(3) Method Three. Transaction Value of Similar Goods. Where the

dutiable value cannot be determined under the preceding method, the
dutiable value shall be the transaction value of similar goods sold for
export to the Philippines and exported at or about the same time as the
goods being valued. "Similar goods" shall mean goods which,
although not alike in all respects, have like characteristics and like
component materials which enable them to perform the same functions
and to be commercially interchangeable. The quality of the goods,
their reputation and the existence of a trademark shall be among the
factors to be considered in determining whether goods are similar.

If the dutiable value still cannot be determined through the successive

application of the two immediately preceding methods, the dutiable
value shall be determined under method four or, when the dutiable
value still cannot be determined under that method, under method five,
except that, at the request of the importer, the order of application of
methods four and five shall be reversed: Provided, however, That if
the Commissioner of Customs deems that he will experience real
difficulties in determining the dutiable value using method five, the
Commissioner of Customs may refuse such a request in which event
the dutiable value shall be determined under method four, if it can be
so determined.

(4) Method Four. Deductive Value. The dutiable value of the

imported goods under this method shall be the deductive value which
shall be based on the unit price at which the imported goods or
identical or similar imported goods are sold in the Philippines, in the
same condition as when imported, in the greatest aggregate quantity, at
or about the time of the importation of the goods being valued, to
persons not related to the persons from whom they buy such goods,
subject to deductions for the following:

(1) Either the commissions usually paid or agreed to be paid or the

additions usually made for profit and general expenses in connection
with sales in such country of imported goods of the same class or kind;

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(2) The usual costs of transport and insurance and associated costs
incurred within the Philippines; and

(3) Where appropriate, the costs and charges referred to in subsection

(A) (3), (4) and (5); and

(4) The customs duties and other national taxes payable in the
Philippines by reason of the importation or sale of the goods.

If neither the imported goods nor identical nor similar imported goods
are sold at or about the time of importation of the goods being valued
in the Philippines in the conditions as imported, the customs value
shall, subject to the conditions set forth in the preceding paragraph
hereof, be based on the unit price at which the imported goods or
identical or similar imported goods sold in the Philippines in the
condition as imported at the earliest date after the importation of the
goods being valued but before the expiration of ninety (90) days after
such importation.

If neither the imported goods nor identical nor similar imported goods
are sold in the Philippines in the condition as imported, then, if the
importer so requests, the dutiable value shall be based on the unit price
at which the imported goods, after further processing, are sold in the
greatest aggregate quantity to persons in the Philippines who are not
related to the persons from whom they buy such goods, subject to
allowance for the value added by such processing and deductions
provided under Subsections (D)(1), (2), (3) and (4) hereof.

(5) Method Five. Computed Value. The dutiable value under this
method shall be the computed value which shall be the sum of:

(1) The cost or the value of materials and fabrication or other

processing employed in producing the imported goods;

(2) The amount for profit and general expenses equal to that usually
reflected in the sale of goods of the same class or kind as the goods
being valued which are made by producers in the country of
exportation for export to the Philippines;

(3) The freight, insurance fees and other transportation expenses for
the importation of the goods;

(4) Any assist, if its value is not included under paragraph (1) hereof;
and

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(5) The cost of containers and packing, if their values are not included
under paragraph (1) hereof.

The Bureau of Customs shall not require or compel any person not
residing in the Philippines to produce for examination, or to allow
access to, any account or other record for the purpose of determining a
computed value. However, information supplied by the producer of the
goods for the purposes of determining the customs value may be
verified in another country with the agreement of the producer and
provided they will give sufficient advance notice to the government of
the country in question and the latter does not object to the
investigation.

(6) Method Six. Fallback Value. If the dutiable value cannot be

determined under the preceding methods described above, it shall be
determined by using other reasonable means and on the basis of data
available in the Philippines.

If the importer so requests, the importer shall be informed in writing of

the dutiable value determined under Method Six and the method used
to determine such value.

No dutiable value shall be determined under Method Six on the basis

of:

(1) The selling price in the Philippines of goods produced in the

Philippines;

(2) A system that provides for the acceptance for customs purposes of
the higher of two alternative values;

(3) The price of goods in the domestic market of the country of

exportation;

(4) The cost of production, other than computed values, that have been
determined for identical or similar goods in accordance with Method
Five hereof;

(5) The price of goods for export to a country other than the
Philippines;

(6) Minimum customs values; or

(7) Arbitrary or fictitious values.

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 If in the course of determining the dutiable value of imported goods, it
becomes necessary to delay the final determination of such dutiable
value, the importer shall nevertheless be able to secure the release of
the imported goods upon the filing of a sufficient guarantee in the form
of a surety bond, a deposit, cash or some other appropriate instrument
in an amount equivalent to the imposable duties and taxes on the
imported goods in question conditioned upon the payment of customs
duties and taxes for which the imported goods may be
liable: Provided, however, That goods, the importation of which is
prohibited by law shall not be released under any circumstance
whatsoever.

Nothing in this Sec. shall be construed as restricting or calling into

question the right of the Collector of Customs to satisfy himself as to
the truth or accuracy of any statement, document or declaration
presented for customs valuation purposes. When a declaration has
been presented and where the customs administration has reason to
doubt the truth or accuracy of the particulars or of documents
produced in support of this declaration, the customs administration
may ask the importer to provide further explanation, including
documents or other evidence, that the declared value represents the
total amount actually paid or payable for the imported goods, adjusted
in accordance with the provisions of Subsection (A) hereof.

If, after receiving further information, or in the absence of a response,

the customs administration still has reasonable doubts about the truth
or accuracy of the declared value, it may, without prejudice to an
importer's right to appeal pursuant to Article 11 of the World Trade
Organization Agreement on customs valuation, be deemed that the
customs value of the imported goods cannot be determined under
Method One. Before taking a final decision, the Collector of Customs
shall communicate to the importer, in writing if requested, his grounds
for doubting the truth or accuracy of the particulars or documents
produced and give the importer a reasonable opportunity to respond.
When a final decision is made, the customs administration shall
communicate to the importer in writing its decision and the grounds
therefor."

b. Specific

On articles that are subject to specific rate of duty, based on weight,

the duty shall be ascertained as follows:

a. When articles are dutiable by the gross weight, the dutiable weight
thereof shall be the weight of same, together with the weight of all
containers, packages, holders and packings, of any kind, in which said

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 articles are contained, held or packed at the time of importation.

b. When articles are dutiable by the legal weight, the dutiable weight
thereof shall be the weight of same, together with the weight of the
immediate containers, holders and/or packing in which such articles
are usually contained, held or packed at the time of importation and/or,
when imported in retail packages, at the time of their sale to the public
in usual retail quantities: Provided, That when articles are packed in
single container, the weight of the latter shall be included in the legal
weight.

c. When articles are dutiable by the net weight, the dutiable weight
thereof shall be only the actual weight of the articles at the time of
importation, excluding the weight of the immediate and all other
containers, holders or packing in which such articles are contained,
held or packed.

2. Special duties

a. Dumping duties

Special duties imposed by the secretary of finance upon the

recommendation of the Tariff Commission when it is found that:

a. The price of the imported articles is deliberately or continually

fixed at less than the fair market value or cost of production.
b. The importation would cause or likely cause an injury to local
industries engaged in thr manufacture or production of the
same or similar articles or prevent their establishment.

b. Countervailing duties

Special duties imposed by the secretary of finance upon prior

investigation and report of the Tariff Commission to offset any
bounty,subsidy, or subvention upon the articles of the same class
manufactured at home or subsidies to foreign producers or manufacturers
by their respective governments.

The requisites in the imposition of countervailing duties are:

a. The levy of an excise or inland tax on local goods of the same

or similar class as the articles imported or the grant of subsidy
to the foreign exporter by his government.
b. The importation is likely to injure materially established local
industries or prevent their establishment

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 c. Marking duties

Special duty of five percent 5% ad valorem imposed on articles not

properly marked, collected by the commissioner except when such article
is exported or destroyed under customs supervision and prior final
liquidation of the corresponding entry. The purpose of the surtax is to
present possible deception of the consumers.

d. Retaliatory/Discriminatory duties

Special duty, in an amount not exceeding one hundred percent

100% ad valorem, imposed by the President of the Philippines against
goods of a foreign country which discriminates against Philippine
commerce or against goods coming from the Philippines and shipped to
such foreign country.

c. Safeguard

Special duty imposed when there is an unexpected increase of

import of a particular product that they cause or threaten to cause serious
injury to domestic producers of like or directly competitive products.

I. Drawbacks

The money collected by customs on imported merchandise and remitted if the goods are
re- exported.

Sec. 106. Drawbacks

a. On Fuel Used for Propulsion of Vessels. On all fuel imported into the Philippines
which is afterwards used for the propulsion of vessels of Philippine registry engaged in
trade with foreign countries, or in the coastwise trade, a refund shall be allowed equal to
the duty imposed by law upon such fuel, less one per cent thereof, which shall be paid
under such rules and regulations as may be prescribed by the Commissioner of Customs
with the approval of the department head.

b. On Articles Made from Imported Materials or Similar Domestic Materials and Wastes
Thereof . Upon the exportation of articles manufactured or produced in the
Philippines, including the packing, covering, putting up, marking or labeling thereof,
either in whole or in part of imported materials, or from similar domestic materials of
equal quantity and productive manufacturing quality and value, such question to be
determined by the Collector of Customs, there shall be allowed a drawback equal in

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amount to the duties paid on the imported materials so used, or where similar domestic
materials are used, to the duties paid on the equivalent imported similar materials, less
one per cent thereof: Provided, That the exportation shall be made within three years
after the importation of the foreign material used or constituting the basis for drawback:
And Provided, further, That when the articles exported or coverings thereof are in part of
materials grown or produced in the Philippines not entitled to drawback under this
section, the imported materials, or the similar domestic materials of equal quantity and
productive manufacturing quality and value entitled to drawback, shall so appear in the
completed articles or packages that the quantity or measure thereof may be ascertained:
And Provided, finally, That the imported materials, or the similar domestic materials
entitled to drawback under this section for which drawback is claimed, shall be identified;
that the quantity of such materials used and the amount of duty paid thereon or, if the
domestic materials, paid upon its equivalent, shall be ascertained; and that the fact of
their exportation shall be established; and the refund if made shall be paid to the
manufacturer, producer, or exporter, or to the duly authorized agent of any of them, under
and in accordance with such rules and regulations as the Commissioner of Customs shall
prescribe with the approval of the department head.

J. Remedies

1. Government

a. Administrative/Extrajudicial

1) Search, seizure, forfeiture, arrest

In order to prevent smuggling and to secure the collection of the

legal duties, taxes and other charges, the customs service shall
exercise surveillance over the coast, beginning when a vessel or
aircraft enters Philippine territory and concluding when the article
imported therein has been legally passed through the
customhouse.

For the enforcement of the customs and tariff laws, the following
persons are authorized to effect searches, seizures and arrests
conformably with the provisions of said laws:

a. Officials of the Bureau of Customs, collectors, assistant

collectors, deputy collectors, surveyors, security and secret-service
agents, inspectors, port patrol officers and guards of the Bureau of
Customs.

b. Officers of the Philippine Navy when authorized by the

Commissioner.

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c. Any person especially authorized in writing by the
Commissioner.

d. Officers generally empowered by law to effect arrests and

execute processes of courts, when acting under direction of the
Collector.

e. Any person especially authorized by a Collector, subject to the

restrictions stated in the next succeeding section.
Persons exercising the powers hereinabove conferred shall, in the
exercise thereof, have the same authority, be entitled to the proper
protection, and shall be governed by the same law, not inconsistent
with the provisions of this section, as other officers exercising
police authority in general.
It shall be within the power of a customs official or person
authorized as aforesaid, and it shall be his duty, to make seizure of
any vessel, aircraft, cargo, articles, animal or other movable
property when the same is subject to forfeiture or liable for any
fine imposed under customs and tariff laws, and also to arrest any
person subject to arrest for violation of any customs and tariff
laws, such power to be exercised in conformity with the law and
the provisions of this Code.

It shall be the duty of any person exercising authority as aforesaid,

upon being questioned at the time of the exercise thereof, to make
known his official character as an officer or official of the
Government, and if his authority is derived from special
authorization in writing to exhibit the same for inspection, if
demanded.

Any person exercising police authority under the customs and

tariff laws may demand assistance of any police officer when such
assistance shall be necessary to effect any search, seizure or arrest
which may be lawfully made or attempted by him. It shall be the
duty of any police officer upon whom such requisition is made to
give such lawful assistance in the matter as may be required.

A dwelling house may be entered and searched only upon warrant

issued by a judge or justice of the peace, upon sworn application
showing probable case and particularly describing the place to be
searched and person or thing to be seized.

Right to Search Vessels or Aircrafts and Persons or Articles

Conveyed Therein. It shall be lawful for any official or person
exercising police authority under the provisions of this Code to go
abroad any vessel or aircraft within the limits of any collection to

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 go aboard any vessel or aircraft within the limits of any collection
district, and to inspect, search and examine said vessel or aircraft
and any trunk, package, box or envelope on board, and to search
any person on board the said vessel or aircraft and to this end to
hail and stop such vessel or aircraft if under way, to use all
necessary force to compel compliance; and if it shall appear that
any breach or violation of the customs and tariff laws of the
Philippines has been committed, whereby or in consequence of
which such vessels or aircrafts, or the article, or any part thereof,
on board of or imported by such vessel or aircraft, is liable to
forfeiture, to make seizure of the same or any part thereof.

The power of search hereinabove given shall extend to the removal

of any false bottom, partition, bulkhead or other obstruction, so far
as may be necessary to enable the officer to discover whether any
dutiable or forfeitable articles may be concealed therein.

No proceeding herein shall give rise to any claim for the damage
thereby caused to article or vessel or aircraft.

Right to Search Vehicles, Beasts and Persons. It shall also be

lawful for a person exercising authority as aforesaid to open and
examine any box, trunk, envelope or other container, wherever
found where he has reasonable cause to suspect the presence
therein of dutiable or prohibited article or articles introduced into
the Philippines contrary to law, and likewise to stop, search and
examine any vehicle, beast or person reasonably suspected of
holding or conveying such article as aforesaid.

Search of Persons Arriving From Foreign Countries. All

persons coming into the Philippines from foreign countries shall be
liable to detention and search by the customs authorities under
such regulations as may be prescribed relative thereto.

Female inspectors may be employed for the examination and

search of persons of their own sex.

Note: When the goods are prohibited or imported irregularly,

although released, the goods are still subject to seizure.

b. Judicial

When the goods are released and the tax lien is lost, judicial action
against the importer may then be instituted.

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In the absence of special provision, judicial action and proceedings
instituted on behalf of the Government pursuant to the provisions
of this Code shall be subject to the supervision and control of the
Commissioner.

The party aggrieved by a ruling of the Commissioner in any matter

brought before him upon protest or by his action or ruling in any
case of seizure may appeal to the Court of Tax Appeals, in the
manner and within the period prescribed by law and regulations.

Unless an appeal is made to the Court of Tax Appeals in the

manner and within the period prescribed by laws and regulations,
the action or ruling of the Commissioner shall be final and
conclusive.

2. Taxpayer

a. Protest- If legality of assessment or appraisal is

questioned.

When a ruling or decision of the Collector is made whereby

liability for duties, fees, or other money charge is
determined, except the fixing of fines in seizure cases, the
party adversely affected may protest such ruling or decision
by presenting to the Collector at the time when payment of
the amount claimed to be due the Government is made, or
within thirty days thereafter, a written protest setting forth
his objections to the ruling or decision in question, together
with the reasons therefor. No protest shall be considered
unless payment of the amount due after final liquidation
has first been made.

Protest Exclusive Remedy in Protestable Case. In all

cases subject to protest, the interested party who desires to
have the action of the Collector reviewed, shall make a
protest, otherwise, the action of the Collector shall be final
and conclusive against him, except as to matters correctible
for manifest error in the manner prescribed in section one
thousand seven hundred and seven hereof.

Form and Scope of Protest. Every protest shall be filed

in accordance with the prescribed rules and regulations
promulgated under this section and shall point out the
particular decision or ruling of the Collector to which
exception is taken or objection made, and shall indicate

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with reasonable precision the particular ground or grounds
upon which the protesting party bases his claim for relief.

The scope of a protest shall be limited to the subject matter

of a single adjustment or other independent transaction; but
any number of issue may be raised in a protest with
reference to the particular item or items constituting the
subject matter of the protest.

"Single adjustment", as hereinabove used, refers to the

entire content of one liquidation, including all duties, fees,
surcharges or fines incident thereto. chan robles virtual law
library

Samples to be Furnished by Protesting Parties. If the

nature of the articles permit, importers filing protests
involving questions of fact must, upon demand, supply the
Collector with samples of the articles which are the subject
matter of the protests. Such samples shall be verified by the
custom official who made the classification against which
the protest are filed.

Decision or Action by Collector in Protest and Seizure

Cases. When a protest in proper form is presented in a
case where protest in required, the Collector shall
reexamine the matter thus presented, and if the protest is
sustained, in whole or in part, he shall enter the appropriate
order, the entry reliquidated if necessary.

In seizure cases, the Collector, after a hearing, shall in

writing make a declaration of forfeiture or fix the amount
of the fine or take such other action as may be proper.

b. Abandonment

The owner or importer may abandon expressly the

importation in favor of the Government thus relieving
himself of the tax liability.

The failure to file the import entry within 30 days from the
discharge of the goods shall be deemed an implied
abandonment or having filed an entry fails to claim within
15 days but it shall not be effective until so declared by the
collector.

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The owner or importer may reclaim the articles impliedly
abandoned at any time before said goods are sold or
otherwise disposed of by complying with the legal
requirements regarding the importation and paying the
corresponding duties and other charges.

NOTE: Abandonment relieves the owner-importer from the

payment of duties, taxes and other charges but not from
possible criminal liability.

c. Abatement and refund-

An Abatement or drawback (if importation is missing or

deficient or if re-exported).

A written claim for refund may be submitted by the

importer in abatement cases, such as on missing packages,
deficiencies in the contents of packages or shortages before
arrival of the goods in the Philippines, articles lost or
destroyed after such arrival, dead or injured animals, and
for manifest clerical errors; and in drawback cases where
the goods are re-exported.

Page | 228
V. Judicial Remedies; Republic Act 1125 The Act that Created the Court of Tax
Appeals (CTA), as amended, and the Revised Rules of the Court of Tax Appeals

A. Jurisdiction of the Court of Tax Appeals

1. Exclusive appellate jurisdiction over civil tax cases

(a) Decisions of the Commissioner of Internal Revenue
1. in cases involving disputed assessments, refunds of internal revenue taxes,
fees or other charges, penalties in relation thereto,
2. or other matters arising under the NIRC or other laws administered by the
BIR;
(b) Inaction by the Commissioner of Internal Revenue
1. in cases involving disputed assessments, refunds of internal revenue taxes,
fees or other charges, penalties in relation thereto,
2. or other matters arising under the NIRC or other laws administered by the
BIR, where the NIRC provides a specific period for action, in which case the
inaction shall be deemed a denial;
(c) Decisions, orders or resolutions of the RTC
in local tax cases originally decided or resolved by them in the exercise of their
original or appellate jurisdiction;
(d) Decisions of the Commissioner of Customs
1. in cases involving liability for customs duties, fees or other money charges,
seizure, detention or release of property affected, fines, forfeitures or other
penalties in relation thereto,
2. or other matters arising under the Customs Law or other laws administered by
the Bureau of Customs;
(e) Decisions of the Central Board of Assessment Appeals
in the exercise of its appellate jurisdiction over cases involving the assessment
and taxation of real property originally decided by the provincial or city board of
assessment appeals;
(f) Decisions of the Secretary of Finance
on customs cases elevated to him automatically for review from decisions of the
Commissioner of Customs which are adverse to the Government under Section
2315 of the Tariff and Customs Code;
(g) Decisions of the Secretary of Trade and Industry in the case of nonagricultural
product, commodity or article, and the Secretary of Agriculture in the case of
agricultural product, commodity or article,
involving dumping and countervailing duties under Secs. 301and 302,
respectively, of the Tariff and Customs Code, and safeguard measures under RA
No, 8800, where either party may appeal the decision to impose or not to impose
said duties.

a. Cases within the jurisdiction of the Court en banc

The Court en banc shall exercise exclusive appellate jurisdiction to review by appeal the
following:

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(a) Decisions or resolutions on motions for reconsideration or new trial of the
Court in Divisions in the exercise of its exclusive appellate jurisdiction over:

(1) Cases arising from administrative agencies Bureau of Internal

Revenue, Bureau of Customs, Department of Finance, Department of
Trade and Industry, Department of Agriculture;

(2) Local tax cases decided by the Regional Trial Courts in the exercise of
their original jurisdiction; and

(3) Tax collection cases decided by the Regional Trial Courts in the
exercise of their original jurisdiction involving final and executory
assessments for taxes, fees, charges and penalties, where the principal
amount of taxes and penalties claimed is less than one million pesos;

(b) Decisions, resolutions or orders of the Regional Trial Courts in local tax cases
decided or resolved by them in the exercise of their appellate jurisdiction;

(c) Decisions, resolutions or orders of the Regional Trial Courts in tax collection
cases decided or resolved by them in the exercise of their appellate jurisdiction;

(d) Decisions, resolutions or orders on motions for reconsideration or new trial of

the Court in Division in the exercise of its exclusive original jurisdiction over tax
collection cases;

(e) Decisions of the Central Board of Assessment Appeals (CBAA) in the

exercise of its appellate jurisdiction over cases involving the assessment and
taxation of real property originally decided by the provincial or city board of
assessment appeals;

(f) Decisions, resolutions or orders on motions for reconsideration or new trial of

the Court in Division in the exercise of its exclusive original jurisdiction over
cases involving criminal offenses arising from violations of the National Internal
Revenue Code or the Tariff and Customs Code and other laws administered by
the Bureau of Internal Revenue or Bureau of Customs;

(g) Decisions, resolutions or orders on motions for reconsideration or new trial of

the Court in Division in the exercise of its exclusive appellate jurisdiction over
criminal offenses mentioned in the preceding subparagraph; and

(h) Decisions, resolutions or orders of the Regional trial Courts in the exercise of
their appellate jurisdiction over criminal offenses mentioned in subparagraph (f).

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b. Cases within the jurisdiction of the Court in divisions

The Court in Divisions shall exercise:

(a) Exclusive original or appellate jurisdiction to review by appeal the following:

(1) Decisions of the Commissioner of Internal Revenue in cases involving

disputed assessments, refunds of internal revenue taxes, fees or other
charges, penalties in relation thereto, or other matters arising under the
National Internal Revenue Code or other laws administered by the Bureau
of Internal Revenue;

(2) Inaction by the Commissioner of Internal Revenue in cases involving

disputed assessments, refunds of internal revenue taxes, fees or other
charges, penalties in relation thereto, or other matters arising under the
National Internal Revenue Code or other laws administered by the Bureau
of Internal Revenue, where the National Internal Revenue Code or other
applicable law provides a specific period for action: Provided, that in case
of disputed assessments, the inaction of the Commissioner of Internal
Revenue within the one hundred eighty day-period under Section 228 of
the National Internal revenue Code shall be deemed a denial for purposes
of allowing the taxpayer to appeal his case to the Court and does not
necessarily constitute a formal decision of the Commissioner of Internal
Revenue on the tax case; Provided, further, that should the taxpayer opt to
await the final decision of the Commissioner of Internal Revenue on the
disputed assessments beyond the one hundred eighty day-period
abovementioned, the taxpayer may appeal such final decision to the Court
under Section 3(a), Rule 8 of these Rules; and Provided, still further, that
in the case of claims for refund of taxes erroneously or illegally collected,
the taxpayer must file a petition for review with the Court prior to the
expiration of the two-year period under Section 229 of the National
Internal Revenue Code;

(3) Decisions, resolutions or orders of the Regional Trial Courts in local

tax cases decided or resolved by them in the exercise of their original
jurisdiction;

(4) Decisions of the Commissioner of Customs in cases involving liability

for customs duties, fees or other money charges, seizure, detention or
release of property affected, fines, forfeitures of other penalties in relation
thereto, or other matters arising under the Customs Law or other laws
administered by the Bureau of Customs;

(5) Decisions of the Secretary of Finance on customs cases elevated to him

automatically for review from decisions of the Commissioner of Customs

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 adverse to the Government under Section 2315 of the Tariff and Customs
Code; and

(6) Decisions of the Secretary of Trade and Industry, in the case of

nonagricultural product, commodity or article, and the Secretary of
Agriculture, in the case of agricultural product, commodity or article,
involving dumping and countervailing duties under Section 301 and 302,
respectively, of the Tariff and Customs Code, and safeguard measures
under Republic Act No. 8800, where either party may appeal the decision
to impose or not to impose said duties;

(b) Exclusive jurisdiction over cases involving criminal offenses, to wit:

(1) Original jurisdiction over all criminal offenses arising from violations
of the National internal Revenue Code or Tariff and Customs Code and
other laws administered by the Bureau of Internal Revenue of the Bureau
of Customs, where the principal amount of taxes and fees, exclusive of
charges and penalties, claimed is one million pesos or more; and

(2) Appellate jurisdiction over appeals from the judgments, resolutions or

orders of the Regional Trial Courts in their original jurisdiction in criminal
offenses arising from violations of the National Internal Revenue Code or
Tariff and Customs Code and other laws administered by the Bureau of
Internal Revenue or Bureau of Customs, where the principal amount of
taxes and fees, exclusive of charges and penalties, claimed is less than one
million pesos or where there is no specified amount claimed;

(c) Exclusive jurisdiction over tax collections cases, to wit:

(1) Original jurisdiction in tax collection cases involving final and

executory assessments for taxes, fees, charges and penalties, where the
principal amount of taxes and fees, exclusive of charges and penalties,
claimed is one million pesos or more; and

(2) Appellate jurisdiction over appeals from the judgments, resolutions or

orders of the Regional Trial Courts in tax collection cases originally
decided by them within their respective territorial jurisdiction. (n)

2. Criminal cases

a. Exclusive original jurisdiction

over all criminal cases arising from violations of the NIRC or Tariff and Customs Code
and other laws administered by the BIR or the Bureau of Customs
Provided however, where the principal amount of taxes and fees, exclusive of
charges and penalties claimed is less than one million pesos (P1, 000, 000. 00) or

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 where there is no specified amount claimed - the offenses or penalties shall be
tried by the regular courts and the jurisdiction of the CTA shall be appellate.
Any provision of law or the Rules of Court to the contrary notwithstanding, the
criminal action and the corresponding civil action for the recovery of civil
liability for taxes and penalties shall at all times be simultaneously instituted with,
and jointly determined in the same proceeding by the CTA, the filing of the
criminal action being deemed to necessarily carry with it the filing of the civil
action, and no right to reserve the filing of such civil action separately from the
criminal action will be recognized.

b. Exclusive appellate jurisdiction in criminal cases

1. Over appeals from the judgments, resolutions or orders of the RTC in tax cases
originally decided by them, in their respective territorial jurisdiction.
2. Over petitions for review of the judgments, resolutions, or orders of the RTC in
the exercise of their appellate jurisdiction over tax cases originally decided by the
Metropolitan Trial Courts, Municipal Trial Courts, and Municipal Circuit Trial
Courts in their respective jurisdiction.

B. Judicial Procedures
1. Judicial Action for Collection of Taxes

a. Internal Revenue Taxes

1. Ordinary civil action
a. Court collection filed in Court.
b. Hold-order against the departure of erring taxpayer.
2. Criminal action-pursuing criminal prosecution of taxpayer.
Note: The Government my use these remedies singly or independently of each other,
repeated or some or all of them simultaneously until there is full settlement of the
taxpayers liability.

Judicial tax collection arises:

a. If the self-assessed tax shown in the return was not paid within the date prescribed
by law.
b. Final assessment is not protested administratively within 30 days from date of
receipt.
c. Non-compliance with the condition laid down in the approval of the protest.
d. Failure to file a timely appeal to the CTA on the final decision of the CIR or his
authorized representative on the disputed assessment.

Judicial action for tax collection is commenced by:

a. Filing of a complaint with the proper court, or
b. Where the assessment is on appeal in the CTA, by the filing by the government of
its answer to the taxpayers petition for review wherein payment of the tax is
prayed for.
Civil action of collection can be resorted to by filing a collection case in
the regular court where the assessment is already final and demandable. It

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 should be noted that no civil action for the recovery of taxes shall begun
without the approval of the CIR.

b. Local Taxes
1. Prescriptive period
Local taxes, fees, or charges may be collected within five (5) years from the date
of assessment by administrative or judicial action. No such action shall be instituted after
the expiration of said period: Provided, however, That, taxes, fees or charges assessed
before the effectivity of this Code may be collected within a period of three (3) years
from the date of assessment.

The running of the periods of prescription provided on assessments and collection

shall be suspended for the time during which:

(1) The treasurer is legally prevented from making the assessment of collection;

(2) The taxpayer requests for a reinvestigation and executes a waiver in writing before
expiration of the period within which to assess or collect; and

(3) The taxpayer is out of the country or otherwise cannot be located.

2. Civil Cases

The civil remedies for the collection of local taxes, fees, or charges, and related
surcharges and interest resulting from delinquency shall be:

(a) By administrative action thru distraint of goods, chattels, or effects, and other
personal property of whatever character, including stocks and other securities, debts,
credits, bank accounts, and interest in and rights to personal property, and by levy upon
real property and interest in or rights to real property; and

(b) By judicial action. Either of these remedies or all may be pursued concurrently or
simultaneously at the discretion of the local government unit concerned.

a. Who may appeal, mode of appeal, effect of appeal

Who may appeal; period to file petition.

(a) A party adversely affected by a decision, ruling or the inaction of the Commissioner
of Internal Revenue on disputed assessments or claims for refund of internal revenue
taxes, or by a decision or ruling of the Commissioner of Customs, the Secretary of
Finance, the Secretary of Trade and Industry, the Secretary of Agriculture, or a Regional
Trial Court in the exercise of its original jurisdiction may appeal to the Court by petition
for review filed within thirty days after receipt of a copy of such decision or ruling, or

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expiration of the period fixed by law for the Commissioner of Internal Revenue to act on
the disputed assessments. In case of inaction of the Commissioner of Internal revenue on
claims for refund of internal revenue taxes erroneously or illegally collected, the taxpayer
must file a petition for review within the two-year period prescribed by law from
payment or collection of the taxes. (n)

(b) A party adversely affected by a decision or resolution of a Division of the Court on a

motion for reconsideration or new trial may appeal to the Court by filing before it a
petition for review within fifteen days from receipt of a copy of the questioned decision
or resolution. Upon proper motion and the payment of the full amount of the docket and
other lawful fees and deposit for costs before the expiration of the reglementary period
herein fixed, the Court may grant an additional period not exceeding fifteen days from
the expiration of the original period within which to file the petition for review. (Rules of
Court, Rule 42, sec. 1a)

(c) A party adversely affected by a decision or ruling of the Central Board of Assessment
Appeals and the Regional Trial Court in the exercise of their appellate jurisdiction may
appeal to the Court by filing before it a petition for review within thirty days from receipt
of a copy of the questioned decision or ruling. (n)

MODES OF APPEAL

(1) By filing a petition for review under a procedure analogous to that provided for under
Rule 42 of 1997 Rules on Civil Procedure
decision, ruling, or inaction of the Commissioner of Internal Revenue,
Commissioner of Customs, the Secretary of Finance, the Secretary of Trade and
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 that provided for under
Rule 43 of 1997 Rules on Civil Procedure
decisions or rulings of the Central Board of Assessments Appeals and the
Regional Trial Courts in the exercise of its appellate jurisdiction
this appeal shall be heard by the CTA en banc.

Effect of Failure to Appeal to the CTA

Failure of the taxpayer to appeal to the CTA within the reglamentary period makes a
tax assessment final, executory and demandable. (Dayrit vs. Cruz 165 SCRA 571)

The 30-day period of appeal to the CTA is non-extendible. A tax payer may not delay
indefinitely a tax assessment by reiterating his original defenses over and over again,
without substantial variation. (Filipinas Investment Corp. vs Comm., L-23501, 16 May
1967.)

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Effect of Appeal to the CTA

1. The appeal taken to the Court of Tax Appeals from the decision of the
commissioner of Internal Revenue or Commissioner of Customs does not
suspend payment, levy or distraint, and/or sale of any property of the
taxpayer for the satisfaction of his liability. (par. 2, Sec 11, R.A. No. 1125)

2. It does not preclude the Commissioner of Internal Revenue from making

a reassessment by increasing or decreasing a previous assessment (Coll.
Vs. Batangas trans Co. 102 Phil 822) for a contrary rule would enable a
taxpayer to feign an appeal to hide a connivance with unscrupulous officials
for a low assessment. The taxpayer is not prejudiced considering that the CTA
is authorized to scrutinize the legal and factual bases of the new assessment.

3. The government may not file a counterclaim for an amount not included in the
original assessment which has been appealed by the taxpayer. (Comm. Vs.
Guerrero, L-19074 & L-12089, Jan. 31, 1967.

1. Suspension of Collection of Tax

No appeal taken to the Court shall suspend the payment, levy, distraint, or sale of any
property of the taxpayer for the satisfaction of his tax liability as provided under existing
laws, except as hereinafter prescribed. (n)

Who may file:

Where the collection of the amount of the taxpayers liability, sought by means of a
demand for payment, by levy, distraint or sale of any property of the taxpayer, or by
whatever means, as provided under existing laws, may jeopardized the interest of the
Government or the taxpayer, an interested party may file a motion for the suspension of
the collection of the tax liability. (RCTA, Rule 12, sec. 1a)

When to file:

The motion for the suspension of the collection of the tax may be filed together with the
petition for review or with the answer, or in a separate motion filed by the interested
party at any stage of the proceedings. (RCTA, Rule 12, sec. 2)

1. Injunction not available to restrain collection

General Rule: No court shall have the authority to enjoin or restrain the collection of any
national internal revenue tax, fee or charge or any other tax including customs duties,
local government taxes, real property taxes, etc.
Under RA No 9282, the no injunction rule extends to all kinds of taxes, whether
internal revenue, tariff and customs duties, local taxes and real property taxes.

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 No appeal taken to the CTA from the decision of the CIR or the Commissioner of
Customs or the Regional Trial Court, provincial, city or municipal treasurer or the
Secretary of Finance, the Secretary of Trade and Industry, and Secretary of Agriculture,
as the case may be shall suspend the payment, levy, distraint, and/or sale of any property
of the taxpayer for the satisfaction of his tax liability as provided by existing law. Reason:
Lifeblood theory.

Exception: No injunction rule does not apply to Court of Tax Appeals

The provisions of RA 1125 which authorizes the Court of Tax Appeals, to issue
an injunction prohibiting the Bureau of Internal Revenue from collecting the tax assessed
is considered as an exception to the no injunction rule contained in Section 218 of the
NIRC. This is also true for other taxing authorities.
When in the opinion of the CTA the collection by the aforementioned
government agencies may jeopardize the interest of the Government and/or the taxpayer,
the Court at any stage of the proceeding may suspend the said collection and require the
taxpayer either to deposit the amount claimed or to file a surety bond for not more than
double the amount with the Court (Sec. 11, R.A. No. 1125 as amended by Sec. 9, R.A.
No. 9282)
The Supreme Court may enjoin the collection of taxes under its general judicial
power, but it should be apparent that the source of the power is not statutory but
constitutional.

Conditions for issuance of an injunction by Court of Tax Appeals:

The Court of Tax Appeals may enjoin the collection of taxes,
e. If in its opinion the same may jeopardize the interest of the government and/or
taxpayer. In this instance,
f. The court may require the taxpayer either to deposit the amount claimed or file a
surety bond for not more than double the amount with the court.

2. Taking of evidence

Power of the Court to receive evidence:

The Court may receive evidence in the following cases:

(a) In all cases falling within the original jurisdiction of the Court in Division
pursuant to Section 3, Rule 4 of these Rules; and

(b) In appeals in both civil and criminal cases where the Court grants a new trial
pursuant to Section 2, Rule 53 and Section 12, Rule 124 of the Rules of Court.

Taking of evidence by a justice

The Court may, motu proprio or upon proper motion, direct that a case, or any issue
therein, be assigned to one of its members for the taking of evidence, when the
determination of a question of fact arises at any stage of the proceedings, or when the

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taking of an account is necessary, or when the determination of an issue of fact requires
the examination of a long account. The hearing before such justice shall proceed in all
respects as though the same had been made before the Court.

Upon the completion of such hearing, the justice concerned shall promptly submit to the
Court a written report thereon, stating therein his findings and conclusions. Thereafter,
the Court shall render its decision on the case, adopting, modifying, or rejecting the
report in whole or in part, or, the Court may, in its discretion, recommit it to the justice
with instructions, or receive further evidence.

Taking of evidence by Court official:

In default or ex parte hearings, or in any case where the parties agree in writing, the Court
may delegate the reception of evidence to the Clerk of Court, the Division Clerks of
Court, their assistants who are members of the Philippine bar, or any Court attorney. The
reception of documentary evidence by a Court official shall be for the sole purpose of
marking, comparison with the original, and identification by witnesses of such
documentary evidence. The Court official shall have no power to rule on objections to
any question or to the admission of exhibits, which objections shall be resolved by the
Court upon submission of his report and the transcripts within ten days from termination
of the hearing. (Rules of Court, Rule 30, sec. 9a)

3. Motion for Reconsideration or New Trial

Who may and when to file motion. Any aggrieved party may seek a reconsideration or
new trial of any decision, resolution or order of the Court. He shall file a motion for
reconsideration or new trial within fifteen days from the date he received notice of the
decision, resolution or order of the Court in question. (RCTA, Rule 13, sec. 1a)

Grounds of motion for new trial. A motion for new trial may be based on one or more
of the following causes materially affecting the substantial rights of the movant:

(a) Fraud, accident, mistake or excusable negligence which ordinary prudence

could not have guarded against and by reason of which such aggrieved party has
probably been impaired in his rights; or

(b) Newly discovered evidence, which he could not, with reasonable diligence,
have discovered and produced at the trial and, which, if presented, would
probably alter the result.

A motion for new trial shall include all grounds then available and those not included
shall be deemed waived.

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Requisites for motion for new trial based on newly discovered evidence
1. The evidence was discovered after the trial.
2. Such evidence could not have been discovered and produced at the trial with
reasonable diligence.
3. It is material, not merely cumulative, corroborative or impeaching and
4. It is of such weight, if admitted will probably change the judgment.

4. Appeal to the CTA, en banc

Decisions or resolution of the Court of Tax Appeals en banc that should be
the subject of a petition for review under Rule 43 of the Rules of Court
before filing a petition for review on certiorari with the Supreme Court
under Rule 45 of the Rules of Court.

a. Petition for review on certiorari to the Supreme Court

A party adversely affected by a decision or ruling of the Court en banc may appeal
therefrom by filing with the Supreme Court a verified petition for review on certiorari
within fifteen days from receipt of a copy of the decision or resolution, as provided in
Rule 45 of the Rules of Court. If such party has filed a motion for reconsideration or for
new trial, the period herein fixed shall run from the partys receipt of a copy of the
resolution denying the motion for reconsideration or for new trial. (n)
3. Criminal Cases

a. Institution and prosecution of criminal actions

Institution of criminal actions. All criminal actions before the Court in Division in the
exercise of its original jurisdiction shall be instituted by the filing of an information in the
name of the People of the Philippines. In criminal actions involving violations of the
National Internal Revenue Code and other laws enforced by the Bureau of Internal
Revenue, the Commissioner of Internal Revenue must approve their filing. In criminal
actions involving violations of the tariff and Customs Code and other laws enforced by
the Bureau of Customs, the Commissioner of Customs must approve their filing. (Rules
of Court, Rule 110, sec. 2a; n)
The institution of the criminal action shall interrupt the running of the period of
prescription.
Prosecution of criminal actions. All criminal actions shall be conducted and
prosecuted under the direction and control of the public prosecutor. In criminal actions
involving violation of the National Internal Revenue Code or other laws enforced by the
Bureau of Internal Revenue, and violations of the Tariff and Customs Code or other laws
enforced by the Bureau of Customs, the prosecution may be conducted by their respective
duly deputized legal officers.

1. Institution on civil action in criminal action

In cases within the jurisdiction of the Court, the criminal action and the corresponding
civil action for the recovery of civil liability for taxes and penalties shall be deemed
jointly instituted in the same proceeding. The filing of the criminal action shall
necessarily carry with it the filing of the civil action. No right to reserve the filing of such

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civil action separately from the criminal action shall be allowed or recognized. (Rules of
Court, Rule 111, sec. 1[a], par. 1a)

b. Appeal and period to appeal

(a) An appeal to the Court in criminal cases decided by a Regional Trial Court in the
exercise of its original jurisdiction shall be taken by filing a notice of appeal pursuant to
Sections 3(a) and 6, Rule 122 of the Rules of Court within fifteen days from receipt of a
copy of the decision or final order with the court which rendered the final judgment or
order appealed from and by serving a copy upon the adverse party. The Court in Division
shall act on the appeal.
(b) An appeal to the Court en banc in criminal cases decided by the Court in Division
shall be taken by filing a petition for review as provided in Rule 43 of the Rules of Court
within fifteen days from receipt of a copy of the decision or resolution appealed from.
The Court may, for good cause, extend the time for filing of the petition for review for an
additional period not exceeding fifteen days.
(c) An appeal to the Court in criminal cases decided by the Regional Trial Courts in the
exercise of their appellate jurisdiction shall be taken by filing a petition for review as
provided in Rule 43 of the Rules of Court within fifteen days from receipt of a copy of
the decision or final order appealed from. The Court en banc shall act on the appeal. (n)

1. Solicitor General as counsel for the People and government officials sued in their
official capacity
The Solicitor General shall represent the People of the Philippines and government
officials sued in their official capacity in all cases brought to the Court in the exercise of
its appellate jurisdiction. He may deputized the legal officers of the Bureau of Internal
Revenue in cases brought under the National Internal Revenue Code or other laws
enforced by the Bureau of Internal Revenue, or the legal officers of the Bureau of
Customs in cases brought under the Tariff and Customs Code of the Philippines or other
laws enforced by the Bureau of Customs, to appear in behalf of the officials of said
agencies sued in their official capacity: Provided, however, such duly deputized legal
officers shall remain at all times under the direct control and supervision of the Solicitor
General. (n)

c. Petition for review on certiorari to the Supreme Court

From the CTA en bancs decision, the losing party may file with the Supreme
Court a unified petition for review on certiorari pursuant to Rule 45 of the 1997Rules of
Civil Procedure.

C. Taxpayers suit impugning the validity of tax measures or acts of taxing

authorities

a. Taxpayers suit, defined

A case where the act complained of directly involves the illegal disbursement of public
funds derived from taxation.

b. Distinguished from citizens suit

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In taxpayers suit, the plaintiff is affected by the expenditure of public funds while in
citizens suit, he is but the mere instrument of the public concern.
In a citizens suit, which is in the matter of public right, the people are the real parties, it
is at least the right, if not the duty, of every citizen to intervene and see that a public
offence be properly pursued and punished, and a public grievance be remedied while with
respect to taxpayers suit, the right of a citizen and a taxpayer to maintain an action in
courts to restrain the unlawful use of public funds to his injury cannot be denied.

c. Requisites for challenging the constitutionality of a tax measure or act of taxing

authority
a. The case should involve constitutional issues;
b. For taxpayers, there must be a claim of illegal disbursement of public funds or
that the tax measure is unconstitutional.
c. For voters, there must be a showing of obvious interest in the validity of the
election law in question.
d. For concerned citizens, there must be a showing that the issues raised are of
transcendental importance which must be settled early.
e. For legislators, there must be a claim that the official action complained of
infringes upon their prerogatives as legislators.

1. Concept of locus standi as applied in taxation

Locus standi is a right of appearance in a court of justice on a given question.
(Abaya v. Ebdane, G. R. No. 167919, February 14, 2007)
It is a partys personal and substantial interest in the case, such that the party has
sustained or will sustain (Ibid.)direct injury as a result of the government act being
challenged. It calls for more than just a generalized grievance.
A party need not be a party to the contract to challenge its validity. (Ibid.)
2. Doctrine of transcendental importance
In cases of paramount importance where serious constitutional questions are involved, the
standing requirements may be relaxed and a suit may be allowed to prosper even where
there is no direct injury to the party claiming the right of judicial review.

3. Ripeness for judicial determination

A. Nature of actual case or controversy

An actual case or controversy involves a conflict of legal rights, an assertion of opposite
legal claims susceptible of judicial adjudication. (ABAKADA Guro Party List, etc., v.
Purisima, etc., et al., G. R. No. 166715, August 14, 2008 citing Cruz, Isagani,
PHILIPPINE CONSTITUTIONAL LAW, 1995 edition, p. 23)

B. Criteria of being ripe for judicial determination

A closely related requirement is ripeness, that is, the question must be ripe for
adjudication. And a constitutional question is ripe for adjudication when the
governmental act being challenged has a direct adverse effect on the individual
challenging it. (ABAKADA Guro Party List, etc., v. Purisima, etc., et al., G. R. No.
166715, August 14, 2008 citing Bernas, Joaquin, THE 1987 CONSTITUTION OF

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THE REPUBLIC OF THE PHILIPPINES: A COMMENTARY, 1996 edition, pp. 848-
849) Thus, to be ripe for judicial adjudication, the petitioner must show a personal stake
in the outcome of the case or an injury to himself that can be redressed by a favorable
decision of the Court. [ABAKADA Guro Party List, etc., supra, v. Purisima, etc., citing
Cruz v. Secretary of Environment and Natural Resources, 400 Phil. 904 (2000), Vitug, J.,
separate opinion]

C. Personal injury must be shown for judicial controversy to be ripe for judicial
determination
In this case, aside from the general claim that the dispute has ripened into a judicial
controversy by the mere enactment of the law even without any further overt act.
(ABAKADA Guro Party List, etc., v. Purisima, etc., et al., G. R. No. 166715, August 14,
2008 citing La Bugal-BLaan Tribal Association, Inc. v. Ramos, G.R. No. 127882, 01
December 2004, 445 SCRA 1)
Thus, where petitioners fail either to assert any specific and concrete legal claim or
to demonstrate any direct adverse effect of the law on them or are unable to show a
personal stake in the outcome of this case or an injury to themselves their petition is
procedurally infirm. (ABAKADA Guro Party List, etc., supra)

D. Constitutionality of law is exception to the doctrine of ripe for judicial

determination. This notwithstanding, public interest requires the resolution of the
constitutional issues raised by petitioners. The grave nature of their allegations tends to
cast a cloud on the presumption of constitutionality in favor of the law. And where an
action of the legislative branch is alleged to have infringed the Constitution, it becomes
not only the right but in fact the duty of the judiciary to settle the dispute. [ABAKADA
Guro Party List, etc., v. Purisima, etc., et al., G. R. No. 166715, August 14, 2008 citing
Taada v. Angara, 338 Phil. 546 (1997)]

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TAXATION II STUDENTS 2010-2011

Abragan, John Bryan

Absin, Patrick Bryan
Dangazo, Nolan
Ferraren, Ryan
Galas, Stevenson
Macarayan, Maichel Rick
Maquiling, Muammar John
Ortiz, Francis Edmund
Pangandaman Jr, Palayogan
Tirariray, Louie

Abbu, Rufeliz Ann

Baliton, Malucar
Bingona, Mavel
Cainglet, Monalisa
Musni, Czarina Golda
Salic, Norhalisa
Tomolin, Jessica
Uno, Jedyl
Villarta, Hannah Joy

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