Tax Review Notes 2014

TAXATION
REVIEW NOTES
By:
ATTY. ERWIN D. CABARLES, CPA
Partner, Demonteverde Vinco Tuble and Demonteverde
Professor, UNO-Recoletos School of Law
BAR Reviewer, UNO-Recoletos Bar Review
CABARLES NOTES
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UNO-Recoletos
School of Law
PART 1
GENERAL PRINCIPLES OF TAXATION
CABARLES NOTES
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UNO-Recoletos
School of Law
CHAPTER 1
Concepts, Classifications, and Distinctions
Taxation Defined
Taxation is the act of levying a tax.
It is the process or means by
which the sovereign, through its law-making body, raises income to
defray the necessary expenses of government.
As a power it refers to the inherent power of the State to demand
enforced contributions for public purpose or purposes.
It is the inherent power of a State to collect enforced proportional
contribution to support the expenses of government.
Basic Purposes of Taxation
1. The primary purpose of taxation on the part of the government is to
provide funds or property with which to promote the general welfare
and protections of its citizens and to enable it to finance its
multifarious activities.
Almost all revenues of the government are derived from taxes raised
through taxation.
2. Taxation may also be employed for purposes of regulation or control.
Taxes Defined
Taxes are the enforced proportional contributions from persons and
property levied by the law-making body of the State by virtue of its
sovereignty for the support of the government and all public needs.
Taxes are enforced proportionate contributions, which the State collects
in exercising its inherent power from persons, property or interest to
defray the expenses of the government.
Essential elements of tax
1. It is an enforced contribution.
2. It is generally payable in money.
3. It is proportionate in character.
4. It is levied on persons, property, or the exercise of a right or
privilege.
5. It is levied by the State which has jurisdiction over subject or
object of taxation.
6. It is levied by the law-making body of the State; and
7. It is levied for public purpose or purposes.
It is also important characteristic of a tax that
required to be paid at regular periods or intervals.
it
is
commonly
Basis of Taxation lifeblood of the government and their prompt and certain
availability is an imperious need. The collection of taxes must
be made without hindrance if the state is to maintain its orderly
existence.
Lifeblood Doctrine (Bar 1991)
Taxes are the lifeblood of government and should be collected without
unnecessary hindrance.
They what we pay for a civilized society.
Without taxes, the government would be paralyzed for lack of motive
power to activate and operation it.
The government, for its part, is
expected to respond in the form of tangible and intangible benefits
intended to improve the lives of the people and enhance their moral and
material values.
CABARLES NOTES
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UNO-Recoletos
School of Law
Theories of Taxation
1. Necessity Theory.
The power of taxation proceeds upon the theory that the existence of
government is a necessity; that it cannot continue without means to
pay its expenses; and that for this means it has a right to compel
all its citizens and property within its limits to contribute.
2. Benefits-Protection Theory
The basis of taxation is found in the reciprocal duties of protection
and support between the State and its inhabitants. In return for his
contribution, the taxpayer receives benefits and protection from the
government. This is so-called benefits received principle.
Benefits Received Principle (Doctrine of Symbiotic Relationship)
the one is compensation for the other: protection for support and
support for protection. This does not mean, however, that only those
who are able to and do pay taxes can enjoy the privileges and
protection given to a citizen by the government.
Question:
May a person legally refuse to pay a tax on ground
that he will derive no personal benefit from the tax?
Answer:
No, in return for the tax, the government promises or
renders no definite specific commodity or benefit to
any particular property or person. The only benefit
to which the taxpayer is entitled is that derived from
his enjoyment of the privileges of living in an
organized society established and safeguarded by the
devotion of taxes to public purposes.
Nature or Characteristics of the States power to tax (Bar 1996)

1. It is inherent in sovereignty it may be exercised although not
expressly granted by the Constitution;
2. It is legislative in character only the legislature can impose
taxes (although the power may be delegated); and
3. It is subjected to constitutional and inherent limitations it is
not an absolute power than can be exercised by the legislature
anyway it pleases.
Nature of the Power of Taxation (96 Bar 1(b) (5%)

1.
2.
3.
4.
Inherent power of a sovereign state

Legislative in nature
Civil and not political in character
Tax laws are not penal in nature
(97 Bar)
Question:
Assuming that the new Constitution drafted by the delegates
and ratified by the people failed to provide for the
enactment of law imposing taxes, may the legislative body
created by the same Constitution enact tax laws? Explain
your answer.
Answer:
Yes, the legislative body may enact tax laws.
Taxation is an inherent power of a sovereign state and can
be exercised whether or not the Constitution provides for
it. Absence of any Constitutional limitations, the taxing
power becomes unlimited provided revenues raised therein are
for a public purpose.
CABARLES NOTES
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UNO-Recoletos
School of Law
Process, aspect, phases of Taxation

1.
2.
Levying or imposition of the tax which is a legislative in

character;
Collection of the tax levied which is essentially administrative
in character.
The first is taxation, strictly speaking, while the second may be

referred to as tax administration.
The two processes together
constitute the taxation system.
Power to Tax the Power to Destroy (Bar 1983)
The power to tax is the strongest of all the powers of government.
It is inherent power to tax vested in the legislature includes the
power to determine who to tax, what to tax and how much tax is to be
imposed.
The power to tax includes the power to destroy if it is used validly
as an implement of the police power in discouraging and in effect,
ultimately prohibiting certain things or enterprises inimical to the
public welfare.
Purposes of Taxation
1. Primary purpose (General, fiscal or revenue)
To raise revenue for government expenditures.
government and for all public needs.
For the support of the
2. Secondary purpose (Special or regulatory)(Bar 1991)

To achieve some social or economic ends irrespective of whether
revenue is actually raised or not.
Taxation also seeks to
(a) Reduce social inequality;
(b) Encourage the growth of local industries;
(c) Protect our local industries against unfair competition;
(d) Implement the police power of the state (regulatory).
CABARLES NOTES
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UNO-Recoletos
School of Law
Reduce social inequality

Our present tax system has adopted the progressive system of
taxation. In progressive system of taxation, the tax rate increases
as the tax base increases.
This system aims at reducing the
inequality in the distribution of wealth by preventing its undue
concentration in the hands of a few individuals.
Encourage the Growth of Local Industries
It is a settled rule that the power to tax carries with it the power
to grant tax exemptions.
Tax exemptions and tax reliefs serve as
incentives to encourage investment in our local industry and thereby
promote economic growth.
Protect our local industries against unfair competition
The Tariff and Customs Code allows the imposition of certain taxes
(countervailing and dumping duties) upon imported goods or articles
to further protect our local industry.
RA 8752 (Anti-Dumping Act)
imposes stricter conditions.
As an implement of the Police Power of the State (Regulatory Measure)
The power of taxation may be used as an implement of the police power
of the State through the imposition of taxes with the end in view of
regulating a particular activity.
Lutz vs. Araneta
As a protection and promotion of the sugar industry is a
matter of public concern, the Legislature may determine
within reasonable bounds what is necessary for its
protection and expedient for its promotion.
Extent of the Taxing Power (Bar 2000)

The power of taxation reaches to every trade or occupation; to every
object of industry, use, enjoyment; to every species of possession, and
it imposes a burden which in case of failure to discharge the same may
be followed by seizure, confiscation or forfeiture of the property.
Taxation is said to be:
1. Comprehensive
2. Unlimited
3. Plenary
4. Supreme
Comprehensive
it covers persons, businesses,

professions, rights and privileges.
activities,
Unlimited -
the power to impose taxes is one so unlimited in

force and so searching in extent that the courts
scarcely venture to declare that it is subject
to any restrictions whatever, except such as
rest in the discretion of the authority which
exercises it.
Plenary as it is complete Under the NIRC, the BIR may avail of

certain remedies to ensure the collection of
taxes.
Supreme -
Although referred to as the strongest of all the

powers of the government, cannot be interpreted
to mean that it is superior to the other
inherent powers of the government, only that it
is supreme insofar as the selection of the
subject of taxation is concerned.
CABARLES NOTES
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UNO-Recoletos
School of Law
Principles of a Sound Tax System (Bar 1973)

1. Fiscal adequacy
2. Theoritical Justice or Equality
3. Administrative Feasibility
Fiscal Adequacy it means that the sources of revenue should be
sufficient to meet the demands of public expenditures.
Theoritical Justice or Equality it means that the tax burden should
be proportionate to the taxpayers ability to pay. This is the socalled ability to pay principle.
Administrative Feasibility it means that tax laws should be capable
of convenient, just and effective administration. Tax laws must be
capable of effective and efficient enforcement.
They must not
obstruct business growth and economic development.
Taxation Distinguished From Other Inherent Powers and Impositions

Taxation distinguished from Police Power
Taxation
Police Power
As to PURPOSE
Is levied for the purpose

of raising revenue.
Is exercised to promote
public welfare through
regulation.
As to AMOUNT
OF EXACTION
The amount gathered in the

exercise of taxation
contemplates of no limits.
The exaction is limited to

the cost of regulation,
issuance, of the license,
or surveillance.
As to the
BENEFITS
RECEIVED BY
THE TAXPAYER
No special or direct
benefit is received by the
taxpayer other than the
fact that the government
secures the citizen that
general benefit resulting
from the protection of his
person and property and
the welfare of all.
No direct benefits are

received through the
exercise of Police Power,
yet a healthy economic
standard of society is
maintained.
As to
SUPERIORITY OF
CONTRACTS
Recognizes the obligations

imposed by contracts.
This limitation does not

apply to Police Power.
As to TRANSFER
OF PROPERTY
RIGHTS
The taxes paid form part

of the public funds.
Allows merely the

restraint on the exercise
of property rights.
Taxation distinguished from Eminent Domain
Taxation
Eminent Domain
As to PURPOSE
Is levied for the purpose

of raising revenue.
Is taking of property for

public use.
As to
COMPENSATION
Payment of taxes accrue to

the general benefit of the
citizens of the taxing
state.
Just compensation is given

the owner of the
expropriated property.
As to the
PERSONS
AFFECTED
Applies to all persons,

property and exercises
that may be subject
thereto.
Only particular property

is comprehended.
CABARLES NOTES
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UNO-Recoletos
School of Law
Limitations on the Taxing Power

Classes of Limitations in Taxing Power
1. Inherent Limitations on the Power to Tax
2. Constitutional Limitations on the Power to Tax
Inherent Limitations on the Power to Tax
These limitations proceed from the very nature of the taxing power
itself.
These
1.
2.
3.
4.
are:
Public purpose
International comity
Non-delegation of the power to tax
Tax exemptions granted government agencies or instrumentalities.
Constitutional Limitations on the Power to Tax

1. Due process of law;
2. Equal protection of laws;
3. Uniformity;
4. Progressive system of taxation;
5. Non-impairment of contracts;
6. non-imprisonment for non-payment of poll tax;
7. appropriation, revenue and tariff bills must originate exclusively
in the House of Representatives;
8. Presidential veto;
9. Presidential power to fix tariff rates;
10. Freedom of the press;
11. Freedom of religion;
12. Exemption from property tax of properties of religious,
educational, charitable institutions;
13. Tax exemptions granted to non-stock, non profit educational,
charitable institutions;
14. No public money or property used for a particular sec, priest,
religious minister, etc;
15. Grant of tax exemptions;
16. Grant of power of taxation to local government units;
17. Money collected for a special purpose shall be considered a
special fund;
18. Exclusive appellate jurisdiction of the Supreme court over
judgments of lower courts involving the legality of taxes,
imports, assessment, fees, penalty.
1. Due Process of Law
Art. III, Sec. 1
No person shall be deprived of life, liberty
property without due process of law x x x x.
or
Due process mandates that no person shall be deprived of life,

liberty, or property without due process.
The implication is that
one may be deprived as long as the requirement of due process
notice and hearing have been complied with.
Due process is usually violated where the tax imposed is for a
private purpose as distinguished from a public purpose; a tax is
imposed on property outside the State, i.e, extra-territorial
taxation; and arbitrary or oppressive methods are used in assessing
and collecting taxes.
But, a tax does not violate the due process
clause, as applied to a particular taxpayer, although the purpose of
the tax will result in injury rather than a benefit to such taxpayer.
CABARLES NOTES
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UNO-Recoletos
School of Law
The following situations are illustrative of violations of the due

process clause:
(a) If the tax amounts to a confiscation of property;
(b) If the subject of confiscation is outside the jurisdiction of
the taxing authority;
(c) If the law is imposed for a purpose other than a public
purpose;
(d) If the law which is applied retroactively imposes unjust and
oppressive taxes;
(e) Where the law is in violation of inherent limitations.
2.
Equal Protection Clause
Equal protection does not require equal rates of taxation on

different classes of property, nor prohibit unequal taxation so long
as the inequality is not based upon arbitrary classification.
Legislation which, in carrying out a public purpose, is limited in
its application, does not violate the provisions if, within the
sphere of its operation, it affects alike all persons similarly
situated.
It does not prohibit special legislation or legislation
that is limited either in the objects to which it is directed, or by
the territory within which it is to operate.
It merely requires that all persons subjected to such legislation
shall be treated alike, under like circumstances and conditions, both
in the privileges conferred and in the liabilities imposed.
The power to select the subjects of taxation and apportion the public
burden among them includes the power to make classifications.
The
inequalities which result from the singling out of one particular
class
for
taxation
or
exemption
infringe
no
constitutional
limitation. (Lutz vs. Araneta, G.R. L-7859, Dec. 22, 1955, 98 Phil.
148)
However, for classification to be valid, the following requisites
must concur:
(a) it must be based on substantial distinction;
(b) it must apply both to present and future conditions;
(c) it must be germane to the purpose of the law;
(d) it must apply equally to all members of the same class.
3.
Uniformity of Taxation (1998 Bar Question No. 1)

Art. VI, Sec. 28[1] of the Constitution
The rule of taxation shall be uniform and equitable.
Uniformity in taxation means that all taxable articles or kinds of

property of the same class shall be taxed at the same rate. It does
not mean that lands, chattels, securities, occupations, franchises,
privileges, necessities and luxuries shall all be taxed or assessed
at the same rate.
Different articles may be taxed at different
amounts provided that the rate is uniform on the same class every
where, with all the people and at all times.
A tax is uniform when it operates with the same form and effect in
every place where the subject of it is found.
Double Taxation
Double Taxation is the imposition of two (2) or more taxes upon the
same person, the same property or subject matter, for the same
purpose, by the same State, Government, or taxing authority, within
the same jurisdiction or taxing district, during the same taxing
period and same king or character of tax.
CABARLES NOTES
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UNO-Recoletos
School of Law
1997 Bar 1(a)

Question:
Is double taxation
legality of a tax?
valid
defense
against
the
Answer:
No, double taxation is not a valid defense against the
legality of a tax.
There is no constitutional
prohibition double taxation.
A tax enactment cannot
be illegal simply because it results to double
taxation.
1997 Bar. 1(c)
Question:
What are the various methods
occurrence of double taxation?
of
avoiding
the
Answer:
There are two methods of relief:
1. The exemption method
Income or capital taxable in the state of source or
situs but exempted in the sate of residence; and
2. The credit method
While the income or capital is taxed in both the
state of source and in the state of residence, the
tax paid in the former is credited against the tax
levied in the latter.
1996 Bar 2(a) (5%); 1980 Bar 3,9
(Villanueva vs. City of Iloilo, 26 SCRA 578)
Question:
X, a lessor of a property, pays real estate tax on the
premises, a real estate dealers tax based on rental
receipts and income tax on the rentals. X claims that
this is double taxation. Decide.
Answer:
1. There is no double taxation. The three (3) types
of taxes have different purposes/nature and are
imposed by different taxing authorities.
2.
Real estate tax is imposed on the property itself

by the Local Governments.
3.
Real Estate Dealers Tax is imposed on the

dealers privilege to engage in the buy and sell
of real property.
4.
The Income Tax on the Rental Income is imposed on

the businessmans privilege to earn income and is
under the National Governments BIR.
1997 Bar 1(b)
BIR Ruling No. 018-96, Feb. 20, 1996
Question:
When an item of income is taxed in the Philippines and
the same income is taxed in another country, is there
a case of double taxation?
Answer:
No, there is no double taxation.
The foreign
government has the right to withhold taxes, in the
exercise of its inherent and sovereign right to tax.
There are two (2) separate taxing authorities
involved.
CABARLES NOTES
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UNO-Recoletos
School of Law
4.
Progressive Taxation
Congress shall evolve a progressive system
taxation.
of
Taxation is said to be equitable when its burden falls on those

better able to pay; taxation is progressive when its rate goes up
depending on the resources of the person affected.
The Constitution does not really prohibit the imposition of
regressive taxes. What is simply provides is that Congress shall
evolve a progressive system of taxation.
Kinds of Taxation System
1. Progressive Taxation
2. Regressive Taxation
Progressive System of Taxation favors the imposition of more direct
taxes versus indirect taxes.
Regressive System of Taxation is characterized by more indirect taxes
being imposed.
Direct and Indirect Taxes (2001 Bar Question 2(b) (2%)
Direct Taxes are those that are demanded from the very person, who,
it is intended or desired, should pay them.
Indirect Taxes are those that are demanded in the first instance from
one person in the expectation and intention that he can shift the
burden to some else.
1997 Bar 5(a) (2.5%)
Question:
Discuss the meaning of the Global
Systems of Taxation?
and
Schedular
Answer:
1. Global or Uniform Tax Rate refers to tax structure
where only one (1) tax rate is applied across the
tax base.
2. Schedular or Progressive Tax Rates refer to the
imposition of graduated rates of taxes in scalar
range or a layered set of tax bases.
1997 Bar 5(b) (2.5%)
Question:
To which system would you say the method of taxation
under the National Internal Revenue Code belongs:
Answer:
1.
The National Internal Revenue Code uses both the
Global and the Schedular Systems of Taxation.
The Corporate Income Tax Rate and the 10% VAT
Rate as examples of Global rates of taxes.
2.
The Income Tax Table for individual Taxpayers is

an example of the Schedular rates of taxes.
Income taxes on individuals are progressive tax
rates because the rates increase as the scale of
income increases.
CABARLES NOTES
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UNO-Recoletos
School of Law
5.
Non-impairment Clause
Art. III, Sec. 10 of the Constitution
No law shall be passed impairing the obligations of
contracts.
When the state has stipulated by contract to give exemption from

taxation, or has commuted the uncertain taxes for a definite and
fixed sum or sums, and afterwards undertakes to tax, in the same
manner as it taxes other subjects, the persons, corporations or
property which were the subject of the exemption or commutation, the
obligation of the contract is impaired.
The constitutional prohibition against the impairment of the
obligation of contracts only applies, however, where it is claimed
that the obligation of a contract is impaired by a law of the state
a statute or constitutional provision of the state.
It does not
apply to mere decisions of courts construing a contract.
1997 Bar (3)
Question:
Is a tax exemption revocable?
Answer:
(Qualified Answer)
1. If the grant of an exemption does not constitute a
contract, but merely a spontaneous concession by
the legislative, not connected with any service or
duty imposed
It is revocable by the power which made the grant.
A state may, at its pleasure, withdraw an exemption
which is a mere gratuity possessing no element of a
contract, even though the corporation may have
incurred expense on the faith thereof.
2. If the tax exemption constitutes a binding
contract and for valuable consideration
The government cannot unilaterally revoke the tax
exemption.
When the government enters into a contract, it
descends to the level of an ordinary individual.
It cannot invoke state immunity.
6.
Non-imprisonment for non-payment of poll tax

No person shall be imprisoned for non-payment of a
debt or poll tax.
While a person may not be imprisoned for non-payment of a
cedula or poll tax, he may be imprisoned for non-payment
of other kinds of taxes where the law so expressly
provides.
7.
Bills to Originate from the House of Representatives

All appropriation, revenue or tariff bills, bills
authorizing the increase of the public debt, bills of
local application and private bills, shall originate
exclusively in the House of Representatives, but the
Senate may propose or concur with amendments.
CABARLES NOTES
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UNO-Recoletos
School of Law
1997 Bar (2)

Tolentino vs. Secretary of Finance, et a.
GR. No. 115455, August 25, 1994, 235 SCRA 630
Question:
Petitioners assail the constitutionality of Republic
Act. No. 7716 imposing a value added tax (VAT). The
contention of petitioners is that in enacting RA 7716
congress violated the Constitution because, although
H. No. 11197 had originated in the House of
Representatives, it was not passed by the Senate but
was simply consolidated with the Senate version (S.
No. 1630) in the Conference Committee to produce the
bill which the President signed into law. Decide.
Answer:
This argument will not bear analysis.
What the
constitution simply means is that the initiative for
filing
revenue,
tariff,
or
tax
bills,
bills
authorizing an increase of the public debt, private
bills and bills of local application must come from
the House of Representatives on the theory that,
elected as they are from the districts, the members of
the House can be expected to be more sensitive to the
local needs and problems.
On the other hand, the
senators, who are elected at large, are expected to
approach
the
same
problems
from
the
national
perspective. Both views are thereby made to bear on
the enactment of such laws.
Nor does the Constitution prohibit the filing in the
Senate of a substitute bill in anticipation of its
receipt of the bill from the House, so long as action
by the Senate as a body is withheld pending receipt of
the House Bill.
8.
Veto Power of the President

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.
The item or items vetoed shall be returned to the Lower House of

Congress together with the objections of the President. If after a
reconsideration 2/3 of all the members of such House shall agree to
pass the bill, it shall be sent, together with the objection, to the
other House by which it shall likewise be reconsidered, and if
approved by 2/3 of all the Members of that House, it shall become a
law.
9.
Presidents Power to Tax

Art. VIII, Sec. 28[2] of the Constitution
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 imports within the framework
of the national development program of the government.
CABARLES NOTES
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UNO-Recoletos
School of Law
2000 Bar (18)

Question:
What is flexible tariff clause?
Answer:
The term refers to the authority given to the
President to adjust tariff rates under Section 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.
10.
Taxation and the Freedom of the Press

No law shall be passed abridging the freedom
speech, of expression, or of the press x x x
11.
of
Taxation and the Freedom of the Religion

No law shall be made respecting an establishment of
religion or prohibiting the free exercise thereof.
The
free
exercise
and
enjoyment
of
religious
profession and worship without discrimination or
preference shall forever be allowed.
No religious
test shall be required for the exercise of civil or
political rights.
12. Tax Exemption of Properties Actually, Directly and Exclusively

Used for Religious, Charitable and Education Purposes
Art. IV, Sec. 28 [3] of the Constitution
Charitable institutions, churches and parsonages or
convents appurtenant thereto, mosques, non-profit
cemeteries, and all lands, buildings and improvements
actually,
directly,
and
exclusively
used
for
religious, charitable, or educational purposes shall
be exempt from taxation.
Exclusive but not Absolute Use
The term exclusively used does not necessarily mean
total or absolute use for religious, charitable and
educational purposes.
Even if the property is
incidentally used for said purposes, the tax exemption
will apply.
Corollary, if a property, although actually owned by a
religious, charitable and educational institution is
used for a non-exempt purposes, the exemption from tax
shall not attach.
1996 Bar No. 8
Herrera vs. Quezon City Board of Assessment Appeals
3 SCRA 186
Question:
The Constitution exempts from taxation charitable
institutions,
churches,
parsonages
or
convents
appurtenant thereto, mosques and non-profit cemeteries
and lands, exclusively used for religious, charitable
and educational purposes. Mercy Hospital is a 100-bed
hospital organized for charity patients.
Can said hospital claim exemption from taxation under
the above-quoted constitutional provision? Explain.
CABARLES NOTES
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UNO-Recoletos
School of Law
Answer:
Yes, being a charitable institution, Mercy Hospital
can claim tax exemption under the Constitution but
only with respect to real property taxes provided that
such real properties are used actually direct and
exclusively for charitable purposes.
The exemption in favor of property used exclusively
for charitable or educational purposes is not limited
to property actually indispensable therefore, but
extends to facilities which are incidental to and
reasonably necessary for the accomplishment of said
purposes, such as in the case of hospitals, a school
for training nurses, a nurses home, property use to
provide housing facilities for interns, resident
doctors, superintendents, and other members of the
hospital staff, and recreational facilities for
student nurses, interns, and residents, such as
Athletic fields including a firm used for the
inmates of the institution.
13.
Tax Exemption granted
institution (2000 Bar (9))
to
non-stock
non-profit
educational
Art. XIV, Sec. 4 of the Constitution

All revenues and assets of non-stock, non-profit
educational institutions used actually, directly and
exclusively for educational purposes shall be exempt
from taxes and duties.
Upon the dissolution and
cessation of the corporation existence of such
institutions, their assets shall be disposed of in the
manner provided by law.
Subjects 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.
14.
Appropriation of Public Money

Art. VI, Sec. 29 [1] of the Constitution
No public money or property shall be appropriated,
applied, paid or employed directly or indirectly for
the use, benefit or 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
such priest, preacher, minister or dignitary is
assigned to the armed forces or to any penal
institution or government orphanage or leprosarium.
1996 Bar 4(a)
Gonzales vs. Marcos, GR L-31685, July 31, 1975
Tan vs. Macapagal, GR L-34161, February 29, 1972
Question:
When may a taxpayers suit be allowed?
Answer:
1. A taxpayers suit may be allowed when the issue
involves the unlawful disbursement of public funds
raised through taxation.
2. When the issue involves the disbursement of
public funds by an officer of the State for
administering an unconstitutional act, constitutes
a misapplication of such funds, such disbursement
may be enjoined at the request of a taxpayer.
CABARLES NOTES
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15.
Grant of Tax Exemptions

Art. VI, Sec. 28 [4] of the Constitution
No law granting any tax exemption shall be passed
without the concurrence of a majority of all the
members of Congress.
Note that in granting any tax exemptions, an absolute majority vote

of the Members of Congress is required, while in cases of withdrawal
of such tax exemption, a relative majority vote is sufficient.
Tax amnesties, tax condonations, and tax refunds are in the nature of
tax exemptions. Such being the case, a law granting tax amnesties,
tax condonations, and tax refunds requires the vote of an absolute
majority of the Members of Congress.
2001 Bar 2(a)
Question:
Distinguish tax exemption and tax amnesty
Answer:
Tax Amnesty is an immunity from all criminal and civil
obligations arising from non-payment of taxes. It is
a general pardon given to all taxpayers. It applies
only to past tax periods, hence of retroactive
application.
Tax Exemption is an immunity from civil liability
only. It is an immunity or privilege, a freedom from
a charge or burden of which others are subjected. It
is generally prospective in application.
1996 Bar 3 (5%)
Asiatic Petroleum Co. vs. Llanes
49 Phil 466, 471-472, (1926)
Question:
Why are tax exemptions strictly construed against the
taxpayer?
Answer:
A grant of tax exemption is looked upon with disfavor.
The right of taxation will not surrendered unless the
intention to surrender is too plain to be mistaken for
the state cannot strip itself of the most essential
power of taxation by doubtful words.
So, when exemption is claimed, it must be shown
indubitably to exist, for every presumption is against
it, and a well-founded doubt is fatal to the claim.
Revocation of Tax Exemption
1997 Bar 3 (5%)
Meralco vs. Vera, GR L-23847, October 22, 1975
Question:
X Corporation was the recipient in 1990 of two tax
exemptions both from Congress, one law exempting the
companys bond issue from taxes and the other
exempting the company from taxes in the operation of
its public utilities. The two laws extending the tax
exemptions were revoked by Congress before their
expiry dates.
Were the revocation constitution?
CABARLES NOTES
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Answer:
The revocation were constitutional provided the
corporate beneficiaries did not have to perform a
reciprocal duty in order to avail of the exemptions.
The congressional power to grant an exemption carries
with it the consequent power to revoke the same.
16.
Municipal Taxation
Art. X, Sec. 5 of the Constitution
Each local government unit shall have the power to
create its own sources of revenues and to levy taxes,
fees and charges subject to such guidelines and
limitations as the Congress may provide, consistent
with the basic policy of local autonomy. Such taxes,
fees, and charges shall accrue exclusively to the
local governments.
17.
Special Fund
Art. VI, Sec. 29(3) of the Constitution
All money collected on any tax levied for a special
purpose shall be treated as a special fund and paid
out for such purpose only. If 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.
18.
Supreme Courts Jurisdiction over Tax Cases

Art. VIII, Sec. 2 of the Constitution
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 section 5
hereof.
Art. VIII, Sec. 5 of the Constitution
The Supreme Court shall have the following powers:
Review, revise, reverse, modify or affirm on appeal or
certiorari as the law or the Rules of Court may
provide, final judgments or orders of lowers courts in
(b) all cases involving the legality of any tax,
impost, assessment or toll, or any penalty imposed in
relation thereto.
Kinds of Taxes Differentiated

1. Direct and Indirect (2001 Bar 2)
Direct Tax is a tax for which a taxpayer is directly liable on the
transaction or business it engages.
Indirect Tax is a tax primarily paid by persons who can shift the
burden upon someone else.
2. Specific and Ad valorem
Specific Tax is imposed and based on weight or volume capacity or
any other physical unit of measurement.
Ad valorem is based on selling price or other specified value of
the goods.
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3. General and Special

General Tax is imposed solely to raise revenue for the government.
Special Tax is imposed and collected to achieve a particular
legitimate object of government.
4. National and Local
National Tax is imposed by the national government.
Local Tax is levied and collected by the local government.
5. Personal and Property
Personal Tax is of fixed amount imposed on individuals, whether
citizens or not, residing within a specified territory, without
regard to their property or occupation.
Property Tax is imposed
proportion to its value.
on
property,
real
or
personal,
6. Progressive and Regressive
Tax Evasion and Tax Avoidance Distinguished

1996 Bar 3(a); 1989 Bar 4(b)
Question:
Distinguish tax evasion from tax avoidance.
Answer:
Tax Evasion is the use of fraudulent or forbidden schemes or
devices to lessen or defeat the taxpayers tax obligation.
Tax Avoidance is the legal method of reducing or altogether
avoiding the tax liability by finding and availing of valid
and legitimate shortfalls in the law.
1998 Bar 20
Question:
Is assessment necessary before a taxpayer may be prosecuted
for willfully attempting, in any manner, to evade or defeat
any tax imposed by the Internal Revenue Code?
Answer:
No, an assessment is not necessary before a criminal charge
can be filed.
Section 205 of the Tax Code clearly mandates that the civil
and
criminal
aspects
of
the
case
may
be
pursued
simultaneously. A criminal complaint is instituted not to
demand payment, but to penalize the taxpayer for violation
of the Tax Code.
The crime is complete when the violator
has knowingly and willfully filed a fraudulent return with
intent to evade and defeat a part of all of the tax.
CABARLES NOTES
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in
Doctrine of Imprescriptibility
1997 Bar 4; 2001 Bar 3(a)
Question:
Taxes were generally imprescriptible; statutes, however, may
provide otherwise. State the rules that have been adopted
on this score by
a) The National Internal Revenue Code;
b) The Tariff and Customs Code;
c) The Local Government Code.
Answer:
The rules that have been adopted are as follows:
a) National Internal Revenue Code
The statute of limitation for assessment of tax if a
return is filed is within three (3) years from the last
day prescribed by law for the filing of the return or if
filed after the last day, within three years from date of
actual filing. If no return is filed or the return filed
is false or fraudulent, the period to assess is within
ten years from discovery of the omission, fraud or
falsity.
The period to collect the tax is within three years from
date of assessment. In the case, however, of omission to
file or if the return filed is false or fraudulent, the
period to collect is within ten years from discovery
without need of an assessment.
Any internal revenue tax which has been assessed within
the period of limitation may be collected by distraint or
levy or by a proceeding in court within five (5)
following the assessment of the tax.
b) Tariff and Customs Code
It does not express any general statute of limitation; it
provided, however, that when articles have 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 (1) 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
import entry was merely tentative.
c) Local Government Code
Local taxes, fees, or charges shall be assessed within
five (5) years from the date they become 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.
They shall also be collected either by administrative or
judicial action within five (5) years from date of
assessment.
CABARLES NOTES
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PART 2
INCOME TAXATION
CABARLES NOTES
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General Principles of Income Taxation

Subject of Taxation
Resident Citizen
Basis of Taxation
Income derived from sources within and
without the Philippines.
Non-resident Citizen and

Overseas Contract Worker
Taxable only on income derived from

sources within the Philippines.
Alien Individual, whether

resident or not

Domestic Corporation
Income derived from sources within and

without the Philippines.
Foreign Corporation, whether

engaged or not in trade or
business in the Philippines

Income Defined
Income, in its broad sense, means all wealth which flows into the
taxpayer other than as a mere return on capital.
Doctrine of Constructive Receipt of Income
The doctrine is designed to prevent the taxpayer on the cash basis from
deferring or postponing the actual receipt of taxable income. Without
the rule, the taxpayer can conveniently select the year in which he will
report his income.
Concept of Gross Income

Taxable Income Defined
Taxable Income means the pertinent items of gross income specified in
the Code less the deductions and/or personal and additional exemptions,
if any, authorized for such types of income by the Code, or other
special laws.
Gross Income Defined (1995 Bar 1a)
Gross Income means all income derived from whatever source, including
(but not limited to) the following items:
(1) Compensation for services, in whatever form paid including fees,
salaries, wages, commissions, and similar items;
(2) Gross income derived from the conduct of trade or business or the
exercise of 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) Partners distributive share from the net income of a general
professional partnership.
1995 Bar 1b
Vicente Madrigal, et al vs. James Rafferty
38 Phil. 414
Question:
How does income differ from capital? Explain.
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Answer:
Income means any wealth, which flows into the taxpayer other
than a return of capital. Income is the service of wealth.
Capital is the investment that brings about income. Capital
is a fund or property existing at one distinct point of
time. Capital is wealth.
Requisites for Income to be Taxable
1. There must be a gain or profit.
2. The gain must be received or realized.
3. The gain must not be excluded by law or treaty from taxation.
1.Compensation Income
Rules on Inclusion of the Corresponding amount as income from
compensation paid for services rendered
Mode of Payment
Cash
Value of Income subject to tax

Full amount received.
Paid other than

money
Fair market value of the thing taken in

payment.
At a stipulated
price
Price shall be presumed to be the fair

market value.
In stocks
Fair value of the stock at the time he

received it.
The rental value of such quarters should be
reported as income.
Living quarters
furnished in
addition to salary
Bonuses representing
additional payments
for satisfactory
services rendered
Reported as income. They are, however, not

taxable as income if given in the nature of
outright gifts. Then it will be subject to
donors tax.
1996 Bar 3(b) (2.5%)

Question:
Assuming the shares of stocks were given to Mr. Y in
consideration of his services to the corporation, what
are the tax implications? Explain.
Answer:
Mr. Y will be liable for income tax on the services he
rendered using the fair market value of the shares
received for valuation.
Convenience of the Employer Rule
Under this rule, allowances furnished to the employee for, and as
a necessary incident to, the performance of his duties are not
taxable.
Thus, the value of meals and living quarters given a
driver who is available any hour of the day when needed by his
doctor-employer is not considered income of the said driver.
2001 Bar 6a (5%)
Question:
X was hired by Y to watch over Ys fishponds with a
salary of P10,000.00.
To enable him to perform his
duties well, he was also provided with a small hut,
which he could use as his residence, in the middle of
the fishponds. Is the fair market value of the use of
the small hut by Z a fringe benefit that is subject
to the 32% tax imposed by Section 33 of the National
Internal Revenue Code? Explain your answer.
Answer:
CABARLES NOTES
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No, the fair market value of the use of the small hum
is not subject to the 32% tax as a fringe benefit.
The use of said hut is not taxable under the Employer
Convenience Rule.
Xs use of the hut is for the
convenience of his employer and intrinsically for his
personal benefit.
1996 Bar 6(a) (5%)
Question:
X is employed as a driver of a corporate lawyer and
receives a monthly salary of P5,000.00 with free board
and lodging with an equivalent value of P1,500.00.
What will be the basis of Xs income tax? Why?
Answer:
Xs income tax will be based on the sum of his Salary
(P5,000.00) and the equivalent value of his free board
and lodging (P1,500.00).
He does not benefit from the Employer Convenience Rule
because his free board and lodging is not needed to
provide any convenience at all in the exercise of his
employers occupation as a Corporate Lawyer.
1996 Bar 6(b) (5%)
Question:
Will your answer in question be the
employer is an obstetrician? Why?
Answer:
No, my answer will be different.
be based solely on his salary.
same
if
Xs
Xs income tax will
The equivalent amount of his free board and lodging

will be tax exempt. He will benefit from the Employer
Convenience Rule because the occupation of employer,
an Obstetrician, makes its necessary for him to be
available even beyond the normal working hours.
Rules on Unused Vacation Leaves converted to Cash
BIR Ruling No. 016-96, Feb. 20, 1996
Vacation Leave Credits, not exceeding ten (10) days per year,
are not subject to income taxes.
However, any Monetized vacation leaves in excess of ten (10)
days shall be subject to income taxes through the withholding
tax mechanism.
2.Income derived from the conduct of trade or

business or the exercise of a profession
Gross Income means the total sales, less the cost of goods sold
plus any income from investments and from incidental or outside
operations or sources.
3.Gross income derived from dealings in property

It includes all income derived from the disposition of property,
whether real, personal, or mixed, for money (sale) or for other
property (exchange) or for a combination of both, which results in
gain (or loss) because of the difference between the taxpayers
investment in what he disposed of and the value in what he
received.
4.Gross income derived from interest

CABARLES NOTES
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Interest income is only such interest as arises from indebtedness,

that is, compensation for the loan or forbearance of money, goods,
or credits.
Unless exempted by law, interest received by a taxpayer, whether
or not usurious, is taxable.
5.Gross income derived from rents and royalties

Rents may be derived not only from real estate but also from the
use of personal property. Like rents, royalties are payments for
the use of property.
They include earnings from copyrights,
trademarks, patents, and natural resources under lease.
Question:
Suppose buildings are erected or improvements are
by a lessee in pursuance of an agreement with
lessor and such buildings or improvements are
subject to removal, how may the lessor report
income there from?
made
the
not
the
Answer:
Upon either of the following methods:
(1) He may report as income at the time when such
buildings or improvements are completed, the fair
market value of such buildings or improvements
subject to the lease; or
(2) He may spread over the life of the lease, the
estimated depreciated value of such buildings or
improvements at the termination of the lease and
report as income for each year of the lease an
aliquot part thereof.
6.Gross income derived from Dividends

Kind of
Dividend
Cash dividend
Taxability
Rate
Is taxable paid to
shareholders or members.
Property
dividend
Subject to Final
Withholding Tax. 6%,8%
and 10%, beginning
1998 upwards.
FMV of property received. Same as cash dividend.
Is taxable.
Stock dividend
Not taxable.
Scrip dividend
Taxable.
Liquidating
dividend
If not gain not taxable

If
there
is
gain
- Same as cash dividend.
taxable
Same as cash dividend.
CABARLES NOTES
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Examples of Income Derived from Whatever Source

1. Gains arising from expropriation of property which constitute
income from dealings in property;
2. Income derived from illegal sources, such as gambling, theft,
embezzlement, and smuggling;
3. Compensation for damages if it represents payment for loss of
expected profits (BIR Ruling, Sept. 8, 1954);
4. The amount of the debt, where the stockholder is indebted to a
corporation and the latter forgives such debt, because the
transaction has the effect of the payment of dividend;
5. Bad debts previously charged-off but afterwards recovered;
6. Contest awards and prizes for commercial and non-commercial
contests; and
7. Taxes paid and subsequently refunded.
Exclusions from Income

Exclusion as used in income taxation:
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.
Items expressly excluded from the computation of gross income and are
excluded from income taxation.
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
(9)
(10)
(11)
(12)
(13)
(14)
(15)
(16)
Proceeds of Life Insurance to heirs & beneficiaries

Return of Premiums to the Insured
Gifts, Bequests & Devices (Subject to donors tax)
Compensation for Injuries or Sickness
Income exempt from Treaty
Retirement Benefits, Pensions & Gratuities
Income from Investment by Foreign Government
Income derived by the Government or its political subdivisions
Income from Public Utilities
Income from essential Government Function
Prizes and Awards for achievement in
(a) Religious
(b) Charitable
(c) Scientific
(d) Educational
(e) Artistic
(f) Literary
(g) Civic activities
Prizes & Awards in Sports Competition
13th Month Pay & Other Benefits
GSIS, SSS, Medicare & Labor Union dues of Individual Taxpayers
Gains
from
Sale
of
Bonds,
Debentures
or
Certificates
Indebtedness maturing in more than five (5) years
Gains from Redemption of Investment in Stocks or Mutual Funds
of
1. Proceeds of Life Insurance to heirs & beneficiaries

The proceeds paid to beneficiaries upon the death of the insured,
whether in a single sum or otherwise.
If the amount are held by the insurer under an agreement to pay
interest thereon, the interest payment shall be included in gross
income.
2. Return of Premiums to the Insured

The amount received by the insured, as a return of premium or
premiums paid by him under life insurance, endowment, or annuity
contracts, either during the term or at the maturity of the term
mentioned in the contract or upon surrender of the contract;
CABARLES NOTES
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3. Gifts, bequests, and devises

The value
descent.
of
property
acquired
by
gift,
bequest,
devise,
or
Income from such property as well as gift, etc. of income from any
property, in cases of transfer of dividend interest, shall be
included in gross income.
4. Compensation for Injuries or Sickness

Amounts received, through accident or health insurance or under
Workmens Compensation Act, as compensation for personal injuries
or sickness, plus the amount of any damages received whether by
suit or agreement on account of such injuries or sickness;
1996 Bar 9(a) (5%)
Question:
X, an employee of ABC Corporation, died.
ABC
Corporation gave Xs widow an amount to Xs salary for
one year.
Is the amount considered taxable income to the widow?
Why?
Answer:
No, the one year salary given to the Widow on account
of the employees death is not taxable income to her.
Amounts received by the heir from the employer, as a
consequence of her husbands death, is not taxable.
5. Income exempt under Treaty

Income of any kind, to the extent required by any
obligation binding upon the government of the Philippines.
treaty
6. Retirement Benefits, Pensions & Gratuities

(a) Retirement benefits received under RA No. 7641 and those by
officials and employees of private firms, whether individual
or corporate, in accordance with a reasonable private benefit
plan maintained by the employer, subject to certain
conditions.
Bar Question
RSU retired from his employment in 1983 and was paid
P100,000 as retirement gratuity without deduction of
any tax.
The corporation subsequently became
insolvent. Can the BIR deduct from the P100,000 any
tax?
Answer:
No. the BIR cannot deduct any amount from the P100,000
as tax because under Sec. 32(b) par. (f) states that
retirement
benefits
received
by
officials
and
employees of private firms, whether individual or
corporate, in accordance with a reasonable private
benefit plan maintained by the employer are excluded
from income taxation provided that:
(1) The retiring official or employee has been in
service for the same employer for at least ten
(10) years and is not less than fifty (50) years
of age at the time of retirement;
CABARLES NOTES
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(2) The benefit granted by the official or employee

is availed only once.
The mere fact
retirement pay
taxable.
that the corporation who paid the

becomes insolvent does not make it
BAR Question
Mr. Kirus worked as chief account in a hospital for 45

years. When he retired at 65, he received retirement
pay equivalent to 2 months salary as provided in
hospitals BIR-approved retirement plan. The Board of
Directors of the hospital felt that they should
provide more in view of Mr. Kirus loyalty. Hence, he
was given a gratuity of P1 million over and above his
retirement benefit.
The BIR Commissioner taxed the P1 million as pay of
Mr. Kirus income.
a) He protested that it is a retirement benefit, was
he correct?
b) Was Mr. Kirus correct in holding the P1 million as
a gift, therefore, not taxable?
Answer:
a) No, he is not correct. The additional P1 million
was given as gratuity was not taken from the BIRapproved retirement benefit plan. The P1 million
given out of the votation made by the Board of
Directors of the hospital.
His retirement pay
had already been received by him. To be excluded
from gross income, the retirement pay received
must come from a retirement benefit plan by the
company, approved of the BIR.
Thus, the P1
million received is not excluded from gross
income, hence, taxable.
b)
The additional P1 million was given because the

Board of Directors voted for it in view of Mr.
Kirus long and loyal service to the company.
It
would seem than the P1 million falls within the
classification of a gift for his retirement pay
had
long
been
paid.
Loyalty
may
be
a
consideration but it is not a valuable one,
hence, the P1 million is a gift and is therefore
excluded from gross income but subject to donors
tax.
(b) Any amount received by an official or employee or by his

heirs from the employer as a consequence of separation of
such official or employee from the service of the employer
because of death, sickness or physical disability or for any
cause beyond the control of said official or employee;
(c) Social security benefits, retirement gratuities, pensions and
other similar benefits received by resident or non-resident
Filipino citizens or aliens who come to reside permanently in
the Philippines from foreign government agencies and other
institutions, private or public;
(d) Payments of benefits due to or to become due to any persons
residing in the Philippines under the laws of the United
States administered by the United Stated Administration;
(e) Benefits received from or enjoyed under the social security
system in accordance with RA No. 8282;
CABARLES NOTES
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(f) Benefits received from the GSIS under RA No. 8291 including
the retirement gratuity received by government officials and
employees.
1996 Bar 9(a) (5%)
Question:
A, an employee of the Court of Appeals, retired upon
reaching the compulsory age of 65 years.
Upon
compulsory retirement, A received the money value of
his accumulated leave credits in the amount of
P500,000.00.
Is the said amount subject to tax? Explain.
Answer:
No, all the amounts received, on account of an
employees separation from employment without his
desire nor consent to do so, are not subject to income
taxes.
Subject employee is forced to retire at his
compulsory age.
7. Income from Investment by Foreign Government

Income derived from investment in the Philippines in loans,
stocks, bonds, or other domestic securities, or from interest on
deposits in banks in the Philippines by:
1) Foreign governments;
2) Financing institutions owned, controlled, or enjoying
refinancing from foreign governments, and
3) International or regional financing institutions
established by foreign governments.
8.
Income derived by Government or its political

subdivisions
9. Income from Public Utilities
10. Income from essential Government Function
Income derived from any public utility or from the exercise of any
essential governmental function accruing to the government of the
Philippines or to any political subdivision thereof (e.g., income
received by a municipality from the operation of a market or an
electric power plant).
11. Prizes and Awards for Achievement in (a) Religious; (b)

charitable; (c) scientific; (d) educational; (e)
artistic; (f) literary; (g) civic activities.
Prizes and awards made primarily in recognition of religious,
charitable, scientific, educational, artistic, literary, or civic
achievement but only if:
(1) The recipient was selected without any action on his
part to enter the contest or proceeding; and
(2) The recipient is not required to render substantive
future services as a condition to receiving the
prizes or award;
12. Prizes and Awards in Sports Competition

Prizes and awards granted to athletes in local and international
sports competitions and tournaments.
CABARLES NOTES
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13. 13th month pay and other benefits

Gross benefits received by officials and employees of public and
private entities, provided, that the total exclusion shall not
exceed P30,000.
1997 Bar 9 (5%)
Question:
During the year, a domestic corporation derived the
following items of revenue: (a) gross receipts from a
trading business; (b) interest from money placements
in the banks; (c) dividends from it stock investments
in domestic corporations; (d) gains from stock
transactions through the Philippine Stock Exchange;
(e) proceeds under an insurance policy on the loss of
goods.
In preparing the corporate income tax return, what
should be the tax treatment on each of the above
items?
Answer:
1. Gross receipts from a trading business: Taxable.
2. Interest from money placements in the banks:
Excluded since interests are subject to a final
withholding tax at source.
3. Dividends from its stock investments in domestic
corporations: excluded since dividends are subject
a final withholding tax at source.
4. Gains
from
stock
transactions
through
the
Philippine Stock Exchange; Excluded since capital
gains are subject to a final withholding tax at
source.
5. Proceeds under an insurance policy on the loss of
goods:
Excluded because these proceeds are
exclusions under the law.
Special Treatment of Fringe Benefits

Fringe Benefit Defined
Fringe Benefit means any good, service, or other benefit furnished or
granted in cash or in kind by an employer (individual, professional
partnership, or corporation), whether taxable or not, or the government
and its instrumentalities to an individual employee (except rank-andfile employees) 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) Expense for foreign travel;
(8) Holiday and vacation expense;
(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.
CABARLES NOTES
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Fringe benefits not subject to income tax

(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 plan;
(3) Benefits given to the rank-and-file employees, whether granted
under a collective bargaining agreement or not;
(4) De minimis benefits which, in general, are limited to facilities
or privileges furnished or offered by the employer that are
relatively of small value and merely as a means of promoting the
health, goodwill, contentment, or efficiency of his employees
such as rice subsidy, laundry allowance, and medical cash
allowance;
benefits,
uniforms,
and
major
anniversary
celebrations for employees and their guests.
(5) Benefits required by the nature of or necessary to the trade,
business or profession, or for the convenience or advantage of
the employers.
Treatment of Fringe benefits
A final tax of 32%, effective January 1, 2000, is imposed on the
grossed-up monetary value of fringe benefit furnished or granted to the
employee by the employer.
Deductions from Gross Income

Deduction Defined
Deductions are items or amounts which the law allows to be deducted
under certain conditions from gross income in order to arrive at taxable
income.
Requisites for Deductions
(1) The taxpayer seeking a deduction must point to some specific
provisions of the statute authorizing the deduction; and
(2) He must be able to prove that he is entitled to the deduction
authorized or allowed.
(Atlas Consolidated Mining and Development Corp. vs. Comm., 102 SCRA
246, Jan. 27, 1981)
Basilan Estates, Inc. vs. Commissioner
21 SCRA 17, Sept. 5, 1967
Question:
May deductions be created by implication?
Answer:
Deductions have generally been deemed to be a matter
of legislative grace.
They are allowed only where
there is a clear provision in the statute for the
deduction claimed; and where particular deductions are
authorized by the statute, no other may be made.
The taxpayer has the burden of justifying
allowance of any deduction claimed by him.
the
Kinds of Deductions from Gross Income

(1) Deductions from compensation income
(2) Deductions from business and/ or professional income
(3) Deductions from corporate income
(4) Special deductions
1. Deductions from compensation income
They
(1)
(2)
(3)
refer to:
personal exemptions;
additional exemptions Sec. 35) and
premium payments on health and/ or hospitalization insurance
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which are allowed to be allowed to be deducted by an individual

taxpayer who receives income for personnel services rendered under
an employer-employee relationship.
2. Deductions from business and/ or professional income
They refer to:
(1) itemized deductions enumerated in Section 34 (A to M) of the
Tax Code
(2) including those deductible from compensation income, which
self-employed individuals and or professional engaged in the
practice of a profession may deduct.
Note:
In lieu of itemized deductions (above), an individual
subject to income tax who is engaged in trade or business or in
the exercise of a profession, other than a non-resident alien
individual, may elect the 10% optional standard deduction (Sec.
34(L)).
3. Deductions from corporate income
They refer to the itemized deductions enumerated in Sec. 34 (A to
J) of the Tax Code which corporations (including partnerships
other than general professional partnerships) engaged in trade or
business are authorized to claim and they are:
(1) Ordinary and necessary expenses;
(2) Interests paid on indebtedness;
(3) Taxes;
(4) Losses;
(5) Bad Debts;
(6) Depreciation;
(7) Depletion;
(8) Charitable and other contributions;
(9) Research and development;
(10) Payment to employees pension trust; and
(11) Special deductions
Special deductions they refer to the deductions allowed in
addition to the itemized deductions allowable to corporations
above which may be availed of by insurance companies and
proprietary educational institutions and hospitals which are nonprofit.
1.
Ordinary and Necessary Expenses
Requisites in order that an expense may be deductible

1. The expense must be ordinary and necessary
2. It must be paid or incurred during the taxable year
3. It must be paid or incurred in carrying on any trade or business or
profession;
4. It must be reasonable in amount;
5. It must be substantiated by sufficient evidence such as official
receipts and other official records; and
6. It must not be against law, morals, public policy or public order.
Meaning of ordinary
Ordinary means when it is commonly incurred in the trade or business of
the taxpayer as distinguished from capital expenditures.
Meaning of necessary
Necessary if it is appropriate and helpful to the taxpayers business
or if it is intended to realize profit or to minimize a loss.
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1993 Bar 1
Question:
X is the manager of Mang Douglas Hamburger Inc. X had
dinner with Y, owner of a chain of restaurants to
convince the latter to carry Mang Douglas hamburgers.
After Y agreed both went their separate ways.
X
celebrated by going to a singles bar. He picked up a
partner and consumed a bottle of beer. He drove home
at 3:00 a.m..
On his way home, he sideswiped a
pedestrian, who died as a result of the accident. X
amicably settled the case by paying the heir of the
pedestrian.
The money, however, came from Mang
Douglas Hamburger Inc.
Discuss whether the reward, given to the heir, can be
claimed by Mang Douglas Hamburger Inc. as an expense
deductible in its income tax return.
Answer:
The reward given to the heir cannot be an expense
deductible for Mang Douglas Hamburger Inc.
The
damage, which X caused upon the pedestrian, is not an
ordinary, necessary and normal expense in the conduct
of the hamburger business. X was no longer performing
his regular task when he inflicted the damage.
Requisites for deductibility of compensation payments
1. The payments are reasonable; and
2. They are, in fact, payments for personal services actually rendered
2.
Ordinary and Necessary Expenses
Requisites for deductibility of interest

1. There must be an indebtedness incurred by the taxpayer in connection
with the taxpayers trade, business, or profession;
2. The interest must have been paid or incurred within the taxable year;
and
3. The interest must have been stipulated in writing.
Comm. Vs. Prieto
L-13912, Sept. 30, 1960
Question:
Is interest for tax delinquency deductible?
Answer:
Yes, an interest expense (but not as tax).
Although
taxes
are
not
considered
debts,
they
constitute
indebtedness (in favor of the government) for purposes of
deduction from gross income of the interest paid.
The
tax being considered an indebtedness, it is immaterial
whether the same is deductible or not.
3.
Taxes
Taxes deductible from gross income

As a general rule, all taxes, national or local, pad or incurred within
the taxable year in connection with the taxpayers trade, business or
profession are deductible from gross income.
Taxes not deductible from gross income
1. Philippine income tax;
2. Income taxes imposed by the authority of any foreign country, but
deduction is allowed (only) in the case of a taxpayer who is entitled
to tax credit for taxes of foreign countries but does not avail of
the same;
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3. Estate and donors taxes;

4. Special assessments or levies (which are not really taxes) assessed
against local benefits of a kind tending to increase the value of the
property assessed; and
5. Taxes which are not connected with the trade, business or profession
of the taxpayer.
Tax Credit Defined
Tax Credit refers to the taxpayer right to deduct from the income tax
due the amount of tax he/it has paid to a foreign country subject to
limitations.
Bar
Question:
Given the distinctions between tax deductions and tax
credit.
Answer:
(1) Tax deductions are deducted from gross income in
computing the net income, while tax credit are
deducted from Philippine income tax itself; and
(2) Tax deductions, all taxes, as a general rule, are
allowed deductions with the exceptions of the
five kinds of taxes expressly or impliedly
excluded, while the latter, only foreign income
taxes
may
be
claimed
as
credits
against
Philippine income tax.
Who are allowed to claim a tax credit
1. Residents citizens
2. Domestic corporations, including business partnerships;
3. Members of general professional partnerships; and
4. Beneficiaries of estates and trusts.
Who are not entitled to claim tax credit
1. Non-resident citizens;
2. Alien individuals, whether resident or non-resident; and
3. Foreign corporations, whether resident or non-resident.
4.
Losses
Requisites for deductibility of a loss

1. The loss must be incurred in trade, business, or profession of the
taxpayer;
2. It must be actually sustained (and charged off) within the taxable
year;
3. It must be evidenced by a closed and completed transaction;
4. It must not be compensated for by insurance or other forms of
indemnity; and
5. The taxpayer has filed a sworn declaration of loss; within 45 days
after the date of discovery of the casualty or robbery, theft, or
embezzlement.
What losses may a taxpayer deduct from gross income
The taxpayer may deduct all losses actually sustained and charged off
within the taxable year and not compensated for by insurance or other
forms of indemnity, as follows:
1. Those incurred in trade, business, or profession in the
Philippines; and
2. Casualty
losses of property connected with trade, business, or
profession in the Philippines.
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Losses which are not allowed by law to be deducted from gross income
1. Loss on voluntary removal of building on land purchased with a
view to erecting another building.
2. Wagering losses not covered by wagering gains;
3. Capital losses not covered by capital gains;
4. Losses from exchanges of property in corporate readjustments;
5. Losses (generally) from wash sales of stock and securities;
6. Losses from illegal transactions;
7. Losses from sales or exchanges of property between related
taxpayers; and
8. Losses not incurred in trade, business, or profession.
Net Operating Loss Carried Over (NOLCO)
The net operating loss of a taxable year not deducted from Gross Income,
which can be carried over as a deduction from Gross Income for next
three (3) consecutive years following the loss.
Limitations
(1) Net loss incurred in a year during which the taxpayer was tax
exempt cannot be claimed as a tax deduction.
(2) Net operating loss carried over shall be allowed only if there is
no substantial change in the ownership of the business.
5.
Bad Debts
Bad debts defined

Bad debts are debts due to the taxpayer which are actually ascertained
to be worthless and charged off within the taxable year.
Requisites for the deductibility of bad debts
1. There must be a valid and subsisting debt;
2. The debt must be actually ascertained to be worthless and
uncollectible during the taxable year;
3. The debt must be charged off during the taxable year; and
4. The debt must be connected with the trade, business, or profession
of the taxpayer, and not sustained in a transaction entered into
between related taxpayers under Section 36(b) of the Tax Code.
6.
Depreciation
(1998 Bar 6(a))
Depreciation Defined
Depreciation is the gradual diminution in the useful value of tangible
property used in trade, business, or profession resulting from
exhaustion, wear and tear, and obsolescence.
The term is also applied to amortization of the value of intangible
assets, the use of which in trade or business is definitely limited in
duration.
Requisites that must concur for the deduction of depreciation
1. The allowance for depreciation must be reasonable;
2. It must be for property used in the trade, business,
profession;
3. It must be charged off during the taxable year; and
4. A statement on the allowance must be attached to the return.
7.
Depletion
What is depletion
Depletion is the exhaustion of natural resources like mines and
oil and gas wells as a result of production or severance from such
mines or wells.
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or
8.
Charitable and other Contributions
Classification of Charitable Contributions

1. Ordinary those which are subject to limitation as to the
amount deductible from gross income; and
2. Special those which are deductible in full from gross income.
Requisites for charitable contribution
1. The contribution must actually be paid or made to the
Philippine government or any political subdivision thereof
or to any of the domestic corporations or associations
specified by the Tax Code;
2. It must be made within the taxable year;
3. It must not exceed:
Individuals 10%
Corporation 5%
Of the taxpayers taxable income (except where the
donation is deductible in full) to be determined
without the benefit of the contribution
4. It must be evidenced by adequate records or receipts.
Types of contributions or gifts that are deductible
1. To or for the use of the government of the Philippines, or any of
its agencies or any political subdivisions thereof exclusively for
public purposes (full deduction)
2. To accredited domestic corporations or associations organized and
operated exclusively for:
(a) Religious;
(b) Charitable;
(c) Scientific;
(d) Youth and sports development;
(e) Cultural; or
(f) Educational purposes; or for the
(g) Rehabilitation of veterans
3. To social welfare institutions or to non-government organizations
in accordance with the rules and regulations promulgated by the
Sec. Of Finance upon recommendation of the CIR, provided no part
of the net income of which inures to the benefit of any private
stockholder or individual.
9.
Research and development
Nature of Research and development

A taxpayer may treat research and development expenditures which are
paid or incurred by him during the taxable year in connection with his
trade, business or profession as ordinary and necessary expenses which
are not chargeable to capital account.
The expenditures so treated shall be allowed as deduction during the
taxable year when paid or incurred.
10.
Pension Trusts
Requisites for pension trusts

1. The employer must have established a pension or retirement plan to
provide for the payment of reasonable pension 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 no longer be subject to his control or
disposition; and
5. the payment has not yet been allowed as a deduction.
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Requisites for a reasonable retirement benefit plan

1. It must be a definite written program setting forth al provisions
essential for qualification;
2. It must be a permanent and continuing program unless sooner
terminated by virtue of a valid business reason;
3. It must cover at least 70% of all officials and employees.
4. it must provide for the non-diversion of the corpus or income of
the trust fund to any purpose other than for the exclusive benefit
of officials and employees;
5. it must not provide for discrimination in contributions or
benefits in favor of officials and employees who are officers,
shareholders, supervisors or highly compensated officers;
6. It must provide for the contribution to the trust fund by the
employer of officials and employees or both the purpose of
distributing to the officials and employees or beneficiaries, the
corpus and income of the fund accumulated by the trust in
accordance with the plan; and
7. It must provide for non-forfeitable rights, that is, upon the
termination of the plan or upon the complete discontinuance of
contributions under the plan, the rights of each official or
employer to benefits accrued to the date of such termination, to
the extent then funded, or the rights of each employer to the
amounts credited to his account at such time are non-forfeitable.
Tax on Individuals
Personal Exemptions
Personal Exemptions defined
Personal Exemptions are arbitrary amounts allowed, in the nature of a
deductions from taxable income, for personal, living or family expenses
of an individual taxpayer.
They are considered to be the equivalent of the minimum subsistence of
the taxpayer.
Who are allowed personal exemptions under the Tax Code
1. Citizens of the Philippines;
2. Resident aliens;
3. Non-resident aliens engage in trade or business in the Philippines
under certain conditions;
4. Estate and trusts, which are treated for purposes of personal
exemptions as a single individual.
Personal exemptions allowed to citizens of the Philippines and resident
aliens
1. P50,000 single, married judicially decreed as legally separated
with no qualified dependents; and
2. P50,000 married individuals.
Additional exemptions is allowed of P25,000 for each dependent (not
parents, brothers, or sisters), not exceeding four (4), for head of the
family or married individuals.
Filing of Returns and Payment of Tax

Income Return defined
Income Tax Return is a sworn instrument in which the taxpayer discloses
the nature and extent of his tax liability by formally making a report
of his income and allowable deductions for the taxable year in the
prescribed form.
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Classes of income tax returns required

1. Individual income tax returns;
2. Corporation income tax returns;
3. Income tax returns of general professional partnerships;
4. Fiduciary income tax returns; and
5. Miscellaneous returns.
Individuals required to file a return (1997 Bar 7 (5%))
1. Resident Filipino Citizen
2. Non-resident Filipino Citizen on his income from sources within
the Philippines
3. Resident aliens on income from sources within the Philippines;
4. Non-resident alien engaged in trade or business or in the exercise
of his profession in the Philippines, on income from sources
within the Philippines.
1997 Bar 7 (5%)
Question:
A bachelor was employed by Corporation A on the first
working day of January 1996 on a part-time basis with
a salary of P3,500.00 a month. He then received the
13th month pay.
In September 1996, he accepted
another part-time job from Corporation B from which he
received a total compensation of P14,500.00 for the
year 1996. The correct total taxes were withheld from
both earnings.
With the withholding taxes already paid, would he
still be required to file an income tax return for his
1996 income?
Answer:
Yes, Under Sec. 51 (A2b) of RA 8424 he is required to
file an income tax return even when his total annual
compensation income does not exceed P60,000.00.
An
individual deriving compensation concurrently from two
or more employers shall file an income tax return.
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TRANSFER TAXES
Estate Tax
Transfer Tax Defined
Transfer Tax 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.
Gross Estate of the Decedent
Resident or Filipino Decedent
The gross estate shall include, to the extent of his interest, the value
at the time of his death of all:
(a) Real or immovable property wherever situated;
(b) Tangible personal property wherever situated; and
(c) Intangible personal property wherever situated.
Non-resident alien decedent
It shall include, to the extent of his interest, the value at the time
of his death of all:
(a) Real property situated in the Philippines;
(b) Tangible personal property situated in the Philippines; and
(c) Intangible personal property with a situs in the Philippines unless
exempted on the basis of reciprocity.
When proceeds of a life insurance policy taken out by the decedent upon
his own life includible in the gross estate
(1) If the beneficiary is the estate of deceased, his executor or
administrator;
(2) If the beneficiary is other than the decedent, where the insured
reserved to himself the power to change or revoke the name of the
beneficiary during his lifetime.
Effect of transfers of property made by the decedent during his
lifetime, where such transfer partake of the nature of testamentary
dispositions
Such transfer (which are inter vivos in form but mortis cause in
substance) are treated by law as farce and are, therefore, disregarded.
The consequence is that they are includible in the taxable gross estate.
Inter vivos transfer which are treated as substitutes for testamentary
dispositions
(1) Transfer in contemplation of death;
(2) Transfer with retention or reservation of certain rights;
(3) Revocable transfers;
(4) Transfer of property arising under a general power of appointment;
and
(5) Transfer for insufficient consideration.
Meaning of transfer in contemplation of death
The words mean that it is the though of death, as a controlling motive,
which induces the disposition of the property for the purpose of
avoiding the tax.
2001 Bar 15
Question:
A, aged 90 years and suffering from incurable cancer,
on August 1, 2001 wrote a will and, on the same day,
made several inter-vivos gifts to his children. Ten
days later, he died. In your opinion, are the intervivos gifts considered transfers in contemplation of
death for purposes of determining properties to be
included in his gross estate. Explain your answer.
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Answer:
Yes, such donation inter-vivos is within the concept
of transfer in contemplation of death. Such transfer
is defined by the law as a gift in contemplation of
death, as a controlling motive, which induces the
disposition of the property for the purpose of
avoiding the tax.
Exclusions from Estate
1. Separate property of surviving spouse;
2. Share of surviving spouse in conjugal property.
Net estate subject to tax
The tax code imposed an estate tax on net estates with value exceeding
P200,000.
By implication, net estates which are not in excess of
P200,000 are exempt from the estate tax.
Properties or transfers which are exempt from estate tax under special
laws.
1. Benefits received by members of the GSIS and the SSS by reason of
death;
2. Amounts
received
from
the
Philippines
and
United
States
governments for damages suffered during the last war.
3. Benefits received by beneficiaries residing in the Philippines
under laws administered by the U.S. Veterans Administration; and
4. Bequests to social welfare, cultural, and charitable (not
including educational and religious) institutions no part of the
net income of which inures to the benefit, of any individual,
provided that not more than 30% of said bequests shall be used by
the donee for administration purposes.
Deductions from Gross estate
1. Ordinary deductions
(a) Funeral expenses
(b) Judicial expenses of proceedings
(c) Claims against the estate
(d) Claims against insolvent persons
(e) Unpaid mortgages
(f) Unpaid taxes
(g) Casualty losses
2. Vanishing deductions
3. Transfer for exclusively public use
4. The value of the decendents family home not exceeding P1 million
pesos
5. Standard deduction equivalent to P1 million;
6. Medical expenses under certain conditions;
7. Retirement benefits received by the heirs under RA 4917
8. Share of surviving spouse in the conjugal or community property.
Requisites for deductibility of funeral expenses
1. Funeral expenses must be actually paid and incurred by the estate;
2. The amount thereof is limited to 5% of the gross estate, whichever
is lower, but in no case to exceed P200,000.
Expenses incurred after the interment, e.g. prayers, masses, etc., or
those borne by relatives and/or friends are not deductible.
2001 Bar 16
Question:
On the first anniversary of the death of Y, his heirs
hosted a sumptuous dinner for his doctors, nurses and
others who attended to Y during his last illness. The
cost of the dinner amounted to P50,000.00. Compared to
his gross estate, the P50,000 did not exceed five
percent of the estate. Is the said cost of the dinner
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to
commemorate
his
one-year
death
anniversary
deductible from his gross estate? Explain your answer.
Answer:
No, such is not deductible expense.
Expenses incurred after the interment, e.g. prayers,
masses, etc., or those borne by relatives and/or
friends are not deductible.
Judicial expenses
These expenses include administration expenses or those actually and
necessarily incurred in the administration of the estate, that is, in
the collection of assets, payments of debts, and distribution among
persons entitled to the estate.
Requisites for claims against decedents estate to be deductible
1. They were contributed in good faith and for an adequate and full
consideration in money or moneys worth;
2. They must be existing against the estate;
3. They must be legally enforceable obligations of the decedent and
ought to be enforced by the claimants; and
4. They must be reasonably certain in amount.
Requisites that must concur in order that the claims of the deceased
against insolvent persons may be deductible from the decedents gross
estate
1. The amount of said claims has been initially included as part of
his gross estate; and
2. The incapacity of the debtors to pay their obligations is proven,
not merely alleged.
Requisites for unpaid mortgage indebtedness be deductible from gross
estate
1. The fair value of the property mortgaged without deducting the
mortgage indebtedness has been initially included as part of his
gross estate; and
2. The mortgage indebtedness was contracted in good faith and for an
adequate and full consideration in money or moneys worth.
Unpaid taxes to be deductible
Taxes owed by the decedent and unpaid, being debts in favor of the
government, are also deductible as a claim against the estate but income
taxes upon income received after death of the decedent, or property
taxes not accrued before his death, or any estate tax are not, because
they are chargeable to the income of the estate.
Casualty losses
Casualty losses include all losses incurred during the settlement of the
estate arising from fires, storms, shipwreck or other casualties, or
from robbery, theft, or embezzlement.
Requisites of casualty losses
1. There must be a loss arising from any causes given above;
2. Such loss is not compensated for by insurance or otherwise;
3. Such loss has not been claimed as a deduction for income tax
purposes; and
4. Such loss was incurred not later than the last day of the payment
of the estate tax.
Transfer for pubic use
The Tax Code allows the deduction from the gross estate the amount of
all bequests, legacies, or transfers, to or for the use of the
government or any political subdivision thereof for exclusively public
purposes.
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Rule with respect to the deduction from the gross estate of the value of
the decedents family home
An amount equivalent to the current or fair market value or zonal value
of the decedents family home, whichever is higher.
If the said current or fair value or zonal value exceeds P1 million, the
excess shall be subject to estate tax.
As a sine quo non condition for the exemption or deduction, said family
home must have been the decedents family home as certified by the
Barangay captain of the locality.
Vanishing deduction (property previously taxed) [PPT]
The deduction, which is commonly referred to as vanishing deduction, is
an amount allowed to reduce the taxable estate of decedent where
property
(1) received by him from a prior decedent by gift, bequest, devise or
inheritance, or
(2) transferred to him by gift, has been the object of previous
transfer taxation.
The rate by gift, has been the object of previous transfer taxation.
The rate of deduction gradually diminishes and entirely vanishes
depending upon the time interval between the two successive transfers.
When and with whom must the return be filed for purposes of estate tax
Time
Within six (6) months from the decedents death.
A certified copy of the schedule of partition and the order of the court
approving the same shall be furnished the Commissioner within 30 days
after the promulgation of the order.
Place
Except in cases where the Commissioner of Internal Revenue otherwise
permits, with an authorized agent bank or the revenue district officer,
revenue collection officer or duly authorized treasurer of the city or
municipality where the decedent 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.
When and where is the estate tax due and payable
General rule
It shall be due and payable at the time the return is filed by the
executor, administrator or the heirs.
It shall be paid at the place where the return is filed.
Exception
The Commissioner of Internal Revenue may grant extension when he finds
that the payment on the due date of the estate tax or of any part
thereof would impose undue hardship upon the estate or any of the heirs.
The extension cannot exceed five (5) years in case the estate is settled
through the courts, or two (2) years in case it is settled extrajudicially.
The running of the statute of limitations for assessment as provided in
Section 203 is suspended for the period of any such extension.
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Conditions for the grant of the CIR of extension to pay the estate
taxes
1. The taxpayer is not guilty of negligence, intentional disregard
of rules and regulations, or fraud; otherwise, no extension may
be granted and
2. The executor, administrator, or beneficiary, may be required to
furnish a performance bond in an amount not exceeding double the
amount of the tax due conditioned upon the payment of said tax in
accordance with the terms of the extension.
Donors Tax
Gift tax defined
Gift tax is the tax imposed on the transfer without consideration of
property between two or more persons who are living at the time of the
transfer is made; or the tax imposed on the transfer of property by gift
inter vivos without relation to the death of the donor.
Property included in gift
1. Real and personal property, whether tangible or intangible, or
mixed, wherever situated, where the donor is a resident or
citizen of the Philippines at the time of the donation; and
2. Real and personal property situated in the Philippines where the
donor is a non-resident alien at the time of the donation.
Property excluded in gift
Real and personal property situated outside the Philippines where the
donor is a non-resident alien at the time of donation;
Gifts which are exempt from donors tax
1. Gifts made by a resident:
(a) Dowries or gifts made on account of marriage and before its
celebration or within one (1) year thereafter of parents to
each of their legitimate, recognized or adopted children to
the extent of the first P10,000.
(b) 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
(c) Gifts in favor of an educational and/ or charitable or
religious
corporation,
institution,
accredited
nongovernment organization subject to the condition that not
more than 30% of said gifts shall be used by the donee for
administration purposes.
2. Gifts made by a non-resident alien
In the case of non-resident alien, only gifts mentioned in letters
(b) and (c) are exempt from the donors tax.
3. Specific exemption of P100,000.
The Tax Code imposes a donors
tax on net gifts exceeding P100,000. The consequence is that net
gifts of amount of P100,000 or less are exempt from the tax.
2000 Bar 12 (b)
Question:
What conditions must occur in order that all grants,
donations and contributions to non-stock, non profit
private educational institutions may be exempt from
donors tax under Section 101 (a) of the Tax Code.
Answer:
Under the NIRC the following conditions must be
present in order that donations and contributions to
non-stock, non profit private education institutions
may be exempt from donors tax:
1.
The donor is a resident Filipino Citizen;
2.
The donee is a non-stock, non profit private
educational institution;
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3.
Not more than 30% of said gifts shall be used by

the donee for administration purposes.
Upon which is the donors tax imposed and computed

It is imposed and computed upon the basis of the total net gifts made
during the calendar year.
2001 Bar 17
Question:
Your bachelor client, a Filipino residing in Quezon
City, wants to give his sister a gift of P200,000.00.
He seeks your advice, for purposes of reducing if not
eliminating the donors tax on the gift, on whether it
is better for him to give all of the P200,000 on
Christmas 2001 or to give P100,000.00 on Christmas
2001 and the other P100,000.00 on January 1, 2002.
Please explain your advice. (5%)
Answer:
I will advice him to giver her sister P100,000.00 on
Christmas 2001 and the other P100,000.00 on January 1,
2002 on the following reasons:
4.
Donors is imposed and computed on the total net
gifts made during the calendar year.
5.
A calendar year means a period which starts on
January 1 and ends on December 31.
6.
Nets gifts made during the calendar of not over
P100,000.00 is exempt from donors tax.
What is a stranger for purposes of donors tax
A stranger is a person who is not:
1. a brother, sister (whether by whole or half blood), spouse,
ancestor, and lineal descendant; or
2. a relative by consanguinity in the collateral line within the
forth degree of relationship.
2000 Bar 12 (a)
Question:
When the donee or beneficiary is a stranger, the tax
payable by the donor shall be 30% of the net gifts.
For purposes of this tax, who is a stranger.
Answer:
A stranger is a person who is not:
1. a brother, sister (whether by whole or half blood), spouse,
ancestor, and lineal descendant; or
2. a relative by consanguinity in the collateral line within
the forth degree of relationship.
Rule of political contributions
Any contribution in cash or in kind to any candidate, political party or
coalition of parties for campaign purposes, shall be governed by the
Election Code.
Who is required to file the donors return
Any individual who makes any transfer by gift, except that which under
the Tax Code are exempt from tax, shall, for the purpose of the donors
tax, made a return under oath in duplicate.
Time and place of the filing of the donors return and payment of tax
The return of the donor shall filed within 30 days after the gift is
made and the tax thereon shall be paid at the time of filing.
Except in cases where the Commissioner otherwise permits, the return
shall be filed with and the tax paid to an authorized agent bank, or the
RDO, revenue collection officer, or duly authorized treasurer of the
city or municipality where the donor is domiciled at the time of
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transfer or if there be no legal residence in the Philippines, with the

Office of the CIR.
In the case of gifts made by a non-resident, the return may be filed
with the Philippine Embassy or Consulate in the country where he is
domiciled at the time of transfer or directly with the Office of the
Commissioner.
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PART 3
TAX REMEDIES
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I. REMEDIES OF THE GOVERNMENT

ASSESSMENT AND COLLLECTION
General Rule:
Assessment precedes collection.
Exceptions:
When the unpaid tax is a tax due per return as in the case of a selfassessed income tax under the pay-as-you-file system in which case
collection may be instituted without need of assessment pursuant to Sec.
56 of the NIRC.
Payment of Tax
In general: The total amount of tax imposed shall be paid by the person
subject thereto at the time the return is filed.
Installment Payment:
When the tax due is in excess of Two thousand
Pesos (P2,000.00), the taxpayer other than a corporation may
elect to pay the tax in two (2) equal installments in which
case, the first installment shall be paid at the time the
return is filed and second installment, on or before July 15
following the close of the calendar year.
CIR vs. PASCOR
309 SCRA 402
An assessment contains not only a computation of tax
liabilities but also demand for payment within a
prescribed period. It also signals the time when the
penalties and interests begin to accrue against the
taxpayer.
To enable the taxpayer to determine his
remedies thereon, due process requires that it must be
served on and received by taxpayer.
REMEDIES FOR COLLECTION OF DELINQUENT TAXES
1. Distraint of personal property and levy upon real property;
2. Civil action;
3. Criminal action;
4. Compromise;
5. Tax liend;
6. Forfeiture;
7. Civil penalties.
1. Distraint and Levy

Distraint and Levy Defined
Distraint is a remedy whereby the collection of the tax is enforced on
the goods, chattels, or effects of the taxpayer including other personal
property of whatever character as well as stocks and other securities,
debts, credits, bank accounts, and interest in and rights to personal
property.
Levy refers to the seizure of real properties and interest in or rights
to such properties for the satisfaction of taxes due from the delinquent
taxpayer.
Note: Levy can be made before, simultaneously, or after the distraing
of personal property.
Both remedies are summary in nature and either may be pursued in the
discretion of the authorities charged with the collection of tax
independently, or simultaneousl with civil and criminal action once the
assessment becomes final and demandable.
Kinds of distraint
1. Constructive
2. Actual
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Constructive distraint shall be effected by requiring the taxpayer or

any person having possession or control of such property to sign a
receipt covering the property distrained and obligate himself to
preserve the same intact and unaltered and not to dispose of the same in
any manner whatever without the express authority of the commissioner.
Actual distraint consist of the seizure of the goods, chattels, or
effects, and the personal property, including stocks and other
securities, debts, credits, bank accounts, and interests in and rights
to personal property of such person in sufficient quantity to satisfy
the tax, or charge, together with any increment thereto incident to
delinquency, and the expenses of the distraint and the cost of the
subsequent sale.
Who shall exercise the distraint
Authorized personnel
Commissioner
or duly authorized representative
Scope
Amount involved is in excess of one
million pesos (P1,000,000.00)
Revenue District Officer
Amount involved is one million

pesos (P1,000,000.00) or less.
When constructive distraint may be availed

When the taxpayer is
1. Retiring from any business subject to the tax;
2. intending to leave the Philippines or to remove his property
therefrom or to hide or conceal his property;
3. intending to perform any act tending to obstruct the proceedings
for collecting the tax due or which may be due from him.
When actual distraint may be availed
Failure of the person owing any delinquent tax or delinquent revenue to
pay the same at the time required.
How Levy is availed
Levy is effected by writing upon said certificate (TCT) a description of
the property upon which levy is made. At the same time, written notice
of the levy shall be mailed to or served upon the Register of Deeds of
the province or the city where the property is located and upon 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.
2. Civil Action
A civil action is resorted to when a tax liability becomes collectible,
that is,
(1) the assessment becomes final and unappealable, or
(2) the decision of the Commissioner has become final, executory, and
demandable.
When assessment becomes final and unappealable
A tax is assessed and the taxpayer fails to file and administrative
protest by filing a request for reconsideration or reinvestigation
within thirty (30) days from receipt of assessment.
When is decision of the Commissioner becomes final, executor and
demandable
A protest against the assessment is filed by the taxpayer but the
Commissioners decision denying in whole or in part the said protest,
was not appealed to the Court of Tax Appeals (CTA) within thirty (30)
days from receipt of such decision.
Sec. 220, NIRC
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A civil action for tax collection filed with the regular courts cannot
be instituted without the approval of the Commissioner.
Note: The approval by the Commissioner of Internal Revenue of a civil
action for the collection of taxes is not jurisdictional, but one
relating to capacity to sue or affecting the cause of action only.
RA 8424 Sec. 7 of the present code authorizes the BIR Commissioner to
delegate the powers vested in him under the pertinent provisions of the
Code to any subordinate official with the rank equivalent to a division
chief or higher, subject to several exceptions.
1999 Bar 4
Yabes vs. Flojo, 15 SCRA 278
Question:
A Co., a Philippine corporation, received an income
tax deficiency assessment from the BIR on May 5, 1995.
On May 31, 1995, A Co. filed its protest with the BIR.
On July 30, 1995, A Co. submitted to the BIR all
relevant supporting documents.
The CIR did not
formally rule on the protest but on January 25, 1996,
A Co. was served a summons and a copy of the complaint
for collection of the tax deficiency filed by the BIR
with the RTC. On February 20, 1996, A Co. brought a
Petition for Review before the CTA. The BIR contended
that the Petition is premature since there was no
formal denial of the protest of A Co. and should
therefore be dismissed.
1.
2.
Has the CTA jurisdiction over the case?

Has the RTC jurisdiction over the collection case
filed by the BIR? Explain.
Answer:
1. Yes, the CTA has jurisdiction over the case. The
Supreme Ruled in Yabes vs. Flojo, 15 SCRA 278,
that the filing of a civil action in court to
collect a tax which was the subject of a pending
protest in the BIR was a justifiable basis for the
taxpayer to appeal to the Court of Tax Appeals and
to move for the dismissal in the trial court of
the Governments action to collection the tax
under dispute.
2. No,
the
RTC
has
no
jurisdiction
over
the
collection case not yet demandable. The action of
the BIR is still premature and the RTC should take
cognizance of the action when the amount due
becomes demandable.
3. Criminal Action
A criminal action cannot be instituted without the approval of the
Commissioner of Internal Revenue.
Sec. 221, NIRC
The remedy of criminal action is resorted to not only for collection of
taxes but also for enforcement of statutory penalties of all sorts.
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4. Compromise
A compromise is an agreement between two or more persons who, to avoid a
lawsuit, amicably settle their differences on such terms as they can
agree on.
Compromise penalty is a certain amount of money which the taxpayer pays
to compromise a tax violation.
Compromise penalties are paid in lieu of criminal prosecution, and
cannot be imposed in the absence of a showing that the taxpayer
consented thereto.
If an offer of compromise is rejected by the taxpayer, the compromise
penalty cannot be enforced thru an action in court or by distraint and
levy.
The CIR should file a criminal action if he believes that the
taxpayer is criminally liable for violation of the tax law as the only
way to enforce penalty.
Cases which may be compromised
1. Delinquent accounts;
2. Cases under administrative protest after issuance of the final
assessment notice to the taxpayer which are still pending in the
Regional Officers, Revenue District Offices, Legal Service, Large
Taxpayer Service (LTS), Collection Service, Enforcement Service
and other offices in the National Office;
3. Civil tax cases being disputed before the courts (MTC to SC);
4. Collection cases filed in courts;
5. Criminal violations other than those already filed in court or
those involving criminal tax fraud; and
6. Cases covered by pre-assessment notices but taxpayer is not
agreeable to the findings of the audit office as confirmed by the
review office.
Sec. 204, NIRC
The Commissioner may compromise any internal revenue tax when:
1. A reasonable doubt as to the validity of the claim against the
taxpayer exists; or
2. The financial position of the taxpayer demonstrates a clear
inability to pay the assessed tax.
2000 Bar 16 (a)
Question:
Under what conditions may the Commissioner of Internal
Revenue be authorized to Compromise the payment of any
internal revenue tax?
Answer:
The Commissioner may compromise any internal revenue
tax when:
1. A reasonable doubt as to the validity of the claim
against the taxpayer exists; or
2. The financial position of the taxpayer demonstrates
a clear inability to pay the assessed tax.
Instances when the CIR may cancel a Tax Liability
1. The tax appears unjustly or excessively assessed; or
2. The administration and collection costs do not
collection.
justify
Cases
1.
2.
3.
4.
the
which cannot be compromised

Withholding tax cases
Criminal tax fraud cases
Criminal violation already filed in court
Delinquent accounts with duly approved schedule of installment
payments
5. Cases where final reports of reinvestigation or reconsiderations
have been issued resulting to reduction in the original assessment
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and the taxpayer is agreeable to such decision by signing the

required agreement form for the purpose.
6. Cases which become final and executory after final judgment of a
court, where compromise is requested on the ground of doubtful
validity of the assessement
7. Estate tax cases where compromise is requested on the ground of
financial incapacity of the taxpayer.
5. Tax Lien
A tax lien is a legal claim or charge on property (whether real or
personal) established by law as a sort of security for the payment of
tax obligations.
An unpaid internal revenue tax, together with related interest,
penalties and costs, constitutes a lien in favor of the government from
the time an assessment therefore is made and until paid, upon all
property and rights to property belonging to the taxpayer.
A tax lien created in favor of the government is superior to all other
claims or preferences.
Sec. 219, NIRC
The lien is not valid against any mortgagee, purchaser, or judgment
creditor until notice of such lien shall have been filed in the register
of deeds of the province or city where the property of the taxpayer is
located.
1995 Bar 5
It is settled that the claim of the government
predicated on a tax lien is superior to the claim of a
private litigant predicated on a judgment.
The tax
lien attaches not only from the service of the warrant
of distraint of personal property but from the time
the tax became due and payable.
6. Forfeiture
The forfeiture of chattels and removable fixtures of any sort shall be
enforced by the seizure and sale, or destruction, of the specific
forfeited property. The forfeiture of real property shall be enforced
by a judgment of condemnation and sale in the legal action or
proceeding, civil or criminal, as the case may require.
Forfeiture and seizure distinguished (1968 Bar)
Forfeiture
For the enforcement of tax lien,
the residue, after deducting the
tax liability and expenses, will go
to the taxpayer.
Seizure
All proceeds of the sale will go to
the coffers of the government.
A taxpayer in forfeiture or seizure cases to enforce tax lien may still

be subject to criminal action even if his property has been forfeited.
7. Civil Penalties
Sec. 248.
Covering civil penalties.
25% to 50% of the total tax due.
Surcharges imposed ranging from
NO INJUNCTION TO RESTRAIN TAX COLLECTION

218, NIRC
An injunction is not available to restrain collection of tax. No court
shall have the authority to grant an injunction to restrain the
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collection of any national internal revenue tax, fee, or charge imposed

by the NIRC.
2001 Bar 3(b)
Question:
May the courts enjoin the collection of revenue taxes?
Explain your answer.
Answer:
No, as a general rule, collection of revenue taxes
cannot be enjoined.
The NIRC provides that injunction is not not available
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.
Exceptions to the general rule (1996 Bar 12):
When the decision of the Commissioner is pending appeal before the Court
of Tax Appeals, the said court may enjoin the collection of taxes if
such collection will jeopardize the interest of the government and/or
the taxpayer.
In such case, the Court at any stage of the proceeding may suspend the
collection of the tax 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.
The posting of the bond is not an absolute
requirement, its imposition lies within the sound discretion of the Tax
Court.
II. STATUTE OF LIMITATIONS
2001 Bar 3(b), 1996 Bar 12, 1997 Bar 4, Bar. 1999 1
Remedy
Assessment of
Internal Revenue
Taxes
Period Required
3 Years after the last day of filing of the
return.
If the return is filed beyond the period
prescribed:
The three (3) year period shall be counted
from the day the return is filed.
In case of a false or fraudulent return with
intent to evade tax or failure to file a
return.
Any time within ten (10) years after the
discovery of the falsity, fraud or omission
Collection
5 years following the assessment of the tax,

may be collected by distraint or levy or
proceeding in court.
10 years without assessment, and in case
of false or fraudulent returns with intent
to evade the tax or failure to file a
return.
Criminal liability
5 years from commission or discovery of

the violation, whichever is later.
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Fraudulent or False Return (1996 Bar 7)

Fraudulent Return
Fraudulent return is intentional
and deceitful with the aim of
evading correct tax due.
False Return
False return merely implies a
deviation from the truth or fact
whether intentional or not.
Requirements for a Valid Waiver of the

Prescriptive Period
(Commissioner of Internal Revenue vs. Kudos Metal Corporation, GR No.
178087 May 5, 2010)
The BIR issued assessment notices to Kudos Metal Corporation beyond the
three-year prescriptive period, but claims that the period was extended
by the two waivers executed by its accountant executed without the
notarized written authority of Kudos Metal Corporation to sign the
waiver in behalf of respondent, the waivers failed to indicate the date
of acceptance and the fact of receipt by the respondent of its file copy
was not indicated in the original copies of the waivers.
The Supreme Court ruled that the waivers are defective and hence, the
assessments issued by the BIR are void.
The waiver must be in the
proper form.
A perusal of the waivers executed by respondents
accountant waiver reveals infirmities such as the waivers were executed
without the notarized written authority of Kudos to sign the waiver in
behalf of respondent, the waivers failed to indicate the date of
acceptance and the fact of receipt by the respondent of its file copy
was not indicated in the original copies of the waivers. Due to the
defects in the waivers, the period to assess or collect taxes was not
extended. Consequently, the assessments were issued by the BIR beyond
the three-year period and are void.
Requisites of a valid waiver
1. The waiver must be signed by the taxpayer himself or his duly
authorized representative. In
the case of a corporation, the
waiver must be signed by any of its responsible officials. In
case the authority is delegated by the taxpayer to a
representative, such delegation should be in writing and duly
notarized.
2. The waiver should be duly notarized.
3. The CIR or the revenue official authorized by him must sign the
waiver indicating that the BIR has accepted and agreed to the
waiver. The date of such acceptance by the BIR should be
indicated. However, before signing the waiver, the CIR or the
revenue official authorized by him must make sure that the waiver
is in the prescribed form, duly notarized, and executed by the
taxpayer or his duly authorized representative.
4. Both the date of execution by the taxpayer and date of acceptance
by the Bureau should be before the expiration of the period of
prescription or before the lapse of the period agreed upon in
case a subsequent agreement is executed.
5. The waiver must be executed in three copies, the original copy to
be attached to the docket of the case, the second copy for the
taxpayer and the third copy for the Office accepting the waiver.
The fact of receipt by the taxpayer of his/her file copy must be
indicated in the original copy to show that the taxpayer was
notified of the acceptance of the BIR and the perfection of the
agreement.
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III. REMEDIES OF TAXPAYER

Kinds of Remedies for the Taxpayer
1. Administrative protest which is a protest against the assessment
and is filed before payment.
2. Claim for Refund file with the Commissioner of Internal Revenue
after payment.
1.
Administrative Protest
Sec. 228, NIRC

When the CIR or his duly authorized representative finds that proper
taxes should be assessed, he shall first notify the taxpayer of his
findings.
Exceptions: No pre-assessment notice shall be required:
1. When the finding for any deficiency tax is the result of
mathematical error in the computation of the tax as appearing on
the face of the return; or
2. When the discrepancy has been determined between the tax
withheld and the amount actually remitted by the withholding
agent; or
3. When the taxpayer who opted to claim a refund or tax credit of
excess creditable withholding tax for a taxable period was
determined to have carried over and automatically applied the
same amount claimed against the estimated tax liability for the
taxable quarter or quarters of the succeeding taxable year; or
4. When the excise tax due on excisable articles has not been paid;
or
5. when an article locally purchased or imported by an exempt
person, such as, but not limited to, vehicles, capital
equipment, machineries and spare parts, has been sold, traded or
transferred to non-exempt person.
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Outline of Procedurals in Protesting an Assessment
BIR
Aud
it
Service
to
taxpaye
r
Pre-assessment
notice
Despite the response,

the BIR still opines
that the taxpayer to
be assessed for
deficiency taxes
Yes
Repl
y
No
Service
to
taxpaye
r
Assessment of
tax deficiency
Prote
st
Administrative
Protest
NO
Assessment
shall become
final and
unappealable
Yes
Appea
l to
CIR
Unfavorable
CTA
FAVORABLE TO
Taxpayer:
Service
to
taxpaye
r
Taxpayer is given
fifteen (15) days
from receipt of the
pre-assessment
notice, extendible
for not more than ten
(10) days
Taxpayer is given
thirty (30) days from
receipt of the
assessment to file
administrative
protest.
Within 60 days from
filing of
administrative
protest, all relevant
documents should be
submitted otherwise,
the assessment shall
become final and
unappealable.
(1) From receipt of

adverse decision of
CIR or
(2) 180 days from
submission of the
documents,
the Taxpayer may appeal
to the CTA within thirty
(30) days, otherwise, the
decision or assessment
shall become final.
Appeal to
CTA
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Meralco Securities Corporation vs. Savellano

117 SCRA 805
Mandamus does not lie to compel the Commissioner of
Internal Revenue to impose a tax assessment not found
by him to be proper. A judge of a regular court has
no jurisdiction to take cognizance of a mandamus case
raising the question of whether or not to impose a
deficiency tax assessment.
This undoubtedly comes
within the purview of the words disputed assessment
or of other matters arising under the National
Internal Revenue code, thus belonging to the
jurisdiction of the CTA.
2.
Claim for Refund
Sec. 229, NIRC

No suit or proceeding shall be maintained in any court for the recovery
of any national revenue tax hereafter alleged to have been erroneously
or illegally assessed or collected, or of a penalty claimed to have been
collected without authority or of sum alleged to have been excessively
or in any manner wrongfully collected, until a claim for 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 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 an supervening cause that may arise after payment.
The Commissioner may, even without written claim therefore, refund or
credit a tax, where on the face of the return upon which payment was
made, such payment appears clearly to have been erroneously paid.
Tax refund and Tax Credit distinguished
Tax refund there is actual reimbursement of the tax.
Tax credit, the reimbursable amount is applied against the sum that may
be due or collectible from the taxpayer.
What covers tax refund
1. Erroneous or illegally assessed or collected internal revenue
taxes;
2. Penalties imposed without authority;
3. Any sum alleged to have been excessive or in any manner wrongfully
collected.
Requirements for Tax Refund
1. There must be a written claim for refund filed by the taxpayer
with the Commissioner;
2. The claim for refund must be a categorical demand for
reimbursement;
3. The claim for refund must be filed within two (2) years from date
of payment of the tax or penalty regardless of any supervening
cause.
IV. COURT OF TAX APPEALS

Court of Tax
The Court of
cases.
The
not bound by
Appeals
Tax Appeals is a highly specialized body which reviews tax
proceedings therein are judicial in nature although it is
the technical rules of evidence.
Quorum
Consisting of a Presiding Judge and two Associate Judges, the presence
of any two of them shall constitute a quorum, and the concurrence of two
judges shall be necessary to promulgate any decision thereof.
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Powers of the CTA

1. To administer oaths. (Sec. 10)
2. To received evidence (Sec. 12)
3. To summon witnesses by subpoena and require the production of
documents by subpoena duces tecum (Sec. 10)
4. To punish for contempt for the same cases under the same procedure
and with the same penalties provided for in the Rules of Court
(Sec. 10)
5. To prescribe the form of writs and other processes (Sec. 8)
6. To promulgate rules and regulations for the conduct of its
business (Sec. 8)
Jurisdiction of the CTA
The Court of Tax Appeals shall exercise exclusive appellate jurisdiction
to review by appeal the following:
1. Decision of the Commissioner of Internal Revenue (CIR) in cases
involving disputed
(a) Assessment,
(b) Refund of internal revenue taxes, fees, or other charges
(c) Penalties imposed in relation thereto, or
(d) Other matters arising under the NIRC or
(e) Other laws or part of law administered by the BIR
2. Decision of the Commissioner of Customs in cases involving liability
for
(a) customs duties, fees or other money charges;
(b) seizure, detention or release of property affected;
(c) fines, forfeitures or other penalties imposed in relation
thereto;
(d) other matters arising under the Customs Law or other law or
part of law administered by the Bureau of Customs
3. Decision of the Secretary of Finances, such as the imposition of
dumping or countervailing duty;
4. Decision of the Secretary of Finance in automatic review cases where
such decision of the Secretary of Finance is adverse to the taxpayer.
Automatic Review Cases
In a case involving the assessment of customs duties, the decision of
the Commissioner is automatically elevated to, and reviewed by, the
Secretary of Finance. It is the decision of the Secretary of Finance
adverse to the taxpayer which is appealable to the CTA within thirty
(30) days from receipt thereof. A decision of the Secretary which is
favorable to the taxpayer is no longer appealable.
PART 4
TARIFF AND CUSTOMS LAWS
And
LOCAL TAXATION
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Customs Laws
Imported articles subject to customs duty
All imported articles, when imported from any foreign country into the
Philippines, are subject to duty upon each importation, even though
previously exported from the Philippines, except as otherwise provided
in the Tariff and Customs Code or in other laws.
Liability of Importer for duties
Unless otherwise relieved by laws or regulations, the liability of
duties, taxes, fees and other charges attaching on importation
constitutes a personal debt due from the importer to the government
which can be discharged only by payment in full of said duties and
charges. It also constitute a lien upon the articles imported which may
be enforced while such articles are in custody or subject to the control
of the government.
Duties, powers and jurisdiction of the Bureau of Customs
1. 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;
2. the prevention and suppression of smuggling and other frauds upon
the customs;
3. the supervision and control over the entrance and clearance of
vessels and aircraft engaged in foreign commerce;
4. the enforcement of tariff and customs laws and all other laws,
rules
and
regulations
relating
to
tariff
and
customs
administration;
5. the supervision and control over the handling of foreign mails
arriving in the Philippines, for the purpose of the collection of
the lawful duty on the dutiable articles thus imported and the
prevention of smuggling through the medium of such mails;
6. supervision and control over all import and export cargoes,
landed or stored in piers, airports, terminal facilities,
including
container
yards
and
freight
stations,
for
the
protection of government revenue; and
7. Exclusive original jurisdiction on seizure and forfeiture cases
under the tariff and customs laws.
Pascual vs. Comm. Of Customs
L-12219, April 25, 1962
Proceedings in seizure cases are actions in rem
directed against the property seized, not against the
owner thereof.
The forfeiture may be enforced against the goods
independently of the criminal prosecution against the
offender.
In a seizure case, the government seeks the transfer
of the title to the property from the owner to the
state as a punishment to the property itself.
Jurisdiction of Seizure and Forfeiture Cases

It is well-settled that the exclusive jurisdiction over seizure and
forfeiture cases vested in the Collector of Customs precludes a Court of
First Instance from assuming cognizance over such cases.
Auyong Hian vs. CTA, et.al.
19 SCRA 10
The Collector of Customs when sitting in forfeiture
proceedings constitutes a tribunal expressly vested by
law with jurisdiction to hear and determine the
subject
matter
of
such
proceedings
without
interference from the Court of First Instance.
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Supervisory
Finance
authority
of
Commissioner
of
Customs
and
Secretary
of
(1) In cases involving assessment of duties.

If in any case involving the assessment of duties, the Collector
renders a decision adverse to the government, such decision shall
automatically be elevated to, and reviewed by the Commissioner;
and if the Collectors decision would be affirmed by the
Commissioner, such decision shall be automatically elevated to,
and finally reviewed by the Secretary of Finance.
However,
the case
the case
decision
if within thirty (30) days from receipt of the record of

by the Commissioner or by the Secretary of Finance, as
may be, no decision is rendered by either of them, the
under review shall become final and executory.
Any party aggrieved by either decision of the Commissioner or of

the Secretary of Finance may appeal to the Court of Tax Appeals
within thirty (30) days from receipt of a copy of such decision.
Except as provided above, the supervisory
authority of the
Secretary of Finance over the Bureau of Customs does not extend to
the administrative review of the ruling of the Commissioner in
matters appealed to the Court of Tax Appeals.
(2)
In seizure cases
Supervisory authority exercised by the Commissioner while the case
is pending in the Office of the Collector of Customs and before
the decision of the Collector becomes final.
2000 Bar 20
Question:
On the basis of a warrant of seizure and detention
issued by the Collector of Customs for the purposes of
enforcing Tariff and Customs Laws, assorted brands of
cigarettes said to have been illegally imported into
the Philippines were seized from a store where they
were openly offered for sale. Dissatisfied with the
decision rendered after hearing by the Collector of
Customs on the confiscation of the articles, the
importer filed a petition for review with the Court of
Tax Appeals.
The Collector moved to dismiss the
petition for lack of jurisdiction.
Rule on the
motion?
Answer:
The motion should be granted. The aggrieved party
should have elevated this matter to the commissioner
of
customs.
The
Customs
code
provides
that
supervisory authority exercised by the Commissioner
while the case is pending in the Office of the
Collector of Customs and before the decision of the
Collector becomes final.
2002 Bar 14
Question:
The Collector of Customs of the Port of Cebu issued
warrants of seizure and detention against the
importation of machineries and equipment by LLD Import
and Export Co., (LLD) for alleged non-payment of tax
and customs duties in violation of customs laws. LLD
was notified of the seizure but before it could be
heard, the Collector of Customs issued a notice of
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sale of the articles.

In order to restrain the
Collector from carrying out the order to sell, LLD
filed with the Court of Tax Appeals a petition for
review with the application for the issuance of a writ
of prohibition. It also filed with the CTA an appeal
for refund of overpaid taxes on its other importations
of raw materials which has been pending with the
Collector of Customs. The Bureau of Customs moved to
dismiss the case for lack of jurisdiction of the Court
of Tax Appeals.
A.
B.
Does the Court of Tax Appeals have jurisdiction

over the petition for review and writ of
prohibition? Explain.
Will an appeal to the CTA for tax refund be
possible? Explain.
Answer:
A.
No, the Court of Tax Appeals have no jurisdiction
over the petition for review and writ of
prohibition.
The aggrieved party should have
elevated the case to the Commissioner of customs.
B.
No, the appeal to the CTA for tax refund is not
possible. The aggrieved party should have made a
request for a tax refund from the Commissioner of
Customs.
Any
adverse
decision
of
the
Commissioner may be appealed to the Secretary of
Finance or Court of Tax Appeals.
Local Taxation
Nature of Taxing Power of Local Governments
1. Not inherent unlike a sovereign state, municipal corporations have
no inherent power to tax.
Being mere creatures of
law, they may exercise the power only if delegated to
them by the national legislature or conferred by the
Constitution itself.
2. Limited the new Constitution declares that each local government
shall have the power to create its own sources of
revenue and to levy taxes, fees, and charges, subject
to such limitations and guidelines as the Congress may
provide.
Fundamental Principles governing local taxation
(a) Taxation shall be uniform in each local government unit;
(b) Taxes, fees, charges and other impositions shall:
(2) be equitable and based as far as practicable on the
taxpayer's ability to pay;
(3) be levied and collected only for public purposes;
(4) not be unjust, excessive, oppressive, or confiscatory;
(5) not be contrary to law, public policy, national economic
policy, or in the 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 be subject to the 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.
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Common limitations on the taxing powers of local governments

(a) Income tax, except when levied on banks and other financial
institutions;
(b) Documentary stamp tax;
(c) Taxes
on
estates,
inheritance,
gifts,
legacies
and
other
acquisitions mortis causa, except as otherwise provided herein;
(d) Customs duties, registration fees of vessel 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;
(e) Taxes, fees, 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;
(f) Taxes, fees or charges on agricultural and aquatic products when
sold by marginal farmers or fishermen;
(g) Taxes on business enterprises certified to by the Board of
Investments as pioneer or non-pioneer for a period of six (6) and
four (4) years, respectively from the date of registration;
(h) Excise taxes on articles enumerated under the national Internal
Revenue Code, as amended, and taxes, fees or charges on petroleum
products;
(i) Percentage or value-added tax (VAT) on sales, barters or exchanges
or similar transactions on goods or services except as otherwise
provided herein;
(j) Taxes on the gross receipts of transportation contractors and
persons engaged in the transportation of passengers or freight by
hire and common carriers by air, land or water, except as provided
in this Code;
(k) Taxes on premiums paid by way or reinsurance or retrocession;
(l) Taxes, fees or charges for the registration of motor vehicles and
for the issuance of all kinds of licenses or permits for the
driving thereof, except tricycles;
(m) Taxes, fees, or other charges on Philippine products actually
exported, except as otherwise provided herein;
(n) 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 "Cooperative Code of the Philippines"
respectively; and
(o) Taxes, fees or charges of any kind on the National Government, its
agencies and instrumentalities, and local government units.
Local authority that shall exercise taxing power
The power shall be exercised by the sangguniang panlalawigan in the case
of provinces, the sangguniang panlungsod in the case of cities, the
sangguniang bayan in the case of municipalities, or the sangguniang
Barangay in the case of barangays through an appropriate ordinance.
The exercise of the power to tax by the local legislative assembly is
subject to the veto power of the local chief executive.
Taxing and other revenue raising powers
1. Tax on the transfer of real property ownership;
2. Tax on the business of printing and publication;
3. Franchise tax;
4. Tax on sand, gravel and other quarry resources;
5. Professional tax;
6. Amusement tax; and
7. Annual fixed tax per delivery truck or van of manufacturers or
producers and wholesalers of, or dealers in, certain products.
Common revenue-raising powers
1. Services fees and charges
2. Public utility charges
3. Toll fees or charges
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Procedure for Approval and Effectivity of Tax, Ordinances and Revenue

Measures; Mandatory Public Hearings.
Public
Hearin
g
Approval
of Local
Chief
Executive
Municip
al
Ordinanc
e
Override the
veto of the
Chief
Executive by
2/3 votes of
all the
members
Grounds for Veto:

1. Ultra vires;
2. Prejudicial to public
welfare
(Local executive may veto
an ordinance and
resolution only once)
Y
Veto
Override
Duly enacted
Ordinance
Effectivity
Ordinance for
Local Devt Plans
Local investment
programs
Other Ordinance
Publication:
No penal clause [Posting
on bulletin boards]
With penal clause
[Publication in a
newspaper of Gen
Circulation
Review by
Sangguniang
Panlalawigan
30 days after
receipt
Ordinance is
ineffective
Declaration
of validity
Effective 10 days after

posting or publication
1. Effectivity upon
declaration of validity
2. No action taken after 30
days [Presumption of
validity]
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1. The procedure for approval of local tax ordinances and revenue

measures shall be in accordance with the provisions of this Code.
2. Public hearings shall be conducted for the purpose prior to the
enactment thereof.
3. 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.
4. 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.
5. 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.
2002 Bar 9(b)
Question:
An ordinance was passed by the Provincial Board of a
Province in the North, increasing the rate of basic
real property tax from 0.006% to 1% of the assessed
value of the real property effective January 1, 2000.
Residents of the municipalities of the said providence
protested the Ordinance on the ground that no public
hearing was conducted, therefore, any increase in the
rate of real property tax is void. Is there merit in
the protest? Explain your answer.
Answer:
Yes, there is merit in the said protest.
The local government code provide that public hearings
shall be conducted for the purpose prior to the
enactment of local taxes.
This requirement is
mandatory.
Community Taxes
Individuals Liable to Community Tax.
Every inhabitant of the Philippines
(1) eighteen (18) years of age or over
(2) who has been regularly employed on a wage or salary basis for at
least thirty (30) consecutive working days during any calendar
year, or who 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 who is required by law to file an income
tax return shall pay an annual additional 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.
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, in no case, shall exceed Ten thousand
pesos (P10,000.00) in accordance with the following schedule:
(2) 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 real property tax under existing
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laws, found in the assessment rolls of the city or municipality

where the real property is situated - Two pesos (P2.00); and
(3) 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.
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.
Real Property Taxes

Fundamental Principles governing appraisal and assessment of real
property
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 and fair value;
2. Real property shall be classified for assessment purposes on the
basis of its actual use;
3. Real property shall be assessed on the basis of a uniform standard
of value within each local government unit;
4. The appraisal, assessment, level and collection of real property
tax shall not be left to any private person; and
5. The appraisal and assessment of real property shall be equitable.
2000 Bar 19(a)
Question:
Give at least two (2) fundamental principles governing
real property taxation, which are limitations on the
taxing power of local governments insofar as the
levying of the realty tax is concerned.
Answer:
1. Real property shall be appraised at its current and fair
value;
2. Real property shall be classified for assessment purposes on
the basis of its actual use;
3. Real property shall be assessed on the basis of a uniform
standard of value within each local government unit;
4. The appraisal, assessment, level and collection of real
property tax shall not be left to any private person; and
5. The appraisal and assessment of real property shall be
equitable.
Classes of real property for assessment purposes
For purposes of assessment, real property shall be classified as
1. residential
2. agricultural
3. commercial
4. industrial
5. mineral,
6. timberland, or
7. special
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.
Special classes of real property
All lands, buildings, and other improvements thereon actually, directly
and exclusively used for
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(6) hospitals,
(7) cultural, or scientific purposes, and
(8) 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.
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, non-profit 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.
2002 Bar 10
Question:
Under the Local Government Code what properties are
exempt from real property taxes?
Answer:
(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, non-profit
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.
Actual Use of Real Property as Basis for Assessment.
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.
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2002 Bar 11
Question:
The real property of Mr. And Mrs. Angeles, situated in
a commercial area in front of the public market, was
declared in their Tax Declaration as residential
because it had been used by them as their family
residence from the time of its construction in 1990.
However, since January 1997, when the spouses left for
the United States to stay there permanently with their
children, the property has been rented to a single
proprietor engaged in the sale of appliances and agriproducts.
The Provincial Assessor reclassified the property as
commercial for tax purposes starting January 1998.
Mr. Mrs. Angeles appeal to the Local Board of
Assessment
Appeals,
contending
that
the
Tax
Declaration previously classifying their property as
residential is binding.
How should be the appeal be decided?
Answer:
The appeal will be decided in favor of the government
for the Local Government Code provides that Real
property shall be classified, valued and assessed on
the basis of its actual use regardless of where
located, whoever owns it, and whoever uses it.
2001 Bar 20
Question:
Under Article 415 of the Civil Code, in order for
machinery and equipment to be considered real
property, they must be placed by the owner of the land
and, in addition, must tend to directly meet the needs
of the industry or works carried on by the owner. Oil
Companies,
such
as
Caltex
and
Shell,
install
underground tanks in the gasoline stations located on
land leased by the oil companies from others.
Are
those underground tanks, which were not placed there
by the owner of the land but which were instead placed
there by the lessee of the land, considered real
property for purposes of real property taxation under
the Local Government Code? Explain your answer.
Answer:
Yes, the underground tanks of the oil companies
constitute machinery for Real Property Tax purposes.
It is the beneficial use of the tanks that make it
part of the taxable real property. In addition, said
tanks are used actually and directly in the business
of petroleum retailing.
General Revision of Assessment and Property Classification.
(Sec. 219 of the Local Government Code_
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.
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ASSESSMENT PROCEDURES
Declaration of Real Property Value

(DRPV) by owner
[Sec. 203 of the Local Govt Code]
If no Declaration of owner
[Failure/Refusal to File]
The City/Provincial Assessor shall
himself declare the property.
[Sec. 204 of the local Govt Code]
Listing of Real Property in the

ASSESSMENT ROLLS
[Sec. 205 of the Local Govt Code]
PROCEDURES FOR CLAIM FOR EXEMPTION
ASSESSMENT ROLLS
File for exemption within 30 days from date of

declaration documentary evidence supporting such
claim to Provincial/City/Municipal Assessor.
If proven to be TAX
EXEMPT
1. If proven not exempt

2. Failure to submit evidence
Dropped from the

assessment Roll
Listed as Taxable Property
AMENDMENT OF SCHEDULE OF FAIR MARKET VALUES
ASSESSMENT ROLLS
Amendment of Schedule of
Fair Market Values
Recommendation by Provincial, City or
Municipal Assessor to the Sangguniang
amendments to correct errors in
valuation in the Schedule of Fair
Market Values
The Sanggunian shall act upon the

recommendation within ninety (90)
days from receipt of recommendation.
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Local Board of Assessment Appeals.

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 provincial 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.
Additional Levy on Real Property for the Special Education Fund.
A province or city, or a municipality within the Metropolitan Manila
Area, may levy and collect an annual tax of one percent (1%) on the
assessed value of real property which shall be in addition to the basic
real property tax. The proceeds thereof shall exclusively accrue to the
Special Education Fund (SEF).
Additional Ad Valorem Tax on Idle Lands.
A province or city, or a municipality within the Metropolitan Manila
Area, may levy an annual tax on idle lands at the rate not exceeding
five percent (5%) of the assessed value of the property which shall be
in addition to the basic real property tax.
2000 Bar 19b
Question:
May local governments impose an annual realty tax in
addition to the basic real property tax on idle or
vacant lots located in residential subdivisions within
their respective territorial jurisdiction?
Answer:
Yes, A province or city, or a municipality within the
Metropolitan Manila Area, may levy an annual tax on
idle lands at the rate not exceeding five percent (5%)
of the assessed value of the property which shall be
in addition to the basic real property tax.
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PROCEDURES FOR REVISION OF ASSESSMENT AND PROPERTY

CLASSIFICATION
ASSESSMENT ROLLS
General Revision
On Going Revision
1. 2 years after the effectivity of

the Local Govt Code.
2. 3 years thereafter.
Cases for on going revision

1. Real property declared and
listed for taxation purposes for
the first time.
2. Request is made by real
property owner
Provincial, City, or Municipal

Assessor to make a classification
and appraisal and assessment
Limitation:
The assessment shall not be increased oftener than one
every three (3) years;
Except:
1. Improvements substantially increasing the value
2. Any change in its actual use.
Assessment/
Reassessment
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Reassessement is due to
1. Partial or total destruction
2. Major change in actual use
3. Great and sudden inflation or deflation
of real property values
4. Gross illegality of assessment
5. Any other abnormal cause
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ASSESSMENT AND PAYMENT OF TAXES PROCEDURES

Payment of Real Property Taxes
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VALUE ADDED TAX

VALUE ADDED TAX.
Value Added Tax is a tax on the value added to the purchase price or
cost in the sale or lease of goods, property or services in the course
of trade or business.
BASIC NATURE OF VALUE ADDED TAX
1. Value-Added Tax is an indirect tax on expenditure
2. The seller of goods or services may pass on the amount of tax paid
to the buyer, with the seller acting merely as a tax collector.
3. The burden of VAT is intended to fall on the immediate buyers and
ultimately, the end-consumers.
WHO ARE LIABLE FOR VALUE ADDED TAX
Every
1.
2.
3.
person who, in the course of trade or business,

Sale, Barter, Exchanges, Lease goods or property
Importation of Goods
Gross Receipts derived from the sale or Exchange of Services.
BAR QUESTION:
What are the characteristics of the Value-Added Tax?
ANSWER:
The value-added tax is an indirect tax and the amount of
tax may be shifted or passed on to the buyer, transferee
or lessee of the goods, properties or services.
BAR 1996 (1996)
Who are liable for the payment of Value-Added Tax?
ANSWER:
The persons liable for the value-added tax are:
a. Sellers of goods and proper ties in the course of trade
or business;
b. Sellers of services in the course of trade or
business,
including lessors of goods and properties;
c. Importers of taxable goods, whether in the course
business or not.
SCOPE
1.
2.
3.
4.
OF VALUE ADDED TAX

Sale of Goods or Property
Sale of Services
Lease of Property
Importation of Goods
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of
Goods or Properties subject to VAT

System
REAL PROPERTIES
Real properties held primarily held primarily for sale to customers or
held for lease in the ordinary course of trade or business;
ROYALTIES for intellectual Properties
The right or privilege to use patent, copyright, design or model, plan,
secret formula or process, goodwill, trademark, trade brand or other
like property or right.
The right or the privilege to use in the Philippine of any industrial,
commercial or scientific equipment.
The right or the privilege to sue motion picture films, tapes and discs,
and
Radio, television, satellite transmission and cable television time.
SALES FOR SUBSISTENCE OR LIVELIHOOD
Any-business or business pursued by an individual where the aggregate
gross sale or receipts do not exceed P100,000 during any 12 month
period.
Question:
Makati Leasing is engaged in real estate leasing. It
has an existing property in Makati which it intends
to sell in the future.
Will the sale of said
property be subject to VAT?
Answer:
Yes,
the sale of property
subject to Value Added Tax.
of
Makati
Leasing
is
The Tax Code provides that property held primarily

for sale to customers or held for lease in the
ordinary course of trade or business of the seller
shall be subject to VALUE ADDED TAX based on the
gross selling price.
MEANING OF IN THE COURSE OF TRADE OR BUSINESS
It is the regular conduct or pursuit of a commercial or an economic
activity, including transactions incidental thereto,
by any person
regardless of whether or not the person engaged therein is a non-stock,
nonprofit private organization or government entity.
GROSS SELLING PRICE
GROSS SELLING PRICE is the total amount of money or its equivalent,
which the purchaser pays or is obligated to pay to the seller in
consideration of the sale, barter, or exchange of the goods or
properties, excluding the VALUE ADDED TAX.
CABARLES NOTES
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Bar Question:
What is the basis of the Value-Added Tax on
taxable sales of real property?
ANSWER:
The basis of the Value-Added Tax on
taxable sale of real property is "GROSS
SELLING PRICE" which is either selling price
stated in the sale document or the "Zonal
Value", whichever is higher. In the absence
of zonal values, the gross selling price
shall refer to the market value as shown in
the
latest
tax
declaration
or
the
consideration, whichever is higher.
INPUT VAT, OUTPUT VAT, and EXCESS OUTPUT or INPUT TAX
INPUT VAT the value-added tax due from or paid by a VAT-registered
person in the course of his trade or business on importation of goods or
local purchase of goods or services,
including lease or use of
property, from a VAT-registered person.
OUTPUT VAT the value-added tax due on the sale or lease of taxable
goods or properties or services by any person registered or required to
register under Section 236, Tax Code.
VALUE ADDED TAX PAYABLE
Total OUTPUT VAT less INPUT VAT (OV IN = VAT PAYABLE)
TAXPAYERS under the VAT System
1. 12% rated VAT Taxpayer
2. 0% rated VAT Taxpayer
3. VAT-EXEMPT Taxpayer
SALES
1.
2.
3.
SUBJECT TO ZERO RATED VAT

Exports
Foreign Denominated sales
Sale of goods or property to persons or entities whose exemption
under special law or international agreements to which the
Philippines is a signatory. (ADB, International Rice Research
Institute (IRRI)
TRANSACTION DEEMED SALE (BAR 1997)

1. Transfer, use or consumption not in the course of business of
goods or property originally intended for sale or for use in the
course of business.
2. Distribution or transfer to (a) Shareholders or inventors as share
in the properties of the VAT-Registered persons and (b) Creditors
in payment of debt or obligation;
3. Consignment of goods in actual sale is not made within 60 days
following the date of such goods consigned;
4. Retirement from or cessation of business, with respect to
inventories of taxable goods existing as of such retirement or
cessation.
CABARLES NOTES
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VAT ON SALE OF REAL PROPERTIES

Sale of real properties held primarily for sale to customers or held for
lease in the ordinary course of trade or business of the seller shall be
subject to VAT.
The following sale of properties is subject to output VAT:
1. Sale of residential lot with gross selling price exceeding
P1,500,000;
2. Sale of residential house and lot or other residential dwellings
with gross selling price exceeding P2,500,000.
3. Installment sale of residential house and lot or other residential
dwellings with gross selling price exceeding P1,000,000.
SALE OR EXCHANGE OF SERVICES DEFINED
The phrase sale or exchange of services means the performance of all
kinds of services in the Philippines for others for a fee, remuneration
or consideration, including those performed or rendered by:
1.
Construction and service contractors
2.
Stock, real estate, commercial, customs and immigration brokers;
3.
Lessors of property, whether personal or real
4.
Warehousing services;
5.
Lessors or distributors of cinematographic films;
6.
Persons engaged in milling, manufacturing or repacking for
others;
7.
Proprietors, operators or keepers of hotels, motels, rest
houses, pension houses, inns, resorts, theaters and movie
houses;
8.
Proprietors or operators of restaurants, refreshment parlors,
cafes and other eating places, including clubs and caterers;
9.
Dealers in securities;
10. Lending investors
11. 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;
12. Domestic common carries by air and sea relative to their
transport of passengers, goods or cargoes from one place in the
Philippines to another place in the Philippines;
13. Sale of electricity transmission and distribution companies;
14. Franchiese grantees of electric utilities, telephone and
telegraph, radio and/or television broadcasting and all other
franchise grantees, excecpt franchise grantees of radio and/or
television broadcasting whose annual gross receipts of the
preceding year do not exceed P10,000,000 and franchise grantees
of gas and water utilities;
15. Non-life
insurance
companies
including
surety,
fidelity,
indemnity and bonding companies;
16. Pre-need companies;
17. Health maintenance organization; and
18. Similar services regardless of whether or not the performance
thereof call for the exercise or use of physical or mental
faculties.
Zero rate sale of services is a taxable transaction for VAT Purposes,
but shall not result in any output tax.
However,
the imput tax on
purchases of goods, properties or services related to such zero-rated
sale shall be available as tax credit or refund in accordance with
Regulations.
CABARLES NOTES
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BAR QUESTION (2006) (5%)

VAT; Non-VAT taxpayer; Claim for Refund
Lily's Fashion, Inc. is a garment manufacturer
located and registered as a Subic Bay Freeport
Enterprise under Republic Act No. 7227 and a nonVAT taxpayer. As such,
it is exempt from payment
of all local and national internal revenue taxes.
During
its
operations,
it
purchased
various
supplies and materials necessary in the conduct of
its manufacturing business. The suppliers of these
goods shifted to Lily's Fashion, Inc. the 10% VAT
on the purchased items amounting to P 500,000.00.
Lily's
Fashion, Inc. filed with the BIR a claim
for refund for the input tax shifted to it by the
suppliers. If you were the Commissioner of Internal
Revenue, will you allow the refund?
ANSWER:
No, I will not allow the refund. Only VAT-Registered
taxpayers
are
entitled
to
a
refund
of
their
unapplied/unused Input VAT (Tax Reform Act, Section
112[A] [1997]).
ALTERNATIVE ANSWER:
No. The exemption of Lily's Fashion, Inc. is only for
taxes for which it is directly liable. Hence, it cannot
claim exemption for a tax shifted to it, which is not at
all considered a tax to the buyer but a part of the
purchase price. Lily's fashion is not the taxpayer in so
far as the passed-on tax is concerned and therefore, it
cannot claim for a refund of a tax merely shifted to it
(Phil. Acetylene Co., Inc. v. CIR, L-19707,Aug. 17,
1987).
Zero Rated Services
1. 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 BSP;
2. 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 the Philippines when the services are performed the
consideration for which is paid for in acceptable foreign currency
and accounted for in accordance with the rules and regulations of
the BSP;
3. 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
zero percent rate;
4. Services rendered to persons engaged in international shipping or
air transport operations, including leases of property for use
thereof; provided, however, that the services referred to herein
shall not pertain to those made by common carriers by air and sea
relative to their transport of passengers, goods or cargoes from
one place in the Philippines to another place in the Philippines,
the same being subject to 12% VAT;
5. Services performed by subcontractors and/or contractors duly
accredited by either the BOI or the Export Development Council in
processing, converting, or manufacturing goods for an enterprise
CABARLES NOTES
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UNO-Recoletos
School of Law
whose export sales exceed seventy percent of the total annual

production;
6. Transport of passengers and cargo by domestic air or sea carriers
from the Philippines to a foreign country;
7. Sale of power or fuel generated through renewable source of energy
such as, but not limited to, biomass, solar, wind, hydropower,
geothermal, ocean energy, and other emerging energy sources using
technologies such as fuel cells and hydrogen fuels, provided,
however, that zero-rating shall apply strictly to the sale of
power or fule 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.
VAT ON IMPORTATION OF GOODS

Importation of goods is subject to 12% VAT based on the total value used
by the BOC in determining the tariff and customs duties, plus customs
duties, excise taxes, if any and other charges.
Payment of VAT
The importer prior to the release of such goods from customs custody
shall pay the VAT.
When customs duties are determined on quantity or volume
Where the customs duties are determined on the basis of the quantity or
volume of the goods, the VAT shall be based on the landed cost plus
excise taxes, if any.
LANDED COST consists of the invoice amount, customs duties, freight,
insurance and other charges.
INPUT TAXES
1. Purchase or importation of goods
2. Purchase of real properties for which a value-added tax has
actually been paid
3. Purchase of services in which a value added tax has been paid
4. Transaction deemed sale
5. Transitional input tax allowed
6. Presumptive input tax allowed
7. Transitional input tax credit allowed under the transitory and
other provisions.
TRANSITIONAL INPUT TAX
A person who becomes liable to value-added tax when the minimum turnover
of P1,500,000 in any 12 month period has been exceeded or any person who
elects tob e a VAT-Registered person shall, subject to the filing of an
inventory, be allowed input tax on his beginning inventory of goods,
material and supplies equivalent to TWO PERSON (2%) of the value of such
inventory or the actual value added tax paid on such goods, materials
and supplies, whichever is higher.
The amount shall be creditable against the output tax.
CABARLES NOTES
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UNO-Recoletos
School of Law
PRESUMPTIVE IMPUT TAX

Persons or firms engaged in the production and manufacturing of
a) refined sugar
b) processing of sardines
c) mackerel
d) milk,
e) cooking oil
f) packed noodle-based instant meals
for their own account shall be allowed a presumptive input tax, which is
creditable against the output tax, equivalent to 4% of the gross value
in month of their purchases of primary agricultural products which are
used as inputs to their production.
PRIMARY AGRICULTURAL PRODUCTS shall be limited to sugar care which is
the main raw material for the finished product refined sugar.
EXEMPT TRANSACTIONS
VAT EXEMPT TRANSACTIONS the sale of goods, property or services and
the use of or lease of property is not subject to value-added tax
(output tax) and the seller is not allowed any tax credit or deduction
on value added tax (input tax) previously paid.
ZERO RATED VS EXEMPT TRANSACTION
The person making the exempt sale shall not bill any output tax and
purchase, on the other hand, a VAT-Registered purchaser of VAT-Exempt
goods, property or services is not entitled to any imput tax on such
purchases.
In contrast, zero-rated sale is subject to VAT but will not result to
any output tax.
The taxpayer, however, is entitled to a credit for any
input tax.
VAT EXEMPT TRANSACTIONS
1. Sale or importation of agricultural and marine food products in
their original state, livestock and poultry of a kind generally
used as, or yielding or producing foods for human consumption; and
breeding stock and genetic materials therefor
2. Sale or importation of fertilizers, seeds, seedlings and
fingerlings, fish, prawn, livestock and poultry feeds, including
ingredients, whether locally produced or imported, used in the
manufacture of finished feeds (except specialty fees for race
horses, fighting cocks, aquarium fish, zoo animals and other
animals considered as pets;
3. Importation of personal and household effects belonging to
residents of the Philippines returning from abroad and nonresident citizens coming to resettle in the Philippines, provided,
that such goods are exempt from customs duties under the Tariff
and Customs Code of the Philippines.
4. Sale or importation of coal and natural gas, in whatever form or
state, and petroleum products (except lubricating oil, processed
gas, grease, wax and petrolatum) subject to excise tax imposed
under Title VI;
5. Importation of passenger and/or cargo vessels of more than five
thousand tons (5,000) whether coastwise or ocean-going, including
engine and spare parts of said vessel to be used by the importer
himself as operator thereof
6. Importation of professional instruments and implements, wearing
apparel, domestic animals, and personal household effects (except
any vehicle, vessel, aircraft, machinery and 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
CABARLES NOTES
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UNO-Recoletos
School of Law
exchange, accompanying such persons, or arriving within ninety

(90) days before or after their arrival, upon the production of
evidence satisfactory to the Commissioner of Internal Revenue, tht
such persons are actually coming to settle in the Philippines and
that the change of residence is bonafide
7. Services subject to percentage tax
8. Services by agricultural contract growers and milling for other of
palay into rice, corn intro grits, and sugar cane into raw sugar
9. Medical, dental, hospital and veterinary services, except those
rendered by professionals
10. Educational
services
rendered
by
private
educational
institutions duly
accredited by the Department of
ducation
(DepED), the Commission on Higher Education (CHED) and the
Technical Education and Skills Development Authority (TESDA) and
those rendered by government education institutions
11. Sale by the artist himself of his works of art, literary works,
musical compositions and similar creations, or his services
performed for the production of such works
12. Services rendered by individuals pursuant to an employeremployee relationship;
13. Services rendered by regional or area headquarters established
in the Philippines by multinational corporations which act as
supervisory communications and coordinating centers for their
affiliates, subsidiaries or branches in the Asia Pacific Region
and do not earn or derive income from the Philippines
CABARLES NOTES
80
UNO-Recoletos
School of Law

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TAXATION

Nature or Characteristics of the States power to tax (Bar 1996)

Nature of the Power of Taxation (96 Bar 1(b) (5%)

Inherent power of a sovereign state

Process, aspect, phases of Taxation

Levying or imposition of the tax which is a legislative in

The first is taxation, strictly speaking, while the second may be

For the support of the

2. Secondary purpose (Special or regulatory)(Bar 1991)

Reduce social inequality

Extent of the Taxing Power (Bar 2000)

it covers persons, businesses,

the power to impose taxes is one so unlimited in

Plenary as it is complete Under the NIRC, the BIR may avail of

Although referred to as the strongest of all the

Principles of a Sound Tax System (Bar 1973)

Taxation Distinguished From Other Inherent Powers and Impositions

Is levied for the purpose

The amount gathered in the

The exaction is limited to

No direct benefits are

Recognizes the obligations

This limitation does not

The taxes paid form part

Allows merely the

Taxation distinguished from Eminent Domain

Is levied for the purpose

Is taking of property for

Payment of taxes accrue to

Just compensation is given

Applies to all persons,

Only particular property

Limitations on the Taxing Power

Constitutional Limitations on the Power to Tax

Due process mandates that no person shall be deprived of life,

The following situations are illustrative of violations of the due

Equal Protection Clause

Equal protection does not require equal rates of taxation on

Uniformity of Taxation (1998 Bar Question No. 1)

Uniformity in taxation means that all taxable articles or kinds of

1997 Bar 1(a)

Real estate tax is imposed on the property itself

Real Estate Dealers Tax is imposed on the

The Income Tax on the Rental Income is imposed on

Taxation is said to be equitable when its burden falls on those

The Income Tax Table for individual Taxpayers is

When the state has stipulated by contract to give exemption from

Non-imprisonment for non-payment of poll tax

Bills to Originate from the House of Representatives

1997 Bar (2)

Veto Power of the President

The item or items vetoed shall be returned to the Lower House of

Presidents Power to Tax

2000 Bar (18)

Taxation and the Freedom of the Press

Taxation and the Freedom of the Religion

12. Tax Exemption of Properties Actually, Directly and Exclusively

Art. XIV, Sec. 4 of the Constitution

Appropriation of Public Money

Grant of Tax Exemptions

Note that in granting any tax exemptions, an absolute majority vote

Supreme Courts Jurisdiction over Tax Cases

Kinds of Taxes Differentiated

3. General and Special